Unlisted Property Fund Report. Charter Hall Direct PFA Fund. August 2017

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1 Unlisted Property Fund Report Charter Hall Direct PFA Fund A five-year office fund with government tenants targeting FY18 distributions of 7.25%

2 Unlisted Property Fund Report Charter Hall Direct PFA Fund Contents 1. Overview 2 2. Investment Summary 3 3. Fund Overview 5 4. Properties in the Portfolio Financial Analysis Management Past Performance Appendix Ratings Process Disclaimer & Disclosure 21 About Core Property Research Core Property Research Pty Ltd was established in July 2017 to provide market leading and insightful research on the property funds sector for its clients and investors. Our ratings and research covers sector level research, ratings and recommendations on listed and unlisted property funds, and is built upon the extensive research experience of its staff. The Core Property team collectively, has over 50 years' experience across property, financial services and investment markets. The team has also evaluated over 500 different funds across multiple sectors and a range of investment structures over the last decade. IMPORTANT NOTICE This document is published by Core Property Research Pty Ltd ABN ( Core Property) and should be read before making any investment decision about the product(s). This publication has been prepared by Core Property which is an Authorised Representative ASIC number of Odyssey Capital Funds Management LTD (AFSL No ). For further information, please refer to the Disclaimer & Disclosure notice at the end of this document. Copyright 2017 Core Property Research Pty Ltd 1

3 Unlisted Property Fund Report Charter Hall Direct PFA Fund The Charter Hall Direct PFA Fund ( the Fund ) is the new name for the Charter Hall PFA Diversified Property Trust, an unlisted property fund first established in The Fund s Responsible Entity, Charter Hall Direct Property Management Limited ( the RE ) has managed the Fund since 2012 and has opened the Fund to new investments for an initial term of five years to August The RE is seeking to issue Ordinary Units in the Fund to support further acquisitions and to provide liquidity for future redemptions. The Offer consists of: Ordinary Units allocated prior to 31 October 2017 will be issued at $0.98 per unit (after a 2% discount) for up to $60M under a Limited Offer; Ordinary Units allocated up to 31 December 2017 will be issued at $1.00 per unit (plus an allowance for accrued income at allocation date), and Ordinary Units issued thereafter will be issued at the prevailing unit price. The Offer compares well with the estimated NTA of $0.99 per dollar invested under the Limited Offer and $0.97 per unit for Ordinary Units. The Fund s portfolio consists of six A/B grade office assets in metropolitan areas across Australia valued at $268.0M with an occupancy of 100% and WALE of 9.2 years at 1 July Around 71% of the current portfolio is Australian government tenanted, and a further 19% by corporate tenants. Approximately 22% of income is from lease expiries within the Fund s initial five-year term. In this context, the Manager has budgeted capex at ~ 1% of the portfolio value to manage these expiries, including incentives. Core Property considers this to be in line with valuation assumptions. The property portfolio may change over time as it issues new capital and redeems units. Funds raised by this Offer will used to acquire an office asset under construction in Port Adelaide SA as well as future acquisitions the Fund may undertake. The Fund has recently exchanged contracts to sell its St Leonards NSW property, which has been excluded from the Fund s portfolio metrics. Core Property estimates the LVR to peak around 42.1% in FY19 against a bank covenant of 60%. The forecast is based on the current portfolio and assumes $10M equity is raised and capex is funded by debt. Interest is expected to be hedged at a minimum of 50% of the debt over the five-year term at an all-in cost of debt of 4.2%. The current debt facility expiries in June 2020 and will need to be renegotiated to maintain funding for the initial five-year term. An initial ICR of 4.7x is expected against a 1.75x ICR covenant. The RE has forecast a distribution in FY18 of 7.25 cents per units (50% tax deferred). Core Property s review of the existing portfolio suggests that additional rental growth can support an increase in distributions to around 8.75 cents per unit by FY22. Core Property estimates the pre-tax equity IRR to be between 9.6% % p.a. over the initial term, based on the current portfolio (see Financial Analysis section). Core Property has analyzed the Fund based on the current portfolio and is unable to comment on the effect of future acquisitions or disposals. Investor suitability Core Property considers the Fund to be attractive to investors seeking a relatively secure income yield of 7.25%+ p.a. (with tax deferrals) over five years, supported by a portfolio of office properties across Australia with government tenancies. Investors should expect the portfolio may change over the term of their investment. Potential investors should also consider this as an illiquid fund, and be willing to remain invested for the minimum fiveyear term. The RE intends to offer a six-monthly Withdrawal Offer of $10M p.a. in total from June See the Appendix for a description of our ratings. The above rating must be viewed in the context of comparable syndicates and not across all products Fund Details Offer Open: 16 Offer Closes: Min. Investment: Initial NTA: No close date. (Limited Offer closes 31 October 2017) $20,000 Liquidity: Illiquid 1 $0.99 (Limited Offer) $0.97 (Ordinary Units FY18 Forecast 7.25 cpu Distributions: 2 FY18 Forecast 7.4% (based on Yield: Limited Offer Price) Distribution Monthly Frequency: Minimum 5 years to August Investment 2022 Period: 1. The Fund intends to offer regular Withdrawal Offers every six months from June 2019 of up to $10M p.a. 2. Estimated 50% tax deferred Fund Contact Details Steven Bennett steven.bennett@charterhall.com.au Christopher Choi Recommended christopher.choi@charterhall.com.au Note: This report is based on the Charter Hall Direct PFA Fund PDS dated 16 August 2017, together with other information provided by Charter Hall. Copyright 2017 Core Property Research Pty Ltd 2

