AEW UK REIT PLC

LSE:AEWU

Earnings Call Analysis

Earnings Growth and Strategic Asset Reallocation Drive Strong Performance

The company reported a strong quarter, showcasing consistent earnings growth and solid asset management. Earnings have increased, with key figures showing 1.92% in underlying earnings, and a NAV up 3.1% to £167.79 million since March. The portfolio has been actively rebalanced, selling lower-yielding assets and acquiring higher-yielding ones—such as a 9.3% yield multistory car park and an 8% mixed-use building. Performance highlights include a 5.4% total return of NAV and a dividend yield of over 9%. Future outlook remains positive with ongoing asset management opportunities and potential rate cuts aiding growth .

A Journey of Strategic Growth

Over the last 18 to 24 months, the company has undergone a notable transformation. Following a divestment that left the company with approximately GBP 40 million in cash, management has strategically reinvested these funds into higher-yielding assets. This shift has resulted in a robust earnings report for the recent quarter. The underlying earnings increased to 1.92 from the prior quarter’s figure of 1.75, indicating solid operational momentum.

Active Asset Management Driving Performance

The core of the company’s strategy lies in active asset management—selling lower-yielding properties while acquiring high-yielding ones, leading to enhanced overall portfolio performance. The firm has shifted focus from its earlier offerings in industrial units (previously yielding around 6.2%) to investments such as a multi-story car park in York with a yield of 9.3% at inception, and a mixed-use building in FYL with an 8% yield. These decisions are clearly yielding positive results as the company anticipates continuing this trend moving forward.

Financial Metrics and Performance Indicators

As of June 30, the company reported a net asset value (NAV) of GBP 167.79 million—up 3.1% since March—together with a total return of 5.4% of NAV. The portfolio reflects a strong annualized property total return of 8.9% over three and five years, outperforming market benchmarks by significant margins. This performance is complemented by solid share price appreciation, seeing valuations rise recently from 85.3p to 94p.

Sector Diversification and Outlook

Currently, the asset mix stands at 37% industrial and 37% retail, split between warehousing and high street properties. Management is keen to maintain a sector-agnostic approach to maximize organic growth rather than being confined to specific areas. The company is preparing to capitalize on potential market opportunities that may arise as economic conditions, especially concerning interest rates, begin to stabilize.

Dividend Strategy and Sustainability

A point of focus has been to strengthen dividend coverage, which currently stands at impressive levels. With the recent earnings performance, the dividend cover is expected to improve further. The company aims to maintain a competitive edge in terms of dividend yield, which now exceeds 9%, making it attractive to investors in the real estate investment trust (REIT) market and potentially leading to further increases in shareholder returns.

Management’s Proactive Approach to Challenges

Management remains vigilant about tenant performance amid broader economic uncertainties. Recent higher vacancy rates resulting from lease disclaims allowed for refurbishments and the re-letting of units. Such proactive asset management approaches position the company well to ensure that it can manage potential downturns effectively, turning challenges into opportunities.

Conclusion: A Bright Horizon

Moving forward, the company is confident in its strategic direction, emphasizing growth through active management and promising asset acquisitions. The focus remains not only on defensive strategies but also on capturing growth from sector mispricing, particularly in areas such as leisure which is gaining traction despite economic headwinds. The outlook suggests continued improvement in operational performance, earnings stability, and confidence in sustaining dividend payouts, making this an appealing investment.

Earnings Call Transcript 2025-Q1

[Operator]

Good afternoon, and welcome to the AEW U.K. REIT plc investor presentation. [Operator Instructions] Before we begin, we'd like to submit the following poll.

I'd now like to hand you over to Henry Butt, Assistant Portfolio Manager. Good afternoon.

[Henry Butt, executive]

Thank you, Paul. Good afternoon, everyone. Thank you for joining myself and George today. Just as a reminder, I am Henry Butt, the Assistant Portfolio Manager for AEW UK REIT plc. In the hot seat, currently [ whilst ] Laura Elkin, the portfolio manager is off on maternity leave. Laura's back in February 2025. So in the meantime, George and I are looking after the portfolio.

So just moving to the first slide. If you joined this presentation before, this will be well [indiscernible] to you this slide. Essentially a sort of a snapshot of what we are and what we're trying to do. High income and actively managed. And that is what we're trying to do in a nutshell.

When we are buying properties, we are buying them with value investment principles. And by that, what we mean is that we are looking at the underlying bricks-and-mortar value of the properties that we are buying, whilst also trying to buy assets which are yielding us -- net initial yields, day 1 yields, in excess of 7% or 8% with reversion to come. So i.e., rental growth, which we can capture through lease events and active asset management.

And when we're buying these assets, we are trying to do two things. We're trying to maximize income, and in doing so, we have managed to pay out our two patents per quarter dividend now consistently since Q1 2016, which is 35 consecutive quarters, a statistic that we're very proud about.

And we're also trying to unlock capital upside. And we do that through asset management, which we say is the beating heart of our strategy. And with that asset management, we have managed to achieve an 8.9%, [ 5 ] year total property return [ to ] March 2024. I'm afraid we don't have the June statistics yet, but we will report those in the next quarterly update. And in doing so, we have outperformed the MSCI benchmark whom we report against by 6.8%.

Now it's important to emphasize, what enables us to do that, is that we are looking at properties on a case-by-case basis. We are not [ sector ] constrained. And therefore, the mix of our portfolio is very organic. We don't say we want to be in a particular sector and therefore, only focus on those assets. We sit down, a couple of times a week, and look at stock selection. And we will look at each of these assets on a case-by-case basis, looking at the asset management opportunities, the value to go after, but most importantly, the day 1 yield.

