28 November 2024
AEW UK REIT PLC
Interim Report and Financial Statements
for the six months ended 30 September 2024
AEW UK REIT PLC ("AEW UK REIT" or the "Company"), which holds a diversified portfolio of 32 commercial investment properties throughout the UK, is pleased to publish its Interim Report and Financial Statements for the six months ended 30 September 2024.
Robin Archibald, Chairman of AEW UK REIT, commented: "Having joined the Board of AEW UK REIT plc in the last year, I have been impressed by the historic and current performance record of the portfolio, in terms of the sustainability of income, and capital profits generated. This has been achieved against a difficult market background for UK commercial property since the Company's inception over nine years ago. The last six months have been impressive, with an increase in net asset value of 6.2%, dividends covered by earnings, and the completion of numerous asset management initiatives by the AEW team. The sustained two pence per quarter dividend (eight pence annualised) continues to be very attractive in comparison to other income products."
Financial Highlights
| ● | Net Asset Value ('NAV') of £172.76 million and of 109.05 pence per share ('pps') as at 30 September 2024 (31 March 2024: £162.75 million and 102.73 pps). |
| ● | NAV Total Return for the period of 10.05% (six months ended 30 September 2023: 4.30%). |
| ● | Operating profit before fair value changes of £8.90 million for the period (six months ended 30 September 2023: £6.63 million). |
| ● | Profit Before Tax ('PBT')* of £16.64 million and earnings per share ('EPS') of 10.30 pps for the period (six months ended 30 September 2023: £7.16 million and 4.52 pps). PBT includes a £7.03 million gain arising from changes to the fair values of investment properties in the period (six months ended 30 September 2023: £0.16 million loss) and £1.48 million realised gains on disposal of investment properties (six months ended 30 September 2023: £1.65 million gains). |
| ● | EPRA Earnings Per Share ('EPRA EPS') for the period of 4.43 pps (six months ended 30 September 2023: 3.58 pps). See the full Half Year Report for the calculation of EPRA EPS. |
| ● | Total dividends* of 4.00 pps declared in relation to the period (six months ended 30 September 2023: 4.00 pps). |
| ● | Shareholder Total Return* for the period of 19.35% (six months ended 30 September 2023: 11.00%). |
| ● | The price of the Company's Ordinary Shares on the London Stock Exchange was 98.40 pps as at 30 September 2024 (31 March 2024: 85.80 pps). |
| ● | As at 30 September 2024, the Company had drawn £60.00 million (31 March 2024: £60.00 million) of its £60.00 million (31 March 2024: £60.00 million) loan facility with AgFe and was geared to 24.87% of GAV (31 March 2024: 28.97%). See note 13 in the full Half Year Report for further detail. |
| ● | The Company held cash balances totalling £14.47 million as at 30 September 2024 (31 March 2024: £11.40 million). |
Property Highlights
| ● | As at 30 September 2024, the Company's property portfolio had a valuation of £215.64 million across 32 properties (31 March 2024: £210.69 million across 33 properties) as assessed by the valuer(1) and a historical cost of £207.96 million (31 March 2024: £214.66 million). |
| ● | The Company acquired no properties during the period (year ended 31 March 2024: two properties for a total purchase price of £21.52 million, excluding acquisition costs). |
| ● | The Company made one disposal during the period for gross sale proceeds of £6.30 million (year ended 31 March 2024: five properties for gross sale proceeds of £26.95 million). |
| ● | The portfolio had an EPRA vacancy rate** of 6.77% as at 30 September 2024 (31 March 2024: 6.38%). |
| ● | Rental income generated during the period was £9.57 million (six months ended 30 September 2023: £9.43 million). |
| ● | EPRA Net Initial Yield ('EPRA NIY')** of 8.13% as at 30 September 2024 (31 March 2024: 8.02%). |
| ● | Weighted Average Unexpired Lease Term ('WAULT')* of 4.49 years to break and 5.90 years to expiry (31 March 2024: 4.27 years to break and 5.60 years to expiry). |
* See KPIs in the full Half Year Report for definition of alternative performance measures.
