APN Property Group (ASX:APD)

APN Property Group Limited (‘APN’) is a specialist real estate investment manager that actively manages real estate funds on behalf of institutional and retail investors. APN’s approach to real estate investment is based on a “property for income” philosophy. This philosophy remains central to APN’s four businesses (Real Estate Securities, Industria REIT, Convenience Retail REIT and Direct Funds). Through APN Funds Management Limited (‘APN FM’), a wholly owned subsidiary of APN, APN actively manages 12 funds including domestic and international property securities, direct property and listed funds.

The Company operates the following divisions (as at 30 June 2017):^[1]

APN Property Group maintains the following objectives to build shareholder value:^[3]

Increase Scale

• Grow FuM through delivering for the Group’s clients
• Larger / more profitable funds
• Leverage efficiencies (e.g. Distribution team)

Manage Costs

• Measured investment in growth (e.g. Asia)
• Disciplined overheads

Outcome

• Revenue growth translates to bottom line
• Higher profit margins, EPS growth

The Company operates in the following markets: ^[4]

Major competitors include:^[5]

• Cromwell Property Group (ASX:CMW)
• Centuria CapitalLimited (ASX:CNI)
• Charter Hall Group (ASX:CHC)
• Folkestone Group (ASX:FLK)

1996^[6]     

Australian Property Network Pty Ltd commenced operations with an initial focus on real estate development and project management

1997    

APN Funds Management Limited was established

1998    

The original APN Property for Income Fund was established; the flagship property securities fund

2003    

APN funds under management reached $1 billion

2005    

APN listed on the Australian Securities Exchange as APN Property Group Limited (ASX code: APD), combining both Australian Property Network and APN Funds Management

APN European Retail Trust floated (ASX code: AEZ)

APN Property for Income Fund No. 2 launched

APN’s first private fund, APN Development Fund No. 1 launched

2007    

APN’s second private fund, APN Development Fund No. 2 launched

2009    

APN launched the APN AREIT Fund, a property securities fund invested in Australian Real Estate Investment Trusts

2010    

Placement to ARA Asset Management

2011    

APN Funds Management Ltd appointed as Responsible Entity of the ING Real Estate Healthcare Fund. APN relaunched the fund as Generation Healthcare REIT™ (ASX code: GHC), Australia’s only listed real estate fund that invests exclusively in healthcare properties

2012    

APN AREIT Fund exceeds $300 million funds under management

2013    

APN Asian REIT Fund, a property securities fund invested in Asian Real Estate Investment Trusts launched

APN 541 St Kilda Road Fund, a direct closed-end property fund launched and was fully subscribed

Industria REIT (ASX code: IDR) initial public offering launch. IDR owns interests in a workspace focused portfolio of 18 industrial assets

2014    

APN launched the Newmark APN Auburn Property Fund, a fixed term fund invested in the redevelopment of a full line sub-regional retail centre

2015    

APN AREIT Fund exceeds $1 billion funds under management

APN launched the APN Steller Development Fund, six inner city medium density apartment projects

APN launched the APN Coburg North Retail Fund, a fixed term fund invested in a new neighborhood shopping centre

2016    

APN Property Group exceeds $2 billion funds under management

APN sells holdings in Generation Healthcare to NorthWest Healthcare Properties Real Estate Investment Trust for $58.5 million

Industria REIT acquires WesTrac Newcastle for $159 million

APN successfully launches the APN Retail Property Fund

2017    

APN successfully launches Convenience Retail REIT on the ASX(ASX code: CRR)

APN Property Group exceeds $2.6 billion funds under management

Board of Directors^[7]

APN Property Group Board of Directors

Chris Aylward – Non-Executive Chairman

Howard Brenchley – Non-Executive Director

Clive Appleton – Independent Director

Tim Slattery – Managing Director&Chief Executive Officer

Tony Young – Independent Director

Chantal Churchill – Company Secretary

APN FM Board of Directors

Geoff Brunsdon – Independent Chairman

Jennifer Horrigan – Independent Director

Michael Johnstone – Independent Director

Howard Brenchley – Non-Executive Director

Michael Groth – Executive Director (Alternate Director for Howard Brenchley)

Chantal Churchill – Company Secretary

APN Management Team

Tim Slattery – Managing Director &Chief Executive Officer

Michael Groth - Chief Financial Officer

Michael Doble – Chief Executive Officer, Real Estate Securities

Simone Newman – Head of Marketing and Distribution

Chris Brockett – Fund Manager, Convenience Retail REIT

Alex Abell – Fund Manager, Industria REIT

Chantal Churchill – Company Secretary

Peter Mill – Head of Global Distribution and Channel Management

APN Investment Team

Tim Slattery – Managing Director &Chief Executive Officer

Michael Groth – Chief Financial Officer

Michael Doble – Chief Executive Officer, Real Estate Securities

Pete Morrissey – Fund Manager, Real Estate Securities

Mark Mazzarella, CFA – Assistant Fund Manager, Real Estate Securities

Corrine Ng – Portfolio Manager, Asian Real Estate Securities

Patrick O’Reilly – Analyst, Asian Real Estate Securities

Chris Brockett – Fund Manager, Convenience Retail REIT

Tom Forrest – Head of Direct Property

Alex Abell – Fund Manager, Industria REIT

David Avery – Senior Portfolio Manager, Industria REIT

2018 Full Year Result Presentation

Financial Year 2017(ended 30 June):^[8]

Key risks^[9]

The following are key risk areas that could impact the Company’s ability to achieve its strategic objectives and impact its prospects for future years.

