• Elite Commercial REIT's 1HFY20 results outperformed IPO forecasts but slightly below our expectations, at 44% of our FY20F estimates.
• Portfolio enjoys robust cashflow with key tenant DWP, which provides unemployment services to claimants in the UK.
• Reiterate ADD, with unchanged DDM-based Target Price of £0.76.

Elite Commercial REIT's 1HFY20 Results Highlights

• Elite Commercial REIT (SGX:MXNU) reported 1HFY20 DPU of 1.95 £cts, which was 1.0% ahead of its Initial Public Offering (IPO) forecasts and represented 44% of our FY20F estimates.
• Elite Commercial REIT posted revenue and NPI of £9.3m and £9.1m, which was a slight beat at 0.3% and 0.2%, respectively, ahead of its IPO forecasts, both representing 44% of our full-year estimates. PAT came in at 7.0% greater than previously forecasted by management, which was attributed to higher revenue, operating and interest costs savings.

Enhanced Stability and Income Visibility in Portfolio

• As of 30 Jun 2020, Elite Commercial REIT indicated that it has received in advance 99.8% of its 3-month rental of £5.4m for 3QFY20F.
• According to management, the UK government has also pledged to double the number of work coaches at job centres (by 13,500 more) as part of its economic recovery package. This suggests that Elite Commercial REIT’s key tenant The Department for Work and Pensions (DWP) expects footfall to rise in the near term at its job centres nationwide as the number of unemployment claimants continue to rise, which will increase reliance on the services provided by DWP, in our view.
• In addition, two of its assets at Lodge House, Bristol, and John Street, Sunderland, have waived and extended their break option clause to 31 Mar 2028 and 31 Mar 2022, respectively. We believe this enhances the income visibility of Elite Commercial REIT’s portfolio and exhibits its defensive traits during times of uncertainty. This should translate into steady and resilient cashflow, in our view.

Elite Commercial REIT Remains Well Capitalised, With a Strong Balance Sheet

• Elite Commercial REIT continues to maintain a healthy debt maturing profile and will not face refinancing risks until FY2024F, in our view, with 50% of its borrowings on a fixed rate and an effective interest rate of 2.0%, as at end-1HFY20.
• Elite Commercial REIT has aggregate leverage of 32.6% and interest coverage ratio of 7.4x at end 1HFY20. It has only drawn down £103.2m, with £21.8m in undrawn capacity, of its £140.0m loan facility as of 30 Jun 2020.

Reiterate ADD, With An Unchanged DDM-based Target Price of £0.76

• We reiterate our ADD rating on Elite Commercial REIT, with an unchanged DDM-based Target Price of £0.76.
• Based on the current Elite Commercial REIT Share Price, the REIT offers investors 16.5% potential total return. We continue to like Elite Commercial REIT for its stable income profile, with built-in growth through its inflation-linked rental structure and inorganic growth potential.
• Upside catalysts include accretive new acquisitions, while downside risks include single-tenant exposure to DWP and single-country risk (UK).

Source: CGS-CIMB Research - 23 Jul 2020