Aged Care industry report Strategies converging Event

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1 AUSTRALIA AU Price (at 05:10, 16 Mar 2016 GMT) Outperform A$5.75 Valuation A$ DCF (WACC 9.1%, beta 1.1, ERP 5.0%, RFR 4.5%, TGR 2.0%) 12-month target A$ month TSR % Volatility Index Low/Medium GICS sector Market cap A$m 1, day avg turnover A$m 7.3 Number shares on issue m Investment fundamentals Year end 30 Jun 2015A 2016E 2017E 2018E Revenue m EBIT m Reported profit m Adjusted profit m ROE % P/BV x AU Price (at 05:10, 16 Mar 2016 GMT) Neutral A$5.32 Valuation A$ DCF (WACC 8.4%, beta 1.1, ERP 5.0%, RFR 3.8%, TGR 2.0%) 12-month target A$ month TSR % Volatility Index Low/Medium GICS sector Market cap A$m 1, day avg turnover A$m 5.3 Number shares on issue m Investment fundamentals Year end 30 Jun 2015A 2016E 2017E 2018E Revenue m EBIT m Reported profit m Adjusted profit m ROE % AU Price (at 05:10, 16 Mar 2016 GMT) Neutral A$3.02 Valuation A$ DCF (WACC 8.8%, beta 1.1, ERP 5.0%, RFR 3.8%, TGR 2.0%) 12-month target A$ month TSR % Volatility Index Medium GICS sector Market cap A$m day avg turnover A$m 3.7 Number shares on issue m Investment fundamentals Year end 30 Jun 2015A 2016E 2017E 2018E Revenue m EBIT m Reported profit m ROE % Source: FactSet, Macquarie Research, March 2016 (all figures in AUD unless noted) 17 March 2016 Macquarie Securities (Australia) Limited Strategies converging Event We compare and contrast the listed Aged Care providers across their key operating and investment metrics, namely: facility quality, earnings growth, operating performance, acquisition/development activity, balance sheet analysis and valuation. Impact Upside exists for if it can approach profitability of others: With revenues in aged care regulated and similar across providers, margin is largely dependent on costs. On this metric still leads with cost per resident 10% lower than and 3% below. This drives an EBITDA margin 740 bps above, once non-operating DAP payments are backed out from each provider. This, we believe, creates opportunity for investors through both (i) greater scope for margin expansion at and (ii) a higher potential premium from an acquirer due to higher potential synergies. Regis retains mantle of best quality portfolio: topped all metrics we used to assess asset quality, namely weighted median house price of portfolio (+13% vs. and +19% vs. ); average incoming bond (+10% vs. and +25% vs. ); occupancy (94.8% vs. 94.2% for others); and PP&E per place (+11% v and +24% vs. ). Interestingly, the weighted median house price of s portfolio has overtaken s due to its new acquisitions being skewed to regional areas. bond penetration has stepped up, but cash flows likely safe: The proportion of s non-concessional residents paying a bond has climbed to now sit at ~90%. This has been useful in generating cash flow to fund its acquisitions, but could pose a risk if resident preferences move back towards DAPs for whatever reason. Protecting however, is that is has (by far) the biggest gap between average and incoming bond value, which will generate meaningful inflows over the next few years as it cycles residents. Outlook Upgrade from Neutral to Outperform, TP from $6.50 to $7.00: had a disappointing first half, primarily due to a ramp-up in corporate costs. We view this as a positive measure however given the importance of reducing integration risk and driving network-wide efficiencies which could prove a meaningful tailwind for in coming periods. It also offers the most attractive valuation after recent weakness, trading at a 33% discount to and 20% discount to Downgrade from Outperform to Neutral, TP from $6.30 to $6.00: remains the best quality portfolio, scoring top on all metrics we use to assess asset quality. Post the Masonic acquisition, its balance sheet is now 1.9x geared, however, and with the stock trading close to 30x F16e, we move to Neutral ahead of the upcoming Federal Budget in early May. Downgrade from Outperform to Neutral, TP from $3.50 to $3.30: has the best balance sheet, the biggest development pipeline relative to its size and the greatest potential for operating uplift if it can move its margins towards its peers. The stock price has had a strong run however, outperforming by 19% over the past 6 months and by 25%. And as highlighted above, we believe the sector does warrant some caution heading into a federal budget. Please refer to page 16 for important disclosures and analyst certification, or on our website

