Good afternoon, ladies and gentlemen. Welcome to the AEW UK REIT plc investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged. They can be submitted at any time via the Q&A tab that's just situated on the right-hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. The company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I would like to submit the following poll. As usual, if you could give that your kind attention, I'm sure the company would be most grateful. I'd now like to hand you over to Portfolio Manager, Laura Elkin. Good afternoon.
Thanks, Jake. Hi, everyone. I'm Laura Elkin. I'm the Portfolio Manager for AEW UK REIT. I'm joined today in the presentation by Henry Butt, the assistant portfolio manager. Of course, today we are talking about the REIT. This slide here shows our strategy, the basics of our strategy. There's four main points really that we believe make up the strategy that we've been running now within AEWU for seven years. We are value investors, and that is a principle that is very dear to our heart, that is used to identify mispriced assets in the market, and really is the basis for all of our acquisitions. We believe that being value investors sets us apart from most of our peers out there in the diversified REIT peer group.
We believe that we're the only diversified REIT who are really employing this strategy to its max. One of the reasons for that is because we believe that it is key to efficiently deploying a value strategy to be not constrained by sector. Something that we're quite purist about, we love seeking value across all of the areas of the property market. Certainly at various times over the past few years, that has led us to some sectors more than others. But we believe that over a long period of time, we need to have that freedom to seek value across all of the sectors in order to efficiently deploy. Once we own assets, we very actively manage them. This is really the beating heart of our strategy, our in-house asset management team.
We actively manage our assets to maximize their income streams and also to unlock capital upside. Another feature of the assets that we often buy is that they have shorter than average occupational leases. When I say shorter, I mean, generally in the region of three to five years. We think that provides us with a yield advantage on day one, but also provides us with the ability to have some very real conversations with our tenants at lease end. If we have bought the right asset in the right location, then that should be leading to, at least, the sustainability of that income stream, but hopefully its growth and the growth of an asset's value during its hold period.
Looking at where the portfolio sits today, we think that it still represents a value proposition with low book values in the order of GBP 60 per sq ft on a capital basis and low passing rents of GBP 5 per sq ft across all sectors. Comparing like those levels to the wider commercial property market, they look very low. The next slide provides some high-level statistics on the portfolio. I wasn't planning to pick out many of these, but of course, if you want us to talk about any of them, then please just mention that in the Q&A. I would just touch on our number of properties at 37, number of tenants at just under 150.
I wanted to highlight here our net initial yield versus our reversionary yield, which is independently assessed by our fund value at Knight Frank. Quite a difference there between those two figures at 7.2 and 8.9. Now, clearly, some of that is linked to our current vacancy rate at just under 8%. Quite a lot of that amount is really showing as true reversion in our assets. Those that are currently let, but where the income streams could be increased. Of course, as of course, as I've just said, as a reminder, that's independently assessed by Knight Frank. That is not our own figures.
Hopefully we'll have some examples to demonstrate this today, the overall message being that we still think that the current portfolio presents a significant opportunity for income growth. On this slide, it's one that we put together last September actually, just wanting to show it to you again, because we think that some of the themes here have really sort of rung true over the past quarter. We thought that our higher yielding assets would look more resilient against the sort of valuation loss and value volatility that we saw in the fourth quarter of last year. I think that's really now absolutely what we've seen.
Our higher yielding properties or properties at the value end of the market, such as those that we own, with their long, values being closer to the long-term fundamentals of vacant possession value and alternative use value. Really those other types of value have proven to be a benchmark really for those values and provided much lower levels of volatility, more stability in the values that we have seen over the past quarter. That is something that we thought we would see. I think proven by the fact that, for example, at the prime end of the industrial market, I know we've seen Tritax put out figures in the past week showing values down around 20%.
Our own industrial values, being down significantly of course, but at lower levels of around 15%, and our overall value's down just over 10%. Another point to pick out on this slide, is the resilience in occupational demand that we're still continuing to see. Now I'm assuming that many of you may have seen our NAV announcement, that was released about 10 days ago now. Really one of our busiest quarters for quite some time in lettings. Quite a few of those concentrated on a retail warehousing park in Coventry. Henry's got a slide on that asset specifically coming up.
Across all sectors, we announced in that NAV announcement a leisure letting, an office letting, and Henry's got another industrial letting that we've completed recently to talk about later on as well. Yeah, just highlighting that point, which is of course very important to our strategy, that we're continuing to see a good level of resilience in occupational demand. Another factor as to why we believe that we're currently quite robustly positioned, was our refinancing that we completed in May of last year.
Just in terms of background there, it was coming back from Christmas in 2021, that our in-house debt team, who have a lot of expertise, were flagging to us loud and clear that yeah, straight away in January, we should be commencing our refinancing discussions to get ahead of the curve on the increases that they saw or expected to see coming through on the cost of debt. And that is, was even despite our existing facility having lasted out until October 2023, so quite some way ahead of the expiry of that facility, we took the decision to refinance. Locking in a cost of debt for the next five years of just under 3%.
Feeling incredibly pleased with that now of course, and especially looking at this chart on the right-hand side of the page, demonstrating really what a great level that was, and we think a really robust basis for the portfolio going forward. Not at all to diminish from the value loss that we saw in Q4 last year and, I'm about to come on to talk about that in more detail on the next slide, but just to touch on here that in times of value volatility, we think that as a value investor, that can be a really excellent time to look for value and for mispriced assets in the market.
