ARENA REIT. — Proxy Solicitation & Information Statement 2014

Nov 3, 2014

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Arena REIT (ASX code: ARF) Internalisation Proposal

Creating enhanced alignment and competitive advantages 4 November 2014

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Contents

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1 Executive Summary 3
2 Background 4
3 Proposal overview 5-7
4 Investor meeting 8
5 Board and management 9-11
6 Financial impact 12-14
7 Potential disadvantages and risks 15
8 Other alternatives considered 16
9 Independent expert’s opinion 17
10 Independent directors’ recommendation 18
11 Indicative timetable 19
12 Summary 20
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1 Executive summary

Internalisation Proposal to be presented to ARF Investors

• Arena REIT to internalise its management structure subject to conditions precedent including ARF Investor approval and no superior proposal ( Internalisation Proposal ).

• If the Proposal is approved and implemented, Investors expected to benefit from:

• expected ongoing net management cost savings contributing to ARF distribution guidance for FY15 being upgraded to 10.0 cents per security[1] (up from 9.75 cents);

• greater alignment of interests through the new Board and management being accountable only to Investors; and

• a superior outlook for ARF earnings growth per security with the elimination of external funds management fees.

• KPMG Corporate Finance acting as Independent Expert has reviewed the Proposal and concluded that the Proposal is “fair and reasonable and in the best interests” of Investors.

• Arena’s Independent Directors have also concluded that the Proposal (as compared to other alternatives) is in the best interests of Investors, and unanimously recommend that Investors “vote in favour of the Internalisation Proposal” in the absence of a superior proposal.

• An Investor meeting is scheduled to be held at 11 am (AEDT) 5 December 2014. Refer to Meeting Booklet comprising Notice of Meeting, Explanatory Memorandum and Prospectus (lodged with ASX) expected to be dispatched to Investors by 13 November 2014.

• 1 On a status quo basis assuming no new acquisitions, developments in progress are completed in line with budget assumptions and tenants comply with all their lease obligations.

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2 Background

Internalisation opportunity flagged to market on 25 August 2014

• On 25 August 2014, Arena announced that it had entered into an exclusivity agreement for a period of six months with Citrus II Investments Pty Ltd (the ultimate owner of Arena Investment Management Limited) for Arena REIT ( ARF ) to consider an internalisation of its corporate governance and management function and to assume the managements rights over two wholesale funds, being PHC Darlinghurst Syndicate and Trust and BSH Joint Venture (which both own healthcare properties).

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ASX price performance since announcement of
1.60 1,399
Internalisation Opportunity
1.55 1,358
1.50 1,317
1.45 1,276
1.40 1,235
ARF Close (LHS)
1.35 1,194
XPJ (RHS)
1.30 1,153
1.25 1,112
1.20 1,071
1.15 1,030
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• Since the announcement, Arena has received positive feedback from ARF’s larger institutional investors and ARF’s share price has moved favourably.

• The Arena Board established an Independent Board Committee comprising solely the independent directors to review the internalisation opportunity and consider possible alternatives.

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3 Proposal overview Key elements of the Proposal are …..

• Consideration - ARF is to pay consideration to Citrus II which implies a purchase price of approximately $10.7 million for the ARF and wholesale funds management (intangible) rights plus net asset adjustments of approximately $0.8 million in relation to all other operating assets and liabilities of the management business such as intellectual property, IT systems, office equipment, syndicate receivables and other working capital balances. As a consequence, ARF will no longer pay ongoing management and transaction fees to an external manager. The consideration will be funded utilising ARF’s existing debt facility.

Basis	Consideration $ million	Consideration AUM (%)	Multiple of Base Fees (times)	Multiple of Net Savings (times)
$ paid to Citrus II	11.5	2.8%	3.4	10.7
$ net of Unlisted fund rights	9.5	2.5%	3.1	12.5

Source: KPMG Corporate Finance Report, page 45

• Quality Management Team – Post internalisation, the new ARF Board will comprise the current independent directors and Bryce Mitchelson as Managing Director (current Joint Managing Director of Arena). In addition, other senior staff including Gareth Winter (CFO) and Rob de Vos (Head of Property) have accepted employment with ARF, subject to the Internalisation Proposal proceeding.

• No Change in “Social Infrastructure” Strategy – ARF’s existing investment strategy will essentially not change and will remain focussed in investing in social infrastructure style property including Childcare and Healthcare leased assets. ARF will also assume the management rights to two well performing unlisted wholesales funds (also invested in Healthcare assets) and may seek to grow earnings further by leveraging its existing capabilities by providing funds management and property services to other unlisted managed funds.

