DBS Group Research analysts Tabitha Foo, Derek Tan and Dale Lai have upgraded their call on Elite UK REIT to “buy” from “hold” as they see the REIT’s distribution per unit (DPU) back on a growth trajectory. The analysts have also given the REIT a higher target price of 36 British pence (61 cents) from 25 British pence previously.
The REIT’s results for the FY2024 ended Dec 31, 2024, exceeded their expectations with full-year distributable income up by 2.3% y-o-y to GBP18.5 million. The higher distributable income was due to savings in property holding costs from the divestment of vacant assets, lower interest costs and tax savings. Meanwhile, Elite UK REIT’s FY2024 DPU fell by 6.5% y-o-y to 2.87 pence on an enlarged unit base, although DPU would have been 5% higher y-o-y after adjusting based on FY2024’s weighted average units in issue. The team had predicted Elite UK REIT’s FY2024 DPU to come in at 2.76 pence.
“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.
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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.
