Elite Commercial REIT - RHB Invest 2021-05-05: A High-Quality UK Commercial Reit


Elite Commercial REIT - A High-Quality UK Commercial Reit

  • 99% of Elite Commercial REIT's assets are leased to the UK Government, with the Department for Work and Pensions (DWP) as the key occupant of assets;
  • Long weighted average lease expiry (WALE) of 7.2 years;
  • High trading yields of > 7%, valued at an attractive 1x P/BV.

Elite Commercial REIT - Company Profile

  • Elite Commercial REIT (SGX:MXNU) is an S-REIT that focuses on commercial assets and real estate-related assets in the UK. Listed on 6 Feb 2020, this is the first and only UK-focused listed REIT in Singapore.
  • Elite Commercial REIT’s portfolio contains 155 predominantly freehold quality commercial buildings located across the UK, with a total net internal area of approximately 3.9m sqf, fetching a value of GBP515m. Its sponsors include Elite Partners Holdings, Ho Lee Group, and Sunway RE Capital.

Elite Commercial REIT - Investment Highlights

A counter-cyclical UK commercial portfolio.

  • Elite Commercial REIT’s key tenant, the DWP, accounts for about 93% of rental income of its enlarged portfolio. DWP is a uniquely counter-cyclical occupier – it is the UK’s biggest public service department responsible for welfare, pensions and child maintenance policies, and serves around 20m people. The bulk of its assets is used as front-of-house, primarily Jobcentre Plus and other ancillary services. The majority of the leases have rental reviews every five years, based on the UK Consumer Price Index, and rates are subject to an annual increase of between 1.0% (minimum) and 5.0% (maximum).

Demand for its assets grew due to COVID-19.

  • Elite Commercial REIT has been collecting 100% of rental income three months in advance. Due to the COVID-19 pandemic, the demand for its assets has increased with the increase in claimant count at each of DWP’s JobCentres. This is because the UK Government has extended a range of economic support measures for businesses and unemployment recovery, including an extension of the furlough scheme, and has committed to increase the number of work coaches to 27,000. This, we believe, should help the REIT in the form of further lease extensions and rental growth.

Recent acquisitions strengthens portfolio metrics.

  • Elite Commercial REIT completed its maiden portfolio acquisition of 58 properties across the UK for GBP212.5m in Mar 2021. The yield-accretive acquisitions (+3.2% DPU) from its sponsor will further diversify its exposure to UK government tenants, lift its market cap and liquidity, as well as increase its exposure to the London market to 14%.
  • The acquisition also saw Partner Reinsurance Company (PartnerRE), a leading global diversified reinsurance firm, emerging as a major substantial unitholder by taking a ~23% stake in the enlarged REIT at a higher-than-market share price of GBP0.68. This move demonstrates the attractiveness of the portfolio among large institutional holders who are looking for long-term stable income.

Elite Commercial REIT - Company Report Card

  • Maiden DPU exceeds IPO forecast despite the pandemic. For FY20 (from 6 Feb 2020 to 31 Dec 2020), Elite Commercial REIT achieved a distributable income to unitholders of GBP14.8m and DPU of GBP0.044, which is 2.1% and 2.3% higher than its IPO forecasts. Despite the challenging environment and economic uncertainty arising from COVID-19 and Brexit, Elite Commercial REIT is well-supported by stable cash flows, backed by its AA-rated tenant, the UK Government, with its uniquely counter-cyclical operations of the DWP.
  • FY20 Portfolio valuation gain of GBP15.9m, uplifted by non-exercise of break clauses on certain assets and extension of leases. This also reflects the underlying intrinsic value of the properties.
  • Gearing to remain modest, at 38%. Post-acquisition and recent fund-raising, Elite Commercial REIT’s leverage stands at 38% (still well below the Monetary Authority of Singapore’s threshold of 50%). Elite Commercial REIT’s average borrowing cost stands at 1.9%, with 50% of loans hedged and a high interest cover of 7.7x. All its assets are unencumbered, and there is minimal FX risk – since assets and liabilities are denominated in GBP terms.
  • Elite Commercial REIT declares and distributes dividends to unitholders on a semi-annual basis, with GBP as its default currency in payment.

Elite Commercial REIT - Investment Case

Resilient 7% yields.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2021-05-05
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998 SAME 99998