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 a high degree of capital preservation ability.

Information Is Accurate Up To April 24

Business Description

Elite Commercial REIT is an Office REIT that was listed in 2020 and owns 150 office properties across the United Kingdom that are leased directly to the UK government.

What I Like About Elite Commercial REIT:

Very stable distribution (Figure 8) with 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 Commercial REIT:

REIT is relatively new and management is unproven and their performance and decisions thus far have not been very reassuring.
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. (Figure 4)
Tenant concentration risk is very high, potentially affecting Elite Commercial REIT’s bargaining power when it comes to re-negotiating their lease agreement due to a lowered bargaining power. This may be a notable risk with UK’s constant budget deficit problem as rental negotiation is an avenue for the government to cut their spending. (Figure 11)

Updates From Recent Performance (FY 2023)

General Comments:

Management had also launched their equity fundraising to raise funds and lower their gearing ratio. Overall, this move is expected to bring the net gearing ratio down to 40.9% as opposed to the current 47.5% at the expense of further dilution to existing unit holders.
Management had announced their new strategy for growth which includes investing in residential properties within the UK.

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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