AEW UK REIT plc (AEWU) Earnings Call Transcript & Summary

Good afternoon, and welcome to the AEW UK REIT plc Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand over to Henry Butt, Assistant Portfolio Manager. Good afternoon, sir.

Thank you very much, and good afternoon, everyone. Just to remind us who we are. I'm Henry Butt, Assistant PM, I have been stepping in for Laura Elk in the PM now for the last year or so. Laura is actually back later this month and to my right is George Elliot, fund controller, very much underneath the bonnet with all the numbers on the company. So looking at the first slide, which a lot of you will have seen if you joined these presentations previously, and this pretty much sums up what we do in a nutshell, high income and actively managed. By high income, what we are typically trying to do is we are buying from a pool of diversified U.K. core plus properties throughout the U.K., and we are very sector-agnostic in our approach. We look at properties on a case-by-case basis. And we're typically buying properties and holding properties which are yielding net initial yields somewhere between 7% and 10%. Now if we are buying or holding properties, which are at the lower spectrum of that yield profile so close to 7 rather than 10. And the reason for that is that we are looking for short- to medium-term reversion. And we have a reversion yield for the portfolio of 8.9% in comparison to a net initial yield of low 8s, which really shows the rental growth potential that we are trying to unlock within the portfolio, whether that be through rent reviews or asset management deals. We say that asset management is very much the beating heart of the strategy and what enables us to sort of go out and sort of add this value through asset management is that we are typically buying shorter lease profile. So we have a WAULT to expiry of around 5 years but less to breaks, which is a point in time which we can engage with tenants and look to extend leases and add value. Now what does this all mean? Well, it all really feeds into our dividend. And you will note, we've had another strong quarter of earnings. And so about this point, I think it's probably worth mentioning that over the course of the past 4 quarters, we have added GBP 1.73 million of new income through larger material lease events. And that is really sort of bed into the earnings accretion that we've seen over the past 4 quarters as well as having a more stabilized tenant and property base, and having only carried out 2 transactions, 2 sales, Droitwich and Coventry within the past 9 months or so. Now in terms of what it all means, it means that we can pay our 2p per quarter dividend which we have now done for 37 consecutive quarters since Q1 2016, a metric that we are very proud of, which obviously equates to 8p per annum, and a dividend yield of roughly 8%. Our share price more recently has been bobbing around GBP 1. Now the other aspect of what we're trying to do other than sort of grow income and have high income, which enables us to pay out this high dividend is we're looking to unlock capital upside through asset management. We have a low average book value of GBP 74 per square foot. Now if you compare that to the cost of building properties, excluding the price of land that these properties sit on, we start to get a relatively low base, which enables us to add value through asset management, whether that's through extending leases, growing income, planning game, looking at alternative uses, et cetera. We have an annualized 10.2% 5-year total property return June 30th of September 2024, which is outperforming the MSCI benchmark by 7.8%. Now that's a very strong metric. Obviously, the bulk of that performance comes from income but there's a lot of asset management and another strong metrics, which we continue to like to report is that we have a 38% average sale to purchase price premium. So we're very good at adding value which trickles into our valuations, but then deciding when to crystallize those asset management gains by making sales. And the most recent example of that is the disposal of Central Six in Coventry, which we sold just before Christmas. So we're delighted that this performance is being recognized, and we announced in our previous NAV announcements that we had won 2 awards, Citywire, an Investment Trust award and the MSCI U.K. Property Trust awards, both which are on 3-year property and NAV total return. And in this quarter that we're reporting to you now, we won another award, we won the Investment Week award, which is judged by a panel of 10 experts. Moving on to our at-a-glance slide and this pretty much takes you through all sort of the key metrics of the portfolio in the company. So this quarter, the valuation was up 1.22%. It was up just shy of 3% in the previous quarter. And that was principally driven by ERV growth within the industrial assets in the portfolio, which make up 40% of the sector weightings. Specifically saw that 2 industrial assets, 1 in Basildon in the Southeast, about half an hour away from the city of London. And Runcorn in the Northwest, we've seen some really strong rental growth there, and that is fed through to valuation performance. Sentiment for the industrial sector has certainly improved in the previous quarter. There was more -- it was a more buoyant quarter in terms of investment activity and that's trickled through into valuation performance alongside some nearing lease events at our properties in Wrexham, Sheffield and Bradford. We've also seen some quite nice performance from our retail assets. In terms of asset management, particularly Dewsbury, which actually is retail warehousing, but actually carried out a significant lettings in Tenpin there being a leisure asset, which is quite typical where retail parks are now having a wider variety of uses, and we've seen some nice performance as well from our 2 blocks of high street retail in Bristol being Union Street and Northgate House in Bath. So we still have that 2 properties. We did dispose of Coventry, but we are left with what is known as the Triangle Site, which is 3 units, the same amount of properties as reported in the previous quarter. What is worth noting is that actually our net initial yield of 8.16% and a reversion of 8.88% that gap has widened. So it's 72 basis points this quarter and the previous quarter was 55 basis points. So there is more rental growth to go after. And that is obviously based on our value is making estimates of what the ERVs of our properties are. So that's really -- that's meaningful. That means there's more potential inherent growth within the portfolio. The vacancy rate tends to go around between 5% to 10%. It's currently just shy of 9%, but probably worth noting that, that percentage is actually about 6.8%. If you factor in agreement for leases where we've exchanged, which obviously will complete once we have satisfied the conditions for those agreements. Looking at cash and debt. The debt position is the same with the GBP 60 million debt facility at just shy of 3% fixed until May '27. Capital cash, we have a significant amount of capital and at the moment obviously, that is following the disposal of Coventry before Christmas in December. Once We sort of factor in the cash buffer that we like to hold and ongoing asset management initiatives and capital incentives, we roughly have about GBP 25 million to spend, and that is what's been taking up most of mine and George's time, we've been very much looking at an exciting portfolio of opportunities. NAV performance of 2.73% for the quarter. Obviously, that includes the 2p per dividend that we had paid out. And then just looking at the performance metrics here, 5-year annualized NAV total return of 10.3%, 10.2% 5-year annualized property total return. So some strong performance, as I alluded to you on the first slide. And 1-year property total return of 11.3%. So we are property specialists and those performance figures we're delighted by. Finally, before I hand over to George, just looking at the pie charts on the right, you'll see that the industrial percentage has increased as a result of selling the vast majority of Central Six Coventry so we're at 40%. I think we're all very aware that, that sector has performed very strongly of all the sectors. And then if you look, we're pretty much evenly split between offices, alternatives, retail and retail warehousing, which we're very satisfied with. But making that note point again that we are sector agnostic. We're not looking to do anything specific here in terms of our sector waiting and it's very much sort of an organic process. Thank you. I'm going to hand over to George now.

