ING Industrial Fund Explanatory Memorandum
For a recommended proposal by Goodman Industrial Funds Management Limited ACN 147 891 487 as trustee of Goodman Trust Australia to acquire all of the ordinary units in ING Industrial Fund.
This is an important document and requires your immediate attention. You should read this document in its entirety before deciding whether to vote in favour of the resolutions to approve the Proposal and, if necessary, consult your investment, tax, legal or other professional adviser. You may call the Unitholder information line on 1300 653 497 (within Australia) or +61 2 8280 7057 (outside Australia) if you have any questions.
ING Management Limited (ABN 15 006 065 032; AFSL 237534) as responsible entity of ING Industrial Fund (ARSN 089 038 175)
real estate investment management www .ingrealestate.com.au ING Industrial Fund
Chairman’s letter
10 February 2011
Contents Dear Unitholder Chairman’s letter IFC On 24 December 2010, ING Management Limited (IML), the responsible entity of ING Industrial Fund (IIF), entered Key dates 2 into an Implementation Agreement with Goodman Industrial What you need to do 3 Funds Management Limited (GTA Trustee) in its capacity as trustee of Goodman Trust Australia (GTA), a unit trust Proposal at a glance 4 which upon implementation of the Proposal will be owned Disclaimers and important notices 6 by the Goodman Group and three major pension/sovereign wealth funds (together the Consortium Members) to 1 Questions and answers 8 acquire all of the ordinary units in IIF (Units) under a trust 2 Details of the Proposal 13 scheme (Proposal). 3 Evaluation of the Proposal 20 The Proposal requires the approval of IIF Members at a meeting to be held on 17 March 2011. 4 Meeting/Voting details 25 5 Profile of IIF 28 Consideration Under the Proposal, Unitholders are being offered 54.6 cents 6 Profile of Goodman Trust Australia 34 per Unit in cash (the Offer Price) less any distributions 7 Tax consequences for Unitholders 37 Unitholders become entitled to from 24 December 2010 until implementation of the Proposal (the Consideration). 8 Additional information 42 Following payment of the December quarter 2010 distribution 9 Glossary 51 of 0.8025 cents per Unit, Unitholders will therefore receive Consideration of 53.7975 cents per Unit if the Proposal Appendix A Independent Expert’s Report 58 proceeds. If the Proposal is implemented, Unitholders are not Appendix B Supplemental Deed 153 expected to become entitled to any additional distributions in addition to the December quarter 2010 distribution. If Appendix C Deed Poll 171 Unitholders become entitled to any future distributions, Appendix D Notice of Meeting 180 the Consideration will be reduced by the amount received. Corporate Directory IBC The Independent Expert has concluded the Proposal is fair and reasonable and in the best interests of Unitholders. The Independent Expert, Deloitte Corporate Finance, has reviewed the Proposal and has concluded that the Proposal is fair and reasonable and in the best interests of Unitholders. The Consideration is within the Independent Expert’s valuation range of A$0.534 and A$0.550 per Unit (which takes the December quarter 2010 distribution into account). Further detail on the reasons for its opinion and issues considered by the Independent Expert is contained in the Independent Expert’s Report set out as Appendix A of this Explanatory Memorandum. The IML Independent Directors unanimously recommend that you vote in favour of the Proposal. The Board of IML, as responsible entity of IIF, undertook a strategic review of IIF and examined a range of initiatives to maximise value for Unitholders before deciding to unanimously recommend the Proposal. Section 2.3 of this Explanatory Memorandum describes the alternatives considered. Explanatory Memorandum 1
In undertaking the strategic review of IIF, an Independent Meeting dates Board Committee (IBC) was established given potential The Proposal is subject to a number of conditions, including conflicts of interest between ING Real Estate B.V. (INGRE), the approval of IIF Members. The key conditions and their INGRE’s global real estate investment management platform current status in being satisfied are set out in section 2.5(c) (REIM) and IML on behalf of Unitholders. The IBC comprised of this Explanatory Memorandum. those IML Directors who are independent from INGRE. To The Meeting to consider the Proposal will be held on 17 March further ensure that the best interests of Unitholders were 2011 at Swissôtel Sydney, Level 8, 68 Market Street, Sydney advanced on an independent basis, the Board of IML also NSW 2000, commencing at 2.30pm (AEDST). adopted IBC management protocols to govern its conduct. Refer to section 2.2 for a discussion on the IBC management If the Proposal is approved by IIF Members and all remaining protocols adopted. conditions to implementation of the Proposal are satisfied or otherwise waived (if permitted), it is expected that the The IBC concluded that the Proposal was the preferred option Consideration for your Units will be sent to you on or about to maximise Unitholder value. After a number of proactive 30 March 2011. approaches to other parties seeking alternative offers, and careful consideration of the Proposal, the IML Independent Your vote is important Directors unanimously recommend that IIF Members vote in favour of each Resolution to approve the Proposal, In order for the Proposal to proceed, IIF subject to there being no superior competing proposal Members must pass all of the Resolutions and the Independent Expert not changing or withdrawing to be proposed at the Meeting. its conclusion that the Proposal is in the best interests of The Resolutions include a special resolution which must be Unitholders. A summary of the IML Independent Directors’ passed by at least 75% of the votes cast being voted in favour. evaluation of the Proposal is set out in section 3. ING Group entities, the Consortium Members and their associates are not permitted to vote on the Resolutions. Basis for the IML Independent Directors’ recommendation This Explanatory Memorandum contains important The IML Independent Directors believe that the Proposal information in relation to the Proposal, including the reasons provides Unitholders with an opportunity to immediately for the IML Independent Directors’ recommendation and a realise a price for their investment in IIF at a premium to IIF’s summary of certain reasons why you might vote for or against trading history prior to the emergence of the Proposal, with the Proposal. Please read this Explanatory Memorandum the Consideration of 53.7975 cents per Unit representing: carefully and in its entirety before making your decision and voting (whether in person, by corporate representative or by –– A premium of 17.0% to the closing price of proxy) at the Meeting. 46.0 cents on 27 October 2010, the day prior to the announcement that IML had received an indicative If you have any questions in relation to the Proposal, please proposal; and call the Unitholder information line on 1300 653 497 –– A premium of 23.4% to the six month volume (within Australia) or +61 2 8280 7057 (outside Australia) weighted average price prior to 27 October 2010 Monday to Friday between 8.30am to 5.30pm (AEDST). of 43.6 cents. Alternatively, contact your investment, tax, legal or other professional adviser. In making their recommendation, the IML Independent Directors had regard to a number of factors, including: I look forward to your participation at the Meeting on 17 March 2011 and encourage you to vote in favour of –– The proximity of the Consideration of 53.7975 cents the Proposal. per Unit to Adjusted NTA of 54.608 cents per Unit; –– The recent trading price of IIF Units and the recent Yours sincerely trading of the Australian real estate investment trust sector following the announcement of the Proposal; and –– That after proactive approaches to other parties no superior competing proposal has emerged to date. These considerations have resulted in the unanimous recommendation of the Proposal by the IML Kevin McCann AM Independent Directors. Chairman and Independent Director ING Management Limited ING Industrial Fund 2
Key dates
Event Date
Last date and time to lodge Proxy Forms 15 March 2011 at 2.30pm
Meeting Record Date – Date and time to determine your eligibility to vote 15 March 2011 at 7.00pm at the Meeting
Meeting date 17 March 2011 at 2.30pm
If the Proposal is approved by IIF Members:
Second Court Hearing – Court judicial advice provided that the Resolutions 18 March 2011 have been approved at the Meeting
Effective Date 18 March 2011
Last day of trading of Units on ASX 21 March 2011
Implementation Record Date – All Unitholders who hold Units on the 28 March 2011 Implementation Record Date will be entitled to receive the Consideration for your participation in the Proposal
Implementation Date – Date on which the Proposal will come into effect 29 March 2011
Date on which the Consideration is expected to be paid to Participants 30 March 2011
Note: Dates and times are indicative only and subject to change. Unless otherwise specified, all times and dates refer to AEDST. Any changes to the timetable will be notified to ASX and posted on IIF’s website at www .ingrealestate.com.au. explanatory memorandum 3
What you need to do
Step 1 – read the explanatory memorandum
This Explanatory Memorandum sets out information relating to the Meeting of IIF Members to be held ING Industrial Fund Explanatory Memorandum at 2.30pm (AEDST) on 17 March 2011 at Swissôtel Sydney, Level 8, 68 Market Street, Sydney NSW 2000 to consider the Proposal, and includes the Notice of Meeting. For a recommended proposal by Goodman Industrial Funds Management Limited ACN 147 891 487 as trustee The information contained in this Explanatory Memorandum and the Notice of Meeting is important. of Goodman Trust Australia to acquire all of the ordinary You should read this document carefully and if necessary seek your own independent advice on any units in ING Industrial Fund.
This is an important document and requires your immediate attention. You should read this document aspects about which you are not certain. in its entirety before deciding whether to vote in favour of the resolutions to approve the Proposal and, if necessary, consult your investment, tax, legal or other professional adviser. You may call the Unitholder information line on 1300 653 497 (within Australia) or +61 2 8280 7057 (outside Australia) if you have any questions.
ING Management Limited (ABN 15 006 065 032; AFSL 237534) as responsible entity of ING Industrial Fund (ARSN 089 038 175) If prior to 7.00pm (AEDST) on 15 March 2011 you have sold all of your Units, please disregard this document.
Step 2 – vote
LODGE YOUR VOTE OnLInE www.linkmarketservices.com.au The Meeting is scheduled for 17 March 2011 at: By mail: By fax: +61 2 9287 0309 ING Industrial Fund ING Industrial Fund C/- Link Market Services Limited ARSN 089 038 175 Locked Bag A14 Responsible Entity: Sydney South NSW 1235 Australia ING Management Limited ABN 15 006 065 032 AFSL: 237534 All enquiries to: Telephone: 1300 653 497 Overseas: +61 2 8280 7057 Swissôtel Sydney, Level 8, 68 Market Street, Sydney NSW 2000 commencing at 2.30pm (AEDST). *X99999999999* X99999999999
If you would like to attend and vote at the Meeting, please bring this form with you. This will assist in You can vote on the Resolutions either by attending the Meeting (or having your attorney, or in the registering your attendance.
UnITHOLDER VOTInG FORM I/We, being a member(s) of ING Industrial Fund (IIF) are entitled to attend and vote at the Meeting, so hereby appoint: case of a body corporate, a corporate representative attend) or by completing and returning the Proxy STEP 1 APPOInT A PROXY
the Chairman OR if you are nOT appointing the Chairman of the of the Meeting Meeting as your proxy, please write the name of the (mark box) person or body corporate (excluding the registered unitholder) you are appointing as your proxy or failing the person/body corporate named, or if no person/body corporate is named, the Chairman of the Meeting, as my/our proxy and to vote for me/us on my/our behalf at the Meeting of IIF members to be held at 2:30pm on Thursday, 17 March 2011, at Swissotel Sydney, Form accompanying the Explanatory Memorandum. Proxy Forms must be received by 2.30pm (AEDST) 68 Margaret Street, Sydney, nSW and at any adjournment or postponement of the meeting. If the Chairman of the Meeting is your proxy and you do not specifically direct how your proxy is to vote on a Resolution, you will be taken to have directed the Chairman of the Meeting to vote in favour of the Resolution and the Chairman will exercise your votes in favour of the Resolution.
Proxies will only be valid and accepted by the responsible entity of IIF if they are signed and received no later than 48 hours before the Meeting. Please read the voting instructions overleaf before marking any boxes with an X on 15 March 2011. STEP 2 VOTInG DIRECTIOnS
For Against Abstain* Resolution 1 Approval of amendments to IIF Constitution
Resolution 2 Approval of the Proposal Resolution 3 For details on how to complete and lodge the Proxy Form, please refer to the instructions on your Approval of the change of responsible entity of IIF
*IIF PRX101* Proxy Form. For details on having your attorney or corporate representative attend the Meeting, please
* If you mark the Abstain box for a particular Item, you are directing your proxy not to vote on your behalf on a show of hands or on a poll and your votes will not be counted in computing the required majority on a poll or a show of hands. STEP 3 SIGnATURE OF UnITHOLDERS – THIS MUST BE COMPLETED refer to section 4. Unitholder 1 (Individual) Joint Unitholder 2 (Individual) Joint Unitholder 3 (Individual)
Sole Director and Sole Company Secretary Director/Company Secretary (Delete one) Director This form should be signed by the member. If a joint holding, either member may sign. If signed by the member’s attorney, the power of attorney must have been previously noted by the registry or a certified copy attached to this form. If executed by a company, the form must be executed in accordance with the company’s constitution and the Corporations Act 2001 (Cth). IIF PRX101 ING Industrial Fund 4
Proposal at a glance
What is the Proposal? –– The Proposal is for GTA to acquire all of your Units. –– Under the Proposal as announced on 24 December 2010, the Offer Price is 54.6 cents cash per Unit (less any distributions Unitholders become entitled to or are paid from the date of the Implementation Agreement (24 December 2010) until implementation of the Proposal), with the total amount payable to each Unitholder rounded to the nearest whole cent. –– As a consequence of becoming entitled to the December quarter 2010 distribution of 0.8025 cents per Unit, Unitholders will receive Consideration of 53.7975 cents cash per Unit if the Proposal is implemented. –– IML Directors do not expect that any further distributions will be paid in addition to the December 2010 distribution prior to the implementation of the Proposal. If Unitholders become entitled to any future distributions, the Consideration will be reduced by the amount received. Separately, ING Group will be paid $22.5 million (plus applicable GST) by Goodman under the Facilitation Deed if the Proposal proceeds for, among other things, ING Group giving up its opportunity to receive revenue in respect of IIF arising out of IML’s ongoing management of IIF (Ancillary Transaction). For further details see sections 2.6 and 8.5.
Implementation of the Proposal If the Resolutions are passed, you will not be required to do anything further in order for the Proposal to be implemented. The Proposal is subject to certain Conditions Precedent in addition to IIF Member approval (see sections 2.5(c) and 8.1). IIF will announce to the ASX when all Conditions Precedent to the Proposal have been satisfied or waived and will report on the satisfaction of the Conditions Precedent at the Meeting. It is expected that Unitholders will be sent the Consideration on or about 30 March 2011.
What are the reasons to vote in favour or against the Proposal? This section is a summary only and is not intended to address all of the relevant issues for IIF Members. IIF Members should read all of the Explanatory Memorandum, and in particular section 3.
Reasons to vote in favour of the Proposal and Reasons to vote against the Proposal receive the Consideration
The Consideration under the Proposal is a significant The Consideration under the Proposal represents a premium to recent trading prices of Units prior to the small discount to 31 December 2010 NTA per Unit initial approach by the Consortium Members
The Consideration under the Proposal offers immediate You may not consider it to be the right time to exit your certain value to Unitholders in cash investment in IIF or you may wish to maintain your current investment profile
The Independent Expert has concluded that the Proposal is Tax consequences for Unitholders may not be optimal fair and reasonable and in the best interests of Unitholders for your financial position
The market price of Units may fall if the Proposal is You may disagree with the conclusion or valuation of the not implemented Independent Expert
No superior competing proposal has emerged You may believe that there is the possibility of a superior competing proposal emerging Explanatory Memorandum 5
What if the Proposal does not proceed? If the Proposal does not proceed, Unitholders will continue to hold their Units and no Consideration will be received under the Proposal. IIF will continue to be quoted on the ASX. In the absence of the Proposal, there is a risk that Units will trade at a lower price than the price at which they have traded since the Proposal was announced, having regard to the trading price of Units prior to the announcement of the receipt of the indicative proposal on 28 October 2010. Depending on the reasons for the Proposal not proceeding, IML as the responsible entity of IIF may be liable to pay $14 million to GTA Trustee as a break fee or receive a break fee of $25 million from GTA Trustee. The break fees will not be payable solely because Unitholders do not approve the Proposal. Details of the break fees and the circumstances in which the break fee is payable to, or may be received from, GTA Trustee are described in sections 8.1 and 8.3. If the Proposal does not proceed, the Board of IML will assess available options at the relevant time. This may involve consideration of a number of options, including those outlined in section 2.3.
Independent Expert’s Report The IBC engaged the Independent Expert to provide an independent expert’s report in relation to the Proposal and the Ancillary Transaction (refer to section 2.6 for further information). A copy of the Independent Expert’s Report is set out as Appendix A to this Explanatory Memorandum. The Independent Expert’s Report provides an assessment of the Proposal. The conclusion reached by the Independent Expert is that the Proposal is fair and reasonable and in the best interests of Unitholders. The Independent Expert has reviewed the Ancillary Transaction and has concluded that nothing has come to its attention that causes it to believe that the consideration payable to ING Group is not on arm’s length terms or constitutes the receipt of a collateral benefit by ING Group.
IML Independent Directors’ recommendation For the reasons set out in this Explanatory Memorandum, subject to there being no superior competing proposal and the Independent Expert not changing or withdrawing its conclusion that the Proposal is in the best interests of Unitholders, each IML Independent Director recommends that IIF Members vote in favour of the Resolutions. Christophe Tanghe, the only non-independent director of IML, has made no recommendation due to his role as a senior executive of INGRE. ING Industrial Fund 6
Disclaimers and important notices
This Explanatory Memorandum is issued by ING Management No investment advice Limited (ABN 15 006 065 032) as responsible entity of ING This Explanatory Memorandum does not constitute financial Industrial Fund (ARSN 089 038 175). product advice and does not and will not form any part of any contract for the acquisition of Units. This Explanatory Memorandum This Explanatory Memorandum has been prepared without This Explanatory Memorandum provides IIF Members with taking account of any person’s investment objectives, financial information about the proposed acquisition of all Units on situation or particular needs. IIF Members should seek issue by GTA. The Notice of Meeting is included as Appendix D independent financial and taxation advice before making and a copy of the proposed Supplemental Deed (to implement any investment decision in relation to the Proposal or how the Proposal) is included as Appendix B. to vote in respect of the Proposal. You should read this Explanatory Memorandum in its entirety before making a decision as to how to vote on the Resolutions ASIC and ASX involvement to be considered at the Meeting and, if necessary, consult your A copy of this Explanatory Memorandum (including the investment, tax, legal or other professional adviser. Independent Expert’s Report) has been provided to ASIC for the purpose of Regulatory Guide 74. Neither ASIC nor any Defined terms of its officers takes any responsibility for the contents of this Capitalised terms used in this document have the meaning Explanatory Memorandum. given to them in the Glossary. A copy of this Explanatory Memorandum will be lodged with the ASX. Neither the ASX nor any of its officers takes Disclaimer any responsibility for the contents of this Explanatory None of the entities noted in this document is an authorised Memorandum. deposit-taking institution for the purposes of the Banking Act. The historical information is derived from sources believed Court involvement to be accurate at the date of this Explanatory Memorandum. The First Court Hearing in respect of the convening of the However, no representation or warranty, express or implied, is Meeting is not and should not be treated as an endorsement made as to the fairness, accuracy, completeness or correctness by the Court of, or any other expression of opinion by the of any information, opinion or conclusion contained in Court on, the Proposal. In particular, that hearing does not this Explanatory Memorandum. To the maximum extent mean that the Court: permitted by law, neither IML nor any of its directors, officers, –– has formed any view as to the merits of the Proposal employees, agents, advisers or intermediaries, nor any other or as to how Unitholders should vote (on this matter, person accepts any liability for any loss arising from the use Unitholders must reach their own decision); or of this Explanatory Memorandum or its contents or otherwise –– has prepared, or is responsible for, the content of this arising in connection with it, including, without limitation, any Explanatory Memorandum. liability from fault or negligence on their part. The historical information in this Explanatory Memorandum Responsibility for information is, or is based upon, information that has been released Except as outlined below, the information contained in this to the market. It should be read in conjunction with IIF’s Explanatory Memorandum has been provided by IML and is other periodic and continuous disclosure announcements, the responsibility of IML. Except as outlined below, neither including the IIF full year financial results for the year ended GTA Trustee nor any of its respective directors, employees, 30 June 2010 lodged with ASX Limited (ASX) on 30 August officers or advisers assume any responsibility for the accuracy 2010, the IIF half year financial results for the period ended or completeness of any such information. 31 December 2010 lodged with ASX on 10 February 2011 GTA Trustee has provided and is solely responsible for the and announcements to the ASX available at www .asx.com.au. GTA Information, including information as to the funding The information in this Explanatory Memorandum remains arrangements it has made to provide the Consideration and subject to change without notice. IML reserves the right to information as to GTA’s opinions, views and intentions in withdraw or vary the timetable for the Proposal without relation to IIF (except to the extent that information is based notice. The pro forma financial information provided in this on information about IIF, for which IML takes responsibility). Explanatory Memorandum is for illustrative purposes only None of IML or any of its respective directors, officers and is not represented as being indicative of IIF’s views on or advisers assume any responsibility for the accuracy its future financial condition and/or performance. or completeness of the GTA Information. Explanatory Memorandum 7
The Independent Expert, Deloitte Corporate Finance, has Disclosures regarding forward looking provided and is responsible for the information contained in statements Appendix A of this Explanatory Memorandum. Neither IML, This Explanatory Memorandum contains certain “forward GTA Trustee, nor any of their respective directors, officers, looking statements”. Forward looking statements can employees, agents, advisers or intermediaries assumes generally be identified by the use of forward looking any responsibility for the accuracy or completeness of the words such as “anticipate”, “believe”, “expect”, “project”, information contained in Appendix A. The Independent “forecast”, “estimate”, “likely”, “intend”, “should”, “will”, Expert does not assume any responsibility for the accuracy or “might”, “could”, “may”, “target”, “plan” and other similar completeness of the information contained in this Explanatory expressions within the meaning of securities laws of applicable Memorandum other than that contained in Appendix A. jurisdictions. Indications of, and guidance or outlook on future earnings, distributions or financial position or performance Ernst & Young has provided and is responsible for the are also forward looking statements. The forward looking information contained in the Tax Opinion. Neither IML, statements contained in this Explanatory Memorandum GTA Trustee, nor any of their respective directors, officers, involve known and unknown risks and uncertainties and employees, agents, advisers or intermediaries assumes other factors, many of which are beyond the control of IIF, any responsibility for the accuracy or completeness of the and may involve significant elements of subjective judgment information contained in the Tax Opinion included in this and assumptions as to future events which may or may not be Explanatory Memorandum. correct. There can be no assurance that actual outcomes will not differ materially from these forward looking statements Privacy and personal information and IIF Members are cautioned not to place undue reliance IML will need to collect personal information in connection on such forward looking statements. with the Meeting. The personal information may include the names, contact details and details of holdings of Unitholders, Currency and financial data plus contact details of individuals appointed by IIF Members Unless stated otherwise, all dollar values are in Australian as proxies, corporate representatives or attorneys at the dollars (A$) and financial data is presented as at the Meeting. The collection of some of this information is required date stated. or authorised by the Corporations Act. Unitholders who are individuals, and other individuals in respect of whom personal Time information is collected about them, may have certain rights Unless stated otherwise, all references to time are to to access personal information about them which is collected. Australian Eastern Daylight Saving Time (AEDST). You can contact the IML company secretary if you wish to exercise those rights. The information may be disclosed to Date print and mail service providers, and to IML, GTA Trustee, This Explanatory Memorandum is dated 10 February 2011. the Consortium Members and their advisers to the extent necessary to effect the Proposal. If the information outlined above is not collected, IML may be hindered in, or prevented from, conducting the Meeting or implementing the Proposal effectively or at all. IIF Members who appoint an individual as their proxy, corporate representative or attorney to vote at the Meeting should inform that individual of the matters outlined above. It is noted that all persons are entitled, under section 173 of the Corporations Act, to inspect and copy the IIF register. The IIF register contains personal information about Unitholders. ING Industrial Fund 8
Questions and answers 1 Explanatory Memorandum 9
This section provides summary answers to some questions you may have and will assist you to locate further detailed information in this Explanatory Memorandum. This section is not intended to comprehensively address all issues that may be relevant to you and should be read in conjunction with the remainder of this Explanatory Memorandum. Reference for further Question Answer information Why have I received This Explanatory Memorandum has been sent to you because you are an Section 2 this Explanatory IIF Member and IIF Members are asked to vote on the Proposal which, if Memorandum? approved and implemented, will result in GTA acquiring all Units on issue. This Explanatory Memorandum is intended to help you to decide how to vote on the Resolutions which need to be passed at the Meeting to allow the Proposal to proceed. The IML Directors recommend that you read the Explanatory Memorandum and, if necessary, consult your investment, tax, legal or other professional adviser before voting on the Resolutions. What is the Proposal? The Proposal is an arrangement between IML, as responsible entity of IIF, Section 2 and GTA Trustee that, if approved, will effect the acquisition of all Units by GTA. On 24 December 2010, IML and the Goodman Group announced the Proposal to the ASX. When and where is the The Meeting will be held on 17 March 2011 at 2.30pm (AEDST) Section 4, Meeting to be held? at Swissôtel Sydney, Level 8, 68 Market Street, Sydney NSW 2000. Proxy Form Details for proxy voting are set out in section 4 and the Proxy Form. Who are GTA, GTA GTA is a unit trust established by the Consortium Members for the purpose Section 6 Trustee and the of acquiring the Units under the Proposal. Consortium Members? The Consortium Members are APG, CPPIB (or its wholly owned trust or nominee), Leader (or its wholly owned trust or nominee) and the Goodman Group. GTA Trustee is Goodman Industrial Funds Management Limited. Further details on GTA, GTA Trustee and the Consortium Members are provided in section 6. What is the Under the Proposal, Unitholders will receive Consideration of 53.7975 cents Section 2.5 Consideration? per Unit (with the total amount payable to each Unitholder rounded to the nearest whole cent). IML Directors do not expect that any further distributions will be paid in addition to the December quarter 2010 distribution Unitholders have become entitled to prior to the implementation of the Proposal. If Unitholders become entitled to any future distributions, the Consideration will be reduced accordingly. What is the Independent The Independent Expert has valued Units at A$0.534 to A$0.550 per Unit Appendix A Expert’s opinion (which takes the December quarter 2010 distribution into account), and on the Proposal? concluded that the Proposal is fair and reasonable and in the best interests of Unitholders. The full Independent Expert’s Report is set out in Appendix A. ING Industrial Fund 10
Questions and answers
Reference for further Question Answer information Do the IML Independent The IML Independent Directors unanimously recommend that you vote Section 3 Directors recommend in favour of each Resolution to approve the Proposal in the absence of a the Proposal? superior competing proposal and subject to the Independent Expert not changing or withdrawing its conclusion that the Proposal is in the best interests of Unitholders. The reasons for the IML Independent Directors’ unanimous recommendation are set out in section 3. Why might I vote Please refer to section 3.2 “Why you might vote against the Proposal” Section 3.2 against the Proposal? for some of the reasons why you may elect to vote against the Proposal. What is the Ancillary ING Group entities and Goodman Limited (Goodman) have entered into Section 2.6 Transaction? a facilitation deed dated 24 December 2010 (Facilitation Deed) pursuant to which the ING Group entities have agreed to use their reasonable endeavours to assist Goodman with, among other things: –– implementing the Proposal; –– the appointment of Goodman RE as the responsible entity of IIF; –– obtaining certain consents or waivers in connection with, among other things, the ING Asset Management Agreements and ING Facilities; –– the transition of a number of employees engaged by IIF to Goodman (or as it directs); and –– the transfer of various know-how, books and records of IML as they relate to, and the vesting of assets of IIF in, Goodman RE (or as it directs). In addition, if the Proposal proceeds, Goodman will pay ING Group A$22.5 million (plus applicable GST) in consideration for, among other things, ING Group giving up its opportunity to receive revenue in respect of IIF arising out of IML’s ongoing management of IIF. What do I have to If the Proposal is approved by IIF Members at the Meeting, you do not Section 2.5 do to receive the need to do anything to receive the Consideration. Consideration? When will I receive If the Proposal becomes Effective, the Consideration will be paid within Section 2.5(F) the Consideration? one Business Day after the Implementation Date. On the current indicative timetable, the Implementation Date is expected to be 29 March 2011. The Consideration will be paid by making a payment into your nominated bank account with the Registry. If you do not have a nominated bank account with the Registry as at the Implementation Record Date, you will be sent a cheque for the Consideration. Can I keep my Units? If the Proposal becomes Effective, GTA will acquire all Units on issue, Section 2 including those of Unitholders who voted against the Proposal or did not vote at the Meeting. What will be the The taxation consequences of the Proposal will depend on your personal Section 7 tax consequences taxation and financial circumstances. of receiving the However, general information about the likely Australian capital gains tax Consideration? consequences of the Proposal is set out in section 7. IML recommends that Unitholders seek their own tax advice in relation to the tax consequences of the Proposal. Explanatory Memorandum 11
Reference for further Question Answer information What are the The Conditions Precedent to be either satisfied or (where applicable) waived Sections 2.5(C) Conditions Precedent before the Second Court Date are set out in section 8.1 of this Explanatory and 8.1 of the Proposal? Memorandum. The key conditions and the current status of the satisfaction of those conditions are set out in section 2.5(c) and include: –– approval of the Resolutions by the IIF Members; –– the Implementation Agreement not having been terminated; –– ASIC relief being obtained; –– notice of no objection from the Foreign Investment Review Board (FIRB); and –– no IIF Prescribed Event or IIF Material Adverse Change having occurred. IML will make an announcement to ASX when all Conditions Precedent are satisfied or waived and will report on the satisfaction of the Conditions Precedent at the Meeting. What are the IIF Members are required to approve: Section 2.5(A) Resolutions proposed –– amendments to the IIF Constitution which will allow the Proposal at the Meeting? to be implemented; –– the Proposal including the acquisition of all Units by GTA; and –– a change of the responsible entity of IIF which would be effected at the time of implementation of the Proposal. What is the required The approval threshold is different for each Resolution but the Resolutions Sections 2.5(A) majority to approve are interconditional. The Resolution to approve the amendments to the IIF and 4 the Proposal? Constitution requires the approval by at least 75% of the votes cast on the Resolution. The Resolution to approve the Proposal and the change of IIF responsible entity are ordinary resolutions, and will be passed if more than 50% of the votes cast are in favour. Who is entitled to vote? Every IIF Member on the register at 7.00pm (AEDST) on 15 March 2011, Sections 4.1, unless excluded in accordance with the Notice of Meeting. 4.4 and 4.6 No ING Group entities, GTA Trustee or Consortium Members or their associates can vote on the Resolutions as they have an interest in the Proposal different to other IIF Members. Is voting compulsory? No, although your vote is important and the IML Independent Directors Section 4 encourage you to exercise your right to vote. Each Unit is equally important in determining whether the Proposal will be approved. Your IML Independent Directors unanimously recommend that you vote in favour of the Proposal in the absence of a superior competing proposal and the Independent Expert not changing or withdrawing its conclusion that the Proposal is in the best interests of Unitholders. In the event you cannot attend the Meeting, we encourage you to complete the enclosed personalised Proxy Form and return it to the Registry as per the instructions on the form so that it is received by no later than 15 March 2011 at 2.30pm (AEDST). ING Industrial Fund 12
Questions and answers
Reference for further Question Answer information How can I vote? You can vote at the Meeting: Section 4 –– in person; –– by completing and returning the Proxy Form that is enclosed with this Explanatory Memorandum in accordance with the instructions on the Proxy Form; or –– by attorney or, in the case of a body corporate, by corporate representative. When will the results of The results of the Meeting will be available shortly after the conclusion the Meeting be known? of the 17 March 2011 meeting and will be announced to the ASX as soon as practicable. However, before the Proposal can be implemented (assuming the Resolutions are passed), IML will apply for further Judicial Advice at the Second Court Hearing to the effect that it would be justified in implementing the Proposal in accordance with the Resolutions as approved by IIF Members. IML intends to act in accordance with such Judicial Advice in proceeding to implement the Proposal. Could I be bound by Yes, if the Proposal is approved by IIF Members at the Meeting and the Proposal if I do not becomes Effective, then any Units held by you on the Implementation vote or if I vote against Record Date will be transferred to GTA and you will receive the the Proposal? Consideration, notwithstanding that you did not vote, or that you voted against the Proposal. What happens if If the Proposal does not proceed: Sections 2.3, the Proposal does –– Unitholders will not receive the Consideration; 3.3 and 8 not proceed? –– Unitholders will retain their Units and IIF will remain listed on ASX; and –– the Board of IML will consider a number of potential alternatives available to IIF under the strategic review. Details of the key alternatives considered under the strategic review are provided in section 2.3. Depending on the reasons for the Proposal not proceeding, IML as responsible entity of IIF may have to pay a break fee to GTA Trustee or receive a break fee from GTA Trustee. No break fee is payable if the Proposal does not proceed solely because the Resolutions are not passed. Where can I find If you have any questions in relation to the Proposal, or would like further information? additional copies of this Explanatory Memorandum or the Proxy Form, please call the Unitholder information line on: –– 1300 653 497 (from within Australia); or –– +61 2 8280 7057 (from outside Australia). This Explanatory Memorandum is also available electronically at www .ingrealestate.com.au. For information about your individual financial or taxation circumstances, please consult your investment, tax, legal or other professional adviser. Explanatory Memorandum 13
Details of the Proposal 2 ING Industrial Fund 14
Details of the Proposal
2.1 Background –– The IBC took responsibility for the negotiation of the The global financial crisis severely disrupted capital markets terms of the Proposal, and the decision to enter into worldwide and fundamentally changed the landscape in the Implementation Agreement and commit IML to which global financial institutions operate and structure propose the Proposal to IIF Members; and their businesses. It was within this context that ING Group –– The IBC and its advisers were not involved in the announced to the market that it was conducting a strategic Ancillary Transaction. evaluation of its global real estate investment management platform, REIM and its position within the broader ING Group 2.3 IIF Strategic Review banking business. This review included the Australian real In addition to the ING strategic review referred to above, estate investment management platform, REIMA, and the independently the Board of IML has undertaken a separate potential impact on Unitholders. strategic review of IIF. The strategic review involved an In light of the ING Group review of its global real estate extensive assessment of a number of options and included investment management platform, in May 2010 the Board of discussions with a number of parties about potential IML, as responsible entity for IIF, commenced a strategic review transactions. All the strategic review outcomes were evaluated of IIF and examined a range of initiatives to maximise value and assessed with a focus on maximising value for Unitholders for Unitholders. and closing the gap between the trading price of Units and underlying NTA. 2.2 eSTABLIShment of the Independent In undertaking its strategic review, the Board of IML Board Committee considered a number of options for IIF, including the following: In addition to IML being the responsible entity of IIF, ING –– Maintaining the same business and operating model Group entities, acting through IML, are sub trustees of certain of IIF and refining and refocusing the strategic direction IIF sub trusts, are co-owners with IIF, provide finance to IIF of IIF; and manage certain IIF assets. Recognising the potential for conflicts to arise in the course of undertaking the IIF strategic –– A sale of the management rights to IIF to a third party; review, the Board of IML established an Independent Board –– Restructuring the manager and internalising the Committee (IBC) and adopted protocols and procedures management of IIF; to ensure that the development and consideration of any –– A merger of IIF with another fund; and proposal for IIF was undertaken independently from the –– Disposal of all of IIF’s assets over time. ING Group. Prior to the completion of the strategic review, the Board of The IBC comprised the IML Directors who are independent IML commenced discussions with the Goodman Group which of INGRE, namely Richard Colless until his retirement on led to the development of the Proposal. 23 September 2010, following which Kevin McCann was appointed to the IBC, Paul Scully, Michael Easson and Philip 2.4 development of the Proposal Clark. To ensure that the best interests of Unitholders were Following an announcement by ING Group that the strategic advanced on an independent basis of INGRE, the Board review of its global real estate investment management of IML also adopted IBC management protocols to govern platform included a strategic review of the Australian its conduct and manage any potential conflicts during platform in July 2010, Goodman Group confirmed to the the strategic review process. market its interest in obtaining the management rights to Specific procedures adopted by the IBC included: IIF. Goodman Group increased its stake in IIF from 4.4% to –– Christophe Tanghe, who has a potential conflict of 7.1% in September 2010. On 28 October 2010, Goodman interest due to his role as a senior executive of INGRE, Group submitted a conditional incomplete offer to the Board has made his knowledge available to the IBC, however, of IML, on behalf of the Consortium Members, to acquire he has not voted in relation to proposals affecting IIF, the ordinary IIF Units for cash consideration reflecting a price including the Proposal; equivalent to the NTA at 30 June 2010 adjusted for items post that date and costs of implementing the proposal. Goodman –– The IBC appointed Mallesons Stephen Jaques to act Group subsequently submitted a conditional and incomplete on behalf of IML in relation to the strategic review. The revised proposal of 54.0 cents per Unit. On 15 November ING Group was represented by separate legal advisers; 2010, after considering the merits of the revised proposal, –– The IBC appointed Goldman Sachs and UBS AG to act the Board of IML agreed to grant the Consortium Members on behalf of IML as financial advisers; non-exclusive access to due diligence and to engage with Explanatory Memorandum 15
the Consortium Members, in order to determine whether (d) A sale of IIF’s assets on an individual basis is expected an acceptable transaction could be agreed which maximised to take significant time and expose Unitholders to value to Unitholders. market risk at a time when it would be a known seller of assets. There is no certainty that Unitholders would During the Consortium Members’ due diligence period, the realise more than the Consideration offered under the Board of IML continued to actively approach other parties; Proposal; and however, no other competing proposals emerged. (e) The Board of IML proactively approached other parties On 24 December 2010, following negotiations between the seeking alternative offers for Units; however, no other IBC and GTA Trustee, the Board of IML announced that: competing proposals have emerged to date. (a) IML had entered into an Implementation Agreement with GTA with cash consideration of 54.6 cents per 2.5 details of the Proposal Unit less any distributions Unitholders become entitled The Proposal is a trust scheme which is an arrangement to from 24 December 2010 until implementation of which, if implemented, will result in all Units on issue being the Proposal; transferred to GTA and GTA Trustee paying the Consideration (b) It believed the Proposal was in the best interests of to Participants. Unitholders; and (a) Resolutions (c) IML Independent Directors would recommend the The transfer of all Units on issue to GTA requires IIF Members Proposal in the absence of a superior competing to consider and, if considered appropriate, to approve the proposal and subject to an Independent Expert following Resolutions: concluding that the Proposal is in the best interests Resolution 1: amendment resolution of Unitholders. IIF Members must approve an amendment to the IIF In concluding that the Proposal is in the best interests of Constitution to authorise all actions necessary or desirable for Unitholders, the IML Independent Directors took the view that the transfer of the Units to GTA. These amendments are set the cash Consideration offered under the Proposal is superior out in the Supplemental Deed in Appendix B. to the other alternatives considered for the following reasons: These amendments must be approved by a special resolution (a) Under the same business and operating model, the which requires approval by at least 75% of the votes cast on market price of Units is unlikely to equal or exceed the the resolution at the Meeting by IIF Members entitled to vote Consideration in the short to medium term. IIF’s ability on the resolution. to grow its investment portfolio may be limited due to a higher cost of capital relative to its peers; Resolution 2: acquisition resolution In addition to the amendment resolution, IIF Members must (b) A sale of the management rights for IIF to a third approve the acquisition by GTA of all the Units on issue by party or a restructure of the responsible entity and an ordinary resolution of IIF Members for the purposes of internalisation of management is not expected to have item 7 of section 611 of the Corporations Act, which requires a significant positive impact on IIF’s earnings and the approval by more than 50% of the votes cast on the resolution market value of Units relative to the Proposal; at the Meeting by the IIF Members entitled to vote on (c) A merger of IIF with another entity may not result the resolution. in the units in the merged entity trading at a market price which exceeds the Consideration offered under Resolution 3: Change of responsible entity of IIF the Proposal nor does it offer the immediate price and IIF Members must also approve a change in the responsible cash certainty delivered by the Proposal. In addition, entity of IIF from IML to Goodman RE by ordinary resolution any merger entails various risks, including potential of IIF Members, which requires approval by more than 50% diversification away from IIF’s current strategy to invest of the votes cast on the resolution at the Meeting by the IIF only in high-quality Australian industrial real estate, Members entitled to vote on the resolution, such change to implementation and general market-related risks; take effect on the Implementation Date. ING Industrial Fund 16
Details of the Proposal
Resolutions interconditional (b) Consideration Each of the Resolutions is interconditional and the Proposal will If the Proposal becomes Effective, GTA Trustee will provide only proceed if all the Resolutions are passed at the Meeting the Consideration to each Unitholder (or to IML on trust for by the requisite majorities. If any of the Resolutions are not each Unitholder) who is on the register at the Implementation approved, the Proposal will not be implemented. Please refer Record Date, which is expected to be 28 March 2011. to section 3.3 for the consequences if the Proposal does The Consideration is 53.7975 cents cash per Unit. If the not proceed. Proposal is implemented IIF Unitholders are not expected to Judicial Advice become entitled to any future distributions in addition to the On 10 February 2011, IML applied for Judicial Advice from December quarter 2010 distribution. If Unitholders become the Court in relation to whether it may take the steps required entitled to any future distributions, the Consideration will be to despatch the Explanatory Memorandum and convene a reduced by the amount received. If a Unitholder would have Meeting of IIF Members to consider the Proposal. On that a fractional entitlement to part of a cent in cash arising from date, the Court indicated that IML is justified in: the calculation of the total amount payable to the Unitholder, –– proceeding on the basis that amendments to the then their fractional entitlement will be rounded to the nearest IIF Constitution as set out in the Supplemental Deed whole cent and the fractional entitlement will be disregarded. would be within the powers of IML contained in the (c) Conditions and termination rights IIF Constitution and consistent with section 601GC(1) The Proposal is subject to a number of conditions. Set out of the Corporations Act; and below are the key conditions to implementation of the –– convening a Meeting of IIF Members to consider Proposal, together with a brief description of the status and, if thought fit, approve the Resolutions. of these conditions. The conditions are included in the Implementation Agreement and an explanation of them is contained in section 8.
Key condition Status of conditions
IIF Member approval: IIF Members approving by special A Meeting of IIF Members is to be held on 17 March resolution the amendment to the IIF Constitution and by 2011 at 2.30pm (AEDST) at Swissôtel Sydney, Level 8, ordinary resolution the approval of the Proposal and the 68 Market Street, Sydney NSW 2000. change of the responsible entity of IIF.
The Implementation Agreement not having been IML is not aware of any such action or event. terminated: The Implementation Agreement can be terminated for certain reasons outlined in section 8 “Additional information”, including if a party materially breaches any clause of the Implementation Agreement or if any IML Independent Director changes their recommendation to IIF Members to vote in favour of the Proposal.
Regulatory approvals: The Proposal will not be All ASIC relief and ASX confirmations have been received. implemented unless the regulatory approvals necessary and desirable to implement the Proposal are received from ASIC and ASX as outlined in the Implementation Agreement.
FIRB no objection: The Proposal will not be implemented The application for FIRB review has been submitted by unless the regulatory approvals necessary from FIRB to GTA Trustee and approval is expected to be obtained implement the Proposal are satisfied as outlined in the prior to the Second Court Date. Implementation Agreement.
