AEW UK REIT PLC

LSE:AEWU

Earnings Call Transcript 2023-Q2

[Unknown Executive]

Good afternoon, ladies and gentlemen, and welcome to the AEW U.K. REIT plc investor presentation. [Operator Instructions] And I'd now like to hand over to our Portfolio Manager, Laura Elkin. Good afternoon.

[Laura Elkin, executive]

Thanks very much, Jake, thanks very much to everyone for joining us this afternoon. In case you haven't met me before, I'm Laura Elkin, Portfolio Manager of AEW U.K. REIT, and I'm joined today by Henry Butt, who is the Assistant Portfolio Manager for the company.

So this presentation is following on from our NAV announcements, which we put out as an update to the market at the end of last week. In that announcement, we updated that our asset values have seen a decline of 3.5% over the quarter ending 30th of September. And we also announced our latest dividend of 2p per share per quarter, which has now been paid consistently for 28 consecutive quarters.

So starting with just a recap on the strategy for the benefit of anyone who is new to the company. At AEW U.K. REIT, we look to deliver high income through our active management strategy. We are specialists in value investment. So we use value principles to identify mispriced assets. And we do that with two main aims: firstly, being to maximize income, so that dividend that I mentioned of 2p paid since the completion of our initial ramp-up phase. And we were the only diversified REIT in the U.K. market who did not cut or suspend our dividend during the pandemic. So maximizing income there in a very stable way.

We also look to unlock capital upside demonstrated by an annualized NAV total return of just under 14%. So it's something that we think is really, really key to this strategy is the fact that we are not sector constrained. And we have got plenty of examples coming up of assets in the portfolio where we expect to see some good performance and where we have crystallized very strong performance. And when we talk about our investment pipeline as well, you'll see that point on being not sector constrained, we think leads to a maximization of our performance and also the ability to provide some countercyclical performance as well.

So, moving on to the next slide, but we're controlling them, aren't we. Sorry, we've gone on 2 slides. Thanks, Henry. Sorry, everyone, technical issues. So moving on. Clearly, in the market over recent weeks, we have seen some fairly unsettled times, both from an economic and certainly from a political perspective. But we think that our company is well positioned at present. And the main reasons for this is set out here.

So first and foremost, we have a low fixed cost of debt. And this we achieved back in May, and therefore, we're able to access that cost of debt at just under 3% locked in for the next 5 years. Now of course, compared to current cost of debt in excess of 6% that looks to be incredibly good value. And we are very pleased to have that locked in.

We have currently a high weighting of cash following a number of key sales that we made over the summer. And we think that leaves us really well placed to benefit from upcoming investment opportunities that we are starting to see today, and we expect to see over coming weeks and months. We think that the high-yielding nature of the portfolio is more resilient to the valuation impact of rising interest rates. Now I'm absolutely not start here today telling you that our values will not be impacted by volatility that we see over the coming weeks and months. However, we do think that because our book values are low, they are close -- more closely aligned to long-term property fundamentals. And we think that fact will provide a lower level of volatility through our asset values than we see in some other areas. So it's the fact that those values are more aligned with vacant values and with alternative use values that will provide a more robust capital outlook.

Now if we look back on real estate returns over the past 30 years, and we can look at this since the inception of the MSCI index. Of course, the two constituents of your real estate return being income return and capital return. And this is going back, as I say, over effectively the entirety of data collection and the MSCI index.

The income constituents of that return is the least volatile piece of that return. So much less volatile than your capital return. And therefore with our trust starting with a high level of income return, which we think is a much more resilient starting place. In addition to all of that, we're currently seeing resilience in occupational demand. And you will have seen if you've seen our NAV announcement from last week that we have over the course of recent weeks, signed lettings with new tenants often some way in excess of our value as ERVs. And we are continuing those discussions across significant amount of vacant space in the portfolio at the moment. And those discussions are on the whole taking place at ERV, if not above.

So those occupational discussions, which are driven by our active management and really drive the income stream in this portfolio. They are still coming through. So that provides us with a lot of positivity really when we look at the outlook for our income stream, which, of course, drives that stable dividend that we've talked about.

The next slide shows some high-level statistics on the portfolio. We now have 35 properties and 124 tenants. One of the main differences to point out here in relation to where this slide would have looked last quarter is that our net initial yield has come up. Last quarter, this was around 5.5%. This is because of the fact that the two assets -- the two larger assets that we sold during August being Oxford and Glasgow, they both contained a fairly significant amount of vacancy, and that was depressing our initial yield in portfolio. So you'll see that's recovered now to just under 7%.

