Analysts: Kelly Napier; Peter Ward. Fund type Specialisation Peer group

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1 Analysts: Kelly Napier; Peter Ward Manager APN Funds Management Limited APIR code APN0008AU Fund status Open Min. investment (A$) 1000 Standard & Poor's View Fund type Specialisation Peer group S&P rates this fund four stars, reflecting our high conviction that the manager will consistently generate risk-adjusted returns in excess of both its relevant investment objectives and its peers. The NEW subscript indicates the investment team or process has changed significantly or the fund has a relatively short history. APN Funds Management (APN FM) has in place a large and experienced team. Recent appointments to the team have been appropriate, as has the realignment of responsibilities to each team member. The significant degree of overlap in the real estate securities strategies managed by the team removes any significant key person risk and represents an effective use of the team's resources. While most funds in the peer group undertake proprietary cash flow forecasting, APN FM chooses to source forecasts from brokers while it concentrates on assessing the risks associated with the cash flows, including an assessment of the accuracy of the data. APN FM has a long track record managing real estate securities. This product breaks from past income-focused property offerings which include unlisted property. S&P views positively the pure A-REIT strategy, clearly distinguishing it from earlier products (the Property for Income Fund and the Property for Income Fund #2). Excluding unlisted property still ensures the product is consistent with the manager's income bias, and enables a closer comparison to the rest of the peer group. A criticism is the choice of the S&P/ASX 200 A-REIT universe, given its greater concentration in larger capitalised stocks compared to the more diversified S&P/ASX 300 A-REIT universe, but this is consistent with APN FM's other property securities funds. The fund's short track record has not constrained our conviction. We are comfortable with APN FM's track record and have high conviction that the team and investment process can meet or exceed objectives. However, investors should be aware that the income focus and benchmark-unaware approach to portfolio construction means that the fund's performance could diverge significantly from benchmark, or peer returns. Product Features The fund has an indirect cost ratio (ICR) of 0.85% per year (which can be up to 1.05% per year if a 0.2% per year adviser remuneration fee is paid). The fund aims to provide: a dividend that is 110% of the average dividend yield of the S&P/ASX 200 A-REIT yield (before fees); capital growth at least equal to inflation (over a property cycle); a portion of tax-advantaged income; Product Facts Retail Value Australian Property - Listed Boutique Yes Multimanager No Inception date Jan. 19, 2009 ICR (%pa) 0.85 greater diversification than the benchmark; and lower volatility than the market. Distributions are paid monthly and the fund has a buy/sell spread of 0.25%/0.25%. APN FM recommends a five to sevenyear investment term, consistent with a general property cycle. The fund may invest in up to 10% cash and fixed interest. Under its constitution, the fund is permitted to borrow, but it is not the manager's intention to gear the fund. As a benchmark-unaware fund, tracking error is not targeted and investors should be aware that the fund's performance may deviate substantially from the S&P/ASX 200 A-REIT Accumulation Index which is concentrated in a few large names, particularly Westfield. At the date of the review the fund had a substantial (albeit reduced, relative to historical levels) underweight position to Westfield (-16.2%). Benchmark Target return (% p.a.) Target tracking error Investment Style Fund Objectives S&P/ASX 200 A-REIT Accum Index 110% of S&P/ASX 200 A-REIT Dividend Yield No target, benchmark unaware APN FM is an active, income-focused property-securities manager with a value bias. Effort is spent on identifying securities that will deliver the fund a higher income return than the S&P/ASX 200 A-REIT Dividend Yield Index. The portfolio is constructed with the objective of being a more diversified investment offering than the S&P/ASX 200 A-REIT Accumulation Index. The investment universe comprises listed property securities that are: listed on the Australian Stock Exchange (ASX); have no more than 20% of total earnings derived from corporate activities (funds management, property management, or property development). This can be increased to 30% if at least half the corporate earnings are annuity-based; and where the property assets are substantially located in Australia. Despite being a fundamental bottom-up manager, we note that this fund is one of only a few in the peer group that rely heavily on brokers for cash flow forecasts. Instead, APN FM focuses on identifying the risks associated with the cash flow forecasts. The appropriate checks are in place to monitor and manage the risks associated with relying on external rather than proprietary forecasts. Internal estimates are used for capitalisation rates when determining net asset values (NAV). Passive Value Active Growth Dec. 4, 2009 The contents of this report are subject to the terms of the disclaimer on the final page. Page 1/6

