Centro MCS 36 – International No.4 Investment Research September 2005 Managed Investment Assessments Pty Ltd holds Australian Financial Services Licence Number 228911. This licence enables Managed Investment Assessments Pty Ltd to undertake assessments of managed investment schemes. Disclosure of Interests Managed Investment Assessments Pty Ltd has received a fee from Centro MCS Manager Limited for the preparation of this Assessment. The Directors and employees of Managed Investment Assessments Pty Ltd do not hold securities in Centro Properties Group or the Centro MCS 36 – International No. 4. At the time of publication, neither Managed Investment Assessments Pty Ltd nor any associated entities have conducted any capital raising activity for the Centro MCS 36 – International No. 4. Entities associated with Managed Investment Assessments Pty Ltd may have provided advice to the Responsible Entity of this Trust and may do so in the future. Disclaimer This report is provided to investors as general advice on interests in managed investment schemes. This report should not be relied upon as a specific recommendation as Managed Investment Assessments Pty Ltd has no knowledge of the financial circumstances of any individual investor. It is strongly recommended that investors consult their financial advisor prior to making any investment. It is also recommended that investors review reports on this product from other independent research companies. Managed Investment Assessments Pty Ltd strongly advises investors to read all material provided by the promoter of this product including the entire Product Disclosure Statement. Managed Investment Assessments Pty Ltd has no influence whatsoever on the past, present or future performance of this product or its manager, and does not accept any liability for financial loss incurred by investors who choose to invest in the product assessed in this report, or any other product. © Managed Investment Assessments Pty Ltd 2005 Managed Investment Assessments Pty Ltd ABN 87 094 541 358 Level 3 North Tower, 333 Collins Street, Melbourne, Victoria, 3000 Email: [email protected] website: www.miaresearch.com Telephone: +61 3 9629 5777 Facsimile: +61 3 9629 5744 Centro MCS 36 – International No. 4 September 2005 Overall Rating: ‘Quality’ The Centro MCS 36 – International No. 4 syndicate has achieved an overall score of 73. It is rated as a ‘Quality’ investment offer. Overall Rating 73 ‘Quality’ This report is valid for 6 months from the date of issue or the close of capital raising whichever is the sooner Managed Investment Assessments Pty Ltd ABN 87 094 541 358 Level 3 North Tower, 333 Collins Street, Melbourne, Victoria, 3000 Email: [email protected] website: www.miaresearch.com Telephone: +61 3 9629 5777 Facsimile: +61 3 9629 5744 Centro MCS 36 – International No. 4 Annualised Returns to Investors 10% Income Return on Equity 8% The annual income distribution per unit on each $1 of equity 6% invested for each financial year Tax Advantaged 4% The proportion of the annual distribution that is tax 2% advantaged due to depreciation benefits, and building and other 0% allowances 2006 2007 2008 Funding Structure New Capital Raising (A$ mill) Interest Rate Management Property Purchase Price 400.305 Loan to value ratio 64% Stamp Duty & Acquisition Costs 12.925 Fixed for Interest rate structure Funds for capital expenditure 11.360 average five years US REIT Capitalisation Costs 1.886 Interest rate including margin Average 4.71% TOTAL ACQUISITION COSTS 426.476 Structure of Issue Less net US borrowings 253.539 124 million Ordinary No. of Units offered to TOTAL US INVESTMENT 172.937 Units and 71 million investors Plus syndicate and other establishment Unsecured Notes costs 22.012 25%‐50% of units and Centro participation TOTAL (rounded) 194.951 notes on offer Unit Issue Price $1.00 Capital Structure Management Fees Syndicate Equity Units 124.046 5% of property purchase Establishment Fee Unsecured Notes 70.905 price TOTAL (rounded) 194.951 On‐going Fee 0.73% MER 0.81% Net Tangible Asset Backing Distributions Quarterly Minimum Investment A$10,000 Per $1 unit $0.89 Syndicate Term Six to seven years Centro MCS 36 Benchmarked We have benchmarked key elements of the Centro MCS 36 Syndicate against a basket of closed end unlisted property syndicates with a similar structure, that undertook their first capital raising within the last three years. The accompanying graph places the benchmark level for each element at zero. Better than 30% Benchmark 20% 10% 0% -10% Worse than -20% Benchmark -30% Gearing Yield Tax Inter es t Mar gin MER Effectiveness Level 3 North Tower, 333 Collins Street, Melbourne, Victoria, 3000 www.miaresearch.com Telephone: +61 3 9629 5777 Facsimile: +61 3 9629 5744 Page 2 Centro MCS 36 Benchmarked (cont’d) The extent to which elements of this Syndicate offer vary from the benchmark is expressed as a percentage. The gearing level of 60% is higher than the benchmark average. The Syndicate’s forecast first year yield