RHB initiates coverage on Elite UK Reit with ‘buy’ call

RHB has initiated coverage on Elite UK Real Estate Investment Trust (Reit) with a “buy” recommendation and a target price of £0.31, which implies a yield of 11 per cent. 

The research team attributed the call to the Reit’s firm recovery path, after the trust addressed key issues of lease renewal, gearing and debt refinancing. 

Additionally, the team also expects favourable market conditions following the return of a Labour Party government in the United Kingdom – which could provide more clarity on real estate regulation in the country – and increased chances of an interest rate cut.

Based on a recent ground visit, as well as discussions with the Reit’s management and tenants, the research team noted there was a “strong likelihood” of more than 90 per cent of the trust’s government leases being renewed for the longer term before expiry. 

More than 99 per cent of the trust’s gross rental income came from various agencies in the UK government, with 136 of 150 assets occupied by the UK Department for Work and Pensions.  

The concentration risk of government leases and the chances of lease renewals in 2028 could have been a “key concern” for investors, RHB’s research team said. 

The trust’s distribution per unit is also projected to bottom out in FY2024, before turning around in the following financial year. 

The planned disposal of vacant assets by early next year could lower the trust’s operational costs and result in a higher net property income margin for FY2025, the research team added. 

“The Reit has also proven, so far, its ability to divest some of the vacated assets at a premium to its latest valuations,” the team said. 

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The trust’s five divestments of vacated assets were at a 12 per cent premium over valuations, and generated gross proceeds of £3.4 million (S$5.9 million). 

Financing costs are also expected to stabilise from anticipated interest rate cuts, which could lead to a sustained earnings turnaround.  

With “strong sponsor and shareholder support”, the trust is expected to have a net gearing of about 42 per cent, offering “sufficient headroom” and allaying concerns of potential gearing breaches in the near term. 

Elite UK Reit’s portfolio is mainly found in town centres, near key transport hubs and amenities. As at the first quarter of FY2024, its portfolio of 150 assets is valued at £413 million with a total net lettable area of 3.8 million square feet, and a 92.3 per cent occupancy rate.