Level 1, 31 Franklin Street, Adelaide SA 5000 Level 16, 379 Collins … · 2011. 11. 15. · Exchange [“ASX”] which provides property asset management services to property owners,

______________________________________________________________________ Leadenhall VRG Pty Ltd

Liability limited by a scheme approved under Professional Standards Legislation A.F.S. Licence No: 293586

15 November 2011 The Independent Directors Wentworth Holdings Limited 144 Church Street Brighton Vic 3186 Dear Sirs, Independent Expert’s Report For Wentworth Holdings Limited 1. Introduction Wentworth Holdings Limited [“Wentworth”] is a public company listed on the Australian Securities Exchange [“ASX”] which provides property asset management services to property owners, investors and tenants under the Century 21 brand. It has offices in Victoria (Albert Park, Bayside and Frankston), Western Australia (East Perth, Thornlie and Hillarys) and NSW (Chatswood, Rozelle and Wolli Creek) [“the Property Management Business”]. As at 14 November 2011, Wentworth (Ticker: WWM) had a market capitalisation of approximately $13.1 million (based on a Wentworth share price of $0.058 and 226.3 million shares on issue). A Director of Wentworth, Mr Charles Tarbey (via Combined Rental Pty Limited, an entity associated with Mr Tarbey) has made an offer to acquire Wentworth’s Property Management Business for approximately $18.70 million. The Property Management Business is owned by a number of Wentworth’s subsidiaries. The Proposed Transaction will result in the sale of these subsidiaries to Mr Tarbey. Since Mr Tarbey is a related party of Wentworth, and the Property Management Business is a significant asset of Wentworth, an Independent Expert’s Report [“IER”] is required for the benefit of the shareholders who are entitled to vote on the proposed sale of the business to Mr Tarbey. Mr Tarbey owns the master franchise rights to the Century 21 [“C21”] real estate brand in Australia. Wentworth’s Property Management Business is branded C21. 2. Purpose of the report The Independent directors of Wentworth have engaged Leadenhall VRG Pty Ltd [“Leadenhall”] to prepare an IER, setting out whether in our opinion the proposed sale of the Property Management Business to Mr Tarbey [“the Proposed Transaction”] is fair and reasonable to Wentworth shareholders (apart from Mr Tarbey) [“the Shareholders”]. The Independent directors refers to all directors of Wentworth excluding Mr Tarbey. We understand Wentworth requires this IER to satisfy the requirements of Rule 10.1 of the ASX Listing Rules [“LR”], and Chapter 2E of the Corporations Act 2001 [“the Act”], regulated by the Australian Securities and Investment Commission [“ASIC”], to assist the Wentworth shareholders in deciding whether to vote for the Proposed Transaction. This legislation requires Leadenhall to form a view as to whether the Proposed Transaction is fair and reasonable to Wentworth shareholders (apart from Mr Tarbey). In determining whether the Proposed Transaction is fair and reasonable to Wentworth shareholders, we have followed the requirements of ASIC’s Regulatory Guide 111 [“RG

LEADENHALL VRG PTY LTD A.B.N. 11 114 534 619

C O R P O R A T E A D V I S E R S Level 1, 31 Franklin Street, Adelaide SA 5000 Level 16, 379 Collins Street, Melbourne Vic 3000 Level 2, 10 Barrack Street, Sydney NSW 2000

ADELAIDE: T (08) 8385 2200 MELBOURNE: T (03) 8614 1086 SYDNEY: T (02) 9262 9022 E-Mail: [email protected] Home Page: www.leadenhall.com.au

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3912 WTW 111115 IER FINAL.docx Page 2

111”] “Contents of expert reports”, Regulatory Guide 76 [“RG76”] Related Party Transactions” and Regulatory Guide 112 [“RG112”] “Independence of Experts”. In relation to RG 112 we note that Leadenhall has previously prepared independent valuations of Wentworth’s Property Management Business for impairment testing purposes in accordance with the accounting standard AASB 136 “Impairment of Assets”, most recently as at 30 June 2011 (which report was never finalised). However, the basis of value for impairment testing is “Value in Use” which is a different valuation concept to that of Fair Market Value, which is what is applied in this report. Leadenhall considers itself to be independent of Wentworth for the purposes of preparing this report. The Independent Directors of Wentworth have confirmed they agree with this view. This report is to be included in the Explanatory Memorandum to be sent to Shareholders and has been prepared exclusively for the purpose of assisting Shareholders in their consideration of the Proposed Transaction. Our report cannot be used for any other purpose unless Leadenhall has provided written consent. We are not responsible to Wentworth, or any other third party, whether for our negligence or otherwise, if the report is used by any other party or for any other purpose. 3. Basis of evaluation In order to assess whether the Proposed Transaction is fair and reasonable we have: • assessed whether the Proposed Transaction is fair by determining whether the value of the

consideration offered is equal to or greater than our assessed fair market value of the Property Management Business; and

• assessed the reasonableness of the Proposed Transaction by considering whether the advantages of the proposal outweigh the disadvantages.

In accordance with the requirements of ASIC RG 111 the Proposed Transaction is considered reasonable if it is fair. However, we also have separately considered the other advantages and disadvantages of the Proposed Transaction. 4. Summary and conclusion In our opinion the Proposed Transaction is fair and reasonable to Wentworth Shareholders. In arriving at this opinion, we have had regard to the following factors: 4.1. The Proposed Transaction is fair The Proposed Transaction is fair because the value of the consideration offered by Mr Tarbey is within the fair market value of the Wentworth Property Management Business. We analyse this below. 4.1.1 Value of the Wentworth Property Management Business The value of the Property Management Business is primarily dependent on the assumed growth in property rents (which in turn are a function of property prices and yields). Due to the current uncertainty surrounding the expected growth in rents, we have undertaken a number of scenarios, whereby the growth rate has been varied as set out in Figure 1 below. Based on our selected rental growth scenario, we have valued Wentworth’s Property Management Business to be in the range from $17.97 million to $19.43 million on a controlling basis. We have estimated the fair market value of Wentworth’s Property Management Business using the discounted cash flow [“DCF”] method.

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4.1.2 Valuation of the consideration offered by Mr Tarbey The consideration offered by Mr Tarbey is approximately $18.70 million, and comprises an up-front payment on completion of $16.86 million, and Deferred Consideration of up to $1.84 million, payable in four quarterly instalments following completion beginning on 15 April 2012 and ending on 15 January 2013, which accrues interest at 4.5% per annum. Mr Tarbey has obtained finance for 100% of the consideration of the Property Management Business, however due to 10% of the landlord contracts (by value) requiring updating, his financiers (Macquarie Group Limited [“Macquarie”]) have restricted the initial payment to 90% of the purchase price (hence the Deferred Consideration). Mr Tarbey will collect the management and other fees for 100% of the Property Management Business from the date of completion. In order to receive the Deferred Consideration, certain aspects of some of the landlord contracts need amendments. Once each relevant landlord contract has been updated, Macquarie have confirmed their willingness to provide financing to Mr Tarbey. Wentworth is currently actively pursuing rectification of each relevant landlord contract and anticipates the majority of these contracts will be rectified by the time the Proposed Transaction completes. As at the date of this report, Wentworth has rectified landlord contracts with a value of over $1 million, meaning the outstanding balance of the Deferred Consideration is closer to $800,000. Any relevant landlord contracts that are not rectified by completion will be rectified by Mr Tarbey and his management team. The Wentworth Chief Financial Officer, Mr Ron Hollands, will be given unfettered access to Mr Tarbey and his management team and will regularly report to the Wentworth Board on the landlord contract rectification process. To the extent the remaining contracts are not updated, Wentworth will not receive the full Deferred Consideration. Accordingly the fair market value of the Deferred Consideration is lower than the $1.84 million payable. We have assessed the fair market value of the Deferred Consideration to be in the range from $1.57 million to $1.66 million, depending on the number of relevant landlord contracts which can be updated, and how soon this can occur. This brings the total Fair Market Value of the Consideration to $18.43 million to $18.52 million. The higher the number of relevant landlord contracts that have been updated at the date of completion, the higher the value of the Consideration. 4.1.3 Conclusion - Fairness We set out below a comparison of our assessed value of Wentworth’s Property Management Business (based on our selected rental growth scenario) to our assessed value of the Consideration offered. Table 1: Comparison of Consideration to Value Low

$’000 High $’000

Fair market value of the Property Management Business 17,973 19,432

Value of Consideration offered by Mr Tarbey 18,428 18,520

Excess / (deficit) 455 (912)

Source: Leadenhall analysis, Share Sale Agreement between Wentworth and Combined Rental Pty Limited We summarise the comparison of the value of the Property Management Business under various rental growth scenarios to the value of the Deferred Consideration in the table below.

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Figure 1: Value of Property Management Business under various rental growth scenarios

Source: Leadenhall analysis

Since the value of the consideration offered is within the value of Wentworth’s Property Management Business, the Proposed Transaction is, on balance, fair. 4.2. The Proposed Transaction is reasonable In accordance with ASIC RG 111 an offer is reasonable if it is fair. It is possible that despite not being fair, the offer may be reasonable if overall the advantages and disadvantages of accepting the offer outweigh the advantages and disadvantages of not accepting the offer. Since the Proposed Transaction is fair, it is also reasonable. We have also considered the following advantages and disadvantages to Wentworth shareholders in assessing the reasonableness of the Proposed Transaction: 4.2.1 Advantages of the Proposed Transaction We set out below the advantages to Wentworth shareholders (other than Mr Tarbey) of undertaking the Proposed Transaction: • the Proposed Transaction is fair since the consideration offered by Mr Tarbey is within our

assessed fair market value of the Property Management Business (based on our selected growth rate scenario);

• the up-front payment, including the expected amount of Deferred Consideration which will be received at the end of the quarter following completion (of $17.89 million), is only marginally lower (by $80,000) than the bottom end of our valuation range for the Property Management Business (of $17.97 million). Therefore Wentworth management only need to rectify landlord contracts with a value of approximately $80,000 in order for the Total Consideration to exceed the bottom end of our valuation range for the Property Management Business;

• the Property Management Business is declining due to net churn in the number of properties managed. This reflects the fact that the number of new properties brought under management is lower, overall, to the number of properties no longer managed (which may occur, for example, when a landlord sells their property). Accordingly the Proposed Transaction represents an opportunity to sell the Property Management Business before the decline becomes too significant. We consider the rate of decline is likely to increase over the coming years;

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• the Proposed Transaction allows the Shareholders to exit a business which is sub-optimal. The

value of a Property Management Business is maximised when coupled with a real estate sales agency, as each business can benefit from cross-referrals;

• the Proposed Transaction will result in all of the staff and associated leave liabilities being transferred to Mr Tarbey, meaning Wentworth can avoid future redundancy costs associated with reducing employee numbers in a declining business;

