Arena REIT. Arena REIT Offer of Units Product Disclosure Statement

Transcription

1 Arena REIT ARSN Arena REIT Offer of Units Product Disclosure Statement Arena Investment Management Limited ACN AFSL Joint Lead Managers: Morgan Stanley Australia Securities Limited, National Australia Bank Limited Co-Managers: Morgan Stanley Wealth Management Australia Pty Ltd, ANZ Securities Limited

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3 Important notice and disclaimer (a) The issuer Arena Investment Management Limited ACN AFSL (Arena) is the responsible entity of the Arena REIT ARSN (Fund). Arena is the issuer of Units in the Fund and of this Product Disclosure Statement (PDS). Units issued pursuant to this Offer are issued on the terms and conditions contained in the Fund s Constitution and this PDS. Arena reserves the right to change the terms and conditions of this Offer, subject to the Fund s Constitution, the Corporations Act and the Listing Rules. (b) Important information It is important that you read this document carefully and in its entirety prior to making your investment decision with respect to the Offer. In particular, you should pay careful consideration to the risk factors outlined in Section 6 and the tax implications in Section 12 of this PDS as they relate to your personal investment objectives, financial circumstances and needs. The potential tax effects of the Offer will vary between Investors. Other risk factors, both known and unknown to Arena, may exist in addition to those identified in this document which should also be considered in light of your personal circumstances. If you have any queries or uncertainties relating to aspects of this document or the Offer please consult your stockbroker, accountant or other independent financial adviser before deciding whether to invest. (c) Lodgment and Listing This PDS was prepared in accordance with the Corporations Act. This PDS is dated 13 May 2013 and was lodged with the Australian Securities and Investments Commission (ASIC) on that date. Arena will apply for the admission of the Fund to the official list of ASX and the quotation of the Units on ASX within 7 days of the date of this PDS. Neither ASIC nor ASX takes any responsibility for the contents of this PDS or the merits of the investment to which this PDS relates. The fact that ASX may admit the Fund to its official list is not to be taken in any way as an indication of the merits of the Fund. (d) Not investment advice An investment in the Fund is subject to investment and other risks, including loss of income and the principal invested. Neither Arena nor the Joint Lead Managers give any guarantee or assurance as to the performance of the Fund or the repayment of capital. The information contained in this PDS is not financial product advice and does not take into account the investment objectives, financial situation and particular needs of each potential investor. Accordingly, before making any investment a prospective investor should read this PDS and any supplementary PDS in full. It is recommended that before a decision to invest is made prospective investors consult their financial or other professional adviser. (e) Financial information Unless otherwise specified, all financial and operational information contained in this PDS is believed to be current as at the date of this PDS. All currency amounts are in Australian dollars unless otherwise specified. This PDS includes forecast financial information based on the best estimate assumptions of the Directors of Arena. The PDS includes past financial information. Past performance should not be relied on as indicative of future performance. Figures, amounts, percentages, estimates, calculations of value and fractions in this PDS are subject to the effect of rounding. Accordingly, the actual calculation of these figures may differ from the figures set out in this PDS. (f) Electronic PDS An electronic copy of this PDS may be viewed online by Australian Investors at during the Offer Period. If you access the PDS electronically please ensure that you download and read the PDS in its entirety. The Offer to which this PDS relates is available to persons receiving this PDS (electronically or otherwise) in Australia only. A paper form of this PDS can be obtained, free of charge, during the Offer Period by contacting the Arena Information Line on between 8:30 am and 5:00 pm (AEST) Monday to Friday. Applications for Units in the Fund under this PDS will only be considered if applied for on an Application Form that was included in or accompanied by a copy of this PDS (refer to Section 4 for further information). The Corporations Act prohibits any person from passing the Application Form on to another person unless it is accompanied by this PDS in its paper form or the complete and unaltered electronic form. (g) Offer to Australian Investors This PDS has been prepared to comply with the requirements of Australian law and the Offer is only being made to Australian Retail Investors and institutional Investors in Australia and select other eligible jurisdictions. This PDS does not constitute an offer or invitation in any place in which, or to any person to whom, it would not be lawful to make such an offer or invitation. Distribution of this PDS outside of Australia (whether electronically or otherwise) may be restricted by law. Persons who receive this PDS outside of Australia are required to observe any such restrictions. Failure to comply with such restrictions may find you in violation of applicable securities laws. Unless otherwise agreed with Arena, any person subscribing for Units in the Offer shall by virtue of such subscription be deemed to represent that they are not in a jurisdiction which does not permit the making of an offer or invitation as detailed in this PDS and are not acting for the account or benefit of a person within such jurisdiction. None of Arena, the Joint Lead Managers, nor any of their respective directors, officers, employees, consultants, agents, partners or advisers accepts any liability or responsibility to determine whether a person is able to participate in the Offer. See Section 4 for further details. (h) Updated information Information regarding the Offer may need to be updated from time to time. Any updated information about the Offer that is considered not materially adverse to Investors will be made available on the Arena website at au and Arena will provide a copy of the updated information free of charge to any eligible investor who requests a copy by contacting the Arena Information Line on between 8:30 am and 5:00 pm (AEST) Monday to Friday during the Offer Period. In accordance with its obligations under the Corporations Act, Arena may issue a supplementary PDS to supplement any relevant information not disclosed in this PDS. You should read any supplementary disclosures made in conjunction with this PDS prior to making any investment decision. (i) Valuations Valuations are a prediction of price, not a guarantee of current or future market value. By necessity, valuations require the valuer to make subjective judgments that, even if logical and appropriate, may differ from those made by a purchaser or another valuer. Historically it has been considered that valuers may properly conclude within a range of possible values. Independent valuations are subject to a number of assumptions and conditions, typically including but not limited to: that all properties are held with good and marketable title, free and clear of any or all liens, encumbrances, restrictions or other impediments of an onerous nature and that utilisation of the land is within the boundaries of the property lines with no trespass or encroachment; responsible ownership and competent property management; absence of any defects in engineering or presence of any hazardous waste and/or toxic material; Arena REIT Product Disclosure Statement 3

4 Important notice and disclaimer compliance with all applicable federal, state and local environmental regulations and laws and all applicable zoning and use regulations and restrictions; and absence of any latent or hidden conditions or defects on the property, subsoil or structures. Property values can change substantially, even over short periods of time, and an independent valuer s opinion of value could differ significantly if the date of valuation were to change. A high degree of volatility in the market may lead to fluctuations in values over a short period of time. (j) Forward looking statements Certain forward-looking statements have been provided in this PDS. These statements can be identified by the use of words such as anticipate, believe, expect, project, forecast, estimate, likely, intend, should, could, may, target, predict, guidance, plan and other similar expressions. Indications of, and guidance on, future earnings and financial position and performance are also forward-looking statements. Preparation of these forward-looking statements was undertaken with due care and attention. However, forward-looking statements remain subject to known and unknown risks, uncertainties and other factors, many of which are beyond the control of Arena and its directors, officers, employees, agents and advisers. Consequently, such factors may impact the performance of the Fund such that actual performance differs materially to any performance indicated in the forwardlooking statements. Some of the risk factors that impact on forward-looking statements in this PDS are set out in Section 6. No assurance can be provided that actual performance will accord with the guidance provided. Other than as required by law, none of Arena, its respective directors, officers, employees, agents or advisers or any other person gives any representation, assurance or guarantee that the occurrence of the events expressed or implied in any forwardlooking statements in this PDS will actually occur. You are cautioned not to place undue reliance on those statements. The forward-looking statements in this PDS reflect the views held only immediately before the date of this PDS, unless otherwise stated. Subject to the Corporations Act, the Listing Rules and any other applicable law, each of Arena, its respective directors, officers, employees, agents and advisers disclaims any duty to disseminate after the date of this PDS any updates or revisions to any such statements to reflect any change in expectations in relation to such statements or any change in events, conditions or circumstances on which any such statement is based. (k) Photographs, diagrams Photographs, diagrams and artist s renderings contained in this PDS that do not have accompanying descriptions are intended for illustrative purposes only. Diagrams used in this PDS are also intended for illustrative purposes only and may not be drawn to scale. (l) Disclaimer No person is authorised to give any information, or to make any representation, in connection with the Offer that is not contained in this PDS. Any information or representation that is not in this PDS may not be relied on as having been authorised by Arena in connection with the Offer. Except as required by law, and only to the extent so required, neither Arena, nor any other person, warrants or guarantees the future performance of the Fund, the repayment of capital, or any return on any investment made pursuant to this information. The Joint Lead Managers have not authorised, permitted or caused the issue, lodgement, submission, dispatch or provision of this PDS and do not make or purport to make any statement in this PDS and there is no statement in this PDS which is based on any statement by the Joint Lead Managers. The Joint Lead Managers and their affiliates, officers and employees, to the maximum extent permitted by law, expressly disclaim all liabilities in respect of, make no representations regarding, and take no responsibility for, any part of this PDS and make no representation or warranty as to the currency, accuracy, reliability or completeness of this PDS. Investments in the Fund do not represent investments in, deposits with or other liabilities of NAB or Morgan Stanley or any other member of the NAB group of companies (NAB Group) or the Morgan Stanley group of companies (Morgan Stanley Group). Neither NAB, Morgan Stanley nor any other member of the NAB Group or Morgan Stanley Group does in any way stand behind the capital value, nor do they guarantee the performance of the investment or the underlying assets in the Fund, or provide a guarantee or assurance in respect of the obligations of Arena or the Fund. The NAB Group and Morgan Stanley Group may also provide debt and treasury and other services to the Fund or its controlled entities. These services are provided in various capacities as a third party provider, and the NAB Group and the Morgan Stanley Group will act if necessary to protect their interests ahead of those of investors and other parties. In acting in their various capacities in connection with the Fund, NAB and Morgan Stanley will have only the duties and responsibilities expressly agreed to by them in the relevant capacity and will not, by virtue of acting in any other capacity, be deemed to have other duties or responsibilities or be deemed to hold a standard of care other than as expressly provided with respect to each such capacity. Neither NAB (whether in its individual capacity, its capacity as lender to the Fund, as Joint Lead Manager or Underwriter) nor Morgan Stanley (whether in its individual capacity, as Joint Lead Manager or Underwriter) accept any responsibility for any information or errors contained in, or omission from, this PDS and have not conducted due diligence or otherwise separately verified the information contained in this PDS and make no representation, warranty or undertaking, express or implied, as to the accuracy, completeness or suitability of the information contained in this PDS. (m) International offer restrictions This document does not constitute an offer of New Units in any jurisdiction in which it would be unlawful. New Units may not be offered or sold in any country outside Australia except to the extent permitted below. European Economic Area - Belgium, Denmark, Germany, Luxembourg and Netherlands The information in this document has been prepared on the basis that all offers of New Units will be made pursuant to an exemption under the Directive 2003/71/ EC ( Prospectus Directive ), as amended and implemented in Member States of the European Economic Area (each, a Relevant Member State ), from the requirement to produce a prospectus for offers of securities. An offer to the public of New Units has not been made, and may not be made, in a Relevant Member State except pursuant to one of the following exemptions under the Prospectus Directive as implemented in that Relevant Member State: to any legal entity that is authorized or regulated to operate in the financial markets or whose main business is to invest in financial instruments; to any legal entity that satisfies two of the following three criteria: (i) balance sheet total of at least 20,000,000; (ii) annual net turnover of at least 40,000,000 and (iii) own funds of at least 2,000,000 (as shown on its last annual unconsolidated or consolidated financial statements); to any person or entity who has requested to be treated as a professional client in accordance with the EU Markets in Financial Instruments Directive (Directive 2004/39/EC, MiFID ); or to any person or entity who is recognised as an eligible counterparty in accordance with Article 24 of the MiFID. 4 Arena REIT Product Disclosure Statement