Thank you, Henry, and good afternoon everybody as well. So this slide really is telling the story of the company over the last 18 to 24 months. And to set the scene, you can see I've started this in the summer or late summer of 2022. Now for those of you who aren't aware, at this point in time, we had sold out of about GBP 40 million worth of property. And since that time, we have been redeploying those proceeds into new properties, whilst also selling out of some further, lower-yielding properties during that time. Ultimately, with the intention of selling out of properties which are lower yielding, crystallizing profits as a result and reinvesting those proceeds into high-yielding properties, and we've noted a few examples on here, which you probably recognize from our RNS announcements. I think it's important to highlight that over the last 1 or 2 years, especially when there's been economically distressed times, we have had uncovered dividends. Sometimes there's somewhat a degree of criticism levied at us for that and questions of sustainability of that dividend. And so what Henry and I have really been focused on over the last 9 to 12 months is demonstrating that when this portfolio has stabilized. And when there isn't a property churn, not the churn is -- was necessarily a bad thing. Sometimes, it is correct to take profit. Besides this portfolio delivers incredibly strong earnings performance. In our most NAV recent announcement, we've delivered underlying headline earnings of 2.35p, up from 2.17p for the September 2024 quarter. So really strong, especially against that kind of comparative dividend of 2p. I suppose also, as I've noted on here kind of the far right of the graph, we've had some really, really strong performance by our tenants, which really demonstrates the quality of the tenants in our portfolio. Some really, really healthy turnover rent at the likes of Hollywood Ball and Next in Bromley. And lastly, something I found particularly encouraging is not only is the portfolio itself stabilized, but so as our tenants base. I'm generally seeing like a lower incurrence of void costs. Tenants tend to be performing better in their underlying businesses as well. And what that has ultimately meant is that for us as landlord, our current void costs have lowered and that has further strengthened our earnings performance. So good at the top and bottom line all around, which is very, very encouraging.

And just If you look at this graph, on the left-hand side, what is growing these earnings is selling low-yielding properties into the low to mid-6s and reinvesting into high-end properties, 8% plus. But then on the right-hand side, fully invested, as George said, stabilized less property churn and what has been taking our earnings from kind of 1.8 to being fully covered that has been asset management. I mentioned that metric earlier in the presentation, we've added GBP 1.74 million of new income through significant material lettings and revenues in the last 4 quarters and that is really feeding into these earnings. So 2 sort of distinct periods within -- since Q4 2022, one, investing into high-yielded properties. And then more recently, bedding down, focusing on asset management and looking to drive these earnings through asset management.

