Siddharth Rajeev, B.Tech, MBA, CFA
Analyst
Alexander Changfoot, BSc, MM
Associate
July 19, 2012
ICM VI Realty Trust – Investment in cash flowing commercial properties in the southeastern U.S.
Sector/Industry: Real Estate
Summary of the Proposed Offering
Issuer
Offering
Unit Price
ICM VI Realty Trust
Minimum Offering: $2,000,000 /
Maximum Offering: $50,000,000
Class A Units:
On or before August 31, 2012 - $9.45
Between September 1, 2012 and
November 30, 2012 - $9.70
From December 1, 2012 until Final
Closing - $10.00
Class B Units:
On or before August 31, 2012 - $8.80
Between September 1, 2012 and
November 30, 2012 - $9.05
From December 1, 2012 until Final
Closing - $9.30
Class A Units: $10,000; Class B Units:
Minimum Subscription
$500,000
Management
Compensation and
Acquistion fee
Fees
a.1.5% of the purchase price of a
Property
Management fees
a. 7.5% per annum of the Net Operating
Income
b. 20% of the distributable cash after Class
A and B unitholders receive cumulative
distributions equal to their invested capital
plus an 8% return
c. 50% of the distributable cash after Class
A and B unitholders receive cumulative
distributions equal to their invested capital
plus a 12% return
d. Manager will receive compensation up
to $5,000 p.a.
Class A Units: Selling agent commission:
7.0% and an annual serving fee from the
Selling Commisions
date of Initial Closing of 0.5% / Class B
Units: No selling agent commissions
FRC Rating
Base-Case Return (IRR) N/A
Rating
2- (Very Good)
Risk
3 (Average)
*see back of report for rating and risk definitions
 2012 Fundamental Research Corp.
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Investment Highlights
-
-
-
-
ICM VI Realty Trust (“the Trust”) is an open-ended private real
estate income trust. The trust was formed in February 2012 by
ICM Realty Group, which was founded in 2003. The
management team is highly experienced with a solid track
record.
The trust intends to invest primarily in medical office buildings
and grocery anchored neighbourhood shopping centers located in
the southeastern U.S. (mainly Georgia, Texas, Florida and North
Carolina).
We have a positive outlook on the trust’s target property types in
the four states. We expect Texas to experience the strongest
growth among the four states.
The trust anticipates making distributions on a quarterly basis.
The trust has identified a medical office building in Atlanta,
Georgia as a potential acquisition target.
Management’s goal is to provide at least 8% annualized returns
to investors. Our analysis indicates that the medical office
building identified for acquisition has the potential to generate
approximately 10% p.a. for investors.
Risks
-
Delays in acquisition, sales, etc. may negatively affect returns to
unitholders.
Real property investments tend to be relatively illiquid.
Investors are not guaranteed minimum distributions, or return of
capital.
Although the trust intends to focus on medical office buildings,
and grocery anchored neighborhood shopping centers, it is a
blind pool and management has discretion on what to invest in.
Timely deployment of cash.
A 10% redemption fee will apply if redeemed prior to the
termination of the fund (expected termination date is March
2023).
Like most offerings, dilution risk exists as the number of units
that the Trust is authorized to issue is unlimited.
A minimum of $2 million must be raised to commence
operations.
