Australian Property Opportunities Fund II

Transcription

1 Australian Property Opportunities Fund II January 2017

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3 Contents Viewpoint & Rating... 1 Key Points... 1 SWOT Analysis... 3 Investment Team... 4 Strategy Implementation... 5 Portfolio Analysis... 7 Fund Performance...11 Liquidity And Exit Appendix A Ratings Process Appendix B Managed Investments Coverage... 14

4 Product Facts Manager Responsible Entity Fort Street Real Estate Capital Pty Ltd Walsh & Company Investments Ltd Unlisted Fund Status Min. Investment $2,000 Launch Date June 2014 Fund Objectives Sub-segment Location Target Return p.a. (CPU) Suggested Investment Period Commercial Property East coast Australia 7-9% running yield 7-10 years Fund Structure (as at 30 September 2016) Gross Assets (A$M) 162 Debt ($AM) (as at June 2016 Fund Fees (including GST) Annual Management 0.759% Fee (p.a.) RE Fee (p.a.) 0.088% Trustee Fee (p.a.) 0.11% Asset Acquisition Fee 1.375% of purchase price Property Management 3.3% of gross income Fee (p.a.) Property Disposal Fee 1.1% net sale proceeds Performance Fees 22% of the return in excess of a pre-tax IRR of 10% Buy/Sell Spread N/A Fund Performance (as at 30 September 2016) 6 mth period Fund Income 5.2% annualised Fund Growth N/A Fund Total 5.2% annualised WALE 6.2 years Portfolio Occupancy 99% The investment opinion in this report is current as at the date of publication. Investors and advisers should be aware that over time the circumstances of the issuer and/or product may change which may affect our investment opinion. All data is of 30 September 2016 unless stated otherwise. VIEWPOINT & RATING The Australian Property Opportunities Fund II (the Fund or APOF II) is an unlisted property fund that provides exposure to small-to-mid-value ($15-$75M) commercial property primarily in east coast Australia. Since raising $110M in June 2014, the Fund is now fully invested having acquired five neighbourhood shopping centres for a current value of $162M, with gearing sitting at approximately 40%. The Fund followed the successful launch, and full investment of the APOF I fund in The Fund is managed by Fort Street Real Estate Capital (the Manager), a JV between Dixon Advisory (of which Walsh & Company is a wholly owned subsidiary) and Fort Street Advisers. The latter is a boutique investment advisory firm with significant expertise in the property sector. The team is small with only three, albeit experienced property specialists. However, the team benefits significantly from the property sector expertise within the Investment Committee (IC) and its very close relationship with Fort Street Advisers. The vast majority of the portfolio s income from the five assets is underpinned by longterm leases to strong covenant tenants, including 31% to Coles and Woolworths. The Manager currently focuses on the non-discretionary retail market with long term leases to major supermarkets supported by non-discretionary specialty tenants. The portfolio has a high occupancy level being 99% and rent growth is likely to be driven by an active tenant management and value-add strategy. Asset quality is strong, with the Manager focusing on properties that exhibit the following factors: prominent location and with good exposure to passing traffic, population growth areas, non-discretionary income bias, long leases in place, low occupancy costs with good rental growth potential and with limited competition. The acquisitions demonstrate all or many of these qualities. By targeting the small-to-mid-value sub-segment the Manager holds that it has a number of competitive advantages that essentially translates to often acquiring assets off market and at better cap rates than those prevailing at that time. Evidence to date supports this. IIR has a high conviction in the ability of the Manager to achieve its objectives and rates APOF II RECOMMENDED. KEY POINTS Property Segment Exposure The Fund provides exposure to the commercial property market in the east coast of Australia. The Fund is now fully invested with a total portfolio value of $162M and a level of gearing consistent with the lower end of the target range of 40-50%. Investment Team While the team directly responsible for managing the Fund is small and is at risk of being stretched at times, it gains significant benefit from the property sector expertise in both the IC and Fort Street Advisers. The founder of Fort Street Advisers, Richard Hunt, is regarded as one of the most experienced, knowledgeable and connected experts in the market. Competitive Advantages The Fund targets the small-to-mid-value sub-segment, which is typically too small for institutional property funds. The Manager states it has a competitive advantage in this space, namely through committed and ready capital it has an ability to execute quickly and with certainty. This means it is often first port of call from property agents, often does transactions off-market and, consequently, at better cap rates prevailing at the time. Transactions to date back this up. Strong Tenant Profile From a tenant perspective, the Fund s assets are characterised by a major supermarket tenant (typically Coles or Woolworths) and then a range of financially strong speciality tenants in the food and services sectors. As per ABS data, these sectors are generally non-cyclical and continue to show solid growth. The Manager eschews businesses 1

