AEW UK REIT plc ($AEWU)

Good morning, ladies and gentlemen, and welcome to the AEW U.K. REIT plc Q4 update. [Operator Instructions] Before we begin, we'd like to submit the following poll. And as usual, we'd be grateful for your participation. I'd now like to hand over to today's management team, Henry, Laura. Good morning.

Thanks, Mark, and thanks, everyone, for joining us today. As Mark said, this is our Q4 update on the company. And before we start today, I'd just like to address perhaps some of you have seen some announcements or press articles linking AEW U.K. REIT with a possible merger with Alternative Income REIT in recent weeks. It was announced by both of the companies yesterday afternoon that a recommendable position between the 2 Boards hasn't been reached. And I would urge shareholders to have a look at both of the 2.8 announcements, the withdrawal announcements from those discussions by both companies yesterday afternoon for more information in respect of that. Now what we can say is governed by the regulations of the City Code on mergers and takeovers. So I'm afraid I can't say any more than that to you today. But please do look at those announcements, and you will understand that, of course, we can't take questions on that matter either. But in respect of any other part of the presentation today, please do submit your questions, and we can take those at the end. So for anyone who I haven't met before or spoken to before, I'm Laura Elkin. I'm the Portfolio Manager for AEWU. Henry and I have been managing AEWU at AEW UK now for coming up to 11 years. It's the same strategy that we have been running throughout that time. We are sector-agnostic value investors, which means that we can look with an AEWU strategy across the whole of the U.K. commercial property market to find value [indiscernible] in time. And we like to think that that is key to the outperformance of AEWU strategy over the course of the last 11 years, and that outperformance has really been sustained. And we think that's because the strategy is nimble, able to operate countercyclically between the different property subsectors. So being not constrained by sector, we think, is a really key part of our strategy being able to deliver that high income and outperformance to our shareholders. We also think that, that strategy really speaks to the strength of our team. So as value stock pickers, as value asset managers, we think that those are some key strengths of our team and hopefully displayed to you in the high level of dividend that we have paid out now for 42 consecutive quarters and also in the attractive, very strong total returns, showing very strong outperformance over the MSCI index in the U.K. over that 10-year period. Just pointing to the things that we do buy. When we're looking for assets to acquire, we have a very strong focus on location. And again, we think that helps to future-proof our assets and our business plans. If through the course of a hold period, which can last for numerous years, things change and perhaps tenants' businesses change. It is that location, which clearly in these real assets cannot change. So it's something that we focused on very strongly at purchase. Also because we deliver that high level of dividend, we love to buy high levels of income. Now we think there are a lot of opportunities to buy high income, but actually relatively few that deliver that income stream sustainably. We think it is absolutely our job, our main homework on deciding which assets to acquire is choosing those that we think have that sustainable income stream that can deliver that -- continue to deliver that high income and high earnings level, which feeds through to the dividend into perpetuity during our hold period. Just moving on to the next slide, which shows a snapshot of our financials as at the end of March, which was our financial year-end. We have 34 properties in the portfolio, 130 tenants, so showing a really strong level of granularity and diversification in our income stream there. We always point you to our initial yield and reversionary yield differential, which is figures which are decided by our independent valuer, CBRE. And you'll see that, that gap is clearly wide, demonstrating the company's ability to grow income. Actually, this quarter, that gap is wider than normal. Our net initial yield for this quarter has come down slightly because we have a number of vacancies in the portfolio. You will have noticed our earnings for the quarter are down slightly, and that is what's represented here. So I'm going to just touch on a few properties which are leading to that. So we have a tenant in Southampton, Barclays, who had been a long-term tenant of the company who vacated. We have that unit under offer to another tenant to take occupation. So we expect the initial yield to increase in future periods because of that. We also have some quite significant vacancy at the moment in an asset in Queen Square in Bristol, which has been a long-term holder of ours. We are actively doing some refurbishment work at that property at the moment with a view that we have a tenant who will take space in that building once these works complete and hoping that, that will complete next quarter. So whilst the initial yield has come down, leading to earnings being slightly down in the quarter, we expect that and have a clear route to seeing some strong recovery in that in coming periods. And obviously, then the differential up to the rest of the reversionary yield, demonstrating really strong potential for rental growth. And Henry will talk about some examples of where we expect that to come from on slides coming up. So again, as I've just described, our vacancy rate is up slightly again this quarter, but we do expect that to come down in future periods and in fact, by next quarter as those business plans continue to progress. I'm just going to touch on our debt position. We have a single term loan in the company with a current -- a very favorable rate of just under 3%. Now that loan does come to maturity in just over 12 months' time. We have an in-house debt team at AEWU, who you will have heard us refer to before. And they are continuously sourcing debt products for other activities going on at AEW U.K. And for me, that provides an awful lot of comfort to know that this team is very well tapped into the market. We have already spoken to a number of lenders, including our incumbent lender to gain terms. And we have every confidence that we will achieve a successful refinancing over the course of the next 12 months. I'll hand over to Henry, who can talk through some of our performance.

