Healthcare & Land Lease Retirement Communities

Transcription

1 Property Funds Association New Horizons Conference ALTERNATIVE SECTORS Healthcare & Land Lease Retirement Communities 30 April 2018

2 Barwon Investment Partners Barwon Investment Partners is a diversified wholesale property and private equity manager, with a 12- year track record managing institutional capital. $1,100m Raised for investment strategies since inception Year track record of investment Unlisted property trusts currently being managed Team members Key investment strategy focuses 1

3 Alternative Property Sectors Healthcare Agri. Property Self Storage Student Accommodation ALTERNATIVE PROPERTY SECTORS Retirement Communities Tourist Parks High Density Residential Development Data Centres Aged Care Car Parks Hotels Childcare 2

4 HEALTHCARE PROPERTY INVESTING 3

5 The Australian Healthcare Market Healthcare Industry Overview Representing approximately 10% of Gross Domestic Product, the Australian health sector is one of the nation s largest service industries. Total domestic healthcare spend is approaching $170bn and, driven primarily by ageing demographics, has grown at 8% per annum for the last 5 years. 1 Hospitals account for the largest share ($59b or 40%) of total expenditure on health in Australia by all sources (i.e. the Australian Government; state, territory and local governments; and the non-government sector). Other major areas of expenditure are primary healthcare services ($55b or 38%) and other health goods and services ($32b or 22%). 1 Industry Trends Growing population: by 2030, Australia s population will have expanded by 27%, which means another 6.2 million people will live in Australia. According to the Property Council of Australia, this increase means that an extra 125,000 retirement facilities and 24,000 more hospital beds will be needed. Including secondaries and public to private transactions Aging population: Australian population aged 65+ will grow by circa 70% over the next 15 years. As the population ages, demand for healthcare services will increase. According to the Australian Bureau of Statistics (ABS), persons 65 years of age and older spend 4-5 times more on healthcare than the population average. Technology advancement: recent decades have brought about major advances in medical technology, which are considered a significant driver of increased healthcare expenditure. Technological advances can also facilitate an expansion in the range of conditions and age groups that can be treated. 1 AIHW,

6 Healthcare Property Assets Healthcare property assets are diverse: hospitals, specialist clinics, medical centres, diagnostic and pathology services and hospital service providers Lack of institutional developers focus on this sector Operators often develop their own facilities, and maintain this capital on their balance sheet Contrary to the successful model employed in the US and UK, whereby operators seek real estate capital partners to provide and manage their facilities. Primary Care Facilities Medical Centres Day Surgeries: do not require an overnight hospital stay, and often include outsourced public services Secondary care facilities Specialist treatment facilities: such as renal or oncology day facilities Diagnostic Facilities: such as imaging and pathology services Private Hospitals: are privately owned and provide a range of tertiary services. Public Hospitals: are operated by, or on behalf of, state and territory governments with funding assistance from the federal government. These facilities provide a range of general hospital tertiary services. Tertiary care facilities Public-Private Partnership (PPP) Hospitals: are public hospitals which are funded and operated through a partnership of government and one or more private sector companies. The services provided by these facilities are similar to those of public or private hospitals. Private Specialist Facility: provides specialist services such as psychiatric, mental, skin, and cancer treatments. Aged Care Facilities: include establishments that provide long-term nursing care to low and high care residents. These facilities are regulated and partly funded by government (up to circa 80%). Ancillary Facilities Nursing facilities; medical research and educational facilities; ancillary hospital service providers such as laundries, medical labs and car parks 5

7 Healthcare Property Overview A sector more recently characterised by its superior risk-adjusted returns One of the highest return, lowest volatility property investment asset classes in Australia over the last 7 years; typically less cyclical than other property classes, providing attractive risk-adjusted returns Characteristically long leases and low vacancy rates are a key attraction, providing relatively secure income compared with other real estate sectors Average lease term for core commercial property is ~5 years - healthcare assets typically have year leases Average vacancy rate for healthcare property is only ~2% Sector to benefit from the long-term drivers of the healthcare industry: Healthcare expenditure is largely a mandatory spend Demand for healthcare services continues to grow aging population, increased life expectancy, and advances in medical technology Unlike the US, UK and Europe, healthcare property is widely unsecuritised in Australia with only ~$2.7b 2 held by institutional managers out of an estimated $200b+ 1 of assets Increasing appetite for healthcare property sale and leaseback opportunities in Australia opportunity to secure quality assets from public or private operators with strong leases and yield 1 Barwon management estimate 2 IPD,

