SYGNUS FINANCE - barita.com

[DATE] [COMPANY NAME] [Company address]

SYGNUS

FINANCE

Barita Investments Limited

15 St. Lucia Way, Kingston

Tel #: 1-888-429-5333

Disclaimer

All expressions of opinions are subject to change without notice. The information contained herein was obtained from sources which we consider reliable, but we have not independently verified such information and thus

do not guarantee that it is accurate or complete. Additional information is available upon request. Barita Investments Limited (“BIL”) is a wholly owned subsidiary Cornerstone Investments Holdings Limited. All opinions

and estimates constitute BIL’s judgment as of the date of the report and are subject to change without notice. BIL may have a proprietary interest in the securities recommended above. The above recommendations are

indicative and do not constitute an offer to buy or sell.

BARITA INSIGHTS: Sygnus Real Estate Finance

Company Overview

Sygnus Real Estate Finance Limited (‘SRF’) is a specialty real estate

investment company, dedicated to providing flexible financing to unlock

value in real estate assets across the Caribbean region. SRF is an

alternative investment firm that is dedicated to the real estate asset class,

by providing customized financing solutions in various forms across the

credit and equity spectrum. Through the application of flexible financing,

SRF will seek to earn attractive risk-adjusted returns with downside

protection.

The Company primarily invests in real estate assets using flexible financing

instruments and structures, including preference shares, equity (joint-

ventures, land, ordinary shares, etc.), asset swaps, profit-sharing debt,

secured debt, asset-backed debt, mezzanine debt, and other forms of

flexible financing structures.

Investment Rationale

Business Model: Sygnus aims to provide flexible funding for real estate

development. Given the current credit conditions brought about by the

pandemic, specifically a reduction in the supply particularly to medium-

sized enterprises, Sygnus is well placed to provide value to several

businesses in this space with its flexible financing options. The company

also makes it possible for individuals to profit from the “upside” at the

value-added stage in real estate development while providing some

downside protection.

Strong Management Team: The members of Sygnus Real Estate

Finance Limited's team are known in the market as capable finance

professionals, with each member of the leadership team accumulating

extensive experience in reputable local and international financial

companies, with that experience complemented by solid industry and

other qualifications. As further support to the management team, a robust

governance and risk management structure has been established with

professionals with deep real estate sector development and structuring

expertise.

Financial Performance: After accounting for the topline performance

and expenses, SRF had a Net Profit After Tax for the six months ended

February 2021 that was 56% higher than the 13-months ended August

2020. The majority of this gain reflects fair value gains on investment

property, which gives some indication of the management team’s ability

to select and or structure assets that are steeply undervalued.

Valuation: We conducted a valuation exercise on SRF utilizing the

average price estimates from a justified price to book valuation. In our

base case scenario, we estimated a fair price of J$27.98 while for our

negative scenario we estimate a fair price of J$20.05. Our final fair value

Action: Participate

Industry Outlook Positive

General Public Offer Price J$19.30/USD$0.127

Fair Value J$24.02

Potential total return Upside

(%) 24.46%

Current P/E (12M Trailing) 3.66X

Current P/B (Q2 2021) 1.00X

Financial Summary (J$)

13 months

August 2020

6 months Feb

2020

6 months Feb

2021

Total

Investment

Income

466.79 Mn 29.33 Mn 1.03 bn

Net Interest

Income 65.23 Mn 29.33 Mn 11.69 Mn

Total Assets 2.65 Bn 2.66 Bn 5.71 Bn

Total Equity 6.08 Bn 2.12 Bn 3.60 Bn

Financial Ratios

Debt/Equity 1.30X 0.26X 0.59X

ROE 15.70% 0.89% 33.20%

Disclaimer






estimate was then taken to be the average of these two prices, which was J$24.02 which implies an upside potential of 24.46%

(31.25% for key stakeholders at a price of J$18.30 and 34.19% for current shareholders at a price of J$17.90). As a result,

we recommend investors PARTICIPATE in the offer.

Offer Summary:

1 Team Members Directors and employees of the Company and its affiliated companies; being members of the Sygnus Group of Companies. 2 key suppliers and clients of the Company and/or other members of the Sygnus Group of Companies, as determined by the Directors of the Company. 3 Including residential, commercial, industrial, infrastructure and hospitality.