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Background
and Terms of
the Offering
ICM VI Realty Trust (“the Trust”) is an open-ended real estate investment trust. It is the
intention of the trust to qualify as a mutual fund trust in order to be eligible for registered
plans. As the trust is open-ended, it can continuously issue units. Unitholders will be eligible
to redeem their units quarterly (a 10% redemption fee will apply if redeemed prior to the
termination of the fund). The fund is expected to hold a diversified portfolio of real property
assets and anticipates using up to 65% leverage for acquisitions. The objective of the trust is
to provide income and capital appreciation through investments in properties located in the
“Sunbelt” region of the U.S. (including, but not limited to, Nashville, Charlotte, RaleighDurham, Jacksonville and Houston). Management has indicated that the trust will
primarily focus on medical office buildings and grocery anchored retail shopping
centers. The trust will also consider multi-residential properties should suitable
opportunities arise. Currently, the trust has identified a real estate investment within the
Atlanta metropolitan area in the state of Georgia as a potential acquisition target. Below is a
summary of the units offered:
Summary of the Proposed Offering
Issuer
Offering
ICM VI Realty Trust
Minimum Offering: $2,000,000 / Maximum Offering: $50,000,000
Securities Offered
Class A Units and Class B Units with a total combined value of $50,000,000
Unit Price
Class A Units:
On or before August 31, 2012 - $9.45
Between September 1, 2012 and November 30, 2012 - $9.70
From December 1, 2012 until Final Closing - $10.00
Class B Units:
On or before August 31, 2012 - $8.80
Between September 1, 2012 and November 30, 2012 - $9.05
From December 1, 2012 until Final Closing - $9.30
Minimum Subscription Class A Units: $10,000; Class B Units: $500,000
Expected Time
Management
Compensation and
6 years
Acquistion fee
a.1.5% of the purchase price of a Property
Management fees
a. 7.5% per annum of the Net Operating Income
b. 20% of the distributable cash after Class A and B unitholders receive
cumulative distributions equal to their invested capital plus an 8% return
c. 50% of the distributable cash after Class A and B unitholders receive
cumulative distributions equal to their invested capital plus a 12% return
d. Manager will receive compensation up to $5,000 p.a.
Offering Costs
2.5% of the total amount raised from the offering
Selling Commisions
Class A Units: Selling agent commission: 7.0% and an annual serving fee from
the date of Initial Closing of 0.5% / Class B Units: No selling agent
commissions
Auditor
MNP LLP
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The head office of the trust is located at 114 276 Midpark Way SE, Calgary, AB.
Purpose
The purpose of this report is to analyze the potential risk/reward profile of the units offered
by ICM IV Realty Trust.
Why Invest in
Real Estate?
The following factors are some of the benefits of adding real-estate investments to an
investment portfolio:
Diversification: Real estate offers significant diversification benefits to an investment
portfolio. As seen in the chart below, the level of correlation between private real estate in
relation to mid/small cap stocks and large cap stocks is 0.17 and 0.28, respectively. Also,
there has been negative correlation (-0.23) between private real estate and U.S. government
bonds.
The low or negative correlation between private real estate and stocks/bonds indicates there
is potential to lower portfolio risk, and improve the risk-return ratio, by adding real-estate
investments to a portfolio.
Source: NCREIF; Merrill Lynch; Wilshire 4500; Standard & Poor’s 500; CBRE Investors
2009
High risk-adjusted returns: Returns and standard deviations calculated are sensitive to the
time period chosen, however, we have found retail developments offer one of the best risk
adjusted returns (compared to other direct real estate investments).
Below is a chart illustrating the risk adjusted returns on different real estate options over a
large and, relatively, up to date interval. Over the same period, the S&P 500 had an average
return of 11.4%, standard deviation of 17.8% and a return per unit of risk of 0.64; which is
far below the risk adjusted return of retail or office real estate investments.
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Property Type Characteristics (Q1 – 1978: Q1 – 2010)
Source: NCREIF, LaSalle Investment Management, August 2009, Marquette Associates Oct
2010
Tax benefits: Real estate investments may offer tax deductions, through property
depreciation, potentially offsetting the tax implications of the income received.
Interest rates: Interest rates are still at historically low levels. As a result of this, we believe
that the trust should be able to secure relatively cheap rates in the near term, allowing for
better leveraged returns. The graph below shows some key historical bank rates and
illustrates the currently low levels. On July 17, 2012, the Bank of Canada (BOC) announced
that it is maintaining its overnight rate at 1%. We expect the BOC to maintain low interest
rates over the next 12 – 24 months to stimulate Canada’s economic recovery.
Source: Bank of Canada
ICM will most likely attain a loan from a U.S. based financial institution. Just like Canada,
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interest rates in the U.S. are at historical lows and are expected to remain low over the next
12-24 months – which will benefit ICM for its acquisitions.
Leverage: Real estate investments typically offer high leverage potential whereby a
property can be purchased or built with a cash outlay much less than the value. The benefit
of leverage to investors is the magnification of returns (including losses). Most investments
do not offer the ability to leverage as much, or as easily, as real estate investments.
Investment
Objective and
Strategy
The objective of ICM VI Realty Trust is to profit from the acquisition, holding, and eventual
disposition of a portfolio of revenue producing commercial real estate properties in the
Sunbelt region of the U.S.
