Sygnus Real Estate completes first investment cycle
Management fees cut until 2025
SYGNUS Real Estate Finance Limited (SRF) has commenced plans for the second investment cycle of its real estate projects following the successful completion of its One Belmont and Spanish Penwood developments in St Andrew, Jamaica.
SRF began its first investment cycle in February 2020, a month before the COVID-19 pandemic. Since then, it has built up a collection of various properties in Jamaica across a variety of sectors. Apart from earning income through its real estate investment notes (REINS), the company fully developed an industrial property on Spanish Town Road and reached practical completion for its 70 per cent joint venture on 1-3 Belmont Road.
Based on the impacts and delays that SRF would have experienced over that first investment cycle, its investment manager Sygnus Capital Limited (SCL) has reduced its management fees to 1.00 per cent for September 2023 to August 2024 and 1.25 per cent for September 2024 to August 2025. Sygnus Capital manages the operations of SRF subject to a management fee of 2.0 per cent of core assets under management with the potential to earn a performance fee if a certain target is surpassed.
“SRF started investing at the start of COVID, which in a sense would have disrupted the flow of when we would have timed the exiting of investments. The unfolding of this first exit phase had lots of delays in execution timelines driven primarily by availability of very important raw materials and supply chain issues. Based on how we’re winding down to the first exit and the start of the new investment cycle, we felt that it was necessary to make this adjustment in this case,” said Jason Morris, co-founder and chief investment officer of Sygnus Capital, at SRF’S January 16 earnings call.
SRF has exited 83 per cent of its Spanish Penwood property and expects to complete the sale of the remaining interest in the coming weeks to another investor. The 32,553 square feet (sq ft) property has a 10-year triple net lease with IMCA Jamaica as the tenant at its new warehouse and commercial office.
With respect to its One Belmont property, the $3.70billion development achieved practical completion in December with tenants completing interior work in early 2024. The property has been fully leased to various tenants with SRF looking to complete a partial exit in the year and monetise the roof of the nine-storey corporate office tower. SRF owns 70 per cent of Audere Holdings Limited, which is the joint venture that owns the One Belmont property.
While Morris didn’t delve into what lease rates look like or how many floors SRF would retain later, he had indicated at its November 1 earnings call that they were looking to create a unique vehicle to allow different investors to access the value in One Belmont.
“The structure for One Belmont is going to be very unique exit strategy where in one instance, we may invite, you know, the ordinary person to be able to participate in the revenue generating capacity of One Belmont. That’s something we’re working on and structuring. So, you can look out for that in 2024 and that will likely be towards the back end of the financial year for the One Belmont opportunity,” Morris added.
SRF’S current tenant at its 1-3 Hillcrest Avenue property, former home to the French Embassy, will be moving to One Belmont very shortly. The Sygnus Capital executive highlighted that they are still exploring the value creation process for this property along with its properties at 26 Seaview Avenue, 56- 58 Lady Musgrave Road and 16 Montrose Road, a 51 per cent joint venture holding.
“Yes, the tenant is still there and obviously, at the appropriate time, the tenant will move. In terms of the Hillcrest asset on a go forward basis, we’re evaluating all options to monetise the asset. At the end of the day, as far as I’m aware, there’s no more land that is being made at the location where the Hillcrest property is,” Morris added regarding its golden triangle property.
SRF is currently completing the exit of its Rein project in St James known as Surreal at Sugar Mill while it is in dialogue with the Real Estate Board regarding the Ocean’s Edge development in St Ann. Although SRF has refrained from giving additional commentary, Morris revealed that the financial exposure is about $700 million with the investment secured by the development.
These investment exits will see the company redeploying funds into its other proprietary properties and consider other joint venture projects which have come from three Caribbean islands valued at $8 billion. The company’s next two immediate proprietary projects will include its 55-acre property at Lakespen, St Catherine which is to be developed into an industrial property and 14.4-acre property at Mammee Bay, St Ann.
“When I speak about the JV’S that we’re evaluating, those are other properties that we’re looking at. A lot of exceptionally good properties with exceptional locations that the value needs to be unlocked. So many people have reached out to us to say, hey, David [Cummings] and team, how can you guys collaborate with us to unlock the value from this asset I’ve had sitting on for years. There are a multiplicity of opportunities out there,” Morris explained regarding the next set of projects.
With the company now winding down its first investment cycle, which included $4.21 billion in eight exits/sales, it is now looking to settle some of its liabilities incurred with its investment manager.
Thus, shareholders will vote at the upcoming annual general meeting (AGM) on March 21 on two special resolutions. The first special item will consider the conversion of a $377.91 million liability, payable in January 2022, to Sygnus Capital into 20,707,342 new ordinary shares based on a conversion price of $18.25 per share. These newly created shares would be issued to Sygnus Capital or its nominee and would result in the owner of those shares becoming the second-largest shareholder ahead of SIJML A/C 3119, but behind the ATL Group Pension Fund Trustees Nominee Limited. It would also result in dilution such that a shareholder owning 10 per cent in SRF owning 9.4 per cent afterwards, should the resolution be approved.
“Given the type of pipeline SRF has and where it is in its investment life cycle, it actually makes sense for the company to conserve its cash and to use that to redeploy into assets. Given that the investment manager will be even more aligned with execution and ensuring that we extract all the value that exists in the assets on the balance sheet,” Morris explained regarding the proposed issuance of the new shares which have been called PIK (payment in kind) shares.
The second major resolution would involve the issuance of subscription warrants to existing SRF shareholders on record as at a prescribed date with a reference price of J$18.25/ US$0.12. These warrants would be allotted on a proportional basis to existing shareholders who would be able to exercise these warrants and be able to subscribe for new SRF shares over a two-year time frame.
Thus, the warrants would be issued on the basis of the 20.71 million new shares to be issued to SRF. This translates to one warrant for every 15 ordinary units/shares of SRF. SRF’S book value in February 2022 was $22.34. Shareholders can join virtually or from the satellite location at the AC Hotel for the 10 am AGM.
SRF’S 2023 financial year saw it record $264.52 in net interest income and other revenue which was driven by $430.96 million in fair value gains from its investment property. It recorded net profit of $211.44 million which was down from the $692.96 million in the prior year which had large fair value gains.
SRF’S Q1 ending November 30 saw it record an operating loss of $132.68 million, lower than the $172.64 million due to lower management fees. The net loss was $132.98 million compared to the net loss of $172.50 million in the prior period.
SRF’S total assets were up $15.19 billion which was largely composed of $10.46 billion in investment properties. Total liabilities were $7.52 billion with $3.92 billion in total debt while shareholders’ equity was $7.67 billion with a book value was $23.48. The company will consider a dividend or capital distribution based on the timeline of its cash flow from exits.
SRF’S stock price closed Friday at $10.20/US$0.0809, which leaves it below its initial public offering (IPO) of $19.30/ US$0.127. SRF’S sought $3.9 billion in its IPO but received $2.3 billion instead.