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Maintain 'add' on Elite Commercial REIT after it completes first milestone acquisition: CGS-CIMB

Lim Hui Jie
Lim Hui Jie • 3 min read
Maintain 'add' on Elite Commercial REIT after it completes first milestone acquisition: CGS-CIMB
CGS-CIMB have maintained their “add” call on Elite Commercial REIT after its acquisition of 58 additional commercial properties.
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CGS-CIMB’s Lock Mun Yee and Darren Ong have maintained their “add” call on Elite Commercial REIT with a target price of 78.1 British pence ($1.37) after its acquisition of over 50 additional commercial properties, up from its previous target price of 76.1 pence.

The REIT earlier announced that it has entered into a conditional share purchase agreement with Elite Bushel Holding Limited to acquire 58 commercial properties located across the UK.

See also: Elite Commercial REIT acquires 58 buildings in UK for $372.6 mil, first since IPO

The new properties are 100% occupied with a weighted average lease expiry (WALE) of 7.4 years and have a total net lettable area (NLA) of about 1.3 million square feet. These are “well located within city centres, town centres, and transport hubs.”, the analysts say.

An estimated 80% of the leases by gross rental income (GRI) have CPI-linked rental escalations capped and collared from 1%-5%. The total acquisition outlay is estimated to be £218.5 million including fees, and is expected to be completed in December 2020.

With this acquisition, 82% of the existing portfolio by both NLA and GRI will be occupied by the anchor tenant, the UK’s Department of Work and Pensions (DWP) and 17% by five new UK sovereign tenants, which include prominent agencies such as the Ministry of Defence.

Lock and Ong believe the introduction of five new sovereign-tenants “raises the diversification profile” of ECR’s occupier mix and extends the REIT’s exposure to high quality government tenants to bring total portfolio WALE to 7.5 years.

Additionally, 36% of the new properties’ portfolio are located in London, bringing ECR’s exposure in the area to 14% of its total assets under management (AUM). According to Colliers, London commercial properties have demonstrated strong capital growth of 7.7%-8.1% versus the UK average of 5.4% over the past decade.

Given London’s strategic importance to the UK, they believe that having a sizeable portion of ECR’s assets there will allow the portfolio to enjoy long-term rental and capital growth potential as well as redevelopment opportunities.

According to management, the proposed acquisition is expected to be DPU accretive, with a proforma 3.2% increase to 2.02 pence, assuming the deal is financed via the proposed issuance of consideration units to the vendors, equity fund raising and debt.

As such, the gearing of the enlarged portfolio is expected to increase from 32.6% to 37.7% as at end-June 2020.

The analysts pointed out ECR’s total property portfolio valuation and market capitalisation are expected to expand 66.6% to £531.6 million and 57% to £334.8 million, respectively, raising the stability, liquidity and overall attractiveness of the REIT.

See also: Elite Commercial REIT, an elite REIT offering stability and growth : CGS-CIMB

As at 12.49 pm, shares of ECR were trading at 66 pence, with a FY20 price to book ratio of 0.66 and dividend yield of 7.49%.

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