ASX/Media releasePROFITABLE SALE OF 505 LITTLE COLLINS STREET...

ASX/Media release
PROFITABLE SALE OF 505 LITTLE COLLINS STREET BRINGS TOTAL SALES FOR THE FINANCIAL YEAR TO A$340 MILLION
9 April 2008
Macquarie Office Trust (ASX: MOF) today announced an unconditional contract had been entered into for the sale of 505 Little Collins Street, Melbourne for A$83 million at a significant premium to book value. The transaction represents a significant return for the Trust and reinforces Management’s commitment to realising assets and repaying debt with the view to enhancing unitholder value.
Key features of the transaction include:
•
A$40.4 million gain (96%) above costs including all historical capital expenditure
•
Levered IRR of 28% per annum over the eight years since acquisition
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Proceeds will be utilised to reduce debt and gearing levels
Chief Executive Officer, Adrian Taylor said: “In line with our strategy, we will continue to make selective asset sales where it makes sense. The sale of 505 Little Collins Street represents a strong result for investors. Proceeds from this transaction will be used to further strengthen the balance sheet and reduce debt and gearing.”
At 16% above current book value, the sale reflects improved positioning of the property through active asset management and the strength of the Melbourne office market. The property, which was acquired in 2000 for A$28.5 million, has seen occupancy increase to 100% following tenant retention and new leases across 90% of the building in the past three years, while the weighted average lease term has increased from 1.9 to 5.6 years. A passing yield of 6% was achieved on the sale which was brokered by Richard Butler and Martin O’Sullivan of CB Richard Ellis Pty Ltd.
Macquarie Office Management Limited 2
Lang Centre Sale
In December 2007, the Trust announced that terms had been agreed for the sale of Lang Centre, Parramatta for A$35.4 million with a deferred settlement. The Trust confirms that settlement occurred on 31 March 2008, realising a net profit above historical cost of 16%.
Mr Taylor added: “The sale of 505 Little Collins Street, Melbourne and the Lang Centre, Parramatta highlight that the Trust has been able to achieve a substantial premium above independent valuations, reflecting the continued investor demand for high quality assets. We are confident our proven active asset management strategy will continue to drive the value of the Trust’s properties and enhance investor value.”
Sale of interest in SunTrust Financial Centre Tampa, Florida
Macquarie Office is also pleased to announce that on 24 March 2008, Stiles Capital Partners exercised their option to acquire a 9% interest in a joint venture that will own the SunTrust Financial Centre in Tampa, Florida for US$10.8 million which is equivalent to 9% of the Trust’s entry price. The Trust retains the remaining 91% interest.
Mr. Taylor said: “Macquarie Office looks forward to developing a strong working relationship with the Stiles Corporation through the ownership of this premier asset. Stiles’ expertise and local reputation in the Florida markets provides an excellent opportunity to maximise performance of the SunTrust Financial Centre.”
Covenant Gearing
As noted in the Trust’s half year results presentation the Trust’s syndicated bank debt facility contains a trust level gearing covenant of 60% defined as total liabilities to total tangible assets. At 31 December, the Trust’s gearing on this measure was 53%. On the industry practice measure of debt to total assets the Trust’s gearing was 43.8%.
A summary of the Trust’s look through balance sheet as at 31 December 2007 is included below and it is important to note the inclusion of a A$344 million non-current US deferred tax liability.
Balance Sheet Summary (look through)
A$’b
US properties 3.2
Other properties 3.1
Other assets 0.5
Tangible Assets 6.8
Goodwill 0.2
Total Assets 7.0
Borrowings 3.1
US Deferred tax liability 0.3
Other liabilities 0.2
Total liabilities 3.6
Macquarie Office Management Limited 3
Australian Accounting Standards require the US deferred tax liability to be recognised as the Trust has a prima facie obligation to pay US tax on any realised capital gains. In practice this liability can be deferred through reinvesting the proceeds in a replacement US asset. Moreover, over the past three years the Trust has successfully deferred payment of any capital gains tax arising from the sale of five assets.
Whilst the inclusion of the US deferred tax liability increases the trust level covenant gearing by 5.1% to 53% it also provides a buffer against falling US property values. Every US$1 drop in property value is accompanied by a US$0.35 reduction in the tax liability.
The matrix below summarises the impact of changes in US and non-US capitalisation rates based on the 31 December 2007 financial position.
US properties - 51% of portfolio (% increase in cap rate)
Current
5.8%
+100bps (17%)
+200bps (34%)
+300bps (52%)
+400bps (69%)
+500bps(86%)
Current
6.3%
53.0%
54.3%
55.4%
57.1%
59.4%
61.4%
+50bps
(8%)
54.8%
56.3%
57.6%
59.5%
61.9%
+100bps
(16%)
56.4%
58.2%
59.6%
61.7%
Other Properties - 49% of portfolio (% increase in cap rate)
+150bps
(24%)
58.0%
59.9%
61.5%
In isolation, US capitalisation rates could increase by more than 400bps (69%) before the Trust would be in breach of its covenant gearing.
If capitalisation rates in non-US regions increased by 75bps (12%) US capitalisation rates could rise by 275bps (47%) before reaching the gearing covenant.
Importantly, on the syndicate debt, recently announced leasing deals combined with reduced US interest rates has seen the syndicate debt security pool interest cover ratio increase to 2.8 times ensuring the Trust is comfortably able to service its debt.
Summary
“We are delighted with realising profits on these transactions and strengthening our balance sheet. These deals will bring the Trust’s total sales for the financial year to over A$340 million including the Trust’s property in Chicago in August last year. Management remains focused on enhancing unitholder value and will continue to pursue selective asset sales as appropriate and use the proceeds to pay down debt and reduce gearing, a prudent approach in the current market environment,” Mr Taylor added.
Macquarie Office Management Limited 4
Macquarie Office Trust is a listed real estate investment trust with assets under management of almost A$7 billion (including associates) located within Australia, the United States, Western Europe and Japan. Circa A$28 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.
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