AusFunds Fractional Property Investment Platform ARSN 623 862 662 ASIC RG46 Disclosure 5 November 2018 Vasco Investment Managers Limited ABN 71 138 715 009 AFSL 344486
ASIC Regulatory Guide 46 Disclosure The Australian Securities & Investments Commission (ASIC) requires responsible entities of unlisted property schemes in which retail investors invest to provide a statement addressing ASIC s six benchmarks and eight disclosure principles as set out in Regulatory Guide 46: Unlisted Property Schemes improving disclosure for retail investors (RG46). The disclosure aims to help retail investors compare risks, assess the rewards being offered and decide whether the investments are suitable to them. Vasco Investment Managers Limited (Vasco), as responsible entity (RE) of the AusFunds Fractional Property Investment Platform also known as the Platform, presents the six benchmarks and eight disclosure principles in relation to the Cash Class of the Platform in this document. This document should be read in conjunction with the Platform s latest Product Disclosure Statement (PDS) dated 26 February 2018 and financial statements which will be available on the website www.vascofm.com following the end of each financial year In accordance with the requirements of RG46, this statement will be updated for any material changes that the RE becomes aware of, and in any event, at least every six months. The updated statement will be included on the RE s website www.vascofm.com. Platform background The Platform is an ASIC registered managed investment scheme (unlisted trust) under the Corporations Act 2001, holding Australian Registered Scheme Number (ARSN) 623 862 662. The Platform is an unlisted trust in which interests are issued, which was formalised by a constitution dated 10 January 2018 and registered with ASIC as a managed investment scheme (ARSN 623 862 662) on 24 January 2018. The Corporations Act and the Constitution now regulate the relationship between the Responsible Entity and the Investors. Section 12 of the PDS sets out further information about the Constitution. The Platform provides investors with a low entry barrier into the Australia property market by offering fractional investment opportunities in a range of properties. The Platform consists of 2 types of Unit Classes: a Cash Class and Property Classes. Investors will need to first apply for Units in the Cash Class. Once they have been issued Cash Units they will be able to review the property investment opportunities listed on the Platform. Each property will be held in its own class of Units for which a Supplemental PDS (SPDS) will be issued. The Responsible Entity has appointed the Investment Manager as the manager of the Platform under an investment management agreement. Information on the Platform can be found on our website www.vascofm.com. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 2
Contents 1. Benchmarks... 4 1.1 Gearing Policy... 4 Benchmark 1: Gearing Policy... 4 Benchmark 2: Interest Cover Policy... 4 Benchmark 3: Interest Capitalisation... 4 Benchmark 4: Valuation Policy... 4 Benchmark 5: Related Party Transactions... 5 Benchmark 6: Distribution Practices... 5 2. Disclosure Principles... 6 2.1 Gearing Ratio... 6 2.2 Interest Cover Ratio... 7 2.3 Scheme Borrowing... 8 2.4 Portfolio Diversification... 9 2.5 Related Party Transactions... 10 2.6 Distribution Practices... 11 2.7 Withdrawal Arrangements... 12 2.8 Net Tangible Assets... 13 Annexure 1: Gearing Policy... 14 Annexure 2: Valuation Policies & Processes... 19 Annexure 3: Key Investor Information... 22 Annexure 4: Significant Risks of Investing... 24
1. Benchmarks 1.1 Gearing Policy RG 46.28 - Responsible entities (RE) of unlisted property schemes offered to retail investors and in which retail investors have invested should disclose against the benchmarks on an if not, why not basis. ASIC Benchmark Disclosure against benchmark Benchmark 1: Gearing Policy RG 46.31 The RE maintains and complies with a written policy that governs the level of gearing at an individual credit facility level. Yes - The Platform meets the benchmark While there will be no borrowing in the Cash Class, the RE monitors and manages the borrowings in each Property Class at an individual borrowing facility level on an ongoing basis in accordance with its gearing and interest cover policy. See Gearing and Interest Cover Policy attached as Annexure 1. Benchmark 2: Interest Cover Policy RG 46.36 The RE maintains and complies with a written policy that governs the level of interest cover (ICR) at an individual credit facility level. Yes - The Platform meets the benchmark While there will be no borrowing in the Cash Class the RE maintains a written interest cover policy as well as a Compliance Plan and a Risk Management Framework which require regular reporting on compliance with banking covenants for each facility that may be held by each Property Class. See Gearing and Interest Cover Policy attached as Annexure 1. Benchmark 3: Interest Capitalisation RG 46.41 The interest expense of the scheme is not capitalised. Yes - The Platform meets the benchmark While there will be no borrowing in the Cash Class, even in respect of borrowings in a Property Class, the interest expense of the Platform will not be capitalised unless the asset of the Property Class is a property development. Benchmark 4: Valuation Policy RG 46.45 The RE maintains and complies with a written valuation policy that conforms to ASIC s requirements at RG 46.45, or must explain why they do not. No - The Platform does not meet the benchmark The RE maintains and complies with a written valuation policy for the Platform, which is reviewed at least annually or as market circumstances dictate. This policy may change from time to time. This policy is outlined below, and may change from time to time. Any updates to this valuation policy will be provided on the RE s website at www.vascofm.com. The Responsible Entity endeavours to provide Unit holders ASIC Regulatory Guide 46 Disclosure / 5 November 2018 4
