Elite Commercial REIT - DBS Research 2021-08-04: Pandemic-Proof Distributions


Elite Commercial REIT - Pandemic-Proof Distributions

  • Elite Commercial REIT (SGX:MXNU)'s 1H21 DPU of 2.63 pence was 35% higher y-o-y, 8.7% above IPO projection.
  • Maintained full portfolio occupancy with a long WALE of 6.6 years.
  • Revised projections upwards to account for better-than-expected 1H21 and uplift in earnings for 2H21.

Elite Commercial REIT reported strong 1H21 results.

  • Revenue increased 70.6% y-o-y from £9.3m to £15.9m. Distributable income to unitholders at £11.2m exceeded IPO projection by 37.1% and was up 71.3% y-o-y.
  • Elite Commercial REIT's 1H21 DPU of 2.63 pence was 8.7% above IPO forecast and up 34.9% y-o-y. The strong performance was boosted by ~4 months contribution from newly acquired portfolio of 58 UK commercial properties leased to the UK government.
  • Elite Commercial REIT's portfolio enjoyed superior metrics of 100% occupancy as at 30 Jun 2021 with long WALE of 6.6 years.

Unemployment rate to rise and utilisation of DWP services to increase.

  • We expect unemployment rate to continue rising on the back of a worsening COVID-19 situation in the UK and the expiry of the furlough programme, which will increase the utilisation of DWP services. England celebrated Freedom Day on 19 July, lifting restrictions despite a resurgence in the number of cases driven by the delta variant, reaching a peak of ~ 48,000 daily new confirmed cases as of end July.
  • In addition, DWP’s claimant count of 2.3m in June 2021 remained high vs pre-pandemic number of 1.3m in Mar 2020. Coupled with the expiry of the Coronavirus Job Retention Scheme (furlough) in Sept 2021, which will see unemployment rise further, DWP’s unemployment services are even more crucial to aid workers back into the workforce. With the government pledging to hire more job coaches to boost jobseeker support, the utilisation of DWP services is set to increase.

We revise our DPU estimates upwards for FY21F/FY22F by 8% and 2%, implying attractive yields of 8.0%/8.2%.

  • As Elite Commercial REIT's 1H21 DPU came in above our forecasts, we have revised our DPU estimates upwards. With 2Q21 as the first quarter with the full contribution of its maiden acquisition, we expect similar distributions to unitholders in 3Q21 and 4Q21, as well as the better than expected overall portfolio performance. Hence, our FY21F/FY22F DPU forecast for Elite Commercial REIT now stand at 5.4/5.5 pence.
  • Likelihood of exercise of lease break options still low. The properties in the portfolio are assets that provide important social services to ~30% of the UK population and they are strategically chosen to serve the local communities, hence we think that it is unlikely for the tenants to exercise the lease break option. For example, the lease break option for The Forum, Stevenage was not exercised, thus extending the lease expiry to 31 Mar 2028, and leading to a ~5% uplift in valuation of the property.
  • However, the lease break option was exercised for the East Street, Epsom property but the Manager had received an attractive buy offer of £2.9 million, ~21% over valuation of £2.4 million (as at 31 Dec 2020). The option was exercised as the property could not accommodate DWP’s expansion plans.
  • We believe that the likelihood of tenants exercising the lease break options for the other properties is fairly low as there are social implications involved when government agencies move offices. We also believe that these agencies have to undergo a rigorous assessment exercise before any relocation or commitment is made for long leases, making it unlikely for the tenants to exercise the lease break option.

Balance sheet strengthened

  • Elite Commercial REIT's balance sheet strengthened with the establishment of the Distribution Reinvestment Plan (DRP), which will apply to the distribution for 1H21. Unitholders may elect to receive new units in the REIT in lieu of cash distribution or continue to receive a cash distribution on existing units held. The issue of new units in lieu of cash distributions under the DRP will also strengthen Elite Commercial REIT’s balance sheet, enhance its working capital reserves, and improve liquidity of the units.

Proposed technical listing of Elite UK Commercial Holdings Limited (ECHL) on The International Stock Exchange (TISE).

  • ECHL is a wholly owned subsidiary of Elite Commercial REIT. This listing will enable the tax treatment of Elite Commercial REIT to be on par with other UK REITs and potentially reap tax savings to further improve the REIT’s distributable income to unitholders. The principal tax rate is expected to drop to 15% from the current 19%. The estimated completion in 3Q21 will also future proof Elite Commercial REIT from future increases in corporate tax.

Our thoughts

Singapore Research Team DBS Group Research | Dale LAI DBS Research | https://www.dbsvickers.com/ 2021-08-04
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