2 Investment Team There are five members of the real estate securities team. Four are analysts and portfolio managers (Michael Doble, Andrew Smith, Peter Morrissey, and Damian Diamantopoulos) and there is a performance reporting/support analyst, Cheng Yeoh. In 2008, the real estate securities team experienced three departures. This resulted in the appointment of two new team members; Mr. Smith (who was a co-portfolio manager at Goldman Sachs JBWere) and Mr. Yeoh (who has an accounting, IT, and banking background). The opportunity was taken to restructure the team's responsibilities and better define the remuneration structure. In the past it had been difficult to determine who was responsible for each of APN FM's property funds. Now, each portfolio manager is allocated a property securities fund, also referred to as a "product champion". The allocation of each person to a strategy also provides clear accountability, as each person's performance is measured against the performance of the strategy of which they are the portfolio manager. Each person retains independence in the implementation and execution of their strategy as it relates to portfolio construction decisions, subject to the investment guidelines for each fund. Mr. Doble is the portfolio manager for this fund. As CEO of real estate securities he also has overarching responsibility for all real estate securities and direct property funds. He joined APN FM in 2003 and has over 20 years' experience in the property industry covering direct and listed property. Prior roles included property valuation, consulting, and funds management (he was head of property at ANZ funds management). The other members of the team are suitably qualified. Mr Smith has over 12 years' experience in the property industry and was previously a co-portfolio manager at Goldman Sachs JBWere and the sole portfolio manager at Aviva. Mr. Morrissey has a valuation, property research, and finance background. Mr. Diamantopoulos has been with APN FM since 2002 and, after initially being responsible for a couple of APN FM's direct/hybrid property funds, was moved into the real estate securities team 12 months ago, coinciding with the succession plan identified for him. He has a demonstrated understanding of the real estate securities market and this is expected to grow given the depth of knowledge of his colleagues and the apparent collaborative and open team environment in which peer debate takes place. Mr. Diamantopoulos is the portfolio manager for the Property for Income Fund, Mr. Morrissey for the Property for Income Fund #2, and Mr. Smith for the International Property for Income Fund. However, all four have stock coverage of the Australian market. Primary and back-up coverage is relatively evenly split between the four, and all cover a component of Westfield's business given its size: Australian assets, U.S. assets, development and U.K. assets, and financial (where the financial analyst is the lead analyst). The split coverage of Westfield is unique in the peer group where one analyst would usually cover the stock. The similar investment objectives and investment guidelines for three of APN FM's property securities funds means there is a significant degree of overlap in the securities held in each portfolio; portfolio construction is the main differentiating factor between the funds. The common stock research effort represents an effective use of the team's experience and time. For this reason, the team is considered large and well resourced, and the structure effectively removes any key person risk from a portfolio management and stock coverage perspective. While the team is not considered unstable, there are quite a few teams in our rated peer group that have been together for a number of years, so the stability measure reflects peer relativity. Complementing the team, if needed, are chief investment officer, Howard Brenchley, APN FM's direct property team (colocated with the real estate securities team), and the European team. These insights are supplemented by external information sources from entities such as Jones Lang LaSalle, CBRE, networks in the valuation and banking communities, meetings with company management, and asset visits. These are all used to build up market and stock-specific intelligence that is used in the investment process. New Small Unstable Investment Process Experienced Large Stable The team focuses its bottom-up research on deriving asset and geared stock betas to reflect the risks associated with a stock. APN FM uses a proprietary asset beta matrix to determine the relative risk of each asset in a stock's portfolio. The matrix takes into account the location, sector, and grade of the asset. A stock's asset beta is then geared to reflect the risks associated with qualitative and quantitative factors. Quantitative factors are: the degree of corporate earnings, the quality of earnings, payout ratio, tax effectiveness, liquidity, gearing, debt hedging, and income and capital hedging. Within each component there are ranges against which a stock is graded to determine the risk premium. Together, the weighting assigned to the quantitative factors is 60%. The remainder are the qualitative