The Company is pleased to announce that an interim dividend of 2.265p per Ordinary Share will be paid on 23 February 2024, pursuant to the Company’s ordinary share distribution policy.
The payment of the interim dividend to eligible holders of Ordinary Shares will be effected through CREST or by BACS in the case of holders of depository interests relating to the Ordinary Shares, or by BACS in the case of Ordinary Shares held in certificated form.
AEW UK REIT plc (LSE: AEWU) (“AEWU” or the “Company”), which directly owns a value-focused portfolio of 34 UK commercial property assets, announces its unaudited Net Asset Value (“NAV”) as at 31 December 2023 and interim dividend for the three-month period ended 31 December 2023.
Highlights
· NAV of £164.02 million or 103.53 pence per share as at 31 December 2023 (30 September 2023: £167.93 million or 106.00 pence per share).
· NAV total return of -0.44% for the quarter (30 September 2023 quarter: 0.91%).
· 1.59% like-for-like valuation decrease for the quarter (30 September 2023 quarter: 0.70% increase).
· EPRA earnings per share (“EPRA EPS”) for the quarter of 1.83 pence (30 September 2023 quarter: 1.84 pence).
· Earnings constrained by 0.28 pence per share due to two tenants entering administration: Wilko at Union Street, Bristol, and CJ Services at Sarus Court, Runcorn.
· Interim dividend of 2.00 pence per share for the three months ended 31 December 2023, paid for 33 consecutive quarters and in line with the targeted annual dividend of 8.00 pence per share.
· Loan to NAV ratio at the quarter end was 36.58% (30 September 2023: 35.73%). Significant headroom remains on all loan covenants.
· Company continues to benefit from a low fixed cost of debt of 2.959% until May 2027.
· Disposal of Commercial Road, Portsmouth, for £3.90 million.
· £253,656 of additional income secured from three settled rent reviews, as well as a turnover top-up rent.
Laura Elkin, Portfolio Manager, AEW UK REIT, commented:
“We are pleased to report relatively stable earnings for the third consecutive quarter, as the Company’s programme of investing capital in high yielding assets in core urban locations, combined with asset management transactions, continues to sustain income streams and mitigate void costs. Earnings have been maintained by several key rent reviews settled during the quarter, most notably at both of the Company’s more recently acquired assets in Bath. Upcoming lease events, in particular at Central Six Retail Park in Coventry, should enhance earnings going forward.
EPRA earnings per share have been negatively impacted by 0.28 pence due to two tenants entering administration during the period, without which the Company’s dividend would have been fully covered by earnings this quarter. The Company’s portfolio saw a like-for-like valuation decrease of 1.59% during the quarter, symptomatic of subdued deal flow in the UK commercial property investment market. Despite our recent asset management achievements, we remain cognisant of the economic backdrop and its cumulative effect on occupational markets.
The Company has committed to pay its market-leading dividend of 2.00 pence per share this quarter, which we have now paid for 33 consecutive quarters. This has been funded largely by EPRA earnings, which continues to be supplemented by profit crystallised on the NAV accretive sale of assets in prior quarters.
Valuation movement
As at 31 December 2023, the Company owned investment properties with a total fair value of £212.04 million, as assessed by the Company’s independent valuer, Knight Frank. The like-for-like valuation decrease for the quarter of £3.42 million (1.59%) is broken down as follows by sector:
Sector
Valuation 31 December 2023
Like-for-like valuation movement for the quarter
£ million
% of portfolio
£ million
%
Industrial
77.52
36.56
(0.81)
(1.03)
Retail Warehouses
45.95
21.67
(0.30)
(0.65)
High Street Retail
33.85
15.97
(0.41)
(1.20)
Other
29.12
13.73
(1.25)
(6.14)
Office
25.60
12.07
(0.65)
(2.48)
Total
212.04
100.00
(3.42)
(1.59)*
* This is the overall weighted average like-for-like valuation decrease of the portfolio.
