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Strong income visibility following UK agreements 'key positive' for Elite Commercial REIT

Felicia Tan
Felicia Tan • 3 min read
Strong income visibility following UK agreements 'key positive' for Elite Commercial REIT
Analysts are keeping their target prices unchanged at 76 British pence and 80 British pence for CGS-CIMB and DBS respectively.
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Analysts from CGS-CIMB Research and DBS Group Research are keeping “add” and “buy” on Elite Commercial REIT after the REIT announced, on February 28, that it had entered into separate agreements with The Secretary of State for Levelling Up, Housing and Communities of the United Kingdom, to re-gear certain leases of its properties occupied by the Department for Work and Pensions (DWP).

In addition, ECR has also agreed to collaborate on certain sustainability-linked investments for properties occupied by DWP.

The analysts have also kept their target prices unchanged at 76 British pence and 80 British pence for CGS-CIMB and DBS respectively.

The re-gearing of the lease will extend income visibility on the REIT’s portfolio, with the strong visibility being a “key positive” for the REIT, says DBS’s Dale Lai in his March 3 report.

“As the lease break option in 2023 was removed for almost half of the portfolio, 79% of the portfolio now has straight leases through to 2028 without lease break options,” he notes.

Further to that, Lai believes that the REIT will see a likely lift in valuations with the removal of the lease break options for 100 out of the 117 properties leased to the DWP.

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The remaining 17 properties have lease break options that are undecided by the DWP for now. The leases will continue to run till 2028 unless notice is served by the end of March.

“The weighted average lease to break (WALB) is now at its longest ever at five years, which will be a critical factor for the stock to re-rate,” says Lai.

“Historically P/NAV was at 1.2x when WALB was at its longest at 4.5 years, and the stock is currently trading at just 1x P/NAV with potential revaluation gains ahead,” he adds.

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“With the [UK] government’s aim to achieve sustainability goals such as net-zero carbon emissions by 2050, this sustainability collaboration by Elite Commercial REIT and DWP is timely. Achieving higher Energy Performance Certificate (EPC) ratings for the properties in the portfolio can provide a greater incentive for DWP to stay as a tenant beyond 2028, future-proofing the REIT,” he continues.

“The works could include repair, replacement or upgrading of lighting systems, heating and cooling systems, insulation and solar panels, and other initiatives. This could improve the sustainability and energy efficiency credentials of the properties occupied by DWP within the portfolio,” echo CGS-CIMB’s Lock Mun Yee and Eing Kar Mei.

In their report on March 1, Lock and Eing say they also see the impact on the REIT’s portfolio valuation as positive.

The move could also lower its gearing, which stood at 42.4% as at end-December, they note.

“At current price, Elite Commercial REIT offers an attractive FY2022 dividend yield of 7.7%,” they write.

“We like [the REIT’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,” they add.

Units in Elite Commercial REIT closed at 63.2 British pence on March 9.

Photo: Elite Commercial REIT

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