The trust intends to:
-
generate an annual yield of at least 8% p.a. for unitholders paid quarterly; and
achieve capital appreciation through eventual sale of assets
The trust’s objective is to deliver a total return of 12 – 15% p.a. for unitholders over an
anticipated hold period of six years.
Asset Mix
Management has indicated to us that there are no set percentages on how assets will be
allocated geographically in the United States; however, the trust intends to focus on
secondary and tertiary markets in the Sunbelt area. Management stated that the asset mix
will be primarily dependent on the ability to identify profitable projects regardless of the
area that they are located in. As mentioned earlier, the trust intends to focus on medical
office buildings and grocery anchored neighbourhood shopping centres which are wellknown as defensive sectors as they are less volatile. Defensive sectors perform better than
the market during recessionary times, but not as well during expansionary times.
For example, as a result of the 2008/2009 recession, the S&P 500 declined by 56% (from the
peak in October 2007 to the bottom in March 2009), whereas the S&P Consumer Staples
Sector and the S&P Healthcare Sector declined by just 30% and 40%, respectively, during
the same time period. However, these sectors have not performed as well as the S&P 500
post-recession. Since March 2009, the S&P 500 is up by 101% to date, whereas the S&P
Consumer Staples Sector and the S&P Healthcare Sector are up by only 80% and 78%,
respectively.
The Sunbelt
States
The picture below shows the Sunbelt region of the United States.
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Source: University of Texas
The Sunbelt region consists of the following states: Alabama, Arizona, California, Florida,
Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, South Carolina, and
Texas. ICM’s main focus is on Georgia, Florida, North Carolina and Texas – however,
they will be considering other states should suitable opportunities arise. The following
section discusses our outlook on the key target states.
Real estate investment opportunities depend primarily on the following key factors - GDP
Growth, Population Growth, Unemployment Rates, Income Per Capita, Capitalization Rates
and Vacancy Rates. We now take a look at each of these factors
GDP Growth
The following chart shows the real GDP growth rates, historical and forecasts, of the four
target states and the U.S.
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Source: US Bureau of Economic Analysis, JP Morgan Chase, Wells Fargo
The chart above shows the gradual economic recovery in the U.S. since the recession in
2008/2009. Texas is expected to grow at a much faster pace than the other three states
and the national average.
Population Growth
As seen in the chart below, population growth in the United States, and the four target states
are expected to slow down in the next two decades compared to the period 1990-2000.
However, it is important to note that all four states are projected to have higher
population growth in the current decade than the national average – which is a positive
sign for real estate investments.
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Source: US Census 2010, State of Florida, State of Georgia, State of North Carolina, Texas
State
Unemployment Rate
Unemployment Rate (%)
Unemployment (%)
12
10
8
2008
6
2009
2010
4
2011
2
0
FLORIDA
GEORGIA
NORTH CAROLINA
TEXAS
UNITED STATES
Source: Bureau of Labor Statistics 2011
An important factor to consider is the unemployment rate as it gives an indication of the
strength of an economy. As seen in the chart above, Florida, Georgia and North Carolina
have a higher unemployment rate than the national average. Texas has a lower
unemployment rate and higher GDP growth forecasts than the national average, and
therefore, is in a much healthier position.
Income Per Capita
As shown in the chart below, in 2010/2011, all four states had lower income per capita than
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the national average. However, it is an encouraging sign that the income per capita grew
YOY in 2011 in all four states. Among the four states, Texas had the highest growth of
4.9% versus the national average of 4.3%.
Source: Bureau of Labor Statistics 2011
Capitalization Rates
The capitalization rate is the rate of return on a real estate property based on the expected
income it can generate. Below we outline the capitalization rates for office and retail
buildings in the target areas.
Office Buildings
We compiled the capitalization rates for office buildings in the major cities of Texas,
Florida, Georgia and North Carolina below (average of Class A, Class B and Class C office
buildings). From the chart, we can see that most of the cities have higher capitalization
rates than the national average, indicating that office buildings in the selected markets
have the potential to generate higher expected returns than the national average.