No IIF Prescribed Event or IIF Material Adverse IML is not aware of any such event or change. Change: No IIF Prescribed Event or IIF Material Adverse Change occurs or becomes apparent between the date of the Implementation Agreement (being the 24 December 2010) and 8.00am (AEDST) on the date of the Second Court Hearing. Explanatory Memorandum 17
IML and GTA Trustee have agreed in the Implementation (d) Second Judicial Advice Agreement to use all reasonable endeavours to procure If: that each of these key conditions is satisfied as soon as –– the Resolutions are approved by the requisite practicable after the date of the Implementation Agreement majorities; and (being 24 December 2010) and that they continue to be –– all Conditions Precedent to the Proposal have been satisfied at all times until the last time they are required satisfied or remain capable of being satisfied, or to be satisfied under the Implementation Agreement. (where applicable) waived, Termination IML will apply for further judicial advice (the Second Judicial IML and GTA Trustee may terminate the Implementation Advice) to the effect that it is justified in acting upon the Agreement if: Resolutions and in doing all things and taking all necessary –– the Proposal has not become Effective on or before steps to implement the Proposal. If the Court does not advise the End Date; that IML is so justified, the Proposal will not become Effective. –– the Resolutions are not approved by the requisite Each IIF Member has the right to appear at this court hearing majority of Eligible IIF Members at the Meeting; seeking the Second Judicial Advice. The date for the Second –– the other party materially breaches any clause of the Court Hearing is currently scheduled for 18 March 2011, Implementation Agreement and, to the extent that although this date is subject to change. breach is capable of remedy, that party does not (e) Implementation steps & timing remedy the breach by the required date; If the Court provides the Second Judicial Advice following –– a Regulatory Authority has issued a final and approval of all Resolutions by IIF Members at the Meeting by non-appealable order, decree or ruling or taken any the requisite majorities and the satisfaction or waiver of all other action which permanently restrains or prohibits other Conditions Precedent to implementation, IML and GTA the Proposal; Trustee will take or procure the taking of the steps required –– the Court does not provide the Judicial Advice and an for the Proposal to be implemented, including lodging with expert opinion is obtained that an appeal is unlikely to ASIC a copy of the Supplemental Deed to give effect to be successful; the amendments to the IIF Constitution at which time the –– either GTA Trustee or a Consortium Member, or IML Proposal will become Effective. or any of IML’s subsidiaries, respectively becomes It is anticipated that these steps will occur on or about insolvent; 18 March 2011. –– any of the Conditions Precedent are not satisfied or If the Proposal becomes Effective: waived by the requisite date (if any) and the parties cannot agree to extend that date; or –– IML will become bound to take the steps required for GTA to become the holder of all Units held by –– the termination is agreed to in writing by GTA Trustee the Participants; and and IML. –– GTA Trustee will become bound to deposit the In addition: Consideration into a trust account operated by IML –– GTA Trustee may terminate the Implementation in cleared funds on the Implementation Date. Agreement: On the Implementation Date, following receipt by IML on – if any IML Independent Director changes their behalf of all Unitholders of the Consideration, IML will execute recommendation to IIF Members that they a master transfer on behalf of all Participants to transfer all vote in favour of the Resolutions, including any of their Units to GTA and deliver the master transfer to GTA adverse modification to their recommendation Trustee or otherwise effect a transfer of such Units in CHESS or otherwise makes a public statement that and enter the name of GTA Trustee in the register in respect they no longer support the Proposal; or of all Units. – if a person other than GTA Trustee and its associates has a Relevant Interest in more than 50% of the Units; or –– IML may terminate if GTA Trustee or a Consortium Member is in breach of its obligations under the Deed of Undertaking. ING Industrial Fund 18
Details of the Proposal
(f) Payment of the Consideration In addition, as contemplated by the change of responsible IML will receive the Consideration on behalf of Unitholders entity resolution described in section 2.5(a), it is proposed on the Implementation Date. Payment of the Consideration that IML will be replaced as responsible entity of IIF by to Participants will be made within one Business Day after the Goodman Funds Management Limited ACN 067 796 641 Implementation Date. The Implementation Date is currently (Goodman RE). Such replacement would take effect on expected to be 29 March 2011. implementation of the Proposal. The Consideration will be paid by making a payment into In order to facilitate the Proposal and assist in the orderly your nominated bank account with the Registry. If you transition in the replacement of the responsible entity of have not previously notified the Registry of your nominated IIF, ING Group entities have separately entered into the bank account or would like to change your existing Facilitation Deed pursuant to which they have agreed to nominated bank account, you should contact the Registry use their reasonable endeavours to assist Goodman with, on 1300 653 497 (within Australia) or +61 2 8280 7057 among other things: (outside Australia) before the Implementation Record Date. –– implementing the Proposal; If you do not have a nominated bank account with the –– the appointment of Goodman RE as the responsible Registry as at the Implementation Record Date, you will be entity of IIF; sent a cheque for the Consideration. If your whereabouts –– obtaining certain consents or waivers in connection are unknown as at the Implementation Record Date, the with, among other things, the ING Asset Consideration will be paid into a separate bank account and Management Agreements and ING facilities; held by the then responsible entity of IIF until claimed or –– the transition of a number of IIF employees to applied under laws dealing with unclaimed money. Goodman (or as it directs); and (g) Warranty by Participants about their Units –– the transfer of know-how, books and records of IML The effect of schedule 6 of the IIF Constitution as inserted by as they relate to IIF to, and the vesting of assets of IIF the Supplemental Deed is that all Participants, including those in, Goodman RE (or as it directs). who do not vote and those who vote against the Proposal, will be deemed to have warranted to IML in its own right, Together, the arrangements referred to above, and as more and on behalf of GTA Trustee, that their Units are fully paid fully set out in the Facilitation Deed, are described as the up and are not subject to any encumbrances or interests of Ancillary Transaction. third parties or restrictions on transfer of any kind and that The Facilitation Deed provides, if the Proposal proceeds, for they have full power and capacity to sell and transfer the an amount of $22.5 million (plus any applicable GST) to be Units registered in their name. paid to ING Group in consideration for, among other things, If the warranty is breached, Participants may be liable to pay ING Group giving up its opportunity to receive revenue in to GTA Trustee any amounts GTA Trustee pays to acquire respect of IIF arising out of IML’s ongoing management of IIF. clear title to its Units. This amount will become payable shortly after implementation of the Proposal. 2.6 A rrangements between the ING Group For more information about the Facilitation Deed, see and Goodman Group section 8.5. IML is a wholly owned subsidiary of ING Real Estate Investment Management Asia/Pacific BV (REIM AP), 2.7 GTA’s intentions for IIF which in turn is ultimately wholly owned by ING Groëp NV The intentions set out in this section are statements of current (ING Group). ING Real Estate International Investment III BV intention only and are based on facts and circumstances that (REI III), also ultimately wholly owned by ING Group, holds are known to GTA as at the date of preparing this Explanatory a total of 202,174,232 units in IIF as at 4 February 2011. Memorandum. Final decisions will only be made by GTA IIF currently has in place a number of asset management after having conducted a detailed review of IIF. Accordingly, agreements with members of the ING Group in respect the intentions set out in this section may change as new of certain of its properties situated in Europe (ING Asset information becomes available or circumstances change. Management Agreements) pursuant to which an ING Group member provides asset management services to IIF. There are also a number of finance facilities in place with various members of the ING Group (ING Facilities) pursuant to which an ING Group member has provided financing to IIF and/or a subsidiary of IIF. Explanatory Memorandum 19
If the Proposal is implemented, GTA will hold all of the Units in IIF. In particular, GTA intends to: –– have IIF removed from the official list of the ASX; –– establish an investment committee that will be responsible for the review, endorsement or approval of key investment decisions and related party matters; –– maximise the value of IIF by applying Goodman Group’s integrated own, develop and manage customer service model to drive portfolio organic value and enhance it by developing IIF’s existing development pipeline; –– manage the divestment of IIF’s European portfolio over the short to medium term with proceeds used to repay debt and re-invest in Australian development opportunities; –– reposition IIF’s Australian portfolio to improve portfolio value and redirect capital to more attractive investment in Australian developments; and –– refinance IIF’s existing A$920 million Australian syndicated facility using a new A$1.1 billion syndicated facility. The implications of the implementation of the Proposal on the Exchangeable Notes are set out in section 8.15 and include the trigger of a right for Exchangeable Noteholders to request the redemption of their Exchangeable Notes. Implementation of the Proposal does not provide the responsible entity of IIF with any right to redeem the IIF Subordinated Bonds underlying the Exchangeable Notes without such a request. Goodman RE has not yet formed any intention as to whether (in its capacity as responsible entity of IIF following implementation of the Proposal) it will, following redemption requests, redeem the IIF Subordinated Bonds underlying the Exchangeable Notes. Until Goodman RE is able to consider what redemption requests, if any, are made by Exchangeable Noteholders following implementation of the Proposal, it is not able to form any intention in that respect, which may be influenced by the number of Exchangeable Notes in respect of which redemption requests are made and other relevant factors at that time. ING Industrial Fund 20
Evaluation of the Proposal 3 Explanatory Memorandum 21
3.1 Why you might vote in favour of the Proposal This section is a summary only and is not intended to address all the relevant issues for IIF Members in respect of the Proposal. IIF Members should read the Explanatory Memorandum in its entirety. This section should be read in conjunction with the other sections of this Explanatory Memorandum. In reading this section you should note that the IML Independent Directors unanimously recommend that IIF Members vote in favour of the Proposal, in the absence of a superior competing proposal and the Independent Expert not changing or withdrawing its conclusion that the Proposal is in the best interests of Unitholders. The Consideration of 53.7975 cents cash per Unit is a significant premium to the recent trading prices of Units –– The Consideration is a premium of 17.0% to the closing price of 46.0 cents on 27 October 2010, the day prior to the announcement that IML had received an indicative proposal. –– The Consideration is a premium of 23.4% to the six month volume weighted average price prior to 27 October 2010 of 43.6 cents. In comparison, as at 20 January 2011, the S&P/ASX200 A-REIT index closed 0.6% higher relative to the level it closed at on 27 October 2010. Proposal Consideration premium to recent trading prices of Units (cents per Unit)
17.0% 23.4%
53.7975 46.0 43.6
GTA Consideration 27 Oct 2010 6-month VWAP to 27 Oct 2010
Source: IRESS The Consideration under the Proposal offers immediate certain value to Unitholders in cash –– Units continued to trade at a significant discount to NTA prior to the announcement of the initial proposal by the Consortium Members on 28 October 2010. –– The Consideration under the Proposal delivers the certainty of cash and provides Unitholders with an opportunity to immediately realise a price at a premium to its trading history prior to the receipt of the indicative proposal. The IML Independent Directors unanimously recommend that IIF Members vote in favour of the Proposal, in the absence of a superior competing proposal and the Independent Expert not changing or withdrawing its conclusion that the Proposal is in the best interests of Unitholders –– The IML Independent Directors’ recommendation has been provided following a thorough review of strategies to enhance value for Unitholders (see sections 2.4 and 3). There is no certainty that any of the alternative strategies can deliver a superior value outcome within an acceptable timeframe relative to the Proposal. The all-cash Consideration provides Unitholders with an opportunity to realise a price for their investment in IIF at a premium to its trading history prior to the emergence of the Proposal, albeit at a slight discount to NTA per Unit. –– After discussions with other parties no superior competing proposal has emerged to date nor have Units traded at a price which is higher than the Consideration under the Proposal since the announcement of the initial proposal by the Consortium Members. ING Industrial Fund 22
Evaluation of the Proposal
The Independent Expert has concluded that the Proposal is fair and reasonable and in the best interests of Unitholders –– The IML Independent Directors appointed Deloitte Corporate Finance as an Independent Expert to provide a report for Unitholders expressing an opinion as to whether the Proposal is fair and reasonable and in the best interests of Unitholders. –– The Independent Expert has concluded that the Proposal is fair and reasonable and in the best interests of Unitholders. –– The Consideration of 53.7975 cents per Unit falls within the Independent Expert’s valuation range of A$0.534 to A$0.550 per Unit (which takes the December quarter 2010 distribution into account). The trading price of Units may fall if the Proposal is not implemented –– Prior to the announcement of the initial proposal from the Consortium Members, Units traded at a price which represented a significant discount to stated NTA. –– If the Proposal is not implemented Units may trade at a lower price than the: – Price at which they have traded since the initial proposal from the Consortium Members was announced on 28 October 2010; and – The Proposal Consideration of 53.7975 cents per Unit in the absence of a superior competing proposal. IIF Unit trading price performance
Close Price NTA
65.0
60.0
55.0 GTA Consideration 50.0
IIF trades ex December 45.0 2010 quarter distribution Initial approach by of 0.8025c per unit Unit price (cents) 40.0 Consortium Members
35.0
30.0
1 Jan 10 1 Apr 10 1 Jul 10 1 Oct 10 1 Jan 11
Note: NTA backing represents the NTA backing per IIF Unit disclosed in IIF’s financial results for the periods ending 31 December 2009, 30 June 2010 and 31 December 2010. The future trading price of Units is uncertain –– The future trading price of Units will continue to be subject to market volatility, including general stock market movements, general economic conditions and the demand for listed securities. –– The trading price of Units will continue to be subject to changes in NTA and earnings as a result of movements in foreign exchange rates given IIF continues to hold a number of properties in Europe. –– IIF will continue to be subject to risks associated with any potential disposal of IML or REIMA by INGRE as part of the global review process of REIM being undertaken by ING Group. No superior competing proposal has emerged –– No superior competing proposal has emerged following the announcement of the initial approach from the Consortium Members on 28 October 2010. No brokerage –– There is no brokerage payable by Unitholders under the Proposal. Explanatory Memorandum 23
3.2 Why you might vote against the Proposal You may disagree with the conclusions of the IML Independent Directors and the Independent Expert –– You may consider that the trading price of Units may improve over time to a point above the Consideration. In this case, you may consider that the Consideration offered under the Proposal is inadequate. –– You may consider that an internalisation of IIF’s management or a merger with another entity, may realise greater value than the Consideration. The Consideration of 53.7975 cents cash per Unit is at a discount to the 31 December 2010 net tangible asset backing –– The Consideration represents a discount of 1.5% to the Adjusted NTA of 54.608 cents per Unit as at 31 December 2010 (refer to chart below). –– When adjusted for the expected March 2011 quarter distribution of 0.8025 cents, the adjusted Consideration of 52.9950 cents is a discount of 3.0% to the Adjusted NTA of 54.608 cents per Unit as at 31 December 2010. IIF’s NTA at 31 December 2010 was 55.518 cents per Unit. However, for the purposes of the Proposal, NTA is adjusted for the redemption of the Exchangeable Notes, being the difference between the face value ($395 million) and the accounting carrying amount ($371 million) of the Exchangeable Notes. This results in an Adjusted NTA of 54.608 cents per Unit. Implied premium/(discount) of Consideration under the Proposal to the Adjusted NTA backing of Units at 31 December 2010
(1.5)%
53.7975 54.608
GTA Consideration Adjusted net tangible asset backing at 31 Dec 2010
You may not consider it to be the right time to exit your investment in IIF or you may wish to maintain your current investment profile –– Depending on your views on market cycles and the current state of Australian and international equity, debt and real estate markets, you may not consider it to be the right time to exit your investment in IIF. –– You may wish to retain an investment in IIF as a standalone ASX listed entity. –– If the Proposal becomes Effective, you will not participate in any potential future increase in value of IIF’s portfolio. You may believe that a superior competing proposal may emerge –– After proactive approaches to other parties, no superior competing proposal has emerged. However, you may consider that a superior competing proposal may emerge. Tax consequences for Unitholders may not be optimal for your financial position –– Implementation of the Proposal may trigger tax consequences for Unitholders earlier than may otherwise have been the case (see section 7). ING Industrial Fund 24
Evaluation of the Proposal
3.3 Implications for IIF and Unitholders if the Proposal is not implemented (a) Implications for Unitholders If the Proposal is not implemented, Unitholders will continue to hold their Units and will not receive the Consideration. Also, Unitholders would receive the March 2011 quarterly distribution (which would have been made if the Proposal had not occurred) which is expected to be approximately 0.8025 cents per Unit. (b) Implications for IIF If the Proposal is not implemented, IIF will continue to be listed on ASX. The Board of IML will continue to consider a number of alternatives for IIF under the strategic review. Details of the key alternatives considered under the strategic review are provided in section 2.3. The Board of IML would look to pursue the best alternative strategy at the time that is best able to maximise Unitholder value having regard to, among other things, the relatively high leverage in the fund and its potential constraint on funding developments and acquisitions, IIF’s exposure to offshore assets and the size of IIF. Depending on the reasons for the Proposal not proceeding, IML as responsible entity of IIF may have to pay a break fee of $14 million to GTA, or receive a break fee of $25 million from GTA. IML will not have to pay a break fee if the Proposal does not proceed solely because the Resolutions are not passed. Further detail on the break fees is set out in section 8.1. IML as responsible entity of IIF would look to expedite the refinancing of IIF’s existing debt facilities on favourable terms and with sufficient tenor, and headroom for the repayment of the Exchangeable Notes. Thus far, the refinancing of IIF’s debt facilities has been delayed as a consequence of the Proposal. IIF’s $870.1 million syndicated debt facility matures in December 2011 and its $395 million Exchangeable Notes mature in two tranches in June 2011 ($200 million) and June 2012 ($195 million). Explanatory Memorandum 25
Meeting/Voting details 4 ING Industrial Fund 26
Meeting/Voting details
4.1 eLIGIBLe IIF Members Attorneys who plan to attend the Meeting should bring with All Eligible IIF Members on the IIF register at 7.00pm on them the original or a certified copy of the power of attorney 15 March 2011 (Eligible IIF Members) are entitled to vote under which they have been authorised to attend and vote at unless they are otherwise excluded in the manner set out the Meeting. in the Notice of Meeting. A body corporate which is a Unitholder may appoint In order for the Proposal to proceed, all Resolutions must be an individual to act as its corporate representative. The approved by the requisite majorities of Eligible Members. If any appointment must comply with the requirements of of the Resolutions are not passed by the requisite majority, the section 253B of the Corporations Act. The representative Proposal will not proceed. should bring to the Meeting evidence of his or her appointment, including any authority under which it is signed. The IML Independent Directors unanimously recommend that you vote in favour of the Resolutions to approve the 4.5 voting by proxy Proposal, in the absence of a superior competing proposal If you cannot attend the Meeting in person, you should and the Independent Expert not changing or withdrawing complete the enclosed Proxy Form and return it to Link Market its conclusion that the Proposal is in the best interests of Services as set out in the Proxy Form or IML’s registered office Unitholders. If you are unable to attend the Meeting, the as soon as possible and in any event by 2.30pm (AEDST) on IML Independent Directors urge you to complete and return, 15 March 2011. in the enclosed reply-paid envelope, the Proxy Form that accompanies this Explanatory Memorandum. You may complete the Proxy Form in favour of the Chairman of the Meeting or appoint up to two proxies to attend 4.2 details of the Meeting and vote on your behalf at the Meeting. If two proxies Details of the Meeting to consider the Resolutions are are appointed, and the appointment does not specify the as follows: proportion or number of the IIF Member’s vote each proxy Date: 17 March 2011 may exercise, each proxy may exercise half of the votes. If a proxy appointment is signed by or validly authenticated by Time: 2.30pm (AEDST) the IIF Member but does not name the proxy or proxies in Location: Swissôtel Sydney whose favour it is given, the Chairman of the Meeting will Level 8 act as proxy. 68 Market Street Sydney NSW 2000 To be valid, proxy forms must be received by no later than 2.30pm (AEDST) on 15 March 2011. The Notice of Meeting is set out in Appendix D of this Explanatory Memorandum. There is a personalised Proxy Form 4.6 voting exclusions and intentions (enclosed with this Explanatory Memorandum) for the Meeting. Under the Corporations Act, GTA Trustee and its associates (including the Consortium Members) and IML and its 4.3 Resolutions associates (including other ING Group entities and IML Section 2.5(a) provides details of the Resolutions and the Directors) are excluded from voting on the Resolutions as they requisite voting majorities that are required for the Resolutions have interests in the Proposal different to other IIF Members. to be approved. The ING Group has an interest in the outcome of the Proposal 4.4 voting in person, by attorney in addition to its interest as an IIF Member because of the or BY corporate representative Ancillary Transaction as outlined in section 2.6. Different voting thresholds apply to the relevant Resolutions. Consequently, none of GTA Trustee, the Consortium Members If the Resolutions are approved by the requisite majorities of or any member of the ING Group and their associates will vote Eligible IIF Members and all other Conditions Precedent are on the Resolutions. satisfied or waived, the Proposal will be implemented. However, the responsible entity need not disregard a vote if If you wish to vote in person, you must attend the Meeting. it is cast by a person as proxy for a person who is entitled to If you cannot attend the Meeting, you may vote by proxy, vote, in accordance with the directions on the Proxy Form. attorney or, if you are a body corporate, by appointing a corporate representative. Explanatory Memorandum 27
4.7 voting intentions of the Chairman IML has appointed Kevin McCann, Chairman of IML, to chair the Meeting. If the Chairman of the Meeting is your proxy and you do not specifically direct how your proxy is to vote on a Resolution, you will be taken to have directed the Chairman of the Meeting to vote in favour of the Resolution and the Chairman of the Meeting will exercise your votes in favour of the Resolutions.
4.8 Additional information If, after reading this Explanatory Memorandum, you have any questions about the Proposal, please call the Unitholder information line on 1300 653 497 (within Australia) or +61 2 8280 7057 (outside Australia) Monday to Friday between 8.30am and 5.30pm (AEDST). ING Industrial Fund 28
Profile of IIF 5 Explanatory Memorandum 29
5.1 IIF background and history IIF is an externally managed ASX listed real estate investment trust that develops, owns and manages a diversified portfolio of 61 industrial properties and business parks. IIF was formed in 2000 through the merger of Prime Industrial Property Trust and Armstrong Jones Industrial Fund. IIF is characterised by a portfolio well diversified by location, tenant and lease maturity. IIF’s properties are located near major infrastructure networks and are highly sought after by blue chip tenants from the logistics, consumer durables and fast moving consumer goods sectors. IIF has total property assets under management of A$2.5 billion with investments located across Australia and Europe.
5.2 Strategy IIF invests in well-located industrial properties, focusing on assets with income and capital growth potential over the medium to long term. Management is focused on driving strong performance through astute investment, development and asset management activities supported by a high quality tenant base. IIF’s strategy is to invest in the Australian industrial market with an emphasis on key east coast markets. As a result IML has reviewed IIF’s European assets and expects to begin a phased withdrawal from Europe as European markets improve over the next 2–3 years. Development is a key strategy for IIF. Over 60% of IIF’s current asset base has been developed internally and held as investments in the core portfolio. When undertaking developments, IIF seeks tenancy pre-commitments from investment grade tenants for suitable properties. This strategy benefits IIF by way of higher investment yields, lower acquisition costs, and newly constructed quality buildings typically having long-term leases and taxation benefits.
5.3 IIF portfolio IIF wholly owns a portfolio of 61 industrial assets in Australia and Europe with a total net lettable area of 2.1 million square metres and a total value of A$2.5 billion, with A$2.2 billion (86% by value) invested in Australia and A$0.3 billion invested in Europe (14% by value). IIF’s Australian portfolio includes an industrial development pipeline with a current book value of A$151 million and an end value of approximately A$1 billion as at 31 December 2010. The investment portfolio has 98% occupancy (by income) with a weighted average lease expiry of 4.5 years as at 31 December 2010. Over the past five years IIF has had a high level of tenant retention and is 77% (by income) as at 31 December 2010. Portfolio snapshot (as at 31 DecEMBER 2010) Geography Australia Europe Total Number of properties 45 16 61 Net lettable area (thousand sqm) 1,539 512 2,051 Total value (A$m) 2,154 338 2,492 Capitalisation rate (%) 8.5% 8.2% 8.4% Occupancy (by income) 97% 100% 98% Tenant retention (by income) 75% 100% 77% WALE (years) 4.5 4.8 4.5
Note: As at 31 December 2010, based on FX rate at 31 December 2010 of €0.7643 per A$1. * six months to December 2010 ING Industrial Fund 30
Profile of IIF
Portfolio lease expiry (by income)
19.4%
13.9% 13.3% 11.4% 11.5%
7.0% 6.2% 5.9% 4.9% 3.1% 2.2% 1.2%
Vacant FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21+
Note: As at 31 December 2010, based on average HY2011 FX rate of €0.7122 per A$1. Top 10 industrial tenants (by income)
Fiege 8.2% Metcash 8.1% Linfox 3.5% Neckermann DE 3.1% Ingram Micro 2.8% DHL 2.6% Housewares International 2.6% Microsoft 2.4% Unisys 1.9% Coles 1.9%
0% 2% 4% 6% 8% 10%
Note: As at 31 December 2010, based on average HY2011 FX rate of €0.7122 per A$1. Explanatory Memorandum 31
Australian investment portfolio The Australian industrial portfolio has a total value of A$2.2 billion and a weighted average capitalisation rate of 8.5% as at 31 December 2010. The portfolio consists of industrial assets located in the key east coast Australian markets of Sydney, Melbourne and Brisbane. IIF’s high quality industrial properties are generally located near major infrastructure networks which are highly sought after by a diverse range of blue chip companies. Total net lettable area for the Australian industrial portfolio is approximately 1.5 million square metres. The portfolio has 97% occupancy (by income), 75% tenant retention (by income) and a weighted average lease expiry of 4.5 years as at 31 December 2010. Australian development portfolio IIF has a development book with a value of A$151 million with an end value of approximately A$1 billion and a gross lettable area potential of approximately 942,000 square metres as at 31 December 2010. Recent tenant pre-commitments have resulted in an additional 59,000 square metres of development expected to commence shortly. European portfolio IIF’s offshore portfolio represents 14% of IIF’s total portfolio by value and consists of A$0.3 billion of assets invested across key industrial markets in Europe with a weighted average capitalisation rate of 8.2% as at 31 December 2010. The portfolio has 100% occupancy (by income), 100% tenant retention (by income) and a weighted average lease expiry of 4.8 years as at 31 December 2010.
5.4 Financial results for the half year ending 31 December 2010 Operating income increased by 88% to $54.0 million for the half year ended 31 December 2010 from $28.7 million (before debt establishment costs of $47.5 million) for the half year ended 31 December 2009. The increase is largely attributable to lower debt levels, which decreased finance costs, and stabilised property portfolio occupancy. The statutory net loss attributable to Unitholders of IIF of $92.9 million for the half year was driven by: –– A loss on transfer of the foreign currency translation reserve of $161.6 million to the income statement on disposal of the Canadian operations; –– Net gain on change in fair value of derivatives of $15.8 million; and –– Net foreign exchange gain of $13.7 million. Other key financial metrics as at 31 December 2010 include: –– Operating income for the half year per Unit of 2.1 cents; –– Distributions per Unit for the half year of 1.605 cents; –– Net debt to total assets1 of 27.3%; and –– NTA of 55.52 cents per Unit (Adjusted NTA per Unit of 54.608 cents). Further details on the results for the half year ended 31 December 2010 are in IIF’s interim financial report for the half-year ended 31 December 2010, which has been lodged with the ASX and is available on IIF’s website at www .ingrealestate.com.au.
Note: 1. Net of cash. ING Industrial Fund 32
Profile of IIF
5.5 Pro forma 31 December 2010 balance sheet Reviewed Adjusted 31 Dec 2010 Adjustments 31 Dec 2010 $ million $ million $ million Property investments 2,492.1 – 2,492.1 Derivatives 3.8 – 3.8 Cash 350.6 (300.6) 50.0 Other 100.0 – 100.0 Total assets 2,946.5 (300.6) 2,645.9 Borrowings 1,058.9 94.4 1,153.3 Derivatives 26.1 – 26.1 Other 50.9 – 50.9 Total liabilities 1,135.9 94.4 1,230.3 Net assets 1,810.6 (395.0) 1,415.6 Preference units 371.4 (371.4) – Net assets – ordinary units 1,439.2 (23.6) 1,415.6 Unit on issue (m) 2,592.3 – 2,592.3 NTA per Unit (cents) 55.5 (0.9) 54.6
Note: The adjustments reflect the repayment of the IIF Subordinated Bonds at their face value, which is different to their carrying amount in IIF’s financial statements which takes into account the value of the associated Equity Linked Options and issue costs. The preference units previously issued by IIF were replaced with the IIF Subordinated Bonds after 31 December 2010. IIF’s balance sheet as at 31 December 2010 has been reviewed by IIF’s auditor, Ernst & Young. Their report is attached to IIF’s interim financial report for the half-year ended 31 December 2010, which has been lodged with the ASX and is available on IIF’s website at www .ingrealestate.com.au.
5.6 IIF trading price performance IIF Unit trading price performance
Close Price NTA
65.0
60.0
55.0 GTA Consideration 50.0
IIF trades ex December 45.0 2010 quarter distribution Initial approach by of 0.8025c per unit Unit price (cents) 40.0 Consortium Members
35.0
30.0
1 Jan 10 1 Apr 10 1 Jul 10 1 Oct 10 1 Jan 11
Source: Company filings, IRESS Note: NTA represents the NTA backing per IIF Unit disclosed in IIF’s financial results for the periods ending 31 December 2009, 30 June 2010 and 31 December 2010. Explanatory Memorandum 33
5.7 IML Director Profiles
Name Biography
Kevin McCann AM Mr McCann was appointed to the Board of IML in September 2010. Independent Director Mr McCann is an Independent Director and Chairman of the Board of IML, and Chairman of Origin Energy Limited, Lead Independent Director of Macquarie Group Limited and Director of BlueScope Steel Limited. Mr McCann is also a Director of the Australian Institute of Company Directors (AICD), Chairman of the Corporate Governance Committee of the AICD and a past member of the Takeovers Panel.
Philip Clark AM Mr Clark was appointed to the Board of IML in February 2006. Independent Director Mr Clark is an Independent Director of the Board of IML and Chairman of the Audit Committee, and also sits on a number of public and private boards.
Michael Easson AM Mr Easson was appointed to the Board of IML in November 2004. Independent Director Mr Easson is an Independent Director of the Board of IML, and also sits on a number of public and private boards. He is also co-founder and Executive Chairman of EG Property Group.
Paul Scully Mr Scully was appointed to the Board of IML in May 2002. Independent Director Mr Scully is an Independent Director of the Board of IML and Chairman of the Board Compliance Committee. He also sits on a number of other boards, is a visiting lecturer at Macquarie University and provides a broad range of consulting services.
Christophe Tanghe Mr Tanghe was appointed to the Board of IML as Director in 2009. Director Mr Tanghe joined ING in 2007 as Head and Managing Director of ING Real Estate Capital Advisors. In 2008 Mr Tanghe joined the Management Board of ING Real Estate Investment Management with responsibility for Corporate Strategy as well as the Australian and Canadian Real Estate Investment Management businesses. ING Industrial Fund 34
Profile of Goodman Trust Australia 6 Explanatory Memorandum 35
6.1 Goodman Trust Australia Leader Investment Corporation Goodman Trust Australia (GTA) is an unlisted unit trust that Leader is a wholly owned subsidiary of China Investment has been established for the purpose of acquiring the Units Corporation (CIC) established under the Company Law of the in accordance with the Proposal. GTA has been formed as People’s Republic of China. CIC is an investment institution a vehicle for a consortium of investors comprising APG, established as a wholly state-owned company under the CPPIB, Leader and the Goodman Group (together, the Company Law of the People’s Republic of China in September Consortium Members). 2007. It seeks stable and long-term risk-adjusted financial return and it is operated strictly on a commercial basis. As at Upon completion of the Proposal each Consortium Member 31 January 2011, CIC had registered capital of US$200 billion. will have the following interest in GTA: Please visit www .china-inv.cn to find out more about Leader. APG 25.2% Goodman Group CPPIB 42.5% The Goodman Group is an integrated property group with Leader 12.4% operations throughout Australia, New Zealand, Asia, Europe Goodman Group 19.9% and the United Kingdom. Goodman Group, comprised of the stapled entities Goodman Limited and Goodman Industrial Goodman Industrial Funds Management Limited Trust, is the largest industrial property group listed on the (GTA Trustee), a wholly owned subsidiary of the Goodman Australian Securities Exchange and one of the largest listed Group, has been appointed as trustee of GTA. The directors specialist fund managers of industrial property and business of GTA are Mr Gregory Goodman, Mr Anthony Rozic and space globally with total assets under management of Mr Nicholas Kurtis, being respectively the Chief Executive approximately $16.2 billion as at 30 June 2010. Officer, Chief Operating Officer and Global Head of Equities Goodman’s global property expertise, integrated own, of the Goodman Group. develop, manage customer service offering and significant fund management platform ensures it creates innovative 6.2 B ackground to the Consortium property solutions that meet the individual requirements Members of its customers, while seeking to deliver long-term returns APG for investors. APG is a pooled investment vehicle established in the Netherlands, in which investments, in both Australia and other Please visit www .goodman.com to find out more about the countries, are held for the purpose of collective investment. As Goodman Group. at 30 September 2010, APG Algemene Pensioen Groep NV, the manager of APG, had approximately €266 billion of assets 6.3 The Consortium structure under management. The relationship between each Consortium Member and GTA Trustee will be governed by a Unitholders Agreement to be Please visit www .apg.nl to find out more about APG. entered into prior to the Implementation Date. Canada Pension Plan Investment Board A subsidiary of the Goodman Group will be appointed to CPPIB is a professional investment management organisation manage the properties acquired by GTA as a result of the that invests the funds not needed by the Canada Pension Plan Proposal, and will be responsible for day to day management (CPP) to pay current benefits on behalf of 17 million Canadian and decision making. The Goodman Group will acquire the contributors and beneficiaries. In order to build a diversified right to solely manage the IIF property portfolio from the portfolio of CPP assets, CPPIB invests in public equities, private current managers, REIM AP and REI III, in consideration for equities, real estate, inflation-linked bonds, infrastructure and the payment of $22.5 million in cash. fixed income instruments. Headquartered in Toronto, with offices in London and Hong Kong, CPPIB is governed and managed independently of the CPP and at arm’s length from governments. At 30 September 2010, the CPP fund had assets totalling C$138.6 billion, of which C$4.2 billion is invested in private equity funds, infrastructure and real estate assets in the Asia Pacific region. Please visit www .cppib.ca to find out more about CPPIB. ING Industrial Fund 36
Profile of Goodman Trust Australia
6.4 Funding of the Consideration The total consideration payable to Unitholders under the Proposal is approximately $1.4 billion. In addition, GTA will be required to refinance IIF’s existing $870.1 million Australian syndicated finance facility. GTA has the right to sufficient funds from the Consortium Members and its banks to fund the Consideration for the Proposal and to refinance IIF’s existing syndicated finance facility. The Proposal is not subject to a condition that IIF’s existing $870.1 million syndicated finance facility be refinanced. GTA intends to fund the Consideration out of cash contributions received from each of the Consortium Members. GTA Trustee and each of the Consortium Members has entered into a Subscription Agreement dated 24 December 2010 under which each Consortium Member agrees to pay to GTA Trustee their specified proportion of the Consideration. Each of the Consortium Members intends to fund its proportion of the Consideration from its internal or parent cash resources. GTA also has commitments from financiers for a new $1.1 billion syndicated finance facility. Further information about the consequences of GTA Trustee failing to pay the Consideration when due is set out in section 8.3. This equity and debt funding is conditional upon termination rights that largely mirror those set out in the Implementation Agreement. Explanatory Memorandum 37
Tax consequences for Unitholders 7 ING Industrial Fund 38 Tax consequences for Unitholders
10 February 2011 The Directors ING Management Limited, as Responsible Entity for the ING Industrial Fund (“IIF’) Level 6, 345 George St Sydney NSW 2000
Dear Sirs
Tax aspects of the Proposal for IIF Unitholders
This report has been prepared at the request of ING Management Limited (“IML”) as Responsible Entity for ING Industrial Fund (“IIF”). This report is for inclusion at section 7 of the Explanatory Memorandum (“EM”) for Investors in relation to the proposal by Goodman Consortium through Goodman Industrial Funds Management Limited to acquire all of the IIF Units from the IIF Unitholders (“the Proposal”).
This report provides information of a general nature only, in relation to the potential Australian income tax implications arising to existing Investors in IIF, following the implementation of the Proposal who are individual natural persons and who are residents of Australia for Australian taxation purposes (“Investors”). Further, the information relates only to such Investors who hold their existing units in IIF on capital account and not as trading stock or otherwise on revenue account.
The individual circumstances of each Investor may affect the taxation implications of the investment of that Investor. The information in this report, being of a general nature only, does not constitute taxation advice and cannot be relied upon as such.
Investors should seek appropriate independent professional advice that considers the taxation implications in respect of their own specific circumstances.
All legislative references are to the Income Tax Assessment Act 1936 (the “1936 Act”) or the Income Tax Assessment Act 1997 (the “1997 Act”), as appropriate. Capitalised terms used in this opinion are defined in accordance with this letter, or otherwise in accordance with the EM.
The information in this report is based upon Australian income tax law contained in the 1936 Act and the 1997 Act as at the date of this report. The Australian income tax law is subject to change at any time and any such changes could adversely affect the information provided herein. We have not been retained, nor are we obliged, to monitor or update the information in this report for any future legislative changes which may affect the correctness of the information after the date of this report.
1. Background
Details of the Proposal are set out in Sections 1 and 2 of the EM and are not repeated in detail here. For present purposes, the salient facts are broadly as follows:
Liability limited by a scheme approved under Professional Standards Legislation explanatory memorandum 39
2
1. Implementation of the Proposal will involve on the implementation date:
a. All of the IIF Units being transferred to Goodman Industrial Funds Management Limited as trustee or responsible entity for the Goodman Consortium;
b. Each Investor being entitled to receive the Proposal Consideration;
c. GTA Trustee will pay to the IIF RE (as agent for each investor) the Proposal Consideration of 54.6c per unit less any distributions IIF Unitholders become entitled to from the date of the Implementation Agreement (24 December 2010) until completion. Following the payment of the December 2010 distribution of 0.8025 cents per Unit, the Proposal Consideration is 53.7975 cents per IIF Unit.
Investors should review Section 1 of the EM to obtain an overview of the Proposal.
2. Taxation Implications to Investors in respect of the Proposal
2.1 Disposal of IIF Units
An Investor will make a capital gain to the extent that the capital proceeds of 53.7975 cents per unit received from the disposal of the IIF units exceeds the tax cost base of those units. Alternatively, the Investor may make a capital loss to the extent that the capital proceeds received from the disposal of the IIF units is less than the respective reduced cost base.
If IIF Unitholders become entitled to any future distributions, the Consideration will be adjusted accordingly. The capital proceeds and the resulting capital gain or loss will likewise be adjusted. The tax implications of additional trust distributions is discussed below.
In determining the cost base or reduced cost base of their units, Investors will need to take into account any returns of capital and tax deferred distributions received in respect of their units.
Certain Investors may be entitled to apply the 50% CGT discount percentage to any capital gain to the extent that it is included in their net capital gain for the income year provided that they have held their units or shares for more than 12 months. The discount percentage of 50% is applicable to an individual Investor that is a natural person.
2.2 Trust Distributions
Investors will include their share of the net income of IIF in their assessable income in the year in which they become presently entitled to their share of the income of IIF. The net income of IIF will be calculated in accordance with the relevant provisions of the Australian income tax legislation.
Investors may become presently entitled to a share of the net income of IIF for the period up to the Implementation Date. However, IML Directors do not expect that any distributions will be paid in addition to the December 2010 declared distribution. To the extent that an Investor’s share of the net income is attributable to a capital gain made by IIF, the Investor will be treated as having made a capital gain equal to that amount.
IIF Tax Experts Letter 100111_3.docx
ING Industrial Fund 40 Tax consequences for Unitholders
3
Where such a capital gain is a discount capital gain, the Investor is treated as making a discount capital gain equal to twice the amount that is attributable to the discount capital gain. Investors may be entitled to apply the 50% CGT discount percentage to any distributed capital gain to the extent that it is included in their net capital gains for the income year.
The rate of tax payable by each Investor will depend on the individual circumstances of the Investor.
Where the cash distribution that an Investor receives or reinvests exceeds its share of the net income of IIF, the excess should not be included in their assessable income. A part of the non-assessable cash distribution is commonly referred to as a tax deferred distribution, unless it relates to a discount capital gain that has been made by the relevant trust.
A tax deferred distribution received in respect of trust units should result in a reduction in the cost base of those units. An Investor will make a capital gain equal to the amount by which the tax deferred distributions received for an income year exceeds the Investor’s remaining cost base in those units.
Investors will be considered to have received a distribution when it is applied on their behalf (e.g. where the amount is reinvested).
Certain Investors may be entitled to apply the relevant discount percentage to any capital gain to the extent that it is included in their net capital gain for the income year provided that they have held their units in the trust for a continuous period of at least 12 months.
Investors may receive a distribution which is a return of capital in respect of their existing units. A capital return to Investors on their existing units should not constitute ordinary income to those Investors. However, the cost base of an Investor’s existing units should be reduced by the amount of the capital returned on those units.
In determining the cost base of existing units, the Investor will need to take into account any returns of capital or tax deferred distributions received in respect of the IIF Units to date.
An Investor will make a capital gain to the extent that the amount of capital returned on their existing units exceeds the cost base of those units. Thereafter, the Investor will make further capital gains in respect of all tax deferred distributions, capital returns and capital proceeds received in respect of those units.
Provided that the existing units have been held for a continuous period of at least 12 months, an Investor may be entitled to apply a CGT discount to any resultant capital gain included in a net capital gain for an income year where the Investor is an individual. The relevant CGT discount percentage to be applied would be 50% for an Investor who is a natural person.
2.3 Tax File Numbers and Australian Business Numbers
Investors are not required by law to provide a Tax File Number (“TFN”) to the responsible entity of IIF. However, if a TFN is not quoted, or no appropriate TFN exemption information is provided, the responsible entity of the relevant trust is required to deduct from any income distribution entitlement, tax at the highest marginal tax rate plus Medicare levy (currently 46.5%).
For an entity that made the investment in the IIF Units in the course of an enterprise carried on by it, it may quote their Australian Business Number (“ABN”) rather than their TFN.
IIF Tax Experts Letter 100111_3.docx explanatory memorandum 41
4
2.4 GST
No GST should generally be payable in respect of the transactions outlined above. These dealings with the individual units should be considered input taxed supplies for GST purposes. Each Investor who is registered for GST should consider the recoverability of any GST charged on services provided to them in relation to the transactions (eg advisers fees) outlined above to confirm their recoverability of that GST.
2.5 Stamp duty
No stamp duty should be payable by an IIF Unitholder in respect of the Proposal based on our understanding that at the Implementation Date the units IIF will be quoted on the ASX.
2.6 Non-residents for Australian tax purposes
We have not considered the Australian income tax implications for non-resident Investors. However, it is noted that the Australian tax law imposes obligations on the responsible entity of IIF to pay income tax or withhold tax on distributions made by the trusts that are paid to non-residents for Australian tax purposes.
