Analysts are generally positive on Elite Commercial REIT (ECREIT), considering the growths in its revenue and distributable income for the 1QFY2022 ended March.
During the quarter, the REIT saw revenue increase by 39.4% y-o-y to £9.2 million ($15.8 million). Distributable income during the same period increased by 36.2% y-o-y to £6.1 million.
Distribution per unit (DPU) rose 4.9% y-o-y to 1.28 pence in 1QFY2022 from 1.22 pence in 1QFY2021.
As at March 31, ECREIT’s portfolio of 155 properties reported a fully occupancy rate with a long weighted average lease to expiry (WALE) of 5.5 years. Of its properties, over 99% are leased to the AA-rated UK Government, primarily the Department of Work and Pensions (DWP).
Some 85% of the portfolios currently have straight leases through to 2028.
On this, DBS Group Research analysts Dale Lai and Tabitha Foo have kept a “buy” rating on ECR with a lowered target price of 75 pence.
See also: Test debug host entity
The lower target price implies a 14% potential upside with attractive yields of 7.2% for the FY2022 and FY2023 respectively.
To the analysts, the REIT remains a “good inflation hedge” with its built-in inflation-linked rental escalations. The strong income visibility to 2028 is also a “key positive”, in their view.
“ECREIT has an upcoming rent review for a large proportion of the portfolio in April 2023, and the rental escalation is estimated to be between11-15%. We see further upside to our current c.11% rental growth projection for 124 leases, with the lease break option removed and without rent reduction,” the analysts write in their May 6 report.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
However, the analysts have decided to cut their DPU estimates for the FY2023 by 7%. They have also lowered their FY2023 revenue estimates to £37.2 million from £39.0 million on the back of slightly higher-than-expected rent reductions for 11 leases. The assumption of zero income from the 10 leases that exercised the lease break option were also factored into the analysts’ estimates.
The analysts believe that ECREIT will likely see a lift in valuations with the removal of lease break options for 108 out of 117 properties leased to DWP.
At present, the weighted average lease to break (WALB) is now at its longest at approximately five years, which will be a critical factor for the stock to re-rate.
Historically, P/NAV was at 1.2x when WALB was at its longest at approximately 4.5 years, and the stock is currently trading at just 1x P/NAV with potential revaluation gains ahead.
CGS-CIMB Research analyst Lock Mun Yee has also kept “add” rating on ECREIT with an unchanged target price of 76 pence as the REIT’s revenue and distributable stood within her expectations at 24.3% and 25.5% of her FY2022 forecast.
Lock will be adjusting her FY2023-FY2024 DPU estimates up by 0.36%-0.61%.
“At the current price, ECREIT offers an attractive FY2022 dividend yield of 7.6%,” Lock writes in her May 4 report.
For more stories about where money flows, click here for Capital Section
To Lock, the REIT could see positive outcome from its lease re-gearing.
In 1QFY2022, ECREIT had successfully removed lease break options from 108 assets occupied by the DWP and the Ministry of Defence (MOD), extending income visibility until March 2028 for 85.2% of ECREIT’s annualised portfolio gross rental income.
At this juncture, ECREIT is actively looking at strategies for each asset to maximise value outcomes, including re-letting, disposal or alternative uses, including conversion or redevelopment.
Management guided that rental income from properties occupied by DWP and MOD could increase by 1.5%-5.5% from its FY2022 contractual base, as at 1QFY2022, after taking into account the rental reductions and adjusting for compounded inflation, assumed at 11%-15.4%
“We believe ECR could likely enjoy some positive portfolio uplift, given the longer income visibility as well as the potentially higher income following the rental escalation from April 2023,” says the analyst. “This could lower ECR’s gearing, providing more debt headroom for inorganic growth opportunities.”
Overall, Lock says she likes ECREIT’s stable income portfolio, with inbuilt growth through its inflation-linked rental structure.
“Potential re-rating catalysts could come from rental uplifts for the majority of its portfolio in FY2023, while downside risks include tenant concentration exposure to the DWP,” she says.
As at 2.08pm, units in ECR are trading flat at 65 cents at a FY2022 P/B ratio of 1.09x and dividend yield of 7.6% according to CGS-CIMB’s estimates.
