GOING PLACES MACARTHURCOOK OFFICE PROPERTY TRUST

Transcription

1 GOING PLACES MACARTHURCOOK OFFICE PROPERTY TRUST ANNUAL REPORT 2006

2 Miller Street, North Sydney, NSW Leichhardt Street, Spring Hill, Brisbane, QLD Akuna Street, Canberra, ACT 22 King William Street, Adelaide, SA

3 MACARTHURCOOK OFFICE PROPERTY TRUST ANNUAL REPORT 2006

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5 MACARTHURCOOK OFFICE PROPERTY TRUST ANNUAL REVIEW Overview The MacarthurCook Office Property Trust ( the Trust ) was launched in September Initially the Trust comprised two office properties, 181 Miller Street, North Sydney ( Miller Street ) and Oxygen at Leichhardt Street, Spring Hill ( Spring Hill ), a newly constructed office building located on the Brisbane city fringe. Miller Street was acquired in October 2005 for $54.5 million and settled in March The acquisition was a counter cyclical investment, purchased at what we considered to be the bottom of the North Sydney office market cycle. At the time of acquisition, vacancy levels were around 13.5%, leasing incentives were approximately 35% of gross lease value, and there was a lot of negative press associated with this market. However, management backed their commercial judgment and as a result of active management combined with our predicted recovery in this market, the property has experienced strong capital appreciation and was revalued up to $60.2 million in June This represented an increase of in excess of 10% in less than 12 months. Spring Hill is a newly completed mixed use development comprising two large floors of commercial office space and 11 retail outlets. At the date of sale, the Queensland Department of Transport had pre-commitment to 100% of the office component and a number of the retail outlets were secured under leases. The Trust purchased the property $15.8 million in November 2005 and for similar reasons to that of Miller Street, this property has also experienced strong capital appreciation in a short period of time and was revalued up to $17.5 million in June This represented an increase of in excess of 10% in just over six months. The Trust also successfully negotiated and settled on two additional properties in June King William Street, Adelaide was acquired in May 2006 for $19.05 million and settled in June. The property was the Trust s third acquisition and its first in South Australia. It is located in the heart of the Adelaide CBD and is securely leased to the National Australia Bank until March The Trust s fourth acquisition, an office building leased to the Australian Taxation Office ( ATO ) located at 38 Akuna Street in Canberra also took place in June The property was simultaneously exchanged and settled for $32 million. As at June , the Trust size was $134 million representing 100% invested in direct property. Asset Class Min Max Target Actual (%) (%) (%) $m (%) Direct Property Listed Property Cash & Fixed Interest

6 These acquisitions have provided the Trust with a balanced geographic spread with further acquisitions targeted in Victoria, Perth and New Zealand. Geographic Spread Min (%) Max (%) Target (%) Actual (%) New South Wales Victoria Queensland Western Australia South Australia Other (ACT) Investment performance As at the time of this report, the Trust was still in its initial equity phase. The Trust s unit price will remain fixed at $1.00 until the raising is complete.

7 Portfolio Update Portfolio Summary A brief summary of the Trust is below. 181 Miller Street, North Sydney Oxygen, Spring Hill Purchase Price : $54.5 million Purchase Price : $15.8 million Initial Yield: 9.04% Initial Yield: 8.30% Valuation $60.2 million Valuation $17.5 million 30 June 2006 : 30 June 2006 : Valuer : Jones Lang LaSalle Valuer : Savills Site Area : 1,642 m 2 Site Area : 7,643 m 2 Net Lettable : Office: 10,896 m 2 Net Lettable : Office: 1,409 m 2 Retail: 1,188 m 2 Retail: 2,617 m 2 Car parking : 126 bays Car parking : 19 bays Number of 21 Number of 5 (6 retail outlets & Tenants: Major Tenants: Altiris, Millward Brown, Westpac, BIS Schrapnel, Davis Langdon, Juniper Networks Tenants: Major Tenants: Occupancy : 97.8% Occupancy : 87% Office) Department of Transport, Kids Academy 38 Akuna Street, Canberra 22 King William Street, Adelaide Purchase Price : $32.0 million Purchase Price : $19.0 million Initial Yield: 12.1% Initial Yield: 8.64% Valuation $32.2 million Valuation $19.2 million 30 June 2006 : 30 June 2006 : Valuer : Jones Lang LaSalle Valuer : Savills Site Area : 4,180 m 2 Site Area : 1,061 m 2 Net Lettable : Office: 11,812 m 2 Net Lettable : Office: 8,410 m 2 Retail: 710 m 2 Branch: 1,387 m 2 Car parking : 79 bays Car parking : Nil Number of 6 Number of 1 Tenants: Tenants: Major Tenants: Australian Taxation Major Tenants: Office Occupancy : 97.8% Occupancy : 100% National Australia Bank

