October 2014 ASIC REGULATORY GUIDE 45/46 DISCLOSURE BlackWall Telstra House Trust Tankstream Property Investments Fund Bakehouse Quarter Trust BlackWall Penrith Fund No.3 OVERVIEW Regulatory Guide 46: “Unlisted property schemes: Improving disclosure for retail investors” (RG 46) is a document published by the Australian Securities and Investments Commission. RG 46 sets out six benchmarks and eight disclosure principles for improved disclosure to retail investors to help them compare risks and returns across investments in the unlisted property sector. The revised RG 46 regime specifies that responsible entities of unlisted property schemes offered to retail investors and in which retail investors are invested, should disclose against these benchmarks on an ‘if not, why not’ basis. The information below follows the RG 46 guidelines and is based on the most recent audited or reviewed financial statements adjusted for any material changes since those statements. In 2008 the Australian Securities and Investments Commission introduced Regulatory Guide 45: “Mortgage schemes – improving disclosure for retail investors” (RG 45). The regulatory guide sets out guidelines for disclosure that are similar to those contained in RG 46. BlackWall Penrith Fund No. 3 (BPF3) is technically a mortgage scheme, however the fund has many characteristics of an unlisted property scheme. Accordingly, the managers of BPF3 consider that disclosure to investors would be improved by following the principles outlined in RG 46. A separate table, which reconciles the disclosures herein with the disclosure principles of RG 45, is included after Disclosure Principle 8 in this Report. We are committed to providing investors with timely and balanced disclosure of all material matters concerning the funds in accordance with their continuous disclosure obligations, including RG 45 and RG 46. Key information and any material changes will be updated by us and made available on our website at www.blackwallfunds.com.au 1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Gearing Ratio ...................................................................................................................................................... 3 Interest Cover ..................................................................................................................................................... 5 Scheme Borrowing ........................................................................................................................................... 7 Interest Capitalisation ................................................................................................................................. 11 Valuation Policy .............................................................................................................................................. 12 Portfolio Diversification .............................................................................................................................. 14 Related Party Transactions ....................................................................................................................... 17 Distribution Practices .................................................................................................................................. 18 Withdrawal Arrangements ........................................................................................................................ 20 Net Tangible Assets .................................................................................................................................... 21 2 1. GEARING RATIO Disclosure Principle 1: Gearing Ratio A scheme’s gearing ratio indicates the extent to which its assets are funded by interest bearing liabilities. The gearing ratio is calculated as follows: Gearing ratio = Total interest bearing liabilities Total assets The gearing ratio of each fund is as follows: FUND GEARING RATIO BlackWall Telstra House 56% Tankstream Property Investments Fund 0%1 Bakehouse Quarter Trust 0% 2 Returns from geared investments are more volatile than returns from the same investments that are not geared. Accordingly a geared fund will be regarded as having a higher risk profile than a comparable ungeared fund. A higher gearing ratio means a higher reliance on external liabilities (primarily borrowings) to fund assets. This exposes the scheme to increased funding costs if, for example, interest rates rise. A highly geared scheme has a lower asset buffer to rely on in times of financial stress. Disclosure by the responsible entity of its gearing policy, including at an individual credit facility level, helps investors to better understand the risks associated with the responsible entity’s approach to gearing. 