Thank you, Laura, and good morning, everyone. So this first slide looks at our NAV total return versus the peer group. A 9.4% 5-year annualized NAV total return and a 9% 10-year annualized NAV total return. Many of you will have seen this slide before, and it's good to see those lines still diverging on the right-hand side as at June '25, we would like to -- we will provide a more up-to-date version of this in the next presentation. I think the main 2 themes that I kind of want to touch on here is where our performance diverges from the peer group. That happened around kind of 2019, 2020. And the reason for that was, one, because of our high weighting in sheds of about 55% at the time. We also had a low weighting to retail. Obviously, at that time, we had the COVID pandemic. There was a move to e-commerce away from traditional retail, and we had some really strong valuation performance then. And also because we have shorter lease profiles, roughly kind of 3 years to break, 5 years to expiry, it's no coincidence that our performance moves away in 2019 to 2020 because that is when we are engaging with tenants, extending leases and adding income. Next slide, please. This slide looks at the property total return versus the MSCI benchmark and looks at our outperformance. Just looking at the right-hand side of this slide first. I think what is great to see here is the consistency of the performance and outperformance over a 7- and 10-year period, both at 9.4% total property return. Over the 5-year period, the performance was the strongest, and that is no surprise because that is when we had the highest weighting of industrials. Over 3 years, the outperformance is the strongest, and that was because we had a very successful sale for an alternative use at Oxford Business Park, which we sold for Life Sciences. More recently, the performance is a little bit more muted, but it's worth bearing in mind that we weren't fully invested for the last 12-month period. We sold Coventry in December 2024, and we reinvested those proceeds in March with the asset purchase in Hitchin and then June with the asset purchase in Leicester. There's quite a lot going on in this slide, but I think all this information is important because it really does show the journey that we have been on over the past 10 years. There are sort of 3 themes that I'd like to touch on when I present this slide. I think the first is the consistency of the income. It's that blue bar running right through the middle of this chart. As you can see, that income is consistently at around 8%, which is no surprise given the dividend policy that the Board pays out. The income does slightly drop off a little bit kind of 2021, 2022. That is because we are a total return strategy, and we had to take on a higher vacancy to maximize value at a number of assets, the most relevant one being the Oxford Business Park, which I mentioned shortly ago. I think the second theme here is a countercyclical strategy. We are buying sheds in 2017, 2018. We're selling them in kind of 2022, 2023. We are buying retail when it's sort of going through the eye of the storm, and we think there's some really good value there. More recently, we've been buying leisure. We had a low weighting in offices. We have a low weighting in offices more recently. And obviously, people are still figuring out the return to office, but it's good to see more and more people returning to the offices. I think the third theme here is just like knowing when to sell your assets. We are constantly sort of at least fortnightly monthly having sell and hold meetings. And we take the decision to cash in our chips and sell the assets at the right time, which obviously leads to this strong performance. And here are all the disposals since the beginning of AEWU. As you can see, a 41% average sale to purchase price premium. I suppose the general theme here is that more recently, we've been selling out of lower-yielding industrials for yields kind of in the low 6s and recycling that cash into high-yielding assets, 8%, 9% plus. So the most recent disposal was actually a small vacant office, which was included when we bought a chunk of retail in Hitchin. And we sold that in a couple of quarters ago for twice what it was held in the book value at GBP 1 million.

