Investor Information

improving disclosure for unlisted property schemes

 

In September 2008, the Australian Securities & Investments Commission (ASIC) released Regulatory Guide 46 (RG46) setting out eight principles for improved disclosure to help retail Unitholders compare risks and returns across investments in the unlisted property sector.

360 Capital's Fund and Trust Annual Reports and Half Year Reports seek to address the requirements under RG46 for each Fund and Trust. Where appropriate, 360 Capital will continue to use this website to provide disclosure to Unitholders. Information can also be found in the original Fund or Trust prospectus or product disclosure statement (PDS), in previous half yearly and annual reviews as well as specific investor correspondence.

In particular, RG46 covers the following disclosure requirements:

 

Disclosure Principle 1 – gearing ratio. The gearing ratio represents the extent to which the assets are financed by debt. A higher gearing ratio means a higher reliance on external liabilities (primarily borrowings) to Fund or Trust assets, which may expose a Fund or Trust to increased costs if interest rates rise. A more highly geared Fund or Trust also has a lower asset buffer to rely upon in times when asset values fall. The gearing ratio can be used to assess the potential risks a Fund or Trust may face if interest rates rise or property values decrease, and to compare the risk associated with the Fund or Trust’s return on investment to other products.

The RG46 defined gearing ratio is calculated by dividing the Fund or Trust’s total interest bearing liabilities by gross assets, based on the audited accounts and adjusted where required. Unitholders should note 360 Capital Funds and Trusts utilise Facility LVR as the measure of debt finance as the Facility LVR directly refers to the Fund or Trust’s performance relative to its finance covenants. The RG46 defined gearing ratio and the Facility LVR are shown in the Finance Facility Summary for each Fund or Trust in 360 Capital's Fund and Trust Annual and Half Year Reports.

 

Disclosure Principle 2 – interest cover. Unitholders can use an interest cover ratio (ICR) to assess a Fund or Trust’s ability to meet ongoing interest. Having a high ICR provides a buffer if interest rates or other expenses of the Fund or Trust increase. The lower the ICR, the higher the risk the Fund or Trust will not be able to meet its interest payments. A Fund or Trust with a low ICR only needs a small reduction in earnings (or a small increase in interest rates or other expenses) to be unable to meet interest payments.

The ICR is calculated by determining earnings before interest, tax, depreciation and amortisation (EBITDA), subtracting unrealised gains (if any) and adding unrealised losses (if any). This figure is then divided by the current interest expense (also known as the finance cost) of the Fund or Trust. Unitholders should note 360 Capital Funds and Trusts utilise Facility ICR as the measure of interest cover as Facility ICR directly references the Fund or Trust’s performance relative to its finance covenants. The RG46 defined ICR and the Facility ICR are shown in the Finance Facility Summary for each Fund or Trust in 360 Capital's Fund and Trust Annual and Half Year Reports.

 

Disclosure Principle 3 – Fund or Trust borrowing provides information on the Fund or Trust’s borrowings, duration and any associated risks including breaches of loan covenants. A breach of a loan covenant may result in a lender being able to impose a penalty or require immediate repayment of the loan, in which case a Fund or Trust may be forced to arrange alternative financing or sell assets. Unitholder interests in the Fund or Trust will generally rank behind lenders and other creditors, meaning if the Fund or Trust was to be wound up, then lenders and other creditors would be repaid first, before any capital or outstanding distributions were paid to Unitholders. Details on Fund or Trust borrowings are shown in the Finance Facility Summary for each Fund or Trust in 360 Capital's Fund and Trust Annual and Half Year Reports.

 

Disclosure Principle 4 – portfolio diversification addresses the Fund or Trust’s investment strategy and portfolio risks. ON this website and in 360 Capital's Fund and Trust Annual and Half Year Reports, portfolio geographical diversification, Key Fund and Trust data covers major tenants, lease expiry profile etc., thereby highlighting the level of diversification utilised to reduce risk.

 

Disclosure Principle 5 – Valuation policy assesses the reliability of valuations and covers property, Fund and Trust valuations.

External valuations of direct property investments are obtained at least once in a two year period or if the internal valuation in relation to a property produces an indicative valuation which differs materially from the current carrying value. Properties that are part of a portfolio of assets may be staggered throughout the two year period so as long as each property is externally valued once.

At each reporting period an internal valuation (Manager’s valuation) will be performed. To the extent that an external valuation has been undertaken reliance can be placed on that valuation, however Management must consider all inputs into that valuation and confirm whether they still appropriate and valid. A property purchased within the most current financial year can be valued either externally or via a Manager’s valuation.

A panel of approved external valuers is to be confirmed at least every 24 months with each valuation firm and nominated individuals to meet pre-determined criteria of the Corporations Act, Fund and Trust financiers, and surety of business.

All external valuations must be undertaken by valuers who are authorised to practice under the relevant legislation of where the asset is located, hold a recognised and relevant professional qualification, have experience in valuing the type or nature of the property and have no pecuniary or conflict of interest or any potential conflict of interest with the valuation of the property.

External valuation firms may not value the property more than three consecutive times. An internal valuation being undertaken in one reporting period does not negate the above. The selected valuation firm/valuer is to undertake the valuation providing the Manager with draft report for review of accuracy regarding assumptions. The valuation method undertaken may include (but not limited to) a discounted cashflows, capitalisation of income and comparable recent sale transactions.

