Liquidation – 40%+ Upside
URF is an externally managed REIT listed in Australia with multifamily residential assets in NJ and NY. The company is liquidating and seems to be gradually returning the proceeds to shareholders through buybacks. The stock trades at 50%+ discount to NAV (post-tax NAV at A$0.63). The main risks are a prolonged timeline of the liquidation/asset sales as well as the uncertainty of the realizable value of the properties. Nonetheless, the margin of safety seems to be sufficiently wide. I’ve previously covered the situation in July 2022. Since then, several positive developments have taken place:
- The company got rid of the preferred stock overhang by converting it into common stock.
- URF replaced its previous internalized management by entering into an externalization agreement with Brooksville/Pinnacle. While G&A savings are expected to be minimal, the agreement has improved alignment with shareholders. As per the press release, Brooksville will be required to deliver approximately A$0.40 per unit + 8% IRR in liquidating distributions before any incentive fees kick in (25% of all distributions above this threshold). This clearly incentivizes Brooksville/Pinnacle to progress with the liquidation, otherwise, the +8% IRR threshold will eat into their incentive fees.
- Another big positive is that the company has been ramping up share buybacks lately, which at the current 50% discount to NAV are very accretive. In March’23, the company announced a new 25% capital return program and since then has already repurchased 1.9% of outstanding shares. The company is buying shares almost every day.
Despite all of this, the discount remains wide. This is partially explained by the risks of prolonged asset disposals as well as exposure to the slowing U.S. residential market. Asset sales have been very slow during 2022 – only US$26m of properties were divested during the whole year and only US$8m in Q4 (this compares to US$311m NAV). However, that was before Brooksville/Pinnacle’s appointment to manage the process, and asset sales might have also been put on hold while negotiations were ongoing during Q2-Q4. I would expect property disposals to pick up materially during 2023. FFO (excluding disposal costs and one-off items) seems to have stabilized close to breakeven levels, so there should be minimal NAV deterioration from operations while the liquidation is ongoing.
There is also a risk that the slowing U.S. multifamily market could negatively affect URF’s asset sale prices and pull down NAV. URF reassesses the value of its portfolio two times per year and the balance sheet value of the company’s properties is supposed to reflect the actual fair market value of the assets. In the latest valuation exercise at the end of 2022, specific appraisals were obtained on 55% of the portfolio while the rest of the properties were adjusted accordingly. This resulted in an unchanged valuation of the properties during H2 2022, which is a bit surprising given the reports about the slowing U.S. multifamily market. Remains to be seen if assets disposals will also be carried out around the indicated book values.
In order to start losing money at the current URF share price levels (i.e. for NAV to drop below $0.3/share), the value of the properties would need to decline by 22%. That seems like a sufficient margin of safety. The continuing daily buybacks in the open market are accretive to NAV/share. Any announcements of successful property sales at book value should drive URF shares higher.
Are renovation and transaction costs factored into NAV? This was kind of unclear to me.
The reason I sold this stock was that between potential renovation and transaction costs + cash burn while they are selling, there is not much margin of safety here. And pace of sales seems kind of slow, will take more than a decade at this rate. So CAGR isn’t going to be great.
If the whole thing is sold very close to NAV within 2 years, then yes this is cheap. Otherwise it seems pretty fairly valued. The longer it takes to liquidate, the larger the discount to NAV should be.
I doubt that they explicitly include renovation costs in the NAV. However, their method is a comparable asset valuation that takes into account the property age and condition.
Check page 36 of the annual report.
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02646991-2A1439316?access_token=83ff96335c2d45a094df02a206a39ff4
How substantial do you think renovation costs could be here?
Regarding the cash burn, after the recent cost cuts, the company is already close to breakeven. The pace of sales is my main concern as well. Hopefully, with Brooksville at the helm, the process will pick up speed.
Renovation costs seem to be 0.5-1% of their total asset value. But this is possibly biased to properties that are about to be sold soon?
Re: transaction costs, page 21 seems to imply it is included in the NAV calculation.
Re: pace of sales, because of geographical concentration and since there are no meaningful economies of scale leasing these properties out (reason for liquidation in the first place), it is harder to offload a large number of properties at once.