8 Healthcare Property: Investment Highlights SECTOR GROWTH Australia s growing and aging population is driving strong growth in the demand for healthcare services Advances in care procedures and technology driving demand for new and more specialised care facilities Government funding of sector helps underwrite growth and tenant credit quality OPPORTUNITIES Unlike the US and UK, the Australian healthcare sector has traditionally not attracted significant institutional capital, although this has recently changed Some larger listed groups own hospital facilities, but most medical centres and smaller private facilities are privately owned Often small to medium sized assets, meaning less competition and better pricing ATTRACTIVE RETURNS Properties typically offer long WALEs, CPI+ reviews providing attractive income streams, with an inflation hedge Yields typically range from 5.5% to 7.0%, with modest capital growth LOW RISK WALEs typically 5+ years High credit quality of tenants due to sound sector fundamentals Patients/clients are loyal and support the facilities and personnel they know 7

9 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Historic Returns Annualised Returns (Quarterly Periods) Evolution of $100,000 Invested 25% 600,000 20% 500,000 15% 400,000 10% 5% 300,000 0% 200,000-5% 100,000-10% 0 Total Property Health Care All Property Healthcare Property The healthcare property sector is less volatile relative to other sectors, the annualised average returns have trended between 7% to 25% over the past 10 years. Relatively steady compared to other property sectors Period includes the global financial crisis of 2008/2009 Healthcare property secured positive returns of more than 7% over the GFC period; total property returns plunged to negative values during the same period Source: MSCI Research March 18 8

10 Relative Performance Comparison of total return across various property sectors 25.0% 20.0% In 2017, by delivering a total return of c.25%, the Australian healthcare property sector outperformed the all property (composite) index by more than 1000bps. This comprised 7.2% of income return and 16.7% of capital growth. 15.0% 10.0% Office, retail and Industrial property sectors have annualised returns of 12.5%, 10.0% and 10.5%, respectively for % 0.0% All Property Office Retail Industrial Healthcare Income Return Capital Return Source: IPD Research

11 10-yr Annual Return % RELATIVE PERFORMANCE Risk Return Analysis 10 years ending December % 15% Healthcare The performance data of property sectors in Australia over the past 10 years show that healthcare property has delivered the highest return relative to other sectors in the property market with relatively low volatility 13% 10% 8% Retail All Property Office Industrial Average annualised return and annual volatility for Healthcare has been ~16% and 2.7%, respectively. This positions the Healthcare property sector as an attractive sector for investment compared to other sectors 5% 3% The healthcare property sector has a low correlation with other property sectors, a desirable addition to a diversified property portfolio 0% 0% 1% 2% 3% 4% 10-yr Annual Volatility Source: IPD Research, December

12 Historic Cap Rates Capitalisation Rates (Various sectors) 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Industrial Office 10 YR Bond Retail Healthcare Cap rates across all sectors have compressed to relatively historic levels; however, they remain significantly above the bond rate. Healthcare cap rates have converged to be aligned with more traditional asset classes. One thesis: the spread of property cap rates over the bond rate will continue to drive cap rate compression. Source: MSCI Research March 18 11

13 Key Investment Risks Investors have exposure to two general types of risks: Changes in Federal & State Government policy may impact the Australian health sector and the ability of healthcare tenants to pay the rent. However, the sector has increased focus on private sector funding that mitigates the government risk significantly. Industry specific The level of competition between hospital operators and other service providers and the ability of hospital operators to maintain appropriate levels of cost control may impact the performance of operators generally. Government legislation requires operators to be licensed. If a hospital s operating license were revoked the hospital would not be permitted to continue operating. The majority of private hospital revenue is derived from health funds. The contractual terms negotiated with health funds will impact the profitability of the hospital operators including the ability to meet future cost increases within the business. Property Specific Lease risk: risk of tenant default or non-renewal of any of the leases. This risk is significant where the tenant is the primary operator in the premises. Healthcare operators are generally sophisticated tenants, large organisations (some listed refer appendix) and not easily replaced. Property obsolescence: risk that the property s design, facilities and technology become aged and unsuitable for healthcare services. Most buildings will be suited to refurbishment and technological upgrading. These costs are often shared between the Lessor and Lessee. 12

