AEW UK Reit (AEWU ) saw two tenants go into administration in the third quarter and the loss of earnings has left the dividend uncovered. 

The £221m real estate investment trust’s (Reit) earnings were reduced by 0.28p as furniture retailer Wilko, which rented a shop in Bristol, and CJ Services, which rented a warehouse in Cheshire, folded.

Total earnings of 1.83p per share were short of the 2p dividend, third-quarter results show.

The pressures of subdued deal flow in the UK commercial property investment market hurt the 8.5%-yielding portfolio, which saw its net asset value soften 2.3% to 103.53p by the end of December, or a 1.59% like-for-like valuation fall over the quarter.

Citywire award-winning manager Laura Elkin highlighted that this fall was largely driven by two leisure assets, Circuit nightclub in Cardiff and Odeon cinema in Southend, which saw increasing trading pressures associated with the cost-of-living crisis and rises in the price of energy and goods.

The outlook is not brigtening for the trust as earlier this month, Rekom, the UK holding company of Circuit, announced it had filed notice of intention to appoint administrators to a number of its companies. The impact is unclear at present but Rekom constituted only 1.6% of annual contracted rent.

Deutsche Numis analyst Andrew Rees said the development reflected the portfolio’s positioning further up the risk curve compared to the wider diversified commercial peer group, with management seeking higher yielding assets and willing to tolerate greater volatility and potentially weaker tenant covenants.

Industrial holdings, which make up 37% of assets, saw yields softening across the board as valuations fell. However, this was mitigated by estimated rental value (ERV) growth, a biproduct of the strength of the occupational market. 

Elkin emphasised that key rent reviews settled over the period maintained earnings. These include settling Bath Northgate House Centre Limited’s outstanding 2022 rent 25% higher, and settling Novia Financial’s outstanding rent for Cambridge House 14% higher from 2021.

Further action included agreeing a £195,505 annual turnover top-up rent for the year to 28 September 2023 for retailer Next in Bromley, in addition to the base rent of £350,000 each year, 78% higher than forecast when the property was purchased in November 2022.

‘Despite our recent asset management achievements, we remain cognisant of the economic backdrop and its cumulative effect on occupational markets,’ Elkin (pictured at the 2022 awards) wrote.

She added that upcoming lease events should enhance earnings. In particular at Central Six Retail Park in Coventry, where leases have been signed with The Food Warehouse, which trades as Iceland, Whitecross Dental (MyDentist) and The Salvation Army Trading Company, which are expected to deliver an additional £535,000 of annual contracted rent roll within the next two quarters.

Prospective lettings at void units including Wilko in Bristol, the former Mecca Bingo at The Railway Centre, Dewsbury, and the former Sports Direct at Barnstaple Retail Park are advancing well, she added, and should be completed by the end of the first half of the calendar year.

‘Challenges notwithstanding, AEWU’s shares are currently trading at a 7.9% discount to the December NAV, which remains notably tighter than the average discount of 22% for the diversified commercial PICs peers, whose dividend yields are slightly lower at 6.2% on average, but typically covered by recurring earnings and therefore more sustainable in our view,’ Rees said.