SINGAPORE (Jan 28): Elite Commercial REIT is offering 108.98 million units to international investors outside of the US and 5.74 million units to the Singapore public. The IPO price is £0.68 per unit, the equivalent of $1.21 per unit. The yield at this price will be 7.1%. The total number of outstanding units at IPO including 77.83 million units to cornerstone investors will be 332.22 million.

Based on the offering price, gross proceeds of £130.9 million are expected to be raised from the offering and cornerstone units. 

Gearing at IPO will be 33.6%. The REIT will distribute 100% of distributable income this year and next, and base fees – comprising 10% of distributable income – will be paid to the manager in units in 2020 and 2021. From 2022 onwards, at least 90% of distributable income will be distributed to unitholders.  

The initial portfolio of Elite Commercial REIT comprises 97 commercial buildings located across the UK, and is primarily occupied by the Department for Work and Pensions (DWP) that is responsible for crucial welfare, pensions and child maintenance services for approximately 20 million claimants.

The leases to the UK Government have rent reviews every five years based on the UK Consumer Price Index (CPI), subject to an annual minimum increase of 1% and maximum of 5%.  Over 99.0% of the IPO Portfolio’s gross rental income is the portfolio’s triple net leases to the UK Government with a WALE of approximately 8.6 years. The UK Government is rated AA and Aa2 by S&P and Moody’s respectively. The UK Government has one of the lowest debt-to-GDP ratios amongst the G7.

DWP serves the UK population in good times and bad. Since many of the properties are leased to front facing JobCentre Plus, these properties are a hive of activity during economic downturns. “The counter cyclical nature of the occupier makes this a very stable portfolio,” says Shaldine Wang, CEO of the REIT’s manager.  

A break clause exists for 70% of the properties by valuation, at 3.5 years, and the date for the break clause is Mar 31, 2023. A 12 month notice period is required, so the REIT manager will know by Mar 31, 2022 and there is time to find new tenants. “Often a lot of 10-year leases have a tenant only break clause in the UK,” says Jonathan Edmunds, chief investment officer of Elite Commercial REIT’s manager. “It’s a one-time break and if that doesn’t happen, the lease will run through to 2028.”

In its valuation reports, Colliers has assumed the probability that 50% of the leases could be broken. The UK government has published a White Paper which suggests that it could rationalise a maximum of 5% of the DWP’s leases. The DWP leases around 800 properties, out of which 97 are in Elite Commercial REIT.

“The UK is an extremely liquid market, the second largest investment volume [globally] and the largest in Europe, outperforming Germany and France,” Edmunds says, “It is well developed, transparent and with few restrictions on foreign ownership.”

Elite Commercial REIT’s tenancy management strategy is built around developing a long-term relationship with the DWP. “So we maintain a regular dialogue with them. We [won’t] wait until the last minute. We constantly work on asset management with DWP. We are in constant communication with DWP,” Edmunds reiterates.

The REIT’s growth strategy revolves around keeping the properties attractive and asset enhancement initiatives including for a property in Blackpool that has unutilised gross floor area. The REIT has right of first refusal to a second portfolio of 62 properties leased to DWP managed by Elite Capital Partners. However the REIT’s debt headroom is not sufficient for the acquisition, implying some equity raising may be needed.

The REIT’s manager is 85%-owned by Elite Capital Partners and 15% by Sunway RE Capital, a unit of Sunway Bhd. The sponsors are Elite Capital Partners, Sunway and Ho Lee Group. The sponsor will retain a 20% stake in the REIT after the IPO.