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3 Proposal overview (cont) Key elements of the Proposal are …..

• Retain Existing Name & Branding – ARF will retain the existing Arena brand, investor goodwill and intellectual property built up over the past few years.

• Other Management Services – CISL ( which post implementation will be part of the new ARF group) will provide management services to Arena for its remaining managed funds for a period to no later than 31 December 2016. Certain CISL employees will be retained to provide these services and all costs associated with these management services will be reimbursed to ARF.

Conditions precedent to be satisfied:

• ARF investor approval of the Internalisation Proposal;

• The Independent Expert does not change their opinion that the Internalisation Proposal is “fair and reasonable and in the best interests of” ARF investors;

• No superior proposal;

• ASIC issuing a new Australian Financial Services Licence to ARML in an appropriate form; and

• All required consents of financiers being obtained.

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3 Proposal overview (cont) No changes required to constitutions

• The Proposal will enhance alignment of the Board and management with Investors’ interests and will be implemented via:

Post

• the distribution to Investors of one fully paid ordinary share in Arena REIT Limited ( ARL ) for each existing stapled security in Arena REIT ( Existing Stapled Security ). ARF is a newly formed company that post internalisation will undertake the business and management activities of the new ARF group;

• the stapling of each share in ARL to each Existing Stapled Security to form a new stapled security;

• the acquisition by ARL of Citrus Investment Services Pty Ltd ( CISL ) (and its wholly owned subsidiaries Arena REIT Management Limited ( ARML ) and Arena Property Services Pty Ltd) from Citrus II; and

• the change of the responsible entity of Arena REIT (and manager of PHC and BSH) from Arena to ARML (newly established).

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4 Investor meeting Scheduled for 5 December 2014

• An Investor Meeting is scheduled to be held at 11.00am Friday 5 December 2014 at West Tower Suite, Level 35, Sofitel Hotel, 25 Collins Street, Melbourne.

• Investors will be requested to consider, and if thought fit, pass the following three resolutions:

• “That ... the Internalisation Proposal ... be approved”;

• That … upon the retirement of Arena Investment Management Limited …, Arena REIT Management Limited be appointed as the new responsible entity of Arena REIT …”;

• That …approval is given … to the acquisition by the Managing Director … under the New ARF Long Term Incentive Plan of each of the rights ….”

• Resolutions 1 and 2 are inter-conditional i.e. both must be passed for the Internalisation Proposal to proceed. Resolution 3 is conditional on the passing of both Resolutions 1 and 2.

• All these three resolutions are Ordinary Resolutions and therefore to pass, will require a minimum 50% majority vote of those securities voted on day.

• Arena intends to appoint David Ross, Arena Independent Chairman, as Chair of the meeting.

• Meetings for ARF 1 & ARF 2 will be held concurrently.

Investors are encouraged to vote and attend the meeting

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5 Board & management team Experienced and resourced

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Arena REIT Limited
David Ross (Independent Chairman)
Dennis Wildenburg (Independent Non-executive Director)
Simon Parsons (Independent Non-executive Director)
Bryce Mitchelson (Managing Director)
Managing Director Admin Support
Bryce Mitchelson
Head of Chief Financial Officer Head of Property Communications
Compliance & Risk Gareth Winter Rob de Vos Manager

Senior Assistant Acquisitions & Portfolio
Accountant Accountant Developement Manager
Manager
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5 Remuneration Structure Aligning performance with investor returns

• The Board has adopted a remuneration policy that recognises the need to motivate, attract, and retain employees to deliver sustainable and superior business performance.

• The Independent Board Committee consulted with Ernst & Young to ensure that the remuneration structure and terms of the Short Term Incentive (STI) and Long Term Incentive (LTI) plans offered to selected staff are appropriate and in line with market practice.

• The STI will be assessed against specific KPI’s for each individual and apply for FY15 on a pro-rata basis.

• The LTI is equity based, which for FY15 is split into Performance Rights (60%) and Recognition Rights (40%) which vest as at 30 June 2017 subject to certain hurdles being achieved.

• The number of rights issued is equal to the employees Maximum LTI value divided by the value of the respective rights.

