Macquarie Office Trust Portfolio Update: Solid Rental Growth Across the Portfolio

• Strong rent review results with an average increase of 7.5 per cent in the US and
4.6 per cent increase in Australia.
• US leasing drives a weighted average increase of 24 per cent over prior in place rents
• Record rental levels achieved in a number of US and Australian assets
• Recycling capital into Asian markets

Macquarie Office Chief Executive Officer Adrian Taylor said: “We are pleased with the progress the Trust has made over the past quarter. Occupancy is 96 per cent and we have negotiated strong leasing results. We have also undertaken a series of high quality capital transactions where recent properties acquired are expected to benefit from a positive reversion of rents. All of this has been achieved during a period of volatility in global markets.

The quality of our portfolio has been improved following asset sales in the past year, and the high occupancy above industry benchmarks reflects the overall strength of our investment strategy, our management team and the attractiveness of the assets to occupiers.”

Portfolio management

The Trust has taken advantage of the strength of office markets in which its assets are located to maintain high occupancy and drive income growth with a number of new leases executed totalling 37,576 sqm with terms agreed over a further 17,261 sqm.
Global portfolio occupancy is 96 per cent with the Australian portfolio remaining 99 per cent occupied, the US portfolio at 95 per cent, and Japan and Europe portfolios both at 100 per cent. [1]
Australian portfolio

With minimal portfolio vacancy the management team has worked to deliver rental income growth through its active customer service strategy securing lease extensions with many existing customers resulting in strong rental reversions. Rent reviews during the period resulted in an average increase on prior rentals of 4.6 per cent.

Highlights for the Australian portfolio include:

Citi Centre, 2 Park Street, Sydney – The period has seen a new benchmark rent achieved in the property of A$820 per sqm net on level 38, being a 60 per cent increase over the previous rent for this space. Following this result, terms have been agreed for a 10 percent increase in Citi’s rent for their July 2007 market rent review over 34,836 sqm in the low to mid-rise floors. This result adds approximately A$1.6 million to the property’s net income per year (of which the Trust has a 50 per cent interest). The Sydney CBD market is continuing to experience strong net absorption with low uncommitted supply in the next three years which will continue to add upward pressure to rents.

Eastpoint Plaza, Perth – Capitalising on the strength of the Perth market which has less than 1 per cent vacancy, the Trust agreed terms in the building at A$465 per sqm net on more than 500 sqm. This rate is a 175 per cent increase over the previous rent. At acquisition, the average net rent on the building was A$220 per sqm net. The Perth market continues to experience high rental growth and is expected to continue to post rents in excess of initial forecasts for this property.

5 Queens Road, Melbourne – Leighton Contractors Pty Ltd have recommitted to the building with a new lease on level one and taking additional space on level six with co-terminus leases to November 2015 for 2,958 sqm. Leighton now occupies 17 per cent of the building. The weighted average lease expiry has increased from 2.0 years to 2.9 years and rent levels have increased to a new benchmark rent for the building.

505 Little Collins Street, Melbourne – United Customer Management Services (UCMS) has taken a new five year lease for part of level five and the whole of level six (2,624 sqm), comprising approximately 15 per cent of the net lettable area. Heads of Agreement have also been reached on the remaining 289 sqm suite taking the occupancy up to 100 per cent in both this asset and the Victorian portfolio as a whole.

NCR House, North Sydney –NCR have agreed to renew nearly 3,000 sqm, or approximately 33 per cent of the building. The North Sydney market is tightening with movement of tenants from the space constrained Sydney CBD.

US Portfolio

Over the period, the asset management team and our joint venture partners negotiated lease renewals over 108,244 sqft producing an average 44 per cent increase over the prior rental, which was primarily driven by Pasadena and Stadium Gateway in California.

The full leasing results, with renewals and new leasing, totalled 210,942 sqft, and when combined with terms agreed over a further 80,648 sqft, produced on average a 24 per cent increase in rental levels.

Around 13 per cent of the US portfolio was subject to rent reviews over the September quarter with an average increase in rents of 7.5 per cent. This was mainly due to the rent review negotiated as part of Wells Fargo’s lease extension in Denver.

The Trust has performed well in the US market, securing some excellent leasing success such as the Wachovia Financial Center in Miami where occupancy has increased from 96 to 98 per cent.

Highlights for the US portfolio include:

Wachovia Financial Center, Miami Florida – In total, leases have been executed and terms agreed over 62,167 sqft taking occupancy from 96 per cent to 98 per cent.
KPMG has committed to a ten year lease for 29,559 sqft and the Trust has recently agreed a lease renewal in one of the upper floor suites which will set a new high watermark rent over US$50 sqft. The Miami market continues to show strong signs of rental growth for premium buildings, like Wachovia Financial Center with market vacancy for competitive buildings below 5 per cent. We expect the strong market occupancy to continue to drive rents.

Washington Mutual Campus, Irvine California – The Washington Mutual lease in Building D expires in November 2007; however the Trust has been able to maintain the property’s 100 per cent occupancy rate with the signing of Stratacare. The new lease commencing in January 2008 is for six years and 10 months and takes the entire 54,350 sqft building. This campus has a weighted average lease expiry of 5.2 years, with no expiries until November 2009 and is now well insulated against any near term increases in market vacancy.

Stadium Gateway, Anaheim California – Toyota Motor Credit has extended their commitment to the building over 18,724 sqft for a further three years from January 2008 at a starting rent over 40 per cent above their current rate. Average rents in the building have increased 45 per cent since acquisition in May 2005.