5 subject to high discretionary spend risk, such as fashion. The tenant profile underpins a stable and growing income stream. Income Growth Income growth will be underpinned by additional acquisitions, a track record of effective tenant management (high occupancy rates), leasing agreements that provide the potential for a solid uplift in income, and the Manager s active tenant management strategy. The Manager anticipates that the Fund will generate a distribution yield of over 6% p.a over the longer term. Capital Uplift Potential We believe the outlook for an uplift in capital values is strong at this point in time. This is based on the general appreciation in commercial property values, the fact that the majority of assets were acquired at levels below prevailing cap rates, and the Manager s proven ability to improve the tenancy profile of its assets and the quality of its centres in general. 2

6 SWOT ANALYSIS STRENGTH Strong team: An investment team that, backed by Fort Street Advisers, has developed a solid reputation in the commercial property market since the launch of the APOF series. This, combined with access to committed capital, has put the Manager in a strong position to acquire assets off-market, with limited competition and, ultimately, on attractive terms. Strong team support: The investment team benefits significantly from the expertise in the IC and Fort Street Advisers. Real estate advisory is a core competency of Fort Street with its executives possessing deep sector experience having been involved in the Australian real estate market for over 20 years. Strong tenant profile: The portfolio s income is supported by strong covenant tenants and long-term leases. The Manager is also very much focused on the non-discretionary retail segments of food and services, reducing the risk of a cyclicality of rental income. Competitive advantage: By targeting the small-to-mid-value sub-segment the Manager holds that it has a number of competitive advantages that essentially translates to often acquiring assets off market and at better cap rates than those prevailing in the market at that time. Capital growth potential: The outlook for an uplift in capital values is strong at this point in time. This is based on the general appreciation in commercial property values, the fact that the majortiy of assets have been acquired at levels below prevailing cap rates, and the Manager s proven ability to improve the tenancy profile of its assets. WEAKNESS Small team: The investment team is small with three members and are at risk of being stretched at times. Having said this, we note the significant benefit and input from the IC and Fort Street Advisers. Timing and cap rate compression: Commercial property has appreciated materially over the last few years, with a significant compression in cap rates. While the final two property assets appear to provide upside potential, it remains to be seen as to whether they may ultimately compromise the initial 6% distribution yield expectation. RISKS Key Person risk: By its very nature, the small team introduces key person risk. We do not wish to overstate this given the significant expertise that sits within Fort Street Advisers. Nevertheless, the loss of a team member may prove disruptive over the shorter term and impact morale. Distribution risk: The commercial property market has appreciated materially leading to a compression in cap rates. It remains to be seen whether the more recent property acquisitions may ultimately adversely impact distribution yields, as well as capital growth potential. Interest rate risk: The Fund is sitting at the lower end of its target gearing range of 40-50%. Should interest rates begin to increase distribution yields may be adversely impacted. Liquidity risk: The Manager states that the Fund should be viewed as a 7-10 year investment. The Manager is unlikely to offer a liquidity mechanism in the interim. Investors should realise that property funds which invest in direct assets do not offer the same level of liquidity as listed real estate securities. 3