** See glossary in the full Half Year Report for definition of alternative performance measures.
(1) The valuation figure is reconciled to the fair value under IFRS in note 11.
| Enquiries
| |
| AEW UK Henry Butt |
|
| AEW Investor Relations | +44 (0) 20 7016 4880 |
|
Panmure Liberum Darren Vickers |
darren.vickers@panmureliberum.com +44 (0) 20 3100 2222 |
|
| |
| Cardew Group Ed Orlebar Tania Wild Henry Crane
| +44 (0) 7738 724 630 +44 (0) 7425 536 903 +44 (0) 7918 207 157
|
Chairman's Statement
Overview
I open my first Chairman's Statement by thanking the former Chairman, Mark Burton, for his effective oversight of the Company since its inception, and to thank him on behalf of all stakeholders.
With the UK and US elections behind us, and the Bank of England implementing two rate cuts, there are plenty of political and economic events to digest, some of which will have a direct, or at least indirect, impact on UK commercial property in the short to medium term. There are always events to respond to, which is why good investment management anticipates and responds to these in an effective way.
The six-month period to September 2024 saw the economic and political pressures that have constrained the UK commercial real estate market begin to subside. The period commenced with April 2024 marking the end of an 11-month run of consecutive valuation declines at the property level. The MSCI/AREF UK PFI All Balanced Open-Ended Funds Quarterly Property Index ("the Index") delivered a modest total return of 2.7% for the period, driven almost entirely by an income return of 2.4%, which has been most evident in the retail warehousing and industrial sectors. This same theme has been amplified in the Company's portfolio, which delivered a strong income return of 4.5%. Despite the relatively muted economic backdrop, the Company's portfolio has delivered good capital growth of 4.4% during the same period, well exceeding the Index's average of 0.4%. Overall, the Company has delivered a total return of 9.1% for the period, significantly outperforming the benchmark.
The Company's underlying property performance has translated into a NAV total return of 10.1% during the period, compared to the peer group average of -1.3%. The Company's relative outperformance is testament to its value-focused strategy of investing in mispriced assets where income can be grown, and value created, through active asset management. This continues to be at the centre of the Company's investment philosophy.
As a result of improved shareholder sentiment towards the UK real estate sector, there has been a positive re-rating in the Company's share price. The Company's shares produced a shareholder total return of 19.4% for the period, strengthened by consistent payment of its two pence quarterly dividend, which was fully covered by EPRA EPS for both quarters. The Company's shares traded at an average discount to NAV of 12.8% during the period, compared to the UK diversified REIT peer group average of 29.6%. We expect that the Company's long-term track record of outperformance and robust strategy should continue to assist its share price recovery, and relative discount to NAV versus its peers, as market attitude continues to improve.
This has been a quiet period of transactional activity for the Company, with no acquisitions being made, and only one disposal completing during the first half of the year, being Oak Park Industrial Estate, Droitwich. This asset was sold for £6.30 million, delivering a circa 33% premium to the 31 March 2024 valuation. The sale price achieved for Droitwich is encouraging for the Company's other industrial holdings, where the average book value of £45 per sq. ft. and an average passing rent of £3.71 per sq. ft. at 30 September 2024 are relatively low. The Company's industrial portfolio, with a reversionary yield of 8.86%, versus an initial yield of 7.56%, is also well placed to benefit from the ongoing trend of rental growth in the sector.
A distinct strength of the Company's active asset management approach is that despite subdued transactional activity, symptomatic of wider commercial property investment market conditions, the Company has been able to produce strong capital and income growth by investing in the existing portfolio, rather than relying on disposals and acquisitions to deliver this.
Investing in the existing portfolio has meant that the first half of the financial year has been characterised by a number of significant lettings, most notably at the Company's retail warehousing assets, with the sector recording quarterly valuation increases of 5.34% and 8.87% in June and September, respectively. Prominent examples include lettings to The Salvation Army at Central Six Retail Park, Coventry; Tenpin at The Railway Centre, Dewsbury; and Farmfoods at Barnstaple Retail Park. These three lettings have increased the portfolio's annual contracted rent by £643,470 per annum, while also mitigating potential void property costs. These lettings contributed to the Company's excellent earnings growth during the period (2.17 pence for the September quarter, versus 1.88 pence for the March quarter), and have also been responsible for fuelling capital growth.
In accordance with the Company's strategy of delivering total return through active asset management, capital cash reserves of circa £11.2m at period-end have largely been allocated to further near-term asset management initiatives. These are expected to drive further capital and income growth in several of the portfolio's assets. Most of the cash reserves are being held in a high-interest rate deposit account to minimise the impact of cash drag.