Issuer Sygnus Real Estate Finance Limited

Offer

Initial Public Offer of up to 207,608,341 Ordinary Shares:

I. 72,662,919 Ordinary Shares are available to the General Public

II. 134,945,422 Ordinary Shares are Reserved as follows:

a. 67,472,711 Shares are reserved for subscription by Existing Shareholders and

Team Members1

b. 67,472,711 Shares are reserved for subscription by Key Investors2

Arranger I. Lead Arranger and Financial Advisor: Sygnus Capital Limited

II. Joint Lead Brokers: Sagicor Investments Jamaica Limited and Scotia Investments

Jamaica Limited

Subscription Price

I. General Public Applicants: J$19.30 per share and US$0.1270 per share

II. Key Investor Applicants: J$18.30 per share and US$0.1210 per share

III. Existing Shareholders and Team Members: J$17.90 per share and US$0.1170 per

share

Minimum

Subscription I. Investors applying for shares must request a minimum of 1,000 shares per applicant

Use of Proceeds

The net proceeds of J$3,900,000,000 realized from the Invitation shall be used to:

I. Partially repay vendor mortgages up to J$1.0 billion

II. Invest in Real Estate Investment Assets spanning a broad range of categories3

Dividend Policy

After providing for an appropriate reserve to cover outgoings and a modest reserve for

contingencies, the Directors intend to distribute up to 85% of SRF’s net income to holders of

Ordinary Shares in the form of cash dividends, in keeping with the Company’s dividend policy. The

Company proposes to pay dividends semi-annually and may change to quarterly in the future if it

is more appropriate to do so. This aligns with the Company’s mission of unlocking value from real

estate assets while providing shareholders with consistent dividend payments. The dividend policy

will be subject to review from time to time by the Board of Directors of SRF acting on the advice

of the Investment Manager.

Dividends payable on the J$ Shares will be paid in J$. Dividends payable on the US$ Shares will be

paid in US$ based on the US$ Currency Equivalent of the J$ dividends paid on J$ Shares. The US$

Currency Equivalent shall be determined based on the BOJ weighted average selling rate five (5)

Business Days before the payment date.

Disclaimer






Sygnus Real Estate Finance Limited is seeking to raise J$3,900,000,000 (207,608,341 shares) equivalent to US$25,657,895

in equity capital after the deduction of fees, through its Initial Public Offer (IPO), with the option to upsize by a further 38,857,193

ordinary shares.

Pre- and Post-IPO Shareholding:

Ordinary Shares – Before IPO

Shareholders Number of Issued Ordinary Shares

Percentage of Shareholding J$ Shares US$ Shares

ATL Group Pension Fund

Trustees Nominee Ltd

32,000,000 16.2%

SJIML A/ C 3119 20,000,000 10.1%

Dyna mix Holdings Inc. 20,000,000 10.1%

JCSD Trustee Services

Limited- Sigma Equity

16,217,000 8.2%

MF&G Asset Management

Ltd. (Capital Growth) Fund

10,807,160 5.5%


Ltd. (Income & Growth)

Fund

10,807,160 5.5%

Lyttleton Ovel Shirley 10,000,000 5.0%


Limited - Sigma Global

Venture

8,108,000 4.1%

First Ja./Nat'l Hsng Trust

Pension Fund

6,701,000

3.4%

JMMB Fund Managers Ltd. -

T1 Alternative Assets Funds 5,403,580 2.7%

Total Top Ten Shareholders 101,935,900 38,108,000 70.7%

Other Shareholders 24,577,932 33,506,000 29.3%

Total Issued Shares 126,513,832 71,614,000 100%

Ordinary Shares – After IPO

Shareholders Number of Issued Ordinary Shares Percentage of Shareholding

ATL Group Pension Fund

Trustees Nominee Ltd

42,930,579 10.6%

SJIML A/ C 3119 26,814,744 6.6%

Disclaimer






Dyna mix Holdings Inc. 26,814,744 6.6%


Limited- Sigma Equity

21,749,762 5.4%


Ltd. - (Capital Growth) Fund

14,518,159 3.6%


Ltd. (Income & Growth)

