Model update
- Lowering our FY22-24F DPU estimates to factor in higher funding cost.
- Partly offset by potential uplift in rents in the upcoming Apr 2023F rent review.
- Maintain Add rating with lower TP of £0.59.
Factoring higher interest cost into our FY22-24F estimates
We update our ECR model to pencil in the trust’s latest debt refinancing exercise. In Nov 2022, ECR entered into a second supplemental agreement with Lloyds Bank Plc and CIMB Bank Bhd to extend the maturity of its existing loan facility of £94m, comprising a term loan facility of £76m and a revolving credit facility of £18m, by two years, from 25 Jan 2023 to 25 Jan 2025. There is also a further 1-year extension option from the loan maturity date, subject to certain financial covenants. Based on management’s indication of refinanced debt cost of 5.96%, ECR’s overall cost of debt could rise from 2.6% at end-3Q22 to c.4.2% post refinancing, while its debt maturity is extended to 2.2 years. We estimate postrefinancing interest coverage ratio to decline from the present 5.6x to c.3.4x, still well above the guideline 2.5x. Gearing is unchanged at 41.9% at end-3Q22.
Higher revenue partly offset by increase in funding cost
In its 3Q22 business update, ECR reported 9M22 revenue of £27.9m, +10.3% yoy (3Q: £8.4m) while distribution income remained relatively flat at £18.2m (3Q: £5.9m). However, 9M DPU of 3.79 pence is 7.8% lower yoy, largely due to higher interest expense, an enlarged unit base and following the Manager’s option to receive 100% of its management fees in cash instead of units, partly offset by rental income from its maiden acquisition and tax savings from a lower headline tax rate. Portfolio occupancy dipped slightly qoq to 97.9% as two properties were vacated in Apr and Jun 2022. It has collected 99.9% of rent for the Oct-Dec 2022 period.
Asset enhancements to boost building efficiency
ECR has 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. We anticipate potential near-term income vacuum from these properties to be offset by an estimated rental uplift of 14-15% from the upcoming rent review in Apr 2023F. ECR has also undertaken asset enhancement works to improve energy efficiency of its building including upgrading heating/HVAC system and installation of new LED lighting at Bradmarsh Business Park, Rotherham, that enabled the property’s EPC rating to improve from D-90 to B-49.
Maintain Add rating
We lower our FY22-24F DPU estimates by 4.4-15.5% to bake in the higher funding cost. We believe ECR’s stable income portfolio, with inbuilt growth through its inflation-linked rental structure should provide resilience during this volatile interest rate period. 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 and a weak £.