with timely and accurate information about the value of the Platform s investments. There are many different methodologies for compiling the likely value of an individual property and no one method can reliably be used to value all properties. In short, one valuation method cannot always cover all areas and properties with greater accuracy and consistency than all others. Different methods may become more or less appropriate from time to time or from property to property as more or less information relevant to that method may be available at different times. In summary, the RE s valuation policy requires that: independent external valuations for new properties must be completed no more than three months prior to exchange of contracts; independent external valuations for existing properties must generally be conducted at least once every 3 years; internally valued every other year; where there are multiple properties in a portfolio, the valuations may be staggered through the year; and where a property has been contracted for sale, the contracted sale price may be adopted instead of the independent external valuation. Additionally, we may test asset values on market if required. For further information or to obtain a copy of the Policy please contact us. Benchmark 5: Related Party Transactions RG 46.53 The RE maintains and complies with a written policy on related party transactions, including the assessment and approval processes for such transactions and arrangements to manage conflicts of interest. Yes - The Platform meets the benchmark The RE maintains a related party transaction policy that provides a framework for the review of the terms of all related party transactions. The policy details the circumstances and conditions as to when related party transactions are permitted and any supporting evidence required in relation to such transactions. The policy requires related party transactions to be in the best interests of investors and on arm s length terms unless otherwise disclosed. Benchmark 6: Distribution Practices RG 46.58 The Platform will only pay distributions from its cash from operations (excluding borrowings) available for distributions. Yes - The Platform meets the benchmark Both the Cash Class and any relevant Property Class will only pay distributions from cash from its operations. The likely source of distributable income from the Cash Class will be interest earned on the cash held (after expenses) and in the Property Class it will be from the rental payments (post expenses). ASIC Regulatory Guide 46 Disclosure / 5 November 2018 5
2. Disclosure Principles 2.1 Gearing Ratio RG 46.62 The RE should disclose the Platform s gearing ratio as calculated in accordance with the prescribed formula. RG 46.63 The liabilities and assets used to calculate the gearing ratio should be based on the scheme s latest financial statements. RG 46.64 If the scheme has material off-balance-sheet financing, the RE should disclose a look through gearing ratio that takes into account such financing. RG 46.65 The RE should explain what the gearing ratio means in practical terms, and how investors can use the ratio to determine the Platform's level of risk. The RE must disclose the level of direct gearing and look-through gearing for the Cash Class using the following formula: Gearing ratio = Total interest bearing liabilities Total assets The gearing ratio represents the percentage of debt compared to the gross assets of the Cash Class. As such it indicates the extent to which the Cash Class assets are funded by interest-bearing liabilities. A higher gearing ratio means a higher reliance on external liabilities (primarily borrowings) to assets. A highly geared class/scheme has a lower asset buffer to rely upon in times of financial stress. As at the date of the PDS the Cash Class has no borrowings. Any borrowings in the future will not be to the Cash Class but only to a specific Property Class. Details of any Property Class borrowings including the gearing ratio will be disclosed in the relevant SPDS relating to the Property Class. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 6
2.2 Interest Cover Ratio RG 46.71 The RE should disclose the Platform s interest cover ratio calculated in accordance with prescribed formula. RG 46.72 The EBITDA and interest expense figures used to calculate the interest cover ratio should be consistent with those disclosed in the scheme s latest financial statements. RG 46.74 The RE should explain how investors can use the interest cover ratio to assess the Platform s ability to meet its interest payments. For the purposes of this RG46 disclosure, the interest cover ratio (ICR) is calculated by using the following formula: Interest cover ratio (ICR) = EBITDA unrealised gains + unrealised losses Interest expense where EBITDA = earnings before interest, tax, depreciation and amortisation. The interest cover ratio gives an indication of an entity s ability to meet interest payments on debt from its earnings. It is an important indication of financial health and key to analysing the sustainability and risks associated with the Platform s level of borrowing. As at the date of the PDS the Cash Class has no borrowings. Any borrowings in the future will not be to the Cash Class but only to a specific Property Class. Details of any Property Class borrowings including the ICR will be disclosed in the relevant SPDS for the Property Class. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 7
2.3 Scheme Borrowing RG 46.78 If a scheme has borrowed funds (whether on or off balance sheet) the RE should clearly and prominently disclose: for each borrowing that will mature in five years or less the aggregate amount owing and the maturity profile in increments of not more than 12 months; for borrowings that will mature in more than five years the aggregate amount owing; the amount (expressed as a percentage) by which either the operating cash flow or the value asset(s) used as a security for the facility must fall before the scheme will breach any covenants in any credit facility; for each credit facility; i. the aggregate undrawn amount; ii. iii. iv. the assets to which the facility relates; the loan to-valuation and interest cover covenants under the terms of the facility; the interest rate of the facility; and v. whether the facility is hedged; details of any terms within the facility that may be invoked as a result of scheme members exercising their rights under the constitution of