BETTER TOGETHER. Relating to the proposed merger of Property For Industry Limited & Direct Property Fund Limited. 22 May 2013

Transcription

1 BETTER TOGETHER NOTICES OF MEETING + INFORMATION MEMORANDUM Relating to the proposed merger of Property For Industry Limited & Direct Property Fund Limited 22 May 2013 This is an important document + requires your immediate attention. You should read the whole document before deciding whether and how to vote on the resolutions to approve the Merger. If you are in any doubt as to any aspect of the Merger, you should consult your financial or legal adviser. This document provides information to PFI and DPF shareholders to assist their decision whether to approve the Merger. For DPF Shareholders, it also comprises a simplified disclosure prospectus for shares in PFI to be issued under the Merger, being shares of the same class as existing shares in PFI quoted on the NZX Main Board.

2 CONTENTS important Information 01 notices of Meeting 02 Section 1: Introduction + Key Information 07 Section 2: Merger Highlights 15 Section 3: Overview of the Merger 21 Section 4: Profile of the Merged Group Business 35 Section 5: Directors + Management 49 Section 6: Prospective Financial Information 55 Section 7: Additional Information 79 Section 8: Scheme Plan, Objection Rights + Court Documents 85 independent Expert Report 105 independent Appraisal Report 161 Glossary 193 Directory 196 For the purposes of Regulation 16 of the Securities Regulations, the matters required to be stated or contained in this Information Memorandum under Schedule 10 of the Securities Regulations are set out in this Information Memorandum as follows: Matter Schedule 10 Page(s) Information at front of simplified disclosure prospectus Names, addresses, and other information Clause 1 Front page, 1 Clause 2 80 Experts and underwriter Clause 3 80 Terms of offer and securities Clause 4 82 Relationship with listed securities Clause 5 82 Information available under issuer s disclosure obligation Clause 6 83 Financial Statements Clause 7 83 Additional interim financial statements Access to information and statements Clause 8 Not applicable Clause 9 83 Directors statement Clause Bridon, 6-8 Greenmount Drive, East Tamaki, Auckland

3 IMPORTANT INFORMATION This Information Memorandum is dated 22 May 2013 and gives you notice of the Special Meetings and provides information to assist your decision on whether to approve the Merger. Offer document For the purposes of the Securities Act, this Information Memorandum is also a simplified disclosure prospectus in respect of the offer of PFI Shares by PFI to DPF Shareholders pursuant to the Merger and contains the information required by Schedule 10 of the Securities Regulations. A copy of this Information Memorandum, signed by or on behalf of each director of PFI and each Promoter and having attached to it copies of the documents and other materials required by section 41 of the Securities Act, has been delivered to the Registrar of Financial Service Providers in accordance with section 42 of the Securities Act. The documents required by section 41 of the Securities Act to be attached to the copy of the Information Memorandum delivered to the Registrar of Financial Service Providers are: the market announcements referred to in Section 7 of this Information Memorandum; PFI s latest audited financial statements for the year ended 31 December 2012; relevant agent authorities where an agent has signed this Information Memorandum on behalf of a director of PFI or on behalf of a Promoter; the signed consent of the Independent Expert to the Independent Expert Report and the statements in this Information Memorandum attributed to the Independent Expert appearing in this Information Memorandum; the signed consent of the Investigating Accountant to the Investigating Accountant Report and the statements in this Information Memorandum attributed to the Investigating Accountant appearing in this Information Memorandum; the signed consent of the Independent Appraiser to the Independent Appraisal Report and the statements in this Information Memorandum attributed to the Independent Appraiser appearing in this Information Memorandum; and the signed consent of each Valuer to the inclusion of the valuation figures attributed to that Valuer appearing in this Information Memorandum. Consideration period Pursuant to section 43D of the Securities Act, PFI is unable to allot any PFI Shares or accept any applications or subscriptions in respect of the Offer during the Financial Markets Authority Consideration Period. The Consideration Period commences on the date of registration of this Information Memorandum and ends at the close of the day which is five working days after the date of registration. The Financial Markets Authority may shorten this Consideration Period, or extend it by no more than five additional working days. Continuous Disclosure PFI is subject to a continuous disclosure obligation that requires it to notify certain material information to NZX for the purposes of that information being made available to participants in the NZX Main Board. You should note that other important information about PFI is contained in the disclosures it has made pursuant to its continuous disclosure obligations under the Securities Markets Act and the Listing Rules. That information is available on NZX s website at by searching PFI. NZX Main Board Listing The PFI Shares offered to DPF Shareholders have been accepted for quotation by NZX on the NZX Main Board. PFI will take steps to ensure that the PFI Shares are, immediately after allotment, listed. However, NZX accepts no responsibility for any statement in this Information Memorandum. The NZX Main Board is a registered market operated by NZX, which is a registered exchange regulated under the Securities Markets Act. Definitions Capitalised terms used in this Information Memorandum (including the Notices of Meeting and the explanatory notes to the Notices of Meeting) have the specific meaning given to them in the Glossary or elsewhere in this Information Memorandum. Property statistics All figures and values relating to the property portfolios of PFI and DPF have been calculated on the basis of contracted annual rental income, unless otherwise stated. Where appropriate, market rental on vacant space and other market based estimates have been assumed for the purposes of some calculations. Investment decisions This Information Memorandum does not take into account the individual investment objectives, financial situation or particular needs of any particular shareholder. You may wish to consult your broker or other professional adviser before deciding whether or not to vote to approve the Merger. Forward-looking statements Certain statements in this Information Memorandum constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance and achievements of PFI, DPF and/or the Merged Group to be materially different from any future results, performance or achievements expressed or implied in such forward-looking statements. Such factors include, among other things, general economic and business conditions, regulatory risk, competition, the property market and other factors presented in this Information Memorandum. Given these uncertainties, PFI and DPF shareholders are cautioned not to place undue reliance on such forward-looking statements. In addition, under no circumstances should the inclusion of such forwardlooking statements in this Information Memorandum be regarded as a representation or warranty by PFI, DPF, DPFM and their respective directors or any other person with respect to the achievement of the results set out in such statements, or that the underlying assumptions used will in fact be the case. PFI, DPF, DPFM and their respective directors disclaim any responsibility to update any such risk factors or publicly announce the result of any revisions to any of the forward-looking statements contained in this Information Memorandum to reflect future developments or events, other than where they are required to do so by law. IMPORTANT INFORMATION 01

4 NOTICES OF MEETING As a shareholder of PFI or DPF, you are entitled to vote whether to approve the Merger of PFI and DPF at the applicable Special Meeting to be held on 24 June You are encouraged to read all of the materials provided to you and to vote at the applicable Special Meeting by attending in person or by sending your Voting/Proxy Form in accordance with the instructions on the Voting/Proxy Form. If you are not attending your Special Meeting, but wish to vote, your Voting/ Proxy Form must be returned in accordance with the instructions on the Voting/Proxy Form by: 3.00pm on 22 June 2013 for PFI Shareholders; and 11.30am on 22 June 2013 for DPF Shareholders. PROPERTY FOR INDUSTRY LIMITED Notice of meeting of shareholders to approve the Merger of Property For Industry Limited and Direct Property Fund Limited. Notice is given that a meeting of the shareholders of Property For Industry Limited will be held at Level 4 Lounge, South Stand, Eden Park, Gate P5, Reimers Ave, Mount Eden, Auckland 1024 on 24 June 2013 commencing at 3.00pm, to consider and, if thought fit, pass the resolutions set out below. RESOLUTIONS Resolution 1: Merger Conditional upon Resolution 2 also being approved, it is resolved as a special resolution that: The scheme of arrangement to merge Property For Industry Limited and Direct Property Fund Limited, as described in the scheme plan and other information contained in the Information Memorandum dated 22 May 2013 are approved (it being noted that the scheme of arrangement will not be implemented until, among other things, Final Court Orders for the scheme under Part 15 of the Companies Act 1993 have been granted). Resolution 2: Amended and Restated Management Agreement Conditional upon Resolution 1 also being approved, it is resolved as an ordinary resolution that: The amendment and restatement of the Management Agreement between Property For Industry Limited and PFIM Limited, in the manner described in the Information Memorandum dated 22 May 2013, is approved. Resolution 3: Director Remuneration Conditional on Resolutions 1 and 2 also being approved, it is resolved as an ordinary resolution that: The total director remuneration is increased from $180,000 per annum to $280,000 per annum, being an increase of $100,000 per annum, with effect for the financial year commencing 1 July 2013 pursuant to NZSX Listing Rule By order of the Board. Peter Masfen Chairman 22 May NOTICES OF MEETING

5 EXPLANATORY NOTES PFI Shareholders are encouraged to read all of the materials accompanying this notice of meeting and to vote at the meeting by attending in person or by proxy or by representative (if you are a body corporate) in accordance with the instructions set out in these explanatory notes and on the Voting/Proxy Form. For the Merger to proceed, PFI and DPF shareholders need to approve the Merger. Resolutions 1 and 2 are conditional on the other resolution being approved. Resolution 3 is conditional on both Resolutions 1 and 2 being approved. Explanatory Note 1: Approval of the Merger (Resolution 1) Resolution 1 seeks approval from PFI Shareholders by way of special resolution of the Merger of PFI and DPF pursuant to a Court approved scheme of arrangement under Part 15 of the Companies Act The terms of the Merger are described in the Scheme Plan and other information contained in this Information Memorandum. As required by the Initial Court Orders granted in respect of the Merger, the resolution will be put as a special resolution and, if approved by the required votes, will be binding on all PFI Shareholders. A special resolution of PFI means a resolution approved by at least 75% of the votes of those PFI Shareholders entitled to vote and voting on the resolution. PFI will also require approval from PFI Shareholders by way of ordinary resolution if the Merger triggers the threshold in Listing Rule 9.1 (for example, if the Merger results in PFI acquiring assets in respect of which the gross value is in excess of 50% of the average market capitalisation of PFI). An ordinary resolution of PFI means a resolution passed by a simple majority of those PFI Shareholders entitled to vote and voting on the resolution. This requirement will be satisfied if the special resolution in relation to Resolution 1 is approved by the requisite majority. Resolution 1 is conditional on Resolution 2 also being approved. Explanatory Note 2: Approval of the amended and restated Management Agreement (Resolution 2) Resolution 2 seeks approval from PFI Shareholders by way of ordinary resolution of the amendment and restatement of the Management Agreement between PFI and PFIM Limited, in the manner described in Section 1 of this Information Memorandum (Proposed Amendment). Pursuant to Listing Rule 9.2.1, PFI must obtain shareholder approval, by ordinary resolution, to PFI s entry into any Material Transaction where a Related Party is, or is likely to become, a direct or indirect party to the Material Transaction or to at least one of a related series of transactions of which the Material Transaction forms part. Gregory Reidy is a director of both PFI and PFIM Limited, and has a material economic interest in PFIM Limited by virtue of his ownership interest in DPF Management Limited (the sole shareholder of PFIM Limited). Accordingly, PFIM Limited is a Related Party of PFI and PFI is seeking shareholder approval as the entry into the Proposed Amendment is a Material Transaction (on the grounds that the management fees payable under the Proposed Amendment is likely to exceed an amount equal to 1% of the average market capitalisation of PFI). An independent appraisal report, as required by Listing Rule 9.2.5, has been prepared by PwC in relation to the Proposed Amendment and is included in this Information Memorandum. As required by Listing Rule 9.2.1, Resolution 2 will be put as an ordinary resolution and, if approved by the required votes, will be binding on all PFI Shareholders. An ordinary resolution of PFI means a resolution passed by a simple majority of those PFI Shareholders entitled to vote and voting on the resolution. Gregory Reidy, PFIM Limited and any Associated Person of either of them are not entitled to cast a vote on Resolution 2. Resolution 2 is conditional on Resolution 1 also being approved. Explanatory Note 3: Approval of director remuneration (Resolution 3) Resolution 3 seeks approval from PFI Shareholders by way of ordinary resolution to increase the total director remuneration from $180,000 per annum to $280,000 per annum, being an increase of $100,000 per annum. Pursuant to Listing Rule 3.5.1, PFI must obtain shareholder approval by ordinary resolution to the payment of remuneration to directors in their capacity as a director of PFI or a subsidiary of PFI. At the 2008 annual meeting, PFI Shareholders approved an increase in director remuneration to $180,000 per annum. Currently, $80,000 is paid per annum to the chairman and $50,000 per annum to each of the independent directors. Gregory Reidy, as the director representing the Manager, does not receive any director fees (in accordance with PFI s remuneration policy). If the Merger is approved, John Waller and Arthur Young (current directors of DPF) will be appointed as directors of PFI. Where the number of PFI s directors increases, Listing Rule permits PFI (without approval by ordinary resolution to increase the total remuneration) to pay the additional directors remuneration which does not exceed the average amount paid to each of the other non-executive directors (other than the chair). As Gregory Reidy does not receive any remuneration, the average amount paid to non-executive directors is $33,333. The increased remuneration pool therefore allows for the new non-executive directors to be paid the same amount as the current independent directors. Resolution 3 is conditional on Resolutions 1 and 2 also being approved. NOTICES OF MEETING 03

6 Explanatory Note 4: Voting Voting at the PFI meeting shall be decided by a poll of PFI Shareholders entitled to vote and voting. Set out below are details on voting matters for this meeting. A Voting/Proxy Form for use at the PFI meeting is enclosed with this notice of meeting, which you should bring to the meeting as it also constitutes your voting paper. Who can vote? Every PFI Shareholder whose name is registered in the share register as at 5.00pm on 23 June 2013 and who is present at the meeting in person or by proxy or in the case of a body corporate shareholder, by representative, can vote in respect of Resolutions 1, 2 and 3 and shall have one vote in respect of every fully paid PFI Share held by that PFI Shareholder at that time, subject to the following voting restriction. In respect of Resolution 2, Gregory Reidy, PFIM Limited and any Associated Person of either of them are not entitled to cast a vote. In respect of Resolution 3, John Waller, Arthur Young, the current directors of PFI and any Associated Person of any of them are not entitled to cast a vote. How you can vote? PFI Shareholders can vote in any one of the following ways: In person By proxy By representative (if the shareholder is a body corporate) Required Votes Resolution 1: At least 75% of the votes of those shareholders entitled to vote and voting on the resolution. Resolution 2: More than 50% of the votes of those shareholders entitled to vote and voting on the resolution. Resolution 3: More than 50% of the votes of those shareholders entitled to vote and voting on the resolution. What is the quorum? The quorum for the meeting is three PFI Shareholders. If within 30 minutes after the time appointed for the meeting a quorum is not present, the meeting shall be adjourned to the same day in the following week at the same time and place (or to such other date, time and place as the board may appoint) and, if at the adjourned meeting a quorum is not present within 30 minutes after the time appointed for the meeting, the PFI Shareholders or their proxies or their representatives present will constitute a quorum. Explanatory Note 5: Objection Rights Relating to the Merger The Court makes the final decision on whether or not to implement the Merger and can decide not to grant the Final Court Orders. PFI Shareholders have the right to appear and be heard at the hearing for the Final Court Orders in respect of the Merger. Details of the procedure and timetable to be heard by the Court are set out in more detail in Section 8 of this Information Memorandum. 04 NOTICES OF MEETING

7 DIRECT PROPERTY FUND LIMITED Notice of meeting of shareholders to approve the Merger of Direct Property Fund Limited and Property For Industry Limited. Notice is given that a meeting of the shareholders of Direct Property Fund Limited will be held at Level 4 Lounge, South Stand, Eden Park, Gate P5, Reimers Ave, Mount Eden, Auckland 1024 on 24 June 2013 commencing at 11.30am, to consider and, if thought fit, pass the special resolution set out below. SPECIAL RESOLUTION: TO APPROVE THE MERGER It is resolved as a special resolution that: The scheme of arrangement to merge Direct Property Fund Limited and Property For Industry Limited, as described in the scheme plan and other information contained in the Information Memorandum dated 22 May 2013, are approved (it being noted that the scheme of arrangement will not be implemented until, among other things, Final Court Orders for the scheme under Part 15 of the Companies Act 1993 have been granted). By order of the Board. Arthur Young Chairman 22 May 2013 EXPLANATORY NOTES DPF Shareholders are encouraged to read all of the materials accompanying this notice of meeting and to vote at the meeting by attending in person or by proxy or by representative (if you are a body corporate) in accordance with the instructions set out in these explanatory notes and on the Voting/Proxy Form. For the Merger to proceed, PFI and DPF shareholders need to approve the Merger. Explanatory Note 1: Approval of the Merger The resolution being put to shareholders seeks approval of the Merger of DPF and PFI pursuant to a Court approved scheme of arrangement under Part 15 of the Companies Act The terms of the Merger are described in the Scheme Plan and other information contained in this Information Memorandum. As required by the Initial Court Orders granted in respect of the Merger, the resolution will be put as a special resolution and, if approved by the required votes, will be binding on all DPF Shareholders. A special resolution of DPF means a resolution approved by at least 75% of the votes of those DPF Shareholders entitled to vote and voting on the resolution. Explanatory Note 2: Voting Voting at the DPF meeting shall be decided by a poll of DPF Shareholders entitled to vote and voting. Set out below are details on voting matters for this meeting. A Voting/Proxy Form for use at the DPF meeting is enclosed with this notice of meeting, which you should bring to the meeting as it also constitutes your voting paper. Who can vote? Every DPF Shareholder whose name is registered in the share register as at 5.00pm on 23 June 2013 and who is present at the meeting in person or by proxy or in the case of a body corporate shareholder, by representative, can vote and shall have one vote in respect of every fully paid DPF Share held by that DPF Shareholder. How you can vote? DPF Shareholders can vote in any one of the following ways: In person By proxy By representative (if the shareholder is a body corporate) Required Votes At least 75% of the votes of those shareholders entitled to vote and voting on the resolution. What is the quorum? The quorum for the meeting is five DPF Shareholders. If within 30 minutes after the time appointed for the meeting a quorum is not present, the meeting shall be adjourned to the same day in the following week at the same time and place (or to such other date, time and place as the directors may appoint) and, if at the adjourned meeting a quorum is not present within 30 minutes after the time appointed for the meeting, the DPF Shareholders present will constitute a quorum. Explanatory Note 3: Objection Rights Relating to the Merger The Court makes the final decision on whether or not to implement the Merger and can decide not to grant the Final Court Orders. DPF Shareholders have the right to appear and be heard at the hearing for the Final Court Orders in respect of the Merger. Details of the procedure and timetable to be heard by the Court are set out in more detail in Section 8 of this Information Memorandum. NOTICES OF MEETING 05

8 06 NOTICES OF MEETING

9 SECTION Introduction + Key Information logically TOGETHER Information Management Group, 8 McCormack Place, Ngauranga Gorge, Wellington INTRODUCTION + KEY INFORMATION 07

10 What is the purpose of this Information Memorandum? The shareholders of both PFI and DPF are being asked to separately consider and approve resolutions to approve the Merger. PFI Shareholders are also being asked to consider and approve proposed changes to the PFI Management Agreement and an increase to director fees which are proposed as part of the Merger. The resolutions are set out in the Notices of Meeting included as part of this Information Memorandum. This Information Memorandum describes the terms of the Merger and provides other information to assist the shareholders with this decision, including: a report prepared by Deloitte, as the Independent Expert, which considers, the merits and fairness of the Merger; and an appraisal report prepared by PwC, as the Independent Appraiser, which considers the fairness of the proposed changes to the PFI Management Agreement. You should read this Information Memorandum in its entirety before deciding whether or not to approve the Merger. What happens under the Merger? PFI and DPF are seeking to merge their respective businesses pursuant to a Court approved scheme of arrangement. Under this scheme, PFI and DPF will merge by way of amalgamation, with DPF Shares converting into PFI Shares and PFI continuing as the amalgamated company. On Merger, former PFI Shareholders will hold 53.6%, and former DPF Shareholders will hold 46.4%, of the shares in the Merged Group. What do your directors recommend? The directors of both PFI and DPF believe that the Merger is compelling and is in the best interests of their shareholders. The directors unanimously recommend that their respective shareholders vote to approve the Merger. What is the opinion of the Independent Expert in relation to the Merger? PFI and DPF have jointly commissioned Deloitte to prepare an independent report on the merits and fairness of the Merger. Deloitte concluded, in their Independent Expert Report, that: In our opinion, after having regard to all relevant factors, the Merger has merit for the shareholders of both PFI and DPF, and the benefits of the Merger are shared fairly between the shareholders of PFI and DPF. The conclusions of the Independent Expert should be read in the context of the full Independent Expert Report. A copy of the Independent Expert Report is included as part of this Information Memorandum. Who will be the proposed directors of the Merged Group? The board of the Merged Group will initially comprise Peter Masfen, Humphry Rolleston and Anthony Beverley (PFI s current independent directors), Arthur Young (DPF s current chairman), John Waller (a DPF independent director) and Gregory Reidy (who will remain on the board as the management representative). Further information on all of the directors is set out in Section 5 of this Information Memorandum. As part of the Merger, PFI Shareholders are being asked to approve an increase in total director remuneration from $180,000 to $280,000. This will enable PFI to pay Arthur Young and John Waller annual director s fees of $50,000, which is equal to the amount currently paid to PFI s independent directors (other than the chairman who receives $80,000 per annum). 08 INTRODUCTION + KEY INFORMATION

11 What are the management arrangements for the Merged Group following the Merger? Following the Merger, the Merged Group will continue to be managed by PFIM, PFI s existing manager, under the terms of the PFI Management Agreement (as amended as part of the Merger). In conjunction with the Merger, PFI has agreed to update the base management fee structure payable under the PFI Management Agreement to reflect a blending of the current PFI and DPF base management fees and to make certain other amendments to reflect: the Merged Group s gearing policy (as discussed in Section 4); the level of cover for PFIM s required professional indemnity insurance increasing to $5 million; current accounting terminology; redundant provisions/schedules; and statutory reference changes which have occurred since the agreement was originally entered into. The amendment requires the approval of PFI Shareholders under the Listing Rules as they are a Material Transaction with a Related Party 1. A summary of the key terms of the PFI Management Agreement and a description of the key differences between the current PFI Management Agreement and the DPF Management Agreement are set out in Section 4 of this Information Memorandum. Further information on the changes to the PFI Management Agreement is set out in the Independent Appraisal Report. Opinion of the Independent Appraiser in relation to the proposed changes to the PFI Management Agreement PwC, who has been engaged to prepare an independent appraisal report in respect of the proposed changes to the PFI Management Agreement, has concluded that the proposed changes are fair to PFI Shareholders not associated with the Manager of PFI. PwC concluded, in their Independent Appraisal Report, that: In our opinion, the proposed changes to PFI s Management Agreement are fair to the Non-Associated Shareholders of PFI. The conclusions of the Independent Appraiser should be read in the context of the full Independent Appraisal Report. A copy of the Independent Appraisal Report is included as part of this Information Memorandum. Opinion of the Independent Expert in relation to the proposed changes to the PFI Management Agreement As part of the Independent Expert Report, Deloitte were also asked to comment on the management fee that will be payable by DPF Shareholders (once they become PFI Shareholders) as against the current DPF management fees. Deloitte concluded that: We also believe the management fee changes that DPF shareholders will experience if the Merger proceeds are fair. The conclusions of Deloitte should be read in the context of the full Independent Expert Report. A copy of the Independent Expert Report is included as part of this Information Memorandum. Votes, decisions and choices for shareholders Key dates* PFI Shareholders DPF Shareholders 3.00pm on 22 June am on 22 June 2013 Voting/Proxy Forms due to be returned by shareholders voting by way of proxy 3.00pm on 24 June am on 24 June 2013 Special Meetings 24 June 2013 Last day for notices of opposition or notices of appearance to Court in respect of the Scheme of Arrangement to give effect to the Merger 26 June 2013 Final Court Orders applied for and granted 1 July 2013 Merger Date (effective date) 1 July 2013 Shares allotted by PFI * Dates are indicative only and may change and are subject to Court approval of the Scheme of Arrangement. 1 Gregory Reidy is a director of both PFI and PFIM Limited and also an indirect shareholder of PFIM Limited. Accordingly, PFIM Limited is a Related Party of PFI. INTRODUCTION + KEY INFORMATION 09

12 Who votes to approve the Merger? The Merger must be approved by a special resolution of the shareholders of both PFI and DPF. The changes to the PFI Management Agreement and an increase to director fees must be approved by ordinary resolution of the PFI Shareholders. What do I need to do? Having considered the materials circulated to you, you should decide whether you wish to approve the Merger, and vote accordingly. Do I have to vote? You do not have to vote, but have a right to do so. Your directors encourage you to read all of the documents carefully, to make a decision and to vote, either by proxy or by attending the applicable Special Meeting. The Special Meetings are to be held as follows: PFI 3.00pm on 24 June 2013 at Level 4 Lounge, South Stand, Eden Park, Gate P5, Reimers Ave, Mount Eden, Auckland 1024 DPF 11.30am on 24 June 2013 at Level 4 Lounge, South Stand, Eden Park, Gate P5, Reimers Ave, Mount Eden, Auckland 1024 How do I vote? Accompanying this Information Memorandum is a Voting/Proxy Form that you can use to vote on the Merger either by: attending the relevant Special Meeting; or appointing someone to vote for you at the Special Meeting. If you are not attending the Special Meeting but wish to vote, your Voting/ Proxy Form must be returned in accordance with the instructions on the Voting/Proxy Form by: 3.00pm on 22 June 2013 for PFI Shareholders; and 11.30am on 22 June 2013 for DPF Shareholders. Factors for shareholders to consider Each PFI Shareholder and DPF Shareholder should take into account the following considerations before deciding how to cast his or her vote in relation to the Merger: the merits of the Merger that the directors of PFI and DPF consider will be achieved as part of the Merger; the investment you will hold as a result of the Merger; the future prospects of your investment on an as is, standalone basis, absent the Merger; the business, financial and other risks of the Merger and the Merged Group as set out in this Information Memorandum; and your own personal circumstances. PFI Shareholders and DPF Shareholders should refer to the Independent Expert Report included as part of this Information Memorandum when considering the Merger. PFI Shareholders should refer to the Independent Appraisal Report included as part of this Information Memorandum when considering the proposed changes to the PFI Management Agreement as part of the Merger. DPF Shareholders should also consider this report for information purposes when considering the Merger. PFI Shareholders and DPF Shareholders should carefully consider the benefits, disadvantages and risks together with the other information contained in this Information Memorandum before deciding how to vote on the Merger. If, as a PFI Shareholder, you vote against the Merger but the Merger proceeds, you will continue to hold your PFI Shares and those shares will be tradable on the NZX Main Board. If, as a DPF Shareholder, you vote against the Merger but the Merger proceeds, you will still receive PFI Shares under the terms of the Merger for your DPF Shares (on the basis set out in this Information Memorandum). Those shares will be tradable on the NZX Main Board. What are the risks? The Merger is not without risks. The risks associated with the Merger broadly fall into the following categories: merger-specific risks such as the risk associated with PFI and DPF s respective due diligence on each other s property portfolio; Merged Group business risks the principal risk being that shareholders of the Meged Group may not be able to recoup their investment or may not receive the returns they expect; and general business risks such as any change in the New Zealand economy or any regulatory changes that adversely affect the Merged Group. The key risks are described in more detail on pages 45 to 47. No Guarantee Nothing contained in this Information Memorandum should be construed as a promise of profitability or of investment returns in respect of PFI or DPF, and no person named in this Information Memorandum (including PFI, DPF and DPFM, nor any of their respective directors, officers or employees) or any other person gives any guarantee or promise as to the future performance of PFI or DPF of the future value or share price of PFI Shares or payment of any distributions in relation to PFI Shares. 10 INTRODUCTION + KEY INFORMATION

13 MERGER SNAPSHOT Key investment themes Merger of PFI and DPF, bringing together two successful, complementary property investment companies. Significant increase in assets and rental income, achieved in a cost effective manner. Compelling growth opportunity in the industrial property category at an attractive point in the property cycle. Significant diversification within the Merged Group property portfolio by rental income, lease expiry, and the number, type and size of tenants and buildings. The Merger is expected to improve the liquidity of PFI Shares, and greatly improve liquidity for DPF Shareholders. The Merger is expected to be earnings accretive to both sets of shareholders. Bank facility headroom and potential to access more diverse sources of capital at lower cost to support further growth initiatives. Merged Group expected to rank 29 in the NZX 50 Index (as compared to PFI s current ranking of 42). 2 One of the largest specialist industrial property exposures of all LPV s on the NZX Main Board. Snapshot of PFI, DPF and the Merged Group 3 PFI DPF Merged Group Number of properties Portfolio value $400m $414m $814m Average property value $8.0m $12.6m $9.8m Tenants WALT 4.8 years 6.4 years 5.6 years Total net lettable area 297,956sqm 269,480sqm 567,436sqm Occupancy by rental 98.0% 96.3% 97.1% Contract rental $32.8m $31.7m $64.5m Contract yield % 7.65% 7.93% Rent review type Geography Asset class mix 47.3% Market, 11.5% Fixed, 41.2% Index linked 88.6% Auckland, 11.4% Other 96.6% Industrial, 3.4% Office 36.9% Market, 42.5% Fixed, 20.6% Index linked 85.2% Auckland, 14.8% Other 66.9% Industrial, 16.8% Office, 16.3% Other 42.1% Market, 26.9% Fixed, 31.0% Index linked 86.9% Auckland, 13.1% Other 81.5% Industrial, 10.2% Office, 8.3% Other 2 Issuers in the NZX 50 Index are ranked by free float market capitalisation. Merged Group s expected ranking in the NZX 50 Index is calculated on a pro forma basis, assuming it is included in the NZX 50 Index at the next quarterly review date. The information presented is based on the free float market capitalisation of NZX 50 Index issuers as at 23 April 2013, an assumed free float market capitalisation of $509.6 million for the Merged Group and a free float market capitalisation of $1.7 billion for Mighty River Power (based on 686,400,000 shares multiplied by an offer price of $2.50 per share). Merged Group s assumed free float market capitalisation is based on an equity value of $273.0 million for PFI and an equity value of $236.6 million for DPF, being the estimated values as at 28 February 2013, when PFI was trading at $1.24 per share. These conclusions are based on the PFI/DPF s own analysis and have not been approved or checked by NZX. Refer to the charts under the heading Financial and Scale Benefits in Section 2 of this Information Memorandum for further details. 3 The information in this table is as at 31 March 2013, except to the extent that such information is based on valuation information (in which case the valuation information set out under the descriptions of the PFI and DPF property portfolios in Section 3 of this Information Memorandum was used). Merged Group information is an aggregation of the information provided for PFI and DPF. 4 PFI and DPF have two tenants in common. 5 Calculated as the contract rental divided by portfolio value. INTRODUCTION + KEY INFORMATION 11

14 Comparison of PFI, DPF and the Merged Group with NZX Main Board LPVs 6 Portfolio value ($ million) ,076 1,822 $ MILLION ,461 1, AVERAGE: $944M KIP GMT PCT ARG Merged Group DNZ VHP DPF PFI NPT 5 th largest LPV on the NZX Main Board (by market capitalisation). Weighted averaged lease term (years) median: 5.6yrs 9 YEARS VHP DPF NPT ARG GMT Merged PCT DNZ PFI Group KIP Merged Group s WALT in line with the sector median. 6 The information presented in these charts for all LPVs, except PFI, DPF and the Merged Group, is sourced from the last financial report and NZSX filings for those LPVs filed prior to 31 March All charts, except that chart relating to WALT, reflect movements in portfolio value in the period between the last respective financial reports and NZSX filings and 31 March Information presented in the WALT chart is sourced from last respective financial reports and NZSX filings. The information presented for PFI and DPF is as at 31 March 2013, except to the extent that such information is based on valuation information (in which case the valuation information set out under the descriptions of the PFI and DPF property portfolios in Section 3 of this Information Memorandum was used). The information presented for the Merged Group is an aggregation of the information provided for PFI and DPF. The companies which the stock codes set out in the tables relate to can be found on the NZX website at 12 INTRODUCTION + KEY INFORMATION

15 Gearing 7 (%) PERCENTAGE median: 35.8% VHP DPF ARG DNZ Merged PCT PFI KIP GMT NPT Group Merged Group s gearing in line with the market. 7 Calculated as total interest bearing debt divided by portfolio value. The information presented in this table for all LPVs, except PFI, DPF and the Merged Group, is sourced from the last respective financial reports and NZSX filings for those LPVs filed prior to 31 March The information presented for PFI, DPF and the Merged Group is based on the table Merger Pro Forma Prospective Consolidated Statements of Financial Position in the Prospective Financial Information section of this Information Memorandum. INTRODUCTION + KEY INFORMATION 13

16 Top 10 shareholders 8 Top 10 PFI Shareholders as at 31 March 2013 Rank Holder Shares % Total register 1 FNZ Custodians Limited 16,884, % 2 National Nominees New Zealand Limited 13,822, % 3 Custodial Services Limited 10,278, % 4 Investment Custodial Services Limited 9,598, % 5 BNP Paribas Nominees (NZ) Limited 8,259, % 6 Custodial Services Limited 4,414, % 7 Private Nominees Limited 4,130, % 8 Accident Compensation Corporation 4,086, % 9 Masfen Securities Limited 4,000, % 10 Superlife Trustee Nominees Limited 2,804, % Top 10 Total 78,278, % Top 10 DPF Shareholders as at 31 March 2013 Rank Holder Shares % Total register 1 Brendan Jon Lindsay, Jocelyn Elinor Ann Lindsay and Simon Middleton Palmer 69, % 2 John Vincent Wildermoth, Peter Webster Wilson, Arthur William Young and John Scott Spence 49, % 3 Simon John Bufton, Jennifer Jean Bufton and Arthur William Young 47, % 4 Colleen Robyn Mckee, Trevor Francis Mckee and Ronald William Blackhouse 41, % 5 Carlaw Heritage Trust Inc 33, % 6 Heatherfield Investments Limited 31, % 7 Arthur William Young and Allan John Wadams 29, % 8 DPF Management Limited 27, % 9 Rosemary Jeanette Thomas 25, % 10 Bendor Farms Limited 25, % Top 10 Total 381, % Top 10 expected Merged Group shareholders Rank Holder Shares % Total register DPF / PFI 1 FNZ Custodians Limited 16,884, % PFI 2 National Nominees New Zealand Limited 13,822, % PFI 3 Custodial Services Limited 10,278, % PFI 4 Investment Custodial Services Limited 9,598, % PFI 5 Brendan Jon Lindsay, Jocelyn Elinor Ann Lindsay and Simon Middleton Palmer 8,555, % DPF 6 BNP Paribas Nominees (NZ) Limited 8,259, % PFI John Vincent Wildermoth, Peter Webster Wilson, Arthur William Young and 7 John Scott Spence 6,086, % DPF 8 Simon John Bufton, Jennifer Jean Bufton and Arthur William Young 5,881, % DPF 9 Colleen Robyn Mckee, Trevor Francis Mckee and Ronald William Blackhouse 5,138, % DPF 10 Custodial Services Limited 4,414, % PFI Top 10 Total 88,919, % 8 None of the shareholders listed in the tables guarantee the performance of PFI Shares. 14 INTRODUCTION + KEY INFORMATION

17 SECTION MERGER HIGHLIGHTS progress TOGETHER Chemical Freight Services, 10c Stonedon Drive, East Tamaki, Auckland MERGER HIGHLIGHTS 15

18 What is the rationale for the Merger? The rationale for the Merger and the expected benefits of the Merger for both PFI and DPF shareholders are set out on the following pages, together with the key reasons why the independent directors believe you should vote in favour of the resolutions. Benefits of the Merger The boards of both PFI and DPF believe that the Merger is a compelling proposition for both PFI and DPF shareholders for the following reasons: 1 Strong strategic rationale The directors of PFI and DPF believe that the Merger has a strong strategic rationale and will provide the following benefits for both PFI and DPF shareholders: The Merger will bring together two successful, complementary property investment companies. The Merger is consistent with key strategic objectives of PFI of strengthening PFI s lease expiry profile and leveraging PFI s strong balance sheet into earnings accretive industrial property investment opportunities. The Merger is consistent with key strategic objectives of DPF of reducing portfolio vacancy, providing further asset diversification within the portfolio and offering DPF Shareholders the potential for earnings accretion and capital gains. The Merger will provide a compelling growth opportunity for both sets of shareholders in the industrial property category at an attractive point in the property cycle. 16 MERGER HIGHLIGHTS

19 PFI 2 A larger and more diverse property portfolio The Merged Group is expected to benefit from enhanced scale, a more diversified asset portfolio and enhanced portfolio characteristics: The Merger significantly increases PFI and DPF s respective property portfolios and contracted rental income, compared to the respective standalone values of their portfolios as at 31 March This increase is achieved for both parties in a cost effective manner that would not be ordinarily achievable unless capital were raised to fund an acquisition of an equivalent size. The costs associated with raising equity capital to complete an acquisition of this size would likely exceed the costs of the Merger. Shareholders of the Merged Group will have exposure to a significantly larger property portfolio, with increased diversification of the portfolio by rental income, lease expiry, and number, type and size of tenants and buildings. With increased scale, the Merged Group should have an improved ability to retain existing tenants, attract new tenants and leverage off existing tenant relationships to establish new tenancies. The Merged Group will benefit from a reduction in the impact of propertyspecific risks on the performance of its property portfolio, such as individual lease expiry risk, and a reduction in volatility of cash flows due to portfolio diversification. This reduced risk across the Merged Group s portfolio comes from a smoothed lease expiry profile and expected reduced cash flow volatility from less tenant concentration. 3 Enhanced portfolio characteristics Reduced tenant concentration by rental income The charts on the right illustrate how the Merger will diversify each of PFI and DPF s rent rolls (being a list of all tenants and their current contracted rent). Based on information as at 31 March 2013, the Merged Group s top 10 tenants 9 will make up 33.6% of the total lease portfolio, by rent roll, compared to 42.4% for PFI and 52.0% for DPF before the Merger. The reduction in tenant concentration improves the defensiveness of the Merged Group s revenue base. top 10 tenants 42.4% OTHER 57.6% DPF top 10 tenants 52.0% OTHER 48.0% Merged Group top 10 tenants 33.6% OTHER 66.4% 9 The top 10 tenants for PFI, DPF and Merged Group are set out on pages 29, 34 and 38 of this Information Memorandum respectively. MERGER HIGHLIGHTS 17

20 Smoothed lease expiry profile As at 31 March 2013, DPF s property portfolio had a WALT of 6.4 years and PFI s property portfolio had a WALT of 4.8 years. The WALT of the combined property portfolio as at 31 March 2013 would have been 5.6 years, in line with the sector median. The Merger will result in a smoothing of the lease expiry profile of the PFI and DPF portfolios, providing a more defensive rent roll. Lease expiry profile by contract rental 10 PFI PERCENTAGE DPF VACANT Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18 Dec 19 Dec 20 Dec 21 Onwards YEAR ENDING 33.4 PERCENTAGE MERGED GROUP VACANT Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18 Dec 19 Dec 20 Dec 21 Onwards YEAR ENDING PERCENTAGE VACANT Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18 Dec 19 Dec 20 Dec 21 Onwards YEAR ENDING 10 The information presented in this chart is as at 31 March MERGER HIGHLIGHTS

