Aew Uk REIT (LSE:AEWU) — Investor Update

0:01 Good morning, and welcome to the AEW UK REIT PLC Investor Update. Throughout this recorded presentation, investors will be in listen only mode. Questions can be submitted, and the company will respond to questions where appropriate to do so post the meeting. Before we begin, I would like to submit the following poll. And I would now like to hand you over to portfolio manager, Laura Elkin.

0:31 Good morning, everyone. Thank you very much for joining us. I'm Laura Elkin. I'm the Portfolio Manager for AEW UK REIT PLC. Hi, Yvonne. I'm Henry Barts. I'm Assistant Portfolio Manager and Lead Asset Manager on the portfolio.

0:46 So this quarter, we have had to prerecord our quarterly update to you. So I'm afraid that there won't be chance for any Q and A today. But if you do have any questions following today's presentation, please get in touch with us either through our Investor Relations department or via the question and answer section of the Investor Meet company website. And we will endeavor to respond to those questions where appropriate. And then we believe that next quarter, we will be joining you as normal live and with the Q and A function fully up and running.

1:23 So we recently put out our NAV announcement. And we'll come on to talk about some really strong updates that we've had during the company for the company during the quarter. We've had some really strong letting activity that we're excited to be able to talk to you about. But just coming back to the overall strategy and talking about that, at high level on these first few slides. So the strategy that we run at AEW is the strategy that we have always run here for the past eleven years. And to describe that strategy in a sentence, we are sector agnostic value investors. So that really means that we look across the whole of the commercial property market to find value across different market cycles.

2:10 We look to maximize income, so that is important to us for our delivery of our dividend of 2p per share per quarter, which we have paid out now very consistently since our IPO. Income is very important to us to seek that, on our purchases, but we very closely analyze the income stream of the of the purchases that we make to make sure that that income is sustainable. And hopefully, that is demonstrated to you in the, consistency of the payment of that dividend. And once we own our assets, we very actively manage them to unlock capital upside, again, demonstrated in our strong total return where we have outperformed the MSCI benchmark over each time period since our IPO.

3:02 We've got some of our invest investment criteria just noted here on the right hand side of the page. And for me, the number one point that sticks out here is a focus for our buying in strong commercial locations. This is something we look for in everything that we're buying. So I've mentioned the income that we're looking for, but the location is really, really important. It is going to ensure that our properties can perform well over the long term and can continue to be let and deliver that income stream. And hopefully, with some of the examples of asset management that we've got to talk about this quarter, we can demonstrate that to you, in the healthy level of of tenant demand that we've recently seen.

3:46 We've got noted at the bottom of the page here some awards that we have run, during the course of the past ten years. And most notably, the City Wire award, which we have won for six consecutive years, which is based upon the calculation of our three year net asset valued return.

4:08 So just picking up on this slide, at a glance, as at 06/01/2026, very much a bird's eye view of the company as at that date. Pounds 215,700,000 valuation with 34 assets. Worth noting that prior to the quarter end, we exchanged on disposal of a nightclub in Cardiff, and we have completed that acquisition on July 23, we've got a slide coming up on

4:38 that. So actually, as at this point of this recording, we actually have 33 properties, 34 as of the end of the quarter. I want to draw your attention to the net initial yield and reversionary yield. You can see there's a substantial difference, 7.28% net initial yield in comparison to 8.87% reversionary yield. So, that shows the income rental growth potential embedded within the portfolio. I think it's worth saying as well that actually that net initial yield this quarter has come off a little bit and that is partly because we have some rent frees, for example, at an industrial asset in St. Helens. We've got a slide on that later on the presentation. We've had a rent free period kick in at Next in Bromley, where Next were entitled to a rent free period having completed a refurbishment of their unit.

5:31 And we've also recently completed a lettings two lettings actually at Runcorn where they're rent free. So despite that vacancy rate of 6.43 coming down from about 10% in the March quarter, the net initial yield is a little bit suppressed because there's these current rent freeze, which tenants are benefiting from, and they should burn off over the next six to twelve months, and you'd expect to see that net initial yield creep up with all other things in the portfolio being equal.

6:00 Cash and debt. We continue to have a £60,000,000 debt facility, which expires in July next year at a fixed rate of 2.96%. You'll see that we've got a fair bit of cash at the moment. Quite a lot of that is attributed to asset management opportunities we see today within the portfolio, and we typically have a £5,000,000 buffer. As Laura says, we've continued to pay out our 2p per quarter dividend, and that's something that we're very proud of doing. And then finally, just touching on these pie charts on the right hand side, very little change in the sector weighting. We are sector agnostic, but where we find ourselves today, our highest sector weighting is in industrials and in retail, which is split between the high street and retail warehousing with those two sectors sort of really diverging in kind of the post COVID era. And as you can see, properties dotted out throughout the country.