Following the scheduled downsizing of the Countrywide lease (agreed at the beginning of 2007) from one floor (46,887 sqft) to 29,235 sqft, from October 2007, the property will be 92 per cent occupied with a weighted average lease expiry of 4.8 years.

One California Plaza, Los Angeles California – The Trust has executed and agreed terms on more than 54,000 sqft over the period at rates in excess of US$22 per sqft net, up from approx US$17 per sqft at acquisition. Downtown LA is well positioned to capitalise on low vacancy in the surrounding LA suburbs, which has resulted in significant rental differentials. This is forecast to drive rental growth over the next two years which One California Plaza is in a good position to capture. We believe the market and the prominence of this property will continue to deliver strong rental growth over the medium term.

Pasadena Towers, Pasadena California – Rents in this property continue to rise with the latest terms agreed at US$60 per sqft gross over more than 8,500 sqft. Over the period the Trust has signed leases and agreed terms over more than 32,000 sqft at a weighted average increase of more than 80 per cent over the previous rent. The Tri-cities market (including Pasadena) continues to perform well, with a steady vacancy rate over the last quarter of 6.1 per cent. [2]
Portfolio re-weighting for higher growth

“The past few months have been a busy period which saw the Trust crystallise gains from the sale of its Chicago asset and also invest into opportunities providing greater portfolio diversity and potential for higher total returns to investors. These include opportunities to reposition under rented assets in markets experiencing strong market rental growth such as Perth, Sydney and Tokyo,” Mr Taylor said.

The success of the capital recycling strategy has been demonstrated by the sale of 10 & 30 South Wacker, Chicago. In selling the Trust’s interest for US$171.5 million, a US$40 million gain was realised, with the proceeds successfully reinvested. The disposal program has continued with terms agreed for the sale of the Lang Centre in Parramatta above book value.

Following the recent diversification, the Trust now has 8 per cent of assets in Europe, 1 per cent in Japan, 39 per cent in Australia and 51 per cent in the US (down from 55 per cent 12 months ago).

Capital Management

The management team has continued to actively manage the Trust’s capital needs during the period. The multi-currency syndicated bank debt facility has grown to over A$670 million with capacity for up to A$900 million with an increased margin of between 10-20 basis points. On the current drawn debt, this equates to an additional annual expense of approximately A$700,000 to $1.4 million. Four major banks participate including representation from Australia, Asia and Europe. Property level debt at Wachovia Financial Center, Miami of US$81.2 million was refinanced and will save US$660,000 per annum including margins.


Globally, office markets have performed strongly over recent years.
Mr Taylor said: “We have seen particularly strong market movements in Australian CBDs, especially in Brisbane and Perth, both of which have historically low vacancy levels with limited supply being delivered in the next two years. Macquarie Office has captured the upswing again this period through leasing transactions, and we still see further rental reversionary opportunities at 59 Goulburn Street in Sydney and Eastpoint Plaza in Perth which are significantly under-rented and where we are already negotiating terms in excess of the acquisition forecasts.”

Mr.Taylor added: “Currently, several major Australian markets lack new supply with lead times of two to three years before significant new stock is completed. With low vacancy rates, this should be the catalyst for strong rental growth.”

Our expanded asset management team in the Chicago office and our joint venture partners have worked to insulate the US portfolio against the recent vacancy concerns in some US markets. The Trust’s assets are well differentiated in their markets and provide a high quality alternative for customers.

Those assets located within markets which have significant exposure to sub-prime mortgage businesses are well located, have strong tenant profiles, healthy weighted average lease expiries and are of a high quality. Importantly, the Trust’s exposure to sub-prime mortgage related businesses is 0.6 per cent of global property income.

In Europe, our London based asset management team has received several positive enquiries from corporate tenants at City Central in Milan. Conversion of these enquiries should provide secure long term covenants to increase the asset value and provide strong total returns for unitholders.
With rental growth in Tokyo at its strongest in 15 years, the Trust’s recently acquired assets are well placed to capture potential income growth.

Macquarie Office Trust is a listed property trust with assets under management of A$6.0 billion (including associates) located within Australia, the United States, Western Europe and Japan. Circa A$24 billion of real estate assets are managed globally by Macquarie Real Estate and its associates, across a portfolio of listed and unlisted property trusts, unlisted development funds and property investment syndicates. Macquarie’s real estate investment management expertise has been recognised internationally, voted No. 1 in Investment Management in Asia, Australia, China, Hong Kong, Singapore and the US in the 2007 Euromoney Liquid Real Estate Awards.


This information has been prepared by Macquarie Office Management Limited ABN 75 006 765 206 (MOML) for general information purposes only, without taking into account any potential investors’ personal objectives, financial situation or needs. Before investing, you should consider your own objectives, financial situation and needs or you should obtain financial, legal and/or taxation advice.
MOML does not receive fees in respect of the general financial product advice it may provide, however it will receive fees for operating MOF which, in accordance with the MOF Constitution, are calculated by reference to the value of the assets and the performance of MOF. Entities within the Macquarie Group may also receive fees for managing the assets of, and providing resources to MOF. For more detail on fees, see our latest annual report. To contact us, call 1300 365 585 (local call cost).
Past performance is not a reliable indicator of future performance. Due care and attention has been exercised in the preparation of forecast information, however, forecasts, by their very nature, are subject to uncertainty and contingencies, many of which are outside the control of MOML. Actual results may vary from any forecasts and any variation may be materially positive or negative.

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Marc Pallisco

A former property analyst and print journalist, Marc is the publisher of