Thank you, Henry. This slide focuses on the notion of earnings cover and dividend cover. And you can see here that I have shown for each financial year up until the most recent one being 31st of March '24, the degree of uncover we have had and how those dividends have been topped up by profits crystallized on the disposal of properties. I suppose it's -- the first thing I wish to emphasize is that actually since inception, our cover has been very good. We've had 92% cover since inception up until March 2024, which is very strong, especially when considering the economic environment we have gone through over the last few years. Of course, over the last few quarters for FY '25, we've had successive very, very strong quarters with earnings performance. So my expectation is for us to be at or very near full cover on an annual basis. I think the last thing that this slide really emphasizes is, yes, we have a very ambitious dividend, and we are really proud of our ability to sustainably pay that. To remind you, we didn't cut the dividends during COVID and we were one of, if not the only REIT to do so. But this really emphasizes our total return focus, yes, our portfolio is an income strategy, and we're really proud of our ability to generate strong income return on our properties. But it is those profitable sales taken at the correct time that also have fed into our ability to pay our dividend, and we would expect that to carry on being the case. So on the subject of profitable disposals. This graph here shows every property the company has disposed of in its lifetime on a chronological basis. So you can see Coventry on the far right there, where to remind you, we sold part of the property being units 1 to 11 for a 60% sale price to purchase premium across the whole -- against the whole property in 2021. So a really, really strong result. Again, in the center of the graph Oxford, actually, which was one of the properties we sold where I mentioned earlier in the summer of 2022, again for a very, very strong profit. So what I'm really trying to demonstrate in this slide here is it isn't potluck that we've just managed to sell a property for a decent profit, which is then just so happened to enable our dividend. This is a demonstrated pattern of behavior. A significant amount of work goes in from both Henry and I ensuring that not only is that dividend affordable, but it's also affordable and resilient. Are there any specific properties you wish to mention here.

No, I just think sort of the selling of Coventry, we took the decision to sell that asset. As I said, we'll come on to a slide later in the presentation. But a lot of the asset management had been done. We hit the ground running at the time when we bought the property, and we significantly moved the income on. Now you'll see that we've sort of reaped what we've sown in terms of the income and the earnings accretion. And yes, as a PM, there's a decision to be made, do we sit and just collect the income from the property, which would have been completely fine? Or do we sort of roll the dice and put that into the market and see if we can sell it for a yield profile, which is attractive in terms of crystallizing the profits from these asset management and then recycling into new asset management opportunities with higher income than that was being thrown off by Coventry. So that was the decision that we made in May. We have -- we saw a sort of a mini crescendo in terms of investment activity, particularly in the quarter that we've just reported. More recently, it stalled a bit with gilts being as high as they have been. And that's an exciting sort of buying opportunity for us with the sale proceeds for Coventry. So I think we're tying that sell quite nicely getting it done for Christmas, and we're excited by the prospect of reinvesting that money in the next quarter or so.

And just to reiterate a statistic that Henry gave earlier on that slide is, over the lifetime, the average sale price to purchase premium has been 38%. So it's not minimal. It's quite material and notable and something, again, we're very proud of. Coming on to this slide, which is if I were to pick a favorite side, it would probably be it. Now this shows our NAV total return performance against our benchmark. And as you can see, there's a few notable things here. Chief of which is that actually our degree of outperformance has really significantly widened over the last few quarters against the context of an incredibly challenging time for commercial real estate. Now what does this show to me who really focuses on finances of this portfolio. One, it demonstrates to me the resilience of the portfolio, its ability to perform not only in good economic times, but more difficult ones as well. And it's also a testament to the sustainable nature with which we look at the portfolio and how we drive performance in it. I suppose the key point I always make here is the point of intersection around late 2019. Now this isn't a coincidence. The company had existed for 4 and a bit gearing towards 5 years at this point. And our general business plans and how we approach property when we buy it, we will look at this initial 5-year outlook. So actually, what you're seeing here is those asset management initiatives, the work that we do, that is just ultimately coming to fruition. And ultimately, that process is just carried on and on and on. And so that outperformance has grown and grown as a result. I guess it really benefits like the benefit of this portfolio. So it really showcases the benefits of this portfolio, which is that it's not a one-hit wonder, a lot of REITs they can be [ somatic ] whereas this has been consistent and it's been resilient and really has delivered upon its objective as an investment product. Now coming on to this slide, the peers, you can see here are those that we chiefly focus on partly advised by our broker. And a few key things I was going to pick on here, one of which is kept staying on the theme of NAV performance, we have delivered the highest NAV total return across all those time periods that you can see there and by quite significant margin. In terms of share price total returns, as many of you are aware, there's been quite a lot of M&A activity in the sector for the last 18 months or so and that has skewed to short-term share price total returns. But for me, when I'm looking at this company, and I'm always thinking with a longer-term hat on, which, in my opinion, is what REITs really were implemented for as an investment product. You can see the top 5-year shareholder total returns are fantastic and by far away, the highest against our peers. I guess the concept of discount is often something we are queried about. Our discount has remained at around the kind of 8% to 10% mark and has been quite sticky there. However, against our peers, again, this has been generally very good. And certainly, up until the end of last calendar year, the average discount among our peer group on a 1-year basis was around 20%. So we really are truly an outlier in terms of how our shares have performed against those of our peers. This slide is just a graphical representation of dividend yield. Henry mentioned earlier that our shares, it's about an 8% yield at the moment. Of course, with the share price weakness across the sector 6 or 7 months ago, that figure was actually at around 9.3%. So incredibly compelling. Regional REITs as many of you're probably aware, is somewhat in distress. So I tend to discard them as a basis of comparison when looking at our yield. But I think this graph really shows how attractive and compelling we are against our peers and as a product on a standalone basis. We now come on to property returns, which ultimately drive our NAV returns, which one hopes will drive our share price returns. So as you can see here, we've outperformed our benchmark across all time periods again and in a very strong and consistent way. I think the thing that I find most comforting or encouraging about this graph is that actually the degree of outperformance is relatively similar [indiscernible] basis. Again, what that's indicating to me is that the portfolio is consistent in the performance that it delivers and it's consistently good performance. And lastly, before I hand back to Henry, this slide here shows a more detailed analysis of property total returns on a sector-by-sector basis for the 12 months to September 2024. Now again, as you can see here, we've outperformed in all sectors, both driven by capital and income return. The things that I find most encouraging about this graph though is that it's truly how strong our income returns are. And what that's really showcasing is our asset management activity and our active approach and our ability to invest in our own portfolio as opposed to relying on property churn in order to deliver attractive returns. Thank you, Henry. Back to you.