Portfolio Manager’s Review
Although the Company’s portfolio saw a like-for-like valuation decrease of 1.59% during the quarter, this was largely driven by two of the Company’s leisure assets, Circuit nightclub in Cardiff and Odeon cinema in Southend, which saw relatively larger valuation falls this quarter as a consequence of the increasing trading pressures associated with the cost-of-living crisis and rises in the price of energy and goods. On 15 January Rekom, the UK holding company of our tenant in Cardiff, announced that it had filed notice of intention to appoint administrators to a number of its companies. Given the recent timing of this announcement, the impact on the Company’s asset in Cardiff is yet unknown, however Rekom constituted only 1.6% of the Company’s annual contracted rent as at 31 December 2023.
Our industrial holdings, which comprise circa 37% of the portfolio weighting, generally saw yield softening across the board. Valuation declines, however, were mitigated by ERV growth, a biproduct of the strength of the occupational market in this sector. The Company’s industrial reversionary yield profile as at 31 December 2023 was 9.39%, compared with an initial yield of 7.82%.
Equally critical to the earnings performance has been a range of asset management transactions, with the Company settling several rent reviews during the quarter, most significantly at both of its assets in Bath. At Northgate House, the Company settled Bath Northgate House Centre Limited’s (The Regus Group) outstanding 2022 rent review at £491,400 per annum, an increase of £96,811 per annum (circa 25%). At Cambridge House, following arbitration, the Company settled Novia Financial plc’s outstanding 2021 rent review at £362,400 per annum, an increase of £44,775 per annum (circa 14%).
Both rent reviews add evidence to the strong reversionary potential of the Company’s portfolio. This was further demonstrated by the Company agreeing a £195,505 annual turnover top-up rent for the year to 28 September 2023 for Next in Bromley, in addition to the base rent of £350,000 per annum. This is £85,505 (circa 78%) higher than what was forecast when the property was purchased in November 2022.
Earnings are expected to be bolstered by several upcoming lettings, most notably at Central Six Retail Park, Coventry, where agreements for leases have been signed with: The Food Warehouse (trading as Iceland); Whitecross Dental Ltd (trading as MyDentist); and The Salvation Army Trading Company Ltd. In combination, these lettings are expected to deliver an additional £535,000 of annual contracted rent roll within the next two quarters.
Prospective lettings at three void units: the former Wilko at Union Street, Bristol; the former Mecca Bingo at The Railway Centre, Dewsbury; and the former Sports Direct at Barnstaple Retail Park are advancing well. The re-letting of these units are expected to have completed during the first half of this calendar year, further improving income streams and mitigating the incurrence of void costs, albeit with associated tenant incentives suppressing earnings potential over the short term.
Net Asset Value
The Company’s unaudited NAV at 31 December 2023 was £164.02 million, or 103.53 pence per share. This reflects a decrease of 2.33% compared with the NAV per share at 30 September 2023. The Company’s NAV total return, which includes the interim dividend of 2.00 pence per share for the period from 1 July 2023 to 30 September 2023, was -0.44% for the three-month period ended 31 December 2023.
Pence per share
£ million
NAV at 1 October 2023
106.00
167.93
Portfolio acquisition and disposal costs
(0.05)
(0.08)
Capital expenditure
(0.05)
(0.09)
Valuation change in property portfolio
(2.19)
(3.46)
Income earned for the period
3.42
5.42
Expenses and net finance costs for the period
(1.60)
(2.53)
Interim dividend paid
(2.00)
(3.17)
NAV at 31 December 2023
103.53
164.02
The NAV attributable to the ordinary shares has been calculated under International Financial Reporting Standards. It incorporates the independent portfolio valuation at 31 December 2023 and income for the period, but does not include a provision for the interim dividend declared for the three-month period to 31 December 2023.
Share price and Discount
The closing ordinary share price at 31 December 2023 was 101.0p, an increase of 2.64% compared with the share price of 98.4p at 30 September 2023. The closing share price represents a discount to the NAV per share of 2.44%. The Company’s share price total return, which includes the interim dividend of 2.00 pence per share for the period from 1 July 2023 to 30 September 2023, was 4.67% for the three-month period ended 31 December 2023.