the scheme; the fact that amounts owing to lender and other creditors of the scheme rank before investor s interests in the scheme. RG 46.79 If any of the Platform s borrowings or credit facilities are to mature within the next 12 months, the RE should make appropriate disclosure about the prospects of refinancing; or possible alternative actions (e.g. sales of assets or further fund raising). RG 46.80 The RE should explain any risks associated with the Platform s borrowing maturity profile, including whether borrowings have been hedged and, if so, to what extent. RG 46.81 The RE should disclose any information about Platform borrowing and breaches of loan covenants that is reasonably required by investors As at the date of the PDS the Cash Class has no borrowings. Any borrowings in the future will not be to the Cash Class but only to a specific Property Class will be disclosed in the relevant SPDS for the Property Class. The Investment Manager s general approach is to actively manage the Property Classes borrowings in conjunction with the lender(s) to manage this risk as all amounts owed to lenders and to other creditors will rank before each investor s interest in the Property Class. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 8
2.4 Portfolio Diversification RG 46.87 The RE should disclose the current composition of the Platform s direct property investment portfolio, including: a) properties by geographic location, by number and value; b) non-development projects by sector (e.g. industrial, commercial, retail and residential) and development projects by number and value; c) for each significant property, the most recent valuation, the date of the valuation, whether the valuation was performed by an independent valuer and where applicable, the capitalisation rate adopted in the valuation; d) the portfolio lease expiry profile in yearly periods calculated on the basis of lettable area or income and, where applicable, the weighted average lease expiry; e) the occupancy rates of the property portfolio; f) for the top five tenants that each constitutes 5% or more by income across the investment portfolio, the name of the tenant and percentage of lettable area or income; and g) the current value of the development and/or construction assets of the scheme as a percentage of the current value of the total assets of the scheme. RG 46.88 Disclosure should cover the responsible entity s investment strategy on these matters, including its strategy on investing in other unlisted property schemes, whether the scheme s current assets conform to the investment strategy and an explanation of any significant variance from this strategy. A responsible entity should also provide a clear description of any significant non-direct property assets of the scheme, including the value of such assets. The Cash Class does not and will not hold any property assets. Any property assets will be held by a Property Class and the portfolio diversification will be disclosed in the relevant SPDS. The RE does not manage portfolio diversification for any Class of the Platform. The Platform will consist of a number of Property Classes. Each Property Class invests in one (or more) property asset(s). Each Property Class may hold a property from a different property sector (e.g. residential, commercial, retail, industrial etc) and/or geographical location. There may also be Property Class investing in the development stage of a property where the developed property will be held for rental return. It is up to the investors to diversify their investments by employing strategies such as investing into different Property Classes listed on the Platform. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 9
2.5 Related Party Transactions RG 46.98 REs that enter into transactions with related parties should describe related party arrangements relevant to the investment decision. The description should address: a) the value of the financial benefit; b) the nature of the relationship (i.e. the identity of the related party and the nature of the arrangements between the parties, in addition to how the parties are related for the purposes of the Corporations Act or ASX listing rules for group structures, the nature of these relationships should be disclosed for all group entities); c) whether the arrangement is on 'arm's length' terms, is reasonable remuneration, some other exception applies, or relief has been granted; d) whether scheme member approval for the transaction has been sought and, if so, when (e.g. if member approval was obtained before the issue of interests in the scheme); e) the risks associated with the related party arrangement; and f) whether the responsible entity is in compliance with its policies and procedures for entering into related party transactions for the particular related party arrangement, and how this is monitored. Policies and procedures are in place to mitigate the risk of any actual or perceived conflict of interest, including as a result of a related party transaction. The RE and the Investment Manager may enter into related party transactions from time to time. The Investment Manager and its subsidiaries (related parties) may invest in the Platform and the Platform may invest in related parties from time to time. Further, the RE and/or the Investment Manager may appoint related parties or source providers to undertake functions for the Platform from time to time including for example the role of property manager. The Administrator is a related party of the RE and has been engaged on arms length terms. Details of the RE s management fees and the Administrators costs are outlined in section 10 of the Platform s most recent PDS. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 10
