Centro MCS 23 Performance Overview RG 46 Disclosures The Australian Securities and Investments Commission (ASIC) has issued updated disclosure requirements for responsible entities of unlisted property funds (such as the Syndicate) in Regulatory Guide 46 (RG 46). The updated disclosure requirements set out six benchmarks and eight principles for improved disclosure to help retail investors compare risks and returns across investments in the unlisted property sector. The information below covers these disclosure principles and benchmarks and is based on the most recent audited financial statements for the Syndicate.
1) Disclosure Principle 1 and Benchmark 1 - Gearing ASIC Disclosure Principle: Gearing Ratio - This disclosure indicates the extent to which a Syndicate's assets are funded by interest-bearing liabilities. The Gearing Ratio has been calculated in accordance with ASIC RG 46 which states that entities should disclose a Gearing Ratio for the scheme calculated using the following formula: Gearing Ratio = Total interest bearing liabilities Total Assets In accordance with this formula the Syndicate Gearing Ratio is 70.6% as at 30 June 2012. The gearing ratio represents the extent to which the Syndicate's assets are financed by debt. Returns from geared investments are more volatile than returns from the same investments that are not geared. Accordingly a geared fund will be regarded as having a higher risk profile than a comparable ungeared fund. The greater the level of gearing, the greater the potential for both capital gain and loss. Investors can use the gearing ratio to assess the potential risks a fund may face in the event interest rates rise or property values decrease, and to compare the risk associated with the fund's return on investment to other similar products. ASIC Benchmark: Gearing Policy - The Responsible Entity is required to maintain and comply with a written gearing policy that governs the level of gearing at an individual credit facility level. We meet this benchmark and comply with our gearing policy. Please click here to view or obtain a copy of our Gearing Policy.
2) Disclosure Principle 2 and Benchmark 2 - Interest Cover ASIC Disclosure Principle: Interest Cover Ratio - This disclosure indicates the Syndicate's ability to meet its interest payments from earnings. The Interest Cover Ratio has been calculated in accordance with ASIC RG 46 which states that a scheme's interest cover should be disclosed and calculated using the following formula and based on the latest financial statements: Interest Cover Ratio = EBITDA - unrealised gains + unrealised losses Interest expense EBITDA = earnings before interest, tax, depreciation and amortisation. In accordance with this formula the Syndicate Interest Cover Ratio is 1.4 times as at 30 June 2012. This figure indicates that the Syndicate currently has sufficient earnings to satisfy interest repayments. Specifically, based on current figures, the Syndicate could service its debt 1.4 times over. This provides a buffer if interest rates or other expenses of the Syndicate increase or if earnings decrease (for example through the loss of tenants who are not able to be replaced quickly or for the same level of rental income). Investors can use an interest cover ratio to assess a fund's ability to meet ongoing interest payments and therefore service debt. The lower the interest cover, the higher the risk the fund will not be able to meet its interest payments. A fund with a low interest cover only needs a small reduction in earnings (or a small increase in interest rates or other expenses) to be unable to meet its interest payments. ASIC Benchmark: Interest Cover Policy - The Responsible Entity is required to maintain and comply with a written interest cover policy that governs the level of interest cover at an individual credit facility level. We meet this benchmark and comply with our interest cover policy. Please click here to view or obtain a copy of our Interest Cover Policy.
3) Benchmark 3 - Interest Capitalisation ASIC Benchmark: Interest Capitalisation - The interest expense of the scheme is not capitalised. Interest capitalisation means the scheme is not required to make interest payments until an agreed point in time. The Syndicate meets this benchmark as its interest expense is not being capitalised. 4) Benchmark 4 - Valuation Policy ASIC Benchmark: Valuation policy - The Responsible Entity is required to maintain and comply with a written property valuation policy. Key elements of our property valuation policy include: Independent property valuations are to be undertaken on each property at least once a year, except where the property is in the process of being marketed for sale; A Directors' valuation supported by an independent review to be undertaken on an intervening six month basis; The independent valuer is to be registered or licensed in the relevant State in which the property is located or otherwise be a member of an appropriate professional body; No independent valuation company is to undertake more than three consecutive independent valuations over no more than three years for any property; For each real property, an independent valuation to be obtained within two months after the Directors form a view that there is a likelihood that there has been a material change in the value of the property; Contains procedures to be followed dealing with any conflicts of interest; and Requires that for each property purchased, an independent valuation is to be obtained: (a) before the property is purchased: (b) for a development property, on an 'as is' and 'as if complete' basis; and (c) for all other property, on an 'as is' basis. We meet this benchmark and comply with our valuation policy. Please click here to view or obtain a copy of our Valuation Policy. Please see the information under Portfolio Diversification (below) for details on the Syndicate property valuations including if the current valuation is a Directors or an independent valuation.
