Macquarie Direct Property Fund Investment Research October 2005

Transcription

1 Macquarie Direct Property Fund Investment Research October 2005 Managed Investment Assessments Pty Ltd holds Australian Financial Services Licence Number This licence enables Managed Investment Assessments Pty Ltd to undertake assessments of managed investment schemes. Disclosure of Interests Managed Investment Assessments Pty Ltd has received a fee from Macquarie Bank Limited for the preparation of this Assessment. The Directors and employees of Managed Investment Assessments Pty Ltd do not hold securities in Macquarie Bank Limited or the Macquarie Direct Property Fund. At the time of publication, neither Managed Investment Assessments Pty Ltd nor any associated entities have conducted any capital raising activity for the Macquarie Direct Property Fund. Entities associated with Managed Investment Assessments Pty Ltd may have provided advice to the Responsible Entity of this Trust and may do so in the future. Disclaimer This report is provided to investors as general advice on interests in managed investment schemes. This report should not be relied upon as a specific recommendation as Managed Investment Assessments Pty Ltd has no knowledge of the financial circumstances of any individual investor. It is strongly recommended that investors consult their financial advisor prior to making any investment. It is also recommended that investors review reports on this product from other independent research companies. Managed Investment Assessments Pty Ltd strongly advises investors to read all material provided by the promoter of this product including the entire Product Disclosure Statement. Managed Investment Assessments Pty Ltd has no influence whatsoever on the past, present or future performance of this product or its manager, and does not accept any liability for financial loss incurred by investors who choose to invest in the product assessed in this report, or any other product. Managed Investment Assessments Pty Ltd 2005 Managed Investment Assessments Pty Ltd ABN info@miaresearch.com website: Telephone: Facsimile:

2 Macquarie Direct Property Fund October 2005 Overall Rating: Quality The Macquarie Direct Property Fund has achieved an overall score of 78. It is rated as a Quality investment offer. Overall Rating 78 Quality This report is valid for 12 months from the date of issue or the close of capital raising whichever is the sooner Managed Investment Assessments Pty Ltd ABN info@miaresearch.com website: Telephone: Facsimile:

3 Macquarie Direct Property Fund Annualised Returns to Investors 15% 100% Income Return on Equity Yield 12% 9% 6% 3% 0% % 60% 40% 20% 0% Tax Advantaged Component The annual income distribution per unit on each $1 of equity invested for each financial year Tax Advantaged (RHS) The proportion of the annual distribution that is tax advantaged due to depreciation benefits, and building and other allowances Funding Structure Allocation of Funds Direct and Indirect property $230,070,000 investment Debt and hedging costs $3,602,000 Upfront fees $1,726,000 PDS and marketing costs $354,000 Other $691,000 TOTAL (rounded) $236,731,000 Capital Structure Equity $116,010,000 Debt $120,721,000 TOTAL (rounded) $236,731,000 Minimum Investment $10,000 Investment Term Open ended Distributions Quarterly Interest Rate Management Loan to value ratio 51% Interest rate structure Two tranches hedged by swaption instrument Interest rate including margin 70/80 points above bank bill swap rate Structure of Issue Trust structure Buy / Sell spread Liquidity Management Fees Stapled trust entity 2% buy / 0.5% sell Within 10 business days Establishment Fee 1% of property purchase up to 4% advisor commissions On going Fee 0.69% MER 0.90% Other costs Performance fee: 20% of outperformance of benchmark Macquarie Direct Property Fund Benchmarked We have benchmarked key elements of the Macquarie Direct Property Fund against a basket of products with a similar structure, that undertook their first capital raising within the last three years. The accompanying graph places the benchmark level for each element at zero. The extent to which elements of this fund offer vary from the benchmark is expressed as a percentage. Better than Benchmark 30% 20% 10% 0% -10% Worse than Benchmark -20% -30% Current income yield Current tax advantaged income Buy/sell spread MER Gearing on Total Assets Page 2