• LTI Performance rights Hurdle 1 – Relative TSR ranking (ASX 300)

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• LTI Performance rights Hurdle 2 – Distributable income per security

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5 Managing Director’s REM for FY15 Designed in line with market practice

• The annualised remuneration for the Managing Director, Bryce Mitchelson, for FY15 has been set at:

Employee	Total Fixed REM (TFR)	Max FY15 STI % of TFR	Max FY15 LTI % of TFR
Bryce Mitchelson	$475k	$237.5k (50%)	$237.5k 50%

• The actual FY15 STI paid will be pro-rata adjusted for the year and the amount paid in cash will depend on the performance of the Managing Director relative to the KPI’s set by the Board.

• The issue of the FY15 LTI grant to Bryce Mitchelson requires Investor approval at the meeting.

• The FY15 LTI Plan rights have been independently valued by Ernst & Young ABC Pty Ltd as follows:

Rights	%	Value/Right
Recognition*	40%	$1.22
Performance	60%	$0.94

• Accordingly, the maximum number of rights to be issued to the Managing Director are noted below:

Employee	Performance Rights	Recognition Rights*	Total Rights
Bryce Mitchelson	151,596	77,869	229,465

• The number of actual ARF securities issued post 30 June 2017 will depend on the extent to which performance hurdles are satisfied over that period.

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• To remain employed by ARF as at 30 June 2017

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6 Financial impact Annualised pro-forma management costs

$ million	Pre Internalisation 1	Adjustments	Pro forma Post internalisation	* Due to rounding
Base management fee	3.1	(3.1) 2	-
Other management operating costs	0.3	2.3 3	2.6
Management fee income	-	(0.3) 4	(0.3)
Net Management Costs	3.4	(1.1)	2.3
Interest expense on funding the consideration	-	0.4	0.4
Net Operating Cost	3.4	(0.7)	2.6*

Net saving in pro forma annual operating costs of $1.1 million represented by:

• 1 Arena REIT’s FY15 pre internalisation annual operating expense budget for base management fees and other management cost recoveries, including property services.

• 2 Represents the elimination of the base management fee payable to AIML (based on Arena REIT’s gross asset value) no longer payable post internalisation.

• 3 Represents the incremental pro forma annualised expenses in respect of staff remuneration and other operating costs such as IT systems and office accommodation post internalisation.

• 4 Represents the pro forma annual management fees receivable from the Syndicates.

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6 Financial impact (cont) Upgraded FY15 distribution guidance

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Cents per security
10.50
14.3%
10.0 [1,2 ]
10.00
9.75 [1 ] FY15 expected
DPS growth
9.50
1 On a status quo basis
9.00 assuming no new
8.65 8.75 acquisitions and
developments in
8.50 progress are completed
8.2 in line with budget
8.0
assumptions and tenants
8.00
comply with all their
lease obligations.
7.50 2 If the Internalisation
Proposal is implemented
7.0 0
FY13 June 13 Nov 13 FY14 Aug 14 Nov 14
actual IPO guidance upgrade actual DPS guidance DPS upgrade
FY13 FY14 FY15
Actual FY distribution Distribution guidance
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6 Financial impact (cont) Balance sheet pro-forma (as at 30 June 2014)

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Notes:

A – Settlement of asset sales and committed development capital expenditure

B – Acquisition of management business on implementation of the Internalisation Proposal C – Transaction costs

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7 Potential disadvantages and risks Taking a balanced view

Issue	Description	Comment
Change in risk profile • Change in investment characteristics • Operating cost structure • Regulatory risks • Transitional risks • Dependency on key staff	ARF will be taking on funds and property management business services risk. Future operating costs may be higher than anticipated. ARF will effectively become its own responsible entity and will be required to maintain an AFSL. Possible risk of distraction in servicing AIML. ARF is potentially exposed if key staff leave.	These services are ancillary to owning property and allow better control of investment risk. Higher operating costs are not necessarily bad if they enable higher revenues. ARF is well capitalised and has appropriate resources to comply with the regulatory requirements. ARF will retain additional resources to manage this process. Appropriate remuneration systems are in place which should retain and attract talent.
Decrease in NTA	NTA is expected to decline by 4.8% to $1.07	The intangible value of the management rights are valuable but excluded from the NTA calculation.
Increase in Gearing	On a pro-forma basis is expected to increase from 34.9% to 36.7%	ARF’s gearing will remain at the low end of its target range of 35% to 45%.