factors of management (capital management, strategy, remuneration, corporate governance, etc.) and information risk (relating to operating market transparency). The geared beta can be compared with its historical levels for the stock, with the investment peer group, and with comparable international stocks. It is in the determination of the geared beta that APN FM believes the greatest value-add exists; in assessing the risks associated with a stock, rather than determining the cash flows. For this reason, APN FM sources five-year cash flow estimates from a range of brokers. The number of brokers depends on coverage and the size of the stock. Data is received weekly in a standard template so that it can be uniformly incorporated into the models. Broker estimates are complemented by fundamental research by the team, which includes: regular visits with management, property tours, overseas visits, and analysis of economic and direct property market data from a variety of external sources. The volumes of external data are converted into an easily usable format for use in spreadsheets and charts to support the research in an accessible way. To calculate the net present value (NPV), a dividend discount model (earnings per share and adjusted funds from operations, as appropriate) is used. The cash flows are discounted using a discount rate derived from a capital asset-pricing model. The 10- year bond rate, the geared beta, and a 5% equity risk premium are used; the equity risk premium recently increased from 4.5%. To complement the NPV valuation approach, APN FM uses NAV and net tangible assets (NTA), as well as a five-year internal rate of return. The universe is then presented on a valuation summary page that concisely shows the relevant information for each stock, including: Dec. 4, 2009 Page 2/6

3 Distribution yield flagging if it meets the portfolio yield hurdle; Earnings split; The various valuation metrics; High-level debt measures; and The main assumptions in the valuation figures (asset beta, geared beta, discount rate, etc.). The first cut of the portfolio includes a list of stocks that meet the portfolio yield hurdle and are trading at less than valuation. Then, stocks may be included that do not meet the yield hurdle but are trading at a discount to valuation. In this sense any "excess yield" over the hurdle can be used to include stocks that don't have the required yield, but their inclusion in the portfolio still means the yield benchmark is met overall. In some instances these stocks might be included in order to meet top-down asset allocation views. Throughout the investment process the steps are quite prescriptive and based on objective, observable factors and quantitative metrics. This is considered a benefit for this fund, where there are many analysts covering a relatively small universe, because it reduces the scope for any analyst bias. Further rigour is provided by the twice weekly investment team meetings where the team discuss investment ideas and portfolio construction, although the ultimate decisions on the stocks in the fund, and their weights, are made by Mr. Doble. Performance The fund was launched in January 2009 and therefore has a limited performance history. However, we acknowledge APN FM's experience in managing real estate securities funds. The performance period of Aug. 31, 2009, has been chosen as it is consistent with the performance data for the rest of the peer group. Over the short time since inception in January 2009 to Aug. 31, 2009, the fund delivered a net return of 41.6% (annualised) compared to the S&P/ASX AREIT Accumulation Index return of 36.81%, an excess return of 479 basis points (bps). Excess returns have been common in the rest of the rated peer group over the past six and 12 months. That period was characterised by unprecedented volatility in global and domestic listed-property markets, as well as by financial and credit market uncertainty, and extensive recapitalisations as trusts sought to improve their balance sheets and ensure their survival. The recapitalisations by A-REITs through rights issues and placements took place at a discount (some at a significant discount) to their pre-entitlement price and created an opportunity for managers to generate excess returns. The situation resulted in most funds in the peer group, including index funds, posting excess returns relative to the benchmark. The degree of outperformance was influenced by each fund's holding in a stock before the capital raisings, and the degree of participation. Some managers, including APN FM, added value by subunderwriting some of the capital raisings. Due to the limited track record of the fund it is also relevant to provide the fund's net returns since inception to Oct. 31, In that time, the fund posted net returns of 27.73% compared to the S&P/ASX 200 A-REIT Accumulation Index return of 11.62%, an outperformance of 16.12%. The largest positive contributor to relative performance since inception to Oct. 31, 2009, was ING Office Fund, which added 132 bps to relative performance. The next largest contributors were GPT (+129 bps) and Stockland (+ 111 bps). For most funds in the peer group, GPT was the largest contributor given the heavily discounted rights issues. Detractors from relative performance were