Abacus Diversified Income Fund II ABN Half-year Financial Report For the half-year ended 31 December 2008

Transcription

1 Abacus Diversified Income Fund II ABN Half-year Financial Report For the half-year ended 31 December 2008

2 HALF-YEAR FINANCIAL REPORT 31 DECEMBER 2008 Directory ABACUS DIVERSIFIED INCOME FUND II Responsible Entity: Custodian: Abacus Funds Management Limited Perpetual Trustee Company Limited ABN Level 12 Angel Place Level 34, Australia Square 123 Pitt Street George Street SYDNEY NSW 2000 SYDNEY NSW 2000 Tel: (02) Auditor: Fax: (02) Ernst & Young Website: Ernst & Young Centre 680 George Street Directors of Responsible Entity: SYDNEY NSW 2000 John Thame, Chairman Frank Wolf, Managing Director Compliance Plan Auditor: William Bartlett Ernst & Young David Bastian Ernst & Young Centre Dennis Bluth 680 George Street Malcolm Irving SYDNEY NSW 2000 Len Lloyd Company Secretary: Ellis Varejes Share Registry: Computershare Investor Services Pty Ltd Level 3, 60 Carrington Street SYDNEY NSW 2000 Tel: (02) Toll free Fax: (02) Contents Page Directors Report 2 Auditor s Independence Declaration 4 Income and Distribution Statements 5 Statement of Changes in Net Assets to Unitholders 5 Balance Sheet 6 Cash Flow Statement 7 Notes to the Financial Statements 8 Directors Declaration 15 Independent Review Report 16 1

3 DIRECTORS REPORT 31 December 2008 ABACUS DIVERSIFIED INCOME FUND II The Directors of Abacus Funds Management Limited (AFML), the Responsible Entity of the Abacus Diversified Income Fund II ( ADIFII or the Fund ) present their report of the Fund together with the consolidated financial report and the auditor s report thereon. DIRECTORS The Directors of the Responsible Entity in office during the half-year and until the date of this report are as follows. Directors were in office for this entire period unless otherwise stated. John Thame Frank Wolf William Bartlett David Bastian Dennis Bluth Malcolm Irving Len Lloyd Chairman (Non-executive) Managing Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Executive Director PRINCIPAL ACTIVITIES The Fund operates predominantly in Australia and its principal activities during the course of the half-year ended 31 December 2008 included: principal investment in commercial, retail and industrial properties. investment in unlisted and listed property trusts. FUND STRUCTURE ADIFII is an Australian registered managed investment scheme. AFML, the Responsibility Entity of ADIFII, is incorporated and domiciled in Australia and is a wholly owned subsidiary of Abacus Group Holdings Limited (AGHL). REVIEW AND RESULTS OF OPERATIONS The Fund reported a loss of $34.2m for the half-year ended 31 December This was principally caused by property and listed investment devaluations and adverse fair value movements in the Fund s interest rate swap book which is used to fix the cost of borrowings and align these borrowings with the net revenue earned by the property portfolio. The 3% fall in official interest rates in the half-year ended 31 December 2008 was unprecedented. It resulted in a fair value adjustment in the accounts from an asset of $3.4m at 30 June 2008 to a liability of $12.9m at 31 December 2008, a decrement for the half-year of $16.4m which was taken to profit and loss. In addition the Fund s investment properties were devalued by $13.1m and the property securities were devalued by $4.8m in the half-year. The Fund earned a normalised profit attributable to members (excluding net fair value revaluations attributable to investment properties, investments and derivatives) of $0.1m which is calculated as follows; $M Reported Net Loss attributable to unitholders 34.2 Fair Value adjustments Unrealised loss on deriviatives (interest rate swaps) 16.4 Unrealised loss on investments 17.8 Amortisation of finance costs Normalised profit attributable to unitholders 0.1 2

4 DIRECTORS REPORT 31 December 2008 ABACUS DIVERSIFIED INCOME FUND II OUTLOOK As a result of the global financial crisis, the economic outlook for Australia is uncertain, and performance of the Fund s operations is likely to be impacted in some form as all types of property have been adversely impacted by tightening credit conditions which have reduced the availability of debt and increased its cost. The Fund is unlikely to be immune from these market conditions. While the Fund s existing debt facilities do not start to expire until June 2010, the possibility of acceleration of repayment due to loan covenant noncompliance remains an inherent risk which requires the Responsible Entity s focus. SIGNIFICANT EVENTS AFTER BALANCE DATE Other than as disclosed already in this report, there has been no matter or circumstance that has arisen since the end of the half-year that has significantly affected, or may affect, the Group s operations in future financial periods, the results of those operations or the Group s state of affairs in future financial periods. AUDITOR S INDEPENDENCE DECLARATION We have obtained an independence declaration from our auditor, Ernst & Young, and such declaration is set out on page 4. Signed in accordance with a resolution of the directors. Abacus Funds Management Limited (ABN ) John Thame Chairman Sydney, 13 March 2009 Frank Wolf Managing Director 3

