AEW UK REIT PLC

LSE:AEWU

Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to the AEW U.K. REIT plc Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it received during the meeting itself. However, the company can review all questions submitted today and publish responses throughout as appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Laura Elkin, Portfolio Manager. Good morning.

[Laura Elkin, executive]

Thanks, Lilly, and good morning, everyone. I'm Laura Elkin, the Portfolio Manager for AEW U.K. REIT. And I'm joined here this morning by Henry Butt, who is the Assistant Portfolio Manager. Just before we get into the presentation this morning, I'd just like to start with a little bit of housekeeping. I wanted to let everyone know that in about 2 weeks' time, I'll be going on maternity leave. And I'll be leaving you in the very capable hands of the whole team here at AEW, but of course, with Henry at the helm during my absence. Now this is not my first maternity leave. It's my second and will definitely be my last. So of course, Henry covered very actively in my first maternity leave so he has done this before. He will have a lot of support from Nick Winsley, the Head of AEW U.K. and also from the rest of our excellent team who will be remaining the same. If anyone is interested in who the rest of that wider team is, please see the team page on our website. Now just while I'm mentioning the website, I've had a few e-mails in recent weeks just to say that few bits and it look out to date and I do apologize for that. We are actually in the process of launching a brand-new website. We hopefully be going live in a couple of weeks' time. And hopefully, you will find it to be more modern, more user-friendly, more informative. So hopefully, that's something to look forward to in coming weeks. So to start with this morning's presentation. Just a reminder of our strategy, we are, of course, a value strategy, and we use value investment principles to identify mispriced assets to purchase. So by that, we mean those assets that we can buy at prices that are out of line with their long-term fundamental values, such as alternative use values and vacant possession values. Once we own those assets, we very actively manage them in order to maximize income and to unlock capital upside. Our strategy is not sector constrained, and we think that that's incredibly important to being able to look across the whole of the U.K. commercial property market and find best value where we see it from time to time. Now how do we do this in terms of what we buy? We look for strong commercial locations. We're generally buying net initial yields in the range of 7% to 10%. And we always look to buy low book values and low rents in comparison to surrounding real estate or for that location. And that creates optionality in our business plans, that's really important and particularly important for protecting downside over the long term. Just on the bottom of this slide, you'll see a couple of awards that we've won, some of which we've held for a year or two now, but a couple that we received in Q4. So I thought I'd just mention these. In the category of U.K. property, we received the award for Best Investment Trust at the Investment Week Awards and also were awarded in the same category by Citywire and their Investment Trust Awards. Really just in recognition of our leading total return.

[Henry Butt, executive]

Good morning, guys. I'm going to pick up this slide. So this slide summarizes our Q4 highlights, which were also summarized at the top of our another announcement, which hopefully a lot of you have seen last week. If we focus on the second and third bullet points here. So we had a NAV total return of minus 0.44% for the quarter and a valuation decrease of 1.59%. Now I just thought I'd put these to that small decreases into context and sort of run through the portfolio on as a whole and going through sector by sector. If we look at sort of the industrial sector where we were down minus 1, I think that was mainly due to just wider market sentiment. We mentioned in our NAV announcement that there has been a lack of transactional activity. And obviously, with the high interest environment, that's having an impact on values across the board and in particular, industrial where buyers have tapped into cheap debt over recent years, less so obviously today. Those valuation declines are actually negated by quite a strong rental growth story. The occupational market is still very strong. We've got some examples of that later on in the presentation. So the industrial sector has fared quite well as a result of that strong occupational story. I would say the same is probably -- it's the same sort of for the retail warehousing sector, which grew down 0.65%. Again, that's just wider market sentiment, lack of transaction activity, but a good occupational story. So that sector has remained rather robust. Now, we saw our office sector come down by 2.48%. And -- we've only got 3 offices in the portfolio. And actually, that was driven mainly by a tenant ramble at our Bristol assets leaving. So the valuation decline is obviously associated with the vacancy and CapEx refurbishing their space. So that was really the driver of the decline in that sector. And then finally, most notably in the other sector, we have seen some quite severe valuation declines at our properties in the Odeon and South End and the nightclub that we have in Cardiff. Now starting with the cinema that is partly driven by the fact that the sentiment for the cinema sector is very negative at the moment. I'm sure a lot of you will have picked up in the news in the press that obviously, there is a lack of new films hitting the market, and there have been troubles in Hollywood, and that's just really feeding into the occupational story for the cinema sector in the U.K. and obviously, investment pricing. And then with regards to our Nightclub, that really is sort of driven by increasing costs. We all are very well aware of that. And also the cost of living crisis with students and younger people just having less money in their wallets. And therefore, night club performance isn't as strong as perhaps it once was. So because of the occupational story on both those assets, we did see some valuation declines. Moving on to the next slide, I mean the next bullet point. Our earnings for the quarter were 1.83p. Now we would have been fully covered at 2.11p for the quarter. However, we had the administrations of Wilco's and CJ services. Now obviously, this is not ideal news, but actually, you are well aware that we have a very active asset management style, and we are already sort of on the front foot with asset management plans for both of those assets. We're buoyed by the fact that we feel that there's some quite strong ERV growth at our industrial asset Runcorn where CJ services has gone into administration. And we are sort of nicely advanced with negotiations over letting the former Wilkinson's space in Bristol. Just as a reminder, we continue to payout our dividend of 2p per share for the quarter. We've done that now for 33 consecutive quarters. And then just to finish, skipping over the Portsmouth sale because you're well aware of that because we've covered it in previous announcements and presentations. As you can see, we have a strong rental growth story. We've added around GBP 250,000 of new income this quarter through reversionary assets, 2 properties at Bath, 2 recent acquisitions where we have completed [indiscernible] successfully and moved the rents on quite nicely there.

