SINGAPORE (June 30): CGS-CIMB Securities is initiating coverage on Elite Commercial REIT (ECR) with an “add” or “buy” call of £0.761 ($1.30).
This is believed to give the stock a 12.7% upside from its £0.675 closing, analysts Lock Mun Yee and Darren Ong say in a June 26 note.
“ECR offers investors stability and growth, backed by a long lease profile and inflation-linked lease structure,” the duo observe.
“We believe ECR's inflation-linked rental escalation structure which states a minimum of 1% increase in rent annually (capped at 5% p.a.) facilitates its organic expansion while triple-net leases ensure minimal capex requirements near term”.
They add that the counter-cyclical occupancy of the REIT’s key tenant – the UK-government’s Department for Work and Pensions (DWP) – further lends resilience to its portfolio. It accounts for over 99% of ECR’s gross rental income.
ECR’s portfolio comprises 97 assets scattered across London, South East, North East and South West England, the Midlands, Scotland and Wales. 74% of the facilities are located in town centres while 60 – 100% are within a 10 – 15 minute walk from bus stops and train stations.
Collectively, they occupy an internal area of 2.6 million sq ft.
In its recent earnings announcement for the financial period of February 6 to March 31, the REIT recorded a net property income of £3.42 million. Earnings for the period came in at £722,000 up 15.2% from the levels forecast during its initial public offering (IPO) on February 6.
This translated to distributable income of £2.5 million, 1.4% higher than expected.
Lock and Ong expect ECR to remain resilient, given its strong cashflows that is supported by a long weighted average lease to expiry (WALE) of 8.6 years.
Additionally, they expect DWP to have robust performance in the medium to longer term, as its services will be demanded by the UK’s ageing population.
“In our view, the portfolio provides crucial public infrastructure for the provision of DWP's front-of-house and back-office services. Long-term structural demand for DWP services, ensures the relevance of these offices, and ECR, as one of the largest owners of DWP assets,” stress Lock and Ong.
Aside from this, the duo flag potential asset enhancement opportunities, particularly to ECR’s Peel Park in Blackpool. The 15.7 acre property has a net lettable area of 156,542 sq ft and serves as DWP’s technology hub.
ECR is now looking to work with DWP to increase its footprint on the site or carve out a portion of the land, to be used for other purposes in the future.
As at 12.56pm, units in ECT were flat at £0.70.
