September 2015

USR Quarterly Report                                                                                                                                                       PDF version available here     2nd Quarter 2015 

9 September 2015

Dear Investor,

US Residential Fund (ASX: USR) is pleased to release its second quarterly update to investors since listing on the ASX on 12 February 2015.

On 1 September the US Residential Fund (the fund) released its Interim Financial Report for the period to 30 June 2015, to the market.  The Fund reported $2.17 million in revenue and $0.57 million in net profit after tax for the period to 30 June 2015.

1H15

Statutory results

Revenue from ordinary activities

$2.17million

Profit after tax from ordinary activities*

$0.57 million

Net Profit attributable to members

$0.57 million

 

Interim distribution (per stapled security)

2.30 cents

Earnings Per Security (Diluted)

7.14 cents

NTA (per stapled security) as at 30 June 2015

97 cents

NTA (per stapled security) as at 31 August 2015**

103 cents


*includes fair value gain on acquisition of assets
**approximate value

USR is pleased to announce that the NTA balance at 30 June 2015 was 97 cents per stapled security, after providing for the distribution. Favourable currency movements have seen the NTA improve to an estimated 103 cents per stapled security at the end of August.

Since its listing in February, USR has been focused on executing on all three key areas of its strategy.  The fund continues to receive rental income from its portfolio of now 145 single family homes and has strengthened its relationship with a national maintenance group.  

The Fund has furthered its strategic repositioning strategy of upgrading single family homes through the purchase of five properties in Dallas and is currently reviewing apartment complex opportunities throughout the United States.

Distribution

At USR’s Annual General Meeting in June, the Fund announced its intention to pay an interim distribution of 2.3 cents per stapled security for the half year ending 30 June 2015 and this was confirmed with the release of the financial results.  The distribution will be paid on 18 September 2015 and is consistent with USR’s previous guidance of between 6.0 and 8.0 cents per annum per stapled security.  

Investors who have not registered for the Distribution Reinvestment Plan or provided their banking details to facilitate distributions payments, should either complete the relevant form on our website www.usresi.com/forms and return them to Boardroom Pty Ltd or contact Boardroom Pty Ltd on 1300 737 760.  

Please note the Fund does not make distribution payments via cheque. 

Dividend & Distribution Reinvestment Plan (DRP)

USR’s Board has decided to offer investors the opportunity to participate in a DRP. The DRP will operate in respect of the distribution outlined above.

We are pleased to advise that participants in this distribution will receive stapled securities issued at a 2.5% discount to the 15 day Volume Weighted Average Price (VWAP) price at which securities will be issued under the DRP in respect of the Fund’s interim distribution. 
The price of the stapled securities issued to participants in the DRP for the distribution for the half year ended 30 June, 2015, payable on 18 September 2015, will be $0.77 per stapled security.

The full details of the Plan have been published on the Fund’s website www.usresi.com. 

OPERATIONAL UPDATE

Our portfolio of single family homes

Rental income from USR’s initial portfolio of 161 single family homes was the Fund’s primary source of revenue in the period ending 30 June 2015. 

In just over four months of operations since acquisition, our residential rental property portfolio generated $0.91 million of income in line with our offer document on an annualised basis.

The fair value gain of $1.15 million on the single family home portfolio represents the revaluation gains from the prices at which the fund acquired the properties.  

At our Annual General Meeting in June, we indicated that some of our assets in Georgia are experiencing strong sales demand and, where appropriate, the fund is seeking to sell these down, with a view to recycle the capital into apartment and repositioning strategies.

During the quarter the Fund received an unsolicited offer for a number of its Atlanta Georgia properties.  

Following quarter end the Fund announced to the market that it had sold 16 properties at more than 7% above book value. The properties were sold to a single purchaser for US$1.34 million, representing a pre-tax capital gain of US$145,000.  We were able to use the proceeds to pay down US$ 1.24 million in debt, removing debt associated with these properties and releasing a further 12 single family homes which may be sold in the near term.

Following this transaction the Fund now holds 145 single family rental properties across the States of Georgia, Ohio and Texas, with the majority in Georgia. The transaction rebalances the portfolio to a more even spread across these markets.

