half-year financial report 31 december 2019...dec 31, 2019 · the weighted average capitalisation...

(ACN 152 367 649) (AFSL 410 433)

HALF-YEAR FINANCIAL REPORT31 DECEMBER 2019

Fort Street Real Estate Capital Fund IIContents31 December 2019

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Chairman's letter 2Funds from operations 5Directors' report 6Auditor's independence declaration 8Condensed consolidated statement of profit or loss and other comprehensive income 9Condensed consolidated statement of financial position 10Condensed consolidated statement of changes in equity 11Condensed consolidated statement of cash flows 12Notes to the condensed consolidated financial statements 13Directors' declaration 20Independent auditor's review report to the unitholders of Fort Street Real Estate Capital Fund II 21Directory 23

Fort Street Real Estate Capital Fund IIChairman's letter31 December 2019

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Dear Unitholders,

Welcome to the half-year report for the Fort Street Real Estate Capital Fund II (Fund) for the six months ended 31 December 2019.

Overview

On behalf of the Responsible Entity, I am pleased to report that during the half-year the Fund’s portfolio again delivered a strong performance, in line with management’s forecasts. The Fund’s Investment and Property Manager, Fort Street Real Estate Capital, actively managed the Fund’s assets to drive occupancy, sales performance and to implement operational improvements to further enhance the quality of the portfolio and drive long-term capital growth for unitholders.

The Fund’s portfolio is weighted to non-discretionary retail, including supermarkets, food catering and retail services. These categories are more resilient in changing market conditions and evolving sector dynamics, such as online retail disruption. The management team has sought to optimise the tenancy mix across the portfolio to further reduce exposure to discretionary retail categories.

All five of the Fund’s assets were independently revalued in December. The revaluations contributed to a $3.2 million increase in the portfolio value during the six-month period, up 1.8% to $182.2 million as at 31 December 2019 (from $179.0 million at 30 June 2019). Together with the value gains from the previous half-year, the uplift in value has been 2.2% over the last 12-months. These gains equated to an increase of $0.03 cents in the Fund’s net asset value (NAV) per unit to $1.63 per unit (from $1.60 per unit as at 30 June 2019). This increase in value is predominantly attributable to strong growth at Birkdale Fair in Queensland. In addition, demand for convenience-based retail assets across the Eastern seaboard remains strong and is underpinning asset pricing.

Capitalisation rates have been determined for each asset in the Fund’s portfolio by the independent valuers. Other things being equal, a lowering of the capitalisation rate from one period to the next has the effect of increasing the value of an asset. The weighted average capitalisation rate for the portfolio compressed nine basis points to 6.09% from the 30 June 2019 valuations. This was driven by capitalisation rate compression at Birkdale Fair and Newtown of 25 basis points to 6.00%, reflecting the potentially strong market for the assets and their robust performance over the half-year to 31 December 2019.

Portfolio Highlights

Management has continued to proactively manage the assets in the Fund, which has resulted in occupancy increasing to 97.4%, up 1.1% on the prior period. The portfolio’s weighted average lease expiry (WALE) was 5.54 years as at 31 December 2019.

Key asset management highlights across the portfolio included:

Eleven leases were signed during the half-year; seven new leases and four renewals totaling 895 sqm of gross lettable area.

Improved leasing momentum was seen at Northpoint, Toowoomba with two new leases being agreed, following a challenging period for the asset resulting from increased retail competition in the town and the effects of drought. Management will continue to focus on improving occupancy at the asset in the second half of the year.

Retail sales performance:

- Supermarkets: Moving Annual Turnover (MAT) growth for the 12 months to 31 December 2019 increased 5.3% (compared to 4.1% for the 12-months to 30 June 2019), predominantly led by strong performance at Birkdale Fair and Hilton Plaza. This was as a result of recent store refurbishments which has improved sales and customer visitations.


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- Specialties: The best performing specialty categories over the period were retail services and food catering,recording MAT growth of 20.4% and 4.5% respectively. These results are reflected in the strong specialtyproductivity rate of $9,396/sqm and a lower than average specialty occupancy cost of 8.3%.

• Operational improvements:

- Several store upgrades and refurbishments were negotiated and completed over the half-year, which will contribute to improved retailer performance, presentation of the centres and increased customer foot traffic.

- Asset repositioning works at Newtown Central have advanced and are nearing completion. The works included internal and external ambience upgrades, new centre branding and an update of the façade with an art installation.

- In-line with the Fund’s sustainability strategy, we installed and switched on a 100kW solar power system at Campbelltown Marketfair which will deliver clean energy to the asset and improve operational performance. Approximately 60% of the fund assets now have solar power systems and investigations to install a system at Northpoint are well advanced.

