AEW UK REIT plc (LON:AEWU), which directly owns a value-focused portfolio of 32 UK commercial property assets, has announced its unaudited Net Asset Value (“NAV”) at 30 September 2024 and interim dividend for the three-month period ending 30 September 2024.
Highlights
· NAV of £172.76 million or 109.05 pence per share at 30 September 2024 (30 June 2024: £167.79 million or 105.91 pence per share).
· NAV total return of 4.85% for the quarter (30 June 2024 quarter: 5.04%).
· 2.94% like-for-like valuation increase for the quarter (30 June 2024 quarter: 2.41% increase).
· EPRA earnings per share (“EPRA EPS”) for the quarter of 2.68 pence (30 June 2024 quarter: 2.26 pence). Underlying EPS of 2.17 pence (30 June 2024 quarter: 1.92 pence).
· Interim dividend of 2.00 pence per share for the three months ended 30 September 2024, paid for 36 consecutive quarters and in line with the targeted annual dividend of 8.00 pence per share.
· Loan to GAV ratio at the quarter end was 25.04% (30 June 2024: 25.66%). Significant headroom on all loan covenants.
· Company continues to benefit from a low fixed cost of debt of 2.959% until May 2027.
· Disposal of Oak Park, Droitwich, for £6.30 million, reflecting a 33% premium to the 31 March 2024 valuation.
· Three new lettings increasing annual contracted rent by £598,470 per annum.
Henry Butt, Assistant Portfolio Manager, AEW UK REIT, commented:
“We are pleased to report continued growth in NAV per share and a dividend covered by EPRA earnings for a second consecutive quarter. The underlying EPRA EPS of 2.17 pence represents a continuation of dividend cover and is testament to the earnings accretion produced by the Company’s programme of ongoing asset management initiatives, both through income generation and void cost mitigation. Headline EPRA EPS is 2.68 pence this quarter due to recognition of indemnity income, compensating for the PID tax charge detailed in previous announcements. The Company has committed to pay its quarterly dividend of 2.00 pence per share, which has now been paid for 36 consecutive quarters.
Underlying earnings growth this quarter includes the completion of significant lettings, most notably: Tenpin at The Railway Centre, Dewsbury, Farmfoods at Barnstaple Retail Park and Roxy Lanes at Union Street, Bristol. These three lettings have increased the portfolio’s annual contracted rent by £598,470 per annum (3.2%). Effective management of the Company’s ‘bottom line’ has also contributed to earnings performance. Successful recovery of some longstanding arrears and reduced property costs have delivered further earnings growth this quarter.
Following the sale of Oak Park, Droitwich during the quarter, the Company has cash reserves amounting to £11.18 million at quarter end, a large proportion of which is held in an interest-bearing bank account. These funds have been committed to future asset management initiatives and to maintain a cash buffer, given the continued macroeconomic uncertainty. Current initiatives continue to progress well and are advancing their related property valuations, as evidenced by the quarter’s 2.94% like-for-like valuation increase. These initiatives are expected to drive further capital and income growth in several of the portfolio’s assets.
We are delighted to have won the listed property category in the 2023 MSCI UK Property Investment Awards. This award is given to the Company that has delivered the highest annualised property total return over the three years to December 2023. Achieving this award is testament to the Company’s strategy of delivering total return through active asset management.”
Valuation Movement
As at 30 September 2024, the Company owned investment properties with a total fair value of £215.64 million, as assessed by the Company’s independent valuer, Knight Frank. The like-for-like valuation increase for the quarter of £6.17 million (2.94%) is broken down as follows by sector:
| Sector | Valuation 30 September 2024 | Like-for-like valuation movement for the quarter | ||
| £ million | % of portfolio | £ million | % | |
| Industrial | 75.82 | 35.17 | 1.62 | 2.19 |
| Retail Warehouses | 53.68 | 24.89 | 4.38 | 8.87 |
| High Street Retail | 31.82 | 14.75 | 0.12 | 0.36 |
| Other | 29.07 | 13.48 | – | – |
| Office | 25.25 | 11.71 | 0.05 | 0.20 |
| Total | 215.64 | 100.00 | 6.17 | 2.94* |
* This is the overall weighted average like-for-like valuation increase of the portfolio.
Portfolio Manager’s Review
The Company’s portfolio saw a like-for-like valuation increase of 2.94% for the quarter, building on the 2.41% increase recorded in the previous quarter. Similar to the previous period, the valuation increase was chiefly driven by asset management gains at the Company’s retail warehouse parks in Dewsbury, Barnstaple and Coventry, where the sector’s like-for-like valuation was up 8.87%, having produced a 5.34% increase for the previous quarter.
The combined value of the Company’s industrial holdings increased by 2.19% as a result of continued rental growth in the sector, highlighting their reversionary potential. This upside is further demonstrated by the difference in the net initial and reversionary yield of the portfolio’s industrial assets at quarter-end, being 7.56% and 8.86% respectively. The Company recently completed the refurbishment of two units at Sarus Court, Runcorn. The former tenant was paying rent of £6.50 per sq. ft., markedly below the anticipated refurbished ERV.
