1H22: Counter-cyclical Yield Play That Hedges Against Inflation
NPI grew 17.7% yoy in 1H22, driven by the maiden acquisition of 58 commercial buildings completed on 9 Mar 21. DPU declined 2.7% yoy to 2.56 pence as cost of debt edged higher by 0.2ppt qoq to 2.3%. The overhang from lease break options is largely resolved. ELITE’s properties have rent reviews every five years benchmarked against UK CPI and rental escalation of 15.4% is expected starting Apr 23. ELITE is a recession resistant counter-cyclical yield play. Maintain BUY. Target price: £0.79.
• Elite Commercial REIT (ELITE) reported 1H22 DPU of 2.56 pence (-2.7% yoy), which is in line with our expectations.
• Resiliency supported by sovereign tenants. Gross revenue and NPI grew 17.7% yoy in 1H22, driven by the maiden acquisition of 58 commercial buildings for £212.5m completed on 9 Mar 21. Portfolio occupancy remains high at 98% as of Jun 22. ELITE has collected 99.9% of rent for 3Q22 in advance and within seven days of due date.
• Incurred higher cost of debt. Interest expense increased 35% yoy due to increased borrowings to fund the acquisitions. Aggregate leverage eased 0.9ppt qoq to 41.9% but cost of debt rose by 0.2ppt qoq to 2.3%. ELITE generated savings in tax expenses after qualification of its UK entity as a UK REIT group.
• Income stability with long WALE. ELITE has a long WALE of 5.2 years as of the Jun 22 post-renegotiation of lease terms.
• Mid-year valuation. ELITE plans to conduct a mid-year valuation exercise to update the valuations of its properties after the renegotiation of lease terms. The valuation for its portfolio of 155 commercial properties increased 3.5% due to the removal of lease break options for a majority of its leases. It has recognised gain of £10.2m in fair value of investment properties in 1H22. NAV per unit increased 2% to £0.62.