4 Investment Summary Highly regarded fund manager: Charter Hall is a leading Australian commercial property fund manager with a solid performance track record, strong corporate governance and specific expertise in managing property funds. Since becoming the Manager in 2012, Charter Hall has reduced debt levels and restructured the Fund s portfolio into office assets, increasing NTA to $0.99 per unit in June 2017 (from $0.82 per unit in August 2012). Capital Structure: The Offer consists of Ordinary Units which will be issued separate to Existing Units in the Fund. Movements in the net asset of the Fund will be shared in proportion to the unit entitlement of each unit class. The Limited Offer (of up to $60M, closing 31 October 2017) provides an entry price of $0.98 per unit (includes a 2% discount) with an NTA of $0.99 per dollar invested. Ordinary units issued thereafter will be at $1.00 per unit (up to 31 December 2017) adjusted for accrued income, or at the prevailing unit price (after 31 December 2017). Property Portfolio: The portfolio consists of six A and B grade office properties in metropolitan locations across Australia valued at $268M. The portfolio has an occupancy of 100%, a WALE of 9.2 years and an average capitalization rate of 7.36% at 1 July Around 71% of net income is leased to government tenants and 19% with corporate tenants. The current portfolio consists of mainly older office properties constructed between as well as a newly constructed A grade office in Port Adelaide SA (completion expected in FY18). Valuations and NTA will be driven by the Manager s ability to maintain a strong lease profile of government and corporate tenants. Sources & Application of Funds: Funds raised will utilised to acquire new property (including the Port Adelaide office under construction) as well as to support the redemption of Existing Units under the Restricted Liquidity Event in June Debt Profile: Based on a $10M equity investment to fund the Port Adelaide asset, LVR is expected to peak at 42.1% in FY19 against a 60% bank covenant. The ICR is forecast at between 3.3x - 4.7x over the initial five-year term, above the 1.75x bank covenant. Investment Scorecard Management Quality Governance Portfolio Income Return Total Return Gearing Liquidity Fees Capex: The RE has allocated $27.4M in capital expenditure over the five-year term, or around 1% of the valuation, which Core Property considers appropriate. Capex is to be fully funded via debt and capitalized into the valuation of properties. Distributions: The RE is forecasting an FY18 distribution of 7.25 cents per unit (50% tax deferred). Core Property estimates income can support an increase in distribution to 8.75 cents per unit by FY22 based on the existing portfolio. Fees: charged on Ordinary Units are at the low end of what Core Property has seen in the market (see Figure 7: Fees in Perspective) Total return profile: Core Property estimates the pre-tax equity IRR to be between 9.6% % p.a. over the initial term of the Fund. Illiquid investment: Investors must accept that by their very nature, unlisted property funds are illiquid. Investors should be willing to remain fully invested for the minimum five-year term. At the end of the initial term investors will be provided the opportunity to redeem their units or continue on rolling five-year terms. The RE also intends to offer investors a withdrawal facility of around $10M p.a. provided every six months from June Copyright 2017 Core Property Research Pty Ltd 3

5 Fund Structure An unlisted property fund that invests in Australian office properties with a focus on income. Management Leading Australian commercial property fund manager with a solid track record, strong corporate governance, and specific expertise in managing property funds. Property Portfolio No of Properties: 6 Property Valuation: $268M Property Locations: Property Sector: VIC, NSW, SA, TAS, QLD, WA Office Occupancy: 100% 1 WALE: 9.2 years 1 1. Calculations do not include the St Leonards property, which is under contract for sale, but includes the Port Adelaide property (under construction and under contract) and the new Heads of Agreement assumptions at 200 Adelaide Street, Brisbane. Fees Paid Fees paid by the Fund are at the low end of what Core Property has seen in the market (see Figure 5: Fees in Perspective). Entry Fees: Contribution Fees: Withdrawal Fees: Property Acquisition Fee: Property Disposal Fee: Ongoing Fees: Performance Fee: Nil Nil Nil 1.25% of purchase price 1.25% of sale price Est. 0.80% p.a. of the Fund s Gross Asset Value1 15% of the outperformance above a 9% IRR hurdle (pre-tax, net of fees). 1. Consists of 0.60% p.a. Management Fee plus estimated 0.20% p.a. Costs & Expenses Fee. Return Profile Debt Metrics Forecast Distribution: Distribution Frequency: 7.25 cents per unit (FY18) Monthly Initial Debt / Facility Limit: $77.3M / $150.0M Tax advantage (indicative): 50% tax deferred (FY18 estimate) Loan Period: 5 Years expiring June 2020 Estimated Levered IRR (pre-tax, net of fees): 9.6% % Initial LVR / Peak LVR / 27.7% / 42.1% / 60% Min Investment Period: 5 years to August 2022 LVR Covenant: 4.7x / 3.3x / 1.75x Risk Profile Property/Market Risk: Interest Rate Movements: Property Specific Risks: Capital at risk will depend on a portfolio of Australian office properties. Any change in the cost of borrowings may impact the distributable income of the Fund s underlying investments as well as distributions from any potential direct properties the Fund may acquire. Property investments are exposed to a change in vacancy rates, prevailing market rents, and economic supply and demand. As an open-ended fund, Investors should be aware the portfolio may change over time. For a more detailed list of the key risks, refer to the Risks section (Section 6) of the PDS. Legal Offer Document: Wrapper: Manager: Responsible Entity: Custodian: Product Disclosure Statement, 16 Unlisted Unit Trust Charter Hall Holdings Limited (ABN ) Charter Hall Direct Property Management Limited (ABN , AFSL ) The Trust Company Limited (ABN , AFSL ) Copyright 2017 Core Property Research Pty Ltd 4