Thanks, George. This slide covers our recent disposal, Central Six and Coventry. And as we've touched on it a few times before in this presentation. So I hope that doesn't sound like a broken record. But yes, we sold the main sort of run of retail warehousing units 1 to 11 and we've held on to the Triangle site where a JV between a developer and the council, they have the option to buy that from us in this summer. So we will see what happens there but in the meantime, we will continue to collect the income from these units. But just to trigger your memories, we've done a lot of asset management at this property since we acquired it in November 2021. We brought in Aldi and the Food Warehouse, which is Iceland and a tenant called MyDentist. And I think that really kind of shows what's happening in the retail warehousing sector at the moment. Typically, historically, retail warehousing parks have either been bulky good or fashion-led. And what has happened at Central Six is we bought into them a wider variety of tenants kind of almost replicating our old-fashioned high streets. Naturally, that kind of feeds into footfall, which feeds into rents that tenants are willing to pay and then the investment value. So it's been a very strong performer for us. We bought it for GBP 16.41 million, yielding us 11% net initial yield. And since we've owned the property, we have grown the income by 24%. We had 24% vacancy in ERV. And we've grown the net operating income by 54% since inception. So that is through those new lettings to Aldi and Food warehouse but also regearing leases with the likes of Next and TK Maxx. And yes, on the 30th of December, we successfully disposed of the main run of retail warehousing units for GBP 26.25 million at 7.49%. So selling at a yield in the mid-7s with the intention of reinvesting that into properties yielding in excess of 8%, hopefully, as high as 10% that is what I'll focus on the moment. So it's been a really strong case study for us in terms of what we do, buying the assets, low cap up square foot, high-yielding day 1, adding the income, improving the properties investment credentials through stronger tenant lineup, extending leases, improving the environmental performance alongside those lettings and then deciding when to cash in our chips and dispose the asset in what has been a relatively buoyant retail warehousing market in comparison to other sectors more recently. So yes, it's been a great story, and we'd like to sort of blow our trumpet about it. Now we've reported on it consistently because there's been so much going on. So yes, a property that we're delighted to have owned and now sold for a strong premium. So just moving on to some asset management, which is kind of ongoing or more sort of themes which we're seeing within the existing portfolio. So this slide looks at the industrial sector, which represents 40% of the portfolio's assets. The sector was up 2.01% for the quarter, which is roughly GBP 1.5 million on a like-for-like basis. We have a WAULT in the industrial sector for around 5 years, which replicates the entire portfolio. But the reversionary potential is quite significant within the industrial assets. So we have a reversion yield of 8.77% compared to a net initial yield of 7.23%. So significant rental growth that we are planning to go after, whether that be through rent reviews, lease regears or actually tenants leaving and doing new lettings. It's not necessarily a bad thing. If a tenant does go, it enables us to go in and improve the asset through refurbishment and achieving higher rents. And we've more recently been carrying out refurbishments at our small industrial units in Runcorn, and we're looking to achieve some really strong rental growth there. And we're seeing that within the portfolio, but it's sort of a wider U.K. theme, we've had about 6% rental growth up to October this year. And that growth going forward is going to be about 5.5%. So we're very much feeding into this pattern that we're seeing across the U.K. But we're seeing some -- yes, we're outperforming that in terms of the rental growth that we're capturing. I think also the average industrial book value of GBP 47 a square foot just shows that the rents are relatively cheap, and there is asset management opportunities. And these 3 assets on this slide are some examples of that. So starting on the left, we've got Bradford. Tenants being at this site now for 35 years. You can somewhat say they're wedded to the site. We moved on the rent by GBP 1 in 2021, and it was relatively low at GBP 3.50 when we acquired the asset in 2017, and we're currently working on a lease renewal with the intention obviously extending that lease and growing the income. Sarus Court, we had some bad news about a year ago with a tenant and 2 units going to administration. They're paying a rent of GBP 6.50 as I said, making the best out of a bad situation. We've gone in, we've refurbished these units. We've improved the environmental credentials, and we are currently in the process of reletting these units and looking to crystallize some strong rental growth in the Northwest and in the sort of multi-let small industrial sector. St. Helen's, this is occupied by an agriculture manufacturing dealer supplying machinery to the U.K. agricultural industry. It's their UKHQ. They're owned by a JV between Japanese and Scandinavian company so a very strong tenant. There is a significant amount of yard here which they use. We are aware that they have their eyes peeled for potential alternatives to our property. But we're not concerned about that