Elite Commercial REIT - CGS-CIMB Research 2020-10-19: First Milestone Acquisition


Elite Commercial REIT - First Milestone Acquisition

  • Milestone acquisition enlarges property portfolio valuation by c.67% to £531m.
  • Acquisition is DPU accretive and increases portfolio exposure to London.
  • Reiterate ADD on Elite Commercial REIT with a higher DDM-based Target Price of £0.781.

Enlarged property portfolio contributes to organic rental growth

  • Elite Commercial REIT (SGX:MXNU) announced that it has entered into a conditional share purchase agreement with Elite Bushel Holding Limited to acquire 58 commercial properties located across the UK. See Elite Commercial REIT's announcements.
  • The new properties are 100% occupied with a WALE of 7.4 years and have a total NLA of c.1.3m sq ft which are well located within city centres, town centres, and transport hubs. An estimated 80% of the leases by gross rental income (GRI) have CPI-linked rental escalations capped and collared from 1%-5%.
  • The total acquisition outlay is estimated to be £218.5m including fees, and is expected to be completed in Dec 2020.

Diversification of occupier mix and increased exposure to London

  • With this acquisition, 82% of Elite Commercial REIT's existing portfolio by both NLA and GRI will be occupied by the anchor tenant DWP and 17% will be occupied by five new UK sovereign tenants which include prominent agencies such as the Ministry of Defence.
  • In our view, we believe the introduction of five new sovereign-tenants raises the diversification profile of Elite Commercial REIT’s occupier mix and extends the REIT’s exposure to high quality government tenants to bring total portfolio WALE to 7.5 years.
  • Additionally, 36% of the new properties’ portfolio are located in London, bringing Elite Commercial REIT’s exposure in the area to 14% of its total AUM. According to Colliers, London commercial properties have demonstrated strong capital growth of 7.7%-8.1% versus the UK average of 5.4% over the past decade. Given London’s strategic importance to the UK, we believe that having a sizeable portion of Elite Commercial REIT’s assets there will allow the portfolio to enjoy long-term rental and capital growth potential as well as redevelopment opportunities.

Accretive acquisition raises Elite Commercial REIT’s size and market capitalisation

  • According to management, the proposed acquisition is expected to be DPU accretive, with a proforma 3.2% increase to 2.02 pence, assuming the deal is financed via the proposed issuance of consideration units to the vendors (£89.4m), equity fund raising (£30m) and debt.
  • According to management, the gearing of the enlarged portfolio is expected to increase from 32.6% to 37.7% as at end-Jun 2020. Elite Commercial REIT’s total property portfolio valuation and market capitalisation are expected to expand 66.6% to £531.6m and 57.0% to £334.8m, respectively, raising the stability, liquidity and overall attractiveness of the REIT in our view.

Reiterate ADD rating on Elite Commercial REIT

LOCK Mun Yee CGS-CIMB Research | Darren ONG CGS-CIMB Research | https://www.cgs-cimb.com 2020-10-19
SGX Stock Analyst Report ADD MAINTAIN ADD 0.781 UP 0.761