6 Fund Overview The Charter Hall Direct PFA Fund ( the Fund ) is the new name for the Charter Hall PFA Diversified Property Trust, an unlisted property fund that was originally established in The Fund invests in A and B grade office properties across Australia, with 71% of its current portfolio leased to government tenants. Charter Hall Direct Property Management Limited became the Responsible Entity ( RE ) in The RE restructured the Fund from a diversified fund into an office fund, reduced debt levels and increased liquidity for investors. The Fund is being relaunched with an initial term of five years to August At the end of the five-year term there will be a liquidity event where investors will be able to exit or elect to remain invested in the Fund for further five-year term. Investors will be able to subscribe for new Ordinary Units in the Fund via the following Offer ( the Offer ): Limited Offer issued prior to 31 October 2017: The Fund will offer Ordinary Units at an issue price of $0.98 per unit (being a 2% discount to the $1.00 issue price). The Limited Offer will have a maximum $60M of units issued with a closing date of 31 October 2017; Ordinary Units issued prior to 31 December 2017: Issued at $1.00 per unit, plus an adjustment for any accrued income as at the date of issue. Ordinary Units issued after 31 December 2017: Issued at the prevailing unit price on the date of issue. The property portfolio consists of six office assets across Australia including the acquisition of Nile Street, Port Adelaide SA in which is currently under construction and due for completion in late FY18. The portfolio is 100% occupied with a WALE of 9.2 years at 1 July 2017 (including the Port Adelaide acquisition). Around 71% of leases are with government tenants and a further 19% with large corporates, with 22% of rental income exposed to leases expiring within the initial five-year term of the Fund. The RE has forecast distributions for FY18 of 7.25 cents per unit (50% tax deferred). Distributions are paid to unitholders on a monthly basis. An investment in the Fund should be considered illiquid and investors should be prepared to remain invested for the minimum five-year term. However, the RE intends to provide around $10M p.a. of liquidity via a withdrawal offer every six months from June 2019 onwards. Figure 1: Fund Structure Note 1: Based on current 157.6M units on issue. The PDS forecasts assume 10.2M units are issued at $0.98 per unit to raise $10.0M. Source: Core Property, Charter Hall Copyright 2017 Core Property Research Pty Ltd 5

7 History of the Fund The Fund was originally established as a diversified property fund and has undergone a number of changes in management as well as a significant change in portfolio over its lifetime. The following is a brief history of the Fund: Figure 2: Brief History of the Fund Date 14 August 2001 Event The Fund was originally set up on 14 August 2001 as the PFA Diversified Property Trust with its Responsible Entity being the Brisbane based funds manager Property Funds Australia Limited ( PFA ). 1 July 2003 The Fund amalgamated with four other PFA funds and listed on the Bendigo Stock Exchange. August 2004 October 2007 July 2009 April August 2012 Mirvac acquired a 50% stake in fund manager PFA. Mirvac increases its ownership to 100% of PFA and in November 2007 the Fund changed its name to the Mirvac PFA Diversified Property Trust. Assets in the Fund were valued at $687M. The Fund was delisted from the Bendigo Stock Exchange. Mirvac sold the management of the Mirvac PFA Diversified Property Trust to Australian Property Growth Fund (APGF). The Fund was renamed the PFA Diversified Property Trust with around $590M in property. Charter Hall acquires management rights of the Fund. Investment properties at December 2012 valued at $393M. Charter Hall begins to divest non-core assets, utilising the proceeds to reduce gearing, provide liquidity to investors, redeploy funds into new acquisitions and undertake capex. June 2017 Charter Hall renames the Fund as the Charter Hall Direct PFA Fund with a focus on office assets only. The Fund is open to new investments for a five-year term to June Portfolio valuation of $268M, including the acquisition of Port Adelaide, SA for $44M. Source: Charter Hall, Mirvac, APGF, PFA Investment Criteria The PDS sets out the investment criteria of the Fund and its primary focus on office properties with strong and growing income streams from government and corporate tenants. Core Property notes the Fund s criteria to maintain its WALE above a minimum of four years, which compares well to the Fund s five-year term and the current WALE of 9.2 years. Figure 3: Investment Criteria Criteria Property Type Location Tenants Average Lease Term Development Co-Investments A or B grade office properties Emerging or established Australian office markets, with an emphasis on strong and growing income streams. Government or well-regarded corporate tenants to provide a secure income stream. At the time of acquisition, the property will not reduce the portfolio s average lease term below four years. Any acquired property that is subject to development will have an approved development application and an agreement for lease over the majority of the property. All co-investments will be in office properties alongside Charter Hall s institutional funds, partnerships or major Australian or international investors. Source: Charter Hall Copyright 2017 Core Property Research Pty Ltd 6