21 4 Financial and scale benefits Assuming the Merger occurred at 31 December 2012: The Merger and associated treasury initiatives would increase dividends per share by 10.7% for PFI Shareholders and 4.0% for DPF Shareholders (assuming DPF became a listed PIE on 31 December 2012), following the completion of the Merger 11. The Merger would increase net tangible asset (NTA) value per share by 1.2% for PFI Shareholders 12. Although the Merger would slightly reduce NTA value per share by 4.1% for DPF Shareholders, Deloitte has noted that the Merger is expected to preserve the market value of DPF Shareholders investment. The Merger will bring the benefits of economies of scale, scope and business synergies (including procurement benefits) from combining two complementary businesses. Operating efficiencies gained from the management of a substantially larger asset portfolio by the Manager should enhance earnings of the Merged Group. Increased scale may also improve the access of the Merged Group to more diversified sources of funding, including from equity and debt capital markets, as well as providing improved funding terms. The Merged Group is expected to become the 5 th largest LPV on the NZX Main Board, with an implied market capitalisation of approximately $510 million 13 and net assets of approximately $487 million 14. A benefit of having a larger market capitalisation is that the Merged Group will obtain a greater weighting in market indices such as the NZX 50 Gross Index and NZX Property Index, and also an increased profile for investors locally and internationally. NZX50 Index (#20 - #49) The Merged Group is expected to rank 29 in the NZX 50 Index (as compared to PFI s current ranking of 42) FREE FLOAT MARKET CAP ($ MILLION) AFTER MERGER #29 BEFORE MERGER #42 ANZ ARG VCT FSF FRE GPG NPX DIL EBO Merged Group KMD DNZ AIR SUM TPW OGC WHS NZX VHP NZO ATM MET HNZ PFI RBD AMP SKL HLG MHI TWR STU 11 A PFI Shareholder with $100,000 invested is expected to receive a cash dividend of $5,329 in respect of the 2013 calendar year if the Merger does not proceed, compared to a cash dividend of $5,901 (an increase of 10.7%) if the Merger had completed on 31 December A DPF Shareholder with $100,000 invested is expected to receive a cash dividend of $5,674 in respect of the 2013 calendar year if the Merger does not proceed (assuming DPF became a listed PIE on 31 December 2012), compared to a cash dividend of $5,901 (an increase of 4.0%) if the Merger had completed on 31 December Further information is set out in the Merger Pro Forma Prospective Financial Information section in the Prospective Financial Information section of this Information Memorandum. 12 Based on the Merger Pro Forma Prospective Consolidated Statements of Financial Position in the Prospective Financial Information section of this Information Memorandum, assuming the Merger occurred on 31 December Based on an equity value of $273.0 million for PFI and an equity value of $236.6 million for DPF, being the estimated values as at 28 February 2013, when PFI was trading at $1.24 per share. 14 Based on a net asset value of $256.6 million for PFI and a net asset value of $230.0 million for DPF (both rounded to 1 decimal place), as calculated on 28 February Issuers in the NZX 50 Index are ranked by free float market capitalisation. Merged Group s expected ranking in the NZX 50 Index is calculated on a pro forma basis, assuming it is included in the NZX 50 Index at the next quarterly review date. The information presented is based on the free float market capitalisation of NZX 50 Index issuers as at 23 April 2013, an assumed free float market capitalisation of $509.6 million for the Merged Group and a free float market capitalisation of $1.7 billion for Mighty River Power (based on 686,400,000 shares multiplied by an offer price of $2.50 per share). Merged Group s assumed free float market capitalisation is based on an equity value of $273.0 million for PFI and an equity value of $236.6 million for DPF, being the estimated values as at 28 February 2013, when PFI was trading at $1.24 per share. These conclusions are based on the PFI/DPF s own analysis and have not been approved or checked by NZX. Refer to the charts under the heading Financial and Scale Benefits in Section 2 of this Information Memorandum for further details. The companies stock codes can be found on the NZX website at MERGER HIGHLIGHTS 19

22 Property Index 16 FREE FLOAT MARKET CAP ($ MILLION) AFTER MERGER #5 BEFORE MERGER #7 A larger shareholder base is likely to increase the frequency and volume of trading in PFI Shares. The Merged Group s enlarged capital base and access to more diverse sources of capital will also provide a platform for future growth. 0 KIP GMT PCT ARG Merged Group DNZ VHP PFI NPT Independent expert opinion In opining that the Merger has merits, the Independent Expert, Deloitte, concluded in the Independent Expert Report that: the Merger provides a number of portfolio or operational benefits to both sets of shareholders, such as smoothing out the lease expiry profile, and reducing the percentage exposure to individual tenants and properties; the Merger is expected to improve the liquidity of PFI shares, greatly improve liquidity for DPF shareholders, and potentially improve PFI s access to, and reduce the cost of, capital; there are no material negative financial impacts for either shareholder group: while the Merger dilutes DPF shareholders net tangible assets ( NTA ), it is expected to preserve the market value of DPF shareholders investment; the combination of the Merger and the buy-out of DPF s swaps is earnings accretive for both shareholder groups (although most of the accretion is due to the swaps buy-out, which has an associated cost reflected in higher debt levels); after removing the impact of the DPF swaps buy-out, and other normalisation adjustments, the Merger is expected to be broadly earnings neutral for both shareholder groups (on average over time); and while the NTA and earnings outcomes for DPF shareholders would have been approximately 2.5% better but for the 5% tilt in the Merger ratio in favour of PFI, we believe this is a reasonable trade-off for the materially greater liquidity they will likely achieve in the Merger (and a share of the other Merger benefits). the recent increase in PFI s share price does not, in our view, invalidate the Merger ratio or our analysis of the financial impacts of the Merger, because the underlying value of DPF s shares is likely to have increased in a similar manner; there do not appear to be any viable alternatives for either shareholder group that are likely to be superior to the Merger; and there is a reasonable basis for the Merger ratio, and the benefits of the Merger are shared fairly between the shareholder groups. The Independent Expert also concluded that the management fee changes that DPF Shareholders will experience if the Merger proceeds are fair. The conclusions of Deloitte s report should be read in the context of the full Independent Expert Report. A copy of the report is included as part of this Information Memorandum. What are the risks? The benefits of the Merger outlined in this section should be read in the context of the risks associated with the Merger. The key risks associated with the Merger are described on pages 45 to 47 of this Information Memorandum. 16 The companies stock codes can be found on the NXZ website at 20 MERGER HIGHLIGHTS

23 SECTION OVERVIEW OF THE MERGER strategically TOGETHER Fletcher Building Products, Bowden Road, Mount Wellington, Auckland OVERVIEW OF THE MERGER 21

24 Background to the Merger On 15 April 2013, PFI and DPF announced a proposal to merge. The proposed merger will be effected by way of a Court approved scheme of arrangement pursuant to Part 15 of the Companies Act. In order for the Merger to proceed, PFI and DPF must each obtain shareholder approval by way of a special resolution passed by 75% or more of each group of shareholders entitled to vote and voting on the matter. In addition, the proposed changes to the PFI Management Agreement and an increase to director fees must be approved by ordinary resolution of PFI Shareholders. If shareholder approval is obtained, the Merger is intended to be effected on 1 July What happens under the Merger? PFI and DPF are seeking to merge pursuant to a Court approved scheme of arrangement under which: PFI and DPF will merge (by way of an amalgamation); DPF Shareholders will receive PFI Shares for every DPF Share they hold, with those DPF Shares being cancelled. On Merger, former DPF Shareholders will hold 46.4% of the shares in the Merged Group (PFI, as the continuing entity); PFI Shareholders will retain their existing PFI Shares, but will be diluted as a result of the PFI Shares issued to DPF Shareholders under the Merger. On Merger, the former PFI Shareholders will hold 53.6% of the Merged Group (PFI, as the continuing entity); PFI will take and assume all the property, rights, powers and privileges, liabilities and obligations of DPF; PFI will continue as the amalgamated company with the name Property For Industry Limited and continue to be managed by the current Manager, PFIM, under the terms of the PFI Management Agreement (as amended as part of the Merger) (refer to Section 4 of this Information Memorandum for details about the PFI Management Agreement); and PFI Shares will continue to be quoted on the NZX Main Board under the ticker PFI. Further information about the terms and conditions of the Merger is set out in the Scheme Plan in Section 8 of this Information Memorandum. On Merger, the Merged Group will become one of the largest specialist listed industrial property investors in New Zealand Rounded to 3 decimal places. Refer to the description of the exchange ratio under the heading Exchange ratio on page Based on the estimated values of industrial property for LPVs, PFI, DPF and the Merged Group. 22 OVERVIEW OF THE MERGER

25 Final Merger structure Pre-merger Post-merger includes subsidiary: pfi property no.1 limited includes subsidiary: direct property fund No.1 limited includes subsidiaries: pfi property no.1 limited and direct property fund No.1 limited What does the Merger mean for you? Exchange ratio Following extensive due diligence and negotiations, the boards of PFI and DPF agreed an exchange ratio under which DPF Shareholders will receive PFI Shares for every DPF Share that they hold. Fractional entitlements to new PFI Shares will be rounded down to the nearest whole number. If, following application of the entitlement ratio and rounding, some of the 191,091,663 PFI Shares to be issued to the DPF Shareholders would not be allotted, those DPF Shareholders whose entitlements prior to rounding were closest to the nearest whole share will be allotted one additional PFI Share until 191,091,663 PFI Shares are allotted. The exchange ratio reflects agreed relative values for each of PFI and DPF, being 109% of the adjusted net tangible asset value for PFI and 104% of the adjusted net tangible asset value for DPF as at 28 February It was arrived at after considering a number of factors including historical trading multiples for each entity, the historic earnings profiles of each entity, the portfolio characteristics of each entity, the costs associated with PFI raising capital to buy DPF s assets, the costs of DPF listing independently and indexation and liquidity benefits for both PFI and DPF. The directors of PFI and DPF consider that the exchange ratio treats their respective shareholders fairly and provides them with fair value for their shares. PFI and DPF shareholders should read the description of the exchange ratio set out in Section 5.8 of the Independent Expert Report. PFI Shareholders Under the Merger, PFI Shareholders will retain their existing PFI Shares, and together will hold 53.6% of the shares in the Merged Group on completion of the Merger. In addition, on or about 28 June 2013, PFI will pay a dividend in respect of the financial quarter ending 30 June This dividend will be paid to PFI Shareholders who are recorded on the PFI Share register on 19 June 2013 and will otherwise reflect PFI s usual dividend policy. DPF Shareholders Under the Merger, DPF Shareholders will receive PFI Shares in exchange for their existing DPF Shares, with those DPF Shares being cancelled, and together will hold 46.4% of the PFI Shares in the Merged Group on completion of the Merger. DPF Shareholders will not be required to apply, pay or send any money, for the new PFI Shares to be allotted to them under the Merger. In addition, on or before 28 June 2013, DPF will pay a dividend in respect of the financial quarter ending 30 June This dividend will otherwise reflect DPF s usual dividend policy. DPF Shareholders on the register as at 12.01am on the effective date of the Merger (expected to be 1 July 2013) will be issued an aggregate of 191,091,663 new shares in PFI. Based on there being 1,550,842 DPF Shares outstanding, this reflects an exchange ratio of PFI Shares for every DPF Share. For example, a DPF Shareholder who holds 1,000 DPF Shares on the Merger Date will receive 123,218 new PFI Shares (subject to rounding) 20. When will you receive your PFI Shares? If the Merger proceeds: PFI Shares are expected to be allotted to DPF Shareholders on or about 1 July Existing PFI Shareholders will continue to retain their existing PFI Shares. 19 Rounded to 3 decimal places. Refer to the description of the exchange ratio under the heading Exchange ratio on this page. 20 Refer to the description of the exchange ratio under the heading Exchange ratio on this page. OVERVIEW OF THE MERGER 23

26 Profile of PFI Background PFI was formed in 1993 as a specialist investor in high quality industrial property assets throughout New Zealand. PFI aims to provide shareholders with an attractive and reliable income stream. Proactive portfolio management and PFI s capital project and acquisition programmes aim to deliver income and capital growth to PFI s shareholders in the long term. In 1994, PFI made an initial public offering of 50 million shares at $1.00 per share and subsequently listed on the NZX Main Board. Since listing, PFI has seen its market capitalisation grow from $50 million 21 to approximately $295 million as at 24 April Investment strategy PFI s investment strategy is to: invest in quality industrial property in New Zealand s main urban centres; invest in multi-purpose, industrial properties that are occupied by a balanced spread of tenants; invest in properties that display strong income and/or capital appreciation attributes. These will include properties that are located in land constrained areas and close to important transport links; and provide a risk-averse approach to acquisitions, asset management and capital management consistent with delivering the target increase in shareholder wealth and distributing 100% operating profit. Portfolio investment entity status PFI is a listed PIE for tax purposes and is subject to the company tax rate of 28%. PFI should remain a listed PIE throughout the Merger process. A summary of the taxation treatment of a listed PIE is set out in Section 4 of this Information Memorandum under the heading Taxation implications of the Merger. Property portfolio PFI s property portfolio, summarised below, consists of 50 properties valued at $400 million 22 in aggregate. As at 31 March 2013, the portfolio WALT for PFI was 4.8 years, and the yield on contracted rental income for the portfolio was 8.21% 23. Name Key Tenant Contract Rental ($) Valuation ($) Yield on Contract % of portfolio value 17 Allens Road Harvey Norman Leasing Caroma Industries W&R Jack 962,188 11,200, % 2.80% 47 Arrenway Drive Onyx Group 219,800 3,000, % 0.75% Bowden Road Norak Properties Fletcher Building Products 1,297,276 15,000, % 3.75% 8A & 8B Canada Crescent Polarcold Stores 1,080,000 11,875, % 2.97% 50 Carbine Road Atlas Copco 190,000 2,425, % 0.61% 54 Carbine Road & 6a Donnor Place Pharmacy Retailing Glengarry Hancocks Vacant 1,172,641 16,175, % 4.05% 76 Carbine Road Wesfarmers Industrial & Safety Atlas Gentech 420,000 5,400, % 1.35% 21 PFI issued 50 million shares for $1.00 per share when it listed on the NZSX in As at 31 December 2012, based on valuations from the Valuers (other than for 15 Copsey Place, which is a valuation determined by the PFI directors). Details of those valuations and the Valuers are set out in Section 7 of this Information Memorandum. 23 Calculated as current contracted rental, divided by the capital value of investment properties as at 31 March 2013, as reflected in the table. 24 OVERVIEW OF THE MERGER

27 Name Key Tenant Contract Rental ($) Valuation ($) Yield on Contract % of portfolio value 7 Carmont Place Packsys CMI 85 Cavendish Drive Greenmark Wholesaler Reece Big Save Furniture 212 Cavendish Drive Toll Logistics New Zealand Wine Cellars 15 Copsey Place 24 Barkers Clothing Canterbury Vacant 535,000 6,750, % 1.69% 807,884 9,450, % 2.36% 1,208,624 14,200, % 3.55% 407,360 7,550, % 1.89% 6 Donnor Place Wickliffe NZ 1,296,167 16,200, % 4.05% 8 Hugo Johnston Drive Kings Transport & Logistics Tenix YSM Corp Co Argyle Schoolwear Jin Hui Ou & Bi Ou Yang 12 Hugo Johnston Drive Bowls NZ Ricoh New Zealand Hallmark Cards 16 Hugo Johnston Drive Modempak Encap Group 632,841 7,600, % 1.90% 329,755 3,700, % 0.93% 346,615 4,150, % 1.04% 102 Mays Road Carter Holt Harvey 404,400 4,840, % 1.21% 44 Mandeville Street Windflow Technology Fletcher Distribution Tyco Flow Control Pacific Leech & Partners LFA 978,918 11,050, % 2.76% 174b Marua Road Transpacific Industries 136,440 2,045, % 0.51% 8 McCormack Place Information Management Group 819,826 8,900, % 2.23% 4-6 Mt Richmond Road Brambles 797,965 9,450, % 2.36% 509 Mt Wellington Highway Fletcher Distribution Cafe Greco Duluxgroup Tileco Vacant 931,026 11,500, % 2.88% Copsey Place is currently an investment property under development and is due to be completed in October The valuation shown in the table is as if the development currently underway is complete. It is based on as if complete valuation advice from Colliers International New Zealand Limited and reflects costs to complete the development of $1,122,416 and a valuation increase on completion of $831,251. OVERVIEW OF THE MERGER 25

28 Name Key Tenant Contract Rental ($) Valuation ($) Yield on Contract % of portfolio value 511 Mt Wellington Highway Bremca Industries 408,088 5,420, % 1.36% 515 Mt Wellington Highway Stryker 253,490 3,210, % 0.80% 523 Mt Wellington Highway BGH Group 213,741 2,990, % 0.75% 36 Neales Road Mainfreight 1,081,841 12,650, % 3.16% 9 Nesdale Avenue Brambles 605,000 6,860, % 1.72% 1 Niall Burgess Road R L Button & Co 216,466 2,800, % 0.70% 2-6 Niall Burgess Road New Zealand Window Shades 802,222 8,200, % 2.05% 3-5 Niall Burgess Road Electrolux 1,006,654 13,300, % 3.33% 7-9 Niall Burgess Road DHL Supply Chain 2,004,077 22,700, % 5.68% 10 Niall Burgess Road Outside Broadcasting 230,500 3,025, % 0.76% 19 Omega Street New Zealand Automobile Association Just Switchboards 50 Parkside Road Transpacific Industries Vacant 174,241 2,250, % 0.56% 334,740 3,600, % 0.90% 58 Richard Pearse Drive Pharmacy Retailing 957,833 12,240, % 3.06% 320 Rosebank Road Te Ngahere Doyle Sails 649,372 7,500, % 1.88% 326 Rosebank Road Te Ngahere 82,501 1,060, % 0.27% 686 Rosebank Road Roadshow Entertainment Multiflora Laboratories Universal Specialities AA Insurance NZ Racing Laboratory Services Akzo Nobel Coatings New Zealand Comfort 322 Rosedale Road Imake Parkland Products Home Transfer Centre Patiki Road JB Trading Embroidrey Works Dorma Gunnersen Bidvest Vacant 2,394,919 27,900, % 6.98% 887,346 11,400, % 2.85% 982,499 12,250, % 3.06% 1 Ron Driver Place Stewart Scott Cabinetry 393,819 5,235, % 1.31% 26 OVERVIEW OF THE MERGER

29 Name Key Tenant Contract Rental ($) Valuation ($) Yield on Contract % of portfolio value 48 Seaview Road BP Oil Bridgestone Goughs Gough & Hamer Multispares 542,530 6,400, % 1.60% 170 Swanson Road Transportation Auckland 924,261 12,400, % 3.10% 5 Vestey Drive PPG Industries 215,000 2,585, % 0.65% 7 Vestey Drive Wickliffe 460,000 6,020, % 1.51% 9 Vestey Drive Multispares 192,861 2,705, % 0.68% 11 Vestey Drive ASB Bank 491,727 5,940, % 1.49% 15a Vestey Drive Skills For Work PMP Maxum 532,554 6,180, % 1.55% 36 Vestey Drive Fox Air NZ 132,500 1,850, % 0.46% 127 Waterloo Road DHL Supply Chain 276,959 3,550, % 0.89% 41 William Pickering Drive Meridian Energy So-Pac Marine Mayo Hardware 405,385 5,050, % 1.25% Total $32,827,852 $399,730, % 100.0% PFI s property portfolio as at 31 March 2013 is further summarised below: Property type by valuation INDUSTRIAL 96.6% OFFICE 3.4% OVERVIEW OF THE MERGER 27

30 Rent review type by rental income MARKET 47.3% INDEX LINKED 41.2% FIXED 11.5% Tenant spread by rental income Transport & storage 25.9% Machinery & Equipment Manufacturing 18.2% Construction 13.8% Other manufacturing 12.8% Property & Business Services 9.7% Wood & paper manufacturing 7.5% Food manufacturing 5.0% Textiles & clothing 2.6% Health & community services 2.0% Vacant 2.0% Accommodation & restaurants 0.5% Geographic location by valuation AUCKLAND 88.6% CHRISTCHURCH 6.7% WELLINGTON 4.7% 28 OVERVIEW OF THE MERGER

31 Top ten tenants by rental income Rank Top 10 No. of Properties Rent PA ($) % of rental income 1 DHL Supply Chain 2 2,281, % 2 Fletcher Building 3 2,219, % 3 Wickliffe 2 1,756, % 4 Pharmacy Retailing 2 1,624, % 5 Brambles 2 1,402, % 6 Mainfreight 1 1,081, % 7 Polarcold Stores 1 1,080, % 8 Electrolux 1 1,006, % 9 Transportation Auckland 1 924, % 10 New Zealand Comfort 1 828, % Total 16 $14,205, % Ownership PFI is listed on the NZX Main Board. As at 31 March 2013, PFI had approximately 4,800 shareholders, with the top 10 shareholders, which include a number of custodial and nominee shareholders, holding approximately 35.5%. Management of PFI PFI is managed by PFIM, a private company owned by interests associated with McDougall Reidy & Co Limited. PFIM took over the PFI Management Agreement on 20 January 2012, by way of assignment from AMP Capital Investors (New Zealand) Limited. PFIM has appointed McDougall Reidy & Co Limited as its subcontractor to provide the property and administrative management services required under the PFI Management Agreement. Management of the Merged Group following the Merger will continue to be undertaken by PFIM pursuant to the PFI Management Agreement, as amended as part of the Merger. The PFI Management Agreement, and the amendment to be made as part of the Merger, are described in more detail in Section 4 of this Information Memorandum and in the Independent Appraisal Report. OVERVIEW OF THE MERGER 29

32 Profile of DPF Background DPF is an unlisted property fund formed late in 2003 to invest in the commercial property sector, with a focus on industrial property. It is a limited liability company designed and managed to represent as close a surrogate to direct property ownership as possible, with its performance directly linked to the performance of the properties that it owns. Investment strategy DPF s investment strategy involves seeking to enhance distributable profit and the net asset value per share for shareholders by: investing in quality commercial property in New Zealand s main urban centres; acquiring assets and investing in capital projects that are value accretive; considering the sale of selected assets to recycle capital into higher quality commercial properties; and intensively managing the assets and capital to provide investors with a blend of cash distributions and capital growth. Portfolio investment entity status DPF is at present an unlisted multi-rate PIE. As a multi-rate PIE, DPF attributes all its taxable income between its shareholders based on the number of shares held by them. DPF pays tax on the taxable income allocated to each shareholder at the shareholder s nominated Prescribed Investor Rate (PIR) on a quarterly basis to the Inland Revenue. Shareholders will generally have no further tax liability in respect of their investment, provided they elect the correct PIR. Under the Merger, DPF Shareholders will be issued PFI Shares and their DPF Shares will be cancelled. DPF will cease to be a multi-rate PIE. Refer to Section 4 of this Information Memorandum under the heading Taxation implications of the Merger for a summary of the tax implications of holding shares in a listed PIE. Property portfolio DPF s property portfolio, summarised below, consists of 33 properties valued at $414 million 25 in aggregate. As at 31 March 2013, the portfolio WALT for DPF was 6.4 years, and the yield on contracted rental income for the portfolio was 7.65% 26. Name Key Tenant Contract Rental ($) Valuation ($) Yield on Contract % of portfolio value 2-4 Argus Place Yakka 395,260 4,600, % 1.11% 51 Arrenway Drive Pacific Hygiene 445,509 4,900, % 1.18% 5 Cable Street Cato Partners DB Breweries Willis Bond 578,565 7,100, % 1.71% Shed 22, 23 Cable Street Lion Liquor Property Wellington Brewing 856,851 11,800, % 2.85% 122 Captain Springs Road New Zealand Crane 495,625 5,750, % 1.39% Carlaw Commercial Precinct Carlaw Commercial Department of Conservation Dimension Data Lollipops Educare Nestle New Zealand Institute of Chartered Accountants Sinclair Knight Merz 4,190,165 53,700, % 12.96% 25 As at 31 March 2013, based on valuations from the Valuers, other than for 124b Hewlett Road which is a valuation determined by the DPF directors. Details of those valuations and the Valuers are set out in Section 7 of this Information Memorandum. 26 Calculated as current contracted rental, divided by the capital value of investment properties as at 31 March 2013 as reflected in the table. 30 OVERVIEW OF THE MERGER

33 Name Key Tenant Contract Rental ($) Valuation ($) Yield on Contract % of portfolio value Carlaw Gateway Precinct Covo Bistrot Department of Conservation Dimension Data Forever Trading Hayden & Rollett Property Fund Lollipops Educare Management Consultants International Mantra Day Spa Nestle New Zealand Institute of Chartered Accountants Quest Sinclair Knight Merz Stanley Street Sushi Tomi Wilson Parking 2,584,913 35,000, % 8.44% 43 Cryers Road Astron Plastics 675,296 8,400, % 2.03% 229 Dairy Flat Highway Albany Village Bakery Auckland Council Japanese Haru Cuisine Massey University Quest 1,724,838 20,500, % 4.95% 47 Dalgety Drive Peter Hay Kitchens 435,000 9,950, % 2.40% 59 Dalgety Drive Goodman Fielder 1,172,264 14,400, % 3.47% 6-8 Greenmount Drive Bridon 591,132 7,250, % 1.75% Harris Road Goodman Fielder 1,132,747 13,800, % 3.33% 124 Hewletts Road Carter Holt Harvey 906,103 11,300, % 2.73% 124a Hewletts Road SCA Hygiene 1,000,000 11,800, % 2.85% 124b Hewletts Road 27 Ballance Agri-Nutrients 840,800 11,550, % 2.79% 3 Hocking Street Trayco Manufacturing 113,590 1,870, % 0.45% 15 Jomac Place Southern Spars Holdings 1,438,038 18,500, % 4.46% 1 Mayo Road Transdiesel 476,443 5,720, % 1.38% 9 Narek Place AF Logistics Cool Distribution Waikato / BOP Vacant 176,000 3,750, % 0.90% b Hewletts Road is currently an investment property under development and is due to be completed in June The valuation shown in the table is as if the development currently underway is complete. It is based on as if complete valuation advice from Colliers International New Zealand Limited and reflects costs to complete the development of $3,827,221 and a valuation increase on completion of $2,124,054. OVERVIEW OF THE MERGER 31

34 Name Key Tenant Contract Rental ($) Valuation ($) Yield on Contract % of portfolio value 306 Neilson Street Fletcher CSP Pacific 686,250 8,100, % 1.95% 312 Neilson Street Bakery Equipment Total Property Worxs Transport Trailer Services 314 Neilson Street Norfolk Mechanical & Electrical Wakefield Metals 276,717 3,575, % 0.86% 444,750 5,800, % 1.40% 15 Omega Street Yakka Apparel Solutions 540,454 7,000, % 1.69% 2 Pacific Rise Hewlett-Packard New Zealand 814,284 9,000, % 2.17% 18 Ron Driver Place Lion - Beer, Spirits & Wine Vacant 511,605 17,300, % 4.17% 12 Southpark Place Portavin 445,500 5,000, % 1.21% 78 Springs Road Fisher & Paykel Appliances 5,076,669 61,500, % 14.84% 10c Stonedon Drive Chemical Freight Services 800,242 10,200, % 2.46% 558 Te Rapa Road DEC 438,214 5,750, % 1.39% 12 Zelanian Drive Central Joinery 546,790 7,550, % 1.82% 23 Zelanian Drive Exclusive Tyre Distributors 325,000 4,570, % 1.10% 27 Zelanian Drive Goode Industries 587,391 7,500, % 1.81% Total $31,723,005 $414,485, % % DPF s property portfolio as at 31 March 2013 is further summarised below: Property type by valuation industrial 66.9% office 16.8% other 16.3% 32 OVERVIEW OF THE MERGER

35 Rent review type by rental income Fixed 42.5% Market 36.9% index linked 20.6% Tenant spread by rental income Other manufacturing 18.3% Machinery & Equipment Manufacturing 17.1% Property & Business Services 14.7% Food manufacturing 13.1% Transport & storage 9.6% Accommodation & restaurants 7.1% Wood & paper manufacturing 6.1% Vacant 3.7% Textiles & clothing 2.8% education 2.7% Construction 2.3% government 1.9% Health & community services 0.6% Geographic location by valuation Auckland 85.2% MT MAUNGANUI 8.8% Wellington 4.6% HAMILTON 1.4% OVERVIEW OF THE MERGER 33

36 Top ten tenants by rental income Rank Top 10 No. of Properties Rent PA ($) % of rental income 1 Fisher & Paykel Appliances 1 5,076, % 2 Goodman Fielder 2 2,305, % 3 Sinclair Knight Merz 1 2,228, % 4 Southern Spars 1 1,438, % 5 Nestle 1 1,190, % 6 Lion Liquor Property Division 2 1,153, % 7 SCA Hygiene 1 1,000, % 8 Yakka 2 935, % 9 Carter Holt Harvey 1 906, % 10 Massey University 1 883, % Total 13 $17,118, % Ownership DPF is a widely held unlisted limited liability company. As at 31 March 2013, DPF had 503 shareholders, with the top 10 shareholders holding approximately 24.6% and DPF s largest shareholder holding approximately 4.5% of the DPF Shares. DPFM (the parent company of PFIM) currently owns approximately 1.8% of DPF and will therefore own approximately 0.8% of the Merged Group following implementation of the Merger. Gregory Reidy (the Managing Director of both PFIM and DPFM) has a 25% shareholding in DPFM. Mr Reidy is also the management representative director on both the PFI and DPF boards of directors. See page 51 for Mr Reidy s biographical details. Certain shareholders of DPFM also individually own a total of approximately 4.9% of DPF and will therefore own approximately 2.3% of the Merged Group following implementation of the Merger. The PFI and DPF directors consider that DPFM s shareholding in the Merged Group will help align its interests with the interests of PFI Shareholders. DPFM and the shareholders of DPFM do not guarantee the performance of PFI Shares. Management of DPF DPF is managed by DPFM, a private company owned by interests associated with McDougall Reidy & Co Limited. DPFM has appointed McDougall Reidy & Co Limited as its subcontractor to provide the property and administrative management services required under the DPF Management Agreement. Management of the Merged Group following the Merger will be undertaken by PFIM pursuant to the PFI Management Agreement, as amended as part of the Merger. The PFI Management Agreement, as amended as part of the Merger, is described in more detail in Section 4 of this Information Memorandum and in the Independent Appraisal Report. 34 OVERVIEW OF THE MERGER

37 SECTION PROFILE OF THE MERGED GROUP BUSINESS actively TOGETHER Central Joinery, 12 Zelanian Drive, East Tamaki, Auckland PROFILE OF THE MERGED GROUP BUSINESS 35

38 Business strategy of the Merged Group The commercial and industrial property market recovery witnessed in 2012 and during 2013 is expected to continue for the remainder of The low interest rate environment also continues to stimulate the industrial property investment market, with a flow of investment funds from both investors and owner occupiers chasing a limited supply of assets, particularly prime stock. Yields for prime commercial property, and particularly industrial property, continue to firm as more optimism is evident in the wider market. These factors continue to support the attractiveness of the industrial property sector. Against this backdrop, the strategy for the Merged Group will be to: continue to focus on managing the vacancy and upcoming lease expiries in the enlarged portfolio; consider the acquisition of quality industrial property in the main centres; consider the sale of selected assets to recycle capital into higher quality industrial properties in New Zealand s main urban centres; and consider the development of existing expansion land and repositioning of properties as tenant demand dictates. Both PFI and DPF s leasing and capital transaction activities in 2012 have provided a solid foundation from which to build future earnings growth for the Merged Group. With the Merged Group s increased scale and portfolio diversification across the major industrial precincts in Auckland (87%) coupled with exposure to the Hamilton, Mount Maunganui, Wellington and Christchurch markets, the Merged Group will be well positioned to take advantage of increased leasing and investment activity as the industrial property sector continues to improve. While the Merged Group will own industrial and other types of commercial property, the core strategic focus will be on industrial property. Property portfolio of the Merged Group The Merged Group s property portfolio as at 31 March 2013 (if the Merger had occurred by that time) is summarised below: Property type by valuation industrial 81.5% office 10.2% other 8.3% 36 PROFILE OF THE MERGED GROUP BUSINESS

39 Rent review type by rental income Market 42.1% index linked 31.0% Fixed 26.9% Tenant spread by rental income Transport & storage 17.8% Machinery & Equipment Manufacturing 17.7% Other manufacturing 15.5% Property & Business Services 12.2% Food manufacturing 9.0% Construction 8.1% Wood & paper manufacturing 6.8% Accommodation & restaurants 3.8% Vacant 2.9% Textiles & clothing 2.7% education 1.3% Health & community services 1.3% government 0.9% Geographic location by valuation Auckland 86.9% Wellington 4.6% MT MAUNGANUI 4.5% christchurch 3.3% HAMILTON 0.7% PROFILE OF THE MERGED GROUP BUSINESS 37

40 Top ten tenants by rental income Rank Top 10 No. of Properties Rent PA ($) % of rental income 1 Fisher & Paykel Appliances 1 5,076, % 2 Fletcher Building 4 2,905, % 3 Goodman Fielder 2 2,305, % 4 DHL Supply Chain 2 2,281, % 5 Sinclair Knight Merz 1 2,228, % 6 Wickliffe 2 1,756, % 7 Pharmacy Retailing 2 1,624, % 8 Southern Spars Holdings 1 1,438, % 9 Brambles 2 1,402, % 10 Carter Holt Harvey 2 1,310, % Total 19 $22,329, % Financial performance following the Merger The tables on the right set out a summary of the Pro Forma FY13 financial performance and distributable profit per share, which has been prepared to enable comparison of the standalone, prospective financial information for each of PFI and DPF, for the 12 months ending 31 December 2013, with the prospective financial information of the Merged Group. To enable this comparison it assumes that the Merger occurred on 31 December The Merged Group information therefore includes 12 months of trading for both PFI and DPF. Further information on the Pro Forma FY13 of PFI, DPF and the Merged Group as set out in the table on the right can be found in the Prospective Financial Information section of this Information Memorandum. Summary Pro Forma FY13 financial performance PFI DPF 28 Adjustments Merged Merged Group Operating revenue $31.6m $32.1m - $63.7m Operating expenses ($12.4m) ($15.7m) $2.9m ($25.2m) Non-operating income and expenses $5.8m $7.0m ($4.4m) $8.4m Taxation ($2.5m) ($4.2m) $0.4m ($6.3m) Profit/(loss) for the year $22.5m $19.2m ($1.1m) $40.6m Summary Pro Forma FY13 distributable profit 29 per share PFI DPF 30 Adjustments Merged Merged Group Distributable profit $14.5m $13.4m $2.1m $30.0m Shares on issue 220,410, ,091, ,502,391 Distributable profit (cents per share) To enable valid comparison, it is assumed that DPF is taxed as if it were a listed PIE, rather than a multi-rate PIE as it currently is. 29 Distributable profit is non-gaap financial information and is calculated in the table under the heading Merger Pro Forma Prospective Distributable Profit Per Share Calculations in the Prospective Financial Information section of this Information Memorandum. 30 To enable valid comparison, it is assumed that DPF is taxed as if it were a listed PIE, rather than a multi-rate PIE as it currently is. DPF Shares rebased for the exchange ratio for the purposes of comparison. 38 PROFILE OF THE MERGED GROUP BUSINESS

41 Dividend policy of the Merged Group The current dividend policy of both PFI and DPF is to distribute 100% of profit (as determined in accordance with IFRS for the period), adjusting for additional revenue booked as a result of fixed rent review accounting entries, unrealised changes in the values of investment properties, realised gains or losses on disposal of investment properties (net of tax on depreciation claw-back), unrealised changes in the values of derivative financial instruments and deferred tax and other one off items. The payment and amount of any future distributions will be at the discretion of the board of the Merged Group after taking into account the factors the board deems relevant at the time. Those factors may include the Merged Group s financial conditions, operating results, current and anticipated cash needs and debt covenants. The board of the Merged Group will continue to assess whether to operate or suspend a dividend reinvestment scheme on a quarter-by-quarter basis, as the Merged Group s capital needs dictate. Financial Position following the Merger The table on this page sets out a summary of the Pro Forma FY13 financial position, which has been prepared to enable comparison of the standalone, prospective financial information for each of PFI and DPF, for the 12 months ending 31 December 2013, with the prospective financial information of the Merged Group. To enable this comparison it assumes that the Merger occurred on 31 December The Merged Group information therefore includes 12 months of trading for both PFI and DPF. Further information on the Pro Forma FY13 of PFI, DPF and the Merged Group as set out in the table on this page can be found in the Prospective Financial Information section of this Information Memorandum. Summary Pro Forma FY13 financial position PFI DPF 31 Adjustments Merged Merged Group Bank $0.1m - - $0.1m Investment properties $396.4m $415.7m - $812.1m Goodwill - - $9.8m $9.8m Other assets $8.6m $5.0m ($0.3m) $13.3m Total assets $405.1m $420.7m $9.5m $835.3m Borrowings $133.1m $173.3m $11.8m $318.2m Other liabilities $14.4m $11.7m ($5.5m) $20.6m Total liabilities $147.5m $185.0m $6.3m $338.8m Net assets $257.6m $235.7m $3.2m $496.5m Net tangible assets $257.6m $235.7m ($6.6m) $486.7m Shares on issue 220,410, ,091, ,502,391 NTA per share $1.17 $1.23 $1.18 Loan-to-value ratio % 41.2% 38.6% Balance Sheet and Capital Management Capital management The Merged Group will continue PFI s already adopted capital management objectives, which are to safeguard the Merged Group s ability to continue as a going concern, whilst maximising the return to shareholders through maintaining an optimal balance of debt and equity. The increased size of the Merged Group provides the opportunity to re-evaluate certain capital management policies previously adopted by PFI. In order to maintain or adjust the capital structure, the Merged Group may adjust the amount of distributions paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Merged Group will monitor capital on the basis of a loan-to-value ratio. The Merged Group has determined that a loan-to-value ratio of up to 40% post-merger will be appropriate, with covenants of up to 50%. The covenants on all borrowings require a loan-to-value ratio of not more than 50% and an interest cover ratio 33 of not less than 2:1. In addition to this, registered mortgage security is required to be provided. 31 To enable valid comparison, it is assumed that DPF is taxed as if it were a listed PIE, rather than a multi-rate PIE as it currently is. DPF Shares rebased for the exchange ratio for the purposes of comparison. 32 Calculated as total interest bearing debt divided by portfolio value. 33 Calculated as operating earnings before interest divided by interest expense. PROFILE OF THE MERGED GROUP BUSINESS 39