The Fund’s portfolio has performed strongly, above retail sector benchmarks and in line with management forecasts. This performance reflects the management team’s proactive approach to leasing, remixing to non-discretionary retail, and investing in select value-enhancing upgrades, while managing costs, to further enhance returns for investors.

Capital Management

The management team maintained its prudent approach to capital management and, as a result, there were no changes to the Fund’s debt facility over the period. Gearing was at 38.4% as at 31 December 2019 and remains comfortably below the target gearing range of 40-50%.

Distributions

The Fund made two distributions, in September and December, totalling 4.20 cents per unit, equating to an annualised return of 5.3% on net asset value.

Strategy & Outlook

The retail sector continues to face challenges, however more positive signs are emerging with annual turnover growth stabilising at around 2.8%1 which is forecast to be steady for the rest of 2020. The headwinds of online retailing and low consumption are most likely to continue to impact centres with high exposures to discretionary retail categories such as apparel. The assets in Fund II have no exposure to apparel and very minimal exposure to other discretionary categories, therefore performance of the portfolio is expected to remain strong.

Non-discretionary retail, which represents the majority of the Fund’s portfolio and earnings, is expected to remain resilient through the cycle, a view supported by local and global market consensus. The Responsible Entity is confident that the non-discretionary retail strategy of the Fund, and the defensive nature of the portfolio of assets will continue to deliver consistent results for investors.

The most powerful catalyst for long-term growth would be a rebound in wage growth. However, in the short term, increasing house prices, especially in the nation’s capital cities, are likely to create a ‘wealth effect’ which could positively impact retail spending. Population growth and migration are also likely to aid retail spending growth in the longer-term, with the largest cohort of the population soon to move into peak consumption age.

1 JLL Research (2019)

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On the COVID-19 virus outbreak, as the manager of a portfolio of convenience-based retail shopping centres which are at the centres of their communities, we recognise our responsibility to do everything we can to mitigate spread of the virus. We have implemented a risk management plan across all properties with the health and wellbeing of our customers and tenants paramount. We will continue to work with our communities to mitigate the impacts of COVID-19 and keep Unitholders updated as the situation evolves.

During the next six months, active management of the portfolio will remain a priority in order to maintain high occupancy, which is key to delivering sustainable earnings to investors through periods of lower economic growth. We will continue to identify and invest in value-enhancing projects across the Fund, whilst remaining prudent in our approach to the deployment of capital, to deliver long-term capital growth to unitholders.

On behalf of the board, I would like to thank the management team for their hard work and commitment to delivering a good half-year result for the Fund. I would also like to thank the unitholders for your continued support and confidence in our team.

Yours faithfully,

Stuart NisbettChairman of Walsh & Company Investments Limited, Responsible Entity

13 March 2020

Fort Street Real Estate Capital Fund IIFunds from operations31 December 2019

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Funds From Operations (FFO) is a non-International Financial Reporting Standards financial measure. FFO is a market accepted measure of a real estate investment fund’s operating performance. FFO is used to facilitate understanding of a fund’s performance. The Property Council of Australia provides best practice guidelines for the calculation of FFO, which have been followed by the Fund.

FFO is determined by adjusting statutory net profit or loss after tax for certain non-cash items such as depreciation, impairment and amortisation. Other one-off items may also be adjusted to provide a clearer indication of the Fund’s current year FFO.

31 December 2019

$

31 December 2018

$

Profit after tax for the period 4,324,335 1,665,511

Adjustments:

Fair va lue movement of investment properties (2,097,326) 599,409

Amortisation of capi ta l i sed lease costs 113,275 63,149

Stra ight-l ining of renta l revenue and lease incentive amortisation 200,643 229,823

Other i tems (12,857) (10,340)

FFO 2,528,070 2,547,552

Distributions for the period 2,883,084 2,883,084

Cents per unit Cents per unit

FFO 3.68 3.71

Distributions 4.20 4.20

Distributions for the period represented a payout ratio of 114% of FFO (31 December 2018: 113%).

Fort Street Real Estate Capital Fund IIDirectors' report31 December 2019

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IntroductionThe directors of Walsh & Company Investments Limited, as Responsible Entity of Fort Street Real Estate Capital Fund II (Fund), present their report together with the half-year financial report for the Fund and the entities it controlled, (collectively referred to as the Group) for the half-year ended 31 December 2019. DirectorsThe directors of the Responsible Entity at any time during or since the end of the half-year are: Stuart Nisbett Appointed 19 December 2019Mike AdamsWarwick KeneallyPeter Shear Appointed 19 December 2019Alex MacLachlan Resigned 19 December 2019 Directors were in office from the start of the half-year to the date of this report, unless otherwise stated. Review of financial results and operationsa) Financial results for the period

The performance of the Group, as represented by the results of their operations for the respective period ended 31 December, was as follows:

2019 2018

ResultsTotal income ($) 9,476,187 7,158,300Total expenses ($) (5,151,852) (5,492,789)

Net operating profit ($) 4,324,335 1,665,511 Net Asset ValueNet Asset Value Per Unit - $ per unit 1.63 1.62 b) Performance returnsThe performance returns shown in the table below are for the six and twelve months ended 31 December 2019, and have been calculated using the net asset value per unit for the Fund, which is after fees and expenses.

