quarterly update – period ending 30 june 2019€¦ · 2 fort street real estate capital fund...

Want to know more? fsrec.com.au1 FORT STREET REAL ESTATE CAPITAL FUND SERIES | QUARTERLY UPDATE – PERIOD ENDING 30 JUNE 2019

QUARTERLY UPDATE – PERIOD ENDING 30 JUNE 2019

RETAILDomestic growth in Australia was subdued during the first half of 2019, with the outlook for future growth and inflation remaining soft. The outlook is similar for many regions globally, including both advanced and developing economies, given recent trade and technology disputes.The Reserve Bank of Australia (RBA) recently announced two cash rate reductions of 0.25% each, with the cash rate now at a record low of 1.0% – a reduction that is expected to help provide stimulus for the labour market and inflation. The RBA’s cash rate reduction and the proposed government tax relief package have caused housing market sentiment to improve, and these are expected to support household consumption going forward. Importantly for the FSREC Fund Series, weakness in household consumption has not had any significant effect on non-discretionary retail categories, with supermarket and grocery categories continuing to perform well and reporting 4.3% growth year-on-year. The consistent growth and performance of the non-discretionary retail sector in recent times provides evidence to suggest that neighbourhood and convenience-based shopping centres in the FSREC Fund Series should remain resilient through the cycle.Discretionary spending categories continue to remain under pressure, particularly in the household goods and department store sectors. Global conditions in the department store sector appear to have worsened during the first half of 2019 (1H19), with many stores announcing rationalisation programs. The discount department store (DDS) sector is not exempt from this, with Target and Big W also announcing rationalisation strategies for the next three to five years. It is important to note that the FSREC Fund Series has a very low exposure to discretionary retail.While the Investment Manager evaluates assets that have DDS tenants in occupation, it has a preference towards Kmart given the Investment Manager’s conviction in the long-term performance of the Kmart business model compared to the store’s competitors. Retail transactions have been fairly limited during 1H19, with transaction volumes reported to be down 47% from the same time last year. This is reflective of the caution investors are exercising when assessing retail assets for acquisition. Some yield decompression has occurred at the upper end of the yield ranges, particularly for assets with weaker fundamentals

where risk of vacancy and negative leasing spreads is higher. Pricing for neighbourhood assets is forecast to be less volatile going forward, given strong investor demand remaining for these assets – particularly those with strong underlying fundamentals and a high weighting to non-discretionary income. Given the uncertainty surrounding the global macro environment and the changes occurring in the retail market, the Investment Manager has taken a prudent stance and remains cautious, particularly when assessing retail assets for acquisition.

OFFICEThe outlook for the business environment in Australia is uncertain at present, with lead indicators being mixed for the second quarter of 2019 (2Q19). Employment growth remains strong, with the unemployment rate currently reported at 5.2%. Despite this, a recent softening of the labour market prompted two RBA rate cuts in June and July, while business confidence has declined marginally post-election. The performance of commercial office markets has been strong in recent years, driven by employment and population growth. The Sydney and Melbourne markets have both achieved record low vacancy rates and strong rental growth, with other CBD office markets also improving as a result. The South Sydney office market, where FSREC Fund III owns an asset, performed well during 2Q19. Positive net absorption was recorded here (in comparison to Sydney CBD, which recorded negative net absorption), causing the vacancy rate to decline by 1.0%. Prime gross rents also increased by 1.0%, driven by underlying demand and a lack of contiguous space in high-quality assets. Investment yields compressed by 25 basis points at the lower end of the prime range, after the Altitude Corporate Centre in Mascot sold for 5.7%. Looking ahead, slower labour markets may affect the office market, however, future performance is expected to be driven by interest rate cuts and growth expectations. Commercial property yields have continued providing relative value in the low interest rate environment, with the falling cost of debt having the potential to put upward pressure on office pricing.

