15 March 2021 News in brief Welcome to the latest edition of the KM Property Funds Investor Update. Despite the well-documented impacts of the COVID-19 pandemic, assets performed largely in line with expectations for the calendar year 2020. There was no significant disruption to the funds as the KM Property Funds team worked diligently with all the tenants to ensure minimal adverse impact at the various properties. General property market commentary According to JLL's Australian Head of Research, Andrew Ballantyne, the Latin phrase annus horribilis best describes 2020. However, the policy response to mitigate the downside risk of the economic crisis stemming from the pandemic was unprecedented in Australia. And as a result, Australia is now well placed for a sustained economic recovery in 2021. In his latest research paper, Mr Ballantyne states that real estate investors gravitate towards investment opportunities with low-risk profiles in times of uncertainty. As we moved through 2020, investment activity in the industrial and logistics sectors remained firm, while multiple capital sources competed for office assets with long weighted average lease expiries and convenience retail. JLL's outlook for Australia is positive, with the expectation of an economic recovery path and gross domestic product forecasts to rebound in 2021 and 2022. JLL continues to expect that policy measures will be supportive, with the Australian government outlining plans to support employment growth and commit funding to a range of infrastructure initiatives, while monetary policy will remain at very accommodative levels. Greater confidence in the economic growth trajectory will lead to an improvement in office and retail leasing enquiry and activity. However, leasing markets will remain challenging, and vacancy pressures in some geographies will exert downward pressure on effective rents. The industrial and logistics leasing market will continue to remain healthy with the expansion of e-commerce operators, third party logistics and organisations related to the healthcare sector. The first potential vaccine announcement on 9 November 2020 had a positive impact on equity markets. Listed investor confidence in COVID-19 exposed sectors (office, retail and hotels) led to a strong rally in unit prices for those vehicles and a significant narrowing of the discount to net tangible assets. JLL expects this confidence to flow through to direct real estate investors. While the share market rally may reduce the motivation for some Australian real estate investment trusts (A-REITs) to be motivated vendors, JLL believes that portfolio re-weighting will remain a relevant theme for A-REITs and unlisted funds in 2021. JLL predicts that offshore capital sources will be an active buyer group in 2021. Australia will be a beneficiary of two central investment themes – higher allocations to real assets and a portfolio re-weighting towards the Asia Pacific. The expectation that Asia Pacific economies will recover more quickly than western countries is an additional ingredient to JLL's investment thesis. While confirmation that international borders are closed for the first half of 2021 will present a barrier to investment, several offshore capital sources have Australian based investment professionals or strong relationships with local managers. They can overcome the barrier of physical inspection. Property acquisitions KM Property Funds recently exchanged contracts to acquire a new property in Canberra. Flax House is a free-standing commercial property with 1,897 sq.m of net lettable area across two levels in the heart of the Tuggeranong Town Centre. A childcare centre occupies most of the building; it also includes a respiratory medical clinic, an office leased to the National Disability Insurance Scheme employment services, and a café. We acquired Flax House on behalf of KM Property Funds' Community and Social Services Fund. It will be the second asset in the portfolio alongside the existing childcare centre in Sunbury, Victoria. We aim to launch our Community and Social Services Fund later this year. Unlike our existing funds, Community and Social Services Fund will be an open-end fund offering ongoing investment opportunities with limited investor redemptions. We continue to consider and assess several desirable acquisitions. Property valuations Independent valuations are conducted as of 30 June each year. Consequently, the KM Property Funds Board of Directors reviewed, and with input from valuers responsible for completing the valuations, reaffirmed all the June 2020 property valuations as of 31 December 2020. Feature Article The latest KordaMentha Real Estate publication, Property Exposures provides a range of valuable insights into the latest quarter's property data as released by the Australian Prudential Regulation Authority. Property funds NewActon East Property Fund The Stables Property Fund 333 Exhibition Street Property Fund Cambridge Bedford Property Fund Laverton North Property Fund Terrace Office Park Property Fund Thebarton Square Property Fund Thynne Street Property Fund Other investor matters NewActon East Property Fund Fund performance Since fund inception in 2014, the unit value has increased by 6.0% from an initial NTA of $0.87 to $0.92 as of 31 December 2020, following the latest conservative valuation by Knight Frank as reported previously. The fund paid an income distribution of 8.0% p.a. per unit during the year. Tenant and financial update The ACCC accounts for approximately 80% of total property income, and the current lease is due to expire on 31 July 2022. Further to our recent correspondence on this matter dated 16 February 2021, we continue to engage with the ACCC in