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Unlisted Property Fund Report

Sumner Capital

117 Harrington Street Trust

A heritage office building in the heart of the Sydney CBD

targeting average distributions of 6.2% over 5 years

October 2018

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Copyright © 2018 Core Property Research Pty Ltd 1

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Sumner Capital 117 Harrington Street Trust

Contents

1. Overview 2

2. Key Considerations 3

3. Fund Overview 5

4. The Property 9

5. Financial Analysis 15

6. Management & Corporate Governance 18

7. Past Performance 19

8. Appendix – Ratings Process 20

9. Disclaimer & Disclosure 21

About Core Property Research

Core Property Research Pty Ltd was established in July 2017 to provide market leading and insightful research on the property funds

sector for its clients and investors. Our ratings and research cover sector level research, ratings and recommendations on listed and

unlisted property funds, and is built upon the extensive research experience of its staff.

The Core Property team collectively, has over 50 years' experience across property, financial services and investment markets. The team

has also evaluated over 500 different funds across multiple sectors and a range of investment structures over the last decade.

IMPORTANT NOTICE

This document is published by Core Property Research Pty Ltd ABN 31 620 084 880 (“Core Property) and should be read before making

any investment decision about the product(s). This publication has been prepared by Core Property which is an Authorised

Representative ASIC number 001257225 of Odyssey Capital Funds Management LTD (AFSL No. 297283).

For further information, please refer to the Disclaimer & Disclosure notice at the end of this document.



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Sumner Capital 117 Harrington Street Trust October 2018

The Sumner Capital 117 Harrington Street Trust (“the Fund”) is a single asset, unlisted

property fund with an initial term of five years to December 2023. The Fund’s Responsible

Entity, Sumner Capital (“the RE” or “the Manager”) is seeking to raise $10.4M through the

offer of 10.4M units at $1.00 per unit (“the Offer”). The Offer is available to Wholesale

investors only as defined by the Information Memorandum.

The funds will be used in conjunction with bank debt to acquire the office asset at 117

Harrington Street, Sydney NSW (“the Property”). Constructed in 1912/1914 the Property is

a heritage listed B-grade office asset with leasehold title (expiring 2105), centrally located in

the Sydney CBD, close to the Sydney Harbour foreshore. The Property will be acquired for

$18.5M, being a 4% discount to the independent valuation of $19.5M. Current average rental

income for the Property is $933 per sqm, which is at the lower end of the $890 - $1,090 per

sqm range currently seen in the Sydney CDB market for B-grade offices. The Property is

100% occupied with a WALE of 2.9 years, providing potential upside for rental income over

the next three years as leases fall due.

The Fund currently has a three-year debt facility for $10.2M which will need to be extended

or replaced during the term of the Fund. Core Property notes the debt facility is due to expire

in May 2021 at the same time as a major tenant lease falls due, which will place pressure

on the Manager to secure the tenancy. The interest rate has been 100% fixed for the loan

period at an all-in cost of debt of 4.31%. The initial Loan to Valuation Ratio (LVR) of 52.2%

is below the bank LVR covenant of 60% and the initial Interest Cover Ratio (ICR) of 2.2x is

slightly above the bank ICR covenant of 2.0x, which places further pressure on the Fund to

maintain adequate lease terms.

The Manager is forecasting an FY19 distribution yield of 5.9% (annualised), increasing to

6.0% in FY20. A stronger yield of 7.1% p.a. is forecast in FY23 based on the Manager’s

assumptions of higher rental income, with average distributions of 6.2%p.a. over the five-

year term.

Core Property estimates the Fund to deliver an Internal Rate of return (IRR) of between

6.3% - 9.8% over the initial five-year term assuming an increase in the terminal capitalisation

rate of 50bps and a 50bps increase in interest rates after 2.5 years. The analysis includes

the potential that investors may receive a capital gain or loss, based on market conditions.

Fees paid by the Fund are at the low end of what Core Property has seen in the market.

Investor Suitability

Core Property considers the Fund will appeal to investors seeking a reasonable distribution

yield supported by well-located Sydney CBD office asset with high occupancy. Investors will

be exposed to a Property which has tenant expiries in the middle of the Fund term. Capital

gains are likely to be driven by the ability of the Manager to manage these lease expiries

and improve rental income. The performance of the Sydney CBD office market and the

prevailing sentiment on the CBD office will also have an impact on the total return

expectation from the Fund.

The Fund should be considered as part of a Core investment strategy. The Fund is illiquid,

and investors should expect to remain invested for the minimum initial term of five years.

See the Appendix for a description of our ratings. The above rating must be viewed in the context of comparable Funds and not across all products

Fund Details

Offer Open: September 2018

Offer Close: 31 December 20181

Min.

Investment: $250,000

Initial NTA: $0.96

Liquidity: Illiquid

FY19 Forecast Distributions:

5.9 cpu (annualised)

FY20 Forecast Distributions:

6.0 cpu

Distribution Frequency:

Quarterly

Fund Investment Period:

5 years2

1. Indicative close date. The Manager may shorten or extend the Offer period.

2. Initial term is five years. The Fund may be extended by up to one years by the Manager and beyond six years by unitholder vote (see “Liquidity/exit strategy” section).

Fund Contact Details

Kirby Parsonage Fund Manager

[email protected]

Mobile: 0405 562 401

Note: This report is based on the Sumner

Capital 117 Harrington Street Trust

Information Memorandum dated September

2018, together with other information

provided by Sumner Capital.

Approved



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Key Considerations Investment Scorecard

Management: Sumner Capital was established in 2008 to provide personalized investment

service to sophisticated and institutional investors. Specialising in office assets, Sumner

currently manages over $250M of properties, and will be co-investing $0.25M in the Fund

alongside investors.