6 months to 31 December

2019

12 months to 31 December

2019% %

PerformanceGrowth return (a) 1.87 0.62Distribution return (b) 2.67 5.35

Total return (c) 4.54 5.97 (a) The Growth return is calculated as a percentage by dividing the end of period net asset value per unit by the net asset value per unit at the start of the period minus 1. (b) The Distribution return is calculated as a percentage by subtracting the Growth return from the Total return. (c) The Total return is calculated as a percentage by dividing the end of period net asset value per unit (cum-distribution) by the net asset value per unit at the start of the period minus 1. For the purpose of calculating Total returns, quarterly returns are compounded.

Fort Street Real Estate Capital Fund IIDirectors' report31 December 2019

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DistributionsDistributions paid or declared during the financial half-year were as follows:

2019$

2.10 cents per unit for the period ended 30 September 2019 paid on 1 November 2019 1,441,5422.10 cents per unit for the period ended 31 December 2019 paid on 7 February 2020 1,441,542

2,883,084

Matters subsequent to the end of the financial half-yearOn 11 March 2020, the Responsible Entity for the Fort Street Real Estate Capital (FSREC) funds, advised that it is undertaking a review of FSREC Funds I, II, III and IV to ensure that they continue to meet the needs of investors over the long-term, particularly with respect to improved liquidity mechanisms for investors. As part of this review, the Responsible Entity will be assessing several initiatives, including the merger of all four FSREC funds into a single fund, asset realisations, capital raisings, and maintaining the status quo for each fund. The Responsible Entity will consider potential benefits, drawbacks and other alternatives before putting a proposal to unitholders. Any proposal will require approval of the Fund’s unitholders, and the unitholders of each other FSREC fund.

No other matter or circumstance has arisen since 31 December 2019 that has significantly affected, or may significantly affect the Group's operations, the results of those operations, or the Group's state of affairs in future financial years.

Auditor's independence declarationA copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out immediately after this directors' report.

This report is made in accordance with a resolution of directors, pursuant to section 306(3)(a) of the Corporations Act 2001.

On behalf of the directors

___________________________Stuart NisbettChairman of Walsh & Company Investments Limited, Responsible Entity

13 March 2020

Liability limited by a scheme approved under Professional Standards Legislation.

Member of Deloitte Asia Pacific Limited and the Deloitte Network.

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Deloitte Touche Tohmatsu

A.B.N. 74 490 121 060

Grosvenor Place

225 George Street

Sydney, NSW, 2000

Australia

Tel: +61 (0) 2 9322 7000

www.deloitte.com.au

13 March 2020

Dear Board Members

Auditor’s Independence Declaration to Fort Street Real Estate Capital Fund II

In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following

declaration of independence to the directors of the Responsible Entity of Fort Street Real Estate Capital

Fund II.

As lead audit partner for the review of the financial statements of Fort Street Real Estate Capital Fund II

for the financial half-year ended 31 December 2019, I declare that to the best of my knowledge and

belief, there have been no contraventions of:

(i) the auditor independence requirements of the Corporations Act 2001 in relation to the

review; and

(ii) any applicable code of professional conduct in relation to the review.

Yours faithfully

DELOITTE TOUCHE TOHMATSU

Weng W Ching

Partner

Chartered Accountants

The Board of Directors

Walsh & Company Investments Limited as Responsible Entity for:

Fort Street Real Estate Capital Fund II

Level 15, 100 Pacific Highway

NORTH SYDNEY NSW 2060

Fort Street Real Estate Capital Fund IICondensed consolidated statement of profit or loss and other comprehensive incomeFor the half-year ended 31 December 2019

Note31 December

201931 December

2018$ $

The above condensed consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes

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RevenueRental income 6,372,182 6,672,479 Other property income 1,004,345 1,044,017 Finance income 2,334 41,213 Fair value movement of investment properties 4 2,097,326 (599,409) ExpensesInvestment property expenses (2,687,170) (2,899,698)Finance expense (1,154,645) (1,273,858)Responsible entity and trustee fee 11 (167,847) (167,897)Management fees 11 (874,710) (872,336)Accounting and audit fees (43,780) (64,165)Other operating expenses (223,700) (214,835)Total expenses (5,151,852) (5,492,789) Profit before income tax expense 4,324,335 1,665,511 Income tax expense - - Profit after income tax expense for the half-year 4,324,335 1,665,511 Other comprehensive income/(loss)

