URB: An LIC with an urban renewal focus

In late 2016 Tom Millner, Will Culbert and Washington H. Soul Pattinson (SOL) established Contact Asset Management. In doing so, management of BKI Investment Company (BKI) was externalised to Contact.

Milner and Culbert said Contact would give them the opportunity to launch compelling investment opportunities which would benefit BKI shareholders, through broader coverage of companies and a growing analyst team.

Jump forward six months in time and Milner, Culbert and SOL's are introducing URB Investments Limited (URB) to the market.

URB will provide an interesting mix of direct property holdings managed by SOL's property company Pitt Street Real Estate (PSRE) and ASX-listed companies that fall into the thematic of urban renewal. When talking with Milner and Culbert last year, they promised something different and they didn't disappoint.

If you are familiar with the LIC BKI, you would be familiar with its stance on fees. BKI and the board have a strong stance on having the lowest management expense ratio (MER) possible.

The saying, “the thicker the carpet the thinner the dividend” has featured in its recent reports. Contact is continuing this through URB. It's not quite the 0.16 per cent MER of BKI but it is a very respectable management fee of 0.5 per cent per annum. There is also a performance fee of 15 per cent above a benchmark of 8 per cent.

Low management fees aside we also like the diversification this LIC will bring. The mix between direct property (currently three seed properties all is Sydney) and ASX companies will diversify investors away from the usual ASX 20 names.

Income-focused investors, which make up a good proportion of LIC investors, will be satisfied eventually with the yield generated by the portfolio. Milner and Culbert have narrowed down a universe of approximately 80 stocks to invest in, the bulk of which will produce income for the portfolio. On top of this you have the rental income from the properties.

Two of the three currently have tenants providing income for the LIC. The third property, currently a field which will be developed into a distribution centre, is not generating any income yet. URB has stated it intends to have a pay-out ratio of 50 – 70 per cent.

If there is one thing that concerns us here, it is Contact Asset Management's manpower. Yes, the team is using the experience of SOL's real estate investment group but it still leaves Milner and Culbert to sift through a universe of 80 urban renewal themed stocks on top of managing the close to $1 billion BKI portfolio. It's a lot to be across.

Speaking with Milner and Culbert when they initially set up Contact Asset Management, they did say they would look to bring on another analyst/s. Given the workload in getting a new LIC off the ground, plus running an existing portfolio and communication with its shareholders, another set of hands cannot come quick enough.

Saying this, BKI, Milner and Culbert have been assisted by a strong board, and URB will be no different with Warwick Negus as chairman. Negus has most recently been named the chairman of the proposed merger between fund managers Pengana Capital and Hunter Hall International.

Additional concerns we have is the properties' sensitivity to interest rates, and the yield in the short term won't be as high as it can be due to one-third of the property portfolio needing development.

In short there aren't too many LIC initial public offerings we do like. Too many these days come out of fund managers who aren't offering anything different from their unlisted managed funds and the hefty fees that come with it.

But URB is ticking a number boxes for us that many LIC IPOs have not. It comes from a team with investment experience dating back to 1903.

There is a track record of actively lowering fees and continually growing dividends, a pleasing combination for investors. On top of this they are giving us something genuinely different too and this will have us watching on to see how it develops.

As with investments in BKI and SOL's, we would suggest this suits a patient investor with a long-term view.