Fund Term: The Fund will have an initial term of five years, which may be extended by an

extra year by the Manager. The Fund can be extended beyond six-years by agreement from

unitholders (requiring approval from at least 60% of unitholders)

Property: The Fund’s sole investment asset is the office building located at 117 Harrington

Street, Sydney NSW. The Property is a six-level, B-grade office building with a heritage listing

on leasehold title (expiring 2105), with 1,404 sqm of net lettable are (NLA). Positioned in The

Rocks precinct of Sydney, the Property is centrally located in the Sydney office CBD district

and within close proximity to the Sydney Harbour foreshore and transport facilities. The Fund

will acquire the Property for $18.5M, being a discount to the independent valuation of $19.5M,

with the price per sqm being in line with comparable transactions in the CBD.

Tenancies: The Property is 100% occupied with major tenant, Iris Sydney Pty Ltd, accounting

for 29.7% of the total Gross Passing Income. The Property has a short Weighted Average

Lease Expiry (WALE) of 2.9 years and, with the current rent below market levels, the Manager

expects strong rental growth when leases fall due. The Manager has indicated that it may also

consider an alternate strategy to convert some floors to strata title for office or residential

use, in order to realise value for investors.

Debt Profile: The Fund currently has a $10.2M, three-year debt facility with ING with two-

years and five-months remaining, which the Manager will need to renew to cover the initial

five-year term of the Fund. The interest rate has been 100% fixed at an all-in cost of debt of

4.31% for the initial loan period. The initial Loan to Valuation Ratio (LVR) of 52.2%, is below

the bank LVR covenant of 60.0% The initial Interest coverage ratio (ICR) of 2.2x is above the

ICR covenant of 2.0x.

Initial NTA: The initial NTA is calculated at $0.96 per unit.

Distributions: The Manger is forecasting FY19 distributions of 5.9% p.a. (annualized), and

6.0% in FY20. Distributions are estimated to reach 7.1% in the FY23 based on the Manager’s

assumptions for rental growth at lease renewals, with average distributions estimated at 6.2%

p.a. over the five-year term of the Fund.

Fees: Core Property considers the Fund’s fees to be low when compared to what has been

seen in the market.

Total Return: Core Property estimates the Fund to deliver a pre-tax Internal Rate of Return

(IRR) of 6.3% - 9.8%p.a. (see the Financial Analysis section).

Liquidity: Investors must accept that unlisted property funds are illiquid. Whilst the Manager

does offer the ability to submit redemption requests, it is up to the discretion of the Manager

if it is in the best interests of the Fund to do so. Investors should expect to remain fully

invested for the minimum initial term of five years.

Management Quality

Governance

Portfolio

Income Return

Total Return

Gearing

Liquidity

Fees



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Fund Structure

Fees Paid

Fees paid by the Fund are at the low end of the range of what Core Property has seen in the market (see Figure 5: Fees in

Perspective).

Entry Fees: Nil

Exit Fees: Nil

Property Acquisition Fee:

2% of the Gross Acquisition Price of the Property

Property

Disposal Fee:

0.5% of the Gross Sale

Price of the Property.

Ongoing Management Fees:

0.4% p.a. of Gross Asset Value of the Fund

Performance Fee:

20% of the

outperformance of the Fund over an equity IRR of 10.0% (pre-tax, net of fees).

Debt Metrics

Initial Debt /

Facility Limit: $10.2M / $10.2M

Loan Period: 3 years, commencing May 2018.

Initial LVR / Loan Covenant:

52.2% / 60.0%

Initial ICR / ICR Covenant:

2.2x / 2.0x

Legal

Offer

Document:

Information Memorandum

dated September 2018

Wrapper: Unlisted property fund

Manager &

Responsible

Entity:

Sumner Capital Pty Ltd

(ACN 112 051 153,

AFSL No 466735)

Trustee: Sumner Capital Investment

Services Pty Ltd

An unlisted property fund investing in a single heritage office property located at 117

Harrington Street, The Rocks NSW.

Management

Property managers specialising in office assets with over $250M of assets under

management. The Manager is a current tenant at the Property and will be acquiring

$0.25M in units alongside investors.

Property Portfolio

No of Properties: 1

Property Valuation: $19.5M

Property Location: 117 Harrington St, Sydney, NSW

Property Sector: Commercial – Office

Key Tenants: 29.7% of gross passing income occupied by major

tenant Iris Sydney Pty Limited

Occupancy: 100%

WALE: 2.9 years (by income) as at 1 December 2018

Return Profile

Forecast Distribution: FY19: 5.9 cents per unit (annualized) FY20: 6.0 cents per unit

Distribution Frequency: Quarterly

Tax advantage: 100% tax deferred

Estimated Levered IRR (pre-tax, net of fees):

6.3% - 9.8% (see Financial analysis section)

Initial Investment Period: Five years to December 2023

Risk Profile

Property/Market Risk: Capital at risk will depend on a single asset property in

Sydney, NSW. Investors will be exposed to a potential

capital gain or loss, based on market conditions.

Interest Rate Movements: Interest rates have been fixed until May 2021 for the

initial debt facility. Any change in the cost of

borrowings thereafter may impact the distributable

income for the remaining term of the Fund.

Property Specific Risks: Property investments are exposed to a change in

vacancy rates, prevailing market rents, and economic

supply and demand.

For a more detailed list of the key risks, refer to the Key Risks section (Section 8) of the Information

Memorandum.