Yours faithfully
Ernst & Young
IIF Tax Experts Letter 100111_3.docx
ING Industrial Fund 42
Additional information 8 Explanatory Memorandum 43
8.1 Implementation Agreement –– Deed of Retirement and Appointment: each of The Implementation Agreement was entered into by GTA Trustee and IML signs and delivers the Deed of IML as responsible entity of IIF and GTA Trustee on Retirement and Appointment between the date of the 24 December 2010. Implementation Agreement and the date of sending the Explanatory Memorandum to IIF Members; The key terms of the Implementation Agreement are summarised below. Unless otherwise defined in this –– Deed Poll: GTA Trustee signs and delivers the Explanatory Memorandum, capitalised terms in this summary Deed Poll between the date of the Implementation have the meaning given to them in the Implementation Agreement and the date of sending the Explanatory Agreement. To the extent of any inconsistency, capitalised Memorandum to IIF Members; terms have the meanings given to them in the Implementation –– Representations and warranties: certain Agreement. A full copy of the Implementation Agreement representations and warranties of IML and GTA was lodged with the ASX on 24 December 2010 and may be Trustee set out in the Implementation Agreement obtained by contacting the Registry on 1300 653 497 (within remain true and correct in all respects at given times; Australia) or +61 2 8280 7057 (outside Australia) or from IIF’s –– No restraints: as at 8.00am (AEDST) on the Second website: www .ingrealestate.com.au or from ASX’s website: Court Date or 8.00am (AEDST) on the Effective www .asx.com.au. Date, no temporary restraining order, preliminary Conditions Precedent or permanent injunction or other legal restraint or A number of Conditions Precedent contained in the prohibition restraining or prohibiting the Proposal, Implementation Agreement need to be satisfied or (where which has been enacted, enforced or issued by a applicable) waived before the Proposal can be implemented. Regulatory Authority, is in effect; –– IML Independent Directors: the IML Independent In particular, the Conditions Precedent include the following: Directors unanimously recommend that IIF Members –– Regulatory approvals: before the meeting, ASIC, approve the proposed Resolutions and do not change ASX and FIRB have granted the relevant approvals and that recommendation or support a superior competing relief that are reasonably necessary or desirable to proposal at or before the Meeting; and implement the Proposal; –– Material breach: before 8.00am on the Second Court –– Unitholder approval: IIF Members approve the Date, neither IML nor GTA Trustee have breached any Resolutions at the Meeting; material provision of the Implementation Agreement –– Judicial Advice: the Court provides the Judicial Advice; which remains unremedied. –– Third party consents: all third party consents (if any) If a Condition Precedent is not satisfied or waived by the date which are necessary or desirable to implement the specified for its satisfaction, then the parties will consult in Proposal are obtained before 8.00am (AEDST) on the good faith to determine whether the Proposal may proceed by Second Court Date; way of alternative means or methods or may agree (but shall –– Independent Expert’s Report: IML receives the not be obliged to) extend the relevant dates for satisfaction Independent Expert’s Report stating that the Proposal of the Conditions Precedent. is in the best interests of IIF Unitholders, and the Exclusivity Independent Expert does not change or withdraw The Implementation Agreement contains exclusivity provisions that conclusion prior to the Meeting; that prohibit IML and its Related Bodies Corporate and its –– No IIF Prescribed Event: no IIF Prescribed Event representatives, subject to certain exceptions, from directly occurs between the date of the Implementation or indirectly soliciting, inviting, facilitating, encouraging Agreement and 8.00am (AEDST) on the Second or initiating any enquiries, negotiations or discussions, or Court Date; communicating an intention to do any of these things, with a –– No IIF Material Adverse Change: No IIF Material view to obtaining any offer, proposal or expression of interest Adverse Change occurs or becomes apparent between from any person in relation to a Competing Transaction during the date of the Implementation Agreement and the Exclusivity Period. 8.00am (AEDST) on the Second Court Date; –– No termination: the Implementation Agreement has not been terminated before 8.00am (AEDST) on the Second Court Date; ING Industrial Fund 44
Additional information
Except where the below paragraphs would restrict IML or the – where a superior competing proposal has Board of IML from taking or refusing to take any action with been proposed or announced before the respect to a bona fide Competing Transaction (which was not Independent Expert’s Report has been issued, solicited, invited, facilitated, encouraged or initiated by IML), which the Independent Expert may reasonably and provided that the Board of IML has determined, in good regard to be on more favourable terms than faith and acting reasonably, that after consultation with its the Proposal; financial advisers it could reasonably be considered a superior –– GTA Trustee validly terminates the Implementation competing proposal, and has received legal advice that failing Agreement due to a material breach by IML; or to respond to such a bona fide Competing Transaction would –– GTA Trustee terminates the Implementation be reasonably likely to constitute a breach of the Board of Agreement due to an IIF Prescribed Event or IIF IML’s fiduciary or statutory obligations, IML and its Related Material Adverse Change occurring and that event Bodies Corporate and representatives must not during the or change was within the control of IML and was not Exclusivity Period: rectified by IML within the time required under the –– negotiate or enter into, or participate in negotiations Implementation Agreement. or discussions with any other person regarding a Competing Transaction or any agreement, In such circumstances the break fee represents the sole and understanding or arrangement that may be reasonably absolute liability of IML under and in connection with the expected to lead to a Competing Transaction, even Implementation Agreement (other than the payment of if the Competing Transaction was not directly or interest due to late payment) and no further damages, fees, indirectly solicited, invited, facilitated or encouraged expenses or reimbursements of any kind will be payable by or initiated by IML or any of its Related Bodies IML in connection with the Implementation Agreement. Corporate or Representatives or the person has publicly Termination announced the competing transaction; and IML and GTA Trustee may terminate the Implementation –– solicit or enable any person without the prior written Agreement if: consent of GTA Trustee to undertake due diligence –– the Proposal has not become Effective on or before investigations on IIF or IML for the purposes of the End Date; obtaining, or which may reasonably be expected –– the Resolutions are not approved by the requisite to lead to, a Competing Transaction. majority of IIF Members at the Meeting; IML must promptly inform GTA Trustee if it receives any –– the other party materially breaches any clause of the approach with respect to any actual or potential Competing Implementation Agreement and, to the extent that Transaction and must disclose, subject to any obligations of the breach is capable of remedy, that party does not confidentiality, the identity of the relevant person or persons remedy the breach by the required date; involved and the nature of any Competing Transaction –– a Regulatory Authority has issued a final and (to the extent known). non-appealable order, decree or ruling or taken Payment of break fee other action which permanently restrains or IML may become liable to pay GTA Trustee a break fee of prohibits the Proposal; A$14 million, in circumstances where: –– the Court does not provide the Judicial Advice and an –– a Competing Transaction completes or is expert opinion is obtained that an appeal is unlikely to recommended by all the IML Independent Directors be successful; and it has been the subject of a public announcement; –– either GTA Trustee or a Consortium Member, or IML –– an IML Independent Director fails to recommend or any of IML’s subsidiaries, respectively becomes the Resolutions, withdraws or changes their insolvent; recommendation, except if they do so: –– any of the Conditions Precedent are not satisfied or – after the receipt of the final report of the waived by the requisite date (if any) and the parties Independent Expert where that report states cannot agree to extend that date; or that in the opinion of the Independent Expert –– the termination is agreed to in writing by GTA Trustee the Proposal is not in the best interests of and IML. Unitholders; or Explanatory Memorandum 45
In addition: –– to deposit in aggregate A$25 million in an escrow –– GTA Trustee may terminate the Implementation account held by Allens Arthur Robinson. This escrow Agreement: account has been established and funded; – if any IML Independent Director changes their –– to subscribe for units in GTA prior to the recommendation to IIF Members that they Implementation Date in accordance with the vote in favour of the Resolutions, including any Subscription Agreement; and adverse modification to their recommendation –– not to terminate, or amend in a manner that is or otherwise makes a public statement that materially prejudicial to IIF or waive any rights in a they no longer support the Proposal; or manner that is materially prejudicial to IIF under the – if a person other than GTA Trustee and its Subscription Agreement between the Consortium associates has a Relevant Interest in more Members and GTA Trustee under which each than 50% of the Units; or Consortium Member agreed to contribute their proportion of the equity funding required by GTA –– IML may terminate if GTA Trustee or a Consortium Trustee to undertake the Proposal. without the prior Member is in breach of its obligations under the Deed written consent of IML. of Undertaking. 8.4 S upplemental Deed and amendments 8.2 deed Poll to IIF Constitution On 9 February 2011, GTA Trustee executed the Deed If the Proposal is approved by IIF Members at the Meeting, Poll in favour of each Participant pursuant to which GTA IML will execute the Supplemental Deed to amend the Trustee undertakes: IIF Constitution in order to facilitate the implementation –– to comply with its obligations under the of the Proposal. Implementation Agreement and do all things necessary or desirable on its part to give full effect to the Under the IIF Constitution (as amended by the Supplemental Implementation Agreement; and Deed with effect from the Effective Date): –– subject to the Proposal becoming Effective, to provide –– IML will have the power to do all things which it to each Participant the Consideration to which each considers necessary or desirable to give effect to the Participant is entitled under the terms of the Proposal. Proposal and the transactions contemplated by it; and –– Unitholders appoint IML as their attorney with The Deed Poll automatically terminates if the Implementation the power to do all things on their behalf which it Agreement is terminated in accordance with its terms. A copy considers necessary or desirable to give full effect of the Deed Poll is included in this Explanatory Memorandum to the terms of the Proposal and the transactions in Appendix C. contemplated by it. 8.3 Reverse break fee arrangements Also, the obligation to pay distributions quarterly will be On 24 December 2010 each of IML as responsible entity removed. While the responsible entity will have flexibility of IIF, GTA Trustee and each Consortium Member entered to pay distributions more regularly, it will only be required into a Deed of Undertaking and Reverse Break Fee Escrow to calculate a distribution at the end of each financial year. Deed (together the Reverse Break Fee Deeds) under In addition, the Supplemental Deed will make other which the Consortium Members severally agreed, and GTA amendments to the IIF Constitution with effect from Trustee agreed: the implementation of the Proposal. These changes –– to pay IML a reverse break fee of A$25 million if: therefore will not affect Unitholders should the Proposal – GTA Trustee fails to pay the Consideration be implemented and relate to the continuing operation of to IML on the Implementation Date; IIF after implementation when it is wholly owned by GTA. The changes include: – GTA Trustee is in material breach of the Implementation Agreement; –– the introduction of provisions for the withdrawal of Units by Unitholders while IIF is not listed or no longer – GTA Trustee or a Consortium Member a registered scheme; and becomes insolvent; or –– not requiring the trustee to maintain IIF as a listed trust. – GTA Trustee or a Consortium Member is in breach of its obligations under the Deed of Undertaking; ING Industrial Fund 46
Additional information
8.5 F acilitation Deed for –– the preparation of financial reports, taxation Ancillary Transaction returns, tax statements and other taxation reporting REIM AP, REI III (together, the ING Parties) and requirements relating to IIF for the financial year ended Goodman have entered into the Facilitation Deed dated 30 June 2011; 24 December 2010 in respect of the Ancillary Transaction. –– the appointment of Goodman RE as responsible entity (a) obligations of the ING Parties of IIF including the transfer of books and records from Under the Facilitation Deed, the ING Parties agreed to IML to Goodman RE; and do certain things, including obtaining certain consents or –– the employment of those IIF employees selected by waivers and in the transfer of various know-how, books and Goodman to take up employment with a member records of IML as they relate to IIF and generally to provide of the Goodman Group. as much assistance as is reasonably requested by Goodman to assist GTA to implement the Proposal in accordance with (b) obligations of Goodman the Implementation Agreement. The ING Parties also agreed Goodman has agreed to do all things reasonable to facilitate to use their reasonable endeavours to assist Goodman in the transfer of: connection with, among other things: –– those IIF employees selected by Goodman to take up –– its due diligence enquiries relating to, and employment with a member of the Goodman Group; communicating with, IIF employees; and –– facilitating the transfer of know-how, books and –– the relevant shares in each IIF Investment and records of IML as they relate to IIF and the transition Custodian Vehicle and the Redbank Joint Venture of certain IIF employees; to a member of the Goodman Group. –– obtaining any consents or waivers required in respect Goodman has also agreed to perform, and procure that each of the ING facilities and any other facilities or derivative Goodman Party performs, all of its obligations under any contracts under which IML as responsible entity of IIF, documents relating to the Proposal to which they are a party. or the trustee of any sub-trust of IIF, is a borrower for (c) Consideration any change of control arising from or in connection A$22.5 million (plus any applicable GST) is payable by with the Proposal; and Goodman to REIM AP (or as it directs) within 10 Business Days –– obtaining any waivers required in respect of any of implementation of the Proposal. change of control arising from or in connection with (d) Termination rights implementing the Proposal under the Redbank Joint The Facilitation Deed will terminate on the earliest to occur of: Venture or the asset management agreement with CB Richard Ellis. –– a party is in material breach of the Facilitation Deed and, to the extent that breach is capable of remedy, The ING Parties have also agreed to use their reasonable the defaulting party does not remedy the breach by endeavours to assist IML to implement the Proposal the the date specified; subject of this Explanatory Memorandum and to perform –– a superior competing proposal is made by a third party all of their obligations under any documents relating to the and the relevant Goodman Party does not announce, Proposal to which they are a party. within the time specified in the Facilitation Deed, an In addition, if the Proposal is implemented, the ING Parties improvement to the Consideration offered under the have agreed to assist Goodman with, among other things: Proposal so that it is no less than that offered under –– procuring the termination of the ING Asset the superior competing proposal; and Management Agreements; –– 30 June 2011 or such later date being no later than –– the transfer of shares held by members of the ING 30 September 2011 as is specified by the ING Parties. Group in each IIF Investment and Custodian Vehicle and the interest in the Redbank Joint Venture to a member of the Goodman Group; Explanatory Memorandum 47
8.6 Interests in IIF held by IML Directors 8.11 IIF’s substantial Unitholders The IML Directors and the number of Units in which they The substantial holders of Units as at 4 February 2011 are have a relevant interest as at the date of this Explanatory as follows: Memorandum are set out in the table below: Percentage Units held Number of voting Number of through Ordinary power Director Units associates Substantial Unitholders Units % Kevin McCann AM 0 0 Goodman Group 405,258,590 15.63 1 Philip Clark AM 0 15,000 ING Group NV 388,458,590 14.98 2 Michael Easson AM 0 0 UBS AG and its Related 287,912,313 11.11 Bodies Corporate Paul Scully 16,848 23,146 Credit Suisse Holdings 269,394,927 10.39 Christophe Tanghe 0 0 (Australia) Limited
3 8.7 I nterests in GTA or Consortium Members CPPIB US RE-3 Inc 200,605,140 7.74 held by IML Directors Leader Investment 200,605,140 7.74 3 Kevin McCann has an interest in 73,947 Goodman Group Corporation stapled securities through his personal superannuation fund. No Stichting Depositary APG 200,605,140 7.74 3 other securities or any other interests in GTA or the Consortium Strategic Real Estate Pool Members are held by, or on behalf of, any IML Director. Centaurus Capital Limited 175,705,096 6.78 8.8 Co ntracts between GTA or Consortium The Vanguard Group Inc. 130,243,867 5.02 Members and IML Directors There are no contracts or arrangements between any IML Notes: Director and GTA. No IML Director has any interest in any 1. Goodman Group’s direct interest is 7.09% however its total contract entered into by GTA (other than in their capacity interest includes ING Group’s 7.89% interest as ING Group has become an associate of Goodman Group under the Ancillary as a Unitholder). Transaction and APG’s 0.65% interest as APG has become an associate of Goodman Group by virtue of entry into the 8.9 A greements or arrangements with Subscription Agreement. IML Directors 2. ING Group’s direct interest is 7.89% however its total interest There is no agreement or arrangement made between any IML includes Goodman Group’s 7.09% interest as Goodman Group Director and any other person, including GTA, in connection has become an associate of ING Group under the Ancillary Transaction. with or conditional upon the outcome of the Proposal. 3. The voting power of each of the Consortium Members (other than Goodman Group) includes Goodman Group’s 7.09% 8.10 oTher interests of IML Directors interest and APG’s 0.65% interest as each Consortium Member and officers has become an associate of the other Consortium Members by Christophe Tanghe is an employee of the ING Group and virtue of entry into the Subscription Agreement. receives performance-based bonuses based on, among other IIF has relied on the substantial holder notices provided to things, the performance of the REIMA business, including it up to 4 February 2011, which are available on the ASX the management of IIF, and ING Group’s interests in funds website, to compile the above table. it manages, such as IIF. As a senior executive of INGRE Mr Tanghe makes no recommendation in relation to the Information in regard to substantial holdings arising, changing Proposal and has not participated in the IBC’s consideration or ceasing before this time or in respect of which the relevant of proposals affecting IIF, including the Proposal. announcement is not available on the ASX website is not included above. No IML Director or officer has any other interest, whether as a director, officer, member or creditor of IIF, IML or otherwise, material to the Proposal. No directors, secretaries or executive officers of IML will receive any other payment or other benefit as compensation for the loss of, or in consideration for or in connection with his or her retirement from, office in IML or any related body corporate as a result of the Proposal. ING Industrial Fund 48
Additional information
8.12 Co nsortium Member’s and associates’ However, if the issuer of the Exchangeable Notes (EN Issuer) interest in Units does not receive any or all of the early redemption amount As at the date of this Explanatory Memorandum, the or the required number of Units, if the securities settlement Consortium Members and their associates together hold option is exercised, for those Exchangeable Notes (Missed relevant interests in aggregate of 405,258,590 Units. Redemption Event) the EN Issuer must deliver the IIF Accordingly, the Consortium Members and their associates Subordinated Bonds to the Exchangeable Noteholders and have 15.63% of voting power in IIF. the EN Issuer will hold the Equity Linked Options on trust for the Exchangeable Noteholders which will constitute Goodman Group holds a relevant interest in 183,805,140 the redemption in full of the Exchangeable Notes. Units. If a Missed Redemption Event occurs, holders of IIF ING Group holds a relevant interest in 204,653,450 Units. Subordinated Bonds will have limited consent rights to APG holds a relevant interest in 16,800,000 Units. replicate the voting rights of the preference units in IIF which they would otherwise have had following a Missed Equity Linked Options are interests in IIF which carry voting Redemption Event. In addition, IIF will not be permitted rights under the Corporations Act that are determined to pay distributions on or redeem Units until the IIF by reference to the value of the Equity Linked Options Subordinated Bonds have been redeemed in full and the which is expected to give them voting power in IIF of less responsible entity’s obligations under the Equity Linked than 0.01%. Accordingly, if the Proposal is approved, GTA Options have been satisfied or the Equity Linked Options have Trustee and its associates will have voting power in IIF of expired. The responsible entity of IIF may then redeem all approximately 100%. (but not some) of the IIF Subordinated Bonds on 5 Business Days notice. 8.13 A cquisitions of Units and inducing benefits by the Consortium Members As stated in section 2.7, Goodman RE has not formed any or its associates intention as to whether (in its capacity as responsible entity of Neither GTA Trustee nor any of the Consortium Members IIF after implementation of the Proposal) it will redeem the IIF acquired, or agreed to acquire, any Units in the four months Subordinated Bonds underlying the Exchangeable Notes for prior to the date of this Explanatory Memorandum. which redemption is requested as a result of the redemption right triggered by the Proposal. 8.14 Pre-Proposal benefits A$200 million of the Exchangeable Notes have a maturity date In the four months prior to the date of this Explanatory of 30 June 2011 and A$195 million of the Exchangeable Notes Memorandum, neither GTA Trustee, nor any of its associates have a maturity date of 30 June 2012. At the maturity date, have provided any benefit, or agreed to provide any benefit, the IIF responsible entity may elect to redeem the underlying to a person that is not available under the Proposal to induce IIF Subordinated Bonds for either cash or by issuing Units at them to vote in favour of the Proposal or to dispose of their a discount to the volume weighted average price of Units on Units, other than the agreement under the Deed Poll for GTA the relevant business day. If the IIF Subordinated Bonds are not Trustee to pay the Consideration under the Proposal, if it redeemed at maturity an increased coupon of 2% per annum becomes Effective, and the Facilitation Deed. over the existing rates will apply in respect of the outstanding IIF Subordinated Bonds from the final maturity date. 8.15 Implications of Proposal on Exchangeable Noteholders The responsible entity may pay interest on the IIF Subordinated The Proposal will not affect the terms of the Exchangeable Bonds in its absolute discretion. In addition, a Missed Notes. However, if approved, the Proposal will trigger a Redemption Event will have occurred if the IIF Subordinated right for the Exchangeable Noteholders to request the early Bonds are not redeemed at maturity and the consequences redemption of their Exchangeable Notes as it will result in of a Missed Redemption Event outlined above will apply. a change of control and the delisting of IIF. The responsible The implications of the Proposal on Exchangeable Noteholders entity of IIF has discretion as to whether it redeems the IIF do not affect the position of Unitholders under the Proposal. Subordinated Bonds underlying the Exchangeable Notes for which redemption is requested. Explanatory Memorandum 49
8.16 I nformation disclosed to ASX and GTA Trustee has given, and has not withdrawn, its written documents lodged with ASIC consent to the inclusion of the GTA Information and the IIF is a disclosing entity for the purposes of the Corporations references to that information in the form and context in Act and as such is subject to periodic reporting and continuous which they are included in this Explanatory Memorandum. disclosure obligations. Publicly disclosed information about all Each party referred to in this section 8.17: listed entities, including IIF, is available on the ASX website at www .asx.com.au. –– does not make, or purport to make, any statement in this Explanatory Memorandum or any statement IIF is also required to lodge various documents with ASIC. on which this Explanatory Memorandum is based Copies of documents lodged with ASIC by IIF may be other than statements and references included in this obtained from, or inspected at, ASIC offices. Explanatory Memorandum with the consent of that IIF will provide free of charge, to any Unitholder who requests party (as set out above); and it before the Effective Date, a copy of: –– to the maximum extent permitted by law, expressly –– the audited financial report of IIF and its controlled disclaims and takes no responsibility for any part entities for the year ended 30 June 2010 (being the of this Explanatory Memorandum, other than with annual financial report most recently lodged with respect to the statements and references included in ASIC before this Explanatory Memorandum was this Explanatory Memorandum with the consent of lodged with ASIC); that party (as set out above). –– the Implementation Agreement; and 8.18 Supplementary Information –– each announcement to ASX made by IIF after IML will issue a supplementary document to this Explanatory lodgement with ASIC of the annual report referred Memorandum if it or GTA Trustee becomes aware of any to above and before the Meeting. of the following between the date of lodgement of this Explanatory Memorandum with ASIC and the Effective Date: 8.17 Consents –– a material statement in this Explanatory Memorandum The following parties have given, and have not withdrawn, is misleading or deceptive; their written consent to be named in this Explanatory Memorandum in the form and context in which they –– a material omission from this Explanatory are named: Memorandum; –– GTA Trustee; –– a significant change affecting a matter in this Explanatory Memorandum; or –– Mallesons Stephen Jaques as legal advisers to IML; –– a significant new matter has arisen and it would –– Goldman Sachs and UBS AG, Australia Branch have been required to be included in this Explanatory as financial advisers to IML; Memorandum if known at the date of lodgement –– Link Market Services as the Registry; with ASIC. –– Ernst & Young as the author of the Tax Opinion A copy of the supplementary document will also be provided in section 7; to ASIC and/or ASX (as appropriate). –– Deloitte Corporate Finance Pty Limited as the Independent Expert; and Depending on the nature of the timing of the changed circumstances and subject to obtaining any relevant –– Allens Arthur Robinson as the escrow agent. approvals, IML may circulate and publish any supplementary Ernst & Young has given, and has not withdrawn, its written document by: consent to the inclusion of the Tax Opinion in section 7 of this –– placing an advertisement in a prominently placed Explanatory Memorandum and the references to that opinion newspaper which is circulated generally throughout in the form and context in which they are included in this Australia; Explanatory Memorandum. –– posting the supplementary document on IIF’s website, Deloitte Corporate Finance Pty Limited has given, and has www .ingrealestate.com.au; or not withdrawn, its written consent to the inclusion of the –– posting the supplementary document to all Independent Expert’s Report and the references to that report Unitholders. in the form and context in which they are included in this Explanatory Memorandum. ING Industrial Fund 50
Additional information
8.19 oTher material information 8.22 Costs of the Proposal Otherwise than as contained or referred to in this Explanatory The costs of the Proposal for IIF include advisory costs, legal Memorandum, including the Independent Expert’s Report fees, independent expert fees and other costs. If the Proposal and the other information that is contained in the appendices is implemented, these costs for IIF will be approximately to this Explanatory Memorandum, in the opinion of the Board A$17.5 million. If the Proposal is not implemented these of IML there is no other information that is material to the costs for IIF will be approximately A$2.5 million. making of a decision by an IIF Member whether or not to vote in favour of the Resolutions to approve the Proposal, 8.23 Undertakings by GTA being information that is known to any IML Director and Scheme Implementation which has not been previously disclosed to IIF Members. GTA Trustee will observe and perform all obligations contemplated of it under the Proposal and the Implementation 8.20 Material changes since full Agreement including, without limitation, the obligation to year 30 June 2010 audited provide the Consideration in accordance with the terms of financial statements the Proposal. The last annual financial statements sent to Unitholders were Acquisition of Units the audited financial statements for the year ended 30 June GTA Trustee will not, and will procure that its Related Bodies 2010 as lodged with the ASX on 30 August 2010. So far Corporate, the GTA directors and any director of its Related as is known by IML Directors, the only material change to Bodies Corporate will not, acquire Units other than under the the financial position of IIF since the date of those annual Proposal until the earlier of: financial statements is that in November 2010, IIF completed the divestment of its interest in the Summit Industrial Fund –– the Proposal being implemented; (Summit) in Canada. IIF contracted to sell its interest in –– one or more of the Resolutions not being approved Summit on 27 August 2010. The divestment value was by Unitholders at the Meeting; or C$339 million and IIF’s interest in its Canada investment was –– the termination of the Implementation Agreement. disclosed in IIF’s 30 June 2010 audited financial statements under current assets. Compliance with various takeover provisions of the Corporations Act 8.21 ASIC relief GTA undertakes that subject to any differential treatment of ASIC has granted the following exemptions and modifications Unitholders which is inherent in the Proposal, the Proposal in connection with this Explanatory Memorandum and will, as far as practical comply with the following sections of the Proposal: the Corporations Act, as they would apply if GTA were making a takeover bid of IIF on similar terms: –– a modification of section 611 item 7 of the Corporations Act to permit IIF Unitholders (other than –– subsection 618(1) and section 619 (scheme relating GTA and its associates) to vote on the Proposal; to all securities in the relevant class or the same proportion of each holding, on the same terms); –– an exemption from Division 5A of Part 7.9 of the Corporations Act relating to unsolicited offers in –– subsections 621(3), (4), (5) as modified by ASIC respect of the offer by GTA under the Proposal class order 00/2338 (4 month price rule); and to acquire all the Units; –– sections 622, 623, 627, 628 and 651A. –– an exemption from the requirement for IML to provide For this purpose the date on which the Explanatory a financial services guide in connection with this Memorandum is sent to Unitholders will be the date of the Explanatory Memorandum and implementation of bid for the purposes of applying subsections 621(3), (4) and the Proposal; (5) of the Corporations Act and the first date of the bid –– an exemption from Part 7.6 of the Corporations Act in period (which will end immediately after the Meeting) for the relation to any general financial product advice by GTA purposes of applying section 623 of the Corporations Act. contained in this Explanatory Memorandum; and GTA has entered into a Deed Poll in respect of the –– a modification of section 601FL(2) of the Corporations undertakings set out above and in section 8.18. Act to expand the period for lodging a notice with ASIC in relation to the change of responsible entity of IIF until the Implementation Date. Explanatory Memorandum 51
Glossary 9 ING Industrial Fund 52
Glossary
A$ means Australian dollars. Adjusted NTA means 54.608 cents per Unit being the NTA of IIF per Unit as at 31 December 2010 adjusted to reflect the repayment of the IIF Subordinated Bonds at their face value and not their carrying value in IIF’s financial statements which takes into account the value of the associated Equity Linked Options and issue costs. AEDST means Australian Eastern Daylight Saving Time. AFSL means an Australian Financial Services Licence. Ancillary Transaction means the arrangement between ING Group and Goodman as set out in the Facilitation Deed, a summary of which is provided at sections 2.6 and 8.5 of this Explanatory Memorandum. APG means Stichting Depositary APG Strategic Real Estate Pool, as depositary of APG Strategic Real Estate Pool. ASIC means the Australian Securities and Investments Commission. Associate has the same meaning as in the Corporations Act. ASX means ASX Limited (ACN 008 624 691) or the market operated by it, as the context requires. Banking Act means the Banking Act 1959 (Cth). Board of IML means the board of directors of IML. Business Day means a business day as defined in the Listing Rules. C$ means Canadian dollars. Chairman of the Meeting means Kevin McCann, who will act as the chair of the Meeting or any replacement appointed by IML to chair the Meeting. CHESS means the system known as the Clearing House Electronic Subregister System and operated by the ASX Settlement Corporation, a wholly owned subsidiary of ASX. CIC means China Investment Corporation. Competing Transaction means a proposed transaction or arrangement which, if entered into or completed substantially in accordance with its terms, would mean a person (other than GTA Trustee, the Consortium Members or their Related Bodies Corporate or Representatives) would: (a) directly or indirectly, acquire, have a right to acquire or otherwise acquire, an interest or Relevant Interest in or become the holder of: (i) 50% or more of the Units; or (ii) all or a substantial part or a material part of the assets or business of IIF, including by way of takeover bid, informal trust scheme, capital or income distribution, sale of assets, sale of units or joint venture, but not as a custodian, nominee or bare trustee; (b) acquire Control of IIF or a member of the IIF Group; or (c) otherwise acquire or merge (including by a reverse takeover bid or dual listed entity structure) with, or be stapled to, IIF. Conditions Precedent means the conditions precedent set out in schedule 2 of the Implementation Agreement, and set out in section 8.1 of this Explanatory Memorandum. Consideration means the Offer Price less any distributions Unitholders become entitled to from the date of the Implementation Agreement (24 December 2010) until completion of the Proposal. Consortium Members means each of Goodman Group, APG, Leader and CPPIB. Further information on the Consortium Members is set out in section 6 of this Explanatory Memorandum. Control has the meaning given in section 50AA of the Corporations Act. Explanatory Memorandum 53
Corporations Act means the Corporations Act 2001 (Cth) including any Regulations made under the Corporations Act and any modifications to the Corporations Act made under ASIC relief. Court means the Supreme Court of New South Wales. CPP means Canada Pension Plan. CPPIB means CPPIB US RE-3, Inc, or its wholly owned trust or nominee. Deed of Retirement and means the Deed in connection with retirement, appointment and consent between IML and Appointment Goodman RE dated 7 February 2011. Deed of Undertaking means the Deed of Undertaking between GTA Trustee, the Consortium Members and IML dated 24 December 2010. Deed Poll means the Deed Poll dated 9 February 2011 declared by GTA Trustee as set out in Appendix C of this Explanatory Memorandum. Deloitte Corporate Finance means Deloitte Corporate Finance Pty Limited (ABN 19 003 833 127). Effective means when the Supplemental Deed takes effect pursuant to section 601GC(2) of the Corporations Act. Effective Date means the date on which the Proposal becomes Effective, which is expected to be on or about 18 March 2011. Eligible IIF Members means, in relation to the Proposal, those persons who are registered holders of Units as at the Meeting Record Date. EN Issuer means the issuer of the Exchangeable Notes. End Date means 30 April 2011 or such other date as is agreed by GTA Trustee and IML. Entity includes a natural person, a body corporate, a partnership, a trust and the trustee of a trust. Equity Linked Options means the tranche 1 and tranche 2 IIF equity-linked options having the terms set out in schedules 1 and 2 respectively of the IIF Constitution. Exchangeable Noteholder means a holder of an Exchangeable Note. Exchangeable Notes means the two tranches of secured exchangeable notes issued by JP Morgan Australia ENF Nominees No. 2 Pty Ltd in its capacity as trustee of the JP Morgan Australia Exchangeable Note Funding Trust No. 2. Exclusivity Period means the period from and including the date of the Implementation Agreement (being 24 December 2010) to the earlier of: (a) the termination of the Implementation Agreement in accordance with its terms; and (b) the End Date. Explanatory Memorandum means this document, including the appendices. Facilitation Deed means the Scheme Facilitation Deed dated 24 December 2010 between REIM AP, REII III and Goodman. FIRB means Foreign Investment Review Board. First Court Hearing means a hearing before the Court under section 63 of the Trustee Act 1925 (NSW) as to whether IML would be justified in convening the Meeting and proceeding on the basis that amending the IIF Constitution as set out in the Supplemental Deed is in accordance with the power of alteration conferred by the IIF Constitution and section 601GC of the Corporations Act. First Judicial Advice means confirmation from the Court under section 63 of the Trustee Act 1925 (NSW) that IML would be justified in convening the Meeting and proceeding on the basis that amending the IIF Constitution as set out in the Supplemental Deed would be within the power of alteration conferred by the IIF Constitution and section 601GC of the Corporations Act. ING Industrial Fund 54
Glossary
FX means foreign exchange. Goldman Sachs means Goldman Sachs & Partners Australia Pty Ltd (ABN 21 006 797 897). Goodman means Goodman Limited (ABN 69 000 123 071). Goodman Group means Goodman Funds Management Limited (ACN 113 249 595) in its capacity as responsible entity of Goodman Industrial Trust (ARSN 091 213 839) and Goodman. Goodman RE means Goodman Funds Management Limited (ACN 067 796 641). GTA means Goodman Trust Australia, or where the context requires, GTA Trustee as trustee of Goodman Trust Australia. GTA Information means the information provided by GTA Trustee to IML for inclusion in this Explanatory Memorandum regarding GTA Trustee and the Consortium Members. For the avoidance of doubt, GTA Information does not include information about IIF (except to the extent it relates to any statement of intention relating to IIF following the Effective Date). GTA Trustee means Goodman Industrial Funds Management Limited (ACN 147 891 487) in its capacity as trustee of GTA. IBC means the independent board committee of IML as the responsible entity of IIF, comprising the IML Independent Directors. IIF means ING Industrial Fund (ARSN 089 038 175). IIF Constitution means the constitution of IIF as amended from time to time. IIF Investment and means an investment or custodian company owned or controlled by the ING Parties that holds Custodian Vehicles directly or indirectly assets of IIF or is required for an IIF investment structure and includes the Redbank Joint Venture. IIF Material Adverse Change means any Specified Event or Specified Events which when aggregated with all such events, has or is reasonably likely to: (a) reduce the annualised operating income of IIF as set out in the earnings forecast disclosure for the year ending 30 June 2011 made to ASX on 30 August 2010 (excluding mark-to-market movements relating to investment properties and financial derivatives and the effect of any earnings decreation arising from delaying the refinancing of certain facilities as assumed in preparing that earnings forecast disclosure), by at least $5.4 million over the 12 month period following the date of execution of this agreement; or (b) reduce the value of total net tangible assets of IIF by at least 5% of the value shown in the consolidated balance sheet as at 30 June 2010, excluding mark-to-market movements relating to investment properties, financial derivatives and foreign exchange rates, but does not include: (c) any matter fairly disclosed to GTA Trustee or its Representatives prior to the signing of this agreement (including as a result of disclosures made to ASX); (d) any change in taxation, interest rates or foreign exchange rates which impact on IIF and GTA Trustee in a similar manner; (e) any change in accounting policy required by law or applicable accounting standards; or (f) any change occurring directly or indirectly as a result of any matter, event or circumstance required by this agreement, the Proposal or the transactions contemplated by them. IIF Members means Unitholders and holders of Equity Linked Options. Explanatory Memorandum 55
IIF Prescribed Event means, except to the extent contemplated by this agreement or the Proposal, any of the events listed in schedule 1 of the Implementation Agreement provided that an IIF Prescribed Event listed in items (1) to (13) of schedule 1 of the Implementation Agreement will not occur where: (a) IML has first consulted with GTA Trustee in relation to the event and GTA Trustee has approved the proposed event or has not objected to the proposed event within 5 Business Days of having being so consulted (noting that the parties agree in the case of IML seeking an approval under schedule 1 paragraph 11 of the Implementation Agreement, IML is not required to disclose tenant specific information but must provide sufficient information to determine the credit worthiness of the proposed tenant); or (b) IML has fairly disclosed the event to GTA Trustee prior to the signing of the Implementation Agreement. IIF Subordinated Bonds means the tranche 1 subordinated bonds and tranche 2 subordinated bonds issued by IML to the issuer of the Exchangeable Notes. IML means ING Management Limited (ACN 006 065 032; AFS licence 237534) as the responsible entity of ING Industrial Fund (ARSN 089 038 175). IML Directors means the directors of IML as the responsible entity of IIF. IML Independent Director means each director identified as an independent director (or independent chairman) in section 5.7 of this Explanatory Memorandum. Implementation Agreement means the implementation agreement entered into between IML and GTA Trustee on 24 December 2010. Implementation Date means the date upon which the Proposal will come into effect, being the Business Day after the Implementation Record Date, which is expected to be 29 March 2011. Implementation Record Date means the date upon which those IIF Unitholders who hold Units as registered in the register will be entitled to receive the Consideration, being the sixth Business Day following the Effective Date or such other date as IML and GTA Trustee agree, which is expected to be 28 March 2011 at 5.00pm (AEDST). Independent Board means the independent board committee of IML as the responsible entity of IIF, comprising the Committee IML Independent Directors. Independent Expert means Deloitte Corporate Finance Pty Limited (ABN 19 003 833 127). Independent Expert’s Report means the report prepared by the Independent Expert set out in Appendix A to this Explanatory Memorandum. ING Asset Management means the asset management agreements between Related Bodies Corporate of ING and IIF Agreements in respect of IIF’s European assets. ING Facilities means finance facilities in place with various members of the ING Group pursuant to which an ING Group member has provided financing to IIF and/or a subsidiary of IIF. ING Group means ING Groëp NV and each of its Related Bodies Corporate. ING Industrial Fund means ING Industrial Fund (ARSN 089 038 175). ING Parties means REIM AP and REII III. INGRE means ING Real Estate B.V., which was incorporated and is domiciled in The Netherlands and is the parent company of REIM AP. Judicial Advice means the First Judicial Advice and the Second Judicial Advice. Leader means Leader Investment Corporation, or its wholly owned trust or nominee. ING Industrial Fund 56
Glossary
Listing Rules means the ASX Listing Rules and any other rules of ASX which are applicable while the Units are admitted to the official list of ASX, each as amended or replaced from time to time, except to the extent of any express written waiver by ASX. Meeting means the meeting of IIF Members for which a Notice of Meeting is contained in Appendix D of this Explanatory Memorandum. Meeting Record Date means the time and date upon which the eligibility of IIF Members to vote at the Meeting is determined, being 15 March 2011 at 7.00pm (AEDST). Missed Redemption Event has the meaning in section 8.15. Notice of Meeting means the notice of Meeting for IIF to be held at 2.30pm (AEDST) on 17 March 2011 at Swissôtel Sydney, Level 8, 68 Market Street, Sydney NSW 2000 for which a Notice of Meeting is contained in Appendix D of this Explanatory Memorandum. NTA means net tangible assets. Offer Price means 54.6 cents per Unit in cash. Participant means each person, including each Consortium Member, who is an IIF Unitholder at the Implementation Record Date. Preference Units means a preference unit in IIF, the terms of which are set out in schedules 3 and 4 of the Constitution. Proposal means the proposal by GTA to acquire all of IIF’s ordinary units via a trust scheme. Proxy Form means the personalised proxy form included with this Explanatory Memorandum which allows IIF Members to vote on Resolutions without attending the Meeting. Redbank Joint Venture means ING Real Estate Redbank River Park Pty Ltd (ACN 114 031 284). Registry means Link Market Services Limited. Regulatory Authority includes: (a) ASX, ACCC, FIRB and ASIC (and any relevant European equivalent); (b) an Australian or European government or governmental, semi-governmental or judicial entity or authority; (c) an Australian or European minister, department, office, commission, delegate, instrumentality, agency, board, authority or organisation of any government; and (d) any Australian or European regulatory organisation established under statute. Regulatory Guide 74 means the document titled Regulatory Guide 74: Acquisitions agreed to by shareholders issued by ASIC. REII III means ING Real Estate International Investments III B.V. which was incorporated and is domiciled in The Netherlands and is a wholly owned subsidiary of INGRE. REIM means INGRE’s global real estate investment management. REIM AP means ING Real Estate Investment Management Asia/Pacific B.V. REIMA means ING Real Estate Investment Management Australia Pty Ltd (ABN 91 096 136 202). Related Body Corporate has the meaning it has in the Corporations Act, but with “subsidiary” in that meaning having the meaning given in this section 9 and body corporate in that meaning including any entity or trust. Relevant Interest has the same meaning as given by sections 608 and 609 of the Corporations Act. Representative means any person acting for or on behalf of a party including any director, officer, employee, agent or professional advisor of a party. Resolutions means the resolutions proposed to be put to IIF Members as set out in the Notice of Meeting. Second Court Date means the day on which the Second Judicial Advice is received. Explanatory Memorandum 57
Second Court Hearing means a hearing before the Court under section 63 of the Trustee Act 1925 (NSW) as to whether IML would be justified in implementing the Resolutions, giving effect to the provisions of the IIF Constitution (as amended by the Supplemental Deed) and in doing all things and taking all necessary steps to put the Proposal into effect. Second Judicial Advice means confirmation from the Court under section 63 of the Trustee Act 1925 (NSW) that IML would be justified in acting upon the Proposal Resolutions in doing all things and taking all necessary steps to put the Proposal into effect. Specified Events means an event, occurrence or matter that: (a) occurs after the date of the Implementation Agreement (being 24 December 2010); (b) occurs before the date of the Implementation Agreement but has not been publicly announced before the date of the Implementation Agreement (being 24 December 2010); or (c) will or is likely to occur after the date of the Implementation Agreement and which has not been publicly announced prior to the date of the Implementation Agreement (being 24 December 2010). Subscription Agreement means the Subscription Agreement between GTA Trustee and the Consortium Members dated 24 December 2010. Subsidiary has the meaning given in the Corporations Act, but so that: (a) an Entity will also be taken to be a Subsidiary of another Entity if it is controlled by that Entity (as “control” is defined in section 50AA of the Corporations Act); (b) a trust may be a Subsidiary, for the purposes of which a unit or other beneficial interest will be regarded as a share; and (c) an Entity may be a Subsidiary of a trust if it would have been a Subsidiary if that trust were a corporation. Supplemental Deed means the supplemental deed as set out in Appendix B of this Explanatory Memorandum. Tax Opinion means the tax opinion provided by Ernst & Young. UBS AG means UBS AG, Australia Branch (ABN 47 088 129 613). Unit means an ordinary unit in IIF. Unitholder means a person who is registered in the register as the holder of Units, and Unitholders means all of them. WALE means weighted average lease expiry. ING Industrial Fund 58
Appendix A: Independent Expert’s Report A explanatory memorandum 59
ING Industrial Fund Independent expert’s report and Financial Services Guide 10 February 2011 ING Industrial Fund 60 Appendix A: Independent Expert’s Report
What is a Financial Services Guide? In the previous two years we have also provided the This Financial Services Guide (FSG) provides important following services for ING Management Limited and related information to assist you in deciding whether to use our parties:p services. This FSG includes details of how we are a review of the process adopted by the independent remunerated and deal with complaints. directors of the responsible entity for ING Real Estate Healthcare Fund to assess whether the process, path and Where you have engaged us, we act on your behalf when documentation adopted was reasonable providing financial services. Where you have not engaged advice to the responsible entity of ING Real Estate us, we act on behalf of our client when providing these Entertainment Fund in respect of two potential scenarios financial services, and are required to give you an FSG for the fund. In particular we were asked to comment on because you have received a report or other financial the fiduciary duty of the receiver, the possible actions of services from us. receivers and managers, and the potential impact on the What financial services are we licensed to provide? fund of these actions under both scenarios. We are authorised to provide general financial product In addition, in 2010 Deloitte prepared an independent advice or to arrange for another person to deal in financial expert’s report in respect of the acquisition of all of the products in relation to securities, interests in managed equity in Moorabbin Airport Corporation Pty Limited by investment schemes and government debentures, stocks or Goodman Group. Deloitte Touche Tohmatsu has also bonds. undertaken limited forensic and risk services work for Our general financial product advice Goodman Group in the previous two years. Where we have issued a report, our report contains only Associations and relationships general advice. This advice does not take into account your We are ultimately owned by the Deloitte member firm in personal objectives, financial situation or needs. You should Australia (Deloitte Australia). Deloitte refers to one or more consider whether our advice is appropriate for you, having of Deloitte Touche Tohmatsu, a Swiss Verein, and its regard to your own personal objectives, financial situation or network of member firms, each of which is a legally separate needs. If our advice is provided to you in connection with the and independent entity. Please see acquisition of a financial product you should read the www.deloitte.com/au/about for a detailed description of the relevant offer document carefully before making any legal structure of Deloitte Touche Tohmatsu and its member decision about whether to acquire that product. firms. We and Deloitte Australia (and other entities related to How are we and all employees remunerated? Deloitte Australia): Our fees are usually determined on a fixed fee or time cost do not have any formal associations or basis and may include reimbursement of any expenses relationships with any entities that are issuers of incurred in providing the services. Our fees are agreed with, financial products; and and paid by, those who engage us. Other than our fees, we, may provide professional services to issuers of our directors and officers, any related bodies corporate, financial products in the ordinary course of affiliates or associates and their directors and officers, do not business. receive any commissions or other benefits. All employees What should you do if you have a complaint? receive a salary and while eligible for annual salary increases If you have any concerns regarding our report or service, and bonuses based on overall performance they do not please contact us. Our complaint handling process is receive any commissions or other benefits as a result of the designed to respond to your concerns promptly and services provided to you. The remuneration paid to our equitably. All complaints must be in writing to the address directors reflects their individual contribution to the below. If you are not satisfied with how we respond to your organisation and covers all aspects of performance. We do complaint, you may contact the Financial Ombudsman not pay commissions or provide other benefits to anyone Service (FOS). FOS provides free advice and assistance to who refers prospective clients to us. consumers to help them resolve complaints relating to the Neither Deloitte Corporate Finance Pty Limited (Deloitte), financial services industry. FOS’ contact details are also set Deloitte Touche Tohmatsu, nor any partner or executive or out below. employee thereof has any financial interest in the outcome of The Complaints Officer Financial Ombudsman the Proposed Transaction which could be considered to PO Box N250 Service affect our ability to render an unbiased opinion in this report. Grosvenor Place GPO Box 3 Deloitte will receive a fee of $155,000 exclusive of GST in Sydney NSW 1220 Melbourne VIC 3001 relation to the preparation of this report. This fee is based [email protected] [email protected] upon time spent at our normal hourly rates and is not Fax: +61 2 9255 8434 www.fos.org.au contingent upon the success or otherwise of the Proposed Tel: 1300 780 808 Transaction. Fax: +61 3 9613 6399 In addition to the preparation of this report Deloitte was What compensation arrangements do we have? engaged to perform a familiarisation exercise for a potential Deloitte Australia holds professional indemnity insurance independent expert’s report for an alternate transaction that covers the financial services provided by us. This contemplated by ING Management Limited in respect of IIF. insurance satisfies the compensation requirements of the This transaction never completed and we did not release any Corporations Act 2001 (Corporations Act). valuation conclusions during this process. We received fees based on the time spent on this familiarisation exercise.
explanatory memorandum 61 Appendix A: Independent Expert’s Report
Deloitte Corporate Finance Pty Limited A.B.N. 19 003 833 127 AFSL 241457
Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia
DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au The Directors ING Management Limited as the Responsible Entity for ING Industrial Fund Level 6, 345 George Street Sydney NSW 2000
10 February 2011
Dear Directors
Independent expert’s report 1 Introduction ING Industrial Fund (IIF or the Fund) is an Australian real estate investment trust (A-REIT) listed on the Australian Stock Exchange (ASX) which develops, owns and manages a diversified portfolio of industrial properties and business parks. IIF has total property funds under management (FUM) of approximately $2.5 billion and direct investments in properties in Australia, Germany, Spain and Belgium. ING Management Limited (IML) is the responsible entity (Responsible Entity) of IIF, and the Fund is externally managed by ING Real Estate Investment Management Australia Pty Limited (REIMA), a wholly-owned subsidiary of ING Real Estate Investment Management Asia/Pacific B.V. (REIM AP). IIF has recently divested an indirect interest in over 400 properties in Canada through the sale of a 50% equity interest in the ING Summit Industrial Fund LP (Summit). On 28 October 2010 (Conditional Offer Announcement Date), the Board of Directors of IML (Directors) announced a conditional proposal under which a consortium led by Goodman Group (Goodman) which includes Goodman and three major pension/sovereign wealth funds, Leader Investment Corporation (Leader) (a wholly-owned subsidiary of China Investment Corporation (CIC)), Canadian Pension Plan Investment Board (CPPIB) and the Dutch pension fund All Pensions Group as manager of APG Strategic Real Estate Pool (APG) (collectively the Consortium Members), would acquire all the ordinary units of IIF. On 24 December 2010 (Announcement Date) the Board of Directors of IML announced that IML and Goodman Industrial Funds Management Limited (GTA Trustee), in its capacity as trustee of Goodman Trust Australia (GTA) and on behalf of the Consortium Members, had entered into an implementation agreement to acquire all the units in IIF for cash consideration equal to 54.6 cents per unit (cpu) less any distributions IIF Unitholders become entitled to from the date of the Implementation Agreement (24 December 2010) until implementation (Consideration), via a trust scheme of arrangement (the Proposal). If the Proposal is implemented, GTA Trustee will provide the Consideration to IML on trust for each IIF unitholder) on the implementation date, which is expected to be on 30 March 2011 (Implementation Date). IML will then pay the Consideration to IIF Unitholders within 3 business days. The Consideration will be reduced by any distributions which IIF Unitholders become entitled to subsequent to the Announcement Date and prior to the Implementation Date, which are 0.8025 cpu for the 31 December 2010 quarter resulting in unitholders receiving 53.7975 cpu if the Proposal proceeds. GTA is an unlisted, special purpose investment vehicle with a mandate to hold the IIF portfolio and enhance it by developing IIF’s existing development pipeline.