2.6 Distribution Practices RG 46.102 If the Platform is making or forecasts making distributions to members, the RE should disclose: a) the source of the current distribution (e.g. cash from operations available for distributions, or from capital, or from unrealised revaluation gains); b) the source of any forecast distribution; c) whether the current or forecast distribution are sustainable over the next 12 months; d) if the current or forecast distribution is not solely sourced from cash from operations (excluding borrowings) available for distribution, the sources of funding and the reasons for making the distribution from these other sources; e) if the current or forecast distribution is sourced other than from cash from operations (excluding borrowings) available for distribution, whether this is sustainable over the next 12 months; and f) the impact of, and any risks associated with the payment of distributions from the scheme from sources other than cash from operations (excluding borrowings) available for distribution. Distributions are intended to be made to Unit Holders in the Cash Class as well as Property Classes (from interest earned and rental payments respectively). All distributions will be sourced from cash from operations available for distribution and will not be sourced from borrowings or unrealised capital gains. Details of any forecast distributions in respect of a Property Class will be disclosed in the relevant SPDS. In respect of the Property Class, the amount of distribution income paid to you is based on the number of units held at the end of each distribution period irrespective as to when the investor became a Unit Holder within that distribution period. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 11
2.7 Withdrawal Arrangements RG 46.104 If investors are given the right to withdraw from the Platform, the RE should disclose a clear explanation of how investors can exercise their withdrawal rights, including any conditions on exercise. The RE should clearly disclose: a) whether the constitution of the Platform allows investors to withdraw from the Platform, with a description of the circumstances in which investors can withdraw; b) the maximum withdrawal period allowed under the constitution for the scheme (this disclosure should be at least as prominent as any shorter withdrawal period promoted to investors); c) any significant risk factors or imitations that may affect the ability of investors to withdraw from the scheme, or the Interest price at which any withdrawal will be made (including risk factors that may affect the ability of the RE to meet a promoted withdrawal period); d) a clear explanation of how investors can exercise their withdrawal rights, including any conditions on exercise (e.g. specified withdrawal periods and scheme liquidity requirements); and e) if withdrawals from the scheme are to be funded from an external liquidity facility, including any rights the provider has to suspend or cancel the facility. RG 46.105 Any material changes to withdrawal rights (such as if the RE knows that withdrawal requests will be suspended), through ongoing disclosure. RG 46.106 Responsible entities should also clearly disclose if investors have no withdrawal rights. Investors will generally have the right to withdraw from the Cash Class on the first Business day of each month (after the Minimum Holding Period), subject to submitting a written Withdrawal Request to the RE at least 5 Business Days prior to of the end of the previous month. Under the Constitution the RE is allowed 20 Business Days to consider the withdrawal request and if it decides to affect the request a further 21 days to pay the proceeds. Further, the RE has discretion to suspend withdrawals from the Cash Class if it reasonably determines that it is in the best interest of investors as a whole to do so. The minimum amount of withdrawal from the Cash Class is $1,000. If the withdrawal from the Cash Class is such that the investor s total investment in the Platform will be lower than the minimum investment, the withdrawal may be disallowed or the investor s total investment may be redeemed. Investors in all the Property Classes will only be able to withdraw if the RE makes a withdrawal offer. The RE has no obligation to make a withdrawal offer. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 12
2.8 Net Tangible Assets RG 46.108 the responsible entity of a closed-end scheme should clearly disclose the value of the net tangible assets (NTA) of the scheme on a per Interest basis in pre-tax dollars. RG 46.109 We consider that responsible entities should calculate the NTA of the scheme using the following formula: NTA = Net assets intangible assets +/ any other adjustments Number of units in the scheme on issue RG 46.111 Responsible entities should also explain to investors what the NTA calculation means in practical terms and how investors can use the NTA calculation to determine the scheme s level of risk. The NTA in the Cash Class will be calculated through adding the total value of the assets in the Cash Class (i.e. the cash held) and adjusting it for any liabilities (for example accrued but unpaid distributions) and dividing it by the total number of Units in the Cash Class. The NTA for the Cash Class will be published on the Platform s Website and updated every week if required however it is expected to always remain at $1.00. per Unit. The NTA in a Property Class is calculated by reference to the annual valuation of the property asset held less any liabilities (e.g. loans and outstanding expenses) related to the Property Class divided by the number of Units on issue in that Property Class. The Property Class will not hold any tangible assets other than money held in a deposit account and the relevant property asset. The initial NTA of each Property Class will be set out in that Property Class s SPDS. The NTA for each Property Class will then be published on the RE s Website and updated every 12 months. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 13
Annexures Annexure 1: Gearing Policy and Interest Cover Policy 1 Introduction The Gearing and Interest Cover Policy (Policy) below provides guidance and explanation in relation to the calculation and limits on the gearing and interest cover ratios of each class of units in the AusFunds Fractional Property Investment Platform ARSN 623 862 662 (Class) of which Vasco Investment Managers Limited (Vasco) is the Responsible Entity, including at an individual credit facility level. Vasco has appointed AusFunds Investment Management Pty Ltd ACN 622 998 243 (AusFunds) under an investment management agreement to manage the assets of the Fund and ensure the assets are held in accordance with this Policy. 2 Definitions Gearing Ratio of the Class is calculated as: Total Class interest-bearing liabilities Total Class assets Gearing Ratio for an individual credit facility is calculated as follows: Total Class interest-bearing liabilities in relation to an individual credit facility Total secured assets in relation to an individual credit facility
