“Over the past three years of headwinds on multiple fronts resulting in declining DPU, we maintained a neutral stance on Elite. We now turn positive on the REIT as distributable income has stabilised and is operationally driven and sustainable, boosted by interest savings,” the analysts write in their Feb 12 report.
They note that the REIT’s borrowing costs as at Dec 31, 2024, dipped by 30 basis points y-o-y to 4.9% with the estimated annual savings potentially up to as much as GBP2 million.
In addition, lease renewal discussions with the REIT’s main tenant, UK’s Department for Work & Pensions (DWP) are expected to begin as early as this year, which is a plus in the analysts’ book. This is given that early negotiations for leases expiring in 2028 will be crucial to maintaining income visibility.
“Thanks to proactive asset management, Elite has unlocked value from its vacant portfolio over the past year through dilapidation settlements and divestments at an average premium of 15%, which has been used to pare down debt,” they add.
See also: SAC Capital initiates ‘buy’ on Sanli Environmental after $105.3 mil contract win from PUB
Despite the upgrade and higher target price, the analysts have lowered their FY2025 revenue estimate as they factor in the absence of contribution from the REIT’s vacant and disposed assets. This will be offset by higher expected net property income (NPI) margins due to lower vacancy costs and higher interest savings, as well as an increase in the distribution payout ratio to 95% for the full year, they note.
The analysts’ FY2025 and FY2026 DPU estimates are now at 2.93 pence and 3 pence respectively, which imply forward yields of 10% at the current share price, which they deem as “compelling”.
Units in Elite UK REIT closed flat at 31 British pence on Feb 13.
