ING Office Fund December 2004 Half Year Presentation
ING Real Estate Global network North America USA Atlanta Boston Chicago Dallas Denver Los Angeles New York Philadelphia Seattle Washington DC Europe Europe The Hague Budapest Brussels Frankfurt London Madrid Milan Paris Prague Warsaw South East Asia China Australia Asia Bangkok Beijing Hong Kong Seoul Shanghai Singapore Taipei Tokyo Australia Brisbane Melbourne Perth Sydney ING Real Estate Offices Global assets under management AUD77 billion 2
ING Real Estate 2004 Highlights Acquisition Rodamco Asia - Euro832m AuM - Platform for further growth in Asia ING Global Real Estate Income Fund - USD2.2bn AuM - Largest ever IPO in real estate sector 21% portfolio increase - Successful fund launches - Growth of finance portfolio 3
ING Real Estate Global structure ING Group ING Real Estate Development Investment Management Finance Europe USA Asia Australia 4
ING Office Fund Local and US Management team Managing Director ING Real Estate Investment Management Australia Hugh Thomson Chief Executive Officer ING Office Fund Tino Tanfara Accounting, Finance & Legal Jenny Saliba Chief Financial Officer Marketing & Communications Janine Graetz Marketing & Communications Manager Asset Management Michael Carabetta Portfolio Manager Capital Transactions Garry Wilcox Capital Transactions Manager - Commercial ING Clarion (US) Jeff Barclay Capital Transactions Craig Tagen Asset Management 5
Presentation overview Six months of value Australian market summary and outlook US economic and office market outlook Portfolio summary 6
Six months of value Performed Operating profit 9.8m to $54.3m EPU 10.4% to 5.64cpu EPU normalised 3.7% to 5.30cpu Like for like NPI 3.4% Retained earnings $6.5m 7
Six months of value Returned 6mths 12mths 3years* IOF 17.2% 25.3% 12.7% UBS COM 21.3% 27.1% 10.9% Ranking 2nd 2nd 1st Source: UBS 4/1/05 * p/a compound return 8
Six months of value Asset managed Leased 40,257sqm, representing 9% of the entire portfolio Secured $11m of rental income Extended ATO at Box Hill for 7yrs until 2014 Sourced Telstra & Air New Zealand into 9,564sqm at 151 Clarence St Improved occupancy at MLC Centre, Brisbane to 99% Maintained long average lease duration of 5.8 yrs and high portfolio occupancy of 99% 9
Six months of value Acquired Mitretek Building Washington DC metro USD92.8m New York Washington DC Dallas Computer Associates Plaza Dallas metro USD43.5m Freehold interest 347 Kent St Sydney CBD $29.3m 10
Six months of value Raised $76.2m Institutional placement Aug 04 $37.5m Unit Purchase Plan Oct 04 Awarded Gold, Green Globe Award for energy savings across the portfolio 11
Results summary Operating profit Dec 04 Dec 03 $m $m Net property income 75.64 64.77 Net interest (16.69) (15.91) RE fee (3.92) (3.81) Other costs (0.69) (0.53) Operating profit 54.34 44.52 EPU (cents) 5.64 5.11 EPU (cents) normalised* 5.30 5.11 DPU (cents) 5.10 5.10 10.4% headline EPU growth, 3.7% normalised EPU Growth * Normalised excludes $3.4m ATO payment (Cheltenham) 12
Results summary Earnings per unit 5.6 Cents per unit 5.64 5.4 5.2 5.0 4.8 4.82 5.03 5.11 5.22 5.30 4.6 4.4 Dec 02 Jun 03 Dec 03 Jun 04 Dec 04 Stabilised and growing earnings 13
Results summary Net property income ATO Cheltenham payout $3.4m Sale of 50% of 10 20 Bond St ($3.5m) Mitretek & Computer Associates acquisitions $4.8m 111 Pacific Highway acquisition $3.0m 900 Third Avenue leasing $2.7m MLC Complex & AGC leasing $1.1m Other ($0.6m) Movement in net property income $10.9m Like for like NPI growth of 3.4% 14