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Source: Avison Young, Cushman & Wakefield, CBRE, REIS
Retail
In this section, we compiled the capitalization rates for retail real estate in the major cities of
Texas, Florida, Georgia and North Carolina. From the chart, we can see that all the cities
have a similar capitalization rate to the national average, indicating that retail real estate in
the selected markets are performing in line with the national average.
Source: Avison Young, Cushman & Wakefield, CBRE, REIS
Vacancy Rates
Vacancy rates indicate the demand for a property type in a specific area. Below we outline
the vacancy rates for office and retail buildings in the target areas.
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Office Buildings
As shown in the chart below, Miami, Charlotte, Raleigh, Houston and Austin have a lower
vacancy rate than the national average, indicating that there is more demand for office space
in these cities than the average U.S. city. It is important to note that all the cities depicted
(except for Charlotte) have declining vacancy rates – indicating that demand for office
space is growing.
Office Vacancy Rates
25.00%
Vacancy Rates (%)
20.00%
15.00%
10.00%
5.00%
0.00%
Jacksonville
United
States
Miami
Palm Beach Atlanta
Florida
Georgia
Charlotte
Raleigh
Austin
Dallas/Fort Houston
Worth
North Carolina
2011
Texas
2012
Source: Avison Young, Cushman & Wakefield, CBRE, REIS
Retail
As seen in the chart below, all of the cities have a higher retail vacancy rate than the national
average. Jacksonville, Miami, Charlotte, Raleigh, and Austin have a declining retail
vacancy rate indicating that there is a growing demand for retail space in these cities.
Note that ICM will be focusing on grocery anchored retail properties. Our research
indicates that grocery anchored retail properties tend to have lower vacancy rates than
other retail properties. This is because grocery stores typically have higher frequency of
recurring consumer traffic; making the other store locations in the property/building
attractive.
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Source: Avison Young, Cushman & Wakefield, CBRE, REIS
Conclusion: To summarize, our research indicates that ICM’s target cities/states are
recovering and expected to continue recovery at a modest rate. Our top pick is Texas,
followed by Georgia, North Carolina and Florida.
Exchange Rate
Real-estate investments in the U.S. are more attractive for Canadians when the C$ (with
respect to the US$) is strong at the time of investment (which makes acquisitions cheaper in
US$'s), and weak at the time when the assets are sold. The C$ is expected to stay on par
with the US$ over the next 18 months (shown below), which we believe will benefit
ICM for its acquisitions. Our long-term outlook however, on the C$/US$ is 1.1 – which
should benefit ICM at the time of asset sales, as the holding period is expected to be 5-6
years.
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Management
Team
The trust was formed in February 2012 by ICM Realty Group. ICM, founded in 2003, is a
real estate advisory and asset management firm founded in Munich, Germany. ICM also has
offices in San Francisco, California and Calgary, Alberta. The company’s management
teams is highly experienced and has an excellent track record. Brief biographies of the
management team, as provided by the company, follow:
Bruce Timm, Managing Director
Mr. Timm has more than 20 years of experience in the international real estate investment
business. Mr. Timm began managing properties in 1991 with the North American real estate
division of the investment bank B. Metzler seel. Sohn & Co. KGaA, Frankfurt ("Metzler
Division"). Following the sale of the Metzler Division to TMW in 1996, Mr. Timm created
ProVictor Funds, a syndicated fund platform established in joint venture between
PROVINZIAL Rheinland Lebensversicherung AG and ERGO Trust GmbH. Under his
direction, over US$1.6 billion was raised in the German retail market between 1996 and
2003 for the acquisition of U.S. commercial real estate. In 2003, Mr. Timm founded ICM
and acquired the Metzler Division assets from TMW and continues to manage these funds.
ICM currently has assets under management of over $300 million. Mr. Timm is fluent in
German and English. Mr. Timm is a native of Calgary, Alberta, where he currently resides.
He received his Bachelor of Science in Finance from Brigham Young University in Provo,
Utah in 1983. He completed a year of studies at the RWTH in Aachen, Germany before
earning his Masters of Business Administration from Arizona State University in Tempe,
Arizona in 1986.