because we've seen some strong rental growth here and my gut feel is that they probably will look to engage, but it's an asset management opportunity that we'll be working on over the course of the next 6 months. And finally, we quite often talk about buying high-yielding higher income-producing assets, but always having a Plan B and making sure that the assets we buy are underwritten by alternative use values and vacant possession values. We would typically want to have at least 75% of the investment value underwritten by alternative use values, whether that be residential, student, hotel, the Oxford example on that was Life Sciences. And there's 4 assets here where I think the bullet points, which have been highlighted in green, just show us the more obvious short- to medium-term asset management angles but there are longer-term alternative use angles. So next and probably very strong trader for Next. We bought this of a net initial yield of 8.7%, but then look at that low capital value per square foot of GBP 100 per square foot in comparison to what residential values in Bromley are, which is GBP 550 to GBP 650 square foot. So really good underlying plan B. Next had been trading well here, and we've been banking 190,000 roughly of turnover rent, which is significantly higher than we assumed on purchase. So great story with Next, but if all fails, we've got this Plan B. Union Street, we've been busy there. We had [indiscernible]. We've carried out letting to Roxy Leisure, and we're working on another letting there at the moment. So some asset management opportunities. But again, bought for GBP 161 a square foot in comparison to residential values in Bristol of GBP 600 a square foot. There's a lot going on here, with regards to residential development. And actually, there's a picture of this asset on the conclusion slide, and you'll see there's a tower going up. Gloucester, we have the sector stationed here. They've been taking over for a number of years. There probably will be a conversation with them shortly about whether they want to extend their lease. But again, if the property were to become vacant, we have residential consent for 45 units here. So I suspect this might be an asset that we would look to potentially sell to residential developer if the occupational story didn't continue beyond the lease expiry. And Cambridge house. We bought this asset quite recently in Bath. It's a freehold nonlisted property in Bath. We bought it in the wake of the [indiscernible] and budgets. We've got a cracking price for it. Residential values in Bath, as I'm sure you can appreciate, a very high GBP 600 per square foot plus in comparison to the value that we acquired this asset for GBP 233 a square foot. But again, in the short term, we've been quite busy. We've carried out letting to Zara, which is a click and collect opposite their main store on -- in the SouthGate shopping center. And more recently, we've exchanged an agreement for lease with Marchon, who are a premium gym offering. So short-term asset management, adding income, but having the option to [indiscernible] more extreme in terms of alternative uses. So to conclude, it's been another strong quarter so we're delighted to report that. We've had greater than NAV per share and a dividend covered by EPRA earnings now for 3 consecutive quarters. So as I said, we are the -- fruits of our labor in terms of working on asset management and growing income through all those lease events that have been working on for the past year or so. Not only are those deals adding value, I mentioned the GBP 1.74 million, but they're also mitigating void costs so if units are vacant you are picking up the insurance cost, the service charge and the rates after a period of time. So you're mitigating those void costs as well. We continue to prove that we can crystallize asset management gains through successful sales that 38% average sales purchase price. We've done that again with Coventry delivering an IRR of around 16% and 60% premium to the purchase price. So we're delighted to continue that track record of successful sales. We have the proceeds of Coventry of roughly GBP 25 million to deploy on an attractive pipeline of assets. I see there's been a question about our pipeline and where do we source investment opportunities from. We have an in-house investment team at AW, I sit down with them twice a week, and we go through a whole array of opportunities they introduce to us. So that is where we source our deals. And I believe that, yes, we sold Coventry prior to Christmas, I believe that the market has softened more recently with what's happened in the gilt market. So I think it's an exciting buying opportunity at the moment. So we would look to replace, replenish the income from Coventry with new assets. And it's probably worth noting that, that money at the moment is held in interest-bearing bank accounts so we're earning interest on that in a high interest rate environment. So that is accretive as well. The reversion potential in the portfolio of 8.9%. I think that is a very strong metric. It really shows that we can continue to pay this -- look to try and keep this high income strategy going, selling asset managers on the course of capturing potential for rental growth. We have low book values of GBP 74 a square foot and an average rents of GBP 6.66 that's showing that we're starting from a lower base level. So we have opportunities to go after. And we're delighted to have that low cost of debt at 2.96% fixed until May '27, which obviously feeds into the performance. So thank you.

