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Commonwealth Property Office Fund (CPA) announces June 2002 full year results

8 August 2002

Fund Performance
Commonwealth Managed Investments Limited, the responsible entity of the Commonwealth Property Office Fund (CPA), is pleased to announce a distribution by CPA for the six months to 30 June 2002 of 4.49 cents per unit, bringing the distribution for the year ended 30 June 2002 to 8.90 cents per unit. This represents an increase of 5.8% over the previous year.

The Fund’s units will trade on an ex-basis from 13 August 2002 and the record date for the distribution is 19 August 2002. The distribution is forecast to be paid on or about 30 August 2002.

Underlying the Fund’s distribution growth was a strong increase in Fund earnings, up 17.4% for the year. Earnings per unit increased by 8.7% over the previous year, up from 8.41 cents per unit to 9.14 cents per unit. Net income from the properties and the Kent Street Trust increased significantly, up 20% over the year, totalling $68.6 million. Major contributing factors to the increase in net property income were the acquisition of 475 Victoria Avenue, Chatswood, the benefit of a full year distribution from the Kent Street Trust, the refurbishment of the retail area at 175 Pitt Street, Sydney and strong leasing and rent review activity across the portfolio. On a like-for-like basis, net income from the properties increased by 11.3%.

Market Performance
The defensive characteristics of the listed property trust market proved attractive to investors over the course of the 2002 financial year. The Fund again performed strongly, providing investors with a total return of 13.0% for the year to 30 June 2002. This was slightly below the S&P/ASX 200 Accumulation Index return of 14.9% and in line with the UBSW Commercial 200 Accumulation Index, which recorded a return of 12.8%.

Capital Management
A total of $58.4 million was raised in equity over the course of the year. In August 2001, $19.8 million was raised to partially fund the acquisition of 475 Victoria Avenue Chatswood. In April and May 2002, $38.6 million was raised to fund the acquisition of three development sites in West Perth. Of this, $12.5 million was raised via a unit purchase plan. Over 40% of unitholders participated in the plan, significantly higher than the market average and a strong indicator of demand for units in the Fund.

Total borrowings of the Fund at 30 June 2002 were $202 million, representing a gearing ratio of 22.2%. Following the expiry of the Fund’s debt facility in April 2002, the Fund is currently using a stand-by facility at an effective weighted average interest rate (including margins) of 6.25%.

The Fund received a long-term issuer rating of A3 by Moody’s credit rating services in December 2001. On the back of this rating, the Manager intends to undertake a medium term note issue with the expected benefits of lower costs and diversification of debt sources.

Portfolio Management

The Fund’s high occupancy level of 98% has been maintained via direct leasing of 12,711sqm and the renewal of 11,248sqm over the course of the year. Major lease deals completed over the year were the result of building ongoing relationships, with existing key tenants taking additional space, including the Commonwealth Bank of Australia at 175 Pitt Street Sydney, TXU Electricity and Deacons Lawyers at 385 Bourke Street, Melbourne and Nortel Networks Pty Limited at 475 Victoria Avenue, Chatswood.

Rental reviews were conducted over 167,302sqm of space, with an average increase of 7.2% over passing rent. Strong results were recorded at 36 George Street, Burwood, 100 King William Street, Adelaide and AAP Centre, Sydney.

In August 2001, the Fund acquired a one third interest in 475 Victoria Avenue, Chatswood for $42 million. This asset has performed well for the Fund since it was acquired, adding $2.9 million in net property income to the Fund over the course of the year. Since acquiring this asset the Manager has successfully negotiated a number of new leases and renewals at the property, extending the weighted average lease expiry.

In April 2002, the Fund acquired two West Perth sites currently under development. The properties are:

NRMA House, 42 – 46 Colin Street; and
Phillips Oil House, 53 Ord Street.

The Fund also entered into an option agreement to purchase a third development site, 14- 16 Parliament Place, West Perth, upon practical completion.

The three developments, which are all due for completion in the December 2002 quarter, are all leased to blue chip tenants on long term leases with fixed rent review structures, ensuring certainty and longevity of income for the Fund.

The Fund paid an initial $14.6 million* for the development sites, which are expected to have a value on completion of the developments of approximately $70.0 million. These developments are forecast to be accretive to Fund earnings and improve the overall geographic diversification of the portfolio.

Capital expenditure
The $18.5 million redevelopment of the retail and mezzanine office area at 175 Pitt Street Sydney was completed in December 2001. The redevelopment, which was 100% leased on completion, was completed on an incremental yield of 9.7%.

The ongoing refurbishment of office space at 385 Bourke Street, Melbourne continued throughout the year, with 33% of the office space now refurbished. Opportunities to reposition the prominent Galleria retail area at this property are currently being assessed.

Eight assets in the portfolio were revalued over the course of the year. Significant revaluation increments (taking into account capital expenditure) were recorded at Finlay Crisp Centre, Canberra (up $4.1 million), 175 Pitt Street, Sydney (up $3.6 million), 120 Pitt Street, Sydney (up $2.9 million) and units in the Kent Street Trust (up $6.4 million as a result of the revaluation of the 201- 207 Kent Street asset).

These revaluations, together with the acquisitions over the year, resulted in net asset banking (NTA) per unit increasing by 3.8% from $1.04 to $1.08.