of 8.25% is similar to the benchmark but significantly higher than retail property yields currently prevailing in Australia. The tax advantaged income received by investors in the Syndicate is slightly higher than the benchmark average. The interest rate margin is lower than the benchmark average. The MER is slightly lower than the benchmark average assisted by economies of scale due to the size of the Syndicate. Centro MCS 36 – International No. 4 Strengths: Centro MCS 36 Syndicate (‘Syndicate’) provides investors with an exposure to a large geographically diversified portfolio of retail properties based in high density residential areas on the east coast of the United States. Key features of the Syndicate include a clever if complex investment structure, an equity hedge of 100% of initial investment in the US REIT and forecast distributions from the Product Rating 68 US REIT until 2011, an interest rate hedge averaging over five years ‘Attractive’ and a property portfolio with a high weighting towards non‐ discretionary retailers. This contributes to our rating of the Syndicate as an ‘Attractive’ product. Issues to be addressed: This is not a ‘set and forget’ retail property portfolio and will require intensive management during the Syndicate term. This issue is of particular relevance to the supermarket tenants that require expansion space. The success of the Syndicate hinges on the Centro Watt property management team, particularly the leasing department, taking an active asset management approach to maintaining and enhancing portfolio performance. Centro MCS Manager Limited Strengths: Centro MCS Manager Limited (‘Centro MCS’) is an established manager of Australian based retail property which has integrated what appears to be a strong management team in the United States through the joint venture with Watt Commercial, and the acquisition of the Kramont Real Estate Investment Trust. In rating Centro MCS we have taken into account the asset management Management Rating 81 capabilities of the United States East Coast management team based ‘Superior’ on our meetings with key executives and leasing officers. On this basis we rate Centro MCS as a ‘Superior’ manager in relation to its ability to manage the Syndicate. Issues to be addressed: Although the Australian based funds management team have ultimate responsibility for the success of the Syndicate, the main focus is on the involvement of the Centro executives on a day to day basis with respect to the management of the property management and leasing process that will determine the performance of the portfolio. The move to deploy Australian based executives into the United States based management team is an attempt to ensure the greatest possible integration of business cultures. Potential issues are likely to arise from a breakdown in communication between the ‘on site’ management team and the Melbourne head office. Level 3 North Tower, 333 Collins Street, Melbourne, Victoria, 3000 www.miaresearch.com Telephone: +61 3 9629 5777 Facsimile: +61 3 9629 5744 Page 3 Centro MCS 36 – International No. 4 Overview Centro MCS 36 has invested in 30 properties in eight states that formed part of the New York Stock Exchange listed Kramont REIT, purchased predominantly by the Centro (98.5%) and Watt Commercial (1.5%) in early 2005. The previously listed REIT comprised of 93 properties located across the east coast of the United States. Centro MCS 36 is the third syndicate launched by this group based on ‘The third US based Centro a portfolio of United States shopping centres. The syndicate is the syndicate’ largest to be launched in Australia with total capital of $A426.5 million to be raised. The equity to be raised via this offer is A$195 million. We have been informed by Centro that due to a lack of access to retail property in Australia due to tightening property yields and strong investor demand it is becoming progressively more difficult to launch syndicates with Australian based retail property assets. Centro believes that United States based retail property is currently attractive based on the diversification and higher returns that can be delivered to investors. The Syndicate will purchase interests in the assets through the acquisition of units in the existing ownership entities rather than a straight forward property acquisition which will ultimately be owned ‘Indirect holding in underlying by the US REIT. A 97% share of all the properties in the REIT will properties’ effectively be owned by Centro MCS 36 Syndicate. Investors are referred to the Product Disclosure Statement for further information as well as the Investment Structure section of this report. As part of our assessment of the Fund, executives from MIA visited the offices of Centro Properties Group Limited on four separate occasions including: • Wednesday 1st June between 3pm and 5:00pm; th • Thursday 7 July between 11am and 2pm; • Wednesday 27th July between 10am and 12pm; and • Wednesday 31st August between 11am and 12pm.