5 Hong Kong WARNING: This document has not been, and will not be, authorized by the Securities and Futures Commission in Hong Kong pursuant to the Securities and Futures Ordinance (Cap. 571) of the Laws of Hong Kong (the SFO ). No action has been taken in Hong Kong to authorize this document or to permit the distribution of this document or any documents issued in connection with it. Accordingly, the New Units have not been and will not be offered or sold in Hong Kong other than to professional investors (as defined in the SFO). No advertisement, invitation or document relating to the New Units has been or will be issued, or has been or will be in the possession of any person for the purpose of issue, in Hong Kong or elsewhere that is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to the New Units which are or are intended to be disposed of only to persons outside Hong Kong or only to professional investors as defined in the SFO and any rules made under that ordinance. The contents of this document have not been reviewed by any Hong Kong regulatory authority. You are advised to exercise caution in relation to the offer. If you are in doubt about any contents of this document, you should obtain independent professional advice. Japan The New Units have not been and will not be registered under Article 4, paragraph 1 of the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948), as amended (the FIEL ) pursuant to an exemption from the registration requirements applicable to a private placement of securities to Qualified Institutional Investors (as defined in and in accordance with Article 2, paragraph 3 of the FIEL and the regulations promulgated thereunder). Accordingly, the New Units may not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan other than Qualified Institutional Investors. Any Qualified Institutional Investor who acquires New Units may not resell them to any person in Japan that is not a Qualified Institutional Investor, and acquisition by any such person of New Units is conditional upon the execution of an agreement to that effect. New Zealand This document has not been registered, filed with or approved by any New Zealand regulatory authority under or in accordance with the Securities Act 1978 (New Zealand). The New Units are not being offered or sold in New Zealand, or allotted with a view to being offered for sale in New Zealand, and no person in New Zealand may accept a placement of New Units other than to: persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money; or persons who are each required to (i) pay a minimum subscription price of at least NZ$500,000 for the securities before allotment or (ii) have previously paid a minimum subscription price of at least NZ$500,000 for securities of the Fund ( initial securities ) in a single transaction before the allotment of such initial securities and such allotment was not more than 18 months prior to the date of this document. Singapore This document has not been registered as a prospectus with the Monetary Authority of Singapore. This document and any other document or material in connection with the offer or sale, or invitation for subscription or purchase of the New Units may not be circulated or distributed, nor may the New Units be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore except to institutional investors (as defined in the Securities and Futures Act, Chapter 289 (the SFA )), or otherwise pursuant to, and in accordance with the conditions of, any other applicable provisions of the SFA. This document has been given to you on the basis that you are an institutional investor (as defined under the SFA). In the event that you are not an institutional investor, please return this document immediately. You may not forward or circulate this document to any other person in Singapore. Any offer is not made to you with a view to the New Units being subsequently offered for sale to any other party. You are advised to acquaint yourself with the SFA provisions relating to resale restrictions in Singapore and comply accordingly. United Kingdom Neither the information in this document nor any other document relating to the offer has been delivered for approval to the Financial Services Authority in the United Kingdom and no prospectus (within the meaning of section 85 of the Financial Services and Markets Act 2000, as amended ( FSMA )) has been published or is intended to be published in respect of the New Units. This document is issued on a confidential basis to qualified investors (within the meaning of section 86(7) of FSMA) in the United Kingdom, and the New Units may not be offered or sold in the United Kingdom by means of this document, any accompanying letter or any other document, except in circumstances which do not require the publication of a prospectus pursuant to section 86(1) FSMA. This document should not be distributed, published or reproduced, in whole or in part, nor may its contents be disclosed by recipients to any other person in the United Kingdom. Any invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) received in connection with the issue or sale of the New Units has only been communicated or caused to be communicated and will only be communicated or caused to be communicated in the United Kingdom in circumstances in which section 21(1) of FSMA does not apply to the Fund. In the United Kingdom, this document is being distributed only to, and is directed at, persons (i) who have professional experience in matters relating to investments falling within Article 19(5) (investment professionals) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 ( FPO ), (ii) who fall within the categories of persons referred to in Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the FPO or (iii) to whom it may otherwise be lawfully communicated (together relevant persons ). The investments to which this document relates are available only to, and any invitation, offer or agreement to purchase will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents. United States This document may not be released or distributed in the United States. This document does not constitute an offer to sell, or a solicitation of an offer to buy, securities in the United States. Any securities described in this document have not been, and will not be, registered under the US Securities Act of 1933 and may not be offered or sold in the United States except in transactions exempt from, or not subject to, registration under the US Securities Act and applicable US state securities laws. (n) Further questions If you have any queries relating to aspects of this PDS please call the Arena Information Line on between 8:30 am and 5:00 pm (AEST) Monday to Friday (excluding public holidays during the Offer Period). Alternatively, you may contact Arena via at info@arenainvest.com.au. Arena REIT Product Disclosure Statement 5

6 Table of Contents Important notice and disclaimer 3 01: Chairman s letter 7 02: Key dates 8 03: Key features of the Fund and the Offer 9 04: Details of the Offer 18 05: Details of the Fund and the Properties 23 06: Risks 32 07: Investment objectives and strategy 38 08: Financial Information 44 09: Investigating Accountant s Report 54 10: Board and management 59 11: Fees and other costs 64 12: Tax 69 13: Material agreements 72 14: Additional information 81 15: Glossary 85 Corporate directory 90 6 Arena REIT Product Disclosure Statement

7 01: Chairman s letter Opportunity to invest in Arena REIT, a real estate investment trust that currently owns a portfolio of 177 childcare centre properties in Australia to be listed on ASX. Dear Investor On behalf of Arena Investment Management Limited (Arena), the responsible entity for Arena REIT (Fund), I am pleased to present you with the opportunity to invest in Arena REIT. Arena is a leading property funds manager in Australia, currently managing over $1.1 billion in assets and has a strong track record in investing in childcare, healthcare and office assets over the last decade. Arena REIT was established in 2003 as an unlisted fund and owns a portfolio of 172 childcare centres and 5 childcare centre development land sites valued at $228 million, 1 the majority of which are leased to Goodstart Early Learning Ltd (Goodstart), a non-profit organisation founded by four leading community sector organisations in Australia. An application will be made for Arena REIT to be listed on the ASX. In conjunction with the Listing, the Fund is undertaking a fully underwritten Offer of 74.3 million New Units to raise a total of $75.0 million at $1.01 per Unit which approximates the current NTA per Unit of the Fund. The Offer proceeds will initially be applied to reduce debt, provide future liquidity to enable funding of the Buyback and Withdrawal Offer described below (if commenced) and capacity for asset acquisition opportunities. Following Listing, Arena anticipates that there may be some demand from existing Unitholders for liquidity. If Arena determines (in its sole discretion) that there is unsatisfied demand for liquidity to enable existing Unitholders to exit the Fund, the Fund will have capacity to expend up to $20.6 million in buying-back (or redeeming) Units by way of an on-market Buyback (of up to 10% of the Fund s issued Units prior to the Offer) and/or an off-market Withdrawal Offer. Whether the Buyback and/or the Withdrawal Offer commence (in whole or part) will depend on Arena s assessment, in its absolute discretion, of market conditions and the best interests of Unitholders. The timing of commencement, the pricing and the conduct of the Buyback and Withdrawal Offer (if undertaken) will be in accordance with the Constitution, Listing Rules and all applicable laws. No assurance is given that either the Buyback or Withdrawal Offer will be undertaken. Further details are given in Section 4 of this PDS. Following the Offer, the Fund s initial Gearing Ratio will be 10%. The Fund has a targeted Gearing Ratio in the range of 35% to 45%, giving it capacity to acquire additional assets with the aim of increasing scale, improving diversification and enhancing returns to Unitholders. The Fund is forecast to deliver a distribution of 8.2 cents per Unit for the financial year to 30 June This equates to a forecast distribution yield of 8.12% on the Offer Price. The Fund aims to offer attractive and predictable distributions to Unitholders with earnings growth prospects over the medium to long term. The Board of Arena has also decided to broaden the investment mandate of the Fund to invest in real estate in addition to childcare centre properties. The Fund intends, over time, to establish a diversified real estate portfolio with relatively long term leases to tenants in sectors such as childcare, education, healthcare and government tenanted facilities. However, the timing and amount of future investments by the Fund cannot be reliably estimated. Therefore, no new property acquisitions are assumed to occur in the Forecast Period. This PDS contains detailed information about the Offer and the Fund s operations, financial performance and prospects. You should read this PDS carefully and in its entirety including key risks in Section 6, and seek relevant professional advice before making a decision to invest. On behalf of the Board, I encourage you to consider this investment opportunity. Yours sincerely, David Ross Chairman Arena Investment Management Limited 1. As at 31 December Arena REIT Product Disclosure Statement 7

8 02: Key dates PDS lodgement date Monday, 13 May 2013 Broker Firm Offer and Stakeholder Offer open Monday, 20 May 2013 Broker Firm Offer and Stakeholder Offer close (5:00pm) Friday, 7 June 2013 Settlement of Offer Wednesday, 12 June 2013 Issue of New Units and commencement of deferred settlement trading on ASX Thursday, 13 June 2013 Despatch of holding statements Friday, 14 June 2013 Commencement of normal trading Monday, 17 June 2013 The timetable above is indicative only. Arena, in conjunction with the Joint Lead Managers, reserves the right to amend any or all of these dates and times subject to the Corporations Act, the Listing Rules and other applicable laws, including closing the Offer early, extending the Offer or accepting late Applications either generally or in particular cases, or to withdraw the Offer, without prior notice. The quotation and commencement of trading of the Units is subject to confirmation from ASX. 8 Arena REIT Product Disclosure Statement

9 03: Key features of the Fund and the Offer The key features, benefits and risks set out in this Section 3 are a summary only. Investors should read the entire PDS before completing the Application Form as the PDS contains important information about an investment in the Fund. You should also consider seeking relevant professional advice before investing under the Offer. Key feature Details Section Overview of Fund Overview of Fund Property portfolio Arena REIT, managed by Arena Investment Management Limited, comprises 172 childcare centres and 5 childcare centre development land sites located in Australia, valued at $228 million. 2 The Fund was established as an unlisted fund in 2003 to acquire and develop a portfolio of childcare centres. The Fund acquired and developed 216 childcare centres over a period of 5 years and has grown to be one of Australia s largest owners of childcare centre properties. The Fund sold its portfolio of 25 childcare centres in New Zealand in The Fund aims to generate an attractive and predictable distribution to Unitholders, with earnings growth prospects over the medium to long term. An application will be made for the Fund to be admitted to the official list of ASX and for official quotation of the Units on ASX within 7 days after the date of this PDS. The initial investment portfolio of the Fund has 177 childcare centre properties, comprising 172 childcare centres and 5 childcare centre development land sites located throughout Australia. The Carrying Value of the portfolio as at 31 December 2012 was $228 million. The portfolio has the following key features: relatively long weighted average lease expiry (WALE) of 8.2 years; 2 occupancy rate of 97.7%; % 2 leased to Goodstart (by value); and the tenants are responsible, under the Standard Lease for childcare centres (summarised in Section 13.3), for all, or substantially all, of the statutory and operating outgoings and costs including land tax, insurance, repairs and maintenance, including of a capital or structural nature. Section 5.1 Sections 5.2 and 13.3 Distribution policy The Fund intends to distribute a relatively high proportion of its operating earnings (excluding non-cash amounts), which will include all taxable income and reflects the underlying net cash flow from operating activities. Section 5.12 Gearing Ratio Fees and other costs Distributions are paid on a quarterly basis, generally within 8 weeks of the relevant record date. The Fund s initial Gearing Ratio will be 10% following the Offer. The Gearing Ratio will increase to 19% if both the Buyback and Withdrawal Offer are fully completed. The Fund has a targeted Gearing Ratio in the range of 35% to 45%. Arena will receive a management fee that is tiered by the level of the gross value of the Fund s Assets. A fee of 0.80% pa (excluding GST) is payable based on the current gross value of the Fund s Assets. Arena is also entitled to receive other fees as well as reimbursement of its expenses for administering and managing the Fund. Sections 5.9 and 8.8 Section As at 31 December Weighted by income, as at 31 March Arena REIT Product Disclosure Statement 9

