Elite Commercial REIT - DBS Research 2022-05-06: Remains A Good Inflation Hedge

ELITE COMMERCIAL REIT (SGX:MXNU)

Elite Commercial REIT - Remains A Good Inflation Hedge

Elite Commercial REIT's 1Q22 revenue and distributable income increased 39.4% and 36.2% y-o-y, respectively.
Portfolio metrics remain high quality.
Slightly higher than expected rent reductions for 11 leases, cut FY23F DPU estimate by ~7%.

Elite Commercial REIT (SGX:MXNU) reported a 39.4% y-o-y increase in revenue to £9.2m, and a 36.2% y-o-y increase in distributable income to £6.1m. DPU rose 4.9% y-o-y to 1.28 pence in 1Q22 (from 1.22 pence in 1Q21). Gearing ratio increased slightly to 42.8% in 1Q22 (from 42.1% in 1Q21) while borrowing costs also increased (from 1.9% in 1Q22) to 2.1% in 1Q21.
Quality portfolio metrics remain. The portfolio has a long weighted average lease to expiry (WALE) of 5.5 years as of 31 March 2022 and enjoys 100% occupancy with almost 100% of rent collection in advance.

DWP previously had ~650 offices throughout the UK but increased it to ~750 to cope with COVID-19 and rising unemployment. With the pandemic now stabilising, DWP intends to close some of these temporary offices. 8 properties leased to DWP have been affected, with one more potential asset that is still undecided. However, we do not expect a further impact to the portfolio.

With the majority of leases that had a break option in Mar 2023 addressed, management plans to conduct a portfolio revaluation exercise reflecting the revised value of the portfolio, which is estimated to be ~GBP515m, similar to the portfolio valuation a year ago. We reduce our writeback assumption from GBP28m to GBP15m.
Elite Commercial REIT's gearing will potentially decrease from 42.8% to 41.6%, but we note that 41.6% still seems rather high. The long-term target is to maintain gearing below 40%; however, management will veto an equity fundraising just to lower gearing.

Elite Commercial REIT has ~GBP100m of debt expiring in end-Jan 2023. Borrowing costs could potentially rise at that point, as interest rates in the UK have been rising – 25bps so far, with another 25bps increment expected this year.
We understand that there is an agreement in place to extend this expiring loan for another 2.75 years given that the leases have been re-geared and break options have been addressed, so it is likely that there will be no issues with refinancing the loan and it most probably will extend another 2.75 years but with higher borrowing costs (loan terms: 177bps + SONIA).
Elite Commercial REIT's management has also expressed that they would prefer to hedge the loan to fixed rates given that interest rate swap costs are likely to go up as well.

With 88% of the portfolio by total portfolio rent with lease expiries in 2028, Elite Commercial REIT's management is hoping to stagger it with either further acquisitions or early renegotiation of lease renewals with existing tenants. However, this will only be done closer to 2028.

We cut FY23F revenue forecast for Elite Commercial REIT to £37.2m from £39.0m on the back of slightly higher-than-expected rent reductions for 11 leases (average -40% in rents) and our assumption of zero income from the 10 leases that exercised the lease break option (1 till end Mar 2022, 1 till end Jun 2022 and 8 till end Mar 2023). Hence, there is an upside to earnings if Elite Commercial REIT finds new tenants or disposes the properties.
Maintain BUY with lower target price of GBP0.75 for Elite Commercial REIT.
See

Tabitha FOO DBS Group Research | Dale LAI DBS Research | https://www.dbs.com/insightsdirect/ 2022-05-06

SGX Stock Analyst Report BUY MAINTAIN BUY 0.75 DOWN 0.800