That of course has been quite important to our strategy in the past few weeks and months and will continue to be going forward. We made some key sales during summer of last year, which no doubt you know about if you've been following us, we sold around GBP 40 million of assets in the summer last year to maximize the capital values there. One of which in particular, a sale in Oxford, proved to crystallize a significant amount of profit. Really pleased with the timing of those sales and the fact that they completed at that time before really the volatility in values started to hit very hard. Really opening up a lot of opportunity for us as we then came to invest that GBP 40 million.
We made two acquisitions during Q4 2022, which we have announced to the market. We had actually agreed pricing with vendors on those two acquisitions some weeks ahead of the completions of course. During that time with the sort of news that was going on in the world and a lot of political instability, et cetera, we were able to reduce those values further, the purchase prices of those assets by 15%-20% in both cases.
Feeling incredibly pleased with those purchases that we made, and I think they're very demonstrative of what can be achieved in the market today, buying in excellent locations for very strong levels of yield, good levels of capital value, and really looking to buy, I think, countercyclical. We were buying at a time when quite a lot of the commercial property market was sitting on their hands and not making purchase decisions. We were able to make those acquisitions looking very attractive now for the company. Of course, we have roughly GBP 7 million of further capital to invest. We've got some pipeline slides coming up on, to talk about the opportunity that we see there as well.
I said I'd turn back to look at performance and what we saw during Q4, which you will now have seen reflected in our net asset value. I've split this by sector into the three main property sectors, and we show our weighting to each sector, the value change that we saw within the AEWU portfolio, and then comparing that to the value change seen in the wider market. Here as a comparator, we've used the CBRE Monthly Valuation Index, of course aggregated that for the quarter. Very pleased to be able to tell you that in all of these cases, the value change seen within AEWU was less than that seen by that benchmark.
That is an encouraging start for us, and I think rings to that point that I mentioned earlier about value assets having less movement or less volatility than those at the prime end. Turning to warehousing and industrial, this is our, of course, our largest sector exposure at around 45%. I think the point to make here really strongly is that we're still really happy to hold to these assets. It was our largest loss of value in this sector. We are still very happy to hold them because of the levels at which we're holding them in terms of value. That's capital values of around GBP 40. The assets simply cannot be built for that kind of level.
The build costs would be sort of more than double the hold values. That would not even be including land. Really strong value principles within the levels of, at which we're holding those assets and rental values averaging GBP 3.50 per sq ft across these industrials, showing really strong potential for future growth. As I said earlier, Henry's got an example of an asset in this sector where we have seen some really strong rental growth recently coming up. Really happy to continue holding the industrials that we currently have. Moving on to retail, I have grouped together high street and retail warehousing here. They did actually perform quite differently over the course of the last quarter.
Actually, in our high street retail assets, in AEWU's portfolio, we didn't really see much movement at all, and I think that really points to how that sector has suffered a lot over recent years. Of course, it was facing occupational difficulty prior to COVID, with the COVID pandemic then significantly accelerated. We saw many tenant CVAs, values were significantly downsized, ERVs were downsized. I think though, looking at where things stand today, values and ERVs within the high street are looking lean. Therefore, I think there's quite a lot of resilience sort of baked into them for that reason.
When we look at tenant operating figures, on the whole, they are significantly better capitalized, stronger balance sheets than they would have been one or two years ago. That also gives me a lot of confidence. We also saw more positive than expected retail sales during December. I know that that has really sort of put a bit of a positive spin on the figures for quite a few of our tenants. Henry will touch on the acquisition that we made in Bromley during Q4 on a specific slide later on. Next are our tenant there, and as an example, I know that they've put out some strong figures recently, so really pleased about that.
I think that the retail sector provides quite a lot of opportunity for us because as countercyclical buyers, we know that there are quite a few institutional holders of property who at the moment have still decided to continue with their sort of exit strategies, high street retail, even though that would perhaps be considered to be somewhat behind the curve. That really does throw up significant opportunity for us. For example, the asset in Bath was an exact example of that, where we bought that from a vendor who had effectively decided that at all costs, they were going to get rid of their high street retail assets. When they're in such excellent locations, as that, more than happy to pick them up at that level of pricing.
Turning to offices, this is of course a relatively small sector and small exposure for us at just under 8%. You sort of might be forgiven for thinking that our assets have performed quite strangely this quarter in holding their value when the rest of the market saw value loss of 12%. That's really linked to some very specific asset management movements that we had seen within our office portfolio recently. Just to touch on those, our major office holding now is the office in Queen's Square in Bristol, which has been a really strong performer for us, and we've seen a lot of rental growth come through that asset.
The latest example being during December, we completed a lease with a tenant at a new high rental tone of GBP 40 per sq ft. That explains the improvement in our ERVs for that asset and why it held value. We also have a smaller office building up in Gloucester, where the tenant is the Secretary of State, operating as a job center. During the quarter, they passed through a lease break and now remain in the building for another five years. That impacted on that valuation very positively and explains why our offices held value during the quarter. Just as an outlook on that sector, I have some concerns about office occupation and not quite knowing where that's going to settle yet.
I think clearly it's settling at levels much, much lower than we had seen prior to the pandemic. I absolutely believe in offices, but I know that they will not be used to the extent that they were before. In addition to that, the environmental credentials for offices are becoming significantly more important to tenants. That's really being reflected in investment values at the moment. I don't quite know if the market has quite got a handle on the costs required in order to meet tenant demand there. I think there's potentially a lot of Capital Expenditure coming through non-environmentally compliant offices.
It makes me slightly wary of the sector, so I'm grateful that we have a low exposure and a few select assets. We may look for some opportunity here if it's priced in line with alternative use values. I would expect that to be fairly few and far between. The next slide summarizes our NAV total return performance since IPO and really just to quickly touch here. I mentioned on the first slide that we like buying income streams of 3 to 5 years. At that point, we can have that real conversation with our tenants and sort of roll our sleeves up and get stuck into the asset management and start growing income and start growing capital.