4 Macquarie Direct Property Fund Benchmarked (continued) The Fund s forecast income return for the first full financial year is slightly above the benchmark average of 8.01%, a benchmark which has been declining significantly in the past two years due to declining capitalisation rates for most property types. The tax effectiveness of the Fund is marginally below the benchmark average of 66%. The buy/sell spread is somewhat above the average for hybrid funds of 2.09% which we think is appropriate given the level of transaction costs associated with buying property and to ensure that these are not dilutive to existing investors. The Management Expense Ratio of 0.90% is below the 1.04% benchmark average. The Fund s initial gearing is above the benchmark average for hybrid property funds. Macquarie Direct Property Fund Product Rating 73 Quality Strengths: The Macquarie Direct Property Fund is the most innovative product seen in the unlisted property sector in recent years. It combines a portfolio of office buildings with active management requirements but with considerable upside, fair and reasonable fee structure and the ability for retail investors to share in local and international underwriting and pre IPO opportunities usually only available to institutional investors. Interest rate risk has been significantly reduced. This contributes to our rating of the Fund as a Quality product. Issues to be addressed: There is a significant amount of active management required to improve the lease expiry profile of the direct property portfolio. We believe Macquarie is seeking to take advantage of a recovering Sydney office market to retain or replace short term tenants with leases on more favourable terms or move to improve tenant covenant should that recovery not eventuate. In the short term, the acquisition of additional direct assets with longer lease expiry profiles would be advantageous. Macquarie Bank Limited Management Rating 85 Very Strong Strengths: Macquarie Bank has a substantial resource base of quality specialist executives with the ability to deliver technically advanced and innovative products to the market. The company has several areas of its business structure, including interest rate management, treasury and compliance that are the equal of any of the peers. The company is very profitable and commands significant market power as a leading brand in Australian financial services. We rate Macquarie as a Very Strong manager in relation to their ability to successfully manage the Fund. Issues to be addressed: We have not identified any significant human resources issues. However, the historical performance of some of the underlying properties in the unlisted trusts has not met initial forecast expectations. To provide greater diversification and access to opportunities Macquarie has developed the Macquarie Direct Property Fund. This has been structured in a more typically innovative Macquarie format and one more likely to be successful within the Macquarie culture given its ability to interact with other Macquarie business units. Page 3

5 Macquarie Direct Property Fund Overview The Macquarie Direct Property Fund is the result of many months of development by the Macquarie team. The Fund has been structured so that returns from the initial core portfolio of 6 office buildings in Sydney, Melbourne and Brisbane can be enhanced by the involvement of the Fund in various Macquarie property related investments both in Australia and overseas. Fund being created out of existing syndicates A number of novel features to enhance returns The Fund is being created out of several existing fixed term property syndicates. Current investors in these syndicates have the opportunity to receive units in the Fund in exchange for their units in their existing investment or to redeem their investment. Macquarie has concluded that the move towards open ended property trusts in the unlisted sphere is more advantageous to investors who have increasingly seen single asset trusts as less attractive. Open ended structures are more palatable to the myriad of platforms which account for much of retail investor demand. Macquarie aims to utilise its unique access to property related opportunities to provide investors in the Fund with exposure to deals not usually available to retail investors via periodic participation in sub underwriting of Macquarie managed property vehicles and the pre Initial Public Offering ( IPO ) stage. From time to time opportunities for investment into direct property or temporary investment in other Macquarie products may not exist or be on favourable terms to the Fund. Macquarie has also mandated its specialist property securities fund team to invest excess cash. In the current market this will enhance returns on that component by approximately 200 basis points and therefore minimise the dilutionary effect of investor inflows. As part of our assessment of the Fund, executives from MIA visited the offices of Macquarie Bank Limited on Thursday 22 rd September between 10am and 5pm. We met with the following executives: Richard Cutler Chief Executive Office, Macquarie Direct Property Richard Stacker Fund Manager, Macquarie Direct Property Intensive management assessment Steven Bennett Trust Analyst, Macquarie Direct Property Ross Victor National Distribution Manager, Macquarie Direct Property Doris Jurzak Chief Financial Officer, Macquarie Property Investment Management Ian Richardson Legal and Compliance Manager, Macquarie Property Investment Management Douglas Hunt Division Director, Macquarie Property Investment Management James Weaver State Manager, Macquarie Property Investment Management David Kivell Executive Director Macquarie Funds Management Page 4