5) Disclosure Principle 3 - Scheme Borrowings ASIC Disclosure Principle: Syndicate Borrowing - This disclosure provides information on the Syndicate's borrowings, maturity and any associated risks including breaches of loan covenants. Investors should consider information about borrowings of a property syndicate, as there are risks associated, particularly in relation to a syndicate's borrowing maturity profile and any breaches of loan covenants. Investors should be aware that their interests in the Syndicate will generally rank behind lenders and other creditors. This means, if the Syndicate was to be wound-up, then the Syndicate's lenders and other creditors would be repaid first, before any capital or outstanding distributions were paid to investors. The Syndicate constitution allows the Responsible Entity to borrow on behalf of the investors. All Syndicate debt facilities limit the security of a financier to the assets of the Syndicate. General Debt Information Financier Loan Facility Amount ($'000) Undrawn Amount ($'000) Loan Maturity Interest Rate (1) % Hedged Assets secured (Shopping Centres) External Financier - facility # 1 $21,700 $0 22-Oct-12 8.16% Nil Dubbo City Centre (1) Facility interest rate at 30 June 2012 including margin External Financier - facility # 1 will mature within 12 months, however we are in the process of selling Dubbo City Centre, and a party is currently conducting exclusive due diligence on the property. The proceeds from the sale will be used to repay the debt facility in full. Under the terms of External Financier - Facility # 1, if investors were to take any steps to exercise their right to remove Retail Responsible Entity Limited as the responsible entity of the Syndicate, for example by calling a meeting of investors to vote on a resolution to remove Retail Responsible Entity Limited as the responsible entity of the Syndicate, then this will trigger a review event which may cause an event of default under the facility and could result in the external financier demanding immediate repayment of the facility and exercising its rights to appoint receivers over the Syndicate's assets. Loan Covenant Review Financier Loan to Value Ratio (LVR) (1) LVR Covenant Interest Cover Ratio (ICR) (2) ICR Covenant External Financier - facility # 1 65% 65% 1.63 1.40 (1) Ratio at 30 June 2012. A 0.05% reduction in property value will lead to a breach of the LVR Covenant. (2) Ratio at 30 June 2012. A 14.1% reduction of earnings / net property income or a 16.4% increase in interest cost will lead to a breach of the ICR Covenant. As at 30 June 2012 the Syndicate had not breached any loan covenants. A breach of a loan covenant may result in penalties being applied, or the loan becoming repayable immediately. The Syndicate may need to refinance on less favourable terms or sell assets.
