Enhanced Disclosure - ASIC s Regulatory Guide 46 Unlisted Property Schemes: Improving Disclosure for Retail Investors

Transcription

1 Enhanced Disclosure - ASIC s Regulatory Guide 46 Unlisted Property Schemes: Improving Disclosure for Retail Investors Higgs Street Residential Development Fund ARSN This enhanced disclosure document is issued by Open Corp Funds Management Limited (ACN AFSL ) as responsible entity ( OCFML or the Responsible Entity for Higgs Street Residential Development Fund ( HSRDF or the Fund ) pursuant to ASIC s Regulatory Guide 46 Unlisted Property Schemes: Improving Disclosure for Retail Investors ( RG46 ). RG46 sets out eight s and six benchmarks in relation required to include in ongoing disclosures to investors. Previous disclosures made by the Fund can all be referred to the PDS dated September 22 nd, 2014 The information provided in relation to RG46 is based on the most recent financial statements available for the Fund, being the audited Financial Report for the year ended 30 June The Responsible Entity is not aware of any material changes since those statements were published. An overview of the eight s, the benchmarks as required principles and OCFML s responses to the practical application of each of these principles as they relate to HSRDF are provided in the table below. These RG46 disclosures are to be read in conjunction with the Product Disclosure Statement (PDS) dated 22 September The information provided in the table below is as at 31 December 2015, unless otherwise stated. Below is a list of documents available from the Fund s website and may be accessed by clicking on the links below: Product Disclosure Statement dated 22 September 2014 click here Open Corp Funds Management Limited- Gearing Policy click here A copy of ASIC's RG46 click here You may also contact Open Corp Funds Management Limited by investorcomms@opencorp.com.au or telephone to obtain hard copies of the above documents. Page 1

2 Disclosure Principle 1 and Benchmark 1 Gearing Ratio and Gearing Policy This principle relates to the how the Fund s gearing levels are maintained and the policies in place to monitor the level of gearing within the Fund. A higher gearing ratio means a higher reliance on external liabilities (primarily borrowings) to fund assets. This exposes the scheme to increased funding costs if, for example, interest rates rise. A highly geared scheme has a lower asset buffer to rely on in times of financial stress. Disclosure by the responsible entity of the Fund s gearing at an individual credit facility level, helps investors to better understand the risks associated with the responsible entity s approach to gearing. The gearing ratio formula for the Fund as set down by RG46 is: Total interest bearing liabilities Total assets HSRDF was launched as a sector specific, terminating, unlisted management investment scheme in Sept 2014, via a Product Disclosure Statement dated 22 September OCFML has a written policy that governs the level of gearing for the Fund and at an individual credit facility level for the Fund. The policy provides that the gearing of the Fund will not exceed 65%, with gearing being calculated as total interest bearing liabilities divided by total assets. Total Assets is defined as all assets plus, in relation to land, the total gross realizable value for any stage of works under construction plus the capital improved value of any balance land that is outside of the stage of construction works. Furthermore, the policy provides that the gearing of the Fund at an individual credit facility level will not exceed 65%, with gearing being calculated as the amount of each individual credit facility divided by the assets secured by that credit facility. As at 31 st December 2015, the Fund has no loan facility in place other than an unsecured loan facility with Open Corp Project Management Pty Ltd The gearing ratio provides an indication of the extent to which the Fund s assets are funded by external liabilities (i.e. borrowings). Page 2

3 46.62, Based on the Fund s Financial Management Accounts for the year ended 31 December 2015 the gearing ratio of the Fund, calculated in accordance with RG46 and as set down by OCFML s Gearing Policy, is 20.58% % - based on the financial management accounts as at 31 December 2015 and for the purposes of the Gearing Policy, the directors assessment of the value of land at that date (i.e. $1,400,000 being the independent valuation in October 2014) I&L Facility paid off on 23 rd October The gearing ratio formula at an individual credit facility level for the Fund as set down by OCFML s Gearing Policy for the Fund is: Total amount of the credit facility Assets secured by the credit facility Based on the Fund s Financial Management Accounts for the year ended 31 December 2015 the gearing ratio of each individual credit facility of the Fund, calculated in accordance with OCFML s Gearing Policy for the Fund, is I & L Securities the credit facility limit of $860,000 was repaid in full on 23 October There are no member contributions classified as liabilities or any off balance sheet financing arrangements. Page 3

