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Presented by Russell Allison

Care Transactions Story

Property Snapshot: The Real Village and

Care Transactions Story

CONTENTS

Introduction 4

Aged Care 6

Retirement Villages 14

MHE/Land Lease Communities 17

Primary Contacts 19

3

• More than 240 000 individuals are employed in direct care roles in the aged care industry and public expenditure across the industry, including informal care support, is approaching 1% of GDP.

• The over 85s cohort is forecast to increase four-fold by 2050 and current estimates anticipate public expenditure across the aged care industry increasing to 2.2% of GDP by 2050.

• Residential aged care, positioned at the higher end of the aged accommodation spectrum, is highly regulated by the Australian Government.

• The aged care industry remains fragmented with many operators managing less than half a dozen facilities. Profitability across the industry, however, is not uniform with many providers continuing to operate at breakeven.

• The Australian government projects a doubling of the over 65s population by 2050 requiring a corresponding increase in purpose-built housing. Currently some 184 000 Australians or 5.7% of the population over 65 live in retirement villages.

• This penetration rate is projected to increase to 7.5% by 2025, and combined with an increase in the seniors’ population, is expected to lead to a two-fold increase in demand for retirement village accommodation.

• State Governments will continue to shape the future of the retirement village industry along with contributions from industry bodies, not-for-profit, private and publicly listed operators.

INTRODUCTION


Care Transactions Story4

Transactions in 2015 within the Residential Aged Care sector can be summarised as follows:

• In excess of A$1bn reported;

• Nine large portfolios;

• Three sale and leaseback deals; and

• ‘Going concern’ capitalisation rates in line with 2014.

Transactions in 2015 within the Retirement Village sector can be summarised as follows:

• Increased transaction activity - over $900 million;

• Discount rates on transactions tightened marginally; and

• Private equity and investment groups entering the market.

The industry will attract strong interest from domestic and offshore capital again in 2016, with a preference for:

• Commercially priced greenfield and brownfield aged care, retirement living and land lease opportunities;

• Medium density and high rise opportunities;

• Alliances with not-for-profit operators where ‘cherry picking’ opportunities are offered; and

• Merger and acquisition opportunities where larger operators can add ‘scale’.

INTRODUCTION



Over $1bn in transactions

Portfolio transactions comprised over 65% of all beds transacted

In excess of 6,000 operational beds/places transacted

3 Sale and Lease-back/OpCo-PropCo portfolio transactions

AGED CARE

65%

Remains a sellers market

• Pricing influenced by multiple variables in addition to capitalisation of EBITDA;

• Potential RAD or DAP uplift, or conversely accounting for 'over-bonding' (potential to acquire RACFs cheaply for business revenue only);

• Composition of facilities: single bed room ratio and potential to convert double/multiple rooms;

• Portfolios or strategic acquisitions will likely attract a price premium;

• Potential for significant refurbishment, with potential for increase accommodation supplement; and

• Potential for redevelopment and/or expansion.

PRICING TRENDS AND METRICS



PORTFOLIO TRANSACTIONS - BY BED NUMBERS

AGED CARE

620

311349

386311

587

900

311275

0

100

200

300

400

500

600

700

800

900

1000

Embr

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-McK

enzie

RSL

Care

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Heal

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Hutc

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Infin

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St Iv

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Prof

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Kenn

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Vinc

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Vict

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-Mec

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Hall &

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ital H

ealth

care

Pro

perty

Tru

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Number of beds



Freehold going concern capitalisation rates have remained steady through 2015 at similar levels seen in 2014.

There has been a widening in the range of values/prices, for reasons including:

PRICING TRENDS/ METRICS

CAPITALISATION RATES ON POTENTIAL MAINTAINABLE EBITDAR

PREMIUM SECONDARY TERTIARY

CAPITALISATION RATES

12.5%-14.0% 14.0%-16.0% 16.0% +

VALUES PER BED


CORE VALUES$140,000 - $200,000

$120,000 - $140,000

$90,000 - $120,000

GROSS VALUES $350,000+$300,000 - $350,000

$200,000 - $300,000

AGED CARE

1 2Industry growth has accelerated the

obsolescence of older, inefficient facilities; these facilities are

being priced as redevelopment opportunities.

