Analysts have trimmed their target prices on Elite Commercial REIT following the release of the UK-focused S-REIT’s results for FY2023 ended Dec 31, 2023.
Elite Commercial REIT reported a distribution per unit (DPU) of 3.42 British pence (5.8 cents) for FY2023, 28.9% lower y-o-y, based on a payout ratio of 100%.
At a payout ratio of 90%, unitholders will receive DPU of 3.07 pence for the FY2023 and 1.33 pence for the 2HFY2023. Elite Commercial REIT introduced a 10% retention of distributable income from 1HFY2023 ended June 30, 2023.
Revenue for the FY2023 increased by 1.5% y-o-y to GBP37.6 million. Net property income (NPI) rose by 15.7% y-o-y to GBP41.4 million, including GBP317,000 of straight-line rent adjustments.
Gearing stood at 49.6% as at Dec 31, 2023, but would have declined to 43.7% including the effects of the GBP28 million preferential offering, which was announced in December 2023 and completed in January.
This is a big step in the right direction to infuse liquidity and strengthen its capital structure, say DBS Group Research analysts Tabitha Foo, Derek Tan and Dale Lai. “A key overhang on the stock given capital value erosion risk in the UK. Although FY2024 and FY2025 DPU appear largely flattish at 90% payout ratio on an enlarged equity base, we see it as a small trade-off for a stronger foundation to grow.”
See also: Elite Commercial REIT reports FY2023 DPU of 3.42 British pence, 28.9% lower y-o-y
Repositioning the REIT could emerge as a strategic medium-term plan, add the analysts. Elite plans to explore repurposing some of its vacant assets for alternative uses, such as social housing or student accommodation, which are currently undersupplied in the UK.
According to management, this presents an opportunity for Elite to capitalise on emerging trends in the living sector and diversify its tenant base, lease expiries and asset uses in the medium-term. “Further, Elite’s sponsor boasts a portfolio of student accommodation in the UK, which could potentially be integrated into its pipeline,” say the analysts in a Feb 20 note.
Thus, DBS is keeping “hold” on Elite Commercial REIT with a target price of 28 pence, down from 33 pence previously.
Elite Commercial REIT slightly missed DBS’s DPU projections. As a result, they have lowered their FY2024 DPU by 15%, with the DPU for the next two years expected to remain flattish.
Execution on track
Meanwhile, CGS International Research analysts Lock Mun Yee and Natalie Ong think Elite Commercial REIT’s execution is on track.
Portfolio occupancy inched up 0.2% percentage points (ppts) q-o-q to 92.3% at end-FY2023, with a weighted average lease expiry of 4.2 years.
“Elite Commercial REIT has continued to de-risk its lease expiry profile, with five-year lease renewals at Bradmarsh Business Park, Rotherham and Phoenix House, Bradford, lowering its FY2024 expiries to 1.5%, [down] from 3% in 3QFY2023,” say Lock and Ong in a Feb 19 note.
Management had also started early dialogues with tenants to extend and diversify its FY2028 lease expiries. At end-FY2023, Elite Commercial REIT has three remaining properties currently undergoing dilapidation settlement discussions.
Elite Commercial REIT further articulated its strategy to re-let, reposition or recycle its remaining four vacant assets, including maximising potential value by obtaining planning approvals for alternative uses for the assets.
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These include repurposing the properties to benefit from sectors that are facing tailwinds, such as student accommodation or built-to-rent residential properties. “We believe these initiatives would enable the trust to reduce holding costs of the vacated properties or pare down debt to lower its gearing and strengthen the balance sheet in the near term,” say the analysts.
Lock and Ong are staying “add” on Elite Commercial REIT but with a lower target price of 38 pence, down from 49 pence previously.
Stable cash flow until FY2028
PhillipCapital Research analyst Liu Miao Miao likes Elite Commercial REIT’s “stable” cash flow, which she believes will extend into 2028. “This stability is bolstered by the absence of any remaining break clauses, which previously allowed for early termination and rental reductions.”
That said, while Liu stays “buy” on Elite Commercial REIT, she trims her target price to 34 pence, down from 36 pence previously, citing a lack of a “clear growth catalyst”.
That said, Liu notes that the REIT manager plans to restore the distribution payout ratio to 100% “once macroeconomic conditions normalise”, Liu expects this to occur in FY2025, so FY2024 DPU will be “subdued”.
In addition, Elite Commercial REIT reports that the demand in the UK real estate market is currently driven by local owner-occupiers and potential buyers seeking properties for redevelopment due to the shortage of residential units. “With interest rate trends heading downward, a pick-up in transaction activity is expected, paving the way for on-track asset monetisation,” says Liu in a Feb 20 note.
As at 3.50pm, units in Elite Commercial REIT are trading flat at 26.5 pence.