Spencer Y. Patton, Director Acquisitions
Spencer Patton brings over 20 years of diverse financial experience to ICM. Mr. Patton has
been active in business development, underwriting, management and fund raising activities
for both real estate and private equity transactions. Mr. Patton has held senior positions at
Songy Partners (Senior Vice President), Wells Real Estate Funds (Director/Senior Vice
President), The Walker companies (Chief Financial Officer and Director of Real Estate) and
Wachovia Bank. Mr. Patton was responsible for sourcing, securing, underwriting and
closing core, core plus, value added and development office, hospitality and mixed-use real
estate transactions across the United States. Additionally, he assisted in fund raising, asset
management, dispositions and capital planning. He has closed 27 transactions valued in
excess of $1.9 billion, in aggregate, and was engaged in numerous other real estate deals
across much of the United States. Mr. Patton has an MBA from Emory University, Goizueta
School of Business and a Bachelor of Sciences in Business Administration from Washington
and Lee University, Lexington, Virginia.
Jon Leavitt, Director Asset Management
Mr. Leavitt has been a member of the ICM Team since 2004. He has over 20 years
experience in asset management, acquisition and financing of real estate in the U.S. and
Asia. Mr. Leavitt is responsible for the asset management and leasing of ICM's U.S.
portfolio. Mr. Leavitt has served as asset manager for a number of leading real-estate firms
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including Eastdil Realty Inc., The O'Connor Group, Gate Capital LLC, Lehman Brothers,
Inc. and Belrad Group LLC. His experience includes the management of office buildings,
retail, industrial, hotels, acting on behalf of bankruptcy estates, the asset management of
commercial property loans and equity investments, including loans originated by CMBS
issuers, and the underwriting of commercial loans and equity investments. Mr. Leavitt has a
Masters of Business Administration from Darden School, The University of Virginia,
Charlottesville, VA and a bachelor degree from University of California, Berkeley,
Berkeley, CA.
Safet M. Sarich, Jr., Director Portfolio Management
Mr. Sarich has over 10 years of experience in the U.S. real estate industry. Prior to ICM, Mr.
Sarich spent 8 years working as portfolio manager for Sarich Properties, a multi-family
property management firm located in Chicago, IL. After his time at Sarich Properties, Mr.
Sarich developed advanced skills in real estate finance while working as a financial analyst
at Sitex Realty Group, a boutique investment firm focused on industrial properties in
Illinois, New York and New Jersey. Mr. Sarich joined ICM Group in January 2011 and has
been acting as a portfolio manager for ICM's current North American real estate funds. Mr.
Sarich completed his MBA from Northwestern University's Kellogg School of Management
with majors in Real Estate Management and International Business and has a Bachelor of
Arts in Political Science from the University of Illinois at Chicago. Mr. Sarich also holds an
Illinois Broker's License, has lived and worked internationally and is fluent in English and
German.
Matt Reynolds, CFA – Head of Capital Markets
Mr. Reynolds has been working in the North American capital markets for 12 years. Prior to
joining ICM in July, 2011, Mr. Reynolds worked for a major North American land
entitlement and development group with over $2.8 billion of assets under management.
During that time he was responsible for structuring transactions and sourcing capital in what
was previously considered a non-investment grade asset class. He worked with a broad
range of investors, including mandates with investment banks, institutions and insurance
companies and investment advisors. Previously he worked with Newport Partners, a major
investment management firm advising Canadian high net worth families and their related
business and real estate interests. Mr. Reynolds earned the Chartered Financial Analyst
designation in 2004 and received a Bachelor of Commerce from McGill University.
Gayle Frewer, Controller
Ms. Frewer has in excess of 30 years of experience in accounting and finance and has been a
member of ICM since its inception. She is responsible for all accounting, financial and tax
reporting activities of the funds and investments managed by ICM. Her responsibilities also
include cash and risk management.
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Management’s
Track Record
The following table shows the past performance of the assets that were acquired, managed
and sold under the management of the ICM team. According to this table, ICM generated an
average IRR of 15.4%.
Source: ICM
We verified the financial statements and other relevant documents of several projects
listed in the above table. We confirmed that the actual IRR, purchase price, sales price
and purchase date, for the projects we verified, were in line with the figures displayed
in the chart above
The following chart shows the assets that are currently being managed by the ICM team.
The estimated current value is $296 million, with an average IRR of 10%.
Source: ICM
Structure
Below is a chart showing the structure of the fund.
