AEW UK REIT PLC

LSE:AEWU

Earnings Call Transcript 2023-Q4

[Paul Brotherhood]

Good afternoon, and welcome to the AEW UK REIT plc Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company will view all questions submitted today and publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll.

I'd now like to hand you over to Laura Elkin, Portfolio Manager. Good afternoon.

[Laura Elkin, executive]

Thank you very much, Paul. And thank you, everyone, for joining us this afternoon. For those of you who haven't joined us before, I'm Laura Elkin, I'm the Portfolio Manager for AEW UK REIT; and I'm joined by Henry Butt, he is my Assistant Portfolio Manager.

So starting up with this slide shown on your screen, this is a reminder of our strategy. It's the same strategy that we've been running now since our IPO back in 2015. At AEW UK REIT, we are a value specialist. In our opinion, we are the only diversified REIT with a truly value focus. We are not sector-constrained, and we think that, that is incredibly important to delivering for our shareholders a value investment strategy. We can seek value as we best find it across the market.

We let to maximize income and capital. And hopefully, that is demonstrated to you by our 2p per share per quarter dividend that we have paid out now for 30 consecutive quarters, so effectively following -- immediately following our IPO. And on the capital side, we -- of all the U.K. diversified REITs, we have the highest NAV total return performance over 6 months, 3 years and 5 years. We are, I believe, doing over 1 year.

And how do we do that? We have a focus on strong geographical locations across the U.K. So whatever we are buying, we make sure that it is well located for that asset type. We've often had a focus on shorter income streams, and this really comes down to our very active asset management. When we buy properties with shorter income streams, we often receive a yield premium on the way into doing that.

We then very actively manage the assets in our portfolio and look to either improve those income streams, keep them delivering at a high level or improve asset values. And that is, in a nutshell, what we do.

We still think the portfolio represents the value proposition today: capital values remaining low at GBP 63 per square foot on average across all sectors in the portfolio and our average passing rent at GBP 5.40.

So this slide shows you here a snapshot of the portfolio as at the 31st of March. Starting with the pie chart on the right-hand side, you will see that our sector ratings and geographical locations look broadly similar to how they have done for a little while now.

In our sector ratings, we continue to have a high exposure to the industrial sector. That is a position that we built up in the early years of running this REIT. We have not been buying industrial for quite some time now because we don't think that it has represented a relative value proposition compared to other sectors.

But we are still happy to continue to hold that sector as a general comment. The main reason for that is that our average passing rent on those industrials is well below GBP 4 per square foot. So incredibly low, and we think that, that is a good place to be at the moment.

In terms of sectors that are exposed to the office market, it's very light there and something that I expect you will see us continue to have that light holding going forward.

In terms of the portfolio, we've got 36 assets, 145 tenants. As at the end of March, that was an independently assessed net initial yield assessed by our independent valuer, Knight Frank, an initial yield at 7.2% and a reversionary yield at 8.8%. The difference in those 2 numbers reflecting the ability -- inherent ability in the portfolio to grow income.

Now of course, a percentage of that is reflected in our vacancy rate, which sits just below 7%, but a lot of that is reflected in true reversion that we expect to see coming through our business plans through growth in income as we continue to actively manage our assets.

Now during the course of Q1, we saw our property valuations remaining mostly flat. That is, of course, in stark contrast to what we saw happen in property -- commercial property valuations during the fourth quarter of last year. So if anyone has seen our NAV announcement that we put out on Wednesday last week, this will be fully -- have been fully covered in that.

But those values looking to have plateaued since Q4, which is what we had expected them to do, with any movement in valuations seen during this first quarter of the year being really as a result of any very specific assets, specific reasons due to asset management. And when Henry talks about some case studies of some assets, he will explain some of those reasons. So any value made movement during this quarter, not due to any wider market trends and more specific to each asset.

So we still think that the portfolio is robustly positioned. As I just touched on, that we have seen values very much plateaued during the quarter. We still have our low cost of debt and significant headroom on our debt covenants. So our LTV today of around 30% of our LTV covenant kicks in at the level of around 60%. So significant headroom there.