Fund

14,518,159

3.6%

Lyttleton Ovel Shirley 13,373,636 3.3%


Limited - Sigma Global

Venture

10,874,381 2.7%

First Ja./Nat'l Hsng Trust

Pension Fund

8,995,072 2.2%

JMMB Fund Managers Ltd. -

T1 Alternative Assets Funds 7,225,343 1.8%

Top Ten (10) Shareholders

Sub Total (First Priority

Reserve Share Applicants)

136,751,819 51,062,760 46.3%

Other Existing Shareholders

(i.e., other First Priority

Reserve Share Applicants)

37,158,595 40,627,369 19.2%

Sub Total First Priority

Reserve Share Ap applicants

173,910,414 91,690,129 65.5%

Second Priority Reserve

Share Applicants

43,084,463 24,388,248 16.6%

Non-Reserved Share

Applicants

46,398,652 26,264,267 17.9%

Total Issued Shares 263,393,529 142,342,644 100%

The information in the above table is based on the following assumptions:

All Shares in the IPO have been fully subscribed.

The IPO is not upsized.

Reserved Shares Applicants subscribed for a proportionate number of J$ Shares and US$ Shares according to existing shareholdings; and

Members of the Public subscribed for a proportionate number of J$ Shares and US$ Shares according to existing

shareholders proportionate holdings

The actual results of the IPO may vary upon completion.

Disclaimer






Business Economies

Sygnus Capital Group Ltd. (SCG) holds 0.5% of the Company’s ordinary share capital and also owns 1 special share in Sygnus Real

Estate Finance Ltd. which gives SCG the majority of the votes in a poll in a general meeting of the company. Sygnus Capital Ltd

(‘SCL’) a subsidiary of the Sygnus Capital group offers investment management and corporate services to Sygnus Real Estate Finance

LTD (The company). The company has four subsidiaries that it is the sole owner of and one for which it has majority ownership.

The Company's basis of operations is providing flexible financing options to unlock value across the real estate asset class across the

Caribbean. The company is an alternative investment firm that is solely dedicated to the real estate asset class by providing customized

financing solutions through various forms of credit and equity. The company aims to earn attractive risk-adjusted returns with

downside protection through customized financing. The company expects to utilize the following flexible financing options and

structures: preference shares, equity (joint-ventures, land, ordinary shares, etc.), asset swaps mezzanine debt, asset-backed debt,

among others. The typical investment horizon will be ideally between 3-5 years. The company will also target various sectors including

residential, commercial, industrial, infrastructure and hospitality. The stages of investment will also be diverse including greenfield

(new developments), brownfield (acquisition), distressed (e.g. foreclosures), and opportunistic (e.g. event-driven).

Over the next 18-30 months, the company has the following strategic objectives:

Increase Dry Powder to finance projects that have broken ground or are in an advanced stage of planning and to build

out a pipeline of projects that can be executed in the future.

Execute strategic projects: this includes the one Belmont joint venture and the Spanish Penwood which are scheduled to be completed in 12-24 months. There also exist projects such as at the Mammee Bay and Lakespen properties which are

expected to progress to stage 1 in the time frame.

Provide Access to flexible capital for Real Estate. The company hopes to be a leader in the Caribbean as an alternative

investment vehicle by unlocking real estate capital. They plan to do this by strategic partnerships with real estate owners to provide innovative financing that can unlock value for both owners and shareholders.

Expand regionally after focusing on the Jamaican market when the investment opportunities currently in the pipeline

begin to mature. The company is already looking at high probability transactions/opportunities that can be completed across the Caribbean.

Disclaimer






Corporate Governance and Management

There are four distinct committees that provide oversight to the different functions of the Sygnus Group, namely:

1. Audit & Governance Committee (AGC): The primary purpose of this Committee is to assist the Board in fulfilling its oversight responsibilities. The Committee plays a crucial role in corporate governance and internal controls of SRF. The

Committee is also responsible for assisting the Board of Directors and management in its compliance with regulatory requirements.

2. Enterprise Risk Management Committee (ERMC): This Committee is accountable to the Board and assists the Board

in providing leadership, direction, and oversight of the Company's risk governance and framework, including the Company's

risk appetite statement and risk limits and tolerances ("Risk Appetite Statement"). The Committee also assists the Board in fostering a culture within the Company that demonstrates the benefits of a risk-based approach to risk management and

internal controls.

3. Investment and Risk Management Committee (IRMC): This Committee is responsible for all credit and investment

decisions relating to the Company's investment portfolio. This responsibility is delegated to the Investment Risk Management Committee (IRMC) sub-committee of the board of the investment manager Sygnus capital limited.

