Results First Take: 1H22 DPU 8% above forecast; mixed outlook
- 1H22 revenue grew 17.7% y-o-y to £18.7m but DPU declined 2.7% y-o-y to 2.56 pence on a larger unitholder base
- Key positives: (i) Rental income secured up to March 2028 for 87.5% of portfolio by annualised gross rental income after removal of lease break options; (ii) 3.5% upward revaluation of portfolio value to £517.7m as at 30 June 2022; (iii) Expect demand for JobCentre Plus centres to remain elevated after recession warning from BOE
- Key negatives: (i) Two more lease break options exercised; (ii) Some refinancing needed in FY23; (iii) We see some negative impact from the weakening pound against the SGD
- TP of £0.75 under review
- Elite Commercial REIT (ECR) reported 1H22 revenue of £18.7m, which is 17.7% growth y-o-y, mainly due to the full half-year rental contribution from maiden acquisition on 9 March 2021
- Distributable income rose 9.7% y-o-y to £12.2m, also attributable to savings in tax expenses
- Distribution per unit (DPU) of 2.56 pence declined 2.7% y-o-y on a larger unitholder base from 2.63 pence in 1H21 that included an advanced distribution of 0.9 pence
- 3.5% upward revaluation of portfolio value to £517.7m as at 30 June 2022, from £500.1m as at 31 December 2021
- NAV per unit grew to £0.62 as at 30 June 2022, from £0.61 as at 31 December 2021
- Gearing ratio declined to 41.9% as at 30 June 2022, from 42.8% as at 31 March 2022
- Two more properties exercised the lease break option, bringing the total number to 12
- Rental income secured up to March 2028 for 87.5% of portfolio by annualised gross rental income after removal of lease break options
- Portfolio occupancy remains high at 98.0% as at 30 June 2022, with vacancies at John Street, Sunderland and Sidlaw House, Dundee
- Manager continues to consistently collect 99.9% of rent for 3Q22 in advance and within seven days of due date
- Long WALE at 5.2 years as at 30 June 2022
1H22 numbers were slightly above our forecasts, with the higher revenue in 2Q22 vs 1Q22 a result of a one-off adjustment of historical provision. However, with two more properties exercising their lease break options, we see some negative impact to rental income, partially mitigated by the built-in inflation-linked rental escalations that will begin in April 2023.
We note that the £17.6m gain in fair value of investment properties was mainly due to the removal of the lease break options from 108 properties occupied by the DWP and 1 property occupied by the MOD, offset by the reduction in value for vacant and vacating assets. This is roughly in line with our forecasted £15m write-back in valuations but c.£7.3m was for the prepayment for capital expenditure on investment properties relating to the Sustainability Contribution, hence only a c.£10.2m gain in fair value of investment properties was accounted for.
Looking ahead, with The Bank of England (BOE) warning that the UK will fall into recession this year after raising interest rates by the most in 27 years, we anticipate claimant counts and unemployment rate to rise. Hence, the demand for these JobCentre Plus centres should remain elevated given that they play a critical role in the reorganisation of the labour force and economic recovery. However, we also expect some negative impact from the weakening pound against the SGD.
Target price of £0.75 under review.