INVESTMENT TEAM MEMBERS

David Rogers – Director, Investments

Jason Hay – Director, Asset Management

Richard Hunt – Chairman, Fort Street Real Estate Capital

Sources: 1 JLL Research (2019). 2 CBRE Research (2019). 3 M3 Property Research (2019). 4 Reserve Bank Australia (2019).

FUND VALUATIONSThis quarterly provides an unaudited estimate of the current Net Tangible Assets (NTAs) of each Fund in the series as at 30 June 2019 following the half-year valuation process. The audited NTA of each Fund in the series will be detailed in our upcoming FY19 Annual Results which are expected to be released in early September. Over the six months to June 2019, each Fund had valuation increases to its portfolio of properties: Fund I 2.0%, Fund II 0.5%, Fund III 1.5%, and Fund IV 1%. However, notwithstanding the portfolio valuation increases, the Net Tangible Assets of each Fund have been negatively impacted by the reduction in interest rates over FY19. The reduction in interest rates required an accounting adjustment of debt held by the Funds where the interest rate is hedged to a fixed interest rate. There was no offsetting increase in the capitalisation rates used to value the assets as capitalisation rates are based on a range of market based parameters, not simply bond rates. As this is an accounting adjustment to the balance sheet for each Fund, the cash flows for the funds are not impacted.

REAL ESTATE MARKET UPDATE



SERIES OVERVIEWDISTRIBUTIONS ANNOUNCED (LAST 12 MONTHS) FUND I FUND II FUND III FUND IV

June 2019 1.74 cents per unit 2.10 cents per unit 1.90 cents per unit 1.60 cents per unit

March 2019 1.74 cents per unit 2.10 cents per unit 1.90 cents per unit 1.60 cents per unit

December 2018 1.74 cents per unit 2.10 cents per unit 1.90 cents per unit N/A

September 2018 1.74 cents per unit 2.10 cents per unit 1.90 cents per unit N/A

QUARTER HIGHLIGHTS

NTA per unit (unaudited estimate) $1.58 $1.60 $1.52 $1.51

Gross assets (unaudited estimate) $261.9 million $182.4 million $240.3 million $122.4 million

Weighted lease expiry 5.0 years 5.8 years 4.0 years 4.5 years

Gearing ratio (based on unaudited estimates) 36.8% 38.6% 32.0% 37.8%

KEY FUND DETAILS

Inception June 2013 June 2014 December 2016 June 2018

Structure Unlisted unit trust Unlisted unit trust Unlisted unit trust Unlisted unit trust

Sector Australian commercial property Australian commercial property Australian commercial property Australian commercial property

Currency AUD (unhedged) AUD (unhedged) AUD (unhedged) AUD (unhedged)

Retail Office

87%

13%SECTOR DIVERSIFICATION (BY CURRENT VALUE)

NSW VIC QLD SA72%

15%

13%GEOGRAPHIC DIVERSIFICATION (BY CURRENT VALUE)

