AEW UK REIT : Annual Financial Report for the Year Ended 31 March 2023

AEW UK REIT plc

Annual Report and Financial Statements for the year ended 31 March 2024

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	14
Investment Manager's Report	17
Principal Risks and Uncertainties	36
Stakeholder Engagement	43
Governance
Board of Directors	46
Corporate Governance Statement	48
Report of the Audit Committee	54
Directors' Remuneration Report	58
Directors' Report	62
Statement of Directors' Responsibilities	81
Independent Auditor's Report to the members of AEW UK REIT plc	83
Financial Statements
Statement of Comprehensive Income	92
Statement of Changes in Equity	93
Statement of Financial Position	94
Statement of Cash Flows	95
Notes to the Financial Statements	96
EPRA Unaudited Performance Measures	128
EPRA Sustainability Performance Measures	134
Company Information	148
Glossary	150

Strategic Report

Financial Highlights

• Net Asset Value ('NAV') of £162.75 million and 102.73 pence per share ('pps') as at 31 March 2024 (31 March 2023: £167.10 million and 105.48 pps).
• NAV Total Return for the period of 4.98% (31 March 2023: -5.93%).
• Operating profit before fair value changes of £13.36 million for the year (year ended 31 March 2023: £11.10 million).
• Profit before tax ('PBT')* of £9.09 million and earnings per share ('EPS') of 5.71 pps for the year (year ended 31 March 2023: loss before tax of £11.33 million and EPS of -7.15 pps). PBT includes a £4.35 million loss arising from changes to the fair values of investment properties in the year (year ended 31 March 2023: £30.00 million loss).
• EPRA Earnings Per Share ('EPRA EPS')* for the year of 7.29 pps (year ended 31 March 2023: 5.70 pps). See page 108 for the calculation of EPRA EPS.
• Total dividends of 8.00 pps declared for the year (year ended 31 March 2023: 8.00 pps), consistently paid since Q1 2016
  (34 consecutive quarters).
• Shareholder total return* for the year of 1.85% (year ended 31 March 2023: -16.44%).
• The price of the Company's Ordinary Shares on the Main Market of the London Stock Exchange was 85.80 pps as at 31 March 2024 (31 March 2023: 92.10 pps).
• As at 31 March 2024, the Company had drawn £60.00 million (31 March 2023: £60.00 million) of a £60.00 million (31 March 2023:
  £60.00 million) term credit facility with AgFe and was geared to 28.97% of GAV (31 March 2023: 28.06%) (see note 16 on pages 118 and 119 for further details).
• The Company held cash balances totalling £11.40 million as at 31 March 2024 (31 March 2023: £14.32 million).

Property Highlights

• As at 31 March 2024, the Company's property portfolio had a valuation of £210.69 million across 33 properties (31 March 2023: £213.83 million across 36 properties) as assessed by the Valuer1 and a historical cost of £214.66 million (31 March 2023: £224.03 million).
• Over the year, the Company's portfolio delivered outperformance against the MSCI/AREF PFI Balanced Funds Quarterly Property Index of 7.0%. Outperformance of the Company's assets against the benchmark was also seen in each main property sector.
• The Company also won the Citywire investment trust award in the 'UK Property' category for the fourth successive year, as well as winning the 'Property' category at the Investment Week Investment Company of the Year awards.
• The Company acquired two properties during the year for a total purchase price of £21.52 million, excluding acquisition costs (year ended 31 March 2023: five properties for a purchase price of £32.05 million).
• The Company made five disposals during the year with total gross sale proceeds of £26.95 million (year ended 31 March 2023: five disposals with total gross sale proceeds of £44.41 million).
• The portfolio had an EPRA Vacancy Rate** of 6.38% as at 31 March 2024 (31 March 2023: 7.83%).
• Rental income generated in the year under review was £19.89 million (year ended 31 March 2023: £17.71 million). The number of
  tenants as at 31 March 2024 was 133 (31 March 2023: 145).
• EPRA Net Initial Yield ('NIY')** of 8.02% as at 31 March 2024 (31 March 2023: 7.65%).
• Weighted Average Unexpired Lease Term ('WAULT')* of 4.27 years to break (31 March 2023: 3.05 years) and 5.60 years to expiry
  (31 March 2023: 4.33 years).