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8 Other alternatives considered

• In considering the Internalisation Proposal and in forming the view that the Internalisation Proposal is in the best interests of Investors, the Independent Directors have had regard to possible alternatives, and the potential implications of these alternatives for Investors. In particular, the Independent Directors have considered the merits and risks of:

• the prospect that Citrus II (as the owner of Arena) may sell the management rights of ARF to another third party external manager; and

• the potential merger of ARF with another listed A-REIT.

• On 29 September 2014, ARF received an indicative, non-binding, conditional proposal for the potential merger of ARF and the ASX-listed Folkestone Education Trust ( FET ) ( FET Indicative Offer ).

• Under the FET Indicative Offer, ARF Investors would have received 0.795 FET units for every Existing Stapled Security. Folkestone Investment Management Limited would have externally managed the merged entity with base management fees of 0.45% of gross assets (with the intention of further reductions as the vehicle grows past certain thresholds) and removal of Arena asset acquisition, disposal and performance fees. Implementation of the FET Indicative Offer would have required a trust scheme or stapling of units, requiring the approval of ARF Investors and possibly also FET investor approval.

• The FET Indicative Offer was subject to several conditions including due diligence, and final approval from FET independent directors.

• The Arena Independent Directors determined that the FET Indicative Offer did not provide ARF Investors with a compelling value proposition compared to the Arena Internalisation Proposal. Moreover, in the event that the Arena Internalisation Proposal is approved by ARF Investors, the ARF Board will retain the ability to pursue strategic initiatives that are in the best interests of Investors.

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9 Independent expert’s opinion Assessed valuation higher than consideration

• The Independent Directors appointed KPMG Corporate Finance to prepare an independent expert’s report to opine on the Internalisation Proposal.

• The Independent Expert assessed that the present value of the net financial benefits expected from the Internalisation Proposal is greater than the consideration to be paid and, the consideration is supported by comparable market evidence.

• The table below summaries their valuation of the net financial benefits:

$ million	Status Quo1	Growth Scenario2	Refer KPMG Corporate Finance Report page 45
NPV of financial benefit	12.9	16.5
Consideration paid to Citrus II	(11.5)	(11.5)
Net benefit to existing Stapled Securityholders	1.4	5.0

1. Assumes assets under management growth only based on recurring revaluations and completion of existing projects.

2. Assumes additional AUM growth of $20m p.a. over the forecast period of 3 years.

3. Their conclusion is that the Internalisation Proposal is “fair and reasonable and in the best interests” of Investors.

4. A full copy of this report is contained in the Meeting Booklet (lodged with ASX) being provided to Investors.

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10 Independent directors’ recommendation Unanimously recommend the Internalisation Proposal

• The Arena Board established an Independent Board Committee (comprising only the independent directors) to consider the Internalisation Proposal and the available alternatives to determine what is in the best interests of ARF Investors.

• As noted previously, an indicative, non-binding, conditional offer was received from FET. The details of the FET Indicative Offer were provided to the Independent Expert.

• The Independent Board Committee has concluded that the Internalisation Proposal is the best proposal available at this time.

• The Independent Board Committee has also sought an opinion from an Independent Expert (KPMG Corporate Finance) who has also concluded that the Internalisation Proposal is “fair and reasonable and in the best interests of” ARF investors.

The Independent Directors unanimously recommend that investors vote in favour of all Resolutions, in the absence of a superior alternative.

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11 Indicative timetable If the internalisation is implemented

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Indicative only and subject to change.

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12 Summary Why the Internalisation Proposal is in the investors best interests

The Independent Directors believe that the advantages of the Internalisation Proposal outweigh the potential disadvantages.

The key benefits of the Internalisation Proposal are summarised as follows:

• FY15 Distribution guidance upgrade - expected ongoing net management cost savings contributing to ARF distribution guidance for FY15 being upgraded to 10.0 cents per security[1] (up from 9.75 cents);

• Enhanced alignment - greater alignment of interests through the new Board and management being accountable only to Investors; and

• Acquisition growth competitive advantage - A superior outlook for ARF earnings growth per security with the elimination of external funds management fees which would otherwise be charged on any increases in portfolio valuations, new acquisitions and capital expenditure. An internalised ARF will have operating leverage, meaning that new acquisitions should not require a material increase in internal management cost which should therefore provide greater contributions to earnings growth per security.

In the event that the Internalisation Proposal is not approved, Arena would expect Citrus II to pursue alternative transaction structures including sale of the Arena REIT managements rights to a third party.