Niche operators are developing ultra high-end product to cater to

the wealthy demographic, achieving high RADs/DAPs.



RESIDENTIAL AGED CARE FACILITY SITE TRANSACTIONS2014 2015

PURCHASE PRICE*$1,600,000 to $25,000,000 (core range $3mil - 8mil)

$2,800,000 to $20,000,000 (core range $4mil - 9mil)

LAND SIZE2,000m² to 37,000m²

(core range 5,000m2 - 1.5Ha)2,600m2 to 30,000m2

(core range 4,000m2 - 1.2Ha)

RATE PER SQM $90 to $4,700 $150 to $7,000

NUMBER OF PLACES

65 to 150 (average 116) 53 to 150 (average 115)

RATE PER BED$13,000 to $270,000

(core range $20,000 - $60,000)$18,000 to $200,000

(core range $30,000 - $70,000)

*Purchase prices reflecting underlying land value for highest and best use

Since 2011, over 80% of RACF sites transacted have been purchased by for-profit aged care providers.

AGED CARE

RACF NEW GREENFIELD & BROWNFIELD DEVELOPMENTS• Operators are focusing on greenfield and brownfield development to expand their

portfolios as acquiring existing freehold going concern facilities is becoming increasingly difficult and costly;

• Significant demand for metropolitan development sites, particularly suburbs with high median house prices;

• Development sites are becoming increasingly scarce, particularly greenfield and >1Ha sites;

• RACF developers are competing with commercial and multi-residential developers for sites;

• Increasingly new metro RACFs are on smaller sites and are of multi-storey construction, commonly 3-6 storeys with basement car parking;

• Heightened demand and limited supply (in most regions) has seen prices escalate;

• There is a level of scarcity of provisional allocated places, which remains a risk for new developments;

• Development sites with a development approval and allocated bed places can attract a premium price; and

• Availability/scarcity of land remains a barrier to entry for existing operators and new entrants into the sector.



RSL CARE - GENERATION HEALTHCARE TRANSACTION DETAILSPrice: $45.8 million

Number of beds: 311

Price per bed (freehold): $147,000 (avg.)

Description: 1. Baycrest Pialba QLD 101 beds $14.4mil

2. Darlington Banora Point NSW 90 beds $13.5mil

3. Tantula Rise Alexandra Headland QLD 120 beds $17.9mil.

The 3 facilities have single ensuite rooms, 98% occupancy and are co-located with a retirement village.

The 3 facilities achieve strong EBITDA per occupied place.

Brownfield expansion opportunities exist at two of the RACFs.

Leaseback: RSL Care (vendor) will lease back the facilities on an annual rental of $3.5million on a 20 year term lease with 10 + 10 options. Avg. rental of ≈$216 per bed per week.

Yield: 7.65%

Lease Terms: Triple net lease. Lessor is responsible for the structural integrity of the premises and repair and replacement of plant and equipment. Annual rent reviews to the lesser of 3% and CPI, with a market rent review on the tenth anniversary with a 5% cap & collar.

AGED CARE

OPCO-PROPCO MODELMost sales of RACFs have been as going concerns, however, there is growing interest in the OpCo (Operating Company) - PropCo (Property Company) or sale and leaseback model.

The basics of the OpCo-PropCo model are:

• For example, a Real Estate Investment Trust (REIT) such as Generation Healthcare agrees to acquire the freehold component of RACFs from an aged care provider such as RSL Care.

• The REIT is the PropCo and the aged care provider is the OpCo and leases the freehold (land and buildings) back from the PropCo.

• As well, the REIT usually provides capital for improvements/refurbishments to existing RACFs (capital expenditure is usually rentalised) and for new greenfield developments.