Just moving to the investment criteria on the right-hand side here. Nothing has changed here. We are [ set diagnostic ], as I said, U.K. commercial, property, strong locations with low levels of supply. That is important to us because it means that we can be on the front foot with our tenants and look to move on rents. Net initial yields between 7% and 10%. More recently, we've been buying at yields in excess of 8%. It's a good buying market out there. And it's a lot in mispricing. So therefore, we can't get some attractive day 1 yields.

The fifth and the sixth bullet point on the investment criteria are important to us. Their existing metrics from the portfolio as at June. GBP 74 per square foot capital value on average across the portfolio. Now that is a very important metric because if you compare that to the cost of buildings, i.e., GBP 100 per square foot for industrial retail warehousing or higher than GBP 200 a square foot for offices or residential. That value of GBP 74 per square foot is relatively very cheap. And you have that bricks-and-mortar value, but it also has that high income of 8% on top of that through [indiscernible] income returns.

A low average passing rent across the portfolio of GBP [indiscernible] per square foot. This is lowered by a higher weighting in industrial properties, which have a lower per square foot rate to offices or retail warehousing or retail. But I like this metric because it does emphasize the reversion potential of the portfolio. And we have a reversionary yield of 8.6%, which shows the rental growth embedded within the portfolio, which we can go after through asset management.

We have a shorter than average WAULT, which is a weighted average unexpired lease term. So we are able to engage with our talents to move on rents and extend leases that add value. And as I said, our values are underwritten by vacant possession values. So that's in the event that the building becomes vacant, you could sell it for a close to what your investment value is, residual land values and alternative use values.

And we're very proud that we are recognized for this performance. We have a [indiscernible] rewards here at the bottom of this slide. We have now won the Citywire Investment Trust award for 4 years on the trough, which is based on 3-year NAV total returns.

This, at a glance slide, really is a 30,000 feet view of the company. A valuation of GBP 215.8 million, which was up 2.4% this quarter. It was principally driven by retail warehousing gains mainly at [indiscernible], [indiscernible] and [indiscernible] nor through yield compression, but through active asset management. There's a slide later on [indiscernible] where we completed a number of deals over the past 2 years. [indiscernible] we're advancing negotiations with an incoming tenant, which had an impact on the value. And [indiscernible], which we alluded to in the NAV announcement, we've exchanged on an agreement for lease to [ 10 Penn ] There's no slide in this presentation because we will share those details with you once that letting has completed. So a busy quarter for the retail warehousing assets within the portfolio.

We saw some strong performance from our industrial sector as a result of exchanging on the sale of [ Droitwich ] at a 33% premium to the March valuation, which subsequently moved the valuation up to that level. And we have had a quieter quarter in the office and high street retail sectors where there is a fair bit of asset management ongoing. We've got some refurbishments at our offices in [indiscernible] Bristol and the reletting of the former [indiscernible] and Union Street is progressing. So quite the quarter, and I would expect there to be some valuation pops going forward once we get asset management deals in the line.

33 properties -- actually now 32 having completed on the sale of [indiscernible] which we announced on the 24th of July, and net initial yield of 8.19%, reversion of 8.65%, showing the rental growth that we're going after. A vacancy rate of 9.36%, which has increased from 6.3% in the previous quarter. This is a result of us disclaiming the leases, which means leases are essentially torn up, which were in administration with CJ Services and Wilco. We've done that because we want to take the units back so we can carry out work to enable relettings of those units.

I've said historically that we don't necessarily mine vacancies. Every portfolio needs an element of churn to be able to add value through bringing in new tenants and pushing on rents. And that's very much the case with the CJ Services and the Wilco space.

We like to blow our own trumpet on our debt facility. We have a GBP 60 million facility, which is in place with [indiscernible] We have an in-house debt team at AEW, who have that finger very much on the post with regards to the debt markets and advised us to refinanced a year earlier than our previous debt facility, which was with RBSI. We did say and we locked in that 2.96% rate until May 2027, which puts us a very good step considering what's going on in the debt markets at the moment.

A NAV of GBP 167.79 million, that's up 3.1% since March, a 5.4% total return of NAV, which obviously includes the 2p per dividend, which we paid out. Our share price as at of 30th of June was 85.3p. It hit 94p this week. So we've seen some quite strong share price performance more recently. And we would hope that, that would continue as investors look to smaller cap companies and as we hopefully get closer to an interest rate cut.

In terms of performance, 8.9% now for 3- and 5-year annualized property total return and [ 8.84%, 5-year annualized NAV ] total return. So some strong performance there. And just [ running ] before I hand it over to George, our sector weightings will change in the next quarter now that we've sold [indiscernible] and so our industrial [indiscernible] will come down. But at current were at 37% industrial and 37% retail, which is split into retail warehousing in High Street. Those two sectors have diverged in the post-COVID era, and then smaller holdings in offices and alternatives. But just to reemphasize, we are sector agnostic and this is very much organic in its makeup rather than being deliberate.

Handing over to George.

[Unknown Executive]

Thank you, Henry, and good afternoon, everybody. So I thought, kind of, the first forward slide, we talk about earnings. And why I particularly like this slide is because it talks about the journey of the company over the last 18 to 24 months. Now some of you may recall that towards the end of summer 2022, we have sold a number of properties and we're sitting on around GBP 40 million worth of cash. And since that time, we've been reinvesting those monies at the same time disposing of lower-yielding assets and recycling those proceeds into high-yielding ones. And of course, most recently, that's culminated in a very strong quarter for earnings.