Look Through Gearing Ratio is calculated as: Total Class interest bearing liabilities + proportionate share of interest bearing liabilities of the Class's underlying investments Total Class assets (excluding investments) + proportionate share of assets of the Class s underlying investments Interest Cover Ratio is calculated as: EBITDA unrealised gains + unrealised losses Interest expense where EBITDA means earnings before interest, tax, depreciation and amortisation. 3 Gearing ratio (a) (b) (c) (d) (e) (f) The gearing ratio indicates the extent to which all of the Class assets are funded by interest-bearing liabilities. It gives an indication of the potential risks the Class faces in terms of its level of borrowings due to, for example, an increase in interest rates or a reduction in property values. The higher the level of gearing, typically, the higher the level of risk. Low gearing ratios can mean a lower reliance on external liabilities (primarily borrowings) to fund assets and can be viewed as a measure of financial strength of the Class. Where a Class borrows, a gearing ratio for an individual credit facility will be calculated using the formula in section 2. Vasco will disclose to investors the gearing ratio for each individual credit facility of the Class to members. The gearing ratio of the Class will also be calculated and disclosed to members in compliance with disclosure principle 1 of ASIC s Regulatory Guide 46: Unlisted property schemes: Improving disclosure for retail investors. It will be calculated using the formula in section 2 and based on the Class s latest financial statements. The latest financial statements will be the last audited or reviewed financial statement, except where Vasco is aware of material changes since those documents. If Vasco does not base the gearing ratio on the latest financial statements, it will disclose the source(s) and date of information used to calculate the ratio. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 15
(g) (h) (i) (j) (k) If member s contributions (other than borrowings from members) are classified as liabilities in financial statements, they will be excluded from liabilities in calculating the gearing ratio. The financier will only have recourse to the assets of the Class and will not have recourse to the assets of individual members or any other Class. The financier s recourse to the assets of the Class has priority over the rights of members to the income or capital of the Class. AusFunds, as investment manager of the Class, intends on target limiting the gearing ratio of an individual credit facility to 80%. To ensure the Class has sufficient committed funds available to it on a cost effective basis to meet its anticipated liabilities as and when they fall due, AusFunds will target to limit the gearing ratio to a maximum of 85%. This is a target only and not a restriction or limitation. This means when undertaking property acquisitions, AusFunds will permit the Class to borrow up to a maximum of 85% of a property s value to finance the acquisition and/or its development. While in practice the gearing ratio may be lower than 85%, as there are a diverse range of property assets which AusFunds may invest in, it has set the target limit at 85% to allow sufficient flexibility. As this cap on the gearing ratio applies to a Class as a whole, it is possible that the loan to value ratio of an individual credit facility may exceed this cap. The gearing ratio will vary depending on the nature of the asset being financed. It is not intended that the Class will have material off-balance-sheet financing, for example, borrowings of equity-accounted investments and loans taken out by investors to invest in the Class where those loans are secured over the Class s assets on a limited recourse basis. In the event that the Class does have material offbalance-sheet financing, Vasco will disclose: (i) (ii) the look through gearing ratio of the Class that takes into account such financing; and the gearing ratio of the Class based on liabilities disclosed in the Class financial statements. (l) Where Vasco is unable to calculate the gearing ratio of the Class and/or the look through gearing ratio of the Class, Vasco will disclose to Investors the reasons why the ratio(s) cannot be calculated, an explanation of risks and impact of being unable to calculate the ratio(s), and the steps being taken by AusFunds to address these risks. 4 Interest cover ratio (a) (b) (c) The interest cover ratio gives an indication of the Class ability to meet the interest payment from earnings. An interest cover ratio is a measure of how many times the loan interest is covered by the Trust s EBITDA. A property trust s interest cover is a key indicator of its financial health. The lower the interest cover ratio, the higher the risk that the Class will not be able to meet its interest expense. A fund with a low interest cover ratio only needs a small reduction in earnings (or a small increase in interest rates or other expenses) to be ASIC Regulatory Guide 46 Disclosure / 5 November 2018 16