Member of Deloitte Touche Tohmatsu ING Industrial Fund 62 Appendix A: Independent Expert’s Report
Separate to the Proposal negotiated between IML and GTA Trustee, REIM AP and ING Real Estate International Investment III B.V (REI III) (together ING) have entered into a facilitation deed (Facilitation Deed) with Goodman whereby ING have agreed to use their reasonable endeavours to assist Goodman with obtaining certain consents and in the transfer of certain know-how and records of IML as they pertain to IIF including transfer of management rights for the Australian assets of IIF (Ancillary Transaction) in return for a facilitation payment to REIM AP of $22.5 million to (the Ancillary Consideration). The Proposal and the Ancillary Transaction are collectively referred to as the (Proposed Transaction). The Directors have prepared an explanatory memorandum containing the detailed terms of the Proposed Transaction (Explanatory Memorandum) and an overview of the Proposed Transaction is provided in Section 1 of our detailed report. 2 Purpose of the report 2.1 Proposal The Proposal will be implemented by a trust scheme of arrangement and will require approval by Unitholders. The Independent Directors have requested us to prepare an independent expert’s report (IER) advising whether, in our opinion, the Proposal is fair and reasonable to unitholders of IIF excluding Goodman Group and ING (Non-Associated Unitholders) for the purpose of item 7 of section 611 (Section 611) of the Corporations Act and the Takeovers Panel Guidance Note 15 (GN15). In exercising its powers and carrying out its duties as responsible entity of IIF, IML is required to act in the best interest of IIF unitholders. In order to assist in discharging their fiduciary obligations, the Independent Directors have also requested that Deloitte provide an opinion as to whether the Proposal is in the best interests of Non- Associated Unitholders. 2.2 Ancillary Transaction The Independent Directors have requested that Deloitte provide an opinion as to whether: the Ancillary Transaction is on arm’s length terms, and the consideration payable under the Ancillary Transaction constitutes the receipt by REIM AP of a collateral benefit for the purposes of the Corporations Act as interpreted by the Takeovers Panel Guidance Note 21: Collateral Benefits (GN21). This opinion has been commissioned by the Independent Directors to assess the Ancillary Transaction for the purpose of assisting them in forming their opinion as to whether the Proposed Transaction is in the best interests of Non-Associated Unitholders. The purpose of our opinion with respect of the Ancillary Transaction is to assist the Independent Directors in making their assessment, taking into account, amongst other things, those matters which we have been asked to opine upon in our IER. 3 Basis of evaluation We have prepared this report having regard to the relevant aspects of the Corporations Act, GN15, GN21 and the relevant regulatory guides issued by ASIC. We have also had regard to ASIC Consultation Paper 143 which includes proposed updates and amendments to RG 111 in our assessment where relevant. 4 Summary of opinion – Proposal 4.1 Summary In our opinion the Proposed Transaction is fair and reasonable and in the best interests of Non-Associated Unitholders. In order to assess the fairness of the Proposal, we have compared our estimate of the fair market value of IIF to the value of the Consideration. In order to assess whether the Proposal is reasonable, we considered whether the advantages of the Proposal sufficiently outweigh its disadvantages. To assess whether the Proposal is in the best interests of Non-Associated Unitholders, we have adopted the test of whether the Proposal is either fair and reasonable, not fair but reasonable, or neither fair nor reasonable, as set out in RG 111, after considering whether there are sufficient reasons for Non-Associated Unitholders to vote in favour of the Proposal. A summary of our analysis is discussed in further detail below.
2 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 63 Appendix A: Independent Expert’s Report
4.2 Assessment of fairness We have assessed whether the Proposal is fair by comparing the fair market value of an IIF unit (assuming 100% control) to the value of the Consideration. For the purposes of estimating the fair market value of an IIF unit, we have defined fair market value as the amount at which the units would be expected to change hands between a knowledgeable willing buyer and a knowledgeable willing seller, neither of whom is under any compulsion to buy or sell. Special purchasers may be willing to pay higher prices to reduce or eliminate competition, to ensure a source of material supply or sales, or to achieve cost savings or other synergies arising on business combinations, which could only be enjoyed by the special purchaser. Our valuation of IIF has not been premised on the existence of a special purchaser. Moreover, in our assessment of the fairness of the Proposal we did not consider any potential impact on the current value of a unit in IIF that may arise as a consequence of the existing capital structure of the fund. Instead we have considered such factors in our assessment of the reasonableness of the Proposal. In our estimate of the fair market value of an IIF unit we have assessed the fair market value using the net assets on a going concern valuation approach. We have used the net assets on a going concern basis to estimate the fair market value of a unit in IIF. We have estimated the fair market value of IIF by aggregating the fair market value for the investment property assets as well as any other related assets and liabilities. In applying this approach we have taken account of the ongoing management and other costs associated with realising the value of the assets on a going concern basis over the medium term. In our assessment of the fair market value of IIF we have utilised the carrying value of IIF’s portfolio as at 31 December 2010 and considered any adjustments required to reflect the difference between our estimate of the fair market value and the book value of these assets at the Implementation Date. In making this assessment we have undertaken an analysis of the valuation of IIF’s investment properties which has included independent analysis of a sample of IIF’s internal and external valuations noting that independent valuations of 100% of IIF’s properties have been undertaken during the 12 months to 31 December 2010. We have estimated the fair market value of an IIF unit as at the Implementation Date on an ex-distribution basis to be between $0.534 per unit and $0.550 per unit as set out in Section 5.2.2 below. The Ex-Dividend Consideration is within our assessed fair market value range of an IIF unit as set out in the table below:
Table 1: Fair market value of IIF compared to the Consideration
Low value ($) High value ($)
Fair market value of IIF per unit $0.534 $0.550
Consideration $0.538 $0.538
Premium/(discount) to assessed value implied by the Consideration 0.7% -2.2%
Source: Deloitte analysis We have therefore concluded that the Proposal is fair.
3 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 64 Appendix A: Independent Expert’s Report
Given the relatively high level of gearing within IIF, our valuation is sensitive to relatively small movements in the underlying value of IIF’s properties. Our estimate of the impact of movements in the underlying valuations of the properties on the fair market value of an IIF unit is set out below.
Figure 1: Valuation of a unit in IIF– sensitivity to movements in the value of the properties $0.90
$0.80 $0.78
$0.73 $0.70 $0.69
$0.64 $0.60 $0.59 Consideration $0.54 ($) $0.50 $0.49
$0.44
$0.40 $0.40 Value per Value per unit $0.35
$0.30 $0.30
$0.20
$0.10
$0.00 -25% -20% -15% -10% -5% Assessed fair 5% 10% 15% 20% 25% value (midpoint)
Source: Deloitte analysis Broadly speaking, a +/- 5% movement in the value of IIF’s properties would equate to an approximate impact of -/+9% on the value of an IIF unit on average, after taking into account the impact of the existing leverage of the fund. 4.3 Assessment of reasonableness In accordance with RG 111 an offer is reasonable if it is fair. An offer might also be reasonable if, despite being ‘not fair’, the expert believes that there are sufficient reasons for Non-Associated Unitholders to accept the offer in the absence of any higher offer. We have assessed whether the Proposed Transaction is reasonable having regard to whether the advantages of the transaction outweigh the disadvantages. In particular, we have considered: the current status and future prospects of IIF on a stand-alone basis and the alternatives considered advantages and disadvantages of the Proposed Transaction including any potential tax implications to Non- Associated Unitholders.
Background to the transaction The global financial crisis (GFC) resulted in a number of adverse consequences for the A-REIT sector, which was particularly exposed to the decline in liquidity in debt and equity markets due to the relatively high levels of gearing employed and cyclical nature of the underlying asset values. As a consequence, the A-REIT sector went from trading at a premium to NTA in early 2007 to trading at a significant discount to NTA throughout 2009 and into 2010. In response to these conditions, a number of A- REITs undertook significant capital management initiatives including refinancing, large-scale emergency equity raisings, asset disposals, and reducing/delaying distributions. Whilst the implementation of these measures significantly strengthened balance sheets, reduced gearing levels and provided liquidity to meet upcoming debt expiries, the sector on average continues to trade at a discount to NTA.
4 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 65 Appendix A: Independent Expert’s Report
In order to narrow this gap between traded prices and the NTA backing of an IIF unit, a number of initiatives were undertaken by the Directors, which included property sales and the divestment of non-core assets including IIF’s interest in the Summit portfolio in Canada for net proceeds of approximately $300 million. Whilst these initiatives reduced the gap between trading prices and NTA backing, IIF continued to trade at a discount to NTA prior to the announcement of the Proposal in October 2010. The ability for Non-Associated Unitholders to access the underlying NTA value for the Fund through any specific re-rating in the unit price of IIF on a stand-alone basis is unlikely in the short to medium term as a number of risks and uncertainties remain for the Funds including: relatively high leverage: IIF has $395 million in Exchangeable Notes maturing in June 2011 and June 2012. Whilst the divestment of Summit has provided additional financial flexibility for IIF, funding the repayment of the Exchangeable Notes may require further asset divestments. In addition, IIF’s gearing levels are at the higher end of entities in the A-REIT sector. Even after utilising the proceeds of the Summit sale to pay down existing facilities, IIF’s book value gearing as at 31 December 2010 was approximately 42% (inclusive of the Exchangeable Notes). IIF’s current capital structure therefore creates additional uncertainty in respect of near term growth prospects of the Fund due to the uncertainty in respect to the funding of the development pipeline and/or any accretive acquisitions. exposure to offshore assets: IIF has investments in offshore assets, while investors were increasingly wanting A-REITs to focus on domestic markets. Notwithstanding IIF’s offshore exposure has been reduced following the divestment of Summit, IIF’s European assets comprise approximately 12% of total assets as at 31 December 2010 lack of scale: following the GFC, investors were showing increased appetite for scale and liquidity in securities. In particular, global investors were placing greater focus on the largest and most liquid stocks. As a consequence, the Directors implemented a strategic review to identify alternatives available to increase value for Non-Associated Unitholders. This strategic review was undertaken against a backdrop in which ING Group had also indicated to the market that it was undertaking a review of the global Real Estate Investment Management (ING REIM) business, and accordingly was considering the divestment of this business. During this strategic review process, the Directors engaged a number of external advisors to investigate the alternatives which included maintaining the status quo for the Fund, liquidating the portfolio, a merger with another fund as well as the sale and internalisation of the management rights of the Fund. During this process Goodman Group confirmed to the market its interest in obtaining the management rights to IIF and increased its stake in IIF from 4.4% to 7.1% in September 2010. On 28 October 2010, Goodman Group, on behalf of the Consortium Members, submitted a conditional incomplete offer to the Board of IML to acquire the ordinary units of IIF. On 15 November 2010, after considering the merits of the revised proposal, the Board of IML agreed to grant the Consortium Members access to due diligence and to engage with the Consortium Members, in order to determine whether an acceptable transaction can be agreed which maximises value to IIF unitholders. On the 24 December 2010, following negotiations between IML and GTA Trustee, the Board of IML announced that it had entered into an Implementation Agreement with GTA Trustee. Following the strategic review and the discussions with the Goodman Group, on behalf of the Consortium Members, the Independent Directors concluded that the Proposal was the best alternative currently available to IIF unitholders.
Advantages of the Proposal The likely advantages to Non-Associated Unitholders if the Proposal is approved include the following: No superior alternative has been identified or is currently available As discussed above, IML undertook a strategic review that encompassed strategic options with the capacity to address the valuation gap existing between the NTA and the unit price of IIF as well as creating long term value for IIF unitholders. This review included a number of alternative scenarios for IIF including maintaining the fund, a sale or internalisation of the management rights, winding up the fund as well as a merger with another fund.
5 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 66 Appendix A: Independent Expert’s Report
However, we do not consider that any of the alternatives identified provide a superior outcome for Non- Associated Unitholders relative to the Proposal. In particular: maintaining the status quo and refining and refocusing the strategic direction of IIF is unlikely to result in additional value relative to the Proposal in the near term due to the uncertainty arising from ING Groups’ intentions for ING REIM coupled with IIF’s lack of scale, funding requirements and a range of market and general risk factors which combined are likely to limit any near-term re-rating for IIF closer to NTA any liquidation of the underlying assets of IIF is likely to take considerable time (i.e. over 12 months), could result in assets being realised at values less than the current NTA of the fund and is subject to significant execution risk in regards to the merger alternatives, there are only a limited number of potential merger partners in the industrial sector and any merger would entail various risks which may include a diversification of the sector specific nature of the fund as well as significant implementation risks which would be borne by unitholders. Mergers into other asset classes were not seen as attractive to the investor base of IIF based on discussions held throughout this process. Furthermore, in the absence of a significant re-rating, a merger of IIF with another fund is unlikely to result in trading prices for IIF unitholders greater than that offered by the Proposal alternatives that involve a restructure of the manager and either the internalisation of the management of IIF or selling it to a to a third party are unlikely to generate immediate value for Non-Associated Unitholders as there would be no material change to IIF’s earnings or growth prospects and would not likely alleviate the above concerns. Furthermore, despite proactive approaches with other parties by IML, no superior competing proposal has been received by IML to date. Given the above and the lack of a superior competing proposal, we consider that the Proposal is the best alternative available to Non-Associated Unitholders.
6 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 67 Appendix A: Independent Expert’s Report
The Consideration represents a premium to recent trading in IIF units Whilst the Consideration represents a 0.8% discount to the mid-point of our assessed fair market value of an IIF unit, it represents a premium to the recent trading in IIF units, as indicated in the following figure.
Figure 2: Comparison of Consideration to the fair value and trading in IIF units prior the Announcement Date
0.700
0.600 0.8% discount Consideration = $0.538
0.542 0.538 0.500
0.481 0.481 0.465 0.470 0.436 0.400 ($)
0.300 Value per Value per unit 0.200
0.100
0.000 Fair market value Consideration 1-day VWAP 1-week VWAP 1-month VWAP 3-month VWAP 6-month VWAP per unit (midpoint)
-0.100
Source: Deloitte analysis Note: 1. The assessed fair market value of an IIF unit is between $0.534 and $0.550 (thus the midpoint is $0.542) As set out above, the Consideration represents a premium of 16% to the one day VWAP of IIF as at 28 October 2010, the day that the initial conditional proposal was received from Goodman Group on behalf of the Consortium Members (Conditional Offer Announcement Date) and a premium of 24% to the 6 month VWAP of IIF as at this date.
7 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 68 Appendix A: Independent Expert’s Report
IIF units would likely trade below the Consideration in the absence of the Proposal As set out below, the IIF unit price has appreciated by 21.8% since speculation regarding a transaction was acknowledged by IIF management on 23 July 2010 and 15.2% since the Conditional Offer Announcement Date.
Figure 3: IIF unit trading post speculation of a transaction involving the sale of IIF’s units
0.55
0.50 Speculation of a potential transaction acknowledged on 23 July 2010
0.45
Proposed Takeover announced on 28 October 2010 Unit price ($) 0.40
0.35
0.30 Jul-10 Oct-10 Jun-10 Jan-11 Aug-10 Sep-10 Dec-10 Nov-10
IIF unit price
Source: Reuters, Deloitte analysis It is likely that in the absence of the Proposal that the IIF unit price will decline, potentially more in line with prices observed prior to the Conditional Offer Announcement Date in the absence of any specific re-rating of IIF or the A-REIT sector. Whilst the Consideration represents a slight discount to the existing NTA of IIF, it is unlikely that the unit price of IIF will trade at or near NTA in the near future since: the A-REIT sector is generally trading at a discount to NTA as discussed in Section 3.2 below and there is no indication that this will change in the near term IIF’s gearing as at 31 December 2010 was 42% including the Exchangeable Notes. In the absence of the Proposal, IIF may be required to sell assets or raise equity or a combination of the two in order to reduce its gearing. These measures would reduce the scale of the fund and have dilutive impacts for Non- Associated Unitholders IIF’s capital structure and higher cost of capital relative to its peers may constrain the growth prospects of IIF. This may limit any growth in the distribution profile of IIF which may not be attractive relative to other comparable investments in the sector which is likely to limit any short term re-rating closer to NTA for IIF.
The Proposed Transaction allows Non-Associated Unitholders to immediately realise their investment in IIF The Proposed Transaction will allow Non-Associated Unitholders to immediately realise their investment in IIF at a premium to the price at which IIF units traded prior to the Conditional Offer Announcement Date as set out above. The uncertainty in relation to the timing and quantum of the proceeds to be received in the event that the IIF assets were realised on a piecemeal basis is therefore removed.
8 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 69 Appendix A: Independent Expert’s Report
There may be adverse implications if the Proposal does not proceed In the event that the Proposal does not proceed: the IIF unit price would most likely fall closer to levels at which it was trading prior to the Conditional Offer Announcement Date (ie. approximately $0.46 per unit as at 27 October 2010) as discussed above IIF will incur total costs of approximately $2.5 million. Additional advisory and transaction fees are likely to be incurred as the Fund will need to determine an appropriate action plan in order to exit the European investments and to assess the implications of ING divesting their real estate platform in Australia IML may be required to pay the GTA Trustee a break fee of $14 million the refinancing of IIF’s debt facilities has been delayed as a consequence of the Proposal. In the absence of the Proposal, if the refinancing of IIF’s syndicated debt facility and the Exchangeable Notes is not successfully completed ahead of maturity, it would likely have an adverse impact on the value of an IIF unit in the absence of the Proposal, IIF will face other challenges which include: o gearing levels at the high end of IIF’s peer group and what IML considers desirable which is likely to constrain debt funded developments or acquisitions. Equity funding for growth projects may also be limited due to IIF’s relatively higher cost of capital relative to its peers o the distribution profile of IIF may not be attractive relative to other comparable investments in the sector which will likely limit any re-rating closer to NTA for IIF
o the orderly disposal of European assets within a reasonable time period and on terms acceptable to IIF. Due to the current economic climate in Europe, the ultimate net proceeds which could be realised are uncertain and any such disposal could be dilutive to earnings
o IIF’s ability to divest non-core assets in order to fund its development pipeline and grow its investment portfolio. Disadvantages of the Proposal
The likely disadvantages to Non-Associated Unitholders if the Proposal is approved include the following: Non-Associated Unitholders will miss the opportunity to participate in any specific appreciation of IIF’s properties Whilst there is no certainty that the value of IIF’s properties will appreciate, general market sentiment indicates that the industrial property sector has passed the low point in the economic cycle and that property valuations should start to improve from this point in time. Due to the relatively high financial leverage of IIF, any appreciation in the properties portfolio over time would be likely to translate to a more significant improvement in the NTA value of IIF. Non-Associated Unitholders will forgo the opportunity to participate in this leveraged exposure to any medium term upside in the values of properties.
Tax consequences Approval of the Proposal may result in adverse tax consequences for some Non-Associated Unitholders. Whilst we note that the tax implications will vary depending on the circumstances of each unitholder, possible tax consequences for Australian unitholders include capital gains. The approval of the Proposal may therefore accelerate tax payable for Non-Associated Unitholders as it may crystallise a tax liability on that gain in the short-term, which would otherwise have been deferred until the time the units would otherwise have been disposed of. Non-Associated Unitholders should evaluate the capital gains or other tax consequences of acceptance in assessing whether to approve the Proposal. For further details of the tax consequences of accepting the Proposal to Australian and non-Australian resident unitholders, you should refer to the Explanatory Memorandum.
9 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 70 Appendix A: Independent Expert’s Report
Conclusion on reasonableness From our analysis above we consider that the advantages of the Proposal sufficiently outweigh the disadvantages and therefore, we conclude that the Proposal is reasonable for Non-Associated Unitholders. Best interests opinion In our opinion the Proposal is fair and reasonable and in the best interests of Non-Associated Unitholders. In forming our opinion we have had regard to the following: we have concluded that the value of the Consideration is within the range of our estimate of the fair market value of IIF. Accordingly, we concluded that the Proposal is fair the Proposal is reasonable since, on balance, the advantages outweigh the disadvantages of the Proposal. In particular:
o while the Consideration under the Proposal is slightly below IIF’s NTA as at 31 December 2010 it is within the range of our estimate of the fair market value of IIF on a control basis. Furthermore, the Consideration represents a premium to recent trading in IIF units. Given the risks relating to IIF’s discussed above, it likely that IIF units would continue to trade at a discount to NTA and below the Consideration for the near future in the absence of the Proposal
o given the lack of superior alternative offers, the Proposal represents the best alternative available for Non-Associated Unitholders to immediately realise the value of their investment in IIF
o while Non-Associated Unitholders will miss the opportunity to participate in any specific appreciation of IIF’s properties under the Proposal, the Proposal removes any uncertainty associated with potential risks associated with IIF, including high levels of gearing and exposure to offshore assets. After considering the factors discussed above, we are of the opinion that the Proposal is fair and reasonable and in the best interests of Non-Associated Unitholders. An individual Unitholder’s decision in relation to the Proposal may be influenced by his or her particular circumstances. If in doubt the Unitholder should consult an independent adviser. 5 Summary of opinion – Ancillary Transaction 5.1 Approach In determining whether the terms and the consideration payable to REIM AP under the Ancillary Transaction is on arm’s length terms, we have assessed whether the parties are dealing with each other at arm’s length in negotiating the Facilitation Deed. In particular we have considered: the negotiation process for the Proposal and the Ancillary Transaction and any relationship which exists between the parties ING Group’s review of the ING REIM business, which may include divestment, regardless of whether the Proposal is successful the links between the Proposal and the Ancillary Transaction. We have also considered whether the consideration to be received for the Ancillary Transaction represents an arm’s length price. In particular, since the Ancillary Consideration is principally in consideration for ING forgoing the opportunity to receive revenue in respect of IML’s ongoing management of IIF we have considered whether the financial terms of the Ancillary Transaction is arm’s length having regard to: a comparison of the percentage of AUM and earnings/revenue multiples implied by the Ancillary Consideration to asset and earnings multiples observed in other transactions involving the internalisation or the sale of management rights in the property sector an estimate of the fair market value of the IIF management rights having regard to a discounted cash flow analysis of the benefits forgone by ING from managing IIF compared to the consideration received by ING Group. In determining whether there is a collateral benefit to ING Group, consistent with our understanding of the principles outlined in GN21 requiring an overall view of the transaction, we have: considered the process undertaken in negotiating the Proposal and the Ancillary Transaction and the financial terms of the Ancillary Transaction 10 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 71 Appendix A: Independent Expert’s Report
the substance and commercial reality of the transaction including the overall effect of the transaction the price to be paid for ING’s existing interest in IIF Any other relevant considerations. 5.2 Key findings We have considered the following in our assessment: the Proposal and the Ancillary Transaction were separately negotiated transactions between Goodman and REIM AP and REI III in respect of the Ancillary Transaction and GTA Trustee and IML in respect of the Proposal based on the negotiation process undertaken for the Proposed Transaction and the relationships that exist between the parties nothing has come to our attention which would cause us to believe that the parties are not dealing at arm’s length the consideration payable to REIM AP of $22.5 million represents approximately 1.0% of IIF’s AUM. This is consistent with the metrics observed in recent comparable market transactions involving management rights and internalisation transactions in the property sector. Furthermore, this value is in the range of the discounted cash flow analysis prepared to estimate the benefits forgone by REIM AP from managing IIF compared to the consideration received by REIM AP ING Group and related entities currently have a beneficial interest in IIF of approximately 7.9%. If the Proposal is implemented, ING's holding of IIF units will be transferred to GTA as part of the Proposal and ING will receive the same Consideration as other Non-Associated Unitholders. The Ancillary Transaction does not provide any requirement on the disposal or voting of the units in IIF held by ING and ING retains absolute discretion on the exercise of the voting rights and disposal of these units. Moreover, as discussed in Section 1.1.1, ING Group entities are not entitled to vote on the resolutions pertaining to the approval of the Proposal the Proposed Ancillary Transaction allows REIM AP to realise value for the existing management agreements at a time when ING Group is undertaking a strategic review of the global ING REIM platform which could include the divestment of the REIMA platform (inclusive of the IIF management rights). 5.3 Conclusion Having regard to the basis of our evaluation, the limitations set out in this report and the results of our analysis, nothing has come to our attention to cause us to believe that the consideration payable to REIM AP under the Ancillary Transaction: is not on arm’s length terms would constitute the receipt by REIM AP of a collateral benefit. Moreover, nothing has come to our attention in respect of the Ancillary Transaction that would cause us to change the conclusions we have reached in relation to the Proposal.
This opinion should be read in conjunction with our detailed report which sets out our scope and findings.
Yours faithfully DELOITTE CORPORATE FINANCE PTY LIMITED
Mark Pittorino Rachel Foley-Lewis Director Director
Note: All amounts stated in this report are AUD unless otherwise stated, and may be subject to rounding.
11 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 72 Appendix A: Independent Expert’s Report
Contents
1 Terms of the Proposed Transaction 14 1.1 Summary 14 1.2 Background to the Consortium 15 1.3 The acquirer’s intentions 16 2 Scope of the report 17 2.1 Purpose of the report 17 2.2 Basis of evaluation 17 2.3 Limitations and reliance on information 20 3 A-REITs and the industrial property market 21 3.1 Introduction 21 3.2 Recent trends in the A-REIT sector 21 3.3 Sub-sector outlook 24 4 Profile of IIF 28 4.1 Introduction 28 4.2 IIF’s History 29 4.3 Overview of the IIF property portfolio 29 4.4 Development projects 33 4.5 Legal structure 34 4.6 Key fee arrangements 34 4.7 Capital structure and unitholders 35 4.8 Unit price performance 36 4.9 Debt profile 38 4.10 Hedging Profile 39 4.11 Financial performance 40 4.12 Financial position 42 4.13 Strategy and Outlook 43 5 Evaluation of the Proposal 44 5.1 Overview 44 5.2 Fairness 44 5.3 Other considerations 57 6 Evaluation of the Ancillary Transaction 58 6.1 Approach 58
12 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 73 Appendix A: Independent Expert’s Report
6.2 Overview of the management arrangements 59 6.3 Arm’s length considerations 60 6.4 Collateral Benefit considerations 68 6.5 Conclusion 69
Appendices Appendix 1: Glossary 70 Appendix 2: Summary of IIF’s property portfolio 72 Appendix 3: Valuation methodology 75 Appendix 4: Discount rate 77 Appendix 5: Descriptions of industrial A-REITs, diversified A-REITs and property fund managers 85 Appendix 6: Sources of information 89 Appendix 7: Qualifications, declarations and consents 90
13 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 74 Appendix A: Independent Expert’s Report
1 Terms of the Proposed Transaction 1.1 Summary
1.1.1 Proposal On 24 December 2010, the Board of Directors of IML announced a proposal under which Goodman Trust Australia (GTA), an unlisted special purpose investment vehicle, would acquire all the ordinary units of IIF, for cash consideration equal to 54.6 cpu less 0.8025 cpu in distributions for the 31 December 2010 quarter to be declared by IML, via a trust scheme of arrangement. GTA’s mandate would be to hold the IIF portfolio and enhance it by developing IIF’s existing development pipeline. If the Proposal becomes effective, GTA Trustee will provide the Consideration to IML on trust for each IIF unitholder on the Implementation Date, which is expected to be on 30 March 2011. IML will then pay the Consideration to IIF unitholders within 3 business days. . As part of the Proposal, IML must pay to GTA Trustee a break fee equal to $14 million in the event that the Proposal is terminated as a consequence of certain events as defined in the related Implementation Agreement, which include a superior competing proposal being recommended by the Directors before 30 April 2011 or if any or all of the Directors fail to recommend the Proposal or otherwise withdraw or change their recommendations except in certain permitted circumstances. IML is entitled to a ‘reverse break fee’ equal to $25 million if certain events occur, as defined in the related Deed of Undertaking and Reverse Break Fee Escrow Deed, including the GTA Trustee failing to pay the Consideration on the Implementation Date and cases where IML is determined to have validly terminated the implementation agreement relating to the Proposal due to a breach by GTA Trustee. The Proposal is subject to a number of conditions precedent including Non-Associated Unitholder approval, Foreign Investment Review Board (FIRB) approval and that no material adverse change (as defined in the Explanatory Memorandum) occurs up until the date the second judicial advice is obtained. In order for the Proposal to be implemented, the following resolutions must be approved: a special resolution to amend the Constitution of IIF in order to allow the Proposal to be implemented. This resolution must be approved by at least 75% of the total number of votes cast by unitholders entitled to vote on this resolution. GTA Trustee, the Consortium Members and their related entities and ING Group entities are not entitled to vote on this resolution an ordinary resolution to approve the Proposal for the purpose of item 7 of section 611 of the Corporations Act, including the acquisition of all IIF Units by the Consortium Members. This resolution must be approved by at least 50% of the total number of votes cast by unitholders entitled to vote on this resolution. GTA Trustee, members of the Consortium Members and their related entities and ING Group entities are not entitled to vote on this resolution an ordinary resolution for the purposes of section 601FL of the Corporations Act to approve the retirement of IML as responsible entity of IIF and approve the appointment of Goodman Funds Management Limited as the responsible entity of ING Industrial Fund. This resolution must be approved by at least 50% of the total number of votes cast by unitholders.
1.1.2 Ancillary Transaction Separate to the Proposal negotiated between IML and GTA Trustee, REIM AP and REI III entered into a facilitation deed with Goodman Limited whereby ING have agreed to use their reasonable endeavours to assist Goodman with obtaining certain consents and in the transfer of certain know-how and records of IML as they pertain to IIF including transfer of management rights for the Australian assets of IIF (Ancillary Transaction) in return for a facilitation payment to REIM AP (or as it directs) of $22.5 million (the Ancillary Consideration).
14 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 75 Appendix A: Independent Expert’s Report
Under the terms of the Facilitation Deed: ING must use its reasonable endeavours to assist IML to propose and implement the Proposal including obtaining required consents and waivers, transfer of records and know how, assistance with IIF’s tax return and financial reports for the period ending 30 June 2011 and transition of the management of IIF to Goodman ING must procure the termination of the existing management agreements of IIF at no additional cost to Goodman. REIM AP and REI III are both subsidiaries of ING Groep N.V. (together with all such subsidiaries, ING Group). ING Group currently hold approximately 7.9% of the IIF units on issue. If the Proposal is implemented, ING's holding of IIF units will be transferred to GTA as part of the Proposal and ING will receive the same Consideration as other Non-Associated Unitholders. The Ancillary Transaction does not include any requirements in relation to the disposal of, or voting rights attached to, the units in IIF held by ING and ING retains absolute discretion on the exercise of the voting rights and disposal of these units. The Proposal and the Ancillary Transaction are collectively referred to as the (Proposed Transaction). 1.2 Background to the Consortium
1.2.1 Background to GTA GTA is an unlisted unit trust that has been established for the purpose of acquiring the units of IIF in accordance with the Proposal. GTA has been formed for a consortium of investors comprising APG, CPPIB, Leader and the Goodman Group. Upon completion of the Proposal each Consortium Members will have the following interest in GTA: APG 25.2% CPPIB 42.5% Leader 12.4% Goodman 19.9%. Goodman Industrial Funds Management Limited, a wholly-owned subsidiary of the Goodman Group, has been appointed as trustee of GTA. The directors of GTA Trustee are Mr. Gregory Goodman, Mr. Anthony Rozic and Mr. Nicholas Kurtis, being respectively the Chief Executive Officer, Chief Operating Officer and Global Head of Equities of the Goodman Group.
1.2.2 Background to the Goodman Group The Goodman Group is an integrated property group with operations throughout Australia, New Zealand, Asia, Europe and the United Kingdom. Goodman Group, comprised of the stapled entities Goodman Limited and Goodman Industrial Trust, is the largest industrial property group listed on the Australian Securities Exchange and one of the largest listed specialist fund managers of industrial property and business space globally.
1.2.3 Background to Leader Leader is a wholly-owned subsidiary of CIC. CIC is an investment institution established under the Company Law of the People's Republic of China on September 2007. It seeks stable and long term risk adjusted financial returns and it is operated strictly on a commercial basis.
1.2.4 Background to CPPIB CPPIB is a professional investment management organisation that invests funds on behalf of the Canada Pension Plan (CPP) and its 17 million Canadian contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, the CPPIB invests in public equities, private equities, real estate, inflation-linked bonds, infrastructure and fixed income instruments.
15 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 76 Appendix A: Independent Expert’s Report
Headquartered in Toronto, with offices in London and Hong Kong, the CPPIB is governed and managed independently of the CPP and at arm's length from governments. At 30 September 2010, the CPP Fund had assets totalling C$138.6 billion, of which C$4.2 billion is invested in private equity funds, infrastructure and real estate assets in the Asia Pacific region.
1.2.5 Background to APG APG is the manager of APG Strategic Real Estate Pool (the Pool). The Pool is a pooled investment vehicle established in the Netherlands, in which investments, in both Australia and other countries, are held for the purpose of collective investment. 1.3 The acquirer’s intentions If the Proposal is implemented, IIF will become a wholly-owned subsidiary of GTA. In particular, GTA intends to: de-list IIF establish an investment committee that will be responsible for the review, endorsement and approval of key investment decisions and related party matters with respect to IIF maximise the value of IIF by applying Goodman Group's integrated models to drive portfolio value and enhance it by developing IIF's existing development pipeline manage the divestment of IIF's European portfolio over the short to medium term with proceeds used to repay debt and reinvest in Australian development opportunities reposition IIF's Australian portfolio to improve portfolio value and redirect capital to more attractive investment in Australian developments refinance IIF's $920 million Australian syndicated facility using a new $1.1 billion syndicated facility.
16 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 77 Appendix A: Independent Expert’s Report
2 Scope of the report 2.1 Purpose of the report
2.1.1 Proposal The Proposal will be implemented by a trust scheme of arrangement and will require approval by Non- Associated Unitholders. The Directors have requested us to prepare a report advising whether, in our opinion, the Proposal is fair and reasonable to Non-Associated Unitholders for the purpose of Section 611 of the Corporations Act and the Takeovers Panel Guidance Note 15 (GN15). In exercising its powers and carrying out its duties as responsible entity of IIF, IML is required to act in the best interest of IIF unitholders. In order to assist in discharging their fiduciary obligations, the Independent Directors have also requested that Deloitte provide an opinion as to whether the Proposal is in the best interests of Non-Associated Unitholders.
2.1.2 Ancillary Transaction IML has requested that Deloitte provide an opinion as to whether: the Ancillary Transaction is on arm’s length terms, and the consideration payable under the Ancillary Transaction constitutes the receipt by REIM AP of a collateral benefit for the purposes of the Corporations Act as interpreted by the Takeovers Panel Guidance Note 21: Collateral Benefits (GN21). This opinion has been commissioned by the Independent Directors to assess the Ancillary Transaction for the purpose of assisting them in forming their opinion as to whether the Proposed Transaction is in the best interests of Non-Associated Unitholders. The purpose of our opinion with respect to the Ancillary Transaction is to assist the Independent Directors in making their assessment, taking into account, amongst other things, those matters which we have been asked to opine upon in our IER. We have prepared this report having regard to the relevant aspects of the Corporations Act, GN15, GN21 and the relevant regulatory guides issued by ASIC. We have also had regard to ASIC Consultation Paper 143 which includes proposed updates and amendments to RG111 in our assessment where relevant.
2.1.3 Other matters This report is to be included in the Explanatory Memorandum to be sent to Non-Associated Unitholders and has been prepared for the exclusive purpose of assisting them in their consideration of the Proposal. We understand that the Independent Directors will also take our opinion into account in determining whether to recommend the proposal to Non-Associated Unitholders. We are not responsible to you, or anyone else, whether for our negligence or otherwise, if the report is used by any other person for any other purpose. 2.2 Basis of evaluation
2.2.1 Proposal Guidance The basis of evaluation selected by the expert must be appropriate for the nature of each specific transaction. The Proposal is in substance a takeover offer by the Consortium Members for all the units in IIF. In determining whether the Proposal is fair and reasonable and in the best interests of Non-Associated Unitholders, we have therefore considered the relevant regulatory guidelines in respect of takeover offers. Sections 636(2) and 640 of the Corporations Act 2001 (Cth) require an independent expert’s report (IER) in connection with a takeover offer in certain circumstances. These sections require the IER to state whether, in the expert’s opinion, the takeover offer is fair and reasonable.
17 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 78 Appendix A: Independent Expert’s Report
GN15 requires that the form of analysis used to assess whether a proposal is fair and reasonable in these situations be substantially the same as for a takeover bid. In assessing whether the Proposal is in the best interests of Non-Associated Unitholders we have considered ASIC guidance and general market practice.
Fairness RG111 defines an offer as being fair if the value of the offer price is equal to or greater than the value of the securities the subject of the offer. The comparison must be made assuming 100% ownership of the target company (i.e. on a control basis). Accordingly, we have assessed whether the Proposal is fair by estimating the fair market value of an IIF unit (assuming 100% control) and comparing that value to the value of the Consideration. The units in IIF have been valued at fair market value, which we have defined as the amount at which the units would be expected to change hands between a knowledgeable willing buyer and a knowledgeable willing seller, neither of whom is under any compulsion to buy or sell. Special purchasers may be willing to pay higher prices to reduce or eliminate competition, to ensure a source of material supply or sales, or to achieve cost savings or other synergies arising on business combinations, which could only be enjoyed by the special purchaser. Our valuation of IIF has not been premised on the existence of a special purchaser. Based on our understanding of ASIC’s policy intent on the appropriate interpretation of the “fair” and “reasonable” tests in RG111, we note the following: in assessing the fairness of a transaction, an expert should not have regard to any entity specific or structural issues, such as excess gearing, which may temporarily impair an entity’s ability to realise full fair market value for its assets. Instead, in assessing fairness, an orderly market for the underlying assets of the entity should be assumed entity specific factors or structural issues may be appropriate matters to be taken into account when assessing the reasonableness of the transaction.
Reasonableness RG111 considers an offer in respect of a control transaction to be reasonable if either: the offer is fair despite not being fair, but considering other significant factors, unitholders should accept the offer in the absence of any higher bid before the close of the offer. To assess the reasonableness of the Proposal we considered the following significant factors in addition to determining whether the Proposal is fair: the current status and future prospects of IIF on a stand-alone basis and the alternatives considered to the Proposal the existing unitholding structure of, and any other significant unitholding blocks in, IIF the impact on IIF if the Proposal does not proceed other advantages and disadvantages of the Proposal.
Best interests To assess whether the Proposal is in the best interests of Non-Associated Unitholders, we have adopted the test of whether the Proposal is either fair and reasonable, not fair but reasonable, or neither fair nor reasonable, as set out in RG111. RG111 provides guidance in relation to the content of independent expert’s reports prepared for transactions under Chapters 5, 6 and 6A of the Corporations Act, in relation to takeover bids, schemes of arrangement and other transactions.
18 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 79 Appendix A: Independent Expert’s Report
If an expert were to conclude that a proposal was ‘fair and reasonable’ if it was in the form of a takeover bid, it will also be able to conclude that the proposal is in the best interests of unitholders. If an expert was to conclude that the proposal is ‘not fair but reasonable’ it would be open to the expert to conclude whether the proposal is in the best interests of unitholders based on whether there are sufficient reasons for unitholders to vote in favour of the proposal in the absence of a higher offer, however, the expert should clearly state that the consideration is not equal to or greater than the value of the securities subject to the proposal. We have assessed whether the Proposal is in the best interests of Non-Associated Unitholders after considering whether the advantages of the Proposal outweigh the disadvantages for Non-Associated Unitholders.
Individual circumstances We have evaluated the Proposal for Non-Associated Unitholders as a whole and have not considered the effect of the Proposal on the particular circumstances of individual investors. Due to their particular circumstances, individual investors may place a different emphasis on various aspects of the Proposal from the one adopted in this report. Accordingly, individual unitholders may reach different conclusions to ours on whether the Proposal is in the best interest of Non-Associated Unitholders. If in doubt Non-Associated Unitholders should consult an independent adviser, who should have regard to their individual circumstances.
2.2.2 Ancillary Transaction We set out below the framework we have adopted in forming our opinion in respect of whether the Ancillary Transaction is on arm’s length terms and whether the Ancillary Transaction confers a collateral benefit to ING in accordance with GN21. In our opinion, the analysis of whether the consideration payable to REIM AP is on arm’s length terms and whether there is collateral benefit are interrelated issues. Whilst our analysis addresses each aspect separately, our conclusions have regard to the interrelationship between the issues.
Arm’s length terms In determining whether the consideration payable to REIM AP under the Ancillary Transaction is on arm’s length terms, we have assessed whether the parties are dealing with each other at arm’s length in negotiating the Facilitation Deed. In particular we have considered: the negotiation process for the Proposal and the Ancillary Transaction and any relationship which exists between the parties the links between the Proposal and the Ancillary Transaction. We have also considered whether the consideration to be received for the Ancillary Transaction is on arm’s length terms. In particular, since the Ancillary Consideration is principally compensation for the management rights of IIF we have considered whether the financial terms of the Ancillary Transaction are arm’s length terms having regard to: a comparison of the percentage of assets under management (AUM) and earnings/revenue multiples implied by the Ancillary Consideration to asset and earnings multiples observed in other comparable transactions involving the internalisation or the sale of management rights in the property sector an estimate of the fair market value of the IIF management rights having regard to a discounted cash flow analysis of the benefits forgone by ING arising from the management of IIF compared to the consideration to be received by ING. Collateral Benefit Chapter 6 of the Corporations Act imposes various constraints on the terms of a takeover bid, including a prohibition on providing collateral benefits. Section 602(c) of the Corporations Act states the purpose of Chapter 6 includes ensuring security holders have a reasonable and equal opportunity to participate in any benefits accruing to security holders under a proposal. In particular, Section 623 prohibits a benefit that is likely to induce an acceptance and is not offered to all holders in a bid class. In the absence of any regulatory guidance, we have had regard to GN21 in assessing whether anything has come to our attention to cause us to believe the consideration payable to REIM AP under the Ancillary Transaction would constitute the receipt of a collateral benefit. 19 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 80 Appendix A: Independent Expert’s Report
GN21 states as its premise that unacceptable circumstances will be likely to exist whenever a bidder provides a security holder something of value which it does not offer to other security holders. Whilst GN 21 articulates factors that the Takeovers Panel will take into account, there is no explicit framework which must be utilised to undertake an evaluation of these factors. Under GN21, a collateral benefit exists if it violates the equity principle, which states that if the bidder provides a security holder (in this instance an ING party) something of value which it does not offer to other security holders, the Takeovers Panel may conclude that a collateral benefit has been given which gives rise to unacceptable circumstances. The potential collateral benefit should be considered on a holistic basis, by assessing any potential benefit by reference to the commercial balance of advantages flowing to and from the security holder. In accordance with GN21, factors that influence the view of the balance of advantages include: the substance and commercial reality of the transaction the context in which the benefit is given or the consideration is given up the overall effect of the transaction an objective assessment of the transaction (rather than the parties’ intentions). GN21 provides a number of ways in which a party may seek to establish that there is no net benefit, including: market testing of the transaction, for example, by a public sale process an independent valuation of the transaction an expert’s opinion about whether there is a net benefit. In determining whether there is a net benefit to ING Group, consistent with our understanding of the principles outlined in GN21 requiring an overall view of the transaction, we have undertaken both a quantitative and a qualitative analysis of the Ancillary Transaction which has included: consideration of whether the Ancillary Transaction is on arm’s length terms as set out above having regard to the process undertaken in negotiating the Proposal and the Ancillary Transaction and the financial terms of the Ancillary Transaction the substance and commercial reality of the transaction including the overall effect of the transaction the price to be paid for ING’s existing interest in IIF, in particular that, if the Proposal proceeds, this interest will be sold on the same terms and conditions as these applying to other IIF unitholders. This analysis is set out in Section 6 of this report. 2.3 Limitations and reliance on information The opinion of Deloitte is based on economic, market and other conditions prevailing at the date of this report. Such conditions can change significantly over relatively short periods of time. This report should be read in conjunction with the declarations outlined in Appendix 7. This engagement has been conducted in accordance with professional standard APES 225 Valuation Services issued by the Accounting Professional and Ethical Standards Board Limited (APESB). Our procedures and enquiries did not include verification work nor constitute an audit or a review engagement in accordance with standards issued by the Auditing and Assurance Standards Board (AUASB) or equivalent body and therefore the information used in undertaking our work may not be entirely reliable.
20 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 81 Appendix A: Independent Expert’s Report
3 A-REITs and the industrial property market 3.1 Introduction IIF is an A-REIT that operates in the property sector with a focus on investment in industrial properties across Australia and Europe. A-REITs are investment vehicles which allow investors to purchase a tradeable interest in a diversified and professionally managed portfolio of real estate and in general, adopt one of two structures: stand-alone funds which provide investors exposure limited to the underlying real estate portfolio; or stapled securities which provide investors exposure to funds management, property development and/or other corporate activities in addition to passive investment in real estate. The overwhelming trend in recent years is towards stapled structures with internalised management. Australia has the most securitised property market in the world with almost half of Australia’s institutional grade real estate held by listed public entities. However, the proportion varies by sub-sector with retail assets having the highest degree of institutional ownership (approximately 90%), followed by office (approximately 60%) and industrial (approximately 40%). The Standard and Poor’s (S&P)/ASX 200 A-REIT index (A-REIT Index), the primary industry indicator, includes 18 A-REITs which trade on the ASX. As at 7 January 2011, the market capitalisation of the A-REIT Index was approximately $67 billion, which represents approximately 6.1% of the market capitalisation of the S&P/ASX 200 Index at the same date. The performance of A-REITs can provide insights into the outlook for the real estate sector as a whole. In this section we set out an overview of the A-REIT sector in the locations in which IIF operates, with an emphasis on the Australian market where the majority of IIF’s properties are located. 3.2 Recent trends in the A-REIT sector The A-REIT market emerged during the 1990s following a collapse in the commercial property market which highlighted certain limitations of direct investment at the time including insufficient liquidity and lack of regular independent property valuations. This resulted in a wave of A-REIT listings during the 1990s, offering investors liquidity, market-based unit pricing and more regular valuations. In the late 1990s to early 2000s, transaction activity accelerated with significant consolidation occurring within the sector. Over the period from 2000 to 2007 the A-REIT sector performed strongly with the A-REIT Index experiencing a compound annual growth rate (CAGR) of 10%, slightly outperforming the broader equities market with a lower level of volatility during the period. As a result of the GFC, however, the sector experienced a significant decline from July 2008 performing well below the S&P/ASX 200 index as shown in the figure below.
21 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 82 Appendix A: Independent Expert’s Report
Figure 4: Performance of A-REIT Index relative to ASX200 Index (1 July 2008 to 7 January 2011) 1.20
1.10
1.00
0.90
0.80 Price ($ rebased) 0.70
0.60
0.50
0.40 Jul-08 Jul-09 Jul-10 Apr-09 Apr-10 Oct-08 Oct-09 Oct-10 Jan-09 Jun-09 Jan-10 Jun-10 Jan-11 Feb-10 Mar-10 Feb-09 Mar-09 Aug-08 Sep-08 Aug-09 Sep-09 Aug-10 Sep-10 Nov-09 Nov-08 Dec-08 Dec-09 Nov-10 Dec-10 May-09 May-10
A-REIT Index ASX 200 Index
Source: Thomson Reuters In 2007 the A-REIT market experienced a record year of capital raisings with approximately $13 billion of equity capital raisings as REITs pursued growth strategies. However, the GFC resulted in a number of adverse consequences for equity markets, with A-REITs being particularly exposed due to the relatively high levels of gearing employed and the cyclical nature of the underlying asset values which resulted in market capitalisations falling by approximately 60% in the 12 month period to December 2008 (compared with 40% for the general market over the same period). In general, the GFC had the following consequences for A-REITs: declining asset values: the lack of liquidity in debt and equity markets combined with adverse economic prospects in the short term contributed to a widespread fall in real estate asset prices in the Australian and European real estate sectors. The substantial decline in asset values put pressure on debt covenants and resulted in financiers threatening to force real estate vehicles into either aggressive asset sales or significant equity raisings to repay debt. In addition, smaller A-REITs and those with higher gearing levels traded at greater discounts to NTA than other A-REITS as outlined in the figure below.
