Elite Commercial REIT Part 2

The prospectus for Elite Commercial REIT (the REIT) was registered with the Monetary Authority of Singapore’s OPERA site on 28 Jan 2020, along with the Product Highlights Sheet. Let us take a look on top of what we had covered previously here.

The Numbers And Figures

The offering price of the IPO is Sterling Pound (GBP) 0.68, or in Singapore Dollar (SGD) terms 1.21, based on the exchange rate of GBP 1 = SGD 1.7794. The yield (over the IPO price) is forecasted to be 7.1% for the year 2020 and projected to be 7.2% for the year 2021. 

The aggregate leverage (which I assume it to be gearing) as at the listing date will be approximately 33.6%. Most of the other figures remained the same as per my previous post for this REIT, such as the number of properties (97) and the weighted average lease expiry (8.6 years).

The application for the IPO had started on 28 Jan 2020, and will close at 4 Feb 2020, 12pm. The REIT will be listed on the Singapore Exchange on 6 Feb 2020, 2pm.

Calculating The Net Asset Value

Though there is no indication of the REIT’s net asset value (NAV) in the prospectus (or I could have missed it from among the 700-plus pages), we can calculate it based on the information provided, with some assumptions.

Asset = Liability + Shareholder Equity, therefore Shareholder Equity (or NAV) = Asset – Liability, and NAV per share = NAV / Number of shares (units) outstanding.

Hence, with the numbers from pages 61 and 66 of the prospectus, the NAV per unit is:

GBP 196,201,000 (unitholders’ fund as at 31 Aug 2019) / 334,933,000 (number of units issued and issuable by the end of 2020) = GBP 0.586.

Thus, the price-to-book value is at 0.68 / 0.586 = 1.16, meaning the IPO price is 16% above the rough NAV calculated.

The Tax Question

A big disclaimer from me: I am no tax expert. But there might be some tax implications with regards to the distribution of this REIT, positive and negative. Under the sensitivity analysis (page 124), it was indicated that should the corporate tax rate is reduced from 19% to 17% from 1 Apr 2020, the yield for the forecast year of 2020 and projection year of 2021 would be 7.2% and 7.3%, instead of 7.1% and 7.2% respectively. On the flip side, subject to the United Kingdom’s CIR / Anti-hybrid rules, the yield could be at 6.8% and 6.9% for the same said years of 2020 and 2021 respectively.

The Bedokian’s Second Take

My take from the previous post still stands. The big plus point for this REIT will be the high yield (between 6.8% to 7.2%), but this will be compromised by forex fluctuations which is directly related to the outcome of the U.K. economy after Brexit (officially tomorrow). With the IPO price being 16% above its rough NAV, it is overvalued somewhat. However, if you want to have a slice of a relatively stable British pie in your portfolio, then this would be a good start.

Thing is, only 5,734,300 units are open for the public offering, so even if you are interested, it may get a little difficult to be balloted more than 1,000 units, or you may get none at all.

Disclaimer

Reference

Monetary Authority of Singapore. OPERA. Elite Commercial REIT Prospectus and Product Highlights Sheet. 28 Jan 2020. https://eservices.mas.gov.sg/opera/Public/CIS/ViewSchemeDetail.aspx?schemeID=500c7153fce646909d1eaf414599d9d8 (accessed 30 Jan 2020)

Elite Commercial REIT

A new REIT is coming to town; Elite Commercial REIT (the REIT) had lodged its prospectus with the Monetary Authority of Singapore on Friday (17 Jan 2020) and it is likely going to be the first listing on the Singapore Exchange (SGX) for the year 2020. It is also the first Sterling Pound (GBP) denominated REIT on the SGX. Let us have a brief look on it.

Brief Overview

There is a total of 97 properties in the REIT, scattered across the entirety of Great Britain (England, Scotland and Wales), out of which 96 are freehold, and the remaining one is on leasehold up to the year (get this) 2255. Over 99% of the gross rental income comes from the government of the United Kingdom (U.K.), specifically from the Department of Work and Pensions (DWP), which is the largest public service department and it administers the State Pension and benefits for 20 million claimants and customers.

The majority of properties are well located in city centres, town centres and city suburbs, and all have close proximity to train stations, bus stops and other amenities such as supermarkets and schools. This is due to the DWP’s stringent requirements for its locations, as they need to serve the public. The leases are triple net, which in this case the repairs and insurance expenses are covered by the tenant. Rental escalations are every five years based on the U.K. Consumer Price Index, subject to an annual increase of 1% to 5%.

The weighted average lease expiry of the REIT is about 8.6 years, and the aggregate leverage (which I take it as the gearing) is about 32%. It provides a net property income yield of 7.1% based on forecast for the year 2020. Other information such as the IPO price, the number of units to be issued, the net asset value and the use of proceeds are not available from the prospectus as at the time of my writing of this blog post.

Risk Factors

The prospectus covered almost 30 pages of risk factors, which is fair considering that investors should know the risks involved in investing into this REIT. Short of a total collapse of the British government (which I think it is very, very low in probability), in my view, I would be concerned on three risk areas, specifically macroeconomic and geo-political, that are somewhat related to one another.

