Trafalgar Corporate Group Limited
2009 Annual General Meeting
19 November 2009
Chief Executive Officer's Presentation
Trafalgar's Year in Review
Good morning, I am pleased to have the opportunity to present to you the CEO's report for
FY2009.
When I presented to you at last year's AGM I commented that in light of the tight credit
markets, brought about by the Global Financial Crisis, our focus for FY 2009 would be on
effective capital management.
I am pleased to confirm that as events unfolded during the course of FY2009, Trafalgar is one
of the few Listed Property Trusts that did not need to resort to dilutive capital raisings in order
to survive the financial crisis.
The business restructure that commenced in FY2008, prior to the Global Financial Crisis, and
continued to be implemented during FY2009, together with the focus on key deliverables,
enabled your company to weather the Global Financial Crisis storm.
I will comment on these issues later in my address.
Key points to note for the Group in FY2009 are as follows:
Significant progress was made in our withdrawal from development activities. We
previously advised that our target was to complete this process by June 2010 and we
remain on track to largely achieve this goal.
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During the year the Group sold its mezzanine debt and profit share position in the
Southbank residential development in Melbourne.
An additional development site was sold in the Rhodes residential project in Sydney,
reducing the Brookfield Multiplex/Trafalgar joint venture to 4 remaining super lots.
Our capital invested in the Frances Park and Bonnyrigg residential projects was
significantly reduced as sales contracts settled. Both projects have been completely sold
post year end.
Our focus on cost reductions resulted in a 26% decline in operating costs in FY2009.
Further reductions in employment costs will be achieved as the exit from development
activities enters its final stages.
The Group was fortunate that it was not placed in a position to be required to re-negotiate
its loan facilities during the depths of the Global Financial Crisis and, as a result, the
borrowing costs of the business remain relatively low, compared to the market at large.
The overall property market experienced severe pressure on asset values during FY2009
and Trafalgar was no exception. The decline in value of investment properties,
development assets and the impact of mark to market for interest rate hedging resulted in
a $67.4 million writedown for the Group.
FY 2009 Results
The operating profit before tax and unrealised losses on revaluations for FY2009 was down
38% to $4.9 million, compared to $7.9 million the previous year, largely reflecting our
withdrawal from development activities. Whilst development revenue was significantly
reduced, the funding costs of capital invested in development projects continued to be a drain
on profitability.
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While the focus continues on closely managing the costs of operating the business, solid
progress was made in reducing the operating costs in FY2009, with corporate costs down 24%
and employment costs down 27%.
As I mentioned earlier, although development revenue was down in FY2009, the funding cost
of capital invested in development projects negatively impacted profitability. Interest costs
increased from $10.75 million in FY2008 to $11.91 million in FY2009. This was largely due to
total Group debt peaking at $170.8 million in December 2008. Interest costs are expected to
reduce in FY2010 as the proceeds from the sale of development assets are used to repay
debt.
The most significant impact on the Group, as it was for all participants in the property markets,
was the writedown associated with investment and development assets. The $67.4 million
writedown largely comprised the following:
a $34.3 million de-valuation in the value of the investment portfolio as a result of higher
yields. Since the float these assets have increased in value by $32.7m, or 17.8%, even
after writedown. The value of the investment portfolio is down only 3.5% on FY2007;
a $20 million writedown of the carrying value of development assets, including $12.6
million related to the Tallwoods golf and residential estate, which has since been sold
and due to settle in June 2010;
a $0.9 million write-down of the Sydney Airport Centre investment;
the $2.7 million write-off of goodwill, reflecting the Board's decision to cease development
activities; and
a $9.5 million unrealised loss on swaps. The Group is largely protected from rising
interest rates from a cash perspective even though the accounting treatment reflects
prevailing interest rates
Trafalgar Corporate Group Limited 2009 AGM Chief Executive Officer's Address Page 4 of 8
Capital Management
Capital management was the most critical issue for the business in FY2009, with every effort
made to ensure that your company complied with its banking covenants and to avoid the need
to re-negotiate margins on loan facilities.
This goal was achieved and senior management continues to enjoy excellent relationships
with the Group's lenders
Total debt as at 30 June 2009 was $161.8 million, falling from $170.8 million at 31 December
2008, although gearing increased from 43.8% as at 30 June 2008 to 53.6%, directly reflecting
the impact of declining Australian property values. If surplus cash was applied to repay debt,
gearing would have been 52.3%. Subsequent to June 2009, a further $9.3m has been applied
to reduce debt. Group debt outstanding as at close of business yesterday was $152.5 million
compared to $161.8 million as at 30 June 2009.
The company had undrawn committed facilities of $10.5 million as at 30 June 2009 and
available uncommitted cash funds held at balance date of more than $8.0 million. The Group's
available cash position as at close of business yesterday was approximately $9 million
Trafalgar has no finance facilities maturing in FY2009/10 and existing finance facilities have
maturity dates ranging between March 2011 ($145 million) and September 2011 ($15 million).