2 Introduction We have reviewed the aged care sector to compare and contrast the three listed providers. Our analysis assesses each company across five metrics (which also form the section headings for this report): 1. Earnings growth & operating performance; 2. Quality of facilities; 3. Developments and acquisition activity; 4. Balance sheet analysis; and 5. Valuation and recommendations. 1. Earnings growth & operating performance Estia has delivered the strongest growth, due to acquisitions: The 33.8% EBITDA growth delivered in 1H16 placed it above both (10.2%) and (0.8%). This was entirely driven by acquisitions with its average bed numbers +40.3% vs. a year earlier. Like and however, revenue per resident was impacted by the removal of the payroll tax supplement, whilst cost per resident was boosted by the company moving to a more appropriate head office cost base. Fig 1 Estia grown EBITDA the fastest, due to its large number of acquisitions Contribution to growth Bed numbers 40.3% 5.5% 10.0% Occupancy 0.9% 0.5% -0.2% Revenue per resident 1.9% 1.7% 3.3% Cost per resident 3.9% 3.8% 4.0% EBITDA growth 33.8% 0.8% 10.2% Regis growth impacted by removal of payroll tax supplement: Regis delivered solid sales growth of 7.8% in 1H, however due to the removal of the payroll tax supplement it was not enough to offset its cost increases, resulting in EBITDA growth of only 0.8%. Excluding the payroll tax supplement headwind (which has now been cycled) NPAT growth was 15%, despite little benefit during the period from newly opened developments. Japara revenue initiatives offset headwinds: Whilst was also impacted by the removal of the payroll tax supplement, it benefitted from a number of offsets including (i) an increase in extra services revenues will the rollout of Japara Signature Services, (ii) an increase in DAP revenue secondary to the LLLB reform, and (iii) initiatives begun during 1H15 in response to the payroll tax announcement and dementia supplement announcements (mainly ACFI related). Occupancy converging at ~94.5%: has improved its occupancy over the past few years as recently opened brownfield developments (inherited from its acquisitions) have filled, meaning that occupancy for all providers now sits between 94.2% and 94.9% - something we expect to continue given (i) the ongoing need for providers to periodically refurbish facilities in its portfolio, and (ii) the inherent delay in filling newly-opened facilities. And although missed its prospectus occupancy of 97%, we interpret this as a function of optimistic forecasts rather than any operating issues. 17 March

3 Fig 2 Occupancy converging at ~94.5% 96% 94% 92% 90% 88% 86% 84% F12 F13 F14 F15 1H16 Revenue per resident remarkably similar across providers: Consistent with Aged Care revenues being highly regulated and each listed provider focusing on residents with high acuity, revenue per resident for each provider is remarkably similar (see chart below). This is particularly the case when earnings are normalised for the proportion of residents paying a DAP (which goes through the P&L) vs. a bond (which has little direct impact on earnings): Fig 3 Revenue per resident very close across providers Revenue per resident pa $96k $98k $101k Revenue per resident pa (ex-daps) $96k $94k $97k Note: Assumes each provider has 35% concessional residents with the remaining gap relative to bond penetration being DAP-paying residents. Assumes Daily DAP of $35 per day. Japara still carrying highest cost per resident, still the lowest: Although delivered the highest increase in revenue per resident as a result of the initiatives outlined above, it also had the highest growth in cost per resident. Cost per resident of $83.4k now sits +10.2% higher than, which on a similar revenue base to peers means its EBITDA per resident is 17% lower than and 16% lower than. And if EBITDA is normalised for DAPs the gap is even greater (-33% and -21% respectively): Fig 4 profitability remains considerably lower than peers $85k Annual cost per resident $83k EBITDA per resident pa EBITDA per resident pa (ex-daps) $80k $75k $70k $77k $75k $21k $21k $17k $21k $17k $14k $65k $60k F14 F15 F16e Note: Assumes each provider has 35% concessional residents with the remaining gap relative to bond penetration being DAP-paying residents. Assumes Daily DAP of $35 per day. 17 March