Touching on our rent collection. I've seen some recent major newspaper headlines suggesting that rent collection for commercial property was expected to be significantly lower this quarter than we had seen in previous quarters, where we had still continued to see very high levels of collection across the industry. I would specifically say that, that is not what we are seeing in the AEWU portfolio. Our rent collection levels have always been in the region of 98% to 99%, and they continue be at that level for the past quarter and for the current quarter.

Very importantly for ourselves as an active asset manager, we continue to see occupational resilience. So we are incredibly busy with our asset management team in-house, working our way through our asset business plans, mostly on track with where we expect them to be and continuing to work through those in a positive way.

So this slide here really touches on the idea of that value correction really that we saw in Q4 last year. And as a result of that pricing volatility, at the time of Q4 last year, we saw a sharp increase in the amount of mix pricing in the market. And we were able to take advantage of significant opportunity at that time with the purchase of some assets, including Bath and Bromley.

Some really strong locations and really strong assets that we were able to acquire at initial yields of between 8% and 9%. And that is something that we have very much seen continued. So we made a further purchase during this past quarter in Preston. Henry has got a slide on this asset coming up, so I won't talk about it in too much detail now, but a strong asset, a resilient income stream yielding us 9.5%. And when looking at that asset, the capital fundamentals look to be defensive as well in terms of low capital value per square foot.

So the message is, is that we still very much see a lot of opportunity in the current market. We have an attractive pipeline, and we'll comment and show you some of those assets shortly. You will have seen us make a couple of sales during the quarter, and I would expect in a quite selective basis for that recycling of capital out of some of our lower-yielding assets into some attractive pipeline assets in a selective way to be something that we continue to do.

Now turning back to our announcement made last Wednesday, we were very pleased for this quarter to see the improvement in our EPS continue in line with where we had expected it to be. And this chart will show you that our earnings have been improving over the past 12 months, but quite markedly during the last quarter, and we're really happy to see that.

Here, we're pointing out to you various key events, sales, purchases and lettings that have led to that improvement over the past 12 months, but more recently, during the current quarter, with that theme of recycling out some of our lower-yielding assets into high-yielding assets with the sale of Milton Keynes and Hemel Hempstead during the quarter and the purchase of Matalan.

Now this theme, we very much expect this to continue as we look forward to quarters and that is with our business plans, asset management business plans and assets continuing to progress with perhaps further recycling of assets and as the portfolio returns to full investment.

I'll hand you over to Henry now to talk through some of the more specific performance.

[Henry Butt, executive]

Thank you, Laura. Good afternoon, everyone.

So this first slide on performance is pretty self-explanatory really, and it tracks the NAV performance total return since fruition back in 2015. As you can see, our performance is kind of moving away from our peer group in about mid-2019, and that is principally off the back of asset management for one. We have a shorter lease profile until break being around 3 to 5 years. So it's not surprising that performance moved away there where, as an asset management team, we have the ability to negotiate improved terms with our tenants.

And also, that's principally off the back of the success of the industrial sector, which did very well sort of set against the backdrop of COVID with increasing e-commerce, and it was very much sort of the sector in trend at the time. And as you will see, there was a downtick in the previous quarter. Valuations adjusted across the whole of the U.K. and Europe. But we've seen a nice uptick this quarter with 2.42% NAV total return for the quarter.

This next slide just compares our returns to our peer group. The box on the right-hand side is looking at NAV total return, and the larger box in the middle is looking at our share price total return. It's important to stress that the share price total return is as of March this year, whereas the NAV total return is as of December. And you can see that the share price total return over 5 years is 8% and just north of 20% over 3 years, and then a NAV total return 3 years of 16.3% and 12.8% over 5 years.