Goodman Group (-163 bps), Macquarie CountryWide (-110 bps), and Challenger Diversified Property Group (-107 bps). Cash averaged 6% and was particularly high in January, when the fund commenced, and was high again from May to August, coinciding with months of mixed out and underperformance of the benchmark. The higher cash position of the fund mostly reflects the strong inflows it has been receiving each month, and the relatively small size of the fund. In time, as the fund grows, inflows of similar magnitude will not be as significant in percentage terms. Performance Measures Average portfolio turnover (%) No target Typical number of stocks in portfolio 20 Source: APN Funds Management Limited Sector Exposure Versus Fund Benchmark (at Oct. 31, 2009) Source: APN Funds Management Limited Risk Management Stock-specific risks are incorporated in the investment process. Portfolio or fund risks are managed in line with relatively broad investment guidelines. The asset-allocation ranges for this fund are 90%-100% of the fund invested in A-REITs or property companies, and the remainder in cash or fixed interest, although it is expected to be held in cash. To limit offshore exposure, the fund aims to have half the offshore exposure of the S&P/ASX 200 A-REIT Accumulation Index. To reduce exposure to corporate earnings the fund is to have a maximum 80% of the S&P/ASX 200 A-REIT Accumulation Index's exposure to corporate earnings, and 50% is targeted. The actual level will depend on the mix of corporate earnings, and the fund prefers annuity-style corporate earnings rather than development-related earnings. Cash and fixed interest can be up to 10% of the fund. Fixed-interest investments are expected to be minor and opportunistic and will need to meet the fund's liquidity requirements to be included. The fund is benchmark-unaware and is therefore not constrained by benchmark weightings in portfolio construction. In order to provide a more diversified investment portfolio than the benchmark, the largest single stock weight is capped at 20%. The cap can be exceeded if the stock's weight in the benchmark is greater than 12% and the investment committee approves. To manage the contagion risks associated with multiple stocks related to the same parent entity, the fund cannot collectively hold more than 10% of two related names, without express permission Dec. 4, 2009 Page 3/6

4 granted by the investment committee. Investments in vehicles related to APN FM, or the APN Group, are limited to 5% to manage conflicts of interest. Generally, funds in the peer group explicitly exclude investments in any related investments to avoid the perception of conflicts of interest. We note that in APN FM's case, the weight has reduced from 10% to 5%. Stock liquidity risk is managed through the requirement for a position to be able to be liquidated within 20 trading days. This aspect is factored into the geared beta. Each portfolio manager is responsible for placing their trades into a spreadsheet that is uploaded into Bloomberg. Through this system, the efficiency of brokers can be measured and monitored, and brokers rewarded with trading volume on the basis of their efficiency. Portfolio positions are monitored through Bloomberg, which also provides quarterly attribution for all APN FM real estate securities funds. To manage information and data risk, APN FM has in place models and information databases. Models can flag to the team if broker forecasts are overdue and if inputs or outputs are outliers. This is considered critical given the volumes of (external) information APN FM accesses in its research effort. It is evident that APN FM engages in continual process enhancement; from systems and tools, to information sources and presentation, and model inputs and outputs. A recent significant, and relevant, enhancement is the introduction of a debt model from which the team can access detailed stock-specific debt information to use in the determination of the geared beta. This aspect was always included in the analysis, but efforts have been made to increase the data available to the team to help them make more informed decisions regarding the debt risk attached to a particular stock. Management Group Profile APN Property Group is a specialist real estate investment manager listed on the ASX. The head office is located in Melbourne and there is an office in London. In 2008, new managing director, David Blight, was appointed. APN Funds Management Limited is a wholly owned subsidiary of the listed APN Property Group. The APN FM board was recently restructured to have a majority of independent members in line with best corporate practice. As a specialist property investment manager, APN FM has 17 property-related funds, including domestic and international, listed- and direct-property funds. The Property for Income Fund and the Property for Income Fund #2 closed to redemptions in October 2008 after the repricing of the listed property market caused the unlisted property allocations to increase to such a level that the funds became "illiquid". They have recently been through a limited liquidity offer and have reopened to applications through a supplementary product disclosure statement. Market Share At Sept. 30, 2009, APN FM had A$2.84 billion of funds under management (FUM). This includes three domestic listed-property securities funds, an international property fund, diversified property fund, and direct property funds. European funds account for the majority (A$1.3 billion) and real estate securities funds represent approximately A$900 million. This fund was established in January 2009 and had approximately A$24 million of FUM at Oct. 31, Analyst(s): Kelly Napier; Peter Ward. Release authorised by: Leanne Milton. Dec. 4, 2009 Page 4/6

