Fund update

During the June and September quarters we continued our strategy of actively managing the fund to reduce the risk of financial covenant breaches. We completed a further two sales, finalised a number of leasing transactions to improve the fund’s average lease expiry, and obtained valuations of the entire portfolio. We are now in the process of completing further major leasing transactions.

Distributions and redemptions

Distributions in the fund remain suspended. The cash available as a result of suspending distributions has provided vital funds to pay for capital works and leasing incentives to improve the average lease expiry and so avoid breaching the fund’s loan agreements. If the loan agreements had been breached, this would have impacted investor value and significantly reduced the prospects of reinstating distributions in the near term.

We remain acutely aware of the impact suspending distributions has on investors and have been constantly monitoring properties, market conditions and debt with a view to reinstating distributions at the earliest possible time. Ongoing lease negotiations with major tenants and the January 2011 expiry of the fund’s debt facility with National Australia Bank are the key issues that continue to impact distributions.

Debt

During the six months to 30 September, we completed 15 leasing deals in respect of a total 47,322 square metres of space or 15 per cent of the portfolio. The average lease expiry improved from 3.24 years to 3.31 years. Without this significant leasing activity the average lease expiry would be less than 3.0 years bringing it below the minimum required under the fund’s loan agreements.

As at 30 September, the occupancy level had fallen to 91.4 per cent. However, we have advanced negotiations to address this and to further improve the average lease expiry, and have leased vacated tenancies at 500 Princes Highway Noble Park and 310 Spearwood Avenue Bibra Lakes.

Capital expenditure

We have a total $3.25 million of capital expenditure budgeted for the 2011 financial year, the majority of which is associated with attracting prospective tenants and retaining current tenants at fund properties.

Asset values

Since 31 March 2010 we have valued 24 of the 26 properties in the portfolio. The only properties that have not been valued are the two that were contracted to sell. The value of the portfolio has remained substantially the same, only decreasing by $535,000 or 0.1 per cent. However, with the accumulated cash in the fund set aside for the upcoming capital expenditure program, the NTA has increased slightly, from 0.6393 in March to 0.6418 in June and 0.6569 in September 2010.

At the property level, the result of the recent valuations suggests that the significant value decreases of the past 18 months appear to have come to an end. Unless there are further unexpected shocks to economic conditions or property markets, it would appear that we are now at the low point in the valuation cycle. However, history indicates that any recovery of values is likely to be gradual, with additional fluctuations due to property specific factors.