6:55 Laura made the point earlier on that location is very important, but that's a very specific location rather than us typically trying to buy in certain regions of The UK. Handing back to Laura to cover a NAV performance slide.

7:15 Thanks, Henry. So here we are showing you our NAV total return performance. Since our IPO and versus our AIC peer group, AEW delivering a close to nine point five percent ten year annualized NAV total return. So significantly stronger than the rest of that peer group. And you will see AEW's performance start to pull away in 2019, And that's really after four years of running this strategy. And the two main reasons for that is that at the time, AEW had about a 50% weighting to industrials, and that market started to see a lot of growth, at that time around around the inception of the pandemic.

8:04 At this time also though, we started to see a lot of our business plans within AEWU reaching maturity, and we started to make our first strategic disposals. And those of you who know us well know that we like to buy short to mid mid length income so that we can have those very real conversations with our tenants in order to move rents on and to, and and and to see our business plans through to fruition. So, again, it's no surprise to me that around that time, we started to see our performance diverge because of how active our strategy is in both property level, as in buying and selling, and knowing when to buy and sell, but also at tenant level, of course, in our occupation. So the following slide shows our property level total return versus the MSCI benchmark over various time frames.

8:56 And for me, it's really the consistency of our outperformance over the last ten years. And over, I think, all but one of these time frames, AEW's property level total return is more than double that of the wider MSCI benchmark.

9:12 Now Henry will talk to you on the next slide and really point out the reasons why how we can attribute that outperformance to various decisions we've made at portfolio level and parts of our strategy. Thanks, Laura. So, yeah, this slide very much covering the life cycle of the strategy. And you can see where the performance has been coming from. The blue bar, which runs right through the middle here, very much the meat in the sandwich, and that is the income that the property has been throwing off with the red bars being capital performance. And the performance of the strategy has very much been attributed to a number of things. First, obviously, income. We are very much not a strategy which is trying to board the right train at the right time and hoping for yield compression. We will obviously look to add value through asset management and through cycles, but income is very much the bedrock of what we do. And as you can see, that blue bar runs consistently right through this chart. It dips off a little bit around 2022 when we were actually looking to achieve maximized values in two assets, one in Glasgow and one in Oxford, where we had to take on a higher percentage of vacancy. But as you can see, it's pretty consistent around the 8% mark, not surprising given kind of where our share price is trading and where our dividend is at 8p per annum.

10:41 And two other main themes here really is diversification. We have the ability, because we're sector agnostic, to support all the punishes and pick and choose where we feel that there is value opportunities. And countercyclical buying. So, we were buying secondary industrials kind of in 2017, 2018. We were selling out of longer let offices pre COVID when you could argue that actually the office sector was probably at its most mature with obviously the more recent disruption that's had kind of with the return to the office in the post COVID era. Kind of following COVID, we were selling industrials where we've done quite a lot of asset management, selling out at kind of low 6% net initial yields, and then reinvesting that into retail, which obviously had very much gone sort of through a storm with kind of COVID, high streets closing, and the growth of ecommerce.

11:40 And so we felt there was really good value there. And, actually, more recently, we've seen very much renaissance kind of on the high street and, in particular, high street retail to sectors which are they've got a bit of wind in their sails at the moment. So we're seeing some performance there. And I think kind of the final theme on this chart is kind of really knowing when to cash in your chips. We have business plans at the point that we acquire assets. We like to hit the ground running. We really like to get on the bonnet of our assets and add value. But having done that and grown income, if we see opportunities which excite us in our pipeline, we will look typically to dispose of assets in the kind of 67% net initial yields and reinvest that into high yielding assets with asset management opportunities.

12:27 And this chart here just tracks all our sales throughout the life cycle of the company, a 41% average sale to purchase price premium. Oxford sticks out like a sore thumb in the middle there. We sold that at around 250% premium to its acquisition price. That was an alternative use play where we took on a higher percent of vacancy. But more recently, on the right hand side of this graph, we have been selling out of industrials kind of in the low 6s. We sold an industrial asset with vacant possession in D side rather than actually take on a rather capital intensive refurbishment project and then crystallize value there. We actually sort of leapfrogged that asset management initiative and actually sold to an owner occupier for a price similar to what the investment value would have been had we done a letting.