6) Disclosure Principle 4 - Portfolio Diversification ASIC Disclosure Principle: Portfolio Diversification - This disclosure addresses the Syndicate's investment practices and portfolio risks. Relevant portfolio risks are covered in the Syndicate Prospectus or Product Disclosure Statement (PDS), subsequent explanatory memorandum or through investor communication. Refer to Forms & Publications link below. Forms and Publications Section of website. Key portfolio metrics are covered in the tables below:
The Syndicate invests in shopping centres and all syndicate property is part of the retail property sector. The Syndicate was established to invest in retail property, as was explained in the original Prospectus for the Syndicate. Our investment strategy continues to focus on positively influencing the property net operating income, retailer quality and mix, occupancy and condition of the property. On a day-to-day basis, our management teams concentrate on leasing, marketing and maintaining our properties to a high standard to drive both retail sales and property income growth. This management focus assists in protecting the value of the Syndicate's property which, together with effective capital management, underpins the value of the Syndicate's investments. For further information on the current Syndicate strategy please refer to the Syndicate report on the link below: "Syndicate Annual Report"
7) Disclosure Principle 5 and Benchmark 5 Related Party Transactions ASIC Disclosure Principle: Related Party Transactions - The Responsible Entity is a wholly owned subsidiary of Centro Retail Australia (CRF). Retail Responsible Entity Limited has entered into a number of transactions with various companies within the CRF Group which are related parties of the Responsible Entity. The table below sets out the amounts paid or payable pursuant to CRF companies during the 12 months to 30 June 2012. The following related party fees were paid or payable to Centro by the Syndicate during the 12 months to 30 June 2012. Centro MCS 23 Amounts paid during 12 months to 30 Jun 12 ($'000) Nature of the relationship with the Responsible Entity Description of the related party transaction Responsible Entity Fees $288 Rollover/ Performance/ Termination Fees $0 Remuneration to the Responsible Entity in accordance with the Syndicate's Constitution These fees are provided for in the Syndicate's constitution and are payable to the Responsible Entity as remuneration for operating the Syndicate. These fees were disclosed in the original Prospectus issued for the Syndicate. In addition, the changes to the Rollover/Performance/Termination Fees which were approved at the investor meeting held on 17 February 2005 were disclosed in the notice of meeting and explanatory memorandum issued to investors in the Syndicate prior to that meeting. Trustee/ Custodian Fees $5 Trustee services provided by a wholly owned subsidiary of CRF This amount is payable to a wholly owned subsidiary of CRF pursuant to the trust deed of a Syndicate sub trust. Changes to the Trustee Fees which were approved at the investor meeting held on 17 February 2005 were disclosed in the notice of meeting and explanatory memorandum issued to investors in the Syndicate prior to that meeting. The Responsible Entity has complied with its policies and procedures in relation to this arrangement and continues to monitor the arrangement in accordance with its procedures. The Responsible Entity does not consider there are any risks associated with this arrangement. Accounting Cost Recoveries n/a Legal Cost Recoveries $18 Taxation Cost Recoveries $13 Corporate services provided by a wholly owned subsidiary of CRF These amounts are payable to a wholly owned subsidiary of CRF for providing various corporate services to the Responsible Entity as part of the operation of the Syndicate (including accounting services, legal services and taxation services). The arrangements are on arm's length terms or more favourable to the Syndicate and the Responsible Entity has complied with its policies and procedures for entering into related party transactions for this particular arrangement and continues to monitor the arrangement in accordance with those policies. The Responsible Entity does not consider there are any risks associated with the related party arrangement. Property Management Fees $174 Property Leasing Fees $47 Property management and leasing services provided by a wholly owned subsidiary of CRF These amounts are payable to a wholly owned subsidiary of CRF under a property management agreement entered into with the Responsible Entity. The amounts are paid for providing property management and leasing services at the properties owned by the Syndicate. The property management agreement is on arm's length terms. The Responsible Entity has complied with its policies and procedures in entering into this arrangement and continues to monitor the transaction in accordance with its procedures. The Responsible Entity does not consider there are any risks associated with this agreement. Interest Rate Swap Settlements $121 Interest rate swap transactions where CRF is the counterparty under the arrangement This amount is payable to CRF where CRF is the counterparty under an interest rate swap arrangement. The interest rate swap arrangement is governed by an internal swap agreement between CRF and the Responsible Entity. The settlement amount payable under the internal swap agreement is based on a mark-to-market valuation. The internal swap agreement was on arm's length terms and has now been terminated.