8 Capital Structure & Unit Pricing Existing Units: The Fund currently consists of 157.6M of Existing Units. These Existing Units were acquired under previous management structures of the Fund and are subject to different fees and withdrawal rights. Charter Hall Group currently owns 0.2M of Existing Units in the Fund. Existing unitholders will receive the benefits from the sale of the St Leonards NSW property, which is currently under contract for sale. Core Property estimates that, upon settlement, the profit on the sale of the St Leonards property will add around $0.02- $0.03 per unit to the price of Existing Units (which was $0.99 per unit at 30 June 2017). Ordinary Units: The current Offer consists of the issue of a new class of Ordinary Units in the Fund. These Ordinary Units will rank for income and distributions on a pro rata basis based on their respective unit entitlements. Acquisition Units: To facilitate the acquisition of properties, the RE may issue Acquisition Units to entities associated with the Charter Hall Group and/or underwriters. Acquisition Units are issued at the prevailing issue unit price, but will not include the 2% discount under the Limited Offer. Acquisition Units have the same rights as Ordinary Unit however units will be able to be redeemed at any time from the surplus capital of the Fund. Any redemptions will be at the prevailing issue price, excluding a Sell Spread. Debt Facility & Metrics The Fund currently has a bank debt facility with ANZ and NAB for four years expiring in June 2020 with 71% hedged. The RE intends to maintain a minimum 50% hedge on the Fund s interest payments over the Initial Term of the Fund. Depending on the interest rate at the time, the cost of funding may impact on future distributions and total returns of the Fund. Based on the Manager s forecasts and assuming any new equity under the Offer is used to fund redemption requests, Core Property estimates the peak LVR to be 42.1% in FY19 reducing to 40.3% in FY22. This is within the Fund s target LVR range of 30%- 45% and well below the LVR Covenant of 60.0%. The initial ICR of 4.7x is forecast to reach a low of 3.3x in FY22, well above the ICR Covenant of 1.75x. Figure 4: Portfolio Debt Metrics Details Bank Security Debt Facility Limit Metric ANZ/ NAB First ranked mortgage secured against the pool of properties in the Fund $150.0M Initial Draw Down $64.6M (at 30 June 2017) Initial Loan Period 5 Years expiring June 2020 All in cost of Debt 4.2% Initial LVR 27.7% Target LVR 30% - 45% LVR Covenant 60.0% (maximum) Peak LVR / Year % / 2019 Initial interest covered ratio / bank covenant 4.7x / 1.75x Low ICR / Year 3.3x / 2022 Amount by which valuation of properties will have to fall to breach LVR covenant (FY18 FY22) Amount by which income will have to fall to breach ICR covenant (FY18 FY22) Note 1: Based on the assumption that no new equity is raised under the Offer. Source: Charter Hall, Core Property 25.8% % 52.6% % Copyright 2017 Core Property Research Pty Ltd 7

9 Liquidity / exit strategy The initial term of the Fund is five years from, to August Liquidity Events: At the end of the Initial Term, and at the end of every five-year term, Investors will be offered the opportunity to redeem their investment through a Liquidity Event. The RE will provide an outline of the liquidity strategy proposed and the price offered for Investors to redeem their units. In order to provide liquidity, the RE may sell one or more properties, raise new equity, and/or reconsider debt levels. Withdrawal Offers: The RE intends to make regular Withdrawal Offers every six months from June 2019 to all investors (Ordinary and Existing), subject to the Fund having available liquid assets. The amount of the Withdrawal Offer will be determined at the time, however the RE expects to offer around $10M each year. The RE aims to satisfy Withdrawal requests within 30 days, however will have up to 12 months to satisfy the request, and may delay, suspend or scale back redemption requests. Restricted Liquidity Event: Existing investors will have an additional Restricted Liquidity Event around March 2018, whereby the entire 157.6M Existing Units currently on issue will be available to be redeemed. The RE intends to fund the withdrawals from the selective sale of properties, the proceeds of the Offer, or through debt. As a long-dated withdrawal, Existing Unitholders will have their exit price determined at the date of redemption. It should be noted that Ordinary Units acquired under the current Offer will not have access to the Restricted Liquidity Event. Sources & Application of funds As the Fund and its portfolio already exist, the PDS does not provide the usual table of sources and application of funds. The PDS states that the proceeds of the Offer will be used to acquire properties that satisfy the investment criteria and to redeem Existing Units from the Fund. Core Property has considered a scenario as follows: Limited Offer fully subscribed, raising $60M. Funds raised to be initially used to pay down debt and redrawn in March 2018 onwards to fully fund the redemption Existing Units. Assumes $58.8M in redemptions under the Restricted Liquidity Event, (~37% of units on issue). Construction at Port Adelaide/capex in FY19 estimated $56.4M fully funded by debt. Under this scenario LVR is expected to peak at 42.1% in FY19 against a bank covenant of 60%. On this basis, the Fund would have the capacity to fund an additional $46.5M in redemptions via debt, before it would breach its LVR covenant. The following table shows Core Property s calculations of the sources and application of funds under one likely scenario: Figure 5: Sources & Application of Funds assuming Limited Offer fully subscribed Source of Funds Assume Limited Offer is fully subscribed Ordinary Units subscribed Up to 31 Oct 17 $58.8M 31 Oct 17 onwards Mar 18 onwards Draw down of Debt $58.8M $56.4M Application of Funds Pay Down Debt Proceeds from Ordinary Units subscribed Payments for Redemption of Existing Units Construction of Port Adelaide + capex on portfolio $58.8M Open Open $58.8M FY19 $56.4M LVR 29.5% 32.5% 42.1% Source: Core Property Copyright 2017 Core Property Research Pty Ltd 8