Items that may be reclassified subsequently to profit or lossEffective portion of changes in fair value of cash flow hedge 31,794 (240,926) Other comprehensive income/(loss) for the half-year, net of tax 31,794 (240,926) Total comprehensive income for the half-year 4,356,129 1,424,585

Cents Cents

Basic earnings per unit 2 6.30 2.43Diluted earnings per unit 2 6.30 2.43

Fort Street Real Estate Capital Fund IICondensed consolidated statement of financial positionAs at 31 December 2019

Note31 December

2019 30 June 2019$ $

The above condensed consolidated statement of financial position should be read in conjunction with the accompanying notes10

Assets

Current assetsCash and cash equivalents 1,801,411 2,192,862 Trade and other receivables 659,101 963,529 Prepayments 264,359 217,558 Total current assets 2,724,871 3,373,949

Non-current assetsInvestment properties 4 182,150,000 179,000,000 Total non-current assets 182,150,000 179,000,000

Total assets 184,874,871 182,373,949 Liabilities

Current liabilitiesDerivative financial instruments 242,613 205,712 Trade and other payables 5 1,861,900 1,442,027 Distributions payable 1,449,788 1,449,788 Total current liabilities 3,554,301 3,097,527

Non-current liabilitiesBorrowings 6 69,504,723 68,864,925 Derivative financial instruments 227,237 295,932 Total non-current liabilities 69,731,960 69,160,857

Total liabilities 73,286,261 72,258,384 Net assets 111,588,610 110,115,565 EquityIssued capital 7 106,200,663 106,200,663 Cash flow hedge reserve 8 (469,850) (501,644)Retained profits 5,857,797 4,416,546

Total equity 111,588,610 110,115,565

The above condensed consolidated statement of changes in equity should be read in conjunction with the accompanying notes

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Issued capitalCash flow

hedge reserveRetained

profits Total equity$ $ $ $

106,200,663 392,953 5,971,548 112,565,164

- - 1,665,511 1,665,511- (240,926) - (240,926)

- (240,926) 1,665,511 1,424,585

- - (2,883,084) (2,883,084)

106,200,663 152,027 4,753,975 111,106,665

Issued capitalCash flow

hedge reserveRetained

profits Total equity$ $ $ $

106,200,663 (501,644) 4,416,546 110,115,565

- - 4,324,335 4,324,335- 31,794 - 31,794

- 31,794 4,324,335 4,356,129

- - (2,883,084) (2,883,084)

Fort Street Real Estate Capital Fund IICondensed consolidated statement of changes in equity For the half-year ended 31 December 2019

Balance at 1 July 2018

Profit after income tax expense for the half-yearOther comprehensive loss for the half-year, net of tax

Total comprehensive income/(loss) for the half-year

Transactions with unitholders in their capacity as unitholders: Distributions paid/declared

Balance at 31 December 2018

Balance at 1 July 2019

Profit after income tax expense for the half-yearOther comprehensive income for the half-year, net of tax

Total comprehensive income for the half-year

Transactions with unitholders in their capacity as unitholders: Distributions paid/declared

Balance at 31 December 2019 106,200,663 (469,850) 5,857,797 111,588,610

Fort Street Real Estate Capital Fund IICondensed consolidated statement of cash flowsFor the half-year ended 31 December 2019

31 December 2019

31 December 2018

$ $

The above condensed consolidated statement of cash flows should be read in conjunction with the accompanying notes12

Cash flows from operating activitiesRental and other income received 8,308,422 8,726,314 Interest income received 2,414 40,362 Payment to suppliers (4,688,065) (5,139,059)Finance costs (981,569) (1,174,996)

Net cash from operating activities 2,641,202 2,452,621 Cash flows from investing activitiesPayments for capital expenditure (721,368) (637,194)

Net cash used in investing activities (721,368) (637,194) Cash flows from financing activitiesProceeds from borrowings 750,000 1,000,000 Payments of transaction costs relating to loans and borrowings (178,201) - Distributions paid (2,883,084) (2,883,084)

Net cash used in financing activities (2,311,285) (1,883,084) Net decrease in cash and cash equivalents (391,451) (67,657)Cash and cash equivalents at the beginning of the financial half-year 2,192,862 2,150,019

Cash and cash equivalents at the end of the financial half-year 1,801,411 2,082,362

Fort Street Real Estate Capital Fund IINotes to the condensed consolidated financial statements31 December 2019