With one interest rate cut made by the Bank of England in August, and at least one more anticipated prior to calendar year-end, further yield compression is expected for the industrial sector in the near term, which should amplify capital performance. During the quarter, the Company completed the sale of its multi-let industrial estate in Droitwich for a 33% premium to the 31 March 2024 valuation, signalling that momentum is already building in the sector. This bodes well for the Company’s other industrial assets, with the sector weighting at quarter-end standing at 35.17%.
The high street retail and offices sectors have had another quiet quarter, except for Union Street, Bristol, where the first floor space of the former Wilko unit was re-let to the existing tenant of the second floor, Roxy Lanes. This re-letting is encouraging and emphasises the tenant’s strong trading performance at the property. The refurbishment of vacant space at the Company’s office holdings in Bristol and Bath is due to commence next quarter. Until these projects are underway, and marketing commenced, their valuations are likely to remain muted.
Having previously agreed an early surrender with Mecca Bingo at The Railway Centre, Dewsbury, the Company completed a new 25-year lease to Tenpin Limited at a rent of £378,470 per annum. The valuation of the property subsequently increased by 59%, with further capital uplift expected in the near term when the tenant’s fit-out is completed, part of which is being funded by two further capital contributions made by the Company. The former Sports Direct unit at Barnstaple Retail Park has now been re-let to Farmfoods, who have taken a new 15-year lease at a rent of £125,000 per annum. Both these new lettings highlight the importance of ongoing asset management in continuing to bolster the Company’s earnings performance, while at the same time driving capital value.
Net Asset Value
The Company’s unaudited NAV at 30 September 2024 was £172.76 million, or 109.05 pence per share. This reflects an increase of 2.96% compared with the NAV per share at 30 June 2024. The Company’s NAV total return, which includes the interim dividend of 2.00 pence per share for the period from 1 April 2024 to 30 June 2024, was 4.85% for the three-month period ended 30 September 2024.
| Pence per share | £ million | |
| NAV at 1 July 2024 | 105.91 | 167.79 |
| Portfolio acquisition and disposal costs | (0.03) | (0.05) |
| Gain on sale of investments | 0.94 | 1.48 |
| Capital expenditure | (1.10) | (1.75) |
| Valuation change in property portfolio | 2.65 | 4.21 |
| Income earned for the period | 3.58 | 5.67 |
| Expenses and net finance costs for the period | (0.90) | (1.42) |
| Interim dividend paid | (2.00) | (3.17) |
| NAV at 30 September 2024 | 109.05 | 172.76 |
The NAV attributable to the ordinary shares has been calculated under International Financial Reporting Standards. It incorporates the independent portfolio valuation at 30 September 2024 and income for the period, but does not include a provision for the interim dividend declared for the three-month period to 30 September 2024.
Share Price and Discount
The closing ordinary share price at 30 September 2024 was 98.4p, an increase of 15.36% compared with the share price of 85.3p at 30 June 2024. The closing share price represents a discount to the NAV per share of 9.77%. The Company’s share price total return, which includes the interim dividend of 2.00 pence per share for the period from 1 April 2024 to 30 June 2024, was 14.65% for the three-month period ended 30 September 2024.
Dividend
Dividend declaration
The Company today announces an interim dividend of 2.00 pence per share for the period from 1 July 2024 to 30 September 2024. The dividend payment will be made on 29 November 2024 to shareholders on the register as at 1 November 2024. The ex-dividend date will be 31 October 2024. The Company operates a Dividend Reinvestment Plan (“DRIP”), which is managed by its registrar, Link Group. For shareholders who wish to receive their dividend in the form of shares, the deadline to elect for the DRIP is 12 November 2024.
The dividend of 2.00 pence per share will be designated 2.00 pence per share as an interim property income distribution (“PID”).
The Company has now paid a 2.00 pence quarterly dividend for 36 consecutive quarters1, providing high levels of income consistency to our shareholders.
1For the period 1 November 2017 to 31 December 2017, a pro rata dividend of 1.33 pence per share was paid for this two-month period, following a change in the accounting period end.
Dividend outlook
It remains the Company’s intention to continue to pay dividends in line with its dividend policy. In determining future dividend payments, regard will be given to the financial circumstances prevailing at the relevant time, as well as the Company’s requirement, as a UK REIT, to distribute at least 90% of its distributable income annually.
Financing
Equity:
The Company’s share capital consists of 158,424,746 Ordinary Shares in issue.
Debt:
The Company has a £60.00 million, five-year term loan facility with AgFe, a leading independent asset manager specialising in debt-based investments. The loan is priced as a fixed rate loan with a total interest cost of 2.959% until May 2027.
The loan was fully drawn at 30 September 2024, producing a Loan to GAV ratio of 25.04%.