The figure below the reversionary yield at just under 8%. So the difference between that 6.7% and 7.9% is income growth that's inherently built into the portfolio is either through those lettings of vacancy that I've just discussed or perhaps through properties, which are under rented, and we can access that again through rent reviews. An inherent ability to grow income that's built into the portfolio. And of course, in addition, we've touched on the cash that we currently hold in the portfolio and spending that again, will provide a further boost the company's income.

This slide here shows our NAV total return since IPO. Apologies that this data only goes up to June. This is because the MSCI data for September has not yet been released. But you'll note that it's in the time around June 2018 that our performance in AEWU starts to diverge from the rest of a U.K. diversified REIT peer group, and that's the peer group that we're comparing ourselves to here.

Now we think that this is quite a key piece of data because the length of income that we tend to buy on average in AEWU is around 3 to 4 years. And it's that 3-year mark of managing these assets where the performance starts to diverge and it's shown the value then that the strategy is starting to add and that we are adding as a manager. So we think this is a really powerful slide in order to demonstrate how our strategy can provide outperformance.

So just looking at a few more performance slides here. This one looks at our dividend, quite similar to how these peer group has set in the past. AEWU, on the left-hand side, consistently providing one of the highest yields across this diversified REIT peer group. But at the moment, interesting to note that we have one of the narrowest discounts here and still able to provide one of the highest yields.

Again, looking at our performance against that diversified REIT peer group, shareholder or share price return on the left-hand side I think, looking fairly bouncy given recent weeks, what we've seen going on in stock markets. But NAV total return on the right-hand side. And you'll see that over all of these time periods, AEWU looks to be one of the most consistent performers. Highest NAV total return over 3 and 5 years, one of the highest over 6 months.

This slide here shows our property level total return against the MSCI benchmark over various time periods. And again, pretty clearly showing our strong outperformance over 3 and 5 years and also over 6 months. Over 12 months, though, our performance has lagged a little. And I think that's really as a result of the incredibly strong performance that we saw in the very prime logistics market at the start of this year. Now in AEWU, we hold a significant part of our portfolio in warehouse and industrials. But that is more at the good secondary end of the market rather than in the very prime asset.

And it was really at the very prime end of the scale where that growth was seen. So it's just that we didn't capture that growth there in the prime industrials that has led to our performance being a little weaker as compared to the benchmark over a 12-month period. But I'm encouraged then that again over the 6-month period, we look to be competitive. I think just touching on the fact that we didn't capture that peak of the prime industrials market, I think if you look at then the value movement as a whole, of course, if we didn't capture the top element, then the far from there being rather less acute.

The strength of performance over 6 months, I think, is driven quite strongly by our office portfolio, and I think that's very strongly shown in the next slide. So I'll move on to that now. And this again shows our property level performance over 12 months this time but split by sector, and you'll see the fourth category here office shows our very significant outperformance against the benchmark. And I think this really points to the fact with our strategy being unconstrained by sector, during a period where office -- wider office performance was fairly modest. We have been able to, with our very active management approach produce this very high level of outperformance. And I think this comes back to that asset management approach driving the countercyclical performance which we're seeing here. So I think that's a very strong signal of where that strategy is really working.

Again, I think in the industrial markets here, just reiterating that point that I made earlier about not capturing the peak there. You'll see the benchmark very strongly outperforming us, although we were, I think, ahead of the industrial sector against the benchmark for various time periods prior to this. It was just that very top end at the start of this year.

Touching on the retail market here. Again, we lag behind slightly. Again, I think this is perhaps because of some very strong growth seen in the retail warehousing market at the start of the summer. Again, I'm not particularly concerned here about us being slightly behind. Henry can come on to talk about this very shortly. We've got a slide to show one of our retail warehousing assets where we're expecting to see some very strong performance coming through the pipeline. So I'm not particularly concerned. I believe that we have some strong performance in the retail warehousing area to come in following weeks.

Thanks. Now I'll hand over to Henry, who can talk through some further examples.

[Henry Butt, executive]

Thanks, Laura. Good afternoon, everyone. So this slide touches on our debt facility, which Laura has already mentioned. But in summary, we took the decision to refinance in May this year. We had an existing GBP 60 million facility, which expired in October 2023. However, due to the sort of inflationary environment, we took a prudent position to refinance early repaying the RBSI loan facility. And we managed in doing so to secure a rate just shy of 3% for the next 5 years, and that's fixed. And in light of what's happened more recently with the mini budget and build rates and what is going on in the wider U.K. economy, we're thrilled to taking that decision to refinance early.

