Should You Invest In Elite Commercial REIT [Fundamental Analysis]

In this article, we'll be conducting a fundamental analysis of Elite Commercial REIT and its suitability to achieve the following investment objective: To deliver a stable dividend yield of 5% to 6% per year while having high capital preservation ability.

Information Is Accurate Up To Jan 2024

Business Description

Elite Commercial REIT is an Office REIT that was listed in 2020 and owns 155 office properties across the United Kingdom that are leased directly to the UK government.

What I Like About Elite Com REIT:

• Stable top-line performances
  

• More than 99% of gross rental income is derived from AA-Credit rated UK Government and rentals are collected three months in advance. This provides stability in distribution and an additional buffer in the event of major lease changes

What I Do Not Like About Elite Com REIT:

• REIT is relatively new and management is unproven.
  

• The gearing ratio is very high and financial health has been deteriorating. While the management has taken action to reduce their gearing via divestment, the current depressed environment would force the management to dispose of properties at a lower valuation thereby eroding their Net Asset Value.
  

• Tenant concentration risk is very high which may potentially affect Elite Commercial REIT’s bargaining power when it comes to re-negotiating their lease agreement due to a lowered bargaining power.
  

• Concentration in the lease expiry profile will exacerbate the risk of a lowered gross rental revenue as it is not unlikely that the government agencies might force a lower rental agreement as the government seeks to reduce their budget deficit.
  

Updates From Recent Performance (3Q 2023)

General Comments:

• 5 divestments have been realized of which large gross proceeds went towards repayment of loans. (Pro-forma gearing ratio had declined by 0.60% to 45.40% as of 25 October 2023)
  

• Top-line revenue had remained resilient mainly due to a 13.1% inflation-linked rent escalation.
  

• Management had raised funds in December 2023 via preferential share offering to de-leveraging their portfolio. This dilution effect will further negatively impact the bottom line DPU despite having a stable top-line performance.

Positive Headwinds:

• -

Negative Headwinds:

• Headwinds and a potential slowdown in the UK economy may result in a further depressed commercial market. This may continue to push the portfolio valuation down and gearing ratio up which risks crossing the MAS leverage limit.
  

• The cost of borrowing is expected to remain elevated and could increase further as a bulk of Elite Commercial REIT’s debt is due for renewal in Q4 2024, of which interest rates would have just started to come down.

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- Work In Progress -

Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).

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Disclaimer:

This article is meant to be the opinion of the author

This article is for information purposes only

This article should not be seen as financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore