AEW UK REIT PLC

LSE:AEWU

Earnings Call Transcript 2024-Q4

[Paul Brotherhood]

Good morning, and welcome to the AEW U.K. REIT plc investor presentation. [Operator Instructions]. Due to a number of attendees today, the company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted 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 Henry Butt, Portfolio Manager. Good morning.

[Henry Butt, executive]

Thank you, Paul, and good morning, everyone. Just to sort of introduce myself again and my colleagues. Most of you will probably be aware that Laura Elkin, the portfolio manager is not with us today. Laura announced, last time we did this presentation back at the beginning of the year, that she was going off on maternity leave. So that is very much the case at the moment and Laura Elkin will be back with us in February next year at the latest.

My name is Henry Butt, Laura's Assistant Portfolio Manager standing in for this year as interim caretaker manager, so to speak. This is George Elliott on my right-hand side who runs the fund operations side of the business, very much under the bonnet of the company, taking care of all the numbers. And this is Richard Dunling on my left-hand side, who sort of spearheads a lot of the asset management for the company.

So if you move to the next slide, please, Paul. Thank you. So this slide is one that I assume quite a lot of you have seen before. It's really a snapshot of what we do, high income and actively managed. That's really what we do in a nutshell. And when we are buying assets, we very much do so with a value investment hat on. And by that, what we're looking to do is try and generate countercyclical performance by acquiring mispriced assets. And when we are buying these assets, what we're essentially trying to do is maximize income, so we are typically buying properties with net initial yields between 7% and 10%, which sit on the investment criteria on the right-hand side of this slide. And in doing so, we are very proud that we have paid out our 2p per quarter dividend now for 34 consecutive quarters since Q1 2016.

But we are also very much aware of the underlying bricks-and-mortar value of the assets that we're buying. And we are very sort of aware of alternative uses, vacant possession values when we are buying these high-yielding assets, which ultimately give us our income return and in doing so, that gives us our capital performance. And asset management is very much sort of a theme of what we do, and we continue to set sort of beating heart of our philosophy. And that naturally feeds through into unlocking capital upside. And you'll see here, we have an annualized 8.9% 5-year total property return to March this year. and that is outstripping the MSCI benchmark, which we report to by 6.8%. So that higher income and the asset management really driving our performance.

And as part of that identified mispriced assets, we're looking for countercyclical performance. What enables us to do that is that we are not sector constrained. We are not following the herd and going after industrial -- the industrial sector, for example, we are looking at assets on a case-by-case basis. We have stock selection a number of times a week where we will look at lots of individual assets with the asset management team and the investment team and we'll be looking at the specific assets and really sort of getting under the skin of the occupational side of things, and looking at how we can add value whilst naturally buying these properties with good day 1 income.

So just touching on the investment criteria on the right-hand side. As I said, we're sector agnostic. We typically buy cores property in the U.K. in strong locations with good occupational fundamentals. And that's sort of our fourth and fifth bullet point there. They are particularly important. There are 2 metrics that we've taken from the existing portfolio. You will see that we have an average book value of GBP 72 a square foot. Now if you compare that to the cost of replacing buildings, let's say, GBP 100 in excess for replacing industrial or warehouse building or, let's say, building an office or high street retail unit in excess of GBP 200 per square foot, those existing book values look very, very competitive, and we are in a very good place, holding assets at that average GBP 72 per square foot book value with, of course, a very healthy running yield on top of that.

You'll also see that the low passing average rent of GBP 6.46. This really illustrates the reversion re-potential that is in the portfolio. And you'll see the [indiscernible] bullet point here on the [ investment ] criteria that we had a reversion yield of 8.8%. That really encapsulates the rental growth that we're going after through asset management in the portfolio. And obviously, this all sort of feeds into the awards that we have recently received. We're very proud to have these awards and to be recognized by these publications. We've won the Citywire award now 4 years on trout. And that award is based on a 3-year NAV total returns, and we were also a winner of the investment week awards at the end of last year.

We move on please, Paul. So this slide, you will have seen the game before, it's very much a bird's-eye view of the company just to go through a few of these metrics, GBP 210 million valuation, 33 assets, it was 34 in the previous quarter, we sold Black Pool this quarter, 133 tenants. And there, you'll see the net initial yield and reversion yield. So a net initial yield just shy of 8% and a reversion of 8.77% again, showing that reversion potential in the portfolio. And I think what's an important metric here as well is the Walt 4.3 to break and 5.6% to expiry. Having shorter lease length enables us to engage with tenants and look to move on rent and add value through lease negotiations, whether that be a revenue or a lease regear, a tenant may be vacating and letting to a new tenant and establishing a new ERP for a property. That really enables us to add value through asset management. So we typically like to buy shorter lease lengths rather than buying longer lease length where all the value is locked in that longer lease length and the covenant that, that tenant has led to, and that sort of feeds back to that theory of looking at the bricks-and-mortar value of our assets.

