AEW UK REIT PLC
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Good afternoon, ladies and gentlemen. Welcome to the AEW U.K. REIT plc Investor Presentation. [Operator Instructions]. Before we begin, I would like to submit the following poll. And as usual, if you could give that your kind attention, I'm sure the company would be most grateful.
I'd now like to hand you over to Portfolio Manager, Laura Elkin. Good afternoon.
Thanks, Jake, and hi, everyone. I'm Laura Elkin. I'm the Portfolio Manager for AEW U.K. REIT, and I'm joined today in the presentation by Henry Butt, the Assistant Portfolio Manager. So of course, today, we are talking about the REIT. And this slide here shows our strategy, the basics of our strategy.
So there's four main points really that we believe make up the strategy that we've been running now within AEWU for 7 years. So we are value investors and that is a principle this is very dear to our heart. That is used to identify mispriced assets in the market and really is the basis for all of our acquisitions. We believe that being value investors sets us apart from most of our peers out there in the diversified REIT peer group. We believe that we are the only diversified REIT who are really employing this strategy to its max.
One of the reasons for that is because we believe that it is key to efficiently deploying the value strategy to be not constrained by sector, something that we're quite curious about. We love seeking value across all of the areas of the property market. Certainly, at various times over the past few years, that has led us to some sectors more than others. But we believe that over a long period of time, we need to have that freedom to seek value across all of the sectors in order to efficiently deploy.
So once we own assets, we very actively manage them. So this is really the beating heart of our strategy, our in-house asset management team. We actively manage our assets to maximize their income streams and also to unlock capital upside.
Another feature of the assets that we often buy is that they have shorter than average occupational leases. And when I say short, I mean generally in the region of 3 to 5 years. We think that provides us with a yield advantage on day 1 but also provides us with the ability to have some very real conversations with our tenants at lease end. And if we have bought the right asset in the right location, then that should be leading to at least the sustainability of that income stream, but hopefully, it's growth and the growth of the asset value during its hold period.
So looking at where the portfolio sits today, we think that it still represents a value proposition with low book values in the order of GBP 60 per square foot on a capital basis and low passing rents of GBP 5 per square foot across all sectors, comparing those levels to the wider commercial property market, they look very low.
The next slide provides some high-level statistics on the portfolio. And I wasn't planning to pick up many of these, but of course, if you want to talk about any of them, then please just mention that in the Q&A. I would just touch on a number of properties at 37, number of tenants at just under 150. I wanted to highlight here our net initial yield versus our reversionary yield, which is independently assessed by our fund value at Knight Frank, so quite a difference there between those two figures at 7.2% and 8.9%. Now clearly, some of that is linked to our current vacancy rate at just under 8%.
But quite a lot of that amount is really showing us true reversion in our assets. So those that are currently let but where the income streams could be increased. And of course, as I've just said as a reminder, that's independently assessed by Knight Frank, that is not our own figures. So hopefully, we'll have some examples to demonstrate this today, but the overall message being that we still think that the current portfolio presents a significant opportunity for income growth.
Now on this slide, is one that we put together last September, actually, but just wanting to show it to you again because we think that some of the themes here have really sort of run through over the past quarter. We thought that our higher-yielding assets would look more resilient against the sort of valuation loss and value volatility that we saw in the fourth quarter of last year. And I think that's really now absolutely what we've seen. Our higher-yielding properties or properties at the value end of the market, such as dispose that we own.
With the long values being closer to the long-term fundamentals of vacant possession value and alternative use value, really, those other types of value have proven to be benchmark really for those values and provided much lower levels of volatility, more stability in the values that we have seen over the past quarter. And that is something that we thought we would see. I think proven by the fact that, for example, at the prime end of the industrial market, I know we've seen Tritax put out figures in the past weeks showing values down around 20% our own industrial values being down significantly, of course, but at lower levels of around 15%, and our overall value is down just over 10%.
Another point to pick out on this slide is the resilience in occupational demand that we're still continuing to see. Now I'm assuming that many of you may have seen our NAV announcement that was released about 10 days ago now. Really one of our busiest quarters for quite some time in lettings. Quite a few of those concentrated on a retail warehousing park in Coventry. And Henry has got a slide on that asset specifically coming up. But across all sectors, we announced in that NAV announcement in lead letting and office letting, and Henry's got another industrial letting that we've completed recently to talk about later on as well. So yes, just highlighting that point, which is, of course, very important to our strategy that we're continuing to see a good level of resilience in occupational demand.
Another factor as to why we believe that we're currently quite robustly positioned was our refinancing that we completed in May of last year. So just in terms of background there, it was coming back from Christmas in 2021 that our in-house debt team who have a lot of expertise, we're flagging to us loud and clear that yes, straightaway in January, we should be commencing our refinancing discussions to get ahead of the curve on the increases that they saw or expected to see coming through on the cost of debt. And that was even despite our existing facility having lasted out until October 2023. So quite some way ahead of the expiry of that facility. We took the decision to refinance.
So looking in and the cost of debt for the next 5 years is just under 3%. And feeling incredibly pleased with that now, of course, and especially looking at this chart on the right-hand side of the page, demonstrating really what a great level that was, and we think a really robust basis for the portfolio going forward. Now not at all to diminish from the value loss that we saw in Q4 last year, and I'm about to come on to talk about that in more detail on the next slide. But just to touch on here that in times of value volatility, we think that as a value investor, that can be a really excellent time to look for value and for mispriced assets in the market. That, of course, has been quite important to our strategy in the past few weeks and months and will continue to be going forward.