6 Martin Jobling Director, Macquarie Asset Services Limited Ian Macintosh Associate Director, Macquarie Bank Stuart King Treasury Manager, Macquarie Property Investment Management Investment Structure Stapled structure appropriate for new fund 3% 2% 1% 0% Buy/sell Spread Sector Average Macquarie Direct A typical public unit trust structure is being employed at the Fund level. This should make the Fund available for investment by superannuation funds and corporate entities. However Macquarie has determined that it is in investors interests to staple various existing syndicates (see PDS) rather than transfer the direct property holdings into the new vehicle. Each Foundation Investor (in existing syndicates) is being offered a different unit price for their existing units based on external valuations of the underlying assets. The minimum investment for new investors is $10,000 and future additional investments or withdrawals will be able to be made in $1,000 investments. A buy spread of 2.0% and a sell spread of 0.5% will be implemented from 1 January We believe this spread is fully justified having regard to the high level of property transaction costs in Australia. Returns Strength of office leasing markets key factor 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Annualised 1st Year Yield Sector Average Macquarie Direct Conservative and well constructed forecast model The Fund is forecasting an income return of 8.00% for the 2006 Financial Year and 8.10% for the 2007 Financial Year. We have spent a significant amount of time working through the Fund model with Macquarie executives and understand that the forecast returns are based on the current direct property portfolio and without regard to future acquisitions of direct property, future investments in other Macquarie property based products and returns from the property securities mandate. Having examined the various assumptions within the model we believe that the forecast returns are conservative. Taking in to account the unique ability of Macquarie to provide new opportunities for exposure to higher returning opportunities, we would expect the Fund to deliver average annual total returns to investors on a pre tax basis of close to 13% over a three year period. The Fund model assumes that there are no property acquisitions in the forecast period (to 30 June 2007). We will be somewhat surprised if this reflects the actual outcome given the track record to Macquarie in the identification of acquisition opportunities. The model also assumes no income from sub underwriting and pre IPO investment. Again this belies the Macquarie expertise in this area and the large number of opportunities currently available and mooted for the next few months. Macquarie has assumed that each tenant in the initial property portfolio vacates upon lease expiry. This is important as the average lease expiry period of 3.0 years at the time of writing is comparatively short. Nonetheless, while we believe that Macquarie has taken the correct approach in assuming 100% vacation upon lease expiry, we see short term upside possibilities given that this scenario is unlikely to be fulfilled and the various office markets in which the initial direct property portfolio is located are either currently very strong (Brisbane CBD) unexpectedly resilient (Melbourne CBD) and in the early stages of recovery (Sydney/North Sydney). Various rental guarantees are in Page 5

7 place for five of the 6 properties in the initial portfolio and assumptions have been made based on current (7% of initial portfolio) and assumed tenant vacancies during the period to 30 June 2007.Various assumptions have also been made regarding the investment in listed property securities as at 1 January 2006 (see Property Portfolio) as well as the capital expenditure requirements pertaining to the initial property portfolio (see Capital Expenditure) Current direct property risk limited to delay in office recovery It is standard practice for MIA to model the Fund on a more negative basis to understand the potential outcome for investors under a more adverse scenario. In this instance we have worked with Macquarie executives to adjust their assumptions. In our review of the Fund model it was apparent that Macquarie has already taken what could be almost described as a very conservative assessment of many of the factors influencing investors returns. We found ourselves restricted to further downgrading the outlook for office leasing markets to the extent that the various rent guarantees in place were used up earlier or not sufficient to cover vacancies over and above those caused by lease expiry. In order to contrive an outcome we assumed that company failure amongst existing tenants increased the level of vacancy within the existing portfolio between 1 January 2006 and 30 June 2007 and that this reduced income 7% for the 6 months to 30 June 2006 and 14% for the 12 months to 30 June The result of this was a decline in income return to 6.93% for the 2006 financial year and 5.97% for the 2007 financial year. We emphasis that this scenario is considered unlikely and would in all probability have to be the result of a significant economic recession in the short term, a scenario which, high petrol prices notwithstanding is considered unlikely by most commentators. Taxation Issues Tax effectiveness in line with benchmark It is anticipated that income received by investors will be 86% tax advantaged in the 2006 financial year (pro rata) declining to 63% for the 2007 financial year. These forecasts in the PDS assume no new acquisitions of direct property and only a small exposure to listed property securities. As a result the actual outcome may be significantly higher or lower than forecast in the PDS. Tax advantaged income means that payment of a considerable portion of income tax is deferred until the units in the Trust are sold. However, this mechanism reduces the capital gains cost base for investors. Investors must seek advice from their accountant or financial advisor in relation to this matter. Capital Expenditure Significant capital expenditure budget in place The Fund model outlines capital expenditure of $6.5 million in the period to 30 June We would expect that some of this would in fact be utilised to attract new tenants and to assist in retaining existing ones upon lease expiry. We note that each capital expenditure project is managed by Macquarie Asset Services who undertake this work on an arms length basis and normally charge a fee of up to 6% of contract value. Page 6

