STERLING FIRST (AUST) LIMITED
("Sterling" or the "Company")
SHAREHOLDER UPDATE
Further to our most recent update of 10th July 2018.
It has been an interesting time of late, with, on the one hand, our related property management operations, Rental Management Australia, experiencing its fastest growth ever and, on the other hand, the various enquiries and Royal Commissions into retirement villages and financial services, putting pressure on the regulators to "act", resulting in it becoming increasingly difficult to have our Sterling New Life seniors housing product approved by all parties in a manner that makes it cost and operationally competitive.
Against this backdrop, we have been looking closely at our operations with a view to maximising shareholder value.
Sterling's business can effectively be broken down into two components:
- Management services: encompassing property management and associated services, and funds management; and
- Seniors housing: encompassing Sterling New life.
Rental Management Australia's rent roll has grown by over 50% in the last 12 months with now over 3,650 properties under management in WA, Victoria and Queensland. With the WA and Queensland market seeming to have "bottomed out" in terms of rental growth, there are attractive rent roll acquisition opportunities in each of these states, with strong rental growth likely. In addition, with property sales prices starting to decline in Victoria and NSW, we expect rent roll acquisition opportunities at attractive prices to start emerging strongly over the next 12 to 24 months. We enclose for your interest an article from the Australian Financial Review, dated 8 August 2018, discussing Little Real Estate's plans to double their property management operations over the next three years.
With the recent pressures placed on Sterling New Life, we have been re-examining how best to prosecute a strategy in this rapidly growing sector. Sterling is proposing to partner with Bruce Monteath, through a company called Leaf Active Communities (Leaf), which will create two models of integrated over 55's living concepts - a freehold opportunity and a flexible land lease concept. The emphasis and drivers that will differentiate LEAF Active Communities will be to create a relevant lifestyle for residents, and a safe and sustainable community that offers affordability, independence and choice. Bruce (Hamilton Corporation) is a high-profile national developer based in Melbourne who has been the Sterling New Life principal agent for Victoria and Queensland for the past two years.
In addition, Sterling will continue to develop derivatives of Sterling New Life.
With the seniors housing strategy not likely to realise significant shareholder benefits for 12 to 24 months, and with the short term outlook for our management services operation being outstanding, we are proposing to split the Sterling business in two:
- The management services operations, covering funds management and property management will be placed in a company called Gage Management Limited (Gage) with Sterling shareholders receiving 1 share in Gage for every 2 Sterling shares they currently hold, subject to shareholder approval. Listing on the ASX will be pursued as soon as possible after shareholder approval.
The management services operations of Gage will include the current rent roll organic growth, acquisition and integration operations, plus funds management of the Australian Rental Trust (see below for more details) and a new fund, the Gage Mortgage Trust, plus management of Rental Management Australia (with an option to acquire that business); and - Sterling will retain its current investment portfolio, and will development variations of Sterling New Life benefitting from our considerable IP and hold a strategic shareholding in Leaf.
Sterling will look to list on the NSX at the appropriate time.
Leaf has already identified several projects to be brought into the company in Victoria, WA and Queensland. It is intended that Leaf will also seek a listing on a securities exchange in due course at which time Sterling shareholder will receive shares directly in Leaf.
In summary, Sterling shareholders will:
- retain their current shares in Sterling, with a view to this company listing on the NSX;
- receive new shares in Gage on a 1:2 basis, to be listed on the ASX as soon as possible; and,
- when Leaf is ready to list, receive shares in Leaf.
We are pleased to advise that the FY17 audited accounts for the management services operations have now been signed off by the auditors, Stanton International, reporting a net profit after tax of $3.34 million. We have engaged BDO Audit (WA) Pty Ltd (BDO) to audit the management services operation, and they will be carrying out the FY18 audit. BDO will be able to complete this audit expeditiously.
A general meeting of shareholders will be called with 21 days' notice following receipt of the Company's FY17 audit, to vote on various resolutions, including the disposal of Rental Management Australia Developments Pty Ltd to Gage in exchange of shares in Gage to be issued to Sterling shareholders on a 1:2 basis. We are aiming for the shareholders meeting to take place in late October or early November.
An Information Memorandum on Gage is available on request.
On other matters, the Sterling Income Trust, our current managed investment fund with four unit classes, will be wound up so that the different unit classes can either be dissolved or become parts of separate new funds as follows:- Income units - this unit class invests in property management and it is intended that income unit holders will become unit holders of a new fund the Australian Rental Trust, or ART for short.
The ART will be the primary funding driver of the expansion of the property management operations and we will be seeking to list this fund on the ASX early in 2019. The ART's principal asset is our uniquely developed financial instrument attaching to rental management agreements, and which is targeting a return to unitholders of 7.5% to 8% pa 100% tax deferred. A Product Disclosure Statement for the ART will be available soon. - Growth units - these will be bought out and the unit class dissolved.
- Development units - we are currently exploring a mechanism for these unit holders to become owners of the underlying properties secured by this unit class.
- Management Company units - this trust holds shares in Sterling, which will be distributed in specie to the unitholders.
We look forward to seeing you at the AGM to be announced shortly and providing further shareholder updates.
Yours faithfully,
Sterling First (Aust) Limited
Simon Bell
Director |
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