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SGX Market Strategist, Equity & Fixed Income, Singapore Exchange Ltd (SGX)

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

Equity Bottom-Up

<p><em><strong>Non- SGX Report: These equity research reports are not written by the SGX.</strong>&nbsp;SGX supports the distribution of the research reports by external contributors. Please refer to the Disclaimer in the attached report.</em></p>
<h2>Elite Commercial REIT</h2>
<h3>First milestone acquisition</h3>
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<li>Milestone acquisition enlarges property portfolio valuation by c.67%to £531m.</li>
<li>Acquisition is DPU accretive and increases portfolio exposure to London.</li>
<li>Reiterate Add rating with a higher&nbsp; DDM-based&nbsp; TP of £0.781.</li>
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<p><strong>Enlarged property portfolio contributes to organic rental growth</strong><br>Elite Commercial REIT (ECR) announced that it has entered into a conditional share purchase agreement with Elite Bushel Holding Limited to acquire 58 commercial properties located across the UK. The new properties are 100% occupied with a WALE of 7.4 years and have a total NLA of c.1.3m sq ft which are well located within city centres, town centres, and transport hubs. An estimated 80% of the leases by gross rental income (GRI) have CPI-linked rental escalations capped and collared from 1%-5%. The total acquisition outlay is estimated to be £218.5m including fees, and is expected to be completed in Dec 2020.</p>
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<p><strong>Diversification of occupier mix and increased exposure to London<br></strong>With this acquisition, 82% of the existing portfolio by both NLA and GRI will be occupied by the anchor tenant DWP and 17% will be occupied by five new UK sovereign tenants which include prominent agencies such as the Ministry of Defence. In our view, we believe the introduction of five new sovereign-tenants raises the diversification profile of ECR’s occupier mix and extends the REIT’s exposure to high quality government tenants to bring total portfolio WALE to 7.5 years. Additionally, 36% of the new properties’ portfolio are located in London, bringing ECR’s exposure in the area to 14% of its total AUM. According to Colliers, London commercial properties have demonstrated strong capital growth of 7.7%-8.1% versus the UK average of 5.4% over the past decade. Given London’s strategic importance to the UK, we believe that having a sizeable portion of ECR’s assets there will allow the portfolio to enjoy long-term rental and capital growth potential as well as redevelopment opportunities.</p>
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<p><strong>Accretive acquisition raises ECR’s size and market capitalisation</strong><br>According to management, the proposed acquisition is expected to be DPU accretive, with a proforma 3.2% increase to 2.02 pence, assuming the deal is financed via the proposed issuance of consideration units to the vendors (£89.4m), equity fund raising (£30m) and debt. According to management, the gearing of the enlarged portfolio is expected to increase from 32.6% to 37.7% as at end-Jun 2020. ECR’s total property portfolio valuation and market capitalisation are expected to expand 66.6% to £531.6m and 57.0% to £334.8m, respectively, raising the stability, liquidity and overall attractiveness of the REIT in our view.</p>
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<p><strong>Reiterate Add rating</strong><br>We raise FY21-22F DPU by 3.01-3.05% as we factor contributions from the new acquisitions into our projections. We reiterate our Add rating on ECR, with a higher DDM- based TP of £0.781, assuming contributions from the new portfolio from FY21F. We continue to like ECR for its stable income profile, with built-in growth through its inflation- linked rental structure and inorganic growth potential. Upside catalysts could come from rental uplifts for the majority of the portfolio in FY23, while downside risks include high tenant exposure to DWP.</p>
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Non- SGX Report: These equity research reports are not written by the SGX.&nbsp;SGX supports the distribution of the research reports by external contributors. Please refer to the Disclaimer in the attached report.
Elite Commercial REIT
First milestone acquisition



Milestone acquisition enlarges property portfolio valuation by c.67%to £531m.
Acquisition is DPU accretive and increases portfolio exposure to London.
Reiterate Add rating with a higher&nbsp; DDM-based&nbsp; TP of £0.781.



Enlarged property portfolio contributes to organic rental growth Elite Commercial REIT (ECR) announced that it has entered into a conditional share purchase agreement with Elite Bushel Holding Limited to acquire 58 commercial properties located across the UK. The new properties are 100% occupied with a WALE of 7.4 years and have a total NLA of c.1.3m sq ft which are well located within city centres, town centres, and transport hubs. An estimated 80% of the leases by gross rental income (GRI) have CPI-linked rental escalations capped and collared from 1%-5%. The total acquisition outlay is estimated to be £218.5m including fees, and is expected to be completed in Dec 2020.

Diversification of occupier mix and increased exposure to London With this acquisition, 82% of the existing portfolio by both NLA and GRI will be occupied by the anchor tenant DWP and 17% will be occupied by five new UK sovereign tenants which include prominent agencies such as the Ministry of Defence. In our view, we believe the introduction of five new sovereign-tenants raises the diversification profile of ECR’s occupier mix and extends the REIT’s exposure to high quality government tenants to bring total portfolio WALE to 7.5 years. Additionally, 36% of the new properties’ portfolio are located in London, bringing ECR’s exposure in the area to 14% of its total AUM. According to Colliers, London commercial properties have demonstrated strong capital growth of 7.7%-8.1% versus the UK average of 5.4% over the past decade. Given London’s strategic importance to the UK, we believe that having a sizeable portion of ECR’s assets there will allow the portfolio to enjoy long-term rental and capital growth potential as well as redevelopment opportunities.



Accretive acquisition raises ECR’s size and market capitalisation According to management, the proposed acquisition is expected to be DPU accretive, with a proforma 3.2% increase to 2.02 pence, assuming the deal is financed via the proposed issuance of consideration units to the vendors (£89.4m), equity fund raising (£30m) and debt. According to management, the gearing of the enlarged portfolio is expected to increase from 32.6% to 37.7% as at end-Jun 2020. ECR’s total property portfolio valuation and market capitalisation are expected to expand 66.6% to £531.6m and 57.0% to £334.8m, respectively, raising the stability, liquidity and overall attractiveness of the REIT in our view.






Reiterate Add rating We raise FY21-22F DPU by 3.01-3.05% as we factor contributions from the new acquisitions into our projections. We reiterate our Add rating on ECR, with a higher DDM- based TP of £0.781, assuming contributions from the new portfolio from FY21F. We continue to like ECR for its stable income profile, with built-in growth through its inflation- linked rental structure and inorganic growth potential. Upside catalysts could come from rental uplifts for the majority of the portfolio in FY23, while downside risks include high tenant exposure to DWP.













Non-SGX Report: Elite Commercial REIT: First Milestone Acquisition

Elite UK REIT

Non-SGX Report: Elite Commercial REIT: First Milestone Acquisition