Higher cost of debt to weigh on dividends
3Q22 Operational Update
- Elite Commercial REIT (ECR) reported 9M22 revenue of £27.9m, with 3Q22 revenue dipping slightly q-o-q to £9.2m from £9.5m in 2Q22 due to vacancies at John Street, Sunderland and Sidlaw House, Dundee
- 9M22 distributable income remained flattish y-o-y at £18.2m
- Driven by a full period of rental contribution from the maiden acquisition and tax savings
- But offset by election of the Manager’s fees in cash, increased borrowings and higher interest cost, marginally lower occupancy rate and enlarged equity base
- 9M22 distribution per unit (DPU) of 3.79 pence declined 7.8% y-o-y on a larger unitholder base from 4.11 pence in 9M21
- NAV per unit remained constant at £0.61 as at 30 September 2022
- Gearing ratio also remained constant at 41.9% as at 30 September 2022
- High portfolio occupancy at 97.9% as at 30 September 2022 with 99.9% of rent for 4Q22 paid in advance and within seven days of due date
- Long WALE at 5.0 years as at 30 September 2022
- FY23F/FY24F revenue increased slightly to £36.9m/£37.1m to factor in higher inflation-linked rental uplifts in Mar 2023 of 15% (prev: 11%)
- FY22F/FY23F/FY24F borrowing costs raised to 2.6%/4.2%/4.2% post refinancing in FY23F to account for rising interest rates on floating debt
- FY23F/FY24F DPU lowered by 8-11% to 3.98 pence p.a.
- Risk-free rate lifted to 3.5%
Downgrade to HOLD with lower DCF-based TP of £0.53 as higher cost of debt weighs on DPU going forward. The Manager completed the extension of £94m in borrowings ahead of January 2023 maturity, with new maturity in January 2025 and a built-in extension option of one year subject to certain financial covenants. We lower FY23F/FY24F DPU by 8-11% to 3.98 pence p.a., implying a 15% y-o-y drop in FY23F DPU, from FY22.