This article implies a 10-20% discount when sold in bulk:
https://finance.yahoo.com/news/investors-buying-homebuying-cools-131902326.html
Say that $50m is sold over the next 2 years, and then the remaining amount is sold in bulk for a 10-20% discount to a few large buyers. Fees to Brooksville would be ~10-25m. CAGR to URF holders would be aprox 15-25% depending on costs along the way and liquidation fees.
This assumes flat housing prices though. So given the bulk discount thing, there isn’t a whole lot of room for prices to fall here.
“In order to start losing money at the current URF share price levels (i.e. for NAV to drop below $0.3/share), the value of the properties would need to decline by 22%. That seems like a sufficient margin of safety. The continuing daily buybacks in the open market are accretive to NAV/share. Any announcements of successful property sales at book value should drive URF shares higher.”
I think the above is based on the property values at 647m less liabilities of 519m.
What then does the 949m of “investment properties” on the balance sheet as at 31-Dec-2022 represent per the annual report?
Thanks
Investment properties represent the value of URF’s RE assets. A$918m investment properties and A$31m investments held for sale. Property value would have to drop 20%-30% for the NAV to equal current stock price of URF.
Could you clarify where are you getting the ‘property values at 647m less liabilities of 519m’ from?
The 647m came from page of the document linked by the words “valuation exercise” and the Liabilities from their chart in the same document on page 13. However, that isn’t correct/doesn’t make sense now that I reflect on it.
I think you got your 22% decline by ‘solving’ for the asset value assuming NAV of property at 949m, NAV of property per unit of 0.30, units outstanding of ~750m and Liabilities of 518m?
NAV of Property per Unit = (Property Value – Liabilities) / Units outstanding
Rearranging that means NAV of Property at 744.1 m results in NAV of Property per unit of 0.30, and therefore a drop of ~22% (949m – 744.1m/949m)?
Have I now understood your comment that “In order to start losing money at the current URF share price levels (i.e. for NAV to drop below $0.3/share), the value of the properties would need to decline by 22%”?
Apologies, I realize this is elementary school stuff but without the calculation spelled out I didn’t really understand the basis of the comment given this is the first time I’ve read about a REIT along with the accompanying jargon etc.
That’s correct.
The potential new Responsible Entity (RE):
“The focus is on maximising returns to investors and implementing strategies to narrow the discount to NTA through a combination of special distributions, a robust buy-back strategy in line with asset sales.”
https://wcsecure.weblink.com.au/pdf/URF/02671434.pdf
To me this is very positive news.
There hasn’t been much follow up commentary on this idea in many months. I was wondering if you had an updated view on this idea DT?
I am still looking at this from time to time, so will share my thoughts. There’s not much new to report really.. Post-tax NAV is now at A$0.58/share, so similar (large) theoretical upside remains in full liquidation scenario. However, the asset sales are clearly lagging, which I assume means that either management is struggling to sells the assets close to NAV or that the process is getting lagged intentionally so that execs can collect salaries for longer.
URF sold US$54m of assets in 2023 and at least the positive was that these sales happened in the with the BV. US$150m sales (vs US$787m investment property value) are targeted for 2024. Management emphasized it’s not a forecast. Cashburn/FFO is around A$11m per year. The risks remain the same – potentially prolonged timeline (seems more likely now) and the uncertainty of the realizable value of the properties.
Real estate transactions were very slow in general in 2022/2023 and early 2024, so it was not specific to UAF.
I think transaction volumes are picking up now that interest rate expectation has stablished, and it’s generally agreed that U.S. multifamily prices have already bottomed.
However, URF stock price has also responded to the improved sentiment, increasing 25% from $0.28 to $0.35 in the last two months, while AUD has also been appreciating against USD.
Based on the Q3 report, URF should be able to hit the US$150m sales target for 2024.
Sales are picking up speed.
Anyone still holding this? Curious if you have a different perspective.
Asset sales really gained momentum in the second half of last year, which is great to see. Management hit their US$150m sales target for 2024, with nearly US$100m sold in Q3 and Q4. These don’t seem like fire sales just to hit guidance—they were done at book value. As of Dec 31, 2024, URF holds about US$450m in properties and has a US$156m sales pipeline. Management is now guiding for US$200–225m in sales for 2025, which suggests the liquidation could wrap up by late 2026 or early 2027.
The unaudited NAV as of Jan 17 sits at A$0.59/share, implying 40% upside at face value.