22 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 83 Appendix A: Independent Expert’s Report
Figure 5: Gearing and discounts to NTA for industrial and large diversified A-REITs and companies as at 7 January 2011 100%
90%
80%
70%
60%
GOZ Gearing 50% IIF 40% DXS GPT 30% ALZ GMG
MGR BWP 20% SGP
10%
0% (30%) (20%) (10%) 0% 10% 20% 30% 40% Premium/(discount) to NTA
ALZ Australand Property GOZ Growthpoint Properties Australia BWP Bunnings Warehouse Property Trust GPT GPT Group DXS Dexus Property Group MGR Mirvac Group GMG Goodman Group SGP Stockland Group
Source: Thomson Reuters, Deloitte analysis Notes: 1. The size of the bubbles represents the market capitalisation emergency recapitalisations: a large number of equity capital raisings were undertaken during the GFC. A-REITs raised equity capital primarily to satisfy short-term debt commitments, reduce balance sheet gearing to prevent debt covenant breaches and meet capital expenditure and/or working capital obligations. Furthermore, A-REITs with significant debt and interest costs denominated in foreign currencies were also required to raise capital to meet debt covenants which were breached as a result of the depreciation of the Australian dollar and lower interest rates. Since January 2008 A-REITs have raised approximately $19 billion in equity which has been significantly dilutive due to the magnitude of these raisings and these having largely occurred at substantial discounts to NTA and volume weighted average price (VWAP) prior to the announcement of the capital raising lower debt capacity and higher funding costs: the debt market has changed considerably since late 2007 with increasing interest rate margins, more stringent covenants and reduced liquidity available as financiers, particularly in the real estate sector, have repriced risk and have been more selective in their lending criteria. In some instances the higher rate at which debt can be refinanced has led to some assets and projects becoming unviable lower distributions: following the onset of the GFC, A-REITs restricted distributions in order to repay debt and improve gearing levels. In addition, many A-REITS changed their distribution policies from paying out all operating income to a target payout ratio based on a proportion of adjusted funds from operation (AFFO) or other cash flow measures. As a result of the recent recapitalisations undertaken in the sector, most A-REITs have resumed distributions to unitholders. As a consequence of the above factors, the A-REIT sector went from trading at a premium to NTA in early 2007 to trading at a significant discount to NTA since late 2007. More recently A-REITs have: reduced leverage and refinanced near term maturities: due to the large scale recapitalisations discussed above, average gearing for the A-REIT sector has substantially reduced with many A-REITs targeting gearing in the order of 30% whereas historically these same vehicles have been geared in excess of 50%. Furthermore, few A-REITs have major debt expiries before the 2012 financial year. experienced stabilising property fundamentals and capitalisation rates: as the Australian economy is improving, underlying rental demand and occupancy metrics have begun to stabilise, and investment 23 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 84 Appendix A: Independent Expert’s Report
demand for real estate, albeit at the prime end of the market, has increased. As a result many A-REITs have announced stable and/or increasing values for the period ended 31 December 2010 recommenced distributions: as property cash flows begin to improve, A-REITs have recommenced distributions to unitholders, often at lower payout ratios than has historically been the case focused on growth options: until recently there have been few transactions in the Australian, European or North American real estate sectors due to the limited availability of both senior bank debt and mezzanine finance and significant divergence between vendor and buyer price expectations. However, there have been some positive signs emerging in respect of the appetite for pursuing growth options, through recommencement of large scale development activity as well as corporate activity in the sector. The corporate activity over the second half of 2010 was largely a combination of portfolio sales at or close to NTA or independent valuations with limited takeovers of A-REITs other than in distressed or quasi distressed situations. Despite the positive trends above, a number of A-REITs continue to trade at substantial discounts to NTA, with the median discount to NTA for the sector as at 7 January 2011 being approximately 15%. Whilst some A- REITs are trading at or above NTA, they are generally entities that earn active income from funds management, development and other activities (such as Goodman) in addition to income from passive property investment. Furthermore, a number of REITs with offshore assets attract higher discounts to NTA due to the relative uncertainty of asset prices offshore, particularly in the United States (US) and Europe. A-REITs continue to trade at discounts to NTA due to a number of factors including: the listed market remains sceptical of NTA values despite a rising number of transactions occurring at or close to NTA and independent valuations supporting the NTA continuing negative market sentiment and uncertainty around the global economic outlook and the impact on property values limited near term growth prospects in respect of:
o rental growth expectations across most geographic regions and property sub-markets o high funding costs at present make accretive acquisitions difficult, even for vehicles with funding capacity
o distributions due to the above factors and lower payout ratios as a consequence of more prudent distribution policies amongst most A-REITs whilst capitalisation rates are generally firming in Australia, they are not expected to reflect capital growth prospects in the near term retail investors typically evaluate A-REITs with regard to the income yield prospects and in recent periods there has been a lack of a substantial yield differential between A-REITs and alternative relatively lower risk investments including term deposits. 3.3 Sub-sector outlook
3.3.1 Economic drivers of demand Economic and demographic fundamentals are the main drivers of the property sector. As the GFC slowly dissipates, the rate of recovery varies considerably around the world with many analysts expecting slow and uneven growth in global markets, with China and Australia currently outperforming other economies and expected to continue to do so in the near term. Economic conditions also vary markedly around the world. Whilst the US is beginning to show some signs of improvement, there remains significant uncertainty in respect of the timing and rate of the recovery. Whilst Europe had previously shown some positive signs, recent sovereign debt issues in Greece, Ireland, Spain and Portugal have injected uncertainty into financial markets in the region due to the relative economic integration of these economies. In particular rising government deficits and debt levels together with a number of downgrades to the debt of certain European Governments has resulted in declining consumer and investor confidence as well as the widening of bond yield spreads and risk insurance on credit default swaps, particularly in Europe. 24 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 85 Appendix A: Independent Expert’s Report
The key fundamentals in the geographic regions in which IIF operates are summarised in the following table.
Table 2: Economic indicators
GDP Growth CPI Unemployment Country / Average Average Average region 2009 2010 2011-2015 2009 2010 2011-2015 2009 2010 2011-2015
Australia 1.2% 3.2% 3.1% 2.1% 2.8% 2.5% 5.6% 5.1% 4.4% Europe (4.2)% 1.4% 1.1%1 0.5% 1.8% 1.6%1 9.2% 9.8% 9.4%1
Source: Economist Intelligence Unit (EIU) – November 2010 reports Note: 1. EIU forecast for 2011 As set out above, we note that: economic growth in Australia is expected to outpace that in Europe in at least the medium term due largely to low levels of unemployment underpinned by an expectation of sustained demand for resource exports to China economic growth in the Euro region is expected to lag Australia and North America due largely to the uncertainty in at least the short term regarding the economic impact of relatively large budget deficits and sovereign debt issues within the Euro zone which will constrain gross domestic product (GDP) growth and any increases in employment in the near term.
3.3.2 The industrial property market Overview The major asset classes within the industrial property market are graded according to the size, quality and potential usages of the property amongst other factors with prime grade representing the highest grade. Consistent with other property sectors, the larger prime grade industrial properties are regarded as having a more stable income stream than secondary industrial properties and are characterised by blue chip tenants with long- term lease profiles. As a consequence, these properties have historically been keenly sought after by listed property trusts, institutional investors and high net worth investors, resulting in correspondingly lower valuation income yields. IIF primarily holds prime grade industrial properties. Demand and supply of industrial property is primarily affected by the following key factors: consumer spending: increases in spending levels lead to the requirement for many business to re-stock and maintain inventory, increasing the demand for industrial/warehousing space changes in infrastructure availability: in particular new road networks can alter the underlying dynamics of existing markets and will impact the attractiveness of industrial properties changes in production technologies: can lead to demand for new industrial and in particular warehousing space container movements: in particular imports represent a lead indicator for industrial activity land value and availability: the availability and attractiveness of new supply opportunities impacts land pricing and end-user demand changes in real interest rates: falling real interest rates support consumer spending and also encourage investment and expansion by businesses availability of credit: availability of credit impacts the ability of participants to invest in additional properties and land to support future demand.
25 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 86 Appendix A: Independent Expert’s Report
Australian industrial property market Since the onset of the GFC, valuation yields across the Australian industrial property market are generally considered to have passed the bottom of the cycle in all major markets with property values falling approximately 15% to 20%. Over the first half of 2010, the industrial property market in Australia has experienced increasing tenant demand and inquiries as a result of stabilising economic conditions and limited speculative development of new properties. Combined with a lack of supply of higher quality properties, this increase in demand has held rents steady so far in the current period. The Australian economy is expected to experience increased growth going forward which is in turn likely to further stabilise the industrial property market. Further, the higher Australian dollar is also expected to drive a recovery in import levels, another key driver of demand for industrial properties. Rents are expected to experience slow growth from late 2010 through 2011, however, industrial rents in Australia should be favourably impacted by recent employment growth figures as well as the expectation that export volumes will continue to grow, largely driven by economic growth from Asia, in particular China. Furthermore, incentives, which grew to a high of 22% of annual rentals in some cases1 during 2009, are expected to reduce to normal historical levels. Pre-lease rents, however, are forecast to decline until the second half of 2011 as larger developers re-commence projects that were put on hold during the GFC. This will result in an increase in the competition between developers for pre-lease tenants. Valuation yields are expected to remain steady for prime grade properties, averaging between 8.0% to 8.5% for prime properties in both Sydney and Melbourne. According to ANZ, industrial yields will continue to tighten during the next few years, although it is unlikely that the industrial property market will see the low yields achieved in 2007 and 2008 as transaction activity is likely to remain low for some time thus constraining capital growth. The supply of industrial properties in Australia remains subdued with little new construction to replace completed projects. Limited stock is beginning to put upward pressure on rents and capital values in the larger industrial markets of Sydney and Melbourne. In addition, the number of high quality assets available for purchase has been limited as A-REITs that have recapitalised are no longer undertaking asset sales to reduce debt. As a result of this limited availability, the industrial property market has recently been undersupplied and is expected to continue as such in 2011, which should result in increased development activity. Reinvestment in the industrial market by A-REITs is expected to pick up driven in the short-term by inventory restocking and the leasing and sale of existing buildings. Over the medium term, the low levels of high quality assets available provide opportunities for land owners to enter the development market. Speculative development will remain constrained due to continued tight lending conditions and an increasing interest rate environment. These factors are likely to prompt a broad stabilisation of capital values and rents through much of the sector with a more sustained recovery to continue into 2011. Overall, economic growth in Australia is likely to be the strongest driver of growth in the industrial property market.
European industrial property market Market evidence indicates that the European industrial property market is currently close to, if not at, the bottom of its cycle. Industrial valuation yields have begun to stabilise across Europe and in larger markets, began to compress from late 20092. Leasing activity remains low as vacancy levels increase and tenant demand is focused on cost control and increasing efficiency as opposed to expansion or relocation. Industrial yields fell marginally during the first quarter of 2010 with falling yields in some locations being offset by increases in other locations. The market recovered slowly from late 2010 as GDP growth in most European economies will be low, unemployment is expected to remain relatively high and consumer spending and sentiment remains constrained. As governments begin to withdraw stimulus packages and sovereign debt risks increase, there is an increasing fear that Europe may relapse into recession. Increased supply levels and growing competition between landlords to attract tenants has placed downward pressure on industrial rents across Europe. Overall in 2011, rents are expected to remain steady in markets with a high supply of modern properties and decline across other regions.
1 Sydney Industrial – Colliers International Market Indicators Report, Autumn 2010 2 On Point, Jones Lang LaSalle, Spring 2010 26 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 87 Appendix A: Independent Expert’s Report
New developments continue to be put on hold as developers face uncertain economic conditions and difficulties in obtaining finance. Furthermore, developers are unable to match growing requests from tenants for shorter lease lengths with the long-term requirements of their investors. Development activity is likely to remain restricted in 2011 due to constrained credit conditions.
27 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 88 Appendix A: Independent Expert’s Report
4 Profile of IIF 4.1 Introduction IIF is an externally managed A-REIT which performs property investment, property services and property development activities in the industrial property sector. Its property portfolio consists of 61 properties located in Australia and Western Europe. IIF is externally managed by REIMA. On 27 August 2010, IIF entered into an agreement to divest its 50% interest in Summit, the entity through which IIF held an ownership interest in 406 properties in Canada. The sale of Summit was settled in November 2010, with proceeds to IIF, net of transaction costs, being C$300.5 million. Moreover, ING Group sold 100% of its interest in the management rights related to Summit. The following figures summarise the geographic distribution of IIF’s property portfolio by value and by area as at 31 December 2010.
Figure 6: Geographic mix by value (31 December 2010) Figure 7: Geographic mix by area (31 December 2010)
14% 25%
86% 75%
Australia Europe Australia Europe
Source: IIF Source: IIF
28 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 89 Appendix A: Independent Expert’s Report
4.2 IIF’s History An overview of IIF’s history is provided in Figure 8 below.
Figure 8: IIF’s history
1985 Heine Property Trust established in Victoria 1991 First listing on the ASX following the merger of Heine Property Trust and Heine Split Property Trust 1994 Heine Property Trust renamed Heine Industrial Property Trust 1996 Heine Industrial Property Trust renamed Prime Industrial Property Trust 2000 Prime Industrial Property Trust merged with Armstrong Jones Industrial Fund 2001 Prime Industrial Property Trust renamed ING Industrial Fund 2005 IIF expanded internationally, acquiring properties in Europe 2006 IIF expanded into Canada through the acquisition of a 50% interest in Summit 2009 In August 2009, IIF completed the refinancing of its $1.6 billion debt facility In December 2009, IIF completed a $700 million equity capital raising 2010 On 27 August 2010, IML announced the disposal of its 50% interest in Summit On 28 October 2010, IML announced the proposal by Goodman Group to acquire all of the ordinary units in IIF, for a consideration of $0.54 per unit On 24 December 2010, IML announced it had entered into an implementation agreement with GTA Trustee to acquire all the ordinary units of IIF for $0.546 per unit less any distributions
Source: IIF 4.3 Overview of the IIF property portfolio
4.3.1 Overview The following figure summarises the key statistics of IIF’s portfolio as at 31 December 2010.
Table 3: Property portfolio summary as at 31 December 2010
Australia Europe Total
Number of properties 45 16 61 Total lettable area (thousand sqm) 1,539 512 2,051 Book value (million) 2,154 338 2,492 Number of tenancies 256 20 276 Weighted average lease expiry (WALE) (years) 4.5 4.8 4.5 Occupancy 97% 100% 98% Weighted average capitalisation rate (WACR) 8.5% 8.2% 8.4%
Source: IIF All Australian properties are located in the east coast capital cities, with 34 properties in Sydney, 7 properties in Melbourne and 4 properties in Brisbane. The Australian portfolio is characterised by high quality industrial estates, warehouse distribution facilities and business parks, with approximately 80% of the properties (by value) classified by IIF Management as prime properties. The average building age for the portfolio is approximately 13 years. The European properties are located in Belgium (1 property), Germany (11 properties) and Spain (4 properties). The portfolio consists of warehouse distribution facilities (94% by value) and industrial estate (6% by value). The average building age for the European portfolio is 16 years. 29 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 90 Appendix A: Independent Expert’s Report
4.3.2 Weighted average capitalisation rate (WACR) The following figure summarises IIF’s historical WACR by region.
Figure 9: Weighted Average Capitalisation Rate
9.0%
8.0%
7.0%
6.0% Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Jun-08 Jun-09 Jun-10 Feb-09 Feb-10 Aug-08 Dec-08 Aug-09 Dec-09 Aug-10 Dec-10
Australia Europe Portfolio
Source: IIF Note: Portfolio WACR includes the investment in Summit which has since been sold The WACR across the property portfolio as at 31 December 2010 was 8.4%, an increase of 1.4% since 30 June 2008. Since 30 June 2010 market capitalisation rates and discount rates have continued to stabilise across the majority of the portfolio. In particular prime industrial capitalisation rates in Australia have stabilised since June 2010 with limited evidence of compression, however, secondary assets continue to be discounted. This stabilisation, combined with some rental growth resulted in a slight uplift in the valuation of Australian properties since 30 June 2010. This uplift was offset by write-downs in two properties, one in Silverwater and one in Blacktown, NSW, due to their upcoming vacancies and required capital expenditures for refurbishments. Despite stabilisation of yields across most of the portfolio, underlying weakness in property fundamentals particularly in Spain has contributed to the fall in overall value in Europe.
30 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 91 Appendix A: Independent Expert’s Report
4.3.3 Occupancy and tenancy The fund receives rental income from a tenant register comprised predominantly of industrial tenants. At 31 December 2010, IIF’s occupancy rate for the portfolio was 98% following the disposal of Summit. The following table sets out the top ten tenants of IIF based on net operating income as at 31 December 2010.
Table 4: IIF top 10 tenants as at 31 December 2010
Percentage of portfolio income Tenants ( %)
Fiege 8.2% Metcash 8.1% Linfox 3.5% Neckermann Versand 3.1% Ingram Micro 2.8% DHL 2.6% Houseware International 2.6% Microsoft 2.4% Unisys 1.9% Coles 1.9% Total top 10 tenants 37.1%
Other tenants 63.0% Total tenants 100.0%
Source: IIF As set out above the top 10 tenants account for 37% of the portfolio income. The Australian properties contribute approximately 84% of the net property income. The top five Australian tenants account for approximately 20% of the Australian net property income with Metcash being the highest contributor (8.1%), followed by Linfox (3.5%), Ingram Micro (2.8%), Houseware International (2.6%) and DHL (2.6%).
31 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 92 Appendix A: Independent Expert’s Report
4.3.4 Lease expiry profile The following figure sets out the lease expiry profile of IIF.
Figure 10: Lease expiry profile of IIF by income
100.00%
80.00%
60.00%
40.00%
20.00%
0.00% Jun-11 Jun-12 Jun-13 Jun-14+
Australia Europe Portfolio
Source: IIF The WALE of the portfolio is approximately 4.5 years following the sale of Summit, which reflects certain near term expiries. Within the next two financial years, 7.8% of the European leases and 13.2% of the Australian leases will expire. IIF is exposed to a number of significant lease expiries in Spain with Carrefour likely to vacate 32,636 sqm at Great Northern Distribution Centre in January 2011. Management has leased the remaining 34,805 sqm of this property to DHL until 30 June 2012 and is currently in discussions with DHL to take a lease over the entire property. IIF also faces some major lease expiries in Australia, with 10,800 sqm in The Park becoming vacant from December 2010 to October 2012.
32 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 93 Appendix A: Independent Expert’s Report
4.4 Development projects Whilst IIF has historically undertaken property development activities in Australia, these activities were substantially suspended with the onset of the GFC. IIF has communicated its intentions to selectively re- commence investing in development projects and currently holds a land bank capable of delivering approximately 942,383 sqm for this purpose. The following table summarises the existing development pipeline for IIF.
Table 5: IIF development projects as at 31 December 2010
Lettable area Indicative available value Estate Name State (sqm) ($m)
Current industrial development sites Interchange Park NSW 126,117 166 Ingram Micro NSW 38,618 54 Goodyear & Dunlop Tyres NSW 16,010 21 Westpark Industrial Estate NSW 31,287 38 Moorebank Business Park NSW 27,390 37 Southgate Industrial Estate NSW 8,530 17 Keylink Industrial Centre 80,195 80 West Industry Park VIC 288,428 227
Future industrial development sites Redbank River Park QLD 325,808 387
Total industrial developments 942,383 1,027
Source: IIF The development pipeline, whilst capital intensive, can provide benefits in the form of higher returns through capturing the development margin and minimising stamp duty costs as well as enhancing the portfolio age and quality. IIF had previously entered into a number of joint venture agreements with a subsidiary of REIMA to develop properties at Wyndham Industrial Estate, Ricketts Road (Mount Waverley), West Industry Park, Redbank and Banksmeadow. Due to the prevailing market conditions in 2009, the parties to the joint venture decided to cease development and sell off the underlying real estate. Currently only Redbank is held via the joint ventures. IIF owns 100% of West Industry Park following a transfer of the remaining interest to IIF in September 2010.
33 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 94 Appendix A: Independent Expert’s Report
4.5 Legal structure The simplified group structure of IIF is set out in Figure 11 below.
Figure 11: IIF group structure
Unitholders
Responsible Entity
ING Industrial IML Fund
Australian European assets assets
Responsible Entity Ownership
Source: IIF Notes: 1. IIF disposed of its 50% interest in Summit on 1 November 2010 IML has outsourced the property and asset management functions in respect of IIF to external managers under various property management and asset management agreements. IML is entitled to be paid certain fees for its services, as discussed in further detail below. 4.6 Key fee arrangements
4.6.1 Responsible Entity and management fees IML is entitled to receive the following remuneration for its services: base management fee and custody fee: IML is entitled to a fee as Responsible Entity amounting to the lesser of 0.675% of the total balance sheet assets and 9% of the net income for the distribution period. The fee is payable in arrears on a quarterly basis. Moreover, IML is also entitled to a custody fee of 0.09% per annum of Australian and European assets. These fees are payable in arrears on a quarterly basis. Other fees: IML is entitled to acquisition and development and project management fees on normal commercial terms as follows:
o acquisition fee: IML charges an acquisition fee of 1% of the total consideration payable in respect of any acquisition of an overseas assets
o development management and project management fees: IML is entitled to charge development management fees which are to be determined on a project-by-project basis. These fees are typically in the region of 2% to 3% of development cost. In addition, all expenses reasonably and properly incurred by IML in relation to the proper performance of its duties in respect of IIF are payable or reimbursable with the exception of any fees paid to an agent or delegate to hold title to any asset and fees paid by the Responsible Entity to compliance committee members. IML’s entitlements to receive remuneration and be reimbursed for expenses are set out in the constitution of IIF.
34 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 95 Appendix A: Independent Expert’s Report
4.6.2 Third party fees For the European assets asset management fees are payable to ING Group in respect of the asset management function in Europe. The net fees payable are 60 bps of total investment property under management. Other key terms of these agreements include the following: the agreement has a duration of five years which is automatically renewable for an additional five years each time upon expiry the agreement can be terminated via written notice given by any of the parties at least twelve months prior to each five-year anniversary. IML gave such a notice in December 2010, so that the agreements will terminate in December 2011.
4.7 Capital structure and unitholders As at the date of this report, IIF had 2,592 million units on issue. The following table summarises unitholders with ownership of 5% or more of IIF’s units and their respective unitholdings in IIF as at 7 January 2011.
Table 6: IIF top unitholders as at 7 January 2011
Number of units Percentage of total Investor held (m) issued units
ING Real Estate International Investments III Bv 202.2 7.8% Credit Suisse 198.2 7.6% Goodman Group 183.8 7.1% Centaurus Capital 160.1 6.2% Vanguard Investments Australia 130.7 5.0% Other unitholders 1,717.3 66.2 % Total unitholders 2,592.3 100%
Source: Orient Capital
Notes: 1. Subsidiary of the ING Groep NV As set out above the top 5 unitholders hold approximately 34% of the issued capital of IIF. Moreover, the 10 largest unitholders collectively hold approximately 52% of the issued capital of IIF.
35 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 96 Appendix A: Independent Expert’s Report
4.8 Unit price performance In the six month period to 31 December 2010, weekly trading volume averaged approximately 96.3 million IIF units. This equates to an average weekly trading volume of approximately 3.7% of IIF’s total issued capital. Furthermore, a number of brokers follow this stock. Given this level of trading and the information available about the trust, we consider units in IIF to be relatively liquid. These unit price movements, trading volumes and NTA are presented graphically in the figure below.
Figure 12: IIF unit price, NTA per unit and discount to NTA
Rumors on Suspension IML confirms Placement and IIF completed Retail breach of from official discussions with Institutional Entitlement Offer covenants. ASX quotation 5 Goodman Group Entitlement raising $226 million price query on until 11 on 8 December 2009. regarding the sale of 2.5 Offer 40.0% price and December IIF completed 443 million units response to ASX 2008 raising were alloted to query on 24 20.0% approximately Institutional and October 2008 Retail unitholders 2.0 $474 million on 28 October 0.0% 2009 IIF announces the sale of Summit on 27 August 2010 (20.0%) 1.5
(40.0%) Unit price ($) 1.0
(60.0%) (%) to NTA Discount
(80.0%) 0.5
(100.0%)
0.0 (120.0%) Jul-09 Jul-08 Jul-10 Apr-10 Oct-08 Apr-09 Oct-09 Oct-10 Jun-09 Jan-11 Jan-09 Jan-10 Jun-10 Feb-10 Feb-09 Mar-09 Mar-10 Aug-08 Sep-08 Dec-08 Aug-09 Sep-09 Dec-09 Sep-10 Dec-10 Aug-10 Nov-08 Nov-09 Nov-10 May-10 May-09
IIF unit price NTA Discount to NTA
Source: Reuters, ASX company announcements The significant decline in IIF’s unit price between October 2008 and April 2009 was largely due to the impact of the GFC on the A-REIT sector as a whole. IIF has traded at a significant discount to NTA since July 2008, with the fund’s unit price declining to a low in March 2009 of $0.06, a discount to NTA of 96%. While this can be partially attributable to the impact of the GFC on the A-REIT sector as a whole, this was compounded by speculation that IIF would breach its debt covenants. The divergence between NTA and unit price decreased following a $700 million capital raising in late 2009, before stabilising at a discount of approximately 25%. Prior to the announcement of the disposal of Summit, this sustained discount was largely due to the following: uncertainty around IIF’s strategy and ultimate proceeds to be realised from the investment in Summit uncertainty regarding the refinancing of the Exchangeable Notes, the first tranche of which is due to mature in June 2011 as discussed in Section 4.9 below IIF’s look-through gearing was 47% prior to the sale of Summit, which was significantly above the current average gearing of comparable listed REITs. IIF’s look-through gearing as at 31 December 2010 was 27% or 42% including the Exchangeable Notes negative market sentiment regarding the performance of IIF compared to other A-REITs. No unit distribution was paid in the second half of the 2009 financial year (FY09). Although distributions recommenced in FY10, total distributions for FY10 were 1.6 cpu compared to 5.3 cpu for the first half of FY09 and 8.9 cpu for the first half of FY08 market sentiment regarding the A-REIT sector in general which is likely to have negatively affected the unit price of IIF. The GFC resulted in significant capital constraints, in particular, the availability of debt financing which is critical to the industry and has resulted in a significant decline in security prices across the sector. 36 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 97 Appendix A: Independent Expert’s Report
Whilst the performance of IIF was generally in line with the overall performance of the A-REIT Index as a whole until October 2008, due largely to the above factors, IIF’s unit price significantly underperformed the index from October 2008 until mid 2009 as set out below:
Figure 13: IIF unit price against A-REIT index 1.2
1
0.8
0.6 Index value (rebased) 0.4
0.2
0 Jul-10 Jul-08 Jul-09 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Jun-10 Jan-09 Jun-09 Jan-10 Mar-09 Mar-10 Feb-09 Feb-10 Aug-10 Aug-08 Sep-08 Dec-08 Sep-09 Nov-09 Dec-09 Sep-10 Nov-10 Dec-10 Nov-08 Aug-09 May-09 May-10
IIF unit price AREIT Index Source: Reuters Prior to IML confirming that it was in discussions with Goodman in respect of a potential transaction on 28 October 2010, IIF was trading at a discount to NTA of approximately 20% which was an improvement relative to previous trading in IIF units due to: a re-rating of IIF following the announcement of the sale of Summit on 27 August 2010 at close to the carrying value of the investment, which was seen as a positive outcome by market participants takeover speculation for IIF as a consequence of ING Group announcing its intention to exit its Australian real estate funds management platform (which includes IIF) as well as Goodman Group announcing that it had increased its stake in IIF to 7.1% on 30 September 2010 at a price of $0.47) per unit. Since 28 October 2010, the date that IML confirmed that it was in discussions with Goodman, units of IIF have largely traded in line with the offer price for the units.
37 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 98 Appendix A: Independent Expert’s Report
4.9 Debt profile As at 31 December 2010, IIF had an implied look-through gearing of approximately 27%, or 42% inclusive of the Exchangeable Notes. The table below summarises the key terms of IIF’s pro-forma debt facilities following the disposal of Summit.
Table 7: IIF pro-forma debt summary as at 31 December 2010
Facility Amount Facility Unit size drawn1 Expiry date Interest rate
Fund level Syndicated $ million 870 870 Dec-11 BBSW + 3.00% Unsecured loan $ million 13 13 Oct-14 5.1%
Asset level Lahr EUR million 17 17 Sep-13 Euribor + 0.80% TTS EUR million 38 38 Sep-13 Euribor + 0.80% Fiege EUR million 53 53 Nov-14 Euribor + 2.00% Tacormissol EUR million 10 10 Nov-16 Euribor + 0.95% Puurs EUR million 17 17 Dec-16 Euribor + 0.75% Total asset level EUR million 135 135
Combined total1 $ million 1,060 1,060
Source: IIF Notes: 1. Total is calculated based on an AUD/EUR exchange rate of 0.7643 as at 31 December 2010 In August 2009, IIF refinanced its $1.6 billion syndicated loan facility, drawing down the full amount. The facilities were refinanced prior to IIF raising equity in November 2009, at which time look-through gearing was over 60% and there was market speculation that IIF would breach its debt covenants. As a result, and coupled with tightening of capital markets following the GFC, the syndicated loan facility was refinanced at a relatively expensive interest rate margin of 300 bps over BBSW. Since refinancing, IIF has raised $700 million in new equity and sold assets (including IIF’s interest in Summit) the proceeds of which were largely used to pay down debt. As a result, IIF’s look-through gearing (including the Exchangeable Notes) declined to approximately 42% as at 31 December 2010. Furthermore, the contraction in global debt markets has eased, with increased availability of credit and reduced credit spreads. Interest margins on debt currently being paid by IIF are above the spreads that IIF could obtain in the current environment. IIF Management estimate that spreads on the syndicated facility would decline from 300 bps to approximately 225 bps if refinanced today. The syndicated loan shown in the table above is subject to the following covenants from 30 June 2010: a loan to value ratio of 69% (syndicated loan to Australian secured property) declining to 60% by 31 December 2011 look-through total liabilities less cash to look-through total tangible assets less cash of 71%, declining to 67% by 31 December 2011 first ranking interest cover ratio of 1.4 times. In addition, the syndicated facility is subject to a number of restructure provisions, which include change of control clauses. If IIF fails to obtain the pre-consent of the syndicated lenders, and the Proposed Transaction is approved by Non-Associated Unitholders and becomes effective, a number of these provisions will be triggered, but this will not give the syndicated financiers an automatic right to place the facility in default.
38 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 99 Appendix A: Independent Expert’s Report
The syndicated loan facility is due to mature in December 2011 and will trigger a need for IIF to undertake a major refinancing. The debt at the asset level, which relates to the European properties, has a longer maturity profile.
Exchangeable Notes and IIF Subordinated Bonds In May 2007, IML, as the Responsible Entity of IIF, raised $400 million by issuing partly paid preference securities and equity-linked options, and two subsidiary trusts of IIF issuing fully paid preference units (together, the Preference Units) to JPMorgan Australia ENF Nominees No. 2 Pty Limited in its capacity as trustee of the JPMorgan Australia Exchangeable Note Funding Trust No. 2 (JPM ENF). ENF in turn issued the A$200 million Tranche 1 7.000% Secured Exchangeable Notes due 30 June 2011 and A$200 million Tranche 2 7.125% Secured Exchangeable Notes due 30 June 2012 (together, the Exchangeable Notes) in the international capital markets. The Exchangeable Notes are listed on the Channel Islands Stock Exchange and were issued in two tranches of $200 million each. $5 million of the Tranche 2 Exchangeable Notes were exchanged for ordinary units in IIF in 2007. At the time of issue, the constitution of IIF did not cater for the issuance of preference units with the specific terms required. Accordingly, the Preference Units were initially partly paid perpetual, subordinated, deferrable and non-cumulative bonds issued by IML (Original IIF Subordinated Bonds), as the responsible entity of IIF which were subsequently substituted by partly paid preference units in IIF in August 2007 following receipt of the required approvals. The IIF Preference Units were redeemed in January 2011 for the issue of the new partly paid securities on substantially the same terms as the Original IIF Subordinated Bonds (IIF Subordinated Bonds). In accordance with the terms of the IIF Subordinated Bonds, the IIF Subordinated Bonds are now fully paid to $100,000 each and the IIF Subsidiary Trust Preference Units are held on trust for IIF by the trustee of the ENF trust. The IIF Subordinated Bonds are exchangeable into IIF units. Upon maturity, or any time before maturity if the price of IIF units exceeds 130% of the exchange price of Exchangeable Notes of $1.8121 (the original exchange price was $2.8342), IIF has the option to either redeem the Exchangeable Notes for cash, or convert them to ordinary IIF units. The number of ordinary IIF units to be issued on exchange is calculated by reference to the volume weighted average market price at which ordinary units trade at the time less a discount of up to 10% depending on the percentage of IIF’s market capitalisation that the face value of the preference units outstanding represents. In certain circumstances if a change of control is triggered, the exchange price is reduced by 15% times the fraction of the issue period that remains between the change of control date and the expiry date. 4.10 Hedging Profile IIF has entered into a number of forward foreign exchange swaps designed to hedge the fund against fluctuations in income caused by movements in foreign exchange rates. These hedge contracts are denominated in € with maturities extending up to July 2012. Of IIF’s foreign earnings, 100% are hedged until December 2011. IIF’s strategy is to target a hedging range of a minimum of 50% and maximum of 90%. To hedge against adverse movements in interest rates, IIF has entered into a number of fixed-for-floating interest rate swaps, with approximately 84% of total debt being hedged.
39 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 100 Appendix A: Independent Expert’s Report
4.11 Financial performance The audited income statement of IIF for the financial years ended 30 June 2008, 30 June 2009 and 30 June 2010 are summarised in the table below.
Table 8: Financial performance
Audited Audited Audited 2008 2009 2010 ($ million) ($ million) ($ million)1
Rental income 244 243 225 Other property income 32 35 37 Interest income 16 15 4 Total operating income 292 293 266
Fees and other expenses (53) (58) (59) Net foreign exchange gain/(loss) 31 (19) 1 Interest expense (79) (107) (176) Total expenses (101) (184) (234)
Operating profit before fair value movements and tax 191 109 32
Fair value movement of investment properties held 64 (682) (70) Fair value movement of derivatives (50) (154) 2 Impairment (loss)/ gain (22) (45) (8) Total non-operating items (8) (881) (76)
Net profit/loss before income tax 183 (772) (44) Income tax (expense)/benefit (3) 48 12 Net profit/loss for the year from continuing operations 180 (724) (32) Loss from discontinued operations (113) (422) (200) Net profit/loss for the year 67 (1,146) (232) Net profit/loss attributable to preference unitholders (28) (28) (28) Net profit/loss after tax attributable to unitholders 39 (1,174) (260)
Other metrics: EPU from continuing operations (cents) 13.6 (66.5) (3.0) EPU from discontinuing operations (cents) (10.1) (37.3) (10.0) Total EPU (cents) 3.5 (103.8) (13.0) DPU (cents) 17.9 5.3 1.6 Distribution (millions) 200.3 59.8 41.6 Distribution yield % (NTA) 8.5% 5.5% 2.8%
Source: IIF We note the following in respect of the performance of IIF: operating income declined in FY10 due to the following:
o Australia: FY10 revenues were impacted by the disposal of eight directly held properties during the year, including Knoxfield Distribution Centre and Westland Industrial Estate
o Europe: revenues were largely impacted by foreign exchange movements, as well as the subdued economic environment
40 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 101 Appendix A: Independent Expert’s Report
fees and other expenses: consist of general property expenses and Responsible Entity fees payable to IML interest expense: the rise in interest expense between 2008 and 2009 resulted from the refinancing of IIF’s debt facilities. The impact that the GFC had on the availability of funding and debt interest rate spreads resulted in a significant increase in the fund’s financing costs. The FY10 result also includes debt establishment costs of $47.5 million which were expensed fair value movements – investment properties: the fair value adjustment of $682 million for FY09 and $70 million in FY10 reflects the write-down of the carrying value of investment properties following independent valuations of the property portfolio, reflecting the negative impact of the GFC. Independent valuations were carried out for 100% of IIF’s portfolio during the 2010 financial year fair value movements – derivatives: reflects the marked-to-market movement in the value of interest rate swaps, whereby IIF paid a fixed rate of interest in exchange for a floating rate, coupled with losses on foreign exchange contracts tax: IIF incurs income tax on its properties held in Europe. All other properties are classified as flow through for tax purposes. IIF recognises deferred tax on its foreign investments and derivative contracts. No capital gains tax liabilities are anticipated on the disposal of any properties in the IIF portfolio for the foreseeable future loss from discontinued operations: reflects write-downs in the carrying value of properties held in Summit due to a softening of capitalisation rates coupled with marked-to market losses on exchange rate hedges. Expectations for IIF for FY11 are based on the following: rental income is forecast to decline marginally in FY11 due to the impact of the sale of a number of properties largely in Australia. Occupancy is expected to remain stable on comparable levels in Australia and Europe. European net property income is likely to be negatively affected by the negotiation of new lease terms on properties in Germany and Spain a reduction in debt outstanding is forecast for FY11 due to the impact of the Summit transaction on the debt profile of IIF which will contribute to a significant reduction in the interest expense for the period higher management fees are forecast for FY11, mainly as a result of the resumption of distributions to unitholders since management fees for IIF are calculated with reference to net income available for distribution.
Distribution policy IIF’s policy is to distribute 70% to 90% of net operating income or taxable income, whichever is greater in each financial year. Distributions to unitholders are paid on a quarterly basis. No distributions can be paid to IIF unitholders in the event that distributions to holders of Exchangeable Notes remain outstanding. Distributions have declined significantly since 2008, with no distribution being paid in the second half of FY09 and total distributions of 1.61 cpu for FY10 compared to a 8.9 cpu for the first half of FY08.
41 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 102 Appendix A: Independent Expert’s Report
4.12 Financial position The audited balance sheets of IIF as at 30 June 2009 and 30 June 2010 along with the reviewed balance sheets as at 31 December 2009 and 31 December 2010 are summarised in the table below.
Table 9: Consolidated financial position of IIF
June 2009 December 2009 June 2010 December 2010 audited reviewed audited reviewed ($ million) ($ million) ($ million) ($ million)
Cash 75 39 128 351 Receivables 13 12 30 41 Derivatives - 2 3 3 Other 19 88 - - Assets of discontinued operations - - 379 3 Total current assets 107 141 540 399
Trade and other receivables 113 102 89 55 Investment properties 2,758 2,519 2,500 2,492 Equity accounted investments 650 473 2 - Derivatives - 1 1 1 Total non-current assets 3,521 3,095 2,592 2,548 Total assets 3,628 3,236 3,132 2,947
Payables 30 29 40 26 Borrowings 1,781 4 14 883 Derivatives 57 24 17 11 Distribution Payable - - 21 21 Total current liabilities 1,868 57 92 941
Payables - - - 1 Borrowings 211 1,196 1,169 176 Derivatives 53 25 30 15 Deferred tax liabilities 19 10 3 3 Total non-current liabilities 283 1,231 1,202 195 Total liabilities 2,151 1,288 1,294 1,136
Net assets 1,477 1,947 1,838 1,811
Other metrics Net tangible assets per unit 0.96 0.60 0.57 0.56 Book value gearing1 53% 36% 35% 27% Look-through gearing2 70% 59% 57% 42%
Source: IIF Notes: 1. Interest bearing debt (net of cash) divided by total assets (net of cash) 2. Look-through gearing includes net debt at the asset level, equity accounted investments and the Exchangeable Notes We note the following in respect to IIF’s financial position: IIF’s policy is to have all investment properties externally valued at intervals of not more than three years and that such valuation be reflected in the financial statements. It is also the policy of IML to revalue each investment property every six months and to cause investment properties to be revalued to fair values whenever their carrying value differs materially to fair value. However, the lending banks require 100% of the property portfolio to be valued every year
42 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 103 Appendix A: Independent Expert’s Report
during the year ended 31 December 2010, independent valuations were carried out for 100% of IIF’s portfolio. The portfolio including development assets recorded an overall increase in value of 0.6% during the six month period to 30 June 2010 IIF contracted the disposal of $126 million worth of properties during the 2010 financial year (of which $88 million were recorded as current investment properties as at 31 December 2009) non-current trade receivables comprise loans to associates and third parties for the acquisition of properties. Management has advised that the underlying properties have been independently valued during the last 12 months and the loan balances are expected to be fully recoverable derivatives reflect the marked-to-market value of derivative financial instruments such as foreign currency contracts and interest rate swaps entered into to hedge risks associated with foreign currency and interest rate fluctuations look-through debt to total assets is 48% as at 30 June 2010. Following the sale of Summit, this declined to 27% or 42% inclusive of Exchangeable Notes as at 31 December 2010 equity accounted investments, which mainly related to IIF’s 50.0% investment in Summit, were reclassified as a discontinued operation as at 30 June 2010 cash balances as at 31 December 2010 increased predominantly due to the proceeds from the sale of Summit. 4.13 Strategy and Outlook IIF management has communicated a desire to re-focus IIF on its core market in Australia. This strategy is intended to deliver growth to IIF unitholders and reduce the discount to NTA which was reflected in IIF’s unit price prior to the announcement of the Proposal. This will be achieved through: the phased withdrawal from its European portfolio over the next two to three years as markets improve proceeds from the sale of Summit being used to retire debt and make acquisitions and developments in Australia the continued sale of non-core domestic properties and reinvestment of proceeds in new properties or developments recommencing development activities in Australia. The fund currently has an available land bank capable of developing 650,000 sqm of new facilities and has a history of developing similar land banks repaying the Exchangeable Notes and refinancing the Australian debt facilities in order to reduce the number of counterparties, increasing financial flexibility and extending the maturity profile. The above strategies provide higher growth potential and exposure to any recovery in the industrial real estate market, particularly in Australia. Furthermore, the potential sale of European assets at or near book value as markets improve would have a positive impact on the discount to NTA at which IIF has historically been trading. Whilst IIF has some positive prospects for future growth, IIF is also exposed to a number of risks which could result in a decline in asset values and/or deterioration in earnings, including: IIF’s ability to divest non-core assets in order to fund its development pipeline and grow its investment portfolio, competing with listed and unlisted peers who may have a lower cost of capital. IIF management has indicated its intentions to refinance the syndicated loan facility prior to its maturity. Whilst the fund is expected to achieve reduction in financing costs compared to its current cost of funding and additional flexibility, any further tightening of credit markets could put pressure on EPU. Moreover, if the refinancing of the Exchangeable Notes is not successfully completed ahead of maturity, IIF would be prevented from paying distributions or returning capital to unitholders unless it issued units at a discount to market prices on exchange of the Subordinated Bonds selling the European properties at a discount to book value will dilute IIF’s NTA other factors which are applicable to the property sector as a whole, such as a softening of capitalisation rates, unfavourable exchange rate movements and increased uncertainty in global economic conditions placing pressure on rental rates and tenant incentives.
43 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 104 Appendix A: Independent Expert’s Report
5 Evaluation of the Proposal 5.1 Overview In order to assist Non-Associated Unitholders with their evaluation of the Proposal, the Independent Directors have requested that Deloitte prepare an IER advising whether, in our opinion, the Proposal is fair and reasonable and in the best interests of Non-Associated Unitholders. In order to assess the fairness of the Proposal, we have compared our estimate of the fair market value of IIF to the value of the Consideration. In order to assess whether the Proposal is reasonable, we considered whether the advantages of the Proposal sufficiently outweigh its disadvantages. To assess whether the Proposal is in the best interests of Non-Associated Unitholders, we have adopted the test of whether the Proposal is either fair and reasonable, not fair but reasonable, or neither fair nor reasonable, as set out in RG 111, after considering whether there are sufficient reasons for Non-Associated Unitholders to vote in favour of the Proposal. Our analysis is discussed in further detail below. 5.2 Fairness
5.2.1 Approach We have assessed whether the Proposal is fair by comparing the fair market value of an IIF unit (assuming 100% control) to the value of the Consideration. In our selection of an appropriate methodology to estimate the fair market value of an IIF unit we have considered common market practice and the valuation methodologies recommended by RG 111, which are outlined in Appendix 3. In our estimate of the fair market value of an IIF unit we have: assessed the fair market value using the net assets on a going concern valuation approach cross-checked our estimate of the fair market value of IIF units to the market’s assessment of the value of IIF observed in recent share trading in the fund, as well as earnings and asset based multiples of transactions comparable to the Proposal. For the purposes of estimating the fair market value of an IIF unit, we have defined fair market value as the amount at which the units would be expected to change hands between a knowledgeable willing buyer and a knowledgeable willing seller, neither of whom is under any compulsion to buy or sell. Special purchasers may be willing to pay higher prices to reduce or eliminate competition, to ensure a source of material supply or sales, or to achieve cost savings or other synergies arising on business combinations, which could only be enjoyed by the special purchaser. Our valuation of IIF has not been premised on the existence of a special purchaser. Moreover, in our assessment of the fairness of the Proposal we did not consider any potential impact on the current value of a unit in IIF that may arise as a consequence of the existing capital structure of the fund. Instead we have considered such factors in our assessment of the reasonableness of the Proposal. Our assessment of the fair market value of IIF is discussed in further detail below.
