m3commentary SHOPPING CENTRES Autumn | 2018

Key Research Contacts:

Jennifer Williams Katherine Tambouras Amita Mehrotra Casey Robinson Zoe Haskett National Director | NSW Research Analyst | NSW Research Director | VIC Research Manager | QLD Research Manager | SA (02) 8234 8116 (02) 8234 8103 (03) 9605 1075 (07) 3620 7906 (08) 7099 1807

m3property.com.au www.m3property.com.au | P1 m3property Research

CONTENTS Market Overview 3 CHANGING THE Key Retail Influences 4 Occupier Demand 5 Key Indicators 7 RETAIL MIX Retail in focus 9 Significant sales 10 • Retail trade growth, while having slowed, was positive Outlook 11 over the year to February 2018 compared to the year prior. For the year-ending February 2017 to the year- ending February 2018 all sectors experienced growth except Department stores which experienced a fall in turnover of 0.2%. The strongest growth was recorded in the Cafes, restaurants and takeaway sector (3.7%).

• Consumer sentiment, as measured by the Westpac Melbourne Institute, has improved and as at February was positive.

• Specialty rentals in the major A-REIT owned centres DEFINITIONS increased by 4.1% over the year to December 2017. Regional: Major shopping centre typically incorporating at least one full line department store, a full line discount • Sale transaction activity has increased over the 12 department store, a and around 100 specialty stores. GLA is over months to March 2018, compared to the year prior. 30,000m2. Includes Super Regional, Major Regional and Regional centres. Regional, Sub Regional and Neighbourhood centre

Sub Regional: A shopping centre generally transactions over the year to March 2018 totalled incorporating at least one full line discount department store, a major supermarket and $5,364,005,000. This compares to $3,845,391,000 around 40 specialty stores. GLA typically 10,000-30,000m2. worth of sales reported the year prior.

Neighbourhood: Local shopping centre generally containing a supermarket and • Investment yields across prime retail centres specialty stores. GLA typically less than 10,000 square metres. continued to tighten over the year to December 2017. Further yield tightening is expected to taper off with FY – Financial Year bond rates rising and continued challenges hampering income growth in the sector.

• We anticipate activity to continue to be strong over 2018 with many institutional owners divesting assets to maximise portfolio returns.

www.m3property.com.au m3commentary Autumn 2018 | P2 m3property Research

MARKET OVERVIEW

The retail sector continues to face challenges such as changing consumer preferences, weak consumer sentiment, technological changes and rising bond rates. Low interest rates have kept purchaser demand positive, but with rising bond rates investment markets are considered near their peak. Landlords are responding by altering their retail mix to include more food and beverage based retailers, health and beauty and services, which are the groups performing well in the changing consumer environment. The m3property Shopping Centre report focuses on retailer equalling the playing field. In practice, additional and investment activity in Regional, Sub Regional and governance may be required to ensure a positive impact on Neighbourhood centres in Australia. local retailers. Shopping centre tenant demand drivers have shown mixed Rental growth in specialty stores of A-REIT owned centres results over recent years with sentiment being volatile and was 4.1% over the year to December 2017, this was an largely weak, online retail expanding, wages growth being improvement in growth compared to the previous 12 low and residential construction varying widely between months. Consequently gross occupancy costs rose slightly regions. On the positive side, population growth has to 14.4% in December 2017, from 14.1% as at December improved since the end of 2015 and employment growth 2016. has been strong. Overall the outcome has been a slight slowdown in retail trade. Retail conditions are expected to Investment demand was positive with the volume of sales be challenging in most states over the short-term, with increasing over the year to March 2018 compared to the outcomes relying on population growth, employment levels, year prior in Regional and Neighbourhood centres, wages growth and combating future issues, such as online compared to the year prior. Sub Regional centres saw competition and new entrants into the market. activity reduce over the same period. The government is introducing a 10% tariff on clothing, Yields for shopping centres reported across the major retail electronics and furniture under $1,000 in value purchased A-REITs firmed by 27 basis points over the year to online from overseas retailers from July 1, 2018, aimed at December 2017 to average 5.66%. m3property Valuation Left: Marrickville Metro SC, NSW. Top: Canelands Central, QLD. Lower: Rouse Hill Town Centre, NSW.