8 NTA significantly higher than normal % of total assets $1.10 $1.00 $0.90 $0.80 $ % 50% 40% 30% 20% Net Asset Value Sector Average Trust Gearing Sector Average Clearly defined and very attractive debt finance arrangements Macquarie Direct Macquarie Direct Net Asset Value The PDS indicates that the NAV at 1 January 2006 after deducting Fund establishment costs will be $0.98, significantly higher than most unlisted property trusts at inception. The recent introduction of International Accounting Standards in the Australian market has meant that all managed investment schemes have to comply with these new standards. The PDS indicates that the financial reports produced by the Trust will comply with this new legislation. Loan to Value Ratio The Fund will have initial gearing of 51% of total assets. At first glance this is a relatively low level of gearing. However, it is expected that the Fund will have $14 million invested in listed property securities as at 1 January As is normal practice Macquarie will not gear the exposure to non direct property assets. Therefore the appropriate measurement in this instance is the debt component as a proportion of the value of the Fund. This provides a loan to value ratio on the direct property component of 57% which is still conservative but we believe wise when taking into account the current portfolio and the comparatively short average lease expiry profile. Interest Rate Management Macquarie has negotiated a facility with an external major bank of up to $ million. This will be taken up in two tranches to allow for the migration of various existing debt facilities within the original syndicate structures attached to each property. We have been briefed on the parameters of these arrangements and have been impressed by the simplicity of the facility and what appear to be very favourable terms to the Fund. We note that the Fund may borrow up to 65% LVR (on direct property), well above initial levels. When taking account of the low line and establishment fees, the initial margin over the bank bill rate of 80 basis points, declining to 70 basis points for the second tranche is one of the best terms we have seen in the unlisted property trust sector. We would surmise that the Macquarie brand and market position has had considerable influence on this result. Fees and Commissions Fees structured on more traditional Macquarie model % of total assets Management Expense Ratio 1.2% 0.9% 0.6% Sector Average Macquarie Direct The fee structure for the Fund has been created along the lines of Macquarie s non property managed funds where there is a greater emphasis on performance fees than on annuity based remuneration. Macquarie will charge a 1% acquisition fee each time a new direct property acquisition is made. We note that this will not apply to the initial portfolio. Macquarie will also pay advisors up to 4% of equity invested. The standard total up front fee including commissions for unlisted property trusts is 5% of property purchase price. Even assuming Macquarie had charged the 1% acquisition fee for the initial property portfolio, this would have translated into a total up front fee and commission structure of approximately 2.7% of the current value of the direct property assets, a factor contributing to the high initial NAV (see Net Asset Value). The ongoing management fee of 0.69% of total assets is below the average of open ended unlisted property trusts and well within Page 7

9 industry averages for hybrid property offers. The Management Expense Ratio ( MER ) at 0.9% is also below sector averages for both unlisted property trusts and hybrid funds (##%) of this type. The performance fee set in place by Macquarie is to be calculated as 20% of any out performance over a benchmark that Macquarie have deemed appropriate for this Fund. The benchmark will generally be based on various components of the Mercer Unlisted Property Funds Index but its composition will change from time to time to reflect changes in the nature of the property portfolio and the level of exposure to listed property securities. We refer investors to the PDS for more detailed information. Tenant Covenant Tenant covenant needs to be strengthened In our opinion, the current tenant covenant is not particularly strong. Risk free tenants, including Government and the big four banks lease just 13.2% of total net lettable area while institutional and legal tenants make up another 13.0% There are other significant tenants with more than half of the portfolio tenanted by private companies. Macquarie has sought to mitigate leasing risk in the next four years by providing rental guarantees amounting to $6.12 million. Lease Expiry Profile Relatively short lease expiry profile The lease expiry profile at 3.0 years at the time of writing is relatively short. As far as the existing portfolio is concerned this may result in Macquarie being able to re lease space at higher than budgeted rents if their upbeat medium term assessment for the office market proves to be correct. We note that part of $6.12 million in rental guarantees may be used during the forecast period for lease incentives and commission payments as part of a plan to improve the tenant covenant and lease expiry profile. Geographic and Sector Allocation Mandate provides domestic and international opportunities Geographical Diversification % of Fund by value NSW 55% VIC 27% QLD 18% Listed property securities exposure provides opportunity for limited liquidity mechanism The Fund has a significant weighting towards the Sydney office market, in particular the CBD and North Sydney. This is consistent with the Macquarie view that the inner Sydney office market, having underperformed the rest of the country in the past two years, are about to enter a significant growth phase. We would expect the Fund to make future acquisitions of office property in inner Brisbane, Sydney and Melbourne as well as diversify into other markets including international opportunities. Exit Strategy and Liquidity Macquarie intends to implement a limited liquidity facility on or before 30 June We are advised that investors will in most circumstances be able to have redemptions processed within 10 days. However, a maximum of 5% of equity (increased by any further investment into the Fund in the same month) can be redeemed from the Fund by all investors in any month and a minimum of 5% of gross assets must be retained as an investment in listed property trusts at all times. The listed property trust exposure within the Fund means that liquidity will be available to investors subject to the above limitations. However, we cannot discount the possibility that redemptions may be placed on hold in more extreme market conditions from time to time. Page 8

