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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
www.coreprop.com.au
Unlisted Property Fund Report
Copyright © 2018 Core Property Research Pty Ltd 1
www.coreprop.com.au
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.
Unlisted Property Fund Report
Copyright © 2018 Core Property Research Pty Ltd 2
www.coreprop.com.au
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
kp@sumnercapital.com.au
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
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 3
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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
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 4
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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.
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 5
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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
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 6
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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%
Source: Sumner Capital, Core Property
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.
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 7
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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
Source: Sumner Capital, Core Property
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 8
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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
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 9
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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.
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 10
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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.
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 11
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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
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 12
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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
117 Harrington St, Sydney NSW
(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.
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 13
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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)
117 Harrington St, Sydney NSW
(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.
Sumner Capital 117 Harrington Street Trust October 2018
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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
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 15
www.coreprop.com.au
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%
Source: Sumner Capital, Core Property
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 16
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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
Source: Core Property
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
Source: Core Property
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 17
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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%
Source: Core Property
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 18
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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
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 19
www.coreprop.com.au
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
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 20
www.coreprop.com.au
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
Sumner Capital 117 Harrington Street Trust October 2018
Copyright © 2018 Core Property Research Pty Ltd 21
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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.
www.coreprop.com.au
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