• See KPIs on pages 14 to 16 for definition of alternative performance measures.
• See Glossary on pages 150 to 153 for definition of alternative performance measures.
  1 The valuation figure is reconciled to the fair value under IFRS in note 13.

2	AEW UK REIT plc • Annual Report and Financial Statements • 31 March 2024

Chairman's Statement

Overview

The year to 31 March 2024 was a challenging period for the UK economy, which continued to impact the commercial property investment market. The higher interest rate environment has suppressed investor demand, contributing to downward pressure on valuations. This has been exacerbated by low transaction volumes and distressed sales, leading to a lack of evidence on which valuers can base their valuations. Data from Knight Frank suggests that UK commercial property transaction volumes for 2023 were approximately £38.0 billion, a reduction of 38% from £61.3 billion in 2022, and the weakest year since 2011. This culminated in UK commercial property suffering an average decline in capital value of -4.8% during the year, compared to -0.6% experienced by the Company's portfolio. The expectation is for UK commercial property transaction volumes to remain subdued in the short-term ahead of the General Election on 4 July, but to pick up in tandem with the cooling of the inflationary environment and corresponding rate cuts expected later in the calendar year.

There are, however, already signs of some green shoots, with commercial property yields across the UK Monthly MSCI index stabilising. In March 2024, 61% of MSCI sector yields were stable on a three-month rolling average basis, the highest proportion of stable yields since April 2022. Meanwhile, 16% of net initial yields in the index were compressing in March 2024, the highest level since December 2023, signalling that the bottom of the market may be behind us.

During the year, the Company delivered an annual NAV total return to its shareholders of 4.98%. Considering this testing backdrop, the Company's relative performance is testament to its value-focused strategy of investing in mispriced assets where our Manager believes income can be grown and value created through active asset management, which continues to be the beating heart of the Company's philosophy.

With market participants deliberating on the timing of long-awaited interest rate cuts, share price weakness amongst listed property companies has persisted. The Company's shares traded at an average discount to NAV of 8.6% during the year, compared to the UK diversified REIT peer group average of 28.9%. Although the Company's shares produced a subdued shareholder total return of 1.85% for the year, they traded at the narrowest average discount among the UK diversified REIT peer group. We expect that the Company's long-term track record of NAV outperformance, coupled with its dividend record, will aid its share price recovery once market sentiment improves.

Subdued markets can present opportunities for the Company's actively managed value strategy. During the first half of the year, three industrial assets were sold at levels that maximised their value over the short to medium term. These sales included two assets in Leeds and Bradford, sold as a package for a blended initial yield of 6.2%, at a weighted average premium to purchase price of 31.2%. The Company was subsequently able to recycle the resulting capital from these sales into two assets in Bath and York at an average purchase yield of 8.6%, with both offering reversionary yields greater than 10%. Accessing these quality assets in core urban locations at such favourable pricing demonstrates the Company's ability to crystallise asset management gains via the sale of lower yielding assets and recycling the capital into earnings-accretive, higher yielding ones. Corresponding capital profits have also been used, where necessary, to supplement the Company's market-leading dividend, which has been maintained for 34 consecutive quarters.

AEW UK REIT plc Property Performance vs.

Benchmark for 12 months to 31 March 2024

8

6

4

2

%

0

-2

-4

-6

AEW UK REIT			Benchmark*
Capital Growth		Income Return	Total Return

Source: MSCI 31 March 2024

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

AEW UK REIT plc • Annual Report and Financial Statements • 31 March 2024	3

Chairman's Statement (continued)

During the year, the Company made good progress in rebuilding its income stream. Active asset management resulted in many leasing transactions that have supported earnings through a combination of void cost mitigation and rental income enhancement. Recently, three new lettings at the Company's retail warehousing holding in Coventry have augmented annual rental income by £535,000, contributing to circa 20% year-on-year rental growth for the property. The Company also settled two office rent reviews at each of its mixed-use assets in Bath, increasing annual rental income by £141,586 per annum, thus demonstrating that counter-cyclical growth can be captured in this testing sector. Occupational activity was present across all sectors in the Company's portfolio, evidencing

the Investment Manager's conviction in stock selection and highlighting the effectiveness of its active asset management strategy. Quarterly earnings have increased from 1.75 pps in financial Q1 2024 to 1.88 pps in financial Q4 2024, resulting in dividend cover for the year of 91%; a significant increase from the 71% cover in FY 2023. This quarterly earnings growth was particularly encouraging, given the increase in the Company's ongoing charges ratio, which arose due to the ongoing inflationary environment and downward pressure on property valuations. The Company's portfolio retains further income growth potential, as is evidenced by its year end reversionary yield of 8.8% markedly exceeding its initial yield of 8.0%. Further asset management transactions in the coming quarters are expected to assist realisation of this reversionary potential, thereby continuing to improve earnings performance.