Forex Risk: Forex risk is unavoidable when investing in overseas assets. For the past 10 years the GBPSGD exchange rate had fluctuated between the 2.2x and 1.6x regions (see Figure 1). The big drop came during the Brexit vote back in June 2016, after which the exchange rate never recovered to the pre-Brexit vote levels…

Fig. 1¹

Brexit: Which leads me to the second area, and that is Brexit. The plunge of the GBPSGD exchange rate immediately after the Brexit vote was explained by the grave uncertainty felt on what would happen to the U.K. after it leaves the European Union. I believe this uncertainty had somewhat tapered off nowadays since the new government is adamant on a set date to break off, as compared to the previous one with lots of opposition to the exit terms (thus the see-saw of the exchange rate between 2016 and now). However, whether economically the U.K. would be better or worse off after that set date would be anybody’s guess. Still, there is another thing to consider…

Independence of Scotland: And yes, the independence of Scotland. The Scots are asking the U.K. government for a second independence referendum and should this go through (at the moment not likely from news reports), there is a high chance that they may break from the union. 20 of the REIT’s properties, or about 20.6%, are in Scotland, and with the break, there might be some changes in laws and regulations regarding the properties.

The Bedokian’s Take

One highlight of this REIT is that the prospectus had mentioned that the DWP is a “uniquely counter-cyclical occupier”, which meant that DWP services would increase in times of unemployment due to the increased number of claimants for its services. This shows that in good times or bad, the DWP as a government department (and policy) is here to stay, and this translates to constant rental income. Though there is tenant concentration risk, the lease for each property is separately negotiated.

The next point (which was brought up in other blogs) was the origins of the 97 properties: Elite Partners Capital (EPC), a subsidiary of Elite Partners Holdings Pte Ltd, one of the sponsors of the REIT, had acquired 97 properties (which is presumed to be the same 97 for this REIT) back in November 2018 for GBP 282.15 million². Based on the prospectus, the properties are now worth about GBP 319 million. As EPC is a private equity firm, and as with all other private equity firms, one of the natural methods of realising the profits is to release their investments through IPO. 

Considering the above points, my take would be mixed: there is a lot of potential in the properties as they are very conveniently located. Should DWP vacates them, all or in part, it would attract the likes of small and medium businesses, but this meant that rentals may be impacted. Furthermore, the take-up rate of these spaces would depend on the future outlook of the U.K. macroeconomy as it affects commercial leases.

In the prospectus, it was stated that neither the REIT nor the REIT manager has a long established history, which in other words, the term “inexperienced” comes into mind. This is a typical “make-or-break” reason for investors, who would then decide on whether to give this REIT an opportunity to grow themselves (and the investors’ distributions) or to forego it. 

I shall see when more information is available from the prospectus.

Disclaimer

Reference

Monetary Authority of Singapore. OPERA. Elite Commercial REIT Prospectus. 17 Jan 2020. https://eservices.mas.gov.sg/opera/Public/CIS/ViewSchemeDetail.aspx?schemeID=500c7153fce646909d1eaf414599d9d8 (accessed 23 Jan 2020)

1 – XE Currency Charts: GBP to SGD. 10 years. https://www.xe.com/currencycharts/?from=GBP&to=SGD&view=10Y (accessed 23 Jan 2020)

2 – Lai, Leila. Elite Partners Capital buys 97 freehold UK offices for £282.15m. The Business Times. 26 Nov 2018. https://www.businesstimes.com.sg/real-estate/elite-partners-capital-buys-97-freehold-uk-offices-for-£28215m (accessed 23 Jan 2020)

Asset Class Correlation 2019

Now that it is 2020, we shall look back at 2019 to see how the various asset classes had performed for the whole year, using data from the Portfolio Visualizer site and respective ETFs representing the various asset classes. I also added the iShares MSCI Singapore Capped ETF (EWS) to show how our local equities fair against the rest.

Name	Ticker	VTI	VNQ	BND	GLD	CASHX	EWS	Return
Vanguard Total Stock Market ETF	VTI	-	0.38	-0.39	0.02	-0.05	0.88	30.67%
Vanguard Real Estate ETF	VNQ	0.38	-	0.38	0.25	0.39	0.25	28.87%
Vanguard Total Bond Market ETF	BND	-0.39	0.38	-	0.59	0.26	-0.33	8.83%
SPDR Gold Shares	GLD	0.02	0.25	0.59	-	-0.05	0.16	17.86%
Cash	CASHX	-0.05	0.39	0.26	-0.05	-	0.00	2.12%
iShares MSCI Singapore Capped ETF	EWS	0.88	0.25	-0.33	0.16	0.00	-	14.53%

Fig. 1 – Correlation results based on monthly returns for the period 1 Jan 2019 – 31 Dec 2019. For full data click here.

The table in Figure 1 showed that while all asset classes, as represented by their counters, had produced positive returns for 2019, there is still negative correlation existing between some of them, e.g. between equities and bonds (-0.39). This leads to the conclusion that although negative correlation between asset classes exist, it does not necessarily mean that some enjoy gains while others suffer losses.

So for 2020 (and the years beyond), stay diversified.