AEW UK Reit (AEWU ) saw two tenants go into administration in the last quarter of 2023 and the loss of rent has again left the dividend uncovered, just as it looked as if the real estate investment trust might fully meet the payout from earnings. 

In an update for the third quarter of its financial year, the £221m Reit said earnings per share were reduced by 0.28p after furniture retailer Wilko, which rented a shop in Bristol, and CJ Services, which rented a warehouse in Cheshire, folded.

This left total earnings of 1.83p per share, short of the 2p dividend, third-quarter results show, a trend that has been in place since before the 2020 Covid pandemic.

‘EPRA earnings per share have been negatively impacted by 0.28p due to two tenants entering administration during the period, without which the company’s dividend would have been fully covered by earnings this quarter,’ said Laura Elkin, co-manager of the 8%-yielder.

Subdued deal flow in UK commercial property and uncertainty over interest rates depressed net asset value (NAV) per share by 2.3% to 103.53p at 31 December, a 1.59% like-for-like valuation fall over the quarter.

Elkin said the 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.

In further bad news, 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 developments reflected the portfolio’s higher risk position compared to other UK generalist Reits, with Elkin and co-manager Henry Butt 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 soften as valuations fell. However, this was mitigated by estimated rental value (ERV) growth, a byproduct of strong tenant demand. 

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.

The higher rating reflects AEWU’s performance as the best in the AIC UK Commercial Property sector with a five-year total shareholder return of 64%. This compares very well against an average peer group loss of 11%, with the IPD property index returning just 7.2%, according to Numis data. Last November, AEWU won a Citywire performance award for a third year in a row.