Arena Office Fund FY14 annual results presentation 3 September 2014 www.arenainvest.com.au
Presenters James Goodwin Andrew Nicol Rob de Vos Joint Managing Director Appointed to the Board in January 2012. Previously held senior positions with Becton Property Group, Centro Properties Group and Freehills. 2 Fund Manager Joined Arena in February 2013. Previously held positions with Australian Unity Investments and Knight Frank in London. General Manager, Property Joined Arena in August 2012. Previously held positions with Jones Lang LaSalle, Becton Property Group and Ceramic Funds Management.
Agenda 1 Overview 4 2 Financial review 8 3 Property review 12 4 Outlook 18 5 Questions 20 6 Appendix 21 3
4 Overview James Goodwin
1.1 Key achievements Improving profits underpinned by strong leasing results. Positive total return growth Fund 12 month return of 19.0%, 5.8% above the IPD Unlisted Funds (1 year, office sector) benchmark. Significant increase in distributable income Major capex projects nearing completion Strong leasing results Distributable income up 11.7%. FY14 distribution payments increased by 5.5% to 2.6 cents per unit. Partial refurbishment of 600 St Kilda Road and the Eden Business Park seismic repositioning are now in the final stages, with both due for completion in December 2014. 17 lease deals completed in FY14 1, representing approximately 17% of the Fund s net lettable area. Sale of 280 George Street, Sydney Sold for $50 million in July 2014, a 16.3% premium to book value 2. Debt refinanced on improved terms Debt facility refinanced on significantly improved pricing with an annual interest saving of approx. $1.4 million. 1 Includes leases completed post balance date in July 2014. 2 As at 31 December 2013. 5
1.2 Strategy Stages one and two complete, stage three now being explored. 1 2 Stabilisation (distributions recommenced) Recovery (time in the market) Stabilised Remove financial distress. Stabilise fund balance sheet by reducing gearing to sustainable levels and Entitlement Offer. New debt facilities: appropriately priced with no unreasonable covenants. Recommence distributions to investors. Successfully implemented Asset manager to take active approach to optimise/maximise value. Time for property market to improve. Maximise distributable income to investors. Realise non-core assets at fair value. 3 Liquidity (opportunity to exit) JLL appointed to investigate options Seeking to provide liquidity for all investors by either: Selling individual properties; Selling portfolios of properties; Offers for investors units; or A business platform style transaction. 6
1.3 Liquidity Proposal to seek liquidity for investors Over the past year, the Board and management have investigated a number of potential liquidity options, including ASX listing, a sell down of assets, or a combination of both. The Board has resolved to adopt the following strategy: JLL has been appointed to test the market with regards to finding the best liquidity outcome for investors. This process will investigate a broad range of proposals, including selling individual assets, portfolios of properties, or offers for investors units or business platform style transactions. Outcomes This process will seek to identify the best avenue to provide liquidity to investors, focusing on: A preference for 100% liquidity; The time frame to provide a formal liquidity event; Maximising investor returns, up until and at any liquidity event; and The risks associated with completion of any proposals tabled. Timing A further announcement is expected for late October/November. Arena will continue to focus on managing the assets to improve the underlying portfolio metrics and to maximise value for investors while concurrently running the JLL process. 7
8 Financial review Andrew Nicol
2.1 Financial highlights Valuation gains and realised profit on asset sales driving performance Key metrics FY14 FY13 Change (%) Comprehensive profit attributable to $31.3m $29.7m 5.4% investors Distributable income $8.8m $7.9m 11.6% Distributable income per security 2.98 2.67 11.6% Distribution per security 2.60 2.46 5.7% Distribution pay-out ratio 87% 92% 5% Total assets $369.0m $346.8m 6.4% Balance sheet gearing 44.4% 47.7% 6.9% Net asset value $192.1m $168.5m 14.0% NTA per security $0.6514 $0.5713 14.0% Units on issue 294.95m 294.95m No change Balance sheet gearing reduced to less than 45% (post balance date LVR reduced to 36.1%, following the sale of 280 George Street, Sydney. NTA growth from strong investment property valuation performance. 9