• the Proposed Transaction will result in all of the Wentworth’s premises and equipment leases to be transferred to Mr Tarbey. If the Property Management Business were to be sold to an acquirer which did not require the premises and other equipment, Wentworth would incur the cost of terminating and exiting these leases, which may be significant;

• the Proposed Transaction represents an opportunity to divest each property management office simultaneously. If a sales process was run for the entire portfolio, there is no guarantee all of them would be sold collectively in a single transaction, in a reasonable timeframe, or on similar terms (e.g. the purchaser may require vendor finance for a large portion of the purchase price);

• the price offered by Mr Tarbey is not subject to any adjustment for any subsequent losses in properties under management resulting from the change in ownership of the Property Management Business. It is usual for a purchaser of a Property Management Business to require a contractual clause of this nature to minimise their risk. This is an advantage to Wentworth’s shareholders if the Proposed Transaction is approved;

• the Proposed Transaction will not attract any transaction costs (apart from legal costs and the costs of our report) such as success fees of a corporate adviser (which could be in the order of 3% to 5% of the eventual sale price);

• the sale is expected to be capital gains tax free as it will utilise Wentworth’s extensive carry forward tax losses. However, it is anticipated these tax losses will be used over a number of years in the ordinary course of operations if the Property Management Business is retained;

• the price offered by Mr Tarbey reflects a reasonable level of growth in property prices and rents, albeit at lower than historical growth rates. Based on recent comments made by a number of market observers, it appears the likelihood of property price growth rates and rents being in excess of these expectations in the short to medium term is low;

• subsequent to the Proposed Transaction Wentworth will be debt free, and have significant cash and receivables. This may be an attractive vehicle to pursue a new and growing business, although no such opportunities have yet been identified; and

• subsequent to the Proposed Transaction the Company’s level of overheads will be significantly reduced, until such time as a decision is made regarding the Company’s future.

4.2.2 Disadvantages of the Proposed Transaction We set out below the disadvantages to shareholders (other than Mr Tarbey) of undertaking the Proposed Transaction. • the high end of the price payable by Mr Tarbey, of $18.52 million, is lower than the high end of

our assessed value for the Property Management Business, of $19.43 million;

• as noted above, a portion (around 10%) of the consideration payable by Mr Tarbey is deferred. In order to receive the deferred consideration for these properties Wentworth needs to update certain aspects of the contracts it has with landlords. Once each landlord contract has been updated, Wentworth will receive payment from Mr Tarbey for that landlord contract. Wentworth anticipates having completed the majority of this work by the time the Proposed Transaction

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completes. However if all of the relevant landlord contracts are not able to be rectified, then Wentworth will not receive the full Deferred Consideration;

• the rate at which interest will accrue on the Deferred Consideration is only 4.5%, which is lower than Wentworth’s current cost of borrowing (around 9%);

• Wentworth have not undertaken a formal public contested process to sell either parts or the whole of the Property Management Business to various purchasers (although informal market soundings have been undertaken for parts and the whole of the business). If such a process had occurred, it is possible that a higher price, and / or better payment terms may have been achieved. However, this process would have incurred transaction costs, and not all of the offices may have sold, meaning Wentworth would be left with a remnant of its existing business. The market soundings suggested that the potential to achieve a higher price via a contested process is low;

• Wentworth has undertaken significant efforts to restructure the Property Management Business, in order to reduce customer churn through better service, and to reduce costs. These improvements have slowed the decline in profitability and improved the longevity of the business. The sale of the Property Management Business will mean that the Company will forego the future benefits from these improvements, although the price offered appears to reflect this enhanced profitability and longevity;

• the Company will continue to incur corporate costs to remain in operation, including ASX listing fees, share registry fees and audit fees, until the Company is able to decide on its future activities;

• the Company has stated it will seek and evaluate alternative business opportunities. This could take significant time, and result in costs incurred in undertaking due diligence etc.;

• the Company will still have significant carry forward tax losses. Depending on the nature of any subsequent transaction, the Company’s may have limited ability to utilise these losses, particularly if the Company is subsequently delisted from the ASX; and

• the ASX can suspend a company whose assets comprise more than 50% cash or are in a form readily convertible to cash (ASX Listing Rule 12.3). The suspension would apply until such time as those assets are invested, or used for the entity’s business. The ASX have noted that they will not generally apply this rule provided that the entity has adequately disclosed the time within which it proposes to invest its funds and updates the disclosure if the proposal is revised or altered.

4.2.3 Conclusion on reasonableness Since the Proposed Transaction is fair, it is also reasonable. In our opinion the advantages of the Proposed Transaction outweigh the disadvantages and therefore the Proposed Transaction is reasonable.

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4.3. Opinion In our opinion, the Proposed Transaction is fair and reasonable to Wentworth Shareholders. An individual shareholder’s decision in relation to the Proposed Transaction may be influenced by their own particular circumstances. If in doubt the shareholder should consult an independent adviser. This opinion should be read in conjunction with our detailed report which sets out our scope and findings. Yours faithfully

Hamish Blair Simon Dalgarno Director Director Note: All amounts stated in this report are Australian dollars unless otherwise stated.

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LEADENHALL VRG PTY LTD [“LEADENHALL VRG”]

ABN 11 114 534 619

Australian Financial Services Licence No: 293586

FINANCIAL SERVICES GUIDE

Leadenhall VRG Pty Ltd (“LVRG” or “we” or “us” or “ours” as appropriate”) has been engaged to issue general financial product advice in the form of a Report to be provided to you. Financial Services Guide In providing this Report, we are required to issue this Financial Services Guide (“FSG”) to retail clients. This FSG is designed to help you to make a decision as to how you might use this general financial product advice and to ensure that we comply with our obligations as a financial services licensee. This FSG includes information about:

• who we are and how we can be contacted; • the services we are authorised to provide; • remuneration that we and/or our employees and any associates receive in connection with the

general financial product advice; • any relevant associations or relationships we have; and • our complaints handling procedures and how you may access them.

Financial Services We are Licensed to Provide We hold Australian Financial Services Licence 293586 which authorises us to provide financial product advice in relation to:

• interests in managed investments schemes (excluding investor directed portfolio services); and

• securities (such as shares and debentures). We provide financial product advice by virtue of an engagement to issue a Report in connection with a financial product of another person. Our Report will include a description of the circumstances of our engagement and the person who has engaged us. You will not have engaged us directly but will be provided with a copy of the Report because of your connection to the matters in respect of which we have been engaged to report. Any Report we provide is provided on our own behalf as a financial service licensee authorised to provide the financial product advice contained in that Report. General Financial Product Advice The advice produced in our Report is general financial product advice, not personal financial product advice, because it has been prepared without taking into account your personal objectives, financial situation or needs. You should consider the appropriateness of this general advice having regard to your own objectives, financial situation and needs before you act on the advice. Where the advice relates to the acquisition or possible acquisition of a financial product, you should also obtain a product disclosure statement relating to the product and consider that statement before making any decision about whether to acquire the product. Benefits that We May Receive We charge fees for providing reports. These fees will be agreed with the person who engages us to provide the Report. Fees will be agreed on either a fixed fee or time cost basis and set out in the Report that we have been engaged to provide. LVRG is entitled to receive a fixed fee of $50,000 (plus

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GST) for preparing this Report. Except for the fees referred to above, neither LVRG, nor any of its Directors, employees or related entities, receive any pecuniary or other benefit, directly or indirectly, for or in connection with the provision of this Report. Remuneration or Other Benefits Received by our Employees All our employees receive a salary. Our employees are eligible for bonuses based on overall productivity but not directly in connection with any engagement for the provision of a Report. Referrals We do not pay commissions or provide any other benefits to any person for referring clients to us in connection with the Reports that we are licensed to provide. Complaints Resolution As the holder of an Australian Financial Services Licence, we are required to have a system in place for handling complaints from persons to whom we have provided Reports. All complaints must be in writing, to the following address: Leadenhall VRG Pty Ltd Level 1, 31 Franklin Street Adelaide SA 5000 We will try to resolve your complaint quickly and fairly and will endeavour to settle the matter within 14 days from the time the matter is brought to our attention. If you do not get a satisfactory outcome, you have the option of contacting the Financial Ombudsman Service (FOS). FOS will then be able to advise you as to whether or not they can assist in this matter. FOS can be contacted at the following address: Financial Ombudsman Service GPO Box 3 Melbourne VIC 3001 Telephone: 1300 780 808 Email: [email protected] Compensation arrangements LVRG holds professional indemnity insurance in relation to the services we provide. The insurance cover satisfies the compensation requirements of the Corporations Act 2001.

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5. Overview of Independent Expert’s Report This report is set out as follows: Table 2: Report Content

Subject Reference

Terms of the Proposed Transaction Section 6

Scope of the Report Section 7

Economic and Industry Overview Section 8

Profile of Wentworth Section 9

Valuation Methodologies Section 10

Valuation of Wentworth’s Property Management Business Section 11

Valuation of Consideration Offered by Mr Tarbey Section 12

6. Terms of the Proposed Transaction 6.1. Summary On 14 October 2011, the Independent Directors of Wentworth announced that they had executed an agreement to sell Wentworth’s Property Management Business to Mr Tarbey (or entities controlled by Mr Tarbey) for $18.70 million. Mr Tarbey has obtained finance for 100% of the consideration of the Property Management Business, however due to 10% of the contracts (by value) requiring updating, his financiers have restricted payment to 90% of the purchase price. This has resulted in a portion of the Consideration being Deferred. Interest will accrue on the Deferred Consideration at 4.5% per annum, which is lower than Wentworth’s current borrowing cost (of around 9.0% per annum). In order to receive the Deferred Consideration, Wentworth needs to amend certain aspects of some of the contracts it has with landlords. Once Wentworth updates each relevant landlord contract, payment will be received from Mr Tarbey (on a quarterly basis). Wentworth is actively pursuing updating each relevant landlord contract and anticipates the majority of landlord contracts will be updated by the time the Proposed Transaction completes. As at the date of this report, Wentworth has rectified landlord contracts with a value of over $1 million, meaning the outstanding balance of the Deferred Consideration is closer to $800,000. Any relevant landlord contracts that are not rectified by completion will be rectified by Mr Tarbey and his management team. The Wentworth Chief Financial Officer, Mr Ron Hollands, will be given unfettered access to Mr Tarbey and his management team and will regularly report to the Wentworth Board on the landlord contract rectification process. Whilst Wentworth have always informally been rectifying landlord contacts (as it is an integral part of a property management business), the level of activity and focus around this has increased. Wentworth has implemented a number of initiatives to incentivize and encourage staff to rectify as many landlord contracts as possible in the shortest timeframe. To the extent the remaining landlord contracts cannot be updated, Wentworth will not receive the full Deferred Consideration. Wentworth has also agreed to provide a working capital loan to Mr Tarbey to assist with the payment of the monthly payroll obligations. This loan is interest free, to a maximum of $200,000. The loan is repayable in full within one month, and if any amount is not repaid by this time, interest will accrue at

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a rate of (7.5%). 6.2. Wentworth’s intentions post transaction If the Proposed Transaction is completed, Wentworth will have: • cash;

• the Deferred Consideration receivable from Mr Tarbey, to be repaid with interest in four quarterly instalments subsequent to the completion of the Proposed Transaction;

• an investment in the listed property company RUN Corp Limited [“RUN”]; and

• carry forward tax losses. There is some uncertainty as to Wentworth’s ability to utilise these tax losses if the Proposed Transaction occurs.