13:18 And, obviously, there's the Coventry Central six assets. We grew the net operating income about 50% there. That was lots of asset management, bringing in a wider variety of tenants. I think it would probably be wrong of me not to touch on the red bars. I think it's fair to say in the case of kind of Portsmouth and Blackpool, they were both retail assets, high street retail assets. And despite what I've just said about there being a relations on the high street, I think that is true, but it really has to be sort of the best in class properties. The high street has shortened in recent years, and these assets, which we bought a while ago, were in slightly more peripheral retail areas. In Blackpool, for example, the council, which owns a shopping center there, was trying to take a lot of our pinch a lot of our tenants and take them into the shopping center. So in those instances, we're a case of actually filling those assets, trying to maximize income and then actually deciding to, well, throw in the towel, not necessarily, but decide to sell them at the right point of time and move on for opportunities elsewhere.

14:30 Temari, I'm just touching here on this slide on the current market opportunity, which we think is very strong. And we see a lot of very attractive buying opportunity in our pipeline, which we continuously track using our investment team. So I'm showing you here CBRE's value index as a proxy for capital values across the commercial property market. We can see that they have been quite suppressed since late twenty twenty two. That is, of course, because of what we've seen in interest rates, but it is also true that over that time frame, we have seen significantly lower volumes than we would normally see coming through the commercial property market. So far few properties reaching the market and far fewer buyers for them.

15:20 Now that that makes for quite an interesting time for a value investor, because we tend to see that at times in the market of low volumes, we see less pricing transparency and more propensity for mispricing in the market. And as a value investor, that is, of course, what we are looking for. So what we're showing you here is what we think is the strongest buying opportunity that we've seen since our IPO. And we're tracking currently about £200,000,000 worth of, buying opportunities, cross sector, with a weighting in single let industrials, in high street retail, in leisure, and very much representative of what we have bought in the portfolio to date, yielding, eight and a half percent plus, and with some prospects for rental growth as well.

16:14 So a very strong buying opportunity that we are exploring roots, with our board, to try and access at the moment.

16:26 So Henry touched on, one of the previous slides about making sales and knowing when to sell. And we pride ourselves on sort of knowing when to buy and when to sell in different assets and different sectors, quite often counter cyclically within AEWU strategy. And often, we would, of course, like that to be maximizing our receipts. But here, unfortunately, this is not quite such a success story. And we have made a sale, that completed, just post the quarter end, that we have recently announced in order to move on from losses, related to this asset. So, this nightclub in Cardiff was acquired. Apologies, the purchase date up there is showing incorrectly.

17:13 We bought this in late twenty twenty one for 3,600,000, and we have sold it for 1.5, but at a significant premium to the asset's current valuation. The asset was bought, really aiming to benefit from a kind of post COVID recovery in this sector, which due to kind of social change and the cost of living crisis that we've seen in this country over the past few years, isn't something that that materialized. So, yeah, I I guess, being sort of fairly upfront about that, of course, we're disappointed about the performance of this asset, but we consider it to be more important to make the sale that's profitable to current book value and move on when we see very attractive buying opportunities in our pipeline that I've just set out.

18:06 So on to the asset management section of this presentation. So this is our industrial single let unit in St. Helens in the Northwest. It is let to a tenant called Pavarna Land Group and they essentially sell large agricultural machinery and parts. And this is a UK HQ with headquarters over in Norway. And I believe it is owned by a large Japanese conglomerate. And so it's a 94,000 square foot unit. We bought it for $3,450,000.37 pounds a square foot. So very low capital value per square foot if you compare that to what it would cost to rebuild this, which would be probably a price at about £120 a square foot, and that's obviously excluding the price of the land, of a net initial yield of 8.2%, so throwing off some really good day one income exactly what we want.

19:04 So, yeah, an attractive yield, a low capital value. There was about nine years left to the tenant when we bought it. And with it being a very well well located asset close to major motorway links, we obviously were anticipating some really strong rental growth for this asset. And we have just now captured that through a ten year lease renewal and moving on the rent by 42%. So that's moving it on from the level of rent that it was previously paying, which was three hundred and eighty nine thousand pounds and which was set about five years ago when there was an open market rent review. So we've moved on that rent to £6.15 a square foot, a 48% increase. And over the past two quarters, given that this completed very close to quarter end, we've really seen some strong valuation performance on this asset with the value increasing by £1,000,000 over the March and the June quarter collectively.