Now we took a decision this quarter to state in underlying earnings. And I'm slightly hesitant to use the word underlying, it's more a case of a like-for-like earnings [indiscernible] the previous quarter. Much of the [indiscernible] you wish to give these presentations previously, is talking about this return to [indiscernible] and earnings growth. And I'm aware that building a substantial turnover rent, such as that, which we note here of [ Hollywood Bob ] can sometimes distort that image on that journey.

But yes, I very recently very encouraged by how our earnings have continued to increase. And I think an important thing to state is it -- it's my expectation that how the current trajectory has gone -- would continue. But on [indiscernible] the specific sales purchase, do you wish to touch on further?

[Henry Butt, executive]

Yes. I think we've mentioned it on that announcement that there's some exciting asset management kind of feeding into this return to cover. 1.92% underlying earnings being 96% covered. And obviously, because of this is the makeup of the portfolio and the range of tenants, there are about to always be sort of one-off events, which sort of either enhance your earnings or [indiscernible]. We obviously have need that -- to that in our announcements.

I mean in terms of moving away from kind of existing asset management in the existing portfolio, in terms of sales and purchases, the period has very much been characterized by selling out some lower-yielding assets, typically industrials in the low 6s and reinvesting into high-yielding assets. So we sold a vacant possession industrial units in [ D side ], obviously, yet giving us no income.

We sold two industrial units in Yorkshire [indiscernible] net initial yield of 6.2% this time last year. And we reinvested those proceeds into multistory car park in York at 9.3% day 1 yield. The mixed-use building that we bought in [indiscernible] 8%. So that really has been the sort of the two themes. A lot of asset management growing the income within the existing assets, but also selling out of lower-yielding assets and buying high-yielding ones. And we expect that sort of trend to continue going forward.

We will be making probably more sales in the forthcoming year and looking to reinvest into high-yielding assets. And I think despite there being a lack of interesting opportunity at the moment, it's not particularly surprised given that we're sort of moving into the depth of summer. But we'd expect that to pick up and going into the year, especially against the backdrop of rate cuts as well. So I think it's going to be quite a sort of exciting period going forward.

[Unknown Executive]

Thank you. Translating that notion of earnings into very much the hot topic, which is, of course, dividend cover. When we first introduced this slide last quarter and excited to keep it in, and really why it's important is because, yes, there's an acknowledgment in recent years that the dividend [ cover ] has suffered. And that's partly due to actually the fundamental strategy we have been pursuing.

But of course, when one look since incorporation of the company, dividend cover actually stands at over 91%. And with our recent earnings performance and very much where my expectation is, where earnings will go, I would expect that figure to increase.

And then just the added benefits of readers of this, I've included the value intent of what the cover has been, which is in those kind of lighter blue bars. On that slide. And very encouragingly, that is now starting to narrow, and I very much expect it to continue to narrow.

I suppose partly referencing that slide and why this side is particularly important is, we like to refocus on the fact that we are a total return strategy. So [indiscernible], REITs generally are viewed as an income [ plan ] and very much so our focus is on maximizing rents and driving income returns. But of course, we are also a property experts. We are value investors, and we seek to find opportunities to buy and sell properties, thus enabling the crystallization of profits and gains on those disposals.

And what this slide depicts here is, this is every disposal the company has made since incorporation. And as you can see, kind of the average sales purchase price premium has been 36% across all of these properties. Of course, something you may recall Oxford sitting there in the middle, very much the outlier [indiscernible] we bought in 2015 or 2016 for just over GBP 8 million. We sold that for GBP 29 million in the summer of 2022.

I also wanted to just focus on these two more recent red bars being black [indiscernible] For me, these are just important as the wins and the big games because very much what is important about our business is at times, being able to acknowledge when we run the course on a certain property. We've done everything we can to drive value, drive income in that asset. And sometimes, the most astute thing to do. is to draw a line, sell the property and refocus those proceeds and reinvest them into more meaningful opportunities. And of course, we've added joy which [indiscernible] being our most recent disposal.

Were there any other things you can touch on?

[Henry Butt, executive]

No, I think you've covered everything, George.

[Unknown Executive]

Okay. Moving on to Slide 9 then. So this is the manifestation of our active asset management strategy, driving income returns, selling properties to profits. And oftenly, the result of that is [indiscernible] performance. So what this graph shows is our NAV out-performance versus our peer group. There are a few key themes to pick up on here.

One is you will see the out-performance really starts to commence in late 2019, early 2020. And that is no coincidence. As Henry mentioned earlier, our WAULT is around 5 years. And you'll see that since the company incorporated in 2015, this is where that 5-year period really starts to kick in. This is where we start to see the benefit of our asset management initiatives, improving the lease portfolio, undertaking meaningful works on properties to drive capital improvements. And most encouragingly, of course, actually, in more recent times is, even though we've been in a very challenging macroeconomic environment, especially for the commercial property sector, [indiscernible] out-performance has actually started to widen, and we'll come on to that in later slides when we focus more on property performance. And to reiterate [indiscernible] Henry said earlier, we've got a 5-year annualized [indiscernible] return of 8.8%, which is very, very strong.

Moving on then to our peer view comparison matrix, one of the best term. So we've just been discussing NAV terms of returns, and they're on the far right of your screen there. And as you can see, as of March 2024, over all stated time periods, we are the leader amongst all our peers. And by no small margin, if one especially focuses on the 3- and 5-year basis. we are an outlier. We are well ahead of even the closest peer.