We have an example of rental growth at one of our smaller industrial units in Wakefield, where we've moved on the rent nicely. And we've had a cracking result with Next in Bromley, where they have very strong turnover, and we have banked that annual turnover rent and seen a nice rental uplift there as well.

[Laura Elkin, executive]

Thanks, Henry. So this slide here just provides an overview of the portfolio as at the end of December. We hold 34 properties. We have just over 140 tenants. Just looking at our yield profile here. So initial yield just under 8%, and you can see our reversionary yield, here, which is a reflection of the portfolio's rental outlook over the long term, significantly higher at just under 9%. And those figures are as assessed by our independent fund value Knight Frank. And just coming to vacancy, you'll see that the figure there shown in the middle of the page, just under 7.5%. Actually, if you refer to the fit note, we've just showing that excluding some agreements for lease that we have in place at Central Six Retail Park in Coventry. So actually, we see the sort of forward-looking vacancy as more around 5.5% as at the end of December, which is, of course, a pleasing level to see. I'm just going to touch on here as well our portfolio weightings. Now if anyone has been following these presentations, going back some 2 years, you would have seen that our industrial holdings have come down from around 55%, 60% of the portfolio to just under 40% today. And our office waitings have reduced also. So they have come down from around 20% to about 12% today, and we have been buying quite a lot of retail assets where we have seen some great value. The reason for just touching on that today is that it leads us to undertake quite a sort of different type of asset management in the portfolio. Of course, asset management always being something that we are very, very busy with and that is a very active approach. But in the way that we did a lot of asset management on the industrials, often that would see perhaps of a tenant left at lease end, you might spend some money on the roof of a building and then let it with a fairly minimal tenant incentive. With higher weighting of retail in the portfolio, we're tending to find now that with our asset management transactions, we are spending in those sort of re-lettings and turning through different tenants, spending just a little bit less money on the actual buildings themselves. Of course, that's not to mean that they're being neglected more just that the costs for that type of building are a bit lower, but much more money going on tenant incentives. There's just a slight swing there in sort of where that capital outlay for us is sitting around the time of re-letting. And I think a few of you have perhaps remarked on that in, for example, where we have been doing a lot of retail asset management during the course of the last 12 months and announcing with that some fairly hefty tenant's incentives, that is simply just a kind of rebalancing of where that capital outlay sits.

[Henry Butt, executive]

So I'm going to pick up this slide. So yes, we continue to think that we are robustly positioned in what is a slightly sort of uncertain economic backdrop. Focusing on the 2 first bullet points here, we continue to sort of let our investors know that we have sort of book values, which are underwritten by alternative uses and vacant possession values. And those -- and a low average book value of GBP 71 per square foot across the portfolio with low average rents. And I was just actually thinking about this earlier this morning. And actually, just to pick a few, we'd like take, for example, a couple of our office assets, one in cluster and the larger chunk of retail in Bristol. Those assets have a GBP 90 per square foot cap value which is incredibly low for sort of good urban locations.

