Elite UK REIT’s name change from Elite Commercial REIT in May has heralded a host of improvements. Under the guidance of Josh Liaw, CEO of the manager since mid-2023, Elite UK REIT has earned praise from analysts for its expanded investment mandate and operational improvements.
The most recent bout of good news came in the UK-focused REIT’s results for 1HFY2024 ended June 30. Compared to end-2023, when the net gearing ratio was just shy of the 50% limit at 47.5%, Elite UK REIT’s gearing fell to 41.4% as of June 30, with a higher debt headroom of GBP57.9 million ($99.3 million).
One of Elite UK REIT’s focus areas in the near term is achieving sub-40% long-term gearing. As of June 30, approximately 63% of Elite UK REIT’s borrowings are hedged on fixed interest rates, and the interest coverage ratio remains healthy at 3.0 times.
The REIT’s turnaround has been relatively swift. Management has successfully completed refinancing for all debts due between 2024 and 2026, with no further refinancing requirements until 2027. The manager says this will provide stability and credit certainty to Elite UK REIT.
The manager achieved this by securing in July GBP215 million of sustainability-linked terms and revolving loan facilities from a diverse group of relationship banks, extended via their UK- and Asia-based units.
The loan facilities include two-year extension options, which will provide flexibility to Elite UK REIT in managing its debt maturity profile beyond the initial term of 39 months.
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According to RHB Bank Singapore analyst Vijay Natarajan, who initiated coverage in July, the loans will carry an approximate spread of 100bps over the Sterling Over Night Indexed Average (SONIA), which is currently at 4.95%, with some potential savings if certain sustainability goals are achieved.
Elite UK REIT is likely the first REIT listed in Singapore to have 100% of its debt sourced from sustainability financing.
Management plans to hedge “at least 50% to 65%” of its loan portfolio at “an appropriate time”. Based on current market conditions, a three-year hedge could result in interest costs below 5%, says Natarajan.
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While distribution per unit (DPU) of 1.40 pence for 1HFY2024 was down 19.5% y-o-y, this was still a slight beat, says Natarajan, thanks to lower-than-expected operating expenses.
When adjusted for the larger unit base, 1HFY2024 DPU was 2.1% lower y-o-y. Elite UK REIT has been paying out 90% of its distributable income since last year. This was a prudent move then, says Natarajan, in light of uncertainties from high gearing and debt refinancing.
But with most of these issues addressed, it is currently considering a possible increase in the payout ratio, he adds. “Our current forecasts only factor 90% payout and an increase will have a proportionate positive effect on our DPU.”
Valuation, occupancy up
Elite UK REIT’s other operational metrics also improved in 1HFY2024. Portfolio valuation for its 150 properties rose 0.6% h-o-h to GBP415 million, while the total occupancy rate rose 0.2% y-o-y to 92.3% as of June 30.
The valuation uplift is attributed to positive leasing activity, including a renewal at about 30% rental reversion and better ongoing letting prospects and land value at the Peel Park site in Blackpool.
The REIT has renewed two expiring leases so far in 2024, with a 10-year extension secured on Dallas Court, Salford, at a more than 30% increase in rent, while Newport Road, Cardiff, secured a short-term lease extension until March 2025.
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Elite UK REIT has received offers for three vacant assets and is evaluating and exploring conversion options for a handful of other vacant assets. Most of the REIT’s portfolio leases are signed with the UK’s Secretary of State for Levelling Up, Housing and Communities.
As of June 30, 96.9% of Elite UK REIT’s rent will expire by weighted average lease expiry (WALE) in 2028.
According to the manager, early dialogues with the main occupier — the Department of Works and Pension (DWP) — have begun to extend and diversify these leases.
The UK’s Labour Party, which won the 2024 General Election in July, has outlined its key priorities for the next five years. These include boosting growth through a planning system reform to allow for more homebuilding and infrastructure projects.
It also plans to restructure employment support, including combining Jobcentre Plus and the National Careers Service to help people find employment.
