WHAT DOES THE FUND INVEST IN

and/or

The Fund aims to provide investors with regular income by investing in a range of income producing assets through loans made by the Fund to Special Purpose Vehicles (SPVs) that are related parties of the Investment Manager, Australian Diversified Income Pty Ltd.

The SPVs invests in a diverse range of income producing investments that larger investment managers would not normally invest. Some of these assets include:

The Fund may also invest directly into other managed investments that invest in income producing assets such as:

Domestic and international bonds
Cash and bank bills
Corporate debentures and other debt securities
Secured and unsecured loans to individuals and businesses

STRATEGIC PARTNERSHIPS

The SPVs will access some of the investment assets through key business partnerships with high quality businesses. For example, ADI has partnered with Richardson & Wrench, the oldest real estate agency network in Australia to invest in large rental rolls in selected metropolitan and regional centres.

RESIDENTIAL PROPERTY MANAGEMENT ("RENTAL ROLLS")

ADIF is partnering with one of the oldest real estate businesses in Australia, Richardson & Wrench. Founded in 1858, Richardson & Wrench has been operating for more than 160 years.

The Richardson & Wrench network consists of 80 independently owned offices in metropolitan and regional locations throughout NSW and Queensland – and growing. ADIF has invested in one of the R&W’s largest property management agencies located in Sydney. The agency has been in operation for 7 years and has 312 rental properties under management. The residential rental sector is anticipated to remain a major industry segment with revenues forecast to grow to over the period through to 2021-22, to $3.9 billion annually (source: IBIS World, Residential Property Leasing and Management in Australia: Market Research Report IBISWorld, April 17).

How do we achieve an investment return from rental rolls?

Rental property managers, such as R&W, are paid an ongoing percentage of property rents in exchange for providing property management services.

Property management services generally include:

Lease negotiation
Tenant selection
Regular inspections
Property maintenance and repairs
Management of rental arrears
Financial reporting

The investment in and partnership with R&W retains the involvement of the R&W property management team.

The rental book is actively managed by the property management team to ensure it meets its owner/ tenant retention and growth. The intention is to create incremental income streams from the tenant base. For example, investment or owner-occupied rental property sales.

DIRECT PROPERTY INVESTMENTS

The SPVs intend to either invest in or provide finance to property investments that meets its selection criteria, including:

Smaller low-medium density developments
Growth areas in major cities
Strong sales records
Trusted developers and builders
High standard build and fit out
Completed approvals
Ready to build

The SPVs will maintain a spread of project types with different projected completion dates. In addition, the SPV itself must maintain adequate liquidity in order to meet interest payments on its loan from the Fund.

The process is shown in the diagram below:

After the investment is made, the Investment Manager is responsible for its ongoing management within the SPV. This includes monitoring the status of any development against project schedule, ensuring that loan interest is paid when it falls due as well as negotiating suitable terms for loan extensions, where necessary.

MORTGAGE BROKING & LIFE INSURANCE PORTFOLIOS

How do we achieve an investment return?

Mortgage brokers and life insurance advisers are paid an ongoing percentage of the value of loans or life insurance premiums in exchange for providing ongoing advisory services to clients. In effect, an ongoing fee for service (advice).

The percentage continues to be paid until either the loan ceases or the life insurance contract is terminated.

Ongoing fees for service in the financial services world has become highly regulated, with oversight from the Australian Securities & Investments Commission.

The Investment Manager’s criteria to select appropriate portfolios includes, but is not limited to:

Mature established business (portfolio older than four years)
Demonstrate consistency of ongoing income
History of writing a consistent volume of business and future growth potential
Exhibit a low level of turnover/lapses
Clean compliance record, no legal proceedings or other actions

1ST & 2ND MORTGAGE LOANS (SECURED OVER REAL PROPERTY)

The Investment Manager will use a SPV to offer loans to qualified business and investment borrowers, secured by either first or second mortgage over real property (such as residential, commercial, industrial and retail property).

The Investment Manager will use the following Lending Guidelines:

Loans secured by a registered first or second mortgage over real property in Australia
Location of properties will be in capital cities and major regional centres
Maximum Loan to Value Ratio (LVR) will be 70%
Maximum exposure to a single loan is the greater of $2.5m or 10% of the Fund’s total assets under management
Maximum exposure to a single borrower is the greater of $5.0m or 20% of the Fund’s total assets under management
Maximum loan term is 12 months

PROPERTY DEVELOPMENT FINANCE

The Investment Manager may invest in a SPV that provides finance to qualifying property investors and developers.

Finance may be provided by way of a loan to a particular project or equity in a particular project (or a combination of both).

The interest rate received on each loan will be variable, depending on a range of factors including the loan term, loan to value ratio, assessment of development risk and the success of the project.

The Investment Manager will use the following investment criteria:

Loans must achieve Target Income Returns for the Fund
Projects must be in Australia
Property investment or development(s) must relate to residential, industrial, commercial, retail, retirement village or accommodation
No consumer loans
Commercial soundness of the borrower and the borrowing principals
Current market value and/or end value of the Development will repay the loan

RISK OF INVESTING IN THE FUND

There are a number of risk factors that could affect the performance of the Fund and the repayment of Investor's capital. The main risks are summarised below. A more comprehensive description is contained in the Information Memorandum.

Type of Risk

Investment Risk

Investment Manager Risk

Specific Investment Risk

SPV Structure Risk

Investment Performance Risk

Description

The value of an investment may rise or fall, distributions may or may not be paid and an SPVs or Investor's Capital may or may not be returned.

The Fund is relying on the skills, experience and ability of the Investment Manager to achieve its investment objectives. This ability may be impacted in the event of any major changes in the Investment Team and its operations

A borrower may default on their loan and the security provided over the loan may not be sufficient to recover the loan amount.

The Fund will provide interest bearing loans to the SPVs with the interest rate being set by the Investment Manager based on the risk/return profile of a particular investment

None of the Trustee, the Investment Manager not any other person or entity guarantees any income or capital from an SPV or the Fund.

Other risks include:

Description

The value of an investment may rise or fall, distributions may or may not be paid and an SPVs or Investor’s capital may or may not be returned.

None of the Trustee, the Investment Manager nor any other person or entity guarantees any income or capital return from an SPV or the Fund.

The Investment Manager is not a related party of the Trustee. By making an investment in the Fund, Investors acknowledge that the Fund will make investments in or through related parties of the Investment Manager, such as the SPVs.

Changes in Government legislation, regulation and policies may have material adverse effects on the operating results of the Fund.

This is the risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimise a loss or make a profit. The Fund is an illiquid investment.

The Trustee is not in a position to confirm the completeness, genuineness or accuracy of any information or data included in this IM.

Tax regulations can change and changes can be adverse.

There may be external influences from time-to-time, including unforeseen items of expenditure which have not been budgeted for and loss of revenue, which adversely affect the income of the Fund.

A SPV purchasing mortgage broking or life insurance books may see a decline in value of the books purchased.

A SPV lending money on mortgage security could experience loan defaults by borrowers.

There are specific risks for property construction projects such as construction or development costs exceeding budgeted costs, delays in the completion of a development project or a change in market conditions reducing the project’s value.

Type of Risk

General investment risk

Related party transactions

Legal, regulatory and compliance risk

Liquidity risk

Incomplete or inaccurate information

Tax risk

Underlying investment risk

Decline in Mortgage/Life Insurance Book Value Risk

Loan Default Risk

Construction and Development Risk