Financial Results
| | Six months ended 30 September 2024 | Six months ended 30 September 2023 | Year ended 31 March 2024 |
| Operating profit before fair value changes and gains on disposals (£'000) | 8,904 | 6,627 | 13,363 |
| Operating profit (£'000) | 17,417 | 8,110 | 10,861 |
| Profit before tax (£'000) | 16,638 | 7,162 | 9,090 |
| Earnings per share (basic and diluted) (pence)* | 10.30 | 4.52 | 5.71 |
| EPRA Earnings per share (basic and diluted) (pence)* | 4.43 | 3.58 | 7.29 |
| Ongoing Charges (%) | 1.54 | 1.50 | 1.60 |
| Net Asset Value per share (pence)* | 109.05 | 106.00 | 102.73 |
| EPRA Net Tangible Assets per share (pence)* | 109.05 | 106.00 | 102.73 |
* see note 9 of the Financial Statements for the corresponding calculations. See the Investment Manager's Report for further explanation of performance in the period.
Awards
I am delighted that the Company's market leading performance and practices have been recognised in three awards received during the period. The Company has once again been awarded by EPRA, the European Public Real Estate Association, a gold medal for its high standard of financial reporting, and for the first time, a gold medal for standards of sustainability reporting, improving on the previously awarded silver medal. The Company also won the 'Listed Funds' category in the 2023 MSCI UK Property Investment Awards, an award given to the listed fund displaying the highest annualised three-year total property return for the three years to 31 December 2023.
These awards recognise the skill, hard work and dedication that is put into running the Company, particularly by the Company's Investment Manager, AEW.
Outlook
The Board and Investment Manager are confident that the Company is well positioned to benefit from the recent improvement in sentiment towards the UK real estate sector. We are pleased to have delivered two successive quarters of fully covered dividends during the period, evidencing the effectiveness of the Company's active asset management approach in delivering strong rental income growth, while also managing costs.
We expect that the portfolio will continue to be resilient, despite a prolonged period of macroeconomic uncertainty. We continue to have conviction in the Company's investment strategy, especially in its ability to identify and execute cross-sector counter-cyclical moves, and translate them into sustainable shareholder value.
Earnings performance remains a focus for the coming quarters. Ongoing asset management initiatives at Union Street, Bristol, and Sarus Court, Runcorn, are expected to provide further support to income streams in the future. Value and earnings enhancement derived from capital recycling of lower yielding asset sales, or properties where asset management initiatives have concluded, into higher yielding assets, continues to be an opportunity for the Company, and will hopefully be supported by improving market conditions.
In the near term, the Board and Investment Manager will adopt a cautious approach towards managing the Company, while markets digest the recent UK and US elections, as well as the Autumn Budget. With two interest rate cuts actioned by the Bank of England this year, the outlook for commercial property values is broadly more positive than it was a year ago, and we will ensure that the Company is optimally positioned to capitalise on this for the benefit of its shareholders.
Robin Archibald
Chairman
27 November 2024
Investment Manager's Report
Property Market Outlook
Despite uncertainty continuing in the wider economy, values in UK commercial property remained largely stable during the six months to 30 September 2024, with some yield tightening across all the retail sub-sectors, as well as industrials. There continues to be pricing discovery for offices, with most investors ruling the sector out of favour. There has been a noticeable increase in activity and improvement in investor sentiment post the general election. With the Bank of England making its first cuts to interest rates in August and November, and with the US election now behind us, investment volumes, and subsequently valuations, are expected to increase in H2 2024. There remains strong continued investor focus on rental growth and assets which satisfy ESG requirements. Positive rental growth across all market sectors should enhance UK property total returns going into 2025.
Industrial
Investor confidence is returning and there is a renewed ability to successfully target and place capital in the sector. H1 2024 investment volumes totalled £4.3 billion and although below H1 2023, this represents a 32% improvement on H2 2023 and is higher than the 10-year pre-pandemic H1 average. This momentum is expected to continue into 2025, with investors buoyed by the stability of the occupational market and the rental growth story, which despite being more moderate than that enjoyed in recent years, is still forecast to be circa 3% per annum for 2025 (IPF Consensus Retail Growth Forecast, May 2024). We believe that the Company's industrial portfolio, with a low average passing rent of £3.71 per sq. ft. and a reversionary yield of 8.86% (initial yield of 7.56%), will be well placed to benefit. The Company completed its only sale during the period from the sector, being Oak Park Industrial Estate in Droitwich, for a 33% premium to the March 2024 valuation.