Moving on to the cash and debt situation. We are 38 allocated at the moment with our cash. We have around GBP 11 million cash, but that's been allocated to lots of exciting asset management initiatives, which are within the existing portfolio. And we like to sort of blow our trumpet about the debt facility that we secured a year ahead of our previous debt facility expiring with RBSI where we have an in-house debt team who have their finger very much on the pulse with regards to debt markets. So we refinanced the year earlier and locked in that 2.96% fixed cost of debt until May 2027.

If we look at the top right-hand box here, our current NAV as of the 31st of March was $162.75 million, breaking back to 102.7p per share. And the share price as at 31st of March was 86p, which was trading at a 16% discount. It's probably worth mentioning that our average discount over the past year has been about 7%, which is considerably superior to the next [indiscernible] our peers and the rest of the peer group who are trading roughly at about average discount over the same 1-year period of about 20%. It's obviously been a pretty sort of choppy period for the listed property sector recently with sort of continued deliberation over when the interest rates are going to come. And also, there's been a lot of sort of M&A noise in the background. We would hope that as we get closer to some green shoots with regards to interest rates that we will -- that will naturally feed into some share price performance.

Looking at our property performance, you'll see that we have a 3- and 5-year property total return of 8.9% and a 5-year annualized NAV total return, which is March is as of December because we're still waiting for the data to come out at 8.6%. And just to finish on this slide, looking at the 2 pie charts on the right-hand side, I want to draw your attention to the one at the bottom. This is our sector waiting. I think it's very important to emphasize that our sector weightings are organic. We aren't deliberately trying to increase our exposure to a certain sector or reduce our exposure to another. Over recent years, we have reduced our industrial exposure from about 50%, 60% down to 37%. That's really a consequence of us selling out of lower-yielding assets in sort of low 6s and buying high-yielding assets, retail mixed-use assets in goods and central locations in good cities.

Our retail waging has naturally increased to 37%. But I've split that sector into retail warehousing in [ Highstreet], I really thought that those 2 sectors have diverse in recent years. Retail warehousing has had that benefited from planning changes to relaxing of the used class system and it sort of worried the way that the industrial sector wrote sort of in the COVID and post-COVID area.

I'm going to hand over to George, he's just going to touch on some of the Q1 highlights that we announced on Tuesday morning this week.

[George Elliot, executive]

Thank you, Henry, and good morning, everyone. And can we pace to Slide 5, please. So you will all see this is an extra [indiscernible] from our recent NAV announcement being the highlight section and there are a few key themes here I wish to elaborate on. The first of which is the company had a very minor quarter-on-quarter reduction in its NAV per share but we were still able to deliver a positive net return, and that was due to the payment of our dividend for the 34th consecutive quarter, really emphasizing kind of the total return strategy of the portfolio.

The next bullet point, the third 1 down, I wish to kind of elaborate on it. It's very much what I see as the source of the river in this portfolio, it being our like-for-like valuation increase in our portfolio. Now I'm aware the quantum isn't significant, but what I do deem to be significant is that for the wider quarterly MSCI index, its equivalent result was minus 0.6% for the quarter. And it's that contrast of positive and negative that I think really resounds high. What really that is a representation of is the company's ability to deliver positive property return as a result of its active asset management strategy in what is otherwise a very difficult, wider market.

Earnings per share, I'm very buoyed by the fact that we continue on our journey to rebuilding our earnings being standing at 1.88% for this quarter, having increased from 1.83% in the previous quarter, and we will come on to that more shortly. The last bullet point here, I wish to elaborate on slightly is the bottom bullet point. And to reiterate, asset management really is the beating heart of this strategy. We continue to have a raft of initiatives ongoing that I would hope to further build that earnings performance.

If we could go on to Slide 7, please. Thank you. Now, I really like this slide because it embodies the company's journey over the last 18 months to draw your attention to the far left in Q3 2022. Some of you may recall, we had undertaken a number of disposals at that time, and we're sitting on around GBP 40 million worth of cash. And since that time, we've been undertaking a strategy of disposing of lower-yielding assets and recycling those proceeds into high-yielding ones in order to rebuild our earnings stream. My main comments on this would be the journey isn't over, and we are still undertaking, as I say, a series of asset management initiatives, where my expectation would be that those earnings would grow further.

[Henry Butt, executive]

Yes. I'm just sort of touching on this, you'll see that there's sort of an array of disposals and purchases over this 18-month time period. And just to touch on a few of these. You'll see sort of in the bottom left-hand corner of this graph that we bought Northgate House Barton Bromley, which we touched on historically. But we bought those off net initial yields of 8.5% and 8.7%, respectively. Going up the red line, we bought [indiscernible] in Preston being one of [indiscernible] top 10 traders, first [indiscernible] in the U.K. of a 9.5% [indiscernible] yield. So that's sort of the purchases that we've sort of conducted recently.

