ING Office Fund Half Year Results

Adjusting for non-operating and non-recurring items, distributable income rose 7.3% to $64.7 million, while distributions per unit increased 2.9% to 5.35 cents. Distributable income per unit of 5.3cents was in line with distributions.

Key achievements during the six month period were:

• Solid operational results with increased distributions, solid NPI growth, high tenant retention and improved portfolio occupancy.
• Strong balance sheet with long debt maturity, surplus debt capacity and reduced gearing.
• Enhanced portfolio quality with three strategic acquisitions and continued capital recycling.
• Consistent out-performance against the listed office peer group and overall sector, with the Fund being the best performing office trust over the short to long term.

Commenting on the results, ING Office Fund CEO, Tino Tanfara said, “The disciplined repositioning strategy and active capital management that the Fund has adhered to over the past few years is not only resulting in consistent out-performance, but has also ensured the Fund is well placed to deliver attractive returns in the future. IOF is also in a strong position to take advantage of selective investment opportunities which may arise
over the year ahead.”

PERFORMANCE:

For the six month period to 31 December 2007, the Fund delivered a total return of – 4.5% compared with -11.4% for the UBS Commercial 300 index and -8.5 for the S&P/ASX300 property accumulation index. Over the one year and five year periods IOF has been the best performing listed office trust with total annual compound returns of 13.4% and 15.3% respectively.

LEASING AND ASSET MANAGEMENT:

During the period over 22,000 square metres (sqm) and 61,000 square feet (sqft) was leased across the portfolio. This resulted in over $A10.6 million and US$3.4 million of annual rental income being secured. IOF’s tenant retention rate for the period was a healthy 69%.

Of the key leasing deals completed during the period, over 2,700sqm was leased at 111 Pacific Hwy, North Sydney, taking occupancy at the building to 100% from 82% six months ago. At 16-18 Mort St, Canberra, the existing whole building tenant (Federal Department of Employment, Science and Training) has been retained for a further five years over 14,500sqm.

New leasing during the period continues to show positive uplifts on in-place rents, with Brisbane and New York recording average increases of approximately 45% on previous rents.

Like-for-like net property income growth was 3.2% across the portfolio, the occupancy rate ended the year at 97% and the weighted average lease term of the portfolio is 5.3 years.

The Fund’s portfolio is currently weighted 54% to Australia, 23% to the US and 23% to Europe. In total, 48% of the Fund’s portfolio is located in New York, Washington DC, Paris and Sydney, with these four cities ranking in the top 10 cities for global property investors.

ACQUISITIONS AND DISPOSALS:

IOF acquired three properties during the period located in the core office markets of Perth, Washington DC and Brussels. Wellington Central Perth was acquired for A$81.5 million, 2980 Fairview Park, Virginia was acquired for US$52.5 million, and Bastion Tower, Brussels for €71.2 million. Each asset has a distinct investment strategy and is forecast to deliver attractive risk adjusted total returns to the Fund over the long term.

The Fund continued to dispose of non-core assets during the period with the sale of 1 Adelaide Terrace, Perth in July for $87.0 million. The sale price reflected a 22% premium to book value, and provided the Fund with an attractive compound total return of 12.4% per annum over its 20 year ownership. Management regularly reviews the forecast performance of each asset, and where it considers it warranted and financially prudent will continue to selectively dispose of non-core assets.

REVALUATIONS:
Independent valuations were completed on eight Australian properties over the period, resulting in a book value increase of $110 million or approximately 13% to $819 million. The result of these valuations and other fair value movements during the period lead to a
4.0% increase in the Fund’s Net Asset Value to $1.80 per unit.

Based on property values at 31 December 2007, the Fund’s weighted average portfolio capitalisation rate is 6.1%, comprising:

• 6.5% for the Australian portfolio
• 5.7% for the European Portfolio
• 5.4% for the US portfolio.

CAPITAL MANAGEMENT:

IOF has no debt facilities maturing until June 2010 and has an average term across all debt facilities of 4.2 years. With total look through assets of $3.9 billion, the Fund’s look through gearing at 31 December 2007 was 35.7%, a 460 basis point reduction from 31 December 2006. IOF also has over $560 million of undrawn debt facility available to take advantage of future investment opportunities.

The Fund’s US$ and € interest rates are hedged for average terms of 6.5 and 5.6 years respectively, with all offshore income hedged for 4.5 years.
IOF’s hedging strategy and the fact that IOF has no exposure to rising $A interest rates, ensures the Fund’s earnings are well insulated from interest rate and currency movements over the medium term. The Fund’s balance sheet is also insulated from foreign exchange movements, with foreign denominated assets matched by foreign denominated liabilities/debt.

OUTLOOK:

“IOF is continuing to operate from a strong position and with a disciplined strategy. However, one of the major issues currently facing all property owners is the direction of property cap rates and values over the next 12 months. With a portfolio that is diversified across core markets in Australia, Europe and the US, and with a significant difference in interest rates and bond yields across these regions, we believe IOF’s portfolio is well positioned to withstand any possible cap rate decompression in the future,” said Mr
Tanfara.

The Fund’s earnings are well insulated to weather any continuing volatility in global capital markets through a high quality portfolio, diversification to key global office markets, minimal leasing risk and a strong balance sheet with surplus debt capacity.

This, together with generally strong office market fundamentals across the markets IOF is invested in, ensures the Fund is well placed to continue to deliver consistent income returns to investors, whilst taking advantage of attractive investment opportunities which may arise via the ING Real Estate global platform.

Management confirms its FY 2008 full year distribution guidance of 10.75 cents per unit.

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Marc Pallisco

A former property analyst and print journalist, Marc is the publisher of realestatesource.com.au.

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