14 HEALTHCARE PROPERTY ASSETS 13

15 Investment Characteristics Primary Care Secondary Care Tertiary Care Total Return 8-10%+ 8-10%+ 8-10%+ Passing Yield Passing Yield 5.5% 7.0% Passing Yield 5% 6.5% Passing Yield 5.0% 6.5% Target WALE 5+ years 10+ years 12+ years Tenants / Activities Medical practitioners Pharmacy Physiotherapy Hearing services Diabetes Services Dietician Skin Cancer Day Surgeries Specialist facilities Diagnostic Facilities Rehabilitation Services Disabled Services Mental Health Services IVF Services Private Hospitals Private Specialist Facilities Locations Often located near hospital precincts, retail and transport hubs Metropolitan and major regional centres Often located near public hospital precincts and transport hubs Usually occupied by head lessee on long net lease arrangements Metropolitan and major regional centres Key Risks Lease renewal Tenant default Building obsolescence Local competition Lease renewal Tenant default Building obsolescence Local competition Lease renewal Tenant default Cap Ex Management Building obsolescence Risk Mitigation Property selection Tenant credit quality Tenant relations Active lease management Due diligence Property selection Tenant credit quality Tenant relations Due diligence Property selection Tenant credit quality Tenant relations Due diligence 14

16 Overview of Healthcare Assets Shellharbour Private Hospital Barrack Heights, NSW 5,000 sq.m. LVR of 40% 100% leased to Healthe Care WALE 25 years Purchase price $20.9m Logan Mental Heath Facility Logan Central, Queensland 3,172 sq.m. LVR of 45% 100% leased to QLD Health WALE 3 years Passing Yield 8.4% Purchase price $21.5m Wollongong Day Surgery Wollongong, NSW 701 sq.m. LVR of 40% 100% leased to Healthe Care WALE 25 years Purchase price $11.7m Newmarket Medical Centre Brisbane, Queensland 1,076 sq.m with an LVR of 40% 86% leased WALE 3 years Passing Yield 6.3% Purchase price $8.2m Secondary Care Facility Modbury, South Australia 1,213 sq.m. LVR of 45% 100% leased WALE 4 years Passing Yield 5.9% Purchase price $5.5m Benson Radiology Clinic Munno Parra, South Australia 1,357 sq.m. LVR of 41% 100% leased WALE 7 years Passing Yield 6.7% Purchase price $5.0m Property details as at April 2018; Passing Yields and LVRs are on current book values. 15

17 Overview of Healthcare Assets South Pacific Private Hospital Curl Curl, NSW 2,521 sq.m. LVR of 40% 100% leased to Woodrose Pty Ltd WALE 20 years Purchase price $33.0m Clinical labs Pathology Laboratory Melbourne, Victoria 8,798 sq.m. LVR of 35% 100% leased WALE 9 years Purchase price $20.5m Somerset Private Hospital Nepean, NSW Fund-through delivery of a 6,500 sq.m facility. WALE exceeding 10 years on completion Value on completion: c. $55m Hallet Cove Medical Centre Hallet Cove, South Australia 668 sq.m. LVR of 43% 100% leased WALE 5 years Passing Yield 6.7% Purchase price $4.1m Vasse Medical Centre Vasse, Western Australia 1,540 sq.m. LVR of 40% 100% leased WALE 9 years Passing Yield 7.1% Purchase price $8.6m Clinical Labs Pathology Laboratory Adelaide Airport, SA 2,500 sq.m. LVR of 45% 100% leased to Clinical Labs WALE 15 years Passing Yield 8.0% Purchase price c. $10.4m Property details as at April

18 Acquisitions New assets are being added to our portfolio Clinical labs, Adelaide Investment Highlights Off-market, relationship lead investment Attractive risk-adjusted total return, with strong forecast passing yield of c.8% p.a. Agreement for Lease in place over 100% of the asset on a 15 year initial term Critical piece of healthcare infrastructure Anticipate completion Q Fund through structure Investment Overview Project Delivery Partners: Barwon has partnered with Adelaide developer Leyton Properties to deliver a turn-key solution to Australian Clinical Laboratories (ACL). ACL is Australia s third largest pathology provider, performing more than 5.6m pathology episodes each year across 88 NATA accredited laboratories and employing more than 3,600 people. The transaction, which is structured as a fund-through development, will deliver a purpose-built 2,500 sq.m pathology laboratory in Adelaide, South Australia. The Property is a critical piece of healthcare infrastructure. Upon completion, the facility will act as the main laboratory for ACL in South Australia, servicing operations of this business across the entire state. Progressive investments into the project commenced in March