It's really sort of at the three-year period, roughly sort of three to four year period on this chart of us managing this REIT that our performance line starts to diverge from the peer group, and we think that's really reflected in that active asset management strategy that we have. This chart here, I won't dwell on for too long. I have to say the table on the right-hand side is only up until September because most of the peer group here haven't actually announced for December. Apologies that's slightly out of date. The chart in the middle shows share price movement. Of course looking quite favorably towards ours which has been trading at the narrowest discount of this peer group. Moving on to the next slide showing the dividend yields.
We have always been one of the highest dividend yielding REITs within this cohort. Regional REIT clearly sitting there some way higher now, I think reflected in their quite discount. I'll hand over to Henry now, who will talk through some asset management examples, and I'll pick back up on investment very shortly.
Thank you, Laura. Good afternoon, everyone. This slide here, it covers our asset in Coventry. You would have previously seen a slide, if you've attended other investor meet presentations on Coventry, summarizing the acquisition process here. This slide focuses on what we've been doing over the past year on the asset management side of things. Just to recap, we like retail warehousing. We bought a fair bit of it a year or so ago because retail warehousing units are typically modern purpose-built units. They have a lower site coverage than industrial, in the sort of mid-20s rather than in the 40%-50%, which means you can get a more intensive use out of that site through the addition of drive-through restaurant pods and coffee delivery, et cetera.
They also, aside from doing exactly what you want on day one in terms of the income profile, particularly here, they also offer alternative use plays, whether that be last mile logistics, trade counter or sort of other alternative uses being residential. That would work here with this site being only a stone's throw away from Coventry City Center and right next to the station. Just to recap, we bought this property for GBP 16.4 million back in Q4 2021 at GBP 117 a sq ft with a net initial yield of 7.8%, so delivering exactly what we wanted on day one income profile-wise. The line of attendance here are well-known names, predominantly from the fashion side of retail, being TK Maxx, NEXT, and Sports Direct.
It's important to mention the recent changes to the planning use class system, where they have been relaxed, and there's a new use class called Use Class E. What that has enabled us to do is to bring in a wider variety of retail tenants to the park, which will ultimately drive footfall, which will ultimately drive rental growth and occupational demand, and that will all naturally filter through into investment pricing. There's a very good story here from day one. As you would have seen in our NAV announcement, we've completed four transactions in the past six months, all completing in December. The two ones to complete were a renewal to Next, an existing tenant, on a five-year lease with a three-year break at 15 GBP a square foot.
We also completed a lease renewal to Burger King, who operate the drive-through restaurant at the front of the site, at GBP 40 a square foot. It's worth noting that you get higher rents in the restaurant pods than you would in the traditional retail warehousing space. Under the new E-Use Class system, we managed to bring in two new food uses, being an Aldi supermarket, we signed an agreement for lease there, subject to works, a new 20-year lease with RPI reviews. We've also agreed a agreement for lease with Iceland on a 10-year lease, which will be subject to planning. Now, again, bringing in those uses, it will increase dwell time. People will go to this park to shop and buy their food, and then they will nip into Next or Sports Direct.
It works really, really well for the park. I think it's worth noting that if you had a standalone Aldi or Iceland, the yield that investors would pay for that would probably be in the 5s, the low 5s, in comparison to retail warehousing, which where yields are a lot less sharp. When we complete those lettings, we expect to see some good capital performance from this asset. Aside from the capital performance to come down the line when those leases complete, it's also worth showing the net operating income picture here. You can see this chart at top right-hand of the slide where once all these deals are over the line, it's net only, it now by millions.
It's worth mentioning operating the moods because different vacant use when we bought it, so there are vacant service charge costs and insurance costs and empty rates costs. Now that those units are let, those costs will fall away on top of the rent, we'll see. One final mention that we're also currently exploring the position of the freehold in return for disposing part of the long leasehold to the council and that will also be good because freeholds trade much better in the investment market, and they just give landlords more flexibility and freedom to carry out asset management initiatives. That's a good initiative to have in play. I've dropped off.
Hi, Jake. Have we lost Henry?
Yeah, Henry.
Can you hear us now?
I think we might momentarily lost Henry.
Okay. Not, not to worry. I will carry on. Everyone, hopefully you heard what Henry was saying about Coventry. If not, then we can cover that off again, or I know that some people have also submitted some additional questions about Coventry. Let's review that perhaps at the end. Picking up on the next asset, this is perhaps just a rather more straightforward asset management transaction for us. Renewal of an existing lease to ODEON in the new city of Southend-on-Sea. An asset that we had owned for some time, I think roughly about five years.
ODEON were talking to us about a renewal of this lease on and off during the pandemic, as there was sort of roughly 18 months, one year left on the lease and offering some fairly weak terms, I have to say. We sort of rebutted those and were fairly keen to see, or sort of fairly open-minded, I think, to say, to see ODEON offer us some sensible terms. Were sort of happy to kick the can down the road on those discussions until lease end. That's exactly what we did, and they have offered us now a five-year lease at the passing rent with seven and a half months rent-free, and that transaction was completed during December. Really great to keep ODEON in there.
The value of the asset increased 37% during the quarter. Really countercyclical to the, perhaps the rest of the valuation movement during the quarter. If, if you've heard us before, you will have heard us sort of talk no end about alternative use values and having numerous business plans. That's not because we think that current uses will fail or leave, but just to have sort of downside protection built into strategies, and this asset provides a great example of that. Given the location there, and I think the middle plan shows it really close to the station, a really central location within the town, this would make an excellent residential development site.