4 Upside exists for if it can approach profitability of others: Although the above analysis suggests is less efficient than its peers, from an investor s perspective we believe it represents an opportunity. Firstly it suggests that has greater scope to expand its margins going forward to deliver faster organic earnings growth. Secondly it suggests that any potential acquirer will likely be more comfortable paying a higher multiple for than its peers, due to greater potential synergies as it increases its margins up to the acquirer s pre-existing level. Fig 5 Margins have tracked relatively flat for each provider in last few years 25% EBITDA Margins 22.7% 22.5% 20% 18.0% 15% 10% F12 F13 F14 F15 F16e F17e F18e 2. Quality of facilities We compare asset quality using four criteria: In order to understand how the facilities differ across providers, we assess each portfolio across four metrics. None of these metrics are a perfect measure of facility quality (as each is also driven by factors other than facility quality), however when considered collectively we believe they do provide a relatively accurate picture: Book value of facilities: newer, higher quality facilities tend to have higher PP&E value; Average Bond value: higher quality facilities tend to attract higher bond prices; Median house price in area: facilities in higher socioeconomic areas tend to generate higher bond values than those in lower socioeconomic areas; and Occupancy: higher quality facilities tend to have higher occupancy than lower quality facilities. Proportion of single rooms: single rooms are more sought after by residents and thus tend to have higher occupancy and generate higher bond prices. We note however that no longer report this number. When we last undertook this analysis 92% of s rooms were single v 85% for and 83% for. has now risen to 91%. We suspect that s number has fallen with many of its recent acquisitions having a lower number, however as they and do not report this number, we have excluded this analysis for this note. Fig 6 continues to have the PP&E and bond values $150k $140k $130k $120k $110k $100k $90k PP&E per bed 1 $138k $125k $112k $80k F14 F15 1H16 $450k $400k $350k $300k $250k Ave incoming bond value 2 (1) PP&E per bed based on end of 1H16 operational places and 1H16 PP&E. (2) Average incoming bond over the period. (3) Total bond liability divided by the number of bond paying residents. $395k $358k $315k $200k F14 F15 1H16 $400k $350k $300k $250k $200k $150k $100k $50k Ave bond value $338k $237k $199k $0k 2H14 1H15 2H15 1H16 17 March

5 Regis remains at the top in terms of book value, bond value and occupancy: Bond prices are an important measure of a portfolio s quality, given it is one of the few competitive levers available to providers in an industry where funding is regulated and based on care needs. In saying that bond prices need to be viewed in parallel with occupancy given the inherent trade-off between the two metrics (i.e. if bond prices for a facility are too high occupancy will be impacted and vice versa). As shown in the figures above and below, Regis ranks highest on both bond prices and occupancy in 1H16 (as well as on book value per place, the third metric shown above). Regis higher bond value driven by location and competitive position: As depicted in the figure below, the weighted median house price where operated is $663k, +2.8% since 14 months ago, and +13% vs. and +19% vs.. This is beneficial in that residents of higher wealth can afford higher bonds and have greater affinity for extra services. Further has a strong competitive position in the areas it operates (as measured by its high occupancy) meaning that it not only operates in good areas, but has a strong competitive position within those areas. Fig 7 also has a superior facility footprint and higher occupancy levels Weighted median house price 1 $550k $558k $645k $663k Jan-15 Mar-16 $589k $543k 95.5% 95.0% 94.5% 94.0% 93.5% 93.0% 92.5% Ave occupancy in 1H % 94.2% 94.2% 92.0% (1) Median house price in suburbs where facilities are located (weighted by number of beds). Source: Company data, Domain, Macquarie Research, March 2016 s acquisitions have had a dilutionary effect on median house price: Since listing ~15 months ago to end-1h16 has acquired 1,189 places to boost its total places by 35%. Many of the acquisitions have been in outer metro and regional areas, meaning its weighted median house price has only increased by 1.5% over the past 14 months below the average rate seen nationally. The quantum (and location) of its acquisitions have also had a dilutionary affect on its average bond price which has now dipped below $200k, comfortably below both ($237k) and ($338k). Arguably however, the average incoming bond value could be a more accurate indication of portfolio quality ( is below but above ), due to s back-book bond value depressed by the legacy strategies of previous owners of its acquired facilities. portfolio increasing in quality: In the past 14 months the weighted median house of s portfolio has increased by 13.3% to now overtake. We attribute this to general house price inflation across Australia and its acquisitions & brownfields being weighted to higher socioeconomic areas than its pre-existing portfolio. 3. Development and acquisition activity Development and acquisitions likely to remain the primary driver of value creation: We believe Government funding is likely to remain tight for a number of years given its current fiscal position. This means growth and value-creation in aged care will continue to be highly dependent on development and acquisitions in our view. Acquisition spree means is growing bed numbers the fastest: listed ~15 months ago with forecast year ending bed numbers of 3,693 which itself included several acquisitions contingent in the IPO being successful. After its latest acquisitions announced last month, it will now have 5,921 places by end F16 a 60% increase since listing. 17 March