10 Macquarie Direct Property Fund Property Portfolio/Securities Exposure Portfolio of non prime office buildings Direct Property 92% Initial Asset Allocation Listed Property Securities 6% Other 3% Properties located in Australia s major commercial districts Strategic Asset Allocation Investment Range Investment Range Direct Property 50 90% Listed Property Securities 5 50% Underwriting 0 20% Pre IPO Investments 0 20% Unlisted property trusts 0 20% Cash or equivalent 0 10% The current direct property portfolio is made up of 6 non prime office properties in Brisbane, Sydney and Melbourne. We have previously inspected five of these properties and have inspected the Brisbane property as part of this assessment. Each property has been managed by Macquarie for some time and we are advised that the creation of the Fund will not result in any practical changes to management practices with respect to these assets. 154 Pacific Highway, St Leonards, Sydney: This property is currently held by the JJ Direct Property Trust and was purchased by this Macquarie managed syndicate in May The property consists of a 10 level office building currently let to two major tenants Teletech International Pty Ltd and Ramsay Healthcare. The building is located on the St Leonards ridge affording views south east towards the Sydney CBD. The existing syndicate returned an 11.04% distribution for the 2004/05 financial year. 68 Pitt Street, Sydney: This property is currently held by the PH Direct Property Trust and was purchased by this Macquarie managed syndicate in December The property consists of a 26 level office building currently substantially let to ANZ Banking Group and ING. The building is located on the corner of Pitt and Hunter Streets in a prime part of the Sydney CBD. The existing syndicate returned an 11.04% distribution for the 2004/05 financial year in line with forecasts. 461 Bourke Street, Melbourne: This property is currently held by the BM Direct Property Trust and was purchased by this Macquarie managed syndicate in July The property consists of a 19 level office building leased to a number of tenants. The level of vacancies and recent lease expiries caused Macquarie to stop distributions during the 2005 financial year which have since been reinstated reflecting a return to 100% occupancy. We note that an expression of interest campaign was undertaken in early 2005 but heads of agreement was not reached. 165 Walker Street, North Sydney: This property is currently held by the NB Direct Property Trust and was purchased by this Macquarie managed syndicate in December The property, leased to a mix of tenants, consists of a 9 level office building located on the eastern side of the North Sydney CBD a location with very high visibility. The existing syndicate returned an 8.56% distribution for the 2004/05 financial year, below the 9.70% forecast in the original PDS in Adelaide Street, Brisbane: This property is also currently held by the NB Direct Property Trust and was purchased by this Macquarie managed syndicate in December The property consists of a 23 level B Grade office building located in a semi prime area of the Brisbane CBD. An executive of MIA inspected the property between 4:15pm and 4:40pm on Monday 26 September. The property is in generally good condition. However, we note that the rear of the property could do with some cosmetic maintenance. Page 9

11 456 Lonsdale Street, Melbourne: This property is currently held by the Macquarie Direct Property No.9 Syndicate and was purchased by this Macquarie managed syndicate in July The property consists of a 14 level office building adjacent to the new Supreme Court complex in Melbourne s legal precinct. The building is leased to a significant law firm and several other tenants. The existing syndicate returned an 8.56% distribution for the 2004/05 financial year, below that forecast in the original PDS in Listed Property Securities Portfolio The PDS forecasts that the Fund will have a $14 million exposure to listed property securities by 1 January 2006 and the allocation may increase to as much as 50% of the total Fund assets under certain circumstances. Property securities exposure to be managed by experienced active management team Mandates restricts investment universe to specific income profile We have recently interviewed the Macquarie property securities team to gauge their investment philosophy. Its approach is to be an active manager seeking relative value through a bottom up stock selection process. The team does not rely on published research reports but develops proprietary market forecasts and believes that it can do this proficiently by using the direct property experience of the team members. The listed property securities mandate for the Fund has been clearly defined and is more limited in its scope than most standard listed property securities mandates. The Fund management team have taken steps to ensure that investors are gaining the highest possible exposure to income streams actually derived from underlying property by limiting investment in listed property securities to those stock that derive 10% or less of their net income from non annuity streams such as property development and construction. This has disqualified several large stapled securities from the investment universe applicable to this mandate. Unlisted Property Trust Exposure Exposure to unlisted property trusts may be internal or external opportunities The Fund may have up to 20% of total assets invested in unlisted property trusts or syndicates. These may be either Macquarie managed products or externally managed entities. Investment in unlisted trusts by third party managed property securities funds has grown considerably in the past two years and we would expect opportunities to present themselves on a fairly regular basis. We note that investment guidelines pertaining to this exposure have not yet been quantified but will be subject to investment committee approval. Underwriting/pre IPO Investments Unique opportunity for investors seeking exposure to institutional type risk return profile The opportunity to gain exposure to pre Initial Public Offering investment and sub underwriting opportunities is the feature of this Fund that separates it from all others currently available in the market. Given Macquarie s unequalled ability to develop opportunities for the Fund and based on our discussions with senior Macquarie executives, we believe that the Fund will be provided with opportunities to invest in this manner during the 2006 calendar year. While there is clearly risk involved in exposure of this type, we believe that it enhances the Fund on the basis that the nature of the direct property portfolio is one of active management rather than a stable income steam in any case. Page 10