Financial Results Summary

	Year ended	Year ended
	31 March 2024	31 March 2023
Operating profit before fair value changes (£'000)	13,363	11,096
Operating profit/(loss) (£'000)	10,861	(9,164)
Profit/(loss) before Tax (£'000)	9,090	(11,325)
Earnings/(loss) Per Share (basic and diluted) (pence)*	5.71	(7.15)
EPRA Earnings Per Share (basic and diluted) (pence)*	7.29	5.70
Ongoing Charges (%)	1.60	1.37
Net Asset Value per share (pence)*	102.73	105.48
EPRA Net Tangible Assets per share (pence)*	102.73	105.48

• See note 11 of the financial statements for calculation.

Financing

The Company had a £60.00 million loan facility, which was fully drawn as at 31 March 2024 (31 March 2023: £60.00 million facility; fully drawn), producing the following measures of gearing:

	Year ended	Year ended
	31 March 2024	31 March 2023
	%		%
Loan to NAV	36.87	35.91
Gross Loan to GAV	28.97	28.06
Net Loan to GAV (deducts cash balance from the outstanding loan value)	23.47	21.37

4	AEW UK REIT plc • Annual Report and Financial Statements • 31 March 2024

Chairman's Statement (continued)

Awards

I am delighted that the Company's performance and business practices were recognised in four awards during the year. The Company has once again been awarded by EPRA, the European Public Real Estate Association, a gold medal for its high standard of financial reporting and a silver medal for standards of sustainability reporting. During the year, the Company won the Citywire investment trust award in the 'UK Property' category, an award given to the trust displaying the highest NAV returns over a three-year period. The Company won this award in 2020, 2021 and 2022, so we are thrilled to receive it for a fourth consecutive year. The Company also won the 'Property' category at the Investment Week Investment Company of the Year awards. We are delighted that these awards and nominations recognise the hard work and dedication put into running the Company by both my colleagues on the Board and the Company's Investment Manager, AEW.

ESG+R

AEW, as Investment Manager of the Company, has committed to abide by the UN Principles for Responsible Investment (PRI), where these are consistent with operating guidelines, as outlined in its Socially Responsible Investment Policy. The Investment Manager continually looks to improve its processes relating to environmental, social, governance and resilience (ESG+R) factors in line with sector best practices as they evolve. As a result, within this Annual Report, the Company provides voluntary reporting against the Task Force on Climate-related Financial Disclosures ('TCFD') for the fourth time. In recent periods, the Investment Manager made progress by improving the integration of ESG+R into its investment, asset management and operations processes. The Company continues to undertake greater analysis and scoring of assets at the time of purchase, along with a more comprehensive assessment of the asset's specific climate resilience.

During 2018, AEW established sustainability targets across its managed portfolio which, comprises service charged assets and vacant accommodation, whose utilities the Company operationally controls. These targets include the reduction of Scope 1 and 2 greenhouse gas emissions and waste disposal. As at December 2023, absolute energy usage had reduced by 26.5% and emissions had reduced by 40.8% versus the 2018 baseline. Waste transferred to landfill had reduced to zero within the managed portfolio. We would like

to thank the Company's very committed managing agents, Mapp, for their assistance in achieving these improvements. As a result of the Company's accomplishments against these targets, new targets have been set out within this report against current levels of performance that the Company hopes will lead to further improvement in the sustainability of its activities.

GRESB is a global real estate benchmark that assesses Environmental, Social and Governance performance. The Company achieved two stars out of five in its eighth submission year, maintaining its 2022 score to achieve an overall score of 67 out of 100, versus a peer group average of 65. Much of the GRESB score relates to data coverage and due to the high percentage of assets in the Company's portfolio with tenant-procured utilities, the Company does not score as well as peers given its larger holding of multi-let managed assets.

Minimum Energy Efficiency Standards (MEES)

AEW is committed to ensuring compliance with MEES regulations which first came into effect from April 2018, when it became unlawful to grant new leases of commercial property with an EPC of below an 'E' rating. From 1 April 2023, existing leases certified with an 'F' or 'G' rating also became unlawful, even if the lease was granted prior to the MEES Regulations coming into effect.