44 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 105 Appendix A: Independent Expert’s Report
5.2.2 Fair market value of the net assets of IIF We have used the net assets on a going concern basis to estimate the fair market value of a unit in IIF. We have estimated the fair market value of IIF by estimating the NTA for IIF by aggregating the fair market value for the investment property assets as well as any other related assets and liabilities. In applying this approach we have considered the ongoing management and other costs associated with realising the value of the assets on a going concern basis over the medium term. In our assessment of the fair market value of IIF we have utilised the NTA of IIF’s portfolio as at 31 December 2010 and considered any adjustments required to reflect the difference between our estimate of the fair market value and the book value of these assets at the Implementation Date. In making this assessment we have undertaken an analysis of the valuation of IIF’s investment properties which has included independent analysis of a sample of IIF’s internal and external valuations noting that independent valuations of 100% of IIF’s properties have been undertaken during the 12 months to 31 December 2010. We have estimated the fair market value of an IIF unit as to be between $0.534 per unit and $0.550 per unit as set out in the table below.
Table 10: Fair market value of an IIF unit
Low High $ Millions $ Millions
Book value of net assets of IIF as at 31 December 2010 1,810.6 1,810.6 Less: carrying value of Preference Securities / Exchangeable Notes (371.4) (371.4) Adjusted book value of net assets of IIF as at 31 December 2010 1,439.2 1,439.2
Fair market value adjustments Expected cash flows up until Implementation Date 5.8 5.8 Redemption price adjustment for Preference Securities / Exchangeable Notes (23.6) (23.6) Movement in fair market value of financial instruments (1.0) (1.0) Foreign exchange movements 5.0 5.0 Management fees (30.0) 0.0 Change of control payments triggered (10.9) 0.0 Fair market value of IIF 1,384.5 1,425.4
Number of IIF units 2,592 2,592
Fair market value per unit $0.534 $0.550
Source: Deloitte analysis
Investment properties The main component of IIF’s net assets as at 31 December 2010 is its investment portfolio comprising $2.5 billion invested directly in industrial properties. A full list of IIF’s property portfolio is set out in Appendix 2. IIF’s policy is to have all investment properties externally valued at intervals of not more than three years and that such valuation be reflected in the financial statements. It is also the policy of IML to revalue each investment property every six months and to cause investment properties to be revalued to fair values whenever their carrying value differs materially to fair value. However, the lending banks require 100% of the property portfolio to be valued every year. For 31 December 2010 reporting purposes, management obtained independent valuations for approximately 44% of Australian investment properties (19 properties) and 44% of European investment properties (7 properties). In addition 5 Australian development properties were independently valued. The remaining properties have been valued internally using external metrics. Under instructions from the lending syndicate of IIF, those Australian properties not externally valued in June 2010 were required to be independently valued for 31 December 2010 reporting purposes. As a result, 100% of the portfolio has been independently valued during 2010.
45 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 106 Appendix A: Independent Expert’s Report
A summary of the movements in capitalisation rates and the carrying value of the property portfolio since 30 June 2010 is set out below:
Table 11: Summary of the current value of IIIF investment properties
Carrying value Capitalisation Rates
31 December Change 30 June 2010 2010 ($’m) 31 December ($’m) ($’m) 30 June 2010 2010 Change
Australia 2,123 2,154 31 8.51% 8.48% (0.03)% Europe 378 338 (40)1 8.19% 8.16% (0.03)%
Total 2,501 2,492 (9) 8.46% 8.43% (0.03)%
Source: Deloitte analysis
Notes:
1. No properties were sold during the period however West Industry Park, with a carrying value as at 31 December 2010 of $20.6 million, was transferred to investments properties
2. Includes impact of foreign exchange loss of $38 million for the period
Since 30 June 2010 market capitalisation rates and discount rates have continued to stabilise across the majority of the portfolio. In particular prime industrial capitalisation rates in Australia have stabilised since June 2010 with limited evidence of compression, however, secondary assets continue to be discounted. This stabilisation, combined with some rental growth resulted in a slight uplift in the valuation of Australian properties since 30 June 2010. This uplift was offset by write-downs in two properties, one in Silverwater and one in Blacktown, NSW, due to their upcoming vacancies and required capital expenditures for refurbishments. Despite stabilisation of yields across most of the portfolio, underlying weakness in property fundamentals particularly in Spain have contributed to the fall in overall value in Europe. The development land portfolio has not witnessed any material movement since June 2010. In general, there is likely to be upside potential for further revaluations over the medium term due to a number of factors including: the GFC contributed to a sharp reduction in industrial supply during 2009 and 2010 which may contribute to future supply shortages which should have a favourable impact on rental growth and yields a potential reduction in the discounts currently observed in the pricing of secondary industrial property (noting that this would only impact a small proportion of IIF’s portfolio) cyclical recovery in European economies, in particular Spain. We have undertaken an analysis of a sample of the independent valuations of the properties and have concluded that: the external property valuers are independent from IIF based upon statements included in the valuation reports and that there were no restrictions on their scope the reports were prepared by professionals who have sufficient qualifications and competence to provide an informed opinion of the fair market value of assets of this nature the valuation methods used in the property valuations are not inappropriate and appear to have been correctly applied to estimate the fair market values of the properties the assumptions and valuation metrics used do not appear unreasonable or inappropriate for the purpose of estimating the fair market values of the properties nothing has come to our attention that would cause us to make any adjustments for any valuation movements since 31 December 2010. However, we note that, on balance, there is an expectation that capitalisation rates for industrial properties will continue to moderately firm in Australia and may begin to firm in Europe as 46 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 107 Appendix A: Independent Expert’s Report
well. Any further firming of capitalisation rates may result in an increase in the value of IIF’s properties in the future.
Expected cash flows from normal operations up until the Implementation Date The net assets of IIF as at 31 December 2010 do not include the cash flow movements expected between 31 December 2010 to the Implementation Date (30 March 2011). We have therefore included the expected distributable earnings to be generated by IIF for this period until the Implementation Date as set out below:
Table 12: Expected cash flows up until Implementation Date
$ Millions
Net cash flows from operating activities 23.3 Transaction costs (17.5) Expected cash flows up until Implementation Date 5.8
Source: Deloitte analysis We note the following in respect of the above: cash flows from operating activities represents rent and operating expenses up to Implementation Date net of withholding taxes and investing activities transaction costs represent the costs expected to be incurred from 31 December 2010 until the Implementation Date including approximately $17.5 million in costs which are contingent upon the success of the Proposed Transaction.
Preference Securities / Exchangeable Notes As the Preference Securities have been treated as equity for financial reporting purposes, the carrying value has been excluded from the book value of net assets. However, as the Preference Securities represent a financial liability to ordinary unitholders of IIF, it is necessary to adjust the net assets of IIF to reflect this liability. As at 31 December 2010, the Exchangeable Notes had a face value of $395 million ($5 million of notes have been redeemed) and a carrying value of $371 million in the books of IIF. As discussed in Section 4.9, in 2007, IML raised $400 million by issuing partly paid preference units and equity-linked options with a subsidiary trust of IIF issuing fully paid preference units to ENF. The IIF Preference Units were redeemed in January 2011 for the issue of the partly paid IIF Subordinated Bonds. In accordance with the terms of the IIF Subordinated Bonds, the IIF Subordinated Bonds are now fully paid to $100,000 each and the IIF Subsidiary Trust Preference Units are held on trust for IIF by the trustee of the ENF trust. The IIF Subordinated Bonds are exchangeable into IIF units if the price of an IIF unit exceeds the exchange price of $1.8121 (the original exchange price was $2.8342), IIF has the option to either redeem the IIF Subordinated Bonds for cash, or convert them to ordinary IIF units determined by the market price at which ordinary units trade at the time. In the event of change of control, holders of IIF Subordinated Bonds have the right to request redemption under certain limited circumstances. Failure to meet this redemption request may result in IIF being prohibited from paying distributions to ordinary unitholders, and as a consequence, the fund could become subject to income tax. Given that the IIF Subordinated Bonds are significantly out of the money, it is likely that IIF will be required to redeem the preference securities at their face value either at maturity or in the event that a change of control event is triggered. Furthermore, whilst the Exchangeable Notes are listed on the Channel Islands exchange, they are not actively traded. However, the most recent pricing for the Exchangeable Notes on this exchange was circa $99,315 for the June 2011 tranche and circa $98,370 for the June 2012 tranche. This implies a current market value in the region of $387 million to $391 million. Having regard to the likely requirement to redeem these securities at their face value in the future we have adopted the redemption value of $395 million for these instruments for the purpose of determining the fair market value of a unit in IIF on a control basis. This results in a reduction to the 31 December 2010 NTA value of IIF of $23.6 million, being the difference between the redemption value of $395 million and the book value as at 31 December 2010 of $371.4 million. 47 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 108 Appendix A: Independent Expert’s Report
Movement in the fair market value of financial instruments IIF has entered into a number of forward foreign exchange swaps and interest rate swaps designed to hedge the fund against fluctuations in income caused by movements in foreign exchange rates and interest rates. We have adjusted the net asset position for the movement in the marked-to-market value of these instruments between 31 December 2010 and 14 January 2011 of $(1.0) million.
Foreign exchange movements IIF holds cash, debt and investment properties denominated in foreign currency, in particular EUR. The NTA as at 31 December 2010 is based on exchange rates prevailing on that date, being an AUD/EUR exchange rate of 0.7643. For the purpose of our valuation we have used the AUD/EUR exchange rate as at 21 January 2011 of 0.74. This results in an increase to the 31 December 2010 NTA of $5.0 million.
Management and responsible entity fees Whilst property management fees are included in the property cash flows used by the management and independent valuers in their valuations of the properties as at 31 December 2010, responsible entity and other management fees are not otherwise factored into the property valuations or in the financial position of IIF. Such fees would be payable as long as IIF and its investments are externally managed by ING Group or another responsible entity. These costs would typically be considered in assessing the value of a minority interest of an A-REIT, however, we have considered whether there should be an adjustment to our control net asset valuation range of IIF to reflect the potential leakage of value associated with paying ongoing contracted management fees. IIF pays base management fees amounting to the lesser of 0.675% of the total assets under management or of 9% of the net income for the distribution period. Given the current asset base and distribution expectations for IIF, it is likely that management fees will be based on 9% of distributable net income for the foreseeable future. IIF’s distribution policy is to have a payout ratio range of 70% to 90% of distributable earnings. As IIF’s management fee arrangements were negotiated in 1985, these arrangements may not be reflective of the current environment as these arrangements are less favourable to IML compared to more recent mandates which are generally asset-based fees. In addition, IIF pays an acquisition fee of 1.0% of total consideration payable in respect of any new overseas assets and is entitled to charge development management fees of 2.0% to 3.0% on new development projects. There is an argument that such costs would not be factored in at all when assessing the market value of a property holding company since: investment property management is a highly scalable business model where costs tend to be relatively fixed. A third party buyer considering purchasing IIF would likely be able to achieve economies of scale in managing the portfolio and therefore would be likely to factor in only a portion of these costs when assessing the purchase price to acquire IIF these arrangements are often able to be terminated through an ordinary resolution of unitholders which may result in the manager not receiving any compensation for these rights these costs are incurred for the purpose of improving the performance of a fund either by sourcing new investment opportunities or by optimising the existing portfolio thereby increasing the return of the existing portfolio. Accordingly, it can be argued that the ongoing costs associated with such services produce a return equal to or higher than the cost of providing those services. On the other hand a potential acquirer of IIF may not see value in continuing with the existing management agreements due to the synergies they expect from assuming the role of the investment manager. In order to remove the responsible entity and asset manager an acquirer may be required to compensate the manager for terminating these management contracts which may include a payment for ensuring a transfer of knowledge from the existing management team to the new management team to minimise disruption for the buyer during implementation. Such compensation is likely to make reference to the net present value of the profit stream associated with the management of the fund. Based on the terms of the Ancillary Transaction, the payment to REIM AP for terminating the existing management agreement for IIF is $22.5 million. As set out in Section 6 below we have concluded that this represents an arm’s length price for the management arrangements of IIF.
48 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 109 Appendix A: Independent Expert’s Report
Since our valuation of IIF assumes the portfolio is retained (rather than liquidated) we consider that it is appropriate to allow for ongoing management fees and administration expenses for the fund. In addition to management fees, IIF incurs administrative and overhead costs which would likely be incurred by a potential buyer of IIF of approximately $4 million per annum which include professional fees, compliance costs, etc, some of which would likely be incurred going forward by a potential buyer (reflecting that costs associated with the European assets would only be incurred until these assets are divested). Assuming approximately 25% of these costs would continue to be incurred by a potential buyer and a pre-tax capitalisation multiple of 7 times (having regard to our assessed discount rate for the IIF management rights as set out in Appendix 4 results in a present value for ongoing administration costs applicable to a potential buyer of approximately $7 million. Based on the above considerations, we have adjusted the net asset position of IIF for future management fees and ongoing administration costs of between $ nil and $30.0 million and consider such a cost would be factored into the overall price payable for IIF as a valuation adjustment.
Change of control implications IIF has a development agreement in respect of one of its properties which has certain provisions requiring the payment of 3 years of ground rents on the property in the event of a change of control of IIF which is estimated at approximately $10.9 million. We understand that this payment would likely be triggered in any change of control event for IIF. In order to estimate the control value of a unit in IIF we consider it is appropriate to reduce the NTA of IIF as at 31 December 2010 for the expected amount of this payment, however, as there may be some uncertainty in respect of whether this payment will be triggered we have only included this in the low end of our range.
Other considerations In assessing the fair market value of a unit in IIF under the net assets approach we have also considered the following: unfavourable debt funding terms: As detailed in Section 4.9, IIF has a syndicated facility and a series of debt facilities secured against properties in the amount of $1.1 billion, which was fully drawn as at 31 December 2010. The syndicated facility is equal to $870.1 million and has a margin of 300 bps over BBSW. The syndicated facility was secured prior to IIF raising equity in October and December 2009, while look- through gearing was over 60% and there was market speculation that IIF would breach its debt covenants. As a result, the debt spreads currently being paid by IIF are above spreads that IIF could obtain if they refinanced their debt facility in the current environment as discussed in Section 4.9. However, since a potential acquirer would likely be required to refinance the carrying value of these facilities we have made no adjustment to the carrying value for the purpose of our analysis deferred tax liabilities: at 31 December 2010, IIF holds a number of deferred tax liabilities relating to its property portfolio and European interest rate swaps. These liabilities reflect timing differences, and accordingly, will reverse in future periods. Given the nature of these liabilities, we have made no adjustment in our valuation of IIF. Furthermore, no capital gains tax liabilities are anticipated on the disposal of any properties in the IIF portfolio for the foreseeable future intangible assets: We are not aware of any intangible assets which are not otherwise identified in the accounts of IIF which should be attributed a fair market value.
49 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 110 Appendix A: Independent Expert’s Report
5.2.3 Sensitivity of the value of an IIF unit Given the relatively high level of gearing within IIF, our valuation is sensitive to relatively small movements in the underlying value of IIF’s properties. Our estimate of the impact of movements in the underlying valuations of the properties on the fair market value of an IIF unit is set out below.
Figure 14: Valuation of a unit in IIF– sensitivity to movements in the value of the properties $0.90
$0.80 $0.784 $0.735 $0.70 $0.687 $0.639 $0.60 $0.590 Adjusted NTA $0.542 ($) $0.50 $0.494 $0.445 $0.40 $0.397 Value per Value per unit $0.349
$0.30 $0.301
$0.20
$0.10
$0.00 -25% -20% -15% -10% -5% Base value 5% 10% 15% 20% 25%
Fair value per unit (midpoint) NTA
Source: Deloitte analysis Broadly speaking, a +/- 5% movement in the value of IIF’s properties would equate to an approximate impact of -/+9% on the value of an IIF unit on average, after taking into account the impact of the existing leverage of the fund. Furthermore, since a portion of IIF’s assets and liabilities are denominated in Euro, the fair market value of an IIF unit is sensitive to the AUD:EUR exchange rate assumed. Our valuation is based on an AUD:EUR exchange rate of 0.74. Movements in the exchange rate would cause changes to the fair market value of an IIF unit expressed in $ with any variation being relatively linear (excluding the impact of any hedging arrangements in place). For example, a 5% appreciation in the $ against the EUR would result in an approximate 0.4% fall in the fair market value of an IIF unit.
50 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 111 Appendix A: Independent Expert’s Report
5.2.4 Valuation cross-check We have set out below the valuation parameters observed from publicly available market data as a cross-check to our valuation of IIF under the net assets approach. In particular, we have considered: recent trading in IIF units premiums/(discounts) to NTA and distribution yields observed in listed securities, as well as earnings and asset based multiples implied by transactions comparable to the Proposal. Each of these is discussed in further detail below.
Trading in IIF units
Introduction The share market generally provides an objective measure of the market value of an entity’s securities provided that there is an active, well informed market for the securities and that there are no abnormal factors reflected in market prices, such as takeover speculation. We note prior to the announcement of the Proposal, IIF was trading at a significant discount to its underlying NTA value as discussed above. However, we consider that trading in the units of IIF prior to the announcement of the Proposal is a reasonable cross-check to our assessment of the fair market value of an IIF unit since this discount is likely to persist in at least the near to medium term due to the risk factors for IIF discussed in Section 4.13 above. Furthermore, we consider recent trading in IIF units to be appropriate for the purpose of assessing the Proposal since: in the six month period to 31 December 2010, approximately 96.3 million IIF units were traded on a weekly basis. This equates to an average weekly trading volume of approximately 3.7% of IIF’s total issued capital. Furthermore, IIF has a number of research analysts who cover the Fund’s performance. Given this level of trading and the information available on IIF, we consider IIF to be relatively liquid IIF has recently provided an update to the market in respect of the FY10 results and prospects for the 2011 financial year. Furthermore, the disposal of Summit has reduced an element of uncertainty which was previously reflected in the security price of IIF prior to this date. We therefore consider recent trading in IIF to be a fair basis for cross-checking our estimate of the fair market value of IIF.
51 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 112 Appendix A: Independent Expert’s Report
Analysis of recent trading in IIF units The VWAP per IIF unit ranged from $0.436 to $0.481 for the six months prior to the Conditional Offer Announcement Date. On 28 October 2010, IML announced that a conditional offer for the units of IIF had been received from the Consortium Members. We have therefore considered the prices observed in trading of IIF units prior to and subsequent to the announcement of the Proposal below. The table below sets out the further details on the recent historical unit trading price of IIF, together with the premium or discount that the IIF units have traded at compared to the Consideration.
Table 13: Analysis of recent trading in IIF units
Volume Premium / daily (discount) Closing average implied by the price Low High VWAP (million) Proposal
Price as at 28 October 2010 0.530 0.525 0.545 0.530 31.6 3.02%
Price prior to 28 October 2010: 1 day 0.460 0.455 0.480 0.465 22.2 16.11% 1 week 0.480 0.480 0.490 0.481 18.8 12.33% 1 month 0.480 0.475 0.485 0.481 16.5 12.35% 3 months 0.450 0.445 0.450 0.470 13.3 14.90% 6 months 0.445 0.440 0.450 0.436 12.7 23.94%
Source: Reuters, Deloitte analysis A comparison of recent trading in IIF units to the Consideration is set out below.
Figure 15: Comparison of IIF’s unit trading with fair market value and the Consideration
$0.65
Consideration = $0.538
$0.55
$0.45 ($)
Value per Value per unit Proposed Takeover $0.35 announced on 28 October 2010
Speculation of a potential transaction acknowledged , as part of the strategic review for IIF $0.25
$0.15 Jul-2009 Oct-2009 Jan-2010 Apr-2010 Jul-2010 Oct-2010 Jan-2011
Unit market close price Consideration
Source: Reuters, Deloitte analysis
52 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 113 Appendix A: Independent Expert’s Report
As set out above, we note that the recent trading in IIF’s units up to the announcement of the Proposal was below the consideration per unit offered under the Proposal. However, we note that this observation is likely due to a number of factors, in particular: uncertainty and speculation regarding the future of IIF and the wider ING Group’s intention to divest the IREIMA platform IIF’s current capital structure creates additional uncertainty in respect of near term growth prospects of the fund due to the uncertainty in respect of the funding of the development pipeline and/or any accretive acquisitions due to the relatively high gearing of IIF relative to its peer group and the refinancing risk in respect of the senior debt of IIF. In pricing IIF’s units, the market is likely to have applied a discount to fundamental value to reflect these risks, however, these have not been factored into our assessed value of an IIF unit as discussed in Section 5.2.1 IIF had a material weighting to overseas investments, which are currently perceived to be higher risk than Australian investments. Notwithstanding IIF’s intention to exit these markets over time, the uncertainty in respect of the timing and the proceeds to be realised upon the orderly disposal of these investments is likely to be contributing to the pricing gap between IIF’s unit price and our estimate of the fair market value of an IIF unit. However, we note that the increased certainty following the sale of Summit has resulted in a reduced discount to NTA. This is likely a contributing factor to IIF’s underperformance compared to the broader A-REIT sector (represented by the A-REIT Index) over this period as well as discussed in Section 4.8 above the Consideration is on a control basis, while security prices from market trading do not generally reflect the market value for control of a company as they are for portfolio holdings, and accordingly, would be expected to trade at a discount to a control value. Subsequent to the announcement of the conditional offer received from the Consortium Members, the price of IIF units has trended towards the value of the Consideration.
Conclusion As set out in Figure 15 above, IIF’s unit price has largely traded below the Consideration. We do not consider this to be unreasonable given the factors set out above. In the absence of the Proposal, or an alternate control transaction, we would expect that IIF will continue to trade at a discount to its NTA for at least the near term unless significant improvement occurs in the A-REIT sector and IIF’s risk and return profile as perceived by the market.
Earnings and asset based multiples and other key metrics In our assessment of the fair value of IIF, we have also compared our assessed value and the value implied by the Consideration, to key metrics implied by the share trading of entities that are considered comparable to IIF, as well as earnings and asset based multiples implied by transactions that are considered comparable to the Proposal. The Consideration of $0.538 results in a lower discount to NTA of 3.1% and a stabilised distribution yield for FY11 of 5.9%, which compares favourably to the yields and discount to NTA observed in recent share trading of comparable industrial A-REITs and diversified A-REITs as set out below:
53 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 114 Appendix A: Independent Expert’s Report
Figure 16: IIF metrics relative to comparable A-REITs
15.00%
10.00% 8.93% 7.19% 7.31% 6.32% 5.90% 5.60% 5.00%
n/a 0.00%
-3.10% % -5.00% -5.99% -10.00% -7.93% -7.93%
-15.00%
-20.00% -18.83%
-25.00% IIF Goodman Group Bunnings Warehouse Growthpoint Properties Dexus Property Group Australand Property Property Trust Australia Group
Premium/(discount) to NTA FY11 distribution yield
Source: Reuters, Deloitte analysis Note: 1. Goodman is excluded from the premium/(discount) to NTA analysis as it is not directly comparable to IIF given that a significant portion of its revenue is derived from active income. We note the following in respect of the entities comparable to IIF: prior to the announcement of the conditional offer for IIF in October 2010, IIF was trading at a discount to NTA of approximately 15%, which is above the median discount to NTA for industrial A-REITs that are most comparable to IIF of 6.0%. IIF’s overall gearing is currently 42% (inclusive of the Exchangeable Notes). This is above the average gearing for industrial A-REITs that are most comparable to IIF. The Consideration implies a discount to our assessed value of IIF’s net assets of 0.8% which is significantly lower than the discounts to NTA observed amongst comparable A-REITs prior to the announcement of the conditional offer for IIF in October 2010, trading in IIF units implied a current and forward distribution yield of 3.5% and 6.6% respectively. The forward yield is broadly in line with comparable A-REITs. Generally, higher and more volatile distribution yields for A-REITs reflect increased uncertainty regarding earnings of these trusts and NTA valuations. Accordingly, A-REITs with high distribution yields are likely to exhibit higher discounts to NTA relative to the market.
54 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 115 Appendix A: Independent Expert’s Report
We have also identified a number of transactions that we consider broadly comparable to the Proposal, as set out in the table below.
Table 14: Transactions comparable to the Proposal
Premium / Announcement / Fund size (discount) to Completion Date Target ($ billion) Acquirer NTA (%)
Oct-10 IIF 2.5 Consortium Member -0.7%1
Nov-10 Summit 2.0 KingSett / Alberta Pension Fund -5%2 Oct-10 Colonial Direct Property Investment Fund 0.2 Dexus Wholesale Property Fund n/a Austexx Proprietary Limited's DFO Sep-10 0.5 Colonial Retail Property Trust -2% centres Jul-10 MacarthurCook Industrial Property Fund 0.1 CommonWealth REIT -34.3% Apr-10 Westpac Office Trust 1.1 Mirvac Group 2.4% Certain property funds managed by Feb-10 7.2 Charter Hall Group -23.0% Macquarie Group Dec-09 ING Retail Property Fund 1.4 Lend Lease consortium n/a Dec-09 Challenger Kenedix Japan Trust 0.7 Challenger Life -44.6% Dec-09 Mirvac REIT 0.8 Mirvac Group -30.1% Jul-09 Orchard Industrial Property Fund 0.6 Growthpoint Properties Australia -11.1%
Source: ASX announcements, company websites, Deloitte analysis Notes: 1. Based on the midpoint of IIF’s adjusted NTA of $0.542 per unit as set out above 2. Based on IIF’s carrying value of its 50% interest in Summit as at 30 June 2010 3. n/a: not available As set out above, with the exception of the Westpac Office Trust transaction, all of the above transactions occurred at significant discounts to NTA and in excess of the discount to NTA implied by the Proposal. A number of these transactions were undertaken by entities which were in financial distress or were likely to be in financial distress as a consequence of near term debt covenant issues such as Mirvac Real Estate Investment Trust, Orchard Industrial Property Fund and Challenger Kenedix Japan Trust Other observations on the above transactions: as discussed in Section 4, on 27 August 2010, IIF announced the sale of its 50% interest in Summit, which was completed in November 2010. The transaction formed part of IIF’s strategic plans to shift its investment focus to Australia and exit its overseas investments to bridge the discount to NTA and reduce gearing in October 2010, Dexus Wholesale Property Fund completed the acquisition of 13 of Colonial Direct Property Investment Fund’s industrial assets for a purchase price of $230 million. The properties are located in Sydney, Melbourne and Brisbane and were targeted by Dexus Wholesale Property Fund as part of its plan to increase its AUM allocation to industrial property to between 10% and 20%, by constructing a diversified industrial portfolio of properties primarily located near key infrastructure and employment hubs. The Dexus Wholesale Property Fund portfolio pursuant to the transaction would be 11% industrial, 57% retail and 32% office assets on 27 September 2010 CFS Retail Property Trust completed the acquisition of four retail direct factory outlets (DFOs) from Austexx Proprietary Limited for a total purchase price of $498 million (excluding transaction costs) which represented a discount of 2% to the most recent independent valuation of these assets
55 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 116 Appendix A: Independent Expert’s Report
on 23 September 2010, CommonWealth REIT, a publicly traded U.S. REIT listed on the New York Stock Exchange, acquired all of the units of MacarthurCook Industrial Property Fund for $0.44 per unit, which represented a 34% discount to the 31 December 2009 NTA of the fund of $0.67. The fund had significant debt maturing in August 2010 in April 2010, Mirvac announced that it had completed the acquisition of all units in Westpac Office Trust via a scrip and/or cash offer. The implied value of the scrip offer and the cash offer, represented a 2.4% premium to the trust’s stated NTA as at 31 December 2009, which was 6 months prior to the completion of the transaction at a time when office rents and capitalisation rates were beginning to stabilise. At the time Westpac Office Trust had gearing of approximately 62%. in February 2010, Charter Hall Group effectively acquired Macquarie Group’s real estate management platform, including interests in the underlying investment properties, through acquiring the management rights of Macquarie Office Trust, Macquarie Countrywide Trust and three unlisted funds for $189.0 million. The purchase price represented a 23% discount to NTA as at 31 December 2009 in December 2009, a consortium including Lend Lease managed funds acquired the 14 assets of the $1.4 billion ING Retail Property Fund in December 2009 Challenger Life Company Limited acquired all the issued units in Challenger Kenedix Japan Trust that it does not already own, for a consideration of $1.00 for each unit in CKT. The transaction implied a discount to NTA of 44.6%. At the time of the transaction the trust had a gearing ratio of approximately 63% and was experiencing debt refinancing and covenant-breach risks, which made it likely that the trust will need to raise capital to address these risks in December 2009, Mirvac Group acquired all the issued units in Mirvac Real Estate Investment Trust, an externally managed diversified property trust primarily invested directly in commercial, retail, industrial and hotel property Australian property assets. The purchase price represented a 30.1% discount to NTA as at 31 December 2009 in July 2009, Orchard Industrial Property Fund, which holds a portfolio of 23 industrial properties, and Growthpoint Properties Limited entered into an agreement whereby the latter would recapitalise and restructure the trust, through a multi-stage transaction that included a $55.6 million placement and a $144.4 million rights issue underwritten by Growthpoint Properties Limited and an internalisation of the trust’s management. The transaction implied a discount to NTA of 11.1% The consideration paid relative to NTA in the above transactions range between a premium of 2.4% and a discount of 44.6%. Whilst any direct comparisons to the above transactions are limited, we consider that the Proposal metrics, in particular the implied discount to IIF’s NTA, compare favourably with other recent transactions in the A-REIT sector.
56 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 117 Appendix A: Independent Expert’s Report
5.2.5 Conclusion on fairness Our estimate of the fair market value of an IIF unit on an ex-distribution basis, compared to the value of the Consideration is set out in the table below.
Table 15: Fair market value of a unit in IIF compared to the Consideration
Low value ($) High value ($)
Fair market value of a unit in IIF $0.534 $0.550
Consideration $0.538 $0.538
Premium/(discount) to assessed value implied by the Consideration 0.7% -2.2%
Source: Deloitte analysis As set out above, the fair market value of the Consideration is within the range of the fair market value of a unit in IIF. Accordingly, we have concluded that the Proposal is fair for Non-Associated Unitholders. Our assessment of the reasonableness of the Proposal is discussed below. 5.3 Other considerations In accordance with RG 111 an offer is reasonable if it is fair. An offer might also be reasonable if, despite being ‘not fair’, the expert believes that there are sufficient reasons for Non-Associated Unitholders to accept the offer in the absence of any higher offer. Other considerations in respect of the whether the Proposal is reasonable and in the best interests of Non- Associated Unitholders are set out in the introductory letter of this report.
57 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 118 Appendix A: Independent Expert’s Report
6 Evaluation of the Ancillary Transaction 6.1 Approach The Independent Directors have requested that Deloitte provide an opinion as to whether: the Ancillary Transaction is on arm’s length terms, and constitutes the receipt by REIM AP of a collateral benefit for the purposes of the Corporations Act as interpreted by GN21. In determining whether the Ancillary Transaction is on arm’s length terms, we have considered: the negotiation process for the Proposal and the Ancillary Transaction and any relationship which exists between the parties ING Group’s review of the ING REIM business, which may include divestment, regardless of whether the Proposal is successful the links between the Proposal and the Ancillary Transaction. We have also considered whether the consideration to be received for the Ancillary Transaction represents an arm’s length price. In particular, since the Ancillary Consideration as principally in consideration for ING forgoing the opportunity to receive revenue in respect of IML’s ongoing management of IIF we have had regard to: a comparison of the percentage of AUM and earnings/revenue multiples implied by the Ancillary Consideration to asset and earnings multiples observed in other transactions involving the internalisation or the sale of management rights in the property sector an estimate of the fair market value of the IIF management rights having regard to a discounted cash flow analysis of the benefits forgone by REIM AP from managing IIF compared to the consideration received by REIM AP. In determining whether there is a collateral benefit to ING, consistent with our understanding of the principles outlined in GN21 requiring an overall view of the transaction, we have undertaken both a quantitative and a qualitative analysis of the Ancillary Transaction which has included: consideration of whether the Ancillary Transaction is at arm’s length as set out above having regard to the process undertaken in negotiating the Proposal and the Ancillary Transaction and the financial terms of the Ancillary Transaction the substance and commercial reality of the transaction including the overall effect of the transaction the price to be paid for ING’s existing interest in IIF any other relevant considerations. Our assessment of these factors is set out below.
58 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 119 Appendix A: Independent Expert’s Report
6.2 Overview of the management arrangements As discussed in Section 4.6, IML is currently entitled to receive a number of fees in respect of services currently provided to IIF which include: base management fee and custody fee: IML is entitled to a fee as Responsible Entity amounting to the lesser of 0.675% of the total balance sheet assets and 9% of the net income for the distribution period. The fee is payable in arrears on a quarterly basis. Moreover, IML is also entitled to a custody fee of 0.09% of Australian and European assets. These fees are payable in arrears on a quarterly basis Other fees: IML is entitled to acquisition and development and project management fees on normal commercial terms as follows:
o acquisition fee: IML charges an acquisition fee of 1% of the total consideration payable in respect of any acquisition of an overseas asset
o development management and project management fees: IML is entitled to charge development management fees which are to be determined on a project-by-project basis. These fees are typically in the region of 2% to 3% of development cost. In addition, all expenses reasonably and properly incurred by IML in relation to the proper performance of its duties in respect of IIF are payable or reimbursable with the exception of any fees paid to an agent or delegate to hold title to any asset and fees paid by the Responsible Entity to compliance committee members. Further information on the remuneration and expenses are defined in the constitution of IIF. The fees paid by IIF pursuant to these arrangements in recent periods are set out below:
Figure 17: Summary of management fees paid
Actual Actual Actual 2008 2009 2010 ($ million) ($ million) ($ million)
RE fees 9.9 5.8 5.01 Other fees paid to IML 2.9 3.0 0.5 Total 12.8 8.8 5.5
Source: IML, Deloitte analysis Note: 1. Since net income available for distribution declined significantly over 2009 and 2010 the base management fee over these periods declined. On a normalised basis management fees for FY10 were $7.5 million reflecting the removal of one-off adjustments
The responsible entity of IIF may be removed if an ordinary resolution is passed to terminate the current management arrangement provided at least 50% of the total votes cast vote in favour of the resolution. ING, which has a 7.9% voting interest in IIF would be entitled to vote on such a resolution. Therefore, so long as investment performance continues to be satisfactory it is less likely that unitholders would seek to terminate the current arrangements. If the responsible entity’s performance falls below the expectations of unitholders at some time in the future, there is a range of possible scenarios including a renegotiation of the fees arrangements or a termination of the arrangements for a negotiated payment. There could also be a termination of the responsible entity for no consideration. However, if the existing responsible entity was removed, there could potentially be adverse consequences on the operations of IIF including change of control implications for IIF’s debt facilities and other arrangements. In addition there are various other challenges associated with replacing the responsible entity such as ensuring a transfer of knowledge from the existing management team to the new management team.
59 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 120 Appendix A: Independent Expert’s Report
6.3 Arm’s length considerations
6.3.1 Introduction In determining whether the Ancillary Transaction is on arm’s length terms, we have considered the qualitative elements of the process, in particular the negotiation process undertaken, the commercial rationale for the transaction and the linkages between the Ancillary Transaction and the Proposal. We have also considered whether the consideration to be received for the Ancillary Transaction represents an arm’s length price by performing a quantitative analysis of the financial terms of the Ancillary Transaction.
6.3.2 Negotiation process IML is a wholly-owned subsidiary of REIM AP which in turn is ultimately wholly-owned by ING Group. REI III, which is also ultimately wholly-owned by ING Group, which beneficially holds a total of 7.9% of the outstanding units in IIF. In 2010 the Directors implemented a strategic review of the REIMA platform (as well as the underlying funds including IIF) to identify alternatives available to increase value for IIF unitholders through narrowing the gap to NTA at which the underlying funds traded. Following an announcement by IREIMA that the strategic review of the global ING REIM business included a strategic review of the Australian platform in July 2010, Goodman Group confirmed to the market, its interest in obtaining the management rights to IIF. Goodman Group increased its stake in IIF from 4.4% to 7.1% in September 2010. On 28 October 2010, Goodman Group submitted a conditional incomplete offer to the Board of IML, on behalf of the Consortium Members. On 15 November 2010, after considering the merits of the revised proposal, the Board of IML agreed to grant GTA Trustee access to due diligence and to engage with the Consortium Members, in order to determine whether an acceptable transaction could be agreed. On 24 December 2010, following negotiations between IML and the GTA Trustee, the Board of IML announced that it had entered into an Implementation Agreement with GTA Trustee in respect of the Proposal. Concurrently, but separate to the negotiation process for the Proposal REIM AP and REI III separately negotiated the Ancillary Transaction in order to facilitate the Proposal to assist in an orderly transition in the replacement of the responsible entity of IIF. On 24 December 2010 REIM AP and REI III entered into a facilitation deed with Goodman pursuant to which they agreed to use their reasonable endeavours to assist Goodman with certain matters including the following in return for cash consideration of $22.5 million: obtaining certain consents or waivers in connection with, amongst other things, the ING Asset Management Agreements and ING Facilities the transition of a number of employees engaged by IIF to Goodman (or as it directs) the transfer of various know-how, books and records of IML as they relate to IIF to, and the vesting of assets of IIF in, Goodman RE (or as it directs). The Proposal and the Ancillary Transaction were therefore separately negotiated transactions between Goodman and REIM AP and REI III in respect of the Ancillary Transaction and the GTA Trustee and IML in respect of the Proposal.
6.3.3 Relationship between the parties As discussed in Section 1.1, the Consortium Members are Goodman Group, Leader, CPPIB and APG. Goodman Group is a property group with $16.2 billion in AUM that owns, develops and manages industrial property and business space globally. Leader is a wholly- owned subsidiary of CIC, a state-owned company based in China, which invests in equity, fixed income and alternative assets in both developed and emerging markets, as well as key state-owned financial institutions in China.
60 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 121 Appendix A: Independent Expert’s Report
CPPIB invests the funds not needed by the CPP to pay current benefits and seeks to manage the plan’s long term liabilities via the acquisition of a diversified portfolio of public equity and private equity and fixed income instruments. APG administers over 30% of all collective pension schemes in the Netherlands and carries out collective pension schemes in a variety of sectors including education, government and construction sectors, cleaning and window-cleaning companies, housing corporations and energy and utility companies. GTA Trustee is unrelated to ING and, with the exception of APG and the Goodman Group, has no financial interest in IIF. APG owns 0.65% and Goodman Group owns 7.09% of IIF’s units on issue. GTA Trustee has undertaken extensive due diligence in relation to both the Proposal and the Ancillary Transaction, which would suggest that it has carefully considered the merits of the transactions and the consideration to be paid for each aspect of the Proposed Transaction. Based on the negotiation process undertaken for the Proposed Transaction and the relationships that exist between the parties, nothing has come to our attention which would cause us to believe that the parties are not dealing at arm’s length.
6.3.4 Quantitative analysis
Approach We have also considered whether the consideration to be received for the Ancillary Transaction is on arm’s length terms having regard to: a comparison of the percentage of AUM and earnings/revenue multiples implied by the Ancillary Consideration to asset and earnings multiples observed in other transactions involving the internalisation or the sale of management rights in the property sector an estimate of the fair market value of the IIF management rights having regard to a discounted cash flow analysis of the benefits forgone by REIM AP from managing IIF compared to the consideration received by REIM AP. Our analysis for each of these approaches are set out individually below.
Benchmarking to market transactions Since the Ancillary Consideration is, in effect, compensation to ING for termination of the management rights of IIF, in order to assess whether the financial terms of the Ancillary Transaction are at arm’s length we have compared the Ancillary Consideration as a % of REIMA’s gross AUM related to IIF, as well as the relevant management fee multiple implied by the fair value of the IIF management agreement to recent merger and acquisition activity in the funds management sector, as set out below.
61 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 122 Appendix A: Independent Expert’s Report
Table 16: Consideration as a percentage of REIMA’s gross AUM
Unit
IIF property AUM as at 31 December 2010 $m 2,492
Base management fees: FY101 $m 7.5 FY11 $m 7.5
Ancillary Consideration $m 22.5
Consideration as a % of IIF AUM % 0.90%
Implied multiple of base management fees FY10 times 3.0 FY11 times 3.0
Source: IML, Deloitte analysis Notes: 1. Management fees for FY10 have been normalised to remove one-off and non-recurring items As set out above, the Ancillary Transaction implies a ratio of 0.90% of IIF’s AUM as at 31 December 2010 and a multiple of base management fees for FY11 of 3.0 times. We have considered amounts paid to procure the management rights of A-REITs in comparable transactions involving the internalisation of the property, funds management and responsible entity functions. In addition, we have also identified other recent comparable transactions that include the procurement of management rights of A-REITs as set out below.
62 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 123 Appendix A: Independent Expert’s Report
Table 17: Internalisation comparable transactions
Gross asset Consideration Historical Forecast Consideration value to gross management management Entity Date ($ million) ($ million) assets (%) fee multiple4 fee multiple4
Management internalisations Macquarie Leisure Trust Jun-09 17.0 623 2.73% 5.5 6.42 GEO Property Trust May-08 2.5 809 0.31% 0.6 0.52 Macquarie ProLogis Trust Jun-07 22.0 1,690 1.30% n/a n/a Average 1.45%1 3.1 3.5
Other transactions involving management rights 3 Becton Oct-10 n/a n/a n/a n/a n/a Westpac Office Trust Jun-10 15 1,147 1.31% 3.4 3.6 Macquarie DDR Trust Jun-10 7 1,562 0.45% 0.7 1.1 Macquarie Group (real estate Feb-10 management platform) 108 7,186 1.50% 3.6 3.8 Orchard Industrial Trust Aug-09 6 642 0.93% 4.3 3.2 B&B Japan Property Trust Apr-09 22.1 2,300 0.96% n/a n/a B&B Capital Limited Mar-09 5 6,443 0.08% n/a n/a B&B Wind Partners Dec-08 40 5,619 0.71% n/a n/a B&B Communities Nov-08 17.5 1,519 1.15% 2.2 n/a DB RREEF Feb-08 2605 8,752 2.97% 3.9 n/a Lachlan Property Group Dec-07 42.4 450 9.42% n/a n/a Rubicon Holdings Dec-07 327.7 5,140 6.38% n/a n/a Average 2.09%1 3.0 2.9
Source: Mergermarket, Connect4, ASX announcements, transaction disclosures, Deloitte analysis
Notes:
1. Weighted average based on gross asset value
2. Calculated as current AUM times base management fee
3. In October 2010 Becton Property Group Limited entered into a share sale agreement to sell its funds management business, Becton Investment Management Limited, to 360 Capital Group. The acquisition will be executed through an initial cash payment plus an agreed revenue share agreement. Estimation of valuation metrics for the acquisition is not possible since the financial terms of the agreement were not announced 4. Excludes performance fees
5. The consideration paid was $130 million for a 50% stake in DB RREEF. This has been grossed up to 100% for the purpose of comparison. 6. n/a: not available or not applicable We have not considered any earnings multiples for these transactions as the management vehicle in these transactions was generally internal and therefore separate earnings before interest and tax (EBIT) or net profit after tax (NPAT) information is not publicly available for the estimation of earnings multiples. The consideration paid to acquire the management and/or responsible entity rights in the comparable transactions averages 1.45% of gross assets under management for the internalisations of fund managers, and 2.09% for transactions involving the acquisition of management rights. The average forecast management fee multiples for the transactions that we consider broadly relevant to our analysis range between 3.5 for the internalisation of fund managers and 2.9 times for transactions involving the acquisition of management rights.
63 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 124 Appendix A: Independent Expert’s Report
We note the following in relation to the above transactions: the range of percentages of AUM set out above reflects the differing growth prospects and risks of those businesses. Each transaction is driven by a unique combination of factors including asset class, investor base and gearing levels of the funds being managed as well as synergies available and the level of competitive tension at the time of the transaction we consider that transactions that have occurred prior to 2009 are unlikely to be reflective of current market pricing of transactions involving internalisation of management, and accordingly we have placed less emphasis on these transactions in our analysis. In particular, these transactions reflected a significant expectation of growth in AUM due to rising asset prices and the launching of new funds that is unlikely to exist in the current environment a number of the transactions identified involved assets or managers either in financial distress or were compelled to deleverage, which likely resulted in the pricing for these transactions not being reflective of a ‘pure’ fair market value. For example:
o the transactions involving the sale of rights in Babcock & Brown was part of a wider group of transactions involving the sale of distressed assets, including the internalisation of Babcock & Brown Japan Property Trust, Babcock & Brown Capital Limited and Babcock & Brown Wind Partners. Furthermore, the majority of the Babcock & Brown’s funds were invested in a variety of sectors, including telecommunications and global directory companies, wind farms, residential property development and retirement and aged care facilities
o Allco Finance Group Limited was placed in administration in November 2008, less than 12 months after the purchase of Rubicon, and was subsequently placed in liquidation. The Rubicon transaction is under investigation in the Federal Court together with other transactions leading up to the collapse of Allco Finance Group Limited
o in June 2010 Macquarie DDR Trust was acquired by EPN GP LLC for the purposes of refinancing outstanding revolver debt facilities, in addition to allowing for increased focus on leasing activities. Macquarie DDR Trust’s activities are largely retail investments in US-based shopping centres the rationale behind the acquisition of Westpac Office Trust by Mirvac Group in June 2010 was to primarily reduce the group’s relatively high gearing level (approximately 62%), particularly given that its debt facilities were due for refinancing in June 2011. As part of the acquisition Mirvac Group acquired the management rights related to Westpac Office Trust in February 2010 Charter Hall Group effectively acquired Macquarie Group’s real estate management platform to gain diversification benefits, position itself as one of Australia’s largest specialist real estate fund managers and achieve EPU accretion. The transaction included acquiring the management rights of Macquarie Office Trust, Macquarie Countrywide Trust and three unlisted funds for $108.0 million, which was expected to reduce Charter Hall Group’s look-through gearing from 38.5% to 33.5% we do not consider the Macquarie Leisure Trust internalisation and GEO Property Trust transactions to be comparable due to the nature of the underlying assets in these funds As set out above, the Ancillary Consideration as a percentage of AUM and as a multiple of base management fees is within the range, although at the bottom end of the ranges observed in comparable transactions. We consider this reasonable since: we consider the Westpac Office Trust and Macquarie Group’s real estate management platform transactions to be the most comparable to the Ancillary Transaction, given the rationale behind these transactions and the asset classes to which investment managers are exposed. The average consideration to gross AUM ratio for these transactions is 1.4%, while the average forecast management fee multiples for these transactions was 3.7 IIF has limited growth prospects for management fees relative to the majority of the comparable transactions which were either negotiated in a different economic environment or on the assumption that AUM/FUM would grow significantly from the existing levels
64 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 125 Appendix A: Independent Expert’s Report
As discussed above, IIF pays base management fees amounting to the lesser of a range between 0.65% and 0.675% of the total assets under management (depending on the country in which the asset is held) or 9% of distributable net income. Given the current asset base and net income expectations for IIF, it is likely that management fees will be based on 9% of distributable net income for the foreseeable future. As IIF’s management fee arrangements were negotiated in 1985, these arrangements may not be reflective of the current environment as they are less favourable to REIMA compared to more recent mandates which are generally asset-based fees. Based on the above analysis, is the valuation benchmarks implied by the Ancillary Transaction are not inconsistent with the benchmarks implied by recent market internalisations.