7 INVESTMENT TEAM STRUCTURE Walsh & Company Investments Limited is the responsible entity of the Fund (the RE) and Walsh & Company Investments Services Pty Limited is the trustee of the trust (the Trustee). Fort Street Real Estate Capital Pty Limited has been appointed by the Trustee as Manager of the Fund. The Manager is responsible for sourcing, assessing and recommending investments and divestments. Fort Street Real Estate Capital has also been appointed by the Trustee as property manager for the Fund. Ongoing property management services will be provided by a mix of in-house capabilities and external contractors. The Manager reports to the IC with respect to potential acquisitions, property performance, potential divestments and various other matters. The IC consists of three individuals, all of whom have significant property and general asset class investment expertise. INVESTMENT TEAM The three team members have the requisite skills to successfully execute their roles. The team is small relative to peers. Having said that, the team benefits from its very close relationship with Fort Street Advisers, with ideas and other matters informally discussed on or close to a daily basis. Furthermore, there is additional resource availability if and when required from both Walsh & Company Asset Management Pty Ltd and Fort Street Advisers. There is also a high degree of accountability by way of the very frequent interaction with the IC members. We would describe the dynamic and culture of the investment team members as collegiate, open and flat, facilitating an open exchange of views and opinions and, hence a more effective investment team. With respect to the three team members, David Rogers is responsible for sourcing and executing all real estate transactions for the Fund. David has extensive experience across commercial office, retail and industrial markets. David joined Fort Street Real Estate Capital in September 2013 and been responsible for the acquisition of nine properties to date in the two APOF funds. Prior to joining, David was Capital Transactions Manager with Charter Hall, where he was involved across 16 listed and unlisted funds, with a total exposure of $10 billion commercial real estate funds under management. David also previously served as Capital Transactions Manager with Macquarie Real Estate, executing several transactions across Japan, Italy, Germany and Australia, and held other roles within Macquarie Group including the Macquarie Office Trust, a $6 billion global REIT, and the Securitisation division. James Besson is responsible for Fund strategy and capital management. Before joining Fort Street Real Estate Capital, he was an Associate Director at UBS AG in Sydney, where he spent four years in the real estate equity research team covering nine real estate investment trusts with a combined market capitalisation of over $35 billion. Prior to this, he was a Financial Analyst at the Westfield Group, where he spent four years working in the Sydney and London offices in a number of different operational and finance roles including the Shopping Centre Management and Leasing, Finance Operations, Change Management and Development Finance teams. Anika Richardson joined Fort Street Real Estate Capital in January 2016 and is responsible for asset strategy and implementation. Before joining Fort Street Real Estate Capital, Anika was a senior Financial Accountant at Lend Lease Europe, where she worked across a portfolio of property developments in the United Kingdom. In this role she supported the Financial Controller to meet statutory and management reporting obligations during a transition to a new finance system. Prior to Lend Lease, she was a Finance Manager at a private equitybacked start up, where she on-boarded new businesses after acquisition, developed finance processes and streamlined reporting. She has gained a wide range of business experience from project positions in London and Australia after starting her career in Sydney as an accountant in Corporate Recovery for McGrathNicol. Anika is a Chartered Accountant and holds a Bachelor of Business (Property and Property Valuation) and Bachelor of Commerce (Accounting) from the University of South Australia. 4

8 Investment Team Members Name Responsibility Tenure Industry Exp. David Rogers Property sourcing and execution 3 years 15 years James Besson Fund strategy & capital management 3 years 12 years Anika Richardson Asset management <1 year 10 years INVESTMENT COMMITTEE The IC comprises three members. There is an impressive mix of both property sector specific and general investment market expertise. As noted above, there is a high degree of contact between the IC and Investment Team based on both a formal weekly meeting and informal conversations. We would also note that the key representatives from Walsh & Co Asset Management, specifically Alex MacLachlan and Tom Kline, had previously worked with the IC member Richard Hunt. Both hold Richard in very high regard and, in fact, it was this confidence in the abilities of Fort Street Advisers that formed the genesis for the formation of Fort Street Real Estate Capital. Stuart Nisbett is the independent chairman of the IC. Stuart is currently the Managing Director and Principal at Archerfield Capital Partners, a boutique corporate advisory firm specialising in real estate, which he established in He has more than 25 years experience in property development, property funds management, equity and debt raising, corporate advisory and project finance. Previously, Stuart was Executive Director, Head of Property Funds at ANZ Investment Bank. He was also the Managing Director, Head of Property Banking & Property Investment Banking at N M Rothschild & Sons (Australia) Limited. Stuart has also held senior roles at director level at Macquarie Bank Property Investment Banking Division and at Lend Lease Corporation in its development and commercial asset management divisions. Richard Hunt is a principal of Fort Street Advisers, with more than 20 years of investment banking and corporate Advisers experience. Prior to establishing Fort Street in 2009, Richard was Co-Head of Investment banking, UBS AG, Australasia from 2003 to 2008, having been Head of UBS Real Estate Australasia from 1999 to Richard has been actively involved in a significant number of listed real estate transactions over the past 20 years, including mergers, acquisitions, disposals, debt restructuring and capital raisings. His clients have included Westfield, Dexus, Goodman Group, GPT, Challenger, Australand, Stockland, Mirvac and AMP Capital, Lloyds International and Investa. Alex MacLachlan is CEO of Walsh & Company. Alex joined Dixon Advisory in 2008 to lead the then newly formed Funds Management division, Walsh & Company. Alex focused the efforts of the Funds Management division on providing Dixon Advisory clients with access to asset classes and investment opportunities that would normally only be available to institutional investors. From funds under management of under $100 million at the time of his start, Alex has grown Walsh & Company to over $2.5 billion of funds under management today, with investments across residential and commercial property, fixed income, private equity, and listed equities and renewable energy. Before joining Walsh & Company, Alex was an investment banker specialising in the natural resources sector, most recently serving as Head of Energy, Australasia, for UBS AG in Sydney and, prior to that, as an investment banker at Credit Suisse First Boston. Before specialising in natural resources investment banking, he worked in the Japanese Government Bond derivatives markets in London, New York and Sydney. STRATEGY IMPLEMENTATION OVERVIEW The performance of APOF I and APOF II to date reflects well upon both on the capabilities of the team as well as the benefits it gains from the expertise and network of relationships of the IC and Fort Street Advisers. In relation to acquiring properties, the Investment Team has benefited from the market coverage provided by its, and Fort Street Advisers, extensive network of relationships with major property owners, institutional property investors and agents. For example, the relationship with the vendor of Northpoint Shopping Centre led to the off-market acquisiton of this property. 5