Markets

Portfolio 
prior to 
transaction

%

Sold

Current portfolio

%

Dallas -Houston, Texas

46

29%

0

46

32%

Atlanta, Georgia

73

45%

16

57

39%

Cleveland, Ohio

42

26%

0

42

29%

Total

161

100%

16

145

100%


The sale of properties presented us with the opportunity to rebalance the portfolio and recycle capital into other potentially higher yielding opportunities.

Strategic repositioning and upgrade of single family homes for potential re-sale

The single family home repositioning strategy involves the refurbishment and repositioning of single family homes for the purpose of re-sale and is moving ahead well, with the purchase of five properties based in Dallas though our Joint Venture Special Purpose Vehicle. The first three purchases were completed by 30 June, with two additional purchases occurring in July and August.  
  
Pleasingly our property located at Goodfellow Drive has now been completely renovated and is on the market for re-sale.  Renovations at the remaining four properties are on track and the properties will come onto the market in due course.


Ponder Place, Dallas, Texas

Located 20 minutes’ drive north-west of Dallas, Ponder Place was purchased for US$267,500.  The large home has five bedrooms, two and a half bathrooms and a pool situated in a large garden.  Refurbishment is underway, budgeted at a cost of US$55,000 including kitchen remodelling, bathroom updating, flooring, painting and landscaping
 
Goodfellow Drive, Dallas, Texas

A sprawling one story home on a large block conveniently located near a number of amenities including NorthPark Shopping centre.  

The property was acquired for US$390,000 and contains 3 bedrooms and also a guest suite which can be used as a game room or separate accommodation. The master bedroom has private access to a sunroom and the property has plenty of storage throughout, with 2.5 garages. 

The property required refurbishment of approx.  US$76,000 including a new kitchen and master bathroom, remodelling of other bathrooms, lighting upgrades, interior and exterior painting, fencing and landscaping. The property is currently being marketed for re-sale.
 

Driftwood Drive, Dallas, Texas

Driftwood Drive is located close to Dallas and with close proximity to lifestyle amenities such as shops, restaurants and access to commuter roads.  The Dallas area is experiencing strong economic growth which is expected to persist throughout 2015. 

The property, is a 294.7sqm home  on a 930 sqm block, was purchased for US$153,000 predominantly using debt funding with the special purpose vehicle providing approximately 20% of the required equity. The home has 3 bedrooms, 2 bathrooms, a large bonus room, a study, a private fenced backyard and is close to the local school. The property will require refurbishment budgeted at US$50,000 including kitchen remodelling, bathroom updating, flooring, painting, and electrical upgrade.
 
Dobbins Drive, Plano, Texas 

The property is situated just a minute from shops and banks, in a highly rated school district with many of the schools rated 10 out of 10 by the Bill and Melinda Gates Foundation sponsored “greatschools.org”.  The property is a 288.6 sqm home on a 2,023 sqm block and was purchased for
US$291,500 predominantly using debt funding with the special purpose vehicle providing approximately 20% of the required equity. The home has four bedrooms with custom built-ins, four bathrooms, a loft, two car garage and an impressive foyer entrance open to formal living and dining. It is a spacious, inviting home with multiple living areas. 

The property will require refurbishment budgeted at US$56,000 including, re-texturing and painting walls and ceiling, new cabinets in the master bath and laundry, repairs to masonry, cracks and some minor roof plumbing on the back porch.
 
The Thunder Road

The property is conveniently located just off the intersection of the North Dallas Tollroad and the LBJ Freeway. It is minutes from the Addison business district and the up market Galleria Shopping centre with 200 stores and restaurants including an ice rink and The Westin Galleria Hotel. 

The property is a spacious single story house.  It has four bedrooms, three living areas and three bathrooms with a lap pool, two car garage with a mature neighbourhood close to private and public schools.  It is a 288.6 sqm home on a 1,404 sqm block and was purchased for US$463,500 predominantly using debt funding with the special purpose vehicle providing approximately 20% of the required equity. 