10 Fees Charged by the Fund Figure 6: Fees charged by the Fund Fee Type Fee Charged Comment Entry Fee Nil Withdrawal Fee Nil Contribution Fee Nil Buy/Sell Spread 0% Buy / 2.5% Sell Acquisition fee 1.25% of purchase price. Industry average is 1.5% - 2.0%. Disposal fee 1.25% of sale price of property. Estimated at 0.80% p.a. of GAV, consisting of: Industry average is 0.7% - 1.1%. Ongoing Management Fee 0.60% p.a. of GAV - Base Management Fee 0.20% p.a. (est.) of GAV - Costs & Expenses. Performance fee 15% of the portion of outperformance over a pre-tax levered IRR of 9% p.a. after all fees and costs. Lower than what Core Property has seen in the industry. Source: Charter Hall, Core Property Entry (Establishment)/ Withdrawal (Exit) Fees The Fund does not charge any Entry/Establishment Fees or Withdrawal/Exit Fees. Contribution Fee / Switching Fee The Fund does not charge a Contribution Fee on any increases in investment holdings. There is no fee charged to Investors wishing to change their investments options. Buy / Sell Spread The RE may charge a Buy Spread on the purchase of new Ordinary Units. As at the date of the PDS the Buy Spread is Nil. The RE may charge a Sell Spread to reflect the costs of selling investments to provide liquidity and/or wind up the Fund. As at the date of the PDS there is a Sell Spread of 2.5% for Ordinary Units. Ongoing Management Fee The RE calculates the Management Fee to be around 0.80% of the Gross Asset value (GAV) of the Fund, consisting of: Base management fee: charged at 0.60% p.a. of the GAV of the Fund Costs and Expenses: estimated at 0.20% p.a. of the GAV of the Fund. This includes costs for accounting, valuation, audit, administration, compliance and other costs. Overall, Core Property considers the Management Fee of 0.80% of GAV to be at the low end of the typical range seen by Core Property (0.7%-1.1%). Acquisition Fee The RE is entitled to an Acquisition Fee of 1.25% (plus GST) of the purchase price of any direct or indirect property acquired by the Fund. Disposal Fee The RE is entitled to a Disposal Fee of 1.25% (plus GST) of the sale price of any direct or indirect property disposed of by the Fund. It should be noted the RE is entitled to charge the Disposal Fee if it is removed as the RE of the Fund, the Fund is listed on the ASX, the fund is stapled or merged with another entity, or the Disposal Fee provisions in the Fund s Constitution are amended without the consent of the RE. Copyright 2017 Core Property Research Pty Ltd 9

11 Performance Fee The RE is entitled to 15% of the portion of outperformance above a 9% IRR hurdle (pre-tax, net of fees). Core Property notes the performance fee and hurdle are both slightly lower than what we have seen in the industry for a fund of this type typically we would see a performance fee of 20% of the outperformance above a 10% IRR hurdle. The Performance Fee is calculated from the date of first issue of Ordinary Units under the Offer to the earlier of the conclusion of the Initial Term (on or around June 2022) or the wind up of the Fund. If the Fund is continued beyond the Initial Term, the Performance Fee will be reset at the end of the Initial Term, based on the NAV less anticipated Disposal Costs. The Performance Fee will also be calculated, payable and reset if the RE is removed as RE, the Fund is listed on the ASX, the Fund is stapled or merged with another entity, a scheme or other arrangement affects the Fund or the performance fee provisions in the Constitution are amended without the consent of the RE. The RE has also confirmed that Ordinary Units issued under the Offer will not be liable for any past Performance Fees of the Fund as the Existing Unit price already includes an accrual of the past Performance Fee. All-in fee analysis As a percentage of total Fund cash flow In Figure 7, Core Property analyses how much of the Fund s cash goes to the RE in fees, and how much is left over for investors. The key assumptions include: Calculations are based on a five-year fund term to June Assumes the St Leonards property is not sold. Calculations assume a disposal fee (1.25% of GAV) at the end of the Fund term. A performance fee has not been included; Core Property assumes there is no change in the forecast portfolio terminal cap rate of 7.36% at the end of the Initial term in FY22, which effectively assumes no cap rate compression. A lower terminal cap rate would lead to a higher sale price and hence, higher performance fees may be payable. Calculations do not include the 2% discount available under the Limited Offer. Overall, Core Property estimates that the RE takes 4.4% of the total cash generated by the Fund, which leaves investors with $1.57 per unit, or approximately 95.6% of the total. Core Property believes the fees paid to the Manager are at the low end compared to similar products, which are typically around 7% - 9%. Core Property stresses that these are estimates of how much investors will receive and not guaranteed amounts. For further details, please refer to the Financial Analysis section. Figure 7: Fees in Perspective Core Property estimates that for every $1.00 of equity invested, the Fund can return: Principal repayment to investors $1.000 Income and capital gains to investors $0.573 Total cash to investors $1.573 Acquisition fee $0.003 Base management fee $0.046 Disposal fee $0.023 Fees for the RE (excluding disposal/ admin costs) $0.072 Total cash generated by Trust $1.646 Fees = % of total cash generated (before fees) 4.4% Source: Core Property Copyright 2017 Core Property Research Pty Ltd 10