Share price surgical terms have been interesting in the year-to-date. Of course, as I'm sure many of you are aware, the various offerings in the sector of M&A activity. And that's a somewhat skewed share price performance. When I look at the business in my role, I'm always thinking on the long-term sustainable performance, which is, of course, how many people view REITs as a long-term investment. And I'm also encouraged by a 3- and 5-year basis, we are also the head of our peer group.

And the last two statistics here, [indiscernible] focus on are our dividend yield and our discount to NAV. Of course, in more recent times, our discount to NAV has widened and this is something we've really queried with our broker. And really it's just market sentiment as unfortunate as that is.

Although as Henry said earlier, I'm very encouraged by the recent share price performance. We're now starting to see that discount narrowing. And lastly, on our dividend yield, of course, the one benefit of the discount widening [indiscernible] different yield has improved. And it being above 9% now is a very, very strong metric.

And if we go on to the next slide, this graphically shows that. So as you can see, after discounting for regional REIT, which I tend to exclude given its financial difficulty, we are at least 1% higher in different yield times. We [indiscernible] nearest period. And in fact, actually, this quarter, it's in excess of 1.5% higher. I find that particularly compelling.

Moving on to Slides 12 and 13 are drilling down into our profit performance. Now as you will see here, over all the stated time periods, we're far up for the MSCI benchmark. Most encouragingly for me actually is the 3, 5 and 7 year performance where you will see [indiscernible] is actually very consistent numerical terms. I feel that's really testament to the defensive and sustainable nature of our strategy.

And the last thing to point out is -- although the [indiscernible] is still as at March, you'll see at the title of the graph a stated figure of [ 6.18% ] or performance. That actually was a widening from the December '23 position where [indiscernible] at 6.65%. So I find that very encouraging. But not only is our performance still extremely strong, is actual our performance comparisons in the market is continuing to widen.

And lastly, this slide drills down into our performance on a sector-by-sector basis, both in terms of capital and income return basis. You will see that we've outperformed the benchmark in the last 12 months across all property sectors. Particularly of interest is the fact that industrials were the only sector that delivered a positive capital performance.

Now the conclusion that can be drawn from that is that actually what is driving our outperformance is our income returns. And this is a direct result of our asset management strategy -- our active asset management strategy it's improving leases. It's driving on rents, it's managing costs. And that is ultimately what is delivering our performance at what is quite a difficult time for the market.

Back to you, Henry.

[Henry Butt, executive]

Thank you, George. So moving on to our most recent disposal. We made announcement on the data call, the NAV announcement on the 24th of July that we had completed the sale of [indiscernible]. I mentioned earlier on in the presentation that and exchanging this unconditionally was what increased the value and gave the May contributed to the valuation performance for the industrial sector this quarter.

So just to touch on a few metrics for this asset, 189,000 square foot. When we bought this asset back in December 2015, it was single let to [indiscernible] Taylor, who manufacture commercial bins. And overall, sort of 9-year hold period, [ Egbert ] Taylor have downsized to about 50% of the site, which has left us with a [indiscernible] of asset management in reletting the units that they had moved out of appreciating the [indiscernible] still are the anchor tenant on the site. So we bought the property for GBP [ 5.60 ] million, a low cap back square feet of GBP 30 a square foot. But actually, if you compare that to the long income that we have [indiscernible], then that was really good value at the time, yielding is 10.4%. So these are the types of assets that we will be continuing to provide going forward. However, obviously, things changed over the lifestyle of this property.

So we sold it at a 33% premium to the March valuation to GBP 6.3 million, and that initial yield of 7.9%. Now the reason we sold this is because we carried out a number of lettings over the course of the past 12 months, letting several units to new tenants. And we thought the next phase of asset management will be quite capital intensive.

Now we are not shy of [indiscernible] projects. But in this instance, we thought that the ERV that we could go after didn't really justify the potential capital expenditure that we would have to spend on the buildings. There was also a, sort of a plan B, which would potentially be an open storage, which would lead to demolition of some units. Open Storage is a sector which is quite [ vague ] at the moment, and partly because there's a lack of good secondary space and also because rents in primary logistics and warehouses are so high now. So open store is the [indiscernible] theme.

However, we kind of thought we'd rolled the dice on this one. We felt that there would be sort of a good amount of demand from high net worth individuals for this asset, and we ended up selling it, as I said, for a very healthy premium to valuation. And those proceeds can be reinvested in some really exciting asset management opportunities within the portfolio. We're currently -- as I said, carrying out some refurbishment at our office in Bristol, Queens Square. We're also carrying out refurbishment of two industrial units in Runcorn. We have the [indiscernible] letting, which is subject to landlord works, which [indiscernible] going. So there's a lot of exciting asset management, which we can use the sale proceeds will -- these proceeds will fuel that asset management. And there probably will be a little bit of money left over to maybe buy one small asset.

That said, we are typically now trying to buy slightly larger lot sizes in excess of GBP 5 million. So I think it would be strange to be buying an asset of about GBP 1 million to GBP 1.5 million given this point in time. So I think we would keep that money up [indiscernible] for more asset management or we would roll it in with the larger [ subermoney ] for future sales, obviously subject to any other sales within the portfolio going forward.

So if you joined this presentation before, you'll probably sick to death of hearing us talk about commentary. So apologies. I think, it's fair to say this might the last time we present this slide because our asset management for the time being, is very much done here.

Just as a recap, we bought a property for GBP 16.41 million with the day 1 net natural yield of 7.8%, with a reversion of 12.8%. So very typical metrics for AEW. And what we have done since earning assets, which was bought in Q4 2021, we have moved the 24% vacancy to the property we now being fully let. Which has increased the contracted rent by just shy of GBP 0.5 million. And if you actually look at how much we've increased the net operating income, which obviously factors in the void costs that we had on the 24% of vacancy, we've grown the net operating income by in excess of 50%. So fantastic. This is exactly what we're trying to do within the existing portfolio.

We, through the relaxing of the planning system, have bought in some new tenants, so [indiscernible] food warehouse, which are Iceland, [ Mydentist ] and [ South Asian army ]. So replicating what we think of as our old high street a range of different retailers moving the retail warehouse and park away from either fashion or bulky goods.

We carried out lease [ regears ] with [ Next Boots ], [ Tek Mats ] and Burger King. So we've got a really, really good diverse pool of tenants here and that will ultimately drive footfall and [indiscernible] ultimately pushes on rents. If reps increase occupied demand increases, that naturally feeds into investment performance. So it's really kind of a perfect storm in a good way here.

We also have managed to make every single EPC to the unit in A and B. That's important. If institutions are going to end up buying these assets, they want strong environment performance as do we. And we have a number of other ESG initiatives ongoing. Solar EV charging and a range of [indiscernible] and initiatives throughout the site. So this really is a great example of the type of asset management that we do at AEW.

So this is a new slide. It's our industrial asset in Peterborough. And I think the two sort of main things I want to touch on here are it's underlying capital value per square foot, which where we bought this property of GBP 31 per square foot. So similar to [indiscernible]. But this is left actually on a 15-year lease and the tenants are only 3 years in. So really, really cheap underlying value of this asset with 12 years left on the lease. It's 12 years with 3-year RPI increases.

When we bought the property, their passing on was GBP 2.85, which is very cheap. We subsequently moved the rent to GBP 3.50 how done a regear in April '21. We've subsequently increased that rent by GBP 80,000 a year to GBP 3.94. And what's fantastic is the rent, it's not overrented in existing state. We think ERVs for this unit are probably in excess of GBP 4 a square foot. So that doesn't have an impact on the yield that the valuers will be using to pay this off, which is quite technical.

But -- it really has been -- it's a good asset. As I say, we've seen some nice rental growth as we've owned it, and that rental growth will continue. The RPI reviews have collars and caps and [indiscernible] and it's a nice, sensible rent. It's led to a tenant that works -- that operates in the printing sector. And actually, even though that sector has, to some extent, been on the back foot recently with obviously people spending more time reading newspapers and magazines on their iPhones and on their iPads. The sector has consolidated and actually [indiscernible] the tenant are the market leaders. So we feel that this tenant is actually strong going forward. And also -- it's probably fair to say that they're quite well into this property in sight. There's millions of pounds of printing machinery in there. So it's a good example of an industrial asset that we like to hold and maybe buy going forward as well.

On ESG, other than sort of asset management sort of sustainability plans that we have ongoing for all the properties within the portfolio, where we're looking to improve, for example, bike facilities and sustainable travel and [indiscernible] hotels and bug boxes and a wider variety of flora and fauna on our site. The most important thing at [indiscernible] is EPCs and the minimum energy efficiency standards. And over the course of the past year, since April 23, we've been trying to move our EPC ratings into the [indiscernible] of C and B category. We do have 5Gs, but I'm not concerned about these. They don't keep me awake at night because three of them are in an office building [indiscernible] In due course, we will look to demolish and create some open storage, which we'll be able to rent out or maybe develop some smaller new industrial units at our site in Wakefield.

And then there are two more which are an existing unit, which is not [indiscernible]. So therefore, it's not a reach of knees. But if we had an offer for that unit, we would be able to put in some new LED lights and we would be able to enhance that EPC score to [indiscernible]. So it's something we're very much in control of. And organically, because we have the benefit of shorter lease lets therefore, more and more of a churn than lease events, we will hope to push these EP scores in the direction of season Bs going forward.

So to conclude. So as George touched earlier, we have had consistency of quarterly earnings growth since June '23. June '23, our earnings were at 1.75 and the underlying figure as of this quarter is 1.92. But obviously, the total earnings were 2.26, if were boosted by the Hollywood Bowl turnover rent that George mentioned and a [indiscernible] and service joint works at Union Street. There are some really exciting asset management opportunities in the portfolio. Those are growing the income in the -- of the company, but also they are mitigating board costs, and that's important. So it's sort of a double whammy in terms of boosting this earnings.

We remain very sort of vigilant of what's going on with our talent base and what's going on the wider economy. In the event that we do have tenants that do wobble a bit. But as I said, I don't think that is a concern. As I said, it can represent an opportunity. We can very much make the best of a bad situation. And I touched, obviously, on the CJ Service admin and [indiscernible] where we are in the process of doing [indiscernible] works and letting those units. So that's exciting. And actually, that can be beneficial.

That is the reason why we have a slightly higher cash weighting at the moment, so we can sort of feed that into these asset management opportunities to grow the income. I'm going to regurgitate the statistic, which I did earlier on about our book value being GBP 74 a square foot in [indiscernible] rents. We really like to be in this place, it means that there's value to go after with a relatively low cap [indiscernible] square foot and net income to go in [indiscernible] as well.

That is illustrated by our reversion yield at 8.6%. That is what the asset management team is structured to go after to go and crystallize. We continue to very much think of the portfolio as a total return strategy. Sales are important to us. It enables us to crystallize asset management gains and recycle that capital and into higher-yielding assets with asset management opportunities for us to go after. And we have -- we're proud of that 36% average sale to purchase price premium. And this is also founded on the GBP 60 million debt facility at [ 2.96 ] to May 27, which we acknowledge is a good place to be given what's going on in the wider markets currently.

So thank you very much. We will move on and answer some questions.