4. Real Estate Investment Advisory Committee (RIAC): This Committee is responsible for analyzing and recommending

all real estate investment proposals to the IRMC and monitoring the performance of the Company's investment portfolio.

The IRMC and RIAC will be vital in driving investment and revenue growth as well as protecting the strength of the balance sheet by

adequately managing credit risk. In order to ensure proper risk management, the following measures are currently practiced:

Real Estate Investment Policy: Given the Company’s intention to also pursue development projects, a key risk is project

risks (construction, cashflow collateral, and execution risk). This is mitigated by the investment manager having a panel of real estate experts and advisors it can use as consultants to support certain projects and investment recommendations. The

risk is further mitigated by due diligence done on counterparties as well as shareholders agreements and joint venture agreements that include protections and preemptive rights to mitigate contractual underperformance.

Disclaimer






Independent decision making: The RAIC makes investment recommendations to the IRMC which is independently chaired and is responsible for all investment decisions to ensure it is compliant with stipulated credit and investment criteria.

Post-Investment Monitoring: Active monitoring of investments through covenants, interim financial reviews, collateral

reviews, and annual reviews as well as assuring proper board representation where appropriate in the investments they make

Diversification: The company manages some risk by diversifying its holdings across various issuers with an exposure limit on any single issuer. The risk of being concentrated in real estate is also mitigated by investing in a wide variety of real estate

assets across different life cycles with the use of different financing instruments

The Company has an Investment Management Agreement (the "IMA") with SCL whereby SCL is empowered to manage the company's

day-to-day affairs subject to the Articles of the Company. SCL is paid a management fee of 2.0% of assets under management

("AUM") and a performance fee of 20% of return on average equity exceeding the hurdle rate of 6.5%. The management fee is

payable monthly and the performance fee annually.

It is a critical element of the Company's business model that SRF shall remain a special purpose investment company managed by a

group in Sygnus Capital Group, in this case, SCL. To achieve that objective, it is entrenched into SRF’s Memorandum of Association

and Articles of Association that termination or modification of the Investment Management Agreement shall be treated as a

modification of the rights attaching to the Special Share and accordingly the holder of the Special Share must consent before the

Investment Management Agreement can be legally terminated or modified. This arrangement will assure investors that the

management structure they have invested in will not change even if SRF’s control passes to a third party.

This point is important because it links back to one of the inherent risks/rewards that is built into the offer. That is the performance

of the company will highly be linked to the abilities of the management team. A lot of the strategic real estate acquisitions will for

example be linked to the real estate execution capabilities of the management team which will span project management, investment

analysis, partnership, and negotiating skills. This will be combined with investment banking and financial structuring ability to generate

excess returns. The current management team, and the advisory team, have sufficient technical expertise and experience spanning

the full value chain of real estate (greenfield developments to real estate investments), investment banking, private equity, and M&A.

We highlight both the uncertainty surrounding the economic landscape, that is the risk of new COVID outbreaks that could halt the

economy and further slow GDP growth, along with idiosyncratic risks specific to the business model. These idiosyncrasies relate to

risks pertaining to exit timing of strategic investment properties that the company has a position in, as well as the management’s

technical expertise to derive value from properties given the heightened focus on capital appreciation in the company’s business

model.

The current Board of Directors of the company and its investment advisors are displayed below:

Board of Directors Board of Investment Advisor (Sygnus Capital limited)

Clement Wainwright Iton, Chairman Milton Brady, Chairman

Ike Johnson Simon Cawdery

Pierre Williams David McBean

Linval Freeman Gassan Azan Jr

Horace Messado Ike Johnson

David Cummings Jason Morris

Elizabeth Stair Berisford Grey

Disclaimer






Market Overview

The COVID-19 pandemic represents the biggest economic crisis since the 2008 Global Financial Crisis (GFC). The pandemic constitutes

an unprecedented global macro-economic shock due to the strict, restrictive measures taken to contain/slow the spread of the virus.

During the peak of the pandemic (the 2020 June quarter), many consumers and businesses faced steep losses while others were

closed. Consequently, the global financial system faced the dual challenge of sustaining the flow of credit amidst declining growth

while managing unforeseen risk, as the severity of the threat became more apparent. These efforts were evident with the increase

in short-term interest rates (i.e. treasury bills) as well as rates on new personal and commercial loans during the pandemic as credit

supply became more restrictive as lenders took a risk-off stance.