AGED CARE

OPCO-PROPCO MODEL

HEATHLEY TRANSACTION DETAILSPrice: $50.8 million

Number of beds: 386


5 facilities: 1. Hahndorf 101 beds

2. Klemzig 86 beds

3. Christies Beach 101 beds

4. Churchill Retreat Kilburn 46 beds

5. Rose Court Gilles Plains 55 beds

The facilities are located in South Australia.

Leaseback: Infinite (vendor) will lease back the facilities on an annual rental of ≈$4.165 million on a 20 year term lease. Average rental of ≈$207 per bed per week.

Yield: 8.20%

VITAL HEALTHCARE TRANSACTION DETAILSPrice: $41.0 million

Number of beds: 275


Description: 1. Hamersley Aged Care, Perth 78 beds

2. Rockingham Aged Care, Perth 40 beds

3. Clover Lea Aged Care, Sydney 64 beds

4. Fairfield Aged Care, Sydney 93 beds

The 4 facilities offer both single and companion rooms, not all with private ensuites; expansion capability at 3 of the 4 facilities.

Leaseback: Hall & Prior will lease back the facilities on a 20 year lease term. Annual rental approximately $3.28 million. Average rental of ~$229 per bed per week.

Yield: 8.00%



• OpCo-PropCo structures have been common place for decades in other property sectors: office commercial, retail and industrial;

• These three significant recent OpCo-PropCo transactions in the aged care sector reveal the growing sophistication and commerciality of the sector;

• Operators are ever so conscious of ensuring their capital structure is appropriate for their operations; albeit if they are for-profit or not-for-profit;

• OpCo-PropCo transactions are an alternative capital source for operators other than debt and equity. Equity capital is generally considered to be an expensive form of capital. However, in the current capital markets, debt capital can be obtained relatively cheaply;

• Currently, most operators are able to raise debt capital at a cost lower than the OpCo-PropCo structured transactions (7.65% to 8.20%);

• We consider OpCo-PropCo structured transactions to be appealing to a niche group of operators;

• Attraction of OpCo-PropCo model to the operator is that they can free up capital for expansion purposes, whilst still having the ability to collect lump sum RADs; and

• With local and foreign institutional investment circling the sector, we could see further OpCo-PropCo deals.

OPCO-PROPCO MODEL

AGED CARE



• Further industry consolidation;

• Continued heightened acquisitions activity by the major players, with a focus on portfolio acquisitions given strong growth mandates by the listed operators;

• Increased acquisition of greenfield sites for development of new facilities;

• Potential for more IPOs in 2016 given the weight of institutional and foreign investment currently pursuing Australian healthcare sector assets;

• As acquiring portfolios becomes more difficult, operators looking to expand will focus their attention on acquiring privately operated single facilities; and

• Operators will look for opportunities to diversify their revenue streams (eg. Purchase of allied services businesses by a retirement village operator).

NEW DEVELOPMENT

• Lateral thinking required to secure development sites;

• Community use zoned land re-purposed for Aged Care and Retirement Developments;

• Operators looking to expand will form strategic relationships with these types of community based land holders;

• Councils may incentivise new aged care and retirement developments through reduced infrastructure charges and fast tracking development applications, particularly if we see construction of new housing slow further;

• Location remains key for new developments; demographics, lifestyle factors, accessability and views;

• Continued development of co-located/integrated aged care and senior’s living developments;

• Continued development of multi-storey campus style facilities;

• Potential for high-rise development;

• Push of new mixed use developments to feature co-located/integrated with retail, cafes, restaurants, and medical uses;

• Conversion of existing buildings (eg. Commercial office towers, heritage buildings) will become increasingly feasible;

• Increased focus on building sustainability in an effort to reduce operating costs; and

• Continued redevelopment of existing properties to provide modern facilities, higher densities and increase proportion of single bed rooms. Ability to achieve higher RADs and attract significant refurbishment funding is supporting this redevelopment capex.