We've often looked at acquiring in the units just to the south of that sort of red blob, which is ODEON on the plan, in order to sort of maximize that. Whether or not we look to do that going forward, yeah, time will tell really. We're really happy to have ODEON in the building now for another five years. Henry, do you want to pick back up?
Yes. Sorry, everyone, about that. I have no idea what happened. I hope you can all hear me. We'll move on to the next slide, Rotherham. This is one of our industrial assets, we completed a letting in the previous quarter. We have included this slide again because we actually completed the landlord CapEx in the last quarter of the year. As you can see, we bought this industrial asset for GBP 2.175 million, a very low cap valve per sq ft at GBP 26 a sq ft with a net initial yield of 8.5%.
When the previous tenant, who worked in the aluminum construction industry vacated, we had a good strong list of future occupiers, and in the previous quarter, we had completed a lease, a 10-year exit lease, which means that we have more freedoms and a much easier route to redevelopment in the future. A 10-year lease, with a break in the fifth year to Senior Architectural Systems, as I said, in the aluminum industry, like the previous tenant. This letting really sort of exemplifies the reversionary potential of the portfolio and the rental growth that can be captured. You'll see that we moved the rent on here from GBP 3.35 a square foot to GBP 5 at a 49% increase. In doing that letting, as I said, we spent some money in the building.
We spent just shy of GBP 1 million on the roof and doing some light touch refurbishment works internally. We don't mind doing that because when we improve the buildings, we ultimately can say to the tenant that we'd like to see improved terms, so we can push the rent on a bit more or we'll have less rent-free or we could, you know, in this example, get the higher of open market reviews and RPI. We improve those terms from, by doing these works. That also contributes to the capital performance of the asset because naturally if you spend money on your building, you have a more valuable asset.
What we did here, which is very apt given all the conversations ongoing at the moment from managers like ourselves and investors on the sort of the environmental pressures of investing in real estate, we managed to improve the environmental performance of this building. We had the EPC reassessed following improved insulation and a new roof on the building, and we moved the EPC from a C 67 to a B 44, which is a nice increase. That means that it will be resilient to all the MEES regulations coming in as of April this year up to 2030. I've got a slide on that later on in the presentation. A cracking deal from, for a number of reasons.
Moving on to some recent transactions, which Laura has touched on already in the presentation, and you will have seen separate announcements on, and they were included again in the NAV announcement. This is our new asset in Bath. We're delighted to have acquired this in December. Laura's already mentioned that we managed to renegotiate the price here by 15%-20%, that's fantastic. It's also really worth noting that locations like Bath, over sort of between six going well back probably wouldn't have been available to us at yields, like 8.5%. We're delighted to have bought this really good quality property in a really good city in the U.K., giving us exactly what from an income perspective.
We also really like this asset because it is not listed, and the majority of assets in Bath are listed, which really sort of ties your hands in terms of looking at alternative uses as another sort of asset management angle. This one isn't, so we could potentially, if the office is above, didn't go according to plan, we could look to move this into alternative uses being residential. However, I can say that it's very unlikely that's going to happen. The Bristol office market is very constrained supply-wise, and actually we expect to see some really strong rental growth come through in the office space here, and there's an outstanding September 2022 rent review, which we're working on at the moment.
We've got a very good line up of well-known high street retail brands. It's worth noting that TK Maxx who anchor the retail, their rent was recently rebased. We don't have an over rented unit there, which is really good news. Again, touching on that sort of capital sort of alternative use perspective, you can see we bought this in at GBP 194 a sq ft. If you compare that to where residential value sits in Bath, it looks very cheap. Finally, next in Bromley, a bit more straightforward in that it is single let to Next, who you all know well. As Laura said, next have traded very well over the festive period, so that's brilliant news for this asset.
Next have a lease here until September 2025, which kind of fits in with our shorter lease profile strategy. We feel that Next will be staying into the medium to long term here. They trade very well, as I've just said, and they also, when they renewed the lease a couple of years ago, they spent a lot of money fitting out this store. A lot of capital investment from Next themselves, which implies that they're not looking to go anytime soon. As you can see, a bit like Bath, we bought this on a relatively low capital value per sq ft at GBP 101 per sq ft, which is very cheap given this is a Greater London location. Its yielding is just shy of 9%.
Talking about sort of the rebasing of rent, with TK Maxx, as you can see, this is a sensible, affordable rent. Its yielding is 8.7% and we feel that's a good rack rent there. In terms of alternative uses, I don't really wanna labor this point, but we do like it at AEW UK REIT because it does give us an alternative option, other than the existing one. This would lend itself very well, like Bath, to residential conversion. We've had a look at this, and we think we could get 46 residential units in here if Next did decide to go and we couldn't find a new tenant to take the Next space. We've got a good backup solution if, yeah, Next decide to vacate. Thank you. Sorry about the IT issues.
I'll hand back to Laura to cover the investment strategy.
Just a slide here. I think we've hopefully labored the point enough already. Value investment being at the heart of all of our purchase decisions, we are always comparing our purchase prices to vacant possession values and to alternative use values. We think that not only creates opportunity in looking at optionality, but also is a significant protector of downside. Within this diversified strategy, using value investment to not only provide opportunity but to protect downside. Looking at the pipeline, we've got two slides here showing eight assets, totaling around GBP 40 million, which is of course more than we have to spend. It is also a number that's sort of growing by the day really.
When we come back from Christmas in January, it takes a couple of weeks for the investment to market to get going. These are some assets that we sort of put together in the past week or two. We receive more opportunities, each day that our team are analyzing. I think it's clear to say, though, that this opportunity that we saw arise during Q4 last year of a just a really excellent price point, for a value investor, seems to be continuing well into the start of this year. I think just sort of taking a look at the kind of macroeconomic position, we certainly expect that to be the case for the coming weeks and months. Yeah, presenting a really interesting price point for us.