10 03: Key features of the Fund and the Offer Key feature Details Section Distribution forecast Forecast distribution of 8.20 cents per Unit for the financial year ending 30 June Details of the risks and key asumptions to the Forecasts are set out in Sections 6 and 8, respectively. Sections 8.7 to 8.8 Investment objectives and strategy of the Fund Investment objectives of Fund The Board has decided to broaden the investment mandate of the Fund. The Fund intends over time to establish a diversified real estate portfolio typically with long term leases to tenants in sectors such as childcare, education, healthcare, aged care and government tenanted facilities. The investment strategy of the Fund is to invest in real estate in Australia featuring some or all of the following characteristics: relatively long remaining lease terms; premises that have strategic importance for the operations of the tenant; high credit quality tenants; leases where the tenants are responsible for all, or substantially all, of the statutory and operating outgoings and costs including land tax, insurance and repairs and maintenance; and manageable reversionary property valuation risk which Arena believes can be appropriately mitigated through active management. However, the timing and amount of future investments by the Fund cannot be reliably estimated. Therefore, no new property acquisitions are assumed to occur in the Forecast Period. Section 7 Investment sectors The Fund does not have a pre-determined real estate sector allocation. Arena Section 7 intends to diversify the portfolio by sector, individual asset and tenants over the medium term. Arena intends to invest in sectors that are underpinned by supportive macroeconomic trends including population growth and emerging demographics such as an ageing population. Arena believes that the following sectors are likely to provide acquisition opportunities that are consistent with the Fund s investment strategy: childcare/early learning services; education including schools, colleges and universities (and associated facilities); healthcare including medical centres, diagnostic facilities, hospitals and aged care facilities (and associated facilities); and facilities with government and other high credit quality tenants. The Fund will not invest in operating businesses. The Fund intends to generally invest in direct real estate but may from time to time invest in a partial interest, joint ventures or property securities where the underlying real estate is consistent with the Fund s investment objectives. 10 Arena REIT Product Disclosure Statement

11 Key feature Details Section Overview of Offer What is the Offer? An Offer of 74.3 million Units fully underwritten by the Joint Lead Managers to raise $75 million at $1.01 per Unit comprising: a Broker Firm Offer; an Institutional Offer; and a Stakeholder Offer. Section 4 Investors entitled to participate in the Offer The Broker Firm Offer is open to all Retail Investors who have received a firm allocation from their Broker. Certain institutional Investors in Australia will be invited by the Joint Lead Managers to participate in the Institutional Offer. The Stakeholder Offer is open to all existing Arena REIT Unitholders, investors in other funds managed by Arena, Directors of Arena (and their associates) and Arena Staff who have a registered address in Australia. Sections Offer Price Minimum and maximum application amount Proceeds of Offer Applicants under the Broker Firm Offer, Institutional Offer and Stakeholder Offer must apply for Units at a fixed price of $1.01 per Unit. For Applicants applying under the Broker Firm Offer and Stakeholder Offer, the minimum application amount is at least $20,000 and in at least $1,000 increments thereafter. There is no maximum application amount. The Offer proceeds will be used to reduce debt and pay the costs of the Offer and the Listing. Following the Offer, the Fund will be able to redraw borrowings to fund the Buyback and Withdrawal Offer (if commenced) and asset acquisitions. Section 4.2 Section 4.8 Section 4.3 Ranking of Units and distributions New Units will rank equally from the date of issue with all existing Units and will Section 4.10 be entitled to receive a first distribution for the period from the Allotment Date (expected to be 13 June 2013) to 30 June 2013, which is forecast to be 0.4 cents per Unit. Existing Unitholders will also be entitled to receive a distribution for the period from 1 April 2013 to the day before the Allotment Date (expected to be 12 June 2013). Thereafter, distributions will be paid on a quarterly basis. Cooling off Cooling off rights do not apply to an investment in Units pursuant to the Offer. Section Arena REIT Product Disclosure Statement 11

12 03: Key features of the Fund and the Offer Key feature Details Section Key highlights and risks Key highlights A geographically diverse portfolio of property assets The Fund owns childcare centres located across all 6 States of Australia and the Northern Territory. Relatively long term leases to tenants providing a stable income stream Relatively long WALE of 8.2 years. 4 Over 95% of the leases for the Fund s childcare centres require a minimum 5 year notice period prior to termination by the tenant. Goodstart, the largest tenant, was founded and is owned by four leading community sector organisations in Australia, The Benevolent Society, Mission Australia, the Brotherhood of St Laurence and Social Ventures Australia. Current rents are indexed annually to CPI, with substantially all of the leases having a minimum increase of 2.5% per annum. Over 95% of the leases for the Fund s childcare centres are on the terms of the Standard Lease. Under the Standard Lease for childcare centres, (summarised in Section 13.3), the tenants are responsible for all, or substantially all, of the statutory and operating outgoings and costs including land tax, insurance, repairs and maintenance, including of a capital or structural nature. Federal Government funding of childcare sector The childcare sector is supported by the Federal Government with a FY2013 budget of $19.9 billion over 4 years in childcare benefits and rebates. Demand for childcare has been increasing as the population increases through childbirth and immigration. The population of 0 to 4 year olds is forecast to increase from 1.36 million in 2008 to 1.61 million by An attractive distribution yield Forecast distribution yield for the Fund is 8.12% on the Offer Price for the full financial year to 30 June Conservative capital structure Following the Offer, the Fund s initial Gearing Ratio will be 10%. The Fund has a targeted Gearing Ratio in the range of 35% to 45%, giving it capacity to undertake the Buyback and Withdrawal Offer and to acquire further real estate. Section 5 4. Weighted by income, as at 31 March Arena REIT Product Disclosure Statement

13 Key feature Details Section Key risks Key risks relating to the Fund s current Assets Concentration risk The current portfolio of Arena REIT solely comprises childcare centre properties. Adverse events affecting the childcare sector may result in general deterioration of tenants ability to meet their lease obligations across the portfolio. 67.8% of the initial portfolio, 5 by income, is leased to Goodstart. If Goodstart does not meet its lease obligations for any reason, this could reduce Arena REIT s income and adversely impact the value of its properties. Tenant risk The Fund relies on tenants to generate the majority of its revenue. These tenants are primarily not for profit companies limited by guarantee or private companies. If a tenant is affected by financial difficulties it may default on its rental or other contractual obligations which may result in loss of rental income or losses to the value of the Fund s Properties. Government policy risk and changes in law Childcare operators rely on government funding, which if reduced, may adversely impact the underlying demand for childcare services and therefore tenants ability to meet lease obligations. There is a risk that there may be changes in legislation, government policy or legal or judicial interpretation relating to the childcare sector. Licensing The provision of childcare services is a regulated activity. There is therefore a risk that if the relevant licence is revoked, no suitably qualified replacement tenant may be found. Key risks relating to the Fund s current Assets and future investment strategy Alternative use risk The risks associated with investing in real estate assets are greater for special purpose facilities such as childcare centres, healthcare facilities and aged care facilities, which may require extensive expenditure and rezoning to be suitable for other commercial purposes. Acquisition risk The Fund intends to make additional investments to diversify its portfolio, which may include the acquisition of additional childcare centres, or other assets. Future acquisitions may affect the level of future returns to Investors. No acquisitions are assumed to have been made during the periods covered by the forecast financial information contained in this PDS. For further information on risks in this category and key risks relating to the Offer and the Fund see Section 6. Section 6 5. As at 31 March Arena REIT Product Disclosure Statement 13

14 03: Key features of the Fund and the Offer Key feature Details Section Buyback and Withdrawal Offer Reasons for the Buyback and Withdrawal Offer Buyback and Withdrawal Offer Costs and underwriting The Fund ceased accepting applications for Units and offering regular withdrawal offers in 2008 as a result of prevailing economic conditions associated with the global financial crisis. It is for this reason that Arena expects that there may be some demand from existing Unitholders for liquidity. The Buyback and Withdrawal Offer (if commenced) are intended to provide liquidity support to Unitholders wishing to exit the Fund. Following Listing, if Arena determines (in its sole discretion) that there is unsatisfied demand for liquidity, the Fund may expend up to $20.6 million in buying-back (or redeeming) Units by way of an on-market Buyback (of up to 10% of the Fund s issued Units prior to the Offer) and/or an off-market Withdrawal Offer. The Fund will only purchase Units under the Buyback if: (a) the trading price of Units on ASX is $1.00 or less; and (b) the Fund is permitted to do so under the Constitution, Corporations Act, Listing Rules and securities trading policy of Arena. The price paid by the Fund under the Buyback may be less than $1.00 per Unit and is not permitted to be more than the lesser of: (a) the Withdrawal Price; or (b) the 5-day volume weighted average price of Units on ASX. If Arena so determines (in its sole discretion) the Fund may at any time (either alone or in combination with a Buyback) make an off-market Withdrawal offer to acquire Units at the Withdrawal Price. The Withdrawal Price will be calculated by reference to the NTA of the Fund as at the time the Withdrawal Offer closes. The total maximum amount which may be expended under the Buyback and/or Withdrawal Offer (if undertaken) is $20.6 million. Whether the Buyback or Withdrawal Offer proceeds (in whole or in part) will be determined by Arena at its sole discretion at the relevant time, based on its assessment of market conditions and the best interests of Unitholders. The timing of commencement and conduct of the Buyback and the Withdrawal Offer (if undertaken) will be in accordance with the Constitution, Listing Rules and all applicable laws. The earliest date on which the Buyback may commence (without regulatory relief) is after 14 days from the date of Listing (assuming trading in Units are recorded on ASX on at least 5 days in that period). No assurance is given that either the Buyback or Withdrawal Offer will proceed. Sections 4.14 and 4.15 Costs Underwriting The costs associated with the Offer and the Listing are expected to total approximately $3.7 million (including any non-recoverable GST). The Offer has been fully underwritten by the Joint Lead Managers at the Offer Price. Section 11.5 Section 13.4 Taxation implications Tax implications The acquisition of New Units under the Offer may have Australian taxation implications for Investors participating in the Offer. These implications will differ depending on the individual circumstance of each investor who participates in the Offer. Investors should obtain and only rely on their own taxation advice. Section Arena REIT Product Disclosure Statement

15 Key feature Details Section About Arena About Arena Arena is a leading property funds manager in Australia, currently managing over $1.1 billion in assets and has a strong track record in investing in childcare, healthcare and office assets over the last decade. Section 10 Directors of Arena The directors of the Arena Board are: David Ross, Independent Non-executive Chairman David has 30 years experience in the real estate and investment management sectors. He held senior positions with Lend Lease Corporation over a period of 10 years, including Global and US Chief Executive Officer Real Estate Investments (based in the US), Chief Executive Officer Asia Pacific and Chief Executive Officer of General Property Trust. He was also Chief Operating Officer of Babcock and Brown, responsible for the Group s corporate and administrative support functions globally. David holds a Bachelor of Commerce, a Property Valuation qualification and is a Graduate of the Australian Institute of Company Directors (GAICD). Section 10 Dennis Wildenburg, Independent Non-executive Director Dennis has over 30 years experience in the financial services and funds management industry. He is currently an Independent Director of Investa Wholesale Funds Management Limited. Dennis is a Chartered Accountant and currently serves as an independent member of two compliance committees. Simon Parsons, Independent Non-executive Director Simon has over 34 years experience in the commercial property industry. He is presently Managing Director of Parsons Hill Stenhouse Pty Ltd, a commercial property practice. Simon is a Fellow of the Royal Institution of Chartered Surveyors (RICS) and is a member of the RICS Oceania Property Board. Simon holds a Master of Science (Real Estate). The executive directors of the Arena Board are: James Goodwin, Executive Director James is Joint Managing Director of Arena and was appointed to the role on 30 December 2011, following the acquisition of Arena by MSREF VII Global. James has extensive experience in property funds management having previously spent five years at Becton Property Group and prior to that, four years at Centro Properties Group and three years at Freehills. James holds a Bachelor of Laws (Hons), a Bachelor of Arts and a Master of Applied Finance. Bryce Mitchelson, Executive Director Bryce is Joint Managing Director of Arena and joined Arena in May Bryce was appointed as a director of Arena in April Bryce has more than 20 years experience in listed and unlisted property funds management as well as property investment, development, valuation and real estate agency. Bryce holds a Bachelor of Economics (Accounting), Bachelor of Business (Property) and Graduate Diploma of Applied Finance and Investment. Arena REIT Product Disclosure Statement 15