This next slide looks at the strong dividend yield amongst the highest in the U.K. diversified REIT peer group. And you can see we're paying a dividend yield of 8.2% currently, and that's off a share discount of roughly 7.5%. It's probably worth noting that a lot of these peers are at bigger discounts to us, which naturally inflates the share dividend that they're paying. And for example, the 12.3% that Regional are paying out, they're at a 20% share discount at the moment, which boosts that dividend.

This final performance slide just compares our performance to the MSCI benchmark. As you can see, it's been a fairly tough 12 months set against the backdrop of the autumn budget and rising interest rates. But over 3 years and 5 years, we're favoring well against the benchmark with a 5.46% outperformance of that benchmark over 5 years.

I now hand back to Laura to cover the investment strategy. Thank you.

[Laura Elkin, executive]

Thanks, Henry. And so we thought it would be interesting to just include some slides beat in here on our investment strategy and then turning to our pipeline. The reason being is that clearly, we're going through a period of, particularly at the end of last year and perhaps going forward if we continue to recycle assets, as I've discussed, a period of investment in having a particularly attractive pipeline.

So I thought I'd just sort of summarize here the investment strategy that we have and really how we apply that in practice. So when we talk about value investment, what do we mean and really what does that mean to us? At a very high level, we're looking for mispriced assets, and that's one of the reasons why at the current time, we are seeing a lot of opportunities.

So we tend to find that when there is less transparency on pricing or at times when general investment volumes in commercial property are lower and there is a greater propensity for mispricing, and it was that less -- sort of more opaque, less transparent pricing that we saw at the end of last year, and this year still investment volumes remaining below average, and therefore, we are finding more opportunity and less competition than we would generally see for the types of assets that we like to buy.

We focus on value investment as a downside protection for our shareholders. And how that sort of plays out in practice is when we're looking to buy an asset, we are often very focused on its capital value per square foot, and that's remaining low for the type of assets that we're buying. The reason why that's very important to us is that we will be comparing that capital value per square foot to our -- or to the expected vacant possession values of an asset or to alternative uses.

Now if we think that a capital value per square foot looks high during an asset life cycle, for example, if a new 10-year lease has just been signed and that value is peaking for that reason, the capital value per square foot will be high versus where you would expect to see that asset trade over the long term. And this is one that we will less likely be buying, not to say that we would rule it out, but it makes it less likely that we would buy it because we would always be comparing that purchase price on a capital basis to the long-term fundamentals and where we do expect that asset to trade value-wise over the long term.

That leads us to often having numerous business plans for an asset, and that is again something that we really like. We are conscious of the fact that we hold properties over quite a few years. Sometimes, that can be as short as a year or sometimes many years.

We hold assets over a long time period where, yes, things can change. And being nimble and buying those assets at a low capital value per square foot allows us to have those numerous business plans that we've fully costed to be a bit more nimble if things are changing or if values are moving as, of course, they always do in the market. And that is really what value investment means to us, and we continue to apply that to our pipeline today.

So we've shown you a few pipeline assets here. We said at the top here that we've got a sort of GBP 50 million-plus pipeline. That kind of figure changes broadly every day as we are analyzing assets for purchase. And we, on a daily basis, are receiving new introductions of assets that we are analyzing for purchase. But GBP 50 million is sort of on any given day where that is sort of currently looking in terms of high-quality assets that we're analyzing. There are many more that we are analyzing before that.

Anyway, within that size, the average sort of weighted net initial yield that we're currently seeing is in excess of 8%. So a healthy place to be in terms of delivering this strategy over the medium term.

Just looking at some of these assets here, they are all top 10, top 20 U.K. cities. And in terms of sectors, few industrials here. That has been a factor of our pipeline now for some years and continues to be so. When we saw a lot of value loss across commercial property, the industrial and warehousing sector at the very prime end was obviously sort of almost the most or the first to be called into question when we saw that happening in the sort of mid to the third quarter of last year.