The country’s real GDP for the fiscal year is estimated to have declined by 11.02% with the majority of this decline being seeing in

the tourism and BPO sectors. However, looking at seasonally adjusted quarterly data, we have seen that the economic recovery is

currently underway. With several sectors inclusive of the other services, transport storage and communication sector having grown

by 33.01% and 10.40% between quarter 2 2020 and quarter 1 2021, respectively, representing modest recovery. The construction

sector specifically, has shown robust growth during the pandemic, being one of the quickest to recover and show positive growth

over the 2020-2021 period (construction grew 23.60% in Q3 2020 after the heights of the pandemic based on quarterly seasonally

adjusted data, compared to 8.50% for the overall economy). This combined with the resilience and recovery of the financial sector

and the assessment that the general housing/development market is not currently in a bubble by the Bank of Jamaica means that

current economic conditions remain favorable. This stable economic outlook and favorable domestic conditions for the housing market

along with growing financing demand, therefore, points to possible opportunities in the marketplace for Sygnus Real Estate Finance

to operate.

Outlook

It is expected that overall credit demand in all sectors will pick up, as the economy recovers from the pandemic. This sentiment is

echoed by the local lending agents who according to the latest credit conditions survey from the Bank of Jamaica noted that they

expect to see increased credit demand in local currency from all sectors including construction. They also stated that they expect to

see above-average growth in foreign currency credit demand from the construction sector over the June 2021 quarter. In contrast

to this, the lenders expect overall credit supply to contract marginally over the June quarter. This contraction they project will be

greatest for the small business sector. Looking specifically at the medium-sized enterprises within the construction sector which might

form a large portion of possible partners for SRF, respondents believed credit supply would remain unchanged for the medium-sized

businesses as they contain risk exposure, while they expect an increase in credit demand particularly from the construction sector.

This unchanged credit supply and increasing demand is expected to cumulate

in increased interest rates for medium-sized construction enterprises.

Specifically, they expect the average interest rates of these businesses to move

from 8.96% in the March 2021 quarter to 9.11% over the September quarter.

Despite having passed the worst of the pandemic, we expect this trend to

continue in the near future. That is, we expect the demand for credit in the

construction sector which has remained resilient during the pandemic to

continue to outgrow the supply leading to potentially higher rates for firms,

particularly among medium-sized firms. We have already seen where these

Companies have been the most affected by the reduction of credit brought

about by the pandemic. The proportion of private industry credit to medium-

sized enterprises in March 2020 was 29.2% before declining to 17.5% in March

2021 (graph adapted for BOJ March 2021 quarterly credit conditions survey).

Disclaimer






We believe that this will continue in the future and thereby provide a space for SRF to operate with innovative financing solutions as

credit demand continues to grow. This is further bolstered by the fact that GDP growth is projected to be along the lines of 5.2% for

2021 and 6.2% for 2022 with the construction sector likely to continue its run buoyed by overall improvements in economic conditions.

This is also seen by the picking up of the pace of registration for new development where the Real estate board noted that they have

already received 64 new development registrations between January – June 2021 compared to 52 in the same period of 2019.

SRF has developed a pipeline of approximately J$5.5 billion as indicated by the Company's management. The company aims to raise

approximately J$3.9 billion from the IPO net of expenses. After the repayment of J$ 1.0 billion of vendor mortgage loans, the company

will have to increase dry powder to fund a portion of this J$2.6 billion gap. Management has indicated that the rest will be funded by

other means such as revolving credit lines. A portion of these

investments in the pipeline are investment notes (roughly J$1.5

billion). With an average yield on notes of between 10.1% and

11.7%, it is projected these investments will bring in between

J$151.5 million and J$175.5 million in additional interest income

while the remaining investments in the pipeline are expected to be

real estate developments for which the company has set a 3–5-year

development and exit horizon.

