Property Acquisition Management (PAM) is to be the first split capital closed-end fund launched in t...
Property Acquisition Management (PAM) is to be the first split capital closed-end fund launched in the UK.
The fund, domiciled in Guernsey, is in the process of acquiring the UK-based property company CNC Properties with the intention of completing in the middle of June. CNC Property will make up the majority of PAM's portfolio.
To buy the company, PAM has raised £78m worth of equity. Some £58m of geared ordinary shares have been placed yielding 9.5%. The balance is made up of £10m of convertibles yielding 8.5% and £10m zero dividend preference shares with a gross redemption yield of 9%. Although the fund has a split capital structure it does not have a fixed life. The zero shareholders will be repaid 154p in five years time. One of the company's strategies will be to take-over other property companies. If further capital is needed the fund will issue more geared ordinary paper.
Collins Stewart, corporate brokers to the deal, said the fund will find it easy to issue more paper if, like many other split capital funds, it trades at a premium to NAV. The total market cap of the fund will be around £215m. As well as the £78m raised in equity the fund has secured £36m of bank borrowings. CNC has upgraded its borrowing facility from £80m to £100m.
CNC will invest £155m of the funds in property while the remaining £60m will be run by Paul Reed, head of fixed interest at Aberdeen Asset Management. The bond portfolio is being run to provide some additional yield, but mainly as an alternative to holding excess cash.
CNC will continue with its strategy to target high yielding investment opportunities of around 11%. Yield for property is calculated by dividing rent by property value. The higher the yield the more distressed the property. Office space in the centre of London usually has a yield of between 4-7%.
While higher yielding property carries higher risks, CNC has increased its net assets from £4m in 1992 to £75m in 1999. According to HSBC, over the five years to 31 December 1999 the company has produced an annual total return of 23.5%.
During the period it was one of eight property companies out of a total of 80 to outperform the FTSE All-Share, which provided a total return of 21.3%pa.
The fund is based in Guernsey due to tax benefits, which can come into play when PAM acquires other property companies. PAM will be tax exempt and pays no income or capital gains tax. If it buys a UK company with remaining capital gain liabilities, these will then be wiped out.
CNC's current portfolio split will remain unchanged with large weightings in industrial, office and leisure properties which are equally spread around the country.
Roger Alcock, non-executive chairman of PAM, said: "The acquisition of CNC has given us the opportunity to create a fund which offers investors the benefits of broad exposure to the property sector, from a company with a proven track record, combined with a high yield within a tax efficient structure."
Despite improved risk appetite
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Ceremony will take place 13 November