And then in terms of sales, we sold out to Milton Keynes, an industrial asset having done some asset management for $6.3 million. We sold a vacant industrial building to a special [indiscernible] under occupying [indiscernible] side, which obviously was yielding 0 at the time we sold it. And then we sold Lockwood Court and [indiscernible] industrial assets in Yorkshire for a blended net [ build ] at 6.2%. And then finally bought York, a multistory car park and lent to the NCP with an uncapped [ inflation ] increase for 9.3% and another asset in [indiscernible] of 8%.

So you can really see we are selling we are selling industrial assets in the low to mid-6s, and we're recycling that into assets, which are yielding in excess of 8%. And it's important to emphasize these assets are in no way inferior. They are obviously not in the same sectors. It's up to about [indiscernible] point to note that larger institutions have been reducing their exposure to retail and offices just because they're being forced to we fish in a smaller lot size [ partner ], and we're really seeing some really good opportunities and some really strong mispricing these assets. They are very good quality. There's asset management. And as you can see, the yielding is exactly what we want on day 1.

[George Elliot, executive]

Thank you, Henry. Moving on to Slide 8, please. Now relating earnings to what is very much a hot topic in the industry dividend cover. The first point I really wish to highlight is, yes, the company has been uncovered in recent years. But since incorporation, [indiscernible] has stood at over 90%. And what this graph, I think, really emphasizes is the notion of our total return strategy. Yes, our earnings have been uncovered, but they have been supplemented by a whole series of profitable disposals since incorporation of the company, the cash from which we have consistently utilized to top up that dividend. A few examples of these, in fact, all of them can be seen chronologically on Slide 9.

[Henry Butt, executive]

So if we move -- yes, so if we move on to Slide 9. As George said, these are sort of our 18 sales, which we have executed throughout the history of the company. And a lot of you will be aware of some of these sales. But just sort of going across this chart on the left and right, and just as a reminder, we sold Corby and Solihull a while ago now, but just as a reminder, we bought Corby, which was a 30-acre car park storage facility. We bought up 12.4% of net initial yield of 10%. We held it for a couple of years, and we ended up selling it to 18.8%. So you can really see a great result there. We actually ended up selling it to an owner occupier, a special purpose British Car Auctions who are on the adjacent side of the road, and they could get this property back their own occupation and because they knew that because the lease was outside the act, and they obviously were prepared to pay such steam price for it.

Solihull, we -- this was an office building left to the government. We bought it off a net initial yield of 11% to GBP 5.4 billion. We re-give the lease [indiscernible] of state, a longer lease with inflation-linked increases. There was a lot of money chasing, there's longer RPI increases at the time. We ended up selling it at 10.5%. So almost doubling our money. The Oxford example is obviously exceptional where we bought that asset for 8.2%, sold -- of a net initial yield of $9.4 million and sold it for GBP 29 million. That was really much an alternative use play where we decided to take it away from a more box standard office use and convert it into a sort of lab, life sciences, health care use, having crystallized that use through a lease to a cancer care tenant. And then more recently, as I said, we'd be selling out of lower-yielding industrial assets where we have carried out the asset management and recycling that money into higher-yielding assets.

I think it's probably worth to say, yes, there are some red bar charts here for example, price busters building in Portsmouth more recently. It's probably worth making that they are much smaller ticket sizes. So Portsmouth was $3.5 million and the price [ buster ] buildings this quarter of 2.2. So in comparison to those larger sales, they're obviously much more to ticket sizes. And we have decided to sell these assets to weed out a few assets in the portfolio where we really feel like there's that much asset management that we can get excited about going forward. Portman the classic example, we had fully let that building. There wasn't really any more asset management upside. So we decided to take our chips off the table on that one. And Blackfin, we didn't really have the appetite to expand lots chasing new tenants with the use to sports repo vacating in April.

[George Elliot, executive]

Thank you, Henry. Moving on Slide 10, please. Thank you. To reiterate, the company's 5-year annualized now total return has stood at 8.6% as of December. And why I particularly like this graph is -- not only does it show that the company's outperformance has been consistent for almost 5 years now. But actually the degree of that outperformance is growing. And that to me really highlights 1 of the key benefits of this company and its strategy. It's defensive nature and its ability to drive further outperformance even in difficult economic times. And if we move to Slide 11, please. This looks at a variety of performance metrics in a tabular method against what we deem to be our immediate peer group. Now of course, in the far right columns, you can see the NAV total return that I've just alluded to, where we have delivered the highest total return over 1, 3 and 5 years and the second highest in the last 6 months.