4 Disclosure Principle 2 and Benchmark 2 Interest Cover Ratio and Interest Cover Policy This principle relates to the how the Fund s interest cover is maintained and the policies in place to monitor interest cover within the Fund. A property scheme s interest cover ratio is a guide of its financial health. The lower the interest cover, the higher the risk that the scheme will not be able to meet its interest expense. A scheme with a lower interest cover ratio only needs a small reduction in earnings (or a small increase in interest rates or other expense) to be unable to meet is interest expense. Disclosure by the responsible entity of the Fund s interest cover at an individual credit facility level helps investors to better understand the risks associated with the responsible entity s approach to interest cover. Interest cover ratio as set down by RG46 is: EBITDA unrealised gains + unrealised losses Interest expense The Fund does not have a formal policy in relation to the Fund s interest cover as it is not considered necessary due to the development nature of the Fund and continuous review and reporting. HSRDF was launched as a sector specific, terminating, unlisted management investment scheme in Sept 2014, via a Product Disclosure Statement dated 22 September At the time of establishment a loan facility with I & L Securities Pty Ltd was secured for the purpose of part funding the purchase price of the development and all costs associated with the project and on 19 September 2014 a facility was established with Open Corp Project Management Pty Ltd Interest cover provides a guide to the Fund s ability to meets its interest expense from its earnings , Due to the development nature of the Fund, OCFML is 46.72, unable to calculate the interest cover ratio. The bank debt facility will not contain an interest cover ratio. Page 4

5 Disclosure Principle 3 and Benchmark 3 Scheme Borrowings and Interest Capitalisation This principle relates to the how the Fund s borrowings are maintained and the policies in place to monitor the level of borrowings within the Fund. Relatively short-term borrowings and credit facilities with short expiry dates are a risk factor if they are used to fund assets intended to be held long-term. If the scheme has a significant proportion of its borrowings that mature within a short timeframe, it will need to refinance. There is a risk that the refinancing will be on less favourable terms or not available at all. If the scheme cannot finance, it may need to sell assets on a forced sale basis with the risk that it may realise a capital loss. Breach of a loan covenant may result in penalties being applied, or the loan becoming repayable immediately. The scheme may need to refinance on less favourable terms or sell assets. Termination of critical financing could also mean the scheme is no longer viable (a) 46.78(b) Borrowing maturities: Loan facility with I&L Securities Pty Ltd was Loan paid off on 23 rd October 2015 The only unsecured loan facility in place as at 31 December 2015 is as follows: Lender: Open Corp Project Management Pty Ltd Amount of facility: Overdraft as Required Amount drawn: $289, Maturity Date: 30 June 2016 (or as repaid earlier) Interest capitalisation Interest have paid off with loan on 23 rd October 2015 The loan facility is due to be re-financed in January 2016 The interest capitalization balance is considered to be sufficient to meet this time frame (c) Operating cash flows Page 5

6 46.78(d)(i) At 31 December 2015, the Fund had low gearing levels. This indicates that the Fund is at low risk of not being able to meet its operating cash flow requirements. Total Facility At 31 December 2015 total loan and interest have been paid off (d)(ii) 46.78(d(iii) 46.78(d)(iv) 46.78(d)(v) Security As at 31 December 2015, the Fund has no loan facility in place other than an unsecured loan facility with Open Corp Project Management Pty Ltd. Covenants The Fund has no interest cover covenant. The loan to value ratio is dependent on the phase of development for each stage. At 31 December 2015, the Fund is compliant with its obligations under the current loan facility. Interest rate As at 31 December 2015, the Fund has no loan facility in place other than an unsecured loan facility with Open Corp Project Management Pty Ltd. Interest on the unsecured loan facility is charged at a fixed rate of 0.00% per annum, calculated on the drawn down component of the loan. No line fee is applicable. Hedging arrangements Page 6

