On Oct 19, Elite Commercial REIT announced the proposed acquisition of 58 properties for GBP212.5 million ($375.9 million) from Elite UK Commercial Fund II, managed by sponsor Elite Partners Capital. The main investor in the fund is PartnerRe, the reinsurance arm of Exor, which in turn counts the famed Agnelli family as its major shareholder. PartnerRe likes the portfolio and plans to stay invested by taking new units in Elite Commercial REIT.
Based on the proposed £89.4 million of units issued to PartnerRe in a placement, a further GBP30 million in a preferential equity offering, GBP96 million in debt, and GBP2.1 million in acquisition fee units, the transaction is accretive to the tune of 3.2% to the REIT’s distribution per unit (DPU) of 1.95 pence for the period of Feb 6 to June 30, on a pro forma basis. Net asset value would remain unchanged.
According to Shaldine Wang, CEO of Elite Commercial REIT’s manager, the five key reasons for the acquisition are: diversifying occupier mix but remaining with the REIT’s exposure to UK’s AA-rated sovereign credit; providing stable cash flow in the face of volatility globally; inflation-linked growth from a counter-cyclical occupier in the form of the Department of Works and Pensions (DWP); increased exposure to London where 36% of the assets are located; and size, where AUMs post-acquisition will rise to GBP531.6 million from GBP319.1 million.
By gross rental income, the acquisition properties are leased to DWP (81.5%), Ministry of Defence (5.6%), National Records of Scotland (4.8%), HM Courts & Tribunals Service (3.2%), Natural Resources of Wales (2.9%) and other tenants (2%).
“Our aim is to provide stable returns and recession-proof yields and we’ve outperformed all our promises at IPO on all our financial metrics that matter, such as DPU, cost of debt and leverage. Our price continues to trade well during Covid,” Wang said during a recent briefing.
To be sure, factors likely to stress other sectors, such as rising unemployment, and slower economic and job growth, work in favour of Elite Commercial REIT’s assets. Prior to the transaction announced on Oct 19, Elite Commercial REIT’s main tenant for almost its entire portfolio was the DWP, and nearly all the properties were JobCentres Plus properties. According to the UK’s Office of National Statistics, unemployment rate had risen to near two-year highs at 4.1% for the three months from May to July, as almost 750,000 jobs were lost since March.
There was a reported 120.8% increase in the number of people claiming unemployment benefits in the UK since March, to 2.7 million in August. It is estimated that official data from the Office of National Statistics may not present the true extent of job losses in the UK as the numbers did not include those who have yet to return to work from furlough, and as such are not classified as unemployed yet. As a result, the DWP has announced plans to double its “work coaches” at its JobCentres to help jobseekers get back to work.
The increased need for space by DWP has resulted in waivers of break clauses for a couple of properties in Elite Commercial REIT’s original portfolio. “The two break clauses in the old portfolio that had come up since listing weren’t exercised. We have a number of break clauses in 2023 and the DWP will give 12 months’ notice should they wish to break the tenancy, and that is 18 months away. We don’t think the government is interested in exercising any of the break clauses,” says Jonathan Edmunds, CIO of Elite Commercial REIT’s manager.
In the original portfolio where new leases were signed with the DWP in 2018, there were some break clauses in year five, that is, 2023. For the new portfolio, the London properties do not have a break clause. “What’s changed is that Covid has made very clear how the DWP uses these properties in a rising unemployment scenario. The government has doubled its work coaches. We don’t have an announcement about the number of break clauses that have been removed, but we have an indication that the break clauses won’t be exercised and we hope to remove them and see valuations rise,” Edmunds explains.
Elite Commercial REIT listed at an IPO price of GBP0.68, and closed at GBP0.64 on Nov 3.
To find out more about Elite Commercial REIT, tune in to our REITs Investment Forum from Nov 18 to 21; Shaldine Wang’s presentation on Nov 20, 12pm; and a “live” panel discussion on Nov 21, 2pm.
Sign up for REITs Investment Forum here: https://edgesg.link/reitsforum-2020