20:04 We have previously mentioned Rumcorn having done a new letting a couple of quarters ago, but this quarter, we completed two more new lettings. You may all recall about a year or so ago, we got three units back from CJ Services who were paying a rent of £6.50. It's never a great thing having more vacancy within your portfolio, but there's always a silver lining because it's an opportunity to move rents on and crystallize rental growth, that was very much the case here. The units were also a little bit tired, so we had the ability to improve them through refurbishments and improve their environmental performance. So, the EPCs of these three units are now at B, where previously they were at a D rating.

20:52 And as you will see in this slide, we have done two new lettings, one at 9.50 and one at 9.55 to do two good tenants taking ten year leases. So moving on those rents significantly and getting two new really good tenants. So it's been a very good kind of asset management story. And it's really good to actually follow through with your business plans and see that value enhancement. So, this chart really here is looking at the opportunity within the industrial portfolio. I've included some bullet points here, which quite a lot of you will be familiar with because we've reported these statistics, obviously updated for this quarter in previous presentations.

21:45 So, the statistics for the industrial sector tend to be more acute than portfolio wide. So, we have a smaller wall to break and to expiry for the industrial assets than we do for the rest of the portfolio at two point four eight years and four point eight four, respectively, which means that the asset management opportunities are closer to where we are today than they would be elsewhere in the portfolio.

22:11 We have a stronger reversionary potential, so reversionary yield of 9.56% in comparison to a lower net new shield of six point one two, which kind of makes sense because industrials are valued more keenly than other sectors currently. And a very low average passing rent of £3.48 per square foot in comparison to a rent of £4.86 per square foot, I think it's fair to say that based on some of the examples that we've given over the past two quarters,

22:38 that ERV actually could be stronger. That's CBRE's assessment of ERV, and we tend to be beating those assessments. So do bear that in mind when you're thinking about the opportunity within the industrial sector within the portfolio. And I touched on this earlier on about the Cat Valve square foot of the St. Helens asset, but our industrial book value is at £48 a square foot, which is relatively very low when you think about the cost of replacing these industrial assets, as I said, pounds 120 a square foot. But just touching on this bar chart here, the dash lines are essentially showing the cumulative rental growth between now and 2030. And we believe that there's 18.2% cumulative rental growth within our industrial assets between now and that point in time in comparison to Knight Frank's forecast, which is just shy of 14%.

23:33 So our assets are outperforming Knight Frank's rental growth forecast. I think it's probably worth noting as well that these are this rental growth is 18.2% is attributed to lease events and ERVs, which CBRE have put on those assets when those lease events come up. So the Knight Frank estimate of rental growth is not that's not factored into our rental growth forecast. Now, I think looking at this graph, it's quite obvious that there's a lot to go after in this year, 2026 and 2027, where there's as much rental growth as higher than 10% in 2027, but then we have a number of quiet years in '28, '29, 2030. Now that might initially look quite strange, but you will all appreciate that typically, in The UK, lease cycles tend to go on a five year basis.

24:30 So if we are capturing rental growth through rent reviews and lease renewals in 2026 and 2027, it would mean that the next lease event would be in 2031 and 2032, which obviously falls off this graph with it only going out as 2030. So I think it's just far to say that, you know, we've got a very busy next couple of well, this year and next year. We then might have a bit of a quieter period over '28, '29, 2030. But do bear in mind that the rents that we are agreeing in '26 and '27 will then subsequently be grown by these rental growth forecasts. And then in 2030 and 2031, we will start to look to push on those rents again. So, it's not like saying the asset management opportunity is falling off a cliff in 2028.

25:17 It certainly isn't. This rental growth story will very much continue, but we will just go through a quiet two year period. And we could also possibly consider some sales from that portfolio in that period of time where the rental growth is coming through a bit less if we think that's advantageous for the portfolio. Yes. Which we've done on a number of occasions over the past couple of years, going back to that chart that I showed earlier on in the presentation. Thanks. So I'm just going to talk about a letting that we undertook during the quarter and was recently announced at our asset at 40 Queen Square in Bristol. Again, apologies, the purchase price, on a number of these slides is wrong. So this asset was acquired in 2016.

26:05 So this has been quite a long term hold for us, and we've seen some really strong rental performance coming from this asset. So just looking back to 2016, we bought the asset with around 50% vacancy and with average passing rents of about £17 per square foot. Within about eighteen months of owning the asset, we had it fully let and with rents up to about £20 per square foot. Over the course of the last eight years, we have continued to move those rents up, and we've seen really strong performance from this asset. And it really just goes to show, sort of touching on my comment on going back to the very first slide of this presentation on how a focus on well located assets, really can sort of future proof strategies.