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Fund Overview

The Fund is a closed-ended, single asset, unlisted property fund which is targeting a distribution yield of 5.9% - 7.1% p.a. (average

6.2%) through an investment in a B-grade heritage office building in the Sydney CBD office market. The Fund is managed by Sumner

Capital Pty Ltd (“the Manager”) who are seeking to raise $10.4M in equity through the issue of 10.4M units at $1.00 per unit (“the

Offer”). The Offer is available to Wholesale investors only as defined in the Information Memorandum, with a minimum investment is

$250,000, however the Manager may accept other amounts at its discretion. The Manager will be acquiring $0.25M of units in the Fund

on the same terms as investors

The funds will be used, in conjunction with bank debt, to acquire 117 Harrington Street, Sydney NSW (“the Property”) for $18.5M. The

Acquisition Price represents a 5.4% discount to the independent valuation of $19.5M. The Property is a B-grade commercial office

building located in the Sydney CBD with a heritage listing. Constructed in 1912/1914, the Property is 100% occupied with a Weighted

Average Lease Expiry (WALE) of 2.9 years. The current average rent of $933 per sqm is at the low end of the market for B-grade assets

($890 - $1,090 per sqm), providing potential upside to rental income and distributions in later years when current leases fall due.

The Fund’s debt facility for $10.2M will fall due around May 2021 by which time around 35% of the lease income (by NLA) will have

fallen due. A further 42% will fall due within 1 month (August 2021), which we expect the Manager will negotiate in advance to provide

certainty of income. The initial Loan to Valuation Ratio (LVR) of 52.2% is below the bank LVR covenant of 60% and initial Interest Cover

Ratio (ICR) of 2.2x is slightly above the bank ICR covenant of 2.0x. Whilst the ICR is close to the bank covenant, Core Property expects

the attractive location provides a strong occupancy level for the Property to generate rental income to support interest payments.

The Fund will have an initial investment term of five years which may be extended by an additional year by the Manager. An extension

beyond six-years will require a unitholder vote and approval from at least 60% of unitholders.

An investment in the Fund should be considered illiquid and investors should be prepared to remain invested for the Fund’s initial five-

year term to benefit from potential returns.

Figure 1: Fund structure

Source: Sumner Capital, Core Property



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Sources & Application of funds

The Information Memorandum sets out the sources and application of funds under the terms of the Offer. Core Property notes the

Debt & Fund Establishment Costs of $0.5M includes a Property Acquisition Fee of $0.4M payable to the Manager.

Figure 2. Sources and Application of funds

$M % of purchase price % of total funds

Sources of funds

Equity subscriptions 10.4 56% 51%

Bank Debt 10.2 55% 49%

Total source of funds 20.6 111% 100%

Application

Purchase price of property 18.5 100% 90%

Stamp duty 1.0 5% 5%

Debt & Fund Establishment Costs 0.5 2% 2%

Working Capital & Other 0.6 4% 3%

Total application of funds 20.6 111% 100%


Liquidity / exit strategy

Investors should view the Fund as illiquid in nature during the initial five-year term of the Fund to 31 December 2023.

After the initial five-year term, the Fund may be extended by 1 year by the Investment Manager and then an additional year by an

agreement from the Unitholders (requiring approval from 60% of unitholders).

Whilst investors can apply for a redemption of units, it is up to the discretion of the Trustee to either accept or reject redemption

requests. Please refer to the Information Memorandum for further information.

Debt Facility & Metrics

The Fund has a three-year debt facility for $10.2M with ING Bank, with expiry in May 2021, which the Manager will need to renew or

replace to cover the full term of the Fund. Interest on the loan has been 100% fixed for the initial loan period at an all-in-cost of debt

is 4.31%, which the Manager has assumed to increase to 4.8% thereafter.

The Fund’s Loan to Valuation ratio (LVR) and Interest Coverage Ratio (ICR) are forecast to remain within the bank covenants. Based on

the debt assumptions the initial LVR of 52.2% is below the bank’s covenant of 60.0%. Core Property estimates the Property can withstand

a 13% reduction in valuation before the LVR covenant is breached. We estimate the LVR to peak at 54.3% during the term of the Fund,

based on the Manager’s forecast assumptions.

The initial ICR covenant of 2.2x is above the bank’s covenant of 2.0. Core Property estimates the Property can withstand a 9.1%

reduction in rental income before the ICR covenant is breached.



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Figure 3: Debt Metrics

Details Metric

Bank ING Bank

Security First ranked security over the assets in the Fund

Debt Facility Limit $10.2M

Initial Draw Down $10.2M

Initial Loan Period 3 years, expiring May 2021

% Hedged 100%

All-in cost of Debt 3.0 years 4.31%

Initial LVR / Peak LVR 52.2% / 54.3% (Core Property estimates)

LVR Covenant 60.0%

Initial interest covered ratio / bank covenant 2.2x / 2.0x

Amount by which valuation will have to fall to breach LVR covenant 13.0%

Amount by which income will have to fall to breach ICR covenant 9.1%

Source: Core Property, Sumner Capital

Fees Charged by the Manager

Overall, Core Property considers the fees charged to be appropriate and lower with what has been seen in the market (0.7% – 1.1%

p.a of Gross Asset Value).

A summary of the fees charged by the Trust is presented below.

Figure 4: Summary of Fees charged by the Manager

Fee Type Fee Charged Core Property Comment

Entry/Establishment Fee Nil

Exit Fee Nil

Establishment and

Placement Fee

(Acquisition Fee)

2.0% of the purchase price of the Property The Acquisition Fee is at the high end of the

industry average of 1.5% - 2.0%.