Dividend
Dividend declaration
The Company today announces an interim dividend of 2.00 pence per share for the period from 1 October 2023 to 31 December 2023. The dividend payment will be made on 1 March 2024 to shareholders on the register as at 2 February 2024. The ex-dividend date will be 1 February 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 13 February 2024.
The dividend of 2.00 pence per share will be designated 2.00 pence per share as an interim property income distribution (“PID”) and 0.00 pence per share as an interim ordinary dividend (“non-PID”).
The Company has now paid a 2.00 pence quarterly dividend for 33 consecutive quarters, providing high levels of income consistency to our shareholders.
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.
On 8 November 2023, the Directors declared a quarterly dividend in respect of the period from 1 July 2023 to 30 September 2023 of 1.58125p per share, which was paid on 15 December 2023. Aggregate dividend payments over the last 12-months represent a 9.5% yield on the Company’s closing share price at 24 January 2024.
Completion of Phase One of the Strategic Partnership with GLIL Infrastructure (‘GLIL’)
· Following approval under the National Security and Investment Act 2021, the Company is pleased to confirm the completion of its investment of £20 million of equity, alongside £200 million from GLIL, to fund the acquisition of a 247MW portfolio of UK solar assets.
· The Company continues to progress the provisional agreement for GLIL to acquire a 50% stake in a portfolio in excess of 100MW owned by Bluefield Solar, in line with current valuation, which remains expected to complete in early 2024.
Bluefield Solar (LON: BSIF), the London listed UK income fund focused primarily on acquiring and managing solar energy assets, is pleased to report the completion of phase one of its long-term strategic partnership (‘StrategicPartnership‘) with GLIL. This marks the acquisition of a 247MW portfolio of UK solar assets from Lightsource bp (the ‘Lightsource bpPortfolio‘). GLIL is a partnership of UK pension funds currently with a £3 billion portfolio of core UK infrastructure assets. GLIL’s member funds include Local Pensions Partnership Investments, Greater Manchester Pension Fund, Merseyside Pension Fund, West Yorkshire Pension Fund and Nest.
As previously announced, the Lightsource bp Portfolio is predominantly diversified across southern and central England and comprises 58 operating sites: 184MW backed by Feed in Tariff (‘FiT‘) subsidies, 15MW by Renewable Obligation Certificates (‘ROCs‘) and two subsidy-free projects totalling 48MW. Through the period 2023 to 2035 the proportion of fixed and regulated revenues from the portfolio is projected to be approximately 80%. The acquisition raises the level of regulated revenues in the Bluefield Solar portfolio, whilst also increasing the proportion of FiT income.
Bluefield Solar is investing £20 million, or 9% of the equity, with GLIL investing the balance. The Company will fund the acquisition using earnings which arose in the financial year ended 30 June 2023, after the payment of dividends, debt amortisation and the Electricity Generator Levy (‘EGL‘). In addition, Bluefield Solar has used £10 million of earnings to pay down a portion of the Company’s revolving credit facility (‘RCF‘). Total retained earnings prior to this announcement were approximately £60 million. Following the Lightsource bp Portfolio acquisition and the partial repayment of the RCF, the Company’s UK holding companies’ RCF balance will stand at £167 million, with long term amortising debt being £430 million. Overall, the Company’s UK holding companies and its subsidiaries have total outstanding debt of £597 million, with a leverage level of circa 41% of Gross Asset Value (broadly unchanged from 30 June 2023).
The Company continues to progress phase two of the Strategic Partnership, where GLIL has provisionally agreed to acquire a 50% stake in a portfolio of more than 100MW of operational UK solar assets currently owned by the Company (the ‘BluefieldPortfolio‘). The provisional acquisition price is in line with the Company’s current valuation. The Strategic Partnership intends to reach financial close in the first half of 2024. The sale of a stake in the Bluefield Portfolio, as described, will provide Bluefield Solar with additional liquidity, the proceeds of which provide the opportunity to continue to pay down the drawn RCF. This phase is expected to complete in early 2024.
