UOB Kay Hian Research has maintained its ‘buy’ rating for Elite Commercial REIT with a higher target price of 95 British pence ($1.78) from 88 pence previously following the REIT's acquisition of 58 properties across the UK which was completed on March 9.
The higher target price is based on a 9% raised distribution per unit (DPU) forecast for FY2021 ending December 2021 of 5.9 pence on the back of increased contributions from the new properties.
UOB analyst Jonathan Koh notes that leases accounting for about 80% of the rental income from the newly-acquired properties have rent reviews tied to the UK consumer price index (CPI). To that end, rents for these leases will increase by 8% starting from April 23.
The new properties have a total net lettable area of 1.3 million square feet and are 100% occupied with a weighted average lease expiry of 7.4 years.
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In addition, Koh highlights that tenants for the new properties include sovereign tenants such as the Department for Work and Pensions (DWP) (which occupies 82% of the new properties), the Ministry of Defence, and the National Record National Records of Scotland.
Koh believes that the DWP, which accounts for 94% of income for Elite Commercial REIT’s overall portfolio, will not exercise the break option for properties it is leasing from the REIT. This is due to job centres it operates at the properties facing greater demand after Covid-19 caused UK unemployment rates to jump.
“To cope with the increase in the number of unemployed British, the UK government has committed to the number of work coaches at job centres to 27,000 by March 2021, which intensifies the usage of DWP’s Jobcentre Plus and reduces the likelihood of Elite Commercial REIT’s tenants exercising the break clauses,” he says.
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Koh maintains his ‘buy’ recommendation for Elite Commercial REIT as he views it is a “recession-resistant counter-cyclical yield play", pointing to the REIT's 100% rent collection achieved in advance in 2020, despite UK lockdowns and worries over Brexit.
“ELITE has collected over 99.6% of rent in advance for January to March 2021 within seven days of the due date. As at end-4Q2020, Elite Commecial REIT’s portfolio of 97 properties had 100% occupancy,” he adds.
He also notes that PartnerRE, the largest investor of vendor Elite UK Commercial Fund II, has increased its stake in the REIT from 1% to 23% to become its largest shareholder.
As at 12.07pm, shares in Elite Commercial REIT are trading flat at 65.5 pence.