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6 CONSOLIDATED INCOME STATEMENT HALF-YEAR ENDED 31 DECEMBER Dec Dec 2007 Notes REVENUE Rental income 7,032 5,375 Interest Income Income from distributions 1,030 1,620 Net realised gains on investment property 4(a) Total Revenue and Other Income 8,376 7,805 Property expenses and outgoings (641) (307) Unrealised (loss) / gain on derivatives (16,389) 2,252 Unrealised losses on investments 5(a) (17,910) (9,670) Realised loss on investments (565) - Finance costs 5(b) (6,083) (7,108) Establishment fee - (1,000) Administrative expenses 5(c) (1,006) (1,327) NET LOSS ATTRIBUTABLE TO UNITHOLDERS (34,218) (9,355) DISTRIBUTION TO UNITHOLDERS 6 (1,364) (247) CHANGE IN NET ASSETS ATTRIBUTABLE TO UNITHOLDERS (35,582) (9,602) STATEMENT OF CHANGES OF NET ASSETS ATTRIBUTABLE TO UNITHOLDERS HALF-YEAR ENDED 31 DECEMBER Dec Dec 2007 Notes Opening assets attributable to unitholders 447 2,806 Net loss attributable to unitholders (34,218) (9,355) Applications for units 12,737 15,780 Distribution to unitholders (1,364) (247) Closing net assets attributable to unitholders 8 (22,398) 8,984 5

7 CONSOLIDATED BALANCE SHEET HALF-YEAR ENDED 31 DECEMBER Dec Jun 2008 Notes CURRENT ASSETS Cash and cash equivalents 866 1,135 Trade and other receivables 1,370 1,880 Investment properties 7-8,600 Other financial assets 22,193 28,742 TOTAL CURRENT ASSETS 24,429 40,357 NON-CURRENT ASSETS Investment properties 7 167, ,425 Other TOTAL NON-CURRENT ASSETS 167, ,304 TOTAL ASSETS 192, ,661 CURRENT LIABILITIES Trade and other payables 2,721 2,509 Interest bearing loans and borrowings - 22,560 Distributions payable TOTAL CURRENT LIABILITIES 3,474 25,464 NON-CURRENT LIABILITIES Interest-bearing loans and borrowings 198, ,157 Derivatives at fair value 12,982 (3,407) TOTAL NON-CURRENT LIABILITIES 211, ,750 TOTAL LIABILITIES 214, ,214 NET ASSETS/(LIABILITIES) ATTRIBUTABLE TO UNITHOLDERS (22,398) 447 6

8 CONSOLIDATED CASH FLOW STATEMENT HALF-YEAR ENDED 31 DECEMBER Dec Dec 2007 CASH FLOWS FROM OPERATING ACTIVITIES Rental Income 6,785 5,489 Interest Income Income from distributions 1,489 1,620 Operating payments (1,520) (1,649) NET CASH FLOWS FROM OPERATING ACTIVITIES 6,808 5,724 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment properties - (27,476) Disposal of investment properties 3,850 5,100 Proceeds from sale of securities 1,091 - Payment for other investments (380) (20,679) NET CASH FLOWS FROM/(USED IN) INVESTING ACTIVITIES 4,561 (43,055) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of units 7,687 15,780 Repayment of borrowings (6,700) (4,831) Borrowing costs (3,730) (5,880) Proceeds from borrowings - 25,039 Advances from/(repayment to) related entities (7,889) 10,952 Distributions paid (1,006) (55) NET CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES (11,638) 41,005 NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (269) 3,674 Cash and cash equivalents at beginning of period 1, CASH AND CASH EQUIVALENTS AT END OF PERIOD 866 4,574 7

