Product Road Test - Investing in Urban Renewal through URB
While I don’t particularly like the name, I think an investment in the URB Investments IPO is worth considering. And I want to disclose up front our interest in promoting the idea - Switzer Financial Group may earn a selling fee of 1.5% on the value of successful applications placed through us.
With this out of the way, let’s move onto the investment opportunity.
URB Investments Limited
URB Investments Limited is an investment company that will be listed on the ASX. Its aim is to capture long term value by investing in a diversified portfolio of equity securities and direct property assets that have exposure to urban renewal and regeneration.
Through an IPO (Initial Public Offer), the company is seeking to raise gross proceeds of between $75m and $300m by issuing shares at a price of $1.10.
Urban renewal and regeneration is the transformation of existing urban areas to accommodate much denser and generally mixed use environments. It can generate a number of benefits including new infrastructure, better use of existing infrastructure, increased productivity, additional expenditure and new employment opportunities.
URB will invest in assets that have exposure to population growth, population density, major infrastructure investment, housing growth, new employment, revitalisation of town centres, re-zoning and use of land changes, education services, healthcare services and tourism growth.
The Investment Portfolio
The company will develop a portfolio of equity securities and direct property assets, with the equity portfolio to comprise at least 50% of the investment portfolio. The equity component will comprise a diversified portfolio of 20 to 40 securities listed on the ASX that have exposure to urban renewal and regeneration.These will be combined with investments in direct property.
Initially, URB will own a 49.9% interest in three properties which have a combined value of $59m. These assets, all located in Sydney, are:
- Kingsgrove Property, purchased for $15.9m. This is a logistics/industrial property, currently leased to a single manufacturing company until August 2017. In close proximity to Sydney Airport and Port Botany, URB says that the property has the potential to benefit from sub-division into smaller industrial lots, or re-zoning from industrial to residential;
- Prestons Property, purchased for $20.0m. This is a 69,422 sqm undeveloped block of land zoned for industrial use in south-west Sydney, close to the junction of the M5 and M7 tollways. The plan is to construct a logistics warehouse and distribution centre for a pre-committed logistics tenant;
- Penrith Property, purchased for $23.1m. This is a 6,400 sqm property that is close to Penrith railway station and town centre which is used for office and retail with 22 existing leases. URB believes that Penrith is set to undergo a shift in land use by virtue of infrastructure projects in the next 5 years, and the property will benefit from active management of the tenancy (increased income) and possible change to a mixed use site (residential, retail and commercial).
The remaining 50.1% of each property will be owned by Washington H Soul Pattinson and Company Limited (Soul Pattinson). A trust will be used to hold the assets, with Soul Pattinson and URB having pre-emptive rights over each other’s units. Pitt Street Real Estate Partners Pty Ltd (PSRE), the real estate advisory division of Soul Pattinson, will manage the properties. The current intention is that the properties will be sold within 5 years.
The Investment Manager
URB has appointed Contact Asset Management to manage the Investment Portfolio in accordance with URB’s investment strategy. Contact is led by Tom Millner and Will Culbert, and currently manages the BKI Investment Company (ASX: BKI), a listed investment company that has grown to approximately $1bn in size. Contact says that BKI’s total shareholder return (inclusive of dividends and franking credits) over the 13 years to 31 January 2017 is 11.3% pa.
Robert Millner, a Director of Soul Pattinson, is the Chairman of Contact.
Contact will be paid a management fee of 0.50% pa (plus GST). In addition, it will be entitled to a performance fee of 15% of the out- performance above a 12 month increase in the NTA per unit of 8%. For example, if the NTA grows by 10%, Contact will receive a fee of 0.3% of the funds under management (15% of (10% - 8%)).
PSRE, which is led by Hugh Williams and Mike Hercus, will be also paid fees for managing the property assets (paid at the unit trust level). Under a co-investment agreement, URB will have the right to invest on an equal basis with Soul Pattinson in direct property assets originated by PSRE. URB can also source property assets itself, but must give Soul Pattinson the opportunity to invest in these properties in the same proportion and same terms.
The Product Disclosure Statement (PDS) describes a number of risks. In addition to the normal market, people and performance risks that go with any managed investment, two specific risks to call out are that this is a new company with no operating or performance history, which will be investing part of its funds in direct properties. These in turn have their own illiquidity, valuation and development risks.
The PDS says that the objective of the Company is to create “long term value” for investors, and provides this explicit advice: “Investors are strongly advised to regard any investment in the Company as a long-term proposition (7 years or more).”
Details of the Offer
The Company is seeking to raise a minimum of $75m and a maximum of $300m in gross proceeds by the issue of shares at $1.10. A minimum of 68.2m shares will be issued, increasing to 272.7m shares if the full amount is subscribed.
For every share subscribed, the Company will also issue one “free” option which is exercisable into one fully paid ordinary share at $1.10 up until 7 April 2018.
On listing, the NTA (net tangible asset) value per share is expected to be approximately $1.065. The difference to the subscription price effectively represents the costs of the offer (broker selling fees, legals, ASX costs), less a deferred tax asset.
Offer dates and key details are set out below.
In regards to dividends, the Company is making no specific forecast as to the amount. However, it says that its long-term target is offer investors sustainable and growing fully franked dividends and a yield that is competitive within the listed investment company industry. It will aim to pay out between 50% and 70% of net operating profit as ordinary fully franked dividends, and will consider declaring special dividends when it receives special investment gains or income.
This is a relatively unique and interesting investment opportunity that may suit long term investors who feel they have enough invested in banks, Telstra and the resource companies and want something a little more targeted. The urban renewal theme will certainly resonate for city dwellers. It is, however, not going to be the first stock into a portfolio, nor is it going to be a stock that you “bet the house on”.
A long-term time horizon will be required.
The Company is very closely associated with the Soul Pattinson group. Soul Pattinson has committed to subscribe for a minimum of 10% of the shares being offered, is the co-owner of the direct properties (50.1%), is the owner of the property management and advisory company PSRE and owns 20% of the Investment Manager, Contact. Investors need to be comfortable with the related party issues and fee arrangements.
But unquestionably, the association with Soul Pattinson is also a strength. Worth considering.
As always, please read and review the PDS thoroughly before making any investment decision, and if in any doubt, seek appropriate professional advice.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
URB provides an opportunity to invest in the rapidly growing theme of Urban Renewal and Regeneration. Invest directly alongside Soul Pattinson, one of Australia’s oldest and most respected investment groups. Click here to download a Prospectus and invest online.
Switzer Financial Group AFSL 286 531 may earn a selling fee of up to 1.5% on all successful applications placed through us.
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Published: Tuesday, March 14, 2017
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