Brokers' take: UOBKH raises Elite Commercial Reit target post UK acquisition

UOB Kay Hian (UOBKH) has reiterated its "buy" call on Elite Commercial Reit while raising its price target to £0.95 from £0.88 upon factoring in contributions from the trust's newly-acquired properties in the UK.

This comes after Elite Commercial Reit completed the acquisition of 58 properties from its sponsor on March 9, 2021. The deal has expanded its assets under management by 67 per cent, and marks the real estate investment trust's (Reit) maiden acquisition since its initial public offering last year.

In a Friday report, UOBKH analyst Jonathan Koh highlights the Reit as a "recession-resistant, counter-cyclical yield play" which achieved 100 per cent rent collection in advance during 2020, despite lockdowns in the UK and worries over Brexit.

He has raised the Reit's FY2021 distribution per unit (DPU) estimate by 9 per cent to 5.2 pence due to contributions from the 58 properties, while noting its management's expectations that the acquisition would be DPU-accretive by 3.2 to 8.3 per cent.

In particular, Mr Koh believes Elite Commercial Reit stands to benefit from more intensified usage of the British government's Department for Work and Pensions' (DWP) Jobcentre Plus scheme, as it provides defence for the Reit against the side effects of higher national living wage.

"To cope with the increase in the number of unemployed British, the UK government has committed to the number of work coaches at job centres to 27,000 by March 2021, which intensifies the usage of DWP's Jobcentre Plus and reduces the likelihood of Elite Commercial Reit's tenants exercising the break clauses. DWP accounts for 94 per cent of rental income from Elite Commercial Reit's combined portfolio of 155 properties," he explained.

In the analyst's view, the Reit's income visibility is further enhanced by the UK government's waiver of its break option for Lodge House, Bristol, as well as the sovereign tenant's extension of its break option for John Street in Sunderland.

The analyst sees this as an indication that Jobcentre Plus locations at the Reit's properties are "essential for the government to render assistance to those unemployed and help them rejoin the workforce, which is integral to the social fabric of the UK".

As at end-December 2020, the Reit's leases with an option for the sovereign tenant to terminate in 2023 accounted for 70.6 per cent of its revenue. Another 28.8 per cent of revenue came from leases with the option to terminate in 2028.

Units of Elite Commercial Reit closed up 0.76 per cent at £0.66 on Friday.


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