26:58 Because, from 2017 to, today, we have seen the overall rent on let space from this asset increase from £20 per square foot up to about £35 Now, of course, during that time frame, we've seen office rents on, across the rest of the market struggle very significantly. So this asset has really, bucked the trend that we've seen in the wider sector, because of how well located it is, because of the quality of the building, because of the surrounding amenity, because of the refurbishments that we've done on a piecemeal basis to this building. So, during the quarter, we completed a letting to IWG who took occupation of the building during June.

27:48 Now IWG being the overall company name, for some of the serviced office brands, including Regis, and they are in in, in this building now, operating under their signature brand. They had been operating nearby, but had to move from their previous space. So have brought with them a number of, of tenants who who they had in their previous space. So we've kind of hit the ground running here in this location. I think it's really representative, this letting, of kind of changes that we're seeing across the office market. At AEWU, we have always strongly said that we very much believe in office occupation, where it is well located, where it has strong surrounding amenity, where it has good ESG credentials.

28:37 And and tenants now are are often requiring increased flexibility and hence the need for, the the growing need really for this serviced office requirement. So the building is now fully let, and AEWG are in the process of ramping up their occupancy and bringing it to, to maturity, having taken, occupation in June. And on this next slide, it's really just a kind of graphical representation showing you both, rent per square foot on let space in this building and the overall income level that we are expecting to receive. And as you can see, our estimates for the full year '26 and '27 are increasing significantly, and showing further growth coming, in the income stream from this building.

29:28 Actually, in 2027, we are still projecting, well, some upcoming vacancy on smaller suites in the building, such that in 2028, we're actually projecting even more growth from the overall income stream from this building and further growth also on the AEWG income stream as that also reaches a greater level of maturity. So whilst we may have a more flexible occupation style in place with AEWUG, in actual fact, once their once their business plan here reaches maturity, the level of income that we're projecting to receive from them, even at an occupational level less than a 100%, exceeds the level of ERV as projected by our valuers. So we believe that this is a very positive letting for this building that we have completed during the quarter.

30:25 The final asset management slide is on Tanner, Red York. We, updated this, I think, back in, kind of March when administrators were appointed, it was PWC. And obviously, since that time for us in York, very little has changed. The lights are on, the car parks are operating and PWC have continued to pay rent albeit not on a quarterly basis, but on a monthly basis in arrears, also paying service charge and insurance. So that's very good news and bearing in mind that obviously about 30 sites were closed. We've included this slide here just to kind of give you an update.

31:11 We have had a fair bit of communication with PwC and understand that I'm sure this has been alluded to in the press as well that the business will be sold, and I'm sure there will be announcements on that in the national press in the coming weeks. So for the time being, it's just a case of sort of sitting tight and seeing what happens. We suspect when the business is acquired that the lease, which is an administration, will be assigned from the administrators to the new company. So we very much actually see this as an opportunity. I mentioned earlier on how administrations possibly can have silver linings, and we would hope that's the case here. But just finally to point out, we bought this asset off a low cap value per square foot, very much kind of the investment philosophy of AEWU.

32:03 If the doomeday scenario was that the tenant were to go, we're holding off a low cap valve per square foot, which lends itself to alternative uses. Throughout this process, we've actually had alternative use developers interested in this site. You will appreciate that York is a very well known UK city with a strong university, fantastic railings, and this is actually located within York City, also a very land constrained city. So, yeah, there is a plan b and c, but it looks like plan a to keep this building income producing, is, very much on the cards, and we look forward to providing you with updates, in due course. Yeah. I think it's fair to say we feel quite positive about about the concept of the NCP business being sold with this lease in place. We know what we have here is a very profit profitably trading car park, and we are hopeful that, ultimately, that business will end up in the hands of someone who is better capitalized than the previous business, which will, of course, hopefully lead to more positives coming through to the asset itself.

33:14 Well, thank you all for joining us today. We hope that you have read our shareholder update this quarter. We hope that you have heard today, the positive news that we have on lettings during the quarter. We certainly feel very, very pleased about what we've achieved. And of course, that feeds through to our dividend, which continues to be paid very consistently. And again, also consistently, the delivery of our NAV total returns, outperforming the MSCI benchmark over numerous time frames and in the most recent time frames as well. But looking at the portfolio, we still believe it represents a value proposition with low book values, low passing rents, opportunities for rental growth coming forward and a really strong pipeline as well. So thank you for joining us today, and we look forward to hopefully seeing you again next quarter and in future periods when we do hope that we can reengage with you on a live question and answer session as well. Thank you. Thank you very much.