8 Leasing Status Report 181 Miller Street, North Sydney, New South Wales The Australian Rugby Union occupied 3 floors at 181 Miller Street, North Sydney and vacated in July A new anchor tenant, Altiris Australia has been secured for the building and will take occupation of the space in October 2006 on a 5 year lease. Only three small vacancies (758m 2 ) existed in the 12,000m 2 building as at 30 June Renewal negotiations with those tenants who have lease expiries in the next nine to twelve months are progressing well. Oxygen Spring Hill, QLD The Department of Main Roads has taken occupation of the entire office component comprising 2,617 m 2. The ground floor retail component is divided into 11 outlets. Six of the eleven retail outlets are now leased taking the total occupancy of the property up to 87%. Leasing activity over the remaining five retail units is progressing well. 22 King William Street, Adelaide The whole of the building is leased to National Australia Bank Ltd for a term of 12 years that expires on 25 March 2010, plus two renewal options of five years each. The building has been the headquarters for National Australia Bank in South Australia and the Northern Territory since its construction. It is a purpose built bank building with a banking chamber on the ground floor and extensive safety deposit vault and main banking vault to the basement. 38 Akuna Street, Canberra The property is predominately leased to the ATO comprising approximately 85% of the gross income and occupying all of the office accommodation. The Australian Taxation Office ( ATO ) existing lease expires on 31 January The ATO will vacate the building between January 2009 and January 2010 to a purpose build development. The ATO will pay a termination payment equivalent to 1 year s rental if they relocate to their new premises prior to the expiry date. A proactive approach to securing a new tenant for 38 Akuna Street will be taken. We are confident that the letting up period for the building will be minimal given the limited number of competing office buildings likely to have vacant space in Portfolio Occupancy - As at 30 June 2006 Occupancy (m 2 ) Secured to Tenant Rental Guarantee Total Occupancy Vacancy (%) (%) (%) (%) 181 Miller Street, North Sydney Oxygen, Spring Hill King William Street, Adelaide Akuna Street, Canberra Total

9 Property Valuations All four properties were valued as at 30 June 2006 for refinancing purposes. Property Purchase Price ($) Latest Valuation ($) Variance Variance ($) (%) 181 Miller Street, North Sydney 54,500,000 60,200,000 5,700, Oxygen, Spring Hill 15,800,000 17,500,000 1,700, King William Street, Adelaide 19,055,000 19,200, , Akuna Street, Canberra 32,000,000 32,200, , The increase in value for 181 Miller Street, North Sydney reflects a tightening of yields and the new Altiris leasing deal. Spring Hill has been revalued up nearly 11% since the Trust exchanged on the property in November This is also a result of tightening of yields in the Brisbane City fringe and increase in both retail and commercial rentals. The revaluation increases for both buildings clearly demonstrates our ability to actively manage our properties and deliver consistent, long term performance for the Trust s unitholders. Lease Expiry Profile Lease Expiry Profile as at 30 June 2006 By Income 0 2 years 15.36% 2 3 years 7.95% 3 5 years 61.70% 5 years % The Weighted Average Lease Expiry Profile (WALE) at 30 June 2006 is 3.5 years. The industry benchmark for office funds is 3 years.

10 Industry Type The security of income is further enhanced with that component attributable to government income at 36% of the Trust s income and the banking sector at 18%. It should be noted that no sector contributes more than 36% of the Trust s income. Retail, 6.7% Other, 1.9% Banking & Finance, 18.1% Government, 36.7% Information Technology, 22.2% Sports, 0.4% Commercial Services, 14.3% Market outlook White collar employment growth has flowed through to positive net absorption of office space, resulting in declining vacancy rates throughout most commercial markets. The Brisbane and North Sydney office markets have been beneficiaries of this positive activity. Strong levels of investment activity and demand for good quality investment grade stock have led to further growth in capital values across these markets during the last quarter. We expect this trend to continue which positions the Trust well for future rental and capital growth this year. North Sydney, NSW Business confidence continues to return to the Sydney s North Shore office market. With limited new supply and active leasing take-up, vacancy rates have reduced substantially to 9.8%. Incentives are also being reduced to an average of 20% from 35% one year ago. As supply options become more limited in the CBD market putting upward pressures on rents, an increasing number of CBD based tenants are looking to relocate to North Sydney which provides a competitive value proposition. Spring Hill, QLD Yields in the Brisbane and city fringe have continued to tighten. The first quarter of 2006 delivered the lowest vacancy rate since Strong rental growth and falling incentives has resulted in a large spike in effective rentals for Q1 and Q2 of Investment demand for office assets in the Brisbane city fringe continues to be strong and we expect further compression of yields through the balance of 2006.

11 Canberra The Canberra office property market has experienced strong rental and capital growth over the last three to four years. The Canberra office market has one of the lowest vacancy rates in Australia. In the second quarter of 2006 the vacancy rate hit a record low of 2.1%. Vacancy rates are forecast to increase over the medium term, principally as a result of Government tenants relocating to new, purpose built accommodation. This will create increased vacancies for secondary accommodation within the Canberra office sector. However, it is our view that buildings which are well located close to public transport and amenities, which provide a good standard of accommodation with flexible layout and design such as 38 Akuna Street will be well positioned to attract new tenants to their buildings and minimise rental downtime. Adelaide Vacancy levels in the Adelaide CBD are slowly reducing from their record high levels over the last decade, with the current core vacancy rate as at January 2006 at 6.8% according to the PCA June 2006 Office Market Report. Net face rents have remained steady in both Prime and A grade offices in the last 6 months. The Adelaide office market is in the midst of a construction cycle. This is expected to increase the vacancy rate and incentive levels throughout 2006/7 however we expect this to be short lived. The outlook for the South Australian economy and property market is positive. Business investment in South Australia is expected to increase above the national average over the next two to three years, which will create strong demand for office accommodation in the CBD. Fund outlook Our intention moving forward will be to further diversify the geographic spread of the Trust with additional acquisitions in Melbourne and Perth as well as looking at opportunities in New Zealand. The acquisitions to date provide the Trust with an excellent base. Our investment philosophy underpinning our investment approach is that superior returns are achieved through a proactive management style and understanding the fundamentals of the office property market better than our competitors. Accordingly, we will continue to actively manage the existing portfolio to maximize returns to our unitholders. Sally Williamson Fund Manager Office Property

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47 MacarthurCook Fund Management Limited ABN Level 4, 30 Collins Street Melbourne VIC 3000 Australia Customer Telephone Enquiries Website