The manager expects its primary occupier, the DWP, to continue to play a key role in delivering essential public services to the community. “Elite UK REIT’s portfolio of assets serve as missioncritical social infrastructure that support the DWP in executing the UK’s welfare, pensions and child maintenance policy, as well as in administering the state pension and a range of working age, disability and ill health benefits. Nearly 90% of Elite UK REIT’s DWP assets are used as public-facing Jobcentre Plus to serve the local communities, especially those who need financial assistance and career guidance.”
The new Labour government is a “positive” for the UK equity market and Liaw notes a “brighter outlook” for the UK economy. “Inflation in the UK has fallen to 2% as of June, well below its recent peak of more than 11% in October 2022, prompting the Bank of England to cut interest rates to 5%, marking the first cut since the start of the pandemic in March 2020.”
Expanded investment strategy
Earlier this year, Elite UK REIT’s manager announced an expansion of its investment strategy beyond government-leased social infrastructure and workspaces to include the UK living sector, such as student housing and build-to-rent (BTR) apartments. “This allows us to tap on new opportunities that were previously beyond reach, opening up new possibilities in underserved sectors like the living sector,” says Liaw.
The move also aligns with the Labour government’s commitments to support housing delivery, improve the planning process and ease the housing supply crunch.
According to Nomura, Labour has vowed to build 1.5 million homes in the next five years, with a potential GDP uplift of 0.8% from the building blitz.
Liaw says: “Some of our geographically-diversified assets in accessible locations are suitable for conversion into student housing or build-to-rent residential assets, which will help with the national homebuilding agenda in the UK.”
One of the REIT’s three sponsors, Sunway RE Capital, nearly doubled its holdings in Elite UK REIT in a GBP28 million preferential offering in January. The wholly-owned subsidiary of Sunway Berhad has a strong presence in the purpose-built student accommodation (PBSA) space in the UK; it owns a portfolio of five quality PBSA assets in four UK cities: Bristol, Manchester, Sheffield and Southampton, with over 820 beds.
These cities are also where several of Russell Group’s reputable world-class, research-intensive universities are located; the group’s universities reportedly produce more than two-thirds of the research produced in UK universities. “Our sponsor has local knowledge and connections which we can tap on to venture into this new asset class,” says Liaw.
The manager believes this subsector is currently undersupplied in certain markets and benefiting from positive tailwinds. “Higher mortgage rates have exacerbated the imbalance in the past 12 months, as they have caused activity in the sales market to slow and pushed potential buyers to remain renters for longer.”
Liaw says that long-term housing undersupply in the UK means Elite UK REIT’s portfolio is well-suited to meet residents’ demands. “Properties in the portfolio are usually longish in shape, with easy access to sunlight, making it suitable for conversion into a residential property like student housing or build-to-rent. Our assets are also very accessible, being located close to amenities and transportation nodes, making them complementary to living sector assets.”
Potential data centre
There is also a potential data centre development site within the portfolio. The REIT’s Peel Park Data Centre plans are in progress, with management considering potentially increasing available power capacity to 120 megavolt-amperes (MVA) from the current 60MVA already secured to meet hyperscalers’ needs.
Management says it will explore all options for redevelopment with potential partners, including selling the development rights to third parties, thereby monetising the potential.
Peel Park is located within the Blackpool Fylde Industrial Estate and is currently used by DWP as a technology hub. The property has a net lettable area of 156,542 sq ft and sits on 15.65ha of land, including associated car park space.
Three-quarters (11.7ha) of Peel Park is currently undeveloped grassland. CGS International (CGSI) analysts Lock Mun Yee and Natalie Ong have said the data centre development will be accretive. “The best use of the land parcel is for data centre development rather than retaining it for commercial or general industrial use.”
Comparing against nearby cities and accounting for Blackpool’s relatively lower level of economic activity, CGSI estimates industrial land values to be closer to GBP400,000 per acre. “Using this as a benchmark, we estimate the sale of land for the data centre developments could generate GBP8.2 million.”
Besides RHB and CGSI, the manager has ongoing analyst coverage from DBS and Phillip Securities. As the REIT enters the next phase, the manager has engaged current and potential unitholders via webinars, trading representative teach-in sessions and investor group calls.
Management has also participated in non-deal roadshows organised by banks while sharing their outlook via media feature articles, panel discussions and video features with financial bloggers.
Photo: Albert Chua/The Edge Singapore
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