2.2 NTA movement All balance sheet metrics showed improvement during FY14 $0.66 $0.64 $0.62 14.0% FY14 growth $0.60 $0.58 $0.56 $0.54 $0.52 NTA 30 June 2013 Revaluations Disposals Financial derivatives Other NTA 30 June 2014 The key driver of returns was property revaluations at +6.9% and profit on the sale of 280 George St, Sydney at +4.4%. The NTA movement was +14.0%. Inclusive of distributions (+5.0%), the total return was 19.0%. 10
2.3 Periodic performance summary Outperformed the benchmark IPD index Performance to 30 June 2014 Total return apportionment 6 months (%) 1 year (%) 2 years (%) (annualised) 3 years (%) (annualised) Since inception Income distribution 2.5 5.0 5.1 3.3 4.9 Capital growth 11.0 14.0 10.8 8.8 (7.2) Total return 13.5 19.0 15.9 12.1 (2.3) IPD Benchmark 1 N/A 13.2 11.3 10.9 N/A The focus on value recovery via reinvestment and asset management initiatives has been successful over the past three years, with the Fund out performing the benchmark IPD index in this time. 1 Benchmark IPD Unlisted Property Funds (retail investors) Index. 11
12 Property review Rob de Vos
3.1 Property portfolio overview Five office assets located in Sydney, Melbourne and Auckland 637 Flinders St Melbourne, VIC 600 St Kilda Rd Melbourne, VIC 280 George St Sydney, NSW (sold July 2014) 235 Pyrmont St Sydney, NSW 85 Harrington St Sydney, NSW Eden Business Park Auckland, NZ Occupancy 100% WALE 6.1 years 28% of portfolio Occupancy 86.6% WALE 5.4 years 22% of portfolio N/A Occupancy 83.8% WALE 5.4 years 14% of portfolio Occupancy 98.7% WALE 2.5 years 12% of portfolio Occupancy 73.9% WALE 2.7 years 24% of portfolio Portfolio occupancy 91% (+2.9% from FY13) Portfolio WALE 4.6 years (no change from FY13) Portfolio weighted capitalisation rate 8.3% (-0.4% from FY13) Note all portfolio metrics as at 30 June 2014 exclude 280 George St, Sydney, which was divested in July 2014. 13
3.2 Property market update Investment property markets strong, leasing markets remain challenging Occupier market improvement continues to lag previous estimates: Vacancy rates in Sydney and Melbourne have marginally trended down over the past six months, however incentives remain at historic highs. Vacancy rates in the resource driven markets of Perth and Brisbane have increased substantially as a result of the mining capex cliff nearing, leading to a reduction in space requirements from mining and engineering tenants. Increased available sublease space and sublease deals completed at big discounts to market rates, is a concern. Sustained business activity improvement is needed to reduce incentives and increase net effective rents. A shortage of assets located in core CBD and CBD fringe positions in Melbourne and Sydney has resulted in a period of yield compression as competitive bidding pushes up prices. Significant amounts of capital earmarked for commercial property purchases is the key driver of the supply/demand imbalance, comprising both international and domestic sources. Developers are paying significant premiums to purchase, withdraw and convert buildings in core CBD locations to residential or hotel uses, with Sydney a current hot spot in the Australian market. 14
3.3 Divestments and opportunities Successful sale of assets and opportunity for further divestment 280 George Street 85 Harrington Street Eden Business Park 414 Khyber Pass Road Unconditional contracts were exchanged prior to 30 June 2014 and the property was divested in July 2014 for a sale price of $50.0 million, reflecting a 16.3% premium to book value. Proceeds from the sale were used to reduce Fund gearing to 36.1%. Contracts have been exchanged for the sale of the leasehold interest for a sale price of $50 million, a 32% premium to book value. Settlement is due in December 2014. Unconditional contracts have been signed to sell part of the land and buildings known as Eden 2 and Eden 7. Settlement is due in December 2014. The property considered non-core to the portfolio and divested at an 18.3% premium to book value in August 2013. 15
