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Wednesday, November 17, 2021

Elite Commercial REIT Review @ 17 November 2021

Basic Profile & Key Statistics

Elite Commercial REIT (Elite) is an office REIT that owns 155 properties in U.K.

Performance Highlight

Actual performance is better than IPO forecast mainly due to the contribution from the newly acquired portfolio that was completed on 9 March. DPU surpasses the IPO projection by 20.3% due to the same acquisition which is DPU accretive.

The lease break for East Street Epsom has been exercised in the previous quarter. Elite has received a buy offer and also submitted a proposal to retain the tenant. Both options are under evaluation.

Dallas Court Units 1-2 achieve positive rental reversion. At the same time, there is another lease break option being exercised for John Street, Sunderland.

On 27 August, Elite announced that its subsidiary, Elite UK Commercial Holdings Limited (ECHL) complete its technical listing (no trading of shares) on The International Stock Exchange (TISE). As ECHL and its subsidiaries are qualified as UK REIT group, ECHL can enjoy the corporate tax exemption other REIT benefits. As tax expense is reduced, the DPU is expected to increase. Coupled with the reversal of deferred tax liabilities of £7.7 million, its NAV (as well as NAV per unit) would increase as well.

Related Parties Shareholding

  • REIT sponsor's shareholding is low at 6.384%
  • REIT manager's shareholding is high at 1.527%
  • Directors of REIT manager's shareholding is high at 11.336%

Lease Profile

  • Occupancy is high at 100%
  • WALE is long at 6.4 years
  • Highest lease expiry within 5 years is low at 1.7% which falls in 2022, but there is a high lease break of 63.7% which falls in 2023.
  • Almost all properties are freehold or longer than 99 years remaining land tenure

Debt Profile

  • Gearing ratio is high at 42.1%
  • Cost of debt is low at 1.9%
  • Fixed rate debt % is low at 63%
  • All debts are secured debts
  • WADM is short at 2.3 years
  • Highest debt maturity within 5 years is high at 55.4% which falls in 2024
  • Interest coverage ratio is high at 6.2 times

Diversification Profile

  • Top geographical contribution is low at 13.3% 
  • Top property contribution is low at 9.3% 
  • Top 5 properties contribution is low at 26.2% 
  • Top tenant contribution is high at 93% 
  • Top 10 tenants contribution is high at 100%

Key Financial Metrics

  • Property yield is high at 6.7% 
  • Management fees over distribution is low at 10% in which unitholders receive S$ 10 for every dollar paid 
  • Distribution on capital is high at 4.8%
  • Distribution margin is high at 72.1%

Trends

  • Uptrend - DPU
  • Slight Uptrend - NAV per Unit, Distribution Margin 
  • Downtrend - Interest Coverage Ratio, Property Yield, Distribution on Capital

Relative Valuation

  • P/NAV - Average for 1y and 3y
  • Dividend Yield - Average +1SD for 1y and 3y

Author's Opinion

 Favorable Less Favorable
High REIT Manager's ShareholdingLow REIT Sponsor's Shareholding
High Directors of REIT Manager's ShareholdingConcentrated Lease Break Period
High OccupancyHigh Gearing Ratio
Long WALELow Fixed Rate Debt %
No Major Lease Expiry within 5 Years0% Unsecured Debt
Almost 100% Freehold PropertiesShort WADM
Low Cost of DebtConcentrated Debt Maturity
High Interest Coverage RatioHigh Top Tenant & Top 10 Tenants Contributions
Low Top Geographical ContributionInterest Coverage Ratio Downtrend
Low Top Property & Top 10 Properties ContributionsProperty Yield Downtrend
High Property YieldDistribution on Capital Downtrend
Competitive Management Fees 
High Distribution on Capital 
High Distribution Margin 
DPU Uptrend

The gross revenue, distributable income and DPU (albeit no distribution in this quarter) have increased as compared to the previous quarter. Its fundamentals remain resilient, though the high tenant concentration and high lease break % in 2023 are some risks to take note of. With the technical listing of its subsidiary, Elite can now enjoy the tax benefit of UK REIT which would reduce its tax expense and in turn, increase its DPU moving forward.


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*Disclaimer: Materials in this blog are based on my research and opinion which I don't guarantee accuracy, completeness, and reliability. It should not be taken as financial advice or a statement of fact. I shall not be held liable for errors, omissions and loss or damage as a result of the use of the material in this blog. Under no circumstances does the information presented on this blog represent a buy, sell, or hold recommendation on any security, please always do your own due diligence before any decision is made.

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