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KEY INFLUENCES

ECONOMY Momentum appears to be gathering in the Australian economy’s transition away from $ growth driven by investment in the mining and resources sector towards other sectors such as property, tourism and education. Growth continues to improve in states like New South Wales (NSW) and Victoria and while challenges remain, conditions in parts of Western Australia (WA), Queensland and Northern Territory (NT) are also starting to improve. According to the Australian Treasury Budget Papers, in real terms Gross Domestic Product is forecast to grow by 2.75% in 2017-18 and improve to 3.0% in 2018-19.

RETAIL SECTORAL CHANGES The retail sector continues to experience major changes as demanded by consumer behaviour and new shopping trends/technologies. The changes are resulting in regional variations in spending and a transformation in the way we purchase goods and services. These influences are likely to continue to drive regional differences in retail growth over the short- to medium-term. The expansion of Amazon in Australia is likely to result in further evolution of the retail sector in Australia over the short- to medium-term.

CONSUMER CONFIDENCE The Westpac-Melbourne Institute Index of Consumer Sentiment was positive in February 2018 but lower than the January 2018 result. The index is currently at 102.7 in February, above a net balance of 100 (meaning optimists outweigh pessimists). The decrease reported in the February survey is likely to be a result of concerns regarding volatility of global share markets.

RETAIL BUILDING APPROVALS Nationally, over the past year we have seen retail building approvals remain largely stable with a slight increase of 0.7% recorded over the 12 months to January 2018 in comparison to the year prior. The year to January 17 had seen a strong increase of 13.6% compared to the year prior. Retail development activity is still expected to remain robust in the short-term due to approvals from 2017 which are still to be actioned.

POPULATION Moderate population growth continues to underpin the retail sector despite volatile consumer sentiment and low wages growth. Australia’s Estimated Resident Population (ERP) as at 30 September 2017 was 24,702,900 people reflecting an annual increase of 395,600 (1.6%). The fastest population growth in the year to June 2017 was Victoria (2.4%), followed by ACT (1.8%), Queensland (1.7%) and NSW (1.6%).

RETAIL TURNOVER National retail turnover, in current prices (seasonally adjusted), during February 2018 was approximately $26,449,900,000 according to the ABS (April 2018). The total turnover increased over the month of February (0.6%). Total retail spending growth for the year-ending February 2017 to the year-ending February 2018 was 2.7%, decreasing from 3.3% growth in the year-ending February 2016 to the year-ending February 2017. For the year-ending February 2017 to the year-ending February 2018 all sectors experienced growth except Department stores which fell by 0.2%. The strongest growth was recorded in the Cafés, restaurants and takeaway food services retailing category (3.7%). www.m3property.com.au m3commentary Autumn 2018 | P4 m3property Research

OCCUPIER DEMAND

In the year ended December 2017 Debenhams opened in Melbourne DEPARTMENT STORES Kmart’s comparable store sales CBD over 2017 and plans to roll out grew 5.4%. Kmart expanded its to other capitals, which will add Annual retail trade in department store network over the year to total competition to both the department stores fell by 0.2% over the year to 225 stores as at December. Five and discount department stores as it February 2018, compared to the year new stores were opened. A further is considered mid-market. prior, with the past quarter to 11 major refurbishments were February 2018 seeing a stabilisation completed over the period. in retail trade in this retail group. plan to continue to MINI-MAJORS Myer’s sales declined by 1.4% over invest in the Kmart store network 2017 compared to the year prior. It through refurbishments and new The mini-major segment is defined closed three stores and handed back stores (including the conversion of a as retailers who occupy space space in two stores over 2017 Target store over 2018). ranging from 400 to 1,500 square bringing back comparable sales to a metres within a shopping centre. Target saw comparable store sales decline of 0.2% over the year. Myer decrease by 6.5% over 2017. Target Although traditionally dominated by continues to hand back space and opened six stores over 2017 and Australian retailers such as JB HI-FI announced they will be closing stores closed two. Target have therefore and Rebel Sport, international brands at Colonnades, SA (now closed), increased their network to 307 have become major players in the Westfield Belconnen, ACT, and stores. Target continues to focus on mini-majors segment. A number of Westfield Hornsby, NSW. This issue reducing expenses. international brands such as Zara, will be explored further in the retail in H&M, Uniqlo, are currently in an focus section. BIG W witnessed a rise in expansion phase, focusing their comparable sales of 1.3% in the year David Jones’ sales increased by attention towards centres located to December 2017. BIG W 1.0% with comparable sales along the eastern seaboard. management is continuing to (excluding the Dick Smith implement a new strategic plan for Competition in this segment is Concessions) declined by 0.7%. the chain based on rebuilding of expected to continue to come largely David Jones actually increased their customer trust on price and from overseas including Decathlon, footprint with three stores added in enhancing customer experience. At a French sporting goods and active 2017. December 2017 BIG W had 186 wear retailer who opened a store in David Jones are continuing to focus stores with two thirds of their network Tempe, NSW in 2017. Amazon is on their food offering. David Jones (121 stores) having completed a light also set to challenge retailers in this opened Westfield Bondi Junction, store refresh. Over the past year one component of the market. GPT Group’s Wollongong Central store was added. No new stores are and Melbourne’s Bourke Street David planned for the next six months. Jones Food Halls in 2017. The next m3property Valuation: offering was Malvern Central, in Valley Plaza, Green Valley, NSW. southeast Melbourne, which opened in March 2018. David Jones are now planning to open their first stand alone food store in 2019 at Capital Grand, South Yarra, Victoria.