As you will see on this chart on the right-hand side, you can see that the all-in U.K. commercial borrowing costs are getting as high as 7%. So to be at 3% at this time is fantastic. I see that we've got a question from Jeremy B about the LTV covenant, we're at 60%. So we have a nice amount of headroom. Our current loan to NAV as at 30th of September is 31%. So we're well off that. So yes, this is a slide that we're very, very pleased to talk about given what's going on across the Board in terms of cost of debt.

If we move on to the next slide. So this slide really touches on the value investment style that we have at AEWU. And I think sort of one of the main sort of bricks to sort of the asset management strategy is sustainable income. And if we touch on sort of the economic theme of derived demand, that is very important to us. And by that, I mean if there is the occupational demand for a property, which is ultimately driven by the consumer, there will actually be rental growth, and that will feed through into the capital market performance of that specific asset. And we've very much seen that kind of within the portfolio. But sitting alongside that strong sort of income side of the strategy, we have properties, which typically have lower capital values and our properties which are underwritten by VP values, that's vacant possession values, alternative use values and residual site value.

So we feel that each property within the portfolio is very resilient, particularly in slightly more volatile times because we have the higher income there, but it all falls with regards to the occupational side. We can go down a different avenue exploring, repositioning properties, planning gain, et cetera, et cetera. And you'll see that on examples elsewhere in the front.

So this slide on Oxford, apologies, don't want to sound like a broken record because we've talked -- spoken about this asset quite a lot over the past 6 months to a year. But this really touched on what I just mentioned earlier on, in terms of what we do in general at AEWU. We bought this property in June '15. It was yielding is 9.5% low cap a square foot relatively speaking, in terms of offices in Oxford. And we ended up selling it for GBP 29 million at GBP 388 per square foot. And where we managed to secure that huge valuation outlet was through planning.

And what we did here is we repositioned the assets by putting a planning application in for life sciences, medical, research and development, moving it away from a more bog-standard out-of-town office use to a life science use. And in doing that, we then managed to secure a 25-year RPI lease to a cancer care business. And that really crystallized that planning use. And having done that, we really established this property within the sort of the Oxford to Cambridge arc is being a very strong medical life science asset.

And rather than carrying out an asset management plan in terms of doing more refurbishments, moving the property further into that so that life science arena, we decided to roll the dice and put this one into the market, particularly because there's a huge amount of money chasing the life sciences sector, and there are also a lot of money chasing longer 25-year RPI leases. And constantly, we had a fantastic result, selling this property at 254% ahead of what we bought it for with an IRR of 22%. So a fantastic performer for the company, a real stellar asset to sell.

This asset is an industrial asset in the portfolio. It's one of the smaller lot sizes in the portfolio. We bought this at GBP 47 a square foot, yielding is 9%, say, doing exactly what the company wants in terms of going into properties on acquisition. And we ended up selling it for GBP 75 a square foot with -- of net initial yield of 6.6%. The strategy here was that we actually had a vacancy. We managed to secure a new letting to a new tenant at a rent of pound ahead of what the passing rent was. So that really touches on that sort of reversionary growth potential of the portfolio.

And having secured a 10-year lease to a decent covenant and a rent which was pound higher than the past, we really felt like we could maximize the value here. So we decided to take our profits off the table and sell this one, and we had a very swift successful sale at the back end of the summer.

So this slide in Rotherham, this is a property that we still hold and it's an asset management deal that we completed over the summer. It was a property which we bought back in April 2017 let to a tenant called Hydro, who worked in the aluminum manufacturing sector. And we have recently completed a new lease to a company called SAS who are in a similar arena, working with aluminum in the construction industry. In achieve doing that letting, we have moved the rent on by 49%. So the previous passing then was GBP 3.35 square foot, we're now at a rent of GBP 5 a square foot. So some considerable rental growth.

And in securing that tenant, we actually did some refurbishment works. We looked -- we knocked out some partitioning, and we just like to have some refurbishing work internally. But more importantly, we spent roughly about GBP 700,000 on the roof here, which you will see come back to you in terms of the pricing, the investment value of the assets because you're essentially improving the bricks and mortar of your asset. But also there's quite a nice sort of ESG sort of win here because we're improving the installation of the building and therefore, the environmental performance of building.

So a really nice asset management, new letting to do. And as you will see, the valuation went from GBP 4.8 million at GBP 58 per square foot in June, up to GBP 5.5 million, GBP 67 a square foot in September. And it's worth noting that we actually saw some really nice valuation performance whilst this deal was happening off the back of the strong industrial market and obviously, good traction with the tenant list, and naturally, that sort of the valuation creeped up whilst the deal was in listed hands.

Moving on to Central Six, a property we bought in November roughly a year ago. Now Laura mentioned retail warehousing, we like retail warehousing. In general, they are very well-located assets. They're in -- they're modern purpose-built units. They have lower site coverages to industrial, you can redevelop the site, the residential or students or hotel, you could very easily repurpose them to trade counter and industrial where you might see some yield gain, and the rents are relatively cheap in comparison to what we have traditionally seen in the high street.

