• Maintain BUY, new GBP0.35 TP (from GBP0.31), 17% upside, c.10% yield. Elite UK REIT’s 3Q24 numbers were slightly ahead on lower financing costs. Overall, it was a good quarter with the completion of loan refinancing and hedging most of its debt at better-than-expected rates. Asset recycling and repositioning are on track, with more divestments at a premium expected. Potential upsides: Sale of the Peel Park data centre (DC) site, positive valuation gains, and an increase in the dividend payout ratio.

• Refinancing completed; loans hedged at better rates. ELITE has completed the refinancing of its entire GBP215m of loans via sustainability-linked facilities, with interest savings as the assets’ energy performance improves. With this, it has no debt maturing until 4Q27, with another 2-year extension option on the facility. The REIT also managed to hedge a majority (87%) of its debt by taking advantage of the recent central bank rate cuts, resulting in overall borrowing costs of 5% pa, which is better than our initial expectation of a mid-to high-5% level for the next two years.

• Peel Park DC plans taking shape, more divestments and redevelopments on the cards. ELITE has secured power supply for an 80MW DC for the proposed DC facility at its Peel Park site, and is in discussions to tap on sustainable wind power infrastructure nearby, which could be ideal for hyperscale players. It has submitted the planning application to the local government, with a likely positive outcome expected in 6-12 months, after which it could monetise the asset by selling the land to a third party, in our view. It is also in advanced stages of divesting three vacant assets and redeveloping two others into a student accommodation and built-to-rent facility.

• UK budget a mild positive. ELITE’s largest tenant, the Department for Work and Pensions (DWP), will be hiring 3,000 additional staff to combat fraud and error, which could result in higher workspace requirements or maintaining the existing space in the future. There are also plans for reforms and additional budget allocations for the infrastructure and housing segment, which could aide in conversion plans for ELITE’s vacant assets. While the budget saw an increase in capital gains tax and stamp duty land tax, this will not impact ELITE due to its technical listing under the UK REIT tax regime.

• 9m DPU of 2.13 pence (+3.9% YoY) on an adjusted basis accounted for 78% of our previous FY24F DPU. Portfolio occupancy rose to 93.9% (+160bps QoQ) with the divestment of the vacant Sidlaw House at a healthy premium. ELITE has also collected GBP1.4m in dilapidation settlement charges YTD.

• We raise FY24F-26F DPU by 3-5% by factoring in lower finance costs and reducing our COE by 75bps, resulting in a higher TP (inclusive of a 0% ESG premium/discount).

Source: RHB Securities Research - 6 Nov 2024