ASIC Benchmark: Related party transactions - The Responsible Entity is required to maintain and comply with a written policy on related party transactions, including the assessment and approval process for such transactions and arrangements to manage conflicts of interest. For the Syndicates, a related party transaction refers to transactions such as investments, loans, service agreements or guarantees with other Centro Retail entities. All related party transactions are governed by our conflicts of interest and related party transaction policy. Please click on the link below to view this policy. "Related Party Policy" We meet this benchmark and comply with our conflicts of interest and related party transaction policy. A summary of the key elements of our conflicts of interest policy and related party transactions policy is as follows: There are independent directors on the Board of the Responsible Entity, including an independent Chairman. Due diligence committees are established for corporate transactions including the issue of Product Disclosure Statements, capital raisings, issuing of Explanatory Memoranda or Information Memoranda. The Board of the Responsible Entity is represented on each due diligence committee. "Conflicts of Interest" are addressed in the Due Diligence committee Meeting by the application of specified criteria. Management Control Groups at an operational level are formed for various transactions including property acquisitions and disposals, corporate acquisitions and disposals, syndicate rollovers and other significant corporate transactions. Members of all relevant Centro departments are represented on each group. This group considers related party transactions and conflict of interest issues for each transaction, and in doing so will have regard to the principles set out in the conflicts of interest and related party transactions policy. Tailored additional control measures are implemented for major transactions which may affect several funds. Internal reporting processes from management to a member of the Executive Committee about proposed related party transactions and procedures for determining whether a proposed related party transaction is on arm's length terms. All related party transactions are disclosed in the Trust's financial statements. The 30 June 2012 financial statements can be found on the Centro Retail Australia Group website at www.centromcs.com.au
8) Disclosure Principle 6 and Benchmark 6 Distribution Practices ASIC Disclosure Principle: Distribution Practices This discloses whether distributions to Syndicate investors have been made solely from realised income or from a combination of realised income and a return of capital funded by borrowings. Syndicate distributions will not be supplemented with a return of capital component funded by debt. All current and forecast distributions are sourced from realised income. For the current distribution forecast for this Syndicate, please see Key Syndicate Statistics above. We consider that this published distribution rate is sustainable over the next 12 month period i.e. to 30 June 2013. It should be noted, that capital expenditure may be funded from earnings and/or cash reserves, as a result, future distributions may be impacted should the level of capital expenditure required to preserve or maintain the Syndicate properties exceed our expectations. ASIC Benchmark: Distribution practices - The Scheme has and will only pay distributions from its cash from operations (excluding borrowings) available for distribution. We meet this benchmark as all distributions to investors have been paid from realised income for the year ended 30 June 2012.
9) Disclosure Principle 7 Withdrawal Arrangements ASIC Disclosure Principle: Withdrawal arrangements - This Syndicate is a fixed term investment without any general withdrawal right during the fixed term of the Syndicate. However, the Syndicate has a Flexible Exit Mechanism (1) which provides an exit opportunity for investors towards the end of the then current Syndicate term, subject to any earlier restructuring of the Syndicate with investor approval, sale of Syndicate assets or earlier termination of the Syndicate. The Syndicate could be terminated early by the Responsible Entity if it exercises its discretion to do so. In that case, the Flexible Exit Mechanism would not apply. The termination of the Syndicate would result in the winding up of the Syndicate and the distribution of all net sale proceeds of Syndicate property. Flexible Exit Mechanism Generally, the following applies in relation to the Flexible Exit Mechanism: on receipt of a notice from the responsible entity, each investor will then, during a further period of 20 business days, be able to put (or sell) their Units to Centro Retail Limited (Centro), who is then obliged to acquire the Units. In addition, if any one investor puts their Units, Centro has the right to call (buy) all or a specific percentage of all Units which have not been put; Centro may pay for the Units acquired with cash, Centro Retail Australia Stapled Securities or both; investors take counterparty risk with Centro (i.e., the risk that Centro may fail to perform its obligations under the Flexible Exit Mechanism). The above is a brief summary of the Flexible Exit Mechanism contained in the constitution for the Syndicate. (1) This is not a right to withdraw from the Syndicate for the purposes of Chapter 5C of the Corporations Act.
10) Disclosure Principle 8 Net Tangible Assets The value of an investment is determined by reference to the Net Tangible Assets (NTA), that is the assets that have been acquired with investor equity. The RG46 definition of NTA is consistent with our definition of Net Asset Backing (NAB). In practical terms, the NAB calculation is a measure of the amount, per unit, that an Investor's investment in the Syndicate is worth. If the NAB per unit is less than $1.00 prior to any capital return paid during the Syndicate term, then there is a risk that Investors will not receive their full capital repayment when exiting the Syndicate or on a winding up of the Syndicate. Please refer to our NAB valuation policy via the link provided. The NAB for the Syndicate is calculated in accordance with the following formula: NAB = Net Assets - intangible assets +/- any other adjustments Total number of units in the scheme on issue For the current and historic Syndicate NABs please see Key Syndicate Statistics above.