The Group continues to comply with all of its debt facility covenants.
The total assets of the Group were $301.9 million at year end and NTA was $1.51 per security,
down from $2.26 in FY2008, largely as a result of the investment and development asset write
downs.
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Post 30 June 2009 Events
I would also like to take a moment to comment on significant post 30 June 2009 events in
relation to the development assets.
In recent announcements, we advised that your company's interest in the Rhodes and
Tallwoods residential projects have been sold.
In the case of the Rhodes project, the joint venture partners sold their respective remaining
interests in 4 superlot development sites, although the joint venture will retain responsibility for
completion of the remediation and infrastructure; the latter is expected to be completed by
March 2011. Whilst Foreign Investment Review Board approval has been received for 1 lot,
the sale of the remaining 3 lots is still subject to approval, which is expected in December
2009.
The two super lots currently due for settlement in December 2009 will repay all current project
debt, leaving the balance of the remediation costs to be paid from proceeds of the two super
lot pre-sales entered into in 2006.
More importantly, your company entered into contracts for the sale of the Tallwoods golf and
residential estate in its entirety at book value, again, subject to Foreign Investment Review
Board approval. Settlement will take place in June 2010.
Achieving the sale of these two assets is an important step for your company and will enable
the Board and management to focus its efforts on maximising security holder value in the
company.
Trafalgar Corporate Group Limited 2009 AGM Chief Executive Officer's Address Page 6 of 8
Outlook for Trafalgar's Business Activities
I will now review the outlook for Trafalgar's business activities.
Investment Portfolio Overview
The investment portfolio will generate approximately $20 million in net cash flow for the Group
in FY2010, down marginally on FY2009 as a result of some vacant space in the Fujitsu and
Mort St properties. A new 7 year lease was entered into with The Department of Infrastructure
for the Mort St building, which accounts for 55% of the lettable area.
The portfolio weighted lease duration was 4.9 years at year end, and there are a number of
leases maturing in the Fujitsu building in FY2010. The Brisbane leasing market is
experiencing difficulties at present however, management is continuing to negotiate with the
incumbent tenants to renew leases.
The value of the investment portfolio was $227 million as at 30 June 2009 and there are signs
that property values are stablising and some banks are now re-entering the market for property
lending.
Management's focus is on improving the lease maturity profile for the portfolio to preserve and
maximise the value of the investment assets.
Development Portfolio Overview
The company had $52.4 million invested in direct and indirect development projects as at 30
June 2009. Last year I stated that as your company withdraws from direct development
activities the level of investment was expected to reduce progressively as projects are sold
over an 18 month to 24 month period.
During FY2009 $21.8 million was received from the realisation of development assets and
following the sale of the Tallwoods and Rhodes projects, significant cash inflows of
approximately $30 million (excluding funds used to repay project debt) are expected during FY
2010, which will be used to repay debt.
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In relation to the Rhodes sale, Trafalgar will not receive its capital return until December 2010,
when the last lots are due to settle. All project bank debt will be repaid following completion of
the remediation and settlement of the 2006 pre-sale lots, which is expected by 30 June 2010.
We remain on track to realise the majority of the development assets by 30 June 2010 and
expect to complete disposal of the remaining development assets by 31 December 2010.
Strategy
I will now comment on our current strategy.
Our strategy for FY2010 is focussed in three areas:
to continue the task of exiting from development projects and reducing debt;
improving the lease maturity profile for the investment portfolio assets in order to
position the assets to maximise security holder value; and
the opportunistic realisation of the Group's remaining assets over a 2 year period to
take advantage of the improving property market in Australia, providing such sales
provide the best outcome for security holders. In addition to this, we will be exploring
alternate opportunities to maximise security holder value.
In summary, our goal is to reduce debt from the proceeds of return of capital invested in
development activities and position the company to maximise value to security holders
I would like to take this opportunity to acknowledge the efforts and dedication of our staff over
the past year and their commitment to delivering on our goals for the current year and
particularly, more recently, with the sale of Tallwoods and Rhodes.
On behalf of the Trafalgar team I would also like to thank our recently retired directors, Mark
Ford and Brendan Crotty for their contributions during the year.
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Finally, the management and staff would like to thank our current Chairman, Garry Sladden for
his guidance and support in his capacity as director and more recently as Chairman and Garry
Charny for his support and contribution. I also take this opportunity to welcome Mr John
Green as a director to your company.
I look forward to updating you again in February next year when we release our half year
results announcement to convey the progress we have made.
Thank you.
Contacts
Braith
Williams Peter
Norris
Chief Executive Officer
Company Secretary &
Chief Financial Officer
T: 02 9252 4211
T: 02 9252 4211
M: 0412 975 523
M: 0409 301 329
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