100% 100%

42%

47%

11%

100% 100%

63%

37%



3 Months 6 Months 1 Year 3 Years p.a. 5 Years p.a. Inception p.a.

NTA Total Return1 1.1% 1.6% 4.5% 14.5% 12.8% 10.8%

$1.60 $1.58

$0.05 $0.11 $0.11 $0.10

$0.58

$0.07$0.00

$0.30

$0.60

$0.90

$1.20

$1.50

$1.80

Issue price3 Jul 2013

FY14 FY15 FY16 FY17 FY18 FY19 NTA perunit 30 Jun

2019


NTA Total Return1 8.4% 8.3% 8.1% - - 3.6%

$1.60 $1.52

$0.01 $0.08 $0.08$0.00

$0.30

$0.60

$0.90

$1.20

$1.50

$1.80

Issue price7 Dec 2016

FY17 FY18 FY19 NTA per unit30 Jun 2019

FUND PERFORMANCE


NTA Total Return1 0.7% 1.4% 2.7% 7.9% 5.5% 5.5%

$1.60 $1.60

$0.04 $0.08 $0.08 $0.08 $0.08$0.00

$0.30

$0.60

$0.90

$1.20

$1.50

$1.80

Issue price20 Jun 2014

FY15 FY16 FY17 FY18 FY19 NTA per unit30 Jun 2019


NTA Total Return1 0.4% -0.5% -0.5% - - -0.5%

$1.60 $1.51

$0.03$0.00

$0.30

$0.60

$0.90

$1.20

$1.50

$1.80

Issue price1 Jun 2018

FY19 NTA per unit30 Jun 2019

Distributions of 101.06 cents Distributions of 37.26 cents

Distributions of 16.52 cents Distributions of 3.20 cents

FSREC I FSREC II

FSREC III FSREC IV

Note: 1 Performance is calculated on a total return NTA basis, inclusive of distributions and net of fees and costs, using audited and unaudited NTA per unit on a quarterly basis. The initial NTA used is the proforma NTA, or issue price net of issue costs. Historical performance is not a reliable indicator of future performance. All data as at 30 June 2019 unless stated otherwise.



PORTFOLIO UPDATEFund highlights

Distribution of $0.0174 per unit Portfolio occupancy remained strong at 99% Leasing activity was strong with three new leasing deals and two tenant

renewals completed.

Asset management

Occupancy at Oxford Village improved over the quarter to 100%, following the completion of three new leasing deals and one key renewal with a national tenant. Deals completed in the food precinct have introduced a popular Turkish restauranteur offering a Middle Eastern grill and salad concept, as well as an experienced Japanese Bento operator. An external tenancy on Pelican Street has also been leased to a new beauty operator, which has delivered a well-presented tenancy and is now open for trade. Management has continued to progress the entry upgrade project, with tiling completed on both Oxford and Pelican Street and the bulkhead refurbishment to commence shortly, which will further add to the property’s street appeal.

Lake Innes maintained 100% occupancy for another consecutive quarter. The centre has continued to outperform, led by Coles, which reported 11.7% annual sales growth for June 2019. Specialty retail sales were also reportedly up 15.1% month-on-month. The positive sales results are a result of growth in the neighbouring university precinct, with the student population supporting the performance of retail tenants in the centre. A new IGA supermarket is due to open in the catchment in the latter part of the year, however, we do not anticipate that this will have a material impact on centre performance.

FUND IPORTFOLIO SUMMARY

PURCHASE DATE OCCUPANCY (%) COST (INCL. CAPEX) ($m) VALUE ($m)Oxford Village, NSW Oct-13 100% 74.2 96.00

Windsor Riverview, NSW Jul-14 99% 54.2 56.25

Lynbrook Village, VIC Nov-13 97% 33.2 39.00

Noosa Village, QLD Nov-14 97% 28.2 33.10

Lake Innes, NSW Nov-13 100% 18.7 31.70

Total 99% 208.5 256.1

Note – all figures are unaudited estimates, as at quarter end.

At Lynbrook Village, occupancy remained steady at 97%. During the period, renewals were executed with the hairdresser and bakery. As part of the renewals, both tenants will undergo refurbishment of their tenancies. This is in line with management’s ongoing strategy to improve the centre’s presentation, enhance the customer experience and differentiate the centre in a competitive retail catchment. The laneway rejuvenation has now been completed and has garnered positive feedback from both customers and tenants, also resulting in an increase of leasing enquiries from prospective tenants.

At Windsor Riverview, occupancy remained strong at 99%. Discussions have been ongoing with numerous food operators to fill the last vacant tenancy in the recently refurbished food court. Gloria Jeans completed a major refurbishment during the quarter, which has helped improve centre appeal from the George Street entrance. The rooftop solar power system has continued to support the centre efficiently, with management team investigating the potential to increase the size of the system to increase clean energy output.