42 Bank facilities On or before the Merger, a new facility agreement will be entered into with PFI s existing lenders, ANZ and CBA, and DPF s lenders, BNZ and Westpac. Each of the four banks facilities will be documented in one agreement. The term and pricing of PFI and DPF s current banking facilities will be maintained or improved, with DPF s facilities folded into PFI s facilities. These facilities will be documented in a syndicated facility agreement with the four banks prior to Application for Final Court Orders. The facility agreement will contain financial and other covenants similar or identical to those contained in PFI s existing banking documents. PFI s ability to draw down under the syndicated cash advances facilities will be conditional on satisfaction of market standard conditions precedent for facilities of this nature and obtaining Final Court Orders. The key terms of the facility agreement for the Merged Group are set out below: Facility Amounts Facility A: NZ$100 million BNZ NZ$75 million ANZ NZ$75 million CBA Facility B: NZ$100 million Westpac Commencement Date The Merger Date Maturity Dates Facility A: 31 March 2016 Facility B: 31 March 2017 Interest Rate Risk Management The Merged Group s interest rate risk management strategy will focus, as it does for PFI and DPF, on minimising the potential negative economic impact of unpredictable events on the Merged Group s financial well-being. To do this, the Merged Group will use derivative financial instruments, principally interest rate swaps, to exchange its floating short term interest rate exposure for fixed long term interest rate exposure in accordance with prescribed policy bands. This is a continuation of the current approach to interest rate risk management adopted by both PFI and DPF. It is assumed that only DPF s derivative financial instruments are terminated immediately prior to the Merger and replaced with new derivative financial instruments at market prevailing rates in accordance with the Merged Group s interest rate risk management policy. The fair value of DPF s derivative financial instruments will be settled by drawing on existing bank facilities. It is assumed that prevailing market rates will be materially lower than the rates of DPF s derivative financial instruments and therefore this process will have the impact of materially reducing the impact of derivative financial instruments on the Merged Group s interest expense. The impact is set out under the heading Interest expense and bank fees in the Prospective Financial Information section of this Information Memorandum. Ownership of the Merged Group Following the Merger, the Merged Group will have approximately 5,300 shareholders, with an expected market capitalisation of approximately $510 million 34. DPFM (the parent company of PFIM) currently owns approximately 1.8% of DPF and will therefore own approximately 0.8% of the Merged Group following implementation of the Merger. Certain shareholders of DPFM also individually own a total of approximately 4.9% of DPF and will therefore own approximately 2.3% of the Merged Group following implementation of the Merger. PFI and DPF consider that the above shareholdings in the Merged Group will help align the Manager s interests with the interests of PFI Shareholders. DPFM and the shareholders of DPFM do not guarantee the performance of PFI Shares. Upon completion of the Merger, there will be 411,502,391 PFI Shares on issue, held as follows: Holders Number of Shares Held Percentage of Shares Held Former PFI Shareholders 220,410, % Former DPF Shareholders 191,091, % Total 411,502, % Management of the Merged Group PFI is currently managed by PFIM and DPF is currently managed by DPFM. PFIM is a wholly owned subsidiary of DPFM. Both PFIM and DPFM have appointed McDougall Reidy & Co Limited as their subcontractor. Under the Merger, DPF s management contract with DPFM will terminate and PFIM will manage the Merged Group. 34 Based on an equity value of $273.0 million for PFI and an equity value of $236.6 million for DPF, being the estimated values as at 28 February 2013, when PFI was trading at $1.24 per share. 40 PROFILE OF THE MERGED GROUP BUSINESS

43 Terms of management agreements The respective management agreements with PFIM and DPFM are on similar terms except as to the fees paid to PFIM and DPFM and the liability provisions discussed below. The key terms common to each management agreement are: The appointment as manager is on an exclusive basis. Each management agreement can be terminated for non-performance by the Manager or if the Manager consistently fails to provide a satisfactory and competent standard of management services. There are also termination rights if the Manager becomes insolvent. The Manager has the right to terminate the management agreement on 6 months notice. The Manager cannot assign its interest in the management agreement without consent of the company (such consent not to be unreasonably withheld). Each Manager was appointed to provide similar management services. Those management services cover: investment management duties, including recommending investments to the relevant board and otherwise managing the respective property portfolio consistent with the objective of maximising the value of the shareholders investment; property management duties, including supervising the repairs and maintenance of properties, collecting rents, ensuring adherence to lease agreements and liaising with tenants; and administrative management duties, including preparing financial statements and accounts, ensuring compliance with statutory obligations and undertaking all other company secretarial responsibilities. The DPF Management Agreement limits DPFM s liability to: direct losses or damages only; a maximum amount, in respect of any one claim, of the management fee paid in the 6 months prior to DPF s claim arising; and the total liability of DPFM under the agreement is limited to the management fee paid to DPFM during the 24 months prior to the claim arising. The PFI Management Agreement does not limit the liability of PFIM. Management fees PFI The current fees payable under the PFI Management Agreement are: an annual base management fee, which is calculated and paid monthly, of: 0.70% of total assets under management up to $175 million; 0.35% of total assets under management above $175 million and is also entitled to an incentive fee; and an incentive fee, calculated and paid on quarterly basis, which is equal to 10% of the actual increase in shareholder returns which is above 10% in that quarter. Where shareholder returns exceed 15% in a quarter, no payment is due for the actual amount of the increase above 15% but the amount of the increase above 15% can be carried forward and added to the calculation of shareholder returns in later quarters. However, if shareholder returns are less than 10% in a quarter, the deficit can also be carried forward and subtracted from the calculation of shareholder returns in later quarters. DPF An annual base management fee is calculated and paid monthly under the DPF Management Agreement of: 0.75% of investment properties under management up to $250 million; 0.55% of investment properties under management from $250 million to $500 million; 0.45% of investment properties under management above $500 million. There are no incentive or other fees payable under the DPF Management Agreement. Proposed amendments The annual base management fee payable under the PFI Management Agreement will be amended to represent a simple blend of the current PFI and DPF base management fees, as follows: 0.725% of total tangible assets under management up to $425 million; 0.45% of total tangible assets under management above $425 million and below $775 million; 0.35% of total tangible assets under management above $775 million. The current incentive fee for PFI (as described above) will remain unchanged and will continue to apply. In addition, the agreement will be amended to reflect changes to: the Merged Group s gearing policy (as discussed in Section 4); the level of cover for PFIM s required professional indemnity insurance increasing to $5 million; current accounting terminology; redundant provisions/schedules; and statutory reference changes which have occurred since the agreement was originally entered into. All other terms in the agreement will remain the same. The chart on the following page compares the prospective management expense ratio (MER) 35 of the Merged Group for the year ended 31 December 2013, with the MER of other LPVs on the NZX Main Board, calculated for the 2012 financial year for each LPV respectively. 35 Calculated as the sum of audit fees, director fees, other expenses and total management fees (including incentive fees), divided by the average book value of investment properties and any properties held for sale. The calculation excludes bad and doubtful debts, interest and bank expense fees and non-recoverable property costs. PROFILE OF THE MERGED GROUP BUSINESS 41

44 Management expense ratio 36 MANAGEMENT EXPENSE RATIO % 1.04% 0.89% 0.77% 0.74% 0.73% 0.70% sector AVERAGE = 0.78% 0.65% 0.56% 0.53% 0.0 NPT DNZ VHP DPF Merged PFI Group KIP PCT ARG GMT Direct comparison of externally managed LPVs total management fees is difficult because the level of services provided in return for the management fee varies. For example PFI s base management fee covers the provision of property management services, and PFIM is not entitled to charge additional fees for leasing, rent reviews and project management, which some other managers of LPVs do. PwC s analysis of the costs of these additional services for other externally managed LPVs over the last five years suggests an average annual cost of between 0.21% and 0.33% of average total assets is typically incurred for the provision of these other services 37. Taking these additional fees into account, the Merged Group s proposed MER, whilst higher under the existing management fee structure for PFI, will be the lowest of the five externally managed LPVs 38. Pursuant to the Listing Rules, the changes to PFI s Management Agreement require approval by PFI Shareholders. The independent directors of PFI have appointed PwC to prepare an independent appraisal report assessing whether the proposed changes to the PFI Management Agreement are fair to the PFI shareholders not associated with PFI s Manager. PwC has concluded that: In our opinion, the proposed changes to PFI s Management Agreement are fair to the Non-Associated Shareholders of PFI. The conclusions of PwC should be read in the context of the full Independent Appraisal Report. A copy of the Independent Appraisal Report is included as part of this Information Memorandum. As part of the Independent Expert Report, Deloitte were also asked to assess the effect on DPF Shareholders of the proposed changes to the PFI Management Agreement. Deloitte concluded that: We also believe the management fee changes that DPF shareholders will experience if the Merger proceeds are fair. The conclusions of Deloitte should be read in the context of the full Independent Expert Report. A copy of the Independent Expert Report is included as part of this Information Memorandum. 36 The information presented in the table for all LPVs other than PFI and the Merged Group is sourced from the 2012 financial reports and NZSX filings for each LPV. The information presented above for the PFI, DPF and the Merged Group is pro forma prospective information, as at 31 December 2013, calculated as if the Merger had occurred on 31 December The companies which the stock codes set out in the table can be found on the NZX website at 37 GMT, KIP, PCT, VHP and PFI are externally managed. 38 Refer to pages of the Independent Appraisal Report. 42 PROFILE OF THE MERGED GROUP BUSINESS

45 Taxation implications of the Merger A brief summary of the New Zealand taxation implications relating to the Merger is set out below. PFI and DPF shareholders should consult their own tax or financial advisor concerning the taxation implications in their particular circumstances of acquiring, holding and/or disposing of PFI or DPF Shares. Tax implications of the Merger for DPF Shareholders Cancellation of shares in DPF The cancellation of shares in DPF on the Merger Date will be treated as a disposal for tax purposes. The tax treatment of the sale of DPF Shares is dependent upon the DPF Shareholder s individual circumstances (i.e. whether the shares are held on capital or revenue account). Factors that indicate that shares are held on revenue account, and therefore, are likely to be taxable are: (a) if the shares were acquired for the purpose of sale or other disposal; or (b) if the DPF Shareholder carries on a business involving dealing in shares or other similar property. DPF Shareholders are strongly advised to seek their own taxation advice as to the treatment of the sale of their DPF Shares. Dividend for financial quarter ending 30 June 2013 DPF will declare and pay a dividend on or before 30 June 2013 which will be a dividend from a multi-rate PIE. DPF will pay tax on the taxable income allocated to each shareholder at the shareholder s nominated PIR to the Inland Revenue. DPF Shareholders will generally have no further tax liability in respect of their investment, provided they elect the correct PIR. Issue of shares in PFI PIE regime Under the Merger, DPF Shareholders will be issued PFI Shares and their DPF Shares will be cancelled. DPF will cease to be a multi-rate PIE. PFI is a listed PIE for tax purposes and subject to the company tax regime. PFI s statutory tax rate is 28% and tax payments result in a credit to its imputation credit account. Distributions from PFI will have imputation credits attached to the maximum amount available, as determined by the directors of PFI. Tax treatment of distributions The tax treatment of distributions received from PFI is dependent on whether the recipient is a New Zealand resident and whether they are an individual, trustee or corporate. For New Zealand resident individual or trustee shareholders, distributions from PFI will be excluded income, provided that the dividend is not included in their return of income. Shareholders who are on a tax rate exceeding 28% could choose not to return the dividend as income, and as a result, no further tax would be payable. Shareholders on a tax rate of less than 28% could choose to include the dividend in their return of income, and use the surplus imputation credits to offset their other taxable income. To the extent the dividend is not imputed, this portion will be excluded income. For New Zealand corporate shareholders, fully imputed distributions will be assessable income, with the imputation credits attached able to be claimed as a tax credit. For distributions that are not fully imputed: (a) the imputed portion will be assessable income and a tax credit can be claimed for imputation credits attached; and (b) the non-imputed portion will be excluded income. For non-resident shareholders, a fully imputed distribution will be assessable income. To the extent that the distribution is not fully imputed, the imputed portion will be assessable income, with the non-imputed amount deemed excluded income. Under the listed PIE rules, distributions to non-resident shareholders who hold less than 10% of the shares will be subject to New Zealand non-resident withholding tax of 15% to the extent the dividend is imputed. However, the supplementary dividend regime should be available to limit the impost of New Zealand tax to 28%. For shareholders who hold at least 10%, an exemption for withholding tax should apply. Sale of shares The tax treatment of the sale of shares in a listed PIE is dependent upon the shareholder s individual circumstances (i.e. whether the shares are held on capital or revenue account). Factors that indicate that shares are held on revenue account, and therefore, are likely to be taxable are: (a) if the shares were acquired for the purpose of sale or other disposal; or (b) if the shareholder carries on a business involving dealing in shares or other similar property. PROFILE OF THE MERGED GROUP BUSINESS 43

46 Comparison of tax implications of holding shares in a multi-rate PIE versus a listed PIE Multi-rate PIE Tax on income in the PIE Taxed at investors PIR up to 28% (0% for companies, PIEs, charities) Listed PIE 28% company tax rate Distributions New Zealand resident investors Distributions treated as excluded income Excluded income for individual investors, provided that the dividend is not included in their return of income. For New Zealand corporate shareholders, the imputed portion of the dividend will be assessable income, with imputation credits attached able to be claimed as a tax credit. The non-imputed portion will be excluded income. PIE investors must include the imputed component in their PIE income (with a corresponding credit). The non-imputed component is excluded income. Distributions non-resident investors Distributions treated as excluded income Non-imputed portion of dividend treated as excluded income. Imputed portion of dividend paid to non-resident shareholders who hold less than 10% of shares in the PIE will be subject to New Zealand nonresident withholding tax of 15%. Losses Exit Land losses are carried forward in the PIE (subject to maintaining shareholder continuity). Unable to be attributed to investors. Redemption of shares should not be taxable. Sale of shares subject to tax depending on whether they are held on capital or revenue account. Tax losses are carried forward in the PIE (subject to maintaining shareholder continuity). Unable to be attributed to investors. Redemption of shares should not be taxable. Sale of shares subject to tax depending on whether they are held on capital or revenue account. Impact of shareholding change Under New Zealand tax law there will be a change in the shareholding of DPF upon the Merger. Accordingly any tax losses existing at the date of Merger will not be carried forward in PFI after the Merger. The DPF directors expect that DPF will not have material tax losses at the time of the Merger. Other tax considerations No stamp duty is payable in New Zealand on share transfers and no notice of such transfers is required to be given by a shareholder to the Inland Revenue. Tax implications of the Merger for PFI Shareholders PIE regime PFI should remain a listed PIE throughout the Merger process. Dividend for financial quarter ending 30 June 2013 PFI will declare and pay a dividend on or before 30 June 2013 which will be treated as a dividend from a listed PIE (refer to table above). Shareholding change Under New Zealand tax law there is a change in the shareholding of PFI upon the Merger. Accordingly, any imputation credits will not be carried forward by PFI after the Merger. The PFI directors expect that the majority of the imputation credits held by PFI as at the date of this Information Memorandum will be utilised prior to the Merger. 44 PROFILE OF THE MERGED GROUP BUSINESS

47 What are the key risks? The Merged Group will face a number of business risks that are largely comparable in nature to those faced by both PFI and DPF in the ordinary course of their businesses. An overview of these and other risks is outlined below. This overview is not intended to be an exhaustive list of all risks associated with the Merger, PFI or DPF. Merger-specific risks Any merger or acquisition carries with it risks. These are an inherent part of such transactions. PFI and DPF have undertaken due diligence in relation to each other s business and portfolio, but in doing so, each has relied on information provided by the other. In the event that this information is incorrect or incomplete in any material respect, the financial condition or financial performance of these companies may be worse than expected, which in turn may have a material adverse effect on the merged company. As the companies are merging there are no warranties given, and the Merged Group will have the liabilities of both companies. Based on the due diligence process followed and the knowledge of PFI and DPF management of both portfolios, this risk has been assessed by PFI and DPF as relatively low. Exchange Ratio The exchange ratio of PFI Shares for every DPF Share reflects the net tangible assets of PFI and DPF as at 28 February 2013 and an agreed premium. There is therefore a risk that this exchange ratio does not reflect the market price of PFI Shares or the respective valuations of PFI and DPF s properties on the Merger Date. To mitigate the risk around the fairness of the exchange ratio, PFI and DPF engaged Deloitte to prepare the Independent Expert Report. Integration risk Whilst PFIM and DPFM, being related parties, share some common personnel and systems, the success of the Merged Group will depend on the successful integration of the operations and records of each of PFI and DPF and the Manager s ability to successfully manage a larger property portfolio. PFI and DPF have assessed this risk as relatively low. Merged Group business risks No investment is risk-free and the PFI Shares are no exception. The principal risk in holding PFI Shares is that a PFI Shareholder may not be able to recoup their original investment or they may not receive the returns they expect. This could happen for a number of reasons, including: the value of PFI Shares reduce; shareholders are unable to sell their PFI Shares at all for instance, because the market becomes illiquid or ceases to exist; the Merged Group does not pay distributions; the operational and financial performance of the Merged Group is worse than expected; or the Merged Group becomes insolvent and is placed in receivership or liquidation. Leverage risk DPF s gearing ratio is 41.2%, compared to PFI s current gearing ratio of 33.0%. The Merged Group is expected to have a gearing ratio of 38.6% 40. Under the facility agreement for the Merged Group (described on page 40 of this Information Memorandum), the Merged Group s maximum loan-to-value ratio is 50%. There is a risk that adverse market movements may cause the Merged Group loan-to-value ratio to exceed 50% and thereby result in a breach of banking covenants. If a banking covenant is breached, the bank may exercise its rights under the security arrangements. This may include enforcing its security and requiring the Merged Group to sell individual properties, in order to remedy the breach. While there is an event of default or a potential event of default or where such distributions would result in a default, the bank may also restrict distributions to shareholders. Funding In order to provide for future growth, the Merged Group relies on both equity and debt funding including the refinancing of existing debt facilities. An inability to obtain the necessary funding for the Merged Group or a material increase in the cost of the funding through an increase in interest rates may have an adverse impact on Merged Group s financial strength and future performance. Interest rate risk Interest expense will be the Merged Group s largest single expense item. Any increase in interest rates may reduce the Merged Group s profit and, potentially, could cause the Merged Group to breach its banking covenants. If a banking covenant is breached, the bank may exercise its rights under the security arrangements. This may include enforcing its security and requiring the Merged Group to sell individual properties, in order to remedy the breach. While there is an event of default or a potential event of default or where such distributions would result in a default, the bank may restrict distributions to shareholders. Derivative financial instrument risk The Merged Group will use derivative financial instruments, principally interest rate swaps, to exchange its floating short term interest rate exposure for fixed long term interest rate exposure. There is a risk that the fair value of these derivative financial instruments will fluctuate because of changes in market interest rates. This may cause the value of the Merged Group s net tangible assets to also fluctuate. 39 Rounded to 3 decimal places. Refer to the description of the exchange ratio under the heading Exchange ratio on page Refer to footnote 7 on page 13 of this Information Memorandum. PROFILE OF THE MERGED GROUP BUSINESS 45

48 Property market risks The past performance of PFI or DPF s assets does not guarantee their future performance. The Merged Group will be subject to the prevailing property market conditions in New Zealand particularly the market conditions applicable to the industrial property sector (given the Merged Group s core focus on industrial property). Adverse changes in market sentiment or market conditions (whether applying generally to the property market or specifically to industrial property) and the activity of competitors in the market may impact the Merged Group s ability to acquire, manage or develop assets, as well as the value of the Merged Group s assets. These impacts could lead to a reduction or loss in reported profit, distributable earnings or the carrying value of assets. Rent reviews and lease renewals The property market conditions prevailing at the time may have an effect on rent reviews and lease renewal negotiations, which in turn may result in lower than anticipated rent reviews or lease renewals which would have a negative impact on the Merged Group s earnings and the value of the relevant building/s or tenancy/ies. Tenancy default The value of the Merged Group s properties is primarily dependent upon existing or new tenants continuing to operate on a profitable basis and abiding by the terms and conditions of their lease. If a tenant fails to pay its rent when due it may affect the Merged Group s ability to satisfy its obligations to pay interest under its financing arrangements, the value of the property, as well as the Merged Group s profit and earnings. Consistent with the practice of PFIM and DPFM, PFIM will continue to actively monitor the financial wellbeing of its tenants. Geographic risk The property portfolio of the Merged Group is concentrated in the Auckland region with approximately 87% of the Merged Group s property portfolio located in that region. The Merged Group s business and performance is therefore subject to any changes in the Auckland economy or to any natural disasters or other events that affect the Auckland region. Destruction of properties and insurance The Merged Group s property portfolio is subject to the risk of total and significant destruction from natural disasters (such as earthquakes) and other events causing damage to those properties particularly where such events affect the Auckland region. Destruction of part of the Merged Group s property portfolio may result in a loss of rental income which may affect the Merged Group s ability to provide distributions and the value of the PFI Shares. The Merged Group will have a comprehensive material damage, business interruption and public and statutory liability insurance covering the portfolio and utilises policy specifications and insured limits customarily carried for similar portfolios in New Zealand. There are some types of losses (such as earthquake and volcanic eruption) that are insured but subject to higher deductibles. The insurance programme will be renewed annually. The scope of insurance will be dependent on a number of factors such as the continued availability of cover, the nature of the risks to be covered, extent of the proposed coverage and the costs involved. Landlord costs Structural repairs and certain maintenance and capital works to the Merged Group s properties which are the responsibility of the Merged Group may be required under the respective leases. The amount of such repairs, maintenance and capital works may exceed planned expenditure in this regard, reducing the Merged Group s profit and therefore its dividend pay-out and, potentially, cause the Merged Group to breach its banking covenants (to the extent that the works cannot be planned/anticipated and/or the Manager has not budgeted for those works). To the extent possible, the Manager will work with its tenants to plan and secure appropriate funding for any required repairs, maintenance and capital works. Future distribution payments There can be no assurance that any distributions will be paid or as to the level to which those distributions will be imputed, as actual events might differ from the assumptions used in assessing the ability of the Merged Group to pay and impute those distributions. There can be no assurance that future distribution payments will be made under the PIE regime as the Merged Group s PIE status could be lost by events outside of the Merged Group s control. Loss of key personnel The Merged Group s operations are reliant on PFIM, as the Manager, retaining and attracting quality senior executives and other employees. There is no guarantee that the Manager will be able to retain these employees, or that suitable replacements will be hired in the event of their departure or that it will be able to prevent them from competing with the Manager in the event of their departure. 46 PROFILE OF THE MERGED GROUP BUSINESS

49 Given the nature of a number of the Merged Group business risks referred to above, it is not practicable to quantify those risks. Consistent with the practice of PFIM and DPFM, PFIM will continue to monitor, on an ongoing basis, its banking and other arrangements in the context of market movements to determine the likelihood of any risk occurring. General business risks Economic activity The Merged Group s business and its performance are subject to changes in the New Zealand economy at large, the regional economies in which its properties are located and the global economy including but not limited to customer demand, inflation, interest rates, exchange rates and the government s regulatory and fiscal policy. It is possible that a downturn in those economies, or within the Merged Group s customer base, could have a material adverse impact on the Merged Group s performance. The Merged Group could be affected by national or international events or occurrences which result in nonfunctioning financial markets and/or decreased investor and/or borrower confidence. These market risks include natural disasters (such as earthquakes), war, acts of terrorism, a recession, or a downturn in a financial market or the failure of a finance market participant. Movements in New Zealand and international stock markets and changes in economic conditions or interest rates may affect prices at which the PFI Shares trade. Any of the above changes or events could reduce the Merged Group s ability to source funds and adversely affect the Merged Group s borrowing margins and overall cost of funds. Regulatory issues and changes in law PFI, DPF and the Merged Group are exposed to government regulatory policies that could have a direct bearing on business operations. No assurance can be given that current laws and regulations or the adoption of new laws and regulations, particularly those related to the property market and tenancy, may not have a material adverse effect on the Merged Group s operations, financial performance or prospects. Taxation Changes in New Zealand tax law, or changes in the way New Zealand tax law is interpreted, have the potential to impact on returns. Changes to the rates of income tax applying to individuals, companies and/or the Merged Group similarly may impact after-tax shareholder returns. If the Merged Group were to lose its PIE status, this would impact after-tax shareholder returns. PIE status could be lost as a result of matters outside of the control of the Merged Group. The introduction of a capital gains tax or changes to New Zealand tax laws relating to depreciation may also affect the returns received by shareholders. No Guarantee Nothing contained in this Information Memorandum should be construed as a promise of profitability or of investment returns in respect of PFI or DPF, and no person named in this Information Memorandum (including PFI, DPF and DPFM, nor any of their respective directors, officers or employees) or any other person gives any guarantee or promise as to the future performance of PFI or DPF of the future value or share price of PFI Shares or payment of any distributions in relation to PFI Shares. What happens if the Merger does not proceed? If the Merger is not approved, Final Court Orders are not granted or any other condition to the Merger is not satisfied, then the Merger, in the form contemplated in this Information Memorandum, will not be implemented. In such event, each of PFI and DPF will continue to operate its own business. PROFILE OF THE MERGED GROUP BUSINESS 47

50 48 PROFILE OF THE MERGED GROUP BUSINESS

51 SECTION DIRECTORS + MANAGEMENT leading TOGETHER Goodman Fielder, Harris Road, East Tamaki, Auckland DIRECTORS + MANAGEMENT 49

52 DIRECTOR PROFILES The board of the Merged Group will initially comprise Peter Masfen, Humphry Rolleston and Anthony Beverley (PFI s current independent directors), Arthur Young (DPF s current chairman), John Waller (a DPF independent director) and Gregory Reidy (who will remain on the board as the management representative). Peter Masfen Chairman, Independent Director Humphry Rolleston Independent Director Name Peter Masfen Humphry Rolleston Anthony Beverley Arthur Young John Waller Gregory Reidy Position Chairman, Independent Director Independent Director Independent Director Non-Executive Director Independent Director Managing Director Peter joined the PFI board in May 2002 and was appointed chairman in June He is chairman of the Masfen Holdings Limited group of companies and is a director of and has interests in a number of private companies in New Zealand including Mount Linton Station Limited and Greymouth Petroleum Limited. He is a trustee of King s College, Auckland and King s School, Auckland, and Woolf Fisher Trust. Humphry joined the PFI board in 1994 and has interests in a number of private companies in New Zealand. He is chairman of ANZCRO Pty Limited and a director of SKY Network Television Limited, Mercer Group Limited, Infratil Limited, Asset Management Limited and Matrix Security Limited. 50 DIRECTORS + MANAGEMENT

53 Anthony Beverley Independent Director Arthur Young Non-Executive Director John Waller Independent Director Gregory Reidy Managing Director Anthony joined the PFI board in He is a professional director and consultant, consulting to both the private and public sector on a wide variety of property matters. Anthony s other directorships include Marlborough Lines Limited, Harbour Quays A1 Limited, Harbour Quays D4 Limited and Harbour Quays F1F2 Limited. He was formerly head of property for AMP Capital Investors (New Zealand) Limited. Arthur has been a director and chairman of DPF since He is senior partner of Chapman Tripp and has over 55 years legal experience. Arthur acts as a professional trustee for a number of clients, including various client trusts that are significant DPF Shareholders. He has had extensive directorate experience over the years and current directorships involving the property industry include companies in each of the McConnell/Hawkins Group, the Southpark Group, the Dresden Group and the Haydn & Rollett Group. Arthur was a director of Equitable Mortgages Limited when it was placed into receivership on 17 December John became an independent director of DPF in He is also on a number of boards, including the Bank of New Zealand (Chairman), National Australia Bank, Fonterra Cooperative Group, the Eden Park Trust Board (Chairman), SKY Network Television Limited, Haydn & Rollett Limited and Alliance Group Limited. Prior to these appointments, John was a partner at PwC for over 20 years. Greg has been a director of DPF since 2010 and PFI since 2012 and is Managing Director of both PFIM and also DPFM, the respective managers of PFI and DPF. He is also Managing Director of McDougall Reidy & Co Limited, which among other things, has been subcontracted by PFIM and DPFM to undertake the property and administrative management services for PFI and DPF respectively. He has a background in property investment, funds management and development. Greg has more than 18 years experience in the management, ownership and development of industrial, commercial and retail property. Greg is also a shareholder of DPFM (the owner of PFIM) and McDougall Reidy & Co Limited. DIRECTORS + MANAGEMENT 51

54 Senior Management Profiles PFI is managed by PFIM, a private company owned by interests associated with McDougall Reidy & Co Limited. PFIM took over the PFI Management Agreement on 20 January 2012, by way of assignment from AMP Capital Investors (New Zealand) Limited. PFIM has appointed McDougall Reidy & Co Limited as its subcontractor to provide the property and administrative management services required under the PFI Management Agreement. Management of the Merged Group following the Merger will continue to be undertaken by PFIM pursuant to the PFI Management Agreement, as amended as part of the Merger. The senior management team will include those people opposite who will perform the following roles. Gregory Reidy Managing Director See page 51 for biographical details. 52 DIRECTORS + MANAGEMENT

55 Nick Cobham General Manager (Joint) Nick is currently General Manager of PFI. Prior to this, Nick spent more than four years as Development Manager for McDougall Reidy & Co Limited, managing industrial and commercial development projects. He also has previous experience in the listed property sector with Capital Properties New Zealand and has a background in property valuation and funds management. Nick is a registered valuer and a graduate of Massey University. Nick is also a shareholder of DPFM (the owner of PFIM) and McDougall Reidy & Co Limited. Simon Woodhams General Manager (Joint) Simon is currently General Manager of DPF. Simon joined McDougall Reidy & Co Limited as Development Manager in Prior to joining Simon spent seven years in Tokyo and London working in the financial and banking markets. He is a graduate of Canterbury University where he completed his Bachelor of Commerce majoring in Accounting and Marketing. Simon is also a shareholder of DPFM (the owner of PFIM) and McDougall Reidy & Co Limited. Craig Peirce Chief Financial Officer and Company Secretary Craig is currently Chief Financial Officer and Company Secretary of PFI, DPF and McDougall Reidy & Co Limited. Craig joined McDougall Reidy & Co Limited as Chief Financial Officer and Company Secretary in He has more than 10 years property industry experience having previously spent six years in London working in property funds management at LaSalle Investment Management and General Electric Real Estate. Craig is a graduate of Auckland University and is a Chartered Accountant, having trained as an auditor at PricewaterhouseCoopers. DIRECTORS + MANAGEMENT 53

56 54 DIRECTORS + MANAGEMENT

57 SECTION PROSPECTIVE FINANCIAL INFORMATION strong together DEC, 558 Te Rapa Road, Hamilton PROSPECTIVE FINANCIAL INFORMATION 55

58 Why should you read this section? In this section, you can find out detailed information about PFI, DPF and the Merged Group s prospective financial performance, including the important assumptions that have been used in the preparation of the prospective financial information. This section contains two different sets of prospective financial information: The first set is full year pro forma prospective financial information (Merger Pro Forma Prospective Financial Information, or Pro Forma FY13 ) which has been prepared to enable comparison of the standalone, prospective financial information for each of PFI and DPF, for the 12 months ending 31 December 2013, with the prospective financial information of the Merged Group. To enable this comparison it assumes that the Merger occurred on 31 December 2012, and hence the Merged Group information includes a full 12 months of trading for both PFI and DPF. The second set is the prospective financial information for PFI assuming the Merger completes on 1 July 2013 as anticipated (Statutory Prospective Financial Information, or Forecast FY13 ) which has been prepared to enable future comparison against PFI s actual NZ GAAP financial results that will be prepared for the year ending 31 December This set assumes the Merger occurs on 1 July 2013, and hence includes six months trading for DPF from the date of Merger, and a full year s trading for PFI. This section should be read in conjunction with the risk factors set out in Section 4 of this Information Memorandum on page 45 under the heading What are the key risks? and other information contained in this Information Memorandum. The prospective financial information is presented in New Zealand dollars and is rounded, which may result in some discrepancies between the sum of components and totals within tables, and also in certain percentage calculations. If you do not understand the information in this section, you should consult a financial adviser. Basis of Preparation The Pro Forma FY13 and the Forecast FY13 have been prepared in accordance with Financial Reporting Standard 42 Prospective Financial Statements. The Pro Forma FY13 and the Forecast FY13 are based on the Relevant Board s assessment of events and conditions existing at the date of this Information Memorandum and the assumptions set out on pages 64 to 69, page 76 and accounting policies discussed below. For the purposes of this section, the Relevant Board means: in respect of prospective financial information relating to PFI, the PFI board of directors; in respect of prospective financial information relating to DPF, the DPF board of directors; and in respect of prospective financial information relating to the Merged Group, the PFI board of directors (which information has also been approved by the persons named in Section 5 of this Information Memorandum who will join the PFI board upon completion of the Merger), and Relevant Directors means the directors of the Relevant Board. The Relevant Directors believe that the Pro Forma FY13 and the Forecast FY13 have been prepared with due care and attention, and consider the assumptions when taken as a whole to be reasonable at the time of preparing this Information Memorandum. However, actual results are likely to vary from the information presented as anticipated results may not occur as expected, and the variations may be material. Accordingly, neither the Relevant Directors nor any other person can provide any assurance that the prospective financial information will be achieved and investors are cautioned not to place undue reliance on the prospective financial information in this Information Memorandum. The prospective financial information in this Information Memorandum includes unaudited actual results for the period from 1 January 2013 to 28 February 2013, has been prepared for the purpose of the Merger and may not be suitable for any other purpose. The Pro Forma FY13 and the Forecast FY13, including the assumptions underlying them, have been prepared by the Manager and approved by the Relevant Boards. The Relevant Boards approved the Pro Forma FY13 and the Forecast FY13, and authorised their use in this Information Memorandum, on 22 May Prospective financial information by its nature involves risks and uncertainties, many of which are beyond the control of PFI and DPF. These risks and uncertainties include, but are not limited to, those set out in Section 4 of this Information Memorandum on page 45 under the heading What are the key risks?. There is no present intention to update the prospective financial information in this Information Memorandum or to publish prospective financial information in the future, other than as required by accounting standards. PFI will present a comparison of the Forecast FY13 with actual financial results when reporting in accordance with NZ GAAP. 56 PROSPECTIVE FINANCIAL INFORMATION

59 This section 6 contains: Page(s) An overview of the main factors that affect the Merged Group operational and financial performance 57 Merger Pro Forma Prospective Financial Information (Pro Forma FY13), being: PFI prospective financial information for the 12 month period to 31 December 2013 (assuming no Merger) DPF pro forma prospective financial information for the 12 month period to 31 December 2013 (assuming no Merger) Merged Group pro forma prospective financial information for the 12 month period to 31 December 2013 (assuming Merger completed 31 December 2012) Statutory Prospective Financial Information (Forecast FY13) for the 12 month period to 31 December 2013 (assuming Merger completed 1 July 2013) Investigating Accountant s Report 78 OVERVIEW OF THE MAIN FACTORS THAT AFFECT THE MERGED GROUP S OPERATIONAL AND FINANCIAL PERFORMANCE PFI s, DPF s and the Merged Group s operational and financial performance, and that of the New Zealand commercial property sector generally, is driven primarily by occupancy of investment properties, the ability to increase the rental income of tenanted properties, the acquisition or disposal of investment property, the valuation of investment properties and borrowing costs. This is not an exhaustive list of all factors which affect PFI, DPF and the Merged Group s financial performance. These factors should be read in conjunction with the information set out in Section 4 of this Information Memorandum on page 45 under the heading What are the key risks?. The preparation of financial statements requires the Relevant Directors to make judgments, estimates and assumptions that affect the application of PFI, DPF and the Merged Group s accounting policies and the reported amounts of assets and liabilities, income and expenses. The areas of estimation uncertainty and critical judgments in applying accounting policies, that have the most significant effect on the amounts recognised in the financial statements relate to investment properties, derivative financial instruments and deferred tax. For further details on these accounting policies, refer to PFI s audited financial statements for the year ended 31 December For details on how to access PFI s financial statements, see Section 7 of this Information Memorandum on page 83 under the heading Access to information and statements. Non-GAAP financial information You should be aware that certain financial information included in this Information Memorandum is considered non-gaap financial information, including profit measures other than net profit for the year as reported in the statutory financial statements. The notes to the various tables where non-gaap financial information is reported include further information to help you interpret those terms which are not defined under NZ GAAP. The principal non-gaap financial information included is distributable profit. In all cases, distributable profit is defined as profit (as determined in accordance with IFRS for the period), adjusting for additional revenue booked as a result of fixed rent review accounting entries, unrealised changes in the values of investment properties, realised gains or losses on disposal of investment properties (net of tax on depreciation claw-back), unrealised changes in the values of derivative financial instruments, deferred tax and other one off items as determined by the Relevant Directors and described in the notes to the prospective financial information. Distributable profit is used by the Relevant Directors to assist in determining dividends to shareholders. The tables of non-gaap financial information provide a reconciliation of distributable profit to the prospective financial information. PROSPECTIVE FINANCIAL INFORMATION 57

60 MERGER PRO FORMA PROSPECTIVE FINANCIAL INFORMATION (Pro Forma FY13) This section contains the full year pro forma prospective financial information (Merger Pro Forma Prospective Financial Information, or Pro Forma FY13 ) which has been prepared to enable comparison of the standalone, prospective financial information for each of PFI and DPF, for the 12 months ending 31 December 2013, with the prospective financial information of the Merged Group. To enable this comparison it assumes that the Merger occurred on 31 December 2012, and hence the Merged Group information includes a full 12 months of trading for both PFI and DPF. This section contains: Page(s) PFI prospective financial information for the 12 month period to 31 December 2013 (assuming no Merger); DPF pro forma prospective financial information for the 12 month period to 31 December 2013 (assuming no Merger); Merged Group pro forma prospective financial information for the 12 month period to 31 December 2013 (assuming Merger completed 31 December 2012); which includes prospective consolidated statements of comprehensive income, prospective consolidated statements of changes in equity, prospective consolidated balance sheets and prospective consolidated statements of cash flows; a description of the Relevant Board s general and specific assumptions that underpin the Pro Forma FY13; and an analysis of the sensitivity of the Pro Forma FY13 to changes in a number of key assumptions. 69 Note: DPF s year end is 31 March and DPF is an unlisted multi-rate PIE, whereas the information presented in this section assumes a year end of 31 December and that DPF is a listed PIE. Accordingly, the information in this section for DPF is pro forma. 58 PROSPECTIVE FINANCIAL INFORMATION

61 Merger Pro Forma PROSPECTIVE CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2013 All figures in $000 s PFI DPF (pro forma) Merger adjustments Merged Group (pro forma) OPERATING REVENUE Rental income 31,634 32,053-63,687 Interest income 3 11 (11) 3 Total operating revenue 31,637 32,064 (11) 63,690 OPERATING EXPENSES Audit fees and other fees paid to auditors for agreed upon procedures engagements (15) 91 Directors fees Interest expense and bank fees 8,646 11,508 (2,795) 17,359 Management fees 2,009 2, ,788 Non-recoverable property costs 936 1,072-2,008 Other expenses (141) 756 Total operating expenses 12,443 15,749 (2,910) 25,282 Total operating earnings 19,194 16,315 2,899 38,408 NON OPERATING INCOME AND EXPENSES Unrealised net change in fair value of investment properties 2,768 3,368-6,136 Loss on disposal of investment properties - (757) - (757) Unrealised net change in fair value of derivative financial instruments 2,990 4,408 (4,408) 2,990 Total non operating income and expenses 5,758 7,019 (4,408) 8,369 Profit/(loss) before taxation 24,952 23,334 (1,509) 46,777 TAXATION Current taxation 4,271 2, ,939 Deferred taxation (1,798) 1,302 (1,234) (1,730) Total taxation 2,473 4,170 (434) 6,209 Profit/(loss) for the year attributable to the shareholders 22,479 19,164 (1,075) 40,568 Other comprehensive income Total comprehensive income/(loss) for the year attributable to the shareholders 22,479 19,164 (1,075) 40,568 PROSPECTIVE FINANCIAL INFORMATION 59