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Source: Company
The assets will be held in a limited partnership (ICM VI Property Investment LP) which will
be managed by the general partner (ICM VI Management LLC). The general partner has
unlimited liability and will assume the day-to-day operations of the partnership. The limited
partners will be entitled to share 99.99% of the assets of the Trust and the general partner
shall receive 0.01% of the assets. Instead of directly issuing units to limited partners
(investors), the partnership will issue units to ICM VI Realty Trust; which in turn will issue
units to investors. This is a common structure used in exempt market deals because of the
following benefits to investors:
-
Qualified Investments – The trust structure allows the units to be qualified investments
relatively easily (provided that the trust qualifies at all relevant times as a mutual fund
trust). This allows investors to place the investment within registered accounts.
-
Limited Liability – Similar to equity investments in a public corporation, investors are
only liable for their capital contributions.
There are multiple organizations that are involved with the business of the trust. A brief
description on each of them follows.
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ICM VI US Realty, LP – “Property REIT LP” - formed on January 27, 2012, under the
laws of the State of Georgia. This LP will purchase units of ICM VI Property Investment,
LP.
ICM VI Property Investment, LP – “Property Investment LP” - formed on January 27,
2012, under the laws of the State of Georgia. This LP will be investing in property holding
LPs which will in turn be holding the acquired assets.
ICM VI Realty Trustee Corporation – “Trustee”
ICM VI Management, LLC – “General Partner” - formed in Georgia on January 23, 2012.
ICM Realty Group Ltd – “Canadian Manager” - incorporated in the province of Alberta on
January 12, 2004. ICM Realty Group will be managing ICM VI Realty Trust.
Units Offered
The trust will be offering two types of units: Class A units (minimum subscription $10,000) and Class B units (minimum subscription - $500,000). The trust is offering these
units at different price ranges depending on when they are purchased. The following table
shows the price ranges.
Class A Units:
On or before August 31, 2012 - $9.45
Between September 1, 2012 and November 30, 2012 - $9.70
From December 1, 2012 until Final Closing - $10.00
Class B Units:
On or before August 31, 2012 - $8.80
Between September 1, 2012 and November 30, 2012 - $9.05
From December 1, 2012 until Final Closing - $9.30
The amount of units outstanding for each type will vary according to the purchase date. The
different pricing of the units is to encourage investors to purchase the units early.
The table below describes the total number of units to be raised.
Description of Security
Number Authorized to be Issued
Class A Units
unlimited
Number Outstanding
Number Outstanding
After Minimum Offering After Maximum Offering
$10.00 211,640¹
5,000,000 - 5,291,005¹
Price per Security
Class B Units
unlimited
$10.00 227,272²
1
Assumes all sales are of Class A Trust Units and are made at the initial offering price of $9.45
2
Assumes all sales are of Class B Trust Units and are made at the initial offering price of $8.80
Fees
5,000,000 - 5,681,818
²
There are a variety of fees associated with the fund. Below is a list of all the fees.
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Offering Costs
Selling Commisions
Management
Compensation and Fees
2.5% of the total amount raised from the offering
Class A Units: Selling agent commission: 7.0% and an annual serving fee
from the date of Initial Closing of 0.5%
Class B Units: No selling agent commissions
Acquistion fee
a.1.5% of the purchase price of a Property
Management fees
a. 7.5% per annum of the Net Operating Income
b. 20% of the distributable cash after Class A and B unitholders
receive cumulative distributions equal to their invested capital plus an
8% return
c. 50% of the distributable cash after Class A and B unitholders
receive cumulative distributions equal to their invested capital plus a
12% return
d. The Canadian Manager will receive compensation up to $5,000 p.a.
Overall, we believe that the fee structure is reasonable and is highly based on the
performance of the trust; thus, giving incentive for management to actively seek
worthwhile projects.
Management intends to purchase 1.0% of the total amount of units of the Property
Investment LP on the same terms as unitholders. Although we cannot speculate on whether
or not management will actually purchase the units, it will further align management and
investors’ interest if and when they do so.
