Elite Commercial REIT - UOB Kay Hian 2021-03-12: Sovereign Tenant Provides Recession-resistant & Counter-cyclical Cash Flows


Elite Commercial REIT - Sovereign Tenant Provides Recession-resistant & Counter-cyclical Cash Flows

  • On 9 Mar 21, Elite Commercial REIT (SGX:MXNU) completed the acquisition of 58 properties from its sponsor, which expanded its AUM by 67%. Leases contributing about 80% of rental income from the newly-acquired properties have rent review linked to UK CPI, which will increase rents by 8% starting from Apr 23.
  • PartnerRE has increased its stake in Elite Commercial REIT from 1% to 23%.
  • More intensified usage for Jobcentre Plus ensures that Elite Commercial REIT remains a recession-resistant counter-cyclical yield play.
  • Maintain BUY. Target price: £0.95.


More intensified usage of Elite Commercial REIT’s portfolio.

  • Ever since the COVID-19 pandemic erupted, the Department for Work and Pensions’ (DWP) claimant count has more than doubled to 2.7m as of end-Nov 20, with 2.4m British on the government’s furlough scheme as at end- Sep 20. The UK’s unemployment rate is expected to increase once the furlough scheme ends in Apr 21 and peak at 7.5% by mid-21.
  • 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 Mar 21, which intensifies the usage of DWP’s Jobcentre Plus and reduces the likelihood of Elite Commercial REIT’s tenants exercising the break clauses.
  • DWP accounts for 94% of rental income from Elite Commercial REIT’s combined portfolio of 155 properties (existing: 97 properties, newly acquired: 58 properties).

DWP provides defence against side effects of higher NLW.

  • The British government has increased the national living wage (NLW) for workers aged above 25 by a sizeable 6.6% to £8.72/hour with effect from Apr 20. Similarly, the minimum wages for those aged 21 to 24 and those aged 18 to 20 were raised by 6.5% and 4.9% respectively to £8.20/hour and £6.45/hour. The government plans to increase NLW to two thirds of median earnings at £10.50/hour by 2024, which is the highest among developed countries.
  • A higher NLW could lead to a decline in the number of low-paying jobs, and result in higher unemployment in the UK, which will also intensify the usage of DWP’s Jobcentre Plus.

Income visibility enhanced by waiver/extension of break options.

  • The UK government did not exercise the break option for Lodge House, Bristol, and the lease will expire on 31 Mar 28. The sovereign tenant has also extended the break option for John Street, Sunderland, by 12 months to 31 Mar 22. The waiver/extension of the two break options indicates that Jobcentre Plus located at Elite Commercial REIT’s properties are essential for the government to render assistance to those unemployed and help them re-join the workforce, which is integral to the social fabric of the UK.
  • As of end-Dec 20, leases with an option for the sovereign tenant to terminate in 2023 accounted for 70.6% of the revenue and another 28.8% of revenue in 2028.

Higher NAV/unit.

  • Elite Commercial REIT has recognised fair value gain on investment properties of £15.9m in 2H20. The new valuation is not predicated on material uncertainty qualification. NAV/unit increased 4.8% to £0.65.

Lower aggregate leverage.

  • Elite Commercial REIT’s aggregate leverage was lowered from 32.6% at Jun 20 to 31% at Dec 20 due to the gain in fair value of investment properties. Its effective interest rate is low at 1.9% (improved by 0.1ppt), while interest coverage ratio is high at 7.7x.
  • Elite Commercial REIT has no refinancing requirements till 2024.


A recession-resistant counter-cyclical yield play.

  • Elite Commercial REIT benefits from recession-resistant and counter-cyclical cash flows with 100% rent collection achieved in advance in 2020, despite UK lockdowns and worries over Brexit. Elite Commercial REIT has collected over 99.6% of rent in advance for Jan-Mar 21 within 7 days of the due date.
  • As at end-4Q20, Elite Commercial REIT’s portfolio of 97 properties had 100% occupancy.

Completes maiden acquisition since IPO.

  • Elite Commercial REIT completed the acquisition of 58 commercial properties located across the UK for £212.5m on 9 Mar 21. The new properties have a total NLA of 1.3m sf and are 100% occupied with a WALE of 7.4 years. Its assets under management (AUM) have expanded by 67%.
  • The new properties have introduced new sovereign tenants, such as the 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 sovereign tenants. About 36% of the new properties are located in London, which expands Elite Commercial REIT’s exposure to London to 14% of its AUM. All the leases are on a full repairing and insuring basis (triple net).
  • Leases contributing about 80% of rental income from the 58 new properties have rent review linked to UK CPI, which will increase rents by 8% starting from Apr 23.

Acquisition provides significant accretion to DPU.

  • Elite Commercial REIT's management expects the acquisition to be DPU-accretive by 3.2% (assumes equity fund raising) to 8.3% (assumes equity fund-raising replaced by vendor loans).
  • The acquisition is financed by consideration units of £89.4m (issuance of 131.4m new units at £0.68) (42%) and additional bank borrowings of £124.8m (58%). Elite Commercial REIT did not place out new units or take up the vendor loan at a high interest rate of 7%. However, aggregate leverage is estimated to rise to 40.9%.

PartnerRE becomes the largest shareholder.

  • PartnerRE, the largest investor of vendor Elite UK Commercial Fund II, has increased its stake in Elite Commercial REIT from 1% to 23%. PartnerRE is a top-5 reinsurer on a worldwide basis.

Elite Commercial REIT's 2H20 results slightly above IPO forecast.

  • Elite Commercial REIT reported 2H20 DPU of 2.49 pence, exceeding its IPO forecast by 2.9%.
  • Interest expenses were 7.3% below forecast due to a decline in benchmark 3-month GBP LIBOR. Tax expense was 237.3% higher than forecast due to deferred tax from a change in fair value of investment properties of £15.9m (does not affect distributable income).


  • We have raised our Elite Commercial REIT's 2021 DPU forecast by 9% to 5.2 pence due to contributions from the newly-acquired 58 properties.



  • A recession-resistant counter-cyclical yield play, which is sheltered from uncertainties created by the COVID-19 pandemic and Brexit.
  • Accretive acquisitions of government offices and commercial buildings in the UK.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-03-12
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