Elite Commercial REIT Proves to be a Recession Resilient REIT

by: Tam Ging Wien


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Elite Commercial REIT (Elite C-REIT) announced its H1-2020 results on 23-Jul-2020 (Thu) and posted a DPU of 1.95 British pence beating its forecast of 1.93 British pence by about 1%. Based on the latest exchange rate, 1.95 British pence are approximately 3.447 Singapore cents.

As Elite C-REIT was listed on only in February, the results only for the period from 06-Feb-2020 to 30-Jun-2020. At this week’s closing price of GBP 0.695, the annualised yield for H1-2020 translates to approximately a 6.7% dividend yield.

The unit ownership will be recorded on 03-Aug-2020 and unitholders can expect to receive payment on 11-Sep-2020.

ProButterfly first wrote about Elite C-REIT in the article entitled First Impressions of Elite Commercial REIT in late-January. In the article, we liked Elite C-REIT for its interesting asset class mix, a double-A rated sovereign entity as a tenant, and the uniquely counter-cyclical assets of providing core essential public services.

In this article, we review the REIT’s maiden set of results. We found that it continues to enforce our believe in the recession resilient nature of Elite C-REIT.

Lower Interest Expenses Leading to Forecast Beating Results

After ploughing through their financial statements, we observe that the forecast beating results can be attributed to 2 significant reasons:

  • Lower than forecast “operating expenses”
  • Lower than forecast “finance costs”

While many REIT investors tend to prefer a higher proportion of interest on fix rates stability and predictability reasons, we continue to believe that we are likely be in an environment of lower-for-longer interest rates. Hence, we prefer that REITs have a higher proportion of floating interest rates in order to enjoy the trend of declining interest rates.

Elite C-REIT chose to take the middle ground of 50% fix rate debt; striking the balance of predictability with optimisation of interest cost. Its current effective interest rates are ~2.0%, lower than the ~2.3% forecasted effectively owing to the reduction in the benchmark rate of 3-month GBP Libor. This shaved off some of the REITs expenses and passing that back to investors.

Another factor contributing higher DPU compared to forecast are some savings in operating expenses which was lower than originally forecasted.

Healthy Capital Management in the Medium Term

Elite C-REIT’s capital management remains healthy with a 32.6% gearing and a 7.4x interest coverage.

We like that fact that the REIT does not have any refinancing requirements until 2024 giving investors a medium-term predictability. However, in the longer term, we would like to see the debt maturity profile spread out a little more evenly to diversify capital management risk.

Elite C-REIT as a further £21.8mil of undrawn debt facilities which allows it draw upon quickly in future acquisitions of AEI projects.



Source: Elite Commercial REIT Results Announcement

Tenant an Excellent Paymaster

Presently, 99% of Elite C-REIT’s portfolio rental income is derived from full repairing and insuring leases (or triple net leases) from the UK Government which is rated AA and Aa2 by S&P and Moody’s respectively.

Elite C-REIT announced that it has already collected 99.8% of the three-months’ rent for the period spanning across the months of July to September 2020 in in advance.

Similarly, for the period 1 April 2020 to 30 June 2020, 92.8% of the rental was received on or before the due date while 99.4% was received within 7 days of the due date.

This gives us assurance that despite the global crisis that the world is presently going-through, the UK government has proven to be an excellent paymaster to Elite C-REIT.

JobCentre Plus Remains a Core Essential Public Service Amidst the COVID-19 Crisis

According to management’s sharing during the results briefing, the UK government has pledged to double the number of frontline staff at job centres as part of its economic stimulus and recovery package. According the news reports from the BBC, Chancellor Rishi Sunak has pledged £800m to recruit 13,500 extra staff at job centres. About 4,500 of them will be expected to be position by October, with more following later in the year.

When the UK Government announced a lockdown in late-March to curb the spread of COVID-19, the public was advised not to visit Jobcentre Plus locations for medical assessments, interviews or any other face-to-face appointments, however they remain open to process and disburse benefits to claimants.

It is anticipated that job centres around the UK are expected to experience a drastic increase in face-to-face meetings with jobseekers as lockdown restrictions are eased. The number of claimants from March to May had risen from 1.24mil to 2.80mil, representing a 126% increase since the beginning of the lockdown. This is high claimants count is expected to continue.

When asked about the possibility of increased claimants applying for benefits through the internet, the management responded that while internet applications have been encouraged, many beneficiaries are still required to complete their benefit claims via shorter face-to-face appointments in order to submit physical documents proving they are unemployed, interview assistance and other skills retooling and retraining programmes. Hence, increase internet usage for these public benefits are unlikely to disrupt the need for physical JobCentre Plus locations.

82.5% of the Elite C-REIT’s 97 assets in the portfolio are used to provide key front-of-house services, primarily Jobcentre Plus unemployment services.

Increased Income Visibility

The management had announced that the tenant did not exercise the break option, therefore the lease for Lodge House, Bristol will expire on 31-Mar-2028.

For another asset, John Street, Sunderland, the tenant extended their break option clause to 31-Mar-2022. When probed, the management replied that it is common that the UK government may extend break options. Specifically, for John Street, Sunderland where was a government building nearby under development which they had considered to move into. However, for reasons related to COVID-19, they had to delay the move and hence extending the break option clause allowed the tenant to continue leases the asset while keeping their options open to move in 2022.

With these extensions, it brings about greater certainty and visibility to the future income stream and cash flow of Elite C-REIT.

Risk Highlighted in Previous Article Still Remain

In our IPO coverage of C-REIT in the article entitled First Impressions of Elite Commercial REIT in late-January, we highlighted a number of risk among them are:

  • Single Tenant Risk
  • Co-Terminus Risk
  • Weakening Pound Against the Singapore Dollar
  • Potential Equity Based Fund Raising in the Foreseeable Future

We advise readers to consult our previous article to understand the various risk relating to Elite C-REIT.

With a current valuation of its 97 assets totalling £295.968mil, each asset value averages £3.05mil. In the previous section, we highlighted that Elite C-REIT has an undrawn debt facility of £21.8 which would allow it to acquire approximately another 7 new assets and would push its gearing just shy of 40%.

In our view, it’s unlikely that the management will push gearing significantly past 40% and its future pipeline of assets is certainly much more than 7. Therefore, it would need to raise equity fund raising in order to fund acquisitions in the future. Investors in Elite C-REIT need to ensure that they have reserve funding to support any future equity fund raising and this should not catch investors by surprise.

Concluding Remarks

With the release of Elite C-REIT’s maiden results, we solidify our expectation that their assets and tenants show recession resilient traits during the current uncertain times.

We like the fact that its DPU had come above its forecast, capital management risk remains well managed, increased income visibility secured by a good paying tenant and the anchor service of JobCentre Plus remains a core essential public service relevant in the current times.

However, the risk identified earlier continue to remain and investors should always be mindful to manage their downside.

With this current results release, Elite C-REIT remains firmly a part of our REIT portfolio.

Real Estate Investment Trusts (REITs) are one of the most reliable way to invest as they generate steady and consistent tax free cash flow. REITs also open up access for investors to participate in a diverse range of real estate assets with low capital outlay. By having and applying the right investment toolkit at your disposal could potentially boost your investment performance many folds and/or help you reduce your REITs investment risk.

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Meanwhile, do also check out the book REITs to Riches: Everything You Need to Know About Investing Profitably In REITs available at all major bookstores around Malaysia and Singapore. To purchase the eBook (PDF) copy, navigate to http://aktive.com.sg/store/reits-to-riches/.

 

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