1 This fund is debt-free. Bakehouse Quarter Trust is a special purpose trust with an interest in a scheme known as Kirela Development Unit Trust (Kirela) as its single asset. There is no debt at the level of the trust, however Kirela is exposed to borrowings secured on underlying property. The look-‐through gearing in relation to Kirela’s direct property investments is 60.9% (including senior bank debt and a subordinated debt issue known as ‘Bakehouse Bonds’). 2 3 Benchmark 1: Gearing Policy ASIC’s benchmark is: “The Responsible Entity maintains and complies with a written Gearing Policy that governs the level of gearing at an individual credit facility level.” FUND CREDIT FACILITY GEARING LIMIT DOES THE FUND COMPLY WITH THE GEARING POLICY? BlackWall Telstra House Trust 60% Yes Tankstream Property Investments Fund N/A The fund repaid all debts in December 2013. Bakehouse Quarter Trust N/A There is no borrowing at the fund level. 3 3 Bakehouse Quarter Trust is a special purpose trust with an interest in Kirela as its single asset. There is no debt at the level of the trust, however the scheme is exposed to borrowings secured on the underlying property. 4 2. INTEREST COVER Disclosure Principle 2: Interest Cover Ratio A scheme’s interest cover ratio indicates its ability to meet interest payments from earnings. The interest cover ratio is calculated as follows: Interest cover = EBITDA4 – unrealised gains + unrealised losses Interest expense The interest cover ratio (ICR) of each fund is described below. Interest cover is a key indicator of the financial health of a fund. The lower the interest cover, the higher the risk that the fund will not be able to meet its interest payments. A fund with a low interest cover only needs a small reduction in earnings (or a small increase in interest rates or other expenses) to be unable to meet its interest payments. FUND 4 INTEREST COVER RATIO BlackWall Telstra House Trust 2.6 x Tankstream Property Investments Fund N/A 5 Bakehouse Quarter Trust N/A 5 EBITDA is defined as earnings before interest, tax, depreciation and amortisation. Fund has no borrowings. 5 5 Benchmark 2: Interest Cover Policy ASIC’s benchmark is: “The Responsible Entity maintains and complies with a written Interest Cover Policy that governs the level of gearing at an individual credit facility level.” The Interest Cover Policies of each fund’s credit facilities are set out below. FUND BlackWall Telstra House Trust INTEREST COVER POLICY Minimum Interest Cover of 1.5 x COMPLY? Yes IF NOT, WHY NOT Tankstream Property Investments Fund N/A N/A N/A Bakehouse Quarter Trust N/A N/A N/A The Responsible Entity will continually monitor the funds’ debt servicing obligations and may seek to refinance or hedge the borrowings when conditions are favourable, subject to the applicable interest cover ratio policy. 6 3. SCHEME BORROWING Disclosure Principle 3: Scheme Borrowing This principle requires information on a scheme’s borrowing maturity and credit facility expiry, and any associated risks. It is also important that investors are kept informed and updated on the borrowing maturity profile and any other information they would reasonably require including any breaches of loan covenants. All debt facilities limit the security of a financier to the assets of the fund. Therefore, the financier will have no recourse against any investor personally or against other assets of any investor. No investor will be responsible to a financier for the obligations of any other investor. Investors should be aware that the amount owing to the financier and other creditors of the fund rank before an investor’s interest in the fund. The debt facilities of each fund, including Bakehouse Quarter Trust (on a look-‐through basis) are summarised in the following tables. BLACKWALL TELSTRA HOUSE TRUST Facility limit A$19.5 m Undrawn amount 1.45m Maturity January 2015 -‐ The Responsible Entity does not anticipate any difficulty in refinancing the facility upon its maturity. Security Telstra House, 490 Northbourne Ave, Dickson ACT Covenants Loan-‐to-‐Valuation The trust must maintain a loan-‐to-‐valuation ratio of no more than 60%. Any fall in the current value of the property of greater than $1.3 million (whilst maintaining the current level of debt) would result in the trust breaching its loan-‐to-‐valuation covenant. Interest Cover The trust must maintain an interest cover ratio of at least 1.5 times. Bank margin 2.15% p.a. Hedging There is currently one hedging facility in place over $9.5m of the trust’s borrowings. The $9.5m facility is in the form of an interest rate swap fixing interest at 4.97% p.a. until August 2016. Breaches of loan None covenants 7 Events of Default If members exercise their rights under the constitution or the Corporations Act, to remove or replace the Responsible Entity, resolve to wind up the fund, apply to the Court to appoint a temporary responsible entity or amend the scheme constitution, this may be considered an event of default which would allow the bank to consider the total amount owing under the facility immediately repayable. However, these types of provisions are common in facility agreements for managed investment schemes. TANKSTREAM PROPERTY INVESTMENTS FUND This fund has no borrowings. 