Occupancy at Noosa Village remained stable at 97% over the quarter. Woolworths has continued to perform strongly, reporting an annual sales increase of 6.0% to 30 June. The management team has been conceptualising plans to improve the external aesthetic of the centre, which will include painting and improvements to the centre signage. These works are due to commence in the near future and will aid in modernising the presentation and appeal of the centre, which is likely to increase leasing enquiries and customer visitations.

TOP TENANTS (BY GROSS INCOME)

Coles Group Limited 19%

Study Group 15%

Fitness First 6%

Woolworths Group 4%

Aldi Group 4%

Capital management

The Fund announced a distribution of $0.0174 per unit, representing an annualised distribution yield of 4.4%.

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WEIGHTED AVERAGE LEASE EXPIRY (BY GROSS INCOME)

OXFORD VILLAGE, DIVINE LASHES – FUND I

All data as at 30 June 2019 unless stated otherwise.




Distribution of $0.0210 per unit Portfolio occupancy remained strong at 96% Leasing activity was strong with six new leasing deals and three tenant

renewals completed.

Asset management

At Marketfair Campbelltown, occupancy declined marginally to 98%. However, this is expected to improve next quarter as leasing deals have been completed for the remaining vacancies. The new leases are with an experienced Chinese food operator and a beautician, in addition to a deal with a local gentlemen’s barber to replace the hairdresser due to vacate in September. During the quarter, management also considered installing rooftop solar to generate clean energy at the asset, with construction scheduled to commence shortly. Furthermore, management has continued to work through various options to improve the convenience of customer car-parking to improve centre visitation. Minor painting, signage and reconfiguration works are to commence shortly to achieve the planned traffic flow outcomes. Lastly, re-zoning documentation has been formally submitted to council for the Macarthur Precinct Masterplan, with the resulting approvals process likely to take until next year. Should this re-zoning be successful, it would allow additional development and capital growth of the property over the long term.

At Newtown Central, occupancy improved to 96% over the quarter, driven primarily by a new deal with a health food operator. This operator

FUND IIPORTFOLIO SUMMARY

PURCHASE DATE OCCUPANCY (%) COST (INCL. CAPEX) ($m) VALUE ($m)Marketfair, NSW Aug-16 98% 52.3 53.0Northpoint, QLD Sep-14 95% 39.5 46.0Newtown Central, NSW Apr-15 96% 29.0 31.0Birkdale Fair, QLD Mar-15 96% 28.0 28.65Hilton Plaza, SA Aug-16 95% 21.2* 20.35Total 96% 170.0 179.0

*Includes capital expenditure incurred in 2019 of $0.9 million, not reflected in the asset value. Note – all figures are unaudited estimates, as at quarter end.

may appeal to the customers frequenting the newly refurbished 24-hour Fitness First and also improve the food offering at the centre. Additionally, the massage tenant is being relocated to a vacancy on the upper level, leaving a vacancy on the lower level for which the management team is in advanced discussions with food and dessert operators. The beauty operator has been relocated to the services section, in line with mnagement’s strategy to optimise the tenant mix and create designated precincts. The external refurbishment works were completed during the quarter, enhancing the appeal of the asset when leaving Newtown train station.

Occupancy at Northpoint declined marginally to 95% during the quarter, due to the challenging leasing environment in Toowoomba. The Asset Management team has been working with local stakeholders to position the asset as the convenience shopping centre of choice in the town. Building this rapport with the local community will be instrumental in improving leasing enquiry and the performance of the centre over the longer term. Despite local market challenges, recent market rent reviews and tenant sales remain positive and provide a positive outlook for growth in the future.

Birkdale Fair maintained stable occupancy during the period at 96%. The focus at the asset over the quarter has been on leasing and the completion of the solar panel installation. Final approval has been obtained for the system, which is now operational. Over the coming months, this will deliver electricity savings to the tenants in the centre, as well as improve income and returns for investors in the Fund. Deals executed over the quarter include renewals with the hairdresser and the national travel agent, with both agreeing to deliver updated fitouts as part of their renewals. The


Woolworths Group 21%


Fitness First 5%

TJX Australia 5%

Foodworks 4%

newsagent also extended its tenure. Going forward, the priority for the management team will be to lease the remaining vacancies in the centre to improve occupancy and income from the asset.