Distributions
The distributions for unitholders are expected to occur every March 31st, June 30th,
September 30th and December 31st. The distributions will be as following:
-
100% to unitholders until they receive 100% of their net capital contribution plus a 8%
per annum cumulative simple return
-
80% to unitholders until they receive 100% of their net capital contribution plus a 12%
per annum cumulative simple return; the remaining 20% goes to the General Partner
-
Thereafter, 50% to unitholders and 50% to the General Partner
*Note: Management will receive 7.5% p.a. of the Net Operating Income every year
Redemption
Rights
Unitholders are able to redeem quarterly at a redemption price of 90% of the fair
market value of the trust units plus any third party expenses in connection with the
redemption (legal fees / transfer agent fees) until the termination of the trust. The intended
final closing date of the offering is March 31, 2013. Management intends to terminate the
fund 10 years after the final closing date. The maximum number of trust units that can be
redeemed at a time is limited at 10% of the total number of trust units in that quarter.
Management expects to have an initial cash reserve of approximately $2.4 million to fund
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Page 19
potential redemptions and for working capital needs. Note that a large amount of redemption
requests will require the trust to quickly sell a portion of its assets; which might negatively
affect investors’ returns.
According to management, the net asset value will be determined on an annual basis
unless a unitholder holding more than 10% of the outstanding units requests redemption.
The trust will contract third party independent appraisers to conduct the property appraisals.
Details on
Atlanta,
Georgia
Prospect
The first prospect that the trust has identified, and intends to enter into a purchase agreement
with an unrelated third party for, is a medical office building in the Atlanta metropolitan area
in Georgia (the agreement has yet to be signed). The building is a Class A medical office
building. Class A means that it is a more prestigious building with better amenities. Below is
a chart with the details of the building:
Philip Professional Center
455 Philip Boulevard Buildings 100
Property Location
& 200 Lawrencevill, GA (Atlanta
MSA)
Property Description
Medical Office Complex
Rentable Area
31,120 square feet
Completion
2008
Lot Size
3.4 acres
Parking
159 Surface Stalls
Price
US$7.7 million (US$250/square foot)
Capitalization Rate
7.20%
We have reviewed the documents provided by management regarding the purchase of
this property and have verified all the above figures in the table.
Below are pictures of the building:
Source: ICM
As per the Offering Memorandum, there are long term leases for 75% of the property,
which we have verified. The two main tenants of the building are discussed on the next
page.
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Page 20
-
The United States Department of Veterans Affairs (VA) and General Service
Administration for 16,060 square feet with a lease through 2032.
o The United States Department of Veterans Affairs is a government-run military
veteran benefit system with Cabinet-level status. It is the United States
government’s second largest department, after the United States Department of
Defense. With a total 2009 budget of about $87.6 billion, VA employs nearly
280,000 people at hundreds of Veterans Affairs medical facilities, clinics, and
benefits offices and is responsible for administering programs for veterans, their
families, and survivors.
-
Kaiser Permanente for 7,948 square feet with a lease through 2020.
o Kaiser Permanente is an integrated managed care consortium founded in 1945.
They have 8.7 million health plan members, 167,300 employees, 14,600
physicians, 35 medical centers and 431 medical offices. Kaiser Permanente has
an A+ rating from Fitch ratings.
These two tenants provide 84% of the rental revenues for the property. As the two main
tenants are highly reputable and large entities with good credit ratings, we believe it is
highly unlikely that they will default on their lease obligations. Also, the long term lease
agreements with these tenants should give the trust stable long-term revenues.
Financial
Analysis
Due to confidentiality, we are unable to disclose the lease rates and all other financial data
that was presented to us for this property. As a result, we are unable to show our cash flow
projections for this property. We made the following assumptions in our base case model:
-
We calculated the Internal Rate of Return (IRR) for investors assuming a loan to value
of 65%.
-
We used a purchase price of $7.7 million for the property:
-
The purchase price was taken from the purchase agreement. We believe that the
purchase price of $7.7 million is fair given that there are long term lease agreements with
reputable firms, and that the capitalization rate is 7.2%, which is higher than the average
capitalization rates for Class A office buildings in the area.
-
Assumed total equity of $3.06 million gross ($2.77 million net)
We assumed total debt of $5.20 million at 4% per annum – we have reviewed loan
documentation from a major lender confirming that ICM will be able to receive this rate
The acquisition fee is 1.5% of the purchase price of $7.7 million ($115,500)
We used the lease schedule provided by management (documentation from a third party)
and for conservatism, we assumed that the building will only have two tenants: the
United States Department of Veterans Affairs and General Service Administration and
Kaiser Permanente.