At this stage the Directors of Wentworth have not identified any future business opportunities to acquire, however they anticipate using the listed corporate vehicle and cash resources to undertake another business venture. 7. Scope of the report 7.1. Purpose of the report In determining whether the Proposed Transaction is fair and reasonable to Wentworth Shareholders, we have had regard to the Corporations Act, the ASX Listing Rules, common market practice and to RG 111 regarding the content of Expert’s Reports, as noted in Section 7.2 below. Wentworth requires this IER pursuant to ASX LR 10.1 as well as Section 2E of the Act since this is a related party transaction. We discuss each of these requirements below. ASX Listing Rule requirements Under ASX Listing Rule 10.11, an entity must not dispose of a substantial asset to a related party without the approval of holders of the entity’s ordinary securities (ASX LR 10.1 – 10.1.1). The Property Management Business is a substantial asset of Wentworth (as defined in ASX LR 10.2), and Mr Tarbey is a related party of Wentworth since he is a Director. The Notice of Meeting sent to Shareholders advising them of the related party transaction must include a report on the proposed transaction from an independent expert stating whether in the expert’s opinion the Proposed Transaction is fair and reasonable to the holders of the entity’s ordinary securities whose votes are not to be disregarded (as noted in ASX LR 10.10.2). Unless the opinion is that the transaction is fair and reasonable, the opinion must be displayed prominently in the notice of meeting and on the covering page of any accompanying documents. Corporations Act requirements Under Section 208(1) of the Corporations Act 2001, “For a public company, or an entity that the public company controls, to give a financial benefit to a related party of the public company”, the public company must “obtain approval of the public company’s members in the way set out in Section 217 to 227” unless “the giving of benefit (must)… fall(s) within an exception set out in section 210 to 216” (emphasis added). We have been instructed that the proposed benefit to be provided to Mr Tarbey does not fall within

1 A copy of the ASX LR can be found at: http://www.asxgroup.com.au/media/PDFs/Chapter10.pdf

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the exceptions of sections 210 to 216. Accordingly, Wentworth is required to provide members of the company with all material information known to the person (or their associates) making the acquisition. Specifically, Section 219(2) requires that members of the company be provided with:

“information about what, from an economic and commercial point of view, are the true potential costs and detriments of, or resulting from, giving financial benefits as permitted by the proposed resolution, including (without limitation):

(a) opportunity costs; and

(b) taxation consequences (such as liability to fringe benefits tax); and

(c) benefits foregone by whoever would give the benefits.”

In the case of a resolution pursuant to Section 219 of the Act, ASIC requires that shareholders be supplied with sufficient information to enable them to assess the merits of the proposal. The Independent Directors of Wentworth have engaged Leadenhall to provide Shareholders with a detailed analysis of whether the Proposed Transaction is fair and reasonable to Wentworth Shareholders. 7.2. Basis of evaluation In evaluating whether the Proposed Transaction is fair and reasonable to Wentworth Shareholders, we have had regard to Section 219 of the Act, ASIC RG76 and RG111. We set out below the key terms in RG 111 as they relate to evaluating the fairness of a related party transaction:

When analysing related party transactions, it is important that an expert focuses on the substance of the related party transaction, rather than the legal mechanism. For example, where a related party transaction is made up of a number of separate components, the expert should consider the overall effect of the related party transaction. (para 53) Generally, ASIC expects an expert who is asked to analyse a related party transaction to express an opinion on whether the transaction is ‘fair and reasonable’ from the perspective of non-associated members. This analysis is specifically required where the report is also intended to accompany meeting materials for member approval of an asset acquisition or disposal under ASX Listing Rule 10.1. (para 55) Where an expert assesses whether a related party transaction is ‘fair and reasonable’ (whether for the purposes of Ch 2E or ASX Listing Rule 10.1), this should not be applied as a composite test—that is, there should be a separate assessment of whether the transaction is ‘fair’ and ‘reasonable’, as in a control transaction. An expert should not assess whether the transaction is ‘fair and reasonable’ based simply on a consideration of the advantages and disadvantages of the proposal, as we do not consider this provides members with sufficient valuation information. (para 56)

We have therefore considered the concepts of “fairness” and “reasonableness” separately as discussed below.

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7.2.1 Fairness RG 111 at paragraph 57 defines an offer as being fair if the value of the financial benefit to be provided by the company to the related party is equal to or less than the value of the consideration being provided to the company, and that this comparison should be made: • assuming a knowledgeable and willing, but not anxious, buyer and a knowledgeable and willing,

but not anxious, seller acting at arm’s length; and

• on the basis set out in RG 111 paragraph 10 (i.e. on a controlling basis, assuming 100% ownership of the target company).

Accordingly we have assessed whether the Proposed Transaction is fair by comparing the value of Wentworth’s Property Management Business to the value of the consideration offered by Mr Tarbey. We have assessed the value of the Property Management Business at its fair market value, which is defined as:

The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.2

This definition of fair market value is Consistent with the definition in RG 111 at paragraph 57. Special value is typically not considered in forming an opinion on the fair market value of a share. Special value is defined as the amount a specific purchaser is willing to pay in excess of market value. Such specific purchasers may be willing to pay a premium over fair market value as a result of potential economies of scale, reduction in competition or other synergies they may enjoy arising from the acquisition of the asset. However, to the extent a pool of hypothetical purchasers could all achieve the same level of synergies, then these synergies should be included in fair market value. Our valuation of Wentworth’s Property Management Business does not include any special value. 7.2.2 Reasonableness RG 111 paragraph 60 states that:

“A proposed related party transaction is ‘reasonable’ if it is fair. It might also be ‘reasonable’ if, despite being ‘not fair’, the expert believes that there are sufficient reasons for members to vote for the proposal.”

To assess the reasonableness of the Proposed Transaction, RG 111 (paragraph 62) suggests the expert consider the following significant factors in determining whether the Proposed Transaction is reasonable:

a) the financial situation and solvency of the entity, including the factors set out in RG 111.26 (relating to the bidder acquiring more than 20% of the target), if the consideration for the financial benefit is cash;

b) opportunity costs;

c) the alternative options available to the company and their likelihood of occurring; 2 International Glossary of Business Valuation terms – terminology recommended by APES 225

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d) the company’s bargaining position;

e) whether there is selective treatment of any security holder, particularly the related party;

f) the related party’s pre-existing voting power in securities in the company;

g) any special value of the transaction to the purchaser, such as particular technology or the potential to write off outstanding loans from the target; and

h) the liquidity of the market in the entity’s securities.

We have had regard to the above factors in considering the reasonableness of the Proposed Transaction. 7.2.3 Individual investors’ particular circumstances We have evaluated the Proposed Transaction for Shareholders as a whole and have not considered the effect of the Proposed Transaction on the particular circumstances of individual investors. Due to their particular circumstances, individual investors may place a different emphasis on various aspects of the Proposed Transaction from the one adopted in this report. Accordingly, individuals may reach different conclusions to ours on whether the Proposed Transaction is fair and reasonable. If in doubt investors should consult an independent adviser. 7.3. Limitations and reliance on information The opinion of Leadenhall 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 5. Our procedures and enquiries do not include verification work nor constitute an audit in accordance with Australian Auditing Standards [“AUS”]. 8. Economic and Industry Overview We set out a brief analysis of the Australian economy and the real estate industry in which Wentworth operates. 8.1. Economy In its May 2011 Statement on Monetary Policy, the Reserve Bank of Australia [“RBA”] reported that the global economy is continuing to grow, although conditions vary significantly across different regions. Growth in most of Asia, including China and India, remains strong and unemployment rates are generally low. The main exception is in Japan, where the mid-March earthquake is still having a major effect on domestic production and a significant impact on some global supply chains, and has led to a sharp drop in consumer spending. In contrast to the strong growth in the rest of Asia and in some others parts of the world, many of the North Atlantic economies continue to operate with substantial excess capacity, with unemployment rates remaining high. Growth in domestic demand appears to have been solid over recent months, although growth in aggregate production has been significantly affected by the extreme weather conditions in late 2010 and early 2011. The labour market remains strong and recent surveys suggest that business conditions in the overall economy remain positive. The terms of trade are at a record high, which is providing a significant boost to national income at a time when there is a large pipeline of mining investment to be undertaken. Growth in household consumption and borrowing, however, remains relatively subdued, as households continue to save a higher share of income than was the case over the past two

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decades Over the 2011 and 2012 calendar years, GDP growth is forecast by the RBA to be around 4.25% and to decrease to 3.75% per cent in 2013. The economic growth in the mining sector is expected to be stronger than in other sectors. Underlying inflation increased to around 2.5% over the year to the June quarter 2011, and is projected to further increase to around 3% for the foreseeable future. The cash rate was 4.75% in July 2011, having last been increased in November 2010. If the Australian economy continues to expand at a rate that puts upward pressure on inflation, it is likely the RBA will continue to increase interest rates, which may dampen rises in housing prices and the volume of properties sold. However the recent downgrading of credit worthiness of the US Government appears to have reduced the likelihood of an interest rate increase in the short term. 8.2. Profile of the industry The real estate agency industry comprises parties that act as intermediaries between buyers and sellers of real estate or owners and tenants. They are also engaged in valuing, purchasing, selling, managing or renting real estate for others. 8.3. Structure of industry Generally, property management services are provided by real estate agents, as an additional service that can be provided to property investors. Further, if an investor decides to sell their investment property, the property manager hopes to be able to sell the property for a commission. The real estate agency industry in Australia has a high number of competitors and a low level of concentration. The largest four players accounted for approximately 14% of revenues in 2009/2010. The industry is dominated by small real estate agencies (defined as those employing less than 20 persons), which account for approximately 94% of total businesses. The residential market is dominated by localised businesses (defined as those that are not national franchise businesses) that are often very prominent in their geographical location. The rural and commercial markets are predominantly national franchise businesses. 8.4. Major customers The major customers for property management services are property investors. The propensity for investors to invest in property depends on factors such as expected capital gains, rental yields, interest rates, and the availability of tax deductions under negative gearing. 8.5. Demand determinants The demand for property management services is primarily influenced by the level and value of property sales and leasing activity which is a function of population growth levels and overall economic conditions such as interest rate levels, the level of business profitability, household incomes, household wealth and taxation considerations. It is generally perceived that negative gearing increases the demand for investment properties, whilst Government incentives to build and buy houses, such as the First Home Owner’s scheme reduces the demand for rental properties. The growth in the number of overseas students and workers combined, leading to an increase in the mobility of Australian populations tends to lead to an increase in the number of rental properties required.