Thanks, Henry. I'm just going to take over here and touch on what we believe here is this kind of persisting purchase opportunity that exists in the market and has been running for quite some time now. But we're looking at our pipeline, we believe that this is still a strong opportunity today. So this very wiggly red line that we're showing you on the chart is using the CBRE average value index, CBRE being the U.K.'s largest valuer of commercial properties, so effectively using their kind of value index as a proxy for values across the whole commercial property market. And you can see here over the last 20-odd years, some significant peaks and troughs as you would have expected to see associated with these quite significant global and U.K. political events. We've marked right in the middle of the chart there, AEWU's IPO. And clearly, values have been quite sort of tumultuous during that time as well. So actually, what this chart reminds me is that I feel that our strategy has performed very strongly in order to be able to deliver the kind of total return performance that it has done during a time when values have been this challenging. But if we look at the last 3 years of this chart, we'll see that red line wiggle down quite significantly post the Liz Truss' Premiership to below the average line and having not recovered since then. Now of course, interest rates have been a significant factor in that. And the outlook there has really sort of wobbled over the course of the last quarter with kind of global political events. And we will see how that progresses. But something else is kind of underlying this, and that has been quite a significant reduction in the volume of investment transactions taking place in U.K. commercial property. And actually, this is more sort of centered than the overall numbers would suggest because a strong concentration of those transactions that have to have taken place have been in the prime industrial market. So outside of that, with overall volumes being lower, actually, the volumes in other sectors have been quite significantly lower because of that strong concentration. So in the types of sectors, which AEWU's strategy leads us to [indiscernible] at the moment, those that are high yielding, those that we think are kind of trading below their long-term fundamentals actually are showing even stronger value than we see across the general market. So when we look at our pipeline today for the reasons that I've just set out, we see strong ability to buy sustainable yield, often at levels in excess of 9%. We see assets that we think represent significant value. So just to demonstrate to you here that, that is still persisting through today. Now we sometimes get asked the question if we would just look to sell out from significant parts of our portfolio in order to access that pipeline. Of course, though, with values being lower, therefore, isn't a general seller's market either. We look to, and as Henry has just demonstrated in the previous chart, make sales from our assets at opportune times where we think the value of those assets can be maximized in the current market. So that is why we will not look to make a kind of blanket sale from our portfolio in order to access this pipeline opportunity. But of course, the property subsectors move independently from each other. And there are certain sectors in which we might look to sell assets, and we have talked before about how we may look to be net sellers in retail warehousing. Henry's got an asset coming up where we have recently completed some significantly strong asset management. So that could be a candidate for that. Handing back to Henry with more asset management.