Sale Fee

(Disposal Fee) 0.5% of the gross sale price of the Property

The Disposal Fee is below the industry average of

around 1.0% - 2.0%

Fees & Expenses -

Management Fee,

Administration Costs &

Expenses, Other Indirect

Costs

Total management fee is 0.4% p.a. of the Gross Asset

value (GAV)

The Management Fee is well below the range of

what Core Property has typically seen in the

industry (0.7% - 1.1% p.a. of GAV).

Performance Fee 20% of the Fund’s performance above an IRR of 10%

p.a. In line with industry practice.

Leasing Fee 12% of the first year’s rental – only payable if a third-

party leasing agent is used




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All-in fee analysis

Core Property has estimated the fees that will accrue to the Manager over the term of the Fund as a percentage of all cash flow

generated after deducting interest costs but before management fees and performance fees.

Core Property estimates that the Manager is entitled to 5.3% of the total cash generated by the Fund, which leaves investors with $1.49

per unit, or approximately 94.7% of the total. Core Property considers the fees paid to the Manager to be low when compared to similar

products, which are typically around 7% - 9%.

The key assumptions of the calculations include:

◼ Calculations assume a five-year Fund term to December 2023;

◼ A Performance Fee has not been included;

◼ Core Property assumes there is no change in the forecast portfolio terminal cap rate at the end of the initial term, which

effectively assumes no cap rate compression. A lower terminal cap rate would lead to a higher sale price and performance fees

may become payable.

Core Property stresses that these are estimates of how much investors will receive and not guaranteed amounts. For further details,

please refer to the Financial Analysis section.

Figure 5: Fees in Perspective

Core Property estimates that for every $1.00 of equity invested the Fund can return: Amount per $1.00 unit

Principal repayment to investors: $1.00

Income and capital gains to investors: $0.49

Total cash to investors: $1.49

Acquisition fee: $0.04

Base management fee: $0.04

Disposal fee: $0.01

Performance fee: -

Debt arrangement fees: -

Fees for the RE (excluding disposal/admin): $0.08

Expected total cash generated by Fund: $1.57

Fees = % of total cash generated (before fees) 5.3%

Up-front fee vs total fees 42.9%

Source: Core Property estimates



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The Property

117 Harrington St, The Rocks NSW is one of the oldest boutique office buildings in Sydney. It is a B-grade commercial building located

in Sydney’s CBD that enjoys three street frontages, exposure to natural light and views of the Sydney Harbour Bridge. The Property is

situated on a 378.7 sqm site area with 1,404 sqm of net lettable area, with a ground level retail floor space and six levels of office

accommodation.

The Property was initially built as two separate buildings; 117 Harrington Street which was constructed in 1912 as a 5-storey building;

and 120 Gloucester Street which was constructed in 1914 as a 4-storey building. In 2007, the adjacent buildings underwent

refurbishment and were ultimately integrated into a single property with an additional two levels constructed.

The main features of this building include high timber ceilings, exposed brick walls and natural light from three directions. The floor

plates vary in size from 87 sqm – 278 sqm.

Within the Sydney CBD, the Property is in the Northern Precinct and is near Circular Quay and Wynyard. It resides close to notable

offices and hotels such as EY’s headquarters at 200 George Street, Four Seasons Hotel and the Shangri-La Hotel. Furthermore, there

are key public transport facilities within walking distance such as Wynyard railway and bus interchange, rail and ferry terminals at

Circular Quay and the Sydney Light Rail which is expected to be completed early 2020.

The Property has a relatively short WALE of 2.9 years (by income) as at 1 December 2018, with the major tenant, Iris Sydney Pty

Limited, accounting for 29.7% of Gross Passing Income.

The Property has a leasehold title (expiring in 2105) and is listed as heritage significance on the State Heritage Register indicating

historical, associative, aesthetic and social significance.

Figure 6: 117 Harrington Street, Sydney NSW

Source: Savills, Sumner Capital

Property Valuation

An independent valuation was conducted by Savills Valuations Pty Ltd, which valued the Property at $19.5M as at 1 October 2018. The

independent valuation makes several assumptions regarding market rent, tenant incentives, re-letting and other factors based on

available market evidence. The main assumptions below have been adopted in the valuation model.

The Fund has a policy to undertake an independent valuation at least once every 12 months.



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Figure 7: Property summary as at 1 October 2018

117 Harrington Street, The Rocks NSW

Title Leasehold, expiring 2105

Construction Date 1912 & 1914

Ownership 100%

Net Lettable Area 1,403.7 sqm

Major Tenant Iris Sydney Limited – 29.7% of gross passing income

Weighted Average Lease Expiry (WALE) 3.1 years as at 1 October 2018

Occupancy 100%

Initial net passing income $1.08M p.a. as at 1 October 2018

Net market income (fully leased) $1.15M p.a. as at 1 October 2018

Purchase price $18.5M (Gross purchase price)

Valuation (DCF) $19.5M

Passing initial yield 5.55%

Capitalisation rate 5.18%

Valuer Savills Valuations Pty Ltd

Discount rate 6.75%

Value/sqm $13,891 per sqm

Valuer’s unleveraged 10-year IRR 6.63%

Source: Core Property, Savills

Leases, tenants and income

The Property has a diverse tenant portfolio with a Weighted Average lease Expiry (WALE) of 3.1 years as at 1 October 2018. The

Property is 100% occupied with the following tenants:

◼ Iris Sydney – Currently occupy levels 4, 5 and 6 which totals 454 sqm (32.2% of NLA) with a lease expiry of August 2021.

◼ CCUBE Financial Software – Currently occupy level 2 and a suite on level 3 totalling office space of 487 sqm with lease expiry

December 2020.

◼ Artazan Property Group (APG) – Currently occupy level 1 with total office space of 268 sqm with lease expiry in November 2023.