However, the company is bleeding cash and facing hefty transaction costs (6–9%). Just on the remaining properties, transaction costs could hit around A$50m. There will also be some additional cash burn, liquidation expenses and maybe manager’s performance fee, etc. At total costs of around A$80m, the NAV would drop to A$0.47/share, which doesn’t leave much upside from current levels.
So, am I missing something here, or is the market pricing in the expectation that the remaining properties will sell at a significant premium to book value?
i dont think you are missing anything. this looks pretty fully valued, to me (unless there is some residual australian tax benefit from the NOLs or something in the US, which I dont think there is, just speculating).
it seems to me there are much better bets in other US RE exposed names (admittedly things like office reits, ie dodgier exposures) but ones offering similar or higher upside in % terms to liquidation NAV; are also being liquidated, but with less or no debt and generating substantial FCF whilst they liquidate. I am thinking of NLOP specifically but of course there are others.
Another update just came out:
1) The previously disclosed sales target of A$200-225m for 2025 was reaffirmed.
2) The US vehicle (previously structured as a REIT) has been reclassified as a C-Corp for US tax purposes. This allows historical tax losses to offset corporate tax liabilities during the asset sell-down, reducing overall tax exposure. However, post-2017 losses are capped at offsetting 80% of current taxable income annually.
3) Additionally, a formal plan of liquidation for the US entity is now in place, with a target completion date of December 31, 2028. Any assets unsold by that date will be transferred to the Australian-listed entity and taxed at the current US corporate tax rate (~32%). So it seems that the previously anticipated two-year timeline to fully wrap things up is no longer accurate.
4) As of June 30, 2024, the net deferred tax liability stood at US$30.3m. Under the new structure and liquidation plan, this figure is projected to drop to less than US$5m, provided all assets are sold within the liquidation period. That’s like A$0.064/share accretion to post-tax BV.
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02906252-2A1575043
I think Dec 2028 is more like a long stop date than management’s expected timeline.
Management’s sales guidance is more relevant for gauging the pace of liquidation.
Anyway, If we add A$0.064/share in tax savings to your post-cost NAV estimate of A$0.47/share, we get A$0.53.
Discounting that at 15%/year for two years of time value , the present value is around A$0.40.
Thanks for the updates and commentary.
Do you think the ongoing buybacks will result in a materially greater per unit liquidation value than the estimated AUD 0.53 (0.47 + 0.06 = 0.53) per unit? If so any estimates on where it could end up?
I think the accretion from buyback can be substantial.
Previously, the repatriation (from US to AUS) and buyback were put on hold awaiting more clarity on the tax situation.
Now that the issue has been resolved, URF can resume buybacks, and possibly very aggressively.
US$40m (5.8 US cents or 8.9 AUD cents per share) has been repatriated from US to Australia in late June.
A special dividend of 10 AUD cents per share has been paid (ex date July 8).
However, the dividend was not classified as foreign conduit income.
Unaudited NAV after tax as at 27 June 2025 was A$0.566 per unit, based on AUDUSD of 0.6529 and unaudited monthly NAV of A$0.574 (or US$0.369) at 31 May 2025.
For those still in this I would like to share my expected return for discussion/critique. If any of you have any general lessons/resources/experiences in REIT liquidations that you would like to share it would be much appreciated. I have come across a few REIT liquidations and my special sits portfolio is nearly empty. However, I don’t want to go all in on a few REIT liquidations due to my lack of knowledge and experience hence my appreciation for lessons/experiences in the area.
With regard to URF (AUDm)
NAV Forecast:
BV/net assets 30-Jun-25 372.88
Book Value of Properties 478.66
Transaction Costs Est -38.29 (assumed to be 8% of Book Value of Properties)
Target Sales 2025 307.46 (assumed USD 200m)
Time to Completion from 30-Jun-25, 1.56 Years (BV of properties divided by 2025 annual sales target i.e. 478.66/307.46)
Ongoing G&A -15.57 (Assumed AUD 10m annually for time remaining based on the following: “The Group recorded an unadjusted FFO loss of A$27.2 million for the 2024 calendar year. After excluding disposal costs and other one-off items, the Group’s adjusted FFO loss was A$8.4 million, representing an increased loss of A$1.8m when compared to the 2023 calendar year. “)
Liquidation/Other Costs -10.00 (I would love some science around how liquidation costs could be calculated as I have no idea, and in small liquidations it can literally represent the margin of safety)
NAV 309.02
Units 688.79
NAV/unit 0.449
Dividend 8-Jul-25/unit -0.10 (adjustment as not accounted for at 30-Jun-25)
NAV/Unit AUD 0.349
Current Price 0.285
Upside 22.3%
Est Completion Date 19-Jan-27
Time to Completion from today 1.20 Years
CAGR 18.2%
Notes:
AUD:USD 0.65
I hope I was able to format the above so it is readable.