Retail
Values in the retail sector, in particular out-of-town retail and food stores, fared well during the period, highlighting the continued divergence in performance between the high-street and shopping centres. The Company's retail warehousing sector recorded quarterly valuation uplifts in June and September of 5.34% and 8.87% respectively, principally driven by asset management gains. Despite the narrative suggesting an easing of consumer pressure and improving confidence, with inflation returning to more 'normalised' levels, increasing spending power did not translate into retail sales, which were disappointing. Improving occupational dynamics and growing confidence in fair and reflective pricing is driving investor sentiment, with this trend expected to continue into 2025. This bodes well for the Company, with 40% of the portfolio allocated to the retail sector. The period saw significant lettings at the Company's retail warehousing parks in Coventry, Dewsbury and Barnstaple, and high-street asset in Bristol, amounting to a combined total annual rent of £738,470. Two of these four lettings were to leisure operators (Tenpin and Roxy Lanes), illustrating the benefits of a more flexible planning system in facilitating a wider variety of uses in town and city centres.
Offices
Across the national office market, transaction volumes totalled £337 million in Q2 2024. This was 5% below volumes in Q1 2024, 53% below Q2 2023, and for the second quarter running, represents the lowest quarterly volume recorded since 2009. Some entrepreneurial buyers are calling the bottom of the market, while most of the investor market continues to rule the sector out of favour. Occupational uncertainty remains across the sector, as businesses continue to transition to new working patterns. Tenants have also become more discerning, with occupiers now wishing to benefit from strong sustainability credentials as well as surrounding amenities and top-quality space. With the focus on a relatively narrow section of the market, competition has pushed prime rental values across many regional markets. Bristol, where the Company holds one office asset in Queen's Square, has seen year-on-year rental growth of 27%. This is encouraging, with the Company due to commence a refurbishment project of the reception and part of the offices in H2. Serviced office providers have been active in H1 2024, accounting for 10% of total take-up. Greater demand for short-term serviced space is chiefly being generated by occupiers deferring decisions while considering a longer-term occupational strategy..
Alternatives
Across the alternative sectors, visibility of performance in trading updates is key to investor demand. With hospitality and leisure spend stronger than retail according to Barclaycard data, it is unsurprising that we are seeing expansion within the sector. During the period, the Company completed two new leisure lettings at Dewsbury, where Tenpin took a 25-year lease, and Union Street, Bristol, where Roxy Lanes expanded its existing space into the first floor. The billing of three years of Hollywood Bowl's turnover rent, amounting to £276,120, at London East Leisure Park, Dagenham, is also testament to the current popularity of bowling and the corresponding attractiveness of bowling operators as tenants, with bowling being a market leader for experiential leisure spend in the post-Covid era. We find the leisure sector attractive on a selective basis, particularly for assets that offer a superior income return and occupy larger land holdings, or sites in urban areas that can often be underpinned by alternative use values, most likely residential.
Financial Results
The Company's NAV as at 30 September 2024 was £172.76 million or 109.05 pps (31 March 2024: £162.75 million or 102.73 pps). This represents an increase of 6.32 pps or 6.15% over the six-month period, with the underlying movement in NAV set out in the table below:
| NAV Reconciliation | |
| NAV as at 1 April 2024 | 102.73 |
| Portfolio acquisition costs | (0.03) |
| Profit on sale of investments | 0.94 |
| Capital expenditure | (1.27) |
| Valuation change property | 5.74 |
| EPRA Earnings | 4.94 |
| Dividends paid | (4.00) |
| NAV as at 30 September 2024 | 109.05 |
EPRA EPS for the period was 4.43 pence, which based on dividends paid of 4.00 pps, reflects a dividend cover of 110.75%. The increase in dividend cover compared to the prior six-month period has arisen due to the recognition of indemnity income (note 3), as well as the completion of numerous earnings-accretive asset management transactions, which have resulted in income generation and void cost mitigation.
The Company's near-term focus continues to be progressing its pipeline of asset management initiatives which are expected to drive further capital and income growth in several of the portfolio's assets.