The next at Bromley which you mentioned in our NAV announcement, that is a cap value square foot of GBP 95 a square foot. So when you compare that to Greater London residential values, these cap values are relatively very low. And then if you look at some of our retail warehouses, for example, taking Shrewsbury in Preston, they're at about GBP 100 per square foot. Now you couldn't even build those units for that price. So they feel relatively low as well, and let's obviously not forget that they're throwing out some really nice income at the same time. And then if we take our industrial assets, they are even lower than that and they are yielding sort of yields around 10%. So -- we really feel that we are robustly positioned. We're getting this income, but we've got some really nice low capital values per square foot, which gives us optionality in the event that use that the assets are currently in, we can take it in a different direction. On the third point, I sort of mentioned this already, but the portfolio is significantly reversionary with reversal yield of 8.8%. I just mentioned the 2 rent reviews at Bath where we pushed on the rent nicely. And actually, if we focus on our industrial sector, which is 37% of the portfolio. It currently has a sort of running yield of about 7.8%. We feel that the reversion there is about 9.4%. So there's a lot of rental growth to go after, particularly in the industrial sector. It is sort of a sort of fairly active time for asset management. We do have resilience with our tenants. And you'll see that in the NAV announcements where we obviously have a lot of asset management ongoing. I mentioned earlier on sort of the former Wilco, we're sort of in advanced negotiations there and as well with the former Mecca Bingo in Dewsbury and the former Sports Direct in Barnstaple. So we do really feel that there's a really good asset management story despite tenants moving on. There's significant headroom in all our loan covenants, and we continue to have very robust rent collection, we're above 98% for all the quarters and we're doing very nicely this quarter as well.

[Laura Elkin, executive]

Thanks. The next couple of slides look at our performance. And here, I'm just going to talk through a slide which shows the progress that we've made in growing our earnings during the course of '23. Starting off from, I think, what was an all-time historic low for us at the end of 2022. This was a point at which we had just sold the large assets in Glasgow and Oxford had not yet reinvested those proceeds. So hence, why you can see that at the end of 2022, our income levels looking very low. Now of course, we started our reinvestment program during that fourth quarter. So we bought Bath and Bromley. And then during the course of '23, we've completed that reinvestment program, also along the way making a couple of lower-yielding sales for capital profit and where they were possible and really just taking advantage of what we saw as being really excellent buying opportunity during the first 6 months of 2023. So you can see building back up to this sort of -- what has been for the past 3 to 4 quarters, a fairly stabilized position of earnings around sort of 1.8p. Now as Henry has already touched on, without those unfortunate tenant administrations during the last quarter, our earnings -- sorry, our dividend would have been fully covered by earnings during that quarter. But I think it's important to point out also that we aren't always targeting 100% cover of dividend through income at all times. Clearly, based on our strategy over the past couple of years, our directors have chosen to support our 2p per quarter dividend through total returns. So that's phase through income and through capital profit made from sales and that has led us to be able to deliver to shareholders a more stable dividend. And just to show how that has worked in practice here, I'm showing you our dividend cover since IPO, based through income earnings and also through capital profit that's been used to top that up to the 8p level. So this 94% that you'll see in red, that's actually stayed pretty stable over the past few years. So 94% of all of the dividends that we have paid out from AEW since its IPO, some 9 years ago now have been covered 94% through our earnings. Now at that kind of level, when we have been generating also total return outperformance and showing clearly that we have a track record of crystallizing significant capital profit on sales, our directors have been choosing to support that level of dividend. Just to go into that track record of profitable sales in a bit more detail. I'm showing you here all of the 17 sales that we have made since launching AEW and we're really proud of this track record. We think it really shows -- or demonstrates the skills that we have in stock selection in asset management and in timing those sales as well. I'd particularly point to the sale of Oxford for being incredibly well timed in order to maximize the value there. So yes, showing an excellent track record. Clearly, not a perfect one, but I don't think that, that would be realistic really. Yes, one that we're very proud of. And of course, whilst generating this capital profit from those sales since IPO, all of these assets have been on the hold delivering very strong income returns to the portfolio as well. And just to compare our performance to our U.K. diversified REIT payer group over that same time period. It's approximately around early 2019 that our performance in terms of NAV total return starts to diverge from this peer group. And really, I think that's for the reasons that I've just discussed. That's us generally buying income with length of under 5 years. So within a sort of 3- to 4-year period after buying a lot of these assets, after our IPO, we start to be able to get these business plans to mature, and that is where you see our total return performance line diverge from the peers.

[Henry Butt, executive]