12 Macquarie Direct Property Fund Risk Factors The following is a list of general risk factors relating to an investment in Macquarie Direct Property Fund not covered in detail elsewhere in the report. The list is not meant to be exhaustive and does not take into account the individual circumstances of investors. Future economic downturn may affect demand for office space General Economic Conditions: Fluctuations in economic conditions in Australia may affect demand for office property and other property to be acquired by the Fund in future. The certainty of an economic recession is not in doubt, only its timing. Previous recessions have led to a significant decline in demand for office space. Socio economic and Demographic factors: Changes to the social structure or demographic base of the metropolitan areas in which assets are located may diminish their attractiveness and hence the returns of the Fund. Underwriting risk is higher than standard property trust profile Underwriting Risk: Macquarie is among Australia s leading experts in the underwriting of structured investment products. The ability to participate in underwriting opportunities brings the possibility of enhanced returns. However, the exposure to underwriting brings a higher level of risk to the Fund that may also result in a loss under certain conditions. Regulatory Conditions: The attractiveness of an investment in the Fund may be affected by changes to Australian Government policy, particularly in relation to the financial services industry. Changes in taxation law, relevant sections of corporations law or any other statutory changes may affect distributions to investors. Accounting Standards: Further changes to accounting standards within Australia may have an impact on the value of units and the distributions paid to investors in the Fund. We note that the effect of the introduction of International Accounting Standards in Australia in 2005 is forcing property trusts to change their reporting standards to a significant degree. Long term investments subject to interest rate fluctuations Scope for unexpected CAPEX requirements Changes in Interest Rates: This is a medium to long term investment. Changes in interest rates may impact on investor returns. There is no guarantee that interest rates negotiated in future years will be as low as those currently negotiated. Liquidity: There will a limited liquidity mechanism in the Fund. However, experience has shown that liquidity will be limited in a negative equities market or alternatively, funds invested in listed property securities may have to be sold at significant losses in order to provide redemptions for unit holders. Investors should not assume that liquidity, however limited, will guarantee a full return of capital. Unexpected Capital Expenditure: Significant capital expenditure provision has been applied within the modelling of the Fund. However, there is the possibility that capital expenditure requirements in future years may exceed those currently assumed and budgeted. Terrorism: Macquarie, amongst others has identified this issue as a factor within the PDS. It is difficult to dismiss the possibility and its effects in the current climate. Page 11

13 Macquarie Bank Limited Company Background Macquarie Bank is Australia s largest investment bank and a major player in funds management on a global scale, particularly in the areas of infrastructure and property. At the time of writing, Macquarie Bank was second in terms of total funds under management controlled by Australian domiciled fund managers and second in respect of property funds under management. Australia second largest fund manager Macquarie s property funds include a series of listed property trusts invested in Australian and North American property, a number of unlisted property syndicates, property securities funds and a series of private mandates similar to that determined by the Fund. Key Executives There are in excess of 15 Macquarie executives with direct ongoing input into the Fund. We provide descriptions of the skills and experience of who we consider the key personnel as follows: Macquarie Direct Property Very substantial team of executives available as required Richard Cutler is Division Director and Chief Executive Officer of Macquarie Direct Property. He has over 30 years experience in the property industry. Richard has been an advocate for the unlisted property sector and has held leadership roles in the industry for the past few years. We have known Richard since 1998 and he has demonstrated integrity and leadership at all times. Richard Stacker is the Fund Manager for the Fund. He has over 16 years experience in accounting, risk management, property finance and funds management. Richard joined Macquarie approximately two years ago and has worked with Richard Cutler managing the existing property syndicates. Steven Bennett is the key analyst for the Fund. He was responsible for the compilation of the extensive financial model. On an ongoing basis Steven s responsibilities will extend to ongoing analysis of the portfolio of assets and new property acquisition opportunities. Ross Victor is a recent arrival to Macquarie having spent much of the past 22 years in the financial advisory industry in Australian and New Zealand including senior roles at AMP Financial Planning and Hillross Financial Services. His current role is National Distribution Manager for Macquarie Direct Property. Macquarie Property Securities Mandate Experienced property securities fund manager David Kivell is known to us as a strong property securities fund manager having managed Macquarie s property securities exposure for the past five years. Prior to his current role, David spent several years in various roles at Lend Lease including a period managing the Growth Equities Mutual Property Securities Fund. He currently holds the position of Head of Property Securities. David has some strong views on the securitised market and has been prepared to back up these views with action in terms of investment decisions. Page 12