12 Properties in the Portfolio The Fund consists of a portfolio of six office buildings located across Australia with a total valuation of $268M at 1 July 2017 with an occupancy of 100% and a WALE of 9.2 years. Around 71% of rental income is with government tenants, with an additional 19% with major corporate tenants. Figure 8: Direct PFA Fund - Property Portfolio Property 303 Sevenoaks St, Cannington WA 9 Wentworth St, Parramatta NSW 134 Macquarie St, Hobart TAS 1-21 Dean St, Moonee Ponds VIC 200 Adelaide St, Brisbane Qld Lot 107, Nile St, Port Adelaide SA Total Portfolio Acqd by the Fund Const Date / Major Refurb NLA sqm Valn $M Occ % Cap rate % WALE years / , % 8.00% / , % 6.75% / , % 7.50% , % 7.50% / , % % , % 6.25% % 7.36% 9.2 Note 1: Property was acquired in a sub Fund in 1999, and subsequently acquired by the Fund. Note 2: 200 Adelaide St, Brisbane Qld metrics include a Heads of Agreement as at 16, which increases the property s occupancy to 100% with a WALE of 7.1 years. Excluding this Heads of Agreement, occupancy at the property would be 43.1% and WALE 2.6 years. Source: Charter Hall. Properties The Fund has a valuation policy requiring an independent valuation at least once every 12 months, in line with the requirements of debt providers. The following is a brief description of three key properties in the Fund, which account for around 65% of the portfolio. 303 Sevenoaks St, Cannington WA is a B-grade four-level office building with 97 car spaces. The building was constructed in 1992 and is fully leased with the WA government Minister for Works recently renewing the office space on a 10-year lease to June 2027 with 2x3 year options and rent review increases of 3.75% p.a. As part of the renewed lease, a major refurbishment is being undertaken with around $6.5M remaining to be spent over 2017 and 2018, including upgrades to the lobby, a new café and upgrades to all kitchens and toilet facilities. 9 Wentworth St, Parramatta NSW is an A-grade office building with ground floor foyer and retail suite, six upper office levels and 2 basement carparking levels for 91 vehicles. Constructed in 1988, the building was refurbished in The building is leased to four tenants: 1) the Commonwealth Department of Immigration & Border Protection (66% of income, expiry Aug 2023); the Australian Business Academy (16% of income, expiry Dec 2020); 3) Australian College of Nursing (15% of income, expiry June 2020), and 4) Wilson Parking, which lease 69 spaces (3% of income, expiry Feb 2021). Lot 107, Nile Street, Port Adelaide SA is a new A-grade six-level office building currently under construction with completion expected in late FY18. With a NLA of 6,333sqm the building will comprise ground level office and retail, two above ground levels of car parking and three upper office levels. The office will be 100% leased to the South Australian Minister for Transport and Infrastructure on a 15-year lease with 2x5 year options and annual reviews of 2.95%- 3.00%, and a market review in the tenthyear subject to a 5% cap. The acquisition price of the property equates to a 6.25% p.a. initial yield. Copyright 2017 Core Property Research Pty Ltd 11

13 Figure 9: Three key properties in the portfolio 303 Sevenoaks St, Cannington WA Lot 107, Nile St, Port Adelaide SA Artists impression 9 Wentworth St, Parramatta NSW Source: Charter Hall Capex Core Property notes the majority of the properties in the portfolio were constructed between and the RE is forecasting around $27.4M in capex over the five-year term of the Fund. This equates to around 1% of the value of the portfolio which we consider to be reasonable for a portfolio of this age. Capex includes around $17M in refurbishments for the Cannington and Hobart properties, provided as incentives to tenants as part of the lease renewals. The majority of the capex is funded through debt over the term of the Fund. As the Fund has capitalised the expenditure, Core Property estimates the LVR to increase to around 42.1% in FY19 assuming there is no new equity raised under the Offer. This is at the high end of the Fund s targeted 30%-45% range, however is well within the bank covenants of 60%. Core Property has adopted the Manager s capex assumptions on the basis that they were based on independent technical reports. The inherent assumption here is that the capital expenditure is likely to improve the value of the building. While this has been the case in recent years, Core Property reminds investors that this may not be the case in adverse market conditions. Copyright 2017 Core Property Research Pty Ltd 12

14 Leases, tenants and income Key points of the tenancy profile are: Portfolio occupancy level of 100% by income, which includes a recently signed Heads of Agreement for 200 Adelaide St, Brisbane Qld. Portfolio tenancy includes 71% leased to government tenants (by income) with a further 19% to major corporate tenants. Key tenants include: WA government (42% of portfolio income): occupying 100% of the Cannington property. TAS government (19% of portfolio income): occupying 100% of the Hobart property. Foxtel (15% of portfolio income): occupying 100% of the Moonee Ponds property. Commonwealth government (12% of portfolio income): occupying around 66% of the Parramatta property. Portfolio Weighted Average Lease Expiry (WALE) of 9.2 years (by income). Around 22% of leases will fall due within the Fund term. The following figure is a summary of the lease expiry profile. Figure 10: Lease expiry (by Income) Source: Charter Hall, Core Property Copyright 2017 Core Property Research Pty Ltd 13

15 Financial Analysis Core Property has assessed the Manager s forecasts and makes the following observations: Forecast distribution in FY18 is $ per unit (50% tax deferred). Includes $10.0M of new equity is raised under the Offer, and is based on the RE s expectations of increases in rental income, Core Property estimates the existing portfolio will be able to support an increase in distributions to $ per unit in FY22. A summary of the RE s forecast for the Fund s first year is presented in the table below: Figure 11: Charter Hall Direct PFA Fund Profit & Loss Forecast and Pro Forma Balance Sheet Profit & Loss Forecast - $M Net Property Income Straight lining of rent 1.6 Total Income 19.7 Management Expenses -1.4 Fund Expenses Net Interest Expense Total Expenses -5.6 Straight lining of rent Amortisation of borrowing costs 0.3 Distributable Earnings 12.8 Amount Distributed 12.2 Forecast Distribution per unit (cpu) 7.25 Forecast Distribution Yield (annualised) 7.25% Estimated Tax Deferral 50% Pro forma Balance Sheet - $M At 1 July 2017 Assets Investment Property Cash & Other Assets 5.1 Total Assets Liabilities Borrowings 64.6 Other Liabilities 0.9 Total Liabilities 65.5 Net Tangible Assets NTA per $1.00 invested under the Limited Offer $0.99 NTA per Ordinary Unit $0.97 Gearing 27.7% Gearing (at completion of Port Adelaide) 41.3% Note 1: Based on the acquisition of Port Adelaide, and excludes the St Leonards property which is under contract for sale. Also excludes the Heads of Agreement at 200 Adelaide St, Brisbane. Source: Charter Hall FY Copyright 2017 Core Property Research Pty Ltd 14