8 BAKEHOUSE QUARTER TRUST (LOOK-‐THROUGH DEBT FACILITIES) Bakehouse Quarter Trust is a special purpose trust with an interest in Kirela as its single asset. There is no debt at the level of the trust, however the scheme has borrowings secured by Kirela’s direct property investments. The look-‐through credit facilities at the property level are described in the following table. Facility 1 Facility 2 Bakehouse Bonds 6 Lender Australian financial institution Australian financial institution N/A Facility Limit $39.0 million $59.15 million $26.7 million Undrawn Amount Nil Nil N/A Bank Margin 2.0% p.a. 2.25% p.a. N/A Maturity Sep 2015 Nov 2014 Dec 2020 Rate Variable rate facility Variable rate facility Fixed at 5.5% p.a. principal indexed annually to CPI $30 million Expires Aug 2015 $20 million Expires Aug 2016 Hedged at 5.29% (by interest rate swap) Hedged at 4.59% (by interest rate swap) LVR – 61% LVR – 55% Interest Cover – 1.3x Interest Cover – 1.5x None None Hedging Covenants Breach of Covenants N/A N/A N/A 6 The Bakehouse Bonds are subordinated debt instruments with a fixed term. 9 BLACKWALL PENRITH FUND NO.3 BlackWall Property Fund No. 3 does not have any borrowings at the fund level. A discussion of the borrowings at the property level is discussed in the RG 45 disclosures at the end of this report. 10 4. INTEREST CAPITALISATION Benchmark 3: Interest Capitalisation Capitalised interest is where the fund is not paying interest but the lender is accruing interest for payment at a later time. ASIC’s benchmark is: “The interest expense of each of the funds is not capitalised.” The table below sets out whether the funds meet the benchmark. FUND COMPLY ? IF NOT, WHY NOT BlackWall Telstra House Trust Yes N/A Tankstream Property Investments Fund Yes N/A Bakehouse Quarter Trust N/A There is no gearing at the fund level. On a look-‐through basis, interest expense is not capitalised. 11 5. VALUATION POLICY Benchmark 4: Valuation Policy ASIC’s benchmark is: “The Responsible Entity is required to maintain and comply with a written valuation policy that requires: (a) a valuer to: (i) be registered or licensed in the relevant state, territory or overseas jurisdiction in which the property is located (where a registration or licensing regime exists), or otherwise be a member of an appropriate professional body in that jurisdiction; and (ii) be independent; (b) procedures to be followed for dealing with any conflicts of interest; (c) rotation and diversity of valuers; (d) valuations to be obtained in accordance with a set timetable; and (e) for each property: (i) before the property is purchased: (A) for a development property, on an “as is” and “as if complete basis”; and (B) for all other property, on an “as is” basis; and (ii) within two months after the directors form a view that there is a likelihood that there has been a material change in the value of the property.” The Responsible Entity maintains a Property Valuation Policy. The Responsible Entity complies with the Property Valuation Policy with respect to the BlackWall Telstra House Trust, the Bakehouse Quarter Trust and BlackWall Penrith Fund No.3. The Property Valuation Policy does not currently apply to the Tankstream Property Investments Fund because the fund does not currently invest in direct property. The underlying property is held via listed and unlisted property securities funds. Key elements of the Property Valuation Policy are as follows: (a) A valuer shall: (i) be registered or licensed in the relevant State, Territory or overseas jurisdiction in which the property is located, or otherwise be a member of an appropriate professional body in that jurisdiction; and (ii) be independent. (b) There is a procedure to be followed for dealing with any conflict of interest. (c) The fund will rotate valuers and seek diversity of valuers. (d) Independent valuations are to be obtained according to a set timetable. 12 Investors may obtain a copy of the Property Valuation Policy by contacting BlackWall on (02) 9033 8611. The Property Valuation Policy does not comply with ASIC’s benchmark because the policy does not require the Responsible Entity to value each property before the property is purchased or within two months after the directors determine that there has been a material change in the value of the property. This is because the requirement to obtain property valuations is driven by the fund’s financier. The financiers often require a valuation to be obtained at specified times and if the financier has reason to believe that the value of the property has materially decreased. The risks associated with this approach are that the fund may be relying on outdated valuations and if the property value falls significantly it could affect gearing covenants and the accuracy of financial statements. 