discussions about its lease intentions; however, the ACCC continues to assess its options. In the meantime, we continue to consider alternative leasing options. The property is a high quality, well-designed, modern office building in a desirable location. With these attributes, we are confident of the building's broad appeal to the market if the ACCC chooses to reduce the size of its floor space requirement or vacate the property entirely at its lease expiry. For example, Colliers International vacated its principal office at NewActon East on 30 November 2019, and we successfully re-leased that office area to the Department of Health from 1 December 2019. NewActon East Property Fund continues to pay distributions at 8.0% pa per unit. All the tenants are operating at the property. Back to Property funds ⬏ The Stables Property Fund Fund performance Since fund inception in 2016, the unit value has increased by 9.5% from an initial NTA of $0.95 to $1.04 as of 31 December 2020. The fund paid an income distribution of 5.6% p.a. per unit during the pandemic. While the pandemic negatively impacted several tenants' business performance at the Stables Shopping Centre early in 2020, it now operates at 100% occupancy. Tenant and financial update KM Property Funds' Board of Directors recently approved an uplift in the income distribution for The Stables Property Fund to its pre-COVID-19 rate of 7.6% p.a. The change became effective 1 October 2020 and covered the December 2020 quarter. The South Australian state government lifted its lock-down restrictions around August 2020. Since then, the tenants at The Stables Shopping Centre have returned to their pre-COVID-19 business conditions, with tenants in general trading well. Although we continue to monitor the situation, we believe that restoring the annual distribution rate to 7.6% p.a. is appropriate and sustainable. As previously advised, KM Property Funds had also reduced its annual management fee proportionately to the cut in income distributions. KM Property Funds will now reinstate the yearly management fee to 0.60% of gross assets, effective 1 October 2020. KM Property Funds is now looking at property refinancing options, which will become an area of focus over the next few months. Back to Property funds ⬏ 333 Exhibition Street Property Fund Fund performance Since fund inception in 2018, the unit value has increased by 20.4% from an initial NTA of $0.93 to $1.12 as of 31 December 2020. The fund paid a distribution of 6.6% p.a. per unit during the year. Tenant and financial update The KM Property Funds team continues to work closely with the University of Melbourne to manage costs while maintaining the property's amenities. We have also used the opportunity to undertake work on the air conditioning system while also looking for other maintenance opportunities while the building is not at capacity. The University of Melbourne recently advised that it is relocating new administrative teams to the property in 2021. Back to Property funds ⬏ Cambridge Bedford Property Fund Fund performance and valuation As previously advised, given the complex challenges presented by COVID-19, the Cambridge property in Tasmania was not revalued as of 30 June 2020 by the independent valuer. After obtaining confirmatory information from local sources in Hobart, KM Property Funds' Board of Directors determined that the Cambridge property should retain the same value as in June 2019. However, the independent valuer could access Bedford Park near Adelaide and determined it too should maintain the same valuation from June 2019. The next revaluation for these two properties will be on 30 June 2021. Leasing and tenant update The sole tenant at Bedford Park, Westpac, continues to occupy the property with no ongoing maintenance issues. The sole tenant of the Cambridge property, the Hydro-Electric Corporation, continues to occupy the property. Since our last update, we have replaced the air conditioning and building management systems equipment at the property on behalf of the fund and are currently commissioning it to ensure its efficient operation. We identified these capital expenses in our due diligence investigations when acquiring the asset and provided for them in our financial modelling. Back to Property funds ⬏ Laverton North Property Fund Fund performance Since fund inception in 2019, the unit value has increased by 15.0% from an initial NTA of $0.87 to $1.00 as of 31 December 2020. The fund paid a distribution of 8.25% p.a. per unit during the year. Leasing and tenant update Austco Polar, a successful cold storage business, was not materially impacted by the pandemic and continued to perform soundly, with all staff remaining healthy. There were no significant capital or operational expenditure items during the year, and KM Property Funds continues to work with the tenant looking for savings in outgoings. Back to Property funds ⬏ Terrace Office Park Property Fund Terrace Office Park Property Fund owns Terrace Office Park in Fortitude Valley, one of Brisbane's premier office park districts. The fund acquired the property on behalf of a small group of investors in January 2020 at a $34.0 million valuation price. The property presents a compelling short to medium-term office repositioning opportunity with longer-term redevelopment potential. We are undertaking a marketing campaign on behalf of the fund, recently securing a new lease to Mitchell Brandtman over 313 square metres on a new five-year lease. We are also currently in discussions with several other potential new tenants at the property. Over the past few months, KM Property Funds completed a speculative office fit-out, which was the driver in securing the Mitchell Brandtman lease