Financial Performance (18-month Historical)

The company’s two main drivers of income are interest income and

capital appreciation. In 2020 the company had a net interest income

of approximately J$65.23 million This was primarily driven by the

average yield of 10.10% earned on real estate investment notes,

and an expense on borrowings of approximately 5.2% (inclusive of

loans and preference shares). Net Investment income was J$466.7

million. For the 6 months ended February 2021, the net interest income had declined to J$11.69 million for 6 months ended Feb 2021

compared to J$29.3 billion for the same period in 2020. The reason for this decline has been increased interest payments on

outstanding loans due to the loan being outstanding for all of the 6-month period in 2021, while only being outstanding for a portion

of 2020 when it was initially taken. The net investment income likewise for the 6 months ended Feb 2021 was J$873.46 million

compared to J$13.90 million in 2020. The February 2021 outturn is already more than double the net investment income generated

for the 13 months ended August of $376.94 million. The majority of this gain in 2021 was as a result of valuation gains on investment

property of J$913 million. This gain was associated with price appreciation on the Mammee Bay property. The 2020 period however

had very little activity as it relates to investment property acquisitions or disposals.

Operating Expenses

Total operating expenses for the 13 months ended August 2020 were J$89 million, inclusive of J$27 million in Management fees

(30.13%). The largest expense was professional fees of J$32.4 million (36.06%). These relate to legal, tax, and consultancy fees

which are indicative of the nature of the business of originating financing solutions and evaluating investment opportunities. SRF

currently has a goal of keeping operating expenses below 45% of total investment income and less than 2.5% of the total asset

under management. For the period, these expense ratios were 19.2% and 1.5% respectively, meeting ratio targets. For the latest 6

months ended Feb 2021, operating expenses were J$157 million. Management fees were 37.56%, while performance fees were

30.78% of operating expenses respectively. These expenses were much higher than the same period 2020 of J$16.12 million. The

relatively higher operating cost was a result of management introducing management fees and performance fees which had been

forgone in the previous year as the company was in its infancy.

Given that providing financing for real estate development is also a part of the core business it is thus important to keep track of

expected credit losses or impairments. The company had fairly low impairment provisions for financial instruments (real estate

Audited

13 Month Unaudited

6 months

31 Aug 2020 28 Feb 2021

$'000 $'000

Interest receivable 16,141 2,724

Investments 873,996 992,351

Other assets 361,279 425,524

Investment property 2,502,248 3,535,551

Total Assets 6,075,312 5,708,658

Loans and borrowings 1,612,995 1,503,800

Total liabilities 3,428,215 2,111,688

Total Equity 2,647,097 3,596,970

Basic EPS 5.48 0.12

Diluted EPS 2.28 0.11

Return on equity 15.70% 33.20%

Disclaimer






investment notes) and amounts due from related parties. For the 6 months ended Feb 2021, there was no allowance for impairment

recorded as all assets were deemed to be of sufficient credit quality. Furthermore, the company recorded fair value gains on financial

assets of J$54.66 million compared to J$6.60 million recorded for the 6 months ended 2020. These fair value gains primarily reflect

gains on the real estate investment notes recognized on the income statement. These notes charge a fixed interest rate and allow

for participation in profits. Their value will change periodically depending on market conditions (interest rate movements), new

investments, and investment exits.

The results of the Company's FY'20 performance as indicated by its net profit attributable to shareholders was J$414 million which

resulted in a return on equity of 15.70% with a net profit margin of 81.10% which as stated earlier, was primarily driven by fair value

gains on property. For the 6 months ending Feb 2021 net profit was J$949.87 billion compared to JS19.80 million in 2020, representing

net profit margins of 85.24% and 55.12% respectively. This represented a return on average equity of 33.2% for 2021 (important

to reiterate that 6 months Feb 2020 didn’t include management and performance fees hence the stated net profit margin would have

been lower had fees been collected). The larger net profit for 2021 is being made possible through the greater use of leverage to

finance new investments and the subsequent improvements made on the acquired properties that have allowed them to appreciate.

Private Credit Investment (PCI) Activity`

As at the end of Feb 2020 SRF’s investments are allocated across 7

subcategories of real estate. Largest allocation being to the beach-front

property than to industrial-warehouses and commercial/corporate. The

company currently has 5 real estate investment notes outstanding with

a total fair value of J$992.35 million. During the period one investment

note relating to the project zero residential real estate project in St Ann

was successfully exited with a full repayment. The average maturity on

these real estate investment notes was approximately 0.9 years. The

company made J$423.33 million in new real estate investments over the

6 months ending Feb 2021, with a majority of this being drawdowns

(57%), essentially additional loan amounts being taken by creditors

under existing note arrangements. The remaining 43% reflected

additional partial payments on the acquisition of strategic property

investments.

