Elite Commercial Reit to buy 58 UK properties for £212.5m from sponsor

ELITE Commercial Reit has proposed to buy 58 commercial buildings located across the UK for £212.5 million (S$372.9 million), in its first acquisition since its initial public offering (IPO) this February.

These assets are almost entirely leased to the UK government via various agencies, the real estate investment trust's (Reit) manager announced on Monday.

The Reit plans to acquire the entire share capital in special purpose vehicles Elite Amphora and Elite Cask, which hold the 58 buildings.

It has signed a conditional share purchase agreement with the seller, a subsidiary of Elite UK Commercial Fund II, which is in turn managed by the Reit's sponsor, Elite Partners Holdings (EPH). EPH is also a controlling shareholder of the Reit manager.

During the IPO, Elite UK Commercial Fund II had granted the Reit a right of refusal over its assets.

The agreed price of £212.5 million took into account the independent valuations of the properties conducted by Colliers International Valuation UK and BNP Paribas Real Estate Advisory & Property Management UK.

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The Reit manager intends to finance the acquisition by issuing consideration units to the seller or the fund, using net proceeds from a potential equity fundraising, and/or using external bank borrowings. It also has the option to request the seller to provide a £10 million loan at an interest rate of 7 per cent per annum.

Although the manager's main objective is to pursue an equity fundraising, if market conditions are unconducive it may scrap that plan and instead only issue the consideration units as well as draw down loan facilities and the seller's loan. In that case, the Reit will still have sufficient internal resources and financing to complete the transaction, regardless of equity fundraising.

The 58 properties have a total net lettable area of about 1.3 million square feet, and are located in major UK cities such as London, Manchester, Edinburgh and Liverpool.

About a third of these properties are in London, which increases the Reit's overall London exposure to 14 per cent. This provides higher potential for rental and capital growth, as well as redevelopment opportunities, the manager said.

Of the 58 buildings, 54 are freehold while the rest are on a long leasehold tenure ranging between 83 and 983 years.

The manager said the properties will provide attractive rental yields relative to the existing portfolio, which has a 7.3 per cent rental yield but does not include any London assets.

The new properties' portfolio provides an 8 per cent rental yield when the London properties are excluded. That's 70 basis points higher on average than the existing portfolio, on a direct comparison basis. The London assets within the new portfolio provide a rental yield of 4.3 per cent.

In addition, the rental yields will be "recession-proof", given that about 99 per cent of the leases are signed with the government and the proposed deal will add five more UK sovereign tenants, the manager noted.

About 82 per cent of the new properties are occupied by the Department for Work and Pensions (DWP), the UK's largest public-service department responsible for welfare, pensions and child maintenance.

The other occupiers include the UK's Ministry of Defence, National Records of Scotland, Environmental Agency, HM Courts and Tribunals Service and Natural Resources Wales.

All of the leases within the new properties are on a full repairing and insuring basis, while 80 per cent of them by gross rental income have rental escalations linked to the consumer price index. These will contribute to the Reit's organic rental growth, the manager noted.

The enlarged portfolio inclusive of the 58 properties will have a weighted average lease to expiry of 7.5 years.

Elite Commercial Reit's manager said the accretive acquisition will increase the trust's size, market capitalisation, free float and liquidity.

The distribution per unit (DPU) accretion is expected to be 3.2 per cent, based on pro forma DPU, assuming the acquisition is financed through the issuance of new units to the fund and a £30 million equity fundraising.

Following the proposed acquisition, the Reit's portfolio valuation will increase by about two-thirds, to £531.6 million from £319.1 million as at Aug 14. Net property income is also set to increase by 59.1 per cent.

"Notwithstanding the global economic headwinds, the new properties are expected to provide stable cash flows and attractive recession-proof yields," said Shaldine Wang, chief executive officer of the Reit manager.

The properties will also maintain the Reit's exposure to UK sovereign tenants with high credit quality, in addition to the counter-cyclical DWP, Ms Wang added.

She noted that the UK government has committed £900 million to double the number of work coaches employed at JobCentre Plus facilities, which will intensify the use of properties leased to the DWP and thereby make it less likely for the tenant to exercise the leases' break clauses.

In terms of the acquisition funding, Elite UK Commercial Fund II is intended to receive the consideration units from the Reit, after which the fund will do a distribution in specie of those units to its investors, all of whom are unrelated third parties.

This will introduce a new substantial institutional European shareholder, Partner Reinsurance Company (PartnerRe), owned by Milan-listed Exor, which also holds other companies such as Ferrari, Fiat and The Economist. After the distribution in specie, PartnerRe will become the largest investor of Elite UK Commercial Fund II with a 23 per cent stake.

Elite Commercial Reit units last traded at £0.64 on Friday. The manager called for a trading halt on Monday before market open, and lifted the halt at 10.13am.