As we made some key sales during summer of last year, which no doubt you know about if you've been following us. We sold around GBP 40 million of assets in the summer last year to maximize the capital values there. One of which, in particular, a sale in Oxford proved to crystallize a significant amount of profit. So really, really pleased with the timing of those sales and the fact that they completed at that time before really the volatility in value started to hit very hard.
Really then opening up a lot of opportunity for us as we then came to invest that GBP 40 million. We made two acquisitions during Q4 2022, which we have announced to the market. We had actually agreed pricing with vendors on those two acquisitions, some weeks ahead of the completions of course, and during that time with the sort of news that was going on in the world and a lot of political instability, et cetera. We were able to reduce those values further, the purchase prices of those assets by 15% to 20% in both phases.
So feeling incredibly pleased with those purchases that we made. And I think they're very demonstrative of what can be achieved in the market today buying in excellent locations for very strong levels of yield, good levels of capital value and really looking to buy, I think, countercyclical. So we were buying at a time when quite a lot of the commercial property market was sitting on their hands and not making purchase decisions. We were able to make those acquisitions looking very attractive now for the company. Of course, we have roughly GBP 7 million of further capital to invest. So we've got some pipeline slides coming up on to talk about the opportunity that we see there as well.
So I said I'd turn back to look at performance and what we saw during Q4, which you will now have seen reflected in our net asset value. A split is by sector into the three main property sectors, and we show our weighting to each sector the value change that we saw within the AEWU portfolio and then comparing that to the value change seen in the wider market. And here as a comparator, we've used the CBRE monthly valuation index, but of course, aggregated that for the quarter.
Very pleased to be able to tell you that in all of these cases, the value change seen within AEWU was less than that seen by that benchmark. So that is an encouraging start for us. And I think rings to that point that I mentioned earlier about value assets having less movement or less volatility than those at the prime end.
Turning to warehousing and industrial. This is our, of course, our largest sector exposure at around 45%. I think the point to make really strongly is that we're still really, really happy to hold to these assets. It was our largest loss of value in this sector, but we are still very happy to hold them because of the levels at which we're holding them in terms of value. So that's capital values of around GBP 40. The asset simply cannot be built for that kind of level.
The build costs would be sort of more than double the hold values, and that would not even be including land. So really strong value principles within the levels of which we're holding those assets and rental values averaging GBP 3.50 per square foot across these industrials. So it's showing really strong potential for future growth. And as I said earlier, Henry has got an example of an asset in this sector where we have seen some really strong rental growth recently coming up. So yes, really happy to continue holding the industrials that we currently have.
Moving on to retail. I have grouped together high street and retail warehousing here, but they did actually perform quite differently over the course of the last quarter. Actually, in our high street retail assets in AEWU's portfolio, we didn't really see much movement at all. And I think that really points to how that sector has suffered a lot over recent years. So of course, it was facing occupational difficulty prior to COVID, with their COVID pandemic then significantly accelerated. We saw many tenants CBAs values were significantly downsized. ERVs were downsized.
I think, though, looking at where things stand today. Values in the yard within the high street looking lean, and therefore, I think there's quite a lot of resilience sort of baked into them for that reason. When we look at tenant operating figures on the whole, they are significantly better capitalized, stronger balance sheets than they would have been a year or 2 years ago. So that also gives me a lot of confidence.
We also saw more positive-than-expected retail sales during December. And I know that, that has really sort of put a bit of a positive spin on the figures for quite a few of our tenants. Henry will touch on the acquisition that we made in Bromley during Q4 on a specific slide later on. But next our tenant there. And as an example, I know that they've put out some strong figures recently. So really pleased about that.
I think that the retail sector provides quite a lot of opportunity for us because as countercyclical buyers, we know that there are quite a few institutional holders of property who, at the moment, have still decided to continue with the sort of exit strategies of high street retail, even though that would perhaps be considered to be somewhat behind the curve. But that really does throw up significant opportunity for us. And for example, the asset in Bath was an exact example of that. When we bought that from a vendor head effectively decided that at all costs, they were going to get rid of their highs retail assets. And when they're in such excellent locations, is that more than happy to pick them up at that level of pricing.
Turning to offices. This is, of course, a relatively small sector and small exposure for us at just under 8%. So it might be forgiven for thinking that our assets have performed quite strangely this quarter in holding their value when the rest of the market saw value loss of that's really linked to some very specific asset management movements that we have seen within our office portfolio recently.
Just to touch on those, our major office holding now is the office in Queens Square in Bristol, which has been a really strong performer for us, and we've seen a lot of rental growth come through that asset. The latest example being during December, we completed a lease with a tenant at a new high rental tone of GBP 40 per square foot. So that explains the improvement in any ERVs for that asset and why it held value.
We also have a small office building up in Gloster, where the tenant is the secretary of state operating as a job center. And during the quarter, they passed through a lease break and now remain in the building for another 5 years. So that impacted on that valuation very positively and explains why our offices held value during the quarter.
Just as an outlook on that sector, I have some concerns about office occupation and not quite knowing where that's going to settle yet. I think clearly, it's settling at levels much, much lower than we have seen prior to the pandemic. And I absolutely believe in offices, but I know that they will not be used to the extent that they were before. And in addition to that, the environmental credentials for offices are becoming significantly more important to tenants, and that's really being reflected in investment values at the moment.
And I don't quite know if the market has quite got a handle on the costs required in order to meet tenant demand there. So I think there's potentially a lot of capital expenditure coming through non-environmentally compliant offices. And it makes me slightly wary of the sector. So I'm grateful that we have a low exposure in a few select assets. We may look for some opportunity here if it's priced in line with alternative use values, but I would expect that to be for any for few and far between.