7 46.78(e) 46.78(f) Not required and we do not intend to hedge income expense Constitutional rights A resolution passed by investors in the Fund to remove the Responsible Entity or to terminate the Fund would be an event of default under the loan facility. Ranking of investors As noted in the PDS dated 22 September 2014, payments to investors rank behind the loan facility interest and principal repayments. Maturity of loan facility The unsecured loan facility with Open Corp Project Management Pty Ltd has a maturity date of 30 June At 31 December 2015, the Fund had sufficient capital resources for its development plan. Loan facility maturity profile risks The above information in relation to the loan facility provides the status of the loan facility for the year ended 31 December Compliance with covenants The Fund is compliant with its obligations Page 7

8 Disclosure Principle 4 and Benchmark 4 Portfolio Diversification and Valuation Policy This principle relates the Fund s what the Fund s assets are and details about those assets. Generally, the more diversified a portfolio is, the lower the risk that an adverse event affecting one property or one lease will put the overall portfolio at risk. A concentration of development assets in a scheme exposes investors to increased risks involved in the development of property assets (a) The Fund has one direct property asset being a residential land development project in Deception Bay, a suburb that is approx. 32kms north of the Brisbane CBD The unchanged principal continuing activities of the Fund will be the residential development and sub-division of hectares of land in Deception Bay in accordance with the investment mandate in the PDS dated 22 Sept 2014 and provisions of the Fund s constitution. There have been no significant changes in the nature of the Fund s activities. The Fund s investment strategy is restricted to progressively developing and selling 44 residential townhouses. Other investments At 30 June 2015, the Fund does not hold any investment in other unlisted schemes or non-direct property or other assets (a) Timetable and key milestones As the information on the timetable and key milestones regularly changes, this information will be provided in the Fund s regular newsletters. Page 8

9 46.89(b) 46.89(c) 46.89(d) 46.89(e) 46.89(f) Status of key milestones As the information on the status of key milestones regularly changes, this information will be provided in the Fund s regular newsletters. Funding arrangements At 30 June 2015 the Fund s debt facilities are as set out above under the heading Disclosure Principle 3 and Benchmark 3 Scheme Borrowings and Interest Capitalization. Amount of pre-sales As the information on the amount of pre-sales regularly changes, this information will be provided in the Fund s regular newsletters. Loan to value The loan to value ratio of the Fund is as set out above under the heading Disclosure Principle 3 and Benchmark 3 Scheme Borrowings and Interest Capitalization. Risks Property, development, finance and other risks were outlined in the PDS dated 22 September These risks remain current as the project s continuing activities remain unchanged since the Fund s establishment. Risks are reported and reviewed on a quarterly basis by the Board of the Responsible Entity. If you would like to obtain a copy of the Fund s PDS it can be downloaded by clicking here. Page 9

10 46.87(c) 46.87(g) Valuation In accordance with the Funds valuation policy the Property will be valued by an independent valuer once every two years. Or within 2 months after the Directors form a view that there is a likelihood that there has been a material change in the value of the property. Page 10

11 Disclosure Principle 5 and Benchmark 5 Related Party Transactions This principle relates to how the Fund s related party transactions are managed and the policies in place to monitor the related party transactions within the Fund. A conflict of interest may arise when property schemes invest in, or make loans to provide guarantees to, related parties OCFML recognizes its responsibilities in relation to conflicts of interest in related party transactions and has created a specific policy that outlines its position. All arrangements between related OCFML entities are required to be on commercial arms-length terms and evidenced in writing. In the event that there are related parties transactions these would be considered by the Board of the Responsible Entity for approval prior entering into a related party transaction. A register of related party transactions is maintained. The Board of the Responsible Entity has complied with the Related Party Policy for the year ended 30 June Page 11