Henry, George, thank you very much for your presentation this afternoon. [Operator Instructions] Just while the company take a few moments to review those questions submitted today, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your Investor dashboard. As you can see, we received a number of questions throughout today's presentation. And Henry, could I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.

Yes, sure. We'll just run through these. So Tim V, we have the question for you how do you find target properties for purchase. I hope I've answered that in the conclusion to say we sit down with our investment team, we see a lot of opportunities across all sectors within the U.K. Another question from Tim V on what's the level of rent arrears. We don't report the collection rate these days because we feel that it's less relevant to do. So obviously, we reported it pretty extensively during COVID, but our rent collection is in the high 90s so 98% plus. So strong rent collection and George alluded to that earlier on in the presentation.

I was quickly going to add to that to be demonstrative within the first 2 weeks of quarter end for the most recent quarter, we had already collected 94% of the rent. And more to the point, a slightly more techy accounting point. But in terms of the bad debt provision, i.e., those rent arrears, which we don't think we're going to recover, there was virtually no increase quarter-on-quarter. So when I stated earlier that our tenant base has really stabilized and performing well, I meant it. And one of the great markets of that is actually debt recovery, of course, and it is very strong at the moment. We've had some actually very good wins recently where some historic arrears have been recovered as well. So that's something I feel particularly encouraged by.

Another question here from Andrew S. Looking at sales purchase premiums, the worst performance here include geographic outliners on the coast, Portsmouth, Blackpool, Hull, does this imply that best performance can be achieved through heartland areas such as the Midlands and the key corridor? Good question. The first Chairman of Landsec, he coined the phrase location, location, location. And we obviously say in our investment criteria, we buy in strong locations. I think it's worth saying that Portsmouth, Blackpool and Hull, yes, they are all coastal towns. But they were all retail assets. And obviously, that is the sector which has been through most turmoil recently, very much been through the storm in that sector and very much out the other side. And we are quite enthusiastic about the high street retail sector. Not only had the sector experienced the pressures of obviously the shift to online, but also COVID. And we find ourselves in 2025, actually, the high street is in a stronger place, the tenants that are still there, are the ones that have been through this really, really tough time. And so it's a sector that we feel is a good opportunity for investment opportunities. But yes, I think I'd be ignorant to sort of dismiss that sort of location as obviously not important. And we very much factor all the property criteria when we're looking at buying assets.

Laura to answer this question from John C who states Dividend has been held at 8p since 2016. Inflation has eroded the real values return. Do you see a point where you might be able to increase annual dividend. Of course, dividend growth is always the goal. And where we -- this question is given to us each quarter. I think it's very important to remind everybody that on a gross basis, our dividend is very large and very compelling. It's important that our dividend not only is high and attractive but it's -- also it's sustainable. We will always look to grow the dividend if we can. And of course, it's important to remember that the dividend is our board -- our external Board's decision. We will always seek to maximize the dividend as best as we can, but please keep in mind that it has to be sustainable. And I think there's just as much value in its sustainability as there is in this kind of growth size as well?

Question here from Jonathan L. Where do you believe we are in the U.K. commercial property cycle? If there is an upturn in sentiment, do you believe your value-oriented approach will still achieve outperformance. I mean it's hard to -- I feel like we're sort of calling the bottom of the market now for a while. I think we have seen a very much U-shaped bottom. Well, I think what is counting is obviously, we took the decision to sell Coventry in the summer. We completed that disposal in December. And we've obviously had our eyes peeled for investment opportunities, and there are some quite exciting ones out there. As I said earlier on in the presentation, I feel that the momentum that the investment markets, the U.K. investment market was building in the past quarter have stalled slightly more recently, with obviously kind of the headwinds of the U.S. election and what's happened with gilts. But that is a good sort of hunting ground for us. And I think we will continue to source quite exciting opportunities. And we've been alluding to sort of green shoots. I think these green shoots will hopefully continue to sprout going forward in 2025.

I think also to add to that, all we really have to go on when answering that question is our historical performance. And it was only a few years ago, the property went through a period performing very well. And we outperformed them as I think one must also remember during COVID, I try to stay away from the concept of being stock pickers and doing that very well. But I think Henry and his team are very good at ensuring that the portfolio reflects the attractive attitude towards property at that time. And so if we did want to crystallize profitable sales we can, and we've done that during all phases of the economic cycle. So not to overplay ourselves, but do I think our outperformance can be maintained during different economic times or better ones. Yes, I do.