3.4 Leasing activity Positive leasing results Recent leasing success Property Tenant Area (sqm) Term 235 Pyrmont Street, Sydney Parkview Constructions 1 1,680 4 years Monsanto 977 7 years 600 St Kilda Road, Melbourne Imperium Capital 528 10 years Shangri-La Constructions 582 5 years As a result of recent leasing success, the portfolio occupancy has increased to 92% 2 (up from 88.1% at FY13). A large proportion of the portfolio s vacancy relates to Eden Business Park (73.9% occupancy rate), noting the following: Improved leasing is expected on completion of capex works. Whelan & Cook 1 555 5 years 1 Leases to Parkview Constructions and Whelan & Cook were completed post balance date in July 2014. Long term vacancy at Eden 2 (the property now earmarked for residential use) and representing circa 14% of the property NLA, will be removed post settlement in December 2014. 2 Inclusive of post balance date leases and 280 George St sale. 16
3.5 Current initiatives Active management to improve quality of assets 600 St Kilda Road, Melbourne Lift lobby, bathrooms and end of trip facility upgrades complete. Ground floor foyer, café, outdoor landscaping and repainting of exterior façade in progress. Eden Business Park, Auckland Stage 1 of seismic repositioning to buildings 3, 5 and car park complete. Stage 2 involving Eden 4 seismic upgrades currently underway. 600 St Kilda Road New end of trip facilities. 235 Pyrmont Street, Sydney Level 6 fit out works underway to accommodate Parkview (new tenant). 637 Flinders Street, Melbourne Project group working with Victoria Police to determine scope of building upgrade works associated with the lease extension. Bathroom concepts. 17
Outlook James Goodwin 18
4.1 Outlook Active asset management while seeking liquidity Property Tenancy markets remain challenging. The Fund will continue to focus on active asset management initiatives to best position portfolio metrics. Income distributions Capital management The Fund has paid the June 2014 quarterly distribution at a rate of 0.75 cents per unit. Due to uncertainty surrounding potential asset sales to fund liquidity, a forecast distribution target will not be advised for FY15. With the Fund refinancing it s debt facility, the weighted cost of debt decreased by approximately 0.87% (varying subject to actual drawn debt levels at any given time), resulting in savings of approximately $1.4 million per annum. Liquidity JLL currently undertaking a process to seek and identify the best liquidity outcome for investors. Further announcement expected for late October/November. 19
20 Questions
21 Appendix
6.1 About Arena Office Fund Arena Office Fund was established in October 2005 as an open ended fund, specialising in commercial office investments. Morgan Stanley Real Estate Investing (MSREI) acquired Arena and underwrote recapitalisation of the Fund in 2012. MS own a 39.1% stake in the Fund, aligning management and investor interests as the owner of Arena. The Fund has been closed for redemptions since mid 2008. Liquidity options are actively being explored. JLL to test the market from 25 August 2014. Distributions currently being paid quarterly. FY14 statutory accounts published August 2014. AOF key metrics Number of properties held 5 * Adjusted book carrying value 1 $313.9m Gross assets $369.0m Number of investors 2,349 * Harrington Street subject to conditional sale contract as at 2 September 2014. 1 Net of 280 George Street. 22
6.2 Income statement FY14 FY13 Income Net property income 25.1 24.9 Interest income 0.1 0.1 Other operating income 0.1 0.1 Total revenue 25.3 25.1 Expenses Finance costs (12.9) (13.8) Management fees (2.9) (2.8) Other expenses (0.7) (0.8) Total expenses (16.5) (17.4) Distributable income 8.8 7.9 Revaluation gain/(loss) on investment properties 10.8 19.4 Change in fair value of derivatives 1.5 2.3 Net gain/(loss) on foreign exchange 6.3 4.3 Revaluation gain/(loss) on securities 0.1 0.0 Realised gain on sale of investments 6.9 0.8 Other 1.2 (1.6) Net profit 35.6 33.1 Exchange difference on translation of foreign operation (4.3) (3.5) Total comprehensive profit attributable to investors 31.3 29.7 Earnings per unit 2.98 2.67 Distribution per unit (cents) 2.60 2.46 Distribution payout ratio 87% 92% Interest cover ratio 2.4 1.9 NPI increased by 0.64% despite the sale of Khyber Pass Road, Auckland. Like for like NPI (ex. Khyber Pass Road) has increased 4.4% compared to FY13. Net property revaluation gains of $10.82 million, continuing the upward trend over the past 2 years. 23