And I think we've said this before that there really has been a divergence in retail warehousing and high street retail, and they basically have their own subsectors now within the retail category and retail warehousing has performed well recently. And we really like this asset. We've hit the ground running. You'll see that we bought the property for GBP 16.4 million at 7.8% net initial yield a year ago. The value has moved up to GBP 18.6 million in the past year. And that is off the back of a number of things that we've done.

We really sort of capitalized on the planning changes, the new e-used car system, which has merged a used car system, which means that we can now bring in food users and look to bring in leisure uses. And consequently, we have exchanged on an agreement for lease with a discount supermarket operator, there should be further details to come on that in due course. And by bringing in a new use, you're ultimately driving footfall and making the location a more desirable place for people to shop that will make it more attractive to other tenants, which will ultimately drive rental growth. And we expect to see growth coming through on this asset in due course, along with besides some other very exciting asset management opportunities. So this is a property that we are delighted to have bought a year ago. And as you can see, we've had some strong valuation performance in the last 12 months.

So JD Gyms, this is our most recent purchase, a slightly longer income profile than which -- than what we typically see in the REIT over 11 years. However, we managed to secure this for a good healthy yield of 7.4% net initial yield, a relatively small lot size at GBP 2.6 million. So lots of asset management to do here. However, we really feel that we can move the rents on through some of market reviews going forward. There is also the potential to build like a drive-thru restaurant pod on some development land that we have.

And historically, they have been very good profit makers for landlord because essentially, the car park doesn't really hold any value to it. You can build these restaurant units for roughly GBP 0.5 million to GBP 0.7 million, and you can get some very toppy rents. There's been some astronomical rental growth in that sector. And if you secure a good business like La Costa or Starbucks or a strong franchisee, there's a nice bit of money out of it. And also once it's built, it brings people to the site, it would sit very nicely alongside the JD Gyms. So that's kind of an asset management option that we're exploring.

Thank you. I'll hand back to Laura, who will go through the investment pipeline.

[Laura Elkin, executive]

Thanks, Henry. So the slide here about the investment pipeline, I will admit, does not give much away, although that is by design, I think. We've got various conversations ongoing with vendors about assets in the market at the moment. with various live conversations that are commercially sensitive, I haven't put much on paper here this time. So apologies for that, but we absolutely believe that we can reap the benefits of opportunities that will arise.

So if we just recap on a bit of history, of course, we made some fairly sizable sales for AEWU over the summer. So we are currently stacked on just over GBP 30 million of cash. Now our plan in the early summer was to try and dovetail those sales as quickly as possible with purchases. And we had a full pipeline of assets under offer in exclusivity, offering us an average net initial yield of just over 8%.

All of these transactions were progressing very nicely, and we were getting ready to exchange on some of these. And of course, now we find ourselves in the position we do today. I have to say I see that as an opportunity for the company at the moment being set on that amount of capital. We have seen prices move fairly significantly in recent weeks. So I think we've had a question submitted actually, which is asking the question of the pipeline that we had in exclusivity are we able to go back to vendors and renegotiate.

The answer to that question being absolutely yes. So up until the point of exchange where we are contractually committed, which we didn't get to on any of these pipeline purchases, we can go back to vendors and renegotiate. So that's what we're doing at the moment. We haven't been looking to rush those discussions so far. We have been waiting to see what the rest of the market offers to us. And I think we will continue doing that over some coming weeks and months to see where we can find value. That said, though, it's clear to us that the market has already moved to a certain extent. So we're having those conversations with vendors to see where we get to.

I think the way I would summarize that at the moment, though, is to say that, as I've just outlined earlier in the year, we have had an expectation of dovetailing those sales and purchases as quickly as we could for the benefit of our income stream. I now expect that process to take us a little longer. How long at the moment, it's fairly difficult to say, but I think with a fairly prudent hat on, we would expect to be able to make those purchases during at least the first half of next year. But we are certainly looking for ways in which we can maximize shareholders' total return. So based from an income and capital perspective, we are analyzing these assets. And finally finding, to be honest, already some pretty exciting opportunities. So I think this is a really positive opportunity for the company and something that I'm pretty excited about.

I'll just hand back to Henry to talk about ESG.

[Henry Butt, executive]

Thanks, Laura. I'm just going to actually move to this next slide. So yes, ESG and social really responsible investee, it's very much kind of embedded in the whole investment process on kind of credit to grade and by that, I mean from buying an asset to selling it. When we buy properties, we will carry out building surveys, which will address the ESG credentials, specifically the environmental credentials of buildings and we will engage with our tenants on some social aspects.