6 s acquisitions could pause as balance sheet recovers : As depicted in figure 14, now has net bank debt of 2.3x EBITDA, or 10.1x EBITDA when bonds are included. Whilst bonds carry no annual interest charge, they are still a liability which carries risk, for example under a scenario of declining bond prices. Hence we see it unlikely will utilise more bank debt and believe its acquisitions will likely pause for a time as its balance sheet recovers. pause may not last too long however: As depicted in (see figure 13) is generating strong bond inflows. The primary driver of this is the large gap still present between its average bond ($199k) and its average incoming bond ($358k) something we forecast will continue over the next few years. Fig 8 Acquisitions have rapidly boosted s places 7,000 6,000 Average operating places 6,424 6,112 5,000 4,000 3,000 2,000 1,000 4,281 0 F12 F13 F14 F15 F16e F17e F18e Growth vs. pcp: : +15% +13% +61% +19% +3% : +4% +3% +9% +14% +7% : +8% +9% +13% +11% +9% Fig 9 remains the most acquisitive operator Acquired places 1,802 1, F14 F15 F16e and the strongest developers: Whilst rising acquisition prices have resulted in much of the value-creation from acquisitions flowing to vendors, brownfield and greenfield facility development remains highly value-accretive. On this metric has made some progress with construction of its first self-generated development now underway and set to open in F18. and remain the leaders with respect to development however, set to expand operating places by 16.2% and 18.5% through construction by F18 (vs. 9.4% for ). 17 March

7 Fig 10 continues to lead brownfield and greenfield development Development pipeline % 10% 8% Growth in places from development F16e F17e F18e 6% 4% 2% 0% -2% F16e F17e F18e Stronger development capability evident in s return on capital metrics: Consistent with s preference of development over acquisitions it currently offers investors a ROE of 25.3%. Conversely,, due to its high volume of acquisitions since inception, offers a considerably lower ROE of 7.5%, whilst (whose strategy has been a mix of development and acquisitions) sits between the two, with an ROE of 8.7%. Fig 11 the leader for value creation 50% ROIC 1 (ex. bonds) ^ ROIC 1 (inc. bonds) ^ ROE ^ 41% 10% 15% 14% 30% 16% 6% 9% 7% 8% 7% 6% 7% 25% 9% 10% 13% F15 F18e* F15 F18e* F15 F18e* (1) ROIC defined as EBIT over net debt plus equity (excludes bond liability). (*) F18e represents operational maturity for recently acquired/ developed facilities. (^) s capital base excludes $206m of intangibles associated with the propco/opco merger as this is unrelated to acquisitions. 4. Balance sheet analysis Regis continues to have the highest bond liability: is now carrying $742m of bond liability or $338k per bond-paying resident. This compares to $551m in aggregate and $199k per resident for, and $359m in aggregate and $237k per place for. This means that s FCF generation will benefit most from continued bond price appreciation, but conversely will be impacted most if bond prices (for whatever reason) decline. We would highlight however that bond risk is not directly proportional to the quantum of the bond liability; as discussed earlier has higher quality assets than and which, all else being equal, will support a higher bond per resident. 17 March

8 Fig 12 carries the highest bond liability 800 Total bond liability ($m) $400k Ave bond value $350k $338k $300k 500 $250k $237k $200k 300 $150k $199k 200 $100k 100 $50k 0 $0k 2H14 1H15 2H15 1H16 2H14 1H15 2H15 1H16 70% Bond penetration 63.5% 60% 50% 46.5% 40% 42.5% 30% 20% 10% 0% 2H14 1H15 2H15 1H16 bond penetration has stepped up: As depicted above (right), the proportion of residents at who have paid a bond has climbed sharply in the last 12 months from 47% to 63%. This has been driven by a very high proportion of incoming residents choosing to pay a bond (87% in 1H16 plus a further 8% choosing a combination bond/dap). Although the resident does have discretion as to whether they pay a bond or a daily payment (DAP), the provider can in some instances have some influence over payment choice something we suspect is happening at given its very high bond proportion relative to peers ( is at 43% and 47%). generating the highest bond inflows: The benefit of a rising proportion of residents choosing a bond is net bond inflows which has enjoyed over the past 18 months and (together with an increase in average incoming bond value) has funded many of its acquisitions. The downside is that the company is more exposed to potential bond outflows in the future, if the preferences of incoming residents (for whatever reason) moves back towards DAPs. With most large portfolios having ~30-40% concessional residents (who cannot be bonded), we see risk that s penetration figure does in fact decline. However, in saying that, is well shielded against the risk of bond outflows by its average incoming bond value ($358k) currently sitting well above its average outgoing bond value ($199k 1 ). meanwhile has also generated strong bond inflows. However rather than through shifts in bond penetration, it has been from brownfieldrelated inflows and rising average bond values. Bond / DAP mix has little impact on earnings: at its result raised another potential downside of rising bond penetration - that it can be a headwind to EBITDA through decreasing DAP income. We agree with this assertion, but only under a scenario where the excess bonds are deployed at a return lower than the current DAP rate of 6.22%. With a return of 6.22% corresponding to a multiple of 16.1x, it means the headwind only exists if incremental acquisitions are executed at an average EBITDA multiple above 16.1x (or if the excess bonds sit in the bank generating returns of ~2.5%). Fig 13 Estia has the highest bond inflows currently 100 Bond inflows ($m) F12 F13 F14 F15 1H16* (*) 1H16 net bond flow has been annualised (i.e. doubled). 1 Assuming average outgoing value is the same as overall average value. 17 March