The next slide summarizes our NAV total return performance since IPO. And really just to quickly touch here, I mentioned on the first slide that we like buying income streams of 3 to 5 years. And at that point, we can have that real conversation with our tenants and sort of roll our sleeves up and get stuck into the asset management and start growing income and start growing capital. It's really sort of the 3-year period, roughly sort of 3- to 4-year period on this chart of us managing this REIT that our performance line stages to diverge from the peer group. And we think that's really reflected in that active asset management strategy that we have.
This chart here, I won't dwell on for too long. I have to say the table on the right-hand side is only up until September because most of the peer group here have actually announced for December. So apologies that slightly out of date in the chart in the middle shows share price movement. Of course, looking quite favorably towards ours, which has been trading at the narrowest discount of this peer group.
But yes, moving on to the next slide, showing the dividend yields. We have always been one of the highest dividend yielding REITs within this cohort. Regional read clearly sitting there some way higher now, but I think reflected in there quite.
I'll hand over to Henry now, who will talk through some asset management examples, and I'll back up on investment very shortly.
Thank you, Laura. Good afternoon, everyone. So this slide here, it covers our asset in Coventry. You would have previously seen a slide, I don't if you've attended other invest in new presentations on Coventry summarizing the acquisition process here. But this slide focuses on what we've been doing over the past year on the asset management side of things.
Just to recap, we like retail warehousing. We bought a fair bit of it a year or so ago because retail warehousing units are typically modern purpose-built units. They have a lower site coverage than industrial in sort of mid-20s rather than 40% or 50%, which means you can get a more intensive use out of that site through the addition of drive-thru restaurant pods and coffee delivery, et cetera.
And they also, aside from doing exactly what you want on day 1 in terms of the income profile, particularly here. They also offer alternative news plans, whether that be last mile logistics, trade counter or sort of other alternative uses being residential. And that would work here with this site being only a stone throw away from commentary City Center and right next to the station.
But just to recap, we bought this property for GBP 16.4 million back in Q4 2021 at GBP 117 a square foot within that initial yield of 7.8%. So delivering exactly what we wanted on day 1 income profile wise. And the line of tenants here are well-known names, predominantly from the fashion side of retail being TK Maxx, Next and Sports Direct. And it's important to mention the recent changes to the planning use class system where they have been relaxed and there's a new used class called EU class.
And what that has enabled us to do is to bring in a wider variety of retail tenants to the park, which will ultimately drive footfall, which will ultimately drive rental grade and occupational demand. And that will all naturally filter through into investment pricing. So there's a very good story here from the from work from day 1.
And as you would have seen in our NAV announcement, we've completed four transactions in the past 6 months or completed in December. The two ones to complete were a renewal to Next, an existing tenant on a 5-year lease for a 3-year rate at GBP 15 a square foot. And we also completed a lease renewal to Burger King, who operate their drive-thru restaurant at the front of the site at GBP 40 a square foot. And it's worth noting that you get higher rents in the restaurant post than you would in the traditional retail warehousing space.
Under the new EU use class system, we managed to bring in two new food users being an Aldi supermarket, we've signed an agreement for lease there subject to works a new 20-year lease with RPI reviews. And we've also agreed an agreement for lease with Iceland on a 10-year lease, which will be subject to planning. Now again, bringing in those uses, it will increase dwell time people will go to the to shop and buy their food, and then they will lip into Next or Sports Direct. So it works really, really well for the park.
And I think it's worth noting that if you had a stand-alone Aldi or Iceland, the yield that investors would pay for that would probably be in the -- the low 5s in comparison to retail warehouse in which where yields a lot less sharp. So when we complete those lettings, we expect to see some good capital performance on this asset.
And aside from the capital performance to come down the line when these leases is complete, it's also worth showing the net operating income picture here. You can see this chart top right hand of the slide, where we will be -- where all these deals are on the line, [indiscernible] and is worth mentioning operate [indiscernible] property when we work to say that bake in service charge costs, earns costs and empty rates cost. Now that those units are left, those cost will fall away on top of the rent.
So one final [indiscernible] that we're also currently exploring in of free in return for disposing part on leasehold to the council. And that will also be good because freeholds trade much better in the investment market, and they just give [indiscernible] flexibility and freedom to carry out asset management initiatives. So that's a good initiative to have in play.
We lost Henry.
Henry, can you hear us, sir? I think we momentarily lost Henry.
Okay. So not to worry, I will carry on. Everyone hopefully, you had what [indiscernible] about Coventry. But if not, then we can cover that off again. I know that's something we've also submitted some additional questions about Coventry. So let's review that up at the end.
So picking up on the next asset, this is perhaps just a rather more straightforward asset management transaction for us. So renewals an existing lease to Odeon in the new city of South and on sea an asset that we had owned for some time, I think, roughly about 5 years in were talking to us about a renewal of this lease on and off during the pandemic as there was sort of roughly 18 months, 1 year left on the lease and offering some fairly weak terms, I have to say, and we sort of rebated those.
And we're fairly keen to see sort of fairly open minded, I think, to say, to see Odeon on sensible terms, and we're sort of happy to kick the can down the road on those discussions until the end. And that's exactly what we did, and they have offered us now a 5-year lease at the passing rent with 7.5 months rent free and that transaction was completed during December. So really great to keep Odeon in there. And the value of the asset increased 37% during the quarter. So really countercyclical to the -- perhaps the rest of the valuation movement during the quarter.