As at the end of the period, the Company had five units with draft EPC 'G' ratings, with almost all of the Company's assets being MEES compliant. Three of these five draft G-rated units are anticipated to become MEES compliant once M&E works have been undertaken at a non-material cost to the Company. The remaining two units are currently vacant and are therefore not be in breach of MEES or EPC regulations.

To mitigate future MEES risk, the Company will continue to undertake its gap analysis, identifying assets that fall below the MEES regulations, and will either need an improvement plan implemented to achieve an 'E' rating or better, or an exemption lodged, where applicable.

The Company regards its relatively short WAULT (to break and expiry) as an opportunity to proactively engage with its existing tenants at lease events to improve the energy performance of its assets, as well as in the event of a vacancy.

AEW UK REIT plc • Annual Report and Financial Statements • 31 March 2024	5

Chairman's Statement (continued)

Succession Planning

As announced previously, I am very pleased to have made the appointments of Mr Robin Archibald and Mrs Liz Peace as independent Non-Executive Directors to the Board of the Company, effective 1 October 2023. As part of orderly succession planning, Robin has been appointed as Chairman-elect and will succeed as Chairman of the Board upon my retirement at the Company's 2024 AGM. I am delighted that Robin and Liz have joined the Board as their experience and range of skills will complement and further strengthen the Board. Their collective extensive knowledge and experience in investment companies has already been of great benefit and I am working closely with Robin to ensure a smooth handover in September 2024.

As also previously announced, Mr Bim Sandhu retired from the Board as Chairman of the Audit Committee on 30 September 2023, having reached the end of his nine-year tenure as a Director of the Company. As first announced on 10 November 2022, Mr Mark Kirkland was appointed as Chairman-designate of the Audit Committee and has now succeeded Mr Sandhu as Audit Committee Chairman. On behalf of the Board, I thank Mr Sandhu for his invaluable contribution since IPO of the Company and wish him well for his future endeavours.

Mrs Katrina Hart will assume the role of Chair of JPMorgan UK Small Cap Growth & Income plc with effect from 27 November 2024. As a result of this additional commitment, it is currently anticipated that she will retire as a Non-Executive Director of the Company at the AGM in September 2025.

Outlook

The Board and Investment Manager believe that the Company is both defensively and opportunistically positioned to take advantage of and withstand the current market conditions. We are pleased by the resilience that the portfolio exhibited during a period of uncertainty versus the performance that was achieved across the commercial property market as a whole. We also believe that the Company's investment strategy is well placed to benefit from current market conditions that allow it to be nimble in making cross sector and often counter-cyclical moves that can deliver optimal value to our shareholders.

Earnings performance will be a continued focus over coming quarters. Lettings currently underway at assets such as Union Street, Bristol, and The Railway Centre, Dewsbury, should enhance earnings in the future. There is also the likelihood of continued capital recycling from sales of select lower yielding assets, or properties where asset management initiatives have been concluded, into higher yielding assets which present stronger potential for value and income enhancement.

There has been considerable corporate activity within the listed property sector recently. The Board and Investment Manager will continue to seek out potential opportunities to grow the Company, but it goes without saying that it is paramount that any opportunity explored must be to the benefit of the Company's existing shareholders.

In the near term, the Board and Investment Manager will continue to take a prudent approach towards the management of the Company, given the ongoing economic uncertainty and upcoming General Election. Although the outlook for commercial property values is now more positive than during the previous 12 months, the Investment Manager and the Board will continue to monitor economic conditions closely.

Mark Burton

Chairman

1 July 2024

6	AEW UK REIT plc • Annual Report and Financial Statements • 31 March 2024

Business Model and Strategy

Introduction

The Company is a real estate investment trust listed on the premium segment of the Official List of the FCA and traded on the London Stock Exchange's Main Market. As part of its business model and strategy, the Company has, and intends to maintain, UK REIT status. HM Revenue and Customs has acknowledged that the Company has met the necessary qualifying conditions to conduct its affairs as a UK REIT and the Company intends to continue to do so.

Investment Objective

As a real estate investment trust, the Company's purpose is expressed in its investment objective, which is to deliver an attractive total return to shareholders from investing predominantly in a portfolio of smaller commercial properties in the United Kingdom.