As announced on 22 December 2023, in phase three, Bluefield Solar and GLIL intend via the Strategic Partnership to commit capital in a selection of the Company’s development pipeline, assuming market conditions are supportive. The identified development assets are expected to be grid connected over the next two to three years.
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Greencoat UK Wind. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Greencoat UK Wind (UKW) announced last month that Laurence Fumagalli will be stepping down from his role as co-head of the UKW management team at the beginning of March 2024. Laurence played a significant role at the trust, having helped launch it as the first listed renewable infrastructure fund in 2013, alongside co-manager Stephen Lilley.
Although he will stepping down from his role at UKW, Laurence will remain a part of the senior management team at Schroders Greencoat, notably chairing the fund manager’s valuation committee.
Stephen will also remain in his role and will be joined by a new co-manager, Matt Ridley, who is currently Head of Private Markets at Schroders Greencoat and has close to two decades of experience investing in renewable energy infrastructure.
Managerial changes may unnerve some investors, particularly given the volatile few years we’ve had. However, even though UKW may have a new co-manager in 2024, the investment process and ultimate objective remain the same – namely delivering strong total returns for shareholders via real NAV growth and a dividend that rises in line with RPI inflation.
That the trust is capable of delivering on that objective was illustrated at the end of October. UKW announced a £100m buy back scheme and increased its dividend for the 2024 financial year to 10p per share. The dividend increase represents a 14.2% uplift to 2023, far exceeding the rate of inflation in the UK of 5.2%.
The higher dividend and new buyback programme were a more tangible illustration of some of the points the managers made earlier this year when the trust released its half-year results. These included a simple breakdown of the trust’s dividend coverage, based on various changes to the power price.
We have covered those figures in more detail previously, but the key takeaway was that, even if we assume there is a substantial decline in the power price and higher levels of inflation, UKW would still be able to pay a growing, fully covered dividend.
The trust managers have also been more conservative in terms of valuations, increasing UKW’s discount rate to 1% above the level it was at when it held its IPO a decade ago. Today this stands at 11%, which implies a prospective forward return of 10% when management fees are factored out. However, that is on a NAV basis and, given UKW trades at a 12.4% today, the implied return is higher for potential investors.
Given that the implied returns on a NAV basis already offer a roughly 6% equity risk premium, you would think that there is reason for the discount to tighten. That has happened to an extent over the past two months, with the trust discount’s tightening from over 20%.
However, the lingering discount likely reflects the fact that investors have focused on the trust’s yield, as opposed to its total return. The forward yield on the trust now stands at approximately 6.9%. This still offers a healthy premium over gilts but clearly it is not the same as the return implied by the discount rate.
To understand that discrepancy, it’s worth looking at the reinvestment that UKW has undertaken. From IPO in 2013 through to the end of September this year, UKW paid £887m in dividends but also reinvested £877m of excess cash flow.
This has enabled the trust to grow its NAV in real terms substantially since listing, which in turn has fed into its ability to increase dividend payouts. Rate hikes have meant the managers’ ability to enhance returns through leverage have been made more difficult. However, higher discount rates have also offset this to a large extent, meaning borrowing is still additive to returns for the trust.
Despite these positives, UKW has continued to linger on a wide discount in 2023 – an unusual phenomenon for a trust that traded at an average premium every month from IPO until the end of last year.
But the trust has not been alone in this. As one UK equity fund manager noted recently, 2023 has been something of a strange year, with the fundamentals for trusts like UKW suggesting they were attractively valued, but few investors that were willing to buy.
That appears to be changing. As noted, the trust’s discount has tightened substantially in the past two months, perhaps inspired by the buyback programme and increased dividend. Broader coverage of how distorted valuations have become may have played a role as well.
Heading into 2024, the prospect of the rate hike cycle hitting its peak also looks like another potential catalyst for the UKW discount to tighten, with the high yield that UKW currently offers starting to look more appealing relative to bonds than it does today. Assuming that’s the case, it may provide a happy start for the new co-manager.
