Dixon Advisory’s troubled US Masters Residential Property Fund, or URF, is set to be liquidated after its parent E&P Financial accepted an offer to sell “substantially all” of its residential property assets in a $US507 million ($673 million) transaction.
The sale agreement of the portfolio of houses and apartments in the New York and New Jersey region has been struck with US real estate firm Brooksville at an 11 per cent discount to the book value at December 31, 2021, and implies a realization that is 38 per cent below Friday’s closing share price of 34¢.
But the deal is a win for holders of $200 million of the fund’s preference shares or hybrid holders who are set to be repaid the full $100 face value.
In early trading on Monday, the ordinary units plunged 43 per cent to 20¢, which is below the 22¢ distribution implied by the sale price, while the preference shares which trade under the ticker URFPA, jumped 11 per cent to $90.00.
The transaction is still subject to an examination period, an independent expert report, and unitholder approval. But should it proceed, it will mark the end of the conflict-plagued fund that all but brought down self-managed superannuation kingpins, Dixon Advisory.
The US Masters Residential Fund, or URF, was created in 2011 by Dixon Advisory and was intended to raise money from clients of the respected advisory firm.
It sought to take advantage of distressed residential property prices in New Jersey and a strong Australian dollar. But the fund took on more debt as it expanded its portfolio to $1.4 billion and embarked on an enormous renovation strategy that netted tens of millions of dollars of fees for Dixon Advisory.
Dixon Advisory had since merged with Evans & Partners to create Evans Dixon, which has since been rebranded at E&P Financial.
Eventually, the value of the URF plunged from a peak of around $2.25 in May 2016, inflicting significant losses on clients of Dixon Advisory that were advised to invest heavily in the units, preference shares, and bonds of the fund.
That triggered allegations of conflict of interest, and led to court action from the regulator and class action firms, resulting in Dixon Advisory filing for administration this year.
The collapse in the value of the URF, however, lured some bargain hunters and activist investors, and while holders of the hybrids will welcome the terms, ordinary shareholders are set to lose out.
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“There was a lot of a senior debt and preference shares, and the increase in the A$ had reduced the net amount available for ordinary shareholders,” said activist investor David Kingston, who had bought both ordinary units from 20¢ and preference shares at a price of 60¢ in the dollar.
“The market is disappointed about the sale price, but the preference holders have had a big win. That reflects how prioritizing [of the capital structure] works.”
In a statement to the ASX, the fund said E&P, which is the responsible entity, had embarked on a “robust capital markets process” with over 80 investors contacted and 21 entering into confidentiality agreements to conduct due diligence.
US real estate advisory firm Ackman-Ziff was hired in 2021 and mandated to find the highest possible offer that would provide both ordinary and preference shareholders with immediate liquidity, preferring a portfolio sale to a lengthy asset-by-asset divestment program.
The prospective buyer, Brooksville, is a real estate investment and management firm that focuses on multi-family properties, in particular the New York area. Brooksville has partnered with Boston-headquartered real estate private equity firm Rockpoint.
The statement said since 2019, the URF had sold $US200 million of its properties, realized its investment in an apartment joint venture, cut its debt by $245 million, and reduced expenses by 41 per cent. That allowed the fund to repay $265 million of listed bonds.
“At the end of the day it’s been a flawed model, they have overcapitalized their properties and had far too much debt,” said Mr. Kingston.
“But to give them some credit – of the four securities they have issued, at least on the three debt instruments, they are repaying everyone in full.”
The full pay-out of the hybrid securities is of little consolation to investors in the ordinary units that are now near an all-time low.
One former Dixon Advisory client and holder of the ordinary units, Stewart Rogers, said the outcome was “another blow for shareholders”. Mr. Stewart’s self-managed super fund bought ordinary units at a price of around $2 and has now lost $90,000 on the investment.
“We were recommended by an advisor at Dixon Advisory to sell out of the CPU’s [preference units] in April 2019 and buy into URF as the yield was better,” he said. Source: Financial Review