6.3 Balance sheet FY14 FY13 Cash 3.3 7.4 Trade and other receivables 51.2 13.1 Financial assets 0.6 0.5 Property investments 313.9 325.8 Total assets 369.0 346.8 Trade and other payables 8.5 6.9 Interest bearing liabilities 163.3 163.7 Derivatives 5.1 7.7 Total liabilities 176.9 178.3 Net assets 192.1 168.5 Units on issue (millions) 294.9 294.9 Net asset value per unit 0.6514 0.5713 Gearing (balance sheet) 44.4% 47.7% The property balance sheet continues to strengthen: Like for like property values (including 280 George St, Sydney, held as a receivable) up 11.7% in FY14. Gearing reduced to sub 45%. Positive movement in the NTA of +14.0% for the 12 month period to 30 June 2014. 24
For further information Andrew Nicol Fund Manager Ph. 03 9093 9000 andrew.nicol@arenainvest.com.au James Goodwin Joint Managing Director Ph. 03 9093 9000 james.goodwin@arenainvest.com.au Investor and Adviser Services Ph. 1800 008 494 info@arenainvest.com.au www.arenainvest.com.au www.arenainvest.com.au The Arena website contains additional information including ASIC RG46, Statutory Accounts, Net Tangible Asset Values and Fund specific announcements. 25
Important notice This document has been prepared by Arena Investment Management Limited ACN 077 235 879 AFSL No. 233190 ( Arena ) as responsible entity of Arena Office Fund ARSN 115 845 871. The information contained in this document is current only as at 30 June 2014 or as otherwise stated herein. This document is for information purposes only and only intended for the audience to whom it is presented. This document contains selected information and should be read in conjunction with the Financial Report for the year ended 30 June 2014 and other continuous disclosure announcements released from time to time on the Arena website. This document may not be reproduced or distributed without Arena s prior written consent. The information contained in this document is not investment or financial product advice and is not intended to be used as the basis for making an investment decision. Arena has not considered the investment objectives, financial circumstances or particular needs of any particular recipient. You should consider your own financial situation, objectives and needs, conduct an independent investigation of, and if necessary obtain professional advice in relation to, this document. Past performance is not a reliable indicator of future performance. Except as required by law, no representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information, opinions and conclusions, or as to the reasonableness of any assumption, contained in this document. By receiving this document and to the extent permitted by law, you release Arena and its directors, officers, employees, agents, advisers and associates from any liability (including, without limitation, in respect of direct, indirect or consequential loss or damage or any loss or damage arising from negligence) arising as a result of the reliance by you or any other person on anything contained in or omitted from this document. This document contains certain forward-looking statements along with certain forecast financial information. The words anticipate, believe, expect, project, forecast, guidance, estimate, outlook, upside, likely, intend, should, could, may, target, plan, and other similar expressions are intended to identify forward-looking statements. The forward-looking statements are made only as at the date of this document and involve known and unknown risks, uncertainties, assumptions and other important factors, many of which are beyond the control of Arena and its directors. Such statements reflect the current expectations of Arena concerning future results and events, and are not guarantees of future performance. Actual results or outcomes for Arena REIT may differ materially from the anticipated results, performance or achievements expressed, projected or implied by these forward-looking statements or forecasts. Other than as required by law, although they believe that there is a reasonable basis for the forward-looking statements, neither Arena nor any other person ( including any director, officer or employee of Arena or any related body corporate) gives any representation, assurance or guarantee (express or implied) that the occurrence of these events, or the results, performance or achievements expressed in or implied by any forward-looking statements in this announcement will actually occur and you are cautioned not to place undue reliance on such forward looking statements. Risk factors (which could be unknown or unpredictable or result from a variation in the assumptions underlying the forecasts) could cause actual results to differ materially from those expressed, implied or projected in any forward-looking statements or forecast. 26