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8.6. Critical success factors Having regard to the key sensitivities of the Australian property management industry discussed above, we consider the primary success factors to be as follows: Geographic Specialisation: in the residential market, there has been a tendency for property managers to provide personalised service and local knowledge by concentrating on localised markets. Marketing Skills: this is a service-based industry that requires strong marketing skills, with investments in advertising, staff selection, and staff training. Quality of Service: in competing for property management rights, it is important for property managers to emphasise intangible aspects such as quality of service, buyer prospecting and networking. Systems: some agencies compete by developing expertise in database systems to improve referrals, and enhance the quality of leasing and property management services. Price: in certain states, sales commissions have been deregulated and competition is based on price which is increasingly affecting the levels of leasing without an agent. 8.7. Barriers to entry Barriers to entry are relatively low in this industry, mainly due to the relatively low entry costs and regulation. State government licensing regulations stipulating minimum experience and education requirements can inhibit some potential new entrants. We consider the barriers to entry to include: • significant level of competition in the industry therefore it is imperative to develop a referral base

and centres of influence in order to build a critical mass of customers and referral sales.

• property investors seeking property management services tend to concentrate their search within a localised area, therefore established firms can have expertise within defined areas which results in a high level of personalised service and local knowledge required by the customer.

• the low concentration of competitors makes it difficult for new entrants to grow and compete over large geographic areas, without the benefit of scale or business-format franchise systems (such as the Century 21 franchise).

8.8. Regulation The Australian real estate agents’ industry is closely regulated at the state and territory level, with most states having strict provisions requiring licensing of persons and corporations that provide real estate services. Licensing requirements differ between states but generally cover educational qualifications, experience, character and residence. Real estate franchises are also regulated and must comply with the Franchise Code of Conduct administered by the Australian Competition and Consumer Commission [“ACCC”]. 8.9. Market share of franchise affiliated Real estate agents in Australia IBISWorld estimates the number of real estate agents affiliated with a franchise, cooperative or

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marketing group was expected to account for 48% of real estate agents in 2009-10 up from 44.5% of all real estate agent businesses in 2002-03, compared with 38% in 1995-96. In 2002-03, real estate agents affiliated with a franchise, cooperative or marketing group accounted for 53.9% of total revenue generated by real estate agents. There are more than thirty franchise groups. The five largest groups and their estimated market share is set out in the table below: Table 3: Franchised real estate groups in Australia Franchise group Market share

L.J Hooker Limited 5.9% Ray White Real Estate 2.1% Century 21 Real Estate Corporation NA Elders Real Estate 3.5% Raine & Horne (Holdings) Pty Ltd NA Total ~25% Source: IBISWorld Industry Report on Franchising in Australia dated 29 November 2006

8.10. Property sector in Australia A key driver of property management income is the number and value of properties managed. The median value of properties sold in Australia from 2002 to the period ended September 2010 (latest available), is presented in the Figure below. Figure 2: Median price of properties sold per quarter

Source: Australian Bureau of Statistics: 6416.0 House Price Indexes: Eight Capital Cities dated March 2011 As demonstrated from the above, Perth property prices increased significantly over this time, at a compound annual growth rate [“CAGR”] of 11.7%, whilst Melbourne grew at a CAGR of 8.45%. Sydney’s CAGR was the lowest, at 5.74%.

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8.11. Future expectations The demand for housing is impacted by factors such as population growth (births and immigration) and the rate of household formation and dissolution (for example due to divorce and separation). There appears to be an increasing trend to renting properties, which increases demand for residential property management services. According to the 2006 ABS Census, 22% of households rent privately, an increase of four percentage points since 1995 (ABS 2007 4). In 2006 private renter dwellings numbered 1.47 million Australia-wide, an increase of 11% since 2001. Much of this growth has taken place at the moderate to high-end of the housing market. AHURI3 research indicates that the private rental market is no longer a transitional tenure simply used as a steppingstone to home ownership. The high cost of housing is now the most significant barrier to home ownership with many private renters no longer aspiring to home ownership. Another trend is for property developers to develop smaller and therefore more affordable lot sizes including high density housing such as town houses and units / apartments. It is possible that cheaper housing may lead to an increase in home ownership and lower demand for rental properties at some time in the future. At present, there are a number of market commentators suggesting property prices will decrease in the foreseeable future. However the historical trend has been for rents, and therefore property services income, to generally increase year on year, so despite a possible decrease in property values there is not expected to be a significant decline in property management industry revenues. 9. Profile of Wentworth In this section we set out a brief summary of Wentworth, which has been listed on the ASX since 2000 (under various names). Wentworth has an alliance with the Australian master franchise of Century 21 (owned by Mr Tarbey), one of the world’s largest real estate brands. Wentworth seeks to apply its property management expertise together with the recognized and accredited Century 21 system to ensure that its clients’ properties receive maximum exposure each time they are offered for rent. Wentworth employs only experienced property managers who are dedicated to providing professional service at the highest level by ensuring that all staff receive ongoing training to enable them to advise their clients on all matters regarding the management of their property. 9.1. Operations Wentworth provides the traditional property management activities of letting and managing rental properties. Its customers are landlords of investment properties. Vacant properties are let to new tenants (for which Wentworth earns a letting fee), properties are regularly inspected and repairs and maintenance are effected. In some cases Wentworth arranges for payment of insurances and other outgoings on behalf of the landlords, and levies a commission on these payments. 9.2. Management and personnel The Board of Wentworth comprises the following members: Mr Charles Tarbey (Executive Director) - is a Licensed Real Estate Officer with over 35 years experience in the running of company owned and franchised real estate offices. Mr Tarbey currently owns one of the largest real estate franchise networks in Australia, Century 21. 3 Australian Housing and Urban Research Institute

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Mr Vaughan Webber (Chairman) - is an experienced finance professional with a background in chartered accounting at a major international accountancy firm and more recently in corporate finance servicing the Australian capital markets. Mr Colin Cowden (Non-Executive Director) - is a qualified accountant and company secretary and has been on a number of boards including listed Insurance Group OAMPS Ltd and mining company Centamin Egypt Ltd. He has also Executive Chairman of Cowden Ltd, a substantial independent insurance broking group. Mr Hugh Robertson (Non-Executive Director) - represents the interest of institutional investors and is a Partner and Director of Bell Potter Securities. He has had over 20 years experience in dealing with listed Companies. Mr Nigel Sharp (Executive Director) - has over 30 years experience in the property industry including property management, property development, listed property trust management, property valuations and sustainability solutions for property. The key management of Wentworth comprises the following: Mr Ron Hollands – Chief Financial Officer and Company Secretary of Wentworth, a Chartered Accountant with over 20 years experience with a large accounting firm, and with public and private companies. 9.3. Competitive position of Wentworth The table below sets out a brief strengths, weaknesses, opportunities and threats analysis [“SWOT”] for Wentworth. Table 4: SWOT analysis

Strengths

Weaknesses

Stabilised revenue and profitability No sales agency in most offices1

Property portfolio management skills Net churn of properties with declining margins

Broad market coverage with recognised brand Uncertainty of outlook for having price growth

Threats

Opportunities

Economic conditions deteriorating Improve service to reduce churn

Churn higher than expected Provide additional services such as sales

Loss of key operational management

Limited barriers to new competitors

Acquire other rent rolls

Source: Wentworth management and Leadenhall analysis Notes:

1. Wentworth has a sales agency in the Frankston Commercial office, and one of its three NSW offices (Wooli Creek). 9.4. Capital Structure The table below shows Wentworth’s capital structure for FY 2009 and 2010 and half year of FY2011.

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Table 5: The Wentworth’s capital structure

Year Ended 30-Jun-09 A$’000

30-Jun-10 A’000

31-Dec-10 A’000

Total Debt 9,356 4,338 4,014 % of Total 49% 23% 19% Total Common Equity (book value) 9,762 14,256 17,085 % of Total 51% 77% 81% Total Capital 19,118 18,594 21,099 Source: Capital IQ

The above analysis shows that Wentworth has reduced its gearing since FY09, which has reduced the risk profile of the company. 9.5. Historical Share Price The table below shows Wentworth’s share price and volume over the past three years. Table 6: Wentworth’s share price and volume

Source: Capital IQ

From 2007 to 2011, the share price declined from $0.255 (as of 10 Aug 2007) to its current level of around $0.06. The majority of this decline occurred prior to May 2008. This reflects the impact of the global financial crisis and the company’s poor financial performance at the time, as set out below. 9.6. Shareholders The company’s top three shareholders owned 44.31% of the company’s shares at 22 September 2011, and the top 20 shareholders own over 75% of the company. Accordingly we consider Wentworth to be a tightly held, thinly traded stock. 9.7. Financial performance We set out below Wentworth’s actual and normalised financial performance for FY08 to FY11.