Thank you, Laura. And here is that asset, Barnstaple Retail Park. We've owned this for a while now. We bought it back in June 2018. We bought it off an 8.5% net initial yield. We liked and it was fully let off sensible rents with a decent unexpired lease term, attractive yield profile and an established location. I mean we tend to like retail warehousing because it is well located on kind of the edges of large urban areas, and they have typically low site densities, which means intensification of that use is a possibility, whether that be drive-through pods, EV charging or actually if you sort of -- the use in its existing state is obsolete, you could redevelop for last mile logistics or they are typically quite good residential sites. So we do like retail warehousing, and that sector is particularly buoyant at the moment. Hence, one of the reasons why we are considering selling this asset alongside some most recent asset management activity. As you can see here, we've carried out 3 letting events. We did a new letting to Farmfoods, a new 15-year lease. We did a new 10-year lease to Wren. And actually, we considered selling this asset at the end of last year. But what it actually did, it acted as a catalyst for a lease regear with B&Q. We did that regear last quarter. So apologies if a lot of this information you've already heard. So it's more for sort of new listeners. But we've successfully completed that deal with B&Q. And now we are considering selling this asset. So sort of keep your eyes peeled for news over the next 3 to 6 months. This is our asset in Hitchin. We bought it, as I said, in March last year. We've kind of hit the ground running on asset management here. And this quarter, we've reported that we've done a 5-year lease renewal with Next, obviously, a very well-known high street retailer at GBP 150,000. So really good to secure one of those anchor tenants alongside with M&S here. It's positioned on Bancroft, which is sort of the main retail section in Hitchin, which is a affluent commuter town only sort of 25 minutes from Central London on a train. And last quarter, we also reported that we sold off the vacant office, which sat at the back of this retail to a local investor. And in doing so, we have driven that net initial yield. We bought it off an 8.3% net initial yield, and that running yield now is at 8.7% having sold off that vacancy. Finally, I thought it was important to include a slide on York. You will have seen that we announced earlier this month that NCP had gone into administration. So PwC were appointed on the 16th of March. And then subsequent to that, on the 27th of March, NCP shut 22 sites permanently. Just wanted to let you all know that NCP continued to operate from Tanner Row in York. and they are paying a month -- sorry, paying rent monthly in arrears rather than paying it quarterly. So it's still operational, and we're still collecting rent. However, you understand that AEWU is a very active asset manager. So we're considering all opportunities here. That is obviously, of course, working with PwC and NCP, but also considering that short- to medium-term scenario alongside other asset management options, whether that be other operators or potential alternative uses. And that alternative use being a particularly important point, we acquired this asset off a good high yield, but also off a relatively low capital value per square foot, GBP 100 a square foot we bought it off. And that is very much a theme of AEWU's investment style. When we're buying investments, we are also looking at vacant possession values and alternative use values, which means that in the event of something like this happening, a significant amount of value doesn't fall away. As you'll see, we only lost 7.94% of value this quarter following the announcement of the administration. And that is because the asset was hold off a relatively low cap value per square foot, and therefore, there are options that we can explore here. Finally, slide here just touches on our industrial sector. And the metrics here are probably sort of more acute than they are portfolio-wise. So we have a smaller WAULT to break and to expiry in the industrial sector then across the portfolio. So 2.53 years to break and 4.58 years to expiry. We have a stronger reversionary potential in the mid-9% from a lower net initial yield of around 6.75%. So that means there's a lot of rental growth that the asset management team are looking to go and capture. We have a low passing rent of GBP 3.65 per square foot compared to GBP 4.87. And I think it's worth noting that, that ERV is CBRE, our independent valuer's assessment of ERV. And quite typically, we are doing better than those ERVs. So there's an argument that the reversion potential is stronger than what these metrics show here. And just going back to that sort of point about capital value per square foot, which I've just referred to on York, the industrial assets are held off a cap value per square foot of GBP 48 a square foot, which is relatively really cheap. If you compare that to what it costs to build industrial properties at GBP 120 a square foot, which excludes the value of land, we're in a really, really strong position here. And there are 3 assets here. Much of these leasing events we have reported in previous quarters, but I've continued to keep them in because I think it's -- they illustrate the opportunity going forward. As you can see at Bradford, we significantly moved the rent on from GBP 3.50 when we bought the asset to rent as high as GBP 5.75 today. At Sarus Court, in the past year or so, we have actually carried out a number of refurbishments here. We bought this asset off rents of GBP 5 a square foot, which was deemed rack-rented at the time. More recently, we've achieved a letting at GBP 8.50. We have 2 more units, which we are currently under offer on and looking to beat that rate per square foot of GBP 8.50. And hopefully, we can report good news on that in due course. And then at Sheffield, we bought this large manufacturing unit, which produces reinforced steel for HS2 off a relatively really low rent of GBP 2.78. And last quarter or so, we increased the rent to GBP 4.25. So some really strong rental growth coming through in more recent years. Handing back to Laura to conclude the presentation. Thank you very much.

Thanks, Henry, and thank you all for joining us today. Hopefully, we've been able to demonstrate our confidence in the portfolio going forward. Clearly, with these real assets, there are hurdles to manage over the course of time as we've clearly faced this quarter with NCP. But because our strategy is based on strong fundamentals of location, as I set out at the start of the presentation and just ensuring that even if these unexpected things or unwanted things happen during an asset's business plan, we have other routes to securing value. And because of the strong location there in the York and because of the low capital value at which we acquired that asset, we have a number of active business plans that we are working on at the moment, which we believe will show full, if not a very strong level of recovery of the asset's capital value. So we have strong confidence in our portfolio. We believe it still represents a value proposition as at today. And hopefully, you're all encouraged by the continuation of our market-leading level of dividends this quarter as decided by the Board.