62 Merger Pro Forma Prospective Consolidated Statement of Changes in Equity For the year ended 31 December 2013 All figures in $000 s PFI DPF (pro forma) Merger adjustments Merged Group (pro forma) SHARE CAPITAL Balance as at 1 January , ,512 6, ,114 Dividend reinvestment (336) - Share capital as at 31 December , ,848 5, ,114 RETAINED EARNINGS Balance as at 1 January ,613 (995) 54 77,672 Profit/(loss) for the year 22,479 19,164 (1,075) 40,568 Other comprehensive income Dividends to shareholders (15,000) (13,267) (1,549) (29,816) Retained earnings as at 31 December ,092 4,902 (2,570) 88,424 Total equity as at 31 December , ,750 3, , PROSPECTIVE FINANCIAL INFORMATION

63 Merger Pro Forma Prospective Consolidated Statement of Financial Position As at 31 December 2013 All figures in $000 s PFI DPF (pro forma) Merger adjustments Merged Group (pro forma) CURRENT ASSETS Bank (19) 79 Accounts receivable (247) 761 Prepayments and other assets 1, ,641 Total current assets 2,522 1,225 (266) 3,481 NON-CURRENT ASSETS Goodwill - - 9,761 9,761 Prepayments and other assets 6,132 3,825-9,957 Investment properties 396, , ,122 Total non-current assets 402, ,520 9, ,840 Total assets 405, ,745 9, ,321 CURRENT LIABILITIES Accounts payable, accruals and other liabilities 1,813 1,981 (253) 3,541 Taxation payable 1, ,637 Derivative financial instruments 5,107 7,695 (7,695) 5,107 Total current liabilities 8,335 10,632 (7,682) 11,285 NON-CURRENT LIABILITIES Borrowings 133, ,300 11, ,198 Deferred taxation 6,083 1,063 2,154 9,300 Total non-current liabilities 139, ,363 13, ,498 Total liabilities 147, ,995 6, ,783 Net assets 257, ,750 3, ,538 EQUITY Share capital 171, ,848 5, ,114 Retained earnings 86,092 4,902 (2,570) 88,424 Total equity 257, ,750 3, ,538 PROSPECTIVE FINANCIAL INFORMATION 61

64 Merger Pro Forma Prospective Consolidated Statement of Cash Flows For the year ended 31 December 2013 All figures in $000 s PFI DPF (pro forma) Merger adjustments Merged Group (pro forma) CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers 31,090 30, ,648 Payments to suppliers (4,500) (5,514) 58 (9,956) Interest received 3 11 (11) 3 Interest and other finance costs paid (8,488) (11,636) 2,598 (17,526) Income tax paid (3,947) (1,912) (534) (6,393) Net cash flows from operating activities 14,158 11,262 2,356 27,776 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of investment properties - 12,295-12,295 Purchases and development of investment properties (18,165) (8,427) - (26,592) Net cash flows from investing activities (18,165) 3,868 - (14,297) CASH FLOWS FROM FINANCING ACTIVITIES Distributions to shareholders (15,000) (13,267) (1,549) (29,816) Proceeds from term loans 26,400 8, ,200 Repayments of term loans (7,500) (11,110) (990) (19,600) Proceeds from share issues (336) - Net cash flows from financing activities 3,900 (15,741) (2,375) (14,216) Net change in cash and cash equivalents (107) (611) (19) (737) Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period (19) PROSPECTIVE FINANCIAL INFORMATION

65 Merger Pro Forma Prospective Distributable Profit Per Share Calculations (Non-GAAP Financial Information) For the year ended 31 December 2013 All figures in $000 s PFI DPF (pro forma) Merger adjustments Merged Group (pro forma) Total comprehensive income/(loss) for the year attributable to the shareholders 22,479 19,164 (1,075) 40,568 Less: Unrealised net change in fair value of investment properties (2,768) (3,368) - (6,136) Less: Losses on disposals of investment properties Plus: Tax on depreciation claw-back on disposals of investment properties Less: Unrealised net change in fair value of derivative financial instruments (2,990) (4,408) 4,408 (2,990) Less: Deferred taxation (1,798) 1,302 (1,234) (1,730) Less: Fixed rent reviews (367) (134) - (501) Less: Other (12) - - (12) Total distributable profit 14,544 13,428 2,099 30,071 Shares on issue 220,410, ,091, ,502,391 Distributable profit per share (cents per share) DPF shares rebased for the merger ratio for the purposes of comparison. PROSPECTIVE FINANCIAL INFORMATION 63

66 Notes to the Merger Pro Forma Prospective Financial Information (Pro Forma FY13) Accounting policies The accounting policies applied to the preparation of the Pro Forma FY13 are those which are expected to be used in future reporting periods. Apart from the accounting policy for goodwill and the method of computation of deferred tax, they are consistent with the accounting policies and methods of computation as set out in the most recent audited financial statements of PFI. PFI and DPF have the same accounting policies, other than in respect of current and deferred tax. The effect of this different policy and in the change of computation of PFI s deferred tax are set out in this Section under the heading Taxation. The accounting policy for goodwill is set out on page 67 of this Information Memorandum. PFI will adopt NZ IFRS 13 Fair Value Measurement, in its accounts for the year ended 31 December This standard does not change when an entity is required to use fair value but provides guidance on how to determine fair value. It also expands the disclosure requirements about the assumptions made and the qualitative impact of those assumptions on the fair value determined. This may result in more detailed disclosure around the valuation assumptions but should not materially impact the reported fair values, on the assumption that PFI s credit spread and the credit default risk of both parties to the Merged Group s derivative financial instruments does not change materially. Other than as described here, the Pro Forma FY13 assumes no material change in accounting policies throughout the period ended 31 December Principal Assumptions The principal assumptions upon which the Pro Forma FY13 are based are summarised below and should be read in conjunction with the sensitivity analysis set out below, the risk factors set out in Section 4 of this Information Memorandum on page 45 under the heading What are the key risks?, and PFI s accounting policies. General assumptions The following general assumptions are relevant to the Pro Forma FY13: Competitive and regulatory environment: There will be no material change in the competitive operating, legislative and regulatory environment nor any significant technological change or new entrants that will materially change the competitive environment. Property markets: There will be no material change in the general economic environments that PFI, DPF and the Merged Group operate in. Economic conditions: Inflation rates in New Zealand are assumed to be 1.6% for the year ending 31 December 2013 and the Official Cash Rate (as determined from time to time by the Reserve Bank of New Zealand) and the interest rate curve will not change materially from current levels. Investment property acquisitions or disposals: There will be no material investment property acquisitions or disposals other than those specifically mentioned in the prospective financial information. Accounting standards: Aside from NZ IFRS 13 Fair Value Measurement, there will be no changes in accounting standards which would have a material effect on PFI, DPF or the Merged Group. Material contracts: There will be no material amendments to any material agreements, other than those referred to in relation to PFI s banking facilities on page 40 and also in relation to the PFI Management Agreement on page 41 in the Profile of the Merged Group Business section of this Information Memorandum. New Zealand tax laws: There will be no material change to the tax regime in New Zealand, and specifically in relation to the PIE regime and taxation of investment properties. Senior management: Senior management and other key staff of the Manager will continue in their roles. Specific assumptions In addition to the general assumptions, below are specific assumptions that have been adopted by the Relevant Board in preparing the Pro Forma FY13. Merger The Merger is a business combination that is assumed to be accounted for in accordance with NZ IFRS 3 (Business Combinations). It has been assumed that PFI is will be the acquirer in accordance with NZ IFRS 3. Rental income Rental income is based on current contracted rent from lease agreements. Accounting adjustments in respect of lease incentives and fixed rent reviews are also included. Together, this accounts for approximately 98% of the rental income recognised in the Merged Group s Pro Forma FY13. Rent reviews as determined by lease agreements are assumed to be completed during the year, with 35% of PFI s contracted rent and 51% of DPF s contracted rent due for and assumed to be reviewed during the period. It is assumed that these reviews will result in an average annual increase on the previously contracted rental income of 1.7% and 2.5% respectively. These increases are as a result of fixed and index linked rent review mechanisms, and it has been assumed that there is no market rental growth during For those leases expiring during the year ending 31 December 2013, re-leasing assumptions have been applied based on the Relevant Board s expectation of market conditions for each tenancy. Re-leasing assumptions are also a key driver of non recoverable property costs. Rental income for the Merged Group represents an aggregation of rental income of PFI and DPF. 64 PROSPECTIVE FINANCIAL INFORMATION

67 Management fees All figures in $000 s PFI DPF (pro forma) Merger adjustments Merged Group (pro forma) Management fees 2,009 2, ,788 PFI and DPF base management fees have been calculated based on the current PFI and DPF base management fee scales (refer to Section 4 of this Information Memorandum). The Merged Group s base management fees have been calculated based on the following tiers, as documented in the proposed revised management agreement (refer to Section 4 of this Information Memorandum): Total tangible assets under management up to $425 million: 0.725%; Total tangible assets under management above $425 million up to $775 million: 0.45%; Total tangible assets under management above $775 million: 0.35%. PFI, but not DPF, currently has an incentive fee under its management agreement. As documented in the proposed revised management agreement, the incentive fee will apply to the Merged Group. No incentive fee has been assumed for 2013 for PFI or the Merged Group. Please refer also to page 69 for discussion of the sensitivity of this assumption. Interest expense and bank fees All figures in $000 s PFI DPF (pro forma) Merger adjustments Merged Group (pro forma) Interest expense and bank fees 8,646 11,508 (2,795) 17,359 Interest expense and bank fees comprises bank margins and fees, payments made in respect of derivative financial instruments and BKBM (float rates). Bank margins and fees For each of PFI and DPF the borrowings facilities as described in their respective last financial statements has been assumed to continue for the duration of the prospective period. For the Merged Group, it has been assumed that the bank facilities described in Section 4 of this Information Memorandum will be in place for the duration of the prospective period, with margins and fees at levels slightly lower than those paid by PFI or DPF. Derivative financial instruments For PFI, it is assumed that PFI s current derivative financial instruments, averaging $73 million with an average current interest rate of 6.4% for an average duration of 2.8 years from 1 January 2013, continue. For DPF, it is assumed that DPF s current derivative financial instruments, averaging $115 million with an average current interest rate of 6.0% for an average duration of 2.9 years from 1 January 2013, continue. For the Merged Group, it is assumed that DPF s derivative financial instruments are terminated immediately prior to the Merger and replaced with new derivative financial instruments at market prevailing rates in accordance with the Merged Group s interest rate risk management policy (refer Section 4). The fair value of DPF s derivative financial instruments of $ million is settled by DPF drawing on its bank facilities prior to the Merger. Termination of DPF s derivative financial instruments allows the Merged Group to pay shareholders higher dividends during the prospective period than would otherwise be the case. It is assumed that prevailing market rates will be materially lower than the rates of DPF s derivative financial instruments and therefore this process will have the impact of materially reducing the impact of derivative financial instruments on the Merged Group s interest expense. BKBM (float rates) PFI, DPF and the Merged Group have assumed market forecasts for BKBM (float rate), allowing 0.25% on top of these forecasts. Please refer also to page 69 for discussion of the sensitivity of this assumption. PROSPECTIVE FINANCIAL INFORMATION 65

68 Operating expenses excluding interest expense and bank fees and management fees All figures in $000 s PFI DPF (pro forma) Merger adjustments Merged Group (pro forma) Audit fees and other fees paid to auditors for agreed upon procedures engagements (15) 91 Directors fees Non recoverable property costs 936 1,072-2,008 Other expenses (141) 756 Directors fees Directors fees for the Merged Group have been recalculated to reflect the scale of fees currently paid to the PFI board. Non recoverable property costs Non recoverable property costs represents property maintenance and operating expenses not recoverable from tenants, property valuation fees and property leasing costs. The establishment and release of impaired receivables has also been included in non recoverable property costs. Non recoverable property costs for the Merged Group represents an aggregation of PFI and DPF. Other operating expenses All other operating expenses assume a level of expenditure that is broadly in line with the prior year. All other operating expenses in the Merged Group represents an aggregation of these costs for PFI and DPF, after allowing for assumed savings. Transaction costs Estimated transaction costs of approximately $1.750 million (excluding GST) are expected to be incurred before 30 June 2013 in completing the Merger. In the Pro Forma FY13 these have been treated as an adjustment to equity on 31 December The transaction costs are being paid to external advisers and service providers, including legal, accounting and financial advisers and design and printing costs. None of the transaction costs are being paid to any related parties of PFI or DPF. Unrealised net change in fair value of investment properties See the assumptions regarding investment properties on page 68. Please refer also to page 69 for discussion of the sensitivity of this assumption. Loss on disposal of investment properties The loss on disposal of investment properties represents the combined loss on disposal of DPF properties 132 Pavilion Drive and Captain Springs Road which settled in January and February 2013 respectively. No further gains or losses on disposal of investment properties are forecast. The loss on disposal of investment properties for the Merged Group represents an aggregation of loss on disposal of investment properties for PFI and DPF. Unrealised net change in fair value of derivative financial instruments PFI and DPF s derivative financial instruments are assumed to reduce over time, as the closer the derivative is to maturity, the smaller the fair value of the derivative (all other things being equal), as the unrealised liability is realised and paid. As noted in the assumptions regarding interest expense on page 65, the Merged Group assumes that DPF s derivative financial instruments are terminated immediately prior to the Merger and replaced with new derivative financial instruments at market prevailing rates. Interest rates during the prospective period are assumed to mirror the forward interest rate curve on which the derivative financial instruments are priced hence, other than the realisation of PFI s historical derivative financial instrument liability, there is no further fair value adjustment in relation to the derivative financial instruments during the prospective period. 66 PROSPECTIVE FINANCIAL INFORMATION

69 Taxation All figures in $000 s PFI DPF (pro forma) Merger adjustments Merged Group (pro forma) Current taxation 4,271 2, ,939 Deferred taxation (1,798) 1,302 (1,234) (1,730) As noted in Section 3, DPF is a multi-rate PIE whereas PFI is a listed PIE. As a multi-rate PIE, DPF does not currently account for current or deferred tax, but rather attributes all its taxable income between its shareholders based on the number of shares held by them. DPF then pays tax on the taxable income allocated to each shareholder at the shareholder s nominated PIR on a quarterly basis to the Inland Revenue. In order for DPF Shareholders to be able to compare their forecast distributable profit with that of the Merged Group on a consistent post tax basis, it has been assumed that DPF became a listed PIE on 31 December 2012 and was taxed as if it were a listed PIE for the forecast period. Current and deferred taxation have then been calculated for PFI, DPF, and the Merged Group applying current Inland Revenue rules and regulations. The effective current tax rate (being current taxation divided by total operating earnings) is 22% for PFI, 18% for DPF and 21% for the Merged Group. PFI made a change to the way deferred tax on depreciation claimed was calculated during February This change was made in order to better match the depreciation claw-back on disposals to the deferred tax associated with these properties. This exercise resulted in a one-off reduction in deferred tax expense of $1.782 million and a corresponding decrease in the deferred tax liability which has been reflected in the Pro Forma FY13. Deferred tax on depreciation claimed is now calculated on a consistent basis for PFI, DPF, and the Merged Group. The principal reason for the merger adjustments to current taxation is the increase in current tax payable as a result of lower interest costs (see the assumptions regarding interest expense and bank fees). The principal reason for the merger adjustments to deferred taxation is the increase in the deferred tax liability associated with the termination of DPF s derivative financial instruments immediately prior to the Merger (see the assumptions regarding interest expense and bank fees). A full description of the tax implications of the Merger is set out on pages 43 to 44 of this Information Memorandum. Goodwill At the Merger Date, in accordance with NZ IFRS 3, the identifiable assets and liabilities of DPF (the accounting acquiree ) are required to be recognised in the financial statements of the Merged Group at their fair values. Goodwill in relation to the DPF business will arise on the difference between the Merger Date fair value of the consideration transferred to the DPF Shareholders and the Merger Date fair values of the identifiable assets and liabilities of DPF. The consideration to DPF Shareholders under the Merger is in the form of shares in PFI. The consideration is recorded as the fair value of the PFI Shares issued at the Merger Date to effect the transaction. The fair values of the identifiable assets and liabilities of DPF as at 31 December 2013, and the resulting goodwill arising from the Merger, are shown for indicative purposes in the prospective balance sheet. No fair value adjustments other than recognition of goodwill have been assumed. The net effect of the fair value adjustments results in prospective goodwill of $9.761 million arising from the Merger. The actual fair values of the identifiable assets and liabilities and shares issued at the Merger Date, together with the resulting goodwill, could differ from the estimates shown as at 31 December As required by GAAP no amortisation of goodwill is recognised in the prospective income statement. Subsequent to the Merger Date, goodwill will be reviewed for impairment. PROSPECTIVE FINANCIAL INFORMATION 67

70 Investment Properties All figures in $000 s PFI DPF (pro forma) Merger adjustments Merged Group (pro forma) As at 1 January , , ,210 Additions 14, ,603 Disposals - (13,050) - (13,050) Capital expenditure 3,562 8,427-11,989 Prepaid leasing costs, capitalised lease incentives and fixed rent reviews 685 1,384-2,069 Unrealised revaluation 2,768 3,368-6,136 As at 31 December , , ,957 Represented in the statement of financial position by: Prepayments and other assets 1 7,371 4,464-11,835 Investment properties 396, , ,122 As at 31 December , , ,957 1 Amount shown only represents a portion of the total balance in the statement of financial position, being prepaid leasing costs, capitalised lease incentives and fixed rent reviews. PFI has assumed the acquisition of Bowden Road for $14.6 million which settled in March PFI has also assumed the partial redevelopment 15 Copsey Place for $1.3 million which is assumed to be redeveloped from March 2013 to October DPF has assumed the disposal of 132 Pavilion Drive for $7.9 million which settled in January 2013 and Captain Springs Road for $4.4 million which settled February DPF has also assumed the development 124B Hewletts Road for $7.8 million which is assumed to be developed from January 2013 to June No other acquisitions, disposals, or significant development or redevelopment capital expenditure is assumed. Prepaid leasing costs and capitalised lease incentives assume the payment of leasing costs and the granting of lease incentives associated with those properties that are assumed to be re-leased during the prospective period, net of amortisation. Fixed rent review adjustments assumes revenue booked as a result of fixed rent review accounting entries in respect of leases with fixed rent review mechanisms. The unrealised net change in fair value of investment properties (unrealised revaluation) represents the adjustment necessary to bring the value of investment properties in line with the assessment of the Relevant Directors as at 31 December The assessment of the Relevant Directors as at 31 December 2013 is based on the last current market valuation made by independent registered public valuers. After allowing for capital expenditure, prepaid leasing costs, capitalised lease incentives and fixed rent reviews, these valuations have been adjusted for forecast changes in occupancy, proximity to lease expiry and rent reviews. The total uplift for the prospective period is 0.7% for PFI and 0.8% for DPF. Please refer also to page 69 for discussion of the sensitivity of this assumption. Investment properties for the Merged Group represent an aggregation of investment properties of PFI and DPF. Borrowings All figures in $000 s PFI DPF (pro forma) Merger adjustments Merged Group (pro forma) Borrowings 133, ,300 11, ,198 Loan-to-value ratio 33.0% 41.2% N/A 38.6% Net interest cover 3.2 times 2.5 times N/A 3.2 times 68 PROSPECTIVE FINANCIAL INFORMATION

71 Please refer to the assumptions regarding interest expense and bank fees and unrealised net change in fair value of derivative financial instruments. As noted in those sections, the Merged Group assumes that DPF s derivative financial instruments are terminated immediately prior to the Merger and the fair value of those derivatives, being $ million, is settled by drawing on bank facilities. Share capital and dividends Aside from the DPF dividend reinvestment plan which operated during February 2013, it has been assumed that each of PFI and DPF s dividend reinvestment schemes and dividend reinvestment plans are suspended for the prospective period and that the Merged Group does not operate a dividend reinvestment scheme. Under the Merger 191,091,663 shares in PFI will be issued to DPF Shareholders, being a ratio of new PFI Shares per existing DPF Share. The merger adjustments of $5.795 million represents the difference between the fair value of the shares in PFI issued to DPF Shareholders (calculated as if the Merger had occurred on 31 December 2012 and PFI s shares were trading at $1.24 on the date of issue) and the book value of DPF s share capital. Please refer also to the assumptions regarding dividends in the Statutory Prospective Financial Information (Forecast FY13). Sensitivity of significant assumptions Prospective financial information is inherently subject to significant business, economic and competitive uncertainties and contingencies and accordingly actual results are likely to vary from the prospective financial information and variations may be material. The sensitivity analysis provided in the following table demonstrates the potential impact of changes to key assumptions on the prospective distributable earnings and net tangible assets. Care should be taken in interpreting this sensitivity analysis as changes in a specific assumption are analysed in isolation to potential changes in other specific assumptions, whereas in many cases changes to several assumptions may be interdependent having cumulative or mitigating impacts. The sensitivity analysis does not take into account any potential mitigating actions that management may take. Proportional variation of the changes in specific assumptions presented may not result in proportional impacts on prospective distributable earnings or prospective net tangible assets. The sensitivity analysis shows movements in the pro forma prospective distributable earnings and/or net tangible assets for the year ending 31 December 2013 when each assumption is increased or decreased as noted. Unrealised net change in fair value of investment properties The total net change in the fair value of investment properties for the prospective period for the Merged Group is 0.6% of the prior book value. Sensitivity of this assumption is to increase or decrease the total net change in net tangible assets (NTA) by +/- 1%. In the case of a 1% increase, this results in an increase in net tangible assets from $1.18 to $1.20 cents per share (cps), or in the case of a 1% decrease, this results in a decrease in NTA from $1.18 to $1.16 cps. There is no change to distributable profit as a result of these sensitivities. Interest expense and bank fees: BKBM (float rates) It has been assumed that BKBM (float rates) will not change materially from current levels. Sensitivity of this assumption is to increase or decrease BKBM (float rates) by +/- 50 basis points (bps, 0.5%). In the case of a 50 bps increase, this results in a decrease in distributable profit from 7.31 cps to 7.19 cps, or in the case of a 50 bps decrease, this results in an increase in distributable profit from 7.31 cps to 7.42 cps. There is no significant change to net tangible assets as a result of these sensitivities. Management fees: incentive fee It has been assumed that no incentive fee will be paid during the prospective period on the assumption that the Merged Group s share price trades at levels below those required to trigger the incentive fee. Set out in the table below are the share prices at which an incentive fee payment would be triggered in a quarter, the share prices required to trigger the maximum incentive fee in any given quarter without any carry forward, and the maximum incentive fee payable (net of tax) in any given quarter without any carry forward. Quarter ended Share price to trigger an incentive fee payment Share price to trigger the maximum incentive fee without any carry forward Maximum incentive fee payable (net of tax) without any carry forward 30 June , September , December ,647 The total impact on pro forma prospective distributable profit of the payment of the maximum incentive fees payable (net of tax) without any carry forward is a reduction of 0.36 cps to 6.95 cps. There is no change to net tangible assets as a result of this sensitivity. 42 Rounded to 3 decimal places. Refer to the description of the exchange ratio under the heading Exchange ratio on page 23. PROSPECTIVE FINANCIAL INFORMATION 69

72 STATUTORY PROSPECTIVE FINANCIAL INFORMATION (Forecast FY13) This section contains the prospective financial information for PFI assuming the Merger completes on 1 July 2013 as anticipated (Statutory Prospective Financial Information, or Forecast FY13 ) which has been prepared to enable future comparison against PFI s actual NZ GAAP financial results that will be prepared for the year ending 31 December This assumes the Merger occurs on 1 July 2013, and hence includes six months trading for DPF from the date of Merger, and a full year s trading for PFI. This Forecast FY13 for the Merged Group, includes: Prospective consolidated statement of comprehensive income, prospective consolidated balance sheet, prospective consolidated statement of changes in equity and prospective consolidated statement of cash flows. In this section, the assumptions and accounting policies adopted are as set out in the Pro Forma FY13 on pages 64 to 69 and 76 unless otherwise stated. 70 PROSPECTIVE FINANCIAL INFORMATION

73 Statutory Prospective Consolidated Statement of Comprehensive Income For the year ended 31 December 2013 All figures in $000 s OPERATING REVENUE Rental income 48,001 Interest income 3 Total operating revenue 48,004 OPERATING EXPENSES Audit fees and other fees paid to auditors for agreed upon procedures engagements 75 Directors fees 230 Interest expense and bank fees 13,030 Management fees 3,403 Non-recoverable property costs 1,447 Other expenses 1,618 Total operating expenses 19,803 Total operating earnings 28,201 NON OPERATING INCOME AND EXPENSES Unrealised net change in fair value of investment properties 6,136 Unrealised net change in fair value of derivative financial instruments 2,990 Total non operating income and expenses 9,126 Profit before taxation 37,327 TAXATION Current taxation 6,159 Deferred taxation (1,657) Total taxation 4,502 Profit for the period attributable to the shareholders 32,825 Other comprehensive income - Total comprehensive income for the year attributable to the shareholders 32,825 PROSPECTIVE FINANCIAL INFORMATION 71

74 Statutory Prospective Consolidated Statement of Changes in Equity For the year ended 31 December 2013 All figures in $000 s SHARE CAPITAL Balance as at 1 January ,471 Share issues 236,643 Share capital as at 31 December ,114 RETAINED EARNINGS Balance as at 1 January ,613 Profit/(loss) for the year 32,825 Other comprehensive income - Dividends to shareholders (18,831) Retained earnings as at 31 December ,607 Total equity as at 31 December , PROSPECTIVE FINANCIAL INFORMATION

75 Statutory Prospective Consolidated Statement of Financial Position As at 31 December 2013 All figures in $000 s CURRENT ASSETS Bank 94 Accounts receivable 748 Prepayments and other assets 2,641 Total current assets 3,483 NON-CURRENT ASSETS Goodwill 9,254 Prepayments and other assets 9,956 Investment properties 812,122 Total non-current assets 831,332 Total assets 834,815 CURRENT LIABILITIES Accounts payable, accruals and other liabilities 3,525 Taxation payable 2,359 Derivative financial instruments 5,107 Total current liabilities 10,991 NON-CURRENT LIABILITIES Borrowings 313,803 Deferred taxation 9,300 Total non-current liabilities 323,103 Total liabilities 334,094 Net assets 500,721 OWNERS EQUITY Share capital 408,114 Retained earnings 92,607 Total equity 500,721 PROSPECTIVE FINANCIAL INFORMATION 73

76 Statutory Prospective Consolidated Statement of Cash Flows For the year ended 31 December 2013 All figures in $000 s CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers 46,542 Payments to suppliers (7,794) Interest received 3 Interest and other finance costs paid (13,182) Income tax paid (4,891) Net cash flows from operating activities 20,678 CASH FLOWS FROM INVESTING ACTIVITIES Purchases and development of investment properties (18,709) Net cash flows from investing activities (18,709) CASH FLOWS FROM FINANCING ACTIVITIES Distributions to shareholders (18,831) Proceeds from term loans 28,300 Repayments to term loans (11,600) Cash acquired from business combination 85 Net cash flows from financing activities (2,046) Net change in cash and cash equivalents (77) Cash and cash equivalents at beginning of period 171 Cash and cash equivalents at end of period PROSPECTIVE FINANCIAL INFORMATION

77 Statutory Prospective Distributable Profit Per Share Calculations (Non-GAAP Financial Information) For the year ended 31 December 2013 All figures in $000 s Total comprehensive income for the year attributable to the shareholders 32,825 Less: Unrealised net change in fair value of investment properties (6,136) Less: Losses/(gains) on disposals of investment properties - Plus: Tax on depreciation claw-back on disposals of investment properties - Less: Unrealised net change in fair value of derivative financial instruments (2,990) Less: Deferred taxation (1,657) Less: Fixed rent reviews (387) Plus: Transaction costs 941 Less: Other (11) Total distributable profit 22,585 Shares on issue 315,956,559 Distributable profit per share (cents per share) Amount represents the sum of distributable profit divided by shares on issue on a quarter by quarter basis. Please refer to the assumptions regarding dividends for the amounts on a quarter by quarter basis. PROSPECTIVE FINANCIAL INFORMATION 75

78 Notes to the Statutory Prospective Financial Information (Forecast FY13) Specific assumptions Set out below are specific assumptions that differ from those adopted for the Pro Forma FY13. Merger The Merger is effective 1 July 2013, which has the following impacts on the Forecast FY13: Fair value, for the purposes of calculating goodwill, is measured as at that date; DPF s derivative financial instruments are terminated immediately prior to the Merger on 28 June 2013, and the forecast fair value of $9.357 million is settled by drawing on bank facilities; The current and deferred taxation charges reflect the reduced impact of the derivative financial instrument termination noted above. Transaction costs It is assumed that PFI expenses its share of the estimated transaction costs associated with the Merger. Dividend It is assumed that the following net dividends are paid: Dividend in respect of the quarter ended 31 March June September December 2013 PFI / Merged Group payment amount and date 1.70 cents per share (cps), to be paid 29 May cps, to be paid 28 June cps, to be paid 27 November cps, to be paid on 12 March 2014 DPF payment amount and date $2.12 per share, paid 15 May 2013 $2.11 per share, to be paid 28 June 2013 N/A N/A 76 PROSPECTIVE FINANCIAL INFORMATION

79 RECONCILIATION OF STATUTORY PROSPECTIVE FINANCIAL INFORMATION (Forecast FY13) TO MERGER PRO FORMA PROSPECTIVE FINANCIAL INFORMATION (Pro Forma FY13) Reconciliation of Net Assets All figures in $000 s Merged Group Net assets as per Pro Forma FY13 as at 31 December ,538 Net assets as per Forecast FY13 as at 31 December ,721 Difference (4,183) Represented by: DPF s comprehensive income for the six months ending 30 June 2013 included in Pro Forma FY13 but not in the Forecast FY13 7,743 Higher dividends assumed in Pro Forma FY13 as compared with the Forecast FY13 (10,985) DPF s share of the transaction costs are excluded in the Forecast FY13 whereas FY13 Pro Forma assumes all transaction costs affect opening Net Assets (941) Total (4,183) Reconciliation of Distributable Profit All figures in $000 s Merged Group Distributable profit as per Pro Forma FY13 as at 31 December ,071 Distributable profit as per Forecast FY13 as at 31 December ,585 Difference (7,486) Represented by: Pro Forma FY13 includes DPF s distributable profit for the six months ending 30 June 2013 (6,550) Pro Forma FY13 includes 12 months of lower interest rates as a result of treasury initiatives whereas Forecast FY13 includes 6 months at lower interest rates as a result of treasury initiatives (net of current tax) (880) Other (56) Total (7,486) PROSPECTIVE FINANCIAL INFORMATION 77

80 KPMG INVESTIGATING ACCOUNTANT REPORT The Directors Property For Industry Limited The Directors Direct Property Fund Limited 22 May 2013 Dear Directors Investigating Accountant s limited assurance report on the Merger Pro Forma Prospective Financial Information and the Statutory Prospective Financial Information (together the Prospective Financial Information ) for inclusion in the Information Memorandum This report has been prepared by KPMG in accordance with the terms of our engagement letter dated 19 March 2013 at the request of the directors of Property For Industry Limited and the directors of Direct Property Fund Limited (together, the Addressees ) for inclusion in the combined Notices of Meeting and Information Memorandum to be dated on or about 22 May 2013 ( Information Memorandum ). References to defined words and other terminology used in this report have the same meaning as set out in the Glossary to the Information Memorandum. Directors responsibilities The relevant Directors (being the PFI directors for information relating to PFI and Merged Group and the DPF directors for information relating to DPF) are responsible for the preparation and presentation of the Prospective Financial Information, including the assumptions based on best information that are reasonable and supportable (as required in FRS-42 Prospective Financial Information issued by the New Zealand Institute of Chartered Accountants), on which the Prospective Financial Information is based. KPMG responsibilities and scope of work Our responsibility is to perform a limited assurance engagement as described below and to express a conclusion based on the results of our work. We have conducted our work in accordance with International Standard on Assurance Engagements (New Zealand) 3000 Assurance Engagements other than Audits or Reviews of Historical Financial information issued by the Council of the New Zealand Institute of Chartered Accountants. Our procedures consisted primarily of enquiry, discussion and comparison and other such analytical review procedures we considered necessary so as to provide limited assurance as to whether anything has come to our attention that causes us to believe that the assumptions set in section 6 of the Information Memorandum, do not provide, in all material respects, reasonable and supportable basis for the Prospective Financial Information (as required in FRS-42) or that the Prospective Financial Information is unreasonable. The procedures selected depend on our understanding of the Prospective Financial Information, the DPF and PFI business plans, identified key assumptions, and our consideration of areas where material misstatements are likely to arise. Our procedures covered the reconciliations set out on pages 63 and 75. Other than as mentioned above, the scope of this engagement has not extended to performing any procedures by way of audit, review or verification of the underlying records or other sources from which the amounts included in the Prospective Financial Information were extracted. Our conclusion Based on our analysis of the Prospective Financial Information and the relevant Directors assumptions, which is not an audit, nothing has come to our attention that causes us to believe that the relevant Directors assumptions set out in Section 6 of the Information Memorandum, which are subject to the risks set out in Section 4 of the Information Memorandum, do not provide, in all material respects, a reasonable and supportable basis for the Prospective Financial Information (as required in FRS 42) or that the Prospective Financial Information is unreasonable. Actual results during the forecast period may vary materially from the Prospective Financial Information, as it is often the case that some events and circumstances do not occur as expected, or are not anticipated. We do not confirm, guarantee or express an opinion as to whether the actual results will approximate those forecast because assumptions regarding future events, by their nature, are not capable of independent substantiation. We completed the procedures on 22 May 2013 and our findings are reported as at that date. Restriction on use of our report This report is made solely to the Addressees for inclusion in the Information Memorandum. To the fullest extent permitted by law and subject to section 61 of the Securities Act 1978 we do not accept or assume responsibility to anyone other than the Addressees of this report for the conclusions that we have formed. We disclaim any assumption of responsibility for reliance on this report or the amounts included in the Prospective Financial Information for any other purpose other than that for which they were prepared. In addition, we take no responsibility for, nor do we report on, any part of the Information Memorandum not specifically mentioned in this report. Independence or disclosure of interest KPMG New Zealand does not have any interest in the outcome of the Merger other than the preparation of this Report and participation in due diligence in connection with the Information Memorandum for which normal professional fees will be received. We have also provided taxation advice to both PFI and DPF, both ongoing and specifically in relation to the Merger. This has not impaired our independence. KPMG has given, and has not, before delivery of a copy of the Information Memorandum for registration in accordance with section 41 of the Securities Act 1978, withdrawn its written consent to the distribution of the Information Memorandum with this report included in the form and context in which it is included. KPMG 78 PROSPECTIVE FINANCIAL INFORMATION

81 SECTION ADDITIONAL INFORMATION Performing together Transportation Auckland Corporation, 170 Swanson Road, Swanson, Auckland ADDITIONAL INFORMATION 79

82 Additional Information Names, addresses and other information Issuer The issuer of the shares to be issued to DPF Shareholders under the Merger is Property For Industry Limited (PFI). PFI s registered office is: Shed 24 Prince s Wharf 147 Quay Street Auckland 1010 New Zealand Directors As at the date of this Information Memorandum, PFI s directors are: Peter Hanbury Masfen Humphry John Davy Rolleston Anthony Montgomery Beverley Gregory John Reidy Further information about the proposed directors of PFI upon completion of the Merger, and executive team, is set out in Section 5 of this Information Memorandum. Promoters For the purposes of the Securities Act and the Securities Regulations, DPF, DPFM and each of DPF s and DPFM s directors (other than those directors who are also directors of PFI, as the issuer), being Arthur William Young, John Anthony Waller, Simon John Bufton and Malcolm John Lambert McDougall are promoters of the Merger. The registered office and principal place of business of both DPF and DPFM is: Shed 24 Prince s Wharf 147 Quay Street Auckland 1010 New Zealand Directors or associated persons to whom PFI Shares are issued Under the Merger, PFI Shares will be issued to all DPF Shareholders, including DPFM, who is an associated person of Gregory Reidy (a director of PFI). Experts and underwriter The Merger is not underwritten. The following experts are named in this Information Memorandum: Deloitte The Independent Expert Report has been prepared by Deloitte, Chartered Accountants. Deloitte s address is set out in the Directory. KPMG The Investigating Accountant Report has been prepared by KPMG, Chartered Accountants. KPMG s address is set out in the Directory. PwC The Independent Appraisal Report has been prepared by PricewaterhouseCoopers, Chartered Accountants. PwC s address is set out in the Directory. CBRE Limited Certain valuation figures (as set out below) have been provided by David Woolley, Shaun Jackkson, Gareth Strawbridge, Patrick Ryan, Andrew Muller, Marius Ogg, Phillip Diggelmann, Wouter Robberts, Scott Ansley, Jamahl Williams and Todd Sanford of CBRE Limited. Their qualifications are: David Woolley: BBS (VPM), MPINZ and ANZIV Shaun Jackson: BPA, SPINZ and ANZIV Gareth Strawbridge: BProp Patrick Ryan: SPINZ, ANZIV Andrew Muller: BCom (VPM), PINZ Marius Ogg: ANZIV, SPINZ Phillip Diggelmann: BCom (VPM) Wouter Robberts: MPINZ, ANZIV Scott Ansley: ANZIV, MPINZ Jamahl Williams: BBS (VPM), ANZIV, SPINZ Todd Sanford: BProp (Hons), MPINZ CBRE Limited s address is: Level 12 ASB Tower 2 Hunter Street P O Box 5053 Wellington 6011 Colliers International New Zealand Limited Certain valuation figures (as set out below) have been provided by Russell Clark, Leo Lee and Mark Parlane of Colliers International New Zealand Limited. Their qualifications are: Russell Clark: BCom (VPM), MPINZ Leo Lee: BCom, BProp Mark Parlane: BBS (VPM), ANZIV, SPINZ Colliers International New Zealand Limited s address is: Level Queen Street PO Box 1631 Auckland 1140 Jones Lang LaSalle Limited Certain valuation figures (as set out below) have been provided by Dave Wigmore, Arthur Harris, William Hickey, Nigel Fenwick and Lance Collings of Jones Lang LaSalle Limited. Their qualifications are: Dave Wigmore: BPA, ANZIV, SPINZ Arthur Harris: BSc, BPA, DipMan, DipBus (Fin) William Hickey: BProp, BCom, MPINZ, ANZIV Nigel Fenwick: BBS (VPM) Lance Collings: SPINZ, ANZIV Jones Lang LaSalle Limited s address is: Level 16 PwC Tower 188 Quay Street PO Box 165 Auckland ADDITIONAL INFORMATION