[Operator]

[Operator Instructions] As you can see, we've received a number of questions throughout today's presentation. And if I may, I should just click on that Q&A tab. And start from the top, and read out the questions were appropriate to do so, and I'll pick up from you at the end.

[Unknown Executive]

Okay. Fine. So we have the first question here saying, can you clarify the position regarding the tax indemnity. I'm puzzled as I understand that the company was being indemnified for the amount of tax payable already provided for and also presume you already reflected in that.

So HMRC yet to confirm the exact amount. When they do confirm the amount that will be paid and will be indemnified by AEW U.K. investment management. And as we have said previously, we'll have no financial bearing on the company whatsoever. So it's just something that we're working through.

We had hoped that we would note that this quarter, and we now hope that we will [indiscernible] by next quarter.

Question here saying, will the wind up of home REIT impact AEW as AEW received management fee income.

It's very important to stress that AEW is a completely separate portfolio management team and asset management team and investment management team. So we operate entirely separately. So it will have no bearing on AEW whatsoever.

We now have question about discount [indiscernible]. The discount is substantially above the average, what's the company going to do to address this as investors and nursing losses over every period in the last 5 years?

So there's a few points I'd touch on here. One is, yes, as I alluded to in the presentation, the discount has recently widened and really that's to do with wider market sentiment. And of course, in more recent times, we started to see that narrow and it's very much my hope and expectation that, that trend would continue.

But one must remember that over the last year, our average discount has been around 7%. And of course, actually, there was a period of time, certainly in 2022, when we disposed of [indiscernible] actually serve as a premium. [indiscernible].

As a business, we've undertaken a variety of initiatives to improve the marketing efforts of the company, and Henry and I have met with various investors. And some of you may have seen the capital access group research note on the [indiscernible] website. And all of these are efforts to promote knowledge of the company in the market in the hope of supporting its share price.

Of course, there's only so much we control market sentiment is one thing that we can do our best to mitigate on early geosyncratic basis. But as of now, efforts are very much focused on promoting the business and [indiscernible] price as best as we can.

[Henry Butt, executive]

So question here from David S. You mentioned you were seeing this pricing in the market. Do you have enough liquidity to take advantage of these opportunities? And what's the strategy to recycle the portfolio?

Well, what I would say is that you'll be aware that we do sort of carry out a lot of disposal of existing assets and recycling that. That theme is very much going to continue. And obviously, we have only just sold [indiscernible] appreciating that it is -- it's the July 3, so the investment market does slow up. But I'm happy to say that we will -- we anticipate that to be further sales over the course of the next 6 months, which means there will be acquisitions as well. And that is principally being driven by us doing what we have always done in crystallizing asset management gains, but also because we feel that there are some exciting opportunities out there and some good mispricing.

Particularly in larger chunks of high street retail offices and good talent and cities a bit like the properties that we have recently bought in [indiscernible] and broadly. So we had that we would find more opportunities like that. So we certainly have our eyes on disposals and recycling that these proceeds into new buying opportunities.

Question here from [ A&W ]. When do you anticipate some growth in the dividend? It's been stated for a few years now.

I think it's important to stress that the dividend policy is very much designed by our Board rather than the investment manager AEW. So that is the decision of the Board. And obviously, we continue to inform our investors of that when we make our quarterly announcements.

Question here from Mark. Have there been changes to the management of AEW [indiscernible] on this call.

I know they haven't and I said at the beginning of this presentation that Laura's currently on maternity leave. So Laura will be back with us in February. And for the time being, I am in the hot seat as portfolio manager, but Laura will be back and resuming our role in February next year.

Question here from [indiscernible]. Can you please detail the team around you and what resources you can draw on? What involvement do you have as a PM team in the ongoing day to day asset management and portfolio by itself?

If you were to know much about AEW, AEW was founded in Boston, United States of America and is a specialist investment and asset manager of real estate. We have about EUR 40 billion in management in Europe and same in America, and we have a U.K. office, which is where George and I are sitting today.

In our office, we have a dedicated asset management team, a dedicated investment management team and dedicated advisory team and fund operations team. Separate teams all focusing and specializing in their area of expertise. For example, I started my time at AEW 10 years ago in the asset management team. And I worked my way up. So by bread and butter, my trade really is asset management. But obviously, more recently, I moved into portfolio management.

So in terms of how we operate, the portfolio management teams and myself and George will sit down with the asset managers, weekly or [ for night ] need to discuss the existing 32 properties within the portfolio. We go through business plans and we will chat through what we're going to do to try and add value.

And in terms of the investment side of things, we have a hold-sell meeting where we go through the portfolio and decide which assets may or may not need selling for a range of reasons. And we sit down weekly, if not twice a week, depending on the stock that we're seeing with the investment team, and looking at new opportunities.

So it works very well. I think that those specialist departments are very much a contributor to the strong performance of the company over the last 10 years.

So a question here from Mark [indiscernible]. Do you anticipate any move in the U.K. to mandate landlords to install solar PV capacity [indiscernible] similar to the obligations in France. Will agree, this just make financial [ sense ].

I can really speak on my experience of solar panels. If you have a [indiscernible] and sharing lease, which is the majority of our properties within the portfolio. If you were going to install solar, you first the permission of the talent because they are responsible for the upkeep of the property. So therefore, by putting solar panels on the roof, you need their permission because obviously, a very damaged cause would be their responsibility. So you need to work through that.

You also need to make sure that your property is fit to install those solar panels. You also need to have a connection with the grid, so you need to speak to National Grid to make sure that you can do that. And the reason being that if you have surplus electricity produced, which the tenant isn't using, you need to essentially sell that back to the grid. The alternative is that you can have batteries on your site. But that is a bit of a sticky wicket because batteries are very flammable. And therefore, your insurance premium goes up.