9 Recent large acquisitions mean and becoming more highly geared: s recent acquisition of Masonic Care for $163m together with its high greenfield/ brownfield spend this year (we forecast capex of ~$141m) and 100% dividend payout policy means that its gearing (net debt to EBITDA) will reach 1.9x by our estimates (or 9.8x if its bond liability is included). will also see a sharp increase in gearing (we forecast 2.3x for F16 or 10.1x including bonds) due to its acquisition of the Kennedy group (for ~$190m by our estimates) as well as numerous other facilities. Importantly however, debt will likely be paid down quickly due to strong ongoing bond inflows (we forecast F17 gearing of 1.3x for and 1.0x for ). Fig 14 F16e debt ratios Net debt to EBITDA Net debt to EBITDA (inc. bonds) (1) Debt/ Debt + Equity. Plenty of firepower left in s balance sheet:, conversely, will be net cash by our estimates at end F16. Assuming it is comfortable taking on bank debt to the levels that and have, this provides it with ~$100-$120m of acquisition firepower, which its peers do not have. 5. Valuation and recommendations Fig 15 trading at a premium to EHC and Price per bed 1 $445k ex - bonds inc - bonds PE ratio (F17e) 17.5x 3.1x Price to NTA 2 $361k $334k 24.6x 2.4x 22.1x EV/ EBITDA (F17e) 1.3x $235k $303k $230k 10.5x 14.1x 11.7x (1) Including all currently announced beds. (2) 1H16 NTA excluding bond liability. Source: Company data, Macquarie Research, March March

10 ESTIA: risks remains, but now factored into the price Upgrade from Neutral to Outperform: had a disappointing first half, missing prospectus by 12.5%, primarily due to a $4.9m increase in corporate costs over its original forecasts. We are now of the view however that (i) this is a welcome investment in reducing risk of facility integration and drive network-wide efficiencies, (ii) this miss is unlikely related to operating issues at a facilitylevel, and (iii) the core problem was likely related to optimistic prospectus forecasts rather than sub-optimal performance. In terms of valuation, now represents the best value provider by a considerable margin (trading at a 33% discount to and 20% discount to ) and although its balance sheet is carrying meaningful debt, its strong future bond inflows will likely see this paid down relatively quickly. Adj EPS: F16-1.3%; F %; F %. Target Price increased from $6.50 to $7.00. IS: still the best quality, however loss of balance sheet capacity and upcoming budget risk mean we move to Neutral Downgrade from Outperform to Neutral: Remains the best quality portfolio scoring top on all metrics we use to assess asset quality. It also continues to execute well on its consistent and disciplined strategy and will benefit from its development pipeline kicking back in from 2H16. However, post its acquisition of the large Masonic portfolio its balance sheet is now relatively geared and likely lower bond inflows than in coming periods, will mean it will take longer to pay down. We also note that at recent Federal Budgets, the aged care industry has on occasion been impacted by regulatory change and hence, we move to a Neutral for the time being. Adj EPS: F16-1.2%; F %; F %. Target Price decreased from $6.30 to $6.00. JAPARA: steady and consistent, but recent strong run means this is now reflected in price Downgrade from Outperform to Neutral: has the best balance sheet of the three listed providers, the biggest development pipeline relative to its size and the greatest potential for operating uplift if it can move its margins towards its competitors. The stock price has had a strong run however, outperforming by 19% over the past 6 months and by 25%. And as highlighted above, the sector does warrant some caution leading into a federal budget. Adj EPS: F %; F %; F %. Target Price decreased from $3.50 to $3.30. Fig 16 has performed strongly of late 140% 130% Relative performance (last six months) 120% 118% 110% 100% 90% 99% 98% 80% Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Source: FactSet, Macquarie Research, March March

