AEW UK REIT plc: Half Yearly Results

AEW UK REIT plc (AEWU) 17-Nov-2021 / 07:00 GMT/BST Dissemination of a Regulatory Announcement, transmitted by EQS Group. The issuer is solely responsible for the content of this announcement. 17 November 2021     AEW UK REIT PLC   Interim Report and Financial Statements for the six months ended 30 September 2021   AEW UK REIT PLC ("AEW UK REIT" or the "Company"), , which holds a diversified portfolio of 35 commercial investment properties throughout the UK, is pleased to publish its Interim Report and Financial Statements for the six months ended 30 September 2021.   Mark Burton, Chairman of AEW UK REIT, commented: "We are very pleased with the strong performance over the period with the Company's NAV increasing by 10.96% and a total shareholder return of 28.37%.  . The valuation of the Company's property portfolio rose by 9.81% on a like-for-like basis, chiefly driven by its industrial assets. The sales of Langthwaite Industrial Estate, South Kirkby for £10.84 million and Wella Warehouse, Basingstoke for £5.86 million post period end were well above both purchase prices and book values.   The Company continues to see a number of attractive investment opportunities as it seeks to deliver further attractive returns to shareholders and support the 8p annual dividend. The Company made two acquisitions during the period, and one after half-year end, that are aligned with AEWU's strategy of adding value through active asset management by renewing current tenancies and securing new tenants. "     Financial Highlights   ● Net Asset Value ('NAV') of £174.29 million and of 110.01 pence per share ('pps') as at 30 September 2021 (31 March 2021: £157.08 million and 99.15 pps).   ● Operating profit before fair value changes of £5.88 million for the period (six months ended 30 September 2020: £5.93 million).   ● Profit Before Tax ('PBT') of £23.55 million and earnings per share ('EPS') of 14.86 pps for the period (six months ended 30 September 2020: £5.72 million and 3.61 pps). PBT includes a £16.60 million gain arising from changes to the fair values of investment properties in the period (six months ended 30 September 2020: loss of £3.33 million). This change explains the significant rise in PBT for the period.        ● EPRA Earnings Per Share ('EPRA EPS') for the period of 3.45 pps (six months ended 30 September 2020: 3.41 pps).   ● Total dividends of 4.00 pps declared in relation to the period (six months ended 30 September 2020: 4.00 pps). ● Shareholder Total Return for the period of 28.37% (six months ended 30 September 2020: 16.13%).   ● The price of the Company's Ordinary Shares on the London Stock Exchange was 102.80 pps as at 30 September 2021 (31 March 2021: 83.20 pps).   ● As at 30 September 2021, the Company had a balance of £50.50 million drawn down (31 March 2021: £39.50 million) of its £60.00 million (31 March 2021: £60.00 million) term credit facility with the Royal Bank of Scotland International Limited ('RBSi') and was geared to 28.97% of NAV (31 March 2021: 25.15%). The Company can draw £9.50 million of the remaining facility up to the maximum 35% Loan to NAV at drawdown (see note 13 below for further details).   ● The Company held cash balances totalling £15.16 million as at 30 September 2021 (31 March 2021: £17.45 million).     Property Highlights   ● As at 30 September 2021, the Company's property portfolio had a valuation of £206.69 million across 35 properties (31 March 2021: £179.00 million across 34 properties) as assessed by the valuer1 and a historical cost of £197.69 million (31 March 2021: £173.28 million). ● The Company acquired two properties during the period for a total purchase price of £18.54 million, excluding acquisition costs (year ended 31 March 2021: one property for £5.40 million). Post period-end, in November 2021, the Company acquired a retail park asset in Coventry for a purchase price of £16.41 million, excluding acquisition costs. ● The Company made one disposal during the period, Langthwaite Industrial Estate, South Kirkby for gross sale proceeds of £10.84 million (year ended 31 March 2021: two properties for gross sale proceeds of £29.30 million). Post period-end, in October 2021, the Company disposed of Wella Warehouse, Basingstoke, for gross proceeds of £5.86 million.   ● The portfolio had an EPRA vacancy rate of 8.59% as at 30 September 2021 (31 March 2021: 8.96%). Excluding vacancy contributed by Bath Street, Glasgow, which was exchanged to be sold with the condition of vacant possession, the vacancy rate was 5.43% (31 March 2021: 5.58%).   ● Rental income generated during the period was £7.87 million (six months ended 30 September 2020: £8.12 million).   ● EPRA Net Initial Yield ('EPRA NIY') of 6.45% as at 30 September 2021 (31 March 2021: 7.37%).   ● Weighted Average Unexpired Lease Term ('WAULT') of 4.00 years to break and 6.20 years to expiry (31 March 2021: 4.43 years to break and 6.71 years to expiry).   ● As at the date of this report, 87% of the rent due for the September 2021 quarter had been collected, 99% for the June 2021 quarter and 99% for the March 2021 quarter.     1 The valuation figure is reconciled to the fair value under IFRS in note 10.     Chairman's Statement   Overview I am pleased to report the unaudited interim results of the Company for the six months ended 30 September 2021 (the 'period'). The Company held a diversified portfolio of 35 commercial investment properties located throughout the UK with a value of £206.69 million as at 30 September 2021.   