Even after a 65pc gain in two years this property trust still yields 6.6pc. Hold on

A spectacularly successful transaction has boosted its value and attracted new investors, writes Danielle Levy

We made a bold call to back AEW UK Reit during the summer of 2020. At the time the majority of its commercial property investment trust rivals had either cut or suspended their dividend as the effects of the first lockdown were being felt. However, AEW seemed to us to be in much better shape: its dividend looked pretty safe and we were optimistic about the management team’s ability to grow the value of the property portfolio.

They do this by investing in smaller properties, which tend to attract less competition from buyers. This, we hope, reduces the likelihood of overpaying. The team then actively manage the properties by making renovations or improving rent collection to add value and potentially sell them on at a profit. It is a strategy that has so far paid dividends – literally. AEW UK Reit was the only general commercial property trust to avoid cutting or cancelling its dividend during the pandemic; it has delivered an annual payment of 8p a share since launch in 2015. This equates to a yield of 6.6pc at the current share price.

In addition, there has been impressive growth in the value of its assets. During the first quarter of 2022 the trust’s net asset value (NAV) increased by 7.4pc and another significant valuation increase is on the way following the recent sale of Eastpoint Business Park in Oxford.

AEW acquired this asset, which comprised five office buildings, for £8.2m in June 2015 and sold it for around £37m in April, having turned the site into a life sciences hub. Analysts at Numis, the broker, estimated that this would add around 11p, or 9pc, to the NAV per share of 120.63p at the end of March.

Dan Cartridge, of Hawksmoor Investment Management, describes this level of NAV growth as exceptional and unusual for the trust.

“Eastpoint has been a phenomenal asset. Do they have another one of those in the portfolio? Probably not. That is an extremely rare case in terms of the level of value creation from a single asset,” he says. “That said, they are ‘asset management’ specialists. One of the big positives for the portfolio is how consistent the team has been at unlocking value from smaller sites, recycling capital well and improving yields via initiatives such as lease extensions.” In his opinion, there is still a case for holding the trust on account of its attractive and so far reliable income stream, coupled with ongoing asset management initiatives that should unlock value from assets.

“It should still deliver an 8pc-10pc annual total return in future, which is attractive from a portfolio that has pretty low gearing at around 28pc and a management team that has a seven-year track record of consistently delivering,” he adds.

There is also something to be said for the trust’s “open market rent review” structure, which means rent is adjusted to reflect what the landlord could receive if the property were relet in the open market at the time of the review. In a recent update, the fund managers said this might actually provide better income protection in an inflationary environment than inflation-linked rent reviews, which sometimes include caps on the index-linking at 4pc for instance. In one example, a recent rent review for one of the trust’s properties in Bradford resulted in a 14pc increase in income over a three-year period.

Following the announcement of the sale of the Eastpoint Business Park and an office block in Glasgow, which will be redeveloped into student accommodation, all eyes will be on how the fund management team, now led by Laura Elkin following the recent departure of Alex Short, redeploys the proceeds. Can success be repeated with new acquisitions?

Given the team’s strong record, its expertise and hints of an attractive pipeline, something tells us they have every chance.

The trust’s recent success has not gone unnoticed by investors. Its shares have risen by an astonishing 65pc since our tip in July 2020.

The discount has also narrowed from 22pc to nil today. This exposes an inconvenient truth: there are potentially some attractive discounts available among its rivals. However, as we suspect that AEW UK Reit will continue to deliver healthy returns and an attractive income stream, this is one to hold on to.

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