13 6. PORTFOLIO DIVERSIFICATION Disclosure Principle 4: Portfolio Diversification This information addresses a scheme’s investment practices and portfolio risk. Relevant portfolio risks are covered in the funds’ Product Disclosure Statements, subsequent explanatory memoranda and through investor communications. The BlackWall Telstra House Trust, Bakehouse Quarter Trust and BlackWall Penrith Fund No.3 are single asset funds. Tankstream Property Investments Fund holds a portfolio of property securities. Details of these assets, and the funds’ investment strategies are provided in the following tables. BLACKWALL TELSTRA HOUSE TRUST Asset Telstra House, 490 Northbourne Ave, Dickson ACT Sector Commercial NLA 8,325 sqm Valuation $32.5 m Valuation date 14 January 2013 Valuer Independent Capitalisation rate 9.50% Occupancy 43% Lease profile Investment strategy Fully leased to Telstra until 30 November 2018. Telstra has vacated the premises notwithstanding that Telstra is obliged to pay rent until 30 November 2013. Part of the premises is now sublet to ACT Property Group and Sensis and a government tenant. These sub-‐leases expire at the same time as the Telstra lease, on 30 November 2018. The trust is a specific purpose vehicle established for the purpose of investing in the asset described above. It is not anticipated that the trust will make any additional investments. The trust is not invested in property development. 14 TANKSTREAM PROPERTY INVESTMENTS FUND (JULY 2014) Asset APN Poland BlackWall Penrith Fund No.3 TPIF Holding7 % of TPIF Description Portfolio $0.00 0% $1.091 m 97.2% This trust receives income under a PIPES mortgage secured on a bulky goods retail centre at 120 Mulgoa Road, Penrith. This fund provides investors with stable distributions. Australian Unity Diversified Property Fund $0.03 m 2.8% Direct property fund with a portfolio of 12 properties across NSW, Victoria, SA and WA. Approximately half the portfolio represents industrial property, with the remainder split between retail and office space. Total $2.51m 100% BAKEHOUSE QUARTER TRUST Bakehouse Quarter Trust is a special purpose trust holding an investment in Kirela Development Unit Trust (Kirela). Kirela is invested in a large-‐scale real estate development known as the Bakehouse Quarter. Kirela’s unitholders include interests associated with directors of the Responsible Entity. The value of BQT’s investment in Kirela is $10.97m as at August 2014. In July 2014, Kirela distributed its entire holding of 98.3 million units in the ASX-‐listed BlackWall Property Trust (BWR) in specie to all Kirela’s unitholders on a pro-‐rata basis. BQT now holds 12.3 million units in BWR directly. The value of BWR units changes according to the trading price of BWR units on a specific date. Please refer to the ASX website for trading prices of BWR units. As the Bakehouse Quarter Trust is a managed investment scheme, it has adopted a compliance plan and will be subject to independent audit in accordance with the Corporations Act. 7 Based on net tangible asset value 15 BLACKWALL PENRITH FUND NO.3 Asset 120 Mulgoa Road Penrith Sector Big box retail NLA 6,623 sqm Valuation $16.5 m Valuation date December 2013 Valuer Independent Capitalisation rate 9.55% Occupancy 100% Toys’R’Us 2,820 sqm until October 2016 Barbeques Galore 1,130 sqm until November 2016 Lease profile Boating Camping and Fishing 1,440 sqm until December 2015 Little Learning School 683 sqm until December 2034 Investment strategy Rashay’s 550 sqm until September 2023 The trust is a specific purpose vehicle established for the purpose of investing in the asset described above. It is not anticipated that the trust will make any additional investments. The trust is not invested in property development. 16 7. RELATED PARTY TRANSACTIONS Benchmark 5 and Disclosure Principle 5: Related Party Transactions ASIC’s benchmark is: The Responsible Entity maintains and complies with a written policy on related party transactions, including the assessment and approval process for such transactions and arrangements to manage conflicts of interest. This benchmark is met. The Responsible Entity maintains and complies with its Related Party Policy and Procedures, a summary of which is set out below: • • • • Each employee and officer of the Responsible Entity is responsible for initiating a related party transaction report if a potential related party transaction is identified; A director and the CEO of the Responsible Entity must consider the related party transaction in the context of the Corporations Act and whether any exceptions apply; The related party transaction report is considered at the next board meeting