DISCOUNT DEPARTMENT STORES Discount department stores (DDS) include Kmart, BIG W and Target. This retailer segment competes largely on price and has benefited from the shift in consumer preferences for low-cost goods. In particular, Kmart continues to perform well due to this shift. www.m3property.com.au m3commentary Autumn 2018 | P5 m3property Research

OCCUPIER DEMAND

major driver of supermarket Maggie T, Doughnut Time, Specialty competition going forward. Fashion Group and Zachary the Label became insolvent, went into Woolworths Ltd (Woolworths and IGA and Supa IGA, owned by administration or started closing Woolworths Metro) (37.2%), , have lost significant market stores. On the other hand, specialty Wesfarmers Limited (Coles) (30.3%), share over the past five-years due to stores such as Burger Project, Stores Supermarkets Pty Ltd robust competition. It was estimated Decjuba, Hairhouse Warehouse, (9.2%) and Metcash Limited (IGA, that Metcash Limited’s supermarket Lord of the Fries, Dyson, J Crew, Supa IGA, IGA X-press, IGA Fresh, sales increased 1.3% to COS and Freshii plan to expand or Foodland and Friendly Grocer) $7,650,000,000 in 2016-17 but were set up operations in Australia. (7.4%) are the major supermarket down 0.6% on a like-for-like basis chains operating in the competitive compared to the year prior Growth in the online retail sector and food and grocery market (IBISWorld (IBISWorld, February 2018). Metcash the continuing expansion of Amazon February 2018). Other independent operates over 1,683 stores in Australia is resulting in centre supermarket chains include: nationally, after 32 new stores were owners changing their tenant mix. Australian United Retailers Limited opened over the 2017 financial year. The pattern of rationalisation of (), Australia Metcash’s IGA segment has a 7.4% fashion and expansion of health and Limited, Wholesale Australia market share in Australia according beauty, services, food-based retailing Pty Ltd, Harris Farm, Tong Li. to IBISWorld (February 2018). There and entertainment appears to be a were 397 Super IGAs, 823 IGAs and continuing trend in 2018. Wesfarmers reported positive 206 IGA-Xpress’ at June 2017 and a comparable sales growth for Coles further 257 Friendly Grocer/Eziway The food and beverage (F&B) food and liquor in the second half of stores, according to the Metcash category has recorded strong sales 2017 (0.9%). Coles expanded and Limited Annual Report 2017. growth over the past 10-years invested in its supermarket network recording an annual average growth during the six-month period, with 14 rate of 6.1% per annum. Landlords supermarkets opened and 35 have realised the importance of renewals completed. As at 31 SPECIALTY STORES creating a stronger F&B offer to December 2017, Coles had a total of The entrance of new retailers or achieve a higher F&B strike rate (the 806 supermarkets. expansion of existing retailers has frequency of utilisation of the F&B component) and in turn higher rental Woolworths reported strong offset the loss of some specialty and asset value. F&B tenants now comparable sales growth for retailers over 2016 and into 2017, occupy 10% of GLA and are Australian Food of 4.9% for the keeping vacancies low. becoming a second anchor for many second half of 2017. Woolworths Recently. retailers such as Cartridge developments. had 1,008 supermarkets in Australia World, Nine West, Baby Bounce, as at December 2017 having opened m3property Valuation: net 10 supermarkets including one Paradise Centre, Surfers Paradise, Metro store. A further 37 renewals QLD. and 35 upgrades were completed over the December half 2017. Woolworths plan to open a further 10-20 stores each year over the next 3-5 years. From opening its first Australian store in 2001 in NSW, ALDI now has an estimated 9.2% market share and over 500 stores nationally according to IBISWorld, (February 2018). ALDI’s revenue is expected to reach an estimated $9,400,000,000 in the 2018 calendar year, which would represent a rise of 10.6% compared to the 2017 estimated total of $8,500,000,000 (IBISWorld February 2018). ALDI is expected to remain a