83 Each of Deloitte, KPMG, PwC, CBRE Limited, Colliers International New Zealand Limited and Jones Lang LaSalle Limited as experts, have given their consent and have not withdrawn their consent before delivery of this Information Memorandum for registration under section 41 of the Securities Act to the distribution of this Information Memorandum with the inclusion of the statements attributed to each of those experts in this Information Memorandum in the form and context in which they are included. Neither Deloitte, KPMG, PwC, CBRE Limited, Colliers International New Zealand Limited nor Jones Lang LaSalle Limited, nor any director, officer or employee of either of them, is or is intended to be, a director, officer or employee of PFI. Deloitte and KPMG have provided, and may in the future provide, professional advisory services to PFI. Further, CBRE Limited, Colliers International New Zealand Limited and Jones Lang LaSalle Limited have provided, and may in the future provide, valuation services to PFI. The appointment of PwC as Independent Appraiser to assess the fairness of the proposed changes to PFI s Management Agreement was approved by NZX Regulation on 20 March PwC has not undertaken any work for PFI, PFI s Manager, DPF or DPF s Manager within the last three years, and (other than providing the Independent Appraisal Report) is not currently providing any professional services to such persons. PwC may in the future provide professional advisory services to PFI. Valuers CBRE Limited Patrick Ryan and Andrew Muller of CBRE Limited have, as at 31 December 2012, prepared the valuations set out in Section 3 of this Information Memorandum in respect of the properties owned by PFI at 50 Carbine Road, 174b Marua Road, 102 Mays Road, 4-6 Mt Richmond Drive, 686 Rosebank Road and Patiki Road. Wouter Robberts of CBRE Limited has, as at 31 December 2012, prepared the valuations set out in Section 3 of this Information Memorandum in respect of the properties owned by PFI at 511 Mt Wellington Highway, 515 Mt Wellington Highway, 523 Mt Wellington Highway, 9 Nesdale Avenue, 58 Richard Pearse Drive, 5 Vestey Drive, 7 Vestey Drive, 9 Vestey Drive, 11 Vestey Drive and 15a Vestey Drive. Jamahl Williams and Todd Sanford of CBRE Limited have, as at 31 December 2012, prepared the valuation set out in Section 3 of this Information Memorandum in respect of the properties owned by PFI at 36 Neales Road, 1 Ron Driver Place and 41 William Pickering Drive. Marius Ogg and Phillip Diggelmann of CBRE Limited have, as at 31 December 2012, prepared the valuation set out in Section 3 of this Information Memorandum in respect of the property owned by PFI at 44 Mandeville Street. Scott Ansley of CBRE Limited has, as at 31 December 2012, prepared the valuation set out in Section 3 of this Information Memorandum in respect of the property owned by PFI at 8A & 8B Canada Crescent. David Woolley and Shaun Jackson of CBRE Limited have, as at 31 March 2013, prepared the valuation set out in Section 3 of this Information Memorandum in respect of the property owned by DPF at the Carlaw Gateway Precinct (15 Nicholls Lane). David Woolley and Gareth Strawbridge of CBRE Limited have, as at 31 March 2013, prepared the valuation set out in Section 3 of this Information Memorandum in respect of the property owned by DPF at the Carlaw Commercial Precinct (12-16 Nicholls Lane). The methods of valuation used, by each of the above valuers, were the capitalisation approach and the discounted cash flow approach. Colliers International New Zealand Limited Russell Clark and Leo Lee of Colliers International New Zealand Limited have prepared the valuations set out in Section 3 of this Information Memorandum in respect of the following properties: PFI properties (as at 31 December 2012): 15 Copsey Place, 8 Hugo Johnston Drive, 12 Hugo Johnston Drive, 509 Mt Wellington Highway, 320 Rosebank Road, 322 Rosedale Road and 326 Rosebank Road. DPF properties (as at 31 March 2013): 122 Captain Springs Road, 43 Cryers/63 Neales/29 Carpenters Road, 6-8 Greenmount Drive, 15 Jomac Place, 312 Nielson Street, 314 Nielson Street, 2 Pacific Rise, 18 Ron Driver Place, 78 Springs Road, 23 Zelanian Drive and 27 Zelanian Drive. Russell Clark of Colliers International New Zealand Limited has, as at 31 March 2013, prepared the valuation set out in Section 3 of this Information Memorandum in respect of the property owned by DPF at 229 Dairy Flat Highway. Mark Parlane of Colliers International New Zealand Limited has, as at 31 March 2013, prepared the valuations set out in Section 3 of this Information Memorandum in respect of the properties owned by DPF at 47 Dalgety Drive, 59 Dalgety Drive, 124 Hewletts Road, 124A Hewletts Road, 124B Hewletts Road, 3 Hocking Street and 1 Mayo Road. The methods of valuation used, by each of the above valuers, were the capitalisation approach and the discounted cash flow approach. ADDITIONAL INFORMATION 81

84 Jones Lang LaSalle Limited William Hickey and Arthur Harris of Jones Lang LaSalle Limited have prepared the valuations set out in Section 3 of this Information Memorandum in respect of the following properties: PFI properties (as at 31 December 2012): 17 Allens Road, 47 Arrenway Drive, 54 Carbine Road & 6a Donnor Place, 76 Carbine Road, 7 Carmont Place, 212 Cavendish Drive, 85 Cavendish Drive, 6 Donnor Place, 16 Hugo Johnston Drive, 1 Niall Burgess Road, 2-6 Niall Burgess Road, 3-5 Niall Burgess Road, 7-9 Niall Burgess Road, 10 Niall Burgess Road, 19 Omega Street, 48 Seaview Road, 170 Swanson Road, 36 Vestey Drive and 127 Waterloo Road. DPF properties (as at 31 March 2013): 2-4 Argus Place, 51 Arrenway Drive, Harris Road, 9 Narek Place, 306 Neilson Street, 15 Omega Street, 12 Southpark Place, 10c Stonedon Drive, 558 Te Rapa Road and 12 Zelanian Drive. Dave Wigmore and Arthur Harris of Jones Lang LaSalle Limited have, as at 31 March 2013, prepared the valuations set out in Section 3 of this Information Memorandum in respect of the properties owned by DPF at 5 Cable Street and 23 Cable Street. Nigel Fenwick and Arthur Harris of Jones Lang LaSalle Limited have, as at 31 December 2012, prepared the valuations set out in Section 3 of this Information Memorandum in respect of the properties owned by PFI at 8 McCormack Place and 50 Parkside Road. Lance Collings of Jones Lang LaSalle Limited has, as at 31 December 2012, prepared the valuation set out in Section 3 of this Information Memorandum in respect of the property owned by PFI at 127 Waterloo Road. The methods of valuation used, by each of the above valuers, were the capitalisation approach and the discounted cash flow approach. Each of the Valuers has no: relationship with PFI (other than as a valuer) nor interest in PFI or any associated person of PFI; interest in the properties that it has valued (except Patrick Ryan, who is a shareholder of DPF); or relationship with any other person who has a material interest in the properties that it has valued. Affirmation of valuation figures Each of the Valuers has affirmed each of their respective valuation figures that are set out in Section 3 of this Information Memorandum and has consented to the inclusion of this statement of affirmation. Terms of the Offer and Securities The securities being offered to DPF Shareholders under the Merger are ordinary shares in PFI. Those securities are only being offered to DPF Shareholders and are not otherwise available for application by members of the public. The number of securities being offered (and therefore the maximum number of securities being offered as required to be stated by Schedule 10 of the Securities Regulations) is 191,091,663 PFI Shares. The PFI Shares allotted to DPF Shareholders under the Merger will be issued in consideration of the cancellation of the DPF Shares on completion of the Merger. DPF Shareholders will not be required to apply, pay or send any money, for the new PFI Shares to be allotted to them under the Merger. Relationship with listed securities The PFI Shares to be issued on completion of the Merger are of the same class as existing, previously issued, ordinary shares of PFI that are quoted on the NZX Main Board under the code PFI. As such, the PFI Shares offered pursuant to the Merger will be fully paid and rank pari passu (equally) in all respects, including as to distributions and voting, with other fully paid existing PFI Shares. Each PFI Share will confer on the holder the rights described in the PFI Constitution (which may be amended from time to time) and as provided for in the Companies Act including the right to receive notices of, attend and vote on a poll or any resolution of shareholders. DPF Shareholders who are issued PFI Shares will be bound by the PFI Constitution and the terms of the Merger as set out in this Information Memorandum. A copy of the PFI Constitution is filed at the Companies Office of the Ministry of Economic and Development and is available for public inspection (including at govt.nz/companies). DPF Shareholders will receive PFI Shares for every DPF Share held, which DPF Shares will be cancelled. There is no relationship between the consideration to be provided by DPF Shareholders under the Merger and the market price of PFI Shares as the exchange ratio has already been set. The exchange ratio is described on page 23 of this Information Memorandum. The market price of PFI Shares quoted on the NZX Main Board may change between the date of the offer and the date when the ordinary shares are issued to DPF Shareholders. Any changes in market value of the PFI Shares will not affect the consideration for the PFI Shares under the Merger (being the DPF Shares), but will affect the market price of PFI Shares that the DPF Shareholders will receive. 44 Rounded to 3 decimal places. Refer to the description of the exchange ratio under the heading Exchange ratio on page ADDITIONAL INFORMATION

85 Sale of Minimum Holdings The Listing Rules prescribe minimum holdings for shareholders of listed companies. The amount of the minimum holding is dependent on PFI s share price. For example, if the share price exceeds $1.00 but does not exceed $2.00, the minimum holding would be 200 shares. PFI s constitution and the Listing Rules permit PFI s board to sell a PFI Shareholders shares if the number of shares they hold is less than the minimum holding set out in the Listing Rules. Where the Board wishes to exercise that power, they must give a PFI Shareholder three months notice of their intention. A PFI Shareholder may, in that three months, acquire sufficient PFI Shares so that they hold the required minimum holding. Information available under PFI s disclosure obligations From time to time, PFI provides information to NZX in accordance with its disclosure obligations under the Listing Rules. PFI has notified the following information to NZX, on or after the date on which the latest financial statements were notified to NZX, that is material to the offer of PFI Shares: Date 15 May May May 2013 Information Director Nominations for PFI Update on Merger Proposal PFI s First Quarter Dividend 15 April 2013 Merger Proposal 27 March Annual Report 18 February 2013 Portfolio Value Rises 3.3%; Annual Profit Rises to $26.9m If the information PFI has notified to NZX in accordance with the Listing Rules is material to the offer of PFI Shares and such information is misleading in the context of the offer of PFI Shares, PFI will correct or update such information by notifying NZX. PFI is not aware of any material information that is not generally available to the market, that PFI is not required to notify to NZX in accordance with the Listing Rules, which is likely to assist a prudent but non-expert person to make a decision in respect of the Merger. Financial Statements The latest audited financial statements for the PFI Group for the financial year ended 31 December 2012 that comply with, and have been registered under, the Financial Reporting Act 1993 are contained in PFI s 2012 Annual Report which has been sent to PFI Shareholders. Those financial statements were registered at the Companies Office on 15 April 2013 and notified to NZX on 18 February 2013, which together with PFI s Annual Reports for preceding financial years, are also available on PFI s website at Access to information and statements Copies of the information disclosed above under the heading Information available under PFI s disclosure obligations and PFI s 2012 Annual Report: are filed on a public register at the Companies Office of the Ministry of Economic Development and are available for public inspection (including at companies); and may be obtained, free of charge, from PFI by visiting PFI s website at or by making a request during normal business hours at PFI s registered office. Copies of DPF s 2012 Annual Report and its previous Annual Reports: are filed on a public register at the Companies Office of the Ministry of Economic Development and are available for public inspection (including at companies); and along with DPF s Interim Reports, may be obtained, free of charge, from DPF by visiting DPF s website at or by making a request during normal business hours at DPF s registered office. Directors statement In the opinion of PFI s directors, after due enquiry by them, PFI is in compliance with the requirements of the continuous disclosure provisions that apply to PFI. ADDITIONAL INFORMATION 83

86 Signatures Required under the Securities Act A copy of this Information Memorandum has been signed by each director of PFI (or his or her agent authorised in writing) as issuer, and by each Promoter, being DPF and DPFM and each director of DPF and DPFM. Directors of Property For Industry Limited: Directors of Direct Property Fund Limited Peter Hanbury Masfen Arthur William Young Humphry John Davy Rolleston John Anthony Waller Anthony Montgomery Beverley Simon John Bufton Gregory John Reidy Gregory John Reidy Signed for and on behalf of Direct Property Fund Limited By: Arthur William Young Signed for and on behalf of DPF Management Limited By: Gregory John Reidy Director of DPF Management Limited (who is not also a director of PFI or DPF): Malcolm John Lambert McDougall 84 ADDITIONAL INFORMATION

87 SECTION SCHEME PLAN, OBJECTION RIGHTS + COURT DOCUMENTS Focused TOGETHER Multispares, 48 Seaview Road, Seaview, Wellington SCHEME PLAN, OBJECTION RIGHTS + COURT DOCUMENTS 85

88 SCHEME PLAN SCHEME PLAN FOR THE MERGER OF PROPERTY FOR INDUSTRY LIMITED AND DIRECT PROPERTY FUND LIMITED Date: 22 May 2013 BACKGROUND This Scheme Plan, subject to the granting of Final Court Orders, sets out the steps to effect the merger of Property For Industry Limited (PFI) and Direct Property Fund Limited (DPF) by way of a scheme of arrangement under Part 15 of the Companies Act INTERPRETATION 1.1 Definitions In this Scheme Plan: Applicants mean PFI and DPF, and Applicant means any one of them. business day means any day other than a Saturday, Sunday, public holiday in New Zealand or a day on which banks are not open for over-the-counter business in Auckland. Companies Act means the Companies Act Constitution means the constitution of PFI as at the date of this Scheme Plan. Court means the High Court of New Zealand. DPF Shares means all of the shares on issue in DPF as at the Effective Time. DPF Shareholders means the holders of the DPF Shares as recorded on the DPF share register at the Effective Time. Effective Date means 1 July 2013, or such later date as the Applicants may agree in writing. Effective Time means 12.01am on the Effective Date, or such later time as the Applicants may agree in writing. Final Court Orders means the final orders of the Court in accordance with sections 236(1) and 237(1) of the Companies Act to implement the Scheme of Arrangement. Merger means the merger of PFI and DPF in accordance with this Scheme Plan. PFI Shares means ordinary shares in PFI, each of which shall confer on the holder all of the rights set out in section 36(1) of the Companies Act and the Constitution. Scheme Plan means this Scheme Plan. Scheme of Arrangement means the scheme of arrangement and amalgamation to be undertaken under Part 15 of the Companies Act in accordance with clause 2 of this Scheme Plan, subject to any amendment or variation made in accordance with this Scheme Plan. Share Registrar means Computershare Investor Services Limited. Special Meeting means the meeting of DPF members or the meeting of PFI members (as the case may be), and any adjournment of that meeting, to be held to consider, and if thought fit approve, (among other things) the Merger. 1.2 Interpretation: In this Scheme Plan, unless the context otherwise requires: (a) The division of this Scheme Plan into clauses and the inclusion of headings are for convenience of reference only and do not affect the construction or interpretation of this Scheme Plan. (b) References to clauses and schedules are to clauses and schedules of this Scheme Plan, and references to paragraphs within a Schedule are to paragraphs within that Schedule, unless specifically stated otherwise. (c) Words importing one gender include the other gender. (d) The singular includes the plural and vice versa. (e) References to dates and times are to dates and times in New Zealand. (f) References to currency are to New Zealand currency. (g) A reference to a person includes an individual, firm, company, corporation or unincorporated body of persons, or government body, in each case whether or not having separate legal personality, and a reference to a person is a reference also to that person s successors. (h) A reference to a statute or other law includes regulations and other instruments under it and consolidations, amendments, re-enactments or replacements of any of them. (i) Terms not defined in this Scheme Plan, have the meaning given to them in the information memorandum of which this Scheme Plan forms part. 1.3 Time of the essence Time will be of the essence as regards the performance of each matter or thing provided for in this Scheme Plan. 2 SCHEME OF ARRANGEMENT 2.1 From the date on which the Final Court Orders are granted until the Effective Time, no Applicant may (except with the prior written approval of the other Applicant): (a) change its capital structure (whether by way of share issue, dividend reinvestment, buyback, cancellation, sub-division, consolidation or otherwise); (b) declare or pay any distribution (other than in respect of the financial quarter ending 30 June 2013 in respect of which both PFI and DPF intend to declare a dividend on a basis consistent with its usual practice but with a record date and a payment date on or before 30 June 2013); or 86 SCHEME PLAN, OBJECTION RIGHTS + COURT DOCUMENTS

89 (c) enter into, or agree to enter into, a major transaction (as that term is defined in section 129 of the Companies Act). 2.2 At the Effective Time, PFI and DPF will amalgamate, with PFI continuing as the amalgamated company, with the effect that: (a) the DPF Shares will convert into PFI Shares on the basis that each DPF Shareholder will receive that number of PFI Shares equal to C (and PFI will issue those shares to the DPF Shareholders), where: C = S * R S = the number of DPF Shares held by that DPF Shareholder as at the Effective Time R = (being the agreed merger ratio) For this purpose, C will be rounded down to the nearest whole number. If, following the application of the above methodology and rounding, less than 191,091,663 PFI Shares have been allotted by PFI to the DPF Shareholders, those DPF Shareholders whose fractional entitlement to an additional PFI Share prior to rounding were closest to the nearest whole share will be allotted one additional PFI Share until 191,091,663 PFI Shares have been allotted to DPF Shareholders (provided that if two or more DPF Shareholders have the same fractional entitlement and the allotment of one additional PFI Share to each of those DPF Shareholders would result in more than 191,091,663 PFI Shares being allotted to DPF Shareholders, then PFI will draw lots on behalf of those DPF Shareholders to determine which of those DPF Shareholders will be allotted one additional PFI Share so that exactly 191,091,663 PFI Shares are allotted to DPF Shareholders). (b) PFI will continue as the amalgamated company with the name Property For Industry Limited and with a registered office and address for service at Shed 24, Prince s Wharf, 147 Quay Street, Auckland 1010, New Zealand; (c) the Constitution will remain the constitution of PFI as the amalgamated company; (d) the directors of the amalgamated company will be: Peter Hanbury Masfen 23 Bridgewater Road, Parnell, Auckland 1052 Humphry John Davy Rolleston 6 Wood Lane, Fendalton, Christchurch 8014 Anthony Montgomery Beverley 45 Lookout Road, Hataitai, Wellington 6021 Arthur William Young 8 Wanganella Street, Birkenhead, Auckland John Anthony Waller 11 Maungakiekie Avenue, Greenlane, Auckland 1051 Gregory John Reidy 25 St Andrews Road, Epsom, Auckland 1023 (e) PFI will succeed to all the property, rights, powers and privileges of DPF; (f) PFI will succeed to all the liabilities and obligations of DPF; (g) proceedings pending by, or against, DPF may be continued by, or against, PFI; and (h) a conviction, ruling, order or judgment in favour of, or against, DPF may be enforced by, or against, PFI. 2.3 As soon as reasonably practicable following the Effective Date, PFI will cause the Share Registrar to forward (or cause to be forwarded) by mail to each DPF Shareholder, at the address specified in the DPF share register (as applicable), a statement confirming their holding of PFI Shares. 2.4 Within 10 business days of the Final Court Orders being made by the Court, PFI will cause the Final Court Orders made by the Court to be delivered to the Registrar of Companies for registration in accordance with section 237(2) of the Companies Act. 2.5 The amalgamation under the Scheme of Arrangement will become effective on the basis that PFI is the amalgamated company, and section 225A of the Companies Act will apply as if the amalgamation had been effected pursuant to Part 13 of the Companies Act. 2.6 As soon as practicable following the Effective Time, the Registrar of Companies will: (a) issue a certificate of amalgamation evidencing the amalgamation of PFI and DPF pursuant to the Scheme of Arrangement, with PFI continuing as the amalgamated company, with effect from the Effective Date; and (b) remove DPF from the register of companies. 3 AMENDMENT 3.1 The Applicants reserve the right to amend, modify and/or supplement this Scheme Plan at any time and from time to time, provided that any such amendment, modification or supplement is approved by the Court and communicated to the applicable shareholders in the manner required by the Court (if so required). 3.2 Any amendment, modification or supplement to this Scheme Plan shall be effective only if it is proposed, consented to in writing, by the Applicants. 3.3 Each Applicant reserves the right to withdraw this Scheme Plan at any time prior to the Effective Time by giving written notice to the other Applicant, in which case this Scheme Plan shall cease to have any force or effect. SCHEME PLAN, OBJECTION RIGHTS + COURT DOCUMENTS 87

90 OBJECTION RIGHTS Shareholders of PFI and DPF (the Applicants) have the right to appear and be heard at the hearing for the Final Court Orders in respect of the Scheme of Arrangement. The Court makes the final decision of whether or not to implement the Scheme of Arrangement which is the final step in the Merger and can decide not to grant the Final Court Orders. If the Merger is approved and proceeds, then the Application for Final Court Orders is expected to be considered by the Court on 26 June Any shareholder who wishes to appear and be heard on the Application for Final Court Orders must file a notice of appearance or a notice of opposition (both containing an address for service) and, if they oppose the Application for Final Court Orders, any affidavits and a memorandum of submissions on which they intend to rely by 5.00 pm on 24 June 2013 and on the same day serve a copy on the Applicants at their address for service. The Applicants will serve upon that shareholder, at their address for service, a copy of the affidavits in support of the Application for Final Court Orders by 5.00 pm on 25 June In addition, any creditor of any Applicant or any other person (other than a shareholder of an Applicant) claiming to have an interest in the Scheme of Arrangement who wishes to appear and be heard on the Application for Final Court Orders must file an application for leave to be heard on the Application for Final Court Orders (containing an address for service), a notice of opposition, any affidavits and a memorandum of submissions upon which that person intends to rely by 5.00 pm on 24 June 2013 and on the same day serve a copy on the Applicants at their address for service. The Applicants will serve upon that person at their address for service a copy of the affidavits in support of the Application for Final Court Orders by 5.00 pm on 25 June The only persons entitled to appear and be heard at the hearing of the Application for Final Court Orders will be: the Applicants; those shareholders of the Applicants who file a notice of appearance or a notice of opposition to the Application for Final Court Orders in accordance with the above requirements; and those creditors or other persons (other than a shareholder of an Applicant) who claim to have an interest in the Scheme of Arrangement who file an application for leave to be heard and a notice of opposition to the Application for Final Court Orders in accordance with the above requirements and who are subsequently granted leave to appear and be heard at the hearing of the Application for Final Court Orders. Note that unless the Scheme of Arrangement is approved and implemented, the Merger will not proceed. 88 SCHEME PLAN, OBJECTION RIGHTS + COURT DOCUMENTS

91 COURT DOCUMENTS SCHEME PLAN, OBJECTION RIGHTS + COURT DOCUMENTS 89

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107 Independent Expert Report on the proposed merger of Property For Industry Limited and Direct Property Fund Limited 8 May

108 Contents Abbreviations and Definitions 1 1. Executive Summary 3 2. Overview of the Property Fund Sector 8 3. Overview of Property For Industry Overview of Direct Property Fund Overview of the Merged Group Merits of the Merger Fairness of the Merger Information, Disclaimer and Indemnity Qualifications, Independence, and Consent 52 About Deloitte

109 Abbreviations and Definitions $ New Zealand dollars Court DPF DPFM DPS DRP EBIT EBITDA FNZC FY Independent Expert Report Information Memorandum LPV Management Agreement Merged Group Merger Notices of Meeting NTA NZSX High Court of New Zealand Direct Property Fund Limited DPF Management Limited, the manager of DPF distributable earnings per share dividend reinvestment plan earnings before interest and tax earnings before interest, tax, depreciation, and amortisation First NZ Capital financial year ending 31 December for PFI, the Merged Group, and DPF in relation to 2013, and financial year ending 31 March in relation to DPFʼs historical financial results this report into the merits and fairness of the Merger the information memorandum to shareholders of PFI and DPF regarding the Merger listed property vehicle PFI Management Agreement and the Deed of Variation of Management Agreement dated 30 April 1999 PFI and DPF and their respective subsidiaries, following completion of the Merger the proposed merger of PFI and DPF, more fully described in the Information Memorandum the notices of meeting for PFI and DPF shareholders contained in the Information Memorandum net tangible assets the main board equity securities market operated by NZX 1

110 NZX PIE PFI PFIM Pro Forma Scheme of Arrangement WALT NZX Limited portfolio investment entity Property for Industry Limited PFIM Limited, the manager of PFI forecast FY13 financial information for the Merged Group as if the Merger had occurred on 31 December 2012 the scheme of arrangement and amalgamation to be undertaken under Part 15 of the Companies Act, as set out in section 8 of the Information Memorandum weighted average lease term 2

111 1. Executive Summary 1.1. Introduction Property For Industry Limited ( PFI ), an NZSX-listed industrial property fund, and Direct Property Fund Limited ( DPF ), an unlisted industrial and commercial property fund, are proposing to merge. It is proposed that the merger will be effected via a scheme of arrangement under Part 15 of the Companies Act 1993, and the resulting entity will be Property For Industry (the Merger ). Deloitte has been engaged to provide the shareholders of PFI and DPF with an independent expert report on the merits and fairness of the Merger. PFI had a market capitalisation of $288 million as at 31 March PFIʼs audited statement of financial position as at 31 December 2012 recorded total investment and development properties of $375 million and total equity of $250 million. DPFʼs audited statement of financial position as at 31 March 2012 recorded total investment and development properties of $403 million and total equity of $217 million. The Merger will amalgamate PFI, DPF and their respective subsidiaries (the Merged Group ), resulting in one of the largest listed industrial property companies in New Zealand with over $800 million of assets (at current valuations) and an expected market capitalisation of over $500 million. PFI is managed by PFIM Limited ( PFIM ), a subsidiary of DPF Management Limited ( DPFM ), which is the manager of DPF. DPFM is associated with McDougall Reidy & Co Limited through common directors and shareholders Proposed Merger PFI and DPF are proposing to merge by way of a Court-approved scheme of arrangement (the Scheme of Arrangement ), under which: PFI and DPF will amalgamate; DPF shareholders will receive PFI shares for every DPF share they hold, with their DPF shares being cancelled. (The manner in which entitlements will be rounded to whole shares is described in section 3 of the Information Memorandum); PFI will take and assume all the property, rights, powers, privileges, liabilities and obligations of DPF; PFI will continue as the merged company with the name Property For Industry Limited ; and PFI shares will continue to be quoted on the NZSX under the ticker PFI. 3

112 Schemes of arrangement under Part 15 of the Companies Act 1993 (the Act ) require that an application is made to the High Court of New Zealand (the Court ) to approve the scheme. As part of that process, DPF and PFI are seeking approval for the Scheme of Arrangement by way of special resolutions of PFIʼs and DPFʼs shareholders, prior to seeking the final Court order. Resolution 1 for each of DPF and PFI are special resolutions seeking approval of the Scheme of Arrangement. In order for the Merger to proceed, PFI and DPF must obtain the approval of 75% or more of each group of shareholders entitled to vote and voting on the matter. In addition to the special resolutions regarding the Scheme of Arrangement, PFI shareholders are being asked to vote on ordinary resolutions to approve of the proposed changes to the PFI Management Agreement and director remuneration (PFI resolutions 2 and 3). PwC has prepared a separate Independent Appraisal Report in relation to the proposed changes to the PFI Management Agreement. The resolutions relating to the Scheme of Arrangement and the changes to the PFI Management Agreement are interdependent and therefore for the Merger to proceed each of these resolutions must be passed. If any one of these resolutions is not passed then the Merger will not proceed. Under a scheme of arrangement, shareholders of the affected companies have the right to appear and be heard at the hearing for the final Court order. The Court makes the final decision on whether or not to implement a scheme of arrangement. If shareholder approval is obtained and the final Court order granted, the Merger is intended to be effected on 1 July Purpose of the Report Deloitte issues this report (the Independent Expert Report ) for the benefit of the shareholders of both PFI and DPF, to assist them in forming their own opinion on whether to vote in favour of or against the resolutions relating to the Scheme of Arrangement. We note that each shareholderʼs circumstances and objectives are unique. It is not possible to report on the merits and fairness of the Merger in relation to each shareholder. This Independent Expert Report is therefore necessarily general in nature. This Independent Expert Report is not to be used for any other purpose without Deloitteʼs prior written consent Basis of Evaluation There is no regulatory prescription of how to assess a merger being undertaken via a scheme of arrangement under the Act. Had the Merger been structured as a takeover of DPF by PFI then an Independent Adviserʼs Report under the Takeovers Code would have been required for DPFʼs shareholders, because DPF is a code company with more than 50 shareholders. We also note that the Merger would be a major transaction under the NZSX Listing Rules. Under certain circumstances (such as when related parties are involved) major transactions might require an Appraisal Report for the listed companyʼs shareholders. 4

113 We have therefore decided to be guided by the standards used in both the Takeovers Code and NZSX Listing Rules, and have applied these from the perspective of both sets of shareholders. The Takeovers Code requires the Independent Adviserʼs Report to assess the merits of a takeover offer, whereas the NZSX Listing Rules requires an Appraisal Report to consider the fairness of the transaction or proposal in question. Merits There is no legal definition of the term merits in New Zealand in either the Takeovers Code or in any statute dealing with securities or commercial law. The Takeovers Panel has specifically stated that it does not wish to prescribe the meaning of merits. However guidance can be taken from: the Takeovers Panelʼs guidance note on the role of independent advisers, dated August 2007; the ordinary meaning of the term merits ; and how that term has been interpreted in previous Independent Adviserʼs Reports. The Takeovers Panel guidance suggests that a comparison of the offer price (whether it is a cash or scrip offer) to the value of the target companyʼs shares is one aspect that should be considered, but this is only one of a number of issues that the adviser may usefully discuss in its report on the merits of the offer. Other potential issues mentioned in the Takeovers Panelʼs guidance include: if the offer is a scrip offer, then consideration of the prospects of the company whose shares are being offered, against the prospects of the target company; consideration of the position of the offerees if they opt not to accept the offer, including the prospects of the consideration being increased; and the likelihood of a competing higher bid for the target company. The New Collins Concise Dictionary of the English Language defines the term merit as the actual and intrinsic rights and wrongs of an issue, especially in a law case. Blackʼs Law Dictionary defines merit as the substance, elements or grounds of a cause of action or defence. These definitions imply that the essential elements of an issue should be considered in forming a view on the issue itself and an assessment is then made of the associated advantages and disadvantages of the issue from the perspective of the relevant party. For the purposes of this report, we consider that the Merger will have merit for the shareholders of PFI and DPF if, after considering the advantages and disadvantages of the proposed Merger, there are reasonable grounds to believe that each set of shareholders are likely to be better off if the Merger proceeds, and there are not likely to be any superior alternatives to the Merger. 5

114 Fairness The NZSX Listing Rules require an Appraisal Report to consider the fairness of a material transaction or proposal. The term fair has no legal definition in New Zealand either in the Listing Rules or in any statute dealing with securities or commercial law. Guidance Note Number 10 issued by the New Zealand Institute of Chartered Accountants ( Guideline on Independent Chartered Accountants Reporting as Experts to Shareholders ) states the expression of an opinion as to fairness will generally involve an assessment as to whether a transaction or proposal is just, impartial and equitable. There is considerable overlap in the definitions of merits and fairness. For the purposes of this report, if we conclude that the Merger has merit for both groups of shareholders, we will then consider if the terms of the proposed Merger are fair. In this context, we consider that the Merger will be fair if the benefits of the Merger are shared in a broadly equal manner between the two groups of shareholders. We also consider whether the change in management fees experienced by DPF shareholders if the Merger proceeds is fair. PwC has separately opined on the proposed changes in the PFI Management Agreement from the perspective of the existing PFI shareholders. Our opinion should be considered as a whole. Selecting portions of the evaluation without considering all the factors and analysis together could create a misleading view of the process underlying our opinion Deloitteʼs Opinion of the Merger In our opinion, after having regard to all relevant factors, the Merger has merit for the shareholders of both PFI and DPF, and the benefits of the Merger are shared fairly between the shareholders of PFI and DPF. The basis for our opinion is set out in more detail in sections 6 and 7. In summary, the key factors we have taken into account in forming our opinion are as follows: the Merger provides a number of portfolio or operational benefits to both sets of shareholders, such as smoothing out the lease expiry profile, and reducing the percentage exposure to individual tenants and properties; the Merger is expected to improve the liquidity of PFI shares, greatly improve liquidity for DPF shareholders, and potentially improve PFIʼs access to, and reduce the cost of, capital; there are no material negative financial impacts for either shareholder group: while the Merger dilutes DPF shareholdersʼ net tangible assets ( NTA ), it is expected to preserve the market value of DPF shareholdersʼ investment; the combination of the Merger and the buy-out of DPFʼs swaps is earnings accretive for both shareholder groups (although most of the accretion is due to the swaps buyout, which has an associated cost reflected in higher debt levels); 6

115 after removing the impact of the DPF swaps buy-out, and other normalisation adjustments, the Merger is expected to be broadly earnings neutral for both shareholder groups (on average over time); and while the NTA and earnings outcomes for DPF shareholders would have been approximately 2.5% better but for the 5% tilt in the Merger ratio in favour of PFI, we believe this is a reasonable trade-off for the materially greater liquidity they will likely achieve in the Merger (and a share of the other Merger benefits). the recent increase in PFIʼs share price does not, in our view, invalidate the Merger ratio or our analysis of the financial impacts of the Merger, because the underlying value of DPFʼs shares is likely to have increased in a similar manner; there do not appear to be any viable alternatives for either shareholder group that are likely to be superior to the Merger; and there is a reasonable basis for the Merger ratio, and the benefits of the Merger are shared fairly between the shareholder groups. We also believe the management fee changes that DPF shareholders will experience if the Merger proceeds are fair Acceptance or Rejection of Resolutions Voting for or against the resolutions in respect of the Scheme of Arrangement is a matter for individual shareholders based on their own views of the Merger. Shareholders should consult their own professional advisers if appropriate. In the event that any of the resolutions in respect of the Scheme of Arrangement and changes to the PFI Management Agreement are not approved by the PFI or DPF shareholders, then PFI and DPF will remain stand-alone entities. The implication of this situation is that the benefits of the Merger will not be available to either DPF or PFI shareholders. The potential exists for alternative or competing offers for the assets or the shares of DPF or PFI. However as at the date of this report, no approaches have been made to the directors or shareholders of either company Adequacy of Information We have obtained all the information that we believe is necessary for the purpose of preparing this Independent Expert Report. In our opinion, the information set out in the Information Memorandum and this Independent Expert Report is sufficient to enable DPFʼs and PFIʼs shareholders to understand all the relevant factors and to make an informed decision in respect of the Scheme of Arrangement. 7

116 2. Overview of the Property Fund Sector 2.1. Listed Property Vehicles Listed property vehicles ( LPVs ) are professionally managed real estate investment vehicles that allow investors to purchase an equity interest in a portfolio of properties. Currently there are nine NZSX LPVs, including PFI, with a range of different property category focuses, corporate structures and management arrangements (i.e. internally or external managed). While DPF is unlisted, it shares many of the other characteristics of an LPV (large property portfolio; professionally managed; broad spread of shareholders; no controlling shareholding block; focus on dividend yield and NTA growth). LPVs provide an opportunity for investors to hold stakes in investment-grade property portfolios, with professionals maintaining and improving the buildings, retaining tenants and actively managing the property portfolio and capital structure so as to maximise risk-adjusted returns. An investment in a LPV is different to a direct investment in property. The investor is exposed to a diverse portfolio of properties, as opposed to a single property, and the units or shares can be traded on the NZSX and therefore have greater liquidity. Investors evaluate LPVs by reference to the level of cash distributions and movements in share prices, and by assessing the security of the LPVʼs income stream, the quality of the fundʼs properties and tenants, the length of tenant leases, rental yields, appropriateness of the capital structure and the quality of the management Property Portfolio Metrics We discuss below some of the key metrics commonly used to describe and compare LPVs. We focus on the largest eight LPVs (i.e. excluding Augusta Capital Limited), and we include the metrics for DPF and the Merged Group for comparison. 8

117 Scale The following table provides information on the size of New Zealand LPVʼs property portfolios (and DPF for comparison). Greater scale typically provides an entity with advantages such as greater diversity of earnings, a stronger capital base to fund developments, and better share liquidity and access to capital. Presently, PFI and DPF are the 7 th and 8 th largest property entities, respectively. The Merged Group would be the 5 th largest listed property entity on the NZSX by total asset size. NZ Property Entities - Asset Base Total No. of Average $ millions Assets NTA properties property value Kiw i Income Property Trust 2, , Goodman Property Trust 1, Precinct Properties New Zealand Limited 1, Argosy Property Limited Merged Group DNZ Property Fund Limited Vital Healthcare Property Trust Direct Property Fund Limited Property For Industry Limited NPT Limited PFI, DPF and M erged Group figures as at 31 M arch Other entities presented at their most recent available balance date. Source: Annual reports, Deloitte analysis Property Mix The properties owned by LPVs are often classified into four categories: office, industrial, retail, and other (such as specialist healthcare properties). There are three LPVs with a focus on one property category: Vital Healthcare (medical properties); Precinct Properties (office) and PFI (industrial). The remainder are diversified across a combination of categories, albeit different combinations and relative focuses. DPFʼs portfolio, like PFIʼs, is also primarily focused on the industrial sector. As a result, the Merged Group will have one of the largest industrial property portfolios among the NZSX-listed LPVs. 9

118 Geographic Mix The chart below shows the geographic diversification of the property entitiesʼ portfolios. All the property entities with the exception of Vital Heathcare hold property investments only within New Zealand. The majority of Vital Healthcareʼs properties (75%) are located in Australia. PFI and DPF (and therefore the resulting Merged Group) have property portfolios concentrated within Auckland. WALT and Lease Expiry One of the key factors that managers of property entities focus on is their portfolioʼs lease profile. Specifically, they seek to extend the weighted average lease term ( WALT ) of the portfolio and smooth the lease expiry profile. The chart below shows the WALT for selected New Zealand property entities. DPF has one of the highest WALTs, while PFI is below the median industry WALT of 5.6 years. 10

119 2.3. Capital Structure and Liquidity Gearing Maintenance of appropriate debt levels and financial risk management policies are key areas of focus for property entities. Gearing (debt to total property assets) of 30% to 40% has become common in the LPV sector. DPF has one of the highest gearing ratios in the industry at 40%, versus an industry average of 36%. PFI has the second lowest gearing ratio at 33%. Institutional Ownership LPVs have varying levels of institutional ownership. PFI has relatively low institutional ownership at 21.1%. 11

120 Liquidity One of the benefits of investing in an LPV as opposed to investing directly into a specific property, is the greater liquidity available. That is, it is easier and less costly to sell some or all of an investment in shares than it is to sell a property. However, there are varying levels of liquidity amongst the LPVs. One measure of liquidity is the median daily value of share trading. The following table summarises the median daily value of trading over the past two years for the LPVs and DPF. 12

121 3. Overview of Property For Industry 3.1. Background PFI is a listed property company and is New Zealandʼs only LPV specialising in industrial property. PFI was formed by interests associated with Willis Bond & Co in 1993 and was listed on the stock exchange in December From 1999 to 2011 PFI was managed by AMP Capital Investors. In January 2012 PFIM Limited (a subsidiary of DPF Management Limited, a company associated with McDougall Reidy & Co) purchased the rights to manage PFI Property Portfolio PFIʼs nationwide portfolio of 50 properties had a total value of $400 million as at 31 March PFIʼs portfolio is focused on properties in the Auckland industrial sector. The charts below show PFIʼs asset allocation by category and geographic location. PFIʼs major property locations include Rosebank Road (Avondale; Auckland) and Mt Wellington Highway (Auckland). A full list of PFIʼs current property portfolio is shown in the Information Memorandum. 13