Just to, I guess, reiterate the point that I think I made earlier, when we spoke last summer and we talked about reinvesting the capital from our sales, we thought we would be doing that at an income profile of around 8%. This pipeline now shows a yield closer to 9%. Of course, that's where we made those 2 acquisitions last year. Given that this is going out publicly, we're being a little bit cagey on these exact assets and where they sit over these two slides. Let me tell you that these locations are Central Manchester, Central Liverpool, Birmingham, Central Cardiff, affluent southeast towns like Tunbridge Wells.
Location always being a major focus for us and we think that these assets sit in the right location for what they are and make really interesting opportunities. Buying opportunities in these great locations really sort of reminiscent of when we first launched the REIT. I think we're seeing a period in the market where we see value quite widely across a lot of market sectors, more so than we have done in recent periods, where buying opportunities have been a little more concentrated. I'll hand back to Henry, who will talk to you about ESG and MEES.
Thanks, Laura. I touched on MEES, which stands for the Minimum Energy Efficiency Standards when I was mentioning the Rotherham case study. This flowchart just sort of hopefully summarizes the regulations which are being put into play by the government. The first sort of deadline is April this year, where landlords are not allowed to have any buildings with units which have EPC ratings of an F and a G. It's worth mentioning that in the portfolio we only have six F and Gs, and they're actually only in two buildings. One of which we have a short to medium term view to perhaps demolish and look to redevelop new units on an industrial state.
The F unit, we are currently in talks with the existing tenant about doing some Capital Expenditure on that unit in return for maybe a slightly longer term, which should address the EPC. We kind of feel like we've got those two problem assets covered for the time being. It's probably then the next two hurdles we have in 2027, you are not allowed to have any EPC ratings worse than a C, and then by 2030, it's a B rating. They're the three key dates. If we move on to the next slide, this will give you a very sort of good summary of kind of where we currently are. Within the next week, we will have 100% EPC coverage across the portfolio.
We've been working on it quite intensively over the past six months. In doing so, we have managed to increase the number of A and B ratings, which will expire beyond 2030 by 0-33, which is a fantastic bit of news. We're having reassessed the portfolio, we're seeing already some improvements. I've already mentioned the G and the F ratings where we have a plan of how to address those units. When we have our EPCs assessed, we carry out improvement plans, and typically, those improvement plans will be able to improve the EPC ratings of our building by the installation of LED lights and also looking at installing electric heaters rather than traditional heaters that we all know, which are in our residential homes.
Whilst we're carrying out that initiative, we will be looking to install automatic meter readers in the property because understanding the utility consumption of our buildings is very important with regards to understanding the environmental performance of those buildings and their carbon footprint. That brings me on to the next slide, which looks at our GRESB scoring. You will see we score very well in the management part of GRESB, which is the Global Real Estate Sustainability Benchmark. We perform less well in the performance, and that is because we have a high percentage of full repairing and insuring single let assets where we can't get our hands on the utility data, hence the AMR initiative.
We feel that once we have that data, we will really see our GRESB score improving, which is kind of the benchmark for the environmental performance of your portfolio, and we will be able to then work with our tenants because we will have an understanding of what their carbon footprint is. I will hand back to Laura to conclude. Thank you.
Thanks, Henry. Yeah, I think I. Sorry, before I conclude, I was just gonna add that getting hold of that energy usage data for the buildings, and the consumption data of our tenants, you know, does usefully feed into the GRESB score. Of course, bigger picture, it's more about understanding the usage and the emissions within our properties so that we can report it against these targets that are set out on the right-hand side and just keeping track of what we're doing and hopefully be able to show robust improvements over time. Yes, to conclude, and we have Q&A to follow as well, of course. To summarize what we've discussed so far, we feel really pleased with the positioning of the portfolio today.
We think it's got a very robust basis, and excited by the pipeline opportunity looking forward.
Laura, Henry, if I may just jump back in there. Thank you very much indeed for your presentation this afternoon. Ladies and gentlemen, please do continue to submit your questions just by using the Q&A tab that's situated on the top right-hand corner of your screen. Just while the team take a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your investor dashboard. Henry, Laura, we did receive a number of pre-submitted questions ahead of today's event. As you can see there in the Q&A tab, we've also received a number of questions throughout your presentation this afternoon. Firstly, thank you to all of those on the call for taking the time to submit their questions.
Henry, Laura, if I could just hand back to you to respond to those where it's appropriate to do so, and I'll pick up from you at the end.
Yeah. Great. Thanks, Jake. Henry, I'll kick off with a few of these and then perhaps hand it over to you. Starting from the top, this was a pre-submitted question. Somebody asking, apologies I don't have a name, "Which sectors of the property market are we optimistic about over the next three to five years?" I think I've kind of touched on that when I sort of described the slide on the value loss in the sectors and sort of talked around our outlook for each of them. I'll summarize it here again today. I think quite generally we are optimistic about the fundamentals behind most retail sectors and the industrial sector and some leisure sectors.
Of course, sort of caveat to that comment being on all of those assets, location specific, you have to be buying the right thing in the right place. Generally as a whole, less optimistic on offices. Another pre-submitted question, apologies, therefore don't have a name. "Please expand fully about the prospects for capital appreciation in the stock." I think that's referring to the shares. "Why the significant gyrations in the share price of late?" Of course, we have very recently put out an announcement stating a large NAV loss.