9 Both APOF funds have benefited from the Manager s reputation for speed and certainty of execution, given it has committed funds. In contrast, many other potential buyers in the small-to-mid-size end of the property segment are subject to financing, creating both uncertainty and extending the transaction time-frame. Consequently, on a number of occasions where a property has come up for sale the Manager has had first look at the property. The majority of the assets of APOF II were acquired off-market. In these instances there is often little or no competition with the Fund having an exclusive negotiating position during the due diligence period. In relation to property management, the Manager s active management strategies have proved their potential to enhance returns, with the Manager (or appointed property manager) increasing occupancy rates, negotiating higher rental rates where appropriate, and effectively managing tenant needs and upcoming renewals. ACQUISITION The Manager has a thorough, disciplined, and transparent investment process and benefits from its weekly formal contact with the IC to discuss specific potential transactions, the pipeline, and other key decisions that may need to be made. The Manager employs a five-stage investment process when acquiring commercial properties. The Manager describes the process as follows. Step 1 Market Review. The investment process begins with a review of the target market, involving identification of Australian commercial property that meets the Fund s investment criteria. The Manager continually researches and reviews the target market and continually liaises with property managers and agents. The Fund has access to numerous opportunities passed on from Fort Street Real Estate Capital and their extensive network. The Manager will screen numerous potential property acquisitions and create its scope of potential properties to acquire. Step 2 Preliminary Review. During the preliminary screening, the Manager will commence the following tasks: initial investment analysis; inspect properties identified in Step 1; initiate the preliminary due diligence process; prepare market comparable analysis to determine investment thesis and pricing; identify key risks and mitigants. This step is designed to provide a short list of potential investment opportunities to ensure the focus will only be on high quality properties. Step 3 Due Diligence. Once a property investment has been shortlisted, a preliminary due diligence plan is submitted to the IC. The plan outlines: details of the asset to be acquired (size, location, cost, tenants, gross and net income); the strategic fit of the asset within the Fund; preliminary funding strategy (equity and debt); asset due diligence requirements, proposed consultants and cost budget; contractual arrangements (on-market acquisition, under option). Once approved, the full due diligence plan is undertaken on the potential investment. As part of the process, particular attention is given to: obtaining an independent valuation which includes financial due diligence, legal due diligence and undertaking external party contract reviews; conducting both environmental and technical due diligence compliance on the property; determine the funding strategy through internal discussions and external communication with both potential tenants and banks; identifying future exit strategies; pricing terms. Step 4 Deliberation, Decision and Investment. Once the Manager has compiled all due diligence findings, it will then finalise the property and legal due diligence as well as the acquisition s gearing and post-acquisition strategy. Once this is complete, the Manager will prepare an investment proposal for the IC. If approved with a unanimous vote, the Manager will seek final approval from the Trustee. Once the investment and pricing is approved, the Manager will negotiate with the vendor. Once the final terms have been negotiated, the Manager will complete the acquisition of the property. Step 5 Monitor Investments. Part of the ongoing process requires the Manager to monitor all acquired properties. Once the portfolio is established, the IC and Trustee will conduct regular reviews on the performance of assets. In the event concerns are identified with the performance of a particular asset, the Trustee will request the Manager to make an appropriate recommendation to address concerns. That recommendation will pass through the normal stages of approval. 6

