Wednesday, April 2nd, 2025

DBS Upgrades Elite UK REIT to “Buy” as DPU Growth Returns

Analysts See a Turnaround for Elite UK REIT
DBS Group Research analysts Tabitha Foo, Derek Tan, and Dale Lai have upgraded their call on Elite UK REIT to “buy” from “hold”, citing a return to distribution per unit (DPU) growth. The analysts have also raised their target price to 36 British pence (61 cents), up from 25 British pence previously.

Stronger-Than-Expected FY2024 Performance
Elite UK REIT’s FY2024 results, for the year ended Dec 31, 2024, exceeded expectations, with its full-year distributable income rising 2.3% year-on-year (y-o-y) to GBP18.5 million. This increase was driven by savings in property holding costs from the divestment of vacant assets, lower interest costs, and tax savings.

However, the FY2024 DPU fell 6.5% y-o-y to 2.87 pence due to an enlarged unit base. After adjusting for FY2024’s weighted average units in issue, DPU would have been 5% higher y-o-y. The team had initially forecasted Elite UK REIT’s FY2024 DPU at 2.76 pence.

DBS Turns Positive on Elite UK REIT
“Over the past three years of headwinds, including multiple factors leading to declining DPU, we maintained a neutral stance on Elite. However, we now turn positive as distributable income has stabilized and is now operationally driven and sustainable, supported by interest savings,” the analysts wrote in their Feb 12 report.

Lower Borrowing Costs and Debt Management
Borrowing costs as of Dec 31, 2024, dropped by 30 basis points (bps) y-o-y to 4.9%.
Annual savings from lower borrowing costs could reach up to GBP2 million.
Proactive asset management has allowed Elite UK REIT to unlock value from its vacant portfolio, generating 15% premiums from dilapidation settlements and divestments. The proceeds have been used to pare down debt.

Upcoming Lease Renewal Discussions with the DWP
One of the key positive developments is that lease renewal discussions with Elite UK REIT’s main tenant, the UK’s Department for Work & Pensions (DWP), are expected to start as early as 2025. This is a crucial factor in maintaining income visibility, as these leases are set to expire in 2028.

Adjustments to FY2025 Revenue Estimates
Despite the upgraded rating and higher target price, DBS analysts have lowered their FY2025 revenue estimates to reflect the absence of contributions from vacant and disposed assets. However, this is expected to be offset by:

Higher net property income (NPI) margins, due to lower vacancy costs and interest savings.
An increase in the distribution payout ratio to 95% for FY2025.

Compelling Forward Yields
FY2025 and FY2026 DPU estimates are now at 2.93 pence and 3 pence, respectively.
This implies forward yields of 10% at the current share price, which DBS views as “compelling”.
With stabilized earnings, cost efficiencies, and strategic lease renewals, Elite UK REIT appears well-positioned for a rebound in 2025​.

Elite UK REIT’s chart has formed a “Cup and Handle” pattern, indicating a potential upside of over 15% within the next six months.

Thank you

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