Centuria Zenith Fund Case Study The trials and tribulations of our largest unlisted deal
Zenith is BIG! - $279 million, 2 towers, 44,000 sqm, 800 carparks Fund forecasts are not guaranteed. An investment in the Fund is subject to risk and may only be made using the application form accompanying the PDS. 2
Transaction Overview GPT Wholesale Office Fund and DEXUS were the vendors (50% interest each) non core asset Asset had been on the market for over 2 years Centuria identified the opportunity but too large for traditional unlisted fund Centuria co-invested with a fund managed by BlackRock to acquire the Zenith. Purchase price of $279.1m reflecting an implied cap rate of 7.75% and a fully leased yield of 8.66%. Purchase rate of $6,300 per sqm (800 cars) Fund forecasts are not guaranteed. An investment in the Fund is subject to risk and may only be made using the application form accompanying the PDS. 3
Property Overview Iconic asset with striking visual appeal, flexible floor plates, excellent views, landscaped gardens and high parking ratio. Construction date 1987 Title Office grade Site area NLA (twin towers) Floor plates Levels (each tower) Major tenants (by income) Occupancy (at August 2016) WALE (at August 2016) Car parks (NLA ratio) NABERS energy rating Freehold Prime 7,990sqm 44,271sqm ~1,000sqm 21 levels NSW Transport - 22% Abigroup - 11% NSW Health - 9% 94.8% (by area)^ 2.7 years (by area)^ 2.5 years (by income)^ 799 spaces (1:55sqm)* 5.0 stars Fund forecasts are not guaranteed. An investment in the Fund is subject to risk and may only be made using the application form accompanying the PDS. 4
North Shore Theme: Infrastructure Investment Sydney Metro is Australia s largest public transport infrastructure project and is expected to boost Sydney s economic activity by +$5.0b p.a. $8.3b Northwest Link (est. 2019 completion) and $11.0b City & Southwest Link (est. 2024 completion) will provide Chatswood with access to a wider workforce catchment and improve connectivity with the Sydney CBD and other metropolitan economic centres Compulsory government acquisitions to significantly increase office withdrawals: 19 buildings to be acquired in Sydney CBD 17 buildings to be acquired in North Sydney and St Leonards Source: Transport for NSW, Sydney Metro City & Southwest Overview February 2016 Centuria s expectation: rail project to boost future occupier demand leading to lower vacancy and strong rental growth. Fund forecasts are not guaranteed. An investment in the Fund is subject to risk and may only be made using the application form accompanying the PDS. 5
Macq. Park Chatswood St Leonards North Sydney Sydney CBD Zenith Leasing Analysis Chatswood is forecast to achieve strong rental growth: Market Prime Gross Face Rents Cost effective rents v Nth Sydney and Sydney CBD $1,200 $1,075 Sydney Metro infrastructure project Permanent stock withdrawals across the North Shore No near-term supply in Chatswood development pipeline Chatswood s significant retail and food based amenity $1,000 $800 $600 $400 $200 $0 $413 $552 $579 $774 Strengthening NSW economy driving employment Sydney commercial property rents increased by 8% in the six months to July 2916 North Shore Office Historical & Forecast Withdrawals Fund forecasts are not guaranteed. An investment in the Fund is subject to risk and may only be made using the application form accompanying the PDS. 6
Zenith Active Asset Management Strategy 1. Extensive capital works program Reinforce Zenith s best-in-class reputation ~$27.8m^ capital works budget: Lifts & desirable works Refurbishment works (e.g. bathrooms, lobbies, vacancies) End of trip facilities Allowance for title & services split ~$9.3m ~$12.8m ~$1.5m ~$4.2m 2. Proactive leasing strategy Centuria leasing team has a successful track record in Sydney s North Shore office markets Speculative fit-outs of vacant space Extensive engagement with sitting tenants to renew leases and capture forecast rental growth Fund forecasts are not guaranteed. An investment in the Fund is subject to risk and may only be made using the application form accompanying the PDS. 7
Zenith Active Asset Management Strategy 3. Potential to split the Zenith title and implement a shared services agreement Create smaller investment parcels (two separate towers) that better reflect the scale of the Chatswood market Expectation of a corresponding compression in cap rate Consulting firm AECOM have prepared a report on the expected process and costs involved in splitting the title Fund model allows for a $4.2m expense (reflects AECOM report), including consulting fees and implementation costs 4. Development or re-zoning opportunities Leverage low Floor Space Ratio (FSR) and large underutilised site Increase office space and / or redevelop for residential, hotel or mixed-use purposes Provide on-site retail offer e.g. supermarket, restaurants Any development work will be subject to planning approval Fund forecasts are not guaranteed. An investment in the Fund is subject to risk and may only be made using the application form accompanying the PDS. 8