If you've heard us you will have heard us sort of talk no end about alternative use values and having numerous business plan not because we think that current uses will fail or leave, but just to have sort of downside protection built in strategies, and this asset provides a great example of that.
So given the location there, and I think the middle plan showed it really close to the station, a really central location within the town. This will make an excellent residential development site, and we've often looked at acquiring in the units just to the south of that sort of blob, which is Odeon on the plan. In order to sort of maximize that, whether or not we look to do that going forward, yes, time will tell really. But we're really happy to have Odeon in the building now for another 5 years. Henry, do you want to pick back up?
Yes. Sorry, about that. I have no idea what happens, I hope you can all hear me. So we'll move on to the next slide, Rotherham. This is one of our industrial assets. And we completed the letting in the previous quarter, but we haven't agreed with this slide again because we actually completed the landlord CapEx in the last quarter of the year.
As you can see, we bought this industrial asset for GBP 2.175 million, a very low cap a square foot at GBP 26 per square foot net initial yield of 8.5%. And when the previous tenant who worked in the aluminum construction industry vacated, we had a good, strong list of future occupiers. And in the previous quarter, we had completed a lease a 10-year exact lease, which means that we have more freedom and a much easier route to redevelopment in the future, a 10-year lease with a break in the fifth year to senior architectural systems, as I said, in the aluminum industry by the previous tenant.
And this letting really sort of exemplifies the reversion potential of the portfolio and the rental growth and that can be captured. You'll see that we moved the rental here from GBP 3.35 a square foot to GBP 5 and a 49% increase. And in doing that letting, as I said, we spent some money in the building. We spent just shy of a GBP 1 million on the roof and doing some light to referent works internally. Now we don't mind doing that because when we improve the buildings, we ultimately can say to the tenant that we'd like to see improved terms. So we can push the rental a bit more, we'll have less lent free or we could in this example, gets the higher of open market reviews and RPI. So we improved those terms by doing these works.
And that also contributes to the capital performance of the asset because natural if you spend money on your building, you have a more valuable asset. But also what we did here, which is very apt, given all the conversations ongoing at the moment for managers like ourselves and investors on the sort of the environmental pressures of investing in real estate. We managed to improve the environmental performance of this building.
So we have EPC reassessed following improved installation in a new roof on the building. and we moved the EPC from a C67 to B44, which is a nice increase. And that means that it will be resilient to all the means regulations coming in as of April this year, up to 2030. I've got a slide on that later on the presentation. So a cracking deal from -- for a number of reasons.
So moving on to some recent transactions, which Laura has touched on already in the presentation, and you will have seen separate announcements on and if they were a please gain in the NAV announcement. So this is our new asset in Bath. We're delighted to have acquired this in December. Laura has already mentioned that we managed to renegotiate the price here by 15% to 20%. And so that's fantastic. But it's also really worth making that locations like Bath over sort of between going, well, back, probably wouldn't have been available to us at yields like 8.5%.
So we're delighted to have bought this really good quality property and a really good city in the U.K. giving us exactly what we want from an income perspective. We also really like this asset because it is not listed. And the majority of assets in bath are listed, which really sort of hands in terms of looking at alternative uses as another sort of asset management angle. This one isn't so we could potentially, if the office is above didn't go according to plan. We can look to move this into alternative uses being residential. However, I can say that it's very unlikely that's going to happen.
The Bristol office market is very constrained supply wise. And actually, we expect some really strong rental growth come through in the office space here, and there's an outstanding September '22 revenue, which will work on the moment.
We've got a very good lineup of well-known high street retail brands. And it's worth noting that TK Maxx, you anchor the retail, their rent was recently rebased. So we don't have an over unit there, which is really good news. And again, touching on that sort of capital sort of alternative use perspective, you can see we bought this in at GBP 194 a square foot. If you compare that to where residential values sit in part, it looks very cheap.
Finally, Next in Bromley, a bit more straightforward in that in a single let to net, you all know well. As Laura said next have traded very well over the festive period. So that brilliant this asset. Next, I have a lease here until September 2025, which kind of fits in with our shorter lease profile strategy. But we feel that Next will be staying into the medium to long term here. They trade very well as said. And they also, when they renewed the lease a couple of years ago, they spent a lot of money picking up this. So a lot of capital investment from them in next sales, which implies that they're not looking to go anytime soon.
As you can see, a bit like Bath, we bought this on a relatively low capital value per square foot at GBP 101 per square foot, which is very cheap, given this is a greater London location. It's yielding is just shy of 9%. And talking about the rebasing of rent with TK Maxx, as you can see this is a senseful affordable rent, it's yielding at 8.7%, and we feel that's a good track rent there.
In terms of alternative uses, and I don't really want to labor this point, but we do like it at AEWU because it does give us an alternative option other than the existing one. This would lend itself very well like after residential conversion. We've had a look at this, and we think we could get 46 residential units in hair if Next did decide to go, we couldn't find a new tenant to take the next phase. So we've got a good backup solution if next site to vacate.
Thank you. And sorry about the IT issues. I'll hand back to Laura to cover the investment strategy.
So just a slide here, I think we've hopefully labored the point enough already, but value investment being at the heart of all of our purchase decisions. We are always comparing our purchase prices to vacant possession values until alternative use values. We think that not only creates opportunity in looking but also is a significant protector of downside. So within this diversified strategy using value investment to not only provide opportunity, but to protect downside.
Now looking at the pipeline, we've got two slides here showing eight assets, totaling around GBP 40 million, which is, of course, more than we have to spend. It is also a number that's sort of growing by the day, really. When we come back from Christmas in January, it takes a couple of weeks for the investment to market to get going. So these are some assets that we sort of picked together in the past week or 2, but we've received more opportunities each day that our team are analyzing.