The Company's NAV has performed well over the period, having increased by 10.96%. The valuation of the Company's property portfolio rose by 9.81% on a like-for-like basis over the period, chiefly driven by its industrial assets. The sales of Langthwaite Industrial Estate, South Kirkby for £10.84 million and Wella Warehouse, Basingstoke for £5.86 million post period end were undertaken at 1.9x and 1.7x the purchase prices, respectively. The resulting profits achieved on disposal were £2.25 million and £1.93 million above book values, respectively, providing a boost to the Company's NAV. The Company closed the period in a position to take advantage of attractive opportunities to reinvest as a result of its cash position and debt covenant headroom. The Company has maintained a conservative Loan to NAV ratio, which stood at 29.00% at 30 September 2021, and had a healthy cash balance of £15.16 million.   Following the disposal of the Corby and Solihull sites in the prior period, the Company reinvested the sales proceeds to make two acquisitions during the period. Arrow Point Retail Park in Shrewsbury was acquired in May 2021 for £8.35 million and is a fully-let, purpose-built retail park prominently located on a busy estate and providing a Net Initial Yield ('NIY') of 8.7%. The second, 15-33 Union Street, Bristol, is a prime retail site located on a busy pedestrian thoroughfare in Bristol city centre and was purchased for £10.19 million, equating to a low capital value of £161 per sq ft and reflecting a NIY of 8.0%. Both of these assets provide opportunity for value growth in the medium to long term, and also have strong and stable income streams from their tenancy profiles.   The ongoing remedial works in Blackpool, along with the vacancy costs at Glasgow where we have sold an asset conditional on obtaining vacant possession, have constrained the portfolio's overall EPRA EPS, which was 3.45 pence for the period, providing a dividend cover of 86.10%. Following the planned sale of Glasgow, currently anticipated in December 2021, and completion of the works at Blackpool in early 2022, we expect this cost overhead to fall, leading to an increase in the EPRA EPS. The Company has made one acquisition post period-end of a retail park in Coventry for a purchase price of £16.41 million. This presents opportunities to add value through active asset management by renewing current tenancies and securing new tenants, which will further add to the recent strong income return and NAV growth achieved by the Company. The acquisition is accretive to EPRA EPS and takes the Company close to full investment.   The Company continues to work with its tenants in order to manage the difficulties posed by the pandemic. To date, the tenancy profile of the Company has proved to be resilient, demonstrated by the Company's low underlying vacancy rate of 5.43%* by Estimated Rental Value ('ERV') as at 30 September 2021. Rent collection rates have remained high for the March and June 2021 quarters, being 99% for both and 87% has been collected to date for the September 2021 rent quarter. These collection rates are high in comparison with the averages seen in the wider market and we expect that ultimate rates of collection, following the expiry of longer-term payment plans, should result in collection rates in excess of 98%. There are a small number of tenants who continue to face challenges in the current environment, and in a small number of cases the Company has agreed a longer-term payment plan to recover rental income in full over an extended period. A prudent assessment has been made of the recoverability of the Company's outstanding debts and a provision has been made in the financial statements for potential debt write-offs.   The office park at Oxford continues to perform well with its transition to life sciences/medical use, a sector which is seeing particularly strong investor demand at present. Moreover, after a tumultuous period for the retail sector, we have seen valuations stabilise this period, with our valuations increasing by 1.36% on a like-for-like basis, particularly driven by our new retail warehousing holding in Shrewsbury. Stock selection and active asset management continue to be key features of the Company's strategy and drivers of performance. During the period, the Company completed a number of lettings and lease renewals, the most notable of which was two new lettings at our office holding in Bristol, both of which were 15% above ERV. These are noted in more detail below in the 'Asset Management' section of the Investment Manager's Report.   The Company's share price was 102.80 pence per share as at 30 September 2021, representing a 6.56% discount to NAV (31 March 2021: 83.20 pence per share, representing a 16.1% discount to NAV). Subsequent to the period-end, the Company's share price has experienced additional growth, causing a further reduction in the discount to NAV.   * Including vacancy contributed by Bath Street, Glasgow, which has been sold with the condition of vacant possession, the vacancy rate was 8.59%.     Financial Results   Six months ended 30 September 2021    Year ended 31 March 2021 Six months ended 30 September 2020          Operating Profit before fair value changes (£'000) 5,879 10,735 5,934 Operating Profit (£'000) 23,919 23,102 6,276 Profit Before Tax (£'000) 23,547 22,172 5,724 Earnings Per Share (basic and diluted) (pence)* 14.86 13.98 3.61 EPRA Earnings Per Share (basic and diluted) (pence)* 3.45 6.19 3.41 Ongoing Charges (%) 1.31 1.36 1.31 Net Asset Value per share (pence) 110.01 99.15 92.73 EPRA Net Asset Value per share (pence) 109.94 99.11 92.70   * see note 8 of the Financial Statements for the corresponding calculations. Financing The Company has a £60.00 million loan facility, of which it had drawn a balance of £50.50 million as at 30 September 2021 (31 March 2021: £60.00 million facility; £39.50 million drawn), producing a Loan to NAV ratio of 28.97% (31 March 2021: 25.15%).   