122 PFI has a total of 84 separate tenants for its 50 properties. The chart below shows PFIʼs lease expiry profile as at 31 March As at 31 March 2013, PFI had an occupancy rate of 98% Management of PFI PFI is managed by PFIM Limited ( PFIM ), a wholly-owned subsidiary of DPFM (a company associated with McDougall Reidy). DPFM is also the manager DPF. PFIM Limited receives management fees in accordance with the Deed of Variation of Management Agreement dated 30 April 1999 (the Management Agreement ). The management fee comprises a base fee calculated as a percentage of the total assets under management, and a performance fee based on shareholder return. The base fee is calculated as 0.70% per annum of total assets up to $175 million plus 0.35% per annum of total assets held above $175 million. The performance fee is payable when the total shareholder return for the quarter is greater than 10% per annum (2.5% per quarter). The amount payable is 10% of the shareholder return above 10% per annum, but subject to a cap equal to total shareholder return of 15% per annum. If the total shareholder return is greater than the 15% per annum cap or less than the 10% per annum threshold, then the amount of under or over performance is carried forward to the next quarter. Deficits and excesses are carried forward for up to seven quarters after which, if not applied to a fee, the carried forward balance expires. 14

123 3.4. Financial Position The table below summarises PFIʼs financial position at the two most recent year ends, and a forecast of the financial position as at 31 December PFI's Financial Position As at As at As at 31-Dec Dec Dec-13 $ 000s (audited) (audited) (forecast) Current assets 915 1, Prepayments and other assets 6,821 7,621 7,860 Trade and other payables (2,167) (3,259) (1,813) Current tax payable (509) (1,091) (1,415) Working capital 5,060 4,768 5,425 Non-current assets Investment and development property 350, , ,427 Non-current liabilities Interest bearing liabilities (102,500) (114,200) (133,100) Derivative financial instruments (9,454) (8,097) (5,107) Bank overdraft (116) - - Deferred tax liabilities (6,426) (7,881) (6,083) Total liabilities (118,496) (130,178) (144,290) Net Assets 237, , ,563 NTA($000's) 237, , ,563 Total Assets ($000's) 358, , ,080 NTA per share ($) Gearing 28.6% 29.7% 33.0% Shares on issue (000s) 219, , ,411 Source:Property for Industry 2011 and 2012 annual reports and PFI Forecast M odel In addition to gains on revaluations, movements in property values were also driven by acquisitions and disposals. Acquisitions and disposals were nil and $10.4 million for FY11, respectively, and $23.2 million and $15.6 million for FY12. Property values also include prepaid leasing costs and capitalised lease incentives totalling $5.1 million and $6.6 million for FY11 and FY12 respectively. PFI currently has a $150 million bank debt facility, of which $114.2 million was drawn as at 31 December 2012 ($102.5 million as at 31 December 2011). In accordance with its hedging policy, PFI has used interest rate swaps to fix a portion of its interest rate exposure. For the balance dates shown above, the interest rate swaps had a negative fair value (as the expected future interest rates are lower than the fixed rates of the swap contracts). 15

124 3.5. Financial Performance The table below summarises PFIʼs recent and forecast FY13 financial performance. PFI's Financial Performance Year ending Year ending Year ending $ 000s 31-Dec Dec Dec-13 (audited) (audited) (forecast) Income Rental income 30,589 29,214 31,458 Management fee income Total income 30,808 29,406 31,633 Property operating expenses (580) (1,329) (917) Management fees - base fee (1,865) (1,882) (2,009) Other administrative expenses (820) (862) (870) Net operating profit before financing 27,543 25,333 27,837 Net finance costs (8,277) (8,085) (8,643) Net operating profit after financing 19,266 17,248 19,194 Unrealised net change in fair value of derivative instruments (4,219) 1,357 2,990 Net change in value of property investments 3,653 12,302 2,768 Gain/ loss on disposal of investment property 261 1,059 - Net profit before tax attributable to shareholders 18,961 31,966 24,952 Current tax (3,490) (3,579) (4,271) Deferred tax 877 (1,455) 1,798 Net profit after tax attributable to shareholders 16,348 26,932 22,479 Rental yield 8.5% 8.2% 8.2% Weighted average number of shares (000s) 218, , ,411 Distributable earnings before tax per share (cents per share) Effective tax rate on distributable income 18.1% 20.8% 22.3% Distributable earnings after tax per share (cents per share) Percentage of after tax income distributed 100% 99% Cash distributions per share for the period (cents per share) Source:Property for Industry 2011 and 2012 annual reports and PFI Forecast M odel The financial performance for FY11 and FY12 is based on PFIʼs audited annual accounts. The FY13 forecast has been reviewed by KPMG (refer to section 6 of the Information Memorandum). The operating performance of PFI (as represented by the net operating profit before financing) reduced between FY11 and FY12, however it is forecast to improve in FY13. The reduction in FY12 was due to: a combination of property sales ($0.8 million rent reduction in FY12) and vacancies ($0.6 million rent reduction in FY12); and property expenses increased from $0.6 million to $1.3 million due to the profit impact of the adjustment of various prepayments and other assets, and increased costs associated with vacancy during the year. Distributable earnings per share ( DPS ) decreased between FY11 and FY12 as a result of the reduction in operating profit. 16

125 3.6. Shareholders As at 31 March 2013 PFI had million shares on issue. The name of, number of shares held by, and percentage holding of, the ten largest shareholders as at 31 March 2013 are set out below: Top 10 Shareholders as at 31 March 2013 % of total Shareholder No. of shares shares FNZ Custodians Limited 16,884, % National Nominees New Zealand Limited 13,822, % Custodial Services Limited 10,278, % Investment Custodial Services Limited 9,598, % BNP Paribas Nominees (NZ) Limited 8,259, % Custodial Services Limited 4,414, % Private Nominees Limited 4,130, % Accident Compensation Corporation 4,086, % Masfen Securities Limited 4,000, % Superlife Trustee Nominees Limited 2,804, % Total top 10 shareholders 78,278, % Other shareholders 142,131, % Total shares on issue 220,410, % Source: M anagement information Most of the large shareholders listed above are custodians holding shares on behalf of investors. There were no substantial security holders (holding a beneficial interest in 5% or more of PFIʼs shares) as at 31 March Share Trading Historic Trading The chart above shows the share price history and the trading volume for PFI since March We note the following: PFIʼs shares have traded between $0.98 and $1.55 since March The downward trend over the period from late 2007 to early 2009 reflects the effect of the global financial crisis. PFIʼs share price started recovering from early 2009 (increasing from its lowest share price of $0.98 in December 2008). 17

126 As can be seen in the following chart, PFI has outperformed the NZX Gross Property Index since August The following chart shows that PFIʼs shares traded at a premium to NTA per share from December 2002 until PFIʼs share price then declined to levels below NTA per share during 2008 and 2009, as the market reacted more strongly than property valuers to the impacts of the global financial crisis on property values. Share prices have generally been on an upward trend since Over 2011 and 2012 PFIʼs shares traded at a premium to NTA that averaged approximately 9%. 18

127 Recent Share Trading Since February 2013 PFIʼs share price, and the share price of LPVs generally, have risen strongly, as shown in the chart below. As at 24 April 2013, PFIʼs share price was $1.34, an 18% premium to NTA. Trading Volume and Value The volume and value of trading in PFIʼs shares is relatively low compared to other LPVs. Over the last two years, PFIʼs median and average daily trading values were approximately $112,000 and $151,000 respectively. This compares to median and average daily trading values for all LPVs of $370,000 and $572,000 respectively. 19

128 4. Overview of Direct Property Fund 4.1. Background Direct Property Fund is an unlisted property investment company focused on industrial and, to a lesser extent, commercial property. It was formed in November 2003 by executives associated with Willis Bond & Co Auckland, which is now called McDougall Reidy & Co, a private investment firm specialising in the property sector. DPF has raised money from investors seeking a diversified exposure to industrial and commercial property, with a medium to long term investment horizon. In general, these investors have viewed their investment in DPF as an alternative to direct property ownership. The price at which shares have been traded has been based on the value of the underlying property portfolio, and the cash distributions have been equal to the fundʼs cash earnings Property Portfolio As at 31 March 2013, DPFʼs property portfolio had a value of $414 million. DPFʼs portfolio is focused on properties in the Auckland industrial sector. The charts below show DPFʼs asset allocation by category and geographic location. 20

129 As at 31 March 2013, DPF had 55 separate tenants on its 33 properties. The chart below shows DPFʼs lease expiry profile as at 31 March DPFʼs occupancy rate declined from 98.6% in March 2011 to 94.6% at March 2012 primarily due to the failure of two tenancies in East Tamaki and Wiri. As at 31 March 2013 the occupancy rate was 96.3% Management of DPF Direct Property Fund is managed by DPF Management Limited. DPFM wholly owns PFIM, the manager of PFI. DPFM has a number of shareholders in common with McDougall Reidy & Co Limited. DPF pays DPFM a single management fee based on the value of assets under management (i.e. there is no separate performance fee). The fee is calculated as the sum of: 0.75% per annum of DPFʼs portfolio value up to $250 million; 0.55% per annum of the value from $250 million to $500 million; and 0.45% per annum of the value above $500 million. 21

130 4.4. Financial Position The table below summarises DPFʼs financial position at the two most recent year ends, and a forecast of the financial position as at 31 December The latter has been prepared as if DPF had been listed for all of 2013, so that its tax status would change to that of a listed Portfolio Investment Entity ( PIE ) and therefore be consistent with tax status of PFI and the Merged Group. DPF's Financial Position As at As at As at 31-Mar Mar Dec-13 $ 000s (audited) (audited) (forecast) 1 Current assets 1, Prepayments and other assets 11,361 1,730 4,738 Trade and other payables (3,092) (3,017) (1,981) Current tax payable - - (956) Working capital 9,572 (937) 2,112 Non-current assets Investment and development property 383, , ,695 Non-current liabilities Interest bearing liabilities (179,330) (173,600) (173,300) Derivative financial instruments (9,558) (11,264) (7,695) Deferred tax liabilities - - (1,063) Total liabilities (188,888) (184,864) (182,058) Net Assets 204, , ,750 NTA($000's) 204, , ,750 Total Assets ($000's) 396, , ,745 NTA per share ($) Adjusted NTA per share ($) Gearing 45.5% 43.0% 41.2% Shares on issue (000s) 1,439 1,540 1, Audited M arch 2013 figures were not avaliable at the date of this report. 2. Adjusted NTA is net of any dividends payable and liability or asset relating to interest rate swaps. Source: DPF 2012 annual report and M anagement DPF model Key matters to consider when reviewing DPFʼs financial position are: Movements in property values were driven by property devaluations of $1.7 million in FY12 and net acquisitions and capital expenditure of approximately $22 million. FY12 property values also include prepaid leasing costs and capitalised lease incentives of $1.2 million. During FY12 DPF raised $6.4 million of new capital through a renounceable rights issue. Private placements raised $2.2 million, and $4.2 million of shares were issued for the purchase of a Hamilton property. The dividend reinvestment plan ( DRP ) raised $1.5 million in FY11 and $2.0 million in FY12. 22

131 4.5. Financial Performance The table below summarises DPFʼs historical financial performance for FY11 and FY12, and forecast performance for The FY13 forecast has been reviewed by KPMG (refer to section 6 of the Information Memorandum). DPF's Financial Performance Year ending Year ending Year ending $ 000s 31-Mar Mar Dec-13 (audited) (audited) (forecast) 1 Income Rental income 30,475 31,819 32,053 Total income 30,475 31,819 32,053 Management fees - base fee (2,572) (2,637) (2,751) Other administrative expenses (507) (484) (875) Property operating expenses (795) (963) (614) Net operating profit before financing 26,601 27,735 27,812 Net finance costs (11,694) (11,449) (11,498) Net operating profit after financing 14,907 16,286 16,315 Unrealised net change in fair value of derivative instruments (2,867) (1,706) 4,408 Net change in value of property investments 1,761 (1,711) 3,368 Gain/ loss on disposal of investment property (450) 706 (757) Net profit before tax attributable to shareholders 13,351 13,575 23,335 Rental yield 8.3% 8.2% 7.6% Weighted average number of shares (000s) 1,417 1,478 1,551 Distributable earnings before tax per share ($ per share) Percentage of after tax income distributed 100% 97% Cash distributions per share for the period ($ per share) Audited M arch 2013 figures were not avaliable at the date of this report. Source: Direct Property Limited 2012 annual report and management DPF model In FY11 and FY12, operating profit was adversely impacted by the failure of two tenants. This resulted in reduced rental income and increased operating expenses (rates, insurance, etc.) on vacant properties. Other administrative expenses are abnormally high in the FY13 forecast due to the establishment of a one-off provision of $435,000 in respect of the non-cash components of certain fixed rental arrangements. 23

132 4.6. Shareholders The table below shows the composition of DPFʼs shareholders as at 31 March DPF Shareholder Spread Shareholding No. of No. of % of total % of Size shareholders shares shares shareholders % 2.2% , % 5.8% , % 15.7% , % 22.1% 1,000-1, , % 18.5% 2,000-4, , % 19.9% 5,000-9, , % 10.1% 10,000-49, , % 5.6% 50,000-99, , % 0.2% 503 1,550, % 100.0% Independent directors shareholdings 17, % Manager's shareholding 27, % Shareholders of the Manager shareholdings 76, % 121, % Source: M anagement information DPFʼs shareholder base is relatively concentrated. At 31 March 2013 DPF had a total of 503 investors with an average investment of over $450,000. Of these, 85 shareholders have over $700,000 invested Share Trading Historic Trading The manager of DPF (DPFM) and ShareMart (an electronic trade-matching service) each facilitate trading of DPF shares. Most of the volume has been transacted via the manager - the majority by matching buyers and sellers, and a relatively small proportion by DPF repurchasing sellersʼ shares for subsequent issue to buyers. Historically, the shares have traded at a value around DPFʼs definition of adjusted NTA value per share. The adjusted NTA has typically been calculated by deducting any dividends to be declared in relation to the period and after adding back the value of DPFʼs fixed interest rate swaps. DPF has undertaken a number of renounceable rights issues and also operated a dividend reinvestment plan to raise capital. The renounceable rights issues have all been priced at adjusted NTA, while the DRP has been at a 2.5% discount to adjusted NTA. 24

133 The following chart shows the trading price over the past two years. For this period the adjusted NTA, and therefore the share price, has been at a premium of approximately 4% to unadjusted IFRS NTA. Trading Volume and Value The trading in DPF shares has been limited in volume. The average daily trading value of DPF shares over the last two years has been approximately $38,000 per day, compared to an average daily trading volume for PFI of approximately $151,000 and the average for all LPVs of $572,000. Recent Trading As discussed in section 3.7, the share prices of LPVs have risen strongly over the last couple of months. For example, as at 24 April 2013 PFI traded at $1.34, an 18% premium to NTA. Over the same period, there has been no trading in DPF shares. DPFM has over $3 million of requests to acquire shares, and no shareholders willing to sell at the current adjusted NTA. This indicates that, as with the LPVs, investors perceive the current value of DPFʼs shares to be materially above NTA. 25

134 5. Overview of the Merged Group 5.1. Introduction The Merger will result in a listed property company with $814 million of property assets as at 30 June 2013 (of which $664 million will be industrial property), making it one of the largest industrial property LPVs. The Merged Group is forecast to have net tangible assets of $481 million as at 30 June 2013 and an expected market capitalisation of over $500 million. This is a significant increase in scale to either stand-alone entity. This section outlines the expected property and financial metrics for the Merged Group Property Portfolio The Merged Group will consist of mainly industrial property, with most located in Auckland market. 26

135 The WALT of the Merged Group, at 5.6 years, is a blend of the WALTs for the DPF and PFI portfolios. The lease expiry profiles are somewhat complementary and therefore smooth the percentage of leases that expire in a particular year. The resulting lease expiry profile is shown below Management of Merged Group The Merged Group will be managed by PFIM Limited, under an amended and restated version of the PFI Management Agreement. Under the Merger, PFIʼs management contract with PFIM will continue, with PFIM managing the Merged Groupʼs entire property portfolio. The key terms of the (amended) Management Agreement will be: the base fee will be calculated as the sum of: 0.725% per annum of the Merged Groupʼs total assets excluding goodwill up to $425 million; 0.45% per annum of the total assets from $425 million to $775 million; and 0.35% per annum of the value above $775 million; and a performance fee that is payable when the total shareholder return for a quarter is greater than 10% per annum (2.5% per quarter). There is no change to the calculation of this performance fee from the current PFI performance fee as described in section 3.3. The amended thresholds for the base fee calculation are designed to provide PFIM with a base fee for managing the Merged Group that is similar to the total base fees currently being paid to PFIM and DPFM for managing PFI and DPF respectively. The fairness of the proposed changes to PFIʼs Management Agreement for PFIʼs shareholders is the subject of an Independent Appraisal Report by PwC. In section 7.2, we consider the fairness of the changes in the management fees that the Merger would entail for DPF shareholders. 27

136 5.4. Pro Forma Financial Position The table below summarises the pro forma financial position of the Merged Group as at 28 February 2013 and 31 December 2013, as if the Merger had occurred on 31 December 2012 ( Pro Forma ). The Pro Forma forecast has been reviewed by KPMG (refer to section 6 of the Information Memorandum). Merged Group Financial Position As at As at 28-Feb Dec-13 $ 000s (pro forma) (pro forma) Current assets Prepayments and other assets 11,499 12,597 Trade and other payables (3,982) (3,541) Current tax payable (1,199) (2,638) Working capital 7,096 7,259 Non-current assets Investment and development property 781, ,122 Goodw ill 9,761 9,761 Non-current liabilities Interest bearing liabilities (291,698) (318,198) Derivative financial instruments (6,710) (5,107) Deferred tax liabilities (9,849) (9,300) Total liabilities (308,255) (332,605) Net Assets 490, ,537 Source: M anagement information The Pro Forma forecasts assume: that the Merger had occurred on 31 December 2012, and therefore incorporate periods of operating as the Merged Group; property revaluations in December 2013 totalling $4.5 million (see section 6 of the Information Memorandum); the DPF swap portfolio is closed out at fair value prior to the Merger and new swaps are entered into by the Merged Group at prevailing swap rates; and that future interest rates are consistent with market forecasts. The Merger will result in goodwill on the balance sheet of the Merged Group. The goodwill arises because the fair value of the PFI shares being issued (191 million at PFIʼs share price on the Merger date) is likely to be greater than DPFʼs NTA. The actual amount of goodwill on the Merged Groupʼs balance sheet will depend on the relationship between PFIʼs share price and DPFʼs NTA at the time of the Merger. As part of the Merger, DPF intends to realise its interest rate swap portfolio and the Merged Group will enter into new swaps to maintain compliance with PFIʼs hedging policy. This will result in a reduction in the derivative financial instruments liability and an increase in debt. This is reflected in the financial position table above. 28

137 5.5. Pro Forma Financial Performance The following table summarises the Pro Forma forecast financial performance of the Merged Group for the 12 months ending 31 December 2013, assuming a full year of operations as the Merged Group. Merged Group Financial Performance Year ending $ 000s 31-Dec-13 (pro forma) Income Rental income 63,687 Total income 63,687 Management fees - base fee (4,788) Other administrative expenses (1,604) Property operating expenses (1,532) Net operating profit before financing 55,763 Net finance costs (17,356) Net operating profit after financing 38,407 Unrealised net change in fair value of derivative instruments 2,990 Net change in value of property investments 6,136 Gain/ loss on disposal of investment property (757) Net profit before tax attributable to shareholders 46,776 Taxation (6,209) Net profit after tax attributable to shareholders 40,567 Source: M anagement information The Pro Forma forecast assumes a performance fee is not payable, as any outperformance of the threshold would not exhaust the accumulated underperformance of the fund over the past seven quarters. The increase in property values over the period is a result of a $1.7 million revaluation of PFI properties in February 2013 and forecast revaluations on the total portfolio of $4.5 million in December Other administrative expenses are abnormally high in the Pro Forma forecast due to the establishment of a provision of $435,000 in respect of the non-cash components of certain fixed rental arrangements. The Pro Forma forecast includes $145,390 of administrative cost savings as a result of the Merger, consisting of: a 50% cost saving ($87,277) on DPFʼs professional services (legal, accounting, and other professional fees); cost savings of $54,512 in relation to share registry, annual general meetings, and interim and annual reports, as a result of being one entity as opposed to two; and a small saving of $3,600 on board costs, albeit with the same number of directors as the two stand-alone entities. The Merger will also result in an interest cost saving of $2.8 million due to the close-out of the DPF swaps and a slightly lower overall margin and better utilisation of the combined banking facilities. 29

138 5.6. Capital Structure and Shareholders The Merger will result in an increase in PFI shares outstanding from million to million. The existing PFI shareholders will own 53.6% of the Merged Group and DPF shareholders will hold the remaining 46.4%. Merged Group Shareholding DPF shares Merger ratio PFI shares % PFI shares 220,410, % DPF shares 1,550, ,091, % Merged Group shares 411,502, % Source: M anagement information DPF has 503 shareholders, who will become shareholders in the Merged Group. There are no substantial shareholders (holding 5% or more) in either DPF or PFI, and therefore there will be no substantial shareholders in the Merged Group. This also means that there are no shareholders who have any significant influence over the company and there are no shareholders who are able to single-handedly pass or block ordinary or special resolutions. The manager of DPF holds 1.8% of the shares in DPF, and upon the Merger it will hold 0.8% of the Merged Group. Certain shareholders of DPFM also individually own a total of 4.9% of DPF and will therefore own approximately 2.3% of the Merged Group Summary of Merged Group The table below provides a summary of some of the key portfolio and financial metrics for PFI, DPF and the Merged Group. Portfolio and Financial Statistics As at 31 March 2013 PFI DPF Merged Group Portfolio value $400m $414m $814m No. of properties No. of tenants WALT 4.8 years 6.4 years 5.6 years Contract yield 8.2% 7.6% 7.9% Occupancy rate (2013) 98.2% 96.3% 97.2% Contract rental (2013) $32.8m $31.7m $64.5m Asset mix 97% Industrial, 67% Industrial, 82% Industrial, 3% Other 33% Other 18% Other Geographic mix 89% Auckland, 11% Other 85% Auckland, 15% Other 87% Auckland, 13% Other Distributable earnings (FY13) $14.5m $13.4m $30.1m Gearing (loan to value) 32.6% 40.3% 38.0% Net tangible assets $254m $230m $480m Shares in Merged Group 53.6%, 220.4m 46.4%, 191.1m 100%, 411.5m 1 P FI and DPF have two tenants in common. Source: M anagement information 30

139 5.8. Merger Exchange Ratio The Boards of DPF and PFI reached agreement on the terms of the Merger after extensive due diligence and negotiations. These negotiations recognised a number of factors including historical trading premiums to NTA for each entity, the historic earnings and distribution yields of each entity, the portfolio characteristics of each entity, the costs associated with PFI raising capital to buy DPF's assets, the costs of DPF listing independently, and indexation and liquidity benefits for both PFI and DPF. These negotiations resulted in a Merger exchange ratio of PFI shares for each DPF share. This ratio was calculated as shown in the following table. Merged Group Shareholding PFI DPF Net Assets at 28 Feb ,629, ,976,181 Adjustments Declared but unpaid dividends (4,077,598) Undistributed earnings (2,537,678) (2,189,741) DPF deferred tax (244,767) Bow den road acquisition revaluation 400,000 Net assets for merger ratio calculation 250,414, ,541,673 Number of shares 220,410,728 1,550,842 NTA per share Premium 9.0% 4.0% Merger Ratio Source: M anagement information The Merger ratio was calculated using the 28 February 2013 NTA values for PFI and DPF, adjusted for the following factors: DPF paid a dividend relating to earnings over the period 1 October 2012 to 31 December 2012 during February, whereas PFI will pay a dividend relating to the period in March. Therefore an adjustment is required for PFI; undistributed earnings of DPF and PFI over the period 1 January 2013 to 28 February 2013 are removed; as DPF is an unlisted PIE, it does not account for deferred tax and therefore an adjustment is required to bring the deferred tax liability on balance sheet and consistent with the intended future tax treatment; as at 28 February 2013, PFI had entered an unconditional contract to acquire a property on Bowden Road, Mt Wellington. The acquisition of this property completed on 15 March 2013 and its valuation has been assessed at $400,000 greater than its purchase price. As there was an unconditional commitment to acquire the property at 28 February 2013, this gain is brought into PFI's NTA position; and a 9% premium was applied to the PFI adjusted NTA and a 4% premium was applied to the DPF adjusted NTA, to recognise the fundsʼ relative trading price premiums over IFRS NTA over the last two years and the other factors noted above such as the differences in liquidity and the costs of raising capital or listing. 31

140 6. Merits of the Merger 6.1. Introduction As explained in section 1.4, our approach to evaluating the Merger is to consider the merits of the Merger from the perspective of both sets of shareholders. If the transaction is considered to have merit for both PFIʼs and DPFʼs shareholders, we then consider (in section 7) whether the terms of the Merger and the split of the benefits are fair for each shareholder group. In assessing the merits of the Merger, we have considered three broad categories of impacts: portfolio or operational impacts; liquidity and other capital markets impacts; and financial impacts. We have also considered: whether our assessment of the Merger is affected by the recent increases in PFIʼs share price; and whether there are likely to be better alternatives to the Merger available to either shareholder group Portfolio or Operational Impacts The Merger would result in a number of portfolio or operational benefits that are shared between PFIʼs and DPFʼs shareholders, including: smoother lease expiry profile; complementary tenant profiles; operational benefits of scale: reduced exposure to individual tenants or properties; enhanced ability to attract or retain tenants; enhanced ability to undertake developments; and removal of the managerʼs split focus and the potential for conflicts. We discuss each of these in turn below. 32

141 Smoother Lease Expiry Profile The merging of PFI and DPF smooths out the lease expiry profile, particularly the high proportion of PFIʼs leases that expire in 2016 and 2017, but also to a lesser extent DPFʼs expiries in 2015 and In the Merged Group no more than 13% of leases expire in any one year for the next nine years, compared to PFIʼs high lease expiries of 22% and 17% in 2016 and 2017 respectively. This smoother lease expiry profile is expected to reduce the risk and improve the stability of earnings and cash distributions. Complementary Tenant Profiles The tables below show the top 10 tenants and their contract rent (at 31 March 2013) for DPF, PFI and the Merged Group. DPF - Top 10 Tenants PFI - Top 10 Tenants Merged Group - Top 10 Tenants Contract Rent Contract Rent Contract Rent % Rental at 31 March 2013 at 31 March 2013 at 31 March 2013 income Fisher & Paykel Appliances Ltd 5,076,669 DHL Supply Chain (NZ) Ltd 2,281,036 Fisher & Paykel Appliances Ltd 5,076, % Goodman Fielder Ltd 2,305,011 Fletcher Building 2,219,520 Fletcher Building 2,905, % Sinclair Knight Merz Ltd 2,228,927 Wickliffe NZ Ltd 1,756,167 Goodman Fielder Ltd 2,305, % Southern Spars Holdings Ltd 1,438,038 Pharmacy Retailing (NZ) Ltd 1,624,083 DHL Supply Chain (NZ) Ltd 2,281, % Nestle NZ Ltd 1,190,922 Brambles New Zealand Ltd 1,402,965 Sinclair Knight Merz Ltd 2,228, % Lion Liquor Property Division 1,153,559 Mainfreight Ltd 1,081,841 Wickliffe NZ Ltd 1,756, % SCA Hygiene Ltd 1,000,000 Polarcold Stores Limited 1,080,000 Pharmacy Retailing (NZ) Ltd 1,624, % Yakka NZ Ltd 935,714 Electrolux (NZ) Limited 1,006,654 Southern Spars Holdings Ltd 1,438, % Carter Holt Harvey Ltd 906,103 Transportation Auckland Corporation Ltd 924,261 Brambles New Zealand Ltd 1,402, % Massey University 883,458 New Zealand Comfort Group Ltd 828,804 Carter Holt Harvey Ltd 1,310, % Top 10 Tenants 17,118,400 Top 10 Tenants 14,205,331 Top 10 Tenants 22,329, % Other 15,832,203 Other 19,308,557 Other 44,135, % Total 32,950,603 Total 33,513,888 Total 66,464, % Source: Management information, 31 March 2013 There is very little overlap between the two tenant groups. Of the tenants in either top 10 list, only Fletcher Building and Carter Holt Harvey are tenants of both funds, which is why their rent figures are higher in the Merged Group list. 33

142 Because of the low level of tenant overlap, the exposure to any individual tenant approximately halves in percentage terms as a result of the Merger. For example, Fisher & Paykel Appliances drops from 15.4% of DPFʼs rental income to 7.6% of the Merged Group. Overall, the exposure to the top 10 tenants drops to 33.6% as shown in the following charts below. The greater spread of tenants, and the lower percentage exposure to each tenant, reduces risk in the Merged Group relative to PFI and DPF on a stand-alone basis. Operational Benefits of Scale There are a number of operational benefits from the increased scale created by the Merger. Firstly, there is greater diversity of, and lower percentage exposure to, individual tenants or properties. As discussed above, exposure to individual tenants is approximately halved. Similarly, the exposure to individual properties is materially reduced. This benefit is somewhat greater for DPF, which has a relatively higher exposure to its top five tenants and properties. Secondly, by becoming one of the largest industrial property LPVs in Auckland, the Merged Group is likely to have an enhanced ability to attract and retain tenants. Its strong market position means it is more likely to be approached by prospective tenants, and is more likely to be able to provide solutions that meet the needs of new and existing clients. Thirdly, the Merged Groupʼs larger balance sheet means it should be able to undertake more and/or larger capital projects. This may assist the Merged Group to take advantage of opportunities and potentially capture the margin associated with these opportunities. Fourthly, there are expected to be procurement benefits as a result of greater buying power (e.g. insurance and maintenance contracts). While these benefits will flow to tenants, the lower expenses will enable the Merged Group to provide a lower total cost of occupancy, thereby increasing its competitiveness. Management Focus Currently the same management team is managing the PFI and DPF funds separately. The Merger would remove any risk going forward of a divided focus or conflicts of interest in managing the portfolios. 34

143 WALT and Average Building Age All of the above portfolio or operational benefits of the Merger would be shared by both shareholder groups. Certain other portfolio metrics, such as WALT and average building age, improve for PFI shareholders and weaken for DPF shareholders. The averaging effect of the Merger improves WALT for PFI from 4.8 years to 5.6 years, and reduces WALT for DPF from 6.4 years to 5.6 years. Conclusion on Portfolio / Operational Impacts Deloitte concludes that there would be portfolio and operational benefits from the Merger, and that these benefits would be shared by both shareholder groups. Although these benefits do not give rise to immediately identified cost synergies or revenue enhancements, they should reduce the risk and volatility of earnings and/or enhance the Merged Groupʼs market position and competitiveness. Notable benefits for PFI are the reduction in its exposure to high lease expiries in 2016 and In addition, PFI shareholders would enjoy an improvement in WALT and average building age. DPFʼs shareholders, conversely, would see the WALT reduce and average building age increase. However DPF gains relatively more benefit than PFI from the reduction in exposure to individual tenants and properties. We also note that DPFʼs current NTA, and therefore the Merger terms, reflect (among other things) DPFʼs current strength in terms of WALT and average building age (i.e. the market values which underpin DPFʼs NTA already capture these benefits) Liquidity and Other Capital Markets Impacts Current Liquidity of PFI and DPF Shares Relative to other LPVs, both PFI and DPF have low liquidity (see sections 3.7 and 4.7) and low institutional ownership. Currently, it is estimated that institutions hold approximately 21.1% of the shares in PFI compared to the LPV sector average institutional ownership of 36.3%. DPF does not have any institutional ownership at present. The daily average value of PFI shares traded over the last two years is $158,000, or 0.06% of the shares on issue. This compares to the LPV sector average of $572,000 or 0.10%. Being unlisted, DPF has significantly lower liquidity with an average of $38,000 or 0.02% of the share capital traded on an average day over the past two years. 35

144 Liquidity of Merged Group The Merger is expected to increase PFIʼs market capitalisation to over $500 million (as long as the PFI share price exceeds $1.22). Its ranking in the NZX50 is expected to rise from 42nd to 29th place, and it will rise from 7th to 5th in the New Zealand Property Index. Based on an analysis of shareholding registers, institutions in New Zealand have an estimated $2,100 million invested in LPVs (although we note that it is difficult to accurately categorise shareholdings due to the use of custodians). In some LPVs (e.g. Kiwi Income Property Trust), institutions hold more stock than the theoretical index weighting implied by the LPVʼs market capitalisation. In others, such as PFI and Vital Healthcare Properties, institutions are underweight as shown in the chart below. If institutions simply maintained their current underweight exposure to PFI, the increase in free-float market capitalisation would be expected to generate additional institutional demand for PFI shares of approximately $55 million. This would be expected to boost the liquidity of PFIʼs shares. However the improvement in PFIʼs index rankings may generate additional investor interest, improved broker analyst coverage, and potentially an upward revision of investment weightings by institutions. If, for example, institutions adopted an index weighting position in the Merged Group, then this would generate a requirement to hold approximately $195 million of PFI shares, approximately $130 million more than they currently hold in PFI. It is impossible to predict whether, and to what extent, PFIʼs liquidity would improve as a result of the Merger. However based on the factors discussed above Deloitte believes it is reasonable to expect that PFIʼs liquidity will improve. 36

145 Liquidity Benefits for DPF Shareholders The Merger is expected to significantly improve the liquidity of DPF shareholdersʼ investments. Currently, DPFʼs shares trade in small volumes, effectively at a managed price close to NTA. While this has worked reasonably well in the past when perceptions of market value have been close to NTA, problems arise if the market values materially diverge from NTA. For example: there are no DPF sellers at adjusted NTA in the current market environment of LPV share prices materially above NTA; and if future economic conditions were to drive market values below NTA, there would be no liquidity for sellers at an NTA-based price. The Merger would overcome these issues, with investors receiving shares in a large NZSX-listed company, with true market price discovery and trading. This should provide greater liquidity to DPF shareholders across the range of possible economic conditions. Other Capital Markets Benefits The Merged Groupʼs enlarged capital base (allied to improvements in liquidity and index ranking) may improve its access to equity and debt capital markets, and potentially lower its overall cost of capital. For example: the increase in scale of the Merged Group has enabled PFIM to negotiate a lower margin on a portion of its debt (conditional on the Merger proceeding); the Merged Group may have an increase in possible sources of debt finance; and the lower exposure to individual tenants and smoother lease expiry profile should lead to investors attributing lower risk to the companyʼs earnings forecasts. Conclusion on Liquidity and Other Capital Markets Impacts Deloitte concludes that it is reasonable to expect the Merger to lead to improved liquidity for PFI shareholders, and that DPF shareholders are likely to benefit from significantly improved liquidity. Through its enhanced scale, capital base and liquidity, the Merged Group may also have improved access to equity and debt capital markets compared to either PFI or DPF currently. This may have the benefit of reducing the cost of capital. It is also worth noting that these expected liquidity and other capital markets benefits of the Merger would be achieved without the need for external capital raisings, which would likely be more expensive and price dilutive than the Merger. 37

146 6.4. Financial Impacts In considering the financial impacts of the Merger, we have focused on the following key metrics: NTA per share; Possible market value per share; Gearing levels; Forecast/Pro Forma FY13 distributable earnings per share; and Normalised FY13 DPS. Although we have referred to NTA or earnings per share above, in fact we have analysed the impact on a notional $100,000 investment in PFI or DPF, to facilitate comparisons between the shareholder groups. In undertaking our analysis we have assumed that shares in PFI and DPF can be bought or sold at the same values that were used in setting the exchange ratio (i.e. $ or 109% of adjusted February 2013 NTA per share for PFI, and $ or 104% of adjusted NTA per share for DPF). We then discuss in section 6.5 whether our analysis and conclusions are affected by the recent rise in the share prices of PFI and other LPVs. NTA and Market Value Adjusted NTA (as at February 2013) $000s PFI DPF Merged Group % Change Summary Balance Sheet Property assets 376, , ,919 Debt (112,600) (166,000) (291,698) Net other assets (7,572) (9,934) (9,462) Merger adjustments (6,215) (1,641) (7,857) Adjusted NTA 250, , ,903 # shares 220,410,728 1,550, ,502,391 NTA / share ($) Gearing % 29% 41% 37% $100,000 invested in PFI at $1.24/share # shares held 80,751 80,751 Share of NTA ($) 1 91,743 92, % $100,000 invested in DPF at $152.59/share # shares held ,751 Share of NTA ($) 1 96,154 92, % Value of new PFI shares at $1.24 ($) 100,000 1 Number of shares held times NTA per share Source: M anagement information, Deloitte analysis The table uses balance sheet figures for PFI and DPF that are consistent with the adjusted NTA figures used to calculate the Merger ratio (see section 5.8). The table shows that a $100,000 investor in PFI could acquire 80,751 shares at $ per share, and that this shareholding would represent $91,743 of PFIʼs adjusted NTA. This investor would continue to hold 80,751 shares in the Merged Group, with the shareholding then representing $92,800 of NTA. 38

147 Similarly, a $100,000 investor in DPF could acquire 655 shares at $ per share, and this shareholding would represent $96,154 of DPFʼs adjusted NTA. In the Merger these shares would be exchanged for 80,751 new PFI shares, and the investor would then have the same interest in the Merged Groupʼs NTA as the PFI investor ($92,800). As shown in the table, the PFI shareholderʼs interest in NTA increases by 1.2% as a result of the Merger, while the DPF shareholderʼs NTA is diluted by 3.5%. This is a direct result of the share exchange ratio being established based on the ratio of 109% PFI NTA to 104% DPF NTA. Although the NTAs of PFI and DPF are broadly similar, the percentage accretion/dilution figures above are not symmetrical because total NTA drops by approximately $5.0 million in the Merger. This is due mainly to a reduction in deferred tax relating to the close-out of the DPF swaps and, to a lesser extent, transaction costs. Although DPF shareholders experience dilution in NTA, the market value of their investment will be preserved if PFI shares continue to trade at $1.24 after the Merger. This is shown in the last line of the table above, where the value of the DPF shareholderʼs 80,751 shares at $ is $100,000, the assumed value of the original investment in DPF. The Merger in effect provides DPF shareholders with the opportunity to swap unlisted shares, which over the period typically traded (in small volumes) at a 4% premium to NTA, for listed PFI shares which over the same period traded at an average 9% premium to NTA. With the Merger ratio set on that basis, there is no negative value impact for DPF shareholders as long as the Merged Groupʼs shares continue to trade 5% higher (relative to NTA) than the DPF share price if it remained a stand-alone entity. We believe it is reasonable to expect this to be the case. For any given set of macro-economic and sharemarket conditions, the much greater liquidity of the Merged Group relative to DPF stand-alone, combined with the portfolio/operational benefits of the Merger, mean that the Merged Groupʼs shares are likely to trade at least 5% higher (relative to NTA) than the fair value of DPFʼs unlisted shares after applying a discount for illiquidity. This issue is discussed further in section 6.5. Gearing The table above also shows the impact of the Merger and the buy-out of the DPF swaps on gearing, as if the Merger occurred at 28 February PFIʼs gearing would rise from 29% to 37%, while DPFʼs would drop from 41% to 37%. Because of the acquisition of the Bowden Road property in March 2013, PFIʼs gearing at 31 March 2013 was 33%, and the gearing of the Merged Group as at that date would be 38%. Total debt in the Merged Group is approximately $13.1 million higher than the sum of PFIʼs and DPFʼs debt on a stand-alone basis. This is primarily due to a decision to buy out the current DPF interest rate swap book prior to the Merger. This has a cash cost (reflected in the Merged Groupʼs debt level) but no impact on NTA (because the increase in debt is offset by a reduction in the value of hedge liabilities). The associated cash benefit of buying out the DPF swaps is a reduction in the Merged Groupʼs cash interest expense and therefore higher DPS going forward. The chart in section 2.3 shows that PFI and DPF have relatively low and high gearing, respectively, within the property fund sector, with the market average being closer to 36%. The Merged Group will have gearing of 39% (including the impact of the DPF swaps buy-out) at current portfolio values. 39