19 Recent Transactions During Q4 2017, Barwon took advantage of favourable market conditions to dispose of two assets located in Lalor and Greensborough, Victoria. imed Portfolio Disposal Considerations Private buyers have been very active in the smaller end of the healthcare market with local market conditions suggesting that material value uplift could be achieved through an on-market sales campaign The assets both had leasing and capex risk and had arguably become non-core to the portfolio Investment Highlights Opportunistically acquired in an off-market transaction at a discount to market value Holding period: ~12 months Favourable return metrics for assets that had become non-core Return Metrics Greensborough Lalor Total Purchase Price $2,150,000 $1,200,000 $3,350,000 Sale Price $3,255,000 $2,110,000 $5,365,000 Gross Premium $1,105,000 $910,000 $2,015,000 Sale Cap Rate 5.80% 5.30% IRR 45% 62% Equity Multiple 1.7x 1.9x 18

20 Outlook for Healthcare Property Sector Aging population, technology advancements and increasing community care expectations will drive continuing demand for Healthcare property. Healthcare Property is quickly being recognised as an attractive and growing investment sector by Australian institutional capital and private investors. Sector is being rerated as investors better understand growth drivers and risk attributes. Private sector funding of health assets to be more common as Federal and State Governments struggle to manage public funding demands of this critical community sector. Key risks - Government regulation changes, private health insurance take up, property obsolescence, lease renewals. Sector Investors and their property fund managers require a detailed understanding of and networks in the healthcare sector. 19

21 LAND LEASE RETIREMENT COMMUNITIES 20

22 Business Drivers Ingenia operates in two complementary sectors with strong growth prospects Demand Drivers Opportunity Over 65s fastest growing demographic Grow market awareness and penetration 01. Affordable rent-driven seniors housing Housing affordability More than 70% of seniors own home outright Limited purpose-built seniors rental accommodation Home design affordability and site yield Convert home equity into comfortable retirement Develop affordable rental accommodation 02. Experience-driven tourism Rapidly growing caravan and campervan registrations as population ages Diminishing caravan parks conversion to highest and best use Sector leadership Cottage industry conversion Conversion of land to highest and best use Source: Ingenia Communities Page 3

23 Opportunity for a Land Lease Rental Model 100% 80% Property ownership without a mortgage (by age group) 100% 90% 80% 70% 14% 14% Superannuation account balances (by age group) 22% 24% 14% 10% 20% 10% 13% 7% 15% 6% 4% 10% 60% 60% 19% 40% 20% 0% and over 50% 40% 30% 20% 10% 0% 54% 43% 17% years 22% years 34% 32% years 51% years 66% years 81% 75 years + Super balance <$100k Source: ABS. Nil $1-99k $ k $200k+ Source: ASFA Research and Resource Centre. The maximum pension for singles is $439 per week, which is insufficient to fund a comfortable retirement Australia s growing pool of retirees is living longer for people aged some 70% have <$100k in accumulated superannuation For many retirees releasing equity from their home whilst retaining Government payments is an attractive proposition Source: Ingenia Communities Page 13

24 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Many seniors struggle to fund a comfortable retirement Median House Price ($000) Home Ownership (Age) Superannuation account balances Pension 1, % 100% 1,200 1, Sydney Melbourne Brisbane 80% 60% 40% 20% 0% and over 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% years years 75 years + Nil $1-99k $ k $200k+ According to ASFA a couple requires $59,971 a year to fund a comfortable retirement. The age pension is only $31,238 Source: CoreLogic/ANZ Source: ABS Source: ASFA Research and Resource Centre Source: ASFA Super Guru August 2017 Key capital cities have recorded strong growth over past 20 years and with 82% of seniors owning their homes outright with no mortgage, many have considerable assets but more than 81% of seniors have less than $100k in superannuation With limited retirement savings and increasing life expectancy, demand by Seniors for lower cost housing solutions is set to grow Source: Ingenia Communities 23