Occupancy at Hilton Plaza remained consistent with the previous quarter at 95%, as management continued to source a replacement office tenant for the upstairs level of the external tenancy. Outside of this one vacancy, the retail component of the centre has remained fully leased. A renewal with the national chemist was executed during the quarter, and the popular barber franchise completed its new fitout and opened for trade. The upgrade works to the Bagot Street signage has been completed, and the internal bulkhead improvements are currently in progress.

Capital management

During the period, the Fund announced a distribution of $0.0210 per unit, representing a 5.3% annualised yield.

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2019 2020 2021 2022 2023 2024+






Distribution of $0.0190 per unit Portfolio occupancy ended the quarter at 98% Energy upgrade completed at 241 O’Riordan Street, Mascot with

expectation to achieve a 5-star energy rating.

Asset management

At 241 O’Riordan Street, Mascot, occupancy declined marginally to 97% following the exit of a small 500sqm tenant mentioned in the previous quarter. The leasing campaign for this space has gained positive momentum during the period, and negotiations have advanced with a replacement tenant that is expected to finalise its lease during the next quarter. The management team has continued to work with RMS and Austrack (Rail Authority) on infrastructure projects that fall within the vicinity of the asset, and this is expected to improve the road network and infrastructure surrounding the asset over the coming years. The energy upgrade project has been largely completed, with final inspections currently being undertaken. Following the completion of the works, the management team will seek to commence the process for a formal energy rating over the coming months.

Toormina Gardens maintained 98% occupancy over the quarter. The focus has remained on repositioning the asset to improve the tenancy mix and strengthen the quality of the retail offer. New leases have been agreed on with a butcher and a phone accessory kiosk, with new fitouts to be completed. The Centre Management Offices were also relocated to provide a purpose-built work space and meeting room with improved accessibility and amenity for customers and stakeholders. The space

FUND IIIPORTFOLIO SUMMARY

PURCHASE DATE OCCUPANCY (%) COST (INCL. CAPEX) ($m) VALUE ($m)Toormina Gardens, Coffs Harbour, NSW Jan-18 98% 90.4 87.5

241 O'Riordan Street, Mascot, NSW May-17 97% 147.7 151.0

Total 98% 238.0 238.5

Note – all figures are unaudited estimates, as at quarter end.

previously occupied by the Centre Management team is now available to support future developments at the northern end of the centre. The installation of a 300-kilowatt solar electricity system has commenced and is expected to be commissioned shortly. The system will provide sustainable energy to the asset while also delivering savings in operating costs, ultimately improving returns from the asset for unitholders.

Capital management

During the period, the Fund announced a distribution of $0.0190 per unit, representing a 5.0% annualised yield.


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2019 2020 2021 2022 2023 2024+


NSW Government 25%

AbbVie 10%

Woolworths Group 7%

Landis & Gyr 7%


241 O'RIORDAN STREET – FUND III





Distributions of $0.0160 per unit Portfolio occupancy ended the quarter at 99% Positive leasing activity with four renewals agreed with existing tenants.

Fund update

Keilor Central maintained 99% occupancy over the quarter, with leasing momentum remaining strong since acquisition earlier this year. Four renewals were agreed on with long-standing tenants in the centre, including a local café and a national bakery. All major tenants reported good sales results for the quarter, with Coles and Kmart both reporting near 20% month-on-month sales growth. The strong performance of the major tenants has continued to underpin the performance of the

FUND IVWEIGHTED AVERAGE LEASE EXPIRY (BY GROSS INCOME)

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Kmart 17%


Aldi Group 6%

Quality Pharmacy 4%

The Reject Shop 3%

KEILOR CENTRAL SHOPPING CENTRE – FUND IV

PORTFOLIO SUMMARYPURCHASE DATE OCCUPANCY (%) COST (INCL. CAPEX)* ($m) VALUE ($m)

Keilor Central, VIC Dec-18 99% 119.6 114.1

Total 99% 119.6 114.1

*Includes acquisition costs and stamp duty.Note – all figures are unaudited estimates, as at quarter end.

speciality tenants in the centre, the majority of which reported positive sales results for the month of June. Since taking ownership of the asset, management has undertaken a rebranding process and has recently launched a new website which was well received by the community. A key priority for management going forward will be sustainability, with assessments progressing for the installation of an embedded electricity network and solar power system.