16 NTA Analysis The starting NTA is an important consideration. It should be assessed in the context of statutory costs and fees paid to the Manager, which dilute investors return over the term of the Fund. As the Fund and its portfolio already exist, there are no setup costs and hence no dilution. In addition, the Fund intends to utilise capital to complete the construction of the Port Adelaide property with construction costs capitalised to NTA. This is exceptional and one of the Fund s strengths. In this case, the starting NTA is $0.99 per $1.00 invested under the Limited Offer and $0.97 for Ordinary Units. Figure 12: NTA Comparison Amount per unit Existing Units Limited Offer Ordinary Units Date 1 July July July 2017 Units on Issue 157.6M 60.0M Uncapped NTA per unit $0.99 $0.99 $0.97 Discount under Limited Offer NA $0.02 NA Source: Core Property Expected Future Performance (IRR Sensitivity) The three main performance drivers in a property syndicate are: 1. The property income profile (lease structure); 2. The terminal value upon the sale of the property (asset quality + market conditions); and 3. The cost of debt (depending on leverage). Figure 13 summarises our expected IRRs. Based on an assessment of the RE s forecasts, Core Property expects a 5-year pre-tax equity IRR of approximately 10.7% based on a 4.2% cost of debt on the initial debt facility and assuming capitalisation rates remaining at current levels. Based on a +/-25bps movement in capitalisation rates and a +/-50bps movement in the cost of debt, the estimated IRR is between 9.6% %. It should be noted that a movement in the cost of debt does not have a material impact on the IRR as the debt is assumed to be hedged at a minimum 50% over the five-year term of the Fund. Figure 13: Pre-tax, 5-year IRR (after fees) sensitivity analysis Terminal cap rate Cost of debt 3.2% 3.7% 4.2% 4.7% 5.2% 6.86% 12.9% 12.8% 12.8% 12.7% 12.6% 7.11% 11.9% 11.8% 11.7% 11.6% 11.6% 7.36% (base) 10.8% 10.8% 10.7% 10.6% 10.5% Source: Core Property 7.61% 9.9% 9.8% 9.7% 9.6% 9.5% 7.86% 8.9% 8.8% 8.7% 8.6% 8.5% Copyright 2017 Core Property Research Pty Ltd 15

17 Management Background of the Responsible Entity & Manager Charter Hall Group (ASX: CHC) is one of Australia s leading fully-integrated property groups. Established in 1991 CHC has since created and managed a suite of funds on behalf of institutional, wholesale and retail investors. Property funds are held across the office, retail, hospitality and industrial sectors. CHC manages a portfolio of $19.0B of funds under management across 314 properties covering 4.9M sqm and 2,644 tenants with a WALE of 7.9 years and occupancy of 98.0%, as at December The majority of funds are in Unlisted Wholesale ($12.5B), followed by Listed Funds ($4.0B) and Unlisted Retail Funds ($2.5B). Charter Hall Direct Property Management Limited is the Responsible Entity of the Fund. In turn, the RE has appointed Charter Hall Holdings Pty Limited to act as Manager. Both entities are wholly owned subsidiaries of CHC. The Board of the RE has been structured to manage material conflicts of interest and maintain a high level of corporate governance for the Fund. The Board has six directors, three of which are independent (including an independent chairman). Board of the Responsible Entity Core Property has reviewed the composition of the RE Board and senior executive team and consider it has the relevant skills and experience to operate the Fund successfully: Figure 14: Board of the Responsible Entity and Key Management Name & Role Peeyush Gupta Independent Chairman Experience Peeyush was co-founder and CEO of Ipac Securities, a leading wealth management firm. He is a Non- Executive Director of National Australia Bank, BNZ Life, Link Group, Insurance and Care NSW and SBS. Peeyush holds a Master of Business Administration in Finance from AGSM, a Bachelor of Arts in Computer Studies from the University of Canberra, and is an alumnus of Harvard Business School. David Harrison Executive Director David has 29 years property experience across office, retail and industrial sectors. He is currently the Managing Director and CEO of Charter Hall Group and has overseen the growth of the group for 13 years. David holds a Bachelor of Business (Land Economy) fomr Western Sydney University, is a Fellow of the Australian Property Institute (FAPI) and holds a Graduate Diploma in Applied Finance from the Securities Institute of Australia. Richard Stacker Executive Director Richard has over 25 years experience in real estate funds management, finance, mergers and acquisitions, accounting and risk management. Prior to joining Charter Hall Group, Richard was CEO of Macquarie Direct Property Management Limited and General Manager at Lend Lease Corporation. Richard is a member of Chartered Accountants Australian and New Zealand. Cedric Fuchs Executive Director Cedric is a co-founder of Charter Hall Group and has over 41 years experience in property investment, development and financial services. Prior to the establishment of Charter Hall Group in 1991 he worked at Heine Management Limited (now part of ING Real Estate Australia) and Leighton Holdings Limited, involved in the development and investment activities. He has served as a member of investment committees across Charter hall s wholesale and retail funds. Cedric holds a Diploma in Business Management. Copyright 2017 Core Property Research Pty Ltd 16

