1. Describe Elite Commercial REIT’s recent financial performance for its first-year since listing.
Elite Commercial REIT is established with the investment strategy of principally investing, directly or indirectly, in commercial assets and real estate-related assets in the United Kingdom (UK). Elite Commercial REIT has a portfolio of 155 predominantly freehold quality commercial buildings across the UK, with a total net internal area of about 3.9 million sq ft. The REIT’s sponsors include Elite Partners Holdings, Ho Lee Group and Sunway RE Capital. Elite Commercial REIT reported a strong set of results for the period from Feb 6, 2020, to Dec 31, 2020, outperforming IPO forecasts with higher distributable income to unitholders and DPU.
Despite the challenging environment and economic uncertainty arising from the Covid-19 pandemic and Brexit, the REIT is well supported by stable cash flows backed by its AA-rated tenant, the UK Government with its uniquely counter-cyclical operations of the Department for Work and Pensions (DWP). As a result, the REIT achieved a distributable income to unitholders of GBP14.8 million and DPU of GBP0.0444, which is 2.1% and 2.3% higher than IPO forecasts, respectively. There was also an uplift in portfolio valuation with a fair value gain of investment properties of GBP15.9 million, reflecting the underlying intrinsic value of the properties.
2. Can you share more about your investment and divestment strategy, and elaborate on Elite’s recent maiden portfolio acquisition
The REIT manager will seek portfolio growth via rigorous research-driven selection by focusing on long-term sector trends and fundamental real estate qualities to ensure attractive cash flows and yields. The REIT has a right of first refusal (ROFR) granted by its sponsors on its pipeline — most of which are on long-term leases by various UK Government ministries.
On March 9, the manager complete the REIT’s maiden portfolio acquisition of 58 properties across the UK which further extended its exposure to UK sovereign credit, whilst diversifying occupier mix. The GBP212.5 million acquisition was through a ROFR granted by one of the REIT’s Sponsors. The yield accretive acquisition increased the REIT’s total number of properties by 60% and market capitalisation by 39%. The enlarged portfolio also increased the REIT’s overall London exposure to 14%, providing higher potential for rental and capital growth, and redevelopment opportunities.
The acquisition also welcomed a new substantial unitholder. European institution Partner Reinsurance Company (PartnerRE), a leading global diversified reinsurance firm, now holds approximately 23% of the REIT’s enlarged share capital. The REIT views PartnerRE’s decision to roll over their equity capital in the portfolio of 58 properties into the REIT as a display of confidence and alignment in the REIT’s long-term investment strategy.
3. Describe Elite’s portfolio tenant mix. What would you maintain or change in terms of this mix?
The REIT will continue to acquire quality tenants such as the UK Government, to ensure portfolio stability. The REIT’s current enlarged portfolio of 155 properties is over 99.0% (by rental income) leased to the UK government, providing stable cash flow and attractive, recession-proof yields. Approximately 93% (by gross rental income) of the enlarged portfolio is occupied by the DWP, while the remaining 7% is occupied by other UK sovereign tenants.
We are currently one of the largest landlords to the DWP, the UK’s largest public service department responsible for crucial welfare, pensions and child maintenance policy. This provides us with ample opportunities to work closely with the UK Government on their long-term requirements.
Following the latest portfolio acquisition, the REIT expanded its tenant mix to include five new UK Government ministries, consisting of the Ministry of Defence, National Records of Scotland, HM Courts and Tribunal Service, National Resource Wales and Environmental Agency (sponsored by the UK Government’s Department for Environment, Food & Rural Affairs).\
4. Given that majority of your tenants are from the UK Government, does that make Elite a resilient and defensive REIT despite the challenging environment?
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 countries. With over 99.0% of gross rental income derive from full repairing and insuring (triple net) leases, the REIT enjoys an attractive, recession-proof yield with stable cash flow, making it resilient amidst the challenging backdrop.