Having bought properties, we will be working as an asset management team on the sort of ESG initiatives. And we kind of summarize these in what's known as asset sustainability action plans. And so sitting alongside that is very much the whole to the meat agenda at the moment, which is improving EPC ratings to C by 2027 and to P by 2030. And I think it's worth noticing that AEWU's portfolio is quite sort of advantageously placed in terms of sort of improving the environmental performance of our buildings and for one main reason is that we actually have a fairly short lease profile.

And by having that, it means that when we get to a lease event, we can insist with a tenant who is taking space on a new lease, let's say, or renewing that lease that we have what's known as a green lease, which has green covenants. And those covenants will promote the collaboration of landlord and tenant to improve the environmental credentials of a building. Also on the lease event, you can look at improving EPC rating. If you typically have a 25-year lease, single let to one tenant as a landlord, there's very little you can do because the talent is in control of that space. Whereas when you have a lease event that is when the landlord can look to improve the environmental performance of the building.

And so there's various things that we're doing at the moment in portfolio and working on. In terms of sort of the managed properties where we have left, we are looking to roll out by diversity projects and incorporating things like bulk hotels and back boxes. And this ultimately will all have sort of a positive impact on sort of the environmental performance of our assets and ultimately means our properties sit sort of better within the climate crisis that we're suffering.

If we look at the next slide, this slide sort of summarizes where we are with our global real estate sustainability benchmark known as GRESB. We've splitted every year since IPO. And you'll see that our scores have gone from 62 to 65, 65 again last year to 67 this year. So we are naturally gradually improving. We feel that we'd like to take our scoring nicely into the 70s. But I think it's worth caveating that we feel that we can't take the score beyond that necessarily because a lot of the emphasis on the points here is on data collection. And as I said earlier on, because we have a large proportion of buildings which are let to single tenants under full repairing and insuring leases, the only way we can get that information is that the tenants collaborate with us.

Now tenants have lots of other things going on, and it actually proves quite difficult to get that information. I think we are rolling out a sort of an AMR, which is automatic meter reading program. And I feel that if we can get more information on the utility consumptions of our individual properties, we then can really address the environmental performance of our assets and look to improve. So that's really good.

And finally, on the right-hand side here, you'll see our consumption in carbon reporting. In 2018, we set a 15% reduction on absolute energy reductions and emissions. And you will see that since then, based on '22 data, we've reduced our energy consumption by 38% and our emissions by 49%. That's on the managed properties rather than the non-managed ones. And we're delighted to see that come through.

And it's also worth noting the last bullet point here that 100% of our waste has been diverted away from landfill since 2016 baseline. So that's some really nice wins in terms of the management side of the portfolio.

I'll hand over to Laura to bring the presentation to a conclusion. Thank you.

[Laura Elkin, executive]

Thanks, Henry. So thanks, everyone, for listening, although we will, of course, do some Q&A in a minute. I think if we've got some main points that we would like for everyone to take away today, is that we think that we are well positioned to have a defensive outlook at the moment. First of all, our strategic high weighting cash, allowing us to access that really exciting pipeline of investment opportunities that we're starting to see.

Turning to the existing portfolio. We really are seeing ongoing opportunities for further value and income enhancement. And as I said, various live conversations ongoing with tenants to let space in line with value at ERV. And once we've managed to capture those gains via active management, we've got a track record of crystallizing our games. With our prudent [indiscernible], our current book values are underwritten by long-term fundamentals, and we think that stands us in very good stead.

And going back to the cash, once we have fully invested the cash that we have available at the moment, we will be looking to fully cover our dividend at the time of being fully invested.

So should we start to pick up some questions here, would you please bear with us.

[Unknown Executive]

[Operator Instructions]. And Henry, Laura, if I could just hand back to you to run through the Q&A tab to respond to those questions where it's appropriate to do so. And then I'll pick up from you at the end.

[Laura Elkin, executive]

Thanks, Jake. So we've got a pre-submitted question here. Apologies. It doesn't say who it's from. But it says, do we consider the current share price to be an oversold territory?

Funny, I was reading an article earlier in this week, a piece of research put out by HSBC, which was stating that according to their research, they believed that the derating of real estate shares over recent weeks since the mini budget has provided a disproportionately negative outlook as compared to the wider economic outlook. I think I consider that to be a fairly interesting perspective on things.