◼ Sumner Capital (“the Manager”) – Currently occupies a suite on level 3 with total office space of 57 sqm with lease expiry in

December 2019.

◼ Davina Todaro (trading as Trumps Alto Ego) – Currently occupies the ground floor/lobby with total area of 139 sqm with lease

expiry in August 2021.

Currently, the Fund has an average gross income of $933 per sqm which is below market rents of $890-1,050 per sqm. Upon lease

expiry of its tenants, the Fund aims to renew the leases with tenants or lease the vacant spaces that become available at market rent.

These lease structures have fixed annual rent increases between 3.5% - 4.0% p.a.

Capex

The Manager is forecasting around $0.3M in capex over the five-year term, which includes maintenance capex and incentives. The capex

amounts to 1.6% of the valuation of the Property and is in line with the assumptions from the independent valuer.

The Manager has made an allowance to fund capex payments out of operating cashflows, with no additional draw down of debt.



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Figure 8: Lease profile and expiry

Source: Savills

Market Sales Evidence

The table below compares recent transactions on similar properties within the Sydney CBD area. The Property is being acquired at a

price of $13,891 per sqm, which is around the mid-point of market comparables as provided by the independent valuer (range $10,157

- $16,608 per sqm). Furthermore, as the most comparable property in 332 Kent St is considered superior due to its building improvement

and location, the price of 117 Harrington St reflects this.

The Property’s initial passing yield of 5.55% is also better than comparable yields of 4.04% - 4.96% as provided by the independent

valuer.

Figure 9: Recent sales evidence – Sydney NSW

Property Address Tenure Sale Date Sale

Price $ per sqm

Initial

Passing

Yield

(%)

Equated

Market

Yield (%)

IRR

WALE

by

Income

(years)

18-20 York St, Sydney NSW Freehold/ Heritage

Nov-17 $30.7M $16,608 4.65% 4.88% 5.94% 2.39

332 Kent St, Sydney NSW Freehold/ Heritage

Sep-17 $25.0M $15,928 4.04% 4.16% 5.08% 1.42

39-47 Regent St, Sydney

NSW Freehold Jun-17 $38.8M $10,157 4.70% 4.99% 6.91% 13.71

275 George St, Sydney NSW1

Freehold Jun-17 $82.8M $11,247 - 5.17% 6.05% -

56 Clarence St, Sydney NSW

Freehold Dec-16 $64.0M $12,473 4.96% 5.45% 6.10% 2.56

117 Harrington St, Sydney NSW

Leasehold Oct-18 $19.5M $13,891 5.55% 5.23% 6.63% 3.1

Note 1: 275 George St is currently 100% vacant. Source: Savills

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2018 2019 2020 2021 2022+

Lease Expiry Profile



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Heritage Office Buildings

The table below compares resent sales of heritage buildings. The figures in the table suggest that 117 Harrington St is considered

undervalued at $13,891 per sqm, when compared to peers in the range of $16,955- $17,960 per sqm.

Figure 10: Recent heritage sales evidence – Sydney NSW

Property Address Tenure Sale Date Sale Price $ per sqm

60-62 Clarence St, Sydney NSW Freehold/Heritage Jun-17 $31.3M $16,955

73 York St, Sydney NSW Heritage Jun--18 $22.5M $17,564

75 Pitt St, Sydney NSW Heritage Mar-18 $43.5M $17,960

117 Harrington St, Sydney NSW Leasehold Oct-18 $19.5M $13,891

Source: Core Property

Market Rental Evidence

The property is currently leased at an average $933 per sqm (gross) compared to the Sydney CBD B-grade office market which is

currently in the range of $890 - $1,090 per sqm.

The major tenant, Iris Sydney Pty Ltd, is currently paying an average $869 per sqm (gross), which is in line with similar lease terms

undertaken during the same period. The Manager expects the current strong market conditions to provide upside potential to average

rents over time. The following table is a summary of comparable office lease deals as provided by the independent valuer.

Figure 11: Recent rentals – Sydney CBD Office

Property Address Tenant Commence

Date Area sqm Rent per/sqm (gross)

6-10 O’Connell Street Gensler Australia Jan-17 283.5 $850

6-10 O’Connell Street Grupo Sucasa Feb-16 201.2 $1,540

130 Pitt Street (lower) L’Etoille (Hair & Beauty) Sep-17 194.9 $898

10 Bridge Street Actual Fitness May-17 199.0 $600

10 Bridge Street (upper) Skin DNA Jun-17 95.6 $650


(Level 4) Iris Sydney Pty Limited Sep-16 260.5 $869

Source: Savills Valuation

The figure below details various properties in the CBD with their tenants:

◼ The location at 35-75 Harrington St represents a mixed used development that is in the north of the CBD. Whilst it is a

slightly inferior location, reflected in a lower rent per sqm it is still a good indication of market rents.

◼ The location at Piers 8-9 Hickson Road consists of creative commercial office accommodation. However, due to the inferior

location it is considered an inferior property.

◼ The location at Hudson House, 131 Macquarie Street comprises of a B grade, strata subdivided commercial office building. It

is in a similar area to 117 Harrington Street and overall provides a good indication of the market rents associated with the

Property.

◼ The location at 50 Pitt Street is a 16 level B grade building situation in the core precinct. Due to the similar location and

building quality it is also a good indication of current market rents.

Thus, it can be seen from the figures below that the Property is in line with recent leases in the market. Core Property considers the

rent per sqm to be appropriate with the market when comparing with the similar locations at 131 Macquarie Street and 50 Pitt Street.

Furthermore, the inferior buildings at the other two locations are well reflected with a lower rent per sqm than the Property.