16 03: Key features of the Fund and the Offer Key feature Details Section Senior executives of Arena The senior executives of Arena are: Gareth Winter, Chief Financial Officer Gareth was appointed Chief Financial Officer of Arena Investment Management in March Gareth was formerly a Partner at PricewaterhouseCoopers and has over 20 years professional experience. Gareth is a member of the Institute of Chartered Accountants in Australia and holds a Bachelor of Commerce (Accounting and Business Finance). Peter Hulbert, Head of Legal and Compliance and Company Secretary Peter has over 10 years experience in corporate and commercial law and 8 years experience in the financial services industry. Peter holds a Bachelor of Business (Management) and a Bachelor of Laws. Robert de Vos, General Manager, Property Robert has over 15 years property and funds management experience and has particular expertise in developing investment management strategies across broad portfolios of real estate and real estate securities. Prior to joining Arena, Robert held senior roles with Jones Lang LaSalle, Becton Property Group and Ceramic Funds Management. Vin Harink, Portfolio Manager Vin has 34 years experience in the property, finance and service sectors and has been responsible for managing the childcare portfolio of the Fund since December Prior to joining Arena, Vin was Chief Executive Officer of Austock Property Funds Management Ltd and subsidiary entities which managed 4 funds with $850 million of funds under management, including childcare funds Australian Education Trust and Australian Social Infrastructure Fund. Vin is a member of the Institute of Chartered Accountants in Australia and holds a Bachelor of Business. Other information How to apply Listing To apply under the Broker Firm Offer, you should follow the instructions received from your Broker. To apply under the Stakeholder Offer, complete and return the Application Form enclosed with this PDS. Application Forms should be accompanied by the requisite Application Monies. The key dates for the Offer are set out in Section 2. Arena will apply for the admission of the Fund to the official list of ASX and the official quotation of the Units on ASX within 7 days of the date of this PDS. It is expected that the New Units will be issued to successful Applicants under the Institutional Offer, Broker Firm Offer and Stakeholder Offer on the Allotment Date of 13 June The issue of New Units will be conditional upon ASX approval for admission of the Fund to the official list of ASX. Sections Section 2 and Arena REIT Product Disclosure Statement

17 Key feature Details Section Further information If you have further enquiries regarding the Offer, please contact the Offer Information Line on (toll free within Australia) between 8:30 am and 5:00 pm (AEST) Monday to Friday (excluding public holidays) during the Offer period. Key Offer information Offer Price per New Unit $1.01 Number of New Units available under Offer Gross proceeds from Offer Number of Units on issue after Offer 74.3 million $75 million million Forecast FY14 distribution yield on Offer Price 8.12% Pro Forma NTA per Unit 6 following the Offer $ See Section 8.5 for details. Arena REIT Product Disclosure Statement 17

18 04: Details of the Offer 4.1 Underwritten Offer A total of 74,257,426 New Units are available under the Offer to raise $75 million, at an Offer Price of $1.01 per Unit, comprising: a Broker Firm Offer: refer Section 4.4 below; an Institutional Offer: refer Section 4.5 below; and a Stakeholder Offer: refer Section 4.6 below. The issue of all New Units under the Offer has been underwritten by the Joint Lead Managers who have entered into an Underwriting Agreement in respect of the management of the Offer. The Underwriting Agreement may be terminated in certain circumstances as set out in Section The allocation of the New Units between the Broker Firm Offer, the Stakeholder Offer and the Institutional Offer will be determined by the Joint Lead Managers in consultation with Arena, having regard to the allocation policy set out in Sections 4.4 and Offer Price Applicants under the Offer will be required to apply for New Units at a fixed Offer Price of $1.01 per New Unit. 4.3 Application of proceeds The proceeds from the Offer will be used to reduce debt and pay the costs and expenses of the Offer and the Listing. Following the Offer, the Fund will be able to redraw borrowings to fund the Buyback and Withdrawal Offer (if commenced) and asset acquisitions. 4.4 Broker Firm Offer (a) Who may apply? Retail Investors who receive a firm allocation from their Broker may apply under the Broker Firm Offer. The Broker Firm Offer is open between 9:00 am (AEST) Monday, 20 May 2013 and 5:00 pm (AEST) Friday, 7 June Your Broker may impose an earlier Closing Date. Applicants are therefore encouraged to submit their applications as soon as possible. Please contact your Broker for further details. (b) How to apply? Applicants under the Broker Firm Offer must lodge their Application Form and Application Monies with the relevant Broker in accordance with the relevant Broker s directions and within sufficient time to enable processing by the Closing Date of the Broker Firm Offer in order to receive a firm allocation. You should read this PDS in its entirety, including the risks set out in Section 6. You should contact your Broker for further instructions about the minimum and maximum application amount and how to obtain a copy of this PDS and Application Form. The Joint Lead Managers, in consultation with Arena, may determine a person to be eligible to participate in the Broker Firm Offer, and may amend or waive the Broker Firm Offer application procedures. (c) Allocation policy The allocation of New Units to Brokers is determined by the Joint Lead Managers, in consultation with Arena. It will be a matter for the Brokers as to how they make firm allocations among their broker clients, and they (and not Arena or the Joint Lead Managers) will be responsible for ensuring broker clients who have received a firm allocation from them receive the relevant New Units. 4.5 Institutional Offer The Institutional Offer consisted of an invitation prior to the date of this PDS to certain Investors in Australia to be issued New Units under this PDS. Refer to the Important notice and disclaimer Section of this PDS for further information on foreign offering restrictions. 18 Arena REIT Product Disclosure Statement

19 In accordance with the timetable, settlement of the payment obligations relating to the Institutional Offer is expected to occur on 12 June New Units issued pursuant to the Institutional Offer will be on the same terms and conditions as New Units issued under the Broker Firm Offer and the Stakeholder Offer. This PDS has therefore also been prepared for the purpose of setting out the terms of the New Units to be issued pursuant to the Institutional Offer. 4.6 Stakeholder Offer (a) Who may apply? The Stakeholder Offer is open to all existing Arena REIT Unitholders, investors in other funds managed by Arena, Directors of Arena (and their associates) and Arena Staff who have a registered address in Australia. Up to $2 million of New Units have been allocated to Directors of Arena (and their associates) and Arena Staff. The Stakeholder Offer is open from 9:00 am (AEST) Monday, 20 May 2013 to 5:00 pm (AEST) Friday, 7 June (b) How to apply? Before you decide to apply for New Units under the Offer, you should consider whether an investment in New Units is appropriate for you in light of your particular investment objectives and circumstances. If you are in doubt as to the course you should follow, you should seek appropriate professional advice before making an investment decision. You should read this PDS in its entirety, including the risks set out in Section 6. Applications under the Stakeholder Offer by existing Arena REIT Unitholders must be made on the personalised Application Form accompanying this PDS in accordance with the instructions set out on that form. It is important that Unitholders verify any pre-filled information as accurate and current. Please complete all parts in block letters. All other applications under the Stakeholder Offer must be made on the standard Application Form accompanying this PDS in accordance with the instructions set out on that form. Application amount The payment to be made on application is indicated in whole dollar amounts. Investor details You must enter the full names(s) and title(s) of all legal entities that are to be recorded as the registered holders. At least one full given name and surname is required for natural persons. Contact details You must provide a valid mailing address for all future correspondence from Arena in relation to your holding in the Fund. Only one address may be recorded. Arena requests that you provide a valid address which will be used for sending reports and distribution and taxation statements. Tax file number You may enter the TFN, exemption code or ABN (if applicable) for each applicant. Collection of TFNs is authorised by taxation laws. It is not compulsory to provide your TFN. However, if you do not do so, tax may be deducted from your quarterly distributions at the highest marginal tax rate plus levies. Payment methods Please note that cash will not be accepted and receipts for payments will not be issued. Cheque details Please provide details of all cheques accompanying your application form. Cheque(s) must be crossed Not negotiable and made payable to: Arena REIT Application Account Payment must be made in Australian currency. Cheques not properly drawn may be rejected. Cheques will generally be deposited on the day of receipt. Please clip or pin your cheques to the application form do not use staples. Arena REIT Product Disclosure Statement 19

20 04: Details of the Offer Payment using BPay Existing Unitholders may pay using BPAY. The personalised Application Form which accompanies this PDS for existing Unitholders contains your personalised BPAY details. To pay via BPAY please contact your participating financial institution. If paying by BPAY you do not need to return the Application Form. By paying by BPAY, you will be deemed to have completed an Application Form for the number of Units in the Fund with an aggregate Offer Price equal to the amount of your payment received. You will also be taken to have made the statements contained in the Application Form, in particular those set out in the Acknowledgements section. Applicants should be aware of their financial institution s cut-off time (the time payment must be made to be processed overnight) and ensure payment is processed by their financial institution on or before the Business Day prior to the Closing Date. BPAY Applications will only be regarded as accepted if payment is received by the Registry from your financial institution prior to 5:00pm (AEST) on the Closing Date. Distribution payment details Please provide us with details of your bank account for distribution payment, which must relate to an Australian Bank, Credit Union or Building Society. It is Arena s policy to pay distributions only by direct credit to your nominated bank account. (c) Allocation policy The Joint Lead Managers, in consultation with Arena, will determine the allocation of New Units under the Stakeholder Offer and may reject any application, or allocate fewer New Units than applied for, in its absolute discretion. This discretion includes: the right to aggregate any Applications which it believes to be multiple Applications from the same person; and the right to treat any Application which is for more than $250,000, or which is from a person whom it believes may be an institutional Investor, as an Application by the Institutional Investor under the Institutional Offer or to reject the Application. Should the dollar amount of your final allocation of New Units be less than the Application Monies received, the surplus Application Monies received will be refunded to you in accordance with Section Underwriting Arena and the Joint Lead Managers have entered into an Underwriting Agreement in respect of the management of the Offer. A summary of the Underwriting Agreement is contained in Section 13.4, including the circumstances under which the Underwriting Agreement may be terminated. 4.8 Minimum and maximum application amount For Applicants applying under the Broker Firm Offer and the Stakeholder Offer, the minimum application amount is at least $20,000 and in at least $1,000 increments thereafter. There is no maximum application amount. Your Broker may impose a higher minimum application amount. 4.9 Offer discretion Arena reserves the right to: close the Offer or any part of it early; extend the Offer or any part of it; accept late Applications either generally or in particular cases; reject any Application; allocate any Applicant fewer New Units than applied for; and terminate the Offer. Any amendment to the Offer timetable will be announced to the market through ASX and will be made with the prior written consent of the Joint Lead Managers. 20 Arena REIT Product Disclosure Statement