Looking at our own share price, it strikes me that the current level or where we have seen the level of the share price hit over recent weeks is actually not far off where we -- where our share price came to in the early days of the COVID-19 pandemic in the U.K. and during lockdowns. Now sat here today in my perspective as a manager, I certainly feel as though the outlet during COVID was perhaps more concerning from an income perspective, from a rent collection perspective and then perhaps from a capital outlook perspective. So that's also provided me with an interesting sort of thought piece there. I would say that I feel less concerned now about our ability to continue running this strategy than I did then. Anything you'd like to add to that?

[Henry Butt, executive]

No, pretty good.

[Laura Elkin, executive]

So then, we've got another pre-submitted question, and apologies, this one also doesn't have a name against it. But it says there have been media reports of forced sellers in the U.K. property market. Have we seen evidence of this? And is this something that AEWU can take advantage of?

Yes. We're having some pretty interesting conversations at the moment with a range of vendors. Quite a few of those being household names of open-ended retail funds who have gated and are clearly facing some liquidity pressure. So yes, we are seeing signs of that. Yes, we absolutely think that's an area of opportunity, and we are having those discussions at the moment.

[Henry Butt, executive]

So we've got two questions here. We've got one from Jeremy B, which actually already answered, but I'll answer it again. So what are the LTV covenants AEWU senior debt facilities?

That's at 60% and our current NAV to debt is just north of 30%. So we got a lot of headroom there.

And then from Mark C, how will increasing interest rates affect your business as interest rate swaps become more expensive, higher financing costs?

Well, as I said earlier on, we are fixed in at just shy of 3% for the next 5 years. So we're safe there. And in terms of higher borrowing costs and the impact of property values, as Laura said earlier on in her presentation, given the fact that the portfolio is higher yielding we are at a much better starting point in comparison to low-yielding prime shares, for example, which at the peak were yielding net initial yields are around 3%. If you compare that to now cost of borrowing at 7%, you can see why that market has particularly been hit quite hard in recent weeks.

[Laura Elkin, executive]

Another question from Mark C, who is asking do our current earnings cover our dividend?

The answer to that question is, Mark, no. So if you have a look at our NAV announcement from last week, you'll see that we were uncovered on our dividend that we declared and have been now for approximately the last 18 months. The main reason for that being the significant vacancy in the asset in Glasgow that we sold and a vacant position was also building in the asset in Oxford that we sold.

Both of those positions necessary in order to maximize value because both of those assets were sold to developers. However, as we've touched on, we're letting vacant space and continuing to do so, continuing to have those discussions. We are also investing the cash that we have in the portfolio.

And also, we have had in recent periods some capital expenditure projects, which have been going through the reach with slightly elevated costs because of that, one of which Henry touched on being the roof of the asset in Rotherham. So all of those things have led to an impact on our dividend cover over that period. But we project looking forward that once we return to full investment, the dividend will be covered again.

The Board have always taken a fairly long-term outlook and approach to paying the dividend they would like that dividend to be as stable as possible. And of course, that's reflected in the Board's policy of paying the dividend. And for that reason and for the reason that when we look forward, we project that we can cover the dividend again is why they have chosen to continue paying that. Hopefully, that answers your question.

[Henry Butt, executive]

Got another question here from Mark C. Are your rents inflation-linked?

We have, a few tenants in the portfolio who are on inflation-linked leases. And that typically is RPI, even though that's being phased out in the next couple of years, it will probably move to CPIH. And we have, I suppose, because of the lower and the shorter lease profile of the fund, you don't typically tend to have inflation like leases with shorter leases, they tend to come with longer leases. And therefore, most of our reviews are on open market, but that's not a bad thing. Our RPI inflation leases tend to be have caps and collars.

So in a higher-inflation environment, you'll be missing out on a lot of that inflation. I mentioned earlier on the deal that we've just done at Rotherham, have that being relevant year rather than a new deal, we would have pushed on the rand considerably and we achieved a 9% uplift then that probably would have been achieved -- it could have been achieved in a market revenue. So not that much RPI, but we're not faced by that.

[Laura Elkin, executive]

And of course, remembering that inflation-linked leases often have caps and collars. In fact, I would say, about 9x after 10 have caps and collars, which regularly caps the level of inflation that you can capture at around 3% or 4%. So in periods of high inflation, inflation-linked leases, we don't provide -- believe provide the protection to income that they perhaps should.

Sorry, I can't read that name. Max B has asked a question, we have a high weighting of cash. Can some of that be reinvested in buying back shares?

We've got an ongoing discussion point really with our Board around this, that we will continue to revisit over time. We have bought back shares in the past during the pandemic. So we'll continue to revisit that. And if a positive decision is taken, then of course, that will be announced to the market.

[Henry Butt, executive]

Another question here from Mark C, do you see falls in demand? And also, do you anticipate problems with passing rent increases on a weakening economy and are you seeing signs of things deteriorating?