Financing
As at 30 September 2024, the Company has a £60.00 million loan facility with AgFe, in place until May 2027, the details of which are presented below:
|
| 30 September 2024 | 31 March 2024 |
| Facility | £60.00 million | £60.00 million |
| Drawn | £60.00 million | £60.00 million |
| Gearing (Loan to GAV) | 24.87% | 28.97% |
| Gearing (Loan to NAV) | 34.73% | 36.87% |
| Interest rate | 2.959% fixed | 2.959% fixed |
Property Portfolio
In the year to 30 September 2024, the Company outperformed the benchmark in total return terms across all property sectors, demonstrating the benefits of an actively managed portfolio. This was driven by capital growth outperformance in all sectors and income return outperformance in all sectors aside from offices.
The following tables illustrate the composition of the portfolio in relation to its properties, tenants and income streams:
Summary by Sector as at 30 September 2024
|
Sector |
Number of assets |
Valuation (£m) |
Area (sq ft) |
Vacancy by ERV (%) |
WAULT to break (years) | Gross passing rental income (£m) | Gross passing rental income (£psf) |
ERV (£m) |
ERV (£psf) |
Rental income (£m) | Like- for-like rental growth* (£m) | Like- for-like rental growth* % |
| | | | | | | | | | | | | |
| Industrial | 13 | 75.82 | 1,692,187 | 7.19 | 3.02 | 6.28 | 3.71 | 7.74 | 4.58 | 3.11 | (0.22) | (6.96) |
| Retail warehouses | 5 | 53.68 | 444,973 | 1.41 | 6.53 | 4.55 | 10.22 | 4.55 | 10.23 | 2.33 | 0.41 | 21.35 |
| Standard retail | 6 | 31.82 | 243,960 | 10.80 | 3.50 | 3.27 | 13.39 | 3.36 | 13.76 | 1.53 | (0.35) | (18.72) |
| Alternatives | 5 | 29.07 | 228,171 | 0.00 | 7.03 | 3.13 | 13.72 | 2.47 | 10.84 | 1.64 | (0.19) | (12.18) |
| Office | 3 | 25.25 | 125,318 | 15.63 | 2.25 | 2.06 | 16.49 | 2.75 | 21.92 | 0.96 | (0.12) | (11.11) |
| | | | | | | | | | | | | |
| Portfolio | 32 | 215.64 | 2,734,609 | 6.77 | 4.49 | 19.29 | 7.06 | 20.87 | 7.63 | 9.57 | (0.47) | (4.90) |
Summary by Geographical Area as at 30 September 2024
|
Geographical Area |
Number of assets |
Valuation (£m) |
Area (sq ft) |
Vacancy by ERV (%) |
WAULT to break (years) | Gross passing rental income (£m) | Gross passing rental income (£psf) |
ERV (£m) |
ERV (£psf) |
Rental income (£m) | Like- for-like rental growth* (£m) | Like- for-like rental growth* % |
| | | | | | | | | | | | | |
| South West | 7 | 57.50 | 635,587 | 15.31 | 3.47 | 4.97 | 7.82 | 6.28 | 9.88 | 2.48 | (0.29) | (10.47) |
| West Midlands | 4 | 43.83 | 416,451 | 1.80 | 4.76 | 3.59 | 8.62 | 3.56 | 8.54 | 2.05 | 0.19 | 11.24 |
| Yorkshire and Humberside |
7 |
34.84 |
570,563 |
3.79 |
5.49 |
3.25 |
5.70 |
3.68 |
6.46 |
1.41 |
(0.06) |
(4.08) |
| Eastern | 4 | 21.05 | 326,419 | 0.81 | 2.29 | 2.00 | 6.13 | 2.06 | 6.32 | 0.93 | 0.01 | 1.09 |
| North West | 3 | 18.65 | 235,268 | 13.11 | 4.89 | 1.36 | 5.78 | 1.77 | 7.50 | 0.66 | (0.10) | (13.16) |
| Wales | 2 | 14.97 | 319,010 | 0.00 | 8.48 | 1.27 | 4.00 | 1.36 | 4.27 | 0.61 | (0.03) | (4.69) |
| Rest of London | 1 | 11.00 | 102,400 | 0.00 | 8.28 | 1.09 | 10.63 | 0.78 | 7.66 | 0.69 | (0.15) | (26.79) |
| South East | 2 | 8.10 | 74,351 | 0.00 | 1.22 | 1.13 | 15.26 | 0.78 | 10.47 | 0.45 | (0.01) | (2.17) |
| East Midlands | 1 | 3.60 | 28,219 | 0.00 | 2.94 | 0.41 | 14.46 | 0.38 | 13.44 | 0.19 | (0.03) | (13.64) |
| Scotland | 1 | 2.10 | 26,341 | 0.00 | 3.64 | 0.22 | 8.26 | 0.22 | 8.26 | 0.10 | - | - |
| | | | | | | | | | | | | |
| Portfolio | 32 | 215.64 | 2,734,609 | 6.77 | 4.49 | 19.29 | 7.06 | 20.87 | 7.63 | 9.57 | (0.47) | (4.90) |
*like-for-like rental growth excludes turnover rents and is for the six months ended 30 September 2024.