10 PORTFOLIO MANAGEMENT The Manager employs an active asset management strategy as a means of increasing yield and capital upside potential. A strategy is developed for each particular property and done so during the acquisition due diligence process. Potential asset repositioning and significant capital expenditure are integrated into acquisition planning and modelling. Once an asset has been acquired, the Manager works pro-actively with property and leasing managers to optimise the tenant mix and performance of the asset. If significant repositioning is required the Manager may work with external consultants in order to optimise the performance of the asset. To date, the Manager s approach has been successful, with all assets showing strong year on year growth and prospects for continued rental and capital growth into the future. The Manager employs a three-stage management process when managing the Fund s underlying properties, which it describes as follows: Step 1 Property Management. The Manager will undertake the following steps to ensure the acquired property is managed effectively: use their network and expertise to appoint third party property agents or on-site property managers upon the acquisition of a property; review all agreements for each acquired property; arrange meetings with tenants to understand key potential issues or concerns. Once these steps have been completed, the Manager will also identify and implement any potential value adding opportunities for the acquired properties. Step 2 Leasing. Once a property manager has been appointed, the Manager may appoint a leasing agent or undertake leasing activity directly. Leasing agents will endeavour to ensure the property maintains an optimal tenancy rate. The Manager will meet all tenants and identify any potential upcoming vacancies. For potential upcoming vacancies, the Manager will determine a management plan and also conduct tenancy negotiations. The Investment Manager will also determine and initiate a marketing strategy for any current negotiations. Step 3 Potential renovations and upgrades. Should an acquired property need renovations, mandatory changes or any upgrades, the Manager will use their network and expertise and appoint external advisors with the relevant experience and expertise. Once plans and designs have been finalised, the Manager will organise planning approvals and prepare a recommendation for the IC s review and for the Trustee to approve any potential capital expenditures. Should the Trustee approve the process, the Manager will proceed with the renovations and upgrades. PROPERTY DIVESTMENT Should conditions exist where the Manager believes the sale of the property would be in the best interest of the Fund, it may prepare a disposal plan for the IC detailing the reasons for the suggested sale, sales pricing parameters, and terms. Once reviewed by the IC and after approval by the Trustee, the Manager will appoint an agent to manage the process. PORTFOLIO ANALYSIS As at September 2016, the Fund had acquired five properties, all of which are neighbourhood shopping centres, and the Fund is now fully invested. The total value of the five assets is $162M. This is consistent with the Manager s previously stated objective, in which it had indicated that the total assets would sit at around $160M once fully invested and with a level of gearing at the lower end of the 40-50% level. Having gearing sitting at the lower end of the target provides the flexibility to implement value-add opportunities as the Manager sees active asset management as one of its strengths. All assets acquired are shopping centres. This reflects the Manager s view that this segment has and will continue to provide the highest risk-adjusted returns compared to all other commercial property segments at this stage. The Manager s focus on neighbourhood retail is that it exhibits an attractive attribute, specifically that it is typically characterised by a very high proportion of non-discretionary expenditure. The tenant profile of a neighbourhood supermarket is typically that of a major supermarket supported by 15 to 30 specialty tenants. The latter are generally a combination of fresh food (butchers, bakers, seafood, etc), services and general retail, such as chemists and medical. The funds have very few fashion tenants across the property portfolio. It is these non-discretionary retail sectors that continue to record solid sales growth, based on the ABS retail data series. 7

