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Should you invest in Notes of the US Masters Residential Property Fund?

Should you invest in Notes of the US Masters Residential Property Fund?
Feb 03, 2017 By Simon Herrmann Tags: IPO, Notes

Walsh & Company which is the responsible entity of the US Masters Residential Property Fund (ASX:URF) has launched a prospectus for unsecured notes paying a fixed interest rate of 7.75% per annum to raise up to $150 million. This article will explain the common characteristics of unsecured notes and what investors should know before investing in this offer.

Key Details of the Offer

Name: URF Notes III

Ticker Code: ASX: URFHC

How to invest:

Overview of the Notes Offer

The URF Notes III notes will be priced at $100 and carry an annual fixed interest rate of 7.75%, payable to investors quarterly in arrears.  The notes mature on 24 December 2021. The prospectus is issued by Walsh & Company Limited and URF Investment Management Pty ltd is the manager of the fund.

The offer is for a minimum of 500,000 URF Notes III and up to 1,000,000 URF Notes III with the ability to accept a further 500,000 in oversubscriptions. The company intends to raise between $50 million and $150 million.

The funds raised from the offer will be used to fund the company’s investment strategy which includes renovations and acquisitions of new properties.

Overview of the US Master Residential Property Fund

The US Masters Residential Property Fund was established in June 2011 and was listed on the Australian Securities Exchange (ASX) in July 2012. At 20 January 2017, the market capitalisation of URF was approximately $709 million, with 30 June 2016 consolidated total assets of $1,130 million and 30 June 2016 net assets of $501 million.

The Fund was established with the aim to invest in freestanding and multi-tenant houses in the New York metropolitan area, which have depreciated in value between 2006 and 2011. Presently the fund invests in property in Brooklyn, Manhattan and Queens, New York and Hudson County, New Jersey.

What are Unsecured Notes?

Put simply, unsecured notes are a loan to an issuer, which is not secured by the issuer’s assets. Unsecured notes rank behind senior debt and creditors preferred by law and the same as other unsecured creditors. The primary purpose of issuing notes is to raise money which can then be used for company specific purposes. Usually the company pays a fixed interest rate to the lender and must pay back the money when the notes mature. However, terms and conditions of the notes may vary and the company is required to disclose all details in a prospectus.

Benefits of Investing in Unsecured Notes

Investing in unsecured notes means that you lend money to the issuer of the notes and in return the business agrees to pay your money back at the maturity date whilst on top paying you a fixed interest rate. The URF Notes II for instance pay a fixed interest of 7.75% per annum, paid quarterly which is an attractive return in the current low interest rate environment and higher than the dividend yield paid by many Australian companies.

Risks of investing in Unsecured Notes

The biggest risk is that the issuer becomes insolvent and that you lose part or all of your investment. Investors need to keep in mind that they invest in debt and if the issuer does not have sufficient cash to repay the debt, there may be a delay or failure to pay the interest or even the face value of the notes when they become due.

When lending money to a business, you have no control over your funds and what the company intends to do with it. In some cases, the money is on-lent to third parties, which can be quite risky. While the notes may seem like a bank deposit as they receive a fixed interest rate, investors should be aware that in fact it is not and the investment is not guaranteed.

Is the Offer Right for You?

That will depend on your personal circumstances. Before deciding to invest, make sure you understand the potential return and the risk involved and then weigh it up in light of your personal risk profile. Investors of these notes accept a higher risk and in return receive an attractive fixed income which is well above the current benchmark interest rate. As opposed to investing in stocks, there is no incentive for capital growth and potential investors should purely focus on the income component.

Whatever you do, the most important point is to diversify your risk by spreading your investment across a number of assets. By doing so you will ensure that you don’t lose everything if an investment goes terribly wrong.

Keep in mind that this page is only a brief summary of the offer but we encourage you read the prospectus in its entirety. If you have problems with any aspects in the prospectus, we advise you to seek professional help.

Click on the slider below to read more about the offer or to make a bid:

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Simon Herrmann Author: Simon Herrmann Feb 03, 2017

Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.


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