Investment advisory platform Beansprout has initiated “buy” on Elite UK REIT with a target price of 44 pence.
In her September 30 report, analyst Peggy Mak highlights that the REIT is enjoying a high portfolio occupancy rate of 92.3% as at end June. However, a substantial 96.9% of the leases will expire in 2028 — Mak believes is this weighing on the value of its assets and share price.
She notes that the REIT manager is in discussion with the Department for Work and Pensions (DWP) to extend and diversify leases. “As Elite REIT is amongst the largest providers of critical social infrastructure to the DWP and other government departments, the risk of non-renewal for all leases is remote, in our view, though it is difficult to say for sure how many will be renewed,” adds Mak.
For the lease at Dallas Court, Salford that is expiring in 2024, Elite REIT entered into a fresh 10-year lease at about 30% rental uplift. The expiring lease at Cardiff is extended to March 2025.
Meanwhile, there is room for an appreciation in value of Elite REIT’s assets, particularly when the leases are renewed. The portfolio generated gross yield of 9.2% in FY2023, a 4 percentage points (ppts) carry over Sterling Overnight Index Average, and 0.9 ppts to 5.8 ppts above prime yields in various UK regions, Mak points out.
The REIT’s rental income was stable despite the disposal of five assets and lower overall occupancy of 92.3%. FY2023 NPI yield at 10% is one of the highest amongst Singapore-listed REITS, Mak notes.
“Yield compression on lease renewal and declining interest rates would lift value. Elite has also expanded its mandate to include other asset classes. A conversion to residential use would boost valuation,” she adds.
The Bank of England (BOE) had its first rate cut post-pandemic by 25 ppts on August 1, as August inflation eased to 2.2%. Though still above BOE’s 2% target, this gives room for further rate cuts, Mak says. Beansprout expects a further 25 ppts cut in 4Q2024 and 1 ppt in FY2025.
“GDP growth picked up in 1Q2024 to 0.3%, and we expect 1.1% growth for FY2024. Lower interest rates would reduce borrowing costs and raise distributable income,” Mak adds.
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As at 11.10am, units in Elite REIT are trading 1 pence lower or 3.1% down at 31 pence.