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1. General information Fort Street Real Estate Capital Fund II (Fund) is an unlisted managed investment scheme registered and domiciled in Australia. The financial statements comprise the Fund and entities controlled by the Fund (collectively referred to as the Group). The principal activity of the Group is to invest in Australian commercial property. This half-year financial report is intended to provide users with an update on the latest annual financial statements of the Group. The half-year financial report does not include notes of the type normally included in an annual financial report and it is therefore recommended that this half-year financial report be read in conjunction with the annual financial statements of the Group for the year ended 30 June 2019, together with any public announcements made during the half-year. Statement of compliance These condensed consolidated financial statements are general purpose financial statements which have been prepared in accordance with the Corporations Act 2001 and AASB 134 Interim Financial Reporting. Compliance with AASB 134 ensures compliance with International Financial Reporting Standards (IFRS) IAS 34 Interim Financial Reporting. For the purposes of preparing the condensed consolidated financial statements, the Group is a for-profit entity. The condensed consolidated financial statements were authorised for issue by the board of directors of the Responsible Entity, Walsh & Company Investments Limited on 13 March 2020. Basis of preparation The accounting policies and methods of computation adopted in the preparation of the half-year financial report are consistent with those adopted and disclosed in the Group’s Annual financial report for the year ended 30 June 2019. The Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that are relevant to its operations and effective for the current half-year. New or amended Accounting Standards and Interpretations adopted● AASB 16 Leases In the current half-year, the Group has applied AASB 16 that is effective for annual periods that begin on or after 1 January 2019. AASB 16 introduces new or amended requirements with respect to lease accounting. It introduces significant changes to lessee accounting by removing the distinction between operating and finance lease and requiring the recognition of a right-of-use asset and a lease liability at commencement for all leases, except for short-term leases and leases of low value assets. In contrast to lessee accounting, the requirements for lessor accounting have remained largely unchanged.

The date of initial application of AASB 16 for the Group is 1 July 2019. The Group has chosen the modified retrospective application of AASB 16, without restatement of the comparative information. Impact on Lessor Accounting AASB 16 does not change substantially how a lessor accounts for leases. Under AASB 16, a lessor continues to classify leases as either finance leases or operating leases and account for those two types of leases differently. However, AASB 16 has changed and expanded the disclosures required, in particular with regard to how a lessor manages the risks arising from its residual interest in leased assets. Management have assessed that AASB 16 adoption does not result in a material impact on the Group’s accounting for the rental income from lease of its investment properties. Other pronouncements adopted for the first time in the current periodIn the current year, the Group has applied a number of amendments to Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (the Board) that are effective for an annual period that begins on or after 1 January 2019. Their adoption has not had any material impact on the disclosures or on the amounts reported in these financial statements.


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2. Earnings per unit

31 December 2019

31 December 2018

$ $

Profit after income tax 4,324,335 1,665,511

Number Number

Weighted average number of ordinary units used in calculating basic earnings per unit 68,644,678 68,644,678

Weighted average number of ordinary units used in calculating diluted earnings per unit 68,644,678 68,644,678

Cents Cents

Basic earnings per unit 6.30 2.43Diluted earnings per unit 6.30 2.43 There are no transactions that would significantly change the number of ordinary units at the end of the reporting period. 3. Working capital As at 31 December 2019, the Group had total current assets of $2,724,871 (30 June 2019: $3,373,949) and finance facilities available for drawdown totalling $5,750,000 (30 June 2019 $6,500,000) against total current liabilities of $3,554,301 (30 June 2019: $3,097,527). 4. Non-current assets - investment properties

31 December 2019 30 June 2019

$ $

Investment properties - at fair value 182,150,000 179,000,000

Movement in investment properties

Carrying amount of investment properties at beginning of period 179,000,000 178,175,000 Capital expenditure 585,831 1,541,739 Rental straight-lining, tenant incentives and other adjustments 466,843 281,402 Fair value movement of investment properties 2,097,326 (998,141)

Carrying amount of investment properties at end of period 182,150,000 179,000,000 Fair valueAt reporting date, the Group’s investment properties consist of five commercial properties in Australia which are carried at fair value.

The 31 December 2019 fair value amounts were determined by way of independent valuation on all investment properties, using a combination of discounted cash flow (DCF) and capitalisation rate methods. These methods are regarded as Level 3 hierarchy techniques, being based on unobservable market inputs. The key unobservable inputs include the maintainable earnings and capitalisation rate (range 6.00% - 6.25%) applied in the capitalisation rate method and the estimated rental values, rental growth rates, long term vacancy rates, lease incentives and discount rates (range 7.00%- 7.25%) applied in the DCF method. A reduction in capitalisation and discount rates and an increase in maintainable earnings and rental growth rates would result in an increase in fair value, and vice versa.


4. Non-current assets - investment properties (continued)

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Refer to note 9 for further information on fair value measurement.