We have seen -- we're starting to see some recovery at that prime end. So we may have a few industrial assets, isolated industrial assets in our pipeline, but I would not expect to be that -- that sector to be a large focus of our pipeline going forward. We are focusing at the moment on sectors where we see greater value. And that tends to be in retail, both across high street and retail warehousing being very, very selective on locations, particularly on the high street, and I cannot stress that enough.

And I think that our purchases at the end of last year in Bath and in Bromley really go to show you that both of those locations and the capital value is being underpinned by alternative use in the way that I have just described more widely in our investment strategy. So yes, very much sort of more of the same as what you have seen us acquiring recently.

And yes, other sectors, offices, I would expect offices to have, again, a fairly light representation in our pipeline going forward. We tend to never say never in terms of completely ruling out the sector, but that is a representation of where we are seeing value at the moment. Across this pipeline, a similar walk to that we hold in the existing portfolio, but some very strong locations arising particularly in the retail sector.

I'll hand back to Henry to talk through some of the specific assets.

[Henry Butt, executive]

Thank you. So this slide covers our most recent purchase, a retail warehousing unit, single-let, Matalan in Preston. I touched in the past on why we like retail warehousing, but I will just recap on that again. The reason we like it is because modern purpose-built units, they're in good locations on the edges of good towns and city centers. They typically have low site covers, which means you can intensely -- more intensively use those sites through redevelopment of drive-through coffee pods or restaurant units.

And they're very good for repurposing. If the retail warehousing angle does fail, i.e., you could turn them into last-mile logistics or trade counter or you could do something a bit more wholesale and scale in that and knock down and build residential, for example, or other alternative uses like residential.

So specifically looking at Matalan in Preston, we bought this property for GBP 6.45 million, GBP 110 a square foot, yielding a net initial yield of 9.5%. There is a fixed uplift in 2027, which will take reversion yield to 10.7%. So a fantastic income profile for AEWU.

As you can see, it's a high-yielding asset. It's let to Matalan for 9.2 years. Some people might question Matalan's covenant strength, but we were very buoyed by the fact that they recently refinanced, which puts them in a stronger financial position. It's also worth mentioning that this is Matalan's first-ever store in the U.K. So that is good news, and it's in their top 10 U.K. traders.

Just touching on that alternative use angle, you'll see from these pages here that this could very easily be turned into last-mile logistics or trade counter. You could easily subdivide it. And as you can see, there's a lot of car parking. So there's a low site coverage. So we could look to bring in some drive-through units or possibly redevelop the site more intensively going forward.

[Laura Elkin, executive]

I think it's important to point out with this asset, too, that we have received investment introductions of other Matalan premises at perhaps a similar yield profile and similar pricing metrics, and we have rejected them. And this one, we very much liked in contrast because we knew how much capital the tenant was turning over from this specific site. So it's the knowledge of how much cash we know that the tenant is generating here. We know that is incredibly important to their business, and it's that which has allowed us to really take a view on what we're seeing here.

[Henry Butt, executive]

So this is our most recent disposal, Clarke Road in Milton Keynes, an industrial asset. And it very much is a good case study of what Laura mentioned earlier on about how we are selling out lower-yielding industrial assets, which performed well for the company.

Just have a quick canter through these details. As you can see, we bought it in October 2015. We bought it off a price of GBP 50 a square foot with a net initial yield of 8.3%. And we sold it in March for GBP 2.75 million, GBP 91 a square foot, at a net initial yield of 6.3%. So a low net initial yield for a portfolio looking to pay out an 8% dividend.

The reason we took the decision to sell this asset, other than it being below AEW's target income return, is because we had completed the asset management initiatives on this property and definitely for the medium to short -- short to medium term. This asset actually was originally bought in a portfolio of 3 assets. And actually, we sold the other 2, which we're in Swindon, another one on the outskirts of Manchester, and over the course of the last couple of years.

This asset, the tenant went to administration, but the tenant here actually had a pretty good business in -- at the specific site. The company which bought the tenant who went to administration agreed to take a new 10-year lease advance. So we essentially got a new lease to a stronger covenant on a longer term, and we managed to increase the rent. So we kind of felt that there wasn't really much up to do in terms of asset management. We felt like we had maximized the value of this asset.