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Table 7: Wentworth’s financial performance Year Ended 30-Jun-08

A$’000 30-Jun-09

A$’000 30-Jun-10

A$’000 30-Jun-11

A$’000

Sales revenue 31,862 19,894 14,044 13,986

Overheads

Employee Benefits (23,896) (12,267) (7,914) (7,537)

Advertising and Marketing (3,259) (1,856) (107) (139)

Communication (2,605) (1,792) (810) (746)

Occupancy (2,752) (2,663) (1,110) (1,044)

Administration (3,838) (2,404) (2,031) (1,174)

Other (536) (2,126) (11) (31)

Impairment of Assets (3,318) (1,187) - (375)

Total Overhead (40,204) (24,295) (11,983) (11,046)

EBITDA (8,342) (4,401) 2,061 2,938

Depreciation (1,254) (1,810) (323) (185)

EBITA (9,596) (6,211) 1,738 3,159

Amortisation (3,469) (4,068) (2,856) (2,888)

EBIT (13,065) (10,279) (1,118) (135)

Finance costs (2,799) (1,412) (508) (398)

Loss from discontinued operations (5,952) (300) - -

Profit before tax (21,816) (11,991) (1,626) (533)

Source: Wentworth annual reports for FY08 to FY10 and management accounts for FY11. Notes: EBITDA – Earnings before interest, taxation, depreciation and amortisation EBIT – Earnings before interest and taxation Wentworth’s financial results, as set out above, are subject to a number of once-off and non-recurring items. We set out in the Table below Wentworth’s normalised EBITDA for FY08 to FY11. Table 8: Wentworth’s normalised financial performance Year Ended 30-Jun-08 30-Jun-09 30-Jun-10 30-Jun-11 A$’000 A$’000 A$’000 A$’000 Reported EBITDA (8,342) (4,401) 2,061 2,938

Impairment of assets 3,318 1,187 - 375

Non cash remuneration / other payments - 342 813 -

Various legacy items - 455 307 -

Write off goodwill - closure of sales office - 1,036 - -

Loss / (profit) on disposal of non-current assets - 2,588 10 (725)

Other items - 671 - 167

Total Normalisations 3,318 6,279 1,130 (183)

Normalised EBITDA (8,342) 691 3,191 2,755

EBITDA Margin (15.8%) 9.4% 22.7% 19.7%

Source: Wentworth annual reports for FY08 to FY11. In relation to the above financial performance, we note the following:

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• revenues declined significantly in FY09 due to a restructuring undertaken by the Company. This

involved exiting real estate sales, closing certain underperforming offices, selling other assets (such as selling its management letting rights business) and focussing the company’s activities on property management;

• revenues in FY10 reflect the underlying income from the remaining business;

• revenues declined in FY11 by 5.5% due to the net “churn” of properties managed, after allowing for increases in rents and associated management fee income;

• operating expenses mainly relate to salaries and wages paid to property management staff. Management were able to reduce normalised operating costs by only 1.4% in FY11 (which is less than the decrease in revenue);

• the Property Management Business delivered a positive normalised EBITDA contribution in FY10 of $3.2 million subsequent to the restructuring in FY09, which represents an EBITDA margin of 22.7%;

• due to revenues decreasing by more than the reduction in expenses in FY11, the EBITDA contribution reduced to $2.6 million, which represents an EBITDA margin of 19.4%; and

• the Company appears to have stabilised in terms of revenue and profitability, compared to FY09 and previous years.

9.8. Financial position The statements of financial position of Wentworth as at 30 June 2010 (audited) and 30 June 2011 (unaudited) are summarised in the table below. Table 9: Wentworth Financial position

30 Jun 10 Audited (A$’000)


Assets

Cash 625 740

Receivables 513 255

Other Current Assets 1,343 325

Total Current Assets 2,481 1,320

Property, Plant and Equipment 339 230

Intangible Assets (incl. goodwill) 19,142 15,804

Deferred Tax Assets (including tax losses) - 1,585

Other Non-Current Assets 4 4

Total Non-Current Assets 19,485 17,623

Total Assets 21,966 18,943

Liabilities

Trade and Other Payables 275 111

Borrowings 4,338 3,690

Employee Entitlements 548 516

Other Liabilities 810 294

Dividends Payable 1,184 1,132

Tax Payable - 576

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30 Jun 10

Audited (A$’000)


Accrued Expense 555 391

Total liabilities 7,710 6,710

Net assets 14,256 12,233

Source: Wentworth annual report for FY10 and management accounts for FY11. In relation to the above financial position, we note that Wentworth does not have any significant net tangible assets. This reflects the fact that the business is a service business, and deducts payment for management fees as rent is collected. 9.9. Outlook As noted in Table 7 above, the company’s revenues are in decline. This is due to the fact that a number of landlords (whom are Wentworth’s customers) cease to use Wentworth’s services each year. Whilst Wentworth is able to gain new customers, the business is experiencing a net loss of properties under management, or “churn”. The reasons for this reduction in number of properties under management include: • switching to an alternative provider of property management services (including doing it

themselves);

• the property being sold, meaning there may no longer any need for the property to be managed (although in some instances the property is bought by another property investor who requires property management services and continues to use Wentworth as the incumbent manager); and

• the customer moving into the property and no longer requiring property management services.

In the cases where the property is sold, Wentworth is occasionally able to refer the property to a Century 21 real estate agency (being the real estate franchise owned by Mr Tarbey), for which Wentworth receives a referral fee from the sales commission of 25% to 30%. Wentworth also provides real estate sales services from its Frankston (Commercial) and Wooli Creek (NSW) office. Wentworth receives a larger share of commissions from sales made via these offices, and the referral rate is also higher at these offices. These referral fees and sales commissions offset, temporarily, the loss of property management income. In terms of the property management fees Wentworth can expect to generate in the future, the key drivers include: • the demand for rental properties – which has generally increased over time. A recent report by the

Victorian Department of Housing indicated that the number of active bonds had increased by an average of 4.3% per annum over the 10 years to March 2011;

• the number of properties managed. As noted above, the number of properties managed by Wentworth is in decline due to net churn of properties;

• the amount of rent per property – which is a function of the value of properties managed and rental yields. Due to the duration of tenant’s leases, the volatility of rents is expected to be lower than property prices. A recent study by the Victoria Department of Housing indicated that Melbourne rents increased by an average of over 4% per annum from 2001 to 2011, with annual increases ranging from over 3% to almost 8% from 2006 to 2011;

• the ability to charge other fees such as letting fees (when a new tenant signs a lease) and other fees and commissions on outgoings; and

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• the number of churned properties which result in a referral fee or sales commission.

Wentworth’s costs are predominantly salaries and wages for its property management staff. In FY11 over 70% of operating costs relate to employee benefits expenses. Occupancy costs, which are relatively fixed, account for only 10% of costs. Based on discussions with Wentworth management, we expect that as the number of properties managed declines over time, the number of staff employed will also be reduced. A portion of this reduction will occur naturally through staff attrition, however in some instances the company may need to incur redundancies in the absence of any other initiatives to grow the portfolio of properties managed. In conclusion, we expect Wentworth’s revenues and profit margins to decline gradually over time due to the reduction in the number of properties managed. This is partially offset in the earlier years by sales commissions from selling churned properties. Our valuation analysis reflects this outlook for the Wentworth Property Management Business. 10. Valuation Methodologies 10.1. Available valuation methodologies To estimate the fair market value of the Wentworth Property Management Business we have considered common market practice and the valuation methodologies recommended in paragraph 69 of ASIC RG 111. There are a number of approaches that can be used to value a business: • a Market Approach;

• an Asset Approach; and

• an Income Approach.

We summarise each of these approaches in the diagram below. Figure 3: Valuation Approaches

Income based methods estimate a company’s fair market value by considering the future cash flows the company is expected to generate.

Asset based methods estimate the fair market value of a company based on the realisable value of its identifiable net assets.

Market based methods estimate a company’s fair market value by considering the market price of transactions in its shares or the market value of comparable assets.

Within each of these valuation approaches there are a number of specific Valuation Methods. Each approach is appropriate in certain circumstances and often more than one approach is applied, at least as a secondary cross-check to a primary method. The choice of methods depends on factors such as the nature of the business being valued, the valuation methodologies usually applied to value such businesses and the availability of the required information.

Income Asset Market

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10.2. Selection of valuation methodologies In selecting an appropriate valuation methodology to value the Wentworth Property Management Business, we have had regard to the following factors: • the Wentworth Property Management Business is in decline, and therefore has a finite life;

• subsequent to the restructure, Wentworth is generating a positive EBITDA contribution;

• shares in Wentworth are tightly held and thinly traded, meaning the Company’s share price may not be a good indication of fair market value; and

• the are no suitable listed comparable companies to be able to apply Market Approaches. In this regard we note that RUN is also thinly traded and tightly held, and has a significant level of debt. We consider the earnings multiples implied by RUN’s share price are likely to be distorted as a result.

Accordingly we are of the opinion that the most way to value Wentworth’s Property Management Business is by using an Income Approach, and specifically the discounted cash flow (“DCF”) method. This method requires the availability of long-term cash flow projections and assumes that the business is operating as a going concern. The process by which Leadenhall has undertaken this indicative valuation is to: • analyse Wentworth’s historical trend in sales revenue, gross margin, overheads and EBITDA

margins;

• determine Wentworth’s net working capital requirements, and the level of replacement capital expenditure;

• project the future cash flow expected to be generated by the business based on expectations of sales growth, margins and capital requirements;

• discuss each of the assumptions underpinning the projections with Wentworth management. On this basis we consider these assumptions, when taken as a whole, are reasonable;

• calculate an appropriate discount rate;

• determine an appropriate terminal value to include; and

• discount those cash flows to determine their present value.

11. Valuation of the Wentworth’s Property Management Business As discussed above, we have applied the DCF methodology as our primary valuation methodology in determining the indicative fair market value of Wentworth’s Property Management Business. We have also calculated the implied earnings and asset multiples based on our DCF analysis as a secondary cross-check. 11.1. Future Cash Flow Projections As discussed above, the first step in the valuation process is to determine the future cash flow to be generated by the Property Management Business. For the purposes of this report a detailed financial model was prepared by Leadenhall, based on Wentworth’s historical financial performance, with the assistance of Wentworth’s management and this formed the basis of the estimated future cash flows. Since the business is in decline, we have

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projected the cash flows until Wentworth reaches break-even. Based on discussions with Wentworth management we have assumed that the when the business’s profitability becomes break-even, it would be disposed off and that any proceeds would be applied to any closure costs. We set out below some general comments on the revenues and operating expense assumptions we have made. Revenues We have projected the revenues based on: • the number of properties under management;

• the rental commission Wentworth has contracted to earn for each property, based on a percentage of the agreed rent. This is referred to by Wentworth as the “recurring income”;

• other commissions and fees, such as letting fees, based on the historical ratio of these fees to the overall recurring income; and

• a “churn” factor, based on an analysis of Wentworth’s historical churn rate for each office. We selected lower churn rates for offices which included a sales office (as they are more able to replenish properties under management). In this regard we note that Wentworth’s historical churn rate has been adversely impacted by acquiring and re-branding property management businesses, and therefore the expectation is that the future churn rates are likely to be lower than historical rates. Our implied annual churn rates are in the range from approximately 6% to 7.5% on a straight line basis, and 8% to 10% on a diminishing value basis. The selection of a straight line or diminishing value method did not significantly alter the outcome of our analysis.