As Henry alluded to you earlier, M&A activity in the market has caused some unusual short-term share price performance in some of our peers, most notably in relation to UK CM. And I'm sure some of you will recognize some of the other names on this table being those involved. However, when I look at our share price performance, I think with a longer-term hat on. I also think that when REITs were first implemented in this country, what were they there for and it was to be a longer-term hold. And that's why I am particularly encouraged with our -- we have delivered the highest 5-year share price total return and amongst the highest for 3 years.

Now of course, one of the benefits of a widening discount and as Henry said earlier, our 1-year average discount has been around 7%. The average for the remainder of these peers has been 23%. And our next nearest competitor is around 16% or 17% discount. So we are most certainly anomalous to what has been the wider trend impacting these other companies.

I particularly wish to focus on dividend yield. If we go page to Slide 12, please. This graphically demonstrates how our dividend yield compared to our peers. Now putting regional to one side, one can see that our current dividend yield is at least 1% higher than our nearest competitor. And I feel that is a very encouraging statistic and makes the portfolio particularly attractive at the moment.

And lastly, if we can move to Slide 13, please. So yes, this really is the source of the company's revenue, property total return. Now you can see in this graph, over all stated time periods we have significantly outperformed the MSCI benchmark, even more encouragingly to draw your attention to the 5-year annualized bars. You may recall that as at the end of last quarter, our outperformance stood at about 6.65%. This has now actually widened to 6.82%, testament to both the consistency and defensive nature of the company's strategy.

And if we can move to Slide 14. What this shows is the company's sector performance versus the benchmark over the last 12 months. As you can see, the company has outperformed the benchmark in all state sectors. Most interestingly, industrials are the only sector to have delivered a positive capital return in the last 12 months. And what that really highlights to me is that the source of our outperformance is very much in relation to income return. And that, of course, is a direct reflection of our active asset management approach and the value that, that has delivered.

[Richard Dunling, executive]

Thanks, George. Just moving to the next slide. This is just a bit more of a deep dive on the 1 investment transaction that happens last quarter, I think Henry has alluded to it earlier in the presentation, [indiscernible] building in [ Blackhall ] sold last quarter for GBP 2.2 million. There's 2 kind of key elements as to the rationale behind this disposal. And that's linking to the Sports Direct, break notice, which was served and then the CapEx which would have needed to be invested into the asset. And as Henry alluded to, we understood that the occupational market here and didn't want to take risk in terms of investing that looks fairly significant CapEx to get into a condition that would be suitable for a further [indiscernible]. So the running yield on sale with the Sports Direct vacating was at 4%, what you passed in the vacant business rates, it got down to 0.

Just moving to the next slide. It's just a wider piece on the U.K. property transaction volumes over the last few years. I don't think what you'll see is that 2023, the year-to-date 2024 is at the lowest it has been in recent years, it's actually the lowest it has been since JFC. And even lower than 2016, which was the year of Brexit and 2020 and 2021, which hit COVID. So I think what this provides is we're at such a low point in time where -- or a point in time where there's such low transaction volumes, there's a huge amount of mispricing, a huge amount of price discovery still ongoing in the market, and that kind of fits back into the cortical nature of our investment strategy.

[Henry Butt, executive]

Yes. We hope that this really shows sort of an opportunity for us. I was [indiscernible] for the other day saying that the quarter that we've just seen is kind of the first quarter where actually net initial yields in general, I think, sort of 65% [indiscernible] initial yields are actually hardening, which kind of shows that the bottom of the market is behind us. But as Richard said, there is less pricing transparency due to the lack of volumes and transactions. And with that market improving, we hope that there will be some opportunities in the pipeline for us when there comes a point that we will be looking to acquire some new assets, having recycled a few assets out of the portfolio.

If we move on to the next slide, please, Paul. So we decided to include this slide because, obviously, industrial still make up a significant proportion of our sector weighting 37%. And just touching on some of these metrics, which I touched on earlier on for the entire portfolio, but specifically to the industrial. We have a vault to expiry of 5.67 years, so that's not assuming breaks and that says that we really do have kind of a medium-term opportunity to sort of add value on our industrial assets. And if you look at that net initial yield of 7.68% in comparison to a reversion of 8.74% that really illustrates the potential for rental growth within the industrial sector within the portfolio.

And you'll see the last bullet point here, there's been a very strong rental growth story in the U.K. for the past sort of 20 years. More recently so and in the last 5 years, 10.5% and 12 months in 2022 and 7.6% in 2023. And we have really benefited from that. I think it's important to emphasize that our industrial holdings, if our tenants were to vacate, they would be probably paying rents, which are triple what they're currently paying in new shiny sort of big box space. They wouldn't necessarily have space that they require for carrying out their function. For example, they might not have the crane is, though they have some of our units. And there really has still been some very sort of strong occupational and rental performance in industrial assets such as ours. And it's a healthy occupier market.