21 4.10 Ranking of Units and distributions New Units will rank equally from the date of issue with all existing Units and will be entitled to receive a first distribution for the period from the Allotment Date (expected to be 13 June 2013) to 30 June 2013, which is forecast to be 0.4 cents per Unit. Existing Unitholders will also be entitled to receive a distribution for the period 1 April 2013 to the day before the Allotment Date of the New Units (expected to be 12 June 2013). Thereafter, distributions will be paid on a quarterly basis. The Fund s distribution policy is summarised in Section Offer costs No brokerage or commission is payable by Applicants upon acquisition of the New Units under the Offer. Various fees in relation to the Offer may be payable by the Fund to the Joint Lead Managers. See Section 11 for further details Return of Application Monies Pending the issue of New Units to an Investor, Application Monies will be held in a trust account that complies with the Corporations Act. No interest will be paid on Application Monies for the period from receipt until the issue of New Units occurs. Similarly, no interest will be paid to any Investor whose application (or part of an application) is returned by us unfilled. Arena may, in its absolute discretion, reject in whole or in part any application. Refund cheques will be sent following completion of the Offer or as otherwise applicable in the circumstances outlined above. Arena does not need to give any reason for rejection. In exceptional circumstances, where it is considered to be in the best interest of Unitholders, the processing of all Applications may be suspended Listing (a) Application for ASX listing and quotation Arena will apply for the admission of the Fund to the official list of ASX and the official quotation of the Units within 7 days after the date of this PDS. Subject to approval of the Listing by ASX, normal trading of the Units is anticipated to commence on Monday, 17 June (b) CHESS and issuer sponsored holdings This PDS has been prepared in support of an application for the admission of the Fund to the official list of the ASX and the official quotation of the Units on the ASX. The ASX has an automated transfer and settlement system for transactions in securities quoted on the ASX called the Clearing House Electronic Sub-register System (CHESS). Under CHESS, transfers are effected in a paperless form and certificates or transfer forms are not issued or required. In accordance with the Listing Rules and the ASTC Settlement Rules, Arena will maintain: an electronic CHESS sub-register (for Unitholders who are participants in CHESS or are sponsored by such a participant); and an electronic issuer sponsored sub register (for all other Unitholders). Investors can choose to have their holdings registered in one of these two sub-registers, which together make up Arena s register of Unitholders. At least 2 trading days prior to the commencement of normal trading of the Units on the ASX, all Investors will be sent an issuer sponsored statement that sets out the number of Units that are registered in their name. This holding statement will also provide details of an Investor s Holder Identification Number (HIN). An Investor who wishes to have Units sponsored by a CHESS participant should forward their issuer sponsored statement and HIN (upon receipt) to their broker who will transfer their holding onto the CHESS sub register. Arena REIT Product Disclosure Statement 21

22 04: Details of the Offer 4.14 Buyback The on-market Buyback is intended to provide liquidity support to Unitholders who may wish to exit their unitholding in the Fund, following Listing. Under the Buyback, the Fund may acquire a maximum of 13.2 million Units (equivalent to 10% of the Fund s issued Units prior to the Offer) at a price up to $1.00 per Unit which represents the pro forma NTA per Unit following the Offer. The Fund will only purchase Units under the Buyback if: (a) The trading price of Units on ASX is $1.00 or less; and (b) The Fund is permitted to do so under the Constitution, Corporations Act, Listing Rules and securities trading policy of Arena. The price paid by the Fund under the Buyback may be less than $1.00 per Unit and is not permitted to be more than the lesser of: (a) the Withdrawal Price; or (b) the 5-day volume weighted average price of Units on ASX. The earliest date on which Units may be purchased under the Buyback (without regulatory relief) is after 14 days from the date of Listing (assuming trading in Units are recorded on the ASX on at least 5 days in that period). Unitholders may participate in the Buyback (if undertaken) via selling their Units on ASX. Whether Arena decides to proceed with the Buyback (in whole or part) will depend on its assessment, in its sole discretion, of market conditions and the best interests of Unitholders. No assurance is given that the Buyback will proceed Withdrawal Offer The Fund may at any time (either alone or in combination with a Buyback) decide (in its sole discretion) to make an off-market Withdrawal Offer to redeem Units at the then prevailing Withdrawal Price. The Withdrawal Price will be calculated by reference to the NTA of the Fund at the time the Withdrawal Offer closes. The total maximum amount which may be expended under the Buyback and/or Withdrawal Offer (if commenced) is $20.6 million. Whether Arena decides to proceed with the Withdrawal Offer (in whole or part) will depends on its assessment, in its absolute discretion, of market conditions and the best interest of Unitholders. No assurance is given that the Withdrawal Offer will proceed Further enquiries If you have further enquiries regarding the Offer, please contact the Offer Information Line on (toll free within Australia) between 8:30 am and 5:00 pm (AEST) Monday to Friday (excluding public holidays) during the Offer Period. If you have queries or uncertainties relating to any matter you should consult your stockbroker, accountant or other financial adviser before deciding whether to invest. 22 Arena REIT Product Disclosure Statement

23 05: Details of the Fund and the Properties 5.1 Overview of the Fund Arena REIT owns a portfolio of 177 childcare centre properties, comprising 172 childcare centres and 5 childcare centre development sites, located throughout Australia with a Carrying Value of $228 million as at 31 December The Fund was established in 2003, as an unlisted fund, to acquire and develop a portfolio of childcare centres. The Fund acquired and developed 216 childcare centres over a period of 5 years and has grown to be one of Australia s largest owners of childcare centre properties. The Fund sold its portfolio of 25 childcare centres in New Zealand in The Fund ceased accepting applications for Units and offering regular withdrawal offers in 2008 as a result of prevailing economic conditions associated with the global financial crisis. As a result, Unitholders have not had access to liquidity from the Fund for an extended period of time. The Fund has continued to pay distributions to Unitholders since inception. 5.2 Portfolio overview (a) A geographically diversified portfolio of childcare centre properties The current portfolio is geographically diversified across the metropolitan and regional areas of Australia with the 3 largest States by population accounting for 78.9% of the portfolio, by value. (b) Relatively long term leases Arena REIT s current earnings are underpinned by relatively long term leases with a WALE, as at 31 March 2013, of 8.2 years. Over 95% of the Fund s childcare centres have leases which are based on the Standard Lease (summarised in Section 13.3) with an initial 15 year term plus options to extend for two further 5 year periods. Tenants on the Standard Lease are required to provide 5 years notice of their intention to take up each of the two 5 year option periods or terminate the lease. The largest tenant, Goodstart, is owned by four leading community sector organisations in Australia, The Benevolent Society, Mission Australia, the Brotherhood of St Laurence and Social Ventures Australia. Goodstart leases represent 67.8% of the Fund s income. 7 See Section 5.4 for more information about Goodstart. (c) Triple net leases The current tenants are responsible for all, or substantially all, of the statutory and operating outgoings and costs including land tax, insurance, repairs and maintenance, including of a capital or structural nature under the Standard Lease for childcare centres (summarised in Section 13.3). (d) An attractive distribution yield Arena has forecast a distribution yield for the Fund of 8.12% on the Offer Price for the full financial year to 30 June (e) Location of Properties The Fund owns 177 childcare centre properties (including 5 development sites) located throughout Australia. The Fund s portfolio comprises childcare centres and development sites located in six States and the Northern Territory. Set out below is a map of the location of the childcare centres, showing percentage of value of the portfolio (as at 31 December 2012). 7. As at 31 March % WA 22 Centres 0.5% NT 1 Centre 2.6% SA 4 Centres 3.2% Tas 6 Centres 35.5% QLD 58 Centres 29.2% VIC 51 Centres 14.2% NSW 30 Centres Arena REIT Product Disclosure Statement 23

24 05: Details of the Fund and the Properties The majority of the portfolio is located in metropolitan areas and was purpose built in the last 10 years. The composition of the portfolio, by number of centres, is shown in the following table. Other property characteristics Location Metropolitan 59.6% Regional/Country 40.4% Type of construction Purpose built centre 91.3% Converted building 8.7% Age of building Built pre % Built post % Number of Properties 1 Carrying Value ($ 000) 1, 2 Rent (pa) $ 000 % Passing Yield 2 Operating childcare centres Queensland 56 $75,120 $7, % New South Wales 30 $31,865 $3, % Victoria 51 $65,555 $6, % Tasmania 6 $7,280 $ % South Australia 4 $5,875 $ % Western Australia 22 $33,130 $2, % Northern Territory 1 $1,060 $ % Sub-Total 170 $219,885 $20, % Vacant centres - for sale or lease 2 $1,360 Sub-Total childcare centres 172 $221,245 Other property Murarrie office component $3,200 $ % Development land 5 $3,095 Development expenditure $398 Sub-total other property 5 $6,693 Total property portfolio 177 $227,938 $21,240 Notes: 1. As at 31 December Passing Yield means the annual rent divided by the Carrying Value expressed as a percentage. The Carrying Value of the property is the amount determined by the Directors. Arena may determine the requirement for an independent valuation at any time but has adopted a valuation program that provides for each property to be independently valued on a periodic basis by a suitably qualified valuer, at least once every three years. Changes in market conditions may necessitate more frequent independent valuations of properties. The Fund s valuation policy is summarised in Section Arena REIT Product Disclosure Statement

25 At top and above: 6A Chartwell Crescent, Derrimut, VIC. Arena REIT Product Disclosure Statement 25

26 05: Details of the Fund and the Properties In addition to two properties that were vacant at 31 December 2012, the leases for a further five properties have come to an end, or are about to come to an end as a result of Goodstart exercising its rights under an arrangement entered into at the time Goodstart took an assignment of the leases from ABC Learning. There are no other leases that provide the tenant with rights to terminate the leases before the end of the respective initial lease terms. One of these properties has since been re-leased and a further property is expected to be sold in the near term at a price consistent with its Carrying Value. The Fund intends to lease or sell the remaining five vacant properties. 5.3 Tenant allocation As at 31 March 2013, the Fund s properties were leased to 27 tenants with a summary of the top 3 tenants of the Fund set out in the table below. Tenant Centres % of portfolio, by value Information Goodstart % See Section 5.4. Preschool Services Australia % Preschool Services Australia is a privately owned childcare operator. Nurture One 8 3.5% Nurture One is a privately owned childcare operator that operates 19 childcare centres in Australia. 5.4 Goodstart Goodstart is the major tenant with 66.3% of the portfolio, by value (as at 31 March 2013). A syndicate of leading community sector organisations The Benevolent Society, the Brotherhood of St Laurence, Mission Australia and Social Ventures Australia came together in 2009 to form Goodstart. It was incorporated on 13 October 2009 as a not-for-profit organisation in the form of a company limited by guarantee. On 27 December 2009, Goodstart entered into a contract to acquire some 669 childcare centres previously operated by ABC Learning. Following the completion of the assignment of leases from ABC Learning, Goodstart commenced operations on 30 May As at 30 June 2012, Goodstart operated 655 early learning centres. There are approximately 6,200 long day care centres in Australia, of which Goodstart has a 10.6% market share. Goodstart has approximately 15,000 staff supporting over 61,000 families and 73,000 children attending their 655 centres around Australia. Goodstart s financial statements for the year ended 30 June 2012 disclosed total revenue of $736.4 million, earnings before depreciation, interest, tax and amortisation of $42.8 million, borrowings of $94 million and total equity of $20.8 million. 5.5 Lease Expiry As at 31 March 2013, the Fund had a WALE of 8.2 years, comprising the following lease expiry profile (by annualised rental income): Lease Expiry Profile (as at 31 March 2013) 25 % of Annualised rent Financial year of expiry 26 Arena REIT Product Disclosure Statement

