With its 1HFY2021 outperformance, Elite Commercial REIT enjoys “pandemic-proof distributions” with its unique position in the REITs space, says DBS Group Research analyst Dale Lai.
In an Aug 4 note, Lai is maintaining his “buy” call on the REIT, with a target price of 80 pence ($1.50), which represents a 19% upside.
Elite Commercial REIT is the only UK-focused Singapore REIT, established with the investment strategy of principally investing, directly or indirectly, in commercial assets and real estate-related assets in the UK.
“Elite Commercial REIT occupies a unique position in the REITs space, where it functions as social infrastructure, given its 99% exposure to the UK government. With 100% of rent collected in advance even during Brexit and UK lockdowns, we do not foresee any impact on rent collection going forward, hence dividend payout will not be affected by the pandemic,” writes Lai.
“We revise our DPU estimates upwards for FY2021F/FY2022F by 8% and 2%, implying attractive yields of 8.0%/8.2%,” he adds.
For 1HFY2021, revenue increased 70.6% y-o-y from £9.3 million to £15.9 million. Distributable income to unitholders at £11.2 million exceeded IPO projection by 37.1% and was up 71.3% y-o-y.
1HFY2021 DPU of 2.63 pence was 8.7% above IPO forecast and up 34.9% y-o-y, writes Lai. “The strong performance was boosted by some four months contribution from newly acquired portfolio of 58 UK commercial properties leased to the UK government. The portfolio enjoyed superior metrics of 100% occupancy as at 30 Jun 2021 with long weighted average lease expiry (WALE) of 6.6 years.”
The properties in the portfolio are assets that provide important social services to approximately 30% of the UK population, strategically chosen to serve the local communities, says Lai. “While the lease break option was exercised for one property in 2QFY2021, we believe that the likelihood of tenants exercising the lease break options for the other properties is fairly low.”
That said, Lai foresees UK unemployment rate to rise and usage of Department for Work and Pensions (DWP) services to increase. “With a new resurgence of Covid-19 cases driven by the Delta variant in the UK, we expect unemployment rate to continue rising. Coupled with the expiry of the Coronavirus Job Retention Scheme (furlough) in September 2021, DWP’s unemployment services are even more crucial to help people find jobs. The counter-cyclical portfolio with DWP as its main tenant will prove to be resilient.”
See: Elite Commercial REIT posts DPU of 2.63 pence for 1H21, 8.7% above IPO projection
Meanwhile, CGS-CIMB Research analysts Lock Mun Yee and Darren Ong are maintaining “add” on the REIT, with an unchanged target price of 82.6 pence, which represents a 22.4% upside.
As of June 30, 2021, Elite Commercial REIT has received in advance 99.7% of the rent for 3QFY2021F and the portfolio occupancy continues to be at 100% with 99% exposure by gross rental income to sovereign type tenants in the UK.
The REIT experienced two lease events in 1HFY2021: one for The Forum, Stevenage, which had its lease extended to March 31, 2028; and the other at East Street Epsom, which exercised its lease break option.
However, Elite Commercial REIT has received an offer from an undisclosed buyer to purchase East Street Epsom for £2.9 million, a 21% premium above valuation. According to Lock and Ong, the manager is undergoing due diligence for the offer but is also considering the possibility of asset enhancement initiatives.
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With unemployment rates in the UK expected to peak in 3QFY2021F at 5.5% according to the Bank of England, and the furlough scheme expiring in end-September 2021, Lock and Ong believe that this will drive claimant footfall and increase reliance on its key tenant DWP, raising relevance of its assets.
“Elite Commercial REIT remains well capitalised with a strong balance sheet ECR continues to maintain a healthy debt maturing profile and will not face refinancing risks until FY2023F, in our view.”
At end-June 2021, the REIT’s gearing stood at 42.1% with an interest coverage ratio of 6.4 times and £6 million in undrawn facility.
As at 2.07pm, shares in Elite Commercial REIT are trading flat at 68 pence.