148 We discuss below the effect of the Merger on distributable earnings per share, and highlight that the change in each fundʼs gearing is an important factor explaining the dilution or accretion in DPS. Such gearing-related impacts should be viewed primarily as value-neutral trade-offs between financial risk and yield per share. Nevertheless, some shareholders may perceive the gearing changes as beneficial: DPFʼs higher current gearing restricts its ability to grow via debt funded acquisitions and without the Merger further growth would require raising equity capital; and PFIʼs shareholders will experience a gearing-related increase in DPS. Distributable Earnings The table below shows the impact of the Merger on Pro Forma FY13 distributable earnings. As for NTA, we assess the impact on a notional $100,000 invested in PFI or DPF, and the interest those investments have in distributable earnings. Pro-Forma FY13 Distributable Earnings $000s PFI DPF Merged Group % Change Summary Financial Performance Net operating income 27,837 27,812 55,763 Interest expense (8,646) (11,498) (17,359) Cash tax (4,266) (2,868) (7,938) Non-cash adjustments (379) (19) (398) Distributable earnings 14,545 13,428 30,069 # shares 220,410,728 1,550, ,502,391 DPS (DPF $; PFI cents) $100,000 invested in PFI at $1.24 # shares 80,751 80,751 Share of distributable earnings ($) 5,329 5, % $100,000 invested in DPF at $ # shares ,751 Share of distributable earnings ($) 5,674 5, % Source: M anagement information, Deloitte analysis The table shows that as a result of the Merger and the close-out of DPFʼs swaps, distributable earnings increases by 10.7% for PFI shareholders, and by 4.0% for DPF shareholders. The main reason both figures are positive is because buying out the DPF swaps reduces cash interest expense and increases distributable earnings in the Merged Group by approximately $2.1 million. These accretion figures indicate the actual FY13 impact on DPS (on a Pro Forma, full year basis) expected from the combination of the Merger and the DPF swaps close-out. However in Deloitteʼs view these earnings accretion figures do not provide a clear picture of the economic impacts of the Merger, for the following reasons: the DPF swaps close-out is a trade-off between up-front cost (increased debt) and higher earnings (lower interest expense) going forward that could be achieved by DPF on a standalone basis, and therefore should be separated from the analysis of the Merger; 40

149 the reduction in gearing for DPF shareholders, and the increase in gearing for PFI shareholders, are important factors in the observed changes in DPS, but again the gearing changes could be achieved on a stand-alone basis and are best seen as value-neutral tradeoffs between financial risk and earnings yield; and the FY13 forecasts for PFI and DPF used in the table above are not necessarily representative of their normal maintainable earnings. We believe it is important to consider the impact of the Merger after normalising for all of these factors. Normalised Distributable Earnings We have made the following normalisation adjustments: removed the impact of the swap close-out from the Merged Group figures (i.e. as if it does not occur), because the close-out is occurring at fair value and is therefore a value-neutral tradeoff between future cashflow (lower interest expense) and current cash cost (higher debt); for similar reasons as the removal of the swap close-out, we have normalised the hedging profile of each of the stand-alone entities (by making them both equivalent to the hedging profile of the Merged Group without the DPF swaps close-out); we have assumed that, prior to the Merger, PFI and DPF adjust their gearing to 35.8%, the Merged Groupʼs gearing without the DPF swaps close-out. To achieve this gearing change PFI is assumed to buy back shares at $1.2384, and DPF to issue shares at $ (being the share prices used in setting the Merger ratio, and which are close to the trading prices prevailing in February 2013); the occupancy levels (PFI 98.2%; DPF 96.3%) are normalised to the average of the two funds (97.2%); the abnormal rental provision of $435,000 in the FY13 forecasts for DPF and the Merged Group is removed; the level of rent revenue relative to market rents (PFIʼs 2013 rent is expected to be 1.4% lower than market rents; DPFʼs 2013 rent is expected to be 2.9% higher than market rents) are normalised to the market rents as assessed by the property valuers; and the timing differences in each fundʼs tax calculations are normalised to the same level. 41

150 The table below reflects all of these normalisation adjustments as if they were immediately and fully achieved in FY13. The first five adjustments are changes that could be undertaken immediately or could be attained within one to two years. However the last two adjustments could take many years to achieve. Normalised Pro-Forma FY13 Distributable Earnings (Equivalent Hedging, Gearing and Operational Metrics) $000s PFI DPF Merged Group % Change Summary Financial Performance Net operating income 27,873 27,666 55,654 Interest expense (9,959) (10,236) (20,039) Cash tax (3,980) (3,186) (7,241) Non-cash adjustments Distributable earnings 13,934 14,245 28,374 # shares 202,458,763 1,688, ,502,391 DPS (DPF $; PFI cents) $100,000 invested in PFI at $1.24 # shares 80,751 80,751 Share of distributable earnings ($) 5, , % $100,000 invested in DPF at $ # shares ,751 Share of distributable earnings ($) 5,528 5, % Source: M anagement information, Deloitte analysis The table shows that after normalising for hedging, gearing and certain operational metrics, the Merger is slightly earnings accretive for both groups of shareholders. The main reason both figures are positive is because the Merger results in administrative cost savings of $145,000 (discussed in section 5.5) and slightly lower borrowing margins resulting in a $156,000 interest saving. This means the Merged Groupʼs distributable earnings are higher than the sum of the two stand-alone entities. Because two of our operational normalisations above would take several years to eventuate, and taking into account the direction and scale of the impacts of these two normalisations, we conclude that the normalised outcome over the first few years after the Merger should on average be close to earnings neutral for both sets of shareholders. This outcome is as we would have expected. It reflects a combination of the underlying earnings yield on the respective property portfolios and the impact of the Merger ratio. DPFʼs properties on average have been valued using lower (firmer) yields than PFIʼs. In this sense they are viewed as lower risk / higher value properties. A merger on a straight NTA-for-NTA basis would be expected to result in a normalised earnings yield increase for DPF shareholders (due to the higher yield on PFIʼs portfolio), and vice versa for PFIʼs shareholders. Such changes should not be characterised as one group of shareholders gaining at the otherʼs expense, but rather as being value-neutral, with any change in earnings yield being offset by a change in the risk characteristics of the portfolio (as judged by property valuers and reflected in their capitalisation rates). The key issue for this Merger is that the earnings accretion / dilution that would otherwise be expected is offset by the Merger ratio (i.e. the Merger is not on an NTA-for-NTA basis, but on a 104% DPF NTA:109% PFI NTA basis). This 5% tilt in the Merger ratio means that, for example, the average normalised outcome for DPF shareholders is approximately earnings neutral, rather than the accretion of approximately 2.5% they would expect in a straight NTA-for-NTA merger. As discussed in the NTA sub-section above, and in section 6.5 below, this outcome is best seen as a trade-off for DPF shareholders achieving materially greater liquidity as a result of the Merger (and a share of the portfolio / operational benefits). 42

151 Conclusion on Financial Impacts Deloitteʼs analysis of the financial impacts of the Merger can be summarised as follows: the Merger dilutes DPF shareholdersʼ adjusted NTA by 3.5%, mainly due to the 5% tilt in the Merger ratio in favour of PFI; however the value of DPF shareholdersʼ investment is maintained as long as the PFI shares they receive in the Merged Group continue to trade at a premium (relative to NTA) 5% or more above the equivalent DPF share value on a stand-alone, unlisted basis. Deloitte believes this is likely to be the case, after applying a discount for illiquidity in the DPF share value; after normalising for differences in hedging, gearing and certain operational metrics, we expect the impact on earnings yield to be approximately neutral for both sets of shareholders on average over the first few years after the Merger; and if the Merger was done on a straight NTA-for-NTA basis, we would have expected the Merger to be normalised earnings accretive for DPF and dilutive for PFI, due to the differences in the portfoliosʼ underlying yields. The 5% tilt in the Merger ratio offsets this effect. Deloitte concludes that there are no material negative impacts to either group of shareholders as a result of the Merger. While DPF shareholders experience NTA dilution, the value of their investment is expected to be preserved. The Merger is expected to be broadly earnings neutral for both groups of shareholders (on a normalised basis, and on average over time). To the extent that this outcome is influenced by the Merger ratio (when otherwise DPF shareholders might expect some earnings accretion) that is best seen as a trade-off for the materially higher liquidity achieved by DPF shareholders as a result of the Merger Impact of Recent PFI Share Price Increase As set out in section 5.8, the Merger exchange ratio was based on February NTAs for PFI and DPF (adjusted for recent revaluations, and excluding intended dividends) plus premiums of 9% and 4% respectively. Among other factors considered in setting the Merger ratio, the 9% reflected PFIʼs share trading premium, and the 4% reflected the way DPF historically adjusted NTA in setting its share price (i.e. by excluding the value of its hedge liabilities and dividends payable). With PFI shares recently trading at $1.34 (as at 24 April 2013), an 18% premium to NTA, and with no trading currently in DPF shares, the question arises as to whether the Merger ratio is still appropriate and whether our analysis above of the financial impacts of the Merger is still valid. In our view, the recent increase in PFIʼs share price is not a reason to change the Merger ratio and does not invalidate our analysis above. Movements in PFIʼs share price are likely to have been matched by similar movements in the underlying value of DPFʼs shares. The increase in PFIʼs share price since February is consistent with increases for other LPVs and the share market generally (i.e. the drivers are likely to be broad-based and macro-economic in nature). Also, PFIʼs share price is predominantly a reflection of the marketʼs perception of the value of its underlying properties and the return from those properties. It follows that the factors that have caused PFIʼs share price to rise are likely to have had a similar impact on the value of DPFʼs properties, thereby maintaining the relatively between the value of PFIʼs and DPFʼs shares. 43

152 The key issue, therefore, is not the absolute level of PFIʼs share price, but whether the 5% difference between PFIʼs and DPFʼs value in setting the Merger ratio has been maintained. Given PFIʼs greater liquidity, and the costs and uncertainty associated with DPF endeavouring to achieve PFIʼs level of liquidity and share price premium to NTA via listing itself on the NZSX, we believe it is reasonable to value DPFʼs shares (on a stand-alone, unlisted basis) at a 5% discount to the equivalent PFI share price Alternatives to the Merger In assessing the merits of the Merger, it is necessary to consider whether there are any alternatives available to either shareholder group that are superior to the Merger. The main alternatives would be: (i) the status quo (no transaction of any type occurs); (ii) DPF undertakes an initial public offering and lists on the NZSX; (iii) DPF sells its shares to another purchaser at a higher price; or (iv) PFI buys other industrial properties at lower prices. We consider each of these options in turn below. Status Quo In the status quo, the portfolio/operational benefits and liquidity/capital markets benefits discussed in sections 6.2 and 6.3 would be foregone. For this reason, and because the Merger in our view does not have any material negative financial impacts, we do not believe the status quo is superior to the Merger. DPF Lists Alone Listing by itself might address some of DPFʼs liquidity issues, and help reduce gearing if accompanied by a capital raising. However: the portfolio/operational benefits of the Merger would be foregone; DPFʼs liquidity would likely be lower than could be achieved under the Merger; the market is likely to question the logic of having a second relatively small listed industrial property fund, and be concerned about the potential for management conflicts of interest; and for DPF shareholders to be better off in simple share value terms, the shares would need to trade higher than a 5% discount to PFI (e.g. above a 13% premium to NTA compared to PFIʼs premium of 18% as at 24 April 2013). Given the factors noted above, the costs of the listing process, and the lack of track record as a listed entity, we do not believe this is likely to occur. 44

153 DPF Sells Shares to Higher Bidder DPF has not run a sale process to determine if there is an alternative buyer for its portfolio willing to pay a higher price than implied by the Merger. This is understandable given the common management of DPF and PFI, and the commercial logic of the Merger. However it is necessary to consider whether a better price is potentially available to DPF shareholders. Deloitte doubts whether this is likely because: other possible buyers are unlikely to have as strong a commercial rationale to acquire DPFʼs assets as PFI; no such buyer has emerged since the Merger was announced; and given PFIʼs current share price, an alternative bidder for DPFʼs shares would need to pay a premium of more than 13% above NTA. We also note that the Merger would leave DPF shareholders holding liquid shares in an entity with no controlling shareholder blocks. It follows that DPF shareholders can individually sell at any time they wish, and also that the opportunity for other parties to pay a control premium in future to take over PFI would still exist. PFI Buys Other Properties at Lower Prices PFI will frequently have opportunities to acquire individual properties for prices at or close to valuation. However there is no other industrial property portfolio of the scale or strategic fit offered by DPF. The premium to NTA paid for DPF that is implicit in the Merger terms reflects the transformational nature of the transaction for PFI in terms of portfolio/operational and liquidity benefits. 45

154 6.7. Conclusion on the Merits of the Merger We conclude that the Merger has merit for both PFIʼs and DPFʼs shareholders, for the following reasons: the Merger provides a number of portfolio or operational benefits to both sets of shareholders, such as smoothing out the lease expiry profile, and reducing the percentage exposure to individual tenants and properties; the Merger is expected to improve the liquidity of PFI shares, greatly improve liquidity for DPF shareholders, and potentially improve PFIʼs access to and cost of capital; there are no material negative financial impacts for either shareholder group: while the Merger dilutes DPF shareholdersʼ NTA, it is expected to preserve the market value of DPF shareholdersʼ investment; the combination of the Merger and the buy-out of DPFʼs swaps is earnings accretive for both shareholder groups (although most of the accretion is due to the swaps buyout, which has an associated cost reflected in higher debt levels); after removing the impact of the DPF swaps buy-out, and other normalisation adjustments, the Merger is expected to be broadly earnings neutral for both shareholder groups (on average over time); and while the NTA and earnings outcomes for DPF shareholders would have been better but for the 5% tilt in the Merger ratio, we believe this is a reasonable trade-off for the materially greater liquidity they will likely achieve in the Merger (and a share of the other Merger benefits). the recent increase in PFIʼs share price does not, in our view, invalidate the Merger ratio or our analysis of the financial impacts of the Merger, because the underlying market value of DPFʼs shares has likely increased in a similar manner; and there do not appear to be any viable alternatives for either shareholder group that are superior to the Merger. 46

155 7. Fairness of the Merger 7.1. Fairness of the Merger Having concluded that the Merger has merit for both groups of shareholders, we now consider whether the benefits of the Merger are fairly split. The impacts of the Merger range across a variety of operational, capital markets and financial considerations. It is impossible to create a single metric to distil these benefits and measure how they have been split. Instead, we have considered each category of impact separately and then assess whether the benefits appear to be evenly shared. In summary: the portfolio / operational benefits are shared in roughly equal measure (PFI benefits most in the smoothing of lease expiries, and enjoys improvements in WALT and property age; DPF benefits most from reduced tenant and property concentration); both shareholder groups are expected to benefit from increased liquidity in their shares, but DPF shareholders should enjoy a greater improvement; and while the Merger ratio leads to a dilution of DPF shareholdersʼ NTA, share value and (normalised) earnings are preserved for both shareholder groups. The following table summarises our assessment of the impacts of the Merger for each shareholder group. Summary of Merger Impacts Portfolio / Operational PFI DPF Shareholders Shareholders Smoother lease expiry profile Reduced tenant / property concentration Stronger market position Higher WALT; lower age properties x Focussed manager; no conflicts Liquidity / Capital Markets Improved share liquidity Improved capital access Financial Preserves NTA x Preserves share value Preserves normalised DPS 47

156 While DPF shareholders experience a reduction in WALT and average building age, it is important to note that their portfolioʼs strengths in these areas are reflected in DPFʼs NTA and are therefore captured in the Merger terms. Also, the NTA dilution experienced by DPF shareholders is in our view not as important as the preservation of the market value of their investment and the materially greater liquidity achieved by the Merger. Taking the above factors into account, we conclude that the benefits of the Merger are fairly split between the shareholder groups. As discussed in section 6.5, given PFIʼs greater liquidity, and the costs and uncertainty associated with DPF endeavouring to achieve PFIʼs level of liquidity and share price premium to NTA via listing itself on the NZSX, we believe it is reasonable to value DPFʼs shares (on a stand-alone, unlisted basis) at a 5% discount to the equivalent PFI share price. The directors of PFI and DPF took these and other factors into account when negotiating the Merger ratio. In our view the Merger ratio also appears reasonable based on the expected outcomes of the Merger being fair to both groups of shareholders Management Fee Change for DPF Shareholders Finally, we consider whether the management fee changes that DPF shareholders will experience if the Merger proceeds are fair. The Merged Group will continue to be managed by PFIM under the Management Agreement. Part of the Scheme of Arrangement is a proposal to change the thresholds used for calculating the base fee under this agreement (see section 5.3 of this report, and section 4 of the Information Memorandum). PwC have prepared an Independent Appraisal Report opining on this proposal from the perspective of PFIʼs shareholders. The PFI shareholders will be asked to vote on the proposal (resolution 2 in the Notice of Meeting). Under the Merger, DPF shareholders will become PFI shareholders and will be subject to the PFI management fee arrangements, in particular: the new PFI base fee calculation; and the existing PFI performance fee structure (there is no performance fee in the current DPF management agreement). The PFI performance fee calculation is described in section 3.3. We believe the management fee changes are fair to DPF shareholders, because: the base fee paid currently by DPF is $2.8 million. Under the Merger, the proportion of the base fee that DPF shareholders will pay is $2.2 million; the marginal fee (on additional total assets excluding goodwill) drops from 0.45% per annum under the DPF fee structure to 0.35% per annum; the performance fee is only payable if total shareholder returns exceed the 10% per annum threshold, and only after any accumulated underperformance over the previous two years has been reversed; and the combination of a lower marginal base fee and a performance fee better aligns the managerʼs interests with those of shareholders, and is consistent with trends in property management fee structures in recent years. 48

157 8. Information, Disclaimer and Indemnity 8.1. Sources of Information The statements and opinions expressed in this report are based on the following main sources of information: the PFI and DPF annual reports for the financial years 2006 to 2012; valuations of the PFI and DPF portfolio properties as at 31 December 2012 and 31 March 2013, respectively prepared by Colliers, CBRE and Jones Lang LaSalle; property statistics for PFI, DPF and the Merged Group as at 31 March 2013; the term sheet for the proposed Merger of PFI and DPF; a presentation on the proposed Merger prepared by the manager; the PFI and DPF Management Agreements; the proposed Management Agreement for the Merged Group; First NZ Capital analyst reports on the New Zealand property industry; First NZ Capital report on the estimated costs of listing; First NZ Capital New Zealand LPV comparable analysis; financial forecast models of PFI, DPF and the Merged Group prepared by the manager; LPV share and share price data and property index data from Bloomberg Information Services; share price data and company announcements from NZX; information on the LPV industry including industry studies, financial reports and brokersʼ reports; and a draft Notice of Meeting and Information Memorandum in relation to the Merger. During the course of preparing this report, we have had discussions with and/or received information from the manager of PFI and DPF and their financial and legal advisers. The Directors of PFI and DPF have confirmed that, for the purpose of preparing our Independent Expert Report, we have been provided with all information relevant to the Merger that is known or should have been known to them and that all the information is true and accurate in all material aspects and is not misleading by reason of omission or otherwise. 49

158 Including this confirmation, we have obtained all the information that we believe is necessary for the purpose of preparing this Independent Expert Report. In our opinion, the information set out in the Information Memorandum and this Independent Expert Report is sufficient to enable the shareholders of PFI and DPF to understand all the relevant factors and to make an informed decision in respect of the Merger Reliance on Information In preparing this report we have relied upon and assumed, without independent verification, the accuracy and completeness of all information that was available from public sources and all information that was furnished to us by the manager of PFI and DPF and their advisors. We have evaluated that information through analysis, enquiry and examination for the purposes of preparing this report but we have not verified the accuracy or completeness of any such information or conducted an appraisal of any assets. We have not carried out any form of due diligence or audit on the accounting or other records of PFI and DPF. We do not warrant that our enquiries would reveal any matter which an audit, due diligence review or extensive examination might disclose Disclaimer We have prepared this report with care and diligence and the statements in the report are given in good faith and in the belief, on reasonable grounds, that such statements are not false or misleading. However, in no way do we guarantee or otherwise warrant that any projections or forecasts of future profits, cash flows or financial position of PFI, DPF or the Merged Group will be achieved. Forecasts and projections are inherently uncertain. They are predictions of future events that cannot be assured. They are based upon assumptions, many of which are beyond the control of the Directors and manager of PFI and DPF. Actual results will vary from the projections and forecasts and these variations may be significantly more or less favourable. We assume no responsibility arising in any way whatever for errors or omissions (including responsibility to any person for negligence) for the preparation of the report to the extent that such errors or omissions result from our reasonable reliance on information provided by others or assumptions disclosed in the report or assumptions reasonably taken as implicit. Our evaluation has been arrived at based on economic, interest rate, market and other conditions prevailing at the date of this report. Such conditions may change significantly over relatively short periods of time. We have no obligation or undertaking to advise any person of any change in circumstances which comes to our attention after the date of this report or to review, revise or update our report. We have had no involvement in setting the terms of the proposed Merger or in the preparation of the Information Memorandum issued by PFI and DPF and we have not verified or approved the contents of the Information Memorandum. We do not accept any responsibility for the contents of the Information Memorandum except for this report. 50

159 8.4. Indemnity PFI and DPF have agreed that, to the extent permitted by law, they will indemnify Deloitte and its partners, employees and consultants in respect of any liability suffered or incurred as a result of or directly in connection with the preparation of this report. This indemnity does not apply in respect of any fraud by Deloitte. PFI and DPF have also agreed to indemnify Deloitte and its partners, employees and consultants for time incurred and any costs in relation to any inquiry or proceeding initiated by any person. Where Deloitte or its partners, employees and consultants are found liable for or guilty of fraud, Deloitte shall reimburse such costs. 51

160 9. Qualifications, Independence, and Consent 9.1. Qualifications and Expertise Deloitte is one of the worldʼs leading professional services firm. Deloitteʼs Corporate Finance practice provides strategic advisory, valuation and transaction support services. The persons involved in preparing this report are Chas Cable (MSc (Hons), BSc), Alan Dent (CA, BCA), and Simon Chapman (CFA, CA, PGDipCom, BCom). Deloitte Corporate Finance, Mr Cable, Mr Dent and Mr Chapman have significant experience in the independent investigation of transactions and issuing opinions on the merits and fairness of the terms and financial conditions of transactions Independence Deloitte is not the auditor of PFI or DPF. Deloitte has not had any part in initiating or setting the terms of the Merger. Deloitte will receive a fee for the preparation of this report. This fee is not contingent on the conclusions of this report or the outcome of the voting in respect of the Merger. We will receive no other benefit from the preparation of this report. We do not have any conflict of interest that could affect our ability to provide an unbiased report. Advanced drafts of this report were provided to the manager and Directors of PFI and DPF. Certain changes were made to the drafting of the report as a result of the circulation of the drafts. However, there were no material alterations to any part of the substance of this report, including the methodology or conclusions, as a result of issuing the drafts. Our terms of reference for this engagement did not contain any term which materially restricted the scope of the report Consent Deloitte consents to the issuing of this report, in the form and context in which it has been prepared, to the shareholders of PFI and DPF. Neither the whole nor any part of this report, nor any reference thereto may be included in any other document without Deloitteʼs prior written consent as to the form and context in which it appears. 52

161 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitteʼs approximately 182,000 professionals are committed to becoming the standard of excellence. Deloitte New Zealand brings together more than 900 specialists providing audit, tax, technology and systems, strategy and performance improvement, risk management, corporate finance, business recovery, forensic and accounting services. Our people are based in Auckland, Hamilton, Rotorua, Wellington, Christchurch and Dunedin, serving clients that range from New Zealand's largest companies and public sector organisations to smaller businesses with ambition to grow. For more information about Deloitte in New Zealand, look to our website Deloitte. A member of Deloitte Touche Tohmatsu Limited. 53

162 160 Lion Beer, Spirits and Wine, 18 Ron Driver Place, East Tamaki, Auckland

163 Property For Industry Limited Independent Appraisal Report Regarding Proposed Changes to the Management Agreement 20 May

164 Contents Page Background... 4 Requirements Under the NZSX Listing Rules... 5 Purpose of Report... 6 Approach to Assessing the Fairness of the Proposed Changes to PFI s Management... Agreement... 6 Declarations, Qualifications, Disclaimer and Restrictions... 6 Independence Executive Summary Overview of PFI & DPF and Proposed Merger Background Property Portfolios Ownership and Share Trading History Governance Management Agreement Comparison of PFI s and DPF s Management Agreements Proposed Merger Property Metrics The Proposed Changes to the PFI Management Agreement Background Changes to the Management Agreement Conditions Assessment of the Proposed Changes to the PFI Management Agreement Introduction Management Fee Structures for LPVs LPVs Total Management Expenses Ratio LPVs EBIT to Average Total Assets Other Consequences of the Proposed Merger Appendix A Statement of Independence, Disclaimer, Restrictions, Limitation of Liability, and Indemnity Appendix B Sources of Information Property For Industry Limited Contents 2 Independent Appraisal Report 20 May 2013

165 Glossary ARG or Argosy : Argosy Property Trust AUG or Augusta : Augusta Capital Limited AUM : Assets under management Board or the Directors : The Board of Directors of Property For Industry Limited DNZ : DNZ Property Fund Limited DPF : Direct Property Fund Limited DPF s Manager : DPF Management Limited EBIT : Earnings before interest and tax EBITDA : Earnings before interest, tax, depreciation and amortisation EPS : Earnings per share FYXX : The financial year ended 31 December 20XX GMT : Goodman Property Trust GST : Goods and services tax IFRS : International Financial Reporting Standards KIP : Kiwi Income Property Trust LPVs : Listed property vehicles LVR : Loan to Value Ratio Management Agreement : The management contract dated 8 April 1994, including subsequent deeds of variation, dated 19 October 1994, 30 April 1999, and 30 September 2001 MER : Management expense ratio, being total fund management expenses divided by average total assets Non-Associated Shareholders : Shareholders of PFI not associated with the Related Party NPAT : Net profit after tax NPT : NPT Limited NTA : Net tangible assets NZ IRFS : New Zealand International Financial Reporting Standards NZX : New Zealand stock exchange NZSX Listing Rules : The NZSX Listing Rules of the NZX Main Board PCT : Precinct Properties New Zealand Limited PFI or the Company : Property For Industry Limited PFI s Manager : PFIM Limited PwC : PricewaterhouseCoopers Related Party : PFI s Manager Report : Independent appraisal report in relation to the Proposed changes to PFI s Management Agreement Shareholders : The shareholders of PFI The Proposed Merger : The proposed amalgamation of PFI and DPF Total Tangible Assets : Total Assets excluding goodwill TSR : Total shareholder return, being change in share price plus any dividends paid VHP : Vital Healthcare Property Trust VWAP : Volume weighted average price WALT : Weighted average lease term Property For Industry Limited Glossary 3 Independent Appraisal Report 20 May 2013

166 The Independent Directors Property for Industry Limited Shed 24, Prince s Wharf, 147 Quay Street Auckland May 2013 Independent Appraisal Report in Relation to Proposed Changes to Property For Industry Limited s Management Agreement. Background 1. On 15 April 2013 Property For Industry Limited (PFI or the Company) announced a proposal to merge with Direct Property Fund Limited (DPF) whereby DPF shareholders will receive ordinary shares in PFI, based on agreed relative values. 2. PFI is managed by PFIM Limited (PFI s Manager) and DPF is managed by DPF Management Limited (DPF s Manager). PFI s Manager is a wholly owned subsidiary of DPF s Manager. 3. The merger will be effected by way of a Court approved scheme of arrangement pursuant to Part XV of the Companies Act 1993 (the Proposed Merger). 4. Under the Proposed Merger, shareholders in DPF will receive approximately shares issued by PFI in exchange for each existing share held in DPF. The number of shares has been calculated based on relative Net Tangible Assets (NTA) of DPF and PFI as at 28 February 2013 and this has resulted in a merger ratio of 104% of DPF s NTA / 109% of PFI s NTA. 5. In order for the Proposed Merger to proceed, PFI and DPF must each obtain shareholder approval by way of a special resolution passed by 75% or more of each group of shareholders entitled to vote and voting on the matter. 6. The Proposed Merger includes changes to PFI s base management fee payable under its management contract reflecting the increased size of the merged property fund. Pursuant to Listing Rule of the NZX Main Board (the NZSX Listing Rules), the changes to PFI s Management Agreement require approval by way of an ordinary resolution of PFI s shareholders (Shareholders) entitled to vote and voting on the matter. Any PFI shareholders associated with PFI s Manager may not vote on this resolution. 7. The Independent Directors of PFI have requested that PricewaterhouseCoopers (PwC) prepare an independent appraisal report (the Report) assessing whether the proposed changes to PFI s Management Agreement are fair to the Shareholders not associated with DPF s Manager. PricewaterhouseCoopers, 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand T: +64 (9) , F: +64 (9)

167 Requirements Under the NZSX Listing Rules 8. Under rule of the NZSX Listing Rules PFI shall not enter into a Material Transaction if a Related Party is, or is likely to become a direct or indirect party to the Material Transaction, unless that transaction is approved at a meeting of Shareholders by an Ordinary Resolution. 9. The proposed changes to PFI s Management Agreement constitute a Material Transaction with a Related Party, as defined by the NZSX Listing Rules, because the gross cost of the management fee exceeds 1% of PFI s Average Market Capitalisation calculated over the 20 trading day period prior to the announcement of the Proposed Merger, and because PFI s Manager is a Related Party for the purposes of the NZSX Listing Rules. 10. To be approved pursuant to an Ordinary Resolution more than 50% of Shareholders voting and entitled to vote must vote in favour of the proposed changes to PFI s Management Agreement. No Shareholder associated with the Related Party (i.e. PFI s Manager) may vote in favour of the Ordinary Resolution. 11. Under NZSX Listing Rule the Notice of Meeting to approve the Material Transaction must be accompanied by an Independent Appraisal Report confirming whether or not the terms and conditions of the Material Transaction are fair to the Shareholders not associated with PFI s Manager (the Non-Associated Shareholders). 12. NZSX Listing Rule 1.7 contains general provisions relating to the preparation of appraisal reports and the NZX s approval of the appraiser. The following matters are relevant: Our Report must be addressed to the Independent Directors of the Issuer, being those directors of PFI not associated with PFI s Manager; Our Report is to be expressed as being for the benefit of the Shareholders in PFI, other than those associated with PFI s Manager; We are required to state whether or not, in our opinion, the consideration and terms and conditions of the Material Transaction are fair to PFI s Shareholders (other than the Related Parties); We are required to state whether, in our opinion, the information to be provided by PFI to its Shareholders is sufficient to enable them to understand all relevant factors and make an informed decision in respect of the Material Transaction; We are required to state whether we have obtained all information which we believe is desirable for the purposes of preparing our Report, including all relevant information which is or should have been known to any director and made available to directors; and We are required to state any material assumptions on which our opinion is based and any terms of reference which have materially restricted the scope of our Report. 13. The appointment of PwC as independent appraiser to assess the fairness of the proposed changes to PFI s Management Agreement was approved by NZX Regulation on 20 March Property For Industry Limited 5 Independent Appraisal Report 20 May 2013

168 Purpose of Report 14. The purpose of the Report is to present our assessment of whether the proposed changes to PFI s Management Agreement are fair to PFI s Non-Associated Shareholders and in doing so, assist them in forming their own opinion as to whether or not they should approve the resolution required to give effect to the proposed changes to PFI s Management Agreement. 15. We note that each Shareholder s circumstances and investment objectives will be unique. It is therefore not possible to prescribe or advise what action an individual Shareholder should take in response to the proposed changes to the Management Agreement. Our advice will be necessarily general in nature and is intended to assist each Shareholder to form their own opinion as to what action they should take given their specific circumstances. Approach to Assessing the Fairness of the Proposed Changes to PFI s Management Agreement 16. There is no statutory definition of fair under New Zealand law or in the NZSX Listing Rules. Guidance Note Number 10, issued by the New Zealand Institute of Chartered Accountants states: the expression of an opinion as to fairness will generally involve an assessment as to whether a transaction or proposal is just, impartial and equitable. 17. The above definition provides only limited guidance, and therefore we also consider Policy Statement 75 and Practice Note 43 issued by the Australian Securities and Investment Commission (ASIC) relating to independent expert reports. The Policy Statement and Practice Note prescribe standards of best practice for the preparation of expert reports. Furthermore, ASIC Policy Statement 75 contains a definition of fair in the context of a takeover. It defines an offer as fair if the value of the offer consideration is equal to, or greater than, the value of the securities that are the subject of the offer. 18. In assessing the fairness of the proposed Management Agreement changes, we have considered: the level of PFI s new management fee compared to the level of management fees paid by externally managed NZSX LPVs; and the total management expenses paid by externally and internally managed LPVs. 19. As the proposed Management Agreement changes will only proceed if the Proposed Merger is approved we have also considered the benefits and costs which may accrue to PFI s Non- Associated Shareholders as a result of the Proposed Merger. 20. Our principal findings and our opinion on the fairness of the proposed changes in PFI s Management Agreement are summarised in Section 2. This summary should be read in conjunction with the balance of our Report. Declarations, Qualifications, Disclaimer and Restrictions 21. This Report should be read in conjunction with the statements and declarations set out in Appendix A regarding our independence, qualifications, restrictions on the use of this Report, reliance on information, general disclaimer, limitation of liability and our indemnity. Independence 22. We confirm that PwC possesses the necessary independence to carry out this role for the independent directors of PFI. We are not aware of any conflicts of interest that would prejudice our ability to provide an objective and independent opinion on the proposed changes to PFI s Management Agreement. Property For Industry Limited 6 Independent Appraisal Report 20 May 2013

169 23. Our firm has not undertaken any work for PFI, PFI s Manager, DPF or DPF s Manager within the last three years. PwC has not had any role in the formulation of the proposed changes to the Management Agreement or the Proposed Merger. Note 24. All monetary amounts herein are expressed in New Zealand currency (NZD) and are stated exclusive of Goods and Services Tax (GST), unless indicated to the contrary. Certain numbers included in the tables have been rounded and therefore do not add precisely. Generally, references to year should be taken as referring to PFI s financial years ending on 31 December. For example, references to the 2012 year refer to the financial year ended 31 December Information sources used in preparing this report are listed at Appendix B. Yours faithfully PricewaterhouseCoopers David Bridgman Partner Eric Lucas Partner Property For Industry Limited 7 Independent Appraisal Report 20 May 2013

170 1. Executive Summary 26. This Executive Summary is a summary only. It should be read in conjunction with the balance of our Report, as contained in Sections Given the proposed changes to PFI s base management fee comprise an integral part of the Proposed Merger between PFI and DPF and will not occur unless the Proposed Merger is approved, we have evaluated the proposed changes in the context of the consequences that the Proposed Merger will have for PFI s shareholders, as well as considering the relativity of the proposed management fee against the management fee structures of other externally managed LPVs and the total management expense ratios of all LPVs. 28. The Proposed Merger, which includes the proposed changes to PFI s base management fee structure, is expected to: more than double the size of PFI s Total Assets from approximately $401m as at 31 March 2013 to $812m through the inclusion of DPF s Total Assets. The number of properties in its portfolio will increase from 50 to 83 and the number of tenants increases from 84 to 137; result in greater diversification of income through a broader spread of individual tenants and properties and a smoother and extended lease expiry profile; increase the liquidity of PFI shares and improve access to equity and debt capital due to the increased size of PFI and likely increase in institutional investor interest; and result in an increase in forecast distributable earnings for PFI shareholders for FY13 from an estimated 6.6 cents per share absent the Proposed Merger to an estimated 7.04 cents per share in FY13 (assuming a 1 July merger date). Assuming the merger had taken effect on 31 December 2012 FY13 distributable earnings are estimated to increase to 7.31 cents per share. We note that the majority of the increase results from closing out DPF s interest rate swaps and replacing them with lower cost debt. 29. The proposed changes to PFI s base management fee structure result in a higher management fee than would apply under PFI s existing base management fee, both in absolute monetary terms and when measured as a percentage of assets under management. However, the new fee structure represents a blending of the existing PFI and DPF management fee structures such that PFI s Manager will receive approximately the same level of management fees that is payable by PFI and DPF at present, whilst they are managed separately. 30. The proposed annual base management fee (net of recoverable property management fee income of $175,000) of $4.62m (assuming average total tangible assets of $814m post merger) will be approximately $1.3m higher than would be notionally payable under PFI s existing management contract if that was simply applied to the additional assets resulting from the Proposed Merger. This equates to 0.57% of total assets under management, compared to 0.40% under PFI s existing management contract (when applied to the increased asset base). This ranks PFI s base management fee when measured as a percentage of total assets under management as the second highest amongst the five LPVs with external management, although all the LPVs with lower percentage fees are considerably larger. Executive Summary 8

171 31. Direct comparison of externally managed LPVs base management fees is difficult because the level of services provided in return for the base management fee varies. PFI s base management fee covers the provision of property management services and PFI s Manager is not able to charge additional fees for leasing, rent reviews and project management. Our analysis of the costs of these additional services for other externally managed LPVs over the last five years suggests an average annual cost of between 0.21% and 0.33% of average Total Assets (excluding intangible assets, where applicable) typically incurred by other LPVs for the provision of these other services. Taking this additional fee into account PFI s proposed new management fees, whilst higher than under the existing management fee structure, will be the lowest of the five externally managed LPVs. 32. When compared to the total management expenses of all LPVs, PFI s total MER (after allowing for the increase in base management fee) increases by 0.03% to 0.70% which is lower than the MERs of VHP, DNZ, NPT, Augusta, Argosy and PCT, but more than the MER s of GMT and KIP, both of which are considerably larger than PFI will be immediately post merger. Again, including the average additional fees, PFI post merger will be the lowest. 33. The base management fee of 0.35% that will be payable on marginal growth in total assets is lower than the other externally managed LPVs (except for PCT which also has a base fee of 0.35% on marginal growth albeit at a much higher threshold of $1.5 billion). As a consequence, PFI s base management fee, when averaged across its total asset base, will progressively reduce as PFI s asset base grows over time post merger. 34. In our view the Proposed Merger and the consequent doubling in the size of PFI s asset base offers a number of benefits to PFI s shareholders. To achieve the same $411m increase in size in the absence of the Proposed Merger would be likely to cost PFI s shareholders more than the impact of the proposed increase in the base management fee as a result of transaction costs that would be incurred as part of a capital raising which would be needed to fund a similar level of growth. 35. In our opinion, the proposed changes to PFI s Management Agreement are fair to the Non- Associated Shareholders of PFI, because the benefits of the Proposed Merger more than offset the increase in the base management fee and although the threshold has increased from $175m to $775m the management fee on incremental growth remains at 0.35%. 36. In our opinion, the information to be provided by PFI to its Non-Associated Shareholders is sufficient to enable them to understand all relevant factors and make an informed decision in respect of the proposed changes to PFI s Management Agreement. Executive Summary 9