18 Name & Role Rick Higgins Independent Director Experience Rick has over 45 years experience, including valuations and consultancy advice to large institutional clients for a broad range of properties. He is also a Non-Executive Director on the Board of BWP Management Limited, which is the Responsible Entity for the ASX listed BWP Fund. Rick was the National Director of Business Development at Colliers International. Prior to that, he worked at Jones Lang Wootton for 30 years as national Director of the National Valuation and Consultancy Division. Rick is a Fellow Member of the Australian Property Institute (FAPI). Ian Pratt Independent Director Ian has provided property, finance and tax advice for over 40 years and is currently a partner in a firm of Chartered Accountants. He is a member of Chartered Accountants Australia and New Zealand, is a Director of a number of private companies, is Chairman of Ashley Services Group and was a Director of Macquarie Direct Property Management Limited, which became Charter Hall Direct Property Management Limited in Steven Bennett Head of Direct Property & Fund Manager Steven has over 16 years industry experience and has worked in the Direct Property business of Charter Hall for seven years. Prior to joining Charter Hall, he worked for Macquarie Group Limited for seven years in Sydney and London. Steven holds a Bachelor of Business from the University of Technology, Sydney and is a member of Chartered Accountants Australia and New Zealand. Steven is the Fund Manager and has day to day responsibility of the fund including asset management and tenancies, financial structure, debt financing, hedging and updating investors. Christopher Choi Assistant Fund Manager Christopher has over 10 years industry experience, including six years at Charter Hall Group. Prior to this he worked for Investa Property Group in their Commercial Office Development business. Christopher holds a bachelor of Commerce from University of NSW and is a member of Chartered Accountants Australia and New Zealand. Source: Charter Hall, Core Property Compliance & Governance The Fund s compliance committee comprises the three independent members of the RE Board. Compliance with ASIC Regulatory Guide 46 ASIC Regulatory Guide 46 Unlisted property schemes: Improving disclosure for retail investors and Regulatory Guide 198 Unlisted disclosing entities: continuous disclosure obligations describe ASIC's preferred benchmarks and principles. Core Property has reviewed the PDS in reference to the six benchmarks and eight disclosure principles recommended by RG46. The PDS adheres to the ASIC guidelines. Governance around Related Party Transactions The RE maintains, and complies with ASIC requirements for, a written policy on related party transactions, including assessment and approval processes for such transactions. All related party transactions will be conducted on an arm s-length basis and require approval of the RE s independent directors. Removal of the RE The RE can be removed and replaced with another appropriately licensed responsible entity if investors pass an extraordinary resolution, as per the Corporations Act. This requires the resolution to be passed by at least 75% of the votes cast by shareholders entitled to vote. In addition, the Manager may be removed by the RE: 1) at any time with 30 days notice, 2) with 30 days notice if investors pass a resolution to remove the Manager or where the Manager breaches any material obligation under its Asset Management Services Agreement which remains unremedied for 21 days, or 3) immediately, if an insolvency event occurs in respect of the Manager. Copyright 2017 Core Property Research Pty Ltd 17

19 Past Performance Historical Performance of the Fund The following graph shows the Fund performance since June 2008 for Existing Investors. Core Property notes that Charter Hall acquired the management of the Fund on 15 August 2012 with the unit price of $0.82. The current unit price is $0.99 per unit. Total distributions from the Fund have been maintained at $ p.a. since Figure 15: Historical Fund Performance Note: PFA inception date represents when Charter Hall became Fund Manager. Independent valuations of the properties were undertaken within 6-12 months following Charter Hall becoming Manager of the Fund. Source: Charter Hall Charter Hall Syndicate Performance Charter Hall Group was established in The group has advised that since 1998 its Direct Syndicates and Funds have delivered an average return of 13.6% p.a. over 18 years, outperforming the MSCI/IPD Unlisted Core Wholesale Property Funds Index by an average 3.2%. The PFA Fund has delivered a 12.3% net return since 2012 (when Charter Hall became the Fund Manager), outperforming the benchmark index which returned 11.0% over the same period. Investors should note that that past performance is not a reliable indicator of future performance as each fund, and its respective underlying property, has its own specific risks and attributes. The following chart shows the performance of all Charter Hall s Direct Funds compared to their respective benchmarks. Copyright 2017 Core Property Research Pty Ltd 18

20 Figure 16: Performance of Charter Hall Direct Funds as at 30 June 2017 Note: Direct PFA return based on date when Charter Hall became Fund Manager. Source: Charter Hall Copyright 2017 Core Property Research Pty Ltd 19

21 Appendix Ratings Process Core Property has developed a framework for rating property and property related investment product offerings in Australia. The methodology gives consideration to a number of qualitative and quantitative factors. Essentially, the evaluation process includes the following key factors: product and underlying portfolio construction; strength and depth of management team, product structure, risk management, financial analysis, and likely outcomes. It is important for financial planners and investors to view the recommendation and rating in the context of comparable products only and not across all products rated by Core Property. The Ratings Financial Advisers and investors should note that for all ratings categories, the product may not suit the risk/return profiles of all investors. Rating Definition Highly Recommended This is the highest rating provided by Core Property and is indicative of the product exceeding the requirements of our review process across a number of parameters. Recommended Indicates that the product has an above average grade profile across a number of Core Property s parameters, and has the potential to deliver above average risk adjusted total returns. Approved Indicates that the product has met the aggregate requirements of Core Property s criteria. The product has an acceptable risk/return trade-off and is potentially able to generate riskadjusted returns in line with stated investment objectives. Speculative Core Property believes this is a product that has a number of positive attributes; however, there are a number of risks that make investing in this product a speculative proposal. While Core Property does not rule out investing in this product, investors should be very aware of, and be comfortable with the specific risks. The product may provide unique diversification opportunities, although concerns over one or more features mean that it may not be suitable for most investors. Not Approved Indicates that the product has failed to meet the minimum aggregate requirements of Core Property s criteria. While the product may have some positive attributes, funds in this category are considered high risk. This report has been commissioned, and, as such, Core Property has received a fee for its publication. Under no circumstances has Core Property been influenced, either directly or indirectly, in making statements and / or recommendations contained in this report. Copyright 2017 Core Property Research Pty Ltd 20