11 In acquiring neighbourhood shopping centres, the Manager has sought properties with the following factors: prominent location and with good exposure to passing traffic, population growth areas, non-discretionary income bias, long leases in place, low occupancy costs with good rental growth potential and with limited competition. All five acquisitions demonstrate all or many of these qualities. Portfolio Composition The composition of the Fund s property portfolio is detailed below. Geographic Distribution (as at 30 September 2016) 12% 41% 47% Qld NSW SA SPECIFIC INVESTMENTS The Manager has acquired five property assets to date for the Fund and is now fully invested, as summarised and detailed below. Portfolio Summary (as at 30 September 2016) Property Occupancy % Value $AM Northpoint Shopping Centre, Toowoomba, QLD Birkdale Fair, Birkdale, QLD Newtown Central, Newtown, NSW Marketfair, Campbelltown Hilton Plaza, Adelaide Total Northpoint Shopping Centre The Fund acquired its first asset, Northpoint Shopping Centre in Toowoomba in September 2014 for $36.5M and on a fully leased yield of 7.6% and initial yield of 6.8%. The centre has an 11 year WALE. The centre was completed in February 2014 and represents the dominant shopping centre in North Toowoomba. It is prominently located on the New England Highway, making it well suited to service the main trade population of 29,000 people. It also represents a strong focal point for local residents, being nearby to a number of schools and employment areas. The centre is anchored by a full-line Coles supermarket and has a diverse specialty tenant mix, with strong nationally recognised tenants across the food and services sectors including the Reject Shop, Priceline, Australia Post, BWS, Subway, and The Coffee Club. Since acquisition, the Manager s focus has been to increase awareness of the property given it was opened relatively recently in February It has also focussed on bedding down the asset, given new properties can go through a stabilisation process. In this regard, there has been a couple of tenant changes in relation to underperforming food retailers and some very 8

12 minor property improvement initiatives. The Manager reports that the asset is performing very well. Birkdale Fair Birkdale Fair is a fully leased neighbourhood shopping centre and was acquired in March 2015 for $23.3M on a yield of 7.4%. The property is centrally located in Birkdale, 23 km east of Brisbane, Queensland. The centre is anchored by a full-line Woolworths, which comprises 43% of total income. It has 18 specialty stores and parking for 315 cars. It also has numerous independent and national specialty tenants across the food and service sectors, including Flight Centre, Brumby s Bakery and Bank of Queensland. The strategic focus in the centre has changed from expanding the Woolworth s store to refurbishing the store in order to improve productivity. This change has, in turn, been driven by a general change in strategy by Woolworths - improve productivity per square meter rather than simply expansion. Other than this, the major initiative is to upgrade the facade as the centre is looking slightly tired. Newtown Central Newtown Central was acquired in March 2015 for $26.4M on a yield of 7.1%. The agreement was concluded off market, similar to Birkdale Shopping Centre. The property is a prime asset in Sydney s inner west and is conveniently located on King Street and immediately adjoins Newtown Railway Station. The centre was redeveloped in Newtown Central is a well-positioned shopping centre, with strong national tenants including Foodworks, Fitness First, Cellarbrations and Optus. Given the high profile location and long-term leases in place, the property provides a defensive cash flow profile with long term growth potential. When purchased, Newtown Central was the first New South Wales based asset in the Fund, and thus complimented the then two Queensland assets. Of the centre s total income, approximately 75% from the major anchors or national tenants. These are performing well and the Manager is very comfortable with these leases. The only major change the Manager has made recently is replace an under-performing food tenant on King Street (probably on the best sight in the shopping center) vacate and replaced with the high profile Bourke Street Bakery, increasing the profile of the centre. The centre is fully occupied and is performing as the defensive asset it was intended to be. There is a possibility an increase in the height limit might be permitted some time in the future, leading to the possibility of a material uplift in value. Marketfair Campbelltown Marketfair Campbelltown was acquired in August 2016 for $48.3M, representing a fully leased yield of 6.5%. The property has a strong income and leasing profile with 99% occupancy and a Weighted Average Lease Expiry of 8.5 years. The centre is strategically located within the Campbelltown town centre, an area with strong population and investment growth projections, close to local amenities and major infrastructure including schools, the Western Sydney University campus, hospital and Macarthur train station 600 metres away. Completely redeveloped in 2009 by Mark Slot and further refreshed in 2016, Marketfair Campbelltown is the only neighbourhood shopping centre in the local area and is anchored by a Woolworths supermarket, three mini majors, 20 specialty stores and a Hungry Jacks pad site. The area is underpinned by a strong growth outlook, with the Cambelltown CBD trade area forecast to grow by 60 percent over the next 10 years. This forecast is before the impact of the Badgery s Creek airport, in which stage one is expected to come online This will boost the growth outlook and forecasts further. In terms of property initiatives, the Manager is now in the final stages of completing a development to add a new food precinct along the front of the center. The Manager has already added a number of higher profile food tenants, specifically Harry s Cafe de Wheels and Zambrero s Mexican. 9

