Dear Unitholder,

I am pleased to report strong results for IOF for the 2016 financial year, as the Fund continues to focus on active portfolio, capital and asset management. IOF delivered a 3.4% increase in Funds From Operations (FFO) to 28.6 cents per unit, ahead of guidance, and increased the Distribution Per Unit by 1.8% to 19.60 cents.

Statutory net profit increased 175.6% to $493.8 million, reflecting strong performance across all business activities. Net Tangible Assets (NTA) rose by 16.9% to $4.23 per unit supported by the expertise of the Investa Office Management Platform and improved market conditions.

Proactive leasing continues to drive value

Net Property Income (NPI) increased 7.1%, due largely to annual fixed rental increases, new leasing, and the completion of the new Premium grade office development at 567 Collins Street, Melbourne in July 2015, of which IOF holds a 50% interest. On a like for like basis, the portfolio delivered strong NPI growth of 3.1%.

Total portfolio occupancy increased from 93% to 96% with over 116,200sqm of leasing completed including 63,400sqm post balance date, equating to 19% of the portfolio. This resulted in a long weighted average lease expiry of 5.6 years1. Pleasingly, much of the new leasing activity over the financial year occurred in Brisbane where occupancy increased from 78% to 90%.

In Sydney, where 59% of IOF's portfolio sits, conditions are tight driving market rental growth particularly in the second half of the year. Demand from smaller occupiers is strong and the withdrawal of largely B grade stock for the construction of the new metro rail, as well as for residential conversion, continues to place downward pressure on A and B grade vacancy.

Barrack Place, IOF's A grade office development at 151 Clarence Street, Sydney, which is due to complete in late 2018, together with major expiries at 388 George Street and 347 Kent Street in Sydney, provide excellent opportunities to access anticipated stronger market conditions and to drive future performance.

Rounding off a very busy year was the post balance date renewal of Telstra at 242 Exhibition Street, Melbourne to 2031. This 63,400sqm 11.5 year lease extension was the Fund's most significant potential vacancy exposure in the Melbourne market, and the result is a great example of Investa's client focus and expertise to secure an optimal solution for both tenant and landlord.

Selective capital recycling

In July 2015, IOF exchanged contracts to divest 383 La Trobe Street, Melbourne, for $70.7 million, a 31% premium to book value. This transaction is anticipated to settle in the second half of the 2017 financial year.

This asset was attractive to potential buyers for residential/mixed use redevelopment and the Fund took advantage of the strong market to divest this asset and improve the overall quality of the portfolio. The funds from this divestment will be used to repay debt and fund future value add development and asset enhancement activities.

Significant revaluations due to strong capital markets and leasing success

Pro-active asset management, improving fundamentals and strong capital markets have driven a $313m or 9% increase in book values over the period. The portfolio capitalisation rate reduced 73 basis points to 6.2%. Importantly, 40% of the total valuation uplift was due to improved asset fundamentals, independent of capitalisation rate movement.

Strong valuation uplifts were achieved across Sydney and Melbourne, with total valuation uplifts of 11%. Notable increases included 10-20 Bond Street (31%), 6 O'Connell Street (20%) and the Piccadilly Complex (20%) in Sydney.

Asset values in Brisbane increased by 9% following a period of significant leasing activity and repositioning. 140 Creek Street increased 14% in value following the lease up of 18,300sqm, and 295 Ann Street increased by 8% with three new deals completed.

Contrary to rising valuations in Sydney, Melbourne and Brisbane, asset values in Perth declined by 15% on average over the year as the slowdown in the resource sector continued.

Conservative debt profile maintained

IOF's debt capital structure continues to be stable and well balanced. The Fund benefits from a diverse source of debt funding including bank facilities, medium term notes and US private placements.

Post balance date a $350 million bank facility was extended to July 2019, 2020, and 2021. The weighted average debt maturity is now 5 years and is staggered with a target of no more than circa $200 million expiring in any given year.

The Fund's look through gearing of 27.7% remains comfortably within the target gearing range of 25-35%. IOF's weighted average cost of debt continues to remain low at 4.2% and is expected to fall below 4.0% over FY17. The Fund maintained a hedging ratio of 44% at June 2016 which has worked well for the Fund during a declining interest rate environment, and will be closely monitored going forward. The Fund also maintained a stable triple B+ S&P credit rating over the period.

Opportunity to acquire 50% of the Investa management platform

As stated by our Chairman, IOF has an opportunity to acquire 50% of the Investa Management Platform. IOF management will work closely with the Board to review and consider this potential acquisition in the context of what is in the best interests of all unitholders, and further information will be provided as appropriate in the future.

Outlook

Office market fundamentals in Sydney, Melbourne and Brisbane, where the portfolio maintains its largest weightings, are anticipated to continue to improve, and the strong weight of capital chasing prime office assets in these markets should continue to support valuations moving forward.

A final word

I am very excited to be part of the IOF team and to work with the broader Investa Office management business, which I hold in very high regard. I look forward to working hard to optimise unitholder returns and to act in the best interests of all unitholders.

On behalf of the IOF team, I would like to take this opportunity to thank you for your support and I look forward to your continuing support in 2017.

Yours sincerely,

Penny Ransom
Fund Manager, IOF

1. Includes post 30 June 2016 lease extension to Telstra at 242 Exhibition St, Melbourne. Excluding this, the WALE was 4.8 years as at 30 June 2016.