• Gross revenue for 1Q24 increased by 0.8% YoY to £9.2mn thanks to the rental escalation that kicked in Mar23, forming 24% of our FY24e estimates. NPI slid 3.7% YoY to £8.3mn, within our estimates. DPU decreased by 21.2% YoY to £0.67 pence on the back of the enlarged unit base post preferential offering, falling short of our expectations, assuming a 90% payout ratio.
• ELITE has expanded its investment mandate to include the Living Sector. Two vacant assets are on track to be redeveloped into student accommodation and a data center, which will unlock their value by uplifting rental and valuation by c.30-40%.
• We reiterate our BUY recommendation with an lower DDM-TP to £0.32 (prev. £0.34) and lower FY24e-25e DPU forecasts of £2.75 to £4.42 pencRevenue to be disrupted by the vacant building and its increasing vacancy holding costs due to prolonged leasing period. Catalyst will come from redevelopment of the vacant assets. ELITE is currently trading at FY24e dividend yields of 12% and 0.67x P/NAV.

The Positives

+ Expanded investment mandate. ELITE is expanding its investment mandate into the living sector, such as Student Housing, Senior Living, or data centers, to ride on influx of international students and AI demand respectively. Lindsay House is slated to be converted into a 40-200 bed student housing facility upon approval from authorities. Typical values are around £130k per bed with yields of 5.5%. The annual income for the building would soar by 280% to c.£1.4mn from £360k in FY22, and the valuation will double to £38mn upon successful redevelopment. With the power shortage in the UK, data centers will provide a growth engine for the booming AI demand. ELITE is actively working on securing sufficient power to meet tenants’ requirements, and we expect the process to take roughly 1.5 years to complete construction.

The Negative

– Further downtime for the vacant assets.  In 1Q24, distributions were impacted by the increase in vacancy holding expenses such as manpower and electricity due to prolonged vacancy periods. There are 7 vacant assets remaining, 2 of which will be redeveloped, and the others will either be re-let or divested. Dilapidation settlements would partially offset the earnings shortfall, with 4 more buildings expected to be received by the end of FY24. NPI is expected to be on par with FY22 levels.

Source: Phillip Capital Research - 6 May 2024