I think it's clear to say though that this opportunity that we saw arise during Q4 last year of just a really excellent price point for our value investor seems to be continuing well into the start of this year. And I think just sort of taking the kind of macroeconomic position, we certainly expect that to be the case for the coming weeks and months.
So yes, presenting a really interesting price point for us. Just, I guess, reiterate the point that I think I made earlier. When we spoke last summer and we talked about reinvesting the capital from our sales, we thought we would be doing that at a income profile of around 8%. This pipeline now shows a yield closer to 9%. And of course, that's where we made those two acquisitions last year. Given that this is going out publicly, we're being a little bit cagey on these exact assets and where they sit over these two slides. But let me tell you that these locations are Central Manchester, Central Liverpool and Birmingham, Central Cardiff, affluent Southeast towns like Tumbridge wells.
Location always being a major focus for us, and we think that these assets sit in the right location for what they are and make really interesting opportunities. Buying opportunities in these great locations really sort of reminiscent of when we first launched the REIT. I think we're seeing a period in the market where we see value quite widely across a lot of market sectors more so than we have done in recent periods where buying opportunities have been a little more concentrated.
I'll hand back to Henry, who will talk to you about ESG and MEES. .
Thanks, Laura. So I touched on MEES, which stands for the Minimum Energy Efficiency Standards when I was mentioning the Rotherham case study. And this flow chart just hopefully summarizes the regulations which are being put into play by the government. So the first sort of deadline is April this year where landlords are not allowed to have any buildings with units which have EPC ratings of an F and G. It's worth mentioning that in the portfolio, we only have six F and Gs and they're actually only in two buildings, one of which we have a short- to medium-term view to perhaps demolish and look to redevelop new units on an industrial state.
The F unit, we are currently in talks with the existing tenant about doing some capital expenditure on that unit in return for maybe a slightly longer term, which should address the EPC. So we kind of feel that we've got those two problem assets covered for the time being.
It's probably then the next two hurdles we have in 2027, you were not allowed to have any EPC ratings worse than the C. And then by 2030, it's a B rating. So they're the three key dates.
And if we move on to the next slide, this will give you a very sort of good summary of kind of where we currently are. So within the next week, we will have 100% EPC coverage across the portfolio. We've been working on it quite intensely over the past 6 months. And in doing so, we have managed to increase the number of A and B ratings, which will expire beyond 2030 by zero to '33, which is a fantastic the news. So we're having reassessed the portfolio, we're seeing already some improvements.
I've already mentioned the GNF ratings where we have a plan of how to address those units. And when we have our EPCs assessed, we carry out improvement plans. And typically, those improvement plans will be able to improve the EPC ratings of our building by the installation of LED lights, and also looking at installing electric heaters rather than the traditional heaters that we will very -- we know which are in our residential homes.
And whilst we're carrying out that initiative, we will be looking to install automatic media readers in the property because understanding the utility consumption of our buildings is very important with regards to understanding the environmental performance of those buildings and their carbon footprint.
And that brings me on to the next slide, which looks at our GRESB scoring. You will see we scored very well in the management part of GRESB, which is the Global Real Estate Sustainability Benchmark. We performed less well in the performance, and that because we have a high percentage of for pairing and ensuring single-let assets where we can't get a hand on utility data, hence, the AMR initiative. And we feel that once we have that data, we really see our grad score improving, which is kind of the benchmark for the environmental performance of your portfolio, and we will be able to then work with our tenants because we will have an understanding of what their carbon footprint is.
I will hand back to Laura to conclude. Thank you.
Thanks, Henry. Yes, I think -- sorry, before I conclude, I was just going to add that getting hold of that energy usage data for the buildings and the consumption data of our tenants does usefully feed into the GRESB score. But of course, bigger picture, it's more about understanding the usage and the emissions within our properties so that we can report it against these targets that are set out on the right-hand side and just keep a track of what we're doing and hopefully be able to show robust improvements over time.
But yes, to conclude, and we have Q&A to follow as well, of course, but to summarize what we've discussed so far. We feel really pleased with the positioning of the portfolio today. We think it's got a very robust basis and excited by the pipeline opportunity looking forward.
[Operator Instructions].
Yes. Great. Thanks, Jake. Henry, I'll kick off with a few of these and then perhaps hand it over to you. So starting from the top, this was a pre-submitted question. Somebody asking, apologies, I don't have a name, which sectors of the property market are we optimistic about over the next 3 to 5 years?
I think I've kind of touched on that when I sort of described the slide on the value loss in the sectors and sort of talked around our outlook for each of them, but I'll summarize it here again today. I think quite generally, we are optimistic about the fundamentals behind most retail sectors and the industrial sector and some leisure sectors. Of course, some caveat to that comment being on all of those assets, location-specific, you have to be buying the right thing in the right place. Generally, as a whole, less optimistic on this.
So another pre-submitted question, apologies, therefore, don't have a name. Please expand fully about the prospects for capital appreciation in the stock? So I think that's referring to the shares. Why there's significant gyrations in the share price of late?
Of course, we have very recently put out an announcement stating a large net loss. Now I think the way that REIT -- most REIT share prices started to move downward from sort of summer last year, taking the view that some valuation loss was coming. Perhaps there were some who didn't quite have that expectation. And I know that our share price dipped immediately on putting out that announcement but has since recovered.