The recurring revenue per property was increased each year based on expected changes in property prices and rents. Due to the current uncertainty regarding the growth in rents we have developed a number of scenarios with differing rental growth rates, as discussed in Section 11.1 of this report. Sales Commissions In two offices, Frankston Commercial and in NSW, Wentworth has a sales division. In these locations, Wentworth generates cross-referrals to sell a high proportion of properties churned (approximately 40%); in the other locations, a lower proportion (less than 20%) of properties churned are referred to a local C21 sales agency for a referral fee. We have included an allowance for this income stream in our valuation of the Property Management Business based on these historical referral rates. The Sales Commissions earned have been calculated by applying a notional rental yield to the actual rental income per property to determine a notional value per property sold. Yields were discussed with management, and cross-checked to market commentary. The Sales Commission has also been increased each year based on expected increases in property prices. Operating Costs The majority of the Property Management Business’ operating costs are property management staff, information technology [“IT”] costs and occupancy costs. Therefore a high proportion of operating costs are variable, since the number of property management staff can be reduced as the number of properties management churns away. Based on detailed discussions with Wentworth management, an analysis of its cost structure, and the specific steps Wentworth could take to reduce costs over time as the number of properties managed at each office reduces, we have assumed 80% of operating costs are variable, and vary with the number of properties managed (rather than revenues). The higher the

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proportion of fixed costs, the lower the overall value of the Property Management Business. The fixed portion of this cost base has been inflated at 3% per annum. Corporate Overheads Wentworth has corporate overheads of approximately $1.5 million per annum. A portion of these costs relate to corporate overheads (approximately $800,000), whilst the remainder (approximately $700,000) relate to providing accounting, payroll and human resources services to the Property Management Business. Based on discussions with Wentworth management and an analysis of the remaining operating corporate costs, we have assumed that a potential purchaser of the Property Management Business would not have to incur any of the corporate overheads (circa $800,000), and would also be make some further cost savings, in the vicinity of $250,000. These savings primarily relate to the size and cost of the head office management team required to operate the business. The fixed portion of this cost base has also been inflated at 3% per annum. Summary of Assumptions Based on the above explanations, we summarise the key assumptions in the table below. Table 10: Projection Assumptions Bayside Frankston

Residential Frankston

Commercial Albert Park WA NSW

Revenue

Management Fees [“MF”] (MF) As per Wentworth’s management reports – Total of $9.8 million at 30 June 2011

Letting & Other Fees as % of MF Based on historical performance – 24% for FY11

Property Yield 4.0% 5.0% 6.5% 4.0% 4.0% 4.0%

Churn – straight line Approximately 6% to 7.5% (lower if has a sales office)

Operating Costs

Fixed Costs as % of Total Costs 20.0%

Corporate Overheads

Total corporate costs allocated $500,000 indexed at 3% pa

Property Sales

% of Properties Sold by C21 18.5% 18.5% 30.0% 40.0% 18.5% 25.0%

Gross churn as % of net churn 150% 150% 150% 150% 150% 150%

Sales Price (average) $435k $255k $395k $490k $450k $725k

Commission Rate 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Wentworth % of Commission 25.0% 75.0% 75.0% 25.0% 25.0% 25.0%

Annual Price Growth Rate Refer below

Source: Wentworth management, Management Accounts and Leadenhall analysis In relation to the above assumptions, we make the following observations: • if the revenue from property management is projected to fall below the variable and fixed

operating costs, we have assumed the remaining business would be sold for cash consideration, and any exit costs (such as closure costs, employee redundancies, legal costs of transferring property management rights) would be paid out of the consideration received such the net residual value at this future point in time is nil;

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• Management Fees – have been based on the management fees in each offices’ rent roll

reports (which shows the total potential management fees from all properties managed). We have cross-checked these amounts to the management accounts for the year ended 30 June 2011 for reasonableness;

• Letting Fees and other fees as a percentage of management fees are based on the actual fees earned for the year ended 30 June 2011 as a percentage of the management fees. The nature and amount of these fees varies by office e.g. in WA inspection fees are charged, whilst in Frankston Commercial, a commission is charged on outgoings;

• Wentworth gains new properties to manage each year, and also loses management rights. On a net basis, the number of properties managed is declining over time. The gross churn varies as a multiple of the net churn by office, however we have conservatively selected a multiple of 1.5 times (i.e. if 100 properties are churned in a year, the gross churn would be 150 properties and the sales commission / referral fees are based on the proportion of the 150 properties churned);

• Sales Price (average) – is based on capitalising the passing annual rent by the yield noted above. The implied sale price is used to determine the commission payable;

• Commission Rate – standard 2% commission rate based on the amount charged by C21; and

• Rental Growth Rates – as discussed below.

Rental Growth Rates Management fees are charged as a percentage of the rental income. Rents are a function of property prices and yields – as property prices and rents increase (due to increases, in income, population growth etc.), then the management fees also increase. We have analysed historical property price growth rates, as set out in Figure 2, and also considered recent market commentary regarding expected future property price growth. In this regard we note that the properties managed are generally located in inner-city areas which have typically exhibited higher than median growth rates due to the imbalance of supply vs. demand for properties located in these areas. Generally, market commentators suggest that the long term property growth rates are likely to exceed inflation, however be lower than historical growth rates. Further, the current level of property prices continues to be effected by post-GFC related uncertainty, and recent increases in interest rates. Accordingly, to address this uncertainty, we have undertaken a number of scenarios with varying property growth rates, as set out below.

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Table 11: Property Price Growth Rates Bayside Frankston

Residential Frankston

Commercial Albert Park WA NSW

Average 2002 – 2010 9.6% 9.6% 9.6% 9.6% 13.0% 4.6%

Median 2002 – 2010 9.1% 9.1% 9.1% 9.1% 13.7% 3.0%

Low 3.8% 2.5% 2.5% 3.8% 3.8% 2.5%

Moderate 4.5% 3.0% 3.0% 4.5% 4.5% 3.0%

Selected 5.3% 3.5% 3.5% 5.3% 5.3% 3.5%

High 6.0% 4.0% 4.0% 6.0% 6.0% 4.0%

Source: ABS data, Wentworth management, Management Accounts and Leadenhall analysis For the purposes of our valuation analysis, we have selected property growth rates which are lower than historically achieved. We have then undertaken a sensitivity analysis to indicate the impact on the value of the Property Management Business from varying the assumed growth rate. 11.2. Discount Rates To determine the fair market value of Wentworth’s Property Management Business it is necessary to determine an appropriate discount rate to apply to the projected cash flows. The tables below summarise our conclusions regarding the appropriate discount rates which are expressed as a post-tax Weighted Average Cost of Capital [“WACC”]. Table 12: Selected discount rate

Business Ke Post Tax D / (D+E) WACC Post Tax Wentworth Property Management

Business 10.4% - 12.8% 20% 9.5% - 11.4%


Detailed analysis of our selected discount rates is set out in Appendix 4. 11.3. Premium for Control A premium for control can be defined as the difference between the price to which a controlling interest attaches and the price at which a share which does not carry with it control of the company could be acquired. The requirement for an explicit valuation adjustment for a premium for control depends on the valuation methodology and approach adopted. The discounted cash flow methodology implicitly assumes control of the cash flows generated by the assets being valued. Accordingly, such valuations already reflect a premium for control and no further adjustment is required. 11.4. Net Present Value Analysis Conclusion Based on our forecast cash flows and using our selected discount rates, the following enterprise valuation (i.e. pre-debt) range has been calculated. Table 13: Net Present Value of Future Cash Flows

Methodology - Scenario -

DCF Low $’000

DCF Mid

$’000

DCF High $’000

Discount Rate (Post Tax WACC) 11.4% 10.4% 9.5%

Value of Wentworth’s Property Management Business 17,972 18,702 19,432

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Leadenhall have assessed the enterprise value of Wentworth’s Property Management Business to be between $17.97 million and $19.43 million, based on our selected rental growth rate scenario. At lower growth rates the value will also be lower, whilst at higher growth rates, the value will be higher, as set out in the figure below. Figure 4: Value of Property Management Business based on various rental growth rates


11.5. Implied Multiples Using the historical and forecast earnings from the DCF valuation and the valuation conclusion itself, implied earnings and revenue multiples can be calculated. The table below outlines the implied earnings and revenue multiples from the DCF valuation (based on the mid-point of the valuation range). Table 14: Implied Earnings and Revenue Multiples

Historical FY10

(times)

Current FY11

(times)

Prospective FY12

(times) EBITDA (normalised from Table 8) 3,191 2,755 4,015

EV / EBITDA (based on the mid-point value of $18.7 million) 6.1x 7.1x 4.7x

EV / Revenue (based on the mid-point value of $19.1 million) N/A 1.70 NA

Source: Leadenhall analysis Notes: EBITDA for FY12 is based on the projections developed by Leadenhall and is consistent with adjusting the normalised EBITDA in Table 8 for savings in corporate and other costs after allowing for net churn.

Based on the above analysis we consider the implied EBITDA multiples support our DCF based valuation. We note that these implied multiples are higher than the historical multiples Wentworth shares have recently traded at, which is in the range from 4.6 times to 5.5 times. This reflects, in part, the cost savings we expect a hypothetical purchaser could achieve from taking Wentworth private. We consider this implied multiple to be reasonable given the size and risk profile of the Property Management Business, as well as the negative growth outlook given the net churn in properties. We considered cross-checking the implied EBITDA multiple to RUN (of over 11 times), however this appears extremely high, and may reflect the fact that RUN is highly geared, tightly held and thinly traded. Accordingly we consider than RUN’s trading EBITDA multiple is not a reasonable indicator

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of value. The implied revenue multiple is higher than historical revenue multiples for Wentworth (of 1.11 times) and RUN (of 1.45 times), as set out in Appendix 2. Businesses with rent rolls such as the Property Management Business are often valued using the multiple of revenue rule of thumb, however we caution reliance on this metric as profit margins vary between businesses. Accordingly we consider this cross-check of limited usefulness, although some readers may consider it useful. 12. Value of Consideration offered by Mr Tarbey The consideration offered by Mr Tarbey is approximately $18.70 million, and comprises a completion payment of $16.86 million, and Deferred Consideration of up to $1.84 million, payable in four quarterly instalments following completion beginning on 15 April 2012 and ending on 15 January 2013. Interest will accrue on the Deferred Consideration at a rate of 4.5% per annum which is lower than Wentworth’s borrowing cost (around 9.0% per annum). Mr Tarbey has obtained finance for 100% of the consideration of the Property Management Business, however due to 10% of the contracts (by value) requiring updating, his financiers have restricted payment to 90% of the purchase price (hence the Deferred Consideration). In order to receive the Deferred Consideration, Wentworth needs to amend certain aspects of some of the contracts it has with landlords. Once Wentworth updates each relevant landlord contract, payment will be received from Mr Tarbey (on a quarterly basis). Wentworth is actively pursuing updating each relevant landlord contract and anticipates the majority of these contracts will be updated by the time the Proposed Transaction completes. As at the date of this report, Wentworth has rectified landlord contracts with a value of over $1 million, meaning the outstanding balance of the Deferred Consideration is closer to $800,000. Any landlord contracts that are not rectified by completion will be rectified by Mr Tarbey and his management team. The Wentworth Chief Financial, Mr Ron Hollands, will be given unfettered access to Mr Tarbey and his management team and will regularly report to the Wentworth Board on the landlord contract rectification process. To the extent the remaining landlord contracts are not updated, Wentworth will not receive the full Deferred Consideration from Mr Tarbey. As noted above, the amount of remaining Deferred Consideration is approximately $800,000 since over $1 million (by value) of landlord contracts have already been rectified at the date of this report. Therefore the present value of the deferred consideration is lower than the $1.84 million payable due to: • the rectification of over $1 million (by value) of landlord contracts at the date of this report

(which reduces the amount of remaining Deferred Consideration to approximately $800,000);

• the potential for properties to churn in the interim. We have applied a churn rate based on the projected churn rates discussed in Table 10;

• the potential reduction in the amount of Deferred Consideration paid by Mr Tarbey if the relevant landlord contracts cannot be updated with 12 months of completion. We have subjectively assumed that 10% to 20% of the remaining landlord contracts are not able to be rectified. The higher the proportion of landlord contracts which are rectified, the higher the value of the Deferred Consideration; and

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• the lower than market interest rate being charged (which is around 4.5% lower than

Wentworth’s current borrowing rate). We have assumed the remaining Deferred Consideration will be outstanding for 6 months.

