Generation Healthcare REIT 2016 AGM Chairman s speech [Slide 1- Cover] [Introduction] Good