Another question from Andrew, do you see the forthcoming employees national insurance increase putting any negative pressures on rental increases and companies appraise their cost base. Good question. I think it will certainly have an impact on those businesses' profitability and the affordability of rents. I think probably most -- the sector where we feel this is probably going to pinch the most is in kind of like the casual dining sector where the margins are smaller. And I think to a certain extent kind of where those pressures will be alleviated on the high street is the business rates, nondomestic rates. So providing smaller businesses with rates relief. But it's going to be interesting to see how this plays out. And obviously, it's early days, but I think it's a good remark and something that we are very mindful of when we're sourcing new opportunities. Question here from Tim V, can you talk through your shareholder register and what percentage is retail institutional? So when we IPO-ed roughly 10 years ago, the shareholder register was -- the majority was from an institutional background. As the company has evolved, there has been a shift to a higher percentage of retail investors who are naturally attracted to the high dividend yield that we pay out, 8p per annum. We are consistently meeting with, well, yourselves, the retail holders and our institutional investors, each quarter to update them on the performance of the company. And there's a question here about the growth of the company. Obviously, we would love to grow the company. We really hope that sort of the strong performance, particularly more recently, and given the opportunities that we're seeing with our investment pipeline enables us to grow, whether that be sort of organically through raising new capital and buying these new exciting investment opportunities source, but also we continue to keep our eyes peeled for M&A activity and opportunities there.

There are a few questions here in relation to our level of debt refinancing plans for it. I think I'll address those in one go. I think the first reassuring remark to make is that refinancing of the debt is already very much on our radar. We, in fact, have a dedicated session with our Board to start really discussing this in a few months' time, which is 2 years ahead of when we would wish to refinance or when -- sorry, when the current known expiry occurs. I think one key remark to make is with our debt simply priced when we have now, we actually refinanced that every year before it's expired. And it's because we acknowledge that our specialist team here really acknowledge it's actually -- that was probably the best time to do it. And of course, it turned out to be the right call. Had we held that facility to its expiry, we would have been in a much worse position debt-wise now. So to reassure you is something we think about a long way in advance. Am I looking to increase the level of gearing on the portfolio? No would be my short answer given the current interest rate environment. It's also important to remember that we have an investment restriction of a 25% loan to GAAP. And we are around that now. I think there's so much potential in this portfolio to amplify returns by actually investing in what we already have as opposed to necessitating the need to draw down further debt in order to fund further purchases. That's never really been our mantra or how we approach driving earnings growth or NAV returns in our portfolio. But yes, my overriding comment is it's something we're very much thinking about. We have a specialist team who are analyzing it all the time. And I can assure you that we will take it very seriously. And actually, it's well in advance like we did last time. A simple one here to ask is how we calculate our management fees, and they're based on 0.9% of NAV as opposed to share price.

And Tim V, what level of property developments are you prepared to do? At what point would you sell on to the developer? Naturally, given sort of the strategy of high income and continuing to pay out our 2p per quarter dividend development opportunities are ones that we're necessarily going after. Obviously, if we buy investments with a high level of vacancy, it is impacted in terms of our earnings. So we're typically buying sort of well-let properties, but there naturally will be development opportunities. But I would say that the intention to sort of fund these development opportunities, if they're sizable is probably quite unlikely from the company. Don't get me wrong, like, if we were -- had a drive-thru restaurant part opportunity on a leisure park or retail park, then we would probably fund that because the build cost of this is roughly about GBP 1 million. We are not sort of concerned by rolling up our sleeves and doing refurbishments on offices or on industrial units. But I think buying more sizable development opportunities given the high income that we like to pay out to our shareholders, sort of significant development projects when it's the main sort of asset management angle of that property is unlikely, but smaller bit around the edges, certainly we would look at.

A question here from Gordon. And are there any thoughts on increasing the size, liquidity and scope of the REIT through merger acquisition with another quality REIT? If not, why not? I suppose I've answered this in a similar way to the debt questions. Henry and I have spent and continue to spend a significant amount of time looking at such opportunities. So very much so. We are open to that. And of course, we think our or the performance of the company speaks for itself, we deem ourselves to be a very strong candidate for any such activity. I suppose, again, to reassure you we have somewhat gone through an exercise of looking at actually every listed REITs in this country and assessing them as an opportunity. The merits of them and actually the feasibility, and we have frequent, recurring conversations with our corporate adviser, Panmure Liberum as well as our Board. So it's something we're very cognizant of. It's something we're doing a lot of work on. And if the right opportunity came, we would do it as long as it was to the benefit of our existing shareholder base. That is the fundamental and obvious point for me to make. We would only do something if this going to be to the benefit of the company and to its shareholders.