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Figure 12: Recent rentals – Sydney CBD Office

Property Address Tenant Commence

Date Area sqm Rent per/sqm (gross)

35-75 Harrington Street SIRCA Feb – 18 855 $800 (net)

Lot 2 Piers 8-9 Hickson Road Clemenger BBDO Oct – 18 4,191 $667 (net)

131 Macquarie Street Crescent Wealth Nov – 16 523 $950

50 Pitt Street Omnilab Media Investments Feb 17 123 $800 (net)


(Level 4) Iris Sydney Pty Limited Sep-16 260.5 $869

Source: Savills

The Sydney Office Market

Sydney, capital of New South Wales and one of Australia’s largest cities with a population of around 7.86M people (as at 30 June 2017,

ABS). Gross Domestic Product (GDP) growth in 2017 was 3.3%, above the national average of 2.0%. Over the 10-year period from

2007 to 2017 the average annual GDP growth was 2.7%. Some key facts consist of:

• Sydney is the most labour productive (Gross value added per hour worked) out of the major Australian capital cities.

• Sydney NSW offers three efficient modes of transport in, around, and out of the city: road, rail and ferry.

• Additional public transport projects in the works including Sydney Metro and the light rail projects across the city.

The Sydney CBD office market is considered superior among the national capitals with low vacancy rates driving performance in capital

value and rental increases. Notably, the landlocked nature and lack of Greenfield development sites are key contributors for this strong

performance. Sydney CBD comprises a total 5,023,997 sqm of office space with vacancy reaching historic lows of 4.6% (as at June

2018). With expectations of further tightening vacancy rates and negative supply of office space, rents are expected to continue to rise.

This negative net supply is attributed to the lack of office developments within the CBD. There is expected to be no major additions to

office space until 2019 after the recent additions in 2017 of CBA in Darling Harbour in the Western Corridor and International House at

Barangaroo.

Sydney’s next significant supply of office space is expected in early 2019/2020 onwards, following the completion of several projects:

• 275 George Street, 8,000 sqm are expected to come online, with expected completion by 2019.

• 60 Martin Place, 40,000 sqm, reportedly pre-committed, expected completion 2H 2019.

• Lendlease’s second timber building Barangaroo (C1 site), 10,300 sqm being considered by a co-working operator, (expected

completion by 1H 2020).

• Brookfield and AMP Capital’s Wynyard Place project located 10 Carrington Street 56,626 sqm, 53% pre-committed by NAB &

Allianz with expected completion by H1 2020.

Rents within the Sydney CBD region have seen strong growth. Grade A net face rents have increased during 2017 by 19.6% to June

2017. Additionally, within average Grade B net face rents, they have experienced an increase of 35.2% over the year to June 2017. This

increasing trend is expected to be maintained due to the upward pressure that is faced with tightening conditions in the short to medium

term with lack of supply and stock withdrawals.



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Figure 13: Australian Office Vacancy Rates Figure 14: Sydney CBD Office Forecasts

Source: PCA/OMR Source: CBRE Research, Q1 2018,

Sydney’s CBD office yields range from 4.75% - 5.50% for Prime grade buildings and 5.25% - 6.00% for secondary grade buildings.

These figures are expected to continue to tighten over the short to medium term due to the continued demand for office space.

Foreign investors continue to be attracted to the Sydney property market with 51% of all buyers in the year to June 2017 being from

overseas. Specifically, these foreign investors are from Asia which is evident via the purchase of key assets in the CBD such as 275

George St, 320 Pitt St and 20 Bridge St. These sales suggest that investors are more likely to consider secondary grade stock for

purchase the prime assets across the CBD are limited.

Figure 15: Sydney CBD office Key Indicators – December 2017

Source: Savills Research



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Financial Analysis

Core Property has undertaken a financial forecast of the Fund, based on the Manager’s assumptions. Our key observations are:

◼ Initial distribution of 5.9% p.a. (annualised) for FY19, and 6.0% for FY20. Distributions are forecast to reduce to 5.5% in FY21

due to lease renewals falling due and increasing 7.1% in FY22 as leases are reset to higher levels.

◼ The Manager has assumed the average rent will increase from the current level of $933 per sqm to $1,000 per sqm (Levels 1-

2) and $1,050 per sqm (levels 3-6) with a 60% tenant retention probability and 3 months downtime for new leases.

◼ Current tenant incentives of $0.9M are included in the forecast, which are to be paid by the vendor of the Property.

A summary of the Manager’s forecasts is presented in the table below:

Figure 16: Profit & Loss Forecast & Balance Sheet

Forecast Profit & Loss FY19

(31 Dec 2018– 30 June 2019)

FY20

Net Property Income 0.5 1.0

Fund & Property Expenses -0.1 -0.1

Equity Payment of Incentives / Additional Capital 0.1 0.2

Net Interest -0.2 -0.4

Distributable Funds 0.3 0.6

Distributions Paid 0.3 0.6

Distributions per Unit (annualised) 5.9 cpu 6.0 cpu

Tax Deferral Rate (indicative) 100% 100%

Balance Sheet – Pro Forma Forecast ($M) 31 December 2018

Cash & Equivalents 0.3

Property 19.5

Other Assets 0.9

Total Assets 20.7

Borrowings 10.2

Other Liabilities 0.5

Total Liabilities 10.7

Net Assets 10.0

Units on Issue - million 10.4

NTA per unit $0.96

Debt/ Total assets 50%

Debt/ Property Valuation 52%




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Yield Analysis

A notable feature of the Manager’s forecasts is that the distribution yield to investors is comparable to the underlying property yield. As

the table below highlights, leverage (specifically, the positive spread between the asset yield and debt costs) negates the effects of one-

off upfront and ongoing management cost. The overall impact of leverage is calculated to improve the first year returns of 5.9%pa

(annualised), compared to a return of 4.8% if the portfolio was unleveraged. Investors should note that while leverage increases investor

returns when the asset yield exceeds interest rates, it reduces returns when this spread is negative.

