SIPP (Self-Invested Pension) season is upon us and investor attention has again turned towards sources of secure and steady income.
Based just on the dividend pay-out alone, the yield is 8.3% and that’s before any pension tax relief.
The trust is a UK-focused property fund, but the strategy has deliberately and largely avoided the troubled retail sector, which only accounts for 13% of the portfolio at present.
Most of the assets are in provincial industrial sites and offices, which have been two of the best performing areas for property in the UK.
That outperformance is reflected in the recent uptick in the share price, which at 98p currently sits at a slight premium to the last reported net asset value of 97.2p.
Alex Short, the trust’s manager, adds that AEWU has outperformed both its peers and the benchmark property indices over recent years.
Total property returns in the year to September was 6.7% or 3.8 percentage points higher than the benchmark, while annual property returns since 2015’s IPO have totalled 10.9%.
Including the dividend, shareholder returns for the twelve months to December were 20.7%
The 8p dividend was also covered (107%) by earnings in the past year and has been paid every year since the REIT completed its initial ramp-up.
Industrial property the core
AEW UK REIT’s property portfolio is worth just short of £200mln currently, of which half is in industrial sites and roughly a quarter in offices.
The strategy is to acquire small, short-lease properties where there is significant upside potential from a 'tenant event' - such as a new lease, a new covenant, a property upgrade or a new occupier.
Shorter leases and average property value of £5mln might suggest higher risk, but Short says the strategy has been tested over the long term.
AEW is a global property giant with €70bn worth of assets worldwide and £1.8bn in the UK alone.
AEWU's recent focus has been away from London and in good population centres (for the offices) and strong infrastructure and transport links for the industrial sites.
There is still a lot more to come from the portfolio, says Short with several big value drivers, such as conversion from a short to a long lease and change of covenant terms, on the way.
For example, AEWU expects to sign soon a new 15-year lease on an office in Solihull with a government department that will see a rental uplift of 30%.
In Bristol, another office has seen value growth of almost 70% since the trust acquired it at the end of 2015 with the passing rent on let space up by 32%.
In Oxford, a 25-year lease has been signed on an office unit at the Eastpoint business park, while a car park in Corby is in the books for a price per acre some 30% lower than that paid recently by another trust for the site next door.
Liberum believes AEW’s active approach to asset management has played a key role in maximising income.
Outperformance of peers
The broker expects its outperformance relative to its peers to continue given its industrial bias and low retail holdings.
“The portfolio vacancy rate has remained low due to a combination of new lettings and disposals of vacant properties.
“Stock selection focuses on assets with low obsolescence, low capital expenditure requirements and replicable income streams. "
“The Solihull lease demonstrates the potential for valuation gains through lease re-gears.”
Short says activity has picked up since the election, but it has been more in the number of properties coming up for sale rather than a change of attitude by the tenants, who, she says, were consistent all through the Brexit uncertainty.
Financially, AEWU is comfortably within its borrowing limits but with a strong pipeline of up to £100m of potential acquisitions in the industrial and office sectors an equity issue is likely in order to take advantage of this.
Short says the optimal borrowing level is at 25% of the property base so a £50mln funding round would add a lot of firepower to expand the portfolio.
Retail is not likely to be a target as Short still sees some pain ahead for this sub-sector, particularly in longer leased assets, though if something exceptional did come up it would not be ruled out.
Instead, industrial, a few offices and alternative sites will be the focus and similar in style to the deals since it floated.
“This is very much a buy and hold to maximise value strategy.”
At 98p, the trust is valued at £148.5mln.