Now I think the way that REIT, most REIT share prices started to move downward from, sort of summer last year, taking the view that some valuation loss was coming, perhaps there were some who didn't quite have that expectation. I know that our share price dipped immediately on putting out that announcement, but has since recovered. We've seen some good momentum behind the share price since then though, and I think, you know, we've been doing quite a few meetings with our investors and with yourselves today, and just talking about the opportunity set that we think lies in the existing assets and in the pipeline.
I hope that that message is really getting through to some buyers out there, and that perhaps explains where the share price sits today. The same query goes on to ask, "Can we clarify on rent collection percentages, and has this remained satisfactory?" Yes is the answer to that question. I think now every single quarter, since the onset of the pandemic, we have had rent collection in excess of 98%. For the current quarter, it will sit not quite at that level, because of course we're still some way through the quarter, and there are some few tenants, not many, who are making monthly payments, as permitted by their leases.
Yes, we absolutely believe that that will continue and that this quarter, and for future quarters, we should be collecting in line with those high amounts. The same question goes on to ask, "Is the relationship with our lenders under any pressure?" No is the answer to that question. We've got a very healthy relationship with our new lender. Our LTV covenant allows for, I think a further 50% value loss in the portfolio. Quite a significant amount of headroom there in the loan.
There's another pre-submitted question, "Could we please provide some more detail on when we will get the dividend covered, such as timescale?" Yes, I think in our last announcement and the announcement before that, we have reiterated our comment that we are expecting the dividend to become covered during Q3 of this year. I'll point out that that's the calendar Q3 in time for hopefully full cover of the dividend during the fourth quarter. In order to make that happen, we need to see the portfolio fully invested. Given the strength of the pipeline, hopefully making a further acquisition there should not be difficult. Also, of course, any further sales which aren't invested within that time period will also impact upon that.
We also have quite a lot of letting movement at the moment. Also some linked with levels of Capital Expenditure. For example, I'm mainly pointing the finger at the retail park in Coventry that we've talked a lot about today. That position there should have stabilized by Q3, i.e., that the costs of doing those lettings should mostly have been seen. We should at that point be starting to see the benefit of that, those income streams coming through. It's those sort of factors combined that we expect to see us then leading to a covered dividend before the end of this year.
The same question goes on to ask, "What could go wrong to prevent that from happening?" Of course, if any of those things didn't happen, then that would scupper those plans. The lettings in Coventry are now signed up as much as they could be this time, such that some are conditional on perhaps planning permission for user hours and things like that. Those are not significant factors that we expect to cause trouble there. I don't expect that spending the capital will be at all difficult given the strength of the pipeline that we've got. I guess there are many unexpected things that could happen in the economy and wider before then.
Yeah, given what we see today and given the position at the moment, we are certainly on track, to expect that to happen. Henry, do you want to pick up on?
Yeah
Related questions?
We've got another pre-submitted question. Please talk us through the logic, the opportunity you've seen with the latest acquisitions. I hope I covered that when I went through the Bath and Bromley slide. To very quickly recap, well-let properties in good center, in the center of good cities and towns. Alternative use angles up our sleeve, providing the income and profile that we want. Being sort of mid to high 8% net initial yields. Hopefully that sort of answers your question. Moving on to another question, which is a pre-submitted one again. What is the latest feedback on letting discussions with existing new tenants? Is there still demand or is it weakening?
What I think, the Coventry slide in itself illustrates that there's still a lot of letting activity going on. Obviously there has been stuff in the news about retailers trading better over the festive period than anticipated. We obviously also had the ODEON letting, which Laura covered when I slipped off air. Moving to the industrial sort of sector where we have the majority of our assets, there's some still very strong occupational demand. As I'm sure you can appreciate, the cost of building new warehousing is sort of GBP 80 per square foot, and our current book values sit well below that, and that's excluding the land price.
That means that at the moment there's still a very much supply-constrained industrial market, if that continues, there will still be a good occupational letting market. I hope that's answered your question. Moving on to another pre-submitted question. Can we please have an update on the progress at Oak Park, Droitwich, please? Our industrial asset in Droitwich, one of the tenant, the main tenant there, vacated one of their two units in November. We are currently in the process of looking at refurbishment options on that unit. I'm also happy to say that we've already had some interest on it on a short-term basis, that would be a letting maybe just a tad below ERV, it would be a good short-term solution.
On that park as well, there are some, what we would regard as being physically and economically obsolete, smaller buildings, which actually have some holding cost to us as landlord because they're currently not let, so there'll be empty rates and insurance costs to us. We're currently in the process of looking to demolish those units and create some storage land, which we think would let quite well. That's what we're working on at the moment. At Westlands Distribution Park, again, we have some older units there, and we're currently working through the tender process for some piecemeal demolition on that site with a view to building some newer, shinier units, which will attract some much higher rents. We'll move forward the rental tone on that estate and give it a general facelift.
There's one more question here, which is a pre-submitted 1, then I'll hand back to Laura. On financial incentives, at Central Six Retail Park, them being quite sizable. Just to recap on those, we've given a 12-month rent-free and GBP 900K CapEx to Aldi to secure that letting, we've given three months rent-free and GBP 800 grand of CapEx to secure the Iceland letting. We're obviously prepared to commit that capital to secure those lettings, because in doing so, we will let those two units to two very strong covenants, two well-known household covenants, paying rents on good long terms. There will be some very strong valuation performance, which will easily pay back the money that we put on the table to secure those lettings.
It's all a part of the asset management process, what a landlord has to do to get a tenant to sign into a contract. Yes, they are slightly larger, let's face it, typically we're seeing three to five year leases in the U.K. now. To secure these longer supermarket market lettings, the incentives do tend to be a bit larger. That's the same in the leisure sector as well.