9 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER FUND INFORMATION ADIFII is an Australian registered management investment scheme. Abacus Funds Management Limited, the Responsible Entity of ADIFII, is incorporated and domiciled in Australia and is wholly owned subsidiary of Abacus Group Holdings Limited. The financial report of the Fund for the half-year ended 31 December 2008 was authorised for issue in accordance with a resolution of the directors on 13 March SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The half-year financial report does not include all notes of the type normally included within the annual financial report and therefore cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of the consolidated entity as the full financial report. The half-year financial report should be read in conjunction with the Annual Financial Report of Abacus Diversified Income Fund II for the year ended 30 June It is also recommended that the half-year financial report be considered together with any public announcements made by the Fund during the half-year ended 31 December 2008 in accordance with the continuous disclosure obligations arising under the Corporations Act The same accounting policies have been adopted in this report as in the report for the year ended 30 June (a) Basis of preparation The half-year financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, AASB 134 Interim Financial Reporting and other mandatory professional requirements. The half-year financial report has been prepared on a historical cost basis, except for investment properties and derivative financial instruments that have been measured at fair value, and certain investments measured at net market value. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars () unless otherwise stated under the option available to the Fund under ASIC Class Order 98/100. The Fund is an entity to which the class order applies. At 31 December 2008, ADIFII has a net asset deficiency. ADIFII has obtained a letter from the Abacus Property Group ( APG ) that APG intend not to request repayment of its loan of $94 million for a period of 12 months from the date of this financial report and to the extent necessary APG intends to provide financial support to enable ADIFII to pay its debt as and when they fall due. ADIFII seeks to manage its capital requirements through a mix of debt and equity funding. It also ensures that ADIFII entities comply with capital and distribution requirements of their constitutions and/or trust deeds, the capital requirements of relevant regulatory authorities and continue to operate as going concerns. ADIFII also protects its equity in assets by taking out insurance. AFML issued a product disclosure statement for the issue of units in ADIFII at an issue price of $1.00 adjusted for accrued distributions. The offer opened 26 July 2007 and it is intended to raise $102 million of units in ADIFII. ADIFII assesses the adequacy of its capital requirements, cost of capital and gearing (i.e. debt/equity mix) as part of its broader strategic plan. In addition to tracking actual against budgeted performance, ADIFII regularly reviews its capital structure and seeks to ensure sufficient funds and financing facilities, on a cost effective basis are available to implement the ADIFII s strategy that adequate financing facilities are maintained and distributions to members are made within the stated distribution guidance. 8

10 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2008 (a) Basis of preparation (cont) In addition to actively managing its diversified core plus property portfolio and the rental income that flow from it, ADIFII also actively manages its capital via the following strategems: issuing new units, distribution reinvestment plan, divesting assets, active management of both bank debt and interest rate swaps, ongoing support from the APG, or (where practical) recalibrating the timing of transactions and capital expenditure so as to avoid a concentration of net cash outflows. A summary of the ADIFII s key banking covenants are set out below. It is recognised that falling property prices could place pressure on compliance with the LVR. With financial support from APG to the extent necessary, ADIFII anticipates managing its covenant compliance by effecting the strategies set out above. Covenant Measure Key details Nature of facilities Secured, non recourse ADIF II has no unsecured bank facilities Loan Valuation Ratio 65% Drawn Loan / Bank accepted valuations Interest Cover Ratio 1.25 to1.5 Net rental income / Interest expense paid to banks ADIFII has no near term loan maturities with the first expiry of its bank debt facilities being June Details of ADIFII s banking facilities at 31 December 2008 are as follows: Total Facility Limit Amount Drawn Amount Undrawn Due within one year Due within two years $110,124,500 $104,160,516 $5,963,984 At 31 December 2008, 100% of ADIFII s total bank debt facilities were covered by interest rate swap arrangements at an average fixed interest rate (including bank margin) of 7.21% with average term to maturity of 3.5 years. 9

11 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER SEGMENT INFORMATION The Fund predominately operates in Australia. The Fund s segment reporting format is business segments as its risks and rates of return can be readily identified with the type of business and services provided. Segment revenue, segment expense and segment result do not include transactions between business segments. The Fund s primary business segments are Property and Investments. The Property division comprises the principal investment in and ownership of commercial, retail and industrial properties. Investments comprise of investment in listed and unlisted securities. Property Investments Total Half-year ended 31 Dec 2008 Revenue Revenue from external customers 7,032 1,030 8,062 Realised gain on investments ,292 1,030 8,322 Unallocated Revenue Total Revenue 7,292 1,030 8,376 Unrealised losses on investments (13,079) (4,831) Realised losses on listed securities - (565) Other expenses (1,518) (129) Segment result (EBIT) (7,305) (4,495) (11,800) Unallocated revenue 54 Finance costs (6,083) Loss on derivatives (16,389) Net loss for the period (34,218) Half-year ended 31 Dec 2007 Revenue Revenue from external customers 5,375 1,620 6,995 Realised gains on investments ,921 1,620 7,541 Unallocated Revenue Total Revenue 5,921 1,620 7,805 Unrealised losses on investments (5,159) (4,511) Other Expenses (2,319) (315) Segment result (EBIT) (1,557) (3,206) (4,763) Unallocated revenue 264 Finance costs (7,108) Gain on derivatives 2,252 Net loss for the period (9,355) 10