5 S&P Fund Rating Reference Information Australian Property - Listed (Current) Reference Material Sector Reports Reader's Roadmap Glossary Guide to S&P Qualitative Fund Ratings Fund Rating Team Biographies Australian Equities Large Cap Diversified Large Cap Income Large Cap Indexed Large Cap Industrials Long Short Small Cap Specialist Australian Fixed Interest Cash Cash Enhanced Fixed Interest Fixed Interest Income Mortgages Mortgages High Yield Mortgages Conventional Mortgages High Yield Hybrid Mortgages Hybrid Australian Property Direct Commercial Direct Development Direct Diversified Direct Direct Industrial Direct Residential Direct Retail Direct Rural Direct Specialised Diversified Fixed Interest Listed International Equities Diversified Equities Emerging Markets Emerging Markets Asia ex Japan Emerging Markets China Emerging Markets India Large Cap Diversified Large Cap Income Large Cap Indexed Large Cap Industrials Long Short Long Short Specialist Long Short Regional Regional Japan Regional UK/Europe Regional US Regional Asia Small Cap Specialist Healthcare Specialist Information Technology Specialist Resources Fund Rating Peer Groups by Sector International Fixed Interest Diversified Fixed Interest Diversified Fixed Interest Income Fixed Interest Fixed Interest High Yield Fixed Interest Income Mortgages Mortgages High Yield Mortgages High Yield Hybrid Mortgages Conventional Mortgages Hybrid International Property Direct Commercial Direct Development Direct Diversified Direct Direct Industrial Direct Residential Direct Retail Direct Rurual Direct Specialised Diversified Property Listed Alternative Assets Commodities Multi-sector Private Equity Listed Private Equity Unlisted Infrastructure Listed Infrastructure Unlisted Alternative Strategies Single Strategy Funds Multimanager Single Strategy Funds Single Manager Multi-Strategy Funds Multimanager Multi-Strategy Funds Single Manager Multi Sector Capital Guaranteed Equity Other Fund Rating Philosophy A star rating is a forward looking assessment of a manager's ability to consistently generate risk-adjusted returns (net of fees) in excess of both its relevant investment objectives and its peers. Fund Rating Process In assigning a star rating to a fund, Standard & Poor's evaluates: the size, skill, and stability of the manager's investment team; the clarity, implementation, and risk management of the investment process; the fund's objectives, fee structure and portfolio characteristics; and the manager's business management. Dec. 4, 2009 Page 5/6

6 Fund Rating Definitions Standard & Poor s has very high conviction that the manager will consistently generate risk-adjusted fund returns in excess of its relevant investment objectives and relative to its peers. Standard & Poor s has high conviction that the manager will consistently generate risk-adjusted fund returns in excess of its relevant investment objectives and relative to its peers. Standard & Poor s has conviction that the manager will generate risk-adjusted fund returns in-line with its relevant investment objectives and relative to its peers. Standard & Poor s has conviction that the manager will not generate risk-adjusted fund returns in in-line with its relevant investment objectives and relative to its peers. Standard & Poor s has high conviction that the manager will not generate risk-adjusted fund returns in-line with its relevant investment objectives and relative to its peers. Issues that may affect the fund's management have emerged; and the fund rating is temporarily suspended, pending clarification. Significant issues exist that potentially will adversely affect the fund s performance. Investors should consider obtaining advice on switching or redeeming funds. Fund Rating Subscript - NEW - The investment process, fund manager, or the fund has a relatively short history, or the analytical team has changed significantly, but a relevant and demonstrable track record is shown on similar funds. Disclaimer: Standard & Poor's Information Services (Australia) Pty Ltd (ABN ) (Standard & Poor's) rating and other opinions are and must be construed solely as statements of opinion and not statements of fact or recommendations to purchase, sell or hold any financial product(s). Conclusions, ratings and opinions are reasonably held at the time of completion but subject to change without notice. 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Standard & Poor's holds an Australian Financial Services Licence Number Please refer to Standard & Poor's Financial Services Guide for more information at "S&P" and "Standard & Poor's" are trademarks of The McGraw-Hill Companies, Inc. Copyright 2009 Standard & Poor's Information Services (Australia) Pty Limited. Certain funds data contained herein may be proprietary to Morningstar, Inc. Dec. 4, 2009 Page 6/6