13 The shopping center trades well because of its convenient offering. The Manager has sought to further that through the creation of a food precinct with some very solid tenants which is expected to continue to add to the centers attractiveness over the longer term. The Manager s strategy is one of continuing to drive the rent and the retailers through these initiative and based on the Manager s view that the current level of rents are low given the property s productivity. Hilton Plaza, Adelaide Hilton Plaza, a neighbourhood shopping centre located in the inner western suburbs of Adelaide, approximately three kilometres from the CBD, was purchased in August 2016 for $19.2 million, representing a fully leased yield of 6.7%. The shopping centre has a strong tenancy mix, anchored by a Woolworths supermarket and featuring 13 speciality stores across a mix of food and service based retailers. The centre occupies a high profile corner site in the established suburb of Hilton with street frontage to Sir Donald Bradman Drive, a major arterial road which connects the airport and beach suburbs to the Adelaide CBD. It is also an area with no competition and it is the Manager s expectation that this will remain the case given there is no more land available in the area. Furthermore, the Manager believes the asset had become somewhat neglected by the previous owner. The lease of the major tenant, Woolworths, expires in The Manager has started discussions about doing a full refurbishment to the store to continue to drive growth. The Manager is confident that the property will perform very well over the longer term. TENANTS AND LEASES The quality of the tenants and the active management of the leases will have a significant impact upon distributions to investors and on the performance of the portfolio as a whole. The Manager has sought property acquisitions and, subsequently, leasing opportunities with financially strong and stable tenants operating in the non-cyclical non-discretionary segments of food and services. This has either included tenants with a strong national brand or an independent company with a strong track record, local presence and strong customer loyalty. While the Fund has a high degree of tenant concentration to Coles and Woolworths the potential risks are negated by, one, the clear financial strength of both supermarket chains and, two, the long-term leases in place with both. The leases in place with either Coles or Woolworths are typically for a 20 year term and incorporate recoveries of outgoings over a base year. In addition many are close to their percentage rent thresholds where the sales revenue is shared (typically landlord receives 2% of turnover) above an agreed hurdle. This can provide significant long-term rental growth for the landlord. The Manager has fostered an active tenant and lease management culture in order to mitigate tenant risk and maximise leasing potential. Relationships with tenants are viewed as paramount. Property managers generally walk through shopping centres daily speaking with tenants. For larger tenants such as Coles and Woolworths, tenant relationships are handled directly by the Manager with regular meetings and communication. The fact that the Fund has been able to increase occupancy levels on its acquired properties and that the level at the portfolio occupancy level sits at 99% reflects very well upon the Manager s capabilities in this regard. The WALE at the portfolio level has decreased following the latest two acquisitions but is still relatively lengthy, at approximately 6 years. This provides a stability and security of income and is arguably superior to the previous 9 year WALE, which could be view as too lengthy, precluding the Manager from lease renewal opportunities. The Manager is comfortable with having a component of income secured by long-term leases and the WALE of the portfolio in general. 10