25 ($000) Land lease communities offer a solution 700 Median Brisbane House Price Resident has $216,373 net proceeds from selling home and buying at Ingenia Lifestyle Bethania $555k Ingenia Lifestyle Bethania $339k Camellia Home Design $339,000 Asset Test Single Couple Asset Test Threshold $250,000 $375,000 Asset Test Cut Off $542,500 $816,000 Resident can access $216,373, continue to access pension and most also get Commonwealth Rent Assistance of up to $3,437 ($132 per fortnight) Source: Ingenia Communities 24

26 Lifestyle Communities (Manufactured Home Estates) The evolution Caravan parks established in the 1950 s to accommodate families and couples on holidays Caravan parks began to offer increasing mix of temporary caravan sites and permanent manufactured home sites Became a popular low cost permanent accommodation option for a growing segment of seniors Quality and size of mobile homes continued to improve Today, communities primarily built for permanent manufactured home sites Affordable yet better quality manufactured homes with features consistent with master built homes (e.g. with marble bench tops, tiled floors etc.) Source: Ingenia Communities Page 14

27 Land Lease Rental Business Model Resident owns the above ground structure Ingenia owns the freehold land House (above ground) purchased by resident from Ingenia or previous resident Resident enters into a ground lease with Ingenia Upon departure, resident can on-sell the home to an incoming resident or remove their home from site Ingenia provides community facilities and services On site management Maintenance of grounds and community facilities Facilities generally include clubhouse, bowling green, library, swimming pool Ingenia retains land ownership and collects ground lease rent Source: Ingenia Communities Page 15

28 An Affordable Independent Living Option Average home sale price: $290,000 Average ground lease rent: $140 pw Residents may be eligible to receive pension and Commonwealth Government rent assistance Ingenia Stoney Creek, NSW Source: Ingenia Communities Page 17

29 Community Facilities Enhance Lifestyle Element Ingenia Lifestyle Bethania, QLD Source: Ingenia Communities Page 18

30 Quality Homes with Flexible Floor Plans Source: Ingenia Communities Page 19

31 Australia s Housing Market Comparisons with the US UNITED STATES AUSTRALIA $222,400 (USD) Median house price $498,131 (USD) Median house price 63% Detached dwellings 77% Detached dwellings Wholesale price for a quality new manufactured home $63,500 (USD) >$120,000 (USD) Housing is relatively affordable Housing affordability crisis Source: Ingenia Communities p30

32 Low Penetration in Australia Model well established in US UNITED STATES AUSTRALIA >6% of population live in a lifestyle community <1% of population live in a lifestyle community Resident population a mix of individuals, families and retirees Homes commonly purchased on credit Resident population predominantly retirees Cash buyers only no credit available Lifestyle communities have significant scale and recognition Lifestyle communities a small portion of housing stock and (presently) have low penetration Source: Ingenia Communities Page 15

33 Implied cap rate % Valuations: Existing Communities Significant cap rate compression evident Lifestyle and Mixed-use Communities 11.50% 10.50% 9.50% The Grange Riverbreeze 8.50% Cairns Rockhampton Coconut Bonny Hills 7.50% Avina Durack Newport 6.50% (Hometown) Greenpoint (Boyuan) 5.50% Jan-13 Aug-13 Mar-14 Sep-14 Apr-15 Oct-15 May-16 Nov-16 Jun-17 Source: Ingenia analysis. Trend Line Trend Line Mixed-use Lifestyle Poly. (Mixed-use) Poly. (Lifestyle) (Mixed-use) (Lifestyle) Capitalisation rates continuing to tighten growing market evidence as new entrants target scale Greater market awareness and investment interest in sector Value uplift at key communities assisted by improved operating performance, integration into Ingenia platform and execution of individual asset strategies Best in class communities in US now transacting <4.0% Source: Ingenia Communities 32

34 Outlook for Land Lease Communities Sector Many Australian seniors are struggling to fund their retirement as the cost of living, life expectancy and lifestyle expectations increase. Land Lease Communities are offering an attractive and simple downsizing option. Appeals to seniors seeking income security, an active retirement and cash savings for their longer term retirement. Manufactured home communities evolving quickly with better facilities, home designs and care offerings. Increasing interest from LLC prospective residents in communities offering low on no DMF. For investors, LLC can offer attractive development profits and long term rental streams. 33

35