www.m3property.com.au m3commentary Autumn 2018 | P6 m3property Research

KEY INDICATORS

Retail A-REIT Australian vacancy rate 3.00% VACANCY 2.50% The average reported vacancy rate for the major retail A- 2.00% REIT owned centres was 0.9% as at December 2017, up slightly from 0.84% in December 2016. 1.50% 1.00% While the overall fairly stable trend in vacancy is likely to be the same, centres owned by the major A-REITs are typically Vacancy Vacancy rate (%) 0.50% core assets that are actively managed and the broader 0.00% market vacancy is, therefore, likely to be higher. The vacancy has largely been flat over the past six-months on the back of the increased F&B offering in many A-REIT Source: Annual A-REIT reports and presentations and m3property (March 2018) owned centres.

Retail Centre Rental Growth RENTS

Annual rental growth averaged 4.1% across the major

shopping centres, owned by A-REITs in Australia over 4.1%

3.7% 2017. This represented an increase from 3.3% over the

3.6%

3.5% 3.3%

3.3% year prior. The majority of growth appears to be coming

2.9%

2.9% 2.7%

2.6% from centres increasing their focus towards food-based retailing. The reduction in Department store size and some stores exiting centres is likely to have a mixed impact on rents in the short-term. Some centres may benefit from the increase in higher paying specialty stores, whereas others may see an extended period of decreased rent until Source: Annual A-REIT reports and presentations and m3property (March 2018) refurbishments are completed and new tenants sourced.

INVESTMENT DEMAND Retail Sales Volume, by Centre Type 7.0 Regional Sub Regional Neighbourhood Shopping centre sales volume lifted over the year to March 6.0 2018 to be $5,364,005,000. Sales activity rose for Regional 5.0 and Neighbourhood centres, with Sub Regional centre

Billions Billions ($) 4.0 activity slowing. For Regional centres this followed two weak years where stock was tightly held. Neighbourhood 3.0 centres are benefiting from demand for convenience 2.0 centres. 1.0 Over the year to March 2018, unlisted funds accounted for 0.0 the majority of shopping centre purchases (49.9%), followed by overseas investors (13.8%). AMP Capital, GPT Source: m3property Research (*At end March 2018). Sales over $5 million Group and GIC accounted for the largest volume of centre sales over the year to March 2018. Shopping centre sales activity was dominated by the three most populous States over the year with Queensland accounting for 42.2% of sales, NSW (30.9%) and Victoria (16.9%). Supply of centres on the market lifted in recent months with centres, or part shares of centres, for sale at Gateway Plaza Leopold and Highlands Shopping Centre in Victoria; The Strand at Coolangatta and Goldfields Plaza, Gympie in Queensland; Kelmscott Plaza in WA and Lidcombe Centre in NSW, among other assets. www.m3property.com.au m3commentary Autumn 2018 | P7 m3property Research

KEY INDICATORS

INVESTMENT YIELDS INTERNAL RATES OF RETURN

Shopping Centre Market Yields Shopping Centre Prime IRRs 10.00% 8.50%

8.00% 8.00%

6.00% 7.50%

4.00% 7.00%

Regional centres IRRs (%) 2.00% 6.50% Sub Regional centres Regional Sub Regional Neighbourhood centres Average Average market yield (%) Neighbourhood

0.00% 6.00% Prime Prime (prime and super prime)