5. Current liabilities - Trade and other payables


$ $

Trade payables 375,470 67,712 Accrued liabilities 737,770 753,827 Contract liabilities (deferred income) 553,388 437,379 GST payable 195,272 183,109

1,861,900 1,442,027

6. Non-current liabilities - Borrowings


$ $

Secured bank loan - net of borrowing costs 69,504,723 68,864,925

Financing arrangementsAs at 31 December 2019, the Group had a $75.6 million loan facility (30 June 2019: $75.6 million) with National Australia Bank Limited at a variable interest rate with reference to Bank Bill Swap Rate (BBSY) repayable at 31 December 2021, as follows:


$ $

Total facilitiesSecured bank loan facilities 75,615,000 75,615,000

Used at the reporting dateSecured bank loan facilities 69,865,000 69,115,000

Unused at the reporting dateSecured bank loan facilities 5,750,000 6,500,000

To take advantage of the low interest rate environment, the Group entered into an interest rate swap contract with a notional amount of $32 million (30 June 2019: $32 million) whereby it pays a fixed rate of interest and receives a variable rate based on BBSY (1 month) on the notional amount. At 31 December 2019, after taking into account the interest rate swap, 46% of the Group’s borrowings are fully hedged (30 June 2019: 46%). The Group’s average cost of drawn debt is approximately 3.23% (30 June 2019: 3.61%) (excluding costs relating to undrawn debt).

The drawdown amount is secured against investment properties held by the Group with a carrying value $182.2 million at balance date and is subject to compliance with specified covenants and other requirements.

There were no defaults or covenant breaches with respect to the loan during half-year.


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7. Equity - issued capital



Units Units $ $

Fully paid ordinary units 68,644,678 68,644,678 106,200,663 106,200,663 There has been no movement in ordinary units in the period. All issued units are fully paid. The holders of ordinary units are entitled to receive distributions as declared from time to time by the Responsible Entity and are entitled to one vote per unit at the meetings of the Fund. 8. Equity - cash flow hedge reserve


$ $

Cash flow hedge reserve (469,850) (501,644) The cash flow hedge reserve represents the cumulative effective portion of gains or losses arising on changes in the fair value of the interest rate swap held by the Group. Movements in reservesMovements in each class of reserve during the current financial period are set out below:

Cash flowhedge reserve

$

Balance at 1 July 2019 (501,644)- Unrealised gains on cash flow hedge reserve (71,831)- Realised losses transferred to profit or loss as finance expense 103,625

Balance at 31 December 2019 (469,850) 9. Fair value measurement Fair value of the Group’s financial assets and liabilities that are measured at fair value on a recurring basis The Group measures fair value using the following fair value hierarchy that reflects the significance of the input used in making the measurements:

Fort Street Real Estate Capital Fund IINotes to the condensed consolidated financial statements31 December 2019 9. Fair value measurement (continued)

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Level 1: quoted prices (unadjusted) in active markets for identical financial assets and liabilities that the entity can access at the measurement dateLevel 2: inputs other than quoted prices included within Level 1 that are observable for the financial asset or liability, either directly (as price) or indirectly (derived from prices)Level 3: unobservable inputs for the financial asset or liability

Level 1 Level 2 Level 3 Total31 December 2019 $ $ $ $

AssetsInvestment properties - - 182,150,000 182,150,000Total assets - - 182,150,000 182,150,000

LiabilitiesDerivative financial instrument - (469,850) - (469,850)Total liabilities - (469,850) - (469,850)

Level 1 Level 2 Level 3 Total30 June 2019 $ $ $ $

AssetsInvestment properties - - 179,000,000 179,000,000Total assets - - 179,000,000 179,000,000

LiabilitiesDerivative financial instrument - (501,644) - (501,644)Total liabilities - (501,644) - (501,644) The valuation technique applied to fair value the swap derivatives include traditional swap models, using present value calculations. The Group recognises transfers between levels of the fair value hierarchy as at the end of the reporting period during which the transfer has occurred. There were no transfers between fair value hierarchy levels during the financial half-year. Fair value of the Group’s financial assets and liabilities that are not measured at fair value on a recurring basis The fair value of financial assets and financial liabilities which are not measured at fair value on a recurring basis approximate their carrying amounts at the reporting date. 10. Controlled entities

Ownership interest

Principal place of business /31 December

2019 30 June 2019Name Country of incorporation % %

Australian Property Opportunities Trust II Australia 100.00% 100.00% APOTII No.1 Australia 100.00% 100.00% 11. Related party disclosures Key management personnel Stuart Nisbett, Mike Adams, Warwick Keneally and Peter Shear are directors of the Responsible Entity of the Fund, Walsh & Company Investments Limited and are deemed to be key management personnel.

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11. Related party disclosures (continued)

Warwick Keneally is also a director of the Trustee of Australian Property Opportunities Trust II (Trust), Walsh & Company Investment Services Pty Limited.

