Fund update

The fund remains at significant risk of breaching the loan to value ratio covenant in its debt facility agreement with the Commonwealth Bank of Australia (“CBA”) due to the impact of substantial falls in retail property values over the past two years. The fund is already outside its loan to value ratio covenant limit under its debt facility agreement with Westpac Banking Corporation (“Westpac”). In an effort to extract the best possible outcome for fund investors, management continues an active management program focused on increasing income from the assets as much as possible through leasing, and pursuing asset sales where necessary to reduce debt.

Distributions and redemptions

The fund’s lenders continue to require all outgoings to be funded from operating income. The fund needs to continue to retain cash to maintain the properties, to continue to attract tenants and to meet the high cost of debt. As such, distributions and redemptions remain suspended.

Debt

The fund’s debt facility with Westpac Banking Corporation remains outside the loan to value ratio covenant limit and is being re-financed on a short term basis only. Following settlement of the sale of the Southlands Boulevarde Shopping Centre on 9 July 2010, the amount owing on this facility has been reduced to $39.72 million. At the time of writing this facility matures on 26 November 2010. The fund continues to pursue appropriate asset sales with a view to reducing debt and gearing.

Leasing

In the 6 month period to 30 September 2010, the fund completed 15 leases over 3240 square metres of space accounting for $0.9 million gross annual fund revenue. We continue to advance a number of other leasing opportunities across the portfolio and have commenced negotiations with the anchor tenant at Armidale Plaza in relation to a substantial refurbishment of its tenancy.

Capital expenditure

There was no significant capital expenditure incurred or committed during the June or September quarters.

Asset values

The fund obtained valuations of all of its assets during the June quarter. This reduced the portfolio value by $11.4 million or 8.5 per cent. With an $8 million reduction in value, Inala Plaza Shopping Centre was the primary contributor to the loss in value. Inala Plaza continues to be affected by a challenging leasing market and an extremely high level of competition within its catchment area. On the whole, retail property values in New South Wales appear to be stabilising. However, those in Queensland and Western Australia continue to weaken.

Acquisitions and divestments

The fund settled the sale of its interest in Southlands Shopping Centre on 9 July 2010. The fund continues to pursue appropriate asset sales in order to alleviate current borrowing pressures.

Sale of Funds Management business

On 6 October 2010, Becton announced the sale of its Funds Management business to 360 Capital Group. We are working on obtaining all the necessary approvals and settling the sale before the end of the calendar year. The sale is the culmination of more than two years’ work to achieve a longer term capital management solution for the funds. It will provide the funds with the backing of a debt-free specialist property funds manager which in turn will provide the funds with enhanced prospects of attracting capital where needed. For further information about the sale please refer to the CEO’s letter in this edition of Review and to the FAQs on the Becton Investment Management website: www.bim.com.au.