Results Analysis: FY21 results roughly in line
FY21 results roughly in line
• Elite Commercial REIT (ECR) reported higher revenue of £34.7m, which is 65.7% growth y-o-y
• Distributable income rose 65.2% y-o-y to £24.5m, beating IPO projection by 49.4%
• Full year distribution per unit (DPU) of 5.43 pence up 22.3% y-o-y from 4.44 pence
Growth in DPU
- Underpinned by maiden acquisition of 58 properties
- Strong portfolio occupancy of 100% as at 31 December 2021, with 99.9% of quarterly rent collection done in advance or within seven days of due date
- Long weighted average lease to expiry (WALE) of 6 years
- Boosted by tax savings following technical listing of Elite UK Commercial Holdings on The International Stock Exchange (TISE)
Portfolio updates
Property | Comments |
East Street, Epsom | New five-year lease secured (lease break option exercised previously but renegotiated with tenant)c.11% rental uplift starting April 2023 with break option at year three |
Dallas Court Units 1-2, Salford | c.10% rental uplift |
Sidlaw House, Dundee | Lease break option exercisedTo consider disposal, re-marketing or redevelopment of the site |
Management has shared that there are three available options for the Sidlaw House, Dundee property: 1) office building for a Life Sciences tenant looking at space in Dundee; 2) conversion directly into a logistics facility given its suitable layout, size of land plot and location; and 3) data centre, which is high in demand given that data centres are already at full capacity in Dundee. A feasibility analysis will be carried out to evaluate the best option.
Our thoughts
Overall, FY21 numbers were in line with our forecasts and continued to surpass IPO projections for the eight consecutive quarter, while portfolio metrics remain strong, reflecting ECR’s resilience in this uncertain environment.
We like that ECR is an inflation-linked play with its built-in inflation-linked rental escalations. The leases to the UK government have rent reviews every five years pegged to the UK CPI, subject to an annual minimum increase of 1.0% and maximum of 5.0%. There is an upcoming rent review in April 2023 for a large proportion of the portfolio and we see further upside to our current c.8% rental growth forecast as inflation rises in the UK.
We note that the £28.2m loss in fair value of investment properties was due to the shortening lease profile to break as 63% of the portfolio is due for renewal come April 2023. Valuers have taken into account the lease break option exercised for approximately half of the properties due for renewal but we think that this is conservative. With claimant counts and unemployment rate still above pre-pandemic levels, we believe that the demand for these JobCentre Plus centres remain elevated given that they play a critical role in the reorganisation of the labour force and economic recovery. Hence, these properties are assets that provide important social services the UK population and will continue to be needed. As there will be better visibility into lease events at end 1H22 as tenants have to give a one-year notice (i.e. by April 2022), Management will be commissioning an independent valuation of the entire portfolio for a clearer representation and we look forward to higher portfolio valuations and lower gearing.
The acquisition opportunities for ECR look exciting with £125m of government-led real estate in the right of first refusal (ROFR) pipeline and a vibrant third-party market as the investment market recovers in UK, particularly in the logistics and industrial sectors as well as the office sector as employees return from work-from-home.
More details to come after post-results investor call on 9th March.
Maintain BUY, with an unrevised target price of £0.80.