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Following 1HFY2022 results, analysts praise Elite Commercial REIT's stable portfolio, lower gearing

Jovi Ho
·4-min read

From FY2022, the REIT’s manager will receive 100% of its management fees in cash instead of units.

Elite Commercial REIT’s stable portfolio and lease regearing have earned it an “add” from CGS-CIMB Research analyst Lock Mun Yee.

This follows the REIT’s 1HFY2022 ended June results, where it reported a distribution per unit (DPU) of 2.56 pence (4.26 cents), 2.7% lower y-o-y due to a higher unit base. From FY2022, the REIT’s manager will receive 100% of its management fees in cash instead of units "to strengthen the REIT’s financial position in the long term and to preserve unitholder value by minimising unit base dilution".

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In an Aug 8 note, Lock holds an unchanged target price of 76 pence on Elite Commercial REIT.

1HFY2022 revenue rose 17.7% y-o-y to £18.7 million while NPI grew 17.5% y-o-y to £18.1 million on contributions from its new acquisition, partly offset by slightly lower portfolio occupancy.

Slight occupancy dip

The REIT’s portfolio was 98% occupied at end-1HFY2022 and 99.9% of rents have been collected for the period of three months to September.

During 1HFY2022, the REIT renewed and restructured two non-government leases at The Forum, Stevenage.

One of the leases was renewed with a 4.6% rental uplift while the other had a mutual lease break moved to 2028.

In addition, Elite Commercial REIT received notice to exercise a lease break option for Lindsay House, Dundee and Ladywell House, Edinburgh.

Lindsay House is being actively marketed to potential occupiers, with alternative uses being considered. Proactive tenant engagement at Ladywell House is ongoing to maximise space use and to derive the best outcome from active asset management of this property, writes Lock.

This is in addition to two other properties: John Street, Sunderland and Sidlaw House, Dundee, which were vacated in April and June respectively.

In all, 87.5% of total portfolio rental income, as at June, is secured till March 2028 following removal of lease break options.

Lower gearing

Following a 3.5% revaluation uplift in portfolio value at end-1HFY2022, Elite Commercial REIT’s gearing declined to 41.9%.

In terms of capital management, the REIT has hedged 63% of its debt into fixed rates. It has a total of £100.6 million and £125 million of term loan facility, bridge loan and revolving credit facility due to be refinanced in FY2023F and FY2024F, respectively. In view of the rising rate environment, management guided that average funding cost could rise to mid-to-high 2% post-refinancing, notes Lock.

1HFY2022 numbers were slightly above forecasts, write DBS Group Research analysts in an Aug 8 note.

“However, with two more properties exercising their lease break options, we see some negative impact to rental income, partially mitigated by the built-in inflation-linked rental escalations that will begin in April 2023,” says DBS.

In an Aug 15 note, DBS analysts Tabitha Foo, Dale Lai and Derek Tan maintain "buy" on Elite Commercial REIT but lower its target price to 70 pence from 75 pence previously, citing an upcoming rent review for "a large proportion of its portfolio" in April 2023.

The portfolio's "strong income visibility" till 2028 is a key positive, add the DBS analysts. "Approximately 87.5% of the portfolio currently has straight leases through to 2028. The weighted average lease to break (WALB) is now at its longest at five years, which will be a critical factor for the stock to re-rate."

Historically, the REIT's price to net asset value ratio (P/NAV) was at 1.2x when WALB was at its longest at 4.5 years, and the stock is currently trading at 1x P/NAV, says DBS.

The REIT’s portfolio is primarily occupied by the Department for Work and Pensions (DWP), the UK's largest public service department that is responsible for welfare, pensions and child maintenance.

Looking ahead, with The Bank of England (BOE) warning that the UK will fall into recession this year after raising interest rates by the most in 27 years, DBS anticipates claimant counts and unemployment rate to rise.

“Hence, the demand for these JobCentre Plus centres should remain elevated given that they play a critical role in the reorganisation of the labour force and economic recovery. However, we also expect some negative impact from the weakening pound against the Singapore dollar,” writes DBS in its Aug 8 note.

As at 1.05pm, units in Elite Commercial REIT are trading 1 penny lower, or 1.64% down, at 60 pence.

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