The majority of the leases to the UK Government have rent reviews every five years based on the UK Consumer Price Index, subject to an annual minimum increase of 1.0% and a maximum of 5.0%, providing the REIT with a relatively predictable, embedded rental growth profile.
5. How has Covid-19 affected your operating conditions? What measures have you put in place to mitigate the impact?
The REIT was minimally impacted by Covid-19, and consistently achieved close to 100% of its quarterly rent collection in advance since listing. As a uniquely counter-cyclical occupier, the DWP remains instrumental and integral to the UK social fabric, even amidst the UK’s lockdowns, administering the State Pension and a range of working age, disability and ill-health benefits. Notwithstanding the Covid-19 situation, the Group’s leases did not undergo force majeure or termination clauses in 2020.
There has been an increase in claimant count at each of DWP’s JobCentres, as the UK Government has extended a range of economic support for businesses and unemployment recovery, including an extension of the furlough scheme and commitment to increasing the number of work coaches to 27,000. JobCentre Plus locations remained open throughout the nation’s lockdowns to process and disburse benefits to claimants.
6. How do you foresee DPU to be impacted as a result of Covid-19?
We do not expect our income nor DPU to be affected by Covid-19. As a crucial public infrastructure of the UK social fabric, DWP’s operations are counter- cyclical in nature. Over the past year, we have also been successfully collecting 100% of our rent in advance. In FY2020, we have executed the removal of break options and lease renewals and are targeting further break option removals to provide valuation uplift.
Our enlarged portfolio has a long weighted average lease expiry (WALE) of about 7.2 years. The REIT’s portfolio is therefore well supported by stable cash flows from the AA-rated UK Government.
7. What are the key focus areas for the REIT in the next 2–3 years?
We are focused on providing investors with stable returns while seeking opportunities for future income and capital growth. Going forward, we continue to strengthen our portfolio and will closely monitor the market for growth opportunities via yield accretive acquisitions. This includes properties under the ROFR pipeline granted by our sponsors, most of which are on long-term leases by various ministries of the UK government, and assets owned by third parties.
8. What drives Elite Commercial REIT’s performance during this volatile period? What is your outlook for the REIT and its tenants?
Covid-19 has had little impact on the REIT’s portfolio and rent collection, given that our main tenant, DWP, is supported by the UK Government. We expect that the REIT will be able to continue providing stable income to its unitholders.
Additionally, the UK’s unemployment rate is expected to increase once the furlough scheme ends. DWP received about 2.7 million unemployment claims as at Nov 30, 2020, more than doubled from 1.2 million claims in Mar 2020. During this volatile period, DWP had remained open and will continue to do so, to assistance to UK citizens.
9. How has occupancy rates or rental reversions changed as a result of Covid-19?
Our portfolio of 155 properties remains fully occupied, and the REIT has been able to consistently collect close to 100% of the rent in advance throughout FY2020, despite the UK’s Covid-19 lockdowns and Brexit uncertainties. The majority of the leases have rent\ reviews in the fifth year (2023) based on the UK Consumer Price Index, subject to an annual minimum increase of 1.0% and a maximum of 5.0%.
10. What is the REIT’s value proposition to shareholders and investors? What do you think investors may have overlooked about Elite’s business?
We believe that Elite Commercial REIT deserves a spot in every investor’s portfolio. The REIT’s investment mandate and focus is unique in the universe of S-REITs. Deriving over 99% of gross rental income from the AA-rated UK Government, the REIT’s portfolio provides steady and resilient cash flow underpinned by uniquely counter-cyclical tenants.
The geographically diversified portfolio is used by its UK sovereign tenants, to provide crucial services to its residents. Our predominantly freehold office assets are well-located near transport nodes and amenities. Approximately 14% of the portfolio’s AUM are located in London, providing higher potential for rental and capital growth, and redevelopment opportunities.
We believe that the REIT, with its attractive distributions, has a strong investment proposition amidst the current low-interest rate environment and uncertain global economic outlook.
Candace Li is a research analyst with Singapore Exchange
