NAV Update and Dividend Declaration 31 March 2022

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014 which forms part of domestic law in the United Kingdom pursuant to The European Union Withdrawal Act 2018, as amended by The Market Abuse (Amendment) (EU Exit) Regulations 2019.

21 April 2022

AEW UK REIT Plc

NAV Update and Dividend Declaration

AEW UK REIT plc (LSE: AEWU) (the "Company"), which directly owns a diversified portfolio of 36 regional UK commercial property assets, announces its unaudited Net Asset Value ("NAV") and interim dividend for the three-month period ended 31 March 2022.

Highlights

• NAV of £191.10 million or 120.63 pence per share as at 31 March 2022 (31 December 2021: £180.94 million or 114.21 pence per share).
• NAV total return of 7.37% for the quarter (31 December 2021 quarter: 5.63%).
• 4.74% like-for-like valuation increase for the quarter (31 December 2021 quarter: 3.49%), driven by the office and industrial sectors (like-for-like increases of 7.32% and 4.65%, respectively).
• EPRA earnings per share ("EPRA EPS") for the quarter of 1.55 pence (31 December 2021 quarter: 1.80 pence). This is expected to return to the Company's target level of 2 pence per quarter once the sale of Bath Street, Glasgow, completes later in the year.
• Interim dividend of 2.00 pence per share for the three months ended 31 March 2022, in line with the targeted annual dividend of 8.00 pence per share. 
• Acquisition of PRYZM nightclub in Cardiff for a purchase price of £3.63 million / £92 per sq. ft. The price reflects a net initial yield of circa 8%, with an anticipated reversionary yield of circa 9%. 
• Loan to NAV ratio at the quarter end was 28.26% (31 December 2021: 29.84%). The Company had a cash balance of £6.77 million and £6.0 million of its loan facility was available to draw up to the maximum 35% Loan to NAV at drawdown.
• Robust rental outlook, with portfolio ERV being 20% higher than current gross income.

Alex Short and Laura Elkin, Portfolio Managers, AEW UK REIT, commented:

"The portfolio's strong capital performance continues this quarter with a very pleasing NAV total return of 7.37%.  In a change to recent trends, in which the portfolio's industrial and warehousing assets have provided the strongest NAV growth, this quarter's growth comes predominantly from the portfolio's office assets, which have achieved a valuation uplift of 7.3%.  This largely reflects the ongoing work undertaken by AEW's active asset management team, where a number of key value accretive business plans are nearing fruition. Strong performance from the Company's office assets this quarter further highlights the benefit to investors of AEWU's flexible mandate and wealth of expertise, enabling it to take advantage of value opportunities across all sectors of the property market as they arise. Strong growth this quarter also comes after 2021 saw AEWU record its highest total return per annum since launch in 2015.  Further ongoing investment and asset management initiatives show signs of additional growth to follow later in the year.

With respect to income, EPS this quarter has been temporarily reduced by implementation of the same asset management initiatives that have provided significant capital value uplift.  A high proportion of the void costs were incurred at Bath Street, Glasgow, which is contractually committed for disposal later in the calendar year, with vacancy being a condition of the sale that, once completed, will be beneficial to the Company's overall performance. Vacancy costs this quarter had a negative impact on EPS of 0.21pps. Once the sale of Glasgow completes and its sale proceeds are reinvested, EPS is expected to return to a level in line with the Company's target level of 8p per annum. 

Inevitably, implementing accretive asset management initiatives, realising profits through sales and reinvesting the proceeds into attractive new purchases, while providing strong capital returns, will create some short-term volatility in the Company's earnings and we have seen this in recent quarters.  Nonetheless, the total returns generated by AEWU have been the strongest in the UK diversified REIT peer group over a one, three and five-year time horizon.  This has been recognised by Citywire which has for the past two years awarded AEWU its award for Best UK Property Trust (diversified) based on returns over a three-year period.

We are very pleased to announce that for the 26th consecutive quarter, a dividend of 2.00p per share will be paid.  During this time, dividends have been covered by the Company's EPRA earnings by over 98% on average and total property value generation has been in the order of 18 pence per share.  We are pleased to be the only REIT in the UK diversified peer group not to have reduced or suspended our dividend payment during the pandemic, demonstrating the resilience of our strategy.

Looking forward, the portfolio's future income generation prospects appear strong as assessed independently by Knight Frank, the Company's valuer. As at 31st March 2022, despite strong rental growth performance recorded to date, the portfolio's total estimated market rental value remained 20% higher than its current gross income, demonstrating their belief in the portfolio's inherent ability to grow income receipts over the medium term.  This seems particularly topical in today's inflationary environment where leases with inflation-linked rent reviews, which are often seen as protective in such markets, generally have Inflation caps and can only track inflationary growth so far, commonly only up to 3% or 4% pa.  The reality may be that in a high inflation environment, better income protection may arise from selectively chosen assets with an open market rent review structure than from leases that have capped levels of inflationary growth built in.  For example, the rent review settled this quarter for the Company's asset in Bradford resulted in a 14% increase in income over a three-year period.  This is just one example where such levels of growth have been achieved.

