Elite Commercial REIT IPO Review: 7.1% yield backed by the UK Government – too good to pass up?

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2020 has been one hell of a year so far. January is barely even over, and we’ve already had a close shave with WWIII, Australian wildfires, Locusts in Africa, Kobe Bryant’s passing, and now the Wuhan Corona Virus. I’ve had enough excitement for the year, thank you very much.

And amidst all that chaos, comes Elite Commercial REIT’s IPO. I had a healthy dose of scepticism about Elite Commercial REIT when going through the preliminary prospectus (as evidenced in my original article here), but now that the final prospectus is out, I actually quite like this REIT.

Basics: What is Elite Commercial REIT?

Elite Commercial REIT is a small cap ($230 million aprox) REIT that holds commercial office buildings in UK. A total of 97 commercial buildings to be precise, scattered all over the UK, as set out below.

Gearing on launch will be 33.7%, and indicative yield is 7.1%, price to book is about 1.03x approximately.

Sponsor

Let’s start with the stuff that I don’t like about Elite Commercial REIT.

One of the big doubts I had in my original article was what the stakes of the sponsors would be like post-listing, and what the alignment of interest would be like.

Well, the numbers are set out below, and it looks a lot like the biggest unitholders are paring down their stakes, on a percentage basis.

The sponsors will collectively hold around 19% of Elite Commercial REIT post listing (assuming over-allotment option is exercised – which is likely given the small public offer). It’s a decent stake, but I would have preferred to see something much closer to 30%, along the likes of what CapitaLand and Mapletree do.

The cornerstone investors that will take up a huge chunk (23.4%), is private wealth, coming via UBS, Bank of Singapore (OCBC) and CIMB.  I would have preferred to see big institutional names like Blackrock and the likes come in rather than private wealth, since greater ownership by private wealth typically results in greater volatility in share price.

But to be fair, given the small size of Elite Commercial REIT’s IPO, I can’t really fault the big boys like Blackrock for not wanting to come in.

Another thing to note is that this is the first REIT sponsored by Elite Partners, so we don’t have full clarity on their track record. A couple of the guys behind Elite Partners were from the original Viva Industrial Trust / Cambridge Industrial Trust (sold to ESR eventually). Both Viva and Cambridge Industrial did okay as a REIT, so hopefully that track record carries over here.

Forex Risk

Forex risk is another huge one here.

The underlying properties are located in the UK, so naturally they are denominated in British Pounds (GBP), as are the distributions.

The long term chart of the GBP against the SGD is set out below, and it’s not pretty.