14 David Kivell manages a team of four executives including Grant Mackenzie who is the back up fund manager in the event of David s absence, Ozzy De Silva assistant portfolio manager, Trent Reavell Analyst and Anthony Street Product Manager. Human Resource Management Highly structured human resource management focussed on loose tight philosophy Macquarie has approximately 6,000 employees within Australia and throughout the world, including approximately 3,000 in Sydney and 550 in Melbourne. As a result, human resource management is delegated to section heads who must justify all human resources through their superiors to relevant Head Office senior officers. Macquarie executives at all levels are known to be highly remunerated relative to their peers within a culture of performance based assessment. The typical structure within property funds management is to have two to four executives dedicated to each product or series of products with non core management resources such as legal, compliance and interest rate management being sourced from a general pool. Asset Management Expertise Asset management responsibility in hands of dedicated asset services business unit Macquarie has its own in house asset management company known as Macquarie Asset Services Limited ( MASL ) headed by Chris Breach who has been known to us for more than 10 years. MASL is one of the world s largest asset managers currently managing the entire Macquarie portfolio of 496 properties covering more than 7 million square metres housing 5,586 tenants. We have been briefed on the role of MASL by Martin Jobling, a director of MASL who has provided demonstrations of various successful initiatives undertaken on properties within the Macquarie stable. MASL is also involved in the due diligence on any new acquisitions (a regular occurrence at Macquarie) and is responsible for the coordination of various external consultants. MASL have implemented a technologically current platform for the fast transfer of information the interested parties within the Macquarie structure. Interest Rate Management Experience Very strong financial literacy and structuring ability The Fund executives are fortunate to have the Macquarie Bank debt management team at their disposal, a resource which would be the envy of many smaller fund managers. This team has provided direct input into the removal of interest rate exposure in the short to medium term via the purchase of a swaption instrument to provide certainty of the cost of debt. The forecast component has been fixed at a maximum rate of 5.7% for four years, a very good illustration of the skills and market power that Macquarie holds. The Macquarie Treasury department will maintain an ongoing management and review process including quarterly reviews on interest rate exposures. Page 13

15 Investment Performance Track Record Track record in unlisted trusts not without blemish Macquarie s various property trusts, both listed and unlisted have performed well over the past decade. However, the track record amongst the some of the closed end property syndicates including some that are to be rolled into this Fund are less impressive and this is one of the few weaknesses we have identified. Some syndicates have performed well, including the JJ and PH Direct Trusts included in this Fund. Other well performing examples include the VC Direct Property Trust which was wound up in June 2004 after an investment term of five and a half years. Investors received an average 10% distribution over that period and received $1.40 in capital return on their original dollar invested. WP is expected to be wound up in November 2005 with an anticipated unit price of $1.50. By contrast, there are examples of syndicates not performing to expectations. The NS Direct Property Trust was subject to a halt of distributions during the 2004 financial year as one property was sold and another was exposed to a weak North Sydney office market. The current valuation on the remaining property would be insufficient to return the full amount of equity to investors even allowing for the capital return made in July 2004 following the sale of the other property. Other syndicates have had distributions placed on hold or are currently tracking below original distribution forecasts. Financial Position Highly profitable international investment bank Macquarie Bank ends its financial year on March 31. The company announced an $823 million after tax profit for the 12 months to 31 March 2005, an increase of 67% over the previous year. It has been reported by the Board of Directors that total shareholder return from listing in July 1996 until 31 March 2005 was 929% and this can only have increased since that time given the strong upward movement in share price in the five months to the end of September It appears that Macquarie as an organisation is in an extremely strong financial position. However, we are not in the position to provide advice on the financial outlook for Macquarie and investors should not misconstrue this commentary as advice on shares in Macquarie Bank Limited. Regulatory Compliance Track Record No compliance issues at time of writing We have met with John Wright Executive Director Compliance and Doris Jurzak Chief Financial Officer Financial Operations and have queried them on any recent compliance issues. We have been advised that there have been no significant breaches of compliance requirements within Macquarie Property Investment Banking or Macquarie Direct Property in the past two years. We were advised that a compliance surveillance visit from the Australian Securities and Investments Commission took place in 2003 and that there were no significant issues arising from that visit. We have found the company to be strongly compliance focussed. According to the ASIC database, Macquarie holds a large number of Australian Financial Services licences which hold the requisite authorisations for each division of the company to carry out its business. Page 14