27 The lease profile, on the previous page, reflects the end date of the initial lease terms for all 166 leased centres and the office space at Murarrie. The Standard Lease requires the tenant to provide 5 years notice of their intention to take up each of the two 5 year option periods or terminate the lease. There are 33 leases where the tenants are required to provide such notices in the 2014 financial year. Arena has not received any indication that these leases will be terminated. 5.6 Typical childcare centre owned by the Fund Building description Typical configuration Regulatory compliance Location Underlying zoning Alternative use Land size Building size (Gross building area) Lease term Average rent per centre Average passing portfolio yield Childcare Facilities providing long day care accommodation for children. The buildings are typically designed to accommodate children from 6 weeks to 5 years of age. Internal: Typically 4-6 activity rooms that cater for different age groups with direct access to external play areas. Centres catering for 0-1 year olds will also have a nursery. Feature entry & foyer, reception area, administration area, centre hallway, toilets for varying ages, shower, preparation areas, kitchen (commercially fitted), ancillary staff area, storage rooms, toilets including 1 disabled toilet. Education and Care Regulations require at least 3.25 square metres of unencumbered indoor space for each child. External: Shade cloths to sandpits and general play areas, awning covered verandas adjoining external play areas, grass and rubber matting to external play areas, child proof fencing throughout, paving, landscaping, lighting and signage. Education and Care Regulations require at least 7 square metres of unencumbered outdoor space for each child. Ancillary: on-site car parking spaces (required by planning regulations) in marked bays (including 1 disabled) - Typically Tenants are responsible for meeting all legislative requirements including building services, occupational health and safety, essential services compliance audits and childcare provider and service approvals. Typically located in residential and commercial locations featuring medium to high traffic areas, good accessibility and public transport. Often located near primary schools and on main roads. Approximately 70% of the Fund s sites are zoned residential with the remainder being a mix of commercial or general use. Residential or professional facilities (eg medical centre). Average size of 2,600 square metres. Ranges from 1,000 to 4,500 square metres. Average size of 540 square metres. Ranges from 250 to 950 square metres. Initial lease term of 15 years under the Standard Lease. $123,400 per annum 9.51% per annum Arena REIT Product Disclosure Statement 27

28 05: Details of the Fund and the Properties 5.7 Property developments The Fund currently owns 5 development sites. The Fund intends to sell two of the sites that are located in regional Victoria. The Fund is in the process of developing childcare centres on the remaining three development sites as well as building a second childcare centre on an existing property - Augustine Heights. Details of the sites to be developed are set out in the table below. Please refer to Section 6.2 for risks associated with developments. Location Childcare places Total estimated cost 1 Tenant committed Completion due Mernda - VIC 122 $2.7 million Yes May 2013 Maddingley VIC 96 $2.3 million Yes Dec 2013 Griffen QLD 75 $1.8 million Pending Dec 2013 Augustine Heights QLD 75 $1.1 million Yes Dec 2013 Notes: 1. Includes cost of land and capital expenditure already incurred. Please refer to Section 8.6 for the costs to complete the development. 5.8 Major Unitholder MSREF VII Global indirectly holds 26.9 million Units in the Fund (approximately 20.4% of the Fund prior to the Offer) and does not intend to participate in the Offer which will cause its holding to reduce to approximately 13.2% of the Fund following the Offer. MSREF VII Global has agreed to escrow its Units for a period of 6 months from the date of Listing of the Fund. A summary of the terms of the Escrow Agreement between the Fund and MSREF VII Global is contained in Section MSREF VII Global is managed by a member of the Morgan Stanley Group. Morgan Stanley Australia Securities Limited, which is also a member of the Morgan Stanley Group, is a Joint Lead Manager. A summary of the terms of the Underwriting Agreement is contained in Section Financial risk management Arena has a financial risk management policy which addresses the financial risks associated with managing the Fund, including management of debt facilities and related covenants and management of interest rate risk. Arena adopts the following approach to managing financial risk: maintaining headroom relative to key financial covenants; diversifying lender risk by having two or more financiers with a strong credit rating; maintaining sufficient liquidity to meet the Funds objectives; and where possible, reducing refinancing risk by having staggered debt maturities (or managing debt refinancing well in advance of debt expiry). The Fund has a targeted Gearing Ratio in the range of 35% to 45%. This range is lower than the covenant under the Debt Facility which requires the Fund to have a loan to value ratio of less than or equal to 50% (see Section 5.10). It is Arena s policy to minimise the volatility of the Fund s future earnings from movements in interest rates. Arena has an interest rate risk management policy that sets out recommended hedging levels and hedging tenor. The amount hedged is also determined by the Debt Facility which requires the Fund to comply with its interest rate risk management policy (approved by the ANZ or NAB) or to have a minimum of 65% of drawn debt to be hedged against movements in interest rates for at least one year. Arena s policy requires a minimum of 65% of drawn debt to be hedged against movements in interest rates for at least two years. Arena s counterparty to the Fund s interest rate hedges will also be a party to the Fund s debt facility which minimises credit risk. Presently, the counterparty to all the Fund s interest rate hedges is NAB. The Fund s compliance with the interest rate risk management policy is reported quarterly to the Arena Board. 28 Arena REIT Product Disclosure Statement

29 At top and above: 17 David John Drive, Tarneit, VIC. Arena REIT Product Disclosure Statement 29

30 05: Details of the Fund and the Properties Arena actively manages and monitors these risks, particularly in relation to the loan to value ratio and interest cover ratio covenants under the Debt Facility. The policy requires a quarterly report to be provided to the Arena Board in respect of the forecast loan to value ratio and interest cover ratio based on the latest fund cash flows, valuations and debt forecasts. Arena provides actual covenant performance certificates on a quarterly basis to the lenders to the Fund. The Fund s financial risk management policy will continue to be reviewed in the context of any future indebtedness and the prevailing market conditions. The Board will continue to monitor the appropriateness of this policy to ensure that it meets the ongoing objectives of the Fund and is in the best interests of Unitholders Debt Facility of the Fund The Fund has entered into the Debt Facility with NAB and ANZ, expiring in June The Debt Facility may be used by the Fund for eligible purposes which include: (a) the acquisition of properties in accordance with the Fund s investment strategy; (b) the development or refurbishment of existing properties; (c) fitout or incentive costs in respect of any properties; (d) the working capital requirements of the Fund; and (e) funding the proposed Buyback and Withdrawal Offer up to a maximum of $25 million. The Debt Facility may be drawn down at any time and may be drawn upon multiple times. Under the Debt Facility, the Fund is required to maintain: a loan to value ratio of less than 50%. The Fund s loan to value ratio is calculated by dividing the amount owing under the Debt Facility by the aggregate value of the Properties of the Fund (based on the most recent independent valuations), and an interest cover ratio of more than 2.0 times. The Fund s interest cover ratio is the ratio of operating profit (excluding non-cash items such as property or derivative valuations) of the Fund divided by the interest cost for that period. Following the Offer, the Fund will have a Gearing Ratio of 10% and an interest cover ratio of 12 times for FY14 Forecast. The Debt Facility requires the Fund to obtain consent from its lenders, for acquisitions that are greater than 20% of the value of the Properties of the Fund (based on the most recent independent valuations). Arena expects that the Fund will be able to comply with the covenants under the Debt Facility. NAB is also a Joint Lead Manager in respect of the Offer and the Debt Facility will be repaid (in part) from the proceeds of the Offer as described in this PDS. A summary of the terms of the Debt Facility is contained in Section Valuation policy The Carrying Value of the Properties will be reviewed by the Directors every six months prior to each reporting date. The Directors assessment of fair value will be periodically assessed by reference to an independent valuation. The Carrying Value of the Property will be the amount determined by the Directors. Arena may determine the requirement for an independent valuation at any time but has adopted a valuation program that provides for each Property to be independently valued on a periodic basis by a suitably qualified valuer, at least once every three years. Properties that were last independently valued with a value of $5 million or more will be independently valued at least annually. Changes in market conditions may necessitate more frequent independent valuations of Properties. The valuation of Properties under development is on an as is basis. Independent valuations are performed by a qualified valuer who is registered with an appropriate professional body and has a minimum of five years relevant experience. All independent valuations comply with relevant industry standards and codes. 30 Arena REIT Product Disclosure Statement

31 5.12 Distribution policy The Fund intends to distribute a relatively high proportion of its operating earnings (excluding non-cash amounts), which will include all taxable income and reflects the underlying net cash flow from operating activities. The underlying net cash flow from operating activities of the Fund generally consists of rental income paid less the expenses of the Fund, including management fees and interest. The Fund s distribution will be formulated with regard to a range of factors including: general business and financial conditions; the certainty of the Fund s cash flow; the average lease duration and the timing of significant lease expiries; medium term capital expenditure requirements of the portfolio of the Fund; taxation considerations; working capital requirements; and other factors that the Directors consider relevant. Distributions will be paid on a quarterly basis with distribution periods ending on 31 March, 30 June, 30 September and 31 December each year. Distribution will generally be paid within 8 weeks of the relevant record date. The Fund will not offer distribution re-investment upon Listing because the Constitution currently does not provide for Units to be issued by reference to the ASX quoted price Reporting The Fund operates on a June financial year end basis for accounting and financial reporting purposes. Formal financial reporting will be provided to Unitholders at 31 December (interim) and 30 June (full year) each year commencing with 30 June 2013 in accordance with the Corporations Act. These reports will detail (among other things) the following: an income statement, balance sheet and statement of cash flows for the period; the amount of distributions declared and paid for the period; significant activities undertaken over the period; and portfolio updates (including valuations of the Properties). Arena REIT Product Disclosure Statement 31

32 06: Risks Before investing, you should consider whether the Units are suitable given your personal investment objectives. If you require further information regarding the appropriateness or potential risks of this investment, you should seek appropriate financial advice. All investments involve risk and there are many factors that can impact on the performance of an investment. This summary details some of the major risks that you should be aware of when investing in the Fund. Unitholders should be aware that the list of risks described below is not exhaustive. 6.1 Key risks relating to the Fund s current Assets (a) Concentration risk The initial portfolio of Arena REIT is 100% invested in childcare centres and childcare centre development sites. Adverse events to the childcare property sector may result in general deterioration of tenants ability to meet their lease obligations across the portfolio or to future growth prospects of the current portfolio. 67.8% of the initial portfolio (as at 31 March 2013) is leased to Goodstart, by income. Any material deterioration in its operating performance may result in Goodstart not meeting its lease obligations which could reduce Arena REIT s income. (b) Tenant risk The Fund relies on tenants to generate the majority of its revenue. These tenants are primarily not for profit companies limited by guarantee or private companies. If a tenant is affected by financial difficulties it may default on its rental or other contractual obligations which may result in loss of rental income or losses to the value of the Fund s Properties. Under the Standard Lease, tenants are required to provide an unconditional and irrevocable bank guarantee, which must not expire until at least six months after the ultimate expiry date of the lease, for an amount equivalent to six months rent (plus GST) as security for its performance under the lease. Please refer to Section 13.3 for details of the bank guarantees required under the Standard Lease and the leases with Goodstart. (c) Licensing The provision of childcare services is a regulated activity. There is therefore a risk that if the relevant licence is revoked, no suitably qualified replacement tenant may be found. (d) Government policy risk and change in law Childcare operators rely heavily on government funding which, if reduced, may adversely impact the underlying demand for childcare services and therefore tenants ability to meet lease obligations and/or their demand for childcare properties. There is a risk that there may be changes in legislation, government policies or legal or judicial interpretation relating to the childcare sector. 6.2 Key risks relating to the Fund s current Assets and future investment strategy (a) Alternative use risk The risks associated with investing in property assets can be greater for special purpose facilities such as childcare centres, healthcare facilities and aged care facilities, which may require extensive expenditure and rezoning to be suitable for other commercial purposes. The Fund s performance depends in part on the demand for childcare centres in Australia. Most childcare centres would require extensive expenditure and rezoning to be suitable for other commercial purposes. (b) Acquisitions and divestments The Fund intends to make additional acquisitions of assets in accordance with the investment strategy. Future acquisitions may affect forecast distributions or any tax deferred portions of income returns. The value of the freehold interests in the properties may vary as a consequence of general property market conditions, the property market, or factors specific to an individual property. Decreases in value of the freehold interest may result in a decrease in the value at which Units trade on the ASX. The Fund may be required to sell one or more properties, which may result in a capital loss. 32 Arena REIT Product Disclosure Statement