Thunder Road has previously been refurbished using poor quality workmanship and cheap appliances. The JV will refurbish the property by doing extensive roof repair work, removing poorly installed crown moulding, opening up the kitchen into the living area, remediating poorly sealed areas of the property, new landscaping and refinishing all the bathrooms with new flooring and lighting. Other work will include re-texturing and painting walls and ceilings, installing new cabinets in the master bath and laundry, repairs to masonry and some minor roof plumbing on the back porch. The total cost of the refurbishment is estimated to be US$78,000.
 
The intention is to hold the properties for three to five months over which time we will make improvements and refurbish the properties for resale.   The upgrading and repositioning of these properties is expected to generate returns of at least 12%+ on sale on our invested equity.

Diversifying into apartment complexes

The next stage of USR’s strategy is to diversify into apartment complexes and during the quarter we have been reviewing various investment options.  The fund is seeking 100% ownership or enhanced equity partnerships in apartment complexes with 50 apartments or more with targeted deal size of USD8m - USD12m. USR has three partners searching for assets that meet its criteria and currently have offers out on several complexes.

The objective is to generate attractive returns for shareholders and diversify the portfolio using an efficient capital structure. The fund is targeting yields of 8% to 10% with an IRR of 12% to 15%.

Market update

The US housing market continues to remain strong despite global uncertainties.  Importantly, USR are seeing evidence of recovery in its preferred locations with Dallas home values 15 percent above 2007 peak.   

Following the global uncertainty in Greece and in China, the US dollar has strengthened against the Australian dollar.  USR holds all of its assets unhedged in USD which will have a favourable impact on fund returns.  



US Economy

Second quarter economic growth was weaker than expected, and its composition presents a less optimistic outlook for the rest of the year. The first quarter growth was essentially offset in the second quarter, by a drop in non-residential investment in equipment and structures. 

These factors, coupled with continued headwinds from a strong dollar and renewed declines in crude oil prices, are expected to continue to pose challenges in the current quarter, although consumer and government spending will likely provide support. 

Housing also is expected to contribute to 2015’s growth, with year-to-date main housing indicators staying well above year-ago levels.

Job creation remains steady, with full-time employment getting closer to pre-recession numbers, and household net worth continues its gradual rise.

Home sales have trended up and inventories are lean, supporting strong home price appreciation. Given significant uncertainties from Greece and China, continued global monetary easing, and an expected slow pace of monetary tightening by the Fed, the expectation is that at worst mortgage rates will rise only gradually through next year. 
 

Rental markets

The July US Census Bureau report showed that rents are soaring and vacancies in the US have plummeted to their lowest level since the mid-’80s. 

In addition is would seem that the millennial generation is moving out of their parents’ basement and into apartments or rental homes as they look to get themselves settled before buying a home. 

As a result recent data shows that household formations when compared to last year are surging. 

 

Dallas-Fort Worth, Texas 

Demand for rental accommodation continues to top. As a result, occupancy is increasing across the Dallas Fort Worth Metroplex and landlords are increasing rents as occupancy levels are at their tightest since the mid-2001.                                    
 

Houston 

Rental property demand surged during 2nd quarter 2015, with occupancy at a 13-year high. With such solid occupancy, landlords are raising rents. Year-over-year, rents were up for the ninth consecutive year.
 

Atlanta

Rental property demand continued to climb in response to a strengthening local economy. In turn, occupancy increased quarter-over-quarter and year-over-year. As a result rents jumped in key locations by approximately 7.3%.

 

 Cleveland 

Demand for rental accommodation in Cleveland continued to strengthen during the quarter as a result occupancy was among the highest seen since the recession. As occupancy gained momentum, landlords pushed rents resulting in a 3.0% increase year-over-year.



Summary

Our period since listing has been very active for your fund and many opportunities lie ahead as it pursues its three pronged strategy to deliver attractive returns through investment in the US residential property sector.

 In particular this quarter the Fund is looking to further expand its strategic repositioning and upgrade of single family homes for re-sale in conjunction with diversifying into apartment complexes.

We remain positive on the US property market which we believe will continue to provide us with strong residential market opportunities.
We look forward to keeping the market updated with the progress and initiatives being undertaken to deliver attractive shareholder returns as our activities progress in the coming months.