Figure 17: Effect of gearing on investor yield

Yield (%) Comments

Initial property yield 5.2% Passing yield

Ongoing MER -0.40% Management expense ratio

Unlevered asset yield 4.8%

Effect of upfront costs - Acquisition Fee and Upfront costs

Unlevered investor yield 4.8% Pre-gearing return

Effect of gearing 1.1% +ve spread between asset yield and debt cost

Post-gearing investor yield 5.9% Available for distribution


NTA Analysis

The starting NTA is an important consideration. It should be assessed in the context of statutory costs and fees paid to the Manager,

which dilute investors’ return over the term of the Fund. In this case, the starting NTA is $0.96 per unit, with most of the dilution coming

from Stamp Duty Acquisition Costs. Core Property also notes the Fund benefits from the Property being acquired at a discount to

valuation, which add $0.10 per unit to the initial NTA per unit.

Figure 18: Initial NTA

Amount per unit $ per unit

Issue Price $1.00

Less:

Stamp Duty Acquisition Costs -$0.09

Debt & Fund Establishment costs -$0.04

Add back:

Acquisition (premium)/ discount to valuation $0.10

NTA per unit (with capitalised costs) $0.96




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Expected Future Performance (IRR Sensitivity)

The three main performance drivers in a property syndicate are:

1. The property income profile (lease structure);

2. The terminal value upon the sale of the property (asset quality + market conditions); and

3. The cost of debt (depending on leverage).

The table below summarises our expected IRRs.

Based on an assessment of the RE’s forecasts, Core Property expects a 5-year pre-tax equity Internal Rate of Return

(IRR) to be between 6.3% - 9.8% based on the assumption that capitalisation rates increase 50bps and interest rates

increase 50bps in the final two and half years of the Fund. Interest rates on the loan facility are fixed during the initial two and

half years of the Fund.

Investors should be aware the sensitivities include the potential for the valuation of the assets to increase or decrease

(depending on market conditions at the time of sale) which will result in either a capital gain or loss for investors.

Figure 19: Pre-tax, 5-year IRR (after fees) sensitivity analysis

Terminal cap rate Cost of debt in the final 2.5 years of the Fund

3.31% 3.81% 4.31% 4.81% 5.31%

4.60% 12.9% 12.8% 12.6% 12.5% 12.4%

4.85% 11.5% 11.4% 11.2% 11.1% 10.9%

5.10% (base) 10.1% 10.0% 9.8% 9.6% 9.4%

5.35% 8.5% 8.3% 8.1% 7.9% 7.7%

5.60% 6.9% 6.7% 6.5% 6.3% 6.0%




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Management & Corporate Governance

Background of the Responsible Entity & Manager

Sumner Capital has provided a profile about the Board of the Responsible Entity and key management personnel, which are summarised

in the table below. Core Property notes the Board consists of a majority of 2 independent directors, which provides greater accountability.

The Offer is for Wholesale investors only and the Information Memorandum has not been registered with ASIC.

Figure 20: The Board of the Responsible Entity

Name & Role Experience

Beat Kahil

Non-Executive Director

Beat has over 20 years of experience in the fields of real estate, investment banking and financial consulting.

He founded and is currently the CEO of Avalon Park Group which is a US based property development and

Investment business which was the number one selling development in the Orlando, Florida area. He is also the

CEO of Sitex AG, which is a Swiss based unlisted property fund which invests in Australia, the US and

Switzerland.

Ian Robins

Non-Executive Director

Ian has 25 years of dedicated real estate experience, comprising senior management positions in listed and

unlisted real estate funds management and investment banking organisations in Australia, the United States

and Asia. This includes CEO of Link REIT in Hong Kong, Asia’s largest REIT. Ian operates a private real estate

advisory business which currently focuses on the growing build-to-rent funds management sector and provides

real estate advices for the investment committee of Mission Australia’s housing business.

Kirby Parsonage

Director

Over 20 years’ experience, Kirby has acquired more than $1.5B in real estate and managed more than $3.5B of

real estate in various Australian and European markets on behalf of Australian Institutional investors, including

AMP & Challenger. Kirby formed Sumner Capital to provide bespoke real estate investment services to

Institutional & high net worth investors

Figure 21: Management Team

Name & Role Experience

Kirby Parsonage Fund Manager

Over 20 years’ experience, Kirby has acquired more than $1.5B in real estate and managed more than $3.5B of

real estate in various Australian and European markets on behalf of Australian Institutional investors, including

AMP & Challenger.

Carrick Campbell Asset Management

Carrick has broad experience managing commercial office buildings in the Sydney CBD, Sydney suburban

property market and national portfolio on behalf of a wide range of clients both local and overseas, private,

government and institutional.

Lauren McKiernan

Accounting Lauren has over 12 years experience in the accounting industry, having worked for chartered accounting firms

and in the private sector. Lauren is a member of the Institute of Chartered Accountants.

Michelle Parsonage Marketing &

Administration

Michelle has extensive experience working with the property and banking sectors. Michelle is responsible for the

marketing and administrative tasks.