So this slide summarizes our returns versus the U.K. Diversified REIT Peer Group. You would have seen this slide in previous presentations. As you can see in the second column, we are paying out the second highest dividend of 7.9%. I think it's worth mentioning that regional REIT to have a higher dividend around a much, much bigger discount to us, hence, why their dividend is so high. We have the narrowest discount at minus 4.7%. And then as you can see, sort of moving towards the right, we have the highest share price total return across 6 months, 1 year, 3 year and 5 years and we have also the best NAV total return across those same time periods, are particularly focused on the 12.4% annualized NAV total return over 3 years and 9.2% over 5 years. We move on to the next slide. This just shows our strong dividend yield. As you can see, we are second in that bar chart, at 7.9% and as I mentioned, regional, they really stand out, but actually, they're at a 43% discount, which sort of signifies the fact that they're principally invested in offices, which is the sector which is struggling the most. So this next slide is looking at our property total return versus the MSCI benchmark. As you can see, we have had an 11.8% 3-year annualized total return at 9.2% over 5 years. And we have fared relatively well in the last 6 months, but we're down at 3.8% over the 12-month period. Now if we obviously break this into the sectors, you can see that, obviously, everything is down in the benchmark. We fared better than the industrial benchmark. I think that's probably principally driven by the fact that our capital values per square foot are relatively low. Therefore, there is more sort of value in the bricks and mortar of the building than the lease itself. So we fared quite well there an example that Peterborough, one of our sort of industrial assets is on a -- was less on a 15-year lease. I think it's about 12 years left. It's led to a very well-known press printing business, but it's a cap value of GBP 35 a square foot. So the impact of what's happened with interest rates and the investment market is less significant when you've got those lower cap values.

It's probably just worth noting that the other where we have seen capital increase, and that's a result of us doing a reget to Odeon in Southend, but please note that these figures are as of September, so does not factor in the valuation decline that we saw in this current quarter for Odeon, which I touched on earlier on. In on our announcement, we sort of made reference to the fact that there is a lot -- well there's not much transaction activity for our valuers to hang their hat on. And that obviously has been one of the reasons which is putting some valuations under pressure. And I think this bar chart really shows that you can see 2023 the impact of a rising interest environment on transactional activities. And then just to pick out the other 2 lighter blue graphs, you can see 2016 was when Brexit happened or the referendum happened and then 2020 was COVID. So you can really see that like transactional volumes fell off there and then picked up in more normal times. Going to hand back to Laura actually to cover the [indiscernible].

[Laura Elkin, executive]

Thanks. So this was really the only investment transaction that we completed during the quarter. I'll just cover this off briefly because I know that we've provided some narrative on it before. If we just sort of refer back to the slide that I showed you earlier, that was a record of our profitable sales against purchase price. And this was one that was some way significantly down on its purchase price, but it was sold at a premium to the June valuation, and we're comparing that to the June valuation because that was the valuation prior to the asset going under offer. So before receiving this offer for the asset, where we're Knight Frank valuing the asset and it was a premium to that level. So just to sort of give an idea of what kind of value we achieved here. The reason for the sale of the asset was predominantly location-driven. So with the asset having been acquired in late 2017, it was one of our first purchases and of course, it is no secret that the high street retail market has been through a very tumultuous time over that time. With trends starting before the pandemic for a lot of contraction in high street retail, which were only exacerbated by the pandemic.

High Streets have really shrunk in their extent as we all know. But what we saw here, particularly in Portsmouth was the high street contracting away from this location. Comparing this location also to the locations in our pipeline that we were buying during the course of 2023. It really seemed a bit like chalk and cheese. Was this a location that we wanted to hold over the long term, no when at similar yields, we were able to acquire locations in Central Bath, Central York, Greater London, for the same yield profile. Now we very much maximize the value of this asset prior to the sale that we could achieve, and we did that through a letting to spec savers and once the asset was fully let again, we have sold it on. So in terms of performance versus the purchase price, not great fairly good performance, though versus its book value.

[Henry Butt, executive]

