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

ELITE COMMERCIAL REIT (SGX:MXNU)

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.

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.

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.

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.

We raise our Elite Commercial REIT FY21-22F DPU forecast by 3.01-3.05% as we factor contributions from the new acquisitions into our projections.
We reiterate our ADD rating on Elite Commercial REIT, with a higher DDM-based Target Price of £0.781, assuming contributions from the new portfolio from FY21F.
We continue to like Elite Commercial REIT for its stable income profile, with built-in growth through its inflation-linked rental structure and inorganic growth potential.
See Elite Commercial REIT Share Price; Elite Commercial REIT Target Price; Elite Commercial REIT Analyst Reports; Elite Commercial REIT Dividend History; Elite Commercial REIT Announcements; Elite Commercial REIT Latest News.
Upside catalysts could come from rental uplifts for the majority of the portfolio in FY23, while downside risks include high tenant exposure to DWP.

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