12 Disclosure Principle 6 and Benchmark 6 Distribution Practices This principle relates to the Fund s distribution practices. Some property schemes make distributions partly or wholly from unreleased revaluation gains, capital, borrowings, or support facilities arranged by the responsible entity, rather than solely from cash from operations available for distribution. This may not be commercially sustainable over the longer term, particularly when property values are not increasing (a)(b) As disclosed in the PDS dated 22 September 2014, we will use cash from the sale of townhouses (cash from operations) to pay down debt, make distributions of capital and profits to investors and/or apply the cash towards the development of subsequent stage Distribution payments from HSRDF to date are as follows: FY Nil FY Nil FY Nil We intend to distribute fully franked distributions to investors when profits and funds are available subject to relevant taxation provisions, the availability of franking credits and working capital requirements. An interim distribution of funds may be comprised of either capital or profit or both following the sale of Stage 1 developed townhouses provided that funds are not needed for debt reduction or to fund Stage 2 Investors are kept informed via regular newsletters. Page 12

13 Disclosure Principle 7 and Benchmark 7 Withdrawal Rights This principle relates to the withdrawal rights from the Fund. Unlisted property schemes often have limited or no withdrawal rights. This means they are usually difficult to exit As outlined in the PDS dated 22 September 2014 and in accordance with the Fund s constitution dated 16 th of September, The Fund is an illiquid investment and there is no liquidity or redemption facility offered during the life of the Fund nor is it intended for Units to be listed on Australian Securities Exchange ( ASX ) or any other securities exchange. Page 13

14 Disclosure Principle 8 and Benchmark 8 Net Tangible Assets This principle relates to how the Fund s Net Tangible Assets is calculated. The net tangible assets ( NTA ) backing of a scheme gives investors information about the value of the tangible or physical assets of the scheme. The initial and ongoing NTA backing may be affected by various factors including fees and charges paid up-front for the purchase of properties, costs associated with capital raising, or fees paid to the responsible entity or other parties. The NTA formula as set down by RG46 is: Based on the Fund s Financial Management Accounts for the year ended 31 December 2015 which valued the land at the lower of cost and net realizable value, the NTA, calculated in accordance with RG46, is $0.87 per unit. Net assets intangible assets +/- any other adjustments Number of units in the scheme on issue The NTA measures the net current book value of the Fund at a point in time. The NTA is shown on a per unit basis. The Fund assets in the audited Financial Report are valued at the lower of costs or net realisable value in accordance with applicable accounting standards. The directors adjustment to the value of land referred to above, values the land at its gross realisable value for any stage of works under construction plus the capital improved value of any balance land that is outside of the stage of construction works. The NTA when multiplied by the number of units held by an investor provides an estimated value (not guaranteed) of their investment in the Fund. Page 14

15 Important notice This enhanced disclosure document is issued by Open Corp Funds Management Limited (ACN AFSL ) as responsibl e entity ( OCFML or the Responsible Entity for Higgs Street Residential Development Fund ( HSRDF or the Fund ) and is effective as at 30 June 2015 and may be subject to change. The information in this ED is of a general nature only and does not take into account your personal needs, financial circumstances and objectives. This ED is not an offer or an invitation to acquire any financial product and is not a prospectus, product disclosure statement or other offering document under Australian law or any other law. It is for information purposes only. Before acquiring, disposing or deciding whether to continue to hold an investment, investors should consider the appropriateness of the information in this ED and the Fund s information having regard to their objectives, financial situation and needs. Investors should consider the relevant disclosure document and any product updates and obtain independent professional advice prior to making any decision. An investment in the Fund is subject to investment and other known and unknown risks, some of which are beyond the control of OCFML and the Fund, including possible delays in repayment and loss of income and principal invested. OCFML and the Fund do not guarantee any particular rate of return or the performance of the Fund nor do they guarantee the repayment of capital from the Fund or any particular tax treatment. Past performance information given in this ED is given for illustrative purposes only and should not be relied upon as (and is not) an indication of future performance. Page 15