We are pleased to see that the Company's strong performance has been recognised in the rating of its shares, where demand has continued to deliver a share price premium to NAV. With an attractive pipeline of opportunities, we hope the Company will be in a position to take advantage of continued strong demand for its shares to grow its capital base."

Portfolio Manager's report

The Company's office asset at Eastpoint Business Park in Oxford saw capital growth in excess of 20% this quarter as a result of initiatives to move the accommodation's use into the burgeoning life sciences sector.  The asset has been earmarked for sale due to the high cost of completing this conversion, which should allow the Company to crystallise the benefit of excellent capital performance seen since the asset's purchase in 2015.  In addition, the confirmation of planning consent being received at the office on Bath Street in Glasgow, which was reported to the market in February, pushed this asset's valuation up by 13%.  This consent for the development of 527 student beds paves the way for the sale of Bath Street to IQ Student Housing, which is expected to complete later in the summer. 

The remainder of the portfolio's value uplift seen this quarter was driven by the now familiar theme of expansion in global warehousing markets and also by demand within the retail warehousing sector, providing 4.65% and 3.95% valuation uplifts, respectively.  In particular, the Company's industrial asset in Basildon, Apollo Business Park, saw valuation growth of 22.5% during the quarter following the signing of a new five-year lease at a rent 15% ahead of valuer's previously estimated levels.  In Bradford, at the industrial asset occupied by Pilkington UK Ltd, the September 2021 open market rent review was settled during the quarter bringing a 14% increase in income and an 11.7% uplift in capital value. In Rotherham, terms were finalised with a new tenant to take the 80,000 sq ft space vacated by Hydro Components in December 2021.  As terms stand, once the 10-year lease has been completed later this year, rental income is set to significantly exceed previous passing levels of £3.35 per sq ft. The value of the asset increased by 20% on this news.

At the Company's recently acquired retail warehousing park in Coventry, terms have been agreed with a major national retailer which should assist in providing significant income and capital growth from this asset in future periods. The asset was acquired in November 2021, highlighting the speed at which some business plan elements can be achieved with the benefit of our well researched plans and asset management expertise. 

In anticipation of a capital receipt from the sale of Glasgow later this year, we are reviewing an attractive pipeline of retail warehousing, leisure and office assets across the UK which offer income levels and capital growth opportunities in line with the existing portfolio.  We are currently in discussions with a number of vendors and have three assets under exclusive discussions, including two assets which are expected to deliver an element of marriage value due to existing adjoining or complementary holdings.

The Company's EPRA EPS was 1.55 pence for the quarter, providing a dividend cover of 78% (31 December 2021: 1.80 pence and 90%).

Valuation movement

As at 31 March 2022, the Company owned investment properties with a fair value of £240.18 million. The like-for-like valuation increase for the quarter of £10.72 million (4.74%) is broken down as follows by sector:

* This is the overall weighted average like-for-like valuation increase of the portfolio.

Net Asset Value

The Company's unaudited NAV at 31 March 2022 was £191.11 million, or 120.63 pence per share. This reflects an increase of 5.63% compared with the NAV per share at 31 December 2021. The Company's NAV total return, which includes the interim dividend of 2.00 pence per share for the period from 1 October 2021 to 31 December 2021, was 7.37% for the three-month period ended 31 March 2022.

The NAV attributable to the ordinary shares has been calculated under International Financial Reporting Standards. It incorporates the independent portfolio valuation at 31 March 2022 and income for the period, but does not include a provision for the interim dividend for the three-month period to 31 March 2022.

Rent Collection

The Company has achieved very high rent collection levels, which stand at over 98% for each quarter since March 2020 (excluding current quarter where rent continues to be collected).

For the rental quarter commencing on 25 March 2022, approximately 87% of rent has been collected or is expected to be received prior to quarter end. The remainder of rents owed will continue to be pursued.

Dividend

Dividend declaration

The Company today announces an interim dividend of 2.00 pence per share for the period from 1 January 2022 to 31 March 2022. The dividend payment will be made on 31 May 2022 to shareholders on the register as at 29 April 2022.  The ex-dividend date will be 28 April 2022. 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 10 May 2022.

The dividend of 2.00 pence per share will be designated in its entirety as a 2.00 pence per share interim property income distribution ("PID").

