SINGAPORE (Jan 17): The year’s potential first real estate investment trust IPO, Elite Commercial REIT lodged its prospectus on Jan 17. Trading is likely to be in sterling and distributions will be declared in GBP. Each unitholder will receive his distribution in Singapore dollars equivalent of the GBP distribution declared, unless he elects to receive the relevant distribution in GBP by submitting a “Distribution Election Notice” by the relevant cut-off date.

Initially, 100% of annual distributable income from listing date till end of projection Year 2021 will be distributed. Subsequently, the REIT will distribute at least 90% of its annual Distributable Income for each financial year. Distributions will be semi-annual.

The IPO portfolio comprises 97 predominantly freehold commercial buildings across the UK, with total net internal area of around 2.6 million sq ft and total site area of 47 ha.

Over 99.0% of the Gross Rental Income is derived from the current leases with the UK Government via The Secretary for Housing, Communities and Local Government with the Department of Work and Pensions occupying each property under a group sharing arrangement.

According to the prospectus, the properties are all let on co-terminus, fully repairing and insuring (triple net) leases. Co-terminus leases are leases which will expire or terminate at the same time. Under a fully repairing and insuring (triple net) lease, the responsibility for the repair of the external, internal and structural format of the property is placed with the tenant.

The initial portfolio valuation is around £319.1 million as at Aug 31, 2019. Based on the projected and forecast net property income £22.654 million for FY2020 and FY2021,  the NPI yield is 7.1% compared to UK government 10-year bond yields, representing a yield spread to UK Government 10-year bonds of approximately 600+ bps, despite being backed by the same sovereign credit. At listing date, Elite Commercial REIT is expected to have a gearing of 32%.  

In a valuation report, Colliers has valued the properties at yields of 7.0%. “This reflects a discount of around 125 bps to the aggregate yield of the units that currently have 8 years and 7 months to expiry,” Colliers says.  Yields are high because Colliers has reflected the existence of tenant break options “in accordance with market practice”.

“The Manager has advised us that from their discussions with the tenant they believe that 80/90% of the tenant break clause will not be exercised. However, for the purpose of this valuation we have assumed that 50% of the lease break options would be exercised by the tenant as we consider this to be a reasonable level,” Colliers says.

Management of the properties is outsourced to Jones Lang LaSalle. Property Management Fee for Forecast Year 2020 is around £236,000 a year. The manager’s management fee comprises a base fee of 10% pa of distributable income, and performance fee of 25% of the difference in DPU in a financial year with the DPU in the preceding financial year multiplied by the weighted average number of Units in issue for each financial year. The Performance Fee is only payable if the DPU in any financial year exceeds the DPU in the preceding financial year.

The major unitholders pre-IPO are Ho Lee Group, Sunway Group and Kim Seng Holdings. Other unitholders include Apricot Capital, Lian Beng and Partner Reinsurance, a unit of Exor which is 52.99% owned by the descendants of Giovanni Agnelli (FIAT’s founder). Exor is ranked 24th largest company by revenue according to Fortune Global 500. Exor owns Fiat Chrysler Automobiles which in turn owns Ferrari, Fiat, Peugeot and Maserati.

Kim Seng Holdings together with Victor Song, the managing director of Elite Capital Partners started Viva Industrial Trust together, along with Ho Lee Group. VIT was merged with ESR-REIT in 2018.