Thanks, George. Question here from Andrew, how much help and knowledge input do you receive by being part of the wider AEW organization? Well, a lot. So in terms of how the kind of we work as the investment manager, we have an asset management team. So they are looking after the properties on a day-by-day basis. We had an investment team. They're sourcing the opportunities and working with the asset management team when a decision needs to be made on whether to sell the assets. We have an in-house debt team, as George alluded to earlier on, who very much have their finger on the pulse with regards to the debt side of the business. Myself and Laura, we kind of -- Laura's background is actually from the investment side of things, myself, asset management. And then we have the fund operations side of the business. We have the Investor Relations side of the business. So there are lots of departments which sit under the umbrella of AEW, which is obviously a significant asset manager of commercial property throughout the world owned by Natixis that was also owned by BPCE Group, one of the largest investment banks of the world. So yes, a lot of firepower at AEW and sort of [indiscernible] the food chain as far as BPCE is concerned. Question here from Chris B. Sorry, I missed a lot of the presentation. Is an indication of the type of sectors that you are looking to redeploy the Coventry sale proceeds into? Well, we look at investments on a case-by-case basis, I said earlier on, and we're not particularly going after a particular sector. I think it's probably worth noting that if we were to buy industrials, we'd be buying them on lower day 1 yields, and we would have to feel quite compelled by the asset management strategy and the rental growth that we could go after, also sort of acknowledging that we've got 40% industrials already. And then the other sectors make up roughly 10% to 15% each. So yes, we look at the bricks and mortar value of those assets. So where that money is redeployed, it could end up in any of the sectors. And we look at the individual properties, but those individual properties in those sectors have slightly different investment criteria and benefits. So you might get more tenant churn and higher income on like leisure and retail warehousing and you'll get lower income on industrials and potentially less asset management, but you get -- might have more significant CapEx requirements. So it's very much factored in as part of the sort of the investment process, and that's why we are sort of -- we're careful in looking at properties individually rather than being focused on the sector. When investors focus on a sector that's when they make bad decisions. And that's where actually we have brought some really great properties in the past where larger institutions have said we're selling out of the high street. We're selling out of retail housing. We need to reallocate X to Y. And that's where we've picked up some really exciting opportunities in the past.

We got time just 1 or 2 more. This is an easy answer from Martin P. Asking about our ongoing charge ratio disclosed [indiscernible]. This is frustrating, I mean, to make you all aware that there's been a lot of upheaval in the investment trust space with regards to cost disclosures. We actually made the effort to actively engage [indiscernible] how we produce and what they wanted to see. So us and our broker actually spoke with the representative there directly who oversees the cost disclosures and the information they wanted to see and we kind of acted accordingly. So you will see on our key information documents on our website and our EMT and all other cost disclosure documents that we have disclosed, our ongoing charges ratio as per our annual and half year reports. And that is what we will continue to do until new regulatory updates become made. I will once again engage with AJ Bell and ask for them to update their database, but thank you for flagging that.

We've had 2 questions here from Chris B and Sara G on our asset in Cardiff, which has seen valuation decline since we acquired it. I think it's worth noting that people have felt less well off in the past couple of years. And as a result of that, people are spending less money on certain leisure activities. It's funny like the 10-pin bowling sector has fared really well recently. An example of that is the letting we did in Dewsbury. However, night clubbing and the nighttime economy has struggled more recently. And it's kind of a double-edged sword with people being less inclined to go out and also obviously the increase in utility costs and inflation, et cetera. So our rent in Cardiff has struggled, and the tenants did go into administration, and we have signed that lease now to Phoenix Co. and we have rebased that rent at 175,000 with a turnover top-up. And we would hope that as the purse strings loosen and people feel more positive about the economy, the wider economy and going forward, the trade off the back of a rebrand and sort of a new chapter at Circuit Nightclub in Cardiff will improve, and that sort of use will continue going into the future. I think it's also worth noting that the book value of that asset is relatively very cheap. And when we boarded it -- bought the asset, we looked at alternative use values. It's strategically well located in Cardiff City Center and the demographics and strong university give us alternative angles at that asset. There is also the potential to maybe split off the ground floor and do 1 or 2 lettings and take back the upper part. So there are various angles that we can explore. But for the time being, we're happy to work with the tenant and continue to see the nightclub use go to into the future. I'm afraid it's 3:00. So we've done our hour. I would like to thank you all very much for joining. Again, it's been a strong quarter in NAV growth and dividend covered by earnings, now 3 consecutive quarters. We will continue to work on asset management initiatives and getting that Coventry money redeployed going forward. Thank you for your continued support and catch up at the end of next quarter.

Yes. Thank you all.

Henry and George, thank you for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order the management team can better understand your views and expectations. This will only take a few moments to complete and I'm sure it'll be greatly valued by the company. On behalf of the management team of AEW U.K. REIT plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.