And just touching on these 3 assets here, these are 3 existing assets within the built portfolio. And starting on the left-hand side, Bradford. We bought this in December 2017 of a rent of GBP 350 per square foot. We subsequently increased the rent to 450 a square foot in 2021 and there's very much [indiscernible] light in kicking negotiation with the tenant at the moment, who you'll see have been rather wedded to the site having been there for 35 years.

At [indiscernible], you would have read that CJ Service is one of our tenants went into administration and its vacated the unit. Now that's not necessarily a bad thing because actually, it's not necessarily bad to have a bit of churn in some of these very high-performing, well-located industrial states. And we see that actually as an opportunity. We can spend a bit of money on the unit. We can improve its environmental performance, and we can obviously enhance its rental value. And we're being advised by agents that we could get rents of around GBP 7.50 even as high as GBP 8 a square foot on this unit, when this previous tenant was paying 550. So that's encouraging and making the best out of the bad situation.

And then finally St Helens. This is a very well-located unit. The tenant is -- provides machinery for the agricultural industry. This is the U.K. HQ, the parent company is sort of a joint venture between a Scandinavian and a Japanese business as we've got a very strong ultimate parent company. We bought this on a parting rent of GBP 3.22. We subsequently in October '22 -- 2020, I mean, moved that rent to GBP 4.16 and we've got a lease of that on the horizon. If the tenant were to go, I think we'd have a very encouraging reletting story here. But my gut is the tenant will probably stay. And that is obviously good news. We'll hopefully push on the rent as we have done. So throughout the whole period of this asset already.

And just one final point, sorry, which I forgot to mention. If you look at the prenatal bullet point, which sit above these 3 properties, that's the average book value of our industrial holdings. GBP 41 a square foot. Now if you compare that to what it costs you build an industrial unit of these sites around GBP 100 a square foot. So we are sitting on an industrial portfolio of 37% of the portfolio at an average value of GBP 41 square foot, more than half were cost to build these units and those units are yielding 7.68% with further rental growth with that reversion of 8.7%. And that is a very good position to be in.

The next slide just covers this rental growth story. As I said, you can see that it has become a steeper curve in the last 4 years. Obviously, the industrial sector [indiscernible] very well in the sort of COVID area and has done so since off the back of e-retailing and more recently, actually, with interest rates increasing, it's meant that developers and funders have been less bullish on new sites, which has obviously fared well for existing stock and hence why we're seeing occupational growth because the supply of new space has decreased from where it was a couple of years ago.

[Richard Dunling, executive]

Moving on to next side. Thanks, Henry. So this kind of carries on the theme about low book values. We've got 4 examples here where the book values are anywhere between GBP 80 and GBP 235 square foots. But you'll see that not only that, there's also the cover that we get from the net initial yield. So we purchased these assets at 8% or softer percent, which obviously backs up the cover that we need to pay out the dividends. But just moving back to the book values we've got book value sale broadly GBP 100 per square foot, but almost a plan the underwrite of residential values of anywhere between GBP 550 and GBP 650 per square foots further backing up what Henry has already said earlier in the presentation.

Just moving on to the next slide on the commentary, Central VI. I think this is just one asset which has been admittedly talked about quite a lot in fairly -- in recent years. It's an asset we bought back in Q4 2021 for GBP 16.41 million. At the time it was 24% vacant. And just post quarter end, this year, we've reduced that down to 0. There has been 3 key lettings in the last quarter, namely the Food warehouse [indiscernible] and Salvation which have contributed to over GBP 535,000 increase in rental income per annum. There's been a number of [indiscernible] imanagement transactions happened since purchase, kind of namely regears, lease rules. But the biggest key letter, I think, was Audi in July of last year, which has really enabled this to kind of kick on and enable the letting -- further lettings in the food warehouse and [indiscernible] further mentioned. There's also some key ESG initiatives that have been ongoing. EPCs in the presentation says it's currently on 1C as now -- as of this week, being moved up to a B. So all EPCs, which I'll come on to later or meet 2030 compliance. And there's 2 further initiatives, including solar PV and EV charging, which is currently being looked out.

Just moving on to the next slide in terms of EPCs. It's obviously fairly hot topic. The purpose of this slide is to kind of just show where the portfolio sits at the moment. And just to highlight 2 key dates of 2027 and 2030. By 2027, there needs to be EPCs or A, B and C rating. You'll see that there are these and some genes. However, linking back to a comment that Henry mentioned earlier in terms of the walk to break and walk to expiry of 4.3% and 5.6%, respectively. Not only does this enable, as Henry said, us to negotiate rental growth that at least expires or tenant break options, et cetera. It also enables us to engage at that point in time with tenants to almost put the emphasis on them to improve the condition of the unit to increase that EPC rating as opposed to having the landlord burden of those costs where we've got 20 at least and we have to invest our own CapEx.

I think there's a further slide, which....

