- Net asset value (NAV) of £169mn (106p)
- Disposals realise £20.9mn
- Acquisitions’ reversionary yields above 10 per cent
AEW UK Reit (AEWU:101p) continues to outperform the MSCI benchmark through a value-focused investment strategy that involves making cross-sector and often counter cyclical moves. Analysts at Liberum Capital calculate that the portfolio has outperformed the MSCI IPD benchmark by 10.2 per cent on an annualised basis in the six-month period to 30 September 2023, buoyed by timely disposals, strong asset management initiatives and robust property investments.
The disposal of two industrial assets in Leeds and Bradford achieved an average premium of 14 per cent to carrying value and were sold on NIY’s of 6.2 per cent. This was far below the 8.6 per cent average purchase yield achieved by recycling the capital into a carpark leased to NCP in York and a retail and office property in Bath city centre. The purchased properties offer reversionary yields of more than 10 per cent, so are expected to deliver NAV growth over the medium term. A third industrial property in Deeside was sold on an eight per cent premium to book value, too.
The first half performance was underpinned by AEW’s 14 industrial properties (36 per cent of portfolio) which have strong occupational demand, the highest levels of rental growth and low average passing rent of £3.60 per square feet. The retail warehousing sector (21 per cent of portfolio) has seen vacancy levels fall to 4.7 per cent, the lowest level for five years, and is more robust on a total return basis than high street retail (17.4 per cent of portfolio). However, AEW’s investment manager remains cautious given the potential for further distress in the sector.
Importantly, the portfolio retains strong defensive qualities. It is valued on a net initial yield of 7.85 per cent and reversionary yield of 8.7 per cent, well above the MSCI benchmark yields, highlighting potential for growth on a low average passing rent of £6.29 per sq ft to support valuations. A modest loan to gross asset value ratio of 27 per cent compares favourably to peers and £60mn borrowings on the £219mn portfolio at a fixed interest rate of 2.95 per cent until May 2027. It enables the board to recycle cash back to shareholders to support the market-leading 2p a share quarterly dividend that has been held for 32 consecutive quarters.
The combination of an eight per cent dividend yield and five per cent discount to NAV is also starting to attract investor interest (‘Lock in an 8% yield with this industrial Reit’, 19 October 2023). Buy.
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