AEW UK REIT : Annual Report and Financial Statements March 2021

AEW UK REIT plc

Annual Report and Financial Statements for the year ended 31 March 2021

Contents

Strategic Report
Financial Highlights	2
Property Highlights	2
Chairman's Statement	3
Business Model and Strategy	7
Strategy in Action	9
Key Performance Indicators	13
Investment Manager's Report	16
Principal Risks and Uncertainties	29
Stakeholder Engagement	35
Governance
Board of Directors	38
Corporate Governance Statement	39
Report of the Audit Committee	45
Directors' Remuneration Report	49
Directors' Report	52
Statement of Directors' Responsibilities	60
Independent Auditor's Report to the members of AEW UK REIT plc	61
Financial Statements
Statement of Comprehensive Income	71
Statement of Changes in Equity	72
Statement of Financial Position	73
Statement of Cash Flows	74
Notes to the Financial Statements	75
EPRA Unaudited Performance Measures	106
EPRA Sustainability Performance Measures	112
Company Information	127
Glossary	129

Strategic Report

Financial Highlights

• Net Asset Value ('NAV') of £157.08 million and of 99.15 pence per share ('pps') as at 31 March 2021 (31 March 2020: £147.86 million and of 93.13 pps).
• Operating profit before fair value changes of £10.73 million for the year (year ended 31 March 2020: £14.47 million).
• Profit before tax ('PBT')* of £22.17 million and earnings per share ('EPS') of 13.98 pps for the year (year ended 31 March 2020: £3.65 million and of 2.40 pps).
• EPRA Earnings Per Share ('EPRA EPS')* for the year of 6.19 pps (year ended 31 March 2020: 8.67 pps).
• Total dividends of 8.00 pps declared for the year (year ended 31 March 2020: 8.00 pps).
• Shareholder Total Return* for the year of 33.72% (year ended 31 March 2020: -17.89%).
• NAV Total Return* for the year of 15.06% (year ended 31 March 2020: 2.55%).
• The price of the Company's Ordinary Shares on the Main Market of the London Stock Exchange was 83.20 pps as at 31 March 2021 (31 March 2020: 68.20 pps).
• As at 31 March 2021, the Company had drawn £39.50 million (31 March 2020: £51.50 million) of a £60.00 million (31 March 2020: £60.00 million) term credit facility with the Royal Bank of Scotland International Limited ('RBSi') and was geared to 25.15% of NAV (31 March 2020: 34.83%) (see note 14 on pages 96 and 97 for further details).
• The Company held cash balances totalling £17.45 million as at 31 March 2021 (31 March 2020: £9.87 million).
• The Company received three EPRA awards during the year: EPRA Gold Medal for Financial Reporting; EPRA Silver Medal for Sustainability Reporting and EPRA Most Improved Award for Sustainability Reporting. The Company has also been named Best UK Real Estate Investment Trust in the Citywire Investment Trust Awards based upon its strong three year track record.

Property Highlights

• As at 31 March 2021, the Company's property portfolio had a valuation of £179.00 million across 34 properties (31 March 2020: £189.30 million across 35 properties) as assessed by the valuer1 and a historical cost of £173.28 million (31 March 2020: £197.12 million).
• The Company acquired one property during the year for a purchase price of £5.40 million, excluding acquisition costs (year ended
  31 March 2020: none). The Company made two disposals during the year with total gross sale proceeds of £29.30 million (year ended
  31 March 2020: none).
• The portfolio had an EPRA Vacancy Rate** of 8.96% as at 31 March 2021 (31 March 2020: 3.68%). Excluding vacancy contributed by Bath Street, Glasgow, which was exchanged to be sold with the condition of vacant possession, the vacancy rate was 5.58%
  (31 March 2020: 3.68%).
• Rental income generated in the year under review was £15.71 million (year ended 31 March 2020: £17.42 million). The number of
  tenants as at 31 March 2021 was 99 (31 March 2020: 91).
• EPRA Net Initial Yield ('NIY')** of 7.37% as at 31 March 2021 (31 March 2020: 8.26%).
• Weighted Average Unexpired Lease Term ('WAULT')* of 4.43 years to break (31 March 2020: 4.26 years) and 6.71 years to expiry
  (31 March 2020: 5.55 years).
• As at the date of this report, rent collection statistics for 2020 rental quarters and March 2021 quarter were as follows:

Quarter	%
March 2020	98
June 2020	98
September 2020	97
December 2020	97
March 2021	94

* See KPIs on pages 13 to 15 for definition of alternative performance measures.

