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Aussie REITs Turn Sour on U.S. Office Holdings

Holdout Charter Hall Office the Lone Australian REIT Looking To Build on its U.S. Portfolio
March 24, 2010
Continuing to struggle under anemic market conditions, U.S. office properties have fallen out of favor with Australian REITs, with at least two looking to sell U.S. assets and another shifting its investment focus back 'Down Under.'

CoStar Group reviewed the 2009 performance and outlooks for four Australian REITs with major U.S. office property holdings: Tishman Speyer Office Fund and RNY Property Trust, which hold only U.S. properties, and ING Office Fund and Charter Hall Office REIT (formerly Macquarie Office Trust). Ironically, the two U.S.-only funds are the only ones that currently indicate they intend to discard assets. Tishman Speyer said it expects to sell its portfolio by 2015 and RNY said it plans to continue selling selective assets.

However, the performance reported by the two multinational funds show why U.S. office properties are out of favor.

ING Office Fund, for example, saw its like-for-like rental growth average 2.1% last year across its entire portfolio. However, looking across the firm's geographies reveals some glaring differences. Rents in the firm's European office holdings increased 12.1% last year, Australian office rents increased 5.7%, while rates in ING's U.S. holdings fell an average of 18.1%.

Similarly, ING Office Fund said its average office portfolio occupancy stood at 91% at the end of 2009. Occupancy among its Australian office portfolio was 96%, European occupancy was 92% while its U.S. office occupancy was 79%. In fact, the majority of the ING Office Fund’s current average 9% vacancy rate came from just two U.S. properties: the 219,000-square-foot Waltham Woods at 880 Winter St. in Waltham, MA, which has 201,000 square feet available for lease; and the 334,000-square-foot Park Tower at 2980 Fairview Park Drive in Falls Church, VA, which is 100% available.

ING Office Fund owns five U.S. properties in all -- two in Falls Church, one each in Dallas, New York and Boston with a combined carrying value of $437 million.

ING Office Fund reported that U.S. office property values appear to be stabilizing, but in assets where there is leasing risk or vacancy, values have continued to adjust downward. The fund's major operational focus this year is achieving higher occupancy, particularly in the U.S.

"Although office markets are showing signs of improvement, conditions continue to remain challenging, particularly in the U.S. IOF's focus is to enhance its earnings and operational performance through improved occupancy and pro-active asset management over the year ahead. From a strategic perspective the fund will be looking at increasing its Australian weighting as appropriate opportunities arise," said Tino Tanfara, CEO of ING Office Fund.

Tishman Speyer Office Fund reported a loss for the second half of 2009 of about $14.86 million. That is still better than the $203 million the fund lost in 2008. The fund owns 16 properties in the major market areas of Seattle, San Francisco, Los Angeles, Chicago, New York, Philadelphia and Washington DC.

In the fourth quarter of last year, Tishman Speyer Office Fund announced it intends "to fully realize TSO's assets, in an orderly and efficient manner over the medium term (expected to be 2013-'15, in line with the liquidation of the Prime Plus Portfolio), with capital to be returned to unitholders."

The Prime Plus portfolio includes such properties as: 300 Park Ave. in New York, 26 stories, 777,658 square feet and 400 Castro St. in Mountain View, CA, six stories, 138,681 square feet.

Tishman Speyer Office Fund has finalized a financing of 300 Park Avenue, which was previously unencumbered. Terms have been agreed upon for a $135 million loan, which would generate net proceeds for the fund of approximately $59 million, after closing costs. That deal is expected to be completed this month. The loan proceeds will enhance the fund's liquidity and provide resources for increasing portfolio occupancy, which at year-end stood at 90.2%, down from 91.4% as of June 30, 2009.

Tishman Speyer Office Fund still has $400 million of debt maturing in May 2010. As part of debt restructure negotiations, lenders have agreed significant covenants relief, including increasing the maximum gearing ratio to 85% and reducing the minimum net worth requirement to $125 million. For the rest of the year, Tishman Speyer Office Fund said it will continue to focus on asset management and leasing to maximize asset values.

RNY Property Trust owns 24 properties in the New York Tri-State area key submarkets, which include Westchester County (New York), Fairfield County (Connecticut), Long Island (New York) and Northern New Jersey. The REIT lost $42.1 million in 2009 mainly from property value writedowns of $65 million -- a 14.6% valuation decline from year-end 2008. 2009-end occupancy was 88.4% vs. 92.9% at the end of 2008.

RNY reported that is has about $225 million in debt maturing this fall and would selectively sell assets to help deal with them, as well as pursue some mid-range extensions and restructurings.

RNY also reported having some specific tenant issues to address this year. As of Dec. 31, RNY had 501,000 square feet of space expiring in 2010, including 68,000 square feet of space to be recovered from Lend America at 520 Broadhollow Road in Melville, NY, and 32,000 square feet of space to be given back by tenants who have already signed renewals. RNY was projecting a renewal rate of only about 60% this year.

RNY said it intends to pursue a strategy of conserving cash by not paying unitholder distributions and limiting base building capital expenditures to only essential projects. RNY reported having cash on its U.S. LLC's books of $9.5 million as of Dec. 31, 2009.

Lastly, Macquarie Office Trust became Charter Hall Office REIT after Charter Hall Group in Sydney, Australia, acquired the majority of Macquarie Group Ltd.'s core real estate funds management platform.

Charter Hall Office REIT reported net property income of $158.4 million for the half year ended Dec. 31.

Unlike its sister REITs, Charter Hall Office REIT is planning to sell its European and Japanese assets while building up its U.S. and Australian portfolios.

"The trust will continue to reinvest in its existing assets so that as market fundamentals improve, the portfolio will be well positioned to benefit from a recovery," said Adrian Taylor, CEO of Charter Hall Office REIT. "Specifically, we see significant opportunity to recapture value through the cycle by reinvesting into our high quality U.S. portfolio. As such, we will not look to sell assets at the low point in the cycle, but will instead invest in our U.S. portfolio to maintain and enhance occupancy and future cash flow with the objective of recovering value as markets start to improve." "We will continue to pursue an orderly exit of the smaller portfolios in Europe and Japan, in order to reduce leverage, simplify the portfolio composition and enhance liquidity over the medium-term," Taylor added.

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