So I'm just going to cover off some of the more recent asset management that we've been seeing in the portfolio. And I alluded to this GBP 250,000 growth of income in the highlight slides earlier on. But just to sort of build on that point. Here, we've got 3 properties 2 in Bath and 1 in Bromley. And if we start with the asset on the left-hand side, this is Northgate House in Bath. We bought this property in December 2020 for GBP 13 million, GBP 194 per square foot of a net initial yield of 8.5%. It's very well located and has 2 sort of anchor tenants being TK Maxx on the retail side of things, and Regus Spaces being serviced offices in the upper parts. As you can see, there was an outstanding rent view in -- from September '22 when we bought this property, and we have recently completed the rent review of that -- for that tenant, which is the Regus Group. And we've moved on the rent quite significantly just shy of GBP 100,000, a 24.5% increase. And as you can see, that 8.5% net initial yield, which we bought off is now at a running yield of 9.65%. So cracking results, moving the income on and which is exactly what we need to pay out our dividends. Moving on to the middle property, another property in Bath. We're delighted to import 2 good properties in Bath over the past couple of years. We bought this property a year later in September 2023 of a net initial yield of 8%. And we like this asset as well, and particularly because it's a freehold, which tend to be rarer in Bath and of a cap value of GBP 223 per square foot. There was an outstanding review with one of the 10 office tenants, Novia, which dated back to January 2021. And as you can see another good result there, moving on the rent by GBP 45,000, a 14% increase. And then finally, moving to our NEXT in Bromley. This is NEXT on a 5-year lease, there's roughly about 2.5, 3 years left. Just touching on the alternative use angles. This has a cap value of square foot about GBP 90 a square foot, which I mentioned earlier on, so relatively very cheap when you compare it to residential values in the Greater London area. This potentially could be converted into about 40 flats in the event that NEXT were to leave. But NEXT to trading their socks off here, which we're delighted about, there's a turnover rent of 8% above GBP 3.5 million and that turnover rent this year was GBP 195,000, which is 78% higher than we forecast on purchase. So they're really trading well and that's going to see great additional income for the company. So this slide just touches on the reversionary theme that we see in our industrial holdings, that first bullet point there signifies this, the net initial yield of our Industrial Holdings is 7.8% with a reversion of 9.4%. So we feel that there's a lot of growth to come in the portfolio, and that really suits our active asset management style, whether that be through lease renewals, tenants vacating into new lettings or rent reviews. And as you can see there, this is supported by what's going on in the wider in the U.K. and with industrial rental growth at 10.5% for 2022 and 7.6% for this year ending in December. So here are 3 industrial assets. It is just the first point I'd like to mention on these is they're all relatively low cap value per square foot, and they're all yielding really nice income. So we look at Droitwich on the left-hand side, that has got a running yield of 11.65% once the rent-free period has burnt off. And the middle asset in Wakefield, that's off a cap value of GBP 25 per square foot, relatively very cheap and it's yielding is 10%. And then moving to the property on the right-hand side, Weston-super-Mare cap value per square foot similar to Wakefield and is yielding is currently about 9.85%. So all throwing some really great income. And as you can see, there has been some great asset management activity moving on the rent by GBP 270,000 per annum across 3 lettings at Droitwich moving on to rent at Wakefield through rent reviews and setting a new rental tone for upcoming lease events, which is good news. Moving on rents there as high as 51%. And -- and then at Weston-super-Mare, and we've carried out some rent reviews with North Somerset district council, who use the property for recycling facilities and there's been a renewal completed there with JN Baker. So some good asset management and really sort of capturing that rental growth theme that was here in the portfolio. Finally, apologies if some of you are getting a bit bored of hearing about Coventry Central Six. We don't want to sound like a break of record, but I think it really is a testament to the fact that we continue to sort of build on the asset management story here, and there's still lots of activity. And just as a reminder, we bought this retail warehousing park in Q4 '21 at $16.4 million, with net industrial yield of 7.8% and December valuation was 21.4%. So we've really pushed on the value, and that's obviously as a result of a lot of this active asset management, which really has been driven by us capitalizing on the broadening used class system, meaning we can bring in a wider variety of tenants attract a greater footfall, push on rents and bring better tenants. And obviously, that all feeds through into investment pricing. And as you can see, with these bullet points, we've carried out a 5-year lease renewal with NEXT, a 10-year lease renewal with Caspian Food Services trading as Burger King, 5-year reversionary lease to Boots, a new 20-year lease to Aldi with RPI reviews and more recently, a 15-year lease to Mydentist, 11-year lease to Food Warehouse, which is a part of the Iceland brand and an 8.5-year lease to Salvation Army. So all household names, all at good rents and improving the wealth as you can see on that bar chart at the bottom of the page, it might be a little bit confusing because it starts off looking at the quarters and then goes into the months, but we've done this deliberately to show actually how much the income has grown -- will be growing basically in the coming quarter as a result of signing agreements for leases and those agreements for leases completing.

And so yes, the rent from Q3 '23 to March this year will go from basically just shy of GBP 2 million up to in excess of GBP 2.5 million, so an additional $500,000 worth of income. So another great story.

[Laura Elkin, executive]

Thanks, Henry. I'll just pick up quickly here on our portfolio EPCs. Apologies for anyone who's very eagle eyed in comparing this chart to the one we released about 9 months ago in our annual report. On face value, you'll be very much forgiven for thinking this looks like a very similar picture to the one we put out then. And actually, it is. But that's not to say that there hasn't been a lot of work going on in the background. And I'm just going to talk you through that now.

Focusing, of course, on our Fs and Gs, which are noncompliant EPCs. There are, in fact, about -- although we're showing you here about 14, we're just working through these. And there are only about 5 of those remaining in the portfolio, predominantly at our multi-let industrial site in Weston-super-Mare. So we have some small works ongoing there at the moment to improve those, and we think that, that should be dealing with really all of those problem units at that site.

