Fortius have launched the Queen Street Trust, an unlisted property fund to raise $114.98m for the acquisition of 307 Queen Street Brisbane.
Fortius acquired the property in partnership with PGIM Real Estate for $214.48 million from LaSalle Investment Management, reflecting a 6.0% initial yield.
The Fund provides an opportunity for investors to to invest in a prime located commercial office tower situated on a prominent corner within Brisbane’s ‘Golden Triangle’.
The building is set over 25 levels, comprising 19,617 sqm of lettable area with basement parking for 90 cars. The Asset is 93.5% occupied (by area) with income secured by a diverse tenancy profile and underpinned by a 3.5 year WALE (by income). The building includes at ground level 1,249 sqm of high profile convenience retail space, representing 13% of market income and leased to key tenants including Heritage Bank and Bank of China.
Fortius are forecasting average distributions of 8.00% per annum over the investment period, with a projected 12% IRR and a forecast Equity Multiple of 1.6x.
Refer to our article on the acquisition below.
Fund Details
Fortius have provided an Information Memorandum which lists all of the key features benefits and risks of the Fund and is available to download from this page.
| Responsible Entity | Fortius QS No.2 Pty Ltd (ACN 650 067 806). |
| Fund Manager | Fortius Funds Management Pty Ltd (ABN 90 093 111 641) holder of AFSL 289 244. |
| Fund Size Target | $114.98 million |
| Fund Open | 20 May 2021 |
| Fund Raising Close | 4 June 2021 (unless extended) |
| Fund Term | 5 years with 1 year extension (Investment Manager and Cornerstone approval) + a further 1 year extension (Cornerstone and Unitholder approval). |
| Target Return | 12% IRR with an average 8%pa distribution yield |
| Liquidity | Illiquid |
| Investor Type | Wholesale |
| Target Assets | The Trust will own 50.1% of the Head Trust with the other 49.9% owned by an institutional Cornerstone Investor. The Head Trust will own 100% of Sub Trust which in turn owned 100% of Property Trust which in turn holds the Asset, 307 Queen Street Brisbane |
The Property
Located in the heart of the Brisbane CBD, 307 Queen Street sits prominently on the high profile corner of Queen and Creek streets within the coveted ‘Golden Triangle’. The building’s central location is approximately 200m north east from Queen Street Mall, 50m east from Post Office Square and 250m south from Brisbane’s Central Railway Station, optimising the building’s access to the city’s key business, entertainment and retailing amenity.
The property is a 19,617 sqm A-grade office building comprising two levels of basement car parking for 90 vehicles, a high profile ground floor retail and 25 levels of commercial office. The building is 93% occupied by professional services, finance and consulting firms with a WALE of 3.5 years
The office levels are configured around a central core and are accessed via eight passenger lifts. The building’s typical floor plates range between 796 sqm – 822 sqm and currently cater to over 60 tenants ranging from small suites to full floor occupiers. The retail tenancies currently represent 6.4% of the Lettable Area however contribute 13% of the building’s gross market income.
Originally constructed in 1978, 307 Queen Street has undergone numerous multi-million dollar refurbishments including a recent $5m ground floor lobby and retail upgrade, substantially enhancing the building’s tenant amenity and street presence.
Investment Strategy
Fortius have proposed the following strategies to create a best-in-class asset, maximising the NLA, cash flow, tenancy profile and future sale value:
Core investment strategy
- Lease current vacancy to increase running property yield to 6.50%
- Engage with current tenants to drive lease renewals, extensions and tenancy expansions to improve WALE and reduce tenant downtimes and incentives
- Increase Environmental Social Governance (ESG) by improving current 5 Star NABERS energy rating and optimise overall building operating costs to increase appeal to corporate tenants
Value upside initiatives
- Refurbish bathrooms and lift landings on identified floors to improve tenant amenity
- Upgrade End of Trip Facilities (EOTF) and lift cars to assist with leasing and improve market rents
- Reconfigure tenancy layouts on inefficient subdivided floors to increase lettable area
- Consolidate specific multi-let floors and lease to single tenants to unlock 5% – 7% of additional lettable area
Key Features
The Trust is an unregistered managed investment scheme under the Corporations Act.
Units issued under the Offer will be issued at the Unit issue price, which is $1.00 per Unit. Thereafter, the Unit price will reflect the NTA per Unit with adjustments made for fees and expenses relating to the Asset acquisition
The Fund as illiquid in nature and the capital and profits from the investment will be realised upon the sale of the property at the end of the investment term. The term is for an initial five-year period, however Fortius may extend the Fund for one year periods subject to an Ordinary Resolution of investors (50% of votes in favour) and thereafter by 2 year periods with unanimous resolutions (100% of votes cast in favour) or via a Withdrawal Price offer.
Fortius have developed a fund model with a range of market based assumptions including;
- Office Market Rental growth of 2.75% per annum
- Office tenant Renewal Probability of 70%
- Tenant Incentives for vacancies of 40%-45% with an average over the 5 years of 35%
- A letting up period of 10.8 months on average
- A CPI factor of 1.7% on average over the 5 years
Fortius have outlined a forecast 5-year Internal Rate of Return (IRR) in the range of 12% p.a (with a range of 10.4% – 13.8%) with average distribution yield of 8.0% per annum. The return calculation is based on the Manager’s assumptions including a terminal sale price in 2026 of $287m based on a terminal capitalisation rate of 5.50%. We note that a +/- 50bps movement in the terminal cap rate would results in a IRR range of 3.6% to 10.3% return.
Fortius expects to secure a 3 year term loan facility equal to a 54% LVR on acquisition with a maximum draw of equal to a 60% LVR.
Fund Fees
Fortius will be entitled to Fees from the Fund including;
- an acquisition fee of 1.3% of the purchase price
- a management fee of 0.575% of the Gross Asset Value
- a Trustee Fee of $30,000 per annum
- a performance fee of 20% of the outperformance above a IRR hurdle of 9.0%.
- accounting fees of $30,000 per annum, increased at 2.0% pa.
- Trustee Removal Fee of 0.5% of the Gross Asset Value
The fees for the Fund are in line with market practice.
Recommendation
The Fund is recommended for further consideration by investors seeking an average distribution yield from a commercial CBD asset.
Capital growth from the asset is under pinned by the continued leasing of office space in line with the rental estimates in the Managers model. An increase in vacancy in the building or a increase in interest rates could impact the net income from the asset and the potential valuation capitalisation rate at the time of sale and as such there is risk to both income and capital growth. Potential investors are advised to review the key risks in the product documentation and undertake a detailed assessment of the portfolio and investment cash flows.
Disclaimer: The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
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