Investment Policy

In order to achieve its investment objective, the Company invests in freehold and leasehold properties across the whole spectrum of the commercial property sector (offices, industrial/warehouses, retail warehouses, high street retail and alternatives) resulting in a diversified tenant base.

Investment Restrictions

The Company invests and manages its assets with the objective of spreading risk through the following investment restrictions:

• the value of no single property, at the time of investment, will represent more than 15.00% of GAV;
• the Company may commit up to a maximum of 10.00% of its NAV (measured at the commencement of the relevant project) to development activities;
• the value of properties, measured at the time of each investment, in any one of the following sectors: offices, industrial/warehouse, retail warehouses, high street retail and alternatives will not exceed 60.00% of GAV;
• investment in unoccupied and non-income producing assets will, at the time of investment, not exceed 20.00% of NAV;
• the Company may commit up to a maximum of 10.00% of the NAV (at the time of investment) in the AEW UK Core Plus Property Fund (the 'Core Fund'). The Company disposed of its last remaining units in the Core Fund in May 2017 and it is not the current intention of the Directors to invest in the Core Fund;
• the Company will not invest in other closed-ended investment companies; and
• if the Company invests in derivatives for the purposes of efficient portfolio and cash management, the total notional value of the derivatives at the time of investment will not exceed, in aggregate, 35.00% of GAV.

The Directors currently intend, at all times, to conduct the affairs of the Company so as to enable the Company to qualify as a REIT for the purposes of Part 12 of the Corporation Tax Act 2010 ('CTA') (and the regulations made thereunder).

The Company will, at all times, invest and manage its assets in a way that is consistent with its objective of spreading investment risk and in accordance with its published investment policy and will not, at any time, conduct any trading activity which is significant in the context of the business of the Company as a whole.

In the event of a breach of the investment policy and investment restrictions set out above, the Directors upon becoming aware of such breach will consider whether the breach is material, and if it is, notification will be made to a Regulatory Information Service.

Any material change to the investment policy or investment restrictions of the Company may only be made with the prior approval of shareholders.

AEW UK REIT plc • Annual Report and Financial Statements • 31 March 2024	7

Business Model and Strategy (continued)

Our Strategy

The Company exploits what it believes to be the compelling relative value opportunities currently offered by pricing inefficiencies in smaller commercial properties let on shorter occupational leases. The Company supplements this core strategy with asset management initiatives to upgrade buildings and thereby improve the quality of income streams. In the current market environment, the focus is to invest in properties which:

• typically have a value, on investment, of between £2.50 million and £15.00 million;
• have initial net yields, on investment, of typically between 7.50-10.00%;
• achieve, across the whole portfolio, an average weighted lease term of between three to six years remaining;
• achieve, across the whole portfolio, a diverse and broad spread of tenants;
• have potential for asset management initiatives to include refurbishment and re-lettings; and
• have values underwritten by vacant possession, residual and alternative use values.

How we add value

An Experienced Team

The Investment Management team has over 10 years working together, reflecting stability and continuity.

Value Investing

The Investment Manager's investment philosophy is based on the principle of value investing. The Investment Manager looks to acquire assets with an income profile coupled with underlying characteristics that underpin long-term capital preservation. As value managers, the Investment Manager looks for assets where today's pricing may not correspond to long-term fundamentals.

Active Asset Management

The Investment Manager has an in-house team of dedicated asset managers with a strong focus on active asset management to enhance income and add value to commercial properties.

Our Asset Management Process

Business

Plan updated each year with quarterly reviews

Ongoing income and value creation

Agency appointments, letting meetings, tenant negotiations, lease re-structuring, dilapidations, claims, rent reviews and valuations

Business plans for all

new

acquisitions

Quarterly

joint reviews

by AM* &

Investment teams

for the "Hold Sell" review

*AM - Asset Management

Analysing local market trends and supply/demand dynamics, we identify the most profitable and deliverable strategies

Detailed implementation plan, marketing and leasing programmes, capital expenditure forecasts and cash flows

Fortnightly

asset management updates

The Investment Manager's Asset Management process incorporates the Company's Environmental, Social and Governance ('ESG') Policy, which is found in the Directors' Report on pages 65 and 66

The Company reports on its ESG performance using EPRA Sustainability Performance Measures on pages 134 to 147

8	AEW UK REIT plc • Annual Report and Financial Statements • 31 March 2024