We are in the process of gaining some exemptions for a number of units at our office. So there's a small office element at our multi-let industrial in Wakefield and they have some valid exemptions. So we're working to register those. So you will see those come off that list. And also in Basildon and Droitwich, which we have improved EPC significantly through spending some CapEx on those units over recent quarters, and they are, therefore, also improving their scores. We're just waiting for those to filter through. So although it's not yet showing on a headline basis, a lot of focus on activity here on getting these scores to be in line with where they should be. So hopefully, by the time we release our annual report, you will see an improved position. So just to conclude from Henry and myself before we take a few questions, we have shown some excellent earnings growth during 2023. And that has now stabilized, although we do expect further growth to come. We are keeping a very cautious eye on our tenants for obvious [Technical Difficulty] in what remains pretty difficult economic conditions. So that is something that we will be very cautiously monitoring, but we are still really pleased to see a lot of momentum behind our asset management, and it's been a really busy 12 months for asset management. I think, to be honest, one of our busiest since having IPO [ AEW ]. So that provides us with a lot of positivity for the future. Our vacancy level is still low. And we believe that those asset management deals that we've been doing over recent quarters will very much help to drive tomorrow's profitable sales. So thank you to those who have submitted questions. We will start to have a look at these now.

[Laura Elkin, executive]

I'll just pick up, first of all, a question here that has been submitted. It says that mergers are becoming popular in the REIT sector, leading to reduced costs, et cetera and what is our attitude towards this? Yes. Of course, I completely agree that consolidation does very much seem to be a theme of our sector at the moment. And I think I would just sort of summarize our position here by being -- by saying that on behalf of ourselves and our Board, we are considering M&A activity where we believe it's in the best interest of our shareholders. So yes, we have considered opportunities in the past, and we will continue to do so, but very much driven by where we think it's in the interest of our returns to shareholders.

[Henry Butt, executive]

A question here from Shivaji. To what extent can investors rely on alternative use values backstopping current book values? Or alternative values mostly residential in nature or quite a mixture and do so and probably have multiple alternative uses. Yes, so there are multiple alternative uses. For example, if you take, let's say, retail warehousing, now what you could do with retail warehousing in the event that, that was not to succeed, you could elect that space as a trade counter or light industrial or sort of last mile logistics, which actually trade off keener yields and lower rents. So actually, yes, you might not be getting as higher rents that you get from retail warehousing, but you'd get a better yield profile on exit and on valuation. Let's not also forget that retail warehousing is located on the edge of big sort of urban areas with lots of residential areas around them. So actually, these sites also could be flattened for residential development. If you sort of move away from the more sort of purpose-built warehouse space, which you see in industrial and retail warehousing and go into sort of offices and high street retail. Yes, naturally residential is the sort of the first alternative use that you think of. But let's not forget that, that residential use could also potentially be student accommodation. It could be a care home or it could be sort of like a hotel for example. So -- and there are a range of alternative uses, and we're always very sort of aware of that when we're buying the pro and it's always nice to have that as a fallback position. And obviously, in the event that we do come across with any tenants.

[Laura Elkin, executive]

I'm just going to take a question, which is how patient will we be regarding the Southend cinema before we go for change of use, which was, of course, one of the attractions when we purchased the asset. So I guess just to start on the sort of headline basis. And I can see actually a couple of people have queried around this asset and one person contrasting it to the night club in Cardiff. So I'll sort of pick up a couple of questions here, hopefully. But starting with Southend, that property is led to Odeon cinemas for another roughly 4 years. Odeon are a solvent company, albeit as Henry has said, the cinema sector is, of course, going through a fairly difficult time. We had, with the backdrop of that difficulty, thought about whether or not we should sell Odeon in recent periods. And we have discovered that the asset despite being in that tricky sector is actually still one of Odeon is sort of top quartile traders. It's the only cinema in the town. And I still very much believe in that sector going forward. I think it's a sector that will remain part of our leisure industry for the time being, I don't think we'll see it completely disappear despite the challenges and the headwinds that are facing.

So -- the asset is let. We don't have access to it at the moment. We could sell it. But I think that if we sold it now, that would be effectively reflecting pricing at the point of maximum pessimism, which, of course, wouldn't be maximizing the best value for that asset. So I think it's very likely that we will continue to hold Odeon for the time being because I personally believe that the outlook for that asset will improve. Cardiff is a rather different picture. Clearly, we've got a tenant here who may not be solvent in the future. We then therefore, have the ability to get our hands back on that asset acquired for, as Henry has pointed out, low capital value in a vibrant location in Cardiff City Center. So it might be that you see us, yes, accessing that asset and accessing those alternative use values that we would have talked about when we bought it on that asset much more quickly than we do in Southend.