Source: m3property Research Source: m3property Research

Prime Cap Secondary 12 month 12 month Prime IRRs 12 month Secondary 12 month Centre type Rates Cap Rates outlook outlook Q1/18 outlook IRRs Q1/18 outlook Q1/18 Q1/18

Regional 4.00%-5.25% Stable 5.25%-6.50% 25-50 bp 6.25%-7.00% Stable 7.00%-7.50% 25-50 bp

Sub Regional 5.00%-6.25% Stable 6.25%-7.25% 25-50 bp 6.50%-7.25% Stable 7.25%-8.00% 25-50 bp

Neighbourhood 5.00%-6.50% Stable 6.50%-7.50% 25-50 bp 6.50%-7.50% Stable 7.50%-8.00% 25-50 bp

• Investment demand for shopping centres is providing solid evidence of where the market is positive and supply of centres on the market performing at current. has increased. • Looking forward, while Prime centres are likely • The tightening of Regional centre yields was to stabilise over the short-term, Secondary largely driven by market evidence, with three centres are likely to see yields/IRRs soften. major sales occurring over the past 12 months

m3property Valuation: For Sale: Central West, Braybrook, VIC. Lidcombe Centre, NSW.

www.m3property.com.au m3commentary Autumn 2018 | P8 m3property Research

RETAIL IN FOCUS

• Meriton’s Green Square Myer, for example, handed back CONVENIENCE DRIVES NEW development, NSW includes space in Warringah and closed RETAIL residential units, retail, a Brookside and Orange in 2017. From multipurpose function facility gym, 2018 it is handing back space in The changing Australian lifestyle swimming pool and theatre. Cairns, Dubbo, Blacktown and Castle including increasing density of the Hill and exiting Colonnades (closed), urban landscape, reduced passenger Melbourne Central, Chadstone and Logan, Belconnen and Hornsby. vehicle ownership, down 0.1% over Northlands in Victoria, Indooroopilly the year to January 2017 (ABS latest Shopping Centre, Queensland and Many landlords are seeing this as an survey), increased demand for Rouse Hill and Eastlakes in NSW are opportunity to bring in new anchor convenience from time-poor also expected to incorporate tenants and/or incorporate food halls consumers and increased residential space. or entertainment components to their competition from mixed-use centres. In Orange City Centre, developments and online retail is Shopping centre owners such as Harris Scarfe is being considered to driving a changing retail environment. Stockland, ISPT, Mirvac, Scentre, take a large proportion of the almost GPT and Meriton are considering 7,000 square metres vacated by In order to meet the challenges, alternative uses to maximize returns. Myer and the plan is to also landlords are now thinking outside incorporate a mini-major and various the square. While changing tenancy specialty shops. mixes (to include more services, food DEPARTMENT STORES AND and beverage and entertainment) SPACE HANDBACKS The benefit is potentially higher and improving access to centres to income to owners. However, there increase convenience is seeing Department stores have faced may be risks including: positive results, some landlords are difficult trading conditions over recent • Precinct issues linked to tenancy going to greater steps to ensure they years. Department store trade has mix, maintain a strong customer base. reduced by 0.2% over the year to m3property Strategists track February 2018 and 0.9% over the • Tenancy agreements may have development applications from year to February 2017, compared to restrictive clauses regarding loss of landlords and have noticed an the previous respective years. While anchor tenants, resulting in reduced increase in applications from retail the decline in trade is slowing, rents or tenants being able to exit landlords with other sector uses. department stores continue to focus leases, and These include: childcare centres, on improving their performance. To medical centres, hotels, large format this end, both Myer and David Jones • Capital expenditure for retailers and residential. have become more selective in the reconfiguration of single tenancy centres they trade within and into multiple tenancies. These new retail precincts/mixed use continue to downsize. developments provide several Development: advantages to landlords. Residential Eastlakes Shopping Centre, NSW. components supply a new customer base, hotels, medical, large format retail and child care centres provide convenience for customers and raise footfall. Examples of centres incorporating residential include: East Village, Top Ryde and Pacific Square in NSW and Coorparoo Square, Queensland. Future examples include: • Macquarie Centre, NSW, which has approval for offices, hotels, serviced apartments and residential. • The Glen Shopping Centre, Glen Waverley, Victoria has approval for the inclusion of over 500 units.