So the next sort of step in the asset management process would be taking our profits off the table, crystallizing those profits and selling the asset. And as you can see, we sold it for 6.6% above valuation and about 8% above the acquisition price. So we're delighted with the performance of this asset over this whole period.

[Laura Elkin, executive]

And perhaps I'm really laboring the point here, but that asset management story that you've just described that we went through on Milton Keynes is sort of the basis of what I was sort of trying to describe with Matalan in Preston. We had a knowledge on buying this asset that the tenant traded very strongly. And it's because of that, that you can go through a worst-case scenario of a tenant going into administration, which is, of course, not what we intend to have happened. But if you know that a tenant is trading very well from that specific location, you can be about as sure as you can be that, that business will, in some form, continue and, as it has done here, with a stronger tenant covenant.

[Henry Butt, executive]

So this slide touches on some asset management that we've been currently doing. We did actually cover this slide in the previous quarter, but I thought I can do this slide again because we are sort of further through the process.

Just to recap, we bought this property back in Q1 2020 -- sorry, Q4 2021 for GBP 16.41 million, GBP 117 a square foot, which is similar to the Matalan we just bought in Preston, yielding at a net initial yield of 7.8%. There's good reversion down the line, and that was previously because we had a number of vacant units.

This quarter, it's been valued at GBP 19.3 million, GBP 138 a square foot. So you can see we've already sort of made some significant process on enhancing the value of this asset. And the property this quarter was up 4% from the December quarter, and that is really all based off asset management rather than a sector uplift, which shows that this is kind of a countercyclical valuation shift.

And the main reason for that, and I touched on this in the previous quarter, but just to remind you, is that we've agreed 2 agreements for leases with Aldi and Iceland, which are subject to works and planning. And as we are further down that process with planning and doing this work, the value is starting to reflect that in the valuation. That's why we've seen the uptick of 4% this quarter.

We've also, over the course of the past 6 months, completed lease deals with existing tenants being Next and Caspian Food Services, trading as Burger King; and we're in the process of looking to bring in a new tenant, MyDentist. And you'll sort of gather by those various deals which I've just sort of gone through, along with the tenants which are listed in the bottom left-hand side of this slide, being TK Maxx, Poundland, Sports Direct and Furnitureland, that, that really is sort of an elaborate mix of occupiers tenants now at this property.

And that reflects the loosening planning system where instead of just having bulky goods or fashion-led retail warehousing parks, we're now bringing in different uses like a dentist, like a discount food store to sit along beside this fashion and bulky good traders. And you'll see in this picture as well that we a TUI, so travel agents, and a Boots.

So some of these retail warehouses are really starting to reflect what the old high streets are. And that is brilliant because it drives footfall, which means tenants are more encouraged to come to these sites, rents increase, and obviously, that all feeds through into investment pricing. So it's really sort of good in terms of the total performance of this property.

And just to finish, you will see on that chart on the top right-hand side that we've managed to sort of move the income by over GBP 1 million until we bought the property, and that's net operating income. And why net operating income is important here is because we did have vacant units.

But obviously, now that those units are let, not only are we receiving rent, but we will also be covering the nonrecoverable void costs, which we would have been receiving as a landlord, which should have been empty rates and service charge cost of vacant units. So we really have seen a boost in this asset's income profile over the course of the asset management that we've been doing since we owned it back at the end of 2001.

Finally, and just touching on Rotherham, this slide actually has appeared briefly on our asset management section, but I'm just drawing a particular focus to it in the ESG section of this presentation. The reason being that we managed to carry out a [ cracking ] asset management deal here. We moved on the rent by just shy of 50%. We secured a new tenant on a 10-year lease, a well-known business in the Yorkshire area associated with the production of aluminum for the construction industry.

