KGI Securities analyst Alyssa Tee has initiated “outperform” on Elite UK REIT with a target price of 37 pence, noting its portfolio resilience.
In her Dec 18 report, Tee highlights the REIT’s robust business model, with 99.1% of gross rental income derived from the UK government. This provides a strong foundation for continued low-risk sovereign-backed cash flow generation. Elite UK REIT derives 93.5% of its gross rental income from the UK’s Department of Work and Pensions (DWP), which leases 136 of its 149 properties.
A significant opportunity lies in the potential for rental reversions as leases approach expiry in 2028, Tee points out. Currently, the average rental rate for DWP-leased properties is GBP12 per sqft, substantially below market averages.
As one of DWP’s largest landlords, Elite UK REIT is well-placed to negotiate higher rents. Successfully renegotiated leases could significantly enhance rental income and property valuations, providing a robust growth catalyst, says Tee.
“Given that similar UK-listed REITs with majority of leases with the UK authorities have longer leases alongside built-in rental reversions reviewed annually, that is linked to consumer price index or retail price index, we believe that Elite UK Reit has grounds to negotiate for similar terms, allowing them to benefit from yearly rental growth on their properties and more stability from the longer lease terms,” she adds.
The REIT is also actively repositioning its portfolio to maximize value. Vacant properties which are near reputable or Russell Group universities have the potential for conversion into student accommodations, Tee notes.
See also: UOB Kay Hian ups Digital Core REIT’s TP to 99 US cents, says positive developments were ‘overlooked’
Additionally, the REIT is advancing its plans for a sustainably powered data centre in Blackpool, leveraging subsea cable connectivity and renewable energy infrastructure. These strategic initiatives demonstrate management’s proactive approach to unlocking intrinsic value from its portfolio.
“Furthermore, with the planning for Blackpool’s data centre underway, after receiving approval from the relevant authorities, the REIT has the privilege of deciding on whether they should sell a portion of the property, the entire asset or even possibly become an owner of a data centre. This will bring about various methods of valuation and probabilities for the management, allowing them multiple alternatives to bring about the best value for its asset,” says Tee.
As at 10.44am, units in Elite UK REIT are trading 0.5 pence higher or 1.72% up at 29.5 pence.