after recently transforming a tired and empty space. We are also upgrading the end of trip facilities to improve the tenants' amenities and complement the existing services. Back to Property funds ⬏ Thebarton Square Property Fund Thebarton Square is the former Thebarton campus of the University of Adelaide, comprising a complex of commercial and warehouse buildings in the north-eastern corner of the suburb. The fund purchased the property for $17.25 million in February 2020 on behalf of two corporate clients. The property is in a prime location some 2.5 km west of the Adelaide central business district. It is adjacent to the Adelaide Riverbank precinct and parkland, including the $5.0 billion Biomedical/Medical precinct and North Terrace/Port Road in Adelaide. The COVID-19 pandemic negatively impacted the business performance of several tenants at Thebarton Square. The pandemic forced some tenants to close their business operations in line with state government regulations and subsequently apply for rent relief, which we granted them. As a result, the fund lowered its income distribution from 7.0% to 5.0% p.a. per unit initially; its distribution rate subsequently increased to 6.0% from the September 2020 quarter. We have secured a new lease to Novita, one of South Australia's largest providers of disability support, services and equipment. The three-year lease is over an area of 505 square metres. KM Property Funds is also investigating future development possibilities as we consider the property is underdeveloped, leading to new and higher and better use opportunities. The site is zoned Urban Corridor Business Policy Area 37, allowing a mixed-use development, including residential up to six levels. Back to Property funds ⬏ Thynne Street Property Fund Fund performance and valuation Thynne Street Property Fund launched in April 2020, and the first scheduled valuation is 30 June 2021. Leasing and tenant update The Australian Institute of Health and Welfare (AIHW), a statutory authority of Australia's commonwealth government, is the sole tenant. The staff from the AIHW have returned to the property and are fully operational. Back to Property funds ⬏ Other investor matters Tax statements The investor registry services provider, Boardroom Limited, retains copies of investor tax statements for all years. If you have not received your document, you can download it directly from InvestorServe or by calling KM Property Funds' on 1300 132 099, or by email at [email protected]ds.com. Fund financial statements The half-year financial statements are now available on InvestorServe and KM Property Funds for the following funds: 333 Exhibition Street Property Fund NewActon East Property Fund The Stables Property Fund Thynne Street Property Fund If you requested to receive a copy of the fund accounts, the registry company has sent them to you by your preferred communication method. Fund RG-46 reports The half-year RG-46 reports for the following funds will be available in early April 2021: 333 Exhibition Street Property Fund NewActon East Property Fund The Stables Property Fund Thynne Street Property Fund If you have requested to receive a copy of the reports, the registry company will send them to you by your preferred communication method. You will also find copies of the statements on InvestorServe and KM Property Funds’ website. Distribution timetable Below is our indicative distribution timetable for the next four quarters. More information If you have any questions or wish to discuss this Investor Update's contents, please speak with your financial adviser or call KM Property Funds directly on 1300 132 099. We love hearing from you! Disclaimer KM Property Funds Ltd (ACN 164 635 885, AFSL 442806) (‘KMPF’) has prepared this document. The information in this document is general information only and has been prepared without taking into account individual investors’ objectives, financial situation or needs. It does not constitute an offer for the issue, sale or purchase of any units in a fund or any recommendation in relation to investing in a fund. In deciding whether to acquire units or retain units in a fund, investors should read the PDS or offer document for the relevant fund in full and consider consulting a financial, taxation or other professional adviser. Forecasts, opinions and estimates provided in this document are based on assumptions, contingencies and market conditions which are subject to change without notice, and may involve significant elements of subjective judgement and assumptions as to future events which may or may not be correct, and should not be relied upon as an indication of future performance. Past performance is not a reliable indicator of future performance. Distribution forecasts are subject to risks outlined in the PDS or offer document for the relevant fund and distributions may vary in the future. The information in this document is subject to change, and KMPF may not be required to provide updated information to any person. To the maximum extent permitted by law KMPF disclaims all liability for any loss or damage which may arise out of the provision to or are by any person of the information contained in this document. All figures stated herein are as of 30 June 2020 and in Australian dollars unless otherwise stated. Back to Property funds ⬏ Other insights Laverton North Property Fund Settles on Sale of Property for $42.795m Trustee of Laverton North Property Fund, KM Property Funds, announced today that the Fund successfully settled on the Laverton North property sale for $42.795 million. Regulatory Guide RG274 – Product Design and Distribution Obligations A new ASIC regulatory requirement came into effective on 5 October 2021.