Elite Commercial REIT - UOB Kay Hian 2020-07-27: 1H20 Maiden Distribution Exceeds IPO Forecast


Elite Commercial REIT - 1h20 Maiden Distribution Exceeds Ipo Forecast

  • Elite Commercial REIT outperformed in its maiden post-IPO financial results. Actual DPU of 1.95 pence exceeded forecasts made in its IPO prospectus by 1%.
  • Elite Commercial REIT enjoys stable and recession-proof cash flows amidst COVID-19-related headwinds. It has already collected 99.8% of the rents for the next three months (Jul-Sep 20).
  • Elite Commercial REIT provides attractive distribution yield of 6.9% for 2020 and 7.4% for 2021. BUY Elite Commercial REIT, a recession-proof counter-cyclical yield play.
  • Target price: £0.88.

Elite Commercial REIT's 1H20 Results

  • Elite Commercial REIT (SGX:MXNU) reported 1H20 DPU of 1.95 pence, exceeding IPO forecast by 1%.
  • In 1H20, finance costs were lower than anticipated due to the decline in the benchmark interest rate for 3- month GBP LIBOR from 0.75% to 0.30%.

Fully occupied by the UK government.

  • Elite Commercial REIT’s portfolio of 97 properties have occupancies of 100% with their primary occupant being the Department of Work and Pensions (DWP).

Resilient cash flows despite COVID-19.

  • Given the DWP’s counter-cyclical characteristics, Elite Commercial REIT’s financial performance exceeded expectations with profit after tax being 7% greater than forecasted. Rent collection remains robust as Elite Commercial REIT collected 99.8% of rent in advance for the period Jul-Sep 20.

Minimal business disruptions during COVID lockdown.

  • Elite Commercial REIT’s JobCentre Plus Centres remained operational throughout the nationwide lockdown and continued to process and disburse benefits to claimants. Its services grew in importance given the sudden surge in furloughed individuals at risk of redundancy, and demand for employment assistance looks set to increase upon the conclusion of the government’s furlough scheme in Oct 20.

Growing importance of JobCentre Plus.

  • As part of the UK government’s efforts to curb unemployment amidst the economic fallout from the pandemic, 13,500 additional JobCentre Plus workers including job coaches will be recruited, with 4,500 slated to be in position by Oct 20. This will increase the relevance of Elite Commercial REIT’s assets as an important social infrastructure for the British people.

Healthy balance sheet with prudent capital structure.

  • Elite Commercial REIT’s aggregate leverage is relatively low at 32.6%, and interest coverage ratio also remains healthy at 7.4 times. In addition, Elite Commercial REIT has no refinancing requirements until 2024. It also has sufficient debt headroom to meet ongoing obligations as well as pursue yield-accretive acquisitions.

Unemployment claims surging amidst COVID-19 crisis.

  • The economic impact of the pandemic has blighted many sectors in the UK with unemployment claims rising by almost 3m and an additional 9m individuals being placed on the government’s furlough scheme. The government estimated that 10-20% of the people on the furlough scheme would become unemployed when the support expires in Oct 20. This rise in claimant counts will increase job centre footfall as well as DWP spending, highlighting the DWP’s growing relevance in the UK society.

Likelihood of increased space requirements.

  • Management has guided that social distancing measures look set to be part of the “new normal” in the UK. Although the government has not stipulated the exact rules on the spacing between individuals, both front-of-house and back office employees at Elite Commercial REIT’s properties may require additional space in order to comply with the new requirements.

Improved income visibility.

  • Elite Commercial REIT secured waivers of extension of break options for two of their properties, further enhancing their income visibility. The lease for the Lodge House in Bristol was extended to 31 Mar 28 (break option not exercised). The break option for the lease for John Street in Sutherland was extended by 12 months and the lease will expire on 31 Mar 22. The ongoing COVID-19 situation will not trigger any termination clauses of Elite Commercial REIT’s leases with the UK government.

Focus on making accretive acquisitions.

  • Amidst the COVID-19 pandemic backdrop, Elite Commercial REIT’s management is proactively seeking opportunities to make strategic and DPU accretive acquisitions in the UK. It has been granted a right of first refusal to acquire properties from the sponsor pipeline, and the properties align with Elite Commercial REIT’s current portfolio as they are also mostly leased to government departments on a long-term basis.

Elite Commercial REIT - Valuation & Recommendation

Nicola Ho UOB Kay Hian Research | Jonathan Koh CFA UOB Kay Hian | https://research.uobkayhian.com/ 2020-07-27
SGX Stock Analyst Report BUY MAINTAIN BUY 0.880 SAME 0.880