- Net asset value (NAV) total return of 7.37 per cent for three-month period to 31 March 2022
- 4.74 per cent like-for-like valuation increase driven by office and industrial sectors
- Robust outlook, with portfolio estimated rental value (ERV) 20 per cent higher than current gross income
- Post period end agreed sale of Eastpoint Business Park at 90 per cent premium to carrying value
AEW UK REIT (AEWU:131p), the top-performing UK commercial property REIT over the past one, three and five years, has posted eye-catching results for the final three months of its 2021/22 financial year.
The company’s quarterly NAV total return of 7.37 per cent was driven by £10.7mn of valuation uplifts across its £240mn investment portfolio, half of which came from industrial property (50 per cent portfolio weighting), and more than a quarter from offices (18 per cent weighting). The familiar themes of expansion in industrial warehousing markets and demand within the retail warehousing sector delivered 4.65 per cent and 3.95 per cent quarterly valuation uplifts, respectively. NAV per share of 120p is 20 per cent higher than 12 months ago and the board has also paid out 8p a share of dividends in the interim.
Rental growth remains a key driver of the positive revaluations. For example, AEW’s industrial asset in Basildon, Apollo Business Park, was revalued upwards by 22.5 per cent during the quarter following the signing of a new five-year lease at a rent 15 per cent ahead of the valuer's previously estimated levels. In Bradford, the open market rent review of an industrial asset occupied by Pilkington UK led to a 14 per cent increase in income (over a three-year period) and an 11.7 per cent uplift in capital value. In Rotherham, terms were finalised with a new tenant to take the 80,000 square foot (sq ft) space vacated by Hydro Components in December. Once the 10-year lease has been completed later this year, rental income is set to significantly exceed previous passing levels of £3.35 per sq ft. In turn, this underpinned a 20 per cent valuation uplift on the asset. Moreover, given that AEW’s estimated rental value is 20 per cent higher than the company’s passing rent roll, then expect further material rental uplifts as assets come up for rent review or are remarketed after refurbishment.
AEW’s office portfolio is benefiting from active management initiatives, too. In Oxford, Eastpoint Business Park has been successfully signing up tenants from the City’s burgeoning life sciences sector, the higher rent roll supported 20 per cent capital growth in the property’s value. In Glasgow, a former office building in Bath Street has been awarded planning consent for conversion to student accommodation, pushing up its valuation by 13 per cent.
A sale of the vacant building to IQ Student Accommodation should complete over the summer, the effect of which will cut voids by 4 per cent and enable AEW’s investment manager to recycle proceeds into more income producing assets. Three property acquisitions are currently under consideration, which will help boost earnings per share to a level that the 2p a share quarterly dividend is fully covered. Balance sheet gearing is comfortable with AEW’s loan-to NAV ratio around 28 per cent.
Moreover, after the results were released, AEW announced (on 25 April 2022) the agreed sale of the Eastpoint Business Park for £37mn, a massive 90 per cent premium to the 31 March 2022 carrying value (£19.5mn) and 4.5 times the £8.2mn acquisition cost in 2015. The eye-watering return reflects the repositioning the asset from a multi-let business park to a regional healthcare hub for Genesis, a private outpatient centre. A 25-year, RPI-linked lease was agreed with Genesis in 2018. On a proforma basis, the disposal adds 11p a share to NAV per share of 120.6p at 31 March 2022, so effectively the shares are trading at spot book value parity.
AEW’s strong NAV growth profile and high income stream explain why the high-yielding shares (current dividend yield of 6.2 per cent) have rallied from my 110p entry point to surpass my 128p target (Alpha Research: ‘A high-yielding capital growth property play’, 19 November 2021). The shares have produced a total return of 14.8 per cent after I reiterated the buy call (‘Targeting high-yielding property to hedge off inflation risk’ 7 February 2022). I expect the outperformance to continue and raise my target to 145p. Buy.
Please note this article was first published on Thursday, 21 April 2022 and updated on Monday, 25 April 2022 after the announcement of the sale of the Eastpoint Business Park.
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