unable to meet its interest expense. An interest cover ratio of below 1 indicates a fund is not generating sufficient revenues to satisfy interest expenses. (d) (e) Where the Class borrows, an interest cover ratio will be calculated in respect of each individual credit facility. Vasco will disclose to investors the interest cover ratio for each individual credit facility of the Class to members. An interest cover ratio of the Class will also be calculated and disclosed to members in compliance with disclosure principle 2 of ASIC s Regulatory Guide 46: Unlisted property schemes: Improving disclosure for retail investors. The ratio will be calculated by dividing the Class s forecast EBITDA excluding any unrealised gains and adding any unrealised losses, by the Trust s forecast annual interest expense (on a look through basis) for the relevant period as per the formula in Section 2. (i) (ii) The calculations will be based on the Class latest financial statements. The latest financial statements will be the last audited or reviewed financial statement, except where Vasco is aware of material changes since those documents. If Vasco does not base the interest cover ratio on the latest financial statements, it will disclose the source(s) and date of information used to calculate the ratio. (f) (g) To ensure the Class has sufficient committed funds available to it on a cost effective basis to meet its anticipated liabilities as and when they fall due, AusFunds will target to limit the interest cover ratio to be no less than 1 times at an individual credit facility level and Fund level. This is a target only and not a limit. Where Vasco is unable to calculate the interest cover ratio, Vasco will disclose the reasons why the ratio cannot be calculated, an explanation of risks and impact of being unable to calculate the ratio, and the steps being taken by AusFunds to address these risks. 5 Interest capitalisation policy (a) (b) The risk associated with capitalising any interest expense is that it will reduce the amount of money available from the ultimate sale of the property to be distributed to the members, as the compounding effect of the capitalised interest means that more interest will be payable on the debt facility than if the Class was able to repay interest throughout the term of the debt facility. Generally, Classes in the Platform will not capitalise interest payments. However, if a Class invests in a property development, it may capitalise its interest repayments. 6 Reporting AusFunds will regularly report to investors of each Class in respect of its compliance with banking covenants for each facility that may be held by the relevant Class. This will likely be done through its quarterly investor updates. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 17
7 Review The Policy will be reviewed as and when required to take into account the revised conditions for the Class. As appropriate, that review may be carried out with the assistance of external compliance advisers and/or the auditor of Vasco. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 18
Annexure 2: Valuation Policy Real property assets There are many different methodologies for determining the likely value of an individual property and no one method can reliably be used to value all properties. In short, one valuation method cannot always cover all locations and different types of properties with greater accuracy and consistency than all others. Different valuation methods may become more or less appropriate from time to time or from property to property as more or less information relevant to that method may be available at different times. (a) Valuations on acquisition Independent valuations for properties proposed to be acquired by the Fund must be completed no more than three months prior to exchange of contracts. Where a property has been contracted for sale, the contracted sale price may be adopted instead of the independent valuation, subject to the RE s determination that doing so is in the best interest of investors in a Fund. (b) Valuations while holding property passively Independent valuations for properties owned by the Fund not the subject of any development activity (that is held generally for rental purposes) must be conducted at least once every 3 years. The RE or a Fund s auditors (if applicable) may require a valuation on a more frequent basis due the market movements, accounting requirements or regulatory requirements. Properties held passively will otherwise be internally valued at least yearly or as otherwise deemed appropriate by the RE through a desktop valuation conducted and recommended by the relevant Investment Manager and approved by the RE. This desktop valuation will ordinarily incorporate the following reference points: - Contract of sale of security property - Most recent council rates notice or statement detailing assessed site value - Online search of historical sale price of the security property - Online search of sale prices of comparable properties in the vicinity of the security property Where there are multiple properties in a portfolio, the valuations may be staggered through the year. The RE may test asset values on market where required. (c) Valuations of development property Each property subject to any development will be valued quarterly (or as otherwise determined) by the RE based on the following valuation milestones throughout the development process: ASIC Regulatory Guide 46 Disclosure / 5 November 2018 19
- Stage 1 Valuation: Development Approval submission The value of a property will be deemed to be equal to the Property Acquisition and Development Costs plus a 5% increase to reflect the value in completing and lodging the Development Approval for submission. - Stage 2 Valuation: Development Approval The value of the property will be deemed to be equal to the Stage 1 Valuation above plus any additional Property Acquisition and Development Costs plus a 10% increase to reflect the value in receiving the Development Approval. - Stage 3 Valuation: Commencement of construction The value of property will be deemed to be equal to the Stage 2 Valuation plus any additional Property Acquisition and Development Costs plus a 5% increase to reflect the value in having reached the point of commencing construction. - Stage 4 Valuation: Project completion The value of a completed property will be deemed to be equal to the sale price less any selling costs or an independent valuation completed following completion of the development or before 30 June of the year following completion. The RE will rely on an attestation from the Investment Manager as to when a particular valuation milestone for each property, the subject of development, is at prior to completion. Any valuation conducted by the RE prior to any valuation milestone but after the previous valuation milestone will only include the relevant Property Acquisition and Development Costs since the previous valuation milestone and until the next valuation milestone is reached. An independently valuation may be also be sought at any time the RE, or the