An internal valuation may be undertaken by the Manager. Internal valuations may be taken up in the financial statements however they may also trigger an external valuation where there is a material movement in the carrying value of the asset (as disclosed in the balance sheet) or where the movement may materially affect the relevant Fund or Trust’s NTA. Internal valuations are prepared by using appropriate valuation methodologies. Once approved by the Manager, the valuation will be accepted and reflected in the financial accounts.

 

Disclosure Principle 6 – related party transactions refers to transactions such as investments, loans, fee agreements or guarantees with other 360 Capital entities. The related party provisions of the Corporations Act are set out in Chapter 2E (and are applied to schemes by virtue of section 601LA).

In essence, these provide that Funds or Trusts must not give a financial benefit to a related party without the approval of the Unitholders of a Fund or Trust unless the giving of that benefit is on terms that would be reasonable if the parties were dealing “at arm’s length” meaning transactions are conducted as if the parties were not related. In the normal course of conducting its business of managing Fund and Trusts, 360 Capital expects to transact with entities either directly owned or associated with the 360 Capital Property Group.

360 Capital aims to ensure that all transactions that might involve related parties are dealt with on a fair, reasonable and consistent basis. 360 Capital utilises a number of processes to enable it to give full consideration to transactions with a related party. These processes cover the initial assessment and approval of related party transactions, as well as ongoing monitoring. The processes include Board Review, Due Diligence Committees, and Investment Committee consent to proceed with either a proposed sale or acquisition that is considered to be “arm’s length”. If a related party transaction is considered not to be on “arm’s length” terms, then the transaction should be referred to the Boards to ensure that, if proceeded with, the transaction is carried out in accordance with 360 Capital policy, the Corporations Act and the Constitution and Compliance Plan of the relevant Fund or Trust.

 

Disclosure Principle 7 – distribution practices discloses whether distributions have been made solely from realised income or from a combination of realised income and a return of capital funded by borrowings or retained earnings from a prior financial year. 360 Capital’s distribution methodology is that distributions are to be paid in accordance with the Fund or Trust Constitution and associated disclosure documents and generally not be supplemented with a return of capital component funded by cash reserves or new debt funding. Distributions are therefore based upon a number of inputs, including, where relevant:

• accounting net income, including unrealised earnings and retained earnings;
• capital expenditure requirements;
• debt management issues; and
• forecast future earnings, taking into account the need to meet financial covenants, discussions with financiers and the requirement to strengthen Fund and Trust balance sheets in order to provide future flexibility to respond to market events.

In some instances, this may require that the distribution be supplemented by distributions out of capital in the following circumstances:

• operating cashflow is greater than Fund or Trust net accounting income;
• taxable income is greater than Fund or Trust net accounting income;
• the Responsible Entity resolves it is appropriate to distribute a portion of any unrealised gain; or
• the Responsible Entity resolves to normalise distribution income for short-term fluctuations in Fund or Trust net accounting income.

The decision to make any distribution from capital is made in order to manage a short-term position rather than on a sustained basis. In the current economic conditions, 360 Capital considers it appropriate for some Funds and Trusts:

• to continue to suspend distributions;
• reinstate distributions; or
• increase distributions.

The decisions to continue to suspend distributions are generally made in order to apply the retained cash to reduce Fund and Trust debt and to help reduce any future financial stress in relation to debt covenants. 360 Capital’s focus is to restore and increase distributions to Unitholders where permitted by the current and forecast financial position of the Fund or Trust.

 

Disclosure Principle 8 – Withdrawal arrangements discloses whether a Fund or Trust has withdrawal rights. Typically Unitholders in unlisted closed-ended Fund and Trusts have no rights to withdraw from the Fund and Trust prior to the scheduled Fund and Trust expiry date, other than through off market transfers.

The Constitutions of the following Funds or Trusts do not allow withdrawal arrangements to Unitholders:

• 360 Capital Subiaco Square Shopping Centre Property Trust
• 360 Capital Transport Building Property Trust
• 360 Capital Havelock House Property Trust
• 360 Capital Canberra Trust
• 360 Capital 111 St George’s Terrace Property Trust

These Funds and Trusts are fixed-term for which there is no current redemption or withdrawal facility available to Unitholders. Due to the nature of the Funds and Trusts and their underlying assets, the Funds and Trusts are considered “illiquid” based on the definition in the Corporations Act. Accordingly, 360 Capital does not propose to offer redemption facilities to Unitholders in these Funds or Trusts, although it may introduce liquidity facilities via changes to the Constitutions where it is judged in the best interests of Unitholders to do so. These Funds and Trusts should be considered as medium to long term investments, with the ability to withdraw only upon the termination of the Fund or Trust.

The Constitutions of the following Funds and Trusts allow withdrawals to Unitholders in some cases; however these functions have been suspended:

• 360 Capital Diversified Property Fund
• 360 Capital Office Fund
• 360 Capital Retail Fund
• 360 Capital Industrial Fund
• 360 Capital Developments Income Fund
• 360 Capital Development Fund No. 1

The negative impact on asset values from the GFC, combined with the increase in redemption requests in the wake of the introduction of the Federal Government’s bank deposit guarantee, resulted in the need for the Responsible Entities to suspend withdrawals to protect the interests of Unitholders as a whole. These suspensions will continue until such time the Responsible Entities are confident that the market has stabilised and liquidity can be provided without unfairly treating Unitholders who wish to remain invested.

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