Source: Sumner Capital



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Compliance and Governance

The Trustee (Sumner Capital Investment Services Pty Ltd) has entered into an agreement with the Manager (Sumner Capital Pty Ltd)

to utilise its AFSl pursuant to section 916(A) of the Corporations Act. As a result, the Trustee’s compliance regime mirrors the

Manager’s regime. The Manager has advised the compliance regime consists of:

◼ All compliance procedures, document and advice provided by EY;

◼ Quarterly internal compliance reviews; and

◼ An annual compliance audit undertaken by Forsyth GM.

Past Performance

The following table is a summary of properties previously managed by Sumner Capital, as provided in the Information Memorandum.

Investors should note that that past performance is not a reliable indicator of future performance as each fund, and its respective

underlying property has its own specific risks and attributes.

Figure 22: Properties Managed by Sumner Capital

Property Acquired Distribution Yield IRR (p.a.)

50 Miller Street, North Sydney NSW June 2014 8 – 10% p.a. >30%

Pier 8/9 Walsh Bay, Sydney NSW January 2014 6 - 8% p.a. >30%

111 Alinga Street, Canberra ACT October 2016 7 – 8% p.a. >15%

Source: Sumner Capital



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Appendix – Ratings Process

Core Property has developed a framework for rating property and property related investment product offerings in Australia. The

methodology gives consideration to a number of qualitative and quantitative factors. Essentially, the evaluation process includes the

following key factors: product and underlying portfolio construction; strength and depth of management team, product structure, risk

management, financial analysis, and likely outcomes.

It is important for financial planners and investors to view the recommendation and rating in the context of comparable

products only and not across all products rated by Core Property.

The Ratings

Financial Advisers and investors should note that for all ratings categories, the product may not suit the risk/return profiles of all

investors.

Rating Definition

This is the highest rating provided by Core Property and is indicative of the product exceeding the

requirements of our review process across a number of parameters.

Indicates that the product has an above average grade profile across a number of Core Property’s

parameters and has the potential to deliver above average risk adjusted total returns.

Indicates that the product has met the aggregate requirements of Core Property’s criteria. The

product has an acceptable risk/return trade-off and is potentially able to generate risk-adjusted

returns in line with stated investment objectives.

Core Property believes this is a product that has a number of positive attributes; however, there are

a number of risks that make investing in this product a speculative proposal. While Core Property

does not rule out investing in this product, investors should be very aware of, and be comfortable

with the specific risks. The product may provide unique diversification opportunities, although

concerns over one or more features mean that it may not be suitable for most investors.

Indicates that the product has failed to meet the minimum aggregate requirements of Core Property’s

criteria. While the product may have some positive attributes, Trusts in this category are considered

high risk.

This report has been commissioned, and, as such, Core Property has received a fee for its publication. Under no circumstances has Core

Property been influenced, either directly or indirectly, in making statements and / or recommendations contained in this report.

Recommended

Highly Recommended

Approved

Speculative

Not Approved



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Disclaimer & Disclosure

Core Property has received a fee from the Manager for researching the product(s) which has then been subject to a detailed review and

assessment by Core Property and its analysts to produce this report. In compiling this report, Core Property’s views remain fully independent of

influence or conflicts of interest. Our team of analysts undertake an objective analysis of the offer and conclusions are presented to senior

officers for review.

The company specified in the Report (the “Participant”) has provided Core Property with information about its activities. Whilst the information

contained in this publication has been prepared with all reasonable care from sources that Core Property believes are reliable, no responsibility

or liability is accepted by Core Property for any errors, omissions or misstatements however caused.

Any opinions, forecasts or recommendations reflects the judgement and assumptions of Core Property as at the date of publicat ion and may

change without notice. Core Property and the Participant, their officers, agents and employees exclude all liability whatsoever, in negligence or

otherwise, for any loss or damage relating to this document to the full extent permitted by law.

This publication is not and should not be construed as, personal financial product advice, an offer to sell or the solicitation of an offer to purchase

or subscribe for any investment. Any opinion contained in the Report is unsolicited general information (general financial product advice) only.

Neither Core Property nor the participant is aware that any recipient intends to rely on this Report or of the manner in which a recipient intends

to use it. In preparing our information, it is not possible to take into consideration the investment objectives, financial s ituation or particular

needs of any individual recipient. Investors should obtain individual financial advice from their investment advisor to determine whether opinions

or recommendations (if any) contained in this publication are appropriate to their investment objectives. Investors should obtain a copy of, and

consider the PDS/ Information Memorandum, which can be obtained by contacting the issuer.

This publication is not for public circulation or reproduction whether in whole or in part and is not to be disclosed to any person other than the

intended recipient, without obtaining the prior written consent of Core Property. This report is intended for the residents of Australia. It is not

intended for any person(s) who is resident of any other country. Core Property and/or the Participant, their officers, employees or its related

bodies corporate may, from time to time hold positions in any securities included in this Report and may buy or sell such securities or engage in

other transactions involving such securities. Core Property and the Participant, their directors and associates declare that from time to time they

may hold interests in and/or earn brokerage, fees or other benefits from the securities mentioned in this publication.

Core Property discloses that from time to time it or its officers, employees and related bodies corporate may have an interest in the securities,

directly or indirectly, which are the subject of these statements and/or recommendations (if any) and may buy or sell securities in the companies

mentioned in this publication; may effect transactions which may not be consistent with the statements and/or recommendations (if any) in this

publication; may have directorships in the companies mentioned in this publication; and/or may perform paid services for the companies that

are the subject of such statements and/or recommendations (if any). However, under no circumstances has Core Property been influenced,

either directly or indirectly, in making any statements and/or recommendations (if any) contained in this Report.

The information contained in this publication must be read in conjunction with the Legal Notice that can be located at

http://www.coreprop.com.au/Public/Disclaimer.

For more information regarding our services please refer to our website www.coreprop.com.au.

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