The Company has now paid a 2.00 pence quarterly dividend for 26 consecutive quarters1, providing income consistency to our investors.

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 and this will be kept under review. In determining future dividend payments, regard will be given to the 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 158,774,746 Ordinary Shares, of which 350,000 are currently held by the Company as treasury shares.

Debt

The Company had borrowings of £54.0 million at 31 March 2022, producing a Loan to NAV ratio of 28.26% and allowing a further £6.0 million of the remaining facility to be drawn up to the maximum 35% Loan to Value at drawdown.

The loan attracts interest at SONIA + 1.4% and the Company's all-in interest rate as at 31 March 2022 was 2.20%.

To mitigate the risk of interest rates rising, the Company has interest rate caps effective for the remaining term of the loan to 23 October 2023, capping SONIA interest rate costs at 1.0% on a notional value of £51.50 million.

Investment Update

During the quarter the Company completed the following investment transaction:

Greyfriars Road, Cardiff - In February, the Company completed the acquisition of PRYZM nightclub in Cardiff for a purchase price of £3,625,000 / £92 per sq ft. The purchase price reflects a net initial yield of 8%, with an anticipated reversionary yield of circa 9%. The property is prominently located within the leisure and late-night district of Cardiff city centre near the Principality Stadium and St David's Shopping Centre. Cardiff University and the University of Wales are located approximately 300m from the property, contributing to the total student population of circa 75,000.

The property provides 39,469 sq ft of nightclub and bar accommodation and is single-let to a subsidiary of Rekom UK (formerly The Deltic Group), providing over 14 years' unexpired lease term. Rekom UK is one of the largest specialist late-night operators in the UK with 46 clubs and bars across a number of brands. The nightclub trades as "PRYZM" and "Steinbeck & Shaw". 

Asset Management Update

During the quarter the Company completed the following asset management transactions:

Knowles Lane, Bradford (industrial) - During the quarter, the Company settled the September 2021 open market rent review with tenant, Pilkington United Kingdom Ltd, at our industrial unit in Bradford. The agreed rent is £208,000 per annum reflecting £4.50 psf. The previous passing rent was £182,500 per annum reflecting £3.95 psf, representing a 14% increase over a three-year period.     

Apollo Business Park, Basildon (industrial) - During March, the Company completed a new 10-year letting at Unit 1 Apollo Business Park, Basildon.  The lease provides the tenant with a five-year break option and offers six months' rent free. The letting produces annual rental income of £240,750 and realises a new headline rent of £8 per sq ft versus an expected market rental value of £7 per sq ft.

First Avenue, Deeside (industrial) - In Q4 2021, incumbent tenant, Magellan Aerospace (UK) Ltd, served notice to bring their lease to an end on 1 April 2022.  Discussions have however been ongoing since the service of the break notice to agree terms for a short-term lease extension. This agreement has now been signed, extending the tenant's occupation by six months.  Upon completion of the new lease, the tenant paid to the Company a dilapidations settlement of £250,000, three months' rent up front at a rate of £6 per sq ft (vs market rent value of £5.25 per sq ft and previous passing rent of £3.75 per sq ft) and a single lease premium of £50,000. The total capital receipt from the tenant upon completion was £457,400 excluding VAT. The property continues to be marketed.

Bath Street, Glasgow (office) - During February, the Company received confirmation that planning consent had been granted for the demolition and development of a 527-unit student accommodation scheme at 225 Bath Street in Glasgow city centre. This follows the exchange of contracts for the sale of the site with a subsidiary company of IQ Student Accommodation in October 2020. The sale of 225 Bath Street is expected to complete after the standard three-month judicial review period.

Once the sale has completed, occupancy within the portfolio is expected to increase by just over 4% with a corresponding decrease in the Company's costs and associated increase in income once sale proceeds have been reinvested.  Earnings are then expected to normalise at a level much closer to the Company's long-term target.

Notes to Editors

About AEW UK REIT

AEW UK REIT plc (LSE: 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. www.aewukreit.com

LEI: 21380073LDXHV2LP5K50

About AEW UK Investment Management LLP

AEW UK Investment Management LLP employs a well-resourced team comprising 28 individuals covering investment, asset management, operations and strategy. It is part of AEW Group, one of the world's largest real estate managers, with 88.2bn of assets under management as at 31 December 2021. AEW Group comprises AEW SA and AEW Capital Management L.P., a U.S. registered investment manager and their respective subsidiaries. In Europe, as at 31 December 2021, AEW Group managed 38.5bn of real estate assets on behalf of a number of funds and separate accounts with over 450 staff located in 12 locations. In May 2019, AEW UK Investment Management LLP was awarded Property Manager of the Year at the Pensions and Investment Provider Awards.

www.aewuk.co.uk