[Henry Butt, executive]

I don't think it's [indiscernible]. We have historically given the class example of what we did at [indiscernible] where we had a vacant industrial unit. And we led to a new tenant, strong tenant on a 10-year lease outside the app. We moved on the rent by 50%. and we spent roughly GBP 1 million on the roof, improved the insulation. It was at the tenant's request, obviously enhance the value of the asset. But we saw some really strong environmental performance from that initiative and that letting where we took the EPC from a low C to a high B. So it really was kind of exactly what we want to be doing through asset management growing the rent, extending the lease term, improving the environment's performance and that or actually feeded into the value of the asset. And that's an asset that we still hold in the portfolio.

So I think we can move on to the conclusion. So obviously, sort of going over a lot of the themes that I've touched on and we've touched on throughout the presentation. And we're buoyed by consistent earnings, which have increased this quarter, as George alluded to earlier on. We have some really exciting asset management initiatives within the existing portfolio, and we cover a few of this in the NAV announcement that we made on Tuesday morning. And there are a number of asset management initiatives, as I say, which very much as at about the forefront of what exactly what we're trying to do in terms of driving these property returns. We have a healthy cash holding at the moment which is enabling us to have our eyes tailor asset management opportunities. It's probably worth noting that, that cash is held in the interest-bearing bank account with an interest rate of 5.1%. So that is a nice ad-on to that cash holding.

There is significant reversionary potential in the portfolio of 8.8%, and that is asset management that we are essentially going after. We continue to sleep easy at night knowing that we have a low average book value of GBP 72 a square foot, which enables us to access plan B, plan C. We have optionality in the portfolio to go after different asset management initiatives in the event that Plan A doesn't sort of unfold. As I said, we always have our eye on those alternative use values, and that has fed into our performance over recent years.

We have a strong track record of crystallizing profits on sales, a 38% average sale to purchase price premium. We're proud of that, and we would expect that to continue going forward. We have a low cost of debt of 2.96% until May 2027. And all of these factors are really sort of feeding into the performance, which we are proud of, and we are delighted that we are recognized for that performance from the publications that I mentioned earlier in the presentation. Thank you.

[Paul Brotherhood]

Fantastic. Thank you very much, Henry. Thank you to the team. Ladies and gentlemen, do you please continue to submit your questions just using the Q&A tab situated on the right-hand corner of your screen. Just want 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 invested dashboard.

Henry, as you can see, we've received a number of questions both presubmitting throughout today's presentation, and thank you to all the investors who submitted those. If I may just ask you to click on that Q&A tab and where appropriate to do so, if you could read out the question and give your response or director to remember the team, I'll pick up from you at the end.

[Henry Butt, executive]

Yes. Thanks, Paul. So first question, how of your properties are being converted from commercial to residential? Do you encounter much resistance from the local authority planning departments when you apply?

So currently, we are not actually converting any of our assets from commercial use to residential. And obviously, we've had a slide which specifically touches on this. it's probably important to note that we are not a developer. We are not looking to expand lots of sort of cash on those conversions. And actually, when we are like typically going after an alternative use angle, it will typically be through planning game. So to use the example of Oxford again, we did 1 letting there where we crystallize that change of use through that letting. And rather than then go and respectively to lots of very hefty life sciences and lab refurbishments, we decided to basically put that in the market.

Now in terms of these assets which we covered earlier on with the residential alternative usage. All of those assets are well let strong running yields. I think in the event that tenants were to vacate, I think what we would do is we would naturally go after the planning, try and crystallize that we've done it on a number of our assets, for example, the gross and while we've got committed development consent to convert that into residential. So it's very much a plan B, and then we would probably sell that on to someone who would execute that rather than do it ourselves. As I say, we don't really want to [indiscernible] develop. Our focus is on commercial asset management, really, but we also have that alternative angle as a backup.

We have another question here, which is rather levy, but it touches on rent-free incentives and capital contributions and it's saying -- it's asking about why they are so significant in retail warehousing.

Cap cones incentives are more significant retail [indiscernible]. Like if we use commentary for an example, we were doing lettings on much longer terms and the tenants that are coming into that asset got quite high fit-out costs in comparison when you sort of letting our office space or industrial space, the fit-up costs aren't as high. So for example, [ Audi ] and Iceland are fitting up supermarket. And therefore, the cap cones and the incentives have to be bigger to encourage those tenants to come. And actually, they take longer leases and there's value with those leases because they need to hand back that cost that fits out over a longer period, hence why they take longer leases. So that's ultimately why we have larger cap cons in those sectors.

Yes. Richard, you wanted to add.

[Richard Dunling, executive]

Just to paint a bit more color on the Audi and the food warehouse deals. So they've obviously been reported previously in previous [indiscernible]. On ,the amount of money that was spent was split into 2. So a traditional landlord work package, which is CapEx with no CapCon just a rent-free period of 12 months to Audi. On food warehouse, there is -- it was a slightly different approach. There wasn't any CapEx spent by the landlord, and there was a relatively small rent-free provided of only 3 months to tenant. What you would have seen is there appears to be quite a large cap comp given to the tenant.