The general sort of financial metrics behind solar panels is that actually you can generate electricity and sell it to your tenants cheaper than what they are currently buying off the grid. So you make money, they save money. But there are several sort of hoops to jump through. But the returns are fairly exciting. You can get sort of an IRR over like a 15- to 20-year period of about in excess of 10%, obviously, depending on the scheme.

So it is something that we do look at. There is potentially a plan to do it at [indiscernible]. As I said, we exchanged the lease with [indiscernible] there who have a sort of strong focus on ESG. But obviously, after our main goal is sort of the nuts and bolts of property investment management and dealing with the tenants. Of course, we would like to make the portfolio green, and we will always continue to review sale opportunities.

Question here from Mark B. Can you tell us about your pipeline of recycling capital release from recent assets?

It's probably too soon to include a pipeline slide. We might include one in the next quarter. There are a lot of good opportunities out there. I think the heaviest mispricing is an actual in the office sector. So there's some really good deals to go out there. However, it's probably fair to say that I'm a little bit twitchy about the refurbishment costs associated with offices at the moment. Particularly bearing in mind that tenants are only prepared to take 3- to 5-year leases. And there's less rental growth in the sector, and it's becoming quite polarized in the offices. You really have to be sort of the best in class, the best located in the best environmental performance.

But I think there are some good office buying opportunities out there. I also think flipping on the head a very different sector offices, there's some really good leisure opportunities out there. Strangely sort of in the cost living crisis, people naturally feel that people have less money spend, and therefore, that's having a negative impact on the [indiscernible] sector. But we actually alluded to [indiscernible] the success of the [ bowling ] sector, in particular, having done that letting with [indiscernible] obviously, [indiscernible] 3 years of turnover rent from [indiscernible] were in the 3 years prior to the most recent 3 years, there had been no [indiscernible] tenants.

So that stresses the success of the leisure sector. And actually, prime leisure yields are sort of kind of 9%, 10%. So that's perfect AEWU. And typically, that's a long the leases as well with review mechanisms, so we go after rental grade. So I think leisure is an exciting opportunity as offices, mainly because of mispricing. But I think there are also some really good opportunities in larger chunks of real estate and good Townsend cities as well as are our recent purchases in [indiscernible] and [indiscernible]A question

[Unknown Executive]

A question from Gordon. How important is it to AEW to get a different full [indiscernible] is there any scope for fractionally growing the dividend increasing from a historical [indiscernible] quarter?

So I suppose there's two elements to that question. How important [indiscernible] cover. My initial response to that would be we wouldn't place so much emphasis in this presentation on earnings and dividend cover. If it were not ultimately important to us, of course, our focus and much of what is my role in this business is paving the way to achieving that and very much keeping the focus on doing that.

However, as Henry and I alluded to in the presentation, we do very much have a [indiscernible] to return [indiscernible] on as well. REIT, of course, are an income play. Traditionally, that's how they are viewed. But it is no coincidence that we've managed to afford and pay our dividend for so long. Our ability to do that has been facilitated not just by fantastic portfolio of tenants we have and the growing rents we've been able to achieve, which is also selling properties for profit and supplementing the dividend where needed.

And the other part of the question about fractionally increasing the dividend. As Henry said, of course, it's the AEW Board that [indiscernible] dividend policy is. However, I do feel it's important to remember that on a gross basis, our dividend is market leading. It's extremely competitive and it's spitting out of dividend yield well in excess of 9% now and way ahead of our peers, which I feel is very compelling.

Of course, where we can deliver further returns to shareholders, that would always be considered by our Board. But I can't really client on our future earnings or the future affordability of dividends.

[Henry Butt, executive]

Question here from Andreas. Are you and George and Laura dedicated to the REIT or do you work more widely for AEW?

We are dedicated to REIT completely 100%. So I think it's -- what I -- myself and Laura have historically worked on other strategies at AEW. But I think that is a good thing because it's good to sort of work up and down the risk curve. So I have done a bit of work on longer income alternative funds in my early days at AEW, I've also worked on core [indiscernible] strategies. So I think that sort of is a good experience when obviously working on the core [indiscernible] like AEW.

[Unknown Executive]

But I also have worked on that on a value-add strategy that the decision was made slowly focus on AEW, which is testament to us really wanting to deliver what [indiscernible] source this company fully focused on.

[Henry Butt, executive]

Another question from Andrew [indiscernible], the challenges recently faced by other REITs provide any purchase opportunities for AEW?

Yes, very much. So obviously, with our share price and the discount at the moment, raising new capital is tricky. We very much have our eyes peeled on corporate acquisitions. But the most important thing is that we would never really look to [indiscernible] our to merge our corporate transactions as it must be to the benefit of our shareholders. So that is the most important thing.

Question for Rich B., what is positioned with your night club in Cardif, which is under administration?

So it's still under administration. The tenant is still trading out of there with the administrator paying rent. That is obviously a good thing. So we are still getting the rent that we were perceiving prior to the administration on the first of February. We are in the process of signing that lease to Phoenix Co. But to sort of -- if you're on the ground, it would appear nothing has changed.

The rent will be reduced, but we feel that is to our benefit and the tenants, it needs a more sustainable investment going forward. And there will be a turnover provision, which means that obviously we will benefit if the tenant trades well as per the examples that we have shared in prior quarters, for example, Hollywood [indiscernible] recently, [indiscernible], [indiscernible], et cetera.