www.m3property.com.au m3commentary Autumn 2018 | P9 m3property Research

SIGNIFICANT SALES TO DATE

Market Property Date Price Centre Type Purchaser Yield

Kawana Shoppingworld (50%) QLD Dec 17 $186,000,000 5.50% Sub Regional ISPT

Churchill Centre North Churchill Centre North, Kilburn (50%), SA Dec 17 $42,500,000 6.26% Sub Regional Investment Trust 1

Toormina Gardens Shopping Centre, Fort Street Real Estate Capital Dec 17 $83,300,000 6.52% Sub Regional NSW Fund III

Woodcroft Shopping Centre, NSW Dec 17 $43,850,000 5.37% Neighbourhood Undisclosed

Indooroopilly Shopping Centre (50%), AMP Capital (ASCF and Nov 17 $802,500,000 4.25% Super Regional QLD ADPF)

Rockingham Shopping Centre (50%), WA Nov 17 $600,000,000 5.63% Regional AMP Capital

Bathurst City Centre, NSW Oct 17 $71,150,000 6.26% Neighbourhood QIC

Stockland Corrimal, NSW Oct 17 $69,250,000 6.83% Neighbourhood Lederer Group

Benowa Village, QLD Oct 17 $49,500,000 5.03% Neighbourhood Overseas Investor

Port Pirie Plaza, SA Sep 17 $32,050,000 7.63% Sub Regional Primewest

Lakeside Square, Pakenham VIC Jul 17 $30,380,000 5.69% Neighbourhood Private Investor

Marketown East, Newcastle West, NSW Jul 17 $95,250,000 5.78% Sub Regional Sunsuper (AMP Capital)

Marketown West, Newcastle West, NSW Jul 17 $68,000,000 5.77% Neighbourhood Sunsuper (AMP Capital) Highpoint Shopping Centre, Maribyrnong Jul 17 $660,000,000 4.21% Regional GPT Group (25%), VIC

Please contact one of our Retail Valuers for detailed sales analyses.

m3property: Left: Sale Rockingham City Shopping Centre WA. Right Top: Valuation Churchill Centre, Kilburn, SA. Right Bottom: Valuation Mitcham Square Shopping Centre.

www.m3property.com.au m3commentary Autumn 2018| P10 m3property Research OUTLOOK SHOPPING CENTRES

Retail floor-space supply is set to increase over 2018, pessimists outweighing optimists at each of the monthly given high levels of building approvals, ongoing survey’s completed this year. redevelopment and repositioning of assets. Supply is, however, likely to slow over the medium term. In terms of tenants in retail centres in Australia, demand is likely to continue to be strong for health and beauty The Federal Government is forecasting household services and F&B based retailers over 2018. This is consumption to grow by 3.0% in 2017-18 (Mid-Year likely to continue to be at the expense of fashion retailers Economic and Fiscal Outlook, Budget 2016-17) due to and department stores. Centre owners are likely to the combination of low interest rates and population continue to adjust their retail mix in the face of changing growth being tempered by weak wages growth and consumer preferences and Amazon’s expansion in slowing dwelling price growth. Australia. With low interest rates continuing, an expected lower Retail yields are likely to be fairly stable for prime stock Australian dollar and a gradual transition to non-mining and continue to soften for secondary stock. sectors, stronger consumer confidence is expected. Westpac-Melbourne Institute’s measure of consumer confidence has improved over 2018 to date, with

KEY RETAIL VALUATION CONTACTS

Heath Crampton National Director | NSW (02) 8234 8113

Shaun O’Sullivan Director | VIC (03) 8234 8113 m3property provides national

Ross Perkins coverage in all States and Managing Director | QLD Territories. (07) 3620 7901 [email protected] Simon Hickin Director | SA (08) 7099 1812

DISCLAIMER © m3property Strategists Australia. Liability limited by a scheme approved under Professional Standards Legislation This report is for information purposes only and has been derived, in part, from sources other than m3property Strategists and does not constitute advice. In passing on this information, m3property Strategists makes no representation that any information or assumption contained in this material is accurate or complete. To the extent that this material contains any statement as to the future, it is simply an estimate or opinion based on information available to m3property Strategists at that time and contains assumptions, which may be incorrect. m3property Strategists makes no representation that any such statements are, or will be, accurate. Any unauthorised use or redistribution of part, or all, of this report is prohibited.