12 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER REVENUE 31 Dec Dec 2007 (a) Net realised gains on disposal of: Sale of Investment property 3,850 5,100 Cost of investment property sold (3,590) (4,554) Total net realised gains on investments EXPENSES 31 Dec Dec 2007 (a) Unrealised losses on investments Decrease/(Increase) in fair value of investment properties 13,079 (4,845) Decrease in fair value of units - unlisted Decrease in fair value of units - listed 4,473 4,463 Direct property acquisition costs - 7,026 Indirect property acquisition costs - 2,978 Total unrealised losses on investments 17,910 9,670 (b) Finance costs Interest on loans 5,961 7,019 Amortisation of finance costs Total finance costs 6,083 7,108 (c) Administrative expenses Management Fee Other expenses Total administrative expenses 1,006 1,327 11

13 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER DISTRIBUTIONS PAID AND PROPOSED 31 Dec Dec 2007 $ '000 $' 000 (a) Distributions paid during the year Final distribution for financial year 30 June 2008: 1.75 cents per unit (2007: 1.75 cents) Interim distributions paid during the year: September: cents per unit (2007: 1.75 cents) , (b) Distributions proposed and recognised as a liability Interim distribution payable for the December quarter: cents per unit (2007: 1.75 cents)

14 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER INVESTMENT PROPERTIES 31 Dec Jun 2008 Office 24,423 28,710 Commercial 62,370 66,315 Industrial 80,467 88,000 Total investment properties 167, ,025 Reconciliation A reconciliation of the carrying amount of investment properties at the beginning and end of the half year is as follows: 31 Dec Jun 2008 Carrying amount at beginning of the period 183, ,165 Additions and capital expenditure ,930 Fair value adjustments (13,079) 3,290 Expensed acquisition costs - (8,910) Disposals (3,410) (4,450) Carrying amount at end of the period 167, ,025 Investment properties are carried at the Directors determination of fair value and are based on independent valuations. The determination of fair value includes reference to the original acquisition cost together with capital expenditure since acquisition and either the latest full independent valuation or latest independent update. Total acquisition costs include incidental costs of acquisition such as property taxes on acquisition, legal and professional fees and other acquisition related costs. Independent valuations of each investment property is conducted annually either in December or June of each year. Independent valuations are prepared using both the capitalisation of net income method and the discounting of future cashflows to their present value method. Capital expenditure since valuation may include purchases of sundry properties (and associated expenses of stamp duty, legal fees etc) and other capital refurbishment and repair expenditure. The investment properties are used as security for secured bank debt. 13

15 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER NET ASSETS ATTRIBUTABLE TO UNITHOLDERS 31 Dec Dec 2007 (a) Units on issue ' 000 ' 000 Units on issue at beginning of reporting period 22, Units issued during reporting period 12,960 14,896 Units on issue as at the reporting date 35,373 15,415 (b) Movement in net assets attributable to unitholders Opening net assets attributable to unitholders 447 2,806 Net (loss)/profit attributable to unitholders (34,218) (9,355) Application for units 12,737 15,780 Distribution to unitholders (1,364) (247) Closing net assets attributable to unitholders (22,398) 8, RELATED PARTY DISCLOSURE Since the last annual reporting date the following guarantees provided by the Abacus Property Group ( APG ) have commenced: a) Cash Distribution Yield Guarantee whereby APG has agreed to underwrite the cash distribution yield of 8.5% from 1 July 2008 to 30 June This will be achieved by Abacus Finance Pty Ltd deferring the interest on the Working Capital Facility or by the APG deferring any of the fees payable to it under the constitution of ADIFII (or a combination of these things) or in any other way APG considers appropriate. Any interest or fee deferral or other funding support may be recovered if the actual cash distribution exceeds the cash required to meet the underwritten distribution over the Guarantee Period, or after the Guarantee Period or at the expiry of the Working Capital Facility. b) Capital Return Guarantee whereby APG will offer to acquire units in ADIFII at $1.00 per unit. This guarantee will apply to all ADIFII units on issue as at 1 July At that time APG will make an offer to acquire each ADIFII unit for $1.00, payable at the APG discretion in cash or by way of the issue of stapled securities in the APG to an equivalent value based on the 10 day volume weighted average price of the Group s stapled securities over the period ending on 30 June This offer will be made by 30 September

16 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER COMMITMENTS AND CONTINGENCIES Since the last annual reporting date, there has been no material change to any contingent liabilities or contingent assets. 15

17 DIRECTORS DECLARATION ABACUS DIVERSIFIED INCOME FUND II In accordance with a resolution of the directors, we state that: In the opinion of the directors: (a) the financial statements and notes of the consolidated entity are in accordance with the Corporations Act 2001, including : (i) (ii) giving a true and fair view of the financial position as at 31 December 2008 and of its performance for the half year ended on that date for the consolidated entity; and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations (b) there are reasonable grounds to believe that the consolidated entity will be able to pay its debts as and when they become due and payable. On behalf of the Board John Thame Chairman Frank Wolf Managing Director Sydney, 13 March

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