WHAT TO EXPECT IN 2016

AGED CARE



• Market sentiment improved in 2015;

• Renewed institutional investment interest in the sector;

• Existing for-profit and not-for-profit operators have acquisition and expansion mandates;

• Increased transaction activity with over $900million of RV assets transacted;

• In excess of 45 villages transacted;

• A number of portfolios transacted;

• A number of operators have exited the sector;

• A number of private equity and investment groups have entered the market, they view the sector as attractive; and

• A number of residential developers are investigating entering the sector.


• Discount rates tightened marginally from levels transacted post 2014;

• Current indicative discount rates:


DISCOUNT RATES 12.5% - 13.5% 13.5% - 15.5% 15.5% +

• Discount rates have tightened for RV portfolios;

• Nominal price growth rate assumptions have stabilised; and

• Indicative ILU price average growth rates range between 2.5% pa and 4.5% pa (typical range 3.0-4.0% pa).

RETIREMENT VILLAGES

RETIREMENT MARKET AND TRANSACTIONS IN CY15:



0

200

400

600

800

1000

1200

Retirement Alliance-lendlease

Waterbrook-lendlease Masonic Homes SA-Stockland

Rylands-lendlease Freedom-Aveo

ILUs

PORTFOLIO TRANSACTIONS

RETIREMENT VILLAGES

2013 2014 2015 2016 TREND

AVEO 12.5% 12.5% 12.5% - STEADY

LENDLEASE13.0 - 17.0%

(13.2%)13.0 - 17.0%

(13.2%)12.0 - 17.0%

(13.3%)- STEADY

STOCKLAND12.5 - 14%

(12.8%)12.5 - 14%

(12.8%)12.5 - 14.0%

(13.0%)(13.0%) STEADY

SETTLERS 13.5 - 16.1% 14.0 - 20.0% 14.5 - 15.5% - MIXED

RYMAN - 13.0 - 16.0% 13.0 - 16.0% - STEADY

SUMMERSET 14.0 - 16.5% 14.0 - 16.5% 14.0 - 16.5% - STEADY

LIFESTYLE COMMUNITIES

14.0 - 16.5% 14.0 - 16.5% 14.0 - 16.5% - STEADY

*Weighted average discount rates in italics

Listed Retirement Groups - Discount Rates New Developments Discount rates have remained steady over the last 3 years and no change anticipated in 2016

LISTED RV/DMF OPERATORS DISCOUNT RATES – EXISTING VILLAGES FROM COMPANY REPORTS



• Retirement living remains a key development opportunity;

• Ongoing acquisition activity by the major for-profit and not-for-profit groups;

• Potential to see divestment of RV portfolios to institutional investors;

• Continued higher density new development which allow residents to 'age in place'; and

• The outlook is positive for the retirement living sector from an investment, valuation and fundamental perspective.

RETIREMENT LIVING DEMAND, BY GREATER CAPITAL CITY

SYDNEY MELBOURNE BRISBANE ADELAIDE PERTH HOBART DARWIN ACT TOTAL

2011

Persons living in an ILU (65+) 25,106 22,538 18,838 12,513 17,706 962 262 1,891 99,816

Number of ILUs 22,574 20,220 15,969 10,669 14,989 872 203 1,710 87,206

Population (65+) 586,346 540,449 248,945 193,668 227,009 32,741 8,142 38,886 1,876,180

Penetration Rate 4.3% 4.2% 7.6% 6.5% 7.8% 2.9% 3.2% 4.9% 5.3%

2020 Projections*

Population (65+) 773,412 722,245 354,287 249,091 330,189 43,644 14,086 56,938 2,543,890

Persons living in an ILU (65+) 33,116 30,119 26,809 16,094 25,754 1,282 453 2,769 135,339

Number of ILUs 29,776 27,022 22,726 13,722 21,802 1,162 351 2,504 118,241

Additional ILUs needed by 2020

7,202 6,802 6,802 3,053 6,813 290 148 794 31,035

Source: Knight Frank, ABS *Assumes penetration rates remain the same as 2011

RETIREMENT VILLAGES

2016 TRENDS



• High-growth sector;