Key management personnel are not compensated by the Fund or by the Responsible Entity directly for the management function provided to the Fund.

Related party investments in the Fund

As at 31 December 2019, the Responsible Entity or its associates held 250,000 units (30 June 2019: 250,000 units), representing 0.36% interest (30 June 2019: 0.36%) in the Fund.

Distributions paid or payable by the Fund to the Responsible Entity or its associates in the period ended 31 December 2019 was $10,500 (12 months to 30 June 2019: $21,000).

Responsible Entity fee and other transactions

Responsible Entity feeWalsh & Company Investments Limited, as Responsible Entity of the Fund receives a fee for the performance of its duties under the constitution of the Fund. The Responsible Entity fee is 0.08% per annum (exclusive of GST) calculated on the gross asset value of the Fund and payable monthly.

For the period ended 31 December 2019, $73,144 (31 December 2018: $73,406), exclusive of GST, was paid or payable to the Responsible Entity.

Trustee feeWalsh & Company Investment Services Pty Limited in its capacity as Trustee of Australian Property Opportunities Trust II, a wholly owned subsidiary of the Fund, receives 0.10% per annum (exclusive of GST) for services provided under the terms of the Trust’s trust deed. The Trustee fee is calculated on the gross asset value of the Trust, payable monthly.

For the period ended 31 December 2019, $91,331 (31 December 2018: $91,714), exclusive of GST, was paid or payable to the Trustee.

Fund Manager feeWalsh & Company Asset Management Pty Limited, as Fund Manager of the Fund receives a fee of 0.69% per annum (exclusive of GST) calculated on the gross asset value of the Fund and payable monthly.

For the period ended 31 December 2019, $631,238 (31 December 2018: $633,488), exclusive of GST, was paid or payable to the Fund Manager.

Property Manager feeFort Street Real Estate Capital Pty Limited (Fort Street), a related party of the Responsible Entity, is engaged as the Group’s Investment and Property Manager. Fort Street, as Property Manager of the Trust, is responsible for managing and maintaining the property portfolio of the Trust, optimising tenancy profile and maximising returns. The Property Manager receives a fee of 3% per annum (exclusive of GST), payable monthly calculated on the gross income value of the Trust.

For the period ended 31 December 2019, $225,287 (31 December 2018: $225,681), exclusive of GST, was paid or payable to the Property Manager.

Development Manager feeFort Street Real Estate Development Pty Ltd (Development Manager), a related party of the Responsible Entity, provides development management services to the Group where appropriate and on a non-exclusive basis. Services include scoping the design and construction for the development, retail design management, management of key consultants, budgeting, financial analysis, risk analysis, procurement and management of design services and procurement and management of construction services. For these services, the Development Manager receives a fee of 5% of the total development costs incurred in connection with a development.

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11. Related party disclosures (continued)

For the period ended 31 December 2019, $28,292 (31 December 2018: $10,235), exclusive of GST, was paid or payable to the Development Manager.

Leasing Services fee Fort Street Real Estate Leasing Pty Ltd (Leasing Agent), a related party of the Responsible Entity, provides tenant leasing services to the Group where appropriate and on a non-exclusive basis. Services include recommendation on new leases, lease renewals, rental negotiations, arrangement of lease agreements, collection of security under a lease, and preparation of disclosure statements for prospective tenants. For these services, the Leasing Manager receives a fee of 15% of the gross rent on new retail leases, and a fee of 7.5% of the gross rent on existing retail leases. The fee is capitalised and expensed over the lease period.

For the period ended 31 December 2019, $32,662 (31 December 2018: nil), exclusive of GST, was paid or payable to the Leasing Agent.

Debt Advisory feeFort Street Capital Pty Ltd, a related party of the Responsible Entity, receives a debt arranging fee for assistance in arranging new debt facility for the Group. For the period ended 31 December 2019, $75,600 (31 December 2018: nil), exclusive of GST, was paid or payable by the Group. The fee has been capitalised to the costs of borrowings and amortised over the life of the loan.

12. Capital commitments

At 31 December 2019, the Group had total outstanding capital commitments of $986,361 (30 June 2019: $165,032) for lease incentives arising from lease agreements entered into during the period.

13. Contingent liability

The directors of the Responsible Entity are not aware of any potential liabilities or claims against the Group as at the end of the reporting period.

14. Events after the reporting period

On 11 March 2020, the Responsible Entity for the Fort Street Real Estate Capital (FSREC) funds, advised that it is undertaking a review of FSREC Funds I, II, III and IV to ensure that they continue to meet the needs of investors over the long-term, particularly with respect to improved liquidity mechanisms for investors. As part of this review, the Responsible Entity will be assessing several initiatives, including the merger of all four FSREC funds into a single fund, asset realisations, capital raisings, and maintaining the status quo for each fund. The Responsible Entity will consider potential benefits, drawbacks and other alternatives before putting a proposal to unitholders. Any proposal will require approval of the Fund’s unitholders, and the unitholders of each other FSREC fund.

