26 May 2020
AEW UK REIT Plc (the "Company")
Sale announcement and update statement
Further to its announcement on 20 April 2020, the Company today provides a further update in respect of recent activity.
Sales and Asset Management Update
The Investment Manager's active management approach continues to be a major feature of the Company's strategy and, notwithstanding the current uncertain situation relating to COVID-19, it is pursuing a number of potentially accretive negotiations.
Most notably, it has now completed the sale of its asset at Geddington Road, Corby, for a price of £18.8 million. The asset was acquired in February 2018 for £12.4 million and has been fully let to Gefco UK Limited since this time producing net income yield against the purchase price of 10%. The 35 acre site, which due to its specialist use has been held within the Company's allocation to 'Other' sectors, has been the Company's largest asset by value with a valuation level as reported in the Company's half year report for the period ended 30 September 2019 in the region of £10-15 million. The lease to Gefco had an unexpired term of just over 1 year at the date of sale. The Company has not invested any capital expenditure in the asset during its hold period.
Alex Short, Portfolio Manager, AEW UK REIT, commented: "The completion of this sale will deliver to the Company an IRR in excess of 30% which, particularly at the current time, highlights the defensive nature of the Company's strategy. Seeking mispriced assets and those that have higher alternative use values as well as high levels of income, has been a feature of the strategy since IPO. As the portfolio matures these assets create opportunities for significant value to be added and, as evidenced by the Corby disposal, we are now seeing a number of these positions reach fruition".
Following completion of the above sale, the Company holds cash of c £27 million and reports an estimated loan to value ratio of 25.6%, including cash (31 March 2020: 26.0%). As a further result of the sale, the Company's annual rental income will fall by £1.32 million until further investments are made. The Investment Manager's fee will also reduce proportionately as management fees are not charged by AEW on amounts held in cash. The Board, in conjunction with the Manager, is evaluating the optimum use of cash balances in the current environment. The Investment Manager continues to monitor opportunities for investment and believes that market conditions may facilitate an increased number of attractive pipeline opportunities. In the meantime, the Company's high cash weighting reflects its conservative approach to the current situation and provides it with increased flexibility.
The Company also reports the following asset management transactions that have completed so far in 2020:
Bath Street, Glasgow - in January 2020, the Company completed a new letting of 6,700 sq ft to SPS Doorguard Ltd. The lease provides a 10 year term with a tenant break option at year 5 and a rent of £92,250 per annum. The unit had been vacant prior to letting.
Queen Square, Bristol - During February 2020 a new letting of 1,300 sq ft was completed. The letting of the un-refurbished suite proves a new high rental tone for the building of £27.14 per sq ft, 55% higher than the previous level of passing rent. The new letting provides annual income of £17,250.
Oak Park, Droitwich - In March 2020, the Company completed a lease renewal with tenant Egbert Taylor on two industrial units. The renewal takes the tenant's weighted average unexpired lease term from 2.7 years to 4.7 years but also reduces its demised accommodation from 190,000 sq ft to 100,000 sq ft. Total income received on the asset has fallen from £600,000 to £500,000 per annum but rental value per sq ft has increased by 57%. The Investment Manager is exploring potential for higher value alternative uses on the remainder of the site.
Pearl Assurance House, Nottingham - in March 2020, a reversionary lease was completed with Lakeland Ltd on a 4,300 sq ft retail unit providing an unexpired lease term of c 6 years. The reversionary lease documents the rebasing of Lakeland's rent from £155,000 to £90,000 per annum in line with its estimated rental value.
Bank Hey Street, Blackpool - During May 2020, the Company signed a reversionary lease with existing tenant JD Wetherspoon. This documents the removal of the tenant's break option in 2025 and provides an additional 10 year lease term taking the earliest expiry from 2025 to 2050. The annual rent payable by the tenant has reduced from £96,750 to £90,000 but the lease now provides five yearly fixed increases reflecting 1% per annum.
Financing
Whilst the Company passed its banking covenant tests with significant headroom in April, in order to be prudent in the current market environment, the Company has obtained consent from its lender, RBS International, to waive the interest cover tests within its loan agreement for July and October with the next proposed test date being January 2021. The lender also conveyed a willingness to review the position again in December based on circumstances then prevailing. The Company is not required to place funds on account or to comply with additional terms in order to qualify for the waiver. During the period of the waiver, the Company expects to maintain its usual interest payments on the loan.
The Company also confirms that it has traded down it's 2% interest rate cap, using the embedded value to buy an interest rate cap with nominal amount £51.5 million, being the entirety of its drawn loan amount. The new strike rate is 1% and the term remains October 2023, the expiry of the current facility. The new interest rate cap provides protection against interest rate rises at a 1% lower rate each year for a one-off cost of £63k equating to 4 bps per year.
Rent Collection Update
The Investment Manager has continued to maintain close contact with all tenants over recent weeks. At the date of this announcement, 75% of rent has so far been collected, expressed as a percentage of the March quarter's total rental income; however, this figure is expected to increase to 87% once payments have been received both from tenants making monthly payments and those on longer term payment plans which have not yet fallen due. Subject to the agreement of potential asset management transactions, this would increase to 90%. Amounts that remain outstanding as at the date of this announcement (i.e. those which have fallen due but have not yet been paid) are being pursued by the Company and are subject to ongoing engagement between the Manager and the tenant. There are some tenants who are experiencing difficulties in the current environment and the Company is sympathetic to their situation. Unfortunately, there are a few larger tenants who have significant financial resources and the ability to pay who are refusing to do so or even to enter into dialogue. The Company shall be pursuing these tenants when legally able to do so and charging the full default interest rate allowed within their lease agreements.
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Current Position
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As at 22 May 2020
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As at 22 May 2019
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Received
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75%
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96%
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Monthly Payments Expected Prior to Quarter End - 23 June
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5%
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3%
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Longer term payment plan agreed
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7%
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0%
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87%
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99%
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Under Negotiation - pending the agreement of potential asset management transactions
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2%
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0%
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90%
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99%
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Outstanding
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10%
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1%
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Total
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100%
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100%
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It should be noted that the figures above reflect an evolving picture with further payments being received each day.
In addition to the above the Manager reports that none of the Company's tenants have filed for administration at the date of this announcement.
For further information, please contact:
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 was listed on the Official List of the UK Listing Authority and admitted to trading on the Main Market of the London Stock Exchange on 12 May 2015, raising £100.5m. Since IPO it has raised a further £58m.
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 the income stream.
AEWU is currently paying an annualised dividend of 8p per share.
www.aewukreit.com
About AEW UK Investment Management LLP
AEW UK Investment Management LLP employs a well-resourced team comprising 26 individuals covering investment, asset management, operations and strategy. It is part of AEW Group, one of the world's largest real estate managers, with EUR69.5bn of assets under management as at 31December 2019. 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 2019, AEW Group managed EUR33bn of real estate assets on behalf of a number of funds and separate accounts with over 400 staff located in 9 offices. The Investment Manager is a 50:50 joint venture between the principals of the Investment Manager and AEW. 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
LEI: 21380073LDXHV2LP5K50