Regulatory risk

APN operates in a highly regulated environment and the Company’s success can be impacted by breaches to its or its key customers (i.e. bank intermediated wraps and platforms) regulatory licence conditions, changes to the regulatory environment and the structure of the markets that the Company operates in. Regulatory breaches may affect APN and its key customers through penalties, liabilities, restrictions on activities and compliance and other costs. The Group has established a regulatory compliance framework to monitor compliance with its licence requirements at all times.

In addition, the Australian funds management industry continues to operate in a period of significant regulatory change with respect to superannuation and to the provision of financial advice, external scrutiny and digital disruption. The interpretation, practical implementation and reputational consequences of changes could adversely impact APN’s business model or result in its business and or strategic objectives not being achieved. APN closely monitors and actively engages with industry bodies on changes that could impact the Group’s business.

Operational and market risk

As a fund manager, APN depends on the skills and expertise of its employee team to deliver investment performance and outstanding service to meet and exceed the expectations of our investors and other stakeholders. Significant or prolonged underperformance of funds managed by APN may affect the ability of APN to retain existing and attract new business. In addition, the economic environment, particularly interest rates, and market volatility have the potential to influence the investment preferences and products considered desirable by our existing and potential investors. APN continuously monitors investment performance, service levels, market conditions and its product suite to ensure that these continue to meet investor requirements and expectations.

Financial Risk Management

Financial risk management objectives

The Group holds financial instruments for financing, operational and risk management purposes. Exposure to credit, interest rate, liquidity, currency and equity price risks is managed in accordance with the Group’s financial risk management policy.The objective

of this policy is to support the delivery of the Group’s financial targets whilst protecting its long term financial security. The Board hasthe primary responsibility for establishing a sound framework of risk management and audit oversight.

Market Risk

The main risks arising from the Group’s financial instruments are credit, liquidity, and equity price risk. The Group uses different strategies and financial instruments to measure and manage these risks including monitoring ageing analyses and concentration of counterparties (credit risk), cash flow forecasting, including sensitivity analysis, and interest rate hedging instruments (liquidity risk), and monitoring investments, equity and property markets (equity price risk).There has been no change to the Group’s exposure to the market risks identified above or the manner in which it manages andmeasures these risks

Equity Price Risk

The Group is exposed to equity price risk. This arises from investments held by the Group and classified as at fair value through profit or loss. The exposure to equity price risk at the end of the reporting period, assuming equity prices had been 10% higher or lower while all other variables were held constant, would increase/decrease net profit by $7,779,000 (2016: $10,691,000).

Liquidity risk management

The Board has approved a liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate liquid asset reserves,continuously monitoring forecast and actual cash flows and by matching the maturity profiles of financial assets and liabilities. Refer to page 70, section 20.4 of the 2017 Annual Report to Shareholders for further information.

Credit risk management

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. Credit risk arises in respect to cash and cash equivalents, deposits with financial institutions and trade and other receivables (financial assets). The Group has no derivative financial instrument exposure.

The Board has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations areperformed on all non-related party customers requiring credit over a certain amount. The Group does not generally require collateralin respect of financial assets.

Cash and cash equivalents and deposits are limited to high quality financial institutions. Investments are allowed only in liquidsecurities and only with counterparties that have a sound credit rating. The Group uses publicly available financial information andits own trading records to rate its non-related party and related party customers.

At the reporting date there were no significant concentrations of credit risk except those referred to in note 31. Ongoing creditevaluation is performed on the financial condition of customers and where appropriate an allowance for doubtful debts is raised. Forfurther details regarding trade and other receivables refer to note 24 in the 2017 Annual Report to Shareholders.

Interest rate risk management

The Group is exposed to interest rate risk. This arises from loans, short term deposits and cash held by the Group. For the purposes of managing interest rate risk, the Group may enter into interest rate swaps to achieve an appropriate mix of fixed and floating rate exposure within the Group’s policy. At 30 June 2017 there are no interest rate swaps in place (2016: Nil).

The Group’s exposure to interest rates on financial assets and financial liabilities is detailed in the liquidity risk section of this note.

The sensitivity analysis has been determined based on the exposure to interest rates at the end of the reporting period. The analysis prepared to assume the balances outstanding at the end of the reporting period were outstanding for the whole year. A 50 basis point increase or decrease is used to assess the reasonableness of a possible change in interest rates. If interest rates had been 50basis points higher/lower and all other variables were held constant, the Company’s profit for the year ended 30 June 2017 would increase/decrease by $41,000 (2016: $177,000).