The unexpired term of the facility was 2.1 years as at 30 September 2021 (31 March 2021: 2.6 years). The loan incurs interest at 3-month SONIA +1.4%, which equated to an all-in rate of 1.47% as at 30 September 2021 (31 March 2021: 3-month LIBOR + 1.4% equating to an all-in rate of 1.44%).   The Company is protected from a significant rise in interest rates as it has interest rate caps in place. Throughout the period and up to the date of this report, the Company had in effect interest rate caps on a notional value of £51.50 million of the loan, capped at 1.00%, which resulted in the loan balance being 102.0% hedged as at 30 September 2021.   As noted in the KPIs, the Company targets long-term gearing of 35% Loan to NAV, which is the maximum gearing on drawdown of the RBSi facility. The Board and Investment Manager continue to monitor the level of gearing and have the ability to adjust the target gearing according to the Company's circumstances and perceived risk levels.   The Company passed its Interest Cover Ratio ('ICR') tests for April, July and October 2021 with significant headroom.   Dividends The Company has continued to deliver on its target of paying dividends of 8.00 pence per share per annum. During the period, the Company declared and paid two quarterly dividends of 2.00 pence per Ordinary Share, in line with its target. Dividends for the period were 86.00% covered by EPRA EPS.   It remains the Company's intention to continue to pay dividends in line with its dividend policy, and the existing portfolio and investment opportunities support this policy. However, the outlook remains unclear in the wake of the COVID-19 pandemic and in determining future dividend payments, regard will be had to the circumstances prevailing at the relevant time, as well as the Company's requirement, as a UK REIT, to distribute at least 90% of its distributable income annually.   Outlook The easing of most of the remaining COVID-19 restrictions, combined with the continued rollout of the vaccination programme, has lifted most economists' outlook for the post COVID-19 rebound in the second half of 2021. In light of this, the property market has experienced a gradual recovery, with rent collection levels greatly improving, as cash flow pressures on tenants ease. With its strong cash position and borrowing covenant headroom, the Company is well positioned to take advantage of attractive opportunities coming to the market. During the period, the Company has displayed strong NAV performance, reflecting the geographical diversity of the portfolio, its circa 50% exposure to the industrial sector and the fact that many of its assets benefit from viable alternative use potential, limiting downside risk and volatility.   In the near term, the Board and Investment Manager will continue to focus on minimising the legacy impact of COVID-19 on its stakeholders and, as more attractive opportunities arise in the investment market, will aim to find suitable assets to build earnings back to a fully covered dividend. The developing economic conditions will be monitored closely and the Company's strategy adjusted accordingly. It is hoped that the start of 2022 will build upon the economic recovery of the second half of 2021, providing conditions to enable further growth of the Company     Mark Burton Chairman 16 November 2021         Key Performance Indicators     KPI AND DEFINITION   RELEVANCE TO STRATEGY   TARGET PERFORMANCE 1. EPRA NIY A representation to investors of what their initial net yield would be at a predetermined purchase price after taking account of all associated costs, e.g. void costs and rent free periods.     The Company's EPRA NIY demonstrates the ability to generate income from its portfolio in the short-term in order to meet its target dividend.     7.50 - 10.00% 6.45% at 30 September 2021 (31 March 2021: 7.37%). 2. True Equivalent Yield The average weighted return a property will produce according to the present income and ERV assumptions, assuming the income is received quarterly in advance.     The Company's True Equivalent Yield demonstrates the Company's ability to generate income, both from its existing leases and its ERVs, in order to meet its target dividend.   7.50 - 10.00% 7.67% at 30 September 2021 (31 March 2021: 8.15%). 3. Reversionary Yield The expected return the property will provide once rack rented.     A Reversionary Yield profile shows a potentially sustainable income stream that can be used to meet dividends past the expiry of a property's current leasing arrangements.   7.50 - 10.00% 7.67% at 30 September 2021 (31 March 2021: 8.18%).   4. WAULT to expiry The average lease term remaining to expiry across the portfolio, weighted by contracted rent.     The Investment Manager believes that current market conditions present an opportunity whereby assets with a shorter unexpired lease term are often mispriced. It is also the Investment Manager's view that a shorter WAULT is useful for active asset management, particularly in certain growth sectors such as warehousing, as it allows the Investment Manager to engage in direct negotiation with tenants rather than via rent-review mechanisms.     >3 years 6.20 years at 30 September 2021 (31 March 2021: 6.71 years). 5. WAULT to break The average lease term remaining to break, across the portfolio weighted by contracted rent.     