That's great. Laura, Henry, thank you very much indeed for updating investors. [Operator Instructions] A full recording of today's presentation will be available via Investor Meet Company dashboard. Laura, Henry, you've had a number of questions from investors this morning. Thank you to everybody for your engagement. If I may just hand back to you, ask you to read the questions, and then I'll pick up from you at the end.

Yes. Thanks, Mark. Just having looked through these. So there's an interesting question been put forward by Steven R. And Steven says, in the recent update, there have been valuation declines, a rent-free period to secure a letting and 2 new vacancies. Do we consider this to be a sign of growing weakness in our sector of the market or just a sort of coincidence of unfortunate events occurring at the same time? I'll perhaps kind of just start to answer that, and then I'll kind of hand over to you for your thoughts as well, Henry. But I think it's probably important to point out that overall, in this quarter, our portfolio has seen valuation uplift and an overall level, that's uplift of 0.5%, which might not sound very material, but I think against the backdrop of what's happened globally this quarter and also considering what we've been through this quarter with NCP and seeing a significant down valuation of that asset alone to still come out of this quarter with an overall valuation uplift. I actually think that is a signal of strength in our portfolio. And we pointed to it in the announcement that we put out last Friday that a lot of that, sort of, valuation strength and valuation uplift is continuing to be delivered by -- more driven by ongoing process in our asset management business plans. And Henry has pointed to some of them there in his last slide. So that's in Runcorn with hopefully more rental growth being seen and lettings coming up. That's work -- a lot of work that we've been doing Square in Bristol, which will lead to a significant letting hopefully taking very soon there. So I actually read a lot of positivity into our activity recently. But yes, anything to add there, Henry. Sorry, I've probably...

No, I obviously agree with all of what Laura said. I mean just on the sort of the letting activity, it's very typical when you carry out a letting transaction or renewal or a lease regear that there is going to be an incentive. That typically comes in the form of a rent-free period. But quite often, it can come also in the form of a capital incentive. That CapEx, which is put on the table is more typical when a incoming tenant has a significant fit out. So it's very much a part of the property industry that these incentives are given. And just touching on the void periods, Laura referred to our vacancy rate at the beginning of the presentation, which is just shy of 10%. That vacancy rate tends to yo-yo between about 10% and 5%. And actually, if you factor in business plan vacancies, i.e., assets which we potentially would like to demolish to create an IOS, which is an industrial open storage opportunity or residential and the opportunity at Bristol, that vacancy rate is about as low as 5%. So it really does sort of fluctuate quarter-on-quarter. But I think the important thing, which sort of also sort of points in the direction of our lower weighted average unexpired lease term is that having void periods and shorter lease lengths is not a bad thing. Like it is -- it's a point in time where you can move on value and grow rents. And the Runcorn example is classically that. We unfortunately had a tenant vacate, 2 units came back. That tenant was paying GBP 6 a square foot -- we're now doing lettings at GBP 8.50, and we might go beyond that. So it's not a bad thing. It is an opportunity in the short to medium term.