We've seen some good momentum behind the share price since then now. And I think we've been doing quite a few meetings with our investors and with yourselves today. And just talking about the opportunity set that we think lies in the existing assets and in the pipeline. And I hope that, that message is really getting through to some buyers out there. And that perhaps explains where the share price sits today.
The same query goes on to ask, can we clarify in rent collection percentages and has this remained satisfactory?
Yes, is the answer to that question. I think now every single quarter since the onset of the pandemic, we have had rent collection in excess of 98%. For the current quarter, it will sit not quite at that level because, of course, we're still some way through the quarter, and there are some -- a few tenants, not many who are making monthly payments as permitted by their leases. But yes, we absolutely believe that, that will continue and that this quarter and for future quarters, we should be collecting in line with those high amounts.
The same question then goes on to ask, is the relationship with our lenders under any pressure?
No is the answer to that question. We've got a very healthy relationship with our new lender. Our LTV covenant allows for, I think, a further 50% value loss in the portfolio. So quite a significant amount of headroom there in the low.
There's another pre-submitted question. Could we please provide some more detail on when we will get the dividend covered such as time scale?
Yes, I think in our last announcement and the announcement before that, we have reiterated our comment that we are expecting the dividend to become covered during Q3 of this year. And I'll point out that, that's the calendar Q3 in time for hopefully, full cover of the dividend during the fourth quarter.
Now in order to make that happen, we need to see the portfolio fully invested. And given the strength of the pipeline, hopefully making a further acquisition there should not be difficult. But also, of course, any further sales, which aren't invested within that time period will also impact upon that. We also have quite a lot of letting movement at the moment, also some linked with levels of capital expenditure. For example, I'm mainly pointing the finger at the retail park in the commentary that we've talked a lot about today.
That position there should have stabilized by Q3, i.e., that the costs of doing those lettings should mostly have been seen. And we should, at that point, be starting to see the benefit of that those income streams coming through. So it's those sort of factors combined that we expect to see us then leading to a coverage dividend before the end of this year.
The same question goes on to ask, what could go wrong to prevent that from happening?
Of course, if any of those things didn't happen, then that would cover those plans. The lettings in Coventry are now signed up as much as they could be at this time such that some are conditional on perhaps planning permission for user hours and things like that. But those are not significant factors that we expect to cause trouble there. I don't expect that spending the capital will be will be at all difficult given the strength of the pipeline that we've got. I guess there are many unexpected things that could happen in the economy and wider before then. But yes, given what we see today and given the position at the moment, we are certainly on track to expect that to happen.
Henry, do you want to pick up on some of [indiscernible] related questions?
Yes, we've got another pre-submitted question. Please talk us through the logic opportunity you've seen with the latest acquisitions.
Well, I hope I covered that when I went through the Bath and Bromley slide but to very quickly recap well-let properties in good center in the center of good cities and towns, alternative use angles up our sleeve providing the income profile that we want being sort of mid- to high 8% natural it yields. So hopefully, that sort of answers your question.
Moving on to another question, which is a pre-submitted one again. What is the latest feedback on letting discussions with existing new talents? Is there still demand? Or is it weakening?
Well, I think the commentary slide in itself illustrates that there's still a lot of letting activity going on. And obviously, there has been stuff in the news about retail is trading better over the festive period than anticipated. We obviously also had the Odeon letting, which Laura covered when I slipped off there.
Moving to the industrial sort of sector where we have the majority of our assets, there's some still very strong occupational demand. As I'm sure you can appreciate the cost of building new warehousing is sort of GBP 80 per square foot, and our current book values sit well below that, and that's excluding the land price. So that means that at the moment, there is still a very much supply-constrained industrial market. And if that continues, there will still be a good occupational letting market. So I hope that answered your question.
Moving on to another pre-submitted question. Can we please have an update on the progress at Oak Park Droitwich, please?
So just as Droitwich, well, one of the tenant -- well, the main tenant there vacated one of their two units in November. And we are currently in the process of looking at refurbishment options on that unit. I'm also happy to say that we've already had some interest on it on a short-term basis. That will be letting maybe just a tenant below ERV, but it will be a good short-term solution.
On that part as well, there are some -- what we would regard as being physically and economically obsolete smaller buildings, which actually have some holding cost to us as landlord because they're currently not less. There'll be empty rates and insurance cost to us. We're currently in the process of looking to demolish those units and create some storage land, which we think will let quite well. So that's what we're working on at the moment.
And then at Western's distribution part, again, we have some older units there. We're currently working through the tender process for some piece mill demolition on that site with a view to building some newer shine units, which would attract a much higher rents, and we'll move forward the rental tone on that estate and give it a general face lift.
There's one more question here, which is the pre-submitted one, and then I'll hand back to Laura. On financial incentives at Central 6 Retail Park and being quite sizable.
Just to recap on the say, we've given a 12-month rent free and CapEx to [indiscernible] to secure that letting. And we've given 3 months rent free and GBP 800,000 of CapEx to secure the Iceland letting. Now we're obviously prepared to commit that capital to secure those lettings because in doing so, we will let these two very strong covenants to well-known household covenant and paying rents on good long term. And there will be some very strong valuation performance, which will easily pay back the money that we put on the table to secure those lettings.
So it's all a part of the asset management process, what a landlord has to do to get a tenant to sign into a contract. And yes, they are slightly larger but then let's face it. Typically, we're seeing 3- to 5-year leases in the U.K. now and secure these longer supermarket lettings and the incentives do tend to be even they're larger. And that's the same in the leisure sector as well.