The Investment Manager believes that current market conditions present an opportunity whereby assets with a shorter unexpired lease term are often mispriced. As such, it is in line with the Investment Manager's strategy to acquire properties with a WAULT that is generally shorter than the benchmark. It is also the Investment Manager's view that a shorter WAULT is useful for active asset management, particularly in certain growth sectors such as warehousing, as it allows the Investment Manager to engage in direct negotiation with tenants rather than via rent-review mechanisms.     >3 years 4.00 years at 30 September 2021 (31 March 2021: 4.43 years). 6. NAV NAV is the value of an entity's assets minus the value of its liabilities.     Provides stakeholders with the most relevant information on the fair value of the assets and liabilities of the Company.     Increase year-on-year £174.29 million at 30 September 2021 (31 March 2021: £157.08 million). 7. Leverage (Loan to NAV) The proportion of the Company's net assets that is funded by borrowings.     The Company has changed the measure of its Leverage KPI from 'Loan to Gross Asset Value ('GAV')' to 'Loan to NAV'. This is in line with the measure used in its banking covenants and so is considered to be more relevant to the Company's position. The target of 35% Loan to NAV, which is the gearing limit at drawdown under the RBSi facility, approximates to the previous target of 25% Loan to GAV, which is the measure used in the Company's Investment Guidelines. Gearing will continue to be monitored using both measures.     35% 28.97% at 30 September 2021 (31 March 2021: 25.15%). 8. Vacant ERV The space in the property portfolio which is currently unlet, as a percentage of the total ERV of the portfolio.     The Company's aim is to minimise vacancy of the properties. A low level of structural vacancy provides an opportunity for the Company to capture rental uplifts and manage the mix of tenants within a property.     <10.00% 8.59% / 5.43% excluding vacancy contributed by Glasgow* at 30 September 2021 (31 March 2021: 8.96%/5.58% excluding vacancy contributed by Glasgow).   9. Dividend  Dividends declared in relation to the year. The Company targets a dividend of 8.00 pence per Ordinary Share per annum. However, given the current COVID-19 situation, regard will be had to the circumstances prevailing at the relevant time in determining dividend payments.     The dividend reflects the Company's ability to deliver a sustainable income stream from its portfolio.     4.00 pps (six month period to 30 September) 4.00 pps for the six months to 30 September 2021. This supports an annualised target of 8.00 pps (six months to 30 September 2020: 4.00 pps).   10. Ongoing Charges The ratio of annualised administration and operating costs expressed as a percentage of average NAV throughout the period.     The Ongoing Charges ratio provides a measure of total costs associated with managing and operating the Company, which includes the management fees due to the Investment Manager. This measure is to provide investors with a clear picture of operational costs involved in running the Company.     <1.50% 1.31% for the six months to 30 September 2021 (six months to 30 September 2020: 1.31%). 11. Profit before Tax ('PBT') PBT is a profitability measure which considers the Company's profit before the payment of income tax.     The PBT is an indication of the Company's financial performance for the period in which its strategy is exercised.   4.00 pps (six month period to 30 September) £23.55 million/14.86 pps for the six months to 30 September 2021 (six months to 30 September 2020: £5.72 million/3.61 pps). 12. Shareholder Total Return The percentage change in the share price assuming dividends are reinvested to purchase additional Ordinary Shares.     This reflects the return seen by shareholders on their shareholdings through share price movements and dividends received.   8.00%   28.37% for the six months to 30 September 2021 (six months to 30 September 2020: 16.13%). 13. EPRA EPS Earnings from core operational activities. A key measure of a company's underlying operating results from its property rental business and an indication of the extent to which current dividend payments are supported by earnings. See note 8.     This reflects the Company's ability to generate earnings from the portfolio which underpins dividends.   4.00 pps (six month period to 30 September) 3.45 pps for the six months to 30 September 2021 (six months to 30 September 2020: 3.41 pps).   * Glasgow has exchanged to be sold with condition of vacant possession.   Investment Manager's Report   Economic Outlook The easing of most of the remaining COVID-19 restrictions has increased market optimism in both the direct and indirect markets. Oxford Economics' latest forecasts published in mid-September 2021 indicate UK GDP growth to be 6.9% for the whole year, compared with the 9.8% contraction in 2020. However, the Bank of England signalled its concerns on inflation being well ahead of its target in mid-October. Due to energy, labour and materials shortages UK inflation is expected to peak near 6% in early 2022. As a result, gilt markets are pricing in interest rate hikes starting in December 2021 followed by further increases in 2022. Despite these interest rate increases, Oxford Economics' latest forecast confirms the continued strong UK economic recovery with GDP growth of 6.7% in 2022.   