Special Opportunities REIT IPO prospectus published

Special Opportunities REIT is a new internally-managed REIT seeking to capitalise on the recent dislocation in UK real estate capital markets to deliver highly attractive total returns. It has published a prospectus. If successful, the shares would be admitted to the Official List (standard listing) of the FCA and to trading on the standard segment of the London Stock Exchange’s main market.

The company is targeting a fundraise of £500m via an initial placing, an offer for subscription and cornerstone subscriptions of shares at an issue price of 100p.

Commitments have been received from three cornerstone investors, GoldenTree Asset Management, TR Property Investment Trust and other Columbia Threadneedle investments funds and the Bhavnani family office, to subscribe for between 104m and 119m shares (£104m to £119m) in total, on the basis of the Target Initial Issue³.

The company will close applications in respect of the IPO on 11 June 2024.

Highlights

• The company’s proposition is to benefit from both:
  • the cyclical nature of the UK real estate market through opportunistic investment and active management of commercial properties, investing at what it believes is the bottom of the market; and
  • a unique set of circumstances meaning that it believes very high-quality properties are being sold by distressed and/or highly motivated sellers, often at less than their already depressed current market values.
• The company’s management team (team) has a significant pipeline of portfolio and single asset deals against which it expects to rapidly deploy and gear the IPO proceeds; the depth of the pipeline and the relative lack of competition should enable the team to be highly selective.  The company will focus on high-quality, but under-managed, UK commercial property assets with low and reversionary rents and structurally supported sub-sectors, including student accommodation, industrial, data centres, retail parks and budget hotels, where rental growth is expected to outperform.
• Following investment of the net IPO proceeds, the company intends to drive enhanced value from its portfolio, through rental income growth and by leveraging the team’s long-term relationships with tenant operators to enhance the capital value and liquidity of its assets.
• The company is targeting a minimum realised 12%-15% per annum internal rate of return, with the potential to deliver an IRR in excess of 20% per annum, comprising capital and income growth and an attractive regular dividend.
• The company is targeting a dividend of not less than 3p per share for the period to 30 June 2025 and a dividend of not less than 6p per share for the year to 30 June 2026.
• The team, comprising Simon Lee, Freddie Brooks, John White and Rob Ward (all formerly of LXi REIT Advisors) has a strong track record investing in and managing UK commercial real estate assets through multiple market cycles and delivering return outperformance for shareholders.
• The company will benefit from a strong and highly experienced board of non-executive directors, including Harry Hyman (pictured) as chair and Jamie Hopkins as senior independent director.
• The team will have significant alignment with the company’s shareholders (“shareholders”) through:
  • £4.0m being invested by the team and non-executive directors at IPO;
  • a remuneration structure that significantly aligns the team with shareholders and will allow the company to maintain a low cost base (more detail provided below).
• The company expects to maintain a conservative net loan to value ratio of 25%, with a maximum net loan to value ratio of 35% (measured at the time of drawdown), in order to leverage the company’s returns with what it considers to be a low-risk debt strategy, consistent with parameters operated by similar companies that are investment-grade rated.

The company’s proposition is to benefit from both the cyclical nature of the UK real estate market through opportunistic investment and active management of commercial properties, investing at what it believes is the bottom of the market and a unique set of circumstances meaning that it believes high-quality properties are being sold by distressed and/or highly motivated sellers, often at less than their already depressed market values.

The company’s corporate structuring is designed to generate returns for shareholders, in particular, through better alignment between the team and shareholders, including:

• an internal management structure, with material co-investment from the team and the company’s board of directors;
• the team’s remuneration is strongly aligned with cash returns to shareholders, with rewards under the Long Term Incentive Plan (LTIP) crystallising upon the occurrence of a realisation event for shareholders; and
• a low ongoing cost base, through the capping of the team’s remuneration packages (inclusive of salaries, bonuses and all benefits) at a single transparent amount, set below the market rate, with a fully aligned performance-based remuneration structure, the absence of external management fees and efficient corporate streamlining.

Current conditions in the property market closely mirror those in other cycles that have signalled the bottom of the market. The team believes that investment at this point in the cycle should position the company well to acquire assets which are expected to deliver attractive crystalised returns to shareholders on a risk-adjusted basis.

The team has sought to use its extensive industry relationships to establish an attractive short-term pipeline in which to deploy the net IPO proceeds. The team believes the pricing of the pipeline is particularly attractive due to a structural oversupply, driven largely from:

The company will seek to invest a conservative mix of equity and debt capital in commercial properties. The board expects to fully deploy the net IPO proceeds, subject to the maintenance of sufficient working capital, within a period of six months of the Initial Issue. The company expects to achieve growth following the acquisition of these properties, by leveraging the current structural oversupply of UK commercial real estate, driven by a number of time limited factors, in four main ways:

1. by acquiring assets that are mispriced to the benefit of the company, from distressed or forced sellers or otherwise in special situations, from five key relationship-led sources of assets being: DB pension scheme insurance “buy outs”, lender led and consensual sales, local authorities selling assets to balance books, the development funding gap and tenant operator sale and leasebacks;
2. by identifying low-risk opportunities to increase the value of an asset through leveraging tenant and operator relationships;
3. by identifying assets with the opportunity to grow rental income streams; and
4. through market yield compression as macro-economic pressures begin to make real estate a more attractive investment class on a relative basis and more capital returns to the sector.

Deployment

The company is targeting an initial fundraise of £500m. The company also has a 12-month placing programme but only has the potential to issue up to 600m shares in total. The company expects to fully deploy the net IPO proceeds, subject to the maintenance of sufficient working capital, within a period of six months of the Initial Issue.

Returns and management alignment

The company is targeting a minimum 12%-15% per annum internal rate of return to shareholders⁴ and, potentially, to deliver an IRR in excess of 20% per annum, both comprising income and capital growth and a regular income return.

The team is highly incentivised to deliver a realised return (in the form of an IRR) rather than an unrealised metric such as an annual total return because its remuneration is significantly weighted towards an LTIP that will be paid on cash returns received by shareholders as detailed above.

Discount control and continuation votes

As is detailed further in the prospectus, the company has put in place a clear and robust discount control mechanism, along with two continuation votes, to help mitigate the risk of trading below net asset value.

Debt strategy

The company will seek to conservatively leverage the equity in the group with what it considers to be a low-risk debt strategy, consistent with parameters operated by similar companies that are investment-grade rated. The company expects to maintain a loan to value ratio of 25%, with a maximum loan to value ratio of 35% (measured at the time of drawdown). The leverage is designed to enhance risk-adjusted shareholder returns in a prudent manner.

You can acess the prospectus here, please heed the risk warnings and the geographic restrictions about who can apply

SOR : Special Opportunities REIT IPO prospectus published