• Operators are expanding aggressively;

• Gateway Lifestyle ASX listing (June 2015);

• Operators are land-banking future development sites & redeveloping parks;

• Over $300 million worth of communities transacted;

• In excess of 30 communities transacted;

• Discovery Parks $150 million takeover of Aspen Parks Property Fund;

• Blackstone’s $150 million investment/partnership with National Lifestyle Villages;

• The sector has piqued institutional investment interest in the sector;

• A number of residential developers are investigating entering the sector; and

• Operators are forming strategic alliances with aged care providers.

MHE/LAND LEASE COMMUNITIES


2015 MARKET/TRANSACTIONS

• Discount rates and capitalisation rates tightened over the course of 2015;

• The recurring land lease income stream generated is attractive to institutional/private capital; and

• Current indicative capitalisation rates: Average 8.0% to 12.0% (100% permanent resident communities).



MHE/LAND LEASE COMMUNITIES

LISTED HOLIDAY/CARAVAN PARKS & MHE/LAND LEASE COMMUNITIES CAPITALISATION RATES – EXISTING PARKS & MHE/COMMUNITIES:

2013 2014 2015 TREND

Lifestyle Communities - - 8.25-8.75% STEADY

Gateway Lifestyle - - 8.0-10.25% STEADY

Ingenia Garden 7.5-11.8%8.0-13.0%

(11.6%)9.0-12.0%

(10.2%)

Ingenia Active Lifestyle -9.0-12.0%

(10.7%)8.2-17.5%

(9.9%)

Aspen Parks Freehold - 10.3-16.1% 10.0-15.9%

Aspen Parks Leasehold - 10.5-32.9% 11.7-25.4% STEADY

*Weighted average capitalisation rates in italicsNote: Higher yields reflect short-term/holiday letting parks (as opposed to permanent).

• In excess of 2,000 parks in Australia may offer the opportunity to convert to MHE/land lease communities;

• High levels of competition for assets;

• Continued strong and material acquisition activity;

• New entrants including institutional investors will be attracted to the sector;

• Valuation metrics may continue to tighten, leading to asset value increases; and

• As quality reconfiguration/redevelopment opportunities reduce, we forecast a further increase in greenfield site purchases.

TRENDS/WHAT TO EXPECT IN 2016



Russell AllisonSenior Director, AustraliaHead of Health, Aged Care & Retirement [email protected] +61 7 3246 8873M +61 418 858 898

Adam DightSenior AnalystHealth, Aged Care & [email protected] +61 7 3246 8848M +61 466 144 514

PRIMARY CONTACTS

TRANSACTIONS TEAM

VALUATIONS TEAM

Gordon Price Director, [email protected] +61 7 3193 6880M +61 409 993 973

Sam MurphyDirector, Valuations [email protected] +61 3 9604 4705M +61 408 525 776



Knight Frank Australia Pty Ltd

Level 3, 12 Creek Street Brisbane QLD 4000

© Knight Frank 2016 This report is published for general information only. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no legal responsibility can be accepted by Knight Frank for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or in part is not permitted without prior consent of, and proper reference to Knight Frank Research.

Disclaimer

Property Snapshot: The Real Village and Care Transactions Story (‘The Report’) ©Knight Frank 2016 is produced for general interest only; it is not definitive and is not intended to give advice. It must not be relied upon in any way. Although we believe that high standards have been used in the preparation of the information, analysis and views presented in The Report, no responsibility or liability whatsoever can be accepted by Knight Frank for the contents. We make no express or implied warranty or guarantee of the accuracy of any of the contents. As far as applicable laws allow, we do not accept responsibility for errors, inaccuracies or omissions, nor for loss or damage that may result directly or indirectly from reliance on or use of its contents. The Report does not necessarily reflect the view of Knight Frank in any respect. Information may have been provided by others without verification. Readers should not take or omit to take any action as a result of information in The Report.

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