On 13th January 2022, I had the opportunity to speak to Elite Commercial REIT’s Management Team, consisting of Ms Shaldine Wang (Chief Executive Officer), Mr Joel Cheah (Chief Financial Officer), Ms Chai Hung Yin (Assistance Vice President, Investor Relations) and joined by Mr Jonathan Edmunds (Chief Investment Officer) from the United Kingdom.
Through this Q&A, we got to know in-depth details about Elite Commercial REIT, including Elite’s future plans, how its United Kingdom properties are doing, the United Kingdom’s ESG building requirements, and how Elite is working towards meeting these requirements. Part 1 of this series will touch on learning more about Elite Commercial REIT, its future plans, its sponsors and how the idea for this REIT was conceived, while Part 2 will discuss the financial impacts and benefits of going green (meeting ESG requirements), and how Elite Commercial REIT intends to achieve them.
Elite’s Investment Mandate
Kenny: Your investment mandate is currently to invest in United Kingdom Commercial properties. Many investors are interested in United Kingdom Properties. Are there any plans to expand your mandate, for example investing in other asset classes in the UK?
Shaldine (CEO): Not at the moment. Certain requirements have to be met when we change our investment mandate. Firstly, if we do so in the first 3 years, it will require unitholders approval. Secondly, when we first listed on the SGX 2 years ago, we were expecting Brexit but not COVID. Although with COVID happening, it does make sense for our properties to have a strong focus on having the UK government as our tenant, as it gives certainty in terms of rental income. Due to this reason, we have been able to report close to 100% collection of rental income. We see this as a very safe strategy, especially with COVID happening, to be able to pay our unitholders on time. You cannot find a more creditworthy tenant than the UK Government.
In terms of considering other asset classes, we are not ruling out changing our investment mandate to encompass other United Kingdom properties (not just commercial), however, we don’t feel that it is the right time yet. When the time comes, we will evaluate which asset class types will be suitable or complementary to our current portfolio.
With COVID happening, it does make sense for our properties to have a strong focus on having the UK government as our tenant, as it gives certainty in terms of rental income.
Kenny: As an investor myself I feel that it might be too concentrated, especially because moving forward, with remote working spaces and work from home, we may not need as many office spaces in the future.
Shaldine: We feel that there is a wider potential in terms of government assets in the UK as compared to Singapore.
Jonathan (CIO): It is a concern, however with the UK’s government response to the pandemic, we have been able to see the importance of these assets to the government. One of the UK government’s responses to the pandemic was to increase the number of people working in these properties by 13,500 and have also increased the size of their property portfolio. This means there is strong demand for assets to be let to the UK government.
Tenant credit strength is a major factor due to COVID, and other asset classes (especially the hospitality and leisure sectors) have been hugely affected. These COVID impacted businesses were not able to pay their rents on time unlike our tenants, where rents were paid on time every quarter and in advance within seven days of due date.
Our properties are also very diversified across the UK and a 7 per cent yield is very attractive especially because our tenant is the UK government. In addition, our lease terms are usually in excess of 10 years. (Editor’s note: Elite Commercial REIT has 155 properties across the United Kingdom, with a WALE of 6.0 years as at 31 Dec 2021) We feel that this is the best strategy for our unitholders.
The sweet spot is beyond the S$1 billion market cap. Usually, this is the point where it’ll start to attract institutional investors.
Kenny: Do you have any target, in terms of market cap size, within the next 3-5 years?
Shaldine: The sweet spot is beyond the S$1 billion market cap. Usually, this is the point where it’ll start to attract institutional investors. In terms of acquisitions, we have a list of assets in the UK that we are already targeting, with funds coming from both the sponsors and third parties. But for us, the priority now is to remove this lease break option overhang, so that we will be able to deliver what we said we could, before going to the next stage of further growing ourselves.
Dividend Reinvestment Plans (DRP)
Kenny: Will Elite Commercial REIT continue using Dividend Reinvestment Plans to preserve cash?
Joel: Interestingly, DRP is a repeated request by investors, ever since we have listed.
Shaldine: REITs do not usually start their DRP that early, but since we were listed, we consistently received queries about it during our results or business updates every quarter. Hence, it made sense for us to implement the DRP. The cost increment is not large. As a pound-listed REIT, every half-yearly, we have to get CDP to send out notices for election. Surprisingly, we had many people opting to receive dividends in pounds before the DRP. This meant people were interested and coupled with the recurring questions on DRP, we decided to move ahead with it within a year of our listing. In our perspective, the DRP has been quite successful and we will continue with it.
Sponsors: Elite Partners, Ho Lee Group and Sunway
Kenny: One of the largest concerns among my clients is the sponsor of the REIT, especially since sponsors are a major factor on how a REIT will perform. Can you give us a background of your sponsors?
Shaldine: Actually, it is not just the sponsors that make decisions for the REIT. We have a large Board of Directors, one of the largest among REITs, with a good pool of independent directors. Some of our sponsors have set up REITs before and are not new to this game.
Sunway (Editor’s Note: Wiki page | homepage) is an established real-estate developer set-up in Malaysia many years ago and are now expanding overseas with a track record of managing a REIT (Sunway REIT). They also have private funds setup to fund student accommodation portfolios etc.
Ho Lee (Editor’s Note: homepage) had sponsored Viva Industrial Trust back in the day, before the merger with ESR REIT. They are also not green in terms of sponsoring REITs.
Elite Partners Capital (Editor’s Note: homepage) is a relative newcomer in terms of sponsoring REITs, but if you look at who is behind Elite, they are not new guys in the REIT space. The team itself had worked in other REITs before such as Viva Industrial Trust.
As we cross the 2-year mark since our listing (6 Feb 2020), we believe we are no longer a new guy in the market. We have proven ourselves in the market through our track record of key milestones achieved since listing.
Joel: For example, within the 2nd year of listing, we entered into the SGX Fast Track Programme and have ranked joint 6 out of 45 REITs and Business Trusts in GIFT 2021 (Governance Index for Trusts).
How was the idea of an UK-based commercial REIT conceived?
When we acquired the UK properties, we had the intention to list it as a REIT from day one.
Shaldine: After the Viva-ESR merger, the team together with Ho Lee were looking at other investment classes, and we felt that the REIT market within Singapore was too saturated, so we decided to look into the overseas market for good opportunities. We chanced upon this, after looking at other portfolios such as a logistics portfolio in Poland in 2018. Since flying to Poland usually requires a stopover, while in the UK, we chanced upon a portfolio and realised that a portfolio in the UK seemed lucrative. A portfolio with Government tenanted assets, a geographically diversified portfolio, 10-year leases, freehold etc.
We have intended to list Elite Commercial REIT from day one. When we saw the portfolio, we decided that it was something that we could list on SGX. It is something that is new to investors here.
Unlike in Singapore, UK transactions happen very fast. We’re talking about properties changing hands within 2-3 weeks. No one is going to wait for you to do your listing. We decided to purchase those properties under a private fund and structure it as a REIT while being in touch with SGX at the same time. If you haven’t realised, there were no acquisition fees during our IPO. We did the private fund with the intention to list it as a REIT and once that was completed, we started the necessary work with SGX. When investors came into the fund, they had already been notified and were asked if they were willing to take up the listed units when the REIT is listed. This meant that the original investors have converted their units into the listed units. We also did not try to get a big chunk in the difference between the units, hence, the listing process was very short.
Click here to read Part 2, where we touch on how ESG requirements impact REITs financially, and how Elite Commercial REIT is working towards meeting ESG Requirements.