No other matter or circumstance has arisen since 31 December 2019 that has significantly affected, or may significantly affect the Group's operations, the results of those operations, or the Group's state of affairs in future financial years.

Fort Street Real Estate Capital Fund IIDirectors' declaration31 December 2019

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The directors of the Responsible Entity declare that, in the directors' opinion:

● the attached financial statements and notes comply with the Corporations Act 2001, including compliance with the Accounting Standards;

● the attached financial statements and notes give a true and fair view of the Group's financial position as at 31 December 2019 and of its performance for the financial half-year ended on that date; and

● there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable.

Signed in accordance with a resolution of directors of the Responsible Entity made pursuant to section 303(5)(a) of the Corporations Act 2001.

On behalf of the directors

___________________________Stuart NisbettChairman of Walsh & Company Investments Limited, Responsible Entity

13 March 2020

Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte Network.

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Independent Auditor’s Review Report to the Unitholders of

Fort Street Real Estate Capital Fund II

We have reviewed the accompanying half-year financial report of Fort Street Real Estate Capital Fund II (‘the Fund’), which comprises the condensed consolidated statement of financial position as at 31 December 2019, and the condensed consolidated statement of profit or loss and other

comprehensive income, the condensed consolidated statement of cash flows and the condensed consolidated statement of changes in equity for the half-year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration of the consolidated entity comprising the Fund and the entities it controlled at the end of the half-year or from time to time during the half-year. Directors’ Responsibility for the Half-Year Financial Report The directors of the Responsible Entity of the Fund (the “directors”) are responsible for the preparation of the half-year financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the half-year financial report that gives a true and fair view and

is free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express a conclusion on the half-year financial report based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity, in order to state whether, on the basis of the procedures described, we have become aware of any matter that makes us believe that the half-year financial report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the consolidated entity’s financial position as at 31 December 2019 and its performance for the half-year ended on that date; and complying with Accounting Standard AASB 134

Interim Financial Reporting and the Corporations Regulations 2001. As the auditor of the Fund, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report. A review of a half-year financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Auditor’s Independence Declaration

In conducting our review, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Responsible Entity of the Fund, would be on the same terms if given to the directors as at the time of this auditor’s review report.

Deloitte Touche Tohmatsu

ABN 74 490 121 060

Grosvenor Place

225 George Street

Sydney, NSW, 2000

Australia

Phone: +61 2 9322 7000

www.deloitte.com.au

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Conclusion Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the half-year financial report of Fort Street Real Estate Capital Fund II is not in accordance

with the Corporations Act 2001, including: (a) giving a true and fair view of the consolidated entity’s financial position as at 31 December 2019 and of its performance for the half-year ended on that date; and (b) complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001. DELOITTE TOUCHE TOHMATSU

Weng W Ching Partner Chartered Accountants Sydney, 13 March 2020

Fort Street Real Estate Capital Fund IIDirectory31 December 2019

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Fort Street Real Estate Capital Fund II Fund ManagerLevel 15, 100 Pacific HighwayNORTH SYDNEY NSW 2060T: 1300 454 801F: 1300 883 159E: [email protected]

Walsh & Company Asset Management Pty Limited(ACN 159 902 708) (AFSL 450 257)Level 15, 100 Pacific HighwayNORTH SYDNEY NSW 2060T: 1300 454 801F: 1300 883 159E: [email protected]

Responsible Entity Auditor

Walsh & Company Investments Limited (ACN 152 367 649) (AFSL 410 433)Level 15, 100 Pacific HighwayNORTH SYDNEY NSW 2060T: 1300 454 801F: 1300 883 159E: [email protected]

Deloitte Touche TohmatsuGrosvenor Place, 225 George Street SYDNEY NSW 2000 T: +61 2 9322 7000 F: +61 2 9322 7001deloitte.com.au

Directors Unit Registry

Stuart NisbettMike AdamsWarwick KeneallyPeter Shear

Secretaries

Hannah ChanCaroline Purtell

Boardroom Pty LimitedLevel 12, 225 George Street SYDNEY NSW 2000 T: 1300 737 760 (Australia) T: +61 2 9290 9600 (International) F: 1300 653 459boardroomlimited.com.au

Investment Manager & Property Manager

Fort Street Real Estate Capital Pty Limited(ACN 164 101 731)Level 11, 1 O’Connell Street SYDNEY NSW 2000T: +61 2 8241 1300F: +61 2 8241 1333

E: [email protected]

http://www.dixon.com.au/walshandco/

half-year financial report 31 december 2019...dec 31, 2019 · the weighted average capitalisation...

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