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PhillipCapital sees ‘valuation upside’ from Elite Commercial REIT’s expanded mandate

Jovi Ho
Jovi Ho • 3 min read
PhillipCapital sees ‘valuation upside’ from Elite Commercial REIT’s expanded mandate
High Road, Ilford, one of the properties within the REIT's portfolio. Photo: Elite Commercial REIT
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There is valuation upside from Elite Commercial REIT’s expanded investment mandate, which now includes the living sector. Two vacant assets are on track to be redeveloped into student accommodation and a data centre, which will unlock their value by uplifting rental and valuation by some 30% to 40%.

For now, however, PhillipCapital Research analyst Liu Miaomiao has lowered her target price to 32 British pence (54.29 cents) from 34 pence previously, while staying “buy” on the REIT. 

Liu’s May 6 note comes after Elite Commercial REIT reported a distribution per unit (DPU) of 0.67 pence for the 1QFY2024, 21.2% lower y-o-y due to an enlarged equity base from the preferential offering completed on Jan 18.

Distributable income fell by 3.5% y-o-y to GBP4.4 million. Revenue for the 1QFY2024 inched up by 0.8% y-o-y to GBP9.2 million with the growth in rent escalations offset by non-income generating vacant assets and vacancy holding costs. The increase in vacancy holding costs was due to timing, says the REIT manager.

In 1QFY2024, distributions were impacted by the increase in vacancy holding expenses, such as manpower and electricity due to prolonged vacancy periods, notes Liu. “There are seven vacant assets remaining, two of which will be redeveloped, and the others will either be re-let or divested.”

Dilapidation settlements would partially offset the earnings shortfall, with four more buildings expected to be received by the end of FY2024. According to Liu, net property income (NPI) is expected to be on par with FY2022 levels. 

See also: Elite Commercial REIT reports 1QFY2024 DPU of 0.67 pence, 21.2% lower y-o-y

1QFY2024 NPI fell by 3.7% y-o-y to GBP8.3 million.

As at March 31, portfolio occupancy stood at 92.3%. The REIT’s weighted average lease expiry (WALE) stood at 4.0 years.

Net gearing ratio stood at 41.5%, down from 47.5% as at Dec 31, 2023. Interest coverage ratio (ICR) stood unchanged at 3.1 times.

See also: Elite Commercial REIT expands investment strategy to include UK PBSA

Expanded investment mandate

On April 15, Elite Commercial REIT announced the expansion of its investment mandate into the living sector, such as student housing, senior living and even data centres.

The manager says this will let the REIT ride on the influx of international students and artificial intelligence (AI) demand respectively. 

Lindsay House in Dundee, Scotland, is slated to be converted into a 40- to 200-bed student housing facility upon approval from authorities. Typical values are around GBP130,000 per bed with yields of 5.5%. 

The annual income for the building would soar by 280% to some GBP1.4 million from GBP360,000 in FY2022, and the valuation will double to GBP38 million upon successful redevelopment. 

With the power shortage in the UK, data centres will provide a growth engine for the booming AI demand, says Liu. 

Elite Commercial REIT is actively working on securing sufficient power to meet tenants' requirements, and we expect the process to take roughly 1.5 years to complete construction.

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Liu points to the counter-cyclical nature of Elite Commercial REIT, since its largest tenant, the UK’s Department for Work and Pensions (DWP), tends to expand during economic slowdowns as more people claim unemployment benefits and seek help for career consultation.

Hence, Elite Commercial REIT is well-positioned to benefit from an economic downturn in the UK. 

“Despite the possible valuation uplift through expanding its mandate, we believe the effect won’t be salient in the short term given the long legal and construction duration and relatively small scale (two assets vs 150 assets in total),” notes Liu. 

As government support tends to lag during economic downturns, Liu does not expect any major expansion in footprint from DWP in the short term. She projects FY2024-2025 DPUs of 3.76 to 4.42 pence.

As at 10.46am, units in Elite Commercial REIT are trading 0.5 pence lower, or 2.08% down, at 23.5 pence. 

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