We aren't seeing size thing deteriorating yet. The occupational markets in the industrial sector is still very strong. We've not seen rental growth come off yet. Incentives haven't changed. We're still seeing a dozens of tenants wanting to take space. So that is really good. In terms of retail warehousing, as I said earlier on, and that sector has fared very well in the past 2 years, and there's some momentum going into that sector, especially with the planning changes, and that is certainly sort of propping up the rent in the more traditional retail warehousing uses.

I think on the High Street, I mean, it was bad before COVID and COVID really kind of turned it into a perfect storm. And I think we're of such low base rents there as a result of COVID, I think we're in a fairly sort of resilient position. And actually, we've seen quite a bit of activity in the portfolio in terms of lettings on the High Street. We've done some lettings in Portsmouth more recently. So we're seeing some momentum there.

And in terms of offices, we chose not to talk about our office property in Bristol having talked about it quite a lot in the past year. But only 6 months ago, we were talking about lettings at GBP 34 a square foot, we did a letting to grew a dolphin about 6 months or so ago. We are now hitting a headline around GBP 40 a square foot, which shows that actually, if you have the right product in the office sector, i.e. very well located, best-in-class buildings with good ESG credential the office market is pretty resilient at the main of the -- you just don't want to be in the kind of bottom end of the secondary stuff. So -- and there's still good side -- good things on the occupation side of things.

[Laura Elkin, executive]

Thanks, Henry. I'll pick up a question from Vivian W, and she has asked to what extent do we feel that use patterns of property classes, particularly affected by COVID have now settled?

I think one of the main losers from COVID that we saw during that time was retail. And as Henry has just touched on in the answer to the previous question, retail was seeing some weakening, particularly on the High Street before COVID and that really just accelerated that. It's funny when we're having conversations with vendors at the moment to do almost seems as though High Street retail now seems to be viewed as one of the more potentially resilient sectors because of the fact that it saw such value and rental declines during COVID.

I personally feel that the COVID impact on the property sectors in terms of their usage have widely settled, yes. But I believe that we're seeing now other factors starting to impact uses. So I think what we're starting to see is following on from the heavy impact that COVID has on the use of offices, we're now starting to see that sector be hit again with strong ESG agenda. So with [indiscernible] legislation coming in and with, I think, companies of all types, really ramping up the ESG agenda and moving that up the list in terms of priority. It's impacting tenants. It's impacting asset owners. We're seeing the office market be hit again by that.

So in answer to your question, Vivian, I think post COVID, in my mind, the use of property has just about settled. But other factors are at play and that will continue to impact on our use of property and we're very alive to that and -- we're very live into our outlook on our assets. We always talk about how our approach to investment is very bottom-up in terms of assets. And that's absolutely true. But of course, at the same time as doing that, we're overplaying that with these high-level views and making sure that we are appropriately pricing things, and we're very alive to that in the office sector at the moment.

So yes, an interesting time in terms of looking at the pipeline, but I think certain things to be wary of, and ESG is definitely creeping up the agenda and starting to have more of an impact on property usage and property values.

[Henry Butt, executive]

Question here from Oliver M. Do I understand that the valuation increase was less than the CapEx on Rotherham?

You make a good point. Obviously, in the presentation it says that we spent GBP 950,000 of refurbishment, but the valuation increased from June to September at GBP 700,000. The valuation moved on quite considerably over the past sort of year or so, whilst this deal was kind of ongoing. So that GBP 700,000 increase in the last quarter is kind of the last bit of it. We saw some very strong valuation performance. as I said, when we were under offered to the tenant and when we were doing the work. So it was quite considerably more than the GBP 700,000.

[Laura Elkin, executive]

Thanks, Henry. I'll pick up this question from Chris B, who has said that he's aware of a major stock market listed out of town clothing retailer has recently stated that they expect to renegotiate rent with a view to reducing their costs. Is there any evidence that we will be squeezed in terms of retail rents?

So I think just touching on the attitude of that retailer first. Now clearly, we can all name quite a few retailers and other types of tenants who undertook CDAs during the pandemic, and they were fairly plentiful. But I think there's got to be a very strong reason to do that. Clearly, these companies have shareholders too and there's got to be a strong sort of accounting perspective in order to be able to go through with that. So it's got to be done. It's not something that a tenant can undertake on a win.

And now clearly, they are positioned to do that. They will have the ability to do that, but it will sort of impact throughout their portfolio. Now I think perhaps just repeat a comment that I mentioned in the answer to Vivian's question previously, is that comments being made currently around High Street retail in some locations is that because rents have been hit so hard during COVID, they have been rebased at such levels that they appear low and therefore, appear almost one of the most resilient of the sectors at the moment.