Fund s auditors (if applicable), deem necessary or as required by accounting or regulatory requirements from time to time. Where a development property is independently valued before completion, the independent valuation will form the basis of any valuation conducted by the RE (replacing all previous valuations) from that point onwards, to which additional Property Acquisition and Development Costs and valuation increases at subsequent valuation milestones may be added. (d) Scope of independent valuations The Investment Manager will maintain a panel of valuers who are independent, experienced and qualified to perform valuations on property of the nature and type in which the Fund will invest. In order to be considered for inclusion on the panel, a valuer must: - Be suitably qualified to carry out a valuations - Be authorised under the Law of the State or Territory where the valuation takes place to practice as a valuer (if applicable) - Be a member of the Australian Property Institute, or Royal Institution of Chartered Surveyors (RICS) and is categorised as a Certified Practising Valuer by that institute ASIC Regulatory Guide 46 Disclosure / 5 November 2018 20
- Have professional indemnity insurance cover of at least $2m from a reputable and creditworthy insurer - Be independent of the RE and the Investment Manager and have no pecuniary interest or other conflict of interest that could reasonably be regarded as being capable of affecting that person s ability to give an unbiased opinion of the market value or that could conflict with a valuation of the property Panel valuers will be advised that all valuation reports must include confirmation of the details of their Professional Indemnity Insurance and its currency and that this assertion may be relied upon for this valuation. All valuations will be made for the benefit of the RE and must be on an as is or cost to complete value basis and should generally be based on the following guidelines: - for residential property, the value is defined as the estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller in an arm s length transaction, after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion - for commercial, industrial or retail property, the fundamental method of valuation is to include the capitalisation of net rentals supported by comparable sales. - valuations of construction and development property must be on an as is, on a cost to complete and on as if complete basis. - valuation of vacant land, should be made on an as is (current market value) and on project related site value basis with consideration to the existing and proposed (if any) zoning as well as on an as if complete basis, if it there is intention to develop the site. - All valuation reports must contain a statement as to whether the valuation complies with all relevant industry standards and codes. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 21
Annexure 3: Key Investor Information Name of Platform Name of Responsible Entity Name of Manager Investment Time- frame AusFunds Fractional Property Investment Platform ARSN 623 862 662 Vasco Investment Managers Limited ABN 71 138 715 009 AusFunds Investment Management Pty Ltd ACN 622 998 243 Medium to long term (i.e. 5+ years) Date Platform registered with ASIC 24 January 2018 Initial Interest issue price $1.00 Minimum investment in Cash Class $5,000 Withdrawals from Cash Class Yes Contribution fee for Cash Class None Buy/Sell spread for Cash Class None Responsible Entity fee Administration fee 0.31% per annum of the gross asset value of the Platform with a minimum: $44,000 for the first year commencing 17 January 2018, and $66,000 in each year thereafter. $25K p.a. where the Platform has total assets of less than $10m and there are less than 25 unit holders; $35k p.a. where the Platform has greater than $10m of assets or where there are 25 or more unit holders; and $5k p.a. for each Property Class. Other expenses Manager fees Estimated to be 0.66% per annum of the estimated gross asset value of the Cash Class Cash Class: 0.31% per annum of the gross asset value of the Cash Class Distributions Cooling Off Period for Cash Class Yes Yes for retail investors Financial Year End June 30. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 22
Investor Updates Updated information is available via Investor updates posted on the website: www.vascofm.com. This will also include the annual audited financial statements of the Platform as required by the Corporations Act. If you need help about investing generally, speak to a licensed financial adviser. The Australian Securities and Investments Commission ( ASIC ) can help you check if a financial adviser is licensed. If you do not have an adviser, contact us and we can put you in touch with someone who can help. If you have questions about this Platform in particular, speak to your Adviser or call Vasco on +61 3 8352 7120 directly for more information. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 23
Annexure 4: Significant Risks of Investing General risk relevant to all Classes Limited operating history risk The Platform is a newly formed managed investment scheme with no operating history upon which investors can evaluate its likely return. There can be no assurance the Platform will achieve any of an investor s investment objectives. Legal and Regulatory risk There is a risk that domestic or international laws or regulations may change, adversely impacting the regulation of the Platform and resulting in additional costs and/or less rigorous regulatory supervision of transactions and the reporting that is performed. Legal risk also includes the risk of losses occurring as a result of legal issues, principally losses arising out of the non-enforceability or non-enforcement of contracts. Non-enforcement may arise from insufficient documentation, insufficient capacity or authority of a counterparty, uncertain legality or unenforceability resulting from bankruptcy or insolvency. Fees and expenses The Platform will incur fees and expenses regardless of whether it is successful. The Platform will pay investment management fees, RE fees, administration fees and other expenses whether or not it receives its returns. In addition, the Platform will also be