Capital management

During the period, the Fund announced a distribution of $0.0160 cents per unit representing a 4.2% annualised yield.




ABOUT FORT STREET REAL ESTATE CAPITAL Fort Street Real Estate Capital is an experienced specialist in property investment and asset management, with the ability to draw upon extensive networks to help access opportunities, as well as manage and reposition assets. The Fort Street Real Estate Capital executives have more than 50 years’ combined experience in real estate. Their extensive knowledge in this sector has assisted them to transact more than $2 billion of commercial property in recent years.

Fort Street Real Estate Capital targets real estate opportunities with strong underlying rental income and the potential for long-term capital growth through value-add opportunities or repositioning potential.

ABOUT WALSH & COMPANYWalsh & Company, part of the Evans Dixon Group, is a multibillion-dollar global funds management firm founded in 2007, with assets under management across global equities, residential and commercial property, private equity, fixed income, and sustainable and social investments. It provides access to unique investment strategies not readily accessible to investors and focuses on building high-quality, diversified portfolios.

FUND CONTACTSNSW

Adam Coughlan – Head of Distribution T: (02) 8662 9792 M: 0418 653 560 E: [email protected]

Andrew Fitzpatrick – Business Development Associate T: (02) 8662 9743 M: 0400 456 570 E: [email protected]

QLD/WA

Emmanuel Vergara – Key Account Manager T: (07) 3565 9305 M: 0467 773 162 E: [email protected]

VIC/SA/TAS

Charlie Wapshott – Key Account Manager T: (03) 9411 4066 M: 0456 040 613 E: [email protected]

IMPORTANT INFORMATIONThis report has been prepared by Fort Street Real Estate Capital Pty Limited (ACN 164 101 731) (Investment Manager), a corporate authorised representative (CAR No. 440307) of Walsh & Company Asset Management Pty Limited (ACN 159 902 708, AFSL 450 257), and investment manager of Fort Street Real Estate Capital Fund I (ARSN 163 688 346) (Fund I), Fort Street Real Estate Capital Fund II (ARSN 169 190 498) (Fund II), Fort Street Real Estate Capital Fund III (ARSN 605 335 957) (Fund III) and Fort Street Real Estate Capital Fund IV (ARSN 623 196 298) (Fund IV), together referred to as either ‘Funds’ or ‘FSREC Fund Series’.

This report may contain general advice. Any general advice provided has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider the appropriateness of the advice with regard to your objectives, financial situation and needs. Past performance of the Funds is not a reliable indicator of the future performance of the Funds. This report may contain statements, opinions, projections, forecasts and other material (forward-looking statements), based on various assumptions. Those assumptions may or may not prove to be correct. The Investment Manager and its advisers (including all of their respective directors, consultants and/or employees, related bodies corporate and the directors, shareholders, managers, employees or agents of them) (Parties) do not make any representation as to the accuracy or likelihood of fulfilment of the forward-looking statements or any of the assumptions upon which they are based. Actual results, performance or achievements may vary materially from any projections and forward-looking statements and the assumptions on which those statements are based. Readers are cautioned not to place undue reliance on forward-looking statements and the Parties assume no obligation to update that information.

For further information on the FSREC Fund Series, please visit fsrec.com.au.

NEWTOWN CENTRAL – FUND II NEWTOWN CENTRAL – FUND II

quarterly update – period ending 30 june 2019€¦ · 2 fort street real estate capital fund...

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