DBS Group Research has upgraded Elite UK REIT to “buy” from “hold” previously, as the UK-focused REIT’s distributions per unit (DPU) have apparently bottomed out in FY2024 ended Dec 31, 2024 after a “challenging three years”.
In a Feb 12 note, DBS analysts Tabitha Foo, Derek Tan and Dale Lai also raised their target price on Elite UK REIT to 36 pence (61 cents), up from 25 pence previously.
The REIT underwent a name change in May 2024 alongside an expanded investment strategy that now includes purpose-built student accommodation (PBSA) and soon, its Peel Park land plot could house a data centre.
Repositioning the REIT could emerge as a “strategic medium-term plan”, say DBS’s analysts. “Elite plans to explore repurposing some of its vacant assets for alternative uses such as social housing or student accommodation, which are currently undersupplied in the UK. This presents an opportunity for Elite to capitalise on emerging trends in the living sector, and we believe it could look to diversify its tenant base, lease expiries and asset uses in the medium term.”
In addition, the analysts note that Sunway RE Capital, one of Elite UK REIT’s three sponsors, boasts a portfolio of student accommodation assets in the UK, “which could potentially be integrated into Elite’s pipeline”.
Sunway RE Capital is a wholly-owned subsidiary of Sunway Berhad.
See also: Elite UK REIT increases 2HFY2024 DPU by 5.8% y-o-y
Elite UK REIT reported a distribution per unit of 1.47 pence for its 2HFY2024, up 5.8% y-o-y. This brings its full-year distribution to 2.87 pence, up 5% over the preceding FY2023.
The REIT is also lifting its dividend payout ratio to 95% from 90%, as management guided that the REIT is now in better shape.
Hence, DBS now forecasts DPU estimates of 2.93 and 3.00 pence for FY2025 and FY2026 respectively, implying forward yields of 10% at the current share price. This offers “compelling value to investors”, they add.
See also: RHB, Phillip Securities aligned on 35 pence target price for Elite UK REIT, a 17% upside
Capital management yielding results
Meanwhile, CGS International Research analyst Lock Mun Yee notes that the REIT manager increased its fixed rate borrowings to 86% of all outstanding loans as at end-2024.
Weighted average cost of debt was lowered to 4.90% in end-2024, 10 basis points lower q-o-q on more favourable interest rate hedges entered in 2H2024. “Management expects cost of borrowing to stay below 5% in FY2025, benefitting from more favourable hedges, savings via sustainability-linked loans and floating rate exposure with potential interest rate cuts,” writes Lock.
CGSI’s Lock is aligned with RHB and Phillip Securities on a 35 pence target price; up from Lock’s previous estimate of 34 pence.
Like DBS, Lock is lifting her FY2025 and FY2026 DPU estimates by 5% and 1.2% respectively to factor in assumptions for a higher payout ratio, lower cost of borrowing and dilapidation settlements for FY2025, partially offset by a larger unit base.
Similarly, Gerald Wong, founder and CEO of investment platform Beansprout, points to Elite UK REIT’s lower gearing as a positive.
Following its successful GBP28 million preferential offering in January 2024, Elite UK REIT reduced its leverage ratio from 50.0% at end-2023 to 43.4% at end-2024. Similarly, its net gearing ratio declined from 47.5% at end-2023 to 42.5% at end-2024. There is no debt maturing in 2025 and 2026 and refinancing is only due in 2027.
In a Feb 11 note, Wong has a “buy” call on Elite UK REIT with the highest target price among research houses here, at 44 pence. “Based on FY2024 DPU of 2.87 pence, Elite trades at a distribution yield of 9.6%, and a price-to-book ratio of 0.73 times based on its latest net asset value (NAV) per unit of 41 pence.”
Units in Elite UK REIT closed flat at 31 pence on Feb 13, up 6.9% year to date. Against this close price, the 35 pence target price by CGSI, RHB and Phillip Securities represents a 13% upside; while Beansprout’s 44 pence target price represents a 42% upside.