Accordingly we have assessed the fair market value of the Deferred Consideration by applying a 10% to 15% discount to the total amount of Deferred Consideration, which results in a range of values from $1.57 million to $1.66 million. Overall we have assessed the fair market value of the total consideration payable by Mr Tarbey to be in the range from $18.43 million to $18.52 million.

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Appendix 1: Glossary Term Meaning

ASIC Australian Securities and Investments Commission

ASX Australian Stock Exchange Limited

AUS Australian Auditing Standards

Corporations Act The Corporations Act 2001

EBIT Earnings before interest and tax

EBITDA Earnings before interest, tax, depreciation and amortisation

FY Financial year

IBIS IBIS World Pty Ltd

Independent Directors Directors of Wentworth other than Mr Tarbey

Leadenhall Leadenhall VRG Pty Ltd

NPAT Net profit after tax

NTA Net tangible assets

PBT Profit before tax

Proposed Transaction Mr Tarbey’s offer to acquire Wentworth’s Property Management Business

Section 611 Section 611 of the Corporations Act 2001

Section 640 Section 640 of the Corporations Act 2001

Shareholders Existing holders of Wentworth shares

SWOT Strengths, weaknesses, opportunities and threats

The Act The Corporations Act 2001

Wentworth Wentworth Holdings Limited

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Appendix 2: Comparable entities The following table provides analysis of implied historical EBITDA multiples for companies with comparable activities to the Wentworth: Table 15: Comparable entities’ earnings multiples – market trading

Company Enterprise

value ($million)

Market capitalisation

($million) EBITDA

times Revenue

times

Wentworth Holdings (ASX:WWM) 15.6 13.1 4.7 1.11

RUN Corp (ASX:RNC) 41.4 7.2 11.5 1.45 Source: Capital IQ

We provide the descriptions for each of the above comparable Companies as follows: Table 16 Comparable entities’ description

Ticker Company Name Business Description

WWM Wentworth Holdings

Wentworth Holdings Limited, together with its subsidiaries, operates as a property management and real estate company in Australia. The company engages in real estate sales and property management in Western Australia, Victoria, and New South Wales. Its services include onsite letting of holiday, corporate, and/or permanent units.

RNC RUN Corp RUN Corp Limited operates as a retail and residential property management and sales company in Australia. The company provides various services to the property owners, including sourcing of tenants, collection of rent, inspection of premises, and disbursement of funds. It also provides trust accounting and other administrative services to the real estate industry. RUN Corp manages properties in Melbourne, Sydney, and Brisbane; and involves in the sale of properties. The company was founded in 2004 and is headquartered in Prahran, Australia.

Source: Capital IQ

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Appendix 3: Sources of information In preparing this report we have had access to the following principal sources of information: • Financial statements for Wentworth for FY09, FY10 and FY11 (audited);

• The Explanatory Memorandum;

• Albert Park Residential Rent Roll analysis as at 30 September 2011;

• Bayside Residential Rent Roll analysis as at 30 September 2011;

• Frankston Residential Rent Roll analysis as at 30 September 2011;

• NSW Residential Rent Roll analysis as at 30 September 2011;

• WA Park Residential Rent Roll analysis as at 30 September 2011;

• Frankston Commercial Rent Roll analysis as at 30 September 2011;

• Wentworth Management Accounts Snapshot at April 2011, June and September 2011;

• House Price and Selected Housing Indexes from the Australian Bureau of Statistics and the Reserve Bank of Australia website;

• Various media articles regarding property prices;

• The Share Sale Agreement between Mr Tarbey and Wentworth;

• Rental Report by the Victorian Department of Housing dated March 2011; and

• Capital IQ.

In addition, we have had discussions and correspondence with certain directors and executives, including Mr Vaughan Weber, Chairman, and Mr Ron Hollands, Chief Financial Officer and Company Secretary, in relation to the above information and to current operations and prospects.

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Appendix 4: Derivation Of Discount Rate The selected discount rate range for Wentworth’s Property Management Business has been determined in accordance with the Weighted Average Cost of Capital [“WACC”]. The WACC approach represents a merger of the Capital Asset Pricing Model [“CAPM”] with capital structure theory. Summary of WACC concepts The WACC of a firm is the expected cost of the various classes of its capital (i.e. equity and debt), weighted by the proportion of each class of capital to the total capital of the firm, and can be derived using the following formula:

The components of the WACC formula are: Table 17: Components of WACC Input Definition

Kd The pre-tax cost of debt, which is the rate of return required by the providers of debt finance

Ke The after-tax cost of equity, which is the rate of return required by the providers of equity capital

t The applicable corporate tax rate

D The market value of debt

E The market value of equity

D/D+E The proportion of debt in the capital mix of the relevant business operation

E/D+E The proportion of equity in the capital mix of the relevant business operation

Source: Leadenhall analysis Post- tax cost of equity (Ke) In the WACC formula shown above, the CAPM provides the means for estimating the cost of equity. CAPM is based on the assumption that investors require a premium for investing in equities rather than in risk free investments (such as government bonds). The cost of equity, Ke, is the rate of return that investors require to make an equity investment in a firm. The cost of equity capital under CAPM is determined using the following formula:

Ke = Rf + B x (Rm – Rf) + α

The components of the CAPM formula are: Ke = required post-tax return on equity Rf = the risk free rate of return Rm = the expected return on the market portfolio MRP = the Market Risk Premium (Rm – Rf) β = beta, the systematic risk of a stock (this is an equity or levered beta) α = specific company risk premium, to allow for size, key person risk, key client

risk, forecast risk etc.

( ) ( )WACC EV

KeDV

Kd= + −* * ( )1 tc( ) ( )WACC EV

KeDV

Kd= + −* * ( )1 tc( ) ( )WACC EV

KeDV

Kd= + −* * ( )1 tc

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Each of the components in the above equation is discussed below. Risk free rate (Rf) The relevant risk-free rate of return is the return on a risk-free security, typically for a long-term period. In practice, long dated government bonds are an acceptable benchmark for the risk-free security. At 15 November, the 10 year bond rate was approximately 4.3%, having decreased from above 5% in early July 2011. It appears that the current global turmoil (particularly in Europe) has resulted in investors switching from equities to bonds, which has reduced the yields. We have selected 4.5% to reflect our view that the current risk free rate may be temporarily affected by these economic issues. Equity market risk premium (MRP) The MRP (Rm – Rf) represents the additional return that investors expect from an investment in a well-diversified portfolio of assets (such as a market index). It is the excess return above the risk free rate that investors demand for their increased exposure to risk when investing in equity securities. Leadenhall undertakes an annual calculation of the long term MRP, which is published in Australian Valuation Handbook. Based on this research we have adopted 6% as the MRP which is also consistent with common market practice. Beta estimate (β) Description The beta factor is a measure of the risk of an investment or business operation, relative to a well-diversified portfolio of investments. In theory, the only risks that are captured by beta are those risks that cannot be eliminated by the investor through diversification. Such risks are referred to as systematic, undiversifiable or uninsurable risk. The concept of beta is central to the CAPM given that beta risk is the only risk that is priced into investor required rates of return. Beta is a measure of the relative riskiness of an asset in comparison to the market as a whole – by definition, the market portfolio has an equity beta of 1.0. The equity betas of various Australian industries listed on the ASX are reproduced below.

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Figure 5: Betas for various industries

Source: Beta data sourced from the Australian Graduate School of Management (AGSM). The Betas shown above are based on the historical volatility of the returns for each Industry, relative to the returns of the All Ordinaries Index of the Australian Stock Exchange. Betas derived from share market observations represent equity betas, which reflect the degree of financial gearing of the company. In order to control for this, a more valid analysis of betas can be obtained by “ungearing” or “unlevering” the equity beta by applying the following formula:

βa = βe / [1 + (D/E x (1-t)]

where: D/E = the debt to equity ratio assumed (based on market values of debt and equity) t = the corporate tax rate βe = Equity (geared) beta βa = Asset (ungeared) beta The unlevering (ungearing) of betas involves removing the impact of financial gearing from the equity beta (βe) to obtain an asset beta (βa). The unlevered beta is a reflection of the underlying risk of the pre-financing cash flows of the entity. The asset beta is subsequently relevered (regeared) to a specified level of gearing to determine the equity beta appropriate for the company being valued using the following formula:

βe = βa * [1 + (D/E x (1-t)]

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

BETA

INDUSTRY

MARKET AVERAGE

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Selected beta (β) In selecting an appropriate beta for Wentworth’s Property Management Business we have considered the following: • the levered beta for the financial services industry, which we consider Wentworth to operate in;

• the relative riskiness of Wentworth and the industry in which it operates and selected unlevered betas; and

• the historical and forecast EBITDA margin of Wentworth compared to the above comparable companies.

As a result we have selected an unlevered beta in the range from 0.7 to 0.9. On a regeared basis, this results in an equity beta in the range from 0.82 to 1.06 (as set out in Table 19 below).