Although the direct markets are still strongest in the industrial and warehouse sector, the next year is expected to be a year of recovery and growth where some parts of the retail and leisure sectors may be the beneficiaries. The Company is focusing on portfolio adjustments to take advantage of value opportunities, driven more by the specifics of the asset than the sector. This may see the Company realise profits through sales where it believes values have been optimised and where the funds can be recycled into assets with better growth potential going forwards. There is likely to be a slightly reduced weighting to business space and a rotation towards retail warehousing, leisure and a continued focus on assets with viable alternative use value. Assets whose current value is supported by long-term alternative use optionality, irrespective of current use, will be of increasing importance in our stock selection process. Moreover, recent changes to the Use Classes Order are likely to have a significant impact on portfolios in terms of broadening potential use. Finally, in line with market optimism and a period of post pandemic growth, rent collection rates have strongly improved and this trend is expected to continue.   Financial Results The Company's NAV as at 30 September 2021 was £174.29 million or 110.01 pps (31 March 2021: £157.08 million or 99.15 pps). This is an increase of 10.86 pps or 10.96% over the period.   EPRA EPS for the period was 3.45 pence which, based on dividends paid of 4.00 pps, reflects a dividend cover of 86.00%. The increase in dividend cover compared to the prior six-month period has largely arisen due to improvements in rent collection levels, along with successful legal outcomes that have recovered significant arrears. Income across the tenancy profile has remained largely intact. Collection rates have reached 99% for both the March and June 2021 quarters respectively, with further payments expected to be received under longer-term payment plans. Of the outstanding arrears, £0.61 million has been provided for expected credit losses.   Financing As at 30 September 2021, the Company has a £60.00 million loan facility with RBSi, in place until October 2023, the details of which are presented below:     30 September 2021 31 March 2021 Facility £60.00 million £60.00 million Drawn £50.50 million £39.50 million Gearing (Loan to NAV) 28.97% 25.15% Interest rate 1.47% all-in (SONIA + 1.4%) 1.44% all-in (LIBOR +1.4%) Notional Value of Loan Balance Hedged 102.0% 130.4%     Due to GBP LIBOR ending at the end of 2021, the Company transitioned to SONIA on 20 July 2021, with a credit adjustment spread of 0.0981%.   Property Portfolio During the period, the Company disposed of Langthwaite Industrial Estate, South Kirkby, for net proceeds of £10.84 million. The Company made two acquisitions during the period being: Arrow Point Retail Park in Shrewsbury, which was acquired in May 2021 for £8.35 million, and 15-33 Union Street, Bristol, which was purchased in June 2021 for a price of £10.19 million.   The following tables illustrate the composition of the portfolio in relation to its properties, tenants and income streams:   Summary by Sector as at 30 September 2021               Sector         Number of assets           Valuation (£m)           Area (sq ft)         Vacancy by ERV (%)         WAULT to break (years)     Gross passing rental income (£m)     Gross passing rental income (£psf)           ERV (£m)           ERV (£psf)         Rental income (£m)     Like- for like rental growth* (£m)     Like- for like rental growth* %                           Industrial 20 114.72 2,428,590 6.45 3.73 8.04 3.31 9.28 3.82 4.20 0.10  2.42  Offices 5 39.95 251,812 18.73 3.12 2.19 8.71 3.62 14.38 1.16 0.02  1.83  Standard retail 6 24.62 237,792 10.35 4.60 2.65 11.13 2.36 9.92 1.21 (0.02) (1.76) Retail warehouses 2 14.85 145,912 0.00 1.95 1.32 9.07 1.21 8.29 0.57 (0.02) (6.93) Alternatives 2 12.55 112,355 0.00 6.85 1.50 13.31 1.23 10.99 0.73 (0.04) (5.01)                           Portfolio 35 206.69 3,176,461 8.59 4.00 15.70 4.94 17.70 5.57 7.87 0.04  0.57      Summary by Geographical Area as at 30 September 2021           Geographical Area         Number of assets           Valuation (£m)           Area (sq ft)         Vacancy by ERV  (%)         WAULT to break (years)     Gross passing rental income (£m)     Gross passing rental income (£psf)           ERV (£m)           ERV (£psf)         Rental income (£m)     Like- for like rental growth* (£m)     Like- for like rental growth* %                           South West 5 37.69 517,232 12.65 2.85 2.70 5.21 3.40 6.57 1.21 (0.03) (3.08) Yorkshire and Humberside 7 34.10 796,951 4.51 2.59 2.43 3.05 3.10 3.89 1.41 (0.20) (12.34) South East 5 30.32 195,545 3.94 3.99 2.03 10.40 2.19 11.19 1.13 (0.01) (0.41) Eastern 5 23.85 344,339 10.23 2.29 1.84 5.33 2.06 5.98 0.91 0.21  29.68  West Midlands 4 23.22 458,613 3.42 3.46 1.90 4.14 1.83 4.00 0.85 (0.02) (2.71) Wales 2 18.55 376,138 0.00 7.58 1.25 3.31 1.43 3.82 0.64 (0.03) (4.97) North West 4 18.28 302,061 0.00 4.44 1.56 5.18 1.40 4.64 0.78 0.16  25.32  Rest of London 1 9.25 71,720 0.00 10.12 0.96 13.40 0.75 10.45 0.47 (0.02) (4.87) Scotland 1 7.50 85,643 51.1 1.38 0.64 7.49 1.16 13.54 0.27 (0.01) (2.92) East Midlands 1 3.93 28,219 0.00 5.16 0.39 13.82 0.38 13.38 0.20 (0.01) (2.96)                           Portfolio 35 206.69 3,176,461 8.59 4.00 15.70 4.94 17.70 5.57 7.87 0.04  0.57    *like-for-like rental growth is for the six months ended 30 September 2021. Source: Knight Frank/AEW, 30 September 2021.     