11 Fig 17 now trading at a 50% premium to PER relative to ASX 300 (last six months) Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Source: FactSet, Macquarie Research, March 2016 Fig 18 is now trading at ~30x on a one year forward basis 35 PE ratios - One year forward ASX Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Source: FactSet, Macquarie Research, March March

12 Snapshot comparison of the three providers Fig 19 At a glance: Estia vs. Regis vs. Japara Industry 1 Facilities (F16e) ~2,800 Operational places (F16e) 5,921 5,875 3, ,953 Ave occupancy % 94.2% 94.9% 94.2% 93.0% Median house price (Mar-16) $558k $663k $589k Bond penetration % 64% 47% 43% 36% PP&E per bed $112k $138k $125k Average bond value $199k $338k $237k $229k Incoming bond value $358k $395k $315k $296k Total bond liability $551m $742m $359m $15.6b Number of bonds 2,765 2,194 1,510 68,182 Gov revenue/ resident/ day 2 $194 $189 $197 $154 Total revenue/ resident/ day 2 $263 $270 $275 $236 Revenue F15 $298m $439m $281m $14.8b EBITDA F15 $70m $94m $50m $1.6b EBITDA/ resident F15 $22,156 $20,445 $17,186 $9,224 EBIT/ resident F15 $18,888 $16,310 $13,838 EBITDA margin F % 21.3% 17.8% 10.7% (1) Data collected from the 2015 ACFA funding report. Most recent available data has been used. (2) Includes DAPs. Source: Company data, ACFA, Macquarie Research, March March

13 Fig 20 Estia Health ( AU) Profit & Loss 1H15 2H15 1H16 2H16E 1H17E 2H17E E 2017E Top Line Government care funding Resident care funding (incl extras) Service revenue Other income Total Revenue Growth % 44.2% 57.1% 41.6% 9.9% 35.8% 51.2% 23.7% Employee expenses Resident costs Other costs Total operating expenses EBITDA margin % 21.9% 25.1% 20.3% 23.2% 20.5% 24.0% 23.6% 22.0% 22.3% D&A EBIT margin % 17.9% 21.1% 16.1% 19.0% 16.6% 20.1% 19.6% 17.7% 18.3% Extraordinary items Net interest Pretax Profit Tax Expense Tax rate 29.5% 30.9% 32.5% 28.3% 30.0% 30.0% 29.5% 30.0% 30.0% Net Profit Reported Profit Underlying NPAT Growth 19.2% 33.5% 35.0% 10.9% 27.0% 20.4% Basic EPS (cents) Adjusted diluted EPS (cents) Growth 19.0% 28.5% 30.3% 10.9% 24.5% 18.3% Free cash flow (incl RAD flows) FCFE per share $ 0.40 $ 0.37 $ 0.37 $ 0.52 $ 0.41 $ 0.43 $ 0.69 $ 0.89 $ 0.84 P/FCFE Book value Book value per share $ 3.29 $ 3.12 $ 3.08 $ 3.33 $ 3.34 $ 3.39 $ 3.12 $ 3.39 $ 3.39 NTA 85.2 (106.0) (198.9) (407.4) (405.3) (395.3) (106.0) (407.4) (395.3) NTA per share $ 0.47 $ (0.59) $ (1.10) $ (2.17) $ (2.16) $ (2.10) $ (0.59) $ (2.21) $ (2.10) P/BV P/NTA 12.2 (9.8) (5.2) (2.7) (2.7) (2.7) (9.8) (2.6) (2.7) EV/EBITDA EV/EBIT PE DPS Div yield 0.0% 2.4% 2.2% 2.6% 2.5% 3.2% 2.4% 4.9% 5.8% Payout ratio 0% 105% 114% 91% 100% 100% 61% 100% 100% Franking 0% 100% 100% 100% 100% 100% 100% 100% 100% Ordinary Fully Paid EFPOWA Cashflow Analysis 1H15 2H15 1H16 2H16E 1H17E 2H17E E 2017E EBITDA Inc. in Working capital Net Interest Paid Tax Paid Other Net Cash in Op Activities Asset Sales Capex, Acq's & Invest Other Net cash in investing Dividends Paid (before DRP) Equity Movements (inc. DRP) Other Accommodation bonds Net cash in financing Opening Cash balance Net Increase in Cash Adjusting Figure (inc. net exch. diff.) Net Cash movement Cash Balance Performance Analysis Balance Sheet E 2017E Cash Inventories FY15 Cost Breakdown PP&E Intangibles Other costs Other Assets % Total Assets Total debt Resident Accommodation bonds costs Other Liabilities % Total Liabilities Net Assets Shareholders Funds Retained earnings Total Shareholder Funds Employee expenses Ratios E 2017E 77% Working Capital (32.5) (58.4) (61.4) Interest cover (times) na na na Net Debt/Equity (%) 1.4% 35.5% 18.9% Return on Equity (%) 7.2% 8.3% 9.8% ROIC 10.1% 9.4% 13.4% 17 March