[Henry Butt, executive]

Question here from Christopher you. What's your thoughts on the upcoming MEES requirements in 2025 and beyond? Are you engaging with MEES consultants, if that is such a thing. So by that, Christopher, I'm assuming you're talking about EPCs happen to be a C rating by 2025. And just to be crystal clear, actually, you have between 2025 and 2027 to get those ratings to a C rating. We are working with MAP or managing agents who also have an ESG part of their business. And we also work with Evora, who are our ESG consultants. And as Laura touched on, we are working through all of the units within our properties where there are EPCs and looking to improve those EPC ratings when we can. Now I've said previously that actually we benefit with MEES regulations in that we have shorter lease profiles, which basically means that there is more churn. And we are basically having -- we're at a point of negotiations and conversations with our existing tenants, whether they're renewing or whether they're leaving. And in doing so, we have the ability, therefore, to improve the EP scores of our properties, i.e., if a tenant is staying, okay, you're staying, but -- this is what the EP score is. We would like to go in and cap off some gas, which we're not using to improve the EP score. If that or if that tenant is going, we would go in, maybe carry out the refurbishment and address the ESG, the MEES credentials of that asset in doing a light touch refurbishment. So it's something that we are very aware of, and we're working through, and you will see that, obviously, with that bar chart that Laura presented where we have current units, which aren't these compliance, we are working through these assets, ticking them off, whether that be moving towards an exemption if that is applicable or looking to improve that EPC score.

[Laura Elkin, executive]

I'm just going to touch on somebody has pointed out in a query that the fund total return performance is down 6% in the year. Yes, that's absolutely right. If we compare that to our U.K. diversified REIT peer group, however, the NAV total returns across that peer group are down between 10% and 20% over that same time period. Now of course, it is -- yes, not something that I want to be doing, i.e., pointing out that we have good performance because we are less negative than others. But I think that is simply just a reflection on the market conditions and I'm talking more widely here in the economy that we've seen over the past 12 months. We're currently at the peak of a high interest rate environment or the highest interest rate environment that we have seen in the past decade. So yes, I think it's no surprise that property values have taken a hit over that time period. If you compare when Henry presented the property level total returns, to the rest of the MSCI benchmark, so a much larger cohort of property values. Our own total return is down just under 4%, with the benchmark being down close to 15%. Now accepting that it's not helpful to answer that question with saying we are less negative than others. But we are very hopeful that our active approach to asset management and our strategy and always focusing on sort of limiting downside risk is what you're seeing there with our rather more stable performance than some of the others, and we think that will stand us in good stead going forward.

[Henry Butt, executive]

A question here from Matthew P. How long do you think it will take before you can get new tenants into the CJ services building. So obviously, CJ services and administration therefore, for the time being, the administrators in control. We don't mind that for the time being, once we get our [indiscernible] because obviously, it would mean that we aren't on the hook for the rates costs, not forgetting the fact that there is a 6-month rate holiday on vacant industrial space. So that, and we've got plenty of time before that kicks in any way. What we're looking to do here is we've basically been around the units with agents and building surveyors. We have a pretty good understanding of what we need to do to those units to refurbish them to relet them. The previous tenant actually had quite a heavy fit out with offices and [indiscernible] them there. So there's going to be some strip out costs. But the agents feel very optimistic about reletting this space because there's a lack of space in the market. There's strong occupational demand. And actually, the space was let to CJ services of a rent of GBP 6.50 a square foot. And we're being told that we can maybe hit a rent as high as GBP 8 a square foot. So we're very excited about the prospect of doing that. What we will do is we will obviously work through the costs and go out to tender to a number of contractors. At the point that we have a tender return and a traded contractor, we will look to disclaim the lease of the administrator, allowing us to go into units, carry out the refurbishment. And we would hope, given how buoyant the occupational market is for the type of space at Runcorn that we would be able to sort of secure lettings to tenant whilst we were doing the works. And that is because, obviously, the works are [indiscernible] works rather than being bespoke to an incoming tenant.

Also you might have some tenants who might require additional works to the work you're doing. So I would expect us to make some really good progress on that over the next sort of 3 to 6 months, and I'm sure we'll provide updates in due course.

[Laura Elkin, executive]