The company currently has 11 real estate investment assets for 6 months Feb 2021, up from 6 in the same period of 2020 and up

from 9 in August 2020. The company exited 2 investments over the 2021 period with a total value of J$2.1 billion. The company has

also made strategic purchases post Feb 2021, inclusive of purchasing of shares in Lakespen Holdings Ltd an owner of a 55-acre

investment property, a US$120,000 deposit on a Kingston property valued at US$ 1.4 million, and the acquisition of 3.25 acres of

property located at the former French embassy with an underlying value of US$7.2 million.

Disclaimer






Balance Sheet, Liquidity & Solvency

Total assets as at Feb 2021 were J$5.7 billion, representing a growth rate of 114.8% over Feb 2020. This increase reflects changes

in key investment assets of the business including investments,

investment properties, and other assets. This consists of an over

962.71% growth in investment property from J$ 332 .68 million to J$

3.53 billion. This change includes addition and revaluation gains from

the Mammee bay beach property.

Liabilities grew by 291.34% between Feb 2021 and Feb 2020 due to

SRF adding debt to its capital structure. This was primarily through a

US$10 million facility which was granted as part of the consideration

for the acquisition of land. The mortgage period is for 5 years at an

interest of 5%, secured by the property which was acquired. Liabilities between August 2020 and February 2021, however, declined

by 38.40%. This was due to the company paying off several debts in this period. In 2020 a 4% convertible redeemable preference

share was issued at J$13.28 by a private offering. The maturity was extended to August 23, 2021. Within the period the convertible

cumulative redeemable preference shares were paid off early effective May 7, 2021. The company also repaid a promissory note

which was born out of a transaction by a subsidiary and secured by SRF of US$9 million on January 13, 2021.

Total shareholders’ equity was approximately J$3.60 billion as at Feb 2021 compared to J$2.12 billion for the same period of 2020

(69.82% growth) and J$2.6 billion in August 2020 (35.88% growth). This growth in shareholders' equity was primarily driven by a

build-up in retained earnings from J$34.28 million in Feb 2020 to J$1.36 billion in Feb 2021. The growth underlying the increase in

shareholders' equity is predominantly driven by gains on the fair value of real estate holdings and interest income from investment

notes.

Liquidity & Solvency (Three-Months Ended September 30, 2020)

At the end of Feb 2021, SRF had J$249.6 million in Dry powder. SRF also secured a two-year revolving credit line for US$3.9 million

accessible in JMD and USD at a rate of 5% and 6% respectively from a major commercial bank. The company aims to add additional

revolving lines of credit to reach the equivalent of J$1.5 billion in dual currency credit lines. Currently, the company has a debt-to-

equity ratio of 0.58x, up from 0.25x in Feb 2020. This is because of the company adding more debt to its capital structure, which is

a part of the long-term business plan of the company as indicated by management.

In addition to the revolving credit line, the company has also agreed to terms on a J$2.45 billion construction note relating to their

one Belmont project and has an expected additional capital outlay for remaining projects (exclusive of deals completed post-Feb

2021) of J$2.1 billion over the next 12 to 24 months. The company has a required deployment of J$5.5 to J$6.0 billion which will be

partially met via the IPO proceeds.

Valuation

To value SRF we used a justified price to book model. It’s important to note the significant differences in the economics of SRF’s

business model compared to the other real estate companies listed on the Jamaica Stock Exchange. It is our view that SRF’s business

economics is sufficiently distinct such that averaging the book values of the listed real estate entities to derive SRF’s fair value estimate

may not sufficiently reflect the economics of SRF’s intrinsic value. Against that backdrop, we forecasted the company’s full-year

earnings using post prospectus acquisitions coupled with several assumptions related to interest earned on investment notes to arrive

at a year-end book value. Given the uncertainty which is innate in SRF’s business model as it relates to the amount of value that will

be unlocked yearly in its various property investments, we utilized both a base case and a downside scenario which we later average

to reach our fair value estimate.