and compliance committee meeting at which is decided whether an exception applies or whether member approval will be obtained; The Company Secretary monitors all related party transactions to ensure that they are approved in the required manner and all necessary disclosures made. Investors may obtain a copy of the Responsible Entity’s Related Party Policy and Procedures by contacting BlackWall on (02) 9033 8611. Details of all related party transactions are reported annually as part of each fund’s audited annual accounts. The latest annual audited accounts of the relevant fund can be found on BlackWall’s website www.blackwallfunds.com.au. 17 8. DISTRIBUTION PRACTICES Disclosure Principle 6: Distribution Practices This discloses whether distributions to investors have been made solely from realised income or from a combination of realised income and a return of capital funded by borrowings. Information on the scheme’s distribution practices helps investors assess the sources of the distributions and be informed about the sustainability of distributions from sources other than realised income. The current distribution practices are set out in the table below. Benchmark 6: Distribution Practices ASIC’s benchmark is: “The scheme will only pay distributions from its cash from operations (excluding borrowings) available for distribution.” The funds’ compliance with Benchmark 6 is set out in the last column of the table below, Fund BlackWall Telstra House Trust Tankstream Property Investments Fund Bakehouse Quarter Trust Distributions Source Benchmark 6 Total of 8.5 cpu paid in the year ended 30 June 2014. Distributions to reduce to 5.5% p.a. over next 12 months to accommodate debt amortisation. Paid from cash from operations (excluding borrowings). Distributions of 5.5% p.a. are expected to be sustainable over the next 12 months. Comply. Nil N/A N/A 8.5 cpu, paid for the year ended 30 June 2014. The directors have resolved to pay a further distribution of 3 cents per unit on 30 November 2014. 8.5 cpu paid as a return of capital. BQT’s revenue is BQT does not comply with Benchmark 6 as distributions have been by way of a return of capital. This is due to the significant carried forward tax losses of Kirela and BWR (in which BQT has a direct holding). derived from the distributions earned from its holding in Kirela and its direct holding of BlackWall Property Trust (BWR) units, In the year ended 30 June 2014 BQT paid distributions equating to 8.5 cents per unit. Both 18 Fund Distributions Source Benchmark 6 Kirela and BWR have significant carried forward tax losses and as such distribution passed through BQT are by way of return of capital. BlackWall 9 cpu p.a., paid quarterly Penrith Fund (PIPES Interest) No.3 PIPES Bonus -‐ The PIPES Bonus is paid to unitholders on termination of the Fund. It equates to 20% of any Capital Gains. Paid from cash from operations (excluding borrowings). Distributions are expected to be sustainable over the next 12 months Comply. The Capital Gains are calculated by reference to either the sale price or the independent valuation of the Property at the end of the term of the fund. Only payable if there is a Capital Gain at the end of the life of the fund. The Responsible Entity will notify investors through ongoing disclosure of any changes in the distribution practices of the funds as well as the source of any future distributions. 19 9. WITHDRAWAL ARRANGEMENTS Disclosure Principle 7: Withdrawal Arrangements Unlisted property trusts are often illiquid investments meaning investors may not have any right to withdraw from the fund. Members of BlackWall Telstra House Trust have no right to withdraw their investment during the term of the trust under the trust’s constitution. The Tankstream Property Investments Fund has frozen redemptions until further notice. Accordingly, investors may not withdraw from the fund. Members of Bakehouse Quarter Trust have no right to withdraw their investment during the term of the trust under the trust’s constitution. Members of BlackWall Penrith Fund No.3 have no right to withdraw their investment during the term of the trust under the trust’s constitution. However, investors may transfer their units privately in accordance with the relevant fund’s constitution. 