A stable portfolio
- 1H22 DPU of 2.56 pence is in line at 51% of our FY22F forecast.
- Gearing declined to 41.9% on higher portfolio valuation.
- Reiterate Add rating with an unchanged TP of £0.76.
1H22 results highlights
1H22 revenue rose 17.7% yoy to £18.7m while NPI grew 17.5% yoy to £18.1m on contributions from its new acquisition, partly offset by slightly lower portfolio occupancy. Distributable income improved 9.7% yoy to £12.2m due to increased interest expense, partly offset by lower effective tax rate. DPU declined 2.7% yoy to 2.56 pence on an enlarged units base and following the Manager’s option to receive 100% of its management fees in cash instead of units.
Slight occupancy dip but visibility improved from lease regearing
ECR’s portfolio was 98% occupied at end-1H and 99.9% of rents have been collected for the period of three months to Sep 22. During 1H, ECR renewed and restructured two nongovernment leases at The Forum, Stevenage. One of the leases was renewed with a 4.6% rental uplift while the other had a mutual lease break moved to 2028. In addition, ECR received notice to exercise a lease break option for Lindsay House, Dundee and Ladywell House, Edinburgh. Lindsay House is being actively marketed to potential occupiers, with alternative uses being considered. Proactive tenant engagement at Ladywell House is ongoing to maximise space use and to derive the best outcome from active asset management of this property. This is in addition to two other properties – John Street, Sunderland and Sidlaw House, Dundee – vacated in Apr and Jun 2022 respectively, and which are currently being actively marketed to potential occupiers. In all, 87.5% of total portfolio rental income, as at Jun 22, is secured till Mar 2028 following removal of lease break options. As part of its ESG efforts, ECR has made the first tranche of sustainability
contribution amounting to £7.3m to the Department for Work and Pensions (DWP).
Lower gearing of 41.9% post revaluation
Following a 3.5% revaluation uplift in portfolio value at end 1H, ECR’s gearing declined to 41.9%. This could lower gearing, providing more debt headroom for inorganic growth opportunities. In terms of capital management, ECR has hedged 63% of its debt into fixed rates. It has a total of £100.6m and £125m of term loan facility, bridge loan and revolving credit facility due to be refinanced in FY23F and FY24F, respectively. In view of the rising rate environment, management guided that average funding cost could rise to mid-to-high 2% post refinancing.
Reiterate Add rating
We keep our FY22-24F DPU estimates and our DDM-based TP at £0.76. At the current price, ECR offers an attractive FY22F dividend yield of c.8.2%. We like ECR’s stable income portfolio, with inbuilt growth through its inflation-linked rental structure. Potential rerating catalysts could come from rental uplifts for the majority of its portfolio in FY23F, while downside risks include tenant concentration exposure to the DWP and a weak £.