Yes, agreed. I'd just point to as well, we've talked about how, and you will have seen our earnings were lower this quarter than they had been, I think, in the past 2 quarters. And specifically, last quarter, the company's earnings were off the top of my head, about 2.3p. So whilst, yes, we have reported slightly lower earnings this quarter, and we're pointing to improvement in that, hopefully, in the future. Yes, let's be cognizant of the fact that they were -- our dividend was more than covered by earnings last quarter. I'm going to turn to a question from Matt H, who is asking how much upside is there from leasing, rent reviews or repositioning of the existing assets? So in order to answer that question, I think the best way that we can do that is to look at the difference between our initial yield and our reversion yield as determined by CBRE. So that is our independent valuer. So these are not our own numbers. And hopefully, that brings -- having also pointed to the fact during this presentation that CBRE are the U.K.'s largest valuer of commercial property. But hopefully, that brings an element of kind of security to those numbers to our shareholders. And that significant difference between the initial yield and reversionary yield being the amount of income upside that there is in the portfolio. And to what Henry has just said, linking that with our shorter-than-average weighted unexpired lease term of around 3 to 4 years rather than some competitors which have longer, that simply means that we are able to access that reversionary yield more quickly. And yes, in the last quarter, we have seen some rents come down, and that -- those would have been estimated to drop for some time. So reversionary yields on those properties would have been lower. We were perhaps benefiting from excess yield on those assets, i.e., a significantly higher level of yield in the shorter term because we have knowledge that, that reversionary yield was going to come down. So that kind of overall blended reversionary yield on the portfolio being significantly higher, hopefully provides you with a significant amount of comfort that we can capture rental growth in future periods. I'm just going to pick up generally on the subject of possible mergers between AEWU and another listed or for that matter, private companies. Now I said at the start of the presentation, of course, we are not able to comment on specifics here. And of course, activity of the past few weeks. Please do go and look at the announcements that were put out yesterday for more information on that. Now others are asking what would be the advantages to the company of trying to complete some M&A or a merger with another company, whether that's listed or otherwise? And of course, we can talk more generally about that. And to say that we would like to be able to access a greater capital pool such that we could access those pipeline assets and the current market opportunity that we have described to you on that slide where we were talking about the strength of our pipeline at the moment. We would also like to achieve greater scale in the company. We believe that some of our competitors do have a lower operating cost ratio due to their size. Now I absolutely don't believe that ours isn't favorable, but scale would assist in bringing that down, which is something that our Board and AEWU believe would be favorable to our shareholders. And in addition to that, we would also look for any company which we would possibly merge with to bring accretion to our performance on a forward-looking basis. And of course, if we were able to secure a transaction which achieves that, then that would be beneficial to our shareholders as well. So we are not looking to -- you would have heard our Chairman, if you've heard him speak, say before, as he has said numerous times, and I think it's probably in our annual report, that we are not looking to grow for growth's sake. We are looking to grow where there is a strongly accretive or beneficial position for the shareholders. And we believe that it wouldn't be right to do that if that wasn't the case. So we have that motivation behind taking those actions. Paul W. has asked a question about the nightclub that we own in Cardiff and its trade. There was a recent update within the company about that. Do you want to answer that question?

Yes. So we did the lease a number of years ago. We signed the lease actually from the previous operator who went into administration to a Phoenix Co. And since that nightclub has been trading pretty well. I think it's worth noting the nightclub sort of industry in general has changed quite a lot and is having to sort of roll the punches and sort of try and sort of think of new ideas to sort of bring people into their nightclubs. But we all know that Cardiff has a large student population. It's a buzzing city, particularly when the rugby is on. And we've seen some good turnover rent come through on this asset on top of the base rent at around GBP 50,000 a year. And worth noting that when we were doing that lease regear, the tenant is not going to agree to a level of turnover rent, which it feels that it is going to be financially punitive to them. They're going to agree to a sensible turnover rent, which obviously we assessed alongside previous turnover projections. So it's good to be getting a turnover rent because there were potential sort of projections that actually turnover might not have been coming, but it's good to see. And let's see what we get in the not-so-distant future.

I can just see that someone else has asked a question about whether or not we have some urgency behind trying to scale our strategy prior to a refinancing. I'm just going to state that those 2 events aren't linked. We don't feel -- well, we know from conversations that we've had with lenders about refinancing, including our incumbent finance, there is no requirement to have scale there before that's completed. So those 2 things are not linked at all. I'm just going to take a final question from Alan T, who is asking the question it seems to be to compare us to a competitor REIT and asking which one he should perhaps be buying. I'm not going to name which competitor he's mentioned there. I would simply point to perhaps our dividends level is higher. And I would urge anyone sort of in that position asking themselves that question to have a look at the property total returns the respective companies are delivering here because ours, as Henry has demonstrated on these slides, has been consistently one of the strongest, if not the strongest in the peer group and has delivered that on an annualized basis over a good few number of years now. So yes, I think we'll leave that there. Thank you very much, everyone, for joining. It's very good to be able to update you again this quarter, and we look forward to doing so next quarter as well.

That's great. Henry, Laura, thank you very much indeed for updating investors. If I could please ask investors not to close this session as we'll now automatically redirect you in order that you can provide your feedback. On behalf of the team from AEW U.K. REIT plc, thank you once again for your time, and enjoy the rest of your day.