Thanks, Henry. I'll pick up a few questions now. I've got a question from Andrew S. Valuation drops were starting to slow during Q4. Do we feel that this current quarter could see the bottom? I guess I can only comment on the sort of information that's visible to us at the moment. Yes, I definitely feel that that sort of, you know speed of valuation decline, is certainly slowing, if not plateauing. Having visibility on funds valuing monthly is very helpful to this. We could see that the October declines were smaller than the November and December declines, which were then very steep.
The January declines that we already have visibility on, were much, much shallower, and starting to plateau. Yes, based on the information we can see today, we believe that this time the valuers have reacted very quickly. We encourage that, you know, as far as it represents the market and we think that's good. If our values have been right sized pretty quickly, yeah, that's a good thing. Next question from KT. Do we have enough money for the current period without raising more working capital? The answer to that question is yes.
We project out our capital expenditure, well, certainly at the moment because we have a couple of sort of long dated items, but sort of 12 month, 12-18 months in advance. We have capital set aside for those commitments quite some way out because we know that they'll be falling due. We also hold on top of that quite a conservative cash buffer that we don't touch for working capital. Yes, we very much have precautions in place within the company that we always have enough working capital. Next question from Chris B. Can we comment on the long term vacancy target? Are there any future concerns in this area given the economic outlook? Yeah.
I would say that we would expect our long-term vacancy, of course, we don't really have a target. We would love to target zero, I would say we'd always expect, because we run a shorter income profile strategy, we would always expect to have some churn and broadly between 5% and 8% is where I think that will always sort of bounce around over the long term. I think the best way perhaps of answering this question is to say that if we look forward over the rest of 2023, where vacancy sits at the moment, isn't a particular concern for us returning back to our dividend cover.
Of course, though, if vacancy were to increase significantly, then that would start to impact on our earnings. Another question from Chris B. Are the levels of incentives becoming increasingly more demanding from existing and new tenants? No, I think, and I think this really just touches on the answer that Henry gave immediately prior to my joining back on. He was talking about the incentives, for example, that we've given in Central Six. And yes, they are, they're pretty sizable. But tenants that national tenants of that standing who have such a high level of fit out, really often demand those kind of levels. I was very pleased with the way that we were able to sign up ODEON for five years with a rent free of seven months.
You know, if I think we were doing a new letting to a new cinema, it probably would have been quite a bit higher than that. No, I think on the whole, those levels still looking as to be expected. A question from Ray S. Are there any plans to raise funds to take advantage of the pipeline that we have? Actually, I think I'll just combine that with somebody else's question, who was asking if we would be turning to shareholders for an equity raise. That was from Martin K. I think two very similar questions there. Thank you both.
You know, I think we've always sort of sat in front of you, with when we have times of interesting, particularly interesting pipeline and said that we would love to be able to have access to that. I know that some of our larger shareholders who have been very loyal to us from the start would like to see the company grow a little in order to provide them with better levels of liquidity. For us, it just often sometimes is frustrating when we look at a really exciting pipeline of around, you know, GBP 50 million, as sort of real property geeks, and sort of purists in value investment, we get quite excited by our pipelines and when we can't access all of them, it can feel quite frustrating.
You know, the ones that got away, there's always some great assets out there. For that reason, we would love to be able to raise if the share price is in the right place and if our investors support it. If we were to do so, we would certainly think about being able to offer that out to retail investors as well if there was demand. If that decision is taken at some point in the future, then we will certainly think of the retail offer as well.
There's a couple of questions I can pick up here, Laura, whilst the other readers read more.
Thanks, Henry.
There's a question from Robert S. on utility costs and the impact of those on our tenants. I think it's a good point, and it's why I mentioned the automatic meter retake, reading initiative earlier on in the ESG slides. We obviously feel that that's very important to understand what our tenants are using so we can have those conversations with tenants who we feel are under more pressure from their utility costs. It's worth noting that since energy prices have increased, we have been looking into battery storage opportunities on a number of our sites where the tenants have a larger electricity consumption with a view to obviously putting batteries on those sites.
It's to...im portant to emphasize these aren't lithium batteries, so they're not flammable, they, the insurance situation shouldn't be impacted. With a view to obviously storing cheap electricity, which is produced late at night on windy evenings, so it's cheap green electricity with a view to storing that electricity then it can be used at times when electricity is more expensive. There's another question from Robert S., on EPCs and where our portfolio sits within the MEES regulations. I hope that I have answered that question, Robert, when I carried out the MEES slide about 10 minutes or so ago.
Thanks, Henry. I'll just pick up a few more questions now. Another question from Katie. Is the current dividend sustainable long term? Yes, I think I'll refer the sort of comments there back in the direction of those that I made earlier about returning to dividend cover. At times when the portfolio is fully invested, and sort of seeing through this current period where we have some accretive lettings, sort of washing through a income and capital intensive phase before we see the benefit of their income. At a more stabilized time, then yes, absolutely. When we project out long term, the portfolio assets sustainably cover the current dividend. A question from Simon J. As more and more retail financial groups leave the high street, are we seeing any attractive opportunities?
I think, Simon, you might be asking me about banks leaving the high street. We have seen quite a few announcing significant withdrawal programs. Are we seeing any attractive opportunities because of that? Generally, that doesn't open up opportunity for us. Clearly, those would be vacant properties, and we like buying properties that are up and let already so that we can have income from day one. In addition, those bank properties tend to be not have the largest frontages in every case. Sometimes be quite a traditional style, and not the largest asset. We don't see that as a particular area of opportunity for this strategy. An interesting question from, apologies if I'm pronouncing this wrong, I think it's Miguel M.
What are the implications, if any, of the very attractive yields in your pipeline for the valuation of your actual portfolio? I think, Miguel, what you're probably getting at here is, of course, if we're seeing more opportunity in our pipeline and yields having moved out, which makes our pipeline more attractive, then does that mean there is further fall to come in the value of our assets? You know, I think we've seen clearly quite significant value loss in our own portfolio during the last quarter. My sort of response, yeah, and where we haven't seen that, I think there's been some quite clear reasons why linked to asset management gains. I'm not concerned.
I don't think that the pipeline pricing looks particularly out of line with the portfolio's pricing. I think what we see in the pipeline is a few isolated instances of perhaps some assets that look mispriced by the market. For example, like the asset we bought in Bath, where I mentioned a vendor that was sort of hell-bent on selling whatever happened, and almost at any price. It's that type of opportunity that sort of opens up great value opportunities for us. The pricing of the pipeline doesn't make me feel concerned about the valuation of the current portfolio. I think that's what you're asking me. Hopefully that's answered your question. There's also another question from Anthony C. In terms of the office portfolio, how well are they used?
Many offices, although let, are empty most days as people work from home. Yeah, thanks, Anthony C. Hitting exactly sort of the nail on the head in terms of my concerns for the office market in general. Apologies. We have three office assets in this portfolio. We have Queen Square in Bristol. We have the job center in Gloucester. We have a small office building in Hemel Hempstead in a sort of quasi-industrial location that's let to a property management tenant. We know that the property management tenant occupy that building really well, so that one isn't a concern for us. Equally, the job center in Gloucester, that one, as you can imagine, a very busy office. Presence, physical presence there absolutely required.
That takes us back to Queen Square in Bristol. You know, I think the types of offices that will survive and that will perform really well, and that, to be honest, in this asset is proving the exact point. In very few offices at the moment you will see rental growth and those are the ones that are well-located, near to strong amenity, in really exciting cities that tenants want to come back into, and with strong ESG credentials. That's exactly what we have in Queen Square, Bristol. A city that has seen a lot of development, a location with a lot of surrounding amenity and a very attractive Georgian square.
Our EPC on that building is B, so in line with exactly where the corporate tenants where it wants to be. It's that that has led us to see that new high rental tone proved there. Yeah, very few offices that are seeing rental growth. I'm pleased that we have a generally small exposure here, but I'm not concerned about any of the assets that we're currently holding there. Last but not least, Jeremy B. has asked a question, "Are listed buildings exempt from MEES?" Henry, I'm gonna bat that over to you.
They're not exempt. However, let's say you had a listed building and the only way you could improve the EPC to make it sit with inside MEES regulations was by putting in, let's say, double glazing window, and that altered the appearance of that building, and therefore would not be allowed under planning law, then it would become exempt. That's like sort of the example that I would use. There's also a rule where you can apply for an exemption if the cost of doing the MEES works, if it's basically loses you money over a seven-year period, and you can prove that, then there's an exemption as well. And that quite often listed buildings quite often fall within that.
It's a case-by-case process rather than there being a blanket case for all listed buildings. I hope that gives you a flavor for sort of what we have to deal with.
Sorry, I think we said that was gonna be the last question, but I'll just pick up on one more. There's a question from Mark B. here. To what extent do we expect aggregate rental growth across our portfolio to match inflation? You know, I think, and I'm gonna answer that in conjunction with another question, that I think has been asked about by Matthew P. How long will it be before we start seeing inflation increases being reflected in the dividend? sort of taking those two together really. of course, we don't have many inflation-linked leases in our portfolio.
We have a very small percentage, that's because we think that those types of leases don't tend to offer the best value for the assets in the investment market. They're unlikely to be ones that we buy. In answer to the question of will we see inflation linkage coming through in our portfolio, it isn't a feature. The rental growth that we see is more organic and proven through sort of supply and demand dynamics rather than being written into leases. Do we expect that to match inflation? I mean, on a few of our industrial assets, we have seen quite high levels.
I think there was to quote an example that I think we've even talked about in a NAV announcement during the course of the last year, an asset where I think we saw about sort of 20% rental growth over a two-year period. Henry, your example in the presentation earlier of your letting in Rotherham, 50% rental growth from one lease to another. It's those type of sort of examples that we will see of more organic rental growth.
Looking across the portfolio as a whole though, I mean, we wouldn't expect rental growth from that sort of organic route to match inflation at the moment, because of course inflation levels are so high. Commenting on, will we see that reflected in the dividend, I think at the moment we're just focusing on getting the dividend covered. Looking forward to that, or sort of looking forward from that point, as a REIT, we of course are required to pay out 90% of our income as a dividend.
If we were in a position to have higher levels of earnings, then of course our dividend is always set by the board, but we would be required to pay out 90% of that. I hope that answers your question.
Laura, Henry, if I may just jump back in there. Thank you very much indeed for being so generous with your time there and addressing all of those questions that came in from investors this afternoon. Of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended for you to review to then add any additional responses, of course, where it's appropriate to do so. Laura, perhaps before redirecting those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that'd be great.
Thanks, Jake. I think just reiterating the points that we made earlier, we refinanced the portfolio last year and think that that provides for just one of the reasons why we think that the portfolio is very robustly positioned today. Really, really pleased with the strategy that we employed during the course of the last year. Timing our sales last summer, excellently in order to be able to maximize value, and then being able to have capital to reinvest back into this really exciting investment market. Very pleased with our positioning.
Laura, that's great. Henry as well, thank you once again for updating investors this afternoon. Could I please ask investors not to close this session, as you'll now be automatically redirected, for the opportunity to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of AEW UK REIT plc, we would like to thank you for attending today's presentation. That now concludes today's session. Good afternoon to you all.