AEW UK REIT 24 July 2020

AEW UK REIT (LON:AEWU) offers one of the highest yields in the AIC UK Commercial Property sector (10.8%), having so far managed to maintain its dividend in 2020 despite the impact of the coronavirus. The 2p-a-quarter payout is achieved by exploiting inefficiencies in smaller assets, regional locations and shorter lease lengths which are often overlooked by peers. This allows the managers to buy assets at high yields and generate capital growth by taking advantage of optionality, such as asset management or change of use.

AEWU is managed by Alex Short and Laura Elkin at AEW UK, the UK arm of one of the largest real-estate managers in the world. The AEW UK team have over 20 years’ experience investing in property for institutional clients in private funds, and launched AEWU in 2015 as a diversified commercial-property strategy. They are backed by a large team of investment professionals, asset-management specialists and support staff.

This year has seen huge disruption to the commercial-property sector from the lockdown. However, as discussed in the Dividend section, AEWU’s rent collection has held up reasonably well so far, and the board has paid the 2p dividend for the first two quarters of 2020. Clearly there will be more challenges to come, but dividend cover was at 90.5% for Q2 with cash on hand to reinvest.

Nevertheless, the discount sits at c. 20% versus a sector average of c. 12.5%. This is despite strong NAV total-return performance since launch and the dividend having so far been maintained. The trust faces a continuation vote at the AGM in September.

Markets always overshoot. In the first few weeks of the UK lockdown it was possible to believe that high-street retailing and office working would not come back at all. Now that restrictions are being lifted and transactions are being recorded again, we think the market is starting to reassess its fears, and AEWU’s share price has been ticking up. However, a wide discount still remains.

We think the fact the NAV showed no decline in the quarter to June– and the portfolio a modest 1.6% decline – is a positive indication, although we accept the full impact of the recession is still to be felt. Nonetheless, the c. 20% haircut to portfolio valuation implied by AEWU’s discount seems excessive to our minds, particularly given that half the portfolio is in the top-performing industrials sector.

As we discuss in the Dividend section, there is some work to be done in the short term to reinvest recent sale proceeds to achieve dividend cover, and the board has not ruled out a cut. However, the high levels of cash on the balance sheet following the sale of a significant asset at 25% above carrying value give flexibility, and given the opportunistic approach of the managers there are surely likely to be attractive, discounted assets thrown up by the disruption. The continuation vote in September should also give investors comfort on the downside, as we discuss under Discount.