14 Top Tenants by Gross Income (as at 30 September 2016) Woolworths 21% Wesfarmers 10% Fitness First 5% Trade Secrets 5% Foodworks 4% Total 45% Weighted Average Lease Expiry by Gross Income (as at 30 September 2016) FUND PERFORMANCE The Fund has consistently delivered a quarterly distribution in the vicinity of $ per unit since June 2015, representing an annualised distribution yield of 5.2%. The distributions have been fully funded by the cash flows generated by the Fund s five properties and do not include a capital component. We would expect the distribution to marginally increase over time as the Manager continues to pursue its active asset management strategy. The Manager has previously stated that it anticipates an annual distribution yield around 6% once fully invested and with the realisation of some of its asset management initiatives and recently reiterated this longer term target. It may be some time before the portfolio is completely revalued and, hence, evidence obtained as to how the portfolio is performing in terms of capital appreciation, or lack thereof. Capital apprciation to date largely reflects the money the Manager has invested in each individual property. However, we do note that the Fund has been successful in purchasing properties at higher cap rates than where the market is currently and that the commercial property market in general has appreciated. This augurs well for a solid capital uplift when the portfolio is ultimately revalued. The Fund s predecessor, APOF I, has a longer track record and that includes a history of revaluations. The valuation performance of APOF provides a guide to the skill of the Manager and the strength of its investment strategy. The bulk of the properties in the portfolio have recorded a material uplift in value, with an average of approximately 20% across the portfolio. This solid uplift in value reflects price appreciation in the commercial property market, the Manager s success in achieving higher specialty rents and higher occupancy levels, and the fact that many of the assets were acquired at cap rates in the vicinity of mid 8% as opposed to the low 7% that prevails in the market currently. 11

15 LIQUIDITY AND EXIT Investors have no rights to withdraw from the Fund, unless the RE makes a withdrawal offer. Presently, the RE is not at any time obliged and does not intend to make a withdrawal offer. As a result, Unitholders will have limited opportunity to realise their investment in the Fund as there may not be a ready market for selling Units. The RE considers an investment in the Fund to be a long-term investment, consistent with the Investment Term of up to 10 years. On the fifth anniversary of the Trust, a review will be undertaken by the Manager, IC and Trustee to assess whether it is in the best interest of Unitholders to bring forward the realisation process. Further, on the seventh anniversary, the Trust will commence the process of realisation of assets unless the Trustee determines, with the approval of Unitholders by ordinary resolution, that the Trust should continue to hold its property investments. 12

16 APPENDIX A RATINGS PROCESS INDEPENDENT INVESTMENT RESEARCH PTY LTD IIR RATING SYSTEM. IIR has developed a framework for rating investment product offerings in Australia. Our review process gives consideration to a broad number of qualitative and quantitative factors. Essentially, the evaluation process includes the following key factors: product management and underlying portfolio construction; investment management, product structure, risk management, experience and performance; fees, risks and likely outcomes. GRAPHS Highly SCORE 83 and above Not Speculative Investment Grade Highly This is the highest rating provided by IIR, indicating this is a best of breed product that has exceeded the requirements of our review process across a number of key evaluation parameters and achieved exceptionally high scores in a number of categories. The product provides a highly attractive risk/return trade-off. The Fund is likely effectively to apply industry best practice to manage endogenous risk factors, and, to the extent that it can, exogenous risk factors This rating indicates that IIR believes this is a superior grade product that has exceeded the requirements of our review process across a number of key evaluation parameters and achieved exceptionally high scores in a number of categories. In addition, the product rates highly on one or two attributes in our key criteria. It has an above-average risk/return trade-off and should be able consistently to generate above average risk-adjusted returns in line with stated investment objectives. The Fund should be in a position effectively to manage endogenous risk factors, and, to the extent that it can, exogenous risk factors. This should result in returns that reflect the expected level of risk. Investment Grade Not Speculative Investment Grade Highly Not Speculative Investment Grade Highly This rating indicates that IIR believes this is an above-average grade product that has exceeded the minimum requirements of our review process across a number of key evaluation parameters. It has an above-average risk/return trade-off and should be able to consistently generate above-average risk adjusted returns in line with stated investment objectives. Speculative Not Speculative Investment Grade Highly This rating indicates that IIR believes this is a suitable product that has met the aggregate requirements of our review process across a number of key evaluation criteria. The product provides some unique diversification opportunities, but may not stand apart from its peers. It has an acceptable risk/return trade-off and should generate risk adjusted returns in line with stated investment objectives. However, concerns over one or more features mean that it may not be suitable for most investors. Not recommended 39 and below Not Speculative Investment Grade Highly This rating indicates that IIR believes that despite the product s merits and attributes, it has failed to meet the minimum aggregate requirements of our review process across a number of key evaluation parameters. While this is a product below the minimum rating to be considered Investment Grade, this does not mean the product is without merit. Funds in this category are considered to be susceptible to high risks that are not reflected by the projected return. Performance volatility, particularly on the down-side, is likely. 13