20 10. NET TANGIBLE ASSETS Disclosure Principle 8: Net Tangible Assets Responsible Entities of closed-‐end schemes should clearly disclose the value of the net tangible assets (NTA) of the scheme on a per unit basis in pre-‐tax dollars using the following formula: NTA = Net assets-‐intangible assets+/-‐any other adjustments Number of units in the scheme on issue The NTA can be used by potential investors to determine if a premium is being paid to enter the fund. Existing investors should note that if the NTA is less than their original entry price then there is a risk that they will not receive their full capital repayment on their exiting or the winding up of the fund. The fund NTA per unit values are as follows: FUND DATE BlackWall Telstra House Trust NTA 30 June 2014 $1.12 /unit 26 September 2014 $0.09 /unit Bakehouse Quarter Trust 30 June 2014 $4.51 /unit BlackWall Penrith Fund No.3 30 June 2014 $1.00 /unit Tankstream Property Investments Fund 21 FURTHER DISCLOSURE – BLACKWALL PENRITH FUND NO.3 RG 45 guidelines BlackWall Penrith Fund No. 3 is an unlisted mortgage fund and the disclosure requirements and benchmarks required to be met by this fund are set out in ASIC Regulatory Guide 45. To the extent the disclosure requirements differ from RG 46, we have made the relevant disclosures below. RG 45: BENCHMARKS AND DICLOSURE PRINCIPLES FOR MORTGAGE FUNDS 1. LIQUIDITY This principle does not apply as the fund is not a pooled mortgage scheme. 2. SCHEME BORROWING BlackWall Penrith Fund No. 3 has no borrowings and does not intend to borrow on behalf of the fund. This benchmark is met. ASIC’s Benchmark is: “The responsible entity does not have current borrowings and does not intend to borrow on behalf of the scheme.” 3. LOAN PORTFOLIO AND DIVERSITY This principle does not apply as the fund is not a pooled mortgage scheme. 4. RELATED PARTY TRANSACTIONS This benchmark is met as the responsible entity does not lend to related parties of the responsible entity. Further Disclosure ASIC’s Benchmark is: The related party transactions applicable to this fund are set out below. BlackWall Management Services Pty Ltd is party to a property “The responsible entity management agreement under which it receives 2% of gross property income in any month and leasing fees of approximately 10-‐15% of first does not lend to years’ rent. BlackWall Management Services and the Responsible Entity related parties of the responsible entity or to are each wholly owned subsidiaries of BlackWall Property Funds. The arm’s length exception applies because the fee paid to the Property the scheme’s Manager and the terms of the Property Management Agreement are on investment manager.” ordinary commercial arm’s length terms. 5. VALUATION POLICY Refer to Benchmark 4. 6. LENDING PRINCIPLES This benchmark is met. AND LOAN TO VALUATION RATIOS ASIC’s benchmark is: The Fund has one mortgage asset which is the PIPES Mortgage. The PIPES Mortgage is a second-ranking mortgage secured against the Property. The first mortgage ranks ahead of the PIPES Mortgage. The loan-to-value ratios of the 22 first mortgage and PIPES Mortgage are: • First Mortgage – 65% • PIPES Mortgage – 27% By taking the value of the First Mortgage off the property value, the PIPES Mortgage represents approximately 77% of the remaining value of the property according to the latest valuation. On this basis the benchmark is stll met. 7.DISTRIBUTION PRACTICES The responsible entity does not pay distributions from scheme borrowings. This benchmark is met. ASIC’s benchmark is: Further Disclosure “The scheme does not lend more than 80% on the basis of the latest market valuation of property over which security is provided.” Distributions practices are disclosed above under Disclosure Principle 6. “The responsible entity will not pay current The factors that would have the most material impact on forecast distributions from distributions and the risk to changes in these factors are: scheme borrowings.” 8. WITHDRAWAL ARRANGEMENTS 1. Rental Income -‐ If rental income declines, then there may not be sufficient income from the property to pay PIPES Interest which is a quarterly distribution of 9% per annum. However, under the PIPES Mortgage, if PIPES Interest is not paid on time then interest accrues on any overdue PIPES Interest payments. 2. Property Value -‐ If the value of the property decreases over the term of the fund, then investors will not receive a PIPES Bonus because the bonus is only paid in respect of an increase in the property’s value. The higher the capital growth, the higher the amount of PIPES Bonus. 3. Change in Interest Rates -‐ If interest rates increase, this will increase the amount of income from the property that is applied towards servicing senior bank debt. If there is insufficient income after payment of senior bank debt interest, then this could affect payment of PIPES Interest. 4. First Mortgage Default -‐ If the property owner defaults under the first mortgage, the first mortgagee may, at its discretion, seek interim remedies such as increasing the cost of debt to default rates, demanding all cash flow from the property be directed toward the repayment of debt or, ultimately, demanding the immediate repayment of the loan through a forced property sale. Any of these measures may result in there being insufficient cash to pay outstanding PIPES Interest and the PIPES Bonus. Disclosed above under Disclosure Principle 7 23
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