I wonder if my methodology is simplistic and it doesn’t account for certain aspects of REIT liquidations I am unaware of.
Overall, I think this one still represents a good risk/reward, but look forward to getting the perspective of more experienced investors.
Thank you for this. The assumptions look reasonable at a quick glance and are broadly in line with my own view from the beginning of the year, except that the upside has increased and the timeline has narrowed. The timeline is probably the main question here. How confident are you that the same pace of selling can continue? Liquidations usually take longer than expected. I know this one has already dragged on for a long time, but management’s incentives are typically to prolong the process further in order to extend compensation payments, etc. So assuming they’ll maintain the maximum selling pace right through to the end and wrap everything up quickly seems a bit optimistic. They could find ways to stretch it out for another year.
Also – is there a reason for the share price decline from Q1 2025 (aside from the dividend payment)?
Thanks for the fast reply Ilja, it is much appreciated.
I don’t really know if the pace of selling is sustainable or not. That said, since the shake-up driven by JR management seems to have acted in the best interests of unitholders (rare I know!).
If it does get prolonged, I am assuming that it will only be a relatively small number of properties that will remain to squeeze out more compensation, but over the next year material amounts of capital will still be returned to shareholders, thereby mitigating the impact on IRR.
I don’t even fully understand how compensation structures work with REITs, but if I recall correctly they got rid of the ‘external manager’ and reduced management costs by bringing the function in-house. From what I can see in the 2024 annual report, remuneration of $276,806 was paid. That seems low relative to any other publicly listed company I’ve seen. Perhaps a savvy board might say you get a bonus of x if you get it all done by YE 2026, but I’m not sure if that is permissible.
As for the share price decline, I think post-dividend it was trading at 0.32/unit for quite a while. Savvy investors (see above) saw it as fairly valued and took their capital to opportunities with a better return. At 0.32 it appeared to offer a low risk, low return opportunity (~7.5% CAGR with my assumptions above). For me, I am heavy in cash, so anything that offers a low risk and uncorrelated return is acceptable until better opportunities are found to redeploy the capital — that’s my reason for holding. That said, at 0.28 it seems a much better proposition than 0.32.
Also, I believe Samuel Terry Asset Management is still holding. If anyone can find a better risk/reward I am sure they can. The fact that they are holding implies that the pace of selling ought to be maintained and the IRR acceptable to a firm with a stellar record? Irrespective, unless I am making a big mistake URF looks like a low risk of losing money situation.
I noticed that they recently bought back for the first time in several months (17-Jun25 was the last buyback announcement I can see). I don’t think there was any timing constraint on them buying back, therefore given the recent price decline the buyback seems opportunistic and value accretive. While the dollar value was very small relative to market cap, at least there appears to be an active and opportunistic mindset behind the repurchases.
https://www.usmastersresidential.com.au/wp-content/uploads/2025/11/2986277-compressed.pdf
Based on this they met the lower sales target range of USD 200m for the year by 31-Oct-25, a big positive.
Consulting ChatGPT it is adamant I should have also include Investment Property Expenses (costs related to vacancy/holding) which are distinct from G&A, the the disposal/transaction costs. These costs were AUD 9.3m YTD 2025 (i.e. AUD 3.1m/Q). Including these reduces NAV by another AUD ~16m.
Do you agree with ChatGPT on the inclusion of Investment Property Expenses (costs related to vacancy/holding)?
Thanks
I believe investment property expenses should be deducted from NAV since, as you note, they are separate from G&A and investment property disposal costs. Assuming these properties remain vacant until liquidation is completed, these expenses will continue to accrue. If the properties are leased, my understanding is that the cost would be reflected in G&A.
If we reduce NAV by A$0.023/share or A$16m (your estimate of investment property expenses till Jan 2027), then the IRR is not very attractive from A$0.29/share.