16 Managed Investment Assessments Managed Investment Assessments Pty Ltd, ABN , provides investors and their advisors with high quality assessments of property related managed investment schemes. We are an objective observer of the companies and products we examine, and have a strong basis, supported by thorough analysis, for any assessment made. We strive to adhere to the guide for research report providers titled Managing Conflict of Interests released by the Australian Securities and Investments Commission on 3 rd November Our coverage extends across the property funds management sector within Australia, and covers investments made by Australian domiciled funds in both local and overseas markets. Managed Investment Assessments holds AFS Licence No The authority enables us to undertake assessments of managed investment schemes. Investment Ratings The following management and product ratings, and the weighting given to specific variables that comprise them, are consistently applied across property trusts of this type assessed by us. Product Ratings Less than 50 Not recommended Score Approved Score Score Score Attractive Quality Superior Management Ratings Less than 50 Not recommended Score Competent Score Score Score Good Strong Very Strong Overall Ratings Less than 50 Not recommended Score Approved Score Score Score Attractive Quality Superior Product Variable Weightings Return: Income return on equity/ Risk adjusted Internal rate of return 24% Structure: Investment structure/ Loan to value ratio 13% Risk: Tenant covenant/ Lease expiry profile/ Geographic and sector allocation 17% Taxation effectiveness 12% NTA backing 5% Interest rate management 12% Fees and commissions 4% Exit strategy and liquidity 13% Management Variable Weightings Experience of key executives funds management 15% Experience of key executives property asset management 15% Adequacy of staff resources 5% Sector specific property management expertise 12% Interest rate management experience and track record 15% Investment performance track record 10% Financial position of Manager 10% Regulatory compliance procedures 18% Page 15

17 Information for Investors Basis of Assessment Manager Visit: The executives of Managed Investment Assessments have visited the executives of Macquarie Bank Limited and have discussed with senior executives their ability to successfully manage the interests of investors in the Macquarie Direct Property Fund. Information Sources: Managed Investment Assessments has viewed or received copies of a number of documents which may include the most recently available Balance Sheet of the Manager, confirmation of NTA and cash flow compliance, recent annual reports, a summary of events that might have a material impact on investor returns, the Compliance Plan and Constitution, a record of any surveillance visits undertaken by ASIC, property valuations, building due diligence reports, accountants and legal reports, any relevant Prospectus, Product Disclosure Statement or Information Memorandum, the financial model pertaining to the product, documentation relating to the Investment Criteria, the Letter of Offer of Finance, any Option Deed, Underwriting Agreement or Custody Deed, the Managers AFS Licence and the internal organisational structure. Disclosure of Interests The Directors and employees of Managed Investment Assessments Pty Ltd do not hold securities in Macquarie Bank Limited or Macquarie Direct Property Fund. Managed Investment Assessments Pty Ltd has received a fee from Macquarie Bank Limited for the preparation of this Assessment. At the time of this report, neither Managed Investment Assessments Pty Ltd nor any associated entities have conducted any capital raising activity for the Macquarie Direct Property Fund. Managed Investment Assessments Pty Ltd may have provided advice to the Responsible Entity of this Trust and may do so in the future. Disclaimer This report is provided to investors as general securities advice on interests in managed investment schemes. This report should not be relied upon as a specific recommendation as Managed Investment Assessments Pty Ltd has no knowledge of the financial circumstances of any individual investor. It is strongly recommended that investors consult their financial advisor prior to making any investment. It is also recommended that investors review reports on this product from other independent research companies. Managed Investment Assessments Pty Ltd strongly advises investors to read all material provided by the promoter of this product including any prospectus or Product Disclosure Statement. Managed Investment Assessments Pty Ltd has no influence whatsoever on the past, present or future performance of this product or its manager, and does not accept any liability for financial loss incurred by investors who choose to invest in the product assessed in this report, or any other product. Date of report: October 2005 This report is valid for 12 months from the date of issue or the close of capital raising whichever is the sooner Page 16