Source: Knight Frank/AEW, 30 September 2024.
Individual Property Classifications
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|
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| Market Value |
|
| Property - Top 10 | Sector | Region | Range (£m) |
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|
|
|
|
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| 1 | Central Six Retail Park, Coventry | Retail warehouses | West Midlands | 25.0 - 30.0 |
| 2 | Gresford Industrial Estate, Wrexham | Industrial | Wales | 10.0 - 15.0 |
| 3 | Northgate House, Bath | Standard retail | South West | 10.0 - 15.0 |
| 4 | Cambridge House, Bath | Other offices | South West | 10.0 - 15.0 |
| 5 | London East Leisure Park, Dagenham | Other | Rest of London | 10.0 - 15.0 |
| 6 | 40 Queen Square, Bristol | Other offices | South West | 10.0 - 15.0 |
| 7 | Tanner Row, York | Other | Yorkshire and Humberside | 10.0 - 15.0 |
| 8 | Arrow Point Retail Park, Shrewsbury | Retail warehouses | West Midlands | 7.5 - 10.0 |
| 9 | Apollo Business Park, Basildon | Industrial | Eastern | 5.0 - 7.5 |
| 10 | Barnstaple Retail Park, Barnstaple | Retail Warehouses | South West | 5.0 - 7.5 |
The Company's top ten properties listed above comprise 54.5% of the total value of the portfolio.
|
|
|
|
| Market Value |
|
| Property | Sector | Region | Range(£m) |
| 11 | Units 1001-1004, Sarus Court, Runcorn | Industrial | North West | 5.0 - 7.5 |
| 12 | 15-33 Union Street, Bristol | Standard retail | South West | 5.0 - 7.5 |
| 13 | Storey's Bar Road, Peterborough | Industrial | Eastern | 5.0 - 7.5 |
| 14 | Cuerden Way, Preston | Retail warehouses | North West | 5.0 - 7.5 |
| 15 | Brockhurst Cresent, Walsall | Industrial | West Midlands | 5.0 - 7.5 |
| 16 | Westlands Distribution Park, Weston Super Mare | Industrial | South West | 5.0 - 7.5 |
| 17 | The Railway Centre, Dewsbury | Retail warehouses | Yorkshire and Humberside | 5.0 - 7.5 |
| 18 | Mangham Road, Rotherham | Industrial | Yorkshire and Humberside | 5.0 - 7.5 |
| 19 | Walkers Lane, St Helens | Industrial | North West | 5.0 - 7.5 |
| 20 | Diamond Business Park, Wakefield | Industrial | Yorkshire and Humberside | 5.0 - 7.5 |
| 21 | Next, Bromley | Standard retail | South East | 5.0 - 7.5 |
| 22 | 710 Brightside Lane, Sheffield | Industrial | Yorkshire and Humberside | < 5.0 |
| 23 | Odeon Cinema, Southend | Other | Eastern | < 5.0 |
| 24 | Pearl House, Nottingham | Standard retail | East Midlands | < 5.0 |
| 25 | Cedar House, Gloucester | Other offices | South West | < 5.0 |
| 26 | Eagle Road, Redditch | Industrial | West Midlands | < 5.0 |
| 27 | Pipps Hill Industrial Estate, Basildon | Industrial | Eastern | < 5.0 |
| 28 | 69-75 Above Bar Street, Southampton | Standard Retail | South East | < 5.0 |
| 29 | Bridge House, Bradford | Industrial | Yorkshire and Humberside | < 5.0 |
| 30 | JD Gyms, Glasgow | Other | Scotland | < 5.0 |
| 31 | Pryzm, Cardiff | Other | Wales | < 5.0 |
| 32 | 11/15 Fargate, Sheffield | Standard Retail | Yorkshire and Humberside | < 5.0 |
Sector and Geographical Allocation by Market Value as at 30 September 2024
Sector Allocation
| Sector | % |
| Industrial | 35 |
| Retail warehouses | 25 |
| Standard retail | 15 |
| Alternative | 13 |
| Offices | 12 |
Geographical Allocation
| Location | % |
| South West | 27 |
| West Midlands | 20 |
| Yorkshire and Humberside | 16 |
| Eastern | 10 |
| North West | 8 |
| Wales | 7 |
| South East | 4 |
| Rest of London | 5 |
| East Midlands | 2 |
| Scotland | 1 |
Source: Knight Frank valuation report as at 30 September 2024.
