This is one REIT that I got roasted before talking about the possible risks arising from what everyone thought is an invincible REIT that draws rental income from the UK Government so hopefully I don't get flammed posting about it again. Elite UK REIT ("Elite") recently proposed acquiring three freehold/virtual freehold properties in the UK currently leased to government departments, representing a strategic expansion of its portfolio. I thought that Elite is taking a wrong step again following its disastraous plummet during its debt leverage crisis (spiralling towards a potential breach of MAS requirement then). It is interesting to note that Elite debuted on the SGX mainboard on 6 February 2020, trading initially at around £0.705–£0.71 but saw its unit price declined to a record low of £0.231 per unt as at 30 October 2023. Its price has since recovered to £0.31 per unit but a far cry from its IPO debut days.
1. What happened in the past of 2023 that led to Elite's worst crisis as a REIT?
Under Elite's original 2018 leases, around 70–83% of its gross rental income (GRI)—equivalent to 117 properties—had break clauses allowing tenants (primarily the DWP and MoD) to terminate after 5 years, with one year’s notice
Break notices issued by UK government:
The UK Department for Work and Pensions ("DWP") exercised the break option for 8 properties, representing approximately 4.8% of FY2022 contractual rent.
Countermeasures by Elite's management:
• For 100 of the DWP-leased properties, break clauses were removed via renegotiation with the tenant ensuring leases now run to March 2028 .
• This move stabilized lease term and income visibility for a significant majority of the portfolio (around 83% by GRI)
Throw in the high interest rate environment and consequentially, all hell break lose and Elite found itself having to get unit-holders to bail itself out in December 2023.
2. Why I think it is a bad move to acquire the 3 properties?
The acquisition of another 3 government properties smacks of a deja vu. The one primary risk of Elite is that it has an over-concentration of 1 single major tenant which is the UK Government. So I do not like it that the management decided to continue adding on properties being leased to the UK Government. We have all seen the myth of the "resilient income stream" from government agencies.
I thought that Elite should focus more on buying or developing data centre properties similar to its foray into its planned development of Peel Park data centre campus. Alternatively, it should look for other non-government commercial tenants to diversify away from the concentration risk of a single major tenant.
3. Private placement is a slap in the face of loyal unit-holders from IPO/Debut days
Elite management should have offered a rights issue to give its long time unit-holders a right of first refusal. Many have been holding on to their units from the £0.60–£0.70 days. The extremely dilutive price of £0.295 per unit private placement price is extremely disappointing from many of its long time loyal unit-holders. Only good news is that it is slightly higher than the bail out rights package of £0.27 per unit.
4. High Leverage Ratio > 40%
While leverage ratio will improve sligthly from 43.4% to 43.2% post acquistion, it is still too high and worrying.
Parting thoughts
I will continue to stay away from Elite as I do not like the over-concentration in UK government tenants. The post acquisition leverage ratio of 43.2% (over 40%) is also of grave concern bearing in mind what had happened in 2023. Anyway, above just my personal thoughts. This is a free-world....for those who still think that Elite's earnings from the UK government are extremely defensive and resilient, please go ahead to buy more to take advantage of the attractive 9%-10% distribution yield.
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