Discounted cash flow analysis
Summary and conclusion In addition to the benchmarking above, in order to assess whether the financial terms of the Ancillary Transaction are at arm’s length we have also compared the benefits received by REIM AP, being the value of the Ancillary Consideration, to the benefits provided by REIM AP, which is represented by the net income or cash flow which would otherwise be generated by REIM AP in respect of the IIF management rights in the absence of the Ancillary Transaction. In undertaking the quantitative analysis, we have also had regard to: what we consider to be the commercial substance of the Ancillary Transaction whether the benefits provided have special value to REIM AP. GN21 recognises that a transaction may confer a collateral benefit even though it is at fair market value and consequently does not require the measurement of net benefit by reference to fair market value. Having regard to the total benefits provided by REIM AP, compared to the benefits received by REIM AP, on balance there is, prima facie, no net benefit. A summary of our analysis is set out in the table below.
Table 18: Comparison of the fair market value of the IIF management agreement with the Ancillary Transaction Consideration
Unit Low High
Benefits received by REIM AP Value of Ancillary Consideration $m 22.5 22.5
Benefits provided by REIM AP Benefit to REIM AP of IIF management rights $m 19.3 27.7
Net economic cost (benefit) to REIM AP $m (3.2) 5.2
Source: Deloitte analysis
65 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 126 Appendix A: Independent Expert’s Report
We note that the above analysis results in a relatively wide range of values for the net benefits to REIM AP. This is as a consequence of the inherent uncertainty in the future cost structure of REIMA (which includes management of IIF as well as 4 other funds) due to the strategic review of the business by ING Group as any future scenario would require a significant restructure of the platform which would impact the expected cost structure.
Value of the benefits received Under the terms of the Ancillary Transaction, the total consideration payable by Goodman to REIM AP (or as it directs) under the Ancillary Transaction will be a lump sum payment of $22.5 million, payable within 10 business days from the Implementation Date related to the Proposal. In exchange for the Ancillary Consideration, an entity within the Goodman Group will fully acquire the IIF management rights from REIM AP, and Goodman Group will manage IIF on behalf of GTA Trustee, with IIF becoming a sub-trust of GTA.
Value of the net income/ cash flows forgone by REIM AP In determining the present value of the net income that will be foregone under the management agreements following the sale of the IIF management rights we have had regard to a detailed financial model prepared by IML management which includes discrete projections of cash flows that reflect the operations of IIF over the period from 1 January 2011 to 30 June 2015 (the IIF Model). However, due to ING Group’s review of the ING REIM business, limited information is available in respect of the expected future cost structure of REIMA or for the IIF assets in particular. As a result, in order to estimate the net benefits to REIM AP as a consequence of the Ancillary Transaction utilising the DCF analysis we have considered the following:
Management fees received IIF pays base management fees amounting to the lesser of 0.675% of the total assets under management or of 9% of net income distributed. Given the current asset base and distribution expectations for IIF, it is likely that management fees will be based on 9% of distributable net income for the foreseeable future. As IIF’s management fee arrangements were negotiated in 1985, these arrangements may not be reflective of the current environment as they are less favourable to IML compared to more recent mandates which are generally asset- based fees. In order to estimate the future management fees which would likely be earned by REIM AP in the absence of the Ancillary Transaction we have considered the expected net income and distribution profile for IIF having regard to the IIF Model which projects net income for the fund on a property by property basis, taking into account rental income growth in line with expected inflation, which is assumed at 3% per annum, as well as projected expiries. For the purpose of estimating future net income for IIF post-refinancing, we have assumed the current margins on IIF’s facilities up until their assumed refinancing in April 2011, and at 250 bps over the BBSW rate thereafter having regard to the margins observed on recent debt refinancing in the sector. In addition to the above we have assumed the following for the purpose of our analysis: an annual custody fee equal to 0.09% of total gross value of IIF’s AUM based on the existing contractual arrangements for the fund. property management fees of $0.3 million annually development fee revenue based on 2% of IIF’s development costs.
Cost Structure As discussed above, due to ING Group’s strategic review of the REIMA platform, which may include an exit over the short term, limited information is available in respect of the expected future cost structure of REIMA or for the IIF assets.
66 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 127 Appendix A: Independent Expert’s Report
In assessing the likely cost structure attributable to managing IIF’s assets we have had regard to the current cost structure of REIMA AP noting that these costs are incurred in managing all 5 funds of REIM AP and any specific allocation of costs to managing IIF’s assets with any degree of precision is difficult. In particular, since investment property management is a highly scalable business model a large proportion of costs tend to be relatively fixed in nature and these fixed costs are shared across a number of funds. Therefore, in considering the future cost structure of managing IIF in the absence of the Proposed Transaction we have considered: an estimate of the costs incurred by IML for FY10 and FY11 in managing IIF based on an allocation of the total costs of REIMA which are likely to be attributable to IIF having regard to an analysis prepared by IML management of head count, nature of assets and relative amount of management time and other resources utilised. Based on this analysis, the allocation of total REIMA costs applicable to managing IIF for FY10 and FY11 was 25%. We have then considered that the variable component of these costs would grow in line with growth in the asset base and earnings of IIF as discussed above as mentioned above, REIMA is in a period of transition/restructure. In the event that REIMA continued to manage IIF for the foreseeable future a restructure of REIMA would be required which would likely impact the existing cost structure. Therefore we have also considered an estimate of a maintainable or target earnings margin (or cost to income ratio) that REIM AP (or any other manager) would likely target over the longer term. Having regard to discussions with REIMA management and an analysis of current and forecast margins for broadly comparable property fund managers, we have utilised a target earnings before interest and tax, depreciation and amortisation (EBITDA) margin of 35% for the purpose of this analysis.
Term In order to estimate the future management fees payable by IIF to REIMA, we have considered the likely term over which management agreements with REIMA would remain in place, the likelihood of early termination of these agreements and the impact of such potential termination. Given that Unitholders have the right to terminate the management agreement with REIMA at any point in time, it can be argued that the valuation of management fees related to IIF should be assessed over their legal life or an otherwise relatively short period, due to uncertainty over the timing of any potential terminations. However, historical evidence shows that buyers of comparable management agreements in Australia are likely to price these arrangements assuming they would continue in place for periods longer than their legal life. We are of the view that it is likely to be extremely difficult for the current arrangements for the Australian assets to be easily terminated without significant pre-planning to address the transition and change of control issues in the event that the manager is replaced. As such, whilst the current management arrangements are not a perpetual right, it is a matter of judgement as to the likely future term under the current arrangements. Accordingly, we have assessed the cash flows related to management fees relating to IIF and the cost for REIMA to manage these funds assuming the management agreements continue in place indefinitely. We have therefore incorporated a terminal value in our analysis, using a terminal growth rate of 3%.
Other considerations In addition to the above, we have made the following assumptions in respect of estimating the benefits forgone by REIM AP as a consequence of the Ancillary Transaction: the corporate tax rate of 30% is applicable to the net income of REIM AP a discount rate in the range of 11.5% to 12.5% for the reasons discussed in Appendix 4.
6.3.5 Conclusion We have estimated the fair market value of the IIF management agreement to be in the range of $19.3 million to $27.7 million, as summarised in Table 18 above. Based on the information made available to us, which included discussions with IML, nothing has come to our attention that would cause us to believe that the Ancillary Transaction is not at arm’s length.
67 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 128 Appendix A: Independent Expert’s Report
6.4 Collateral Benefit considerations
6.4.1 Approach We have had regard to GN21 in assessing whether anything has come to our attention to cause us to believe the consideration payable to REIM AP under the Ancillary Transaction would constitute the receipt by REIM AP or any of its parties of a ‘collateral benefit’ for the purposes of the Corporations Act. Under GN21, a collateral benefit exists if it violates the equity principle, which states that if the bidder provides a security holder something of value which it does not offer to other security holders, the Panel may conclude that a collateral benefit has been given which gives rise to unacceptable circumstances. In determining whether there is a collateral benefit, the test is one of a ‘net benefit’. In assessing whether a collateral benefit exists, we have undertaken both a quantitative and a qualitative analysis of the Ancillary Transaction, as set out below.
6.4.2 Quantitative analysis For the purposes of our quantitative analysis in relation to whether the Ancillary Transaction would constitute the receipt by REIM AP or any of its parties of a collateral benefit, we have had regard to our analysis of whether the consideration is on arm’s length terms, as well as whether anything has come to our attention which would indicate that the consideration represents a net benefit to REIM AP as set out Section 6.3 by assessing the benefits received by REIM AP relative to those foregone to Goodman. As set out in Table 18, the fair market value of the IIF management agreement is in line with the value of the Ancillary Transaction Consideration. Accordingly, we conclude that nothing has come to our attention which would indicate that the consideration payable to REIM AP under the Ancillary Transaction constitutes the receipt by REIM AP or any of its parties of a collateral benefit for the purposes of the Corporations Act.
6.4.3 Qualitative analysis Under the second part of our analysis, we considered other benefits and advantages flowing to and from REIM AP from the Ancillary Transaction.
Commercial advantages flowing from REIM AP The Proposed Ancillary Transaction facilitates the following: the benefit of rights to certain intellectual property owned by ING (which will be licensed to Goodman Group) and employee records and other know-how related to IIF the provision of services which will assist in the transition of the management of IIF from IML/REIM AP to Goodman Group will result in REIM AP foregoing the opportunity to earn future management, performance and advisory fees. Moreover, IML must obtain all relevant consents and waivers required in respect of material change of control issues as defined in the IIF Scheme Facilitation Deed related to the Ancillary Transaction.
Commercial advantages flowing to REIM AP The Proposed Ancillary Transaction allows REIM AP to realise value for the existing management agreements at a time when ING Group is undertaking a strategic review of the global ING REIM platform which could include the divestment of the REIMA platform (inclusive of the IIF management rights). ING and related entities currently have a beneficial interest in IIF of approximately 7.9%. If the Proposal is implemented, ING's holding of IIF units will be transferred to GTA as part of the Proposal and ING will receive the same Consideration as the Non-Associated Unitholders. The Ancillary Transaction does not provide any requirement on the disposal or voting of the units in IIF held by ING and ING retains absolute discretion on the exercise of the voting rights and disposal of these units.
68 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 129 Appendix A: Independent Expert’s Report
6.5 Conclusion Having regard to the basis of our evaluation, the limitations set out in this report and the results of our analysis, nothing has come to our attention to cause us to believe that the consideration payable to REIM AP under the Ancillary Transaction: is not on arm’s length terms would constitute the receipt by REIM AP of a collateral benefit. Moreover, nothing has come to our attention in respect of the Ancillary Transaction that would cause us to change the conclusions we have reached in relation to the Proposal.
69 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 130 Appendix A: Independent Expert’s Report
Appendix 1: Glossary
Reference Definition
31 December Distribution A distribution of $0.008 per unit ($21 million in total) to Unitholders, which has been declared for the quarter ended 31 December 2010 and will be paid in February 2011 AFFO Adjusted funds from operation Amendment Resolution Special resolution for the purpose of Section 601GC(1) of the Corporations Act to approve the amendments to the IIF constitution Ancillary Consideration $22.5 million, being the amount to be received by REIM AP for, among other things, the giving up by ING of its opportunity to receive revenue in respect of the ongoing management of IIF by IML Ancillary Transaction A transaction whereby ING would assist Goodman to implement the Proposal and with the orderly transition in the replacement of the responsible entity of IIF Announcement Date, the 24 December 2010 APESB Accounting Professional and Ethical Standards Board Limited APG Dutch pension fund Algemene Pensioen Groep Approval Resolution Ordinary resolution by Unitholders approving for all purposes, including for the purposes of Section 611, the steps required to implement the Proposed Transaction A-REIT Australian real estate investment trust A-REIT Index S&P/ASX A-REIT index ASIC Australian Securities and Investments Commission ASX Australian Securities Exchange Limited AUASB Auditing and Assurance Standards Board AUD Australian dollars AUM Assets under management bps Basis points CAGR Compound annual growth rate CIC China Investment Corporation Consideration Cash consideration equal to $0.546 per unit on a cum-distribution basis offered by GTA Trustee under the Proposal Consortium Member Goodman, Leader, CPPIB and APG CPPIB CPPIB US RE-3 (Canadian Pension Plan Investment Board ) cpu Cents per unit Deloitte Deloitte Corporate Finance Pty Limited Directors, the Board of Directors of IML EBIT Earnings before interest and tax EBITDA Earnings before interest, tax, depreciation and amortisation Exchangeable Notes 3,950 IIF preference securities on issue, with a total face value of approximately $395 million FIRB Foreign Investment Review Board FSG Financial Services Guide FUM Funds under management Fund, the ING Industrial Fund FY Financial year GDP Gross domestic product GFC Global financial crisis GN15 Takeovers Panel Guidance Note 15 explanatory memorandum 131 Appendix A: Independent Expert’s Report
Reference Definition
GN21 Takeovers Panel Guidance Note 21: Collateral Benefits Goodman Goodman Limited Goodman Group Goodman Funds Management Limited in its capacity as responsible entity for the Goodman Industrial Trust IER Independent expert’s report IIF ING Industrial Fund IIF Model The detailed financial model prepared by IML management which includes discrete projections of cash flows that reflect the operations of IIF over the period from 31 December 2010 to 30 June 2015 IIF Subordinated Bonds IIF preference units that are partly paid, perpetual, subordinated, deferrable and non-cumulative bonds issued by IML IML ING Management Limited Implementation Date 30-Mar-11 Independent Directors Independent Directors of IML ING REIM AP and the REI III JPM ENF JPMorgan Australia Exchangeable Note Funding Trust No. 2
Kd Cost of debt capital
Ke Cost of equity capital NPAT Net profit after tax NTA Net tangible assets Proposal Proposal under which the Consortium Members would acquire all the ordinary units of IIF, for cash consideration equal to $0.546 per unit on a cum-distribution basis via a trust scheme of arrangement Proposed Transaction, the The Proposal and the Ancillary Transaction RE Responsible Entity REI III ING Real Estate International Investment III B.V REIM AP ING Real Estate Investment Management Asia/Pacific B.V. REIMA ING Real Estate Investment Management Australia Pty Limited Responsible Entity The responsible entity of IIF
Rf Risk free rate of return
Rm Expected return on the market portfolio RMB Chinese Renminbi S&P Standard and Poor’s Section 611 item 7 of section 611 of the Corporations Act Summit ING Summit Industrial Fund LP Unitholders IIF’s unitholders VWAP Volume weighted average price WACC Weighted average cost of capital WACR Weighted average capitalisation rate WALE Weighted average lease expiry
71 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 132 Appendix A: Independent Expert’s Report n/a 9.75% 7.00% 8.75% 9.50% 9.25% 8.75% 9.00% 8.88% 8.00% 8.75% 8.75% 9.25% 8.50% 8.75% 8.75% 8.50% 8.25% 8.25% 8.13% 8.40% 9.50% 8.50% 8.50% 8.25% 10.00% rate ( %) Capitalisation 26 50 43 15 31 32 86 0.5 6.5 22.5 18.0 32.5 20.9 42.7 36.9 46.5 43.6 14.3 29.3 35.5 19.5 80.1 55.4 14.1 74.1 54.4 Value (AUD million) 31 December 2010 Valuations CI CI IIF IIF IIF IIF IIF IIF IIF IIF IIF IIF IIF IIF IIF IIF IIF IIF KF KF KF JLL JLL JLL JLL CBRE Valuer n/a n/a 0.5 3.2 2.5 5.6 3.6 4.5 2.2 1.8 1.8 4.3 5.3 4.5 2.0 2.8 2.7 7.7 7.1 7.7 3.8 4.5 4.5 1.4 10.3 10.5 WALE
n/a 141 5,383 5,363 7,512 10,261 44,748 32,388 14,004 15,655 15,761 29,262 10,415 55,739 11,083 15,283 14,234 25,329 11,103 60,966 54,960 12,857 90,370 40,285 13,386 53,713 metric) area (local Net lettableNet
Location NSW Mascot, Chatswood, NSW NSW Ryde, North NSW Blacktown, Braeside, Vic NSW Ryde, North NSW Chullora, NSW Ryde, North Vic Melbourne, Port NSW Ryde, North NSW Park, Arndell Qld Lake, Forest NSW Ryde, North NSW Rosebery, NSW Park, Arndell Rosebery, NSW NSW Mascot, NSW Huntingwood, NSW Alexandria, NSW Creek, Eastern Minto, NSW Kings Park, NSW Laverton, Vic Qld Loganlea, NSW Ryde, North Matraville, NSW Summary of IIF’s property portfolio property of IIF’s Summary Property Australia Rd Kent 19-33 Way Valley Eastern 223/354 BD Campus Centre Distribution Blacktown North Centre Distribution Braeside Park Business Catalyst Estate Industrial Chullora Park Business Views City Park Business Dockside Campus Everglade Centre Distribution Foothills Centre Distribution Lake Forest Park Business Global Green Central Centre Business Western Great Estate Industrial Harcourt Park Business Heritage Centre Business Huntingwood Park Business Huntley - Park Interchange 1 Stage Keylink - Centre Industrial 1 Stage Park Business Kings Centre Distribution Laverton Centre Distribution Loganlea Microsoft Campus Estate Industrial Court Millennium Appendix 2: explanatory memorandum 133 Appendix A: Independent Expert’s Report ------n/a 8.00% 9.50% 8.50% 9.50% 8.25% 7.75% 8.75% 9.00% 8.00% 9.75% 9.50% 8.00% 8.75% 8.25% 8.50% 8.25% 7.50% rate ( %) Capitalisation
25 76 8.5 3.8 1.3 153 83.1 47.3 31.5 91.1 43.9 17.2 51.5 39.2 53.2 46.5 11.3 13.5 20.6 174.7 127.9 103.4 2,153.7 Value 32.3 (AUD million) C C 31 December 2010 Valuations CI CI CI IIF IIF IIF IIF IIF IIF IIF IIF IIF IIF IIF KF KF KS n/a JLL JLL JLL JLL Valuer
------5.4 3.6 2.7 2.5 3.7 2.8 6.1 3.6 4.6 8.7 2.4 5.9 2.9 6.0 5.3 5.3 5.0 n/a WALE
------59,505 27,399 26,673 33,023 95,391 35,423 81,808 17,691 15,827 44,479 27,126 23,241 13,110 73,443 20,397 201,210 113,750 1,539,156 metric) area (local Net lettableNet
Location Moorebank, NSW Moorebank, NSW Newington, NSW NSW Silverwater, Ardeer, Vic Botany, NSW Vic Melbourne, Port Riverwood, NSW Rosehill, NSW Vic Seaford, NSW Hills, Seven NSW Banksmeadow, NSW Ryde, North NSW Banksmeadow, Rhodes, NSW Erskine Park, NSW Creek,Eastern NSW Minto, NSW Moorebank, NSW QLD Roadbank, QLD Roadbank, VIC Truganina, Belgium Puurs Stage 2 Stage – Stage 2 Stage – Stage 2 Stage – ING Industrial Fund Independent expert’s report expert’s Independent Fund Industrial ING Property Moorebank Business Park - Stage1 Centre Distribution Moorebank Newington Business Park Centre Distribution Newington Estate Industrial Parkwest Portair Estate Industrial Estate Industrial Melbourne Port Riverwood Business Park Estate Industrial Rosehill Estate Industrial Seaford Estate Industrial Hills Seven Estate Industrial Southgate Park The Park Logistics TransLink Campus Unisys Estate Industrial Westpark Park Interchange Estate Industrial Keylink Park Industrial Moorebank Road 112 Monash Street 59 Smith Park Industry West Total Europe Centre Distribution Puurs 73 Deloitte: ING Industrial Fund 134 Appendix A: Independent Expert’s Report
n/a n/a 9.00% 8.50% 8.75% 9.00% 8.50% 8.10% 9.50% 7.75% 8.00% 8.00% 8.00% 8.25% 8.25% 8.10% 7.85% 8.16% 8.43% rate ( %) Capitalisation
42 21.2 338.6 2,419 Value 3.4 48.7 15.9 14.9 27.6 17.8 5.7 32.8 29.4 14.8 10.9 19.5 45.3 13.3 6.3 (AUD million) S 31 December 2010 Valuations IIF IIF IIF IIF IIF IIF IIF n/a n/a JLL JLL JLL JLL JLL JLL JLL Valuer
5.9 7.7 6.4 4.7 5.8 5.8 4.8 4.1 4.8 6.0 5.9 2.8 2.2 3.6 5.3 4.7 4.5 n/a n/a WALE
7,805 16,466 66,154 50,196 22,526 53,900 31,701 11,581 36,230 34,640 23,553 17,745 24,270 67,441 22,085 31,668 35,631 506,690 2,102,210 metric) area (local Net lettableNet
Location Machnow Germany Machnow Germany beeren β β Germany Leipzig Brieselang Germany Germany Burstadt Erfurt Germany Gro Gro Germany Bremen Germany Lahr Germany Bremen Germany Bremen Germany Hannover-Sehnde Spain (Madrid) Daganzo Quer (Madrid) Spain Quer (Madrid) Spain Valdemoro Spain ING Industrial Fund Independent expert’s report expert’s Independent Fund Industrial ING Property Centre Distribution Bautzner Centre Distribution Brieselang Burstadt Distribution Centre Centre Distribution PDLZ Erfurt Groß Machnow Distribution Centre Centre Distribution Großbeeren Centre Distribution Huchting Centre Distribution Lahr Centre Distribution East Bremen Port Port Bremen West Distribution Centre Centre Distribution Sehnde Estate Industrial Daganzo Great Northern Distribution Centre Centre Distribution II Quer Valdemoro Distribution Centre Total Average Overall total Overall average Source: IIF IIF Source: Notes: 1.2. International C: Colliers 3. LaSalle Lang JLL: Jones 4. Ellis Richard CBRE: CB 5. KF: Knight Frank Valuations Chesterton C: 74 Deloitte: explanatory memorandum 135 Appendix A: Independent Expert’s Report
Appendix 3: Valuation methodology
To estimate the fair market value of the securities the subject of the Proposal, we have considered common market practice and the valuation methodologies recommended by ASIC Regulatory Guide 111, which deals with the content of IERs. These are discussed below.
Market based methods Market based methods estimate a company’s fair market value by considering the market price of transactions in its securities or the market value of comparable companies. Market based methods include: capitalisation of maintainable earnings (CME) analysis of a company’s recent security trading history industry specific methods. The CME method estimates fair market value based on the company’s future maintainable earnings and an appropriate earnings multiple. An appropriate earnings multiple is derived from market transactions involving comparable companies. The CME method is appropriate where the company’s earnings are relatively stable. The most recent security trading history provides evidence of the fair market value of the securities in a company where they are publicly traded in an informed and liquid market. Industry specific methods estimate market value using rules of thumb for a particular industry. Generally rules of thumb provide less persuasive evidence of the market value of a company than other valuation methods because they may not account for company specific factors.
Discounted cash flow methods Discounted cash flow methods estimate market value by discounting a company’s future cash flows to a net present value. These methods are appropriate where a projection of future cash flows can be made with a reasonable degree of confidence. Discounted cash flow methods are commonly used to value early stage companies or projects with a finite life.
Asset based methods Asset based methods estimate the market value of a company’s securities based on the realisable value of its identifiable net assets. Asset based methods include: orderly realisation of assets method liquidation of assets method net assets on a going concern basis. The orderly realisation of assets method estimates fair market value by determining the amount that would be distributed to unitholders, after payment of all liabilities including realisation costs and taxation charges that arise, assuming the company is wound up in an orderly manner. The liquidation method is similar to the orderly realisation of assets method except the liquidation method assumes the assets are sold in a shorter time frame. Since wind up or liquidation of the company may not be contemplated, these methods in their strictest form may not necessarily be appropriate. The net assets on a going concern basis method estimates the market values of the net assets of a company but does not take account of realisation costs. These asset based methods ignore the possibility that the company’s value could exceed the realisable value of its assets as they ignore the value of intangible assets such as customer lists, management, supply arrangements and goodwill. Asset based methods are appropriate when companies are not profitable, a significant proportion of a company’s assets are liquid, or for asset holding companies.
75 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 136 Appendix A: Independent Expert’s Report
Industry specific methods Industry rules of thumb estimate fair market value by applying an industry specific benchmark to the operating data of a company. Industry rules of thumb are commonly used as a cross-check to consider the reasonableness of the valuations derived using other methods. In the funds management industry, the value of a business is frequently assessed by reference to a percentage of funds under management (“FUM”). The FUM method does not reflect company specific factors such as risk profile, profitability, the perceived ability of the management team and future prospects of a particular business.
76 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 137 Appendix A: Independent Expert’s Report
Appendix 4: Discount rate
The discount rate used to equate the future cash flows to their present value reflects the risk adjusted rate of return demanded by a hypothetical investor for the asset or business being valued. Selecting an appropriate discount rate is a matter of judgement having regard to relevant available market pricing data and the risks and circumstances specific to the asset or business being valued. Whilst the discount rate is in practice normally estimated based on a fundamental ground up analysis using one of the available models for estimating the cost of capital (such as the Capital Asset Pricing Model (CAPM)), market participants often use less precise methods for determining the cost of capital such as hurdle rates or target internal rates of return and often do not distinguish between investment type or region or vary over economic cycles. Since our definition of fair market value is premised on the estimated value that a knowledgeable willing buyer would attribute to the asset or business, our selection of an appropriate discount rate needs to consider that buyers incorporate other alternatives to the typical CAPM approach in estimating the cost of capital. For ungeared cash flows, discount rates are determined based on the cost of an entity’s debt and equity weighted by the proportion of debt and equity used. This is commonly referred to as the weighted average cost of capital (WACC). The WACC can be derived using the following formula:
E D WACC *K *(K 1 t ) V e V d c Ke = cost of equity capital
Kd = cost of debt
tc = corporate tax rate E/V = proportion of enterprise funded by equity D/V = proportion of enterprise funded by debt
The adjustment of Kd by (1- tc) reflects the tax deductibility of interest payments on debt funding. The corporate tax rate has been assumed to be 30%, in line with the Australian corporate tax rate and expected tax shield benefit for REIMA.
Cost of equity capital (Ke)
The cost of equity, Ke, is the rate of return that investors require to make an equity investment in a firm.
We have used the CAPM to estimate the Ke. CAPM calculates the minimum rate of return that the company must earn on the equity-financed portion of its capital to leave the market price of its shares unchanged. The CAPM is the most widely accepted and used methodology for determining the cost of equity capital. The cost of equity capital under CAPM is determined using the following formula:
Ke Rf (Rm Rf ) a
The components of the formula are:
Ke = required return on equity
Rf = the risk free rate of return
Rm = the expected return on the market portfolio β = beta, the systematic risk of a stock α = specific company risk premium Each of the components in the above equation is discussed below.
77 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 138 Appendix A: Independent Expert’s Report
Risk free rate (Rf) The risk free rate compensates the investor for the time value of money and the expected inflation rate over the investment period. The frequently adopted proxy for the risk free rate is the long-term government bond rate. The 10-year bond rate is a widely used and accepted benchmark for the risk free rate in Australia. As we have considered the value of the asset cost savings over a period in excess of 10 years we have had primary regard to the 10 year risk-free rule. Since there is no zero-coupon government bond issued by the Australian Government, we have utilised the zero coupon bond yield calculated by Thomson Reuters, which excludes the coupon payments from the 10-year Australian Government Bond, for the AUD denominated projected cash flows. In determining the risk free rate, we have taken the 5-day average of the zero coupon 10-year Australian Government Bond yield for the period ending 12 January 2011 of 5.69%. This rate represents a nominal rate and thus includes inflation.
Equity market risk premium (EMRP)
The EMRP (Rm – Rf) represents the risk associated with holding a market portfolio of investments, that is, the excess return a shareholder can expect to receive for the uncertainty of investing in equities as opposed to investing in a risk free alternative. The size of the EMRP is dictated by the risk aversion of investors – the lower (higher) an investor’s risk aversion, the smaller (larger) the equity risk premium. The EMRP is not readily observable in the market and therefore represents an estimate based on available data. There are generally two main approaches used to estimate the EMRP, the historical approach and the prospective approach, neither of which is theoretically more correct or without limitations. The former approach relies on historical share market returns relative to the returns on a risk free security; the latter is a forward looking approach which derives an estimated EMRP based on current share market values and assumptions regarding future dividends and growth. In evaluating the EMRP, we have considered both the historically observed and prospective estimates of EMRP.
Historical approach The historical approach is applied by comparing the historical returns on equities against the returns on risk free assets such as Government bonds, or in some cases, Treasury bills. The historical EMRP has the benefit of being capable of estimation from reliable data; however, it is possible that historical returns achieved on stocks were different from those that were expected by investors when making investment decisions in the past and thus the use of historical market returns to estimate the EMRP would be inappropriate. It is also likely that the EMRP is not constant over time as investors’ perceptions of the relative riskiness of investing in equities change. Investor perceptions will be influenced by several factors such as current economic conditions, inflation, interest rates and market trends. The historical risk premium assumes the EMRP is unaffected by any variation in these factors in the short to medium term. Historical estimates are sensitive to the following: the time period chosen for measuring the average the use of arithmetic or geometric averaging for historical data selection of an appropriate benchmark risk free rate the impact of franking tax credits exclusion or inclusion of extreme observations. The EMRP is highly sensitive to the different choices associated with the measurement period, risk free rate and averaging approach used and as a result estimates of the EMRP can vary substantially. We have considered the most recent studies undertaken by the Centre for Research in Finance at the Australian Graduate School of Management (AGSM), Morningstar Inc (Morningstar), ABN AMRO/London Business School and Aswath Damodaran (Damodaran). These studies generally calculate the EMRP to be in the range of 5% to 8%.
78 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 139 Appendix A: Independent Expert’s Report
Prospective approach The prospective approach is a forward looking approach that is current, market driven and does not rely on historical information. It attempts to estimate a forward looking premium based on either surveys or an implied premium approach. The survey approach is based on investors, managers and academics providing their long term expectations of equity returns. Survey evidence suggests that the EMRP is generally expected to be in the range of 6% to 8%. The implied approach is based on either expected future cash flows or observed bond default spreads and therefore changes over time as share prices, earnings, inflation and interest rates change. The implied premium may be calculated from the market’s total capitalisation and the level of expected future earnings and growth.
Selected EMRP We have considered both the historically observed EMRP and the prospective approaches as a guideline in determining the appropriate EMRP to use in this report. Australian studies on the historical risk premium approach generally indicate that the EMRP would be in the range of 5% to 8%. In recent years it has been common market practice in Australia in expert’s reports and regulatory decisions to adopt an EMRP of 6%. Having considered the estimated EMRP under various approaches and their relative limitations, we consider an EMRP of 6.0% to be appropriate.
Beta estimate (β)
Description The beta coefficient measures the systematic risk or non-diversifiable risk of a company in comparison to the market as a whole. Systematic risk, as separate from specific risk as discussed below, measures the extent to which the return on the business or investment is correlated to market returns. A beta of 1.0 indicates that an equity investor can expect to earn the market return (i.e. the risk free rate plus the EMRP) from this investment (assuming no specific risks). A beta of greater than one indicates greater market related risk than average (and therefore higher required returns), while a beta of less than one indicates less risk than average (and therefore lower required returns). Betas will primarily be affected by three factors which include: the degree of operating leverage employed by the firm in that companies with a relatively high fixed cost base will be more exposed to economic cycles and therefore have higher systematic risk compared to those with a more variable cost base the degree of financial leverage employed by a firm in that as additional debt is employed by a firm, equity investors will demand a higher return to compensate for the increased systematic risk associated with higher levels of debt correlation of revenues and cash flows to economic cycles, in that companies that are more exposed to economic cycles (such as retailers), will generally have higher levels of systemic risk (i.e. higher betas) relative to companies that are less exposed to economic cycles (such as regulated utilities).
79 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 140 Appendix A: Independent Expert’s Report
The betas of various Australian industries listed on the ASX are reproduced below and provide an example of the relative industry betas for a developed market.
Figure 18: Betas for various industries (as at 30 September 2010)
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
- Media Banks Energy Utilities Retailing Insurance Capital goods Capital Transportation Metals & mining Consumer services Software & services Diversified financials sciences Automobile & components & Automobile Food, beverage & tobacco & beverage Food, personal products personal Telecommunication services Real estate investment trusts Consumer durables & apparel Materials (excl metalsmining) & Commercial services& supplies Health care equipmentservices & Technology hardware & equipment Pharmaceuticals, biotechnology & life Food & staples retail and household & Real estate excludinginvestment trusts
Source: AGSM Risk Management Service The differences are related to the business risks associated with the industry. For example, the above diagram indicates transportation companies are more correlated to overall market returns with a beta close to 1.0 whereas telecommunications and other infrastructure companies (in particularly those that are regulated) typically have betas lower than 1.0. The geared or equity beta can be estimated by regressing the returns of the business or investment against the returns of an index representing the market portfolio, over a reasonable time period. However, there are a number of issues that arise in measuring historical betas that can result in differences, sometimes significant, in the betas observed depending on the time period utilised, the benchmark index and the source of the beta estimate. For unlisted companies it is often preferable to have regard to sector averages or a pool of comparable companies rather than any single company’s beta estimate due to the above measurement difficulties.
Market evidence In estimating an appropriate beta for the management rights of IIF we considered the betas of listed property fund managers with similar operations. As this is a limited sample and the nature of the funds managed and the operating characteristics of these companies are not directly comparable. We have also have considered the betas of listed A-REITs operating in the industrial sectors, as well as diversified A-REITs, given that REIMA’s performance is correlated with the underlying performance of the Australian property sector, including the industrial segment. We have calculated betas based on both weekly returns over the last two years as well as monthly returns over the last four years compared to the S&P/ASX 200 index. However, due to the structural deleveraging of the industry which has taken place over the last two years we consider the two year betas to be more relevant to the current structure and risk profile of the Australian properties market. These betas are presented below.
80 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 141 Appendix A: Independent Expert’s Report
Table 19: Analysis of betas for listed A-REITs and property fund managers
Enterprise Average value Gearing Levered Unlevered Comparable companies (million)1 (%) beta beta1 4 14 IIF 2,801 84% 2.65 0.58
Industrial REITs Goodman Group 6,613 61% 2.40 1.15 Growthpoint Properties Australia Ltd 700 53% 1.28 0.72 Bunnings Warehouse Property Trust 912 24% 0.44 0.36 Average 46% 1.37 0.74
Diversified A-REITs Dexus Property Group 6,333 43% 1.11 0.71 Australand Property Group 3,268 63% 1.33 0.55 Challenger Diversified Property Group 626 40% 0.83 0.54 Abacus Property Group 1,160 45% 0.56 0.31 Charter Hall Group 1,714 62% 1.39 0.56 Stockland Corporation Ltd 10,316 24% 1.25 1.03 Mirvac Group 5,392 35% 1.57 1.16 GPT Group 7,302 36% 1.89 1.42 Average 44% 1.24 0.78
Property fund managers Peet Ltd 768 29% 0.58 0.45 Over Fifty Group Ltd 28 0% 0.33 0.33 APN Property Group Ltd 13 0% 2.02 2.02 Average 10% 0.98 0.93
Source: Thompson Reuters, Deloitte analysis, Company annual reports and results presentations
Notes:
1. Betas have been unlevered using the two year average gearing
2. Averages and medians calculations exclude IIF
3. n/m: not meaningful
4. n/a: not available Descriptions for each of the above companies are provided in Appendix 5. The observed beta is a function of the underlying risk of the cash flows of the company, together with the capital structure and tax position of that company. This is described as the levered beta. The capital structure and tax position of the entities in the table above may not be the same as those of REIMA. The levered beta is often adjusted for the effect of the capital structure and tax position. This adjusted beta is referred to as the unlevered beta. The unlevered beta is a reflection of the underlying risk of the pre-financing cash flows of the entity.
81 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 142 Appendix A: Independent Expert’s Report
Selected beta (β) In selecting an appropriate beta for REIMA we note the following: as set out above, the average unlevered beta for property fund managers is 0.93 we have given particular consideration to the observed betas of property fund managers. We regard these companies to be most comparable to the management rights of IIF, as their revenues are driven by management fees which are primarily a percentage of total assets, and indirectly related to the performance of the property sector the performance of the management rights is also likely to be correlated with the underlying performance of the industrial A-REIT sectors, given that IIF represents a significant portion of its core operations, as well as diversified A-REITs. Therefore, we consider it reasonable to select a beta that is broadly supported by observed betas in the A-REIT sector IIF’s management fee structure is based on distributions which is relatively unique, therefore it is likely that the management fees revenues from IIF may exhibit slightly higher risk compared to other comparable industrial A-REITs and fund managers the beta of Bunnings Warehouse Property Trust is relatively lower than the range of betas for the comparable A-REITs. This is likely due to the company’s economies of scale and lower revenue cyclicality relative to the market, given that it has 53 warehouses that are well diversified across Australia, average lease expiries of 9.3 years with conditions beyond current expiries that provide a secure stream of income and low levels of committed capital, which reduces cash flow volatility based on the above, we consider that an unlevered beta range of 0.9 to 1.0 for the IIF management rights to be appropriate for the purposes of re-levering our selected unlevered beta range we have considered a gearing ratio for REIMA based on that of comparable property fund managers, as unlike A-REITs, fund managers tend to not hold direct property investments and accordingly are likely to exhibit lower gearing levels. We consider a gearing level of 10% to be appropriate having regard to gearing levels of other fund managers and the nature of the earnings of REIMA assuming an unlevered beta in the range of 0.9 to 1.0, a corporate tax rate of 30% and a debt to equity mix of 10% debt and 90% equity gives a re-levered beta in the range of 0.97 to 1.08. On this basis we have selected a levered beta of 1.0 to 1.1 for REIMA.
Specific company risk premium (α) The specific company risk premium adjusts the cost of equity for company specific factors, including unsystematic risk factors such as company size, key person risks, customer/supplier dependencies, etc. The CAPM assumes, amongst other things, that rational investors seek to hold efficient portfolios, that is, portfolios that are fully diversified. One of the major conclusions of the CAPM is that investors do not have regard to specific company risks (often referred to as unsystematic risk). However, there are several empirical studies that demonstrate that the investment market does not ignore specific company risks.
Selection of specific company risk premium We have selected a specific company risk premium in the range of 0.5% to 1.0%. In determining this amount we have had regard to the potential for terminating the management agreements. The management agreement can be terminated by unitholders of IIF through an ordinary resolution at any point in time. There is therefore a risk that IML could lose these management rights with or without receiving compensation and would no longer be entitled to the future stream of management fees. Whilst an element of this risk may be implicit in the beta’s observed for other fund manages, due to the existence of direct investment and other activities in these companies we do not consider this to be fully reflected in the observed beta.
82 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 143 Appendix A: Independent Expert’s Report
Dividend imputation Dividends paid by Australian corporations may be franked, unfranked, or partly franked. A franked dividend is one that is paid out of company profits which have borne tax at the company rate, currently 30%. Where the shareholder is an Australian resident individual or complying superannuation fund, it will generally be entitled to a tax credit (called an imputation credit) in respect of the tax paid by the company on the profits out of which the dividend was paid. If the recipient of the dividend is another company, the dividend will give rise to a credit in that company’s franking account thereby increasing the potential of the company to pay a franked dividend at a later stage. We have not adjusted the cost of capital or the projected cashflows for the impact of dividend imputation due to the diverse views as to the value of imputation credits and the appropriate method that should be employed to calculate this value. Determining the value of franking credits requires an understanding of shareholders’ personal tax profiles to determine the ability of shareholders to use franking credits to offset personal income. Furthermore, the observed EMRP already includes the value that shareholders ascribe to franking credits in the market as a whole. In our view, the evidence relating to the value that the market ascribes to imputation credits is inconclusive.
Conclusion on cost of equity
Based on the above factors we arrive at a cost of equity, Ke, as follows:
Table 20: Ke of REIMA
Input Low High
Risk free rate (%) 5.7% 5.7% EMRP (%) 6.0% 6.0% Beta 1.0 1.1
Specific company risk premium (%) 0.5% 1.0%
Ke – calculated 12.2% 13.3%
Source: Deloitte analysis
Cost of debt capital (Kd) We have estimated REIMA’s cost of debt to be between 8.5% and 9.0%. This has been estimated after consideration of the following: the syndicated debt facility of IIF is expected to be refinanced at a credit spread of around 225 bps over the Australian risk free rate, which implies a debt cost per annum of approximately 8.0%. a number of comparable A-REITs have credit ratings of between BBB and A-. The respective average credit spread over the risk free rate for long term corporate bonds issued by these comparable companies range between 200 and 260 basis points. This implies a cost of debt per annum of between 7.6% and 8.3% given that any debt financing REIMA would secure would be backed by its business cash flows as opposed to physical collateral as in the case of A-REITs, we consider that the cost of debt for REIMA would be between 50 bps to 100 bps higher than that for A-REITs our selected level of gearing, as discussed below.
Debt and equity mix We consider the optimal debt to equity mix attributable to the management rights of IIF to be 10% debt and 90% equity based on the average of comparable companies and the limited capital assets against which it could borrow funds.
83 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 144 Appendix A: Independent Expert’s Report
Calculation of WACC Based on the above, we have assessed the nominal post-tax WACC of REIMA to be:
Table 21: WACC applied to the valuation of Net Cost Savings
Low High
Cost of equity capital 12.2% 13.3% After-tax cost of debt capital 6.0% 6.3% Debt to enterprise value ratio 10% 10% Tax rate (%) 30% 30% WACC 11.6% 12.6%
Selected WACC 11.5% 12.5%
Source: Deloitte analysis
84 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 145 Appendix A: Independent Expert’s Report
Appendix 5: Descriptions of industrial A-REITs, diversified A-REITs and property fund managers
Descriptions of entities that we have considered for the purpose of estimating an appropriate beta for the management rights of IIF (as discussed in Appendix 4) are set out below.
Industrial A-REITs
Goodman Group The profile of Goodman Group is discussed in Section 1.2.1.
Growthpoint Properties Australia Ltd Growthpoint Properties Australia is an Australian company which is engaged in the business of property investment. It invests in leased investment property within Australia and derives rental income from property investments. As of June 30 2010, the company held a portfolio of 24 investment properties. Its portfolio includes 22 single tenant properties and two dual tenant properties. The company's subsidiraries include Wholesale Industrial Property Fund, Rowville Property Trust, Kilsyth 1 Property Trust, Kilsyth 2 Property Trust, Queensland Property Trust, New South Wales Property Trust, Coolaroo Property Trust, Broadmeadows Leasehold Trust and Scoresby 1 Property Trust.
Bunnings Warehouse Property Trust Bunnings Warehouse Property Trust is engaged in property investment, and invests in geographically diversified properties with long-term leases to substantial tenants, in the bulky goods retail sector. The trust comprises warehouse retailing properties, particularly Bunnings Warehouse properties tenanted by Bunnings Group Limited, a wholly-owned subsidiary of Wesfarmers Limited. As of 30 June 2010, the trust owned 60 investment properties, all within Australia. The portfolio comprises 53 established Bunnings Warehouses, one development site, on which a Bunnings Warehouse is to be developed, one Bunnings distribution centre, four office warehouse industrial properties and one bulky goods showrooms complex. Bunnings Property Management Limited is the investment manager of the company.
Diversified A-REITs
Dexus Property Group Dexus Property Group owns, manages and develops real estate assets and manages real estate funds on behalf of third party investors. The company consists of Dexus Diversified Trust, Dexus Industrial Trust, Dexus Office Trust and Dexus Operations Trust. The company has six segments: office-Australia and New Zealand, industrial-Australia, industrial-North America, a management company, financial services and all other segments. The Office-Australia and New Zealand segment comprises office space with any associated retail space, as well as car-parks and office developments in Australia and New Zealand. Industrial-Australia segment comprises domestic industrial properties, industrial estates and industrial developments. Industrial-North America segment comprises industrial properties, industrial estates and industrial developments in the United States, as well as one industrial asset in Canada. All other segments comprise the European industrial and retail portfolios.
85 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 146 Appendix A: Independent Expert’s Report
Australand Property Group Australand Property Group is a diversified property group. The company is engaged in investment in income producing commercial, industrial and retail properties; commercial and industrial property development; residential development, including land, housing and apartments; property trust management, and property management. It operates in three divisions: residential, commercial and industrial and investment property. As at 31 December, 2009, the investment property division had a total portfolio of 70 properties, including 2 properties under development and 2 properties held for sale. The portfolio had a total lettable area of 1.2 million square meters and included a total of 169 tenancies. The company’s operations are located in Sydney, Melbourne, South East Queensland and Perth and a sales office in Hong Kong servicing the Asian market.
Valad Property Group Valad Property Group is an Australia-based company that conducts real estate investment management services in Australia and Europe, and real estate ownership primarily in Australia and New Zealand. It also operates in Europe through co-investment in the company’s managed funds. The company operates in four segments: Australia and New Zealand real estate ownership, European real estate ownership, Australia and New Zealand real estate investment management and European funds real estate investment management. The Australia and New Zealand real estate ownership segment consists of income producing properties, properties held for development and resale, property structured finance to external parties and joint ventures, and investments held in funds. The European funds real estate investment management segment establishes and manages listed and unlisted property funds within European region.