And in doing so, we moved the valuation from GBP 4 million, which is GBP 49 a square foot, to GBP 5.75 million, GBP 70 a square foot. Yielding is 6.7-odd percent. But in doing so, we spent money on this asset. And we improved the overall sale of the asset, but the majority of that money was spent on the roof. And in doing so, we significantly enhanced the environmental performance of the asset.

We took it from a mid- to low-C EPC rating to a B44 EPC rating. So we've improved the environmental performance. And that is particularly important at the moment, certainly against the backdrop of MEES, and that has filtered through into this pricing. So a great asset management deal, but one which also has made a building greener.

And just to conclude that point, this is -- we like this because we do run a shorter lease profile at AEWU. And if we have properties, let's say, which are let for 10-plus years, the ability to improve the environmental performance of assets is restricted because there is no negotiating point with the tenant. There is no ability to spend money on that building and look to improve its environmental performance. So having a shorter, well, 3 to 5 years allows us to do that at the point that we are looking to bring in new tenants or renegotiate these terms with existing tenants.

I'll hand back to Laura who is going to complete. Thanks very much.

[Laura Elkin, executive]

Thanks, Henry. Thanks, everyone, for joining us today. Of course, we've got Q&A coming up as well. So I hope that you have enjoyed today's presentation.

And taking on some main points, really, which I see them to be a significant improvement in our earnings cover over the past 12 months, but also particularly in the last quarter, really due to progress with business plans, ongoing recycling of assets from lower-yielding into high-yielding and as the portfolio returns to full investment. So we expect that trend to continue in future quarters.

We really do see a very exciting pipeline of assets for this strategy at the moment. And we're keen to take advantage of some of those where we selectively can through that recycling strategy. We hope that we have demonstrated that to you with some recent high-quality acquisitions, and we hope to make more in coming quarters.

[Paul Brotherhood]

That's fantastic. Laura, Henry, thank you very much indeed for your presentation. [Operator Instructions] But just while the team take a few moments to review those questions submitted today, I'd like to remind you the recording of the presentation, along with a copy of the slides and the published Q&A, can be accessed via your investor dashboard.

Laura, Henry, as you can see, we've received a number of questions throughout today's presentation. Thanks to all the investors for submitting those. If I may, could I ask you just to click on that Q&A tab? And where appropriate to do so, just read out the question and give your response, and I'll pick up from you at the end. Thank you.

[Laura Elkin, executive]

Yes, sure. Thank you, Paul.

[Laura Elkin, executive]

So we've got a question here, which notes that our dividend is sometimes not covered by earnings. Do we intend to continue with this policy?

I think, firstly, I would say that, yes, it's obviously correct that our dividend is not always covered. And that's specifically been the case over the past sort of 18 months really as we have particularly been through some sort of heavy asset management with 2 assets in particular that were sold last summer, being Oxford and Glasgow, which saw some very low levels of income but led to -- well, we're going down some business plans, which led to the maximization of their sales proceeds.

Now this portfolio has been going through a time of flux. We are looking to return that earnings cover to some significant stability. And we have made a lot of progress in doing that, which hopefully we have demonstrated to you with our announcement last Wednesday.

In terms of the policy going forward, of course, our dividend policy is set by our Board. I would just say at high level, though, is that we very much intend over the long term for our dividends to be as highly covered as possible. However, over the long term, when we are running a very active strategy, there will, of course, be time that our dividend is not covered. I'm pointing in particular to times when we are not at full investment.

Now given the level of profits that we have taken from some of our sales, the Board have taken the decision to continue to pay out that 2p because the 2p can be covered, if not by earnings, then by profits made on sales. So it is that which we have used. The Board have taken a decision to use that to pay out the dividend over that time period.

Now that is what we've done to date. And I would say to you that I would expect that to be the case going forward. Short answer, we would very much, over the long term, aim to have our dividend covered as possible.

Another question. Are we seeing any consolidation issues, which is across the sector? Sorry, I'm not [ leaving ] that question slightly. Any consolidation across the sector, referring to, I presume, diversified REITs, which is important to bear in mind our size.