Results summary Leasing activity completed Area (m²) 990 Whitehorse Rd, Box Hill 21,235 151 Clarence St, Sydney 9,564 MLC Complex, Brisbane 5,003 Aust Govt Centre, Brisbane 2,135 628 Bourke St, Melbourne 1,337 10 20 Bond St, Sydney 410 111 Pacific Highway, North Sydney 364 105 151 Miller St, North Sydney 209 Total leasing activity 40,257 Representing 9% of portfolio or $11m p.a. of income 15
Results summary Other key indicators Dec 04 Dec 03 Total assets (look through) $1.85b $1.63b Gearing (look through) 36.8% 35.9% Retained earnings $7.4m $0.9m NTA (per unit) $1.13 $1.12 Units on issue 999.1m 901.9m No. of unit holders 31,475 33,788 Average lease duration 5.8yrs 5.8yrs Retained earnings improve, gearing stable 16
Australian market summary and outlook Annual face rental growth outlook 3 yrs* Sydney 2.6% North Sydney 1.8% Melbourne 0.2% Brisbane 4.7% Canberra 2.7% Ave. 2.0% Current Incentives* 20% - 25% 27% - 32% 30% - 35% 17% - 22% 7% - 12% 22% - 27% 3 year outlook - moderate face rental growth expected - stronger effective rental growth expected for most markets * Source: ING Real Estate 17
Australian market summary and outlook Economic rent premium / discount to market rent $sqm net face rent 650 600 550 500 450 400 350 300 250 590 530 Sydney Economic rent* 415 380 North Sydney 390 330 Market rent 360 350 315 305 Melbourne Brisbane Canberra Rent required to justify new construction 10% - 15% above market rents for most markets New supply unlikely to be currently feasible without significant pre-commitment Rental growth forecasts suggest minimal new supply in short term * Assumes A-grade CBD office tower with profit and risk margin of 10% 15% 18
Australian market summary and outlook Summary and 3 year outlook Recovery currently underway in annual net absorption* - 191,000sqm for 2004 v (61,000)sqm for 2003 Improving face rental growth and declining incentives expected for Sydney and Brisbane North Sydney and Canberra expected to remain stable Further downward pressure on effective rents expected for Melbourne 50 basis point yield compression for investment grade assets during 2004 Further firming of yields expected in 2005 * Based on major eastern seaboard markets. Source: JLL 19
Australian market summary and outlook Research & Strategy Research & Strategy Australia Australian CBD Office Property Market Overview February 2005 A copy of this report is available at www.ingrealestate.com.au/investment 20
US economic and office market outlook 21
The US economy Real yield for the 10-year treasury Real Current Yield 10% 8% 6% 4% 2% 0% -2% 200 bpts compression since 1995-4% -6% Mar-54 Mar-58 Mar-62 Mar-66 Mar-70 Mar-74 Mar-78 Mar-82 Mar-86 Mar-90 Mar-94 Mar-98 Mar-02 Yield on the 10-year US treasury has compressed to its historical average of 2% real 10 yr bonds appear fairly valued 22
The US economy US yield curve 5.0 4.5 4.0 Yield % 3.5 3.0 2.5 2.0 1.5 1.0 2005_24_Jan 2004q4 2004q3 2004q2 3-Month 6-Month 1-Year 2-Year 3-Year 5-Year 7-Year 10-Year Sequential yield curves show long bonds remain relatively stable as the short end flattens Mid-range maturities remain steady reflecting little change in cost of debt 23
The US economy Industry sector job growth 130 High-Tech Mfg. Health Services 120 110 Health Services Back Office Services Financial Services Office sector 100 Government 90 Information Services Consumer Services 80 70 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Transportation Basic Materials Trad. Mfg. High-Tech Mfg. Mfg sector 5 year outlook for office employment is significantly higher than total employment Health, Financial Services and Government expected to provide strongest growth Source: Economy.com 24
US office market overview Snapshot of key trends in 2004 Recovery in annual net absorption - 57.4m sqft (2.2%) for 2004 v 11.9m sqft (0.5%) for 2003 Forecast supply remains in check for most markets Downward pressure on the national vacancy rate - 15.6% at Q4 2004 v 17.0% at Q4 2003 Effective rental growth has stabilised - 0% for 2004 v (3.7) for 2003 Capital values have firmed due to buoyant continued investor demand and improving fundamentals Source: Real Capital Analytics 25
US office market overview National supply and demand % of Stock 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% Net Abs. % Stock Const % Stock Vacancy (RHS) 25% 20% 15% 10% 5% 0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Vacancy Rate Job growth in office using sectors has rebounded Recovery well underway as vacancy rates have begun to fall Declining incentives most evident in major markets Source: ING Real Estate, Real Capital Analytics 26
US office market overview Strongest office employment growth markets Size (sqft) Annual Office Employment growth 2000 2004 2005 2009 (F) New York 348m -9,850 28,492 Washington DC 248m 29,248 37,898 Chicago 213m -6,200 29,746 Los Angeles 175m 15,672 24,358 Dallas 142m 3,964 26,004 Houston 136m 11,938 26,898 Atlanta 124m 7,226 32,380 Seattle 75m 4,200 23,964 Phoenix 58m 16,164 29,198 Total 1,519m 72,362 258,938 Source: Real Capital Analytics, Economy.com 27
US office market overview Annual office property transaction volume (all classes) 14 12 Q4 02 Q4 03 Q4 04 (USD bill) 10 8 6 4 2 - New York Washington DC Dallas LA C hicago Boston Transaction volumes show approx. 40% increase during 2004 Sustained domestic and international investment in US office property Improving liquidity seen in major markets as recovery sets in Source: Real Capital Analytics 28
US office market overview US office property cap rates (all classes) 10.5% 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% New York Washington DC Q4 02 Q4 03 Q4 04 Dallas LA C hicago Boston Yield compression in 2004 of 25 bpts 100 bpts across most markets & classes Compression driven by; attractive yield differential to bonds, increased domestic and global capital flows, and improved office market outlook Source: Real Capital Analytics 29
US office market overview Face rental growth and vacancy outlook in major markets Rental growth Vacancy Vacancy (3yr forecast) (Current) (3yr forecast change) New York 4.5% 8.1% -0.5% Washington DC 4.0% 10.3% -1.3% Chicago 1.5% 17.8% -3.5% Boston 0.8% 16.7% -2.1% Atlanta 2.0% 19.3% -1.5% Los Angeles 4.0% 13.9% -3.9% Dallas 2.1% 26.2% -6.2% Ave 3.0% 14.4% -2.3% strengthening face rental growth forecast across most markets firming vacancy rates expected to drive stronger effective rental growth Source: ING Real Estate, Real Capital Analytics 30
US office market overview Summary US 10 year treasury bond remains steady as short end flattens Medium to long term cost of debt remains stable 5 year outlook for office employment is significantly higher than total employment Strengthening effective rental growth and declining vacancies expected Improving transaction volumes and liquidity Continued attractive yield spread to US 10 year bonds (approx 250bp) 31
US office market overview IOF US portfolio Capital value Cap rate* WALE Occupancy (USD) 900 Third Avenue, 114.7m 6.85% 5.8 yrs 100% New York Mitretek Systems HQ, 92.8m 6.50% 12.1 yrs 100% Washington DC Computer Associates Plaza, 53.5m 8.00% 7.0 yrs** 100% Dallas Portfolio total/ave. 261.0m 6.95% 8.2 yrs 100% * Cap rate on acquisition. ** Assumes break clause exercised in 2012. Leased until 2017. 32