14 Fig 21 Regis Healthcare ( AU) Profit & Loss 1H15 2H15 1H16 2H16e 1H17e 2H17e e 2017e Top Line Government income Resident income Service revenue Other income Total Revenue Growth % 7.9% 14.5% 22.2% 14.8% 8.5% 11.2% 18.4% Employee expenses Resident costs Administrative expenses Occupany costs Total operating expenses EBITDA margin % 24.0% 20.3% 22.1% 21.4% 22.5% 21.8% 22.1% 21.7% 22.1% D&A EBIT margin % 19.9% 15.4% 17.5% 16.3% 18.1% 17.3% 17.7% 16.9% 17.7% Extraordinary items Net interest Pretax Profit Tax Expense Tax rate 30.3% 30.0% 30.0% 30.1% 30.0% 30.0% 30.2% 30.0% 30.0% Net Profit Reported Profit Add back Extraordinary items Underlying NPAT Growth -4.9% 13.8% 15.8% 19.3% 3.4% 17.4% Basic EPS (cents) Adjusted diluted EPS (cents) Growth -4.9% 13.8% 15.8% 19.3% 3.4% 17.4% Free cash flow (incl RAD flows) FCFE per share $ 0.31 $ 0.14 $ 0.15 $ 0.02 $ 0.36 $ 0.34 $ 0.45 $ 0.18 $ 0.70 P/FCFE Book value Book value per share $ 0.62 $ 0.70 $ 0.62 $ 0.58 $ 0.60 $ 0.59 $ 0.70 $ 0.58 $ 0.59 NTA (52.5) (38.5) (80.8) (221.8) (215.6) (216.7) (38.5) (221.8) (216.7) NTA per share $ (0.17) $ (0.13) $ (0.27) $ (0.74) $ (0.72) $ (0.72) $ (0.13) $ (0.74) $ (0.72) P/BV P/NTA (30.9) (42.1) (20.1) (7.3) (7.5) (7.5) (42.1) (7.3) (7.5) EV/EBITDA EV/EBIT PE DPS Div yield 0.0% 3.3% 1.7% 1.6% 2.0% 1.9% 3.3% 3.4% 4.0% Payout ratio 0% 227% 100% 100% 100% 100% 100% 100% 100% Franking 0% 64% 100% 100% 100% 100% 64% 100% 100% Ordinary Fully Paid EFPOWA Cashflow Analysis 1H15 2H15 1H16 2H16e 1H17e 2H17e e 2017e EBITDA Inc. in Working capital Net Interest Paid Tax Paid Other Net Cash in Op Activities Asset Sales Capex, Acq's & Invest Other Net cash in investing Dividends Paid (before DRP) Equity Movements (inc. DRP) Other Accommodation bonds Net cash in financing Opening Cash balance Net Increase in Cash Adjusting Figure (inc. net exch. diff.) Net Cash movement Cash Balance Performance Analysis Balance Sheet e 2017e Cash FY15 Cost Breakdown Inventories PP&E Admin Occupany Intangibles expenses costs 9% 3% Other Assets Total Assets Total debt Resident Accommodation bonds costs Other Liabilities % Total Liabilities Net Assets Shareholders Funds Retained earnings Total Shareholder Funds Ratios e 2017e Employee Working Capital (31.9) (40.9) (41.9) expenses Interest cover (times) na na na 79% Net Debt/Equity (%) -29.1% 112.7% 92.2% Return on Equity (%) 25.3% 31.6% 36.0% ROIC 50.3% 21.9% 29.2% 17 March