So I would say, Chris, that I'm not overly concerned about that comment. I think we're perhaps always likely to hear of a few tenants who could make comments like this, whether or not they actually go through with it. I think looking at our assets and the conversations that we're currently having with tenants in line with ERV gives us strong confidence that our assets are priced and have appropriate levels of rents set against them by our valuers.

Another question from Paul S. Having GBP 30 million not invested will be a hefty drag on the current return. What are we doing with cash in the meanwhile?

Paul, you're absolutely right. We have set aside cash to cover the dividend during the time that we expect to take in order to reach investments. We are also moving that cash into interest-bearing accounts, which we can now access. So we are very mindful of that, but we don't believe that the drag that we're currently seeing will impact on our ability to return to dividend cover in the long term. And clearly, also, if we invest that capital too soon at the wrong price, that will also provide a drag to returns. Henry, do you want to pick up that question from Edward?

[Henry Butt, executive]

Is any of the existing replace covered with solar panels and is this something that is being considered to provide additional rental income as well as improving ESG rating?

So we have been looking at solar panels extensively over the past 6 months. Now in terms of having additional rental income with solar panels, you really need to sort of tick three boxes: First, you need the buying of the tenant, and they need to be happy to have solar panels put on top of the building, assuming that they are responsible for that building under full repairing and insuring lease.

Secondly, you need to have the cooperation of the grid because if the tenant is not using all that electricity, then you need to feed it back into the national grid. And if they can't take the additional electricity that you need to put battery storage on your site, which is more costly, it can sometimes be complicate things. And thirdly, you need to have a building which actually is structurally sound to do that.

So we are reviewing opportunities across the portfolio. I think obviously, an easier way of doing it would actually be to pay for the hardware and to actually get the payback through maybe asset management deals. So what I'm thinking is as a landlord, we could spend GBP 50,000 to GBP 100,000, for example, for solar panels and in return, we can get a tenant break option or we can move the rental by 25p or we could improve the revenue mechanism in lease or we can get landlord break option. So that might be a way of paying for solar panels. But it is something that we would certainly like to do, and we continue to look at it and to put it on our building. So, yes.

[Laura Elkin, executive]

We've got a question from [indiscernible]. Do management and the Board have shares of the business?

Yes, we do. And I'll reiterate that those are shares that we have acquired using our own funds. All of the Board members have shares. I believe that information is publicly available, but I would add to that, that here with the management company, I personally hold shares as do many people in our office. So we definitely have some skin in the game here.

[Henry Butt, executive]

Question here from Tommy K. Also, have collection rates evolved over the last few quarters? Are you still able to maintain high collection rates? If so, how?

Yes. Well, as we have said in the most recent NAV announcement, we are at GBP 0.98 and above for all the quarters since March 2020. We're in the mid-90s for this current quarter, based on what we've demanded. Please bear in mind that obviously, some tenants are entitled to pay monthly rather than quarterly.

So rent collection continues to be very strong. And I think that's because we have consistent and strong working relationships with our tenants. We're in contact with them as are our managing agents, and we very much set a precedent during the pandemic. We obviously took Sports Direct [indiscernible] to Court, who were two tenants who could pay but weren't willing to pay, and we keep a very close eye on our rental collection and the main reason for that obviously being that high rental income is an absolutely key on to the strategy.

[Laura Elkin, executive]

Thanks, Henry. I think just one more question here that we have time for from Colin S. He's just querying, we made a reference in the NAV announcement that we would expect to return to full dividend cover during the third quarter of 2023, and I will add that, that towards following a comment where we said that, that would happen if we had reached full investment during the first half of the year. The question he was asking, do we mean the calendar year -- sorry, the calendar quarter 3 or the fiscal quarter 3, and I would confirm that we were referring to the calendar quarter 3.

So I think that's all we have time for.

[Unknown Executive]

Laura, Henry, if I may just come back in, thank you very much indeed for addressing all of those questions that came in from investors this afternoon. And of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended for you to review and then add any additional responses where it's appropriate to do so.

Laura, perhaps before redirecting those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that would be great.

[Laura Elkin, executive]

Thanks, Jake. Yes. Just to say a big thank you to everyone for joining today. We really do appreciate having this ability to communicate with you. I'd just conclude by reiterating that we believe that the company strategically well placed. We think we are in a very healthy position, and we have got a robust outlook for coming weeks and months. Thank you.

[Unknown Executive]

Laura, that's great. And Henry as well, thank you once again for taking the time to update investors. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations. It's going to take a few moments to complete, but I'm sure it'll be greatly valued by the company.

On behalf of the management team of AEW U.K. REIT plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.