RHB Bank Singapore and PhillipCapital have maintained their “buy” calls on Elite UK REIT while upgrading their target price. This follows the REIT’s 3QFY2024 update, which was released on Nov 5.
RHB Bank Singapore has upgraded its target price to 35 British pence (60 cents), up from 31 British pence previously. PhilipCapital has increased its target price to 34 British pence, up from 32 British pence previously.
RHB analyst Vijay Natarajan notes that “Elite UK REIT’s 3QFY2024 numbers were slightly ahead on lower financing costs.”
“Overall, it was a good quarter with the completion of loan refinancing and hedging most of its debt at better-than-expected rates,” Natarajan adds.
In its update, Elite UK REIT reported that 9MFY2024 distribution per unit (DPU) grew by 3.9% y-o-y to 2.13 pence, attributed to tax savings and lower financing costs, as the REIT used dilapidation settlement to pay down its debt. Year to date, Elite UK REIT collected GBP1.4 million in dilapidation settlement charges.
“The 9MFY2024 DPU aligns with our forecast, forming 78% of full-year estimates,” Phillip Capital analyst Liu MiaoMiao notes.
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“Elite UK REIT may raise its payout ratio to above 90% amid an improving macroenvironment and progress in asset monetisation,” Liu adds.
Elite UK REIT’s gross revenue for 9MFY2024 decreased by 1.8% y-o-y to GBP28 million due to an income vacuum from several vacant assets and recent divestments.
This is in line with PhillipCapital’s Liu’s expectations, forming 74% of her FY2024 estimates.
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Conversely, this accounts for 78% of RHB’s Natarajan’s previous FY2024 forecasted DPU.
Financing costs
PhillipCapital’s Liu notes that the REIT’s cost of borrowing has decreased 20 basis points (bps) q-o-q to 5% due to a 4 percentage point (ppt) increase in hedging position.
Furthermore, RHB’s Natarajan notes that Elite UK has completed the refinancing of its entire GBP215 million of loans via sustainability-linked facilities, with interest savings as the assets’ energy performance improves.
Although the Bank of England (BOE) has revised its inflation forecast upward from 1.5% earlier this year to 2.6% in 2025, which could trigger a more cautious outlook on interest rate cuts, Phillip Capital’s Liu anticipates this will have little impact on Elite UK.
PhillipCapital’s Liu attributed this to the increased hedging exposure, which stands at 87%, with no refinancing obligations until 2027.
As such, Liu anticipated the all-in cost of borrowing will “remain stable” at this level in FY2025 estimates.
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RHB’s Natarajan adds that the REIT was able to hedge majority of its debt by taking advantage of the recent central bank rate cuts, leading to an overall borrowing cost of 5% per annum (pa).
According to RHB’s Natarajan, this is better than his initial expectation of a mid to high-5% level for the next two years.
Development and divestment
Elite UK REIT divested Sidlaw House at a price 41.7% above its book value, and is in the advanced stages of divesting three vacant assets and redeveloping two others into a student accommodation and built-to-rent facility.
PhillipCapital’s Liu believes these assets will also be divested at a price premium, with completion expected by 1Q2025.
“With additional proceeds directed toward debt reduction, Elite UK REIT is well-positioned to deliver positive DPU growth in FY2025 estimates,” Liu adds.
Additionally, RHB’s Natarajan notes that Elite UK REIT has secured power supply for an 80 megawatt (MW) data centre (DC) for the proposed DC facility in Peel Park site, and is in discussions to utilise the sustainable wind power infrastructure nearby, which is potentially ideal for hyperscale players.
Elite UK REIT has submitted its planning application to the local government, with a positive outcome expected in six to 12 months.
RHB’s Natarajan is of the opinion that Elite UK REIT can then monetise the asset by selling land to a third party.
“Asset recycling and repositioning are on track, with more divestments at a premium expected,” Natarajan notes.
Looking ahead
Moving forward, RHB’s Natarajan sees the UK budget as a “mild positive.” Elite UK REIT’s largest tenant, the Department for Work and Pensions (DWP), will be hiring 3,000 additional staff to combat fraud and error.
According to RHB’s Natarajan this could lead to higher workspace requirements or maintenance of the existing space in the future.
There are further plans for reforms and additional budget allocations for the infrastructure and housing segment, which RHB’s Natarajan suggests could aid in conversion plans for Elite UK REIT’s vacant assets.
Additionally, while the UK budget saw an increase in capital gains tax and stamp duty land tax, this will not impact Elite UK REIT given its technical listing under the UK REIT tax regime.
PhillipCapital’s Liu has adjusted her FY2024 to FY2025 estimated DPU forecasts by 3%/0% to 2.8/3.28 pence. This assumes a 90% payout ratio as a base scenario, given Liu’s expectation that Elite UK REIT will retain some distributable income to cushion against macro-economic uncertainties.
RHB’s Natarajan raises his FY2024 to FY2026 forecasted DPU by 3% to 5% factoring in lower finance costs and reducing his cost of equity (COE) by 75 basis points (bps).
As at 12.05pm, units in Elite UK REIT are trading flat at 29.5 British pence.