172 2. Overview of PFI & DPF and Proposed Merger Background PFI 37. PFI was listed on the NZSX in 1994 as a property fund with a primary focus on industrial property. PFI s property portfolio has increased in size from $16.9m to approximately $400m 1 through a combination of acquisitions and capital appreciation. In 1999 the original manager was sold by interests associated with Morrison Holdings Limited and Willis Bond and Company Limited to AMP Asset Management Limited. In January 2012, AMP sold the management contract to a wholly owned subsidiary of DPF s Manager. DPF s Manager is partly owned by interests who were associated with shareholders of the original manager of PFI. PFI has approximately 4,800 shareholders. DPF 38. DPF is an unlisted property fund which was established by interests associated with DPF s Manager in DPF s property portfoil0 has increased from a single property valued at approximately $10m to a portfolio of 33 properties with a value of approximately $414m 2. It has approximately 500 shareholders. DPF Management Limited (DPF s Manager and associates) 7% Management Agreement Direct Property Fund Limited 100% PFIM Limited Management Agreement Property For Industry Limited Source: New Zealand Companies Office, PFI & DPF financial statements 1 This includes the value of a development at 15 Copsey Place "as if complete". The development is due to be completed in October The estimated cost to complete is $1.1m and on completion a value uplift of $0.8m has been assumed. 2 This includes the value of a development at 124b Hewletts Road "as if complete". The development is due to be completed in June The estimated cost to complete is $3.8m and on completion a value uplift of $2.1m has been assumed. Overview of PFI & DPF and Proposed Merger 10

173 Property Portfolios PFI 39. The type of properties and geographic distribution of PFI s property portfolio by value are shown in the charts below: PFI investment portfolio asset class 3% PFI investment portfolio geographic split 5% 6% 97% 89% Source: PFI Industrial Office Auckland Wellington Christchurch Source: PFI 40. The majority (97%) of PFI s properties are industrial. The remaining 3% comprise retail and office space. The portfolio is predominantly located in the Auckland region (89%). DPF 41. The type of properties and geographic distribution of DPF s property portfolio by value are shown in the charts below: DPF investment portfolio asset class DPF investment portfolio geographic split 16% 9% 5% 1% 17% 67% 85% Industrial Office Other Source: DPF Auckland Tauranga Wellington Hamilton Source: DPF 42. The majority (67%) of DPF s properties are industrial. The remaining 33% comprise office 17% and other commercial properties 16%. The portfolio is predominantly located in the Auckland region (85%). Overview of PFI & DPF and Proposed Merger 11

174 Ownership and Share Trading History PFI 43. As at 31 March 2013, PFI had approximately 4,800 Shareholders. PFI s top 10 Shareholders currently hold 78.3m shares or 35.5% of the Company. There are no individual shareholdings greater than 5%. 44. The following graph illustrates PFI s share price movements and trading volumes for the two years ended 30 March 2013: PFI Share Price and Volume (two years ended 31 March 2013) , Share Price (NZ$) Trading Volume (000s) Source: Capital IQ Trading Volume Share Price 45. Over the 12 months to 31 March 2013 the Company s share price fluctuated between a high of $1.31 in March 2013 and a low of $1.13 in June 2012, with an average daily volume of approximately 134,000 shares traded. The Volume Weighted Average Price (VWAP) for the 20 trading days prior to 31 March 2013 was $1.29 per share. This represents a 13.7% premium to PFI s NTA as at 31 December 2012 of $1.13 per share. Overview of PFI & DPF and Proposed Merger 12

175 46. The graph below illustrates PFI s Total Shareholder Return 3 (TSR) compared with the NZX 50 Gross Index 4 and the NZX Gross Property Index 5 over the last two years: PFI Performance Relative to Industry Performance (31 March 2011 base) Source: Capital IQ NZX Gross Property Index PFI NZX 50 Gross Index 47. In the two years to 31 March 2013 the return on the NZX 50 Gross Index was 28.6%, the return of the NZX Gross Property Index was 38.9% and PFI s TSR was 32.4%. 48. PFI is a listed Portfolio Investment Entity (PIE). It pays tax at 28% and attaches available imputation credits to distributions. As a listed PIE the distributions are treated as excluded income for tax purposes and no further tax is payable for New Zealand individual or trustee shareholders. For the year ended 31 December 2012, PFI paid a cash dividend of 6.6 cents per share. This is equivalent to a cash dividend yield of 5.06% based on PFI s share price of $1.31 as at 31 March Total Shareholder Return (TSR) is a measure of a company s performance that includes changes in share price and dividends paid. 4 The NZX 50 Gross Index comprises the 50 largest New Zealand listed stocks by market capitalisation, adjusted for dividends paid and stock splits. 5 The NZX Gross Property Index comprises the performance of the NZX listed property sector, adjusted for dividends paid and stock splits. Overview of PFI & DPF and Proposed Merger 13

176 New Zealand LPV's relative performance (to 31 March 2013) 70% Total Shareholder Return 60% 50% 40% 30% 20% 10% 34.5% 28.4% 17.5% 7.7% 41.9% 18.1% 58.2% 53.6% 44.7% 35.1% 32.4% 32.6% 24.4% 20.4% 19.0% 13.1% 61.0% 38.9% 31.7% 18.3% 28.6% 26.0% 0% KIP GMT PCT ARG DNZ VHP PFI NPT AUG NZX Property IndexNZX50 2 year performance 1 year performance Source: Capital IQ, NZX Company Research DPF 49. As at 3 April 2013, DPF had approximately 500 shareholders. DPF s top 10 Shareholders currently hold 381,000 shares or 24.6% of DPF. This includes DPF s Manager (1.8%) and shareholders of DPF s Manager (4.9%) who collectively own approximately 6.7% of DPF and are the largest shareholder. DPF Trading Price and Volume , , ,000 Share price ($) ,000 6,000 Trading volume 140 4, , Source: Computershare Trading Volume Price 50. We have been advised that DPF s shares typically trade at or close to NTA. In the two years to 31 March 2013 the total volume of DPF shares traded was 157,349, representing a total value of $22.9m. In the last 12 months, 67,125 shares traded at a VWAP of $145 per share. 51. DPF is an unlisted multi-rate Portfolio Investment Entity (PIE) and as such it pays tax based on the tax rates of its shareholders. The distributions to shareholders are treated as excluded income for tax purposes and no further tax is payable for New Zealand taxpayers. Overview of PFI & DPF and Proposed Merger 14

177 52. For the year ended 31 March 2012, DPF s shareholders received a minimum cash dividend of $9.08 per share, depending on the individual shareholder s Prescribed Investor Rate (PIR) they may have received up to $10.70 per share. The minimum cash dividend is equivalent to a dividend yield of 6.01% based on an assumed DPF share price of $151 (NTA of $145 x 104%). The forecast minimum cash dividend for the year ending 31 December 2013 assuming the Proposed Merger does not proceed is $8.66 per share. Governance 53. The PFI Board of Directors comprises three independent directors, Messrs Peter Masfen (Chairman), Humphry Rollerston and Anthony Beverley, and a representative of PFI s Manager, Mr. Greg Reidy. PFI s Board can comprise up to eight members and at least two or a third of its directors (whichever is the greater), must be Independent Directors. 54. The responsibilities of the Board include: Protecting and enhancing the value of assets of the Company for the benefit of Shareholders; Statutory responsibility for the affairs and activities of the Company; Ensuring effective disclosure policies and procedures are fulfilled to maintain a fully informed market; and Delegating responsibility to the manager to implement and deliver the adopted corporate strategies and maintaining oversight of the manager s performance. 55. The existing DPF Board of Directors comprises two non-executive directors, Messrs Arthur Young (Chairman) and John Waller, and two representatives of DPF s Manager, Messrs Greg Reidy and Sam Bufton. 56. Following the Proposed Merger, PFI s Board will comprise six directors, Messrs Peter Masfen (Chairman), Humphry Rollerston, Anthony Beverley, and John Waller, all who are independent, Mr. Arthur Young (a non-executive director) and Mr. Greg Reidy as representative of PFI s Manager. Overview of PFI & DPF and Proposed Merger 15

178 Management Agreement 57. PFI is managed by PFIM Limited, a wholly owned subsidiary of DPF s Manager, under the terms of the Management Agreement originally dated 8 April 1994 and subsequent amendments dated 19 October 1994, 30 April 1999 and 30 September The manager s responsibilities include: making recommendations to the Board and managing property acquisitions and divestments; managing relationships between PFI and agents, lessees, vendors, valuers, investors, the NZX, professional advisors and other relevant parties; arranging funding for PFI and managing the Company s financial affairs; arranging for valuations of PFI s properties to be completed at regular intervals; ensuring collection of rents and compliance by lessees of PFI s properties; ensuring payment of permissible outgoings and recoveries (where possible) from lessees; managing negotiations of rent reviews, variations of leases and lease renewals; managing any development projects and maintenance on the properties; ensuring compliance by PFI with all relevant rules and regulations; and general administrative and reporting duties. 58. Fees payable to the manager are set out in the Deed of Variation of Management Agreement, dated 30 April The manager s remuneration comprises a base management fee and a performance fee. The base fee is currently calculated as 0.7% per annum of Total Assets of PFI up to $175m and 0.35% per annum of Total Assets to the extent they exceed $175m. The base management fee is calculated monthly and paid in arrears. 59. The performance fee is calculated based on returns accruing to PFI s Shareholders each quarter. PFI s Manager is entitled to be paid 10% of the amount by which the TSR exceeds 10% per annum up to a maximum of 15% per annum. Where the TSR exceeds 15% per annum, the excess is carried forward to subsequent quarters for a maximum period of eight quarters. If the TSR is less than 10% per annum for a quarter, the deficit is also carried forward (for a maximum of eight quarters) and taken into account in calculating the entitlement to performance fees in subsequent quarters. 60. The term of the Management Agreement is open ended. Providing the Manager is performing its obligations under the Management Agreement, it will continue indefinitely. 61. PFI s Manager can give six months notice if it wishes to terminate the Management Agreement. PFI may only terminate the Management Agreement if PFI s Manager fails to perform its duties or becomes insolvent. 62. There is no change in control clause in PFI s Management Agreement so PFI s Manager is relatively entrenched. Any party wishing to take over PFI would need to negotiate the purchase of PFI s Management Agreement directly with PFI s Manager if it wished to change or remove the manager. Overview of PFI & DPF and Proposed Merger 16

179 Comparison of PFI s and DPF s Management Agreements 63. We set out below a comparison of PFI and DPF s existing management agreements: Direct Property Fund Property For Industry Base Fee (paid monthly) Tier % up to $250m 0.7% up to $175m Tier % up to $500m 0.35% above $175m Tier % above $500m n/a Based on Average Investment Property Average Total Assets Current effective management fee (% of total assets at 31 March 2013) 0.68% 0.50% Performance Fee (paid quarterly) Rate n/a 10% of TSR over threshold (2.5% per quarter) Threshold n/a 10% TSR Cap n/a 5% of annualised outperformance over threshold (i.e. 3.75% TSR per quarter) TSR shortfalls and excesses carried n/a forward Source: PFI & DPF Financial Statements, Management Agreements Note: n/a = not applicable 2 years Proposed Merger 64. Under the Proposed Merger shareholders in DPF will have their existing shares cancelled and in consideration for the cancellation they will receive approximately new shares in PFI for every DPF share they hold. The exchange ratio 6 of 104% of DPF s NTA / 109% of PFI s NTA reflects a premium to PFI s and DPF s respective NTAs as at 28 February The agreed exchange ratio has been based on negotiations between the Boards of PFI and DPF. 65. Based on this exchange ratio immediately following the Proposed Merger DPF s shareholders will collectively hold 46.4% of PFI s expanded share capital. 66. Following the merger, PFI s Manager will manage the expanded property portfolio of the merged enterprise and the Proposed Merger will include changes to PFI s base management fee, which essentially reflects an amalgamation of the existing base management fee structures of PFI and DPF which will then apply to the expanded property portfolio. As noted previously, under the NZSX Listing Rules the proposed changes to the base management fee must be approved by Shareholders. 67. A comparison of PFI s and DPF s existing fee structures and the proposed new fee structure for PFI post-merger is set out in the following section of the Report. 6 Refer to Section 3 of the Notices of Meeting and Information Memorandum for an explanation of the exchange ratio. Overview of PFI & DPF and Proposed Merger 17

180 Property Metrics 68. The table below provides a comparative summary of key metrics for PFI and DPF pre and post the Proposed Merger: As at 31 December 2013 Direct Property Fund Property For Industry PFI post-merger Portfolio valuation 1 $420m $404m $824m Total Assets $421m $405m $826m 2 Net tangible assets (NTA) $257.6m $235.7m $486.8m Loan to value ratio (LVR) (estimate) 41.2% 33.0% 38.6% Gross rental income 3 $32.1m $31.6m $63.7m Management fee 3 $2.8m $2.0m $4.8m Distributable earnings (cents per share) As at 31 March 2013 Properties Tenants Weighted Average Lease Term (WALT) 6.4 years 4.8 years 5.6 years Contract yield 7.65% 8.21% 7.93% Historical dividend yield 6.01% 5.06% n/a Source: PFI & DPF Financial Statements, PFI merged entity model Note 1: Includes capitalised lease incentives of $4.5m for DPF and $7.4m for PFI Note 2: PFI merged entity assets exclude goodw ill of $9.8m Note 3: Pro Forma FY13 assuming merger date of 31 December 2012 Note 4: Number of shares used in the calculation reflects the exchange ratio of (rounded) 69. Based on the financial positions of PFI and DPF as at 31 March 2013, following the Proposed Merger, PFI will have estimated Total Tangible Assets of $814m and Net Tangible Assets of $487m or $1.17 per share and an estimated market capitalisation assuming its shares trade at a 9% premium to NTA of $509.5m. 70. If the Proposed Merger proceeds on 1 July 2013, the forecast dividend for the year ended 31 December 2013 is projected to increase from 6.6 cents per share to 7.04 cents per share. We note that 0.27 cents per share of the 0.44 cents per share increase results from closing out DPF s interest rate swaps and replacing them with lower cost debt. The cost of closing out these swaps is approximately $9.4m and this cost is reflected by a higher level of debt post merger. 71. Assuming the merger had taken effect on 31 December 2012, FY13 distributable earnings are estimated to increase to 7.31 cents per share. Overview of PFI & DPF and Proposed Merger 18

181 3. The Proposed Changes to the PFI Management Agreement Background 72. As part of the Proposed Merger, shareholders of PFI not associated with the Related Party, are being asked to approve certain changes to its existing Management Agreement with PFI s Manager. The proposed changes are summaries below. Changes to the Management Agreement Base Fee 73. At present, PFI s base management fee is calculated at a rate of 0.7% per annum for the first $175m of Total Assets of the Company and 0.35% per annum on Total Assets exceeding $175m. The fee is calculated monthly and paid one month in arrears. 74. It is proposed that the base fee be amended to a three tiered fee structure as follows: 0.725% per annum on Total Tangible Assets up to $425m; 0.45% per annum on Total Tangible Assets between $425m and $775m; and 0.35% per annum on Total Tangible Assets exceeding $775m. 75. The base management fee will continue to be calculated monthly and paid one month in arrears. Performance Fee 76. No change is proposed to PFI s existing performance fee. Other Changes 77. In addition to the three tiered fee structure, the basis of the management fee calculation has been changed from Total Assets to Total Tangible Assets. This means that the management fee will not be paid on the $9.8m of goodwill which will be created by the Proposed Merger as DPF is effectively being acquired by PFI at a 4% premium to its NTA. 78. The Management Agreement has also been amended to reflect changes to: PFI s gearing policy; the level of cover for PFI s Manager s required professional indemnity insurance which has increased from $2m to $5m; current accounting terminology; redundant provisions and schedules; and statutory references to take account of legislative changes. The Proposed Changes to the PFI Management Agreement 19

182 79. Under PFI s existing Management Agreement PFI s Manager must ensure that PFI s total liabilities do not exceed 35% of Total Tangible Assets without the prior written consent of PFI s Board. Under the proposed changes to PFI s Management Agreement the measure of gearing has been amended to a loan to value ratio (LVR) limit of 40% which cannot be exceeded without the prior written consent of the Board. The LVR is measured as total interest bearing debt divided by the most recent valuation of PFI s property portfolio and is consistent with the gearing measure used in PFI s banking covenants. The maximum LVR permitted by the banking covenants is 50%. Following the Merger PFI s LVR is expected to increase from 33% to 38.6%. 80. Apart from the changes to the structure of the base management fee calculation, the other changes to the Management Agreement referred to above are largely procedural and in our opinion do not impact on our assessment of whether the proposed changes to the management fee under the Management Agreement are fair. Conditions 81. The Proposed Merger is conditional on approval by 75% of shareholders of PFI and DPF entitled to vote and voting. In addition, under the NZSX Listing Rules, PFI s Non Associated Shareholders must also approve the proposed changes to the Management Agreement by way of an Ordinary Resolution. This only requires a majority of 50% rather than the 75% majority that is required to approve the Proposed Merger. The Proposed Changes to the PFI Management Agreement 20

183 4. Assessment of the Proposed Changes to the PFI Management Agreement Introduction 82. PFI is seeking Shareholder approval for the proposed changes to the Management Agreement as described in Section 3. Under the NZSX Listing Rules the proposed changes to the Management Agreement are considered a Material Transaction with a Related Party (PFI s Manager) and therefore an Independent Appraisal Report assessing whether the proposed changes to the Management Agreement are fair to the Non Associated Shareholders must be prepared. 83. To assess the fairness of the proposed changes to the Management Agreement, having regard for the interests of the Non Associated Shareholders, we have considered: the level of PFI s new management fee compared to the level of management fees paid by externally managed NZSX LPVs; the total management expenses paid by externally and internally managed LPVs; and other benefits and costs that may accrue to the Non Associated Shareholders of PFI as a result of the Proposed Merger. Management Fee Structures for LPVs 84. Of the nine LPVs on the NZSX, five are externally managed and four have internal management. Externally managed LPVs pay a management fee based on the value of either total assets or investment properties under management to a manager which is responsible for providing fund management services to the LPV. In contrast, in an internally managed LPV the management services are provided by staff employed directly by the LPV. 85. The management function for an LPV can be split into two broad categories of services: fund management services which involve management of the vehicle itself (e.g. financial reporting, debt management, strategy, etc.). For externally managed vehicles, fees for these services are typically charged as a base fee calculated as a percentage of assets under management; and property management services which involve day to day management of the tenants, collecting rents, leasing of space, conducting rent reviews, project management of remedial or development works and property development. For externally managed LPVs these services are typically charged on a basis that is in addition to the fund management fee. 86. In addition to the base fund management fee managers of all of the externally managed LPVs are also entitled to be paid performance fees which are an attempt to better align the interests of the manager with the interests of the LPV s shareholders. The performance fees are typically based on exceeding a TSR threshold with the manager sharing a portion of any increase exceeding the threshold. This helps balance the incentive for the manager to increase the asset base upon which the base management fee is paid as the performance fee is solely reliant on TSR performance. 87. We note that it is difficult to directly compare LPV base fund management fees in isolation as different management agreements require different levels of service to be provided. In the case of PFI, in return for its base fund management fee PFI s Manager is required to also provide property management services as well. However, we note that generally PFI s industrial properties would require less property management services than larger multi-tenanted office and retail properties. Assessment of the Proposed Changes to the PFI Management Agreement 21

184 88. We set out in the table below a summary of the current fund management fee structures for the five externally managed LPVs. We have also included PFI s proposed fee structure under the Proposed Merger. Base Fee Rate Based on Goodman Kiwi Income Precinct Vital Healthcare Property For Industry PFI Post-merger GMT KIP PCT VHP PFI PFI 0.5% up to 500m, 0.4% thereafter Average Total Assets, less cash & debtors 0.55% Average Total Assets 0.55% up to $1,000m, 0.45% up to $1,500, 0.35% thereafter Investment Property 0.75% Average Total Assets 0.7% up to $175m, 0.35% thereafter Average Total Assets 0.725% up to $425m, 0.45% up to $775m, 0.35% thereafter Average Total Assets Performance Fee Rate 10% of unit holder return over threshold 10% of unit holder return over threshold 10% of shareholder return over threshold 10% of average annual increase in TA over 3 years 10% of shareholder return over threshold 10% of shareholder return over threshold Threshold Quarterly gross return from NZ LPV Index (excl GMT) 10% TSR Quarterly gross return from NZ LPV Index (excl PCT) n/a 10% TSR 10% TSR Cap 5% of annualised outperformance 0.15% of Average Total Assets 5% of annualised outperformance 1% of Average Total Assets 5% of annualised outperformance 5% of annualised outperformance TSR shortfalls & excesses carried forward Indefinite Max 2 years Max 2 years Indefinite Max 2 years Max 2 years Source: NZ LPVs Financial Statements Note 1: References to Average Total Assets exclude intangible assets Base Fee 89. Externally managed LPVs charge fund management base fees calculated either on average total assets or in the case of Precinct Properties Limited (PCT) the value of average investment properties. Vital Healthcare Property Trust (VHP) has the highest annual base fund management fee at 0.75%. Kiwi Income Property Trust (KIP) has an annual base fund management fee of 0.55%. The remaining three externally managed LPVs have a tiered base fee structure. Goodman Property Trust (GMT) charges 0.5% up to total assets of $500m and 0.4% thereafter, PCT charges 0.55% up to Investment Properties of $1b, 0.45% between $1b and $1.5b and 0.35% thereafter. PFI currently charges 0.7% up to Total Assets of $175m and 0.35% thereafter. 90. Under the new fee structure for PFI, a three-tier structure levied on Average Total Tangible Assets has been proposed comprising 0.725% up to $425m, 0.45% between $425m and $775m, and 0.35% thereafter. 91. Whilst the marginal fee remains at 0.35%, the threshold that it applies from increases from $175m to $775m. 92. The new fee structure represents a blending of the existing PFI and DPF management fee structures such that PFI s Manager will receive approximately the same level of management fees that is payable by PFI and DPF at present, whilst they are managed separately. We do note however that on incremental growth the fee is currently 0.35% vs 0.45% which is currently paid by DPF for incremental growth on investment properties above $500m. 93. PFI s average base management fee over the last three years was 0.50%. Under the proposed management fee structure and the expanded asset base post merger PFI s base management fee increases to 0.57%. Our analysis is summarised in the chart below: Assessment of the Proposed Changes to the PFI Management Agreement 22

185 Base management fees of New Zealand externally managed LPVs (percentage of average total assets) 0.9% 0.8% 0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% VHP KIP PFI PCT GMT PFI post-merger Average Source: Capital IQ, NZ LPVs financial statements, PFI merged entity model Note: Precinct restructured its fee structure in 2011 and added a performace fee component which was paid in 2012 at 0.24% of average assets. This has been excluded in the data shown above. 94. We have also compared the proposed base fee structure with PFI s existing base fee and the base fee structures of the four other externally managed LPVs by calculating the base management fee payable on an asset base of $814m under the various LPV base management fee structures and the proposed PFI management fee structure. Base management fees of New Zealand externally managed LPVs applied to PFI's post merger average assets % % Management fee (NZ$m) % 0.50% 0.40% 0.30% 0.20% % 0.00% PFI Existing PFI post-merger PCT GMT KIP VHP Management Fee Effective Rate (RHS) Source: NZ LPVs financial statements, PwC analysis, Management Agreements Assessment of the Proposed Changes to the PFI Management Agreement 23

186 95. The proposed fee structure results in an estimated fee payable to PFI s Manager that is approximately $1.3m per annum higher than the amount that would be payable under PFI s existing fee structure for the post merger Average Total Tangible Assets of $814m and is only lower than the management fees payable under VHP s base fee structure. However, PFI s marginal base fee of 0.35% per annum is lower than that of all other externally managed LPVs with the exception of PCT which also has a marginal fee of 0.35% albeit on a higher threshold of $1.5 billion. Therefore as PFI s post-merger asset base grows the total base fee as a percentage of Total Tangible Assets will decline as illustrated in the chart below: Base fee structure of New Zealand externally managed LPVs PFI post merger average total assets ($814m) 12 Management fee (NZ$m) ,000 1,250 1,500 1,750 2,000 Total assets (NZ$m) PFI PFI post-merger PCT GMT KIP VHP Source: NZ LPVs financial statements, PwC analysis, Management Agreements 96. If PFI s Total Tangible Assets increased to say, $1.25 billion its base management fee under the proposed management fee structure would be lower than VHP, KIP and PCT, excluding any adjustments for additional fees. Performance Fee 97. All the externally managed LPVs have performance fees. With the exception of VHP they are based on either absolute shareholder returns or shareholder returns relative to a peer group of LPVs. 98. For KIP a performance fee is calculated as 10% of the total return above 10% but capped at 0.15% of average gross assets in any one period. For PFI the performance fee is calculated as 10% of total return between 10% and 15%. In both cases any under or over performance is carried forward for a period of up to two years. 99. For GMT and PCT, a performance fee is payable based on 10% of any outperformance of an LPV index (excluding the LPV which is being measured against the index). The fee is capped at 5% of outperformance with any under or over performance carried forward for two years in the case of PCT, and indefinitely in the case of GMT. Assessment of the Proposed Changes to the PFI Management Agreement 24

187 100. VHP s performance fee is based on a 10% share of the average annual increase in gross assets over a three year period with the performance fee payable in any one year capped at 1% of gross assets. Any under or over performance is carried forward indefinitely. Additional Fees 101. As discussed above, in some cases external LPV managers provide other services for which they are able to charge fees over and above the base fund management fee, for example: property and facilities management fees (some or all of which can be recovered from tenants); leasing fees or lease renewal fees; rent review fees; acquisition/disposal fees; project management fees; and development fees We set out in the table below an analysis of the average additional fees charged by KIP, GMT and PCT over the last five years. VHP does not appear to have charged any additional fees over this period. PFI does not charge additional fees over and above its base and performance fees and where it is able to on charge for property management services it offsets these recoveries against the management fee charged to PFI ($192,000 in FY12): $millions KIP GMT PCT Property management services net cost to LPV Development fees Leasing, acquisition and disposal Total additional fees Additional fees % average assets 0.33% 0.27% 0.21% Source: LPVs & LPV's managers financial statements, PwC analysis 103. Comparison of these additional fees between LPVs is difficult. Not all LPV managers provide the same services and the level of fees charged for particular services are not always disclosed in sufficient detail. In addition, a portion of the additional fees may be recoverable from tenants. In a number of cases the fees charged by the LPV manager may be for services that are provided by third parties in other LPV instances (e.g. property management services or leasing services). If fees charged by an LPV manager for some of the additional services are at a higher than market rate the excess should be included in any analysis of total expenses but there is insufficient detail to make an accurate comparison We have analysed additional management fees as a percentage of average total tangible assets for the five externally managed LPVs. For the last five years the average fee was 0.27% with the highest fee of 0.42% and the lowest fee 0.12%. Assessment of the Proposed Changes to the PFI Management Agreement 25

188 LPVs Total Management Expenses Ratio 105. Whether an LPV is managed externally or internally, a key issue for investors is the total management costs and whether the interests of management are aligned with the interests of investors. We have calculated the FY2012 total management expense ratio (MER) (management fees, where applicable, plus other operating expenses 7, divided by average total assets) for externally and internally managed LPVs. For externally managed LPVs we have added the potential maximum performance fee although we note that in FY2012 only PCT actually paid a performance fee. The results of our analysis are set out in the graph below: Total expenses and maximum performance fee for New Zealand LPVs (percentage of Average Total Assets) 2.5% Average assets (%) 2.0% 1.5% 1.0% 0.5% 1.00% 1.15% 0.39% 0.88% 1.10% 1.10% 0.38% 0.31% 0.67% 0.70% 0.38% 0.15% 0.92% 0.57% 0.66% 0.74% 0.0% VHP PCT NPT AUG PFI FY13 (projected) PFI postmerger GMT DNZ KIP ARG Total expenses Maximum performance fee Average MER Source: Capital IQ, NZ LPV financial statements, PFI merged entity model Note 1: PFI post merger values are based on forecast expenses under the proposed management agreement including merger synergies Note 2: The analysis excludes fees related to internalisation and includes capitalised management fees where applicable 106. Excluding potential performance fees, LPV s MERs range from a maximum of 1.15% for VHP to 0.57% for GMT with an average of 0.87%. PFI s MER pre-merger is 0.67% and post merger the new fee structure increases to 0.70%, which is still below the average MER. Whilst the management fee component is projected to increase from 0.45% to 0.57%, the other expenses component is projected to decline from 0.23% to 0.14% Whilst PFI s maximum performance fee post-merger is 0.31%, we note that the average performance fee paid by PFI between 2000 and 2012 was 0.18% (58% of the maximum performance fee). LPVs EBIT to Average Total Assets 108. Given the inherent issues with comparing the management fees and MER s of LPVs we have also compared the Earnings Before Interest and Tax (EBIT) to Average Total Asset ratios for LPVs because this measure should capture the impact of the various different fee structures and the costs of additional services for the LPVs: 7 Other operating expenses include expenses such as director s fees and audit fees but excludes bad and doubtful debts, nonrecoverable property cost and fees relating to internalisation of management where applicable. Assessment of the Proposed Changes to the PFI Management Agreement 26

189 EBIT of New Zealand LPVs (percentage of average total assets) 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% VHP PCT PFI KIP GMT ARG PCT NPT AUG PFI postmerger Average Source: Capital IQ, NZ LPVs financial statements, PFI merged entity model Note: PFI post merger is based on projections assuming the merger occurs on 31 December We note that the average LPV EBIT to Average Total Assets ratio for the last three years was 6.49% and for PFI the average was 7.49% over the same period. Based on annualising PFI s postmerger EBIT, its EBIT to Average Total Assets ratio is 7.22% which is still higher than the LPV average for the last three years. Whilst this measure is not perfect as it does not take into account revaluations and is impacted by the mix of property assets it nonetheless reflects the pre-funding yield of the respective LPV s portfolios after allowing for all property management, management fees and other operating expenses. Other Consequences of the Proposed Merger 110. Given the proposed changes to PFI s base management fee comprise an integral part of the Proposed Merger between PFI and DPF and will not occur unless the Proposed Merger is approved, we have evaluated the proposed changes in the context of the impact of the Proposed Merger on PFI which we summarise below. Distributable earnings 111. The Information Memorandum sets out an analysis of the Proposed Merger on PFI s FY13 distributable earnings assuming the Proposed Merger occurs on 1 July We have also considered the impact of the Proposed Merger on distributable earnings assuming a merger date of 31 December 2012 to illustrate a full year impact on distributable earnings. This analysis is summarised in the table below: Distributable earnings per share PFI standalone PFI post-merger Difference Merger date 1 July 2013 (cents) % Merger date 31 December 2012 (cents) % Deloitte Normalised % Source: Information Memorandum, Deloitte Report, PwC Analysis 112. The Proposed Merger is expected to result in a 6.7% increase in distributable earnings for PFI shareholders in FY13 assuming a merger date of 1 July, albeit the majority of the increase is due to the closing out of DPF s interest rate swaps. On a full year basis distributable earnings could be expected to increase by approximately 11%. Assessment of the Proposed Changes to the PFI Management Agreement 27

190 113. Deloitte has prepared a report on the merits and fairness of the Proposed Merger and have undertaken an analysis where they normalise distributable earnings for a range of factors (occupancy rates, current vs market rentals, gearing, hedging, the DPF swaps buy-out, abnormal rental provisions and timing of tax payments). The Deloitte analysis shows normalised distributable earnings for PFI s shareholders increases by 0.2% as a result of the Proposed Merger. Size 114. Following the proposed merger PFI will rank as New Zealand s fifth largest LPV by Total Assets and NTA, as illustrated in the graph below: Net assets and total assets for New Zealand Listed Property Funds 2,500 2,000 1,500 1, KIP GMT PCT ARG PFI postmerger DNZ VHP PFI NPT AUG Total assets Source: Capital IQ, NZ LPVs financial statements, PFI merged entity model Net assets 115. Assuming that PFI post merger trades at a price to NTA ratio of between 1.05x and 1.1x, PFI would move from 42 nd in the NZX 50 index to approximately 29 th. This increased size and higher index ranking should result in an increase in institutional investor interest in the Company, greater coverage by research analysts and improved access to debt and equity capital. Liquidity 116. There is a correlation between liquidity (measured as total volume of shares traded in the last 12 months divided by average number of shares on issue) and size of LPVs, as shown in the graph below: Assessment of the Proposed Changes to the PFI Management Agreement 28

191 New Zealand LPVs size and liquidity NZ$millions 2,500 2,000 1,500 1, KIP GMT PCT ARG DNZ VHP PFI NPT AUG 40% 35% 30% 25% 20% 15% 10% 5% 0% Liquidity (%) Total assets ($m) Liquidity (RHS) Source: Capital IQ, NZX Company Research Note: Following the internalisation of Argosy's management agreement, MFL Mutual Fund Ltd's shareholding dropped from c.20% to c.13% constituting c. 25.9m shares which is reflected in the volume traded for the period. Increased Capital Base and Impact of a Capital Raising 117. Under the Proposed Merger PFI will acquire DPF s $414m property portfolio in exchange for issuing shares based on an exchange ratio of 104% of DPF s NTA / 109% of PFI s NTA as at 28 February To purchase a similar property portfolio PFI would need to raise approximately $260m in new equity by way of either a share issue to existing shareholders, or a placement of shares to new shareholders or a combination of both (with the balance of the acquisition assumed to be debt funded). The cost of raising new equity could be up to 5-10% of the funds raised, allowing for issue costs and typical rights issue or equity placement discounts. Improved Alignment of Interests 119. As a result of the Proposed Merger, DPF s Manager and shareholders of the manager will hold approximately 12.8m shares representing 3.1% of PFI (3.4m shares or 0.8% of which are presently held directly by DPF s Manager). This shareholding reinforces the alignment of the interests of PFI s manager with the interests of the Non-Associated Shareholders. Assessment of the Proposed Changes to the PFI Management Agreement 29

192 Appendix A Statement of Independence, Disclaimer, Restrictions, Limitation of Liability, and Indemnity Qualifications This Report has been prepared by the Corporate Finance division of PricewaterhouseCoopers, which provides advice on mergers, acquisitions and divestments, valuations, independent expert s reports and appraisals, financial investigations and strategic corporate advice. The Partners responsible for this Report are David Bridgman M.Com, LLB, CA and Eric Lucas BA (Hons), FCA, both of whom have extensive experience in relation to corporate restructurings and the preparation of independent expert s reports for the benefit of investors. Independence PricewaterhouseCoopers considers itself independent of PFI and the Related Party in relation to the Proposed Merger. Our fee for preparation of this report is based on the time required for its completion, and it is not contingent on the success or implementation of the Proposed Merger. We are not, and do not intend to be, a director, officer, or employee of, PFI or the Related Party. Consent PwC has consented to the inclusion of this Report in the Information Memorandum in the form and context in which it is included. Scope, Disclaimer and Restrictions The purpose of this Report is to provide an Independent Appraisal Report, as required by NZSX Listing Rule 9.2.5, assessing the fairness of the proposed changes to PFI s Management Agreement to the Non Associated Shareholders. This Report is prepared solely for this purpose and should not be used or relied upon for any other purpose. The statements and opinions expressed in this Report are based on information available as at the date of the Report. In preparing our Report, we have not independently verified the accuracy of information provided to us, and have not conducted any form of audit in respect of PFI or any of its related entities. Accordingly, we express no opinion on the reliability, accuracy, or completeness of the information provided to us and upon which we have relied. In forming our opinions, we have relied on forecasts and assumptions prepared by PFI and PFI s Manager about future events which by their nature are not able to be independently verified. Inevitably, some assumptions may not materialise and unanticipated events and circumstances are likely to occur. Therefore, actual results in the future will vary from the forecasts upon which we have relied. These variations may be material. The statements and opinions expressed in this Report have been made in good faith and on the basis that all relevant information for the purposes of preparing our Report has been provided by PFI and / or its directors and advisers, and that all such information is true and accurate in all material aspects and not misleading by reason of omission or otherwise. Accordingly, neither PricewaterhouseCoopers nor its partners, employees or agents, accept any responsibility or liability for any such information being inaccurate, incomplete, unreliable or not soundly based or for any errors in the analysis, statements and opinions provided in our Report resulting directly or indirectly from any such circumstances or from any assumptions upon which our Report is based proving unjustified, provided that this shall not absolve PricewaterhouseCoopers from liability arising from an opinion expressed recklessly or in bad faith. Our opinions have been arrived at based on economic, market and other conditions prevailing at the date of our Report. Such conditions may change significantly over relatively short periods of time. We reserve the right, but will be under no obligation, to review or amend our Report, if any additional information, which was in existence on the date of our Report, was not brought to our attention, or subsequently comes to light. Limitation of Liability PricewaterhouseCoopers will accept liability to pay damages for losses arising as a direct result of breach of contract or negligence on our part in respect of services provided in connection with, or arising out of, this engagement but, to the extent permitted by law, any liability of PricewaterhouseCoopers, its partners and staff (whether in contract, negligence or otherwise) shall in no circumstances exceed five times the fees paid in the aggregate in respect of all such services. We accept no liability to any party other than the addressee, as our client. Indemnity PFI has agreed to indemnify us against claims brought by any third party (which includes but is not limited to PFI Shareholders and prospective investors). The indemnity covers PricewaterhouseCoopers for any loss or liability suffered or incurred as a result of or in connection with the preparation of our Report. This indemnity in relation to a claim by a third party will only apply to the extent that the costs, loss, damages or other expenditure incurred by PwC exceeds the amount of the liability cap referred to above, and then only to the extent of that excess. Appendix 30

193 Appendix B Sources of Information PwC has obtained all the information that we believe is desirable for the purposes of preparing this Report, including all relevant information which is or should be known to any director of PFI or PFI s Manager. In PwC s opinion the information to be provided to PFI s Shareholders is sufficient to enable them to understand all relevant factors and make an informed decision. The following information was used and relied upon in preparing this Report: Notice of meeting and Information Memorandum in relation to the Proposed Merger The proposed Management Agreement of the merged entity Various correspondence and discussions with PFI s Manager and PFI s Directors PFI s merged entity model supplied by PFI The management agreements of PFI and DPF NZX and NZX Listing Rules NZX Company Research New Zealand Companies Office New Zealand LPVs (and certain LPV s managers) annual reports, broker reports, shareholder announcements and websites DPF s share trading history sourced from Computershare Capital IQ Other publically available information Appendix 31

194 SCA Hygiene, 124a Hewletts Road, Mount Maunganui