Thanks, Henry. I'll pick up a few questions now. So I've got a question from Andrew S. Valuation yields were starting to slow during -- so valuation drops were starting to slow during Q4. Do we feel that this current quarter could see the bottom?
I guess I can only comment on the sort of information that's visible to us at the moment. And yes, I definitely feel that, that sort of speed of valuation decline is certainly slowing, if not plateauing. Having visibility on funds valuing monthly is very helpful to this. We could see that the October declines were smaller than the November and December declines, which were then very steep. The January declines that we already have visibility on we're much, much shallower and starting to plateau. So yes, based on the information we can see today, we believe that this time, the valuers have reacted very quickly, and we encourage that as far as it represents the market, and we think that's good. If our values have been rightsized pretty quickly, yes, that's a good thing.
Next question from [indiscernible] do we have enough money for the current period without raising more working capital?
The answer to that question is, yes. We project out our capital expenditure, roughly -- well, certainly at the moment because we have a couple of sort of long-dated items, but sort of 12 months -- 12 to 18 months in advance. So we have capital set aside for those commitments quite some way out because we know that they'll be falling due. We also hold on top of that, quite a conservative cash buffer that we don't touch for working capital. So yes, we very much have precautions in place within the company that we always have enough working capital.
Next question from Chris B. Can we comment on the long-term vacancy target? Are there any future concerns in this area given the economic outlook?
Yes. So I would say that we would expect our long-term vacancy. Of course, we don't really have a target. We would love to target zero. But I would say we'd always expect because we run a shorter income profile strategy, we would always expect to have some churn and broadly between 5% and 8% is where I think that will always surround around over the long term. I think the best way perhaps of answering this question is to say that if we look forward over the rest of 2023, where they can see 6% at the moment isn't a particular concern for us returning back to our dividend cover. Of course, there is vacancy were to increase significantly, then that would start to impact on our earnings.
Another question from Chris B. Are the levels of incentives becoming increasingly more demanding from existing and new tenants?
No. I think -- and I think this really just touches on the answer that Henry gave immediately prior to my joining back on. He was talking about the incentives, for example, that we've given in Central VI. And yes, they're pretty sizable. But tenants that national tenants of that standing who have such a high level of fit out really often demand those kind of levels.
I was very pleased with the way that we were able to sign up Odeon for 5 years with a rent free of 7 months. If I think we were doing a new letting to a new cinema, it probably would have been quite a bit higher than that. So no, I think on the whole, those levels still looking as to be expected.
A question from Ray S. Are there any plans to raise funds to take advantage of the pipeline that we have? And actually, I think I'll just combine that with somebody else's question, who was asking if we be -- turning to shareholders for an equity raise. That was from Martin K. So I think two very similar questions there. Thank you, both.
I think we've always sort of sat in front of you with -- when we have types of sort of interesting -- particularly interesting pipeline and said that we would love to be able to have access to that. And I know that some of our larger shareholders who have been very loyal to us from the start would like to see the company grow a little in order to provide them with better levels.
And for us, it just often sometimes is frustrating when we look at a really exciting pipeline of around GBP 50 million a sort of real property geeks and sort of purist in value investment, we get quite excited by our pipelines. And when we can't access all of them, it can feel quite frustrating the ones that got away, there's always some great assets out there.
For that reason, we would love to be able to raise if the share price is in the right place and if our investors support it, if we were to do so, we would certainly think about being able to offer that out to retail investors as well if there was demand. So if that decision is taken at some point in the future, then we will certainly think of the retail offer as well.
There's a couple of questions, I can pick up here Laura [indiscernible]. There's a question from Robert on utility costs and the impact of those on our tenants.
I think it's a good point. And it's why I mentioned the automatic reading initiative earlier on in the ESG slides. We obviously feel that that's very important to understand what our tenants are using. So we can have those conversations with tenant, we feel are under more pressure from their utility costs.
It's worth noting that the since energy prices have increased, we have been looking into battery storage opportunities on a number of our sites where the tenants have a larger electricity consumption with a view to obviously putting batteries on those sites. And it's important to emphasize these aren't lithium batteries, so they're not flammable. So the insurance situation shouldn't be impacted. And the view obviously storing cheap electricity, which is produced in late at night on windy evenings, so it's cheap green electricity. With you store in electricity to say then it can be used at times when electricity is more expensive.
There's another question from Robert S. on EPCs and where our portfolio sits within the MEES regulations?
I hope that I have answered that question, Robert, when I carried out the MEES slide about 10 minutes or so ago.
Thanks, Henry. I'll just pick up a few more questions now. Another question from KT. Is the current dividend sustainable long term?
Yes. I think I'll refer the sort of comments there back in the direction of those that I made earlier about returning to dividend cover. At times when the portfolio is fully invested and sort of seeing through this current period where we have some accretive lettings sort of washing through an income and capital-intensive phase before we see the benefit of their income at a more stabilized time, then yes, absolutely. When we project out long term, the portfolio assets sustainably cover the current dividend.
A question from Simon J. As more and more retail financial groups leave the high street, are we seeing any attractive opportunities?
I think, Simon, you might be asking me about banks leaving the high street. We've seen quite a few announcing significant withdrawal programs. Are we seeing any attractive opportunities because of that? Generally, that doesn't open up opportunity for us. Clearly, those will be vacant properties. And we like buying properties that are up and left already so that we can have income from day one. In addition, those bank properties tend to be not have the largest frontages in every case, sometimes be quite a traditional style and not the largest stuff. So we don't see that as a particular area of opportunity for their strategy.
An interesting question from -- apologies if I'm pronouncing this wrong, I think it's Miguel M. What are the implications, if any, of the very attractive yields in your pipeline for the valuation of your actual portfolio?