Audited

13 Month Unaudited

6 months Unaudited

6 months

31 Aug 2020 28 Feb 2020 28 Feb 2021

ROE 15.70 0.89 33.20

Debt/Equity 1.30X 0.25X 0.59X

Asset/equity 2.30X 1.25X 1.59X

Net profit margin 0.810 0.550 0.850

Net profit 414,918 19,809 949,873

Of which valuation gains 400,704 0 913,396

Disclaimer






Model Assumptions:

General assumptions that were used in both models include an approximate cost of equity of 14.75%. We also start our valuation by

projecting the adjusted book value per share (that is after taking into account the new shares from the IPO) as well as utilizing

information provided in the prospectus about deals that were finalized after the date of the latest 6-month financials (Feb 2021).

Thereafter, we estimate an adjusted book value for the 2021 year-end of J$21.86 per share. In the long term, we expect the ability

of the Company to pay dividends will fluctuate throughout any particular year as the cashflows will be linked to unique events such

as exits from real estate positions while being supplemented in some periods by more stable cash flow from the real estate investment

notes.

In the base case scenario, we estimated a projected return on equity of 17.65% which we use as the long-run return on equity in

our model. This estimate was arrived at by utilizing several assumptions, including a projected gain on new investment property of

33%, this is inclusive of projected gains on new development projects listed in the timeline that are currently in the works. We further

assume that going forward, new investment properties being added to the timeline will have a greater potential for value creation

than older projects and as such assume that “older developments” appreciate by 20% annually based on the continued strategic

work that SRF will be putting into these projects before their intended exits within the 3–5-year period.

In the downside scenario, we reduced the expected rate of appreciation on projects on both new and old investment properties. That

is, we used a projected return on developments in “older” developments of 15% while the rate on new investment property was

lowered to 25%. In this scenario, the long-run return on equity was estimated to be 13.70%. This compares to the 13 months to

August 2020 ROE of 15.7% which indicates that this scenario is fairly conservative.

From these assumptions, we arrived at a fair value estimate using the justified PB model of J$27.98 in the base case scenario and

J$20.05 in the downside scenario. Based on the average of this range we get a fair price of J$24.02. This is relative to the IPO price

of J$19.30 for an implied upside of 24.46% for the general pool applicants (31.25% for key stakeholders at a price of J$18.30 and

34.19% for current shareholders at a price of J$17.9). Given the implied upsides, we recommend investors participate in the IPO. A

summary of the valuation can be found in the table below:

Please see the valuation summary below:

Valuation Summary

Justified P/B (Downside Case) J$20.05

Justified P/B (Base Case) J$27.98

Average Fair Value Estimate J$24.02

IPO Price J$19.30

Implied Upside 24.46%

IPO Price US$0.127

Fair Value US$0.158

Implied Upside 24.43%

Disclaimer






Investment Pros & Risks:

Investment Positives Investment Risks/Considerations

Innovative financing solutions: The company currently uses financial products that allow them to participate in the possible upsides of several development projects

Geographical Diversification: While the company has stated that they intend to invest across the Caribbean eventually, currently the portfolio is concentrated in Jamaica.

Strong Project pipeline: The company currently has 11 projects on book, with additional investment opportunities from real estate notes from which to generate revenue.

Liquidity needs: Given that the company intends to focus on capital gains, being able to dispose of investment properties in a timely manner will be paramount.

Exposure to Real Estate Capital gains: Given the company's heavy focus on capital gains, this presents an opportunity for investors to partake in fair value gains generated by a strong management team.

Tax Treatment: The tax laws in Saint Lucia were radically changed in 2019 and 2020. The Company is therefore exposed to the risk that if it fails to establish satisfactory economic substance in Saint Lucia it could be exposed to Saint Lucian income tax at 30% on its income from all sources. Establishing economic substance in Saint Lucia will increase the Company’s Saint Lucian cost of operating; especially as most of its board meetings may have to be held in Saint Lucia.

General Market Risk Including Covid: Increased economic downturn due to the pandemic which might be exacerbated due to new variants might presents a risk for the company. This risk includes uptake of development projects and credit risk in terms of the financing solutions provided by the company to different developers.

Execution Risk: This includes the risk associated with finding investment properties, negotiating the deal, financing the deal and overseeing its development. This execution risk might limit the company's ability to generate both returns and cashflows from which to pay dividends. The company tries to limit the risk by building relationships with technical experts as well as using measures such as forwards and fixed contracts to limit project risk.

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