Urban Exposure plc, a specialist residential development finance firm and asset manager, today announces an update on trading covering the period since the Company's admission to AIM on 9 May 2018 to 31 October 2018.
Since IPO, the Company has experienced positive trading momentum, with continued growth in its market presence, building on its leading brand and the management team's proven track record. There has been strong demand from developers seeking finance from the Company and also from third parties looking to provide financing to the Company for projects.
Since Admission, the strength of demand for the Company's asset management strategy has also been significant, and the Company is seeking to capitalise on this opportunity through prioritising that demand. Arranging and executing loans on balance sheet to be refinanced through asset management funding lines (rather than simply maintaining those loans on balance sheet) will carry lower immediate profits than expected for the Company but represents a significant opportunity for the Company to execute its asset management strategy earlier than originally planned. Furthermore, higher quality loans have resulted in slower drawdowns as explained further below.
As a result, the Company expects significantly reduced income in the short term. However, the potential for the Company to build a larger asset management business is expected to result in strong growth in the medium term and earnings are protected through minimum earnings clauses as described below.
Whilst the Company envisaged accessing broader loan opportunities post IPO, it did not anticipate the enhanced volume or the higher credit quality of the underlying proposals. The Company is extremely encouraged with the way in which the developer community has responded to the Company's IPO.
From the date of Admission to 31 October 2018, the Company has closed loan commitments totalling £230m across 10 projects, for the construction of 960 residential units and connected mixed-use space. Of the loans that have closed, the Internal Rate of Return (IRR) is in line with expectations.
The average life of these loans is 28 months and the weighted average Loan to Gross Development Value (LTGDV) is 63 per cent., which is more conservative than initial expectations (between 65 per cent. and 75 per cent.).
The Company intends to assign this loan book off balance sheet into the asset management business which will have a negative impact on short-term earnings. However the Company believes that the benefit of doing this will lead to greater earnings potential via a larger asset management business and will also free up capital to redeploy in further loans for the remainder of 2018 and into 2019.
The Company is currently working on a number of new loans with aggregate potential commitments in excess of £300m, which it expects to close by year end. The Company therefore expects to have closed loans totalling £530m by the end of 2018.
Quality of Loan Book and Earnings
The majority of these higher quality loans, both existing and those expected to be committed by the year end are with developers who are prepared to invest more equity in their projects. Such increased equity results in a more conservative LTGDV, which in turn lowers the risk profiles of those loans. In addition, pre-sale conditions on loans are also typically twice what they were historically. The fact that the Company has been able to execute at these more conservative LTGDVs and pre-sale requirements whilst still achieving target IRRs, is a positive development, demonstrating that the Company is attracting high quality developers and writing a higher quality loan book.
Increased equity investment from developers inevitably means that drawdown of loan commitments occur at a slower rate than anticipated, which, whilst not impacting the economic value of a loan, does delay recognition of interest income. The Company benefits from mitigation against the delayed drawdowns through contractual minimum earnings clauses ("Minimum Earnings" or "MECs") documented in each loan's facility agreement. MECs ensure that the majority of the interest and other connected revenue streams (i.e. origination, monitoring, and exit fees) payable over the life of a loan are due to the Company notwithstanding reduced or delayed drawdowns, or in the event of an early refinancing.
Overall, the Company believes that the quality of the loan book and its associated earnings stream is better than it expected at IPO.
Asset Management and Syndication
On 27 July 2018, the Company announced that it had closed its first managed account, a joint venture arrangement with KKR with exclusivity, with a value of £165m. The commercial terms of asset management fees and performance fees agreed in connection with this are in line with expectations. The performance fees will crystallise at the end of the JV's life - once each of the loans are fully redeemed.
The Company is discussing other managed accounts and expects to close further mandates in due course.
The Company is in the process of executing two syndication partner agreements. Loans syndicated to those parties will generate fees for the Company in line with expectations. It is also in discussions with a number of other potential syndication partners.
The Company is in the late stages of closing a debt financing facility with an initial value of £165m with scope to further scale-up in due course. A further announcement is expected to be made on this shortly. This will be assigned to add gearing to the JV.
Key Financial Metrics
The Company's key financial metrics for the year end 2018 are expected to be as follows (unaudited):
- Net Asset Value - estimated to be £153m, 93p per share (excluding Minimum Earnings)
- Estimated Gross revenue (for the eight months to 31 December 2018)
- On a projected earnings basis - £24.7m
- On a Minimum Earnings basis - £19.4m
- On an accounting basis - £3.6m (excluding Minimum Earnings)
- Dividend - in line with the policy set out at IPO, the Company expects to pay a dividend yield of 2.5 per cent. on the IPO price for the eight month period to 2018 and 5 per cent. for 2019, which is twice covered (post tax) on a Minimum Earnings basis. The Company will have a progressive dividend policy thereafter.
The estimated gross revenue on an accounting basis set out above is significantly lower than expected due, inter alia, to slower drawdown of funds, expected accounting treatment, and increased focus on asset management.
Notice of Interim Results
The Company's financial year ends on 31 December, with half yearly financial statements to 30 June in each year.
The Company is required to prepare financial statements covering the first six month period from incorporation. The first financial report for the Company will be for the adjusted period from 10 April 2018 to 30 September 2018, which it expects to publish in December 2018.