I guess the detail behind that cap comp was kind of split into 2 elements as well. So we gave the unit -- we gave the tenant 2 separate units where they carried out what would otherwise have been known as landlord works. So when we could appraise that deal, you can take the cap comp out into 2 separate elements. Part landlord work, which is tenant actually carried out on out of half as well as then a contribution to their fits out. The unit wasn't ready and kind of ready for them to take a media occupation start fitting out, they have to do a lot on enabling works to get to that position.

[Henry Butt, executive]

Thanks, Richard. So there's 2 questions here, one from Oliver C and one from Richard P, both on our cash holding. And asset management and potential purposes. So to summarize, you have seen that in the NAV announcement, we said that we had a number of asset management initiatives ongoing. We have former Wilco's in Bristol, where we're working on asset manager -- an asset management plan for that at the moment and hoping to bring in 2 new tenants there. Obviously, those lettings involve some CapEx and some cap costs. We also have a letting that we're working on at our retail warehousing park in Dewsbury, where [indiscernible] vacated, and we are working on an exciting asset management initiative there.

Sports Direct also vacated our retail warehousing part in [indiscernible]. So that's another asset management initiative. We have some refurbishment projects ongoing at our office asset in Bristol, I mentioned the CJ services example earlier on and where we are looking to refurbish that industrial space and the cost of between about, I think it's about GBP 750,000. But we're very happy to do that because the occupational market is strong. We really have to go after some strong rental growth in doing so. So that really touches on an array of asset management initiatives. I think it's also probably worth noting that everything that Richard has been doing at Coventry has had a capital drain we've taken that asset from 25% vacancy to fully let. There are landlord works that are required to do that and capital incentives.

In terms of acquisitions going forward, we alluded to this earlier on with the transaction volume slide. We do have one sale that we're working at the moment and subject to that sort of going through, we will be looking to recycle capital into new assets over the sort of next 3 to 6 months. So there will be I would imagine some sales going forward. So it's not all going into asset management.

Just having to let us know some other question. So there's 2 questions, one from Perion R and another from who was it? Ben K, about sort of our size and what's obviously being read about a lot in the press about M&A activity. Look, we obviously always will have our sort of our eyes sort of appealed a potential opportunity. I think it's very important to sort of emphasize that we would not do anything that wasn't full benefit of the company in its entirety and its shareholders and not forgetting that we have a Board that are sort of acting on behalf of the shareholders and the company. Fortunately for us, our performance has been strong. So we would like to think that we are on the front foot if we were to explore these opportunities.

Laura and I have -- would love to see the company grow, but we're very, very sort of conscious that we need to continue to do what we do best and deliver the returns for our shareholders. So we make sure that we are not distracted by all the noise in the M&A sector whilst at the same time, obviously, looking at opportunities.

There's a slide from Mark [indiscernible], are these slides available to download. I would like to copy many things. I know that the presentation is on the Investor Meet Company website. I'm not sure Paul whether or not the slides are available to download.

[Paul Brotherhood]

They are indeed Henry. [indiscernible] click on that download.

[Henry Butt, executive]

So there's a question from Chris B about missing the first 10 minutes and what is the dividend cover. So yes, I mean, George touched on this. We have grown to cover this quarter from $1.88 from 1.83% in the previous quarter. And we've mentioned a lot of exciting asset management opportunities within the existing portfolio. We've also touched on even selling out of lower-yielding assets and recycling that into high-yielding assets. I appreciate that, that is something that we're not currently working on. It's something that we have been doing over the past 18 months. But those initiatives are recycling into high-yielding and lower-yielding and continued asset management, and that is what we remain focused on every day as a means of driving those earnings backed for cover.

But I think it's also very important, as George said earlier, on a side, our total return strategy. Quite often, if we are going after a strategy to maximize the value of that asset, it actually might impact earnings. For example, at Oxford, we didn't -- we wanted to actually have a larger vacancy because that also means it is going to drive a stronger price in terms of an ultimate sale. Again, going back further, we sold that asset in Glasgow to a stream developer. If that office asset hasn't been fully let, which will obviously benefit to the earnings it would have not enabled the redevelopment of the asset and obviously, the sale to that developer. So we are always thinking about total property return. Sometimes that is at the [indiscernible] of earnings, but obviously, earnings very much the quarter of what we're trying to do.