Top Ten Tenants
|
| Tenant | Sector | Property | Passing Rental Income (£'000) | % of Portfolio Total Contracted Rental Income |
| 1 | Plastipak UK Limited | Industrial | Gresford Industrial Estate, Wrexham | 975 | 5.1 |
| 2 | NCP | Other | Tanner Row, York | 733 | 3.8 |
| 3 | Walstead Peterborough Limited | Industrial | Storey's Bar Road, Peterborough | 725 | 3.8 |
| 4 | Next | Retail | Next, Bromley | 697 | 3.6 |
| 5 | Matalan | Retail warehouse | Matalan, Preston | 651 | 3.4 |
| 6 | Mecca Bingo Ltd | Other | London East Leisure Park, Dagenham | 584 | 3.0 |
| 7 | Odeon Cinemas | Other | Odeon Cinema, Southend-on-sea | 535 | 2.8 |
| 8 | Poundland Ltd | Retail | Various | 516 | 2.7 |
| 9 | Bath Northgate House Centre Ltd | Retail | Northgate House, Bath | 491 | 2.5 |
| 10 | Senior Architectural Systems Ltd | Industrial | Mangham Road, Rotherham | 410 | 2.1 |
The Company's top ten tenants, listed above, represent 32.8% of the total passing rental income of the portfolio.
Source: Knight Frank valuation report as at 30 September 2024.
Investment Update
Acquisitions - There were no acquisitions completed during the period.
Disposals - 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.
Asset Management Update
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 per sq ft).
Central Six Retail Park, Coventry (retail warehousing) - The Company completed a lease with new tenant, Salvation Army Trading Company Ltd, for Unit 12.
The tenant entered a new lease expiring in November 2032, with a tenant only break option in year five, at a rent of £140,000 per annum (£13.97 per sq ft). The letting includes a nine-month rent-free incentive.
London East Leisure Park, Dagenham (leisure)- Following a protracted exchange of correspondence with The Original Bowling Company Limited (trading as Hollywood Bowl), three years of turnover rent has been billed for 2021, 2022 and 2023 equating to £276,120 (£92,040 per annum).
Pearl House, Nottingham (retail) - The company completed a lease renewal with MSR Newsgroup, whose lease expired in December 2023.
A five-year lease extension was agreed with no incentive at £14,000 per annum, versus an ERV of £12,250 per annum.
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.
Storey's Bar, Peterborough (industrial) - The Company settled Walstead Peterborough Limited's three-yearly RPI rent review (2% collar and 4% cap) at £724,861 per annum (£3.94 per sq ft), an £80,462 per annum (12.5%) increase on the previous passing rent of £644,399 per annum (£3.50 per sq ft).
Despite this notable uplift, the single-let industrial unit is still considered under-rented with an ERV greater than £4.00 per sq ft.
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, which 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 £1,565,000 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.
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.
Westlands Distribution Park, Weston-Super-Mare (industrial) - The company completed a lease renewal with a gym operator, The Hench Fish Ltd, at Unit 3. A three-year lease extension was agreed with mutual break options in the first and second year. The new rent agreed is £15,500 per annum, an uplift of £5,500 per annum (55%) on the previous passing rent of £10,000 per annum.
ESG Update
The Company has maintained its two stars Global Real Estate Sustainability Benchmark ('GRESB') rating for 2024, as well as increasing its score from 67 to 68 (GRESB Peer Group Average-69). A large portion of the GRESB score relates to performance data coverage where, due to the high percentage of single-let assets with tenant procured utilities, the Company does not score as well as Funds with a smaller holding of single-let assets and a higher proportion of multi-let assets, where the landlord is responsible for the utilities and can therefore gather the relevant data.
