The listed property trust sector continues to be one of the best performing sectors on the ASX. Prior to last Friday’s volatility, the sector had returned 14.48% this year. Over the three years to the end of May, it has returned 16.80% pa (distribution plus capital growth), which compares to the broader market’s 7.71% pa. Forward distribution yields on some of the major listed trusts such as Scentre, GPT or Dexus, somewhat remarkably, now start with a big figure of “4”. The search for yield has never been more intense.
An alternate to investing in listed property trusts is through an unlisted trust. Typically, these pay higher yields than listed trusts, are either single asset or own a less diversified mix of property assets and are smaller in size. The trade off, of course, is that there is no liquidity, so investors typically agree a timeframe for the fund with the aim of selling the assets and winding up the fund around this time to provide an exit path.
There are several property managers who develop unlisted property funds, including Charter Hall, Centuria and Stockland. One of the latest unlisted funds is the Centuria Zenith Fund.
Centuria Zenith Fund
The Centuria Zenith Fund is acquiring a 50% freehold interest in the Zenith, a twin tower office complex in Chatswood NSW. The other 50% is being acquired by a fund managed by BlackRock, which is the largest fund manager in the world with over $4.7 trillion in assets under management.
The Zenith is an A-grade office complex of twin 21 level towers. Constructed in 1987, the building comprises large floor plates of approximately 1,000 sqm, 799 car spaces, and a total net lettable area of 44,271 sqm. It is located on the Pacific Highway at Chatswood, 12km north of the Sydney CBD.
[1]The property has a diversified mix of 41 tenants, with a weighted average lease expiry (WALE) of 2.7 years. Major tenants by income are NSW Transport (22%), Abigroup (11%) and Wilson Parking (9%). As at August 2016, it is expected to be 95% occupied, while the vendor has provided a 12-month rental guarantee over the vacant space.
The purchase price for the building of $279.1m represents an implied capitalization rate of 7.75%.
Fund metrics
For a 100% stake in the property plus stamp duty and other acquisition costs, the total transaction cost is just over $300m. Approximately half of this will come through borrowings, with the Fund and Blackrock contributing the rest of the capital. For its 50% share, the Fund will issue approximately 78.7m $1.00 units. Based on the independent valuation of the property, the Fund will have an initial look through loan to valuation ratio (LVR) of 51.4%, and an initial net tangible asset value (NTA) per unit of $0.91.
For unit holders, Centuria forecasts the following distributions:
Distributions will be paid monthly to unitholders. They are also expected to be tax advantaged to the extent that they will be 70% tax deferred in FY2017 and 100% tax deferred in FY2018. (Tax deferred income is not assessable for income tax, but does reduce the cost base for CGT purposes).
Investment rational and exit plan
In addition to the strong forecast yields from rental income underpinned by high quality tenants, Centuria sees upside for the Chatswood precinct as well as specific opportunities for the building. On the North Shore of Sydney, Jones Lang LaSalle has forecast that approx. 8.7% of office stock will be withdrawn over the next four years, predominantly driven by conversion to residential development and compulsory acquisition for the Sydney Metro Project. Centuria expects that reduced stock will result in lower vacancy rates and strong rental growth. The property is only five minutes’ walk from Chatswood station, giving it direct access to the Sydney Metro, Australia’s largest public transport infrastructure project.
Specific opportunities to enhance the value of the property include an extensive capital works program over five years to reinforce its “best in class” reputation, as well as splitting the title and implementing a shared services agreement. Currently, the two buildings are on a single title. Splitting would allow the towers to be sold separately, attracting a deeper buyer pool at exit, due to their smaller investment size. The independent valuer, Cushman Wakefield, has confirmed that the capitalization rate would compress up to 50bps after the title is split, representing an uplift in value of between 5-7%.
The large 7,990 sqm site and low floor space ratio (approximately half that of adjacent buildings) may offer future redevelopment opportunities. While it is not Centuria’s current intention to redevelop the property during the term of the Fund, this may be a consideration for a subsequent purchaser.
[2]The Fund has an initial term of five years. Investors can vote to extend this by a further two years, but after seven years, it can only be extended by a unanimous resolution of all investors.
The Manager is incentivised to maximise returns for unit holders, by potentially earning a performance fee of 20% of any excess return over an internal rate of return of 10% to unit holders (in cash). The Manager is also entitled to a base management fee of 0.80% pa of the gross asset value and a disposal fee of 1.0% of the sale price.
Our view
The forecast distributions are attractive, and the investment rationale well considered. While the initial LVR is on the high side at 51.4%, investors should note that the interest rate on most of the debt facility is fixed for three years, and that the forecast interest cover ratio of 3.7 times is comfortably above the facility’s covenant of 2.0 times.
Like all unlisted trusts, it is an illiquid investment. There is no liquidity. The minimum investment is $50,000, and as there is no cooling off period, potential investors should read and consider the Product Disclosure Statement very carefully. This is available from Centuria at www.centuria.com.au [3]The offer is scheduled to close on 20 July or once fully subscribed.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.