15 Fig 22 Japara Healthcare ( AU) Profit & Loss 1H15 2H15 1H16 2H16e 1H17e 2H17e e 2017e Top Line Government care income Resident care income Service revenue Other income Total Revenue Growth % 13.8% 12.8% 13.4% 26.5% 21.6% 10.0% 13.3% 20.1% 15.4% Employee expenses Resident costs Other costs (repairs & maint, rent, insu Total operating expenses EBITDA margin % 18.8% 17.1% 18.2% 16.7% 18.6% 17.0% 17.9% 17.4% 17.8% D&A EBIT margin % 15.3% 13.6% 14.7% 13.2% 15.1% 13.7% 14.4% 13.8% 14.4% Extraordinary items Net interest Pretax Profit Tax Expense Tax rate 22.3% 32.5% 26.0% 29.9% 30.0% 30.0% 27.2% 28.0% 30.0% Net Profit Reported Profit Add back Extraordinary items Underlying NPAT Growth 46.5% 8.1% 2.5% 32.1% 16.6% 11.5% 26.7% 15.5% 14.0% Basic EPS (cents) Adjusted diluted EPS (cents) Growth 46.2% 7.6% 2.5% 32.4% 16.6% 11.5% 26.1% 15.8% 14.0% Cashflow Analysis 1H15 2H15 1H16 2H16e 1H17e 2H17e e 2017e EBITDA Inc. in Working capital Net Interest Paid Tax Paid Other Net Cash in Op Activities Asset Sales Capex, Acq's & Invest Other Net cash in investing Dividends Paid (before DRP) Equity Movements (inc. DRP) Other Accommodation bonds Net cash in financing Opening Cash balance Net Increase in Cash Adjusting Figure (inc. net exch. diff.) Net Cash movement Cash Balance Performance Analysis Balance Sheet e 2017e Cash Resident costs 10% FY15 Cost Breakdown Other costs 3% Employee expenses 81% Inventories PP&E Intangibles Other Assets Total Assets Total debt Accommodation bonds Other Liabilities Total Liabilities Net Assets Shareholders Funds Retained earnings Total Shareholder Funds Ratios e 2017e Working Capital (69.9) (74.2) (75.3) Interest cover (times) na na na Net Debt/Equity (%) -10.2% -1.7% -0.5% Return on Equity (%) 5.3% 6.1% 7.0% ROIC 8.4% 8.8% 10.5% 17 March

16 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 2015 AU/NZ Asia RSA USA CA EUR Outperform 50.68% 61.04% 53.16% 47.90% 65.22% 43.59% (for global coverage by Macquarie, 5.33% of stocks followed are investment banking clients) Neutral 31.51% 24.66% 34.18% 47.70% 29.71% 34.62% (for global coverage by Macquarie, 5.02% of stocks followed are investment banking clients) Underperform 17.81% 14.30% 12.66% 4.39% 5.07% 21.79% (for global coverage by Macquarie, 3.78% of stocks followed are investment banking clients) AU vs Small Ordinaries, & rec history AU vs Small Ordinaries, & rec history AU vs Small Ordinaries, & rec history (all figures in AUD currency unless noted) (all figures in AUD currency unless noted) (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, March month target price methodology AU: A$7.00 based on a DCF methodology AU: A$6.00 based on a DCF methodology AU: A$3.30 based on a DCF methodology Company-specific disclosures: AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Estia Health's equity securities. AU: MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Regis Healthcare Ltd in the past 24 months, for which it received compensation. MACQUARIE EQUITIES LIMITED or one of its affiliates has provided Regis Healthcare Ltd with investment advisory services in the past 24 months, for which it received compensation. MACQUARIE EQUITIES LIMITED or one of its affiliates managed or co-managed a public offering of securities of Regis Healthcare Ltd in the past 24 months, for which it received compensation. AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Japara Healthcare Limited's equity securities. MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Japara Healthcare Ltd in the past 24 months, for which it received compensation. MACQUARIE EQUITIES LIMITED or one of its affiliates managed or co-managed a public offering of securities of Japara Healthcare Ltd in the past 24 months, for which it received compensation. Important disclosure information regarding the subject companies covered in this report is available at Target price risk disclosures: AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, 17 March

17 foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN , AFSL , a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN AFSL ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Apart from Macquarie Bank Limited ABN (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at Macquarie Group 17 March