Individual Property Classifications           Market Value   Property Sector Region Range (£m)             1 Eastpoint Business Park, Oxford Offices South East   15.0-20.0   2 Gresford Industrial Estate, Wrexham Industrial Wales   10.0-15.0 3 40 Queen Square, Bristol Offices South West 10.0-15.0 4 15-33 Union Street, Bristol Standard retail South West 10.0-15.0 5 Lockwood Court, Leeds Industrial Yorkshire and Humberside 7.5-10.0   6 London East Leisure Park, Dagenham Other Rest of London   7.5 -10.0   7 Arrow Point Retail Park, Shrewsbury Retail warehouses West Midlands   7.5-10.0   8 Storey's Bar Road, Peterborough Industrial Eastern   7.5-10.0 9 Sarus Court, Runcorn Industrial North West 7.5-10.0 10 225 Bath Street, Glasgow Offices Scotland 7.5-10.0   The Company's top ten properties listed above comprise 49.2% of the total value of the portfolio.           Market Value   Property Sector Region Range (£m)           11 Euroway Trading Estate, Bradford Industrial Yorkshire and Humberside 5.0-7.5 12 Apollo Business Park, Basildon Industrial Eastern 5.0-7.5 13 Brockhurst Crescent, Walsall Industrial West Midlands 5.0-7.5 14 Westlands Distribution Park, Weston Super Mare Industrial South West 5.0-7.5 15 Barnstaple Retail Park, Barnstaple Retail warehouses South West 5.0-7.5 16 Walkers Lane, St Helens Industrial North West 5.0-7.5 17 Deeside Industrial Park, Deeside Industrial Wales 5.0-7.5 18 Diamond Business Park, Wakefield Industrial Yorkshire and Humberside 5.0-7.5 19 Wella Warehouse, Basingstoke Industrial South East 5.0-7.5 20 Oak Park, Droitwich Industrial West Midlands <5.0 21 Mangham Road, Rotherham Industrial Yorkshire and Humberside <5.0 22 Pearl House, Nottingham Standard retail East Midlands <5.0 23 710 Brightside Lane, Sheffield Industrial Yorkshire and Humberside <5.0 24 Hall Industrial Estate, Basildon Industrial Eastern <5.0 25 Cedar House, Gloucester Offices South West <5.0 26 75 Above Bar Street, Southampton Standard retail South East <5.0 27 Eagle Road, Redditch Industrial West Midlands <5.0 28 Odeon Cinema, Southend Other Eastern <5.0 29 Commercial Road, Portsmouth Standard retail South East <5.0 30 Clarke Road, Milton Keynes Industrial South East <5.0 31 Bridge House, Bradford Industrial Yorkshire and Humberside <5.0 32 Pricebusters Building, Blackpool Standard retail North West <5.0 33 Vantage Point, Hemel Hempstead Offices Eastern <5.0 34 Moorside Road, Swinton Industrial North West <5.0 35 11/15 Fargate, Sheffield Standard retail Yorkshire and Humberside <5.0     Sector and Geographical Allocation by Market Value as at 30 September 2021   Sector Allocation   Sector % Standard retail 11.9 Retail warehouses 7.2 Offices 19.3 Industrial 55.5 Other 6.1   Geographical Allocation   Location % Rest of London 4.5 South East 14.7 South West 18.2 Eastern 11.6 West Midlands 11.2 East Midlands 1.9 North West 8.8 Yorkshire and Humberside 16.5 Wales 9.0 Scotland 3.6   Source: Knight Frank valuation report as at 30 September 2021.     Top Ten Tenants     Tenant Sector Property Passing Rental Income (£'000) % of Portfolio Total Contracted Rental Income 1 Plastipak UK Ltd Industrial Gresford Industrial Estate, Wrexham 883 5.6 2 Wyndeham Group Industrial Wyndeham, Peterborough 644 4.1 3 Mecca Bingo Ltd   Leisure London East Leisure Park, Dagenham 625 4.0 4 Harrogate Spring Water Limited Industrial Lockwood Court, Leeds 603 3.8 5 Odeon Cinemas Leisure Odeon Cinema, Southend-on-Sea 535 3.4 6 Wilko Retail Limited Retail 15-33 Union Street, Bristol 481 3.1 7 Advanced Supply Chain (BFD) Ltd Industrial Euroway Trading Estate, Bradford 467 3.0 8 HFC Prestige Manufacturing Limited Industrial Cranbourne House, Basingstoke 460 2.9 9 Charlies Stores Retail Arrow Point Retail Park, Shrewsbury 440 2.8 10 Poundland Limited Retail Pricebusters Building, Blackpool 414 2.6   The Company's top ten tenants, listed above, represent 35.4% of the total passing rental income of the portfolio.   Source: Knight Frank valuation report as at 30 September 2021.   Asset Management The Company completed the following material asset management transactions during the period:   Acquisitions - Arrow Point Retail Park in Shrewsbury was acquired in May 2021 for £8.35 million and is a fully-let, purpose-built retail park prominently located on a busy commercial estate, providing a NIY of 8.7%. The second acquisition, 15-33 Union Street, Bristol, is a retail/leisure site located on a busy pedestrian thoroughfare in Bristol city centre and provides a NIY of 8.0%. Both of these assets provide opportunity for value growth in the medium to long term as well as strong and stable income streams from their tenancy profiles.   Disposals - Sales of Langthwaite Industrial Estate, South Kirkby for £10.84 million and Wella Warehouse, Basingstoke for £5.86 million have now been completed, with the latter completing post period end. The sales prices achieved were 31% and 35% ahead of their March 2021 valuations, and also 1.9x and 1.7x their purchase prices, respectively.   Arrow Point Retail Park, Shrewsbury - We have extended British Heart Foundation's unexpired term to break by moving their November 2021 break option out to December 2024 in return for four months' rent free. The majority of the rent free was used to write off rent arrears predating the Company's ownership. British Heart Foundation's lease expires in November 2028.   Diamond Business Park, Wakefield - We have completed a new five year ex-Act lease at £41,866 per annum/£3.75 per sq ft on Unit 14, which reflects a rent 25% above the March 2021 ERV. The tenant has provided a rent deposit equivalent to six month's rent. Six months' rent free was given as an incentive.   40 Queen Square, Bristol - We have completed a new five year ex-Act lease to Brewin Dolphin at £103,770 per annum/£30 per sq ft versus the previous passing rent of £22 per sq ft and the March 2021 ERV of £26 per sq ft. A 12 month rent free incentive was given. We have now also completed a lease renewal to Candide Limited until February 2025 at the same rent of £30 psf (£116,970 per annum). The previous passing rent was £22.81 per sq ft and only 1.5 months' rent free incentive was given. These lettings at £30 psf have produced an increase in the property's valuation of £1.05 million (9.9%) over the past six months.   