Portfolio summary Yield spreads of global office markets Australia USA UK Europe Japan Avg yield (after costs) 6.85% 6.75% 5.50% 6.00% 4.50% 5yr swap 5.62% 3.89% 4.83% 3.00% 0.68% 10 yr bond 5.31% 4.19% 4.81% 3.87% 1.40% 5yr spread 1.23% 2.86% 0.67% 3.00% 3.82% 10yr spread 1.54% 2.56% 0.69% 2.13% 3.10% Source ING Real Estate Global spreads vary across markets 33
Portfolio summary Average lease term by income 75% 65% 55% 45% 99% occupancy Improved long term expiry Focus on 2006-2008 40% 35% 25% 15% 5% 1% 2% 8% 10% 15% 12% 12% 25% -5% Vacant 30-Jun-05 30-Jun-06 30-Jun-07 30-Jun-08 30-Jun-09 30-Jun-10 30-Jun-10+ 30-Jun-10+ (Dec 03) Average lease term remains strong at 5.8 years 34
Portfolio summary Leasing focus Tenant Property FY06 FY07 FY08 Citipower 628 Bourke St, VIC 1% Centrelink Terrica Place, QLD 1% AGL 111 Pacific Highway, NSW 2% ATO 40 Cameron Avenue, ACT 3% Common. of Aust. Royal Mint Centre, VIC 2% ATO Terrica Place, QLD 2% Zweig Advisors 900 Third Avenue, NY 1% MLC 105 151 Miller St, NSW 5% Woodside 1 Adelaide Terrace, WA 2% DEST 16 18 Mort Street, ACT 3% Kroll Associates 900 Third Avenue, NY 1% Major expiries 4% 8% 12% Total expiries 8% 10% 15% Manageable expiries 35
Portfolio summary Rent reviews FY 2005 FY 2006 Market 22% No review 43% Market 12% No review 54% Fixed 32% Fixed 33% CPI 2% CPI 2% Average fixed increase 3.8% Average CPI increase 3.4% Average fixed increase 4.9% Average CPI increase 2.9% Predominantly structured rent reviews 36
Portfolio summary AUD interest rate hedging 100% 7.0% 90% 80% 6.5% Percentage Debt Hedged 70% 60% 50% 40% 30% 20% 6.0% 5.5% Average Hedged Cost of Funds 10% 0% 5.0% Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 % of Debt Hedged Hedged Rate 96% hedged for average of 3.0 years @ 5.9% 37
Portfolio summary USD interest rate hedging 100% 5.0% 90% 4.5% 80% 4.0% Percentage Debt Hedged 70% 60% 50% 40% 30% 3.5% 3.0% 2.5% Average Hedged Cost of Funds 2.0% 20% 10% 1.5% 0% 1.0% Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 % of Debt Hedged Hedged Rate 96% hedged for average of 4.0 years @ 3.7% 38
Portfolio summary USD/AUD income hedging 0.70 0.68 0.66 0.64 0.62 0.60 Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 USD/AUD forward FX rate Jun 09 Dec 10 FX blending 100% hedged until 2010 Aug 04 FX rate Blended FX rate Aug 03 FX rate 39
Portfolio summary Geographic diversification Canberra 5% Perth 3% Dallas 4% Washington DC 7% Sydney 44% New York 8% Brisbane 13% Melbourne 16% US weighting (19%) to three of the largest office markets 40
Summary Portfolio in strong position with little risk Commitment to improving earnings; - Active asset management/retention/leasing - Increased US asset allocation - Value add opportunities locally and US - ING Real Estate global platform Prudently address 2006 2008 lease expiries Deliver growth Diversified office portfolio focused on income security and growth 41
ING Office Fund Thank you & questions A copy of this presentation is available at www.ingrealestate.com.au/investment Disclaimer: This presentation has been prepared by ING Management Limited, the Responsible Entity of the ING Office Fund. It is intended to provide a summary of the Fund's results for the financial year ending 31 December 2004. ING Management Limited believes the information to be correct, however makes no warranty as to the accuracy, reliability or completeness of the information. 42