• Elite Commercial REIT's FY20 results outperformed IPO forecasts with gross revenue/ DPU in line with our expectations, at 100%/102% of our FY20F estimates respectively.
• We expect footfall to DWP offices to increase as the Jobs Retention Scheme expires, exhibiting countercyclical traits and importance of Elite Commercial REIT’s portfolio.
• We reiterate our ADD call on Elite Commercial REIT with a higher DDM-based target price of £0.79.

Elite Commercial REIT's 2H20 and FY20 Results in Line; DPU Came in Above IPO Forecasts

• Elite Commercial REIT (SGX:MXNU) reported FY20 gross revenue/ DPU of £21.0m/ 4.4 £cts which was -0.1%/2.3% below/ above its IPO forecast and formed 100%/ 101% of our full-year estimates respectively.
• Elite Commercial REIT also reported FY20 NPI of £20.4m which came in at 97% of our full-year estimate and was largely in line with its IPO forecasts.
• In 2H20, Elite Commercial REIT posted gross revenue/ DPU of £11.7m/ 2.5 £cts which was -0.5%/2.9% below/above its IPO forecasts while NPI came in at £11.3m.
• Elite Commercial REIT also registered higher revaluation gains of £15.9m in FY20 largely due to valuation uplift from the property at Lodge House, Bristol. This lifted FY20’s net income to £23.4m (+122% above IPO forecasts).

Greater Reliance on DWP as UK Jobs Retention Scheme Expires

• The UK continues to be plagued by COVID-19 uncertainties and unemployment rates are expected to reach 7.5% (Oct 2020: ~5%) by 1H21, according to the Office for National Statistics. With the UK’s Jobs Retention Scheme set to expire in Apr 2021, we expect unemployment rates to rise which will see higher volume of footfall to Elite Commercial REIT’s properties as an increasing number of job claimants will seek the Department for Work and Pensions’s (DWP) services.
• In addition, the leases of the properties at John Street, Sunderland and Lodge House, Bristol have been extended by DWP to 31 Mar 2022/28 respectively, highlighting the unique countercyclical tenant traits in Elite Commercial REIT’s properties during times of uncertainty. Elite Commercial REIT has indicated that it has received 99.6% of the rent (£5.4m) in advance for 1Q21 as at 31 Dec 2020.
• We also expect Elite Commercial REIT to complete its acquisition of 58 commercial buildings by end-1Q21, which will begin contributing revenue for FY21F. This enhances the portfolio’s cash flows, in our view.

Elite Commercial REIT Remains Well-capitalised With a Strong Balance Sheet

• In our view, Elite Commercial REIT has a healthy debt maturing profile and should not face refinancing risks until FY24F with 50% of its borrowings on a fixed rate and an effective interest rate of 1.9% at end-2020.
• Elite Commercial REIT has an aggregate leverage of 31% and interest coverage ratio of 7.7x with undrawn facilities of £36.8m out of £140m loan facilities at-end 2020.

Reiterate ADD With a Higher DDM-based Target Price of £0.79

• We tweak our Elite Commercial REIT's FY21-22F DPU forecasts by 0.3-1.7% to factor in lower effective interest rates. We keep our AD call with a higher DDM-based target price of £0.79.
• We like Elite Commercial REIT’s stable income profile, with built-in-growth through its inflation-linked rental structure and inorganic growth potential.
• Re-rating catalysts could come from rental uplifts for the majority of its portfolio in FY23, while downside risks include high tenant exposure to DWP.

Source: CGS-CIMB Research - 1 Feb 2021