According to Lock and Li, Elite UK REIT’s “unique” value proposition lies in its defensive cashflow from sovereign-rated tenants and ability to selectively and strategically reposition assets into newly identified growth sectors, such as purpose-built student accommodation (PBSA). “We believe this would allow it to enhance its value, future-proof its portfolio and narrow its share price gap to net asset value.”
The CGSI analysts stay “add” on Elite UK REIT in a July 23 note, which was issued just a day before the REIT manager announced it had received planning approval from local authorities to convert Lindsay House in Dundee, Scotland, into a 168-bed PBSA facility.
The REIT manager has also signed a development management agreement with Mys, a Scotland-based development manager and PBSA operator, to manage the development of the upcoming PBSA asset.
As at Dec 31, 2024, Lindsay House was valued at GBP1.49 million ($2.58 million). Following its development, the property is estimated to have a gross development value of GBP24 million with a return on investment (ROI) of around 18%. Its yield on cost is expected to be more than 7%.
See also: Elite UK REIT receives planning approval to convert Scotland’s Lindsay House to PBSA
According to management, there were some 17,950 full time students in Dundee during the 2022/2023 academic year, and the city’s full-time student population has grown at an annual rate of 3% over the past few years.
However, just 4,000 PBSA beds are available, translating to a 4.2 times student-to-bed ratio in Dundee, notes Lock and Li. “There appears to be an undersupply of student accommodation. As such, we believe Elite is well-positioned to benefit from this value accretive conversion. Our back-of-the-envelope estimates show that this redevelopment could boost NAV by GBP2.2 million or GBP0.36 per unit.”
See also: Floating debt to bring better rates for CDLHT, but fixed rates mitigate volatility for Elite UK REIT
Potential acquisitions
Aside from Lindsay House and the three other assets in Elite UK REIT’s portfolio, Lock and Li also visited Queensway House in East Kilbride and 150 Broomielaw in Glasgow.
Both properties belong to the sponsor. Given that the tenants of these properties include His Majesty’s Revenue and Customs as well as the Scottish Ministers Office, the CGSI analysts believe acquiring these properties “could potentially further diversify Elite’s tenant exposure base”.
Queensway House, for example, is a 217,674 sq ft campus-style facility with ancillary spaces for a gym and nursery.
The property is fully leased to His Majesty’s Revenue and Customs and serves as a regional administration centre and call centre hub that processes tax payments, handles enquiries and supports compliance across Scotland and beyond, writes CGSI.
The property houses some 1,760 employees, although part of the space is under-utilised currently, say Lock and Li. The property has a remaining weighted lease expiry of 6.3 years.
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Meanwhile, 150 Broomielaw was developed in 2001 and is located by the River Clyde waterfront, in the heart of Glasgow’s financial district and within walking distance to the Glasgow Queen St station and Central Station.
The 96,759 sq ft property is a high-specification Grade A office accommodation with seven upper floors and a basement. It is fully leased to the Scottish Enterprise and occupied by Scottish Ministers, with a remaining weighted average lease expiry of 5.4 years.
Financial performance
On July 15, the REIT manager announced an advance distribution of 1.43 pence for the period Jan 1 to June 18, compared to a 1QFY2025 distribution per unit (DPU) of 0.76 pence.
This implies an annualised 1HFY2025 DPU of 1.53 pence, accounting for 52% of CGSI’s FY2025 forecast.
“Thus, we raise our FY2025-2027 DPU by 1.29% to 3.07% to factor in a robust 1HFY2025, contributions from the three properties acquired in June, as well as adjusting for its equity fund raising exercise,” write Lock and Li.
With the interest rate cycle peaking, CGSI believes Elite UK REIT’s book NAV should “remain resilient”, with “further prospects of uplift” through unlocking value from repurposing some of its properties. The REIT’s FY2025 dividend yield is “attractive” at 8.6%, at a 95% payout ratio. This translates to a total return of 19%, write Lock and Li.
As at 4.42pm, units in Elite UK REIT are trading 0.5 pence higher, or 1.5% up, at 34.5 pence.