required to pay investment management fees, RE fees, administration fees and other expenses whether the funds raised are fully utilised or not. The Platform must therefore ensure that sufficient liquidity is maintained in order to meet these and other expenses. The RE and the Investment Manager expect to incur significant costs and expenses in seeking to source, evaluate, structure, negotiate, close, monitor and exit an investment including, but not limited to, financial, legal, technical, regulatory, commercial advisers, engaged to assist the RE and the Investment Manager in seeking to source, evaluate, structure, negotiate, close, monitor and exit the investment. There can be no assurance that the Platform will be successful in being able to recover these fees and expenses from a successfully closed investment. These amounts may be significant and could have an adverse impact on the return that Investors might otherwise realise. Risk relevant to the Cash Class Interest Rate risk Interest rates fluctuate from time to time, depending on a range of circumstances wholly outside the control of AusFunds and the Platform. Changes in interest rates may have a negative impact, either directly or indirectly, on investment returns. Risks relevant to the Property Classes The value of property assets is closely linked to rental income, occupancy levels, tenant quality, lease terms, location and supply and demand factors, and may also be impacted by environmental risks (such as land contamination or the cost of removing potentially hazardous materials). Property development assets have additional risks associated with them. Changes to any of these elements will affect the value of the underlying property and ultimately the value of your investment. The specific risks in respect of a specific Property Class will be disclosed in the relevant SPDS. Changing Economic Conditions A downturn in the economy may affect the value or performance of a property held by a Property Class. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 24
Tenancy risk The business conditions for tenants may change adversely, which may result in tenants seeking rental assistance, defaulting on rental payments, abandoning leases, or not renewing leases on expiry. A reduction in rental income received by a Property Class may impact the level of distributions it can make and may reduce the value of its assets. Property maintenance In the day-to-day operations of each Property Class, allowances are made for known capital works and maintenance of the properties. However, unforeseen repairs or capital works may be required, which may reduce the amount of income available for distribution. Class Liquidity risk Property assets tend to be less liquid than other forms of investment and it may take considerable time to sell a property and redeem the Property Units. The expected investment time frame for each Property Class will be disclosed in the relevant SPDS. Borrowing risk The RE may combine investors money with borrowed money in a Property Class and invest the combined amount in a property. This process, known as gearing, magnifies the effect of gains and losses on your investment and is considered more risky than similar investments that are not geared. If property values or rental income falls significantly the Property Class may be unable to meet its loan covenants which may result in the sale of that Property Class assets. In addition to the property risks outlined above, changes to interest rates or lender credit margins impact borrowing costs and ultimately impact the level of income you receive. There is also a risk that the RE may not be able to refinance the borrowings when borrowing facilities mature. If this occurs, the Property Class may lose value from selling assets in poor market conditions in order to repay the borrowed amount. The Investment Manager s intended approach is to actively manage each Class borrowings in conjunction with the lenders to help manage this risk. Income tax risk There is a risk that the Australian tax laws at the date of publication of this document, including applicable case law and published guidance by the ATO, could change. Australia is in the process of ongoing taxation reform. We will continue to monitor the tax reform process and its impact on the Platform. However, Investors are responsible for monitoring tax reform developments that may impact their investment in the Platform. MIT and AMIT risk There is a risk that the Platform may not meet the eligibility criteria that would enable the Platform to access the MIT and AMIT regimes. If these regimes are not available to the Platform, the tax concessions available under those regimes (some of which are noted in Section 11 of the PDS) will not be available to the RE and Investors. If the Platform does not meet the criteria for the regimes, the tax outcomes for investors will be subject to the tax laws that apply to all trusts and those outcomes may differ from those outlined in Section 11 of the PDS. For example, it may be possible that a loss in one Property Class may not be able to be quarantined in that Property Class. Also, the concessional rate of tax withholding that is available on certain distributions of net rental income and capital gains to non-resident investors will not be available. Related party transactions risk The Investment Manager is not a related party of the RE. The contractual arrangements between the RE and the Investment Manager are negotiated at arm s length between the parties. The RE may from time-to-time enter into transactions with related entities. For example, the Administration Manager is a related party of the RE. By making an investment in the Platform, Investors acknowledge that the Platform may make investments in properties managed by or owned by the Investment Manager. It is not the responsibility of the RE to assess the merits of each investment recommended by the Investment Manager, but rather to review that each investment is contemplated by the PDS and the Platform s Constitution. The RE does not directly manage the properties in which the Platform invests, and this role, where relevant will be undertaken by the Investment Manager. ASIC Regulatory Guide 46 Disclosure / 5 November 2018 25