Both an Independent Expert and the Arena Independent Directors believe that the Internalisation Proposal is in the best interests of ARF investors in the absence of a superior proposal

• 1 Assuming the Internalisation Proposal proceeds, no new acquisitions, developments in progress are completed in line with budget assumptions and tenants comply with all their lease obligations.

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A Transaction evidence – management internalisations

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Source: KPMG Corporate Finance Report, page 46

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B

Current management fee entitlements Fees to be removed following Internalisation

Type of fee or cost	Entitlements under the Constitution	Fees Paid FY14 $
Ongoing management fees	0.8% of total assets up to $400m 0.7% on total assets between $400m and $950m 0.6% on total assets over $950m In addition, ARF is required to reimburse Arena for certain costs relating to the proper performance of Arena’s duties.	2,377k
Acquisition fee	1.0% of the value of any property acquired by ARF	876k
Disposal fee	1.0% of the gross sale price of any property of ARF provided the gross sale price exceeds the purchase price of that property	-
Performance fee	An additional 1.0% of the sale price of any property of ARF provided the gross sale price exceeds the purchase price of that property by more than 20%	-
Total		$3,253k

The disposal and performance fees are also payable on the merger or amalgamation of ARF with another managed investment scheme. Based on current valuations, Arena may be entitled to up to 2.0% or approximately $7.5 million on a merger of ARF with another party.

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C

Unlisted wholesale funds Single asset vehicles owning well performing healthcare assets to be managed by ARF

PHC Darlinghurst Syndicate & Trust

No. Investors 40 Asset Large scale medical clinic leased to Primary Health Care with a current value of $14.75m Term The next investor meeting is scheduled to be held in December 2015 at which time investors will vote to either windup or continue the term until Dec 2016. Management 1% of property value per annum Fee Disposal fee At least 1% of the gross sale price Receivable $0.8 million representing deferred management fees

BSH Joint Venture

No. Investors 19 Asset Pathology laboratory asset leased to Primary Health Care with a current value of $17m Term The next investor meeting is scheduled to be held in April 2015 at which time investors will vote to either windup or continue the term until April 2016. Management 1% of the property value per Fee annum Disposal fee 1% of the gross sale price

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Important Note

This document has been prepared by Arena Investment Management Limited ACN 077 235 879 AFSL No. 233190 (“Arena”) as responsible entity of the managed investment scheme(s) referred to on page 1. The information contained in this document is current only as at the date of this document or as otherwise stated herein. This document may not be reproduced or distributed without Arena’s prior written consent. The information contained in this document is not investment or financial product advice and is not intended to be used as the basis for making an investment decision. Arena has not considered the investment objectives, financial circumstances or particular needs of any particular recipient. You should consider your own financial situation, objectives and needs, conduct an independent investigation of, and if necessary obtain professional advice in relation to, this document. Past performance is not an indicator or guarantee of future performance.

The information in this document should be read together with the Meeting Booklet (containing a Notice of Meeting , Explanatory Memorandum and Prospectus) dated on the date of this document.

Except as required by law, no representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information, opinions and conclusions, or as to the reasonableness of any assumption, contained in this document. By receiving this document and to the extent permitted by law, you release Arena and its directors, officers, employees, agents, advisers and associates from any liability (including, without limitation, in respect of direct, indirect or consequential loss or damage or any loss or damage arising from negligence) arising as a result of the reliance by you or any other person on anything contained in or omitted from this document.

This document contains forward-looking statements including certain forecast financial information. The words “anticipate”, “believe”, “expect”, “project”, “forecast”, “estimate”, “outlook”, “upside”, “likely”, “intend”, “should”, “could”, “may”, “target”, “plan”, and other similar expressions are intended to identify forward-looking statements. The forward-looking statements are made only as at the date of this announcement and involve known and unknown risks, uncertainties, assumptions and other factors, many of which are beyond the control of Arena and its directors. Such statements are not guarantees of future performance and actual results may differ materially from anticipated result, performance or achievements expressed or implied by the forward-looking statements. Other than as required by law, although they believe there is a reasonable basis for the forward-looking statements, neither Arena nor any other person (including any director, officer, or employee of Arena or any related body corporate) gives any representation, assurance or guarantee (express or implied) as to the accuracy or completeness of each forward-looking statement or that the occurrence of any event, result, performance or achievement will actually occur. You should not place undue reliance on any of the forward-looking statement.

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