Headroom on the debt facility’s 60% loan to value (“LTV”) covenant continues to be conservative. For those properties secured under the loan, a 48.03% fall in valuation would be required before the LTV covenant were to be breached.
Investment Update
Oak Park Industrial Estate, Droitwich (industrial) – On 24 July 2024, the Company completed on the sale of Oak Park Industrial Estate for £6.30 million, reflecting a net initial yield of 7.95% and a capital value of £33 per sq. ft. A sale at this price represents a circa 33% premium to the 31 March 2024 valuation.
Following three new lettings, which added £272,000 of annual rental income, the property was fully let. The business plan put in place for the property had been completed, and the decision was made to sell the asset as we believed that value over the medium term had been maximised.
The industrial estate was bought in December 2015 for £5,625,000, reflecting a 10.4% net initial yield and a capital value of £30 per sq. ft. The estate was originally single let to Egbert H Taylor & Co Limited (trading as Taylor Bins), a strong tenant covenant with a WAULT to expiry of approximately seven years. The tenant has since downsized on the estate.
No purchases were made by the Company during the quarter.
Asset Management Update
The Company completed and exchanged on the following asset management transactions during the quarter:
Union Street, Bristol (retail) – Having completed subdivision works to the former Wilko unit, separating the ground and basement levels from the first floor, the Company completed a new letting to Roxy Lanes (Bristol) Ltd (Roxy), who already occupy the second floor of the building. Roxy entered into a new lease until 2036, conterminous with their existing lease of the second floor, with no tenant break options. The rent, which will be reviewed to RPI (1.50% collar and 4.0% cap, compounded annually) in 2026 and 2031, is £95,000 per annum (£10.55 per sq. ft.) and is guaranteed by Roxy Leisure Holdings Ltd. Roxy was granted a 12-month rent free period and a £95,000 capital contribution as a letting incentive. The remaining ground and basement levels of the former Wilko continue to be marketed.
The Railway Centre, Dewsbury (retail warehouse) – Having previously exchanged an agreement for lease with leisure operator, Tenpin Limited, to take a new 25-year lease of the former Mecca Bingo space, the Company completed the lease on 17 September. The lease is guaranteed for the duration of the term by Tenpin Entertainment Limited, previously Ten Entertainment Group plc, who was acquired by US private equity firm, Trive Capital, in February 2024 for £287 million. The lease has a tenant break option in year 17.5, at a rent of £378,470 per annum (£13.59 per sq. ft.), with five-yearly compounded CPI reviews (1% collar and 3% cap).
At the time of Mecca Bingo vacating, the unit had an ERV of £8.00 per sq. ft. A £1,550,000 capital contribution was given as a tenant incentive, with the Company carrying out £653,000 of landlord strip-out and enabling works (£368,000 net of the Mecca dilapidations settlement).
Tenpin comprises 53 venues across the UK and provides customers with a diverse range of activities including bowling, video arcades, escape rooms, karaoke, laser tag, pool, table tennis, and soft play. The quarterly valuation uplift was 59% following completion of the letting.
Barnstaple Retail Park, Barnstaple (retail warehouse) – The Company completed a new letting of Unit 2, formerly let to Sports Direct, to Farmfoods Limited. Farmfoods have taken a 15-year lease, with a tenant break option at the expiry of the tenth year, at a rent equivalent to an ERV of £125,000 per annum (£13.00 per sq. ft.). There will be an open market rent review at the end of the fifth and tenth years. No rent-free incentive was given, but the unit’s externals were refurbished by the Company, with the cost anticipated to be recovered through a dilapidations settlement with the former tenant.
Carr Coatings, Redditch (industrial) – The Company settled Carrs Coatings Ltd’s August 2024 annual uncapped RPI rent review at £304,809 per annum (£8.02 per sq. ft.), representing a £10,461 per annum (circa 3.6%) increase. The unit is single-let to Carrs Coatings Ltd until August 2028. The lease was entered into as a sale and leaseback in 2008 at an initial starting rent of £170,300 per annum (£4.50 psf).
Sarus Court, Runcorn (industrial) – The Company completed a speculative refurbishment project of units 1001 and 1003, formerly let to CJ Services. The works comprised roof improvements, respraying of external elevations, internal strip-out and decoration, and replacing M&E services to improve the EPC ratings to a B. The cost of the works was £807,742, excluding professional fees. It is anticipated that the Company will crystalise significant rental growth from the previous rent following the units being re-let.
AEW UK REIT plc (LON: AEWU) aims to deliver an attractive total return to shareholders by investing predominantly in smaller commercial properties (typically less than £15 million), on shorter occupational leases in strong commercial locations across the United Kingdom. The Company is currently invested in office, retail, industrial and leisure assets, with a focus on active asset management, repositioning the properties and improving the quality of income streams. AEWU is currently paying an annualised dividend of 8p per share.
The Company was listed on the Official List of the Financial Conduct Authority and admitted to trading on the Main Market of the London Stock Exchange on 12 May 2015.