So I think Miguel, what you're probably getting at here is -- of course, if we're seeing more opportunity in our pipeline and yields having moved out, which makes our pipeline more attractive, then does that mean there is further for to come in the value of our assets. I think we've seen clearly quite significant value loss in our own portfolio during the last quarter.
So my sort of response -- yes, where we haven't seen that. I think there's been some quite clear reasons why linked to asset management gains. So I'm not concerned. I don't think that the pipeline pricing looks particularly out of line with the portfolio's pricing. I think what we see in the pipeline is a few isolated instances of perhaps some assets that look mispriced by the market. For example, like the asset we bought in Bath, where I mentioned a vendor that was sort of hell bent on selling whatever happened and almost at any price. It's that type of opportunity that sort of opens up, yes, great value opportunities for us. So the pricing of the pipeline doesn't make me feel concerned about the valuation of the current portfolio. I think that's what you're asking me. Hopefully, that's answered your question.
There's also another question from Anthony C. In terms of the office portfolio, how well are they used many offices, although let our empty most days as people work from home?
Yes, thanks, Anthony, hitting exactly sort of the need in terms of Mike can sense for the office market in general. Apologies. We have three office assets in this portfolio. We have Queen Square in Bristol. We have the job center in Gloster, and we have a small office building in Hemel Hempstead in a sort of quasi industrial location that's led to a property management tenant.
We know that the property management tenant occupying that building really well. So that one isn't a concern for us. Equally, the job center in Gloster. That one, as you can imagine, a very busy office presence, physical presence there absolutely required. And that takes us back to Queen Square in Bristol. I think the types of offices that will survive and that will perform really well. And to be honest, in this asset is proving the exact point in very few offices at the moment, you will see rental growth. And those are the ones that are well located on moment in really exciting cities that tenants want to come back into and with strong ESG credentials. And that's exactly what we have in Green Square Bristol.
A city that has seen a lot of development, a location with a lot of surrounding amenity and a very attractive Georgian Square and our EPC on that building is B. So in line with exactly with where the corporate tenants where it wants to be and it's that has led us to see that new high rental to improve there. Yes, very few offices that are seeing rental growth. So I'm pleased that we have a generally small exposure here, but I'm not concerned about any of the assets that we're currently holding there.
Last but not least, Jeremy B has asked a question, are listed buildings exempt from me?
Henry, I'm going to back that over to you.
They're not exempt. However, let's say you had a list of buildings and the only way you could improve the EPC to make it sit with inside means regulations was by putting in, let's say, double glazing window, and that altered the appearance of that building, and therefore, would not be allowed on a planning law, then it would become exempt. So that's like sort of the example that I would use.
There's also where you can apply an exemption if the cost of doing the meat works. If it's basically lose your money over a 7-year period and you can prove that, then there's an exemption as well. So that quite often list of buildings quite often fall within in that. So it's a case-by-case process rather than being a blanket case for all listed buildings. I hope that gives you a flavor for sort of what we have to deal with.
Sorry, I think we said that was going to be the last question, but I'll just pick up on one more. There's a question from Mark B. here. To what extent do we expect aggregate rental growth across our portfolio to match inflation?
I think -- and I'm going to answer that in conjunction with another question that I think has been asked about -- by Matthew P. How long will it be before we start seeing inflation increases being reflected in the dividend?
Sort of taking those two together, really. So of course, we don't have many inflation-linked leases in our portfolio. We have a very small percentage. That's because we think that those types of leases don't tend to offer the best value for the assets in the investment market. So they're unlikely to be the ones that we buy. And so in answer to the question of, will we see inflation linkage coming through in our portfolio, it isn't a feature. The rental growth that we see is more organic and proven through sort of supply and demand dynamics rather than being written into leases.
Do we expect that to match inflation?
I mean on a few of our industrial assets, we have seen quite high levels. I think there was quite an example that I think we've even talked about in an announcement during the course of the last year, an asset where I think we saw about sort of 20% rental growth over a 2-year period. And Henry, your example in presentation earlier of your letting in Rotherham and 50% rental growth from one lease to another. It's those type of sort of examples that we will see of more organic rental rate.
Looking across the portfolio as a whole, though, I mean, we wouldn't expect rental growth from that sort of organic route to match inflation at the levels at the moment because, of course, inflation levels are so high.
Commenting on, will we see that reflected in the dividend?
I think at the moment, we're just focusing on getting the dividend covered. Looking forward to that or sort of looking forward from that point, as a REIT, we, of course, required to pay out 90% of our income as our -- about 90% of our income as a dividend. So if we were in a position to have higher levels of earnings, then of course, our dividends always set by the Board, but we would be required to pay out 90% of that. I hope that answers your question.
Laura, Henry, if I may just jump back in there. Thank you very much indeed for being addressing all of those questions that came in from investors this afternoon. Of course, if there are any further questions that do come through will make these available to immediately after the presentations ended for you to review, to then add any additional responses, of course, where it's appropriate to do so.
Laura, perhaps before redirecting those on the call to provide you 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.
Yes. Thanks, Jake. I think just reiterating the points that we made earlier, we refinanced the portfolio last year and think that, that provides -- just one of the reasons why we think that the portfolio is very robustly positioned today. Really, really pleased with the strategy that we employed during the course of the last year and timing of sales last summer excellently in order to be able to maximize value and then being able to have capital to reinvest back into this really exciting investment market. Yes, very pleased with our positioning.
Laura, that's great. And Henry as well, thank you once again for updating investors this afternoon. 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.