Financial Returns (post fees, pre tax) Centuria s cap ex program, tower separation strategy and proactive leasing campaign, coupled with the underlying strength of Chatswood office market, is expected to deliver attractive distributions and potential for significant cap rate compression. Distribution Yield Forecasts # Financial Year Distribution Yield Indicative Tax Deferral Rates 2017 7.60%* ~70% 2018 7.70% ~100% 2019 7.75% ~85% 2020 7.67% ~55% 2021 8.39% ~50% 2022 9.79%* ~30% Average 7.82% - # Assumes constant cap rate of 7.75%. * Annualised return. Total Return Change in Terminal Cap Rate^ Terminal Cap Rate Terminal Passing Yield Levered IRR Terminal NTA Per Unit -100bps* 6.75%* 7.01% 14.27% $1.40-75bps 7.00% 7.28% 13.12% $1.32-50bps 7.25% 7.56% 12.00% $1.24-25bps 7.50% 7.84% 10.91% $1.17 No change 7.75% 8.12% 9.81% $1.10 +25bps 8.00% 8.40% 8.50% $1.02 +50bps 8.25% 8.68% 7.20% $0.95 +75bps # 8.50% # 8.96% 5.92% $0.88 ^ Assumes the change in cap rate is applied incrementally over the Fund s initial 5-year term. * The vendor s pre-gfc peak valuation reflected a cap rate of 6.75%, which is 100bps tighter than the Fund s acquisition cap rate of 7.75%. # During the GFC the vendor s trough valuation reflected a cap rate of 8.50%, which is 75bps softer than the Fund s acquisition cap rate of 7.75%. Fund forecasts are not guaranteed. An investment in the Fund is subject to risk and may only be made using the application form accompanying the PDS. 9
The Equity Raise $79 million required largest raise to date Centuria Equity raising process Cornerstones / Financial Planners / Direct Retail Clients Cornerstones hesitant due to - WALE Blackrock Research ratings - WALE!! No large cornerstones! Largest individual $4.5 mill. Previous 3 raises closed in 6-10 days. This took 6 weeks! Fund forecasts are not guaranteed. An investment in the Fund is subject to risk and may only be made using the application form accompanying the PDS. 10
Debt Financing What we wanted! - $194 million 3-5 year facility with $154 mill drawn and $40 mill of capex facility CBRE Debt Brokers - Global Search 28 Lenders approached Financier Issues - Large asset outside CBD location Short WALE large expiries in short term Starting LVR over 50% (51.4%) with a 65% LVR (buffer) Size of facility ($50 mill limits for some financiers) Requirement that one local bank be involved for some offshore groups Large capex tranche required - $40 million Insurance companies don t like further draws 6 offers received and none on terms acceptable to us Negotiated with 3 parties one dropped away 2 parties who only wanted 50% each left Finalised deal with Westpac and UOB 3 year term $154 mill draw with $30 mill capex facility 62.5% LVR with step down Fund forecasts are not guaranteed. An investment in the Fund is subject to risk and may only be made using the application form accompanying the PDS. 11
Debt Financing Fund forecasts are not guaranteed. An investment in the Fund is subject to risk and may only be made using the application form accompanying the PDS. 12
Fund Update Settled July 7 th 2016 July 2016 Purchase Price - $279 million December 2016 Independent Valuation - $301 million Number of new lease deals agreed 6 Record rents for Chatswood 8,000 sqm of lease renewals agreed Current enquiry 25,000 sqm + Fund forecasts are not guaranteed. An investment in the Fund is subject to risk and may only be made using the application form accompanying the PDS. 13
Disclaimer This document is strictly for the use of Financial Advisers and Wholesale Clients only and must not be distributed to any Retail Client. This document has been issued by Centuria Property Funds Limited ABN 11 086 553 639 AFSL 231149 (Centuria) and contains general information about Centuria and its related bodies corporate that is current as at May 2016. This document is not a recommendation or personal advice in relation to, or any offer of securities in, Centuria or any product or service offered by Centuria and does not take into account the investment objectives, financial situation or needs of any particular person. It is intended that Centuria will apply to the Australian Securities and Investments Commission (ASIC) to register the Centuria Zenith Fund (Fund) as a management investment scheme. Centuria will be the responsible entity of the Fund and the issuer of units in the Fund. It is intended that a Product Disclosure Statement (PDS) will be issued June 2016 and will be available from Centuria s website www.centuria.com.au. You should obtain and read a copy of the PDS relating to the Fund before making a decision to invest. Centuria and its associates will receive fees in relation to an investment in the Fund as disclosed in the PDS. Investment in the Fund is subject to risk including possible delays in payment or loss of income and principal invested. Centuria does not guarantee the performance of the Fund. The document has been prepared from information believed to be accurate, however, no representation or warranty is made as to the accuracy or adequacy of any information contained in the document. CA-CPFL-21/04/16-00257 V3 Fund forecasts are not guaranteed. An investment in the Fund is subject to risk and may only be made using the application form accompanying the PDS. 14