Peak Equities Annual Report – December 2019

Dear Investors, Colleagues and Friends,

We live in interesting times. This past decade may prove to have been a watershed period in the eco-political landscape. Our current economic circumstances reflect trends that have been developing over several years. Whilst not all these factors are inter-connected, in combination they have created a potent cocktail in an environment of great uncertainty:

• Most impactive has been the sharp fall in interest rates to historic lows, resulting in a tidal wave of money flowing into equities and property markets, driving asset prices to record levels;
• Political debate has become polarised to the extent that it impacts adversely on economic policy and management;
• Western economies (other than the US) are struggling to achieve or maintain real economic growth;
• Australia is lacking clear policies in the essential fields of energy, wages, water resources, infrastructure and education;
• Our major export industries – minerals, agriculture and education are under stress from social activism and severe competition from Asia and other developing countries;
• Powerful Industry Super Funds exercise undue influence over our major corporations, often driving social policy ahead of shareholder interests. Their anti-competitive influence will increase over time as a result of current superannuation legislation;
• Domestic debt as a factor of household income is trending upwards. The impact of a material increases in interest rates would reverberate through the entire economy

Strategic Considerations

Income security remains the principal driver behind Peak Equities’ investment strategy. Security of income requires selection of premium assets, most resistant to cyclical influences, with either long-term leases, or tenants that are likely to remain in occupancy over the medium term.

Feedback from our investors continues to support our single property investment model. We believe that investors should view themselves as joint owners of a quality asset, about which they can be fully informed in making their investment decision.

In assessing the potential profitability of an asset, we look to the annual cash income derived from the investment as well as the prospects for capital growth.

There are essentially four ways in which capital growth can be achieved in the commercial property market:

1. Rental growth;
2. Tightening in yields;
3. More opportunistic acquisitions such as the purchase of distressed assets, or assets which require some repositioning in order to achieve their full potential; and
4. Gearing strategies, allowing for capital growth partially funded through bank debt

Of these, a sensible gearing strategy in combination with at least one of the other factors is the most likely to achieve capital growth. Allowing for acquisition and disposal costs of a property, a medium to long-term holding horizon may be required to achieve significant capital gains.

Recent history has taught us that the prospect of further tightening of yields should not be discounted. We consider that the sheer weight of money in the market may continue to drive yields downwards, beyond any perceived barrier.

No real estate investment can be entirely risk-free. With our emphasis on risk management (security of income and capital) we see our investment strategy focusing on high-quality assets, with a longer-term holding period and cash returns reflecting prevailing market conditions.

For our clients looking for higher returns, we now offer participation in our Property Development Trusts.

The Year in Review

In terms of new acquisitions, this past year has been relatively quiet, despite an intense period of activity in terms of enquiry, investigation and due diligence.

We are pleased to announce that our non-executive director, James Weaver will join our executive team in the new year as Peak Equities’ Head of Property. James’ industry connections and market awareness will be a great enhancement to our service offering.

In July 2019, we acquired a retail complex in the Townsville suburb of Warrina. This acquisition was closely related to our activity at the Precinct shopping centre, where we undertook a $4 million capital raising and achieved a long-term lease over 1,000 sq. metres of space to the Otto’s Fine Food Group, who have entered into matching 12-year leases at both the Warrina and Precinct properties.

In October 2019, we successfully launched our new Property Development Trust, investing in the development of 8 small – medium sized factories/warehouses in the industrial district of Adelaide. Investor response was exceptional, with the offering heavily over-subscribed. We are actively engaged in reviewing further opportunities in that field.

Late this year, our residential property development project, involving the construction and sale of eight up-market apartments in Caulfield, was concluded with the sale of the final apartments. Once final accounts have been prepared, we expect the return to investors to exceed of 12% per annum.

Much of our activity involves dealings with existing tenants. Achieving and maintaining high occupancy levels is a core element of our business undertaking. We have had significant successes in re-leasing more than 60% of the space at our Noarlunga Commercial Centre in suburban Adelaide. We have also reached an important agreement with our major tenant at Bartercard House in Southport, Qld, which should see their occupancy extended well into the future.

I would like to note the significant support we have received from our two major lenders, Suncorp Bank and CBA. The quality of dialogue and cooperation that we have established at the highest levels of management at both banks is vital to the success of our investments.

In conclusion, we extend our sincere appreciation to our Investors, who are the lifeblood of our business, and look forward to a successful and rewarding year ahead.

Tom Borsky

Managing Director