So we have a question here from KT on void as a percentage of the portfolio. This metric is covered on Slide 4. So the current vacancy rate is 6.3%, KT. It's probably worth that feels about normal. We always have actually a little bit of churn in the portfolio. I mentioned CJ [indiscernible] earlier on. we don't necessarily mind having vacancy because it gives us the ability to improve our talent mix and grow the rent. I also mentioned the 3 asset management initiatives that we're working on, which we're all encouraged about. It's probably worth noting that we do have a few tenants and CBN administration of those units are considered as vacant because an administrator is in charge of the lease and paying the rates, for example, and in the event of our night club in Cardiff, we allude to this in the NAV announcement. The tenant is -- that the administrator is actually paying the full rent on behalf of the tenant and administration whilst we work on negotiations to sign that lease. And if you factor in those administrations, our vacancy rate is actually at 10%. But as I say, the CJ Services was in as well, which we see as an opportunity.

We continue to have a few more questions on tenant incentives. And so I hope that I've answered those already. We had another one on the void rate from guy M. So I hope I've answered that question. So we've had a question here from Ashley R. You mentioned the interaction between investment and PM teams. Can you expand on this, please, and explain how you benefit from being part of the wider AEW group. [indiscernible] can you -- is there an opportunity to pipeline compare now that the last few years.

So Yes, I mean -- at AEW, what we typically have. We have a portfolio management team, that is Laura and myself, obviously, with Laura being away, it's kind of [indiscernible] at the moment. We have in-house asset management and investment teams and how those teams specifically operate is, the investment team will be very much kind of at the call phase of the investment market. They will be receiving opportunities to buy assets that are on the market. We will discuss those with the investment team weekly, if not twice weekly. So we always have very much -- sort of our eyes peeled for opportunities.

And then in terms asset management team, we have 4 asset managers within the portfolio, Richards is 1 and my actually background is asset management. So I am specifically looking after. I have a number of masters in portfolio as well. And we have 2 other [indiscernible], who actually heads up the asset management team at AEW. We sit down for and we go through the entire portfolio, we bounce ideas off each other. We discuss our assets. And I think it's very important to us. As I said, it is very much a beating behind what we do. So it's not a surprise that we are meeting who need to discuss the individual assets sharing ideas and some more feeding into that to obviously drive that performance.

Gerald T, we've got a question here saying what are the main opportunities for improvement in [indiscernible] the next year or 2.

Well Gerald, I'd like to say that we hope to sort of continue on the same theme that we're at. I think it's probably fair to say that the property market, we would expect sort of pick up going forward, appreciating that we are about sort of fall in [ summer ] and then we've got a book end of the general election. But with interest rates cooling, hopefully, we should see more transactional activity, that should hopefully feed into valuation performance. It's probably worth noting that we feel very sort of encouraged by the occupier market. And I've said time and time again on this presentation that there's a lot going on. And that's not really sort of mirroring the lack of activity that we're seeing in the investment side of things.

So that's probably more than the other reason -- one of the other reasons why we're very much focusing on asset management in the moment because there isn't that much going on the investment side of things. So very much just continuing on the course that we're at, trying to build those earnings, facing on asset management, and we hope that when conditions are right that we will look to sort of sell out of some assets and buy some new exciting opportunities.

Just 1 final question here on the night club. So we touched on this in the NAV announcement. Yes, so the tenant had gone into administration. And it's one of [indiscernible] best nightclubs. More recently, they had a rebound and it is trading better, but I think it's fair to say that the night clubbing sector has experienced some difficulties with the cost of living crisis, a slight change in trend as to sort of what young people want to do, not to mention sort of inflation. As I say, the administrators are currently paying us the rent that the tenant was historically paying is whilst we're negotiating with an assignment from the administrator to a new talent.

So on the ground, it doesn't really appear that anything will be changing and we hope that sort of going forward, the nightclub will pick up. And as the cost of living crisis calls, it will be a positive story. I think it's also probably worth mentioning that we thought that nightclub very much that our value investment hat on and with a lower book value, higher yielding. So there would be alternative new angles that we could explore in tandem with obviously keeping the income coming in and fixing on that as to the plan A.

Well, I think that's pretty much everything.

[Paul Brotherhood]

Fantastic. Henry. Thank you very much indeed, and thank you for answering all those questions. Of course, the company can review our questions submitted and publish responses where appropriate to do so in the Investor Meet Company platform. Before redirecting investors to provide you with their feedback, which is particularly important to you and the team, Henry, can I just ask you for a few closing comments, please.

[Henry Butt, executive]

Yes. Well, I just want to thank everyone for joining and asking the questions. I hope that we provided a sort of a thorough update and you feel that you have a good understanding of what's going on in the company. As I said, we continue to very much work on the 33 properties within the portfolio. And we continue to stay on the same theme of driving our performance and being recognized for that. So thank you again for joining, and we will hope to see a lot of you next quarter.

[Paul Brotherhood]

Fantastic. Thank you all for updating investors today. Could I please ask investors not to close the session 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. I'm sure it's great valued by the company.

On behalf of the team at AEW U.K. REITs plc, we would like to thank you for attending today's presentation. That concludes today's session, and good morning to you all.

[Henry Butt, executive]

Thank you very much.