Elite Commercial REIT - UOB Kay Hian 2020-11-12: Maiden Acquisition Diversifies Mix Of Sovereign Tenants

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ELITE COMMERCIAL REIT (SGX:MXNU)

Elite Commercial REIT - Maiden Acquisition Diversifies Mix Of Sovereign Tenants

• Elite Commercial REIT has announced its first acquisition since listing, of 58 commercial buildings for £212.5m. About 36% of the new properties are in London, and this will increase Elite Commercial REIT’s London portfolio exposure to 14%, provide higher potential growth for rent and capital values as well as opportunities for future redevelopment.
• Maintain BUY and target price of £0.88.

Elite Commercial REIT Scaling up in the UK.

• Elite Commercial REIT (SGX:MXNU) has entered into a conditional share purchase agreement with Elite Bushel Holding Ltd, a subsidiary of Elite UK Commercial Fund II, to acquire 58 commercial properties located across the UK for £212.5m. The new properties have a total NLA of 1.3m sf and are 100% occupied with a WALE of 7.4 years. The acquisition is expected to complete in Dec 20.
• The enlarged portfolio will boost Elite Commercial REIT’s portfolio size by 67%.

Acquisition will diversify tenant mix.

• The new properties will introduce new sovereign tenants, including the UK Ministry of Defence, National Records of Scotland, HM Courts & Tribunal Service and National Resources Wales.
• The new properties are 82% occupied by the DWP and 17% by the above-mentioned tenants. This will diversify Elite Commercial REIT’s tenant mix while maintaining its focus on quality UK sovereign credit.
• All the leases are on a full repairing and insuring basis (triple net). About 80% of the leases by gross rental income have CPI-linked rental escalations (cap and collared between 1% and 5%). The portfolio has an average weighted lease expiry (WALE) of 7.4 years.

Increased exposure to London.

• About 36% of the new properties are in London, which expands Elite Commercial REIT’s exposure in London to 14% of its AUM.
• London recorded the highest percentage increase of 128.8% in Universal Credit claimants in Jan-Aug 20, reflecting the continued reliance in JobCentres in the area. London properties also have higher growth potential for rents and capital values than the national average. According to Colliers, London commercial properties have recorded strong growth in capital values of 7.7% vs the country’s average of 5.4%. over the past 10 years.

Acquisition expected to be DPU-accretive.

• Elite Commercial REIT's management expects the acquisition to DPU-accretive by 3.2%.
• The acquisition will be financed by the proposed issuance of consideration units to the vendors, totalling £89.4m (minimum price of £0.68 per unit), equity fund raising of £30m and borrowings of £96m. Post-acquisition, Elite Commercial REIT is expected to see a 66.6% increase in portfolio valuation as well as a 59.1% increase in net property income.

Change in shareholding structure.

• Elite UK Commercial Fund II will distribute the consideration units it received to its investors. PartnerRE, the largest shareholder of Elite UK Commercial Fund, would become the largest unitholder in Elite Commercial REIT with a 23% stake.

3Q20 results in line with expectations.

• Elite Commercial REIT reported 3Q20 DPU of 1.23 pence, exceeding its IPO forecast by 1.7%. In 3Q20, the UK corporate tax rate was increased from 17% to 19%, resulting in an additional provision of deferred tax expense of £276,000 to profit after tax as compared to forecasted figures. This additional provision has no impact on its distributable income.

Maintains full occupancy with advanced rent received.

• As at 3Q20, Elite Commercial REIT’s portfolio of 97 properties had 100% occupancy. In terms of rent collection, Elite Commercial REIT has received in advance 99.6% of the rents for Oct-Dec 20.

JobCentre Plus remains operational during second lockdown.

• Similar to the first nation-wide lockdown, Elite Commercial REIT’s JobCentre Plus Centres remain open to process and disburse benefits to claimants. Given that the unemployment rate has risen to 4.5% in August, the UK government has announced it will do ‘whatever it takes’ to mitigate the economic impact of the pandemic and employment assistance is likely to remain strong.

Economic recovery package to increase JobCentre relevance.

• UK Chancellor Rishi Sunak officially announced that on top of the existing 13,500 job coaches, an additional 13,500 JobCentre Plus staff will be recruited for the economic recovery package to assist job seekers. Some 4,500 of these new staff were expected to be in position by Oct 20, and a further 9,000 by Mar 21. This highlights the increased relevance of Elite Commercial REIT’s portfolio.

Maintain BUY on Elite Commercial REIT

• We maintain our DPU forecasts for Elite Commercial REIT, pending approval of the above acquisition during EGM to be held in Nov/Dec 20.
• Maintain BUY on Elite Commercial REIT with target price of £0.88, based on DDM (COE: 6.5%, terminal growth: 1.0%).
• 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.
• Elite Commercial REIT's share price catalyst:
  • A recession-proof counter-cyclical yield play sheltered from uncertainties created by the COVID-19 pandemic and the escalation of trade conflict.
  • More accretive acquisitions of government offices in the UK.

Nicola HO UOB Kay Hian Research | Jonathan KOH CFA UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-12

SGX Stock Analyst Report BUY MAINTAIN BUY 0.880 SAME 0.880