Stable and growing
? 1Q22 revenue/distributable income was within expectations at 24.3%/25.5%
of our FY22F forecast.
? Management guided that net impact of rent reductions and inflation-linked
adjustments could boost rental income from affected properties by 1.5-5.5%.
? Reiterate Add with an unchanged DDM-based TP of £0.76.
1Q22 business update highlights
ECR reported revenue and distributable income of £9.2m/£6.1m for 1Q22, +39.4%/+36.2%
yoy, and within our expectations at 24.3%/25.5% of our FY22F forecast. 1Q22 DPU grew
4.9% yoy to 1.28 pence. The improved performance was due to a full quarter’s contribution
from its maiden acquisition and tax savings from admission of Elite UK Commercial
Holdings Ltd (ECHL) as a UK REIT group, offset by an enlarged equity base. ECR’s
portfolio was fully occupied as at end-1Q and 100% of rents have been collected for 2Q22.
Positive outcome from lease re-gearing
In 1Q, ECR had successfully removed lease break options from 108 assets occupied by
the Department for Work and Pensions (DWP) and the Ministry of Defence (MOD),
extending income visibility until Mar 2028 for 85.2% of ECR’s annualised portfolio gross
rental income. While 11 of the 108 properties will have rent reduction from Apr 2023, all
the leases will be subject to a rent escalation from Apr 2023, calculated based on the UK
CPI, subject to an annual minimum increase of 1% and a maximum of 5% on a
compounding basis from 1 Apr 2018 to 31 Mar 2023. Meanwhile, lease break options for
another eight properties, making up 4.8% of ECR’s FY22F rental income, have been
exercised, with a 12-month notice period. ECR is actively looking at strategies for each
asset to maximise value outcomes, including re-letting, disposal or alternative uses,
including conversion or redevelopment. In addition, two other properties – John Street,
Sunderland and Sidlaw House, Dundee, to be vacated in Apr and Jun 2022 – are being
actively marketed to potential occupiers. In all, management guided that rental income from
properties occupied by DWP and MOD could increase by 1.5-5.5% from its FY22F
contractual base, as at 1Q22, after taking into account the rental reductions and adjusting
for compounded inflation, assumed at 11-15.4%.
Gearing at 42.9%, with room to potentially lower this post valuation
ECR’s gearing stands at 42.9% as at end-1Q. Following the recent lease events which
enhanced ECR’s income visibility, ECR intends to conduct a mid-year valuation exercise
to update its portfolio value. We believe ECR could likely enjoy some positive portfolio
uplift, given the longer income visibility as well as the potentially higher income following
the rental escalation from Apr 2023. This could lower ECR’s gearing, providing more debt
headroom for inorganic growth opportunities.
Reiterate Add rating
We tweak up our FY23-24F DPU estimates by 0.36-0.61% and keep our DDM-based TP
unchanged at £0.76. At the current price, ECR offers an attractive FY22F dividend yield of
c.7.6%. We like ECR’s stable income portfolio, with inbuilt growth through its inflation-linked
rental structure. Potential re-rating catalysts could come from rental uplifts for the majority
of its portfolio in FY23F, while downside risks include tenant concentration exposure to the
DWP