33 (c) Re-leasing and vacancy There is a risk that the Fund may not be able to negotiate suitable lease extensions with existing tenants or replace outgoing tenants with new tenants on substantially the same terms. The Fund could also incur additional costs associated with re-leasing the properties. Re-leasing the properties would depend on numerous market conditions and financial considerations prevalent at that time. This risk may be partially mitigated by the structure of the Standard Lease for childcare centres which requires tenants to provide Arena with a five year notice period if they wish to terminate the lease. (d) Rental income Distributions made by the Fund are largely dependent upon the rents received from its property portfolio and expenses incurred during operations. Arena has made a number of assumptions in relation to the level of rental income the Fund will receive as described in Section 8. However, rental income may differ from those assumptions and may be affected by a number of factors, including: (i) overall macroeconomic conditions; (ii) competition from other childcare centres; (iii) the financial condition of tenants; (iv) increase in rental arrears and vacancy periods; (v) changes in government policies relating to the subsidies received by childcare centre operators; and (vi) supply and demand in the property market. (e) Property valuations The value of the property assets held directly by the Fund and which it may hold in the future is affected by a number of risks which, without limitation, include: (i) changes in market rental rates; (ii) fluctuating tenancy levels due to market forces; (iii) a downturn in the value of a property or in the property market in general; (iv) pricing or competition policies of any competing properties or tenants; (v) risk of tenants defaulting; (vi) increased competition from new or existing properties; (vii) increases in supply or falls in demand for property in the relevant sectors; and (viii) general economic conditions, such as interest rates. Changes in the property market, especially changes in the valuation of properties and in market rents, may adversely affect the Fund s income and distributions and the price of the Fund s Units. In addition, the independent valuations of the Properties are the best estimates of the independent valuers at the time of undertaking the valuation and may not reflect the actual price a property would realise if sold. The independent valuations are subject to a number of assumptions which may prove to be inaccurate. (f) Development risk In certain circumstances, the Fund may be exposed to development risk, resulting from the development of new properties, the refurbishment of existing properties or additions and extensions to existing properties. Arena REIT Product Disclosure Statement 33

34 06: Risks Property development carries a number of risks, including: (i) issues surrounding applications for planning approvals from local authorities which can result in delays or require amendments to plans both of which may result in increased costs; (ii) breach of contract by building contractors; and (iii) unforeseen circumstances which cause project delays or increases to building costs. A number of factors affect the earnings, cash flows and valuations of commercial property developments, including construction costs, scheduled completion dates and securing tenants at estimated rental income. (g) Property liquidity Property assets are by their nature illiquid investments. The Fund may not be able to realise the assets within a short period of time or may not be able to realise assets at valuation. This may affect the Fund s net asset value or trading price per Unit. (h) Asset risk The Properties held by the Fund may be damaged or destroyed by flood, fire, earthquake or other disaster. Whilst Arena insures the Properties against such risks, insurance coverage may prove to be insufficient or not available in some circumstances. (i) Environmental issues As with any property, there is a risk that one of the Properties may be contaminated now or in the future. Government environmental authorities may require such contamination be remediated. There is always a residual risk that the Fund may be required to undertake any such remediation at its own cost. Such an event would adversely impact upon the Fund s financial performance. In addition, environmental laws impose penalties for environmental damage and contamination which can be material in size. Exposure to hazardous substance at a Property within the portfolio could result in personal injury claims. Such a claim could prove greater than the value of the contaminated Property. An environmental issue may also result in interruptions to the operations of a Property, including the closure of the Property. Any lost income caused by such an interruption to operations may not be recoverable. (j) Occupational health and safety There is a risk that liability arising from occupational health and safety matters at a Property may be attributable to Arena as the landlord instead of, or as well as, the tenant. To the extent that any liabilities may be borne by the Fund, this may impact upon the financial performance of the Fund (to the extent not covered by insurance). In addition, penalties may be imposed upon Arena which may have an adverse impact on the Fund and/or Arena. (k) Capital expenditure The forecast capital expenditure represents Arena s current best estimate of the associated costs in maintaining the existing portfolio in accordance with the assumptions and methodology set out in Section 8. Capital expenditure may exceed the current forecasts which could lead to increased funding costs and potentially lower distributions. (l) Insurance The Fund maintains a range of insurances relating to its properties with policy specifications and insured limits that it believes to be customary in the industry. However, potential losses of a catastrophic nature such as those arising from earthquakes, terrorism or severe flooding may be uninsurable or not insurable on reasonable financial terms, may not be insured at full replacement costs or may be subject to large excesses. The nature and cost of insurance has been based upon the best estimate of likely circumstances. However, various factors may influence premiums to a greater extent than those forecast, which may in turn have a negative impact on the net income of the Fund. 34 Arena REIT Product Disclosure Statement

35 6.3 Key risks related to the Offer (a) Economic and market conditions A number of factors affect the performance of the equity market, which could affect the price at which Units trade on the ASX. Among other things, movements on international and domestic stock markets, interest rates, exchange rates, inflation and inflationary expectations and overall economic conditions, economic cycles, investor sentiment, political events and levels of economic growth, both domestically and internationally as well as government taxation and other policy changes may affect the demand for, and price of Units. Trading prices can be volatile and volatility can be caused by general market risks such as those that have been mentioned. Recently, equity markets have become more volatile, with volatility in some markets at very high levels. Investing in or being invested through periods of such highly volatile conditions implies a greater level of risk for Investors than an investment in a more stable market. Units may trade at or below the Offer Price or NTA including as a result of any of the factors that have been mentioned, and factors such as those mentioned may also affect the income, expenses and liquidity of the Fund. Additionally, equity markets can experience price and volume fluctuations that may be unrelated or disproportionate to the operating performance of the Fund. (b) Trading liquidity Following Listing of the Fund on the ASX, there is no guarantee that an active trading market will develop for the Units. Liquidity of the Units will be dependent on the relative volume of buyers and sellers in the market at any given time. Some existing Unitholders may not want, or be able to continue to own their units once the Fund is listed. Additionally, large Unitholders choosing to trade out of their positions at discounts to prevailing market prices may also affect the market. The escrow restrictions which apply to the (currently) 20.41% holding of Units in the Fund held by Citrus Subsidiary Trust, the largest Unitholder in the Fund, for the Escrow Period described in Section 13.5, will cease to apply after the end of the Escrow Period. These factors may result in Unitholders receiving a price less than the Offer Price. (c) Forecast distributions No assurances can be provided in relation to the payment of future distributions. Future determinations as to the payment of distributions by the Fund will be at the discretion of Arena and will depend upon the availability of profits, the operating results and financial conditions of the Fund, future capital requirements, covenants in relevant debt facilities, general business and financial conditions and other factors considered relevant by Arena. No assurance can be given in relation to the level of tax deferral of future distributions. Tax deferred capacity will depend upon the amount of tax depreciation available and other factors. See Section 8 for further details regarding the tax deferred status of forecast distributions. (d) Financial information and forecasts The forward looking statements, opinions and estimates provided in this PDS, including the financial forecasts provided, rely on various contingencies and assumptions, some of which are described in Section 8. Various factors and risks, both known and unknown, many of which are outside the control of Arena, may impact upon the performance of the Fund and cause actual performance to vary significantly from expected results. There can be no guarantee Arena will achieve its stated objectives or that forward looking statements or forecasts will eventuate. (e) Dilution risk As the Fund issues Units to new Investors, existing Unitholders proportional beneficial ownership in the underlying assets of the Fund may be reduced. (f) Funding The Fund s ability to raise funds from either debt or equity sources in the future depends on a number of factors, including, the state of debt and equity markets, the general economic and political climate and the performance, reputation and financial strength of the Fund and Arena. The Constitution of the Fund currently provides for the issue of Units only at a price calculated by reference to NTA, not the market price of Units on ASX. It is proposed that the Constitution of the Fund be amended, as set out in Section 13.1(n). Arena REIT Product Disclosure Statement 35

36 06: Risks 6.4 Other risks related to the Fund and property fund investments (a) Interest rates Unfavourable movements in interest rates relating to the Fund s Debt Facility could lead to increased interest expense, to the extent that interest rates are not hedged. This could impact the level of distributions available to Unitholders. (b) Banking obligation risk Under its Debt Facility, the Fund is subject to a number of undertakings and covenants, including in relation to gearing levels and interest cover ratios. An event of default would occur if the Fund fails to maintain these financial covenants. This may be caused by unfavourable movements in interest rates (to the extent interest rates are not hedged) or deterioration in the income or the value of the Fund s Properties. In the event that an event of default occurs, the lender may require immediate repayment of the Debt Facility. Arena may need to dispose of assets for less than valuation, raise additional equity or reduce or suspend distributions in order to repay the Debt Facility, if this occurs. (c) Financing There is a risk that the Fund may not be able to refinance its Debt Facility and/or interest rate hedges before expiry or may not be able to refinance them on substantially the same terms as the existing facility or hedge instruments. Possible increases in the interest rate, the cost of interest rate hedges and the level of financial covenants required by lenders may adversely impact on the operational and financial results of the Fund and the level of distributions available to Unitholders. (d) Gearing The Fund s gearing level will magnify the effects of any changes in interest rates or changes in property values or performance measures. If the level of gearing increases over the term of the Debt Facility, this may affect the ability of Arena to refinance the Fund s Debt Facility. (e) Personnel risk Arena is owned by Citrus, which is owned and controlled by MSREF VII Global. The Fund relies upon the expertise, experience and strategies of the key executive directors and management of Arena. In the event that their services were no longer available, or if Arena ceased to be owned and controlled by MSREF VII Global, this may affect the management and financial performance of the Fund and therefore returns to Unitholders. (f) Litigation The Fund may in the ordinary course of business be involved in possible litigation and disputes (for example, tenancy disputes, development disputes, occupational health and safety claims or third party claims). A material or costly dispute or litigation may adversely affect the operational and financial results of the Fund. (g) Change of responsible entity There is a risk that Arena may be removed as the responsible entity of the Fund. A change of responsible entity may constitute a default under the Fund s material agreements, which may result in a right for the counterparty to terminate the agreement. A change in responsible entity does not constitute an event of default under the existing Standard Lease. (h) Compliance The Fund is a managed investment scheme which means Arena is subject to strict regulatory and compliance arrangements under the Corporations Act and ASIC policy. If Arena fails to comply with the conditions of its Australian Financial Services Licence, then ASIC may take action to suspend or revoke the licence, which in turn could adversely impact the Fund. 36 Arena REIT Product Disclosure Statement

37 (i) Tax and stamp duty The information in this PDS assumes that the Fund will not be subject to tax on its net income before that net income is distributed to Unitholders. However, the Fund would lose this flow through status if: there was a legislative change which removed the flow through status of property trusts; or the Fund engaged in activities which lead to it being taxed on its net income at the corporate tax rate for Australian income tax purposes. Depending on Unitholders individual circumstances, a loss of the Fund s tax transparency may adversely affect the after tax investment returns. In addition, the taxation treatment for Unitholders is dependent upon the tax law as currently enacted in Australia. Changes in tax or stamp duty law or changes in the way tax or stamp duty law is expected to be interpreted in Australia may adversely impact the Fund s returns, the distributions made to Unitholders or the outcomes outlined in Section 12. Arena REIT Product Disclosure Statement 37