So question here saying AW in the past talked about opportunities on existing portfolios such as drive-through coffee parts at the GM in Scotland. There is land previously been purchased. How are these opportunities progressing? Are there any more opportunities identified? Great results. Thanks. Thank you and team for your hard work.

Well, thank you for the thanks. In terms of drive-thru restaurants. We have, for example, an existing one at our retail [indiscernible] in [indiscernible], where there is a lease negotiation ongoing. And I think high-level summary on the drive-thru restaurants is that actually, there's been some really strong rental growth performance in recent years as the sector has very much become well known. And obviously, we [indiscernible] that you drive around [indiscernible] and these drive thrus are incredibly busy. So it's been really strong rental growth.

However, at the same time, the build costs have really increased. So the profit that you will be going after in building these obviously very small, and there are about 1,500 square feet has actually shrunk based on my recent understanding despite the rents increasing so much. And also as the sector has matured, there are a much wider variety of franchises, and therefore, you don't necessarily get a really strong yield applied to the tenant that is taking that restaurant, which will obviously be a [indiscernible] for lease subject to [indiscernible] being built.

So it's in my experience, there seem to be less of these opportunities at the moment. We've seen these [ drive-throughs ] popping up all over the U.K. And obviously, the more the pop-up and less opportunities that are going to go forward. So I have, in my earlier days, AEW built two of these in a value-add funds. So I've got experience doing it. And obviously, I have my eye on other opportunities.

I think the Glasgow one, in particular, is quite hard because of the access which is frustrating because that is a really nice chunk of land there, which could be developed for that use.

[Unknown Executive]

There's a question here from [ Andreas ]. Do you have a viewpoint on the overall size of AEW, which is very modest in terms of verse of other REITs.

So I think the first obvious point to make is a reiteration of what Henry said a few moments ago. If we were to undertake any corporate activity, the first fundamental criteria that must meet is that it must be for the betterment of our shareholders and must not jeopardize debt. Much of my role and Henry's role -- actually over the last 12, 18 months, especially with all the [ offerings ] of M&A in our industry. has been assessing these opportunities, and it's something that we remain extremely cognizant of.

Of course, it would be optimal for the company to be more liquid to have a higher NAV. And that's something we are always going to maintain a focus on. But of course, that would never be a [indiscernible] overall from that strategy in [indiscernible] driving income and gains in the portfolio that we already have.

[Henry Butt, executive]

Question here from Rich [indiscernible] Are you good landlord? Or put another way, where do you tenants say in your asset management focus priorities?

[indiscernible]. Well, if you -- I might sort of touch on what we've reported on [ Coventry ], for example. In doing a lot of the asset management there, we have obviously spent significant amounts of money on the units and as was delivering units which are fit for purpose for the incoming talents. We've also put on the table capital contributions as an incentive to get tenants in.

So if you take that as an example, yes, of course, we're a good landlord. I think -- what I would really like about sort of getting on the [indiscernible] and inspecting our properties is meeting tenants and inspecting the properties and really sort of realizing that we have a range of properties which obviously providing an important function to the U.K. economy. And I think it's important that the landlord and tender relationship is a good one.

It's very much not a case of the landlord looking to just squeeze as much value out of their asset, and they know that they can do that by putting pressure on the tenant. It's very much mutual relationship. The tenant benefits obviously from good place that they can operate their business other than in return, we collect the rent and our investors benefit.

So Yes, there's -- it's only going to be detrimental if your relationship with your tenant is a bad one, You want it to big one because that ultimately will be the foundations for strong investment performance.

[Unknown Executive]

Question here about [indiscernible] how does overall ownership a share split between retail investors, wealth managers and other holders?

Actually we recently did an analysis into this. Of course, it changes every day. But in terms of our retail holding at the time of the analysis and the information I could go was at least 50%. And I'm sure it would be no surprise many of you who are like the only these platforms, the likes of [indiscernible] Interactive Investor [ A.J. Bell ] [indiscernible], but there are also a huge diversity of wealth managers. I can't say exact figures, but I can say that the retail holdings at least 50%.

[Henry Butt, executive]

There's a question here from [indiscernible] . What's the market looking like? When are you expecting it to change? And what sectors are you going to invest in going forward?

Okay. I think I've answered this question, but I think that there is -- well, -- it's been a very slow year as far as the investment market is concerned, it's been that transaction volumes are significantly less than they were post GFC and post Brexit. So that really shows how the higher interest rate environment has really slowed up the investment market.

I think it's probably fair to say that people are starting to accept that higher interest rates are the norm now. And there are point to be more cash buyers in the market. I feel that September will be quite interesting because I really thought that there probably will be a point where stock increases, there will be some buying opportunities. Obviously, we will have an eye on dispose as well because obviously, we need data plans to buy new assets.

I think that's everything answered, Paul.

[Operator]

Indeed for covering those questions. or of course, any further questions do come through. You will have the ability to review those, and we can publish response from the [indiscernible] platform.

Before redirecting investors, [indiscernible] particularly important to you and the team. Henry, can I ask you for a few closing comments, please.

[Henry Butt, executive]

Thank you, Paul, and thank you all for joining us today. I hope that we have provided more meat to the bone with regards to our most recent announcement. The company is in a good state of affairs. As I said, with some exciting asset management opportunities ongoing. I wish you all a good summer and look forward to presenting to you again in the autumn.

[Operator]

Henry George. Thanks for updating investors today. I please ask investors not to close the session be automatically redirected to provide your feedback in order the team can better understand your views and expectations. It will only take a moment to complete and will be greatly valued by the company.

On behalf of the management team of AEW UK REIT plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.