Specific company risk premium (α) We have added a specific company risk premium of 1% to 2% to the post-tax cost of equity to reflect the fact that Wentworth is smaller than most listed companies (market capitalisation of approximately $13 million). Wentworth is highly diversified, and many of the factors associated with size (such as key person risk, lack of geographic diversification and key customer risk) do not apply to Wentworth. A higher discount rate would reduce the Fair Market Value of the Property Management Business. Many studies have demonstrated that on average, smaller companies have higher rates of return than larger companies. A study by Leadenhall of companies listed on the Australian Stock Exchange indicated price/earnings multiples for companies in the lowest deciles were lower than the average of all companies, and significantly lower than the multiples for companies in the largest deciles. Morningstar publishes an annual study (based on US data) of the additional size risk premium to be added to the post-tax cost of equity, as set out in the table below. Table 18: Evidence of Size Premium

Summary statistics of annual returns

Decile Market capitalisation range (US $m)

Arithmetic mean return

(%)

Size premium (return in excess of CAPM)1

(%)

Largest (1st decile) 14,692 – 329,725 11.31 (0.37)

Large (2nd decile) 5,976 – 14,692 13.16 0.74

Mid-cap (3rd – 5th decile) 1,602 – 5,936 14.01 1.08

Low-cap (6th – 8th decile) 432 – 1,600 15.49 1.85

Micro-cap (9th – 10th decile) 1 – 432 18.46 3.99

Smallest (10th decile)4 1 - 214 20.98 6.28

Source: Market Results for Stocks, Bonds, Bills, and Inflation 2009 Yearbook, Morningstar SBBI 1. Size premium was calculated as the difference between the actual return and the return calculated using the CAPM 2. Market capitalisation was calculated as at 31 December 2009 3. Morningstar use the 20 year government bond rate in determining the risk free rate 4. Morningstar provide a further breakdown of the 10tth decile, noting that the size premium for the upper half of the 10th decile (decile 10a)

was 4.45%, whereas the size premium for the lower half of the 10th decile (decile 10b) was 10.01%. However care must be taken in considering decile 10b due to the volatility of companies in this part of the market

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Dividend imputation Since July 1987, Australia has had a dividend imputation tax system in place, which aims to remove the double taxation effect of dividends paid to investors. Under this system, domestic equity investors receive a taxation credit (franking credit) for any tax paid by a company. The franking credit attaches to any dividends paid out by a company and the franking credit offsets personal tax. To the extent the investor can utilise the franking credit to offset personal tax, then the corporate tax is now not a real impost. It is best considered as a withholding tax for personal taxes. It can therefore be argued that the benefit of dividend imputation should be added into any analysis of value. However in our view, the evidence relating to the value that the market ascribes to imputation credits is inconclusive. There are the diverse views as to the value of imputation credits and the appropriate method that should be employed to calculate this value. Due to the uncertainty surrounding the extent to which acquirers of assets factor in dividend imputation, we have taken the conservative approach and not factored in dividend imputation. Conclusion on cost of equity The following table sets out our cost of equity estimate for Wentworth based on the assumptions and inputs discussed above: Table 19: Estimated cost of equity for Wentworth Discount Rate Low High

Risk Free Rate 4.5% 4.5%

Asset Beta 0.70 0.90

Equity Beta 0.82 1.06

Market Risk Premium 6.0% 6.0%

Cost of Equity (Post-Tax) 9.4% 10.8%

Size risk Premium 1.0% 2.0%

Adjusted Cost of Equity ( Post-Tax) 10.4% 12.8%

Source: Leadenhall Corporate tax rate (t) Australia’s current statutory corporate tax rate is 30%. In calculating a cost of capital for Wentworth we have used the long term corporate tax rate of 30%. Cost of debt capital (Kd) The cost of borrowing is the expected future borrowing cost of the relevant project and/or business. The conventional practice for estimating Kd is to estimate an appropriate risk premium (over the benchmark risk free rate) for debt based on prevailing yields on debt securities of comparable risk and maturity. We have assessed a premium of 3.5% over the risk free rate based on recent discussion with bankers as well as the borrowing rates for small and large businesses. Debt and Equity Mix The selection of an appropriate capital structure is a subjective exercise. The tax deductibility of the cost of debt means that the higher the proportion of debt, the lower the WACC for a given cost of equity. However, at significantly higher levels of debt, the marginal cost of borrowing would increase due to the greater risk which debt holders are exposed to. In addition, the cost of equity would also be

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likely to increase due to equity investors requiring a higher return given the higher degree of financial risk that they have to bear. Ultimately for each company there is likely to be a level of debt/equity mix that represents the optimal capital structure for that company. In estimating the WACC, the debt/equity mix assumption should reflect what would be the optimal or target capital structure for the relevant asset. Calculation of WACC The table below summarises the discount rate we have derived for Wentworth, based on the assumptions and inputs discussed above. Table 20: Estimated WACC for Wentworth Discount Rate Low High

Adjusted Cost of Equity (Post-Tax) 10.4% 12.8%

Debt to Enterprise Value Ratio 20.0% 20.0%

Debt Margin over Risk Free Rate 3.5% 3.5%

Pre-Tax Cost of Debt 8.0% 8.0%

Post-Tax Cost of Debt 5.6% 5.6%

WACC Post tax Nominal 9.5% 11.4%

Source: Leadenhall

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Appendix 5: Qualifications, declarations and consents Responsibility and Purpose This report has been prepared only for the benefit of Shareholders for the purpose of assessing the fairness and reasonableness of the Proposed Transaction. It therefore cannot be used for any purpose other than as described above unless Leadenhall has provided written consent. Other than as specifically identified elsewhere in this report, neither the whole nor any part of this report nor any reference thereto may be included in or with or attached to any document (including electronically), circular, resolution, letter or statement, or released externally to any other party without the prior written consent of Leadenhall as to the form and context in which it appears. No responsibility to third parties We are not responsible to you, or anyone else, whether for our negligence or otherwise, if the report is used for any other purpose or by any other person. Reliance on Information – Accuracy and Completeness The financial information supplied by Wentworth, as set out in Appendix 3, is the prime basis of this engagement. In preparing our analysis we have relied upon the accuracy and completeness of the information provided to us and we have assumed it has been prepared in accordance with applicable Accounting Standards and the Corporations Act. We have assumed that there is no information or documentation that has been withheld from Leadenhall that potentially may have a material effect on our conclusions. We have not performed anything in the nature of an audit, review or financial due diligence on the information provided for this report. Prospective Information – Provision and Responsibility In relation to prospective financial information, we have relied upon this information as detailed in Appendix 3, without verification by us of historical, budgeted or forecast information. Management is responsible for this financial information. Statements and opinions contained in this report are given in good faith but, in the preparation of this report, Leadenhall has relied upon the completeness of the information provided by Wentworth and its officers, employees, agents or advisors which Leadenhall believes, on reasonable grounds, to be adequate, reliable, complete, accurate and not misleading for the purpose of this report. Prospective Information – Procedures Undertaken 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 Leadenhall’s consideration of this information consisted of enquiries of Wentworth 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 Australian Auditing Standards. Based on these procedures and

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enquiries, Leadenhall considers that there are reasonable grounds to believe that the prospective financial information for Wentworth included in this report has been prepared on a reasonable basis. Prospective Information – Not Audited or Verified Leadenhall 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 Wentworth management for confirmation of factual accuracy. We have accepted the information at face value, and have not attempted to test its veracity. Whilst we believe the statements made in this report are accurate, no warranty of accuracy or reliability is given by Leadenhall or its affiliated companies and their respective officers and employees. Prospective Information – No Assurance on Achievability We note that the forecasts and projections supplied to us are, by definition, based upon assumptions about events and circumstances that have not yet transpired. Accordingly we give no assurance that any forecast results will be achieved and consequently any future variation between the actual results and any prospective financial information utilised in this report may affect the relevance of the valuation conclusions included in this report to their intended purpose. In relation to the prospective financial information, actual results may be different from the prospective financial information of Wentworth 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. Market Conditions The opinion of Leadenhall is based on prevailing market, economic and other conditions at the date of this report. Conditions can change over relatively short periods of time. Any subsequent changes in these conditions could impact upon value either positively or negatively. Indemnities In recognition that Leadenhall may rely on information provided by Wentworth and its officers, employees, agents or advisors, Wentworth has agreed that it will not make any claim against Leadenhall to recover any loss or damage which Wentworth may suffer as a result of that reliance and that it will indemnify Leadenhall against any liability that arises out of Leadenhall’s reliance on the information provided by Wentworth and its officers, employees, agents or advisors or the failure by Wentworth and its officers, employees, agents or advisors to provide Leadenhall with any material information relating to this report.

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Appendix 6: Compliance with APES 225 APES 225 requires the following information to be included in a valuation report: Table 21: APES 225 declarations and information APES 225 Requirements Leadenhall Response The name of the party engaging the Member Leadenhall has been engaged by Wentworth A description of the business, business ownership interest, security or intangible asset being valued

We have valued the Wentworth Property Management Business and the consideration offered under the Proposed Transaction

The date at which the value has been determined The value has been determined as at 15 November 2011 The date on which the Valuation Report has been issued The Valuation Report has been issued at 15 November

2011 The purpose for which the Valuation Report has been prepared The Valuation Report has been prepared to assist

Wentworth shareholders consider the Proposed Transaction and cannot be used for any other purpose.

The name and qualifications of the Member(s) responsible for the Valuation

The persons responsible for the Valuation are Hamish Blair, B.Com (Hons), M.Com, FCA, F.FINSIA and Simon Dalgarno Economics, FCA F.FINSIA

The scope of the Valuation, including any limitations or restrictions

The scope has been performed in accordance with the requirements of Section 611 of the Act and ASIC RG 111.

The basis of the Valuation The Valuation has been based on the premise of a going concern.

A statement whether the Valuation was undertaken by the Member acting independently or not

Leadenhall has acted independently of Mr Tarbey and Wentworth

The Valuation Approaches adopted in determining the estimate of value and a description of how they were applied

Refer Sections 12.2 and 13.2

The specific information on which the Member has relied and the extent to which it has been reviewed

Refer Appendix 4

A description of the material assumptions applied in the Valuation and the basis for those assumptions

Refer Sections 12.2 and 13.2

A Conclusion of Value for a Valuation Engagement or a Limited Scope Valuation Engagement, or a Calculated Value for a Calculation Engagement

Refer Section 14.1

All qualifications that materially affect the Conclusion of Value or Calculated Value

Refer Section 14.1 and Appendix 5

For a Limited Scope Valuation Engagement, a statement that if a Valuation Engagement had been performed the results may have been different

Not Applicable

Where a Member has prepared a Valuation Report that requires Independence or purports to be independent, a statement that the compensation to be paid to the Member is not contingent on the conclusion, content or future use of the Valuation Report

The compensation to be paid to the Member is not contingent on the conclusion, content or future use of the Valuation Report.

A statement that the Valuation Service was conducted in accordance with this Standard

The Valuation Services have been provided in accordance with APES 225.

Source: Leadenhall F

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Documents

Level 1, 31 Franklin Street, Adelaide SA 5000 Level 16, 379 Collins … · 2011. 11. 15. · Exchange [“ASX”] which provides property asset management services to property owners,