38 07: Investment objectives and strategy This Section details the investment objectives and strategy of the Fund. This Section also provides an overview of the real estate investment sectors in which the Fund presently invests, or intends to invest in the future in accordance with the investment objectives and strategy. 7.1 Overview The Fund s objective is to generate an attractive and predictable distribution to Unitholders with earnings growth prospects over the medium to long term. The investment strategy of the Fund is to invest in real estate in Australia featuring some or all of the following characteristics: relatively long remaining lease term; premises that have strategic importance for the operations of the tenant, such as where the properties have been purpose-built for the tenant or use (e.g. hospitals or childcare centres); high credit quality tenants; leases where the tenants are responsible for all, or substantially all, of the statutory and operating outgoings and costs including land tax, insurance and repairs and maintenance; and manageable reversionary property valuation risk which Arena believes can be appropriately mitigated through active management. In accordance with this investment strategy, the Fund intends over time to establish a diversified real estate portfolio characterised by relatively long term leases to tenants in sectors such as childcare, education, healthcare, aged care and government tenanted facilities. The Fund does not have a pre-determined real estate sector allocation. Arena intends to diversify the portfolio by sector, individual asset and tenant over the medium term. The Fund will not invest in operating businesses. The Fund intends to generally invest in direct real estate but may from time to time invest in a partial interest, joint ventures or property securities where the underlying real estate is consistent with the Fund s investment objectives. 7.2 Real estate investment sectors The Fund s existing childcare centre portfolio is characterised by leases with the following characteristics: relatively long lease term on commencement, typically 15 years; annual rental increases of CPI or a minimum of 2.5%; and triple net leases where the tenant is typically responsible for all, or substantially all, of the statutory and operating outgoings and costs of operating the asset including land tax, insurance, repairs and maintenance, including of a capital or structure nature. In the real estate sector, longer lease terms and triple net leases are more typical of special purpose assets where both the tenant and landlord prefer certainty of tenure given the increased alternative use risk for the landlord (as compared with more generic commercial property) and the potential value impact on the value of a tenant s business without access to special purpose premises. Arena considers that the following special purpose real estate sectors may satisfy the Fund s investment objectives: childcare assets; healthcare assets, including medical centres, diagnostic facilities, hospitals and aged care facilities; and education assets, such as schools and universities. Arena currently also manages a portfolio of medical centres leased to Primary Healthcare. This portfolio shares similar characteristics to the Fund s current childcare assets including a relatively long lease term on commencement, annual CPI or fixed increases and leases where the tenant is responsible for substantially all of the statutory and operating outgoings and costs relating to the asset including land tax, insurance, repairs and maintenance (including costs relating to any failed plant and equipment). Arena REIT intends to pursue similar investment opportunities in the healthcare sector but may also explore the opportunity to invest in hospitals and aged care facilities. At this stage investment opportunities in the education sector are less well defined as the development of this real estate sector remains relatively immature. However, Arena considers that there may be an opportunity to invest in 38 Arena REIT Product Disclosure Statement

39 school and university assets through long term sale and lease back arrangements. Arena has commenced discussions with a leading Australian university relating to a potential sale and leaseback opportunity; however these discussions remain at a preliminary and incomplete stage. Arena may also consider investment opportunities leased to high credit quality and government tenants on long term lease arrangements where it satisfies the Fund s objective of generating an attractive and predictable distribution to Unitholders and is considered in the best interests of Unitholders to do so. The timing and amount of future investments by the Fund cannot be reliably estimated. Therefore, no new property acquisitions are assumed to occur in the Forecast Period. 7.3 Childcare sector The Childcare sector is an integral component of the education sector, principally aimed at pre-school children (0-4 year olds). Childcare is typically distinguished between formal and informal care. Formal care usually refers to childcare provided for a fee by an external party, with informal care normally provided by relatives. Formal childcare services in Australia are delivered via four streams of providers, where centre-based Long Day Care (LDC) is by far the largest component. LDC services are provided in a specialised childcare centre which provides educational, care and recreational programs. LDC is 82.7% of the market (2011) and represents all childcare centre properties owned by Arena REIT. 8 The sector serves as a critical social infrastructure in Australia, and a key tool for government to increase workplace participation rates with significant economic benefits. Arena believes childcare property is an attractive sector for real estate investment for the following reasons: Type of Formal Child Care (2011) 12.1% Family day care A 4.3% Occasional care 0.9% Before and/or after school care 82.7% Long day care (a) Favourable macro fundamentals The total number of LDC centres has grown at a pace of 2.0% to 6.5% p.a. in the last 10 years, driven by positive demographics shifts and increased service utilisation. 9 Australia s population of children aged 0-4 is projected to continue to grow steadily at approximately 1% per annum, from circa 1.36 million in 2008 to 1.61 million in 2025, an 18% increase over that period, providing a base level of support for growth in the childcare industry. 10 Between 1996 and 2011, the proportion of children aged up to four years old who used formal childcare increased from 24% to 37%. 11 During the same period, the use of LDC by children aged up to four years old is estimated to have increased from around 13% in 1996 to 31%. 12 The average weekly hours in childcare has also been increasing consistently. In September 2005 the average weekly hours of a child attending long day care was 19 hours but this has risen to 27.2 hours in June The long term trend to higher workforce participation, particularly by women, is a key contributor to demand for childcare services. In June 2008, of children where both parents were employed and living together, 53% usually attended childcare. This increased to 59% where the mother worked full time and to 70% for single parent families. 14 (b) Long term leases Childcare centre property leases typically provide a long-term stable income stream to the landlord. In addition, tenants typically bear all operating expenses including outgoings, insurance, as well as repairs and maintenance. 8. Australian Bureau of Statistics, Childcare Education and Care. 9. Department of Education, Employment and Workplace Relations. 10. Australian Bureau of Statistics, Population Data. 11. Australian Bureau of Statistics, Childcare Education and Care. 12. Australian Bureau of Statistics, Childcare Education and Care. 13. Department of Education, Employment and Workplace Relations. 14. Australian Bureau of Statistics, Childcare Education and Care. Arena REIT Product Disclosure Statement 39

40 07: Investment objectives and strategy (c) Government funding support Given the social importance of childcare, the sector receives a significant amount of government funding in the form of both benefits and rebates. These include a means tested Childcare Benefit as well as the Childcare Rebate. Total government funding represents 40% to 45% of total industry revenue. 15 Government support for the sector is expected to continue with the budget forward estimates providing for government funding to increase to $5.5 billion in , or an annual growth rate of 6% 8% per annum. 16 (d) Tenants The sector received some support from the Federal Government following the collapse of ABC Learning. In November 2008, ABC Learning, the tenant to 94% of the Fund s childcare centre properties went into receivership. The impact on the childcare sector and the wider economy was immediately recognised with the Federal Government providing funding to the receivers and managers to keep all centres open until 31 December The collapse of ABC Learning, whilst a significant event in the childcare sector, highlighted the importance of the sector to the Australian economy resulting in the Federal Government s immediate involvement with funding and support. Arena believes that the transition of a significant number of centres from ABC Learning to new operators was also an endorsement by the industry of the long term sustainability of the sector. 7.4 Healthcare sector Arena and its affiliates have a long track record managing investment funds that invest in and develop medical facilities. To date, Arena and its affiliates have established the following healthcare investment vehicles which have a combined value in excess of $300 million: Essential Healthcare Trust (established in 2002); Sydney Healthcare Trust (established in 2002); PHC Darlinghurst Syndicate and Trust and BSH Joint Venture (established in 2001); and Pacific Private Property Trust (established in 2000). In particular, the Essential Healthcare Trust progressively purchased a portfolio of 13 medical facilities including 8 general medical and surgical hospitals. The portfolio consisted of 886 overnight beds, 29 operating theatres and had a combined value of circa $190 million. The Essential Healthcare Trust partnered with Healthe Care Australia (the hospital operator) and over the period of ownership initiated capital works projects at Lingard Private Hospital, Belmont Private Hospital, Maitland Private Hospital, North West Private Hospital, South Eastern Private Hospital and Palm Beach Currumbin Clinic with combined value of $39 million. The entire portfolio was sold in December 2010 to New Zealand listed healthcare REIT Vital Healthcare Property Trust. Healthcare services in Australia are delivered across a broad range of health infrastructure facilities. These include medical/surgical hospitals, day procedure centres, medical consulting suites, psychiatric facilities, laboratories and primary care medical clinics. Healthcare is one of the largest industries in Australia, which generated approximately $121 billion turnover or 9.4% of gross domestic product in The healthcare sector meets a number of Arena REIT s investment criteria: (a) Positive long term macro fundamentals The healthcare services industry is relatively non-cyclical and driven by need with demand for both public and private healthcare services underpinned by: The ageing of Australia s population, where the proportion of the Australian population that is over the age of 65 is forecast to rise from 14% to 23% by As government funded Medicare ensures all Australians have access to free or low-cost health and hospital care, this demographic trend will create growing demand for healthcare services. 15. IBISWorld, Childcare Services in Australia. 16. Department of Education, Employment and Workplace Relations. 17. Australian Institute of Health and Welfare, Australia s Health Private Health Insurance Administration Council, Membership and Coverage, June Arena REIT Product Disclosure Statement

41 Steady growth of private health insurance, driving demand for private hospitals, which funds approximately 12% of total health expenditure nationally. As at 30 June 2012, 46.8% of the population (10.59 million) held private health insurance. 19 (b) Long term leases Healthcare property is a well-established real estate asset class globally. In Australia, healthcare property is considered critical to the tenant s ongoing business operations, and as a result, lease tenure often ranges between 10 and 25 years with long dated extension options. (c) Asset class performance As at 31 December 2012, the IPD 20 Australian Healthcare Index displayed a compound annual return of 10.1% since 30 June This significantly outperformed the traditional property sectors, including both IPD Unlisted Property Fund Index and ASX 200 REIT Total Return Index, which only returned 4.2% p.a. and -9.9% p.a. respectively during the same period. Asset Class Historical Performance 200 IPD Healthcare Index IPD Unlisted Property Fund Index ASX 200 REIT Total Return Index June 2007 June 2008 June 2009 June 2010 June 2011 June 2012 The above performance translates into a moderate or even negative correlation measure of 0.71 to IPD Unlisted Property Fund Index and to ASX 200 REIT Total Return Index, which underpins the strong diversification benefit of healthcare property investments. (d) Tenant quality In , there were 1,345 hospitals in Australia (753 public and 592 private). 21 Public hospitals are generally considered high-grade due to their government ownership. Private hospitals are operated by both for-profit and not-for-profit private organisations, the profitability of which depend on the preferred provider agreements with the relevant private health funds and the support of the referring practitioners. Major hospital operators are in a stronger position to negotiate superior funding arrangements with health insurance funds and are also more capable of providing the resources required by practitioners. Medical centres deliver an integrated service to provide patients with convenient and affordable access to a comprehensive range of medical services. Government funding represents a key support of the sector given that the majority of the medical services are bulk billed via the Medicare system. 19. Australian Bureau of Statistics Population Projections. 20. Investment Property Database Ltd, a leading provider of analytical services, indices and market information to the real estate industry. 21. Australian Institute of Health and Welfare, Australia s Hospitals at a glance. Arena REIT Product Disclosure Statement 41

42 07: Investment objectives and strategy 7.5 Education sector The education industry provides services from preschool through to tertiary education in general, but excludes childcare. In , total industry revenue was reported to be $111.6 billion, which is forecast to grow at 4.1% in the next 5 years to reach $136.4 billion by Investments in education properties are considered likely to be consistent with Arena REIT s investment strategy, given: (a) Positive long term macro fundamentals Favourable demographic trends where population aged between five and 15 is forecast to grow at 1.2% p.a. between 2013 and Australia has a compulsory education system for children aged between five and 15, growth of this population segment and its flow-on effect is expected to underpin the sector s long term demand. Higher education qualifications are becoming more important for employment in an increasingly knowledge-based economy increasing demand for education. The industry exhibits counter cyclical revenue, where student retention rates typically increase during a weaker economic environment, as young students pursue higher education opportunities and mature-age students seek re-education. (b) Lease structure Unlike childcare and healthcare, there has been limited precedence of leasing activities of education properties in Australia, as most schools and universities own their properties on or off campus. This provides scope for Arena REIT to actively explore potential sale and leaseback opportunities with high quality education providers for long-term lease structures that fit with its investment strategy. (c) Tenant quality Education service in Australia is delivered through a diverse set of providers, including preschool, school, higher education (universities and TAFE) and non-vocational education. As at , schools are the largest industry earning 56% of total sector revenue. 24 Education providers e.g. schools and universities are generally considered high quality credits due to the implicit government guarantees given their social importance. In addition, government funding represents a large source of income to the sector. 22. IBISWorld, Education and Training in Australia. 23. Australian Bureau of Statistics, Population Data. 24. IBISWorld, Education and Training in Australia. 42 Arena REIT Product Disclosure Statement

43 At top and above: Baden Powell Drive, Tarneit, VIC. Arena REIT Product Disclosure Statement 43