Vantage Point, Hemel Hempstead - We have completed a new five year ex-Act lease (tenant break option at the end of year three) to Netronix Integration Limited at a rent of £33,683 per annum/£14.50 per sq ft, which is £3 per sq ft above ERV. Four months' rent free incentive was given, with a further two months should the tenant not exercise their tenant break option at the end of the third year.   Above Bar Street, Southampton - We have exchanged on a new straight five year ex-Act lease to Shoe Zone at a gross rent of £80,000 per annum, subject to approximately £40,000 landlord works. 12 months' rent free incentive was given.   Sarus Court, Runcorn - We have completed a ten year lease renewal with NTT United Kingdom Limited (Dimension Data) at £5.75 per sq ft (£64,066.50 per annum) versus the previous passing rent of £5.25 per sq ft. There is a tenant break option in December 2025. Five months' rent free incentive was given. The valuation of this asset has increased by £1.05 million (15.3%) over the past six months to £7.9 million.   Vacancy - The portfolio's overall vacancy level is 8.59%. Excluding vacancy contributed by the asset at 225 Bath Street, Glasgow, the vacancy level is 5.43%. This asset has now been exchanged for sale for alternative use redevelopment as student accommodation. As a condition of the sale agreement, full vacancy must be achieved before the sale can be completed. Completion of the sale is expected in Q4 2021 - Q1 2022. The purchaser has submitted a planning application and is awaiting confirmation on a committee date. Regarding achieving vacant possession, only one tenant remains in the building having recently exchanged on the variation of W.A. Fairhurst's lease, bringing their occupation to an end on 31 January 2022, in exchange for an £800,000 surrender premium, plus nine months' rent free from 28 February 2021 to 1 December 2021.   Environmental, Social and Governance ('ESG') Update The Company has maintained its two stars Global Real Estate Sustainability Benchmark ('GRESB') rating for 2021 and maintained its score of 65 (GRESB Average 72). A large portion of the GRESB score relates to performance data coverage where, due to the high percentage of single-let assets with tenant procured utilities, the Company does not score as well as funds with a smaller holding of single-let assets and a higher proportion of multi-let assets where the owner is responsible for the utilities and can therefore gather the relevant data.   We continue to implement our plan to improve overall data coverage and data collection for all utilities through increased tenant engagement at our single-let assets and by installing automated meter readers ('AMR') across the portfolio. So far, we are in the process of installing AMRs in all of our multi-let properties. We are also in discussions with the tenants of our top 10 single-let FRI assets (in terms of floor area) regarding the installation of AMR.   We endeavour, where the opportunity presents itself through a lease event, to include green clauses in leases, covenanting landlord and tenant to collaborate over the environmental performance of the property.   We continue to assess and strengthen our reporting and alignment against the framework set out by the Taskforce on Climate-Related Financial Disclosures ('TCFD') with further disclosure and update to be provided in the 2022 annual report and accounts. We are pleased to report the Company has maintained its EPRA Silver rating for sBPR for ESG disclosure and transparency.   We have an Asset Sustainability Action Plan ('ASAP') initiative, tracking ESG initiatives across the portfolio on an asset by asset basis for targeted/relevant and specific implementation of ESG improvements. In doing so, all managed assets and units have recently been contracted to High Quality Green Tariffs, ensuring that electricity supply is from renewable sources. All void/vacant unit supplies have also been transferred to High Quality Green Tariffs.   All managed assets will be moved to 'Green Gas' supplies in 2022.   We are underway with implementing initiatives such as a new landscaping/biodiversity programme at our retail warehouse in Barnstaple, replacing the existing plants and shrubs with a greater diversity of appropriate species which in turn will attract a wider variety of insects and wildlife to the property.   Lease Expiry Profile Approximately £3.48 million of the Company's current contracted income stream is subject to an expiry or break within the 12 month period commencing 1 October 2021. 12.87% (£447,984) of this income (Indigo Lighthouse Solutions and WA Fairhurst) is attributable to our office holding in Glasgow, which has exchanged for sale. A further 9.38% (£326,668) of this income relates to a property where we expect the tenants to stay, renewing their leases. 18.31% (£637,238) of this income is in the industrial sector, where we anticipate strong occupier demand, low incentives and reversionary rents. Regarding the remainder, we will proactively manage, looking to unlock capital upside, whether that be through lease regears/renewals, or through refurbishment/capex projects and new lettings.   Source: Knight Frank valuation report as at 30 September 2021.   