Maybank Securities analyst Li Jialin has issued an unrated report on Elite Commercial REIT on Oct 19 after her visit to the REIT’s office assets in the UK.
The REIT has 18 assets in London, the north western part of England and Scotland. Its assets are valued at GBP148.6 million or 32% of its total assets under management (AUM).
Elite Commercial REIT is the only Singapore-listed offshore REIT with pure UK exposure and adhering to the social infrastructure theme. Its total AUM stands at GBP466.2 million.
“Anchored by 155 office assets across the UK, Elite Commercial REIT offers exposure to mostly freehold, triple-net-leased, and government-occupied assets with a weighted average lease expiry (WALE) of 4.5 years,” says Li.
“The major tenant, Department for Work and Pensions (DWP), occupies 146 buildings, including its public serving Jobcentre Plus and back offices,” she adds. “Based on FactSet consensus data, Elite commercial REIT is trading at 0.48x FY2023 P/BV.”
In her report, Li notes that the REIT’s upward rental review will be effective from April onwards, referring to the REIT’s original lease that was inked in 2018 for its initial public offering (IPO) portfolio. The lease includes an inflation-linked rental adjustment in 2023 with an option for its tenant to break the lease, she writes.
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In the 1QFY2023, the REIT completed a rental review and increased its the gross rental income by GBP4.2 million on a net annualized basis.
“In addition, break-lease options for 108 assets have lapsed since the review,” says Li. “The next round of lease renewals will be in 2028.”
“Overall, there is no renegotiation of leases before Elite’s re-financing exercise in FY2024. In June 2023, Elite’s gearing was lowered to 46%, after the proceeds from divesting John Street and Openshaw Jobcentre were partially deployed to repayment. Elite is in the process of divesting three other assets,” she adds.
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The REIT is also taking steps to address the occupancy issues at its 12 vacated assets, with management indicating that they are exploring potential changes for the use of some of its assets.
“In the IPO prospectus, Elite Commercial REIT referred to case studies of residential developments of higher market value converted from office assets, near [its] assets,” notes Li.
“Elite Commercial REIT’s shares have dropped 66% since listing due to uncertainties created by the impact of Covid-19 and rising interest rates. Upside risk stems from the abatement of these factors while high-for-longer interest rates, client concentration risk, slow recovery in physical occupancy are downside risks,” she adds.
Units in Elite Commercial REIT closed flat at GBP0.245 on Oct 20.