Of course, we have seen that brought into question perhaps fairly recently with a peer of ours, Ediston REIT having publicly announced their strategic review. So yes, it's clear that many commentators to the sector do discuss consolidation. I think I would just say that we consider all strategic options for this REIT as long as they are in the best interest of shareholders, and we will continue to do so, and that includes corporate action.

There is a question here, which states that they note -- an investor noted that a potential carve-up acquisition was included in our pipeline. Could the addition of electric charging points increase income from an asset like that?

Yes is the simple answer to that question. To be honest, I think that asset, in particular, already has some EV charging points. So whether or not it would improve the income from that asset remains to be seen.

Just taking this question more widely, though, the addition of EV charging points is something that we do consider across our assets because there is potential for an income stream. Yes. So we are considering this where it is possible to do so across all of our portfolio.

Another investor has asked a very similar question as the previous question in electric charging points in car parks, but also relating to solar panels on roofs. Again, we are considering that. And of course, there are benefits for additional income streams, but also for the improvement of ESG ratings and EPC ratings on assets for both of those things.

The -- perhaps the key difference between those 2 initiatives is that your initial capital outlay for electric vehicle charging is much lower than for solar panels on roofs. So it is an easier route to go down. But where it is financially viable, we are considering both of those options and, I would say, others where we can both improve the income streams from our asset, but also have a win-win situation of improving the ESG profile of the asset also.

[Henry Butt, executive]

It's probably worth also mentioning, on solar panels, you quite often reach deadlock with the National Grid. In many cases, the panels will produce excess electricity. And if the grid doesn't have the capacity to absorb that electricity, which is not being used by the site, then you have to look at basically bringing in battery storage facilities. Now something like multistory car park where the site cover will be very high, putting in battery storage, which obviously is pretty heavy, might be problematic. So that's always worth bearing in mind when you're looking at PV.

It's also really worth noting that actually, we have all seen all the offshore wind farms in the U.K. In a period when we have a lot of wind, which is principally sort of throughout all our autumn, winter and spring, we have the ability to create so much electricity energy. So actually, the grid in the U.K. is going very green anyway. So there is [ only amongst ] some people that actually solar is perhaps not as necessary as it perhaps once was when we're producing so much green electricity already.

There's a question here from [ David T. ] about the cash incentive on the letting with Iceland. It seems like a lot, he says, for a lease at GBP 250,000 per annum.

It is a lot. But that money is -- has been put on the table, too, obviously, as an incentive to bring the tenant in, and it will be used to reconfigure that unit into a supermarket and contribute to all of the tenant's fit-out. When you have tenants that are taking 10-year leases and they're of the covenant strength of Iceland, there's obviously a lot of value creation in doing those deals. And the tenants are very knowledgeable to that. So they need incentivizing.

And obviously, this was a stripped-out, bog-standard retail warehousing unit. It needs to be fitted out in conjunction with the planning application. And therefore, there was a lot of cash incentive to attract that tenant. You'll see that there's only 3 months rent free. More typically, you would probably agree a 12, an 18, maybe a 24-month rent-free with no cash incentive. But in this instance, it's a very low rent free with a larger cash incentive.

[Laura Elkin, executive]

I think I would just say on that as well that the value upside that we expect to eventually be realized once that lease is fully completed from the signing of that lease to significantly outweigh that incentive. So yes, it absolutely is a very large sum of money to be paying out. It's one that is needed to be paid in order to gain tenants of this quality in this type of property. We're very aware of that. The tenants are very aware of that is market standards. But overall, the deal is still capital and income accretive to shareholders.

There's a question asking, do we consider future refinancing at this point? Or is it too far away?

Yes, it's too far away. We have just passed the 1-year anniversary of our signing of our refinancing, which was completed last May. We have a 5-year fixed interest rate at just under 3%. So we will be addressing that in the future. We have an in-house debt team here at AEW who are working across various strategies and assets that are run in-house here by various teams. So the reason for making that point is that they are effectively at all times in touch with lenders across the market and are aware of movement in the cost of debt at various points in time.

