Elite Commercial REIT - DBS Research 2022-08-15: Two More Lease Breaks Exercised

• Elite Commercial REIT (SGX:MXNU) reported 1H22 revenue of £18.7m, which is 17.7% growth y-o-y, mainly due to the full half-year rental contribution from its maiden acquisition on 9 March 2021. Distributable income rose 9.7% y-o-y to £12.2m, also attributable to lower 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.
• Elite Commercial REIT reported 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.
• 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.
• Elite Commercial REIT's portfolio occupancy remains high at 98.0% as at 30 June 2022, with vacancies at John Street, Sunderland and Sidlaw House, Dundee. Manager has collected 99.9% of rent for 3Q22 in advance and within seven days of due date.
• Gearing ratio declined to 41.9% as at 30 June 2022, from 42.8% as at 31 March 2022.
• Long WALE at 5.2 years as at 30 June 2022.

Elite Commercial REIT - Earnings forecast revision and recommendation

• Cut FY23F revenue forecast for Elite Commercial REIT to GBP36.3m from GBP37.2m to factor in the new lease breaks for 2 properties (Lindsay House, Dundee and Ladywell House, Edinburgh) and our conservative assumption of zero income.
  • Lower FY23F net property income (NPI) to GBP35.3m from GBP36.1m.
  • FY22F/FY23F DPU lowered to 4.58/4.48 pence from 4.70/4.70 pence.
• Cost of debt assumptions increased to 2.6%/3.0% for FY23F/FY24F post re-financing.
• Maintain BUY recommendation on Upside to earnings if Elite Commercial REIT finds new tenants for the 12 properties or divests them. with lower DCF-based target price of GBP0.70.
• Upside to earnings if Elite Commercial REIT finds new tenants for the 12 properties or divests them.