Challenger Diversified Property Group Challenger Diversified Property Group is an Australia-based company which consists of two stapled Australian registered investment schemes; Challenger Diversified Property Trust 1 and Challenger Diversified Property Trust 2. The principal activities of the company include investment in office, retail and industrial property portfolios, as well as pursuing property development activities and investment in a car parking operating business. Challenger Listed Investments Limited is the responsible entity of the group.
Abacus Property Group Abacus Property Group is an Australia-based company which, along with its subsidiaries, is engaged in investment in commercial, retail and industrial properties; property funds management; property finance, and participation in property joint ventures and developments. The company operates in four business segments; property, funds management, property finance, and joint venture and developments. The property division comprises the investment in and ownership of commercial, retail and industrial properties. The funds management division develops, originates and manages off balance sheet funds in addition to discharging the company’s responsible entity obligations. Property finance provides mortgage lending and related property financing solutions. The joint ventures and development segment is responsible for the company’s investment in joint venture development and construction projects, as well as in property securities.
Charter Hall Group Charter Hall Group is an Australia-based property fund manager. The company is active within two segments; property investment, with interests in investment properties and unlisted property funds, and funds management and corporate, providing management services, development management services and other property services. Charter Hall Group controls over 30 entities mainly in Australia, the United States and the United Kingdom. The company operates through offices in Sydney, Melbourne, Brisbane, Adelaide, Perth, Chicago and Warsaw.
86 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 147 Appendix A: Independent Expert’s Report
Stockland Corporation Ltd Stockland Corporation Limited is an Australia-based company. The principal activities of the company include investment in income producing retail, office, industrial and office park properties; development of retail, office, industrial and office park properties; residential property development; retirement living development and investment; property trust management, and property management. The company operates in Australia with small operations in the United Kingdom. The company operates in four segments; residential, retirement living, commercial property and UK. The residential segment delivers a range of master planned and mixed use residential communities and apartments. The retirement living segment designs, develops, manages lifestyle communities for retirees. The commercial property segment invests in, develops and manages retail, office and industrial properties. The UK segment is the developer and asset manager of retail, office and mixed use properties.
Mirvac Group The principal activity of the Mirvac Group consists of real estate investment, development, hotel management and investment management. The group has two core divisions; development and investment. During the 2010 financial year the company commenced new hotel management contracts bringing the total number of hotel rooms across the portfolio to 5,812.
GPT Group GPT Group comprises General Property Trust and its controlled entities, and GPT Management Holdings Limited and its controlled entities. The company is engaged in investing in income producing retail, office, industrial, business parks and seniors housing properties; development of retail, office, industrial and business park properties; property funds management, and property management. The company operates in five segments: retail, office, industrial, funds management-Australia and United States senior housing. GPT Group operates in Australia, United States and Europe. As of 31 December, 2009, GPT divested all of its resorts, with the exception of the Ayers Rock Resort.
Property fund managers
Peet Ltd Peet Limited is an Australia-based company. The company is engaged in the asset management, funds management and land syndication. The company operates in three segments; funds management/land syndication, company-owned projects and joint ventures. The company is engaged in the development of residential land estates with approximately 80 owned, syndicated and joint venture estates across four states. It is also a residential land syndicator in Australia. The company also invests in industrial, retail and commercial properties in Australia. It has joint venture projects in Western Australia, Victoria, Queensland and New South Wales.
Over Fifty Group Ltd Over Fifty Group Limited is engaged in the marketing and management of investment products (including friendly society investment bonds and property investment funds), general insurance through agency arrangements, mortgage lending and management, property investment, and management of Over Fifty Guardian Friendly Society Limited.
87 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 148 Appendix A: Independent Expert’s Report
APN Property Group Ltd APN Property Group Limited is an Australia-based boutique real estate investment manager. The company is principally engaged in the provision of funds management services. The company’s segments include real estate securities funds, which is an open ended properties securities funds; retail funds, which is fixed term Australian funds; real estate private funds, which is wholesale; European real estate funds, which is listed property trust fund and fixed term European funds; registry, which provides registry services to funds, and investment revenue, which include investment income received or receivable from co-investment in funds. The Company’s funds include APN National Storage Property Trust, APN Regional Property Fund, APN Poland Retail Fund and APN Champion Retail Fund. In August 2010, the company acquired ARA Strategic Capital I Pte. Ltd., the Singapore-based fund manager of the ARA Asian Asset Income Fund.
88 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 149 Appendix A: Independent Expert’s Report
Appendix 6: Sources of information
In preparing this report we have had access to the following principal sources of information: copies of the Explanatory Memorandum related to the Proposal other transaction documents, including the Implementation Agreement, Deed of Undertaking and Scheme Facilitation Deed audited financial statements for IIF for the years ending 30 June 2008, 30 June 2009, and 30 June 2010 management accounts of IIF for the period ending 31 December 2010 and other company financial information received from management related company websites property valuations of IIF’s portfolio, both external and internal, as received from IIF’s management management documents related to the sale of Summit financial models related to IIF and REIMA publicly available information on comparable companies, market transactions and other financial metrics sourced from Thompson Reuters, Mergermarket and OneSource broker reports IBIS World and other industry reports In addition, we have had discussions and correspondence with certain directors and executives of IIF and IML.
89 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 150 Appendix A: Independent Expert’s Report
Appendix 7: Qualifications, declarations and consents
The report has been prepared at the request of the Independent Directors of IML and is to be included in the Explanatory Memorandum to be given to Non-Associated Unitholders for approval of the Proposal in accordance with Section 611 and GN15. Accordingly, it has been prepared only for the benefit of the Independent Directors and those persons entitled to receive the Explanatory Memorandum in their assessment of the Proposed Transaction outlined in the report and should not be used for any other purpose. We are not responsible to you, or anyone else, whether for our negligence or otherwise, if the report is used by any other person for any other purpose. Further, recipients of this report should be aware that it has been prepared without taking account of their individual objectives, financial situation or needs. Accordingly, each recipient should consider these factors before acting on the Proposed Transaction. This engagement has been conducted in accordance with professional standard APES 225 Valuation Services issued by the APESB. The report represents solely the expression by Deloitte of its opinion as to whether the Proposed Transaction is fair and reasonable and in the best interests of the Non-Associated Unitholders as a whole. Deloitte consents to this report being included in the Scheme Booklet in the form and context in which it is to be included in the Scheme Booklet. Statements and opinions contained in this report are given in good faith but, in the preparation of this report, Deloitte has relied upon the completeness of the information provided by IML and its officers, employees, agents or advisors which Deloitte believes, on reasonable grounds, to be reliable, complete and not misleading. Deloitte does not imply, nor should it be construed, that it has carried out any form of audit or verification on the information and records supplied to us. Drafts of our report were issued to IML management for confirmation of factual accuracy. In recognition that Deloitte may rely on information provided by IML and its officers, employees, agents or advisors, IML has agreed that it will not make any claim against Deloitte to recover any loss or damage which IML may suffer as a result of that reliance and that it will indemnify Deloitte against any liability that arises out of either Deloitte’s reliance on the information provided by IML and its officers, employees, agents or advisors or the failure by IML and its officers, employees, agents or advisors to provide Deloitte with any material information relating to the Proposed Transaction. To the extent that this report refers to prospective financial information we have considered the prospective financial information and the basis of the underlying assumptions. The procedures involved in Deloitte’s consideration of this information consisted of enquiries of IML personnel and analytical procedures applied to the financial data. These procedures and enquiries did not include verification work nor constitute an audit or a review engagement in accordance with standards issued by the AUASB or equivalent body and therefore the information used in undertaking our work may not be entirely reliable. Based on these procedures and enquiries, Deloitte considers that there are reasonable grounds to believe that the prospective financial information for IML included in this report has been prepared on a reasonable basis. In relation to the prospective financial information, actual results may be different from the prospective financial information of IML referred to in this report since anticipated events frequently do not occur as expected and the variation may be material. The achievement of the prospective financial information is dependent on the outcome of the assumptions. Accordingly, we express no opinion as to whether the prospective financial information will be achieved. Deloitte holds the appropriate Australian Financial Services licence to issue this report and is owned by the Australian Partnership Deloitte Touche Tohmatsu. The employees of Deloitte principally involved in the preparation of this report were Mark Pittorino, Director, BComm., MAppFin, CA; Rachel Foley-Lewis, Director, B.Comm., CA, F.Fin; Dave Pearson, Senior Manager, B.Comm., CBV, CFA, CA; and Omar Safadi, Manager, BEc, CFA, CFM/CMA. Each has many years experience in the provision of corporate financial advice, including specific advice on valuations, mergers and acquisitions, as well as the preparation of expert reports. Neither Deloitte, Deloitte Touche Tohmatsu, nor any partner or executive or employee thereof has any financial interest in the outcome of the proposed transaction which could be considered to affect our ability to render an unbiased opinion in this report. Deloitte will receive a fee of $155,000 exclusive of GST in relation to the
90 Deloitte: ING Industrial Fund Independent expert’s report explanatory memorandum 151 Appendix A: Independent Expert’s Report
preparation of this report. This fee is based upon time spent at our normal hourly rates and is not contingent upon the success or otherwise of the Proposed Transaction. In addition to the preparation of this report Deloitte was engaged to perform a familiarisation exercise for a potential independent expert’s report for an alternate transaction contemplated by ING Management Limited in respect of IIF. This transaction never completed and we did not release any valuation conclusions during this process. We received fees based on the time spent on this familiarisation exercise. In the previous two years we have also provided the following services for ING Management Limited and related parties: a review of the process adopted by the independent directors of the responsible entity for ING Real Estate Healthcare Fund to assess whether the process, path and documentation adopted was reasonable advice to the responsible entity of ING Real Estate Entertainment Fund in respect of two potential scenarios for the fund. In particular we were asked to comment on the fiduciary duty of the receiver, the possible actions of receivers and managers, and the potential impact on the fund of these actions under both scenarios. In addition, in 2010 Deloitte prepared an independent expert’s report in respect of the acquisition of all of the equity in Moorabbin Airport Corporation Pty Limited by Goodman Group. Deloitte Touche Tohmatsu has also prepared limited forensics and risk services work for Goodman Group in the previous two years.
91 Deloitte: ING Industrial Fund Independent expert’s report ING Industrial Fund 152 Appendix A: Independent Expert’s Report
About Deloitte In Australia, Deloitte has 12 offices and over 4,500 people and provides audit, tax, consulting, and financial advisory services to public and private clients across the country. Known as an employer of choice for innovative human resources programs, we are committed to helping our clients and our people excel. Deloitte's professionals are dedicated to strengthening corporate responsibility, building public trust, and making a positive impact in their communities. For more information, please visit Deloitte’s web site at www.deloitte.com.au 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 www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. “Deloitte” is the brand under which tens of thousands of dedicated professionals in independent firms throughout the world collaborate to provide audit, consulting, financial advisory, risk management, and tax services to selected clients. These firms are members of Deloitte Touche Tohmatsu Limited (DTTL), a UK private company limited by guarantee. Each member firm provides services in a particular geographic area and is subject to the laws and professional regulations of the particular country or countries in which it operates. DTTL does not itself provide services to clients. DTTL and each DTTL member firm are separate and distinct legal entities, which cannot obligate each other. DTTL and each DTTL member firm are liable only for their own a cts or omissions and not those of each other. Each DTTL member firm is structured differently in accordance with national laws, regulations, customary practice, and other factors, and may secure the provision of professional services in its territory through subsidiaries, affiliates, and/or other entities. © Deloitte Touche Tohmatsu. February, 2011. All rights reserved.
92 Deloitte: ING Industrial Fund Independent expert’s report Explanatory Memorandum 153
Appendix B: Supplemental Deed B ING Industrial Fund 154 Appendix B: Supplemental Deed
Supplemental Deed – ING Industrial Fund
Dated
ING Management Limited (ABN 15 006 065 032) in its capacity as trustee and responsible entity of ING Industrial Fund (ARSN 089 038 175) (“Responsible Entity”)
Mallesons Stephen Jaques Level 61 Governor Phillip Tower 1 Farrer Place Sydney NSW 2000 Australia T +61 2 9296 2000 F +61 2 9296 3999 DX 113 Sydney www.mallesons.com
10621351_2 explanatory memorandum 155
Supplemental Deed – ING Industrial Fund Details
Parties Responsible Entity
Responsible Name ING Management Limited in its capacity as Entity trustee and responsible entity of ING Industrial Fund (ARSN 089 038 175)
ABN 15 006 065 032
Address Level 6, 345 George Street, Sydney NSW 2000
Telephone +61 2 9033 1095
Fax +61 2 9033 1059
Attention Company Secretary
Recitals A The Trust is governed by the Constitution. The Trust is registered as a managed investment scheme under Chapter 5C of the Corporations Act.
B Section 601GC(1) of the Corporations Act provides that the constitution of a registered scheme may be modified, or repealed and replaced with a new constitution:
(a) by special resolution of the members of the scheme; or
(b) by the responsible entity if it reasonably considers the change will not adversely affect members’ rights.
C Under clause 22.1 of the Constitution, the Responsible Entity may by deed amend the Constitution.
D Under clause 22.4 of the Constitution, the Responsible Entity must not exercise any rights it has under clause 22.1 or the Corporations Act to amend or vary the Constitution in a manner which would adversely affect the rights of Preference Unit Members, or Option Holders of Equity- linked Options, without their respective consent by way of special resolution of those Preference Unit Members and Option Holders.
E The Responsible Entity wishes to modify the Constitution, as set out in this deed, to give effect to the special resolution to modify the Constitution that was passed by Members of the Trust at the meeting held on or about 17 March 2011.
Mallesons Stephen Jaques Supplemental Deed – ING Industrial Fund i 10621351_2 ING Industrial Fund 156 Appendix B: Supplemental Deed
F The Responsible Entity considers that the amendments set out in this deed would not adversely affect the rights of Preference Unit Members, or Option Holders of Equity- linked Options.
Governing law Victoria
Date of deed See Signing page
Mallesons Stephen Jaques Supplemental Deed – ING Industrial Fund ii 10621351_2 explanatory memorandum 157
Supplemental Deed – ING Industrial Fund General terms
1 Definitions and Interpretation
1.1 Definitions Terms used in this deed have the same meaning as in the Constitution unless otherwise defined in this deed or the context requires otherwise.
Constitution means the deed dated 18 February 1985 (as amended from time to time) under which the Trust is governed.
Effective Date has the same meaning as in the Implementation Agreement.
GTA Trustee means Goodman Industrial Funds Management Limited (ACN 147 891 487) in its capacity as trustee of the trust known as Goodman Trust Australia.
Implementation Agreement means the implementation agreement dated 24 December 2010 between the Responsible Entity and GTA Trustee in relation to the Proposal.
Implementation Date has the same meaning as in the Implementation Agreement.
Trust means the registered managed investment scheme ING Industrial Fund (ARSN 089 038 175).
1.2 Interpretation Clauses 23 ('Deemed provisions of this Constitution') and 28.3 ('Interpretation') apply to this deed as if set out in this deed.
1.3 Deed supplemental to Constitution This deed is supplemental to the Constitution.
1.4 Headings Headings are inserted for convenience only and do not affect the interpretation of this deed.
2 Modifications to the Constitution The Constitution is modified on and from the Effective Date by inserting a new schedule 6 immediately following schedule 5 as set out in the Schedule and by replacing the definition of “Distribution Calculation Date” in clause 28.1 with:
“Distribution Calculation Date: the last day of each Financial Year and such other days as the Responsible Entity designates.”.
Mallesons Stephen Jaques Supplemental Deed – ING Industrial Fund 1 10621351_2 ING Industrial Fund 158 Appendix B: Supplemental Deed
3 Modifications to the Constitution The Constitution is modified on and from the Implementation Date as follows:
(a) by replacing clause 11.2 ('Contracting Powers') with the following:
'11.2 Without limiting clause 11.1, but subject to the Responsible Entity's duties under the constitution and at law, the Responsible Entity in its capacity as trustee of the Trust has power to borrow or raise money in any manner (whether or not on security) and to incur all types of obligations and liabilities.';
(b) in clause 19.5 ('Expenses'), by deleting the words 'except those specified in clause 19.6';
(c) by deleting clause 19.6 ('Custody and Compliance Expenses');
(d) by deleting clause 26.1 ('Maintenance of Listing');
(e) by deleting clause 20.2 ('If Trust is de-listed');
(f) by inserting a new clause 7A immediately after clause 7 ('Redemption and Exchange of Preference Units') as follows:
'7A Withdrawal of Ordinary Units
7A.1 Withdrawal of Ordinary Units while Trust is Liquid or not a registered scheme
Subject to clause 7A.3, while the Trust is Liquid or is not a registered scheme, any Ordinary Member may request that some or all of their Ordinary Units be withdrawn. Each request must:
(a) satisfy the form and content requirements prescribed by the Responsible Entity; and
(b) be delivered to the Responsible Entity at its registered office (or other place nominated by the Responsible Entity).
Upon making such a request, the Ordinary Member will have no right to deal with the Ordinary Units (unless and until the request is denied by the Responsible Entity). An Ordinary Member may not withdraw a withdrawal request unless the Responsible Entity agrees.
7A.2 Action following request
Within a reasonable time of receiving a withdrawal request under clause 7A.1, the Responsible Entity must consider that request and:
(a) deny the request (but it must then notify the Ordinary Member accordingly); or
Mallesons Stephen Jaques Supplemental Deed – ING Industrial Fund 2 10621351_2 explanatory memorandum 159
(b) effect the withdrawal by causing the number (or value) of Ordinary Units held by the Ordinary Member referred to in the withdrawal request to be redeemed at the applicable Withdrawal Price out of the Assets; or
(c) subject to the Listing Rules and the Corporations Act, purchase or arrange for another person to purchase the number (or value) of Ordinary Units held by the Ordinary Member referred to in the withdrawal request; or
(d) partially effect the withdrawal in the manner described in clause 7A.2(b) and partially purchase (or arrange for Ordinary Units to be purchased) in the manner described in clause 7A.2(c).
7A.3 Suspension of withdrawal request right
Unless the Responsible Entity determines otherwise, the right to make a withdrawal request under clause 7A.1 is suspended while the Trust is Listed.
7A.4 Withdrawal while Trust is not Liquid
(a) While the Trust is a registered scheme but is not Liquid the Responsible Entity may make a Withdrawal Offer to all Ordinary Members. An Ordinary Member may withdraw from the Trust in accordance with the terms of any current Withdrawal Offer. Otherwise, an Ordinary Member has no right to request that some or all of the Ordinary Member's Ordinary Units be withdrawn. An Ordinary Member may not withdraw an acceptance of a Withdrawal Offer unless the Responsible Entity agrees.
(b) A Withdrawal Offer must contain the information required by the Corporations Act. The Withdrawal Offer may be made by:
(i) publishing it (for example, in a national newspaper or on the internet); or
(ii) giving a copy to all Ordinary Member.
(c) Subject to the Corporations Act and the Listing Rules, the Responsible Entity may determine the terms of a Withdrawal Offer.
(d) The Responsible Entity may cancel a Withdrawal Offer in accordance with the Corporations Act.
Mallesons Stephen Jaques Supplemental Deed – ING Industrial Fund 3 10621351_2 ING Industrial Fund 160 Appendix B: Supplemental Deed
7A.5 Sums owed
The Responsible Entity may deduct from the proceeds of withdrawal of Ordinary Units any money due to the Responsible Entity in relation to the Ordinary Member.
7A.6 Transfer of Assets to effect a withdrawal
Rather than pay cash to effect a withdrawal in whole or in part, the Responsible Entity may transfer Assets to an Ordinary Member (or the Ordinary Member's nominee). The Responsible Entity must satisfy itself that the value of the Assets (with any cash paid) will equal the total amount of cash otherwise payable.
7A.7 Liquid or not Liquid
The Responsible Entity will determine whether or not the Trust is Liquid. Such a determination is binding on Ordinary Members and no Unitholder will challenge it.
7A.8 Order
Unless the Responsible Entity decides otherwise, the first Ordinary Units issued to an Ordinary Member are the first Ordinary Units withdrawn.
7B Withdrawal Price
The Withdrawal Price for any Ordinary Unit will be equal to:
Net Asset Value + Transaction Costs Number of Ordinary Units in issue
While the Trust is not a registered scheme or is Liquid, each of these variables will be calculated as at the next Valuation Time after the Responsible Entity received (or is taken to have received) the withdrawal request. If the Trust is a registered scheme but is not Liquid, then each such variable will be calculated as at the day the relevant Withdrawal Offer closes.
(g) by inserting the following definitions in clause 28.1 in alphabetical order:
Liquid in relation to the Trust, has the meaning given by section 601KA(4) of the Corporations Act.
Withdrawal Offer means an offer made by the Responsible Entity in accordance with section 601KB of the Corporations Act.
Withdrawal Price in relation to an Ordinary Unit means the price at which that Ordinary Unit is to be withdrawn in accordance with clause 7B.
Mallesons Stephen Jaques Supplemental Deed – ING Industrial Fund 4 10621351_2 explanatory memorandum 161
4 No redeclaration etc The Responsible Entity declares that it is not, by this deed:
(a) resettling or redeclaring the Trust declared under this Constitution; or
(b) causing the transfer, vesting or accruing of any property comprising the Assets in any person.
5 Governing law This deed will be governed by the laws in force in the place specified in the Details. Each person affected by it must submit to the non-exclusive jurisdiction of the courts of that place and the courts of appeal from them.
EXECUTED as a deed poll.
Mallesons Stephen Jaques Supplemental Deed – ING Industrial Fund 5 10621351_2 ING Industrial Fund 162 Appendix B: Supplemental Deed
Supplemental Deed – ING Industrial Fund Schedule – New schedule 6
Schedule 6 – Proposal
1 Interpretation
1.1 Definitions Unless the contrary intention appears, in this schedule capitalised terms not defined have the same meaning as in the constitution or schedule 1, and:
ASX Settlement: ASX Settlement Pty Limited (ABN 49 008 504 532).
ASX Settlement Operating Rules: the operating rules of the settlement facility of ASX Settlement for the purposes of the Corporations Act.
Bid Vehicle: Goodman Industrial Funds Management Limited (ACN 147 891 487) in its capacity as trustee of the trust known as Goodman Trust Australia.
CHESS: the Clearing House Electronic Subregister System for the electronic transfer of securities and other financial products operated by ASX Settlement .
Deed Poll: the deed poll dated 9 February 2011 executed by Bid Vehicle in favour of the Proposal Participants in respect of the Proposal.
Effective: the supplemental deed making amendments to this constitution to facilitate the Proposal, including the insertion of this schedule 6, taking effect pursuant to section 601GC(2) of the Corporations Act.
Effective Date: the date on which the Proposal becomes Effective.
IML: ING Management Limited (ABN 15 006 065 032).
Implementation Agreement: the implementation agreement dated 24 December 2010 between IML (in its capacity as trustee and responsible entity of the Trust) and Bid Vehicle.
Implementation Date: the Business Day after the Record Date.
Meeting: the meeting of Members held on or about 17 March 2011 convened by the Responsible Entity pursuant to clause 15.1 of this constitution to consider the Proposal Resolutions, and includes any adjournment of that meeting.
Proposal: the arrangement under which Bid Vehicle acquires all of the Ordinary Units from Proposal Participants facilitated by the amendments to this constitution under the Supplemental Deed, including the insertion of this schedule 6.
Proposal Business Day: means a Business Day as defined in the Listing Rules.
Proposal Consideration: A$0.546 for an Ordinary Unit held by a Proposal Participant on the Record Date, minus the aggregate value per Ordinary Unit of
Mallesons Stephen Jaques Supplemental Deed – ING Industrial Fund 6 10621351_2 explanatory memorandum 163
any distributions to which a Proposal Participant becomes entitled, after the date of the Implementation Agreement.
Proposal Participant: each person who is an Ordinary Member as at the Record Date.
Proposal Resolutions: the resolutions of Members set out in the notice of meeting of Members dated 10 February to approve the Proposal, including:
(a) a resolution for the purposes of item 7 of section 611 of the Corporations Act to approve the acquisition of all the Proposal Units by Bid Vehicle;
(b) a resolution for the purposes of section 601GC(1) of the Corporations Act to approve amendments to this constitution to facilitate the Proposal; and
(c) a resolution for the purposes of section 601FL of the Corporations Act to choose a new responsible entity of the Trust following the retirement of the IML as responsible entity of the Trust.
Proposal Transfer: for each Proposal Participant, a proper instrument of transfer of their Proposal Units for the purpose of section 1071B of the Corporations Act, which may be a master transfer of all Proposal Units.
Proposal Units: all of the Ordinary Units on issue as at the Record Date.
Record Date: 7.00pm on the sixth Proposal Business Day following the Effective Date, or such other date (after the Effective Date) as the Responsible Entity and Bid Vehicle may agree in writing.
Registry: Link Market Services Limited (ABN 54 083 214 537) of Level 12, 680 George Street, Sydney NSW 2000, Australia.
1.2 Interpretation Unless the contrary intention appears, in this schedule a reference to a “paragraph” is a reference to a numbered paragraph of this schedule.
2 Proposal
2.1 Recognising dealings in Ordinary Units (a) For the purpose of establishing the persons who are Proposal Participants, dealings in Ordinary Units will only be recognised if:
(i) in the case of dealings of the type to be effected using CHESS, the transferee is registered in the Register as the holder of the relevant Ordinary Units by the Record Date; and
(ii) in all other cases, registrable transfers or transmission applications in respect of those dealings are received at the Registry by the Record Date.
(b) The Responsible Entity must register registrable transfers or transmission applications of the kind referred to in paragraph 2.1(a)(ii)
Mallesons Stephen Jaques Supplemental Deed – ING Industrial Fund 7 10621351_2 ING Industrial Fund 164 Appendix B: Supplemental Deed
by, or as soon as practicable after, the Record Date. The persons shown in the Register, and the number of Ordinary Units shown as being held by them, after registration of those transfers and transmission applications will be taken to be the Proposal Participants, and the number of Ordinary Units held by them, on the Record Date.
(c) The Responsible Entity must not accept for registration, nor recognise for any purpose (including for the purpose of establishing the persons who are Proposal Participants), any transfer or transmission application in respect of Ordinary Units received after the Record Date (or received prior to the Record Date not in registrable form) nor any transfer or transmission in respect of dealings in Ordinary Units that have occurred on ASX after the close of business on the Business Day after the Effective Date.
(d) The Responsible Entity will maintain or procure the maintenance of the Register in accordance with this paragraph 2.1. The Register immediately after registration of registrable transfers or transmission applications of the kind referred to in paragraph 2.1(a)(ii) will solely determine the persons who are Proposal Participants and their entitlements to the Proposal Consideration.
(e) From the Record Date and until registration of Bid Vehicle in respect of all Proposal Units under paragraph 2.3(c), no Proposal Participant (or any person purporting to claim through any Proposal Participant) may deal with Ordinary Units in any way except as set out in this schedule and any attempt to do so will have no effect.
(f) Other than in respect of Bid Vehicle (after registration of Bid Vehicle in respect of all Proposal Units under paragraph 2.3(c)), from the Record Date, all certificates and holding statements (as applicable) for Proposal Units as at the Record Date will cease to have any effect as evidence of title, and each entry on the Register as at the Record Date will cease to have any effect other than as evidence of the entitlements of Proposal Participants to the Proposal Consideration.
2.2 Proposal Consideration (a) Each Proposal Participant will be entitled to receive for each Proposal Unit held by that Proposal Participant on the Record Date the Proposal Consideration, which must be paid in the manner referred to in paragraph 2.2.
(b) The Responsible Entity acknowledges that Bid Vehicle has undertaken to pay the Proposal Consideration by 12.00 noon on the Implementation Date by depositing into an account nominated by the Responsible Entity an amount in Australian currency and in immediately available funds equal to the aggregate of all the Proposal Consideration payable to Proposal Participants entitled to receive the Proposal Consideration under the Proposal.
(c) Subject to Bid Vehicle having provided the Proposal Consideration in the manner contemplated by paragraph 2.2(b), the Responsible Entity must procure that:
Mallesons Stephen Jaques Supplemental Deed – ING Industrial Fund 8 10621351_2 explanatory memorandum 165
(i) the amount received from Bid Vehicle under paragraph 2.2(b) is held on trust for the relevant Proposal Participants; and
(ii) within three Business Days after the Implementation Date such amount is drawn to pay to each applicable Proposal Participant such amount in Australian currency as each Proposal Participant is entitled to receive as Proposal Consideration in accordance with the Proposal, either by:
(A) electronic funds transfer to an account nominated by the Proposal Participant for the purpose of payment of distributions or the Proposal Consideration; or
(B) cheque sent by pre-paid post:
(aa) in the case of Proposal Participants who are registered as holding the Ordinary Units jointly – to the address recorded in the Register at the Record Date of the person whose name appears first in the Register in respect of the joint holding; or
(bb) otherwise – to the Proposal Participant’s address recorded in the Register at the Record Date.
(d) If a fractional entitlement to part of a cent in cash arises from the calculation of the total amount of cash to be paid to a Proposal Participant, then that fractional entitlement will be rounded:
(i) where the fraction is 0.5 or more – up; and
(ii) where the fraction is less than 0.5 – down,
to the nearest whole cent, with any fractional entitlement being disregarded.
(e) If the Responsible Entity believes that a Proposal Participant is not known at the Proposal Participant's address recorded in the Register, and no account has been notified in accordance with clause 2.2(c)(ii)(A), or a deposit into such an account is rejected or refunded, the Responsible Entity may credit the amount payable to the relevant Proposal Participant to a separate bank account of the Responsible Entity to be held until the Proposal Participant claims the amount or the amount is dealt with in accordance with any applicable unclaimed money legislation. If the Responsible Entity elects to proceed in this manner:
(i) the Responsible Entity must hold the amount on trust, but any interest accruing on the amount will be for the account of Bid Vehicle;
(ii) an amount credited to the account is to be treated as having been paid to the Proposal Participant when credited to the account; and
Mallesons Stephen Jaques Supplemental Deed – ING Industrial Fund 9 10621351_2 ING Industrial Fund 166 Appendix B: Supplemental Deed
(iii) the Responsible Entity must maintain records of the amounts paid, the people who are entitled to the amounts and any transfers of the amounts.
(f) If any amount is required under any Australian law or by any Australian government or any Australian governmental, semi-governmental or judicial entity or authority to be:
(i) withheld from an amount payable under clause 2.2(c)(iii) and paid to that entity or authority; or
(ii) retained by the Responsible Entity out of an amount payable under clause 2.2(c)(ii),
its payment or retention by the Responsible Entity will constitute the full discharge of the Responsible Entity’s obligations under clauses 2.2(c)(iii) or 2.2(e) with respect to the amount so paid or retained until, in the case of clause 2.2(f)(ii), it is no longer required to be retained.
2.3 Transfers to Bid Vehicle On the Implementation Date, subject to Bid Vehicle having provided the Proposal Consideration in the manner contemplated by paragraph 2.2(b), the following will occur:
(a) all of the Proposal Units, together with all rights and entitlements attaching to the Proposal Units, will be transferred to Bid Vehicle without the need for any further act by any Proposal Participant (other than acts performed by the Responsible Entity (or its directors, officers or attorneys) as attorney or agent of the Proposal Participants under paragraph 2.6 or otherwise) and must be transferred to Bid Vehicle;
(b) the Responsible Entity will procure:
(i) in the case of Proposal Units in a CHESS holding, a message to be transmitted to ASX Settlement in accordance with ASX Settlement Operating Rules so as to transfer the Proposal Units held by the Proposal Participant from the CHESS sub-register of the Responsible Entity to the issuer sponsored sub-register operated by the Responsible Entity; and
(ii) the delivery to Bid Vehicle of transfers of all the Proposal Units to Bid Vehicle duly completed and executed on behalf of the Proposal Participants in the form of Proposal Transfers which transfer all of the Proposal Securities to Bid Vehicle; and
(c) the Responsible Entity will, immediately following receipt of the executed Proposal Transfers in respect of the Proposal Units from Bid Vehicle, enter the name and address of Bid Vehicle in the Register in respect of all the Proposal Units.
2.4 Implementation of the Proposal (a) The Responsible Entity and each Proposal Participant must do all things and execute all deeds, instruments, transfers or other documents as may
Mallesons Stephen Jaques Supplemental Deed – ING Industrial Fund 10 10621351_2 explanatory memorandum 167
be necessary, desirable or reasonably incidental to give full effect to the Proposal and the transactions contemplated by it.
(b) Without limiting the Responsible Entity's other powers under this schedule 6, the Responsible Entity has power to do all things that it considers necessary, desirable or reasonably incidental to give effect to the Proposal, this schedule, the Implementation Agreement and the transactions contemplated by them.
(c) Subject to the Corporations Act, the Responsible Entity or any of its directors, officers, employees or associates, may do any act, matter or thing described in or contemplated by this schedule even if they have an interest (financial or otherwise) in the outcome of such exercise.
2.5 Covenants and representations by the Responsible Entity and Proposal Participants Each Proposal Participant:
(a) irrevocably acknowledges that the Trust Scheme binds the Responsible Entity and all Proposal Participants, including those who do not attend the Meeting, do not vote at the Meeting or vote against the Proposal Resolutions;
(b) irrevocably agrees to the transfer of all of their Ordinary Units held at the Record Date to Bid Vehicle in accordance with this schedule;
(c) irrevocably agrees to the modification or variation (if any) of the rights attaching to their Ordinary Units arising from this schedule; and
(d) irrevocably consents to the Responsible Entity doing all things and executing all deeds, instruments, transfers or other documents as may be necessary or desirable to give full effect to the Proposal, this schedule, the Implementation Agreement and the transactions contemplated by them.
2.6 Appointment of the Responsible Entity as attorney and as agent for implementation of the Proposal Each Proposal Participant, without the need for any further act by that Proposal Participant, irrevocably appoints the Responsible Entity as that Proposal Participant’s attorney and as that Proposal Participant’s agent for the purpose of:
(a) doing all things and executing all deeds, instruments, transfers or other documents as may be necessary or desirable to give full effect to the terms of the Proposal, this schedule, the Implementation Agreement and the transactions contemplated by them, including effecting a valid transfer or transfers of the Proposal Units to Bid Vehicle under paragraph 2.3(b), including executing and delivering any Proposal Transfers; and
(b) enforcing the Deed Poll against Bid Vehicle,
and the Responsible Entity accepts such appointment. The Responsible Entity, as attorney and as agent of each Proposal Participant, may sub-delegate its functions, authorities or powers under this paragraph 2.6 to all or any of its
Mallesons Stephen Jaques Supplemental Deed – ING Industrial Fund 11 10621351_2 ING Industrial Fund 168 Appendix B: Supplemental Deed
directors and officers (jointly, severally, or jointly and severally). Each Proposal Participant indemnifies the Responsible Entity and each of its directors and officers against all losses, liabilities, charges, costs and expenses arising from the exercise of powers under this paragraph 2.6.
2.7 Status of Proposal Units (a) To the extent permitted by law, the Proposal Units transferred to Bid Vehicle under this schedule will be transferred free from all mortgages, charges, liens, encumbrances and interests of third parties of any kind, whether legal or otherwise.
(b) The Proposal Participants are deemed to have warranted to the Responsible Entity in its own right and on behalf of Bid Vehicle that all their Proposal Units (including any rights and entitlements attaching to those Proposal Units) which are transferred to Bid Vehicle under this schedule will, at the date they are transferred to Bid Vehicle, be fully paid and free from all mortgages, charges, liens, encumbrances and interests of third parties of any kind, whether legal or otherwise, and restrictions on transfer of any kind not referred to in this constitution, and that they have full power and capacity to sell and to transfer such Proposal Units (including any rights and entitlements attaching to those Proposal Units).
(c) Bid Vehicle will be beneficially entitled to the Proposal Units transferred to it under this schedule pending registration by the Responsible Entity of the name and address of Bid Vehicle in the Register as the holder of the Proposal Units.
2.8 Suspension and termination of quotation of Ordinary Units (a) The Responsible Entity must apply to ASX for suspension of trading of the Ordinary Units on the financial market known as the Australian Securities Exchange conducted by ASX with effect from the close of business on the Effective Date.
(b) The Responsible Entity must apply to ASX for termination of official quotation of Ordinary Units on the financial market known as the Australian Securities Exchange conducted by ASX and the removal of the Trust from the official list of the ASX with effect from the Proposal Business Day immediately following the Implementation Date, or from such later date as may be agreed by Bid Vehicle and the Responsible Entity.
2.9 Effect of this schedule This schedule:
(a) binds the Responsible Entity and all Proposal Participants, including those who do not attend the Meeting, those who do not vote at that meeting and those who vote against the Proposal Resolutions at that meeting; and
(b) overrides the other provisions of this constitution to the extent of any inconsistency, other than clause 23 (Deemed provisions of this constitution).
Mallesons Stephen Jaques Supplemental Deed – ING Industrial Fund 12 10621351_2 explanatory memorandum 169
2.10 Responsible Entity’s limitation of liability Subject to the Corporations Act, without derogating from any limitation of the Responsible Entity’s liability in this constitution, the Responsible Entity has no liability of any nature whatsoever to Members beyond the assets of the Trust arising, directly or indirectly, from the Responsible Entity doing or refraining from doing any act (including the execution of a document), matter or thing pursuant to or in connection with the implementation of the Proposal in accordance with this schedule and the Implementation Agreement.
Mallesons Stephen Jaques Supplemental Deed – ING Industrial Fund 13 10621351_2 ING Industrial Fund 170 Appendix B: Supplemental Deed
Supplemental Deed –ING Industrial Fund Signing page
DATED:______
EXECUTED by ) ) as attorney for ING MANAGEMENT ) LIMITED in its capacity as ) responsible entity of ING ) INDUSTRIAL FUND under power of ) attorney dated ) ) in the presence of: ) ) ) ...... ) ...... By executing this deed the attorney ) Signature of witness states that the attorney has received no ) notice of revocation of the power of ) ...... attorney Name of witness (block letters) ) ) ) ) ...... ) Signature of witness By executing this deed the attorney ) states that the attorney has received no ) ...... notice of revocation of the power of ) Name of witness (block letters) attorney
Mallesons Stephen Jaques Supplemental Deed – ING Industrial Fund 14 10621351_2 9 February 2011 Explanatory Memorandum 171
Appendix C: Deed Poll C ING Industrial Fund 172 Appendix C: Deed Poll explanatory memorandum 173 ING Industrial Fund 174 Appendix C: Deed Poll explanatory memorandum 175 ING Industrial Fund 176 Appendix C: Deed Poll explanatory memorandum 177 ING Industrial Fund 178 Appendix C: Deed Poll explanatory memorandum 179 ING Industrial Fund 180
Appendix D: Notice of Meeting D explanatory memorandum 181
Notice of Meeting
Notice is given by ING Management Limited (ABN 15 006 065 032) (“Responsible Entity”) that a meeting of Members (“Meeting”) of the ING Industrial Fund (ARSN 089 038 175) (“IIF”) will be held at:
Location: Swissôtel Sydney Level 8 68 Market Street Sydney NSW 2000
Date: Thursday, 17 March 2011
Time: 2.30pm
AGENDA
The business of the Meeting will consist of the following:
Resolution 1: Approval of amendments to IIF Constitution
To consider and, if thought fit, to pass a special resolution of ING Industrial Fund in the following terms:
“That, subject to the passing of Resolutions 2 and 3 in the Notice of Meeting convening this meeting, the constitution of ING Industrial Fund is amended in accordance with the provisions of the supplemental deed poll in the form tabled at the meeting and initialled by the Chairman of the meeting for the purposes of identification, and the responsible entity of ING Industrial Fund is authorised to execute and lodge with the Australian Securities and Investments Commission a supplemental deed poll to give effect to these amendments to the constitution of ING Industrial Fund.”
Resolution 2: Approval of the Proposal by IIF
To consider and, if thought fit, to pass an ordinary resolution of ING Industrial Fund in the following terms:
“That, subject to the passing of Resolutions 1 and 3 in the Notice of Meeting convening this meeting, the proposal described in the Explanatory Memorandum accompanying the Notice of Meeting convening this meeting as the “Proposal”, under which Goodman Industrial Funds Management Limited as trustee of Goodman Trust Australia will acquire all of the ordinary units in ING Industrial Fund, on the terms and subject to the conditions of the Proposal, is approved for all purposes including for the purposes of item 7 of section 611 of the Corporations Act.”
Resolution 3: Approval of change of responsible entity of IIF
To consider and, if thought fit, to pass an ordinary resolution of ING Industrial Fund in the following terms:
“That, subject to the passing of Resolutions 1 and 2 in the Notice of Meeting convening this Meeting, with effect from the day (“Change Date”) of the implementation of the Proposal described in the Explanatory Memorandum accompanying the Notice of Meeting convening this Meeting as the “Proposal”, ING Management Limited be removed as the responsible entity of ING Industrial Fund and Goodman Funds Management Limited be chosen and appointed as the new responsible entity of ING Industrial Fund, and ING Management Limited is to execute and lodge with ASIC on the Change Date a notice requesting ASIC to record the change of responsible entity of ING Industrial Fund.”
VOTING INFORMATION
Explanatory Memorandum
This Notice of Meeting should be read in conjunction with the Explanatory Memorandum that accompanies this Notice. Section 2 of the Explanatory Memorandum contains an explanation of the resolutions above. The Explanatory Memorandum also provides a summary of the Proposal ING Industrial Fund 182 Appendix D: Notice of Meeting
and sets out why you should vote in favour of the Proposal and why you might vote against the Proposal to enable you to make an informed decision as to how to vote on the resolutions.
Unless otherwise defined in this Notice of Meeting, terms used in this Notice of Meeting have the same meaning as set out in section 9 of the Explanatory Memorandum.
Voting exclusion statement
Under the Corporations Act, GTA Trustee and its associates (including the Consortium Members) and IML and its associates (including other ING Group entities and directors of IML) are excluded from voting on the Resolutions as they have interests in the Proposal different to other IIF Members.
The ING Group also has an interest in the outcome of the Proposal in addition to its interest as an IIF Member because of the Ancillary Transaction as outlined in section 2.6 of the Explanatory Memorandum.
Consequently, none of GTA Trustee, the Consortium Members or any member of the ING Group and their associates will vote on the Resolutions.
However, the Responsible Entity need not disregard a vote if it is cast by a person as proxy for a person who is entitled to vote, in accordance with the directions on the proxy form
Required majority
Resolution 1 is a special resolution, and will be passed if at least 75% of the votes cast on the resolution are cast in favour. Resolutions 2 and 3 are ordinary resolutions, and will be passed if more than 50% of the votes cast are in favour.
Appointment of Chairperson
In accordance with the Corporations Act and the constitution of IIF, the Responsible Entity has appointed Kevin McCann, Chairman of IML, to chair the Meeting.
Right to appoint a proxy
A Member has a right to appoint a proxy to attend and vote at the Meeting on their behalf. A proxy does not need to be a Member of IIF, and you may appoint the Chairman of the Meeting as your proxy. A unitholder may appoint two proxies, and if so, the unitholder may specify the proportion or number of votes each proxy is appointed to exercise. The Proxy Form, which accompanies this Notice of Meeting, includes instructions on how to vote and appoint a proxy.
To be valid, Link Market Services Limited (Registry) or the Responsible Entity must receive your Proxy Form no later than 2.30pm AEDST on 15 March 2011, that is, 48 hours before the Meeting. Proxy Forms may be lodged using the reply paid envelope or:
• online at www.linkmarketservices.com.au in accordance with the Proxy Form;
• by mailing it to:
ING Industrial Fund c/- Link Market Services Limited Locked Bag A14 Sydney South NSW 1235 Australia
• by faxing it to +61 2 9287 0309;
• by delivering it to Link Market Services Limited, Level 12, 680 George Street, Sydney NSW 2000; or
• by delivering or faxing it to the Responsible Entity’s registered office.
If you appoint the Chairman of the Meeting as your proxy and you do not specifically direct how your proxy is to vote on a Resolution, you will be taken to have directed the Chairman of the explanatory memorandum 183
Meeting to vote in favour of the Resolution and the Chairman of the Meeting will exercise your votes in favour of the Resolution.
Voting entitlement
IIF Unitholders registered as holders of units in IIF and IIF Optionholders registered as the holders of IIF Options issued as at 7.00pm AEDST on 15 March 2011 will be entitled to attend and vote at the meeting (subject to any applicable voting exclusion).
Corporate representatives
A company wishing to appoint a person to act as its representative at the meeting must provide that person with a letter executed in accordance with the company’s constitution and the Corporations Act authorising him or her to act as the member’s representative.
To be effective, the letter or certificate by which a representative is appointed by the company must be received by the Registry at least 48 hours before the Meeting.
Issued by ING Management Limited (ABN 15 006 065 032) as the Responsible Entity of the ING Industrial Fund.
10 February 2011
Mark Lamb ING Industrial Fund 184
This page has been left blank intentionally. Corporate Directory
Responsible Entity Taxation Adviser ING Management Limited Ernst & Young (ABN 15 006 065 032; AFSL 237534) Ernst & Young Centre Level 6 680 George Street 345 George Street Sydney NSW 2000 Sydney NSW 2000 Fax +61 2 9033 1060 Independent Expert Deloitte Corporate Finance Pty Limited IML Directors Finance (ABN 19 003 833 127; AFS Licence Number 241457) Kevin McCann AM Grosvenor Place Philip Clark AM 225 George Street Michael Easson AM Sydney NSW 2000 Paul Scully Christophe Tanghe Registry Link Market Services Limited Secretaries of IML Level 12 Mark Lamb 680 George Street Sarah Wiesener Sydney NSW 2000
Legal Adviser Investor Enquiries Mallesons Stephen Jaques In relation to the Proposal Level 61 1300 653 497 (within Australia) Governor Phillip Tower +61 2 8280 7057 (outside Australia) 1 Farrer Place Sydney NSW 2000
Financial advisers Goldman Sachs & Partners Australia Pty Limited Level 42 Governor Phillip Tower 1 Farrer Place Sydney NSW 2000 UBS AG Level 16 Chifley Tower 2 Chifley Square Sydney NSW 2000 real estate investment management www .ingrealestate.com.au