So I think it is really credit to our debt team that we took the decision some 18 months ago to start that refinancing earlier than we would need it to do at that time. We significantly benefited in the rate that we received because of the debt team's proactivity in doing that with us. So yes, we're very happy with where the cost of debt sits today. I can see that someone else has queried the rate. It's 2.96%, and that is fixed for another 4 years.

[Henry Butt, executive]

I see there's a few questions on MEES, which is minimum energy efficiency standards, for those who don't know. You'll see there's a MEES slide attached at the appendix, which kind of explains legislation. The question particularly mentions the 2030 deadline where the EPC ratings of properties need to be a B. But it's important to mention that there is another deadline, which is 2025, where they need to be a C. And so that is what we are currently working to.

With regards to the current situation where landlords cannot hold F and Gs, we only have 6 units across the portfolio which are G and F rating. And we're in the process of sorting those out. We actually -- the majority of those units are very small units, and they're in a vacant -- well, 95% vacant office building at our industrial holding in Wakefield. And we're looking at potential exemptions, but we might also demolish that office and look to redevelop it as smaller industrial units.

And then we have one F rating, which is at an industrial asset in [ Bath ], where we are in negotiations with the tenant to improve the environmental performance of that asset alongside a lease we give. So those 6 units, which currently don't meet the MEES agenda, we are very much working at the moment. And then we will look to improve EPC ratings, which is E and D, towards, say, between now and 2025.

[Laura Elkin, executive]

Thanks. And I'll just pick up a question. Somebody has asked which sites have rent reviews coming up.

Apologies, I'm going to talk in the round as I answer this question. With 155 tenants across our portfolio, I think it's fair to say that we very regularly have rent reviews coming up on a whole range of assets in the portfolio. You'll see that if you read our NAV announcement from last Wednesday that we have, in particular, talked about one of these where we have settled a rent review at a fairly healthy increase because it was an uncapped RPI review.

The reason why we've talked about that pretty publicly is, a, because it's good news; but b, because the rent review is subject to a very simple calculation based upon the level of RPI at that date. And we, unfortunately, will be less likely to talk about other rent reviews. And we have settled a number of rent reviews recently, I'm thinking of one asset in particular, which have led to an increase in the income stream. And one of the reasons why we haven't talked about that publicly in a lot of detail is because we also have another unit in the building which is currently vacant, although it is under offer to a tenant.

Now clearly, if we were to make public announcements about the outcome of those rent reviews, the incoming tenants or the tenants that we are trying to market that unit to would be very aware of where they would expect their rent to be, and it would rather prejudice our negotiations with those incoming tenants.

So I think -- apologies, I'm probably not answering that question as fully as you would like me to be, but we are always very alive to not prejudicing ongoing conversations, which can, of course, be very easy to happen in multi-let buildings. But I hope you very much take the message that we are on top of all of our rent reviews, and they keep us very busy on an ongoing basis.

[Paul Brotherhood]

Guys, I think you've pretty much covered off all the questions you can from investors. Of course, any further questions that do come through, the team will be able to review those. And we'll be able to publish responses where appropriate to do so on the Investor Meet Company platform.

Laura, perhaps just before redirecting investors to provide you with their feedback that is particularly important to you and the team, I would just ask you just for a few final closing comments, if I may.

[Laura Elkin, executive]

Yes. Thank you, Paul, and thanks, everyone, again for joining today. We feel really pleased with where the portfolio sits today. We feel very positive about its future, both in terms of NAV total return, which we clearly proved to be very resilient in the past, and now with our increasing earning levels as well. We hope that you take away a positive message from that also.

[Paul Brotherhood]

That's fantastic, Laura, thank you, and Henry for updating investors today. Can I please ask investors not to close this session? You should be automatically redirected to provide your feedback in order the team can better understand your views and expectations. This will only take a few moments to complete and is greatly valued by the company.

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