We continue to implement our plan to improve overall data coverage and data collection for all utilities through increased tenant engagement at our single-let assets. This includes a current project to automate tenant data collection via online platforms such as Perse and Metrey, therefore reducing reliance on manual data collection.
Where the opportunity presents itself through a lease event, we endeavour to include green clauses in leases, covenanting landlord and tenant to collaborate over the environmental performance of the property. Green clauses seek to improve data coverage by ensuring tenants provide regular and appropriate utility consumption data.
Other key GRESB improvement opportunities to action for H2 2024 include expanding the Company's tenant and community engagement programs and measures, such as fit-out and refurbishment programs that are ESG-minded.
We continue to assess and strengthen our reporting and alignment against the framework set out by the TCFD with further disclosure provided in the 2024 annual report and accounts. We are pleased to report that the Company has improved its rating for EPRA Sustainability Best Practices Recommendations ('sBPR') for ESG disclosure and transparency from a silver rating to a gold rating.
The Company has an Asset Sustainability Action Plan ('ASAP') initiative, tracking ESG initiatives across the portfolio on an asset-by-asset basis for targeted implementation of ESG improvements. In doing so, we ensure all possible sustainability initiatives are considered and implemented where physically and economically viable. As at 30 September 2024, 280 initiatives have been completed within the portfolio, with a further 100 actions planned or in progress. Current feasibility assessments include the installation of a wellbeing garden at 40 Queen Square and PV panels at London East Leisure Park.
Following a significant emissions reduction from assets within the portfolio during 2023 (-33.8% vs. the 2018 baseline), we took the decision to increase the reduction target from 15% to 40% by 2030, equating to a planned saving of roughly 76 extra tonnes of carbon. Emissions for the first half of 2024 reflect further progress, with a 12% reduction vs. the same period during 2023. All managed assets and units have been contracted to High Quality Green Tariffs, ensuring that electricity supply is from renewable sources and contributing to the continued reduction in emissions.
The Company is committed to ensuring compliance with MEES regulations which first came into effect from April 2018, when it became unlawful to grant new leases of commercial property with an EPC of below an 'E' rating. From 1 April 2023, existing leases certified with an 'F' or 'G' rating also became unlawful, even if the lease was granted prior to the MEES Regulations coming into effect. As at the end of the period, the Company had five units with draft EPC 'G' ratings, with the majority of the Company's assets (approximately 93% based on the portfolio's ERV) being MEES compliant. Three of these five G-rated units are anticipated to become vacant shortly, with their demolition planned in the medium term to enable open storage lettings. The remaining two units are currently vacant and are therefore not in breach of MEES. To mitigate future MEES risk, the Company will continue to undertake its gap analysis, identifying assets that fall below the MEES regulations, and will either need an improvement plan implemented to achieve an 'E' rating or better, or an exemption lodged, where applicable. The Company regards its relatively short WAULT (to break and expiry) as an opportunity to proactively engage with its existing tenants at lease events to improve the energy performance of its assets, as well as in the event of a vacancy.
We have recently completed the refurbishment of two industrial units at Sarus Court, Runcorn comprising approximately 30,000 sq. ft. together. The refurbishment works have comprised: removing the gas supply, installing new LED lighting throughout both units controlled by PIR sensors, installing split system air-conditioning units within the office accommodation and installing new electric panel heaters within the circulation and welfare facilities. The EPC scores for the two units prior to the refurbishment works being undertaken are C58 and D83. Following the works completing, the units have been reassessed with the EPC ratings improving to B34 and B47 respectively.
Lease Expiry Profile
Approximately £3.66 million of the Company's current contracted income stream is subject to an expiry or break within the 12-month period commencing 1 October 2024. We will proactively manage these leases nearing expiry, looking to unlock capital upside, whether that be through lease regears/renewals, or through refurbishment/capex projects and new lettings.
Source: Knight Frank valuation report as at 30 September 2024.
AEW UK Investment Management LLP
27 November 2024
AEW UK REIT PLC's interim report and financial statements for the period ended 30 September 2024 will be available today on www.aewukreit.com.
It will also be submitted shortly in full unedited text to the Financial Conduct Authority's National Storage Mechanism and will be available for inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism in accordance with DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.
LEI: 21380073LDXHV2LP5K50
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