“With the majority of its rental income derived from leases with the AA-rated UK Government, its stable stream of cash flow is a key positive for the REIT,” write Foo, Tan and Lai.
In the REIT’s 1QFY2024 business updates ended Mar 31, Elite UK REIT reported revenue growth of 0.8% y-o-y to GBP9.2 million with a distributable income to shareholders of GBP4.4 million.
Foo, Tan and Lai note that gearing has declined from 49.6%, close to Monetary Authority of Singapore’s (MAS) limit of 50%, to a more comfortable level of 43.% following the REIT’s recent equity placement.
“We believe this is a big step in the right direction to infuse liquidity and strengthen its capital structure, a key overhang on the stock given the capital value erosion risk in the UK,” they add.
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While the analysts view these stronger credit metrics as a “relief” for the REIT’s shareholders, they forecast a modest drop in Elite UK REIT’s distribution per unit (DPU) ahead.
The analysts have lowered their FY2024/FY2025 margins estimates for the REIT to 90%-92% from 95% previously to factor in higher vacancy costs. Consequently, their FY2024/FY2025 DPU projections are trimmed by 9% and 6%, to 2.76 pence and 2.83 pence respectively.
Although the DPU in the next financial years is set to decline due to an enlarged equity base and lower margins, it is a small trade-off to cement a stable foundation for growth, the analysts add.
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Currently, the analysts view Elite UK REIT’s ongoing asset repositioning as a strategic medium-term plan following the REIT’s plans to repurpose some of its vacant assets for alternative uses. These include social housing and student accommodation which are currently undersupplied in the UK.
“This presents an opportunity for Elite UK REIT to capitalise on emerging trends in the living sector and diversify its tenant base, lease expiries, and asset uses in the medium term,” the analysts say.
While the repurposing of the vacant assets has taken an extended period of time in this initial stage, the analysts believe the process will be quicker in the future.
“Management has shared that they will begin lease negotiations with Department for Work & Pensions (the largest tenant) well in advance of the bulk lease expiries in 2028, which should allow the REIT to determine the best use for each asset, hence accelerating the process of reletting, repositioning, divesting or others,” the analysts point out.
DBS sees the current risk-to-reward for Elite UK REIT as fair, noting that it could turn more positive on the stock in the near term if the trust maximises value on its vacant portfolio.
As at 10.56am, shares in Elite UK REIT are trading at 0.5 pence lower or down 2.08% at 23.5 pence.