AEW UK Investment Management LLP 16 November 2021     Principal Risks and Uncertainties   The Company's assets consist of UK commercial property. Its principal risks are therefore related to the commercial property market in general, but also to the particular circumstances of the individual properties and the tenants within the properties.   The Board has overall responsibility for reviewing the effectiveness of the system of risk management and internal control which is operated by the Investment Manager. The Company's ongoing risk management process is designed to identify, evaluate and mitigate the significant risks the Company faces.   At least twice a year, the Board undertakes a formal risk review with the assistance of the Audit Committee, to assess the adequacy and effectiveness of the Investment Manager and other service providers' risk management and internal control processes.   The Board has carried out a robust assessment of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.   An analysis of the principal risks and uncertainties is set out below. The risks below do not purport to be exhaustive as some risks are not yet known and some risks are currently not deemed material but could turn out to be material in the future. Changes to the principal risks since the date of the Annual Report and Financial Statements for the year ended 31 March 2021 are indicated below.   Principal risks and their potential impact How risk is managed Risk assessment REAL ESTATE RISKS     1. Property market Any property market recession or future deterioration in the property market could, inter alia, (i) cause the Company to realise its investments at lower valuations; and (ii) delay the timings of the Company's  realisations. These risks could have a material adverse effect on the ability of the Company to achieve its investment objective.     The Company has investment restrictions in place to invest and manage its assets with the objective of spreading and mitigating risk.     Probability: Moderate Impact: Moderate to High Movement: Decrease 2. Property valuation Property and property-related assets are inherently difficult to value due to the individual nature of each property.   There may be an adverse effect on the Company's profitability, the NAV and the price of Ordinary Shares in cases where properties are sold whose valuations have previously been materially overstated.     The Company uses an independent external valuer (Knight Frank LLP) to value the properties at fair value in accordance with accepted RICS appraisal and valuation standards.     Probability: Low Impact: Low to Moderate Movement: Decrease 3. Tenant default Failure by tenants to fulfil their rental obligations could affect the income that the properties earn and the ability of the Company to pay dividends to its shareholders.   Comprehensive due diligence is undertaken on all new tenants. Tenant covenant checks are carried out on all new tenants where a default would have a significant impact.   Asset management team conducts ongoing monitoring and liaison with tenants to manage potential bad debt risk.     Probability: Moderate Impact: Moderate to High Movement: Decrease 4. Asset management initiatives Asset management initiatives, such as refurbishment works, may prove to be more extensive, expensive and take longer than anticipated. Cost overruns may have a material adverse effect on the Company's profitability, the NAV and the share price.     Costs incurred on asset management initiatives are closely monitored against budgets and reviewed in regular presentations to the Investment Management Committee of the Investment Manager.     Probability: Low to Moderate Impact: Low to Moderate Movement: No change 5. Due diligence Due diligence may not identify all the risks and liabilities in respect of an acquisition (including any environmental, structural or operational defects) that may lead to a material adverse effect on the Company's profitability, the NAV and the price of the Company's Ordinary Shares.     The Company's due diligence relies on work (such as legal reports on title, property valuations, environmental and building surveys) outsourced to third parties who have expertise in their areas. Such third parties have professional indemnity cover in place. ...
6. Fall in rental rates Rental rates may be adversely affected by general UK economic conditions and other factors that depress rental rates, including local factors relating to particular properties/locations (such as increased competition).   Any fall in the rental rates for the Company's properties may have a material adverse effect on the Company's profitability, the NAV, the price of the Ordinary Shares and the Company's ability to meet interest and capital repayments on any debt facilities.	The Company builds a diversified property and tenant base with subsequent monitoring of concentration to individual occupiers (top ten tenants) and sectors (geographical and sector exposure).   The Investment Manager holds quarterly meetings with its Investment Strategy Committee and regularly meets the Board of Directors to assess whether any changes in the market present risks that should be addressed in the Company's strategy.	Probability: Moderate to High Impact: Moderate to High Movement: No change
BORROWING RISKS
7. Breach of borrowing covenants The Company has entered into a term credit facility with RBSi.   Material adverse changes in valuations and net income may lead to breaches in the Loan to Value ('LTV') and interest cover ratio covenants.	The Company monitors the use of borrowings on an ongoing basis through weekly cash flow forecasting and quarterly risk monitoring to monitor financial covenants.	Probability: Low to Moderate Impact: Moderate to High Movement: Decrease
8. Interest rate rises ...