Thanks, Henry. Just a query here, which I think is sort of focused on our -- some of the asset management announcements that we've made around Central Six in Coventry. So referring to some longer leases on this asset and some fairly hefty cash incentives given to tenants and the question asked, can we not simply provide tenants with a rent-free period. And of course, we have often paid out for significant landlord works in doing those lettings as well. Yes, I sort of tried to touch on this at the start of the presentation when I was talking about the rather different nature of asset management transactions that we're doing at the moment in retail. And yes, Central Six is a great example of this. Fair to say that a lot of those sort of high street names of retailers that are going into Central Six at the moment. A lot of them have had some fairly hefty and expensive fit out including the 2 supermarkets that we now have there. And those tenants simply require a capital contribution in order to do that. They know they're worth. Aldi know their worth. They know how much it means to landlords, both in terms of footfall and the yield compression once they get on to a site. So to a certain extent, they hold a lot of bargaining power. Now we are more than happy to do those transactions with them despite the cost because we believe that it will not only improve our income levels to those assets. But over the medium term, improve the capital value significantly at those sites as well. So yes, it may look like we are doing a lot of expensive works in commentary in order to get that Retail Park up and let. But we believe that there is some significant profit to come further down the line. Now Henry demonstrated the increase in value that we have seen from that site to date. We believe that as more of those lettings start to sort of filter through and there as Henry has demonstrated more to come during Q1 this year that we will continue to see those increases in value there. So yes, they look very expensive, but they are all weighed up against the capital benefit that we expect to see. And yes, we expect the outcome to be profitable.

[Henry Butt, executive]

Question here from [indiscernible]. What are your future plans for Bristol offices? So just to be clear, we have 2 assets in Bristol. One, which is Queen Square, which is sort of an office. And then we have Union Street, which actually is more retail and leisure use. I'll just cover both of those because obviously, the Union Street one is quite topical because that's the asset where will continue [indiscernible] its administration. But focusing on the office. We've covered this property actually on several occasions in previous presentations. And the main theme of that slide in that presentation has been rental growth. We have really sort of managed to push on rents from sort of low to mid-20s since we bought this property to rents targeting now about GBP 40 a square foot. So there's been a really strong rental growth story. Currently, we have a tenant ramble who vacated in November, and we have another part of the office, which is vacant. And we're looking to let that space refurbished. [indiscernible] space is not refurbished, but the other space has already been refurbished and hit rents in excess of GBP 40 a square foot. So building on that rental growth story. And we're also looking to carry out a refurbishment of the reception, which will help us in trying to push those rents on. So I think once those units are let, the office should be fully let, and we would have really demonstrated some strong rental growth. There's also another asset management angle where we are in discussions with Bristol City Council about extending the long leasehold. We really feel that there is some nice valuation upside in doing so. But it is sort of -- it's early days, and obviously, it will all come down to pricing. So that's kind of the asset management angle for that asset. And then just touching on the other asset in Bristol I mentioned earlier on, Wilkinson administration in August, and we are in the process of, hopefully, securing lettings on that space to new exciting leisure tenants, which will be a great result for the asset.

And as I'm sure you guys are aware, the top floor is already let to Roxy Leisure, which is like a competitive social brand and they're trading their [indiscernible], so we really feel that like sort of building on this leisure theme will be great for the asset.

[Laura Elkin, executive]

Thanks, Henry. Just conscious of time here. I'm just going to take one final question, I'm afraid. The question asked, Recent research from Gerald Dev indicates that multi-let industrial is holding up better than other sectors. We have reduced our exposure to industrials. The question is being asked, are we happy with that level of the current weighting for now? And yes, I think, is the answer to that question. We took some profit off the table with industrials over the past 18 months. I'm really happy to do that where we saw some really great off-market approaches, whilst there has not been much stock on the market. We were able to achieve some great premium pricing for the states that we have sold. And contrasting that to the availability in our pipeline as a value investor, it's quite an exciting time when we can take that profit on some of the assets. At the same time, as seeing growing value in other sectors. It's kind of arbitraging between where a lot of demand has been in the market and our own sort of ability to seek across sector, where we best see value. So we've been clearly buying retail as opposed to where most people have been going. I would like to see that industrial weighting staying fairly stable for now, though, accepting perhaps a few sort of singular asset management or investment transactions. But yes, really happy with the weighting there. That sector is providing a lot of rental growth for us, as Henry has demonstrated. So I'm comfortable with the weightings as they are for now. Thank you.

[Operator]

Laura, Henry, thank you for answering those questions you can from investors. And of course, the company can review all questions submitted today, and we'll publish those responses on the Investment Company platform. Before redirecting investors to provide you with their feedback, which I know is particularly important to yourself and the company, Laura, can I please ask you for a few closing comments.

[Laura Elkin, executive]

Yes. Thanks, Lilly, and thank you very much for everyone who's joined us today. Apologies that we didn't have time to get through all of the questions. We always get so many -- but hopefully, you have found today's presentation informative. We are certainly buoyed for the future. You may not see me for a couple of quarters, but I certainly will be back, and I look forward to speaking to you again then.

[Operator]

Laura and Henry, thank you for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team better understand your views and expectations. This may only take a few moments to complete and I'm sure will be greatly valued by the company. On behalf of the management team of AEW U.K. REIT plc, we'd like to thank you for attending today's presentation. Good morning to you all.