The expenses for the property were taken from the building’s offering memorandum
-
-
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Page 21
-
-
prepared by a reputable real estate firm.
For conservatism, we used a capitalization rate of 7.2% at the time of asset sale in year 5.
We predict the trust will be able to sell the project at a lower capitalization rate (higher
valuation) than 7.2% as – 1) we expect prices in Atlanta to increase with gradual
economic recovery in the region over the next five years, and 2) as the average
capitalization rate for the Atlanta, Georgia area for Class A office buildings is 7.0%
(Source: CBRE Cap Rate Survey Feb 2012).
We assumed a 5 year hold period.
We assumed a constant exchange rate of C$1:U$1 to be conservative. As mentioned
earlier, our long-term forecast (2015+) for the C$/US$ is 1:1; so the actual returns might
be higher than our base-case estimate.
Our base case scenario, using a 7.20% capitalization rate, arrived at an expected IRR
of 9.72%. The annual yield just from rental income is expected to be between 7-8%.
As long-term lease agreements are already in place with highly reputable and stable
institutions (which secures rental income and occupancy), the only major variable that could
potentially change the expected IRR is the capitalization rate. The range of potential IRR is
shown in the following chart.
Investors will lose 100% of their capital if the trust has to sell the project in Year 1 at a
capitalization rate of 12.16%, which we believe is highly unlikely.
Rating
Overall, we believe the Philip Professional Center is a good investment opportunity
considering our base-case IRR estimate of 9.7% and the reasonably low risks associated it.
The Philip Professional Center opportunity reinforces ICM management’s ability to
identify good projects. That being said, this is a blind pool and there is no guarantee that
management will be able to continue to identify such projects in the future.
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PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Page 22
Based on our review of the offering, structure, management track record and our
projections, we assign a Rating of 2- (on a scale of 1 to 7) on the units issued by ICM VI
Realty Trust.
FRC Rating
Base-Case Return (IRR) N/A
Rating
2- (Very Good)
Risk
3 (Average)
Risks
We assign a risk rating of 3 (Average) on the units. The following points highlight the
primary risks associated with this offering:
-
-
Expected returns will drop, or rise, if any of the inputs used in our scenarios move
unfavourably, or more favourably, respectively.
Delays in acquisition, sales, etc. may negatively affect returns to unitholders.
Real property investments tend to be relatively illiquid.
Investors are not guaranteed minimum distributions, or return of capital.
Although the trust intends to focus on medical office buildings and grocery anchored
neighborhood shopping centers, it is a blind pool investment and management has
discretion on what to invest in.
Timely deployment of cash.
A 10% redemption fee will apply if redeemed prior to the termination of the fund
(expected termination date is March 2023).
Like most offerings, dilution risk exists as the number of units that the trust is authorized
to issue is unlimited.
A minimum of $2 million must be raised to commence the trust
Potential conflict of interest and dilution of focus - Management manages several other
assets outside the ICM VI Realty Trust.
 2012 Fundamental Research Corp.
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PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Page 23
Fundamental Research Corp. Rating Scale:
Rating – 1: Excellent Return to Risk Ratio
Rating – 2: Very Good Return to Risk Ratio
Rating – 3: Good Return to Risk Ratio
Rating – 4: Average Return to Risk Ratio
Rating – 5: Weak Return to Risk Ratio
Rating – 6: Very Weak Return to Risk Ratio
Rating – 7: Poor Return to Risk Ratio
A “+” indicates the rating is in the top third of the category, A “-“ indicates the lower third and no “+” or “-“ indicates the middle third of the
category.
Fundamental Research Corp. Risk Rating Scale:
1 (Low Risk)
2 (Below Average Risk)
3 (Average Risk)
4 (Speculative)
5 (Highly Speculative)
Rating - 1
Rating - 2
Rating - 3
Rating - 4
Rating - 5
Rating - 6
Rating - 7
FRC Distribution of Ratings
Risk - 1
33%
Risk - 2
52%
Risk - 3
5%
Risk - 4
10%
Risk - 5
-
43%
57%
-
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