• See Glossary on pages 129 to 132 for definition of alternative performance measures. 1 The valuation figure is reconciled to the fair value under IFRS in note 11.

2	AEW UK REIT plc • Annual Report and Financial Statements • 31 March 2021

Chairman's Statement

Overview

I am pleased to present the audited annual results of AEW UK REIT plc for the year ended 31 March 2021. As at 31 March 2021, the Company owned a diversified portfolio of 34 commercial investment properties throughout the UK with a value of £179.00 million.

The financial year began with a period of unprecedented economic uncertainty due to the outbreak of COVID-19 and the associated measures to contain the spread of the virus. These measures continued throughout the year to varying degrees and have had a profound impact on certain sectors, most notably retail and leisure. To mitigate the increased risk posed by the uncertainty in the wider economic environment, the Company adopted a cautious approach to cash and debt management. Despite this, the Company has maintained its quarterly dividend payments at the target level of 8.00 pps per annum throughout the year and increased its NAV per share by 6.46%, providing a NAV total return of 15.06% (year ended 31 March 2020: 2.55%).

In May 2020, the Company disposed of 2 Geddington Road, Corby, for gross proceeds of £18.80 million, delivering an internal rate of return ('IRR') of 27%. This disposal allowed the effective management of the Company's risk profile, and in July 2020, £12.00 million of its RBSi loan facility was repaid in order to provide appropriate headroom against its borrowing covenants. Since the repayment, the Loan to NAV ratio has remained below 27% and was 25.15% as at 31 March 2021, against a soft covenant of 40% (triggering an increase in the margin) and a hard covenant of 55%.

This disposal, and the loss of the Company's largest tenant at the time, also resulted in a fall in rental income. The income profile from the remainder of the portfolio remained largely intact, with rent collection rates reaching at least 94% for all quarters since the onset of the pandemic. The majority of rents outstanding as at 31 March 2021 were attributable to tenants who were financially able, but unwilling, to pay. Post year-end, the Company announced the successful outcome of the legal action against two well-funded national tenants to recover unpaid rent. £0.52 million has been provided for as expected credit loss relating to these tenants in these financial statements and subsequent to the court ruling all rent arrears of these tenants have been received. The prudent policy for provision against expected credit losses contributed to a fall in EPRA EPS for the year to 6.19 pps (year ended 31 March 2020: 8.67 pps), providing a dividend cover of 77.4% (year ended 31 March 2020: 108.4%). Certain asset management initiatives are also temporarily reducing earnings potential. Remedial works are ongoing at Bank Hey Street, Blackpool, including the reinstatement of its cathodic protection system and comprehensive repairs to faience elevations and windows. The nature of these repair works means that costs are expensed to profit or loss as they are incurred, with a corresponding increase expected to be seen in the revaluation of the property. The Company has also exchanged to sell its property at Bath Street, Glasgow, with the condition of vacant possession, and this property will continue to operate at a high level of vacancy until the sale has completed.

The Company has benefitted from its defensively positioned portfolio, which achieved a total return of 14.8% over the year - an outperformance of 10.7% relative to the Benchmark. Relatively small lot sizes, geographical diversification and valuations that are underpinned by alternative use value have all contributed

to limiting the downside during the period of unprecedented economic uncertainty in the first half of the financial year. The improved economic outlook in the second half of the year saw

AEW UK REIT plc Property Performance vs. Benchmark for 12 months to 31 March 2021

16

14

12

10

valuations recover and the Company generated an increase in fair value of its investment property of £5.32 million for the year, which has largely been driven by the strong performance of the Company's industrial assets. The pandemic has accelerated the trend towards online retail, and consequently sentiment towards the industrial and warehousing sector has improved. The

%

8

6

4

2

0

Company benefits from a high weighting towards industrials, which made up 60.8% of the portfolio valuation as at 31 March 2021. Weightings in the retail and leisure sectors, which have been most negatively affected by the pandemic, remain low at 11.6% and 7.0% respectively.

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AEW UK REIT			Benchmark
Capital Growth		Income Return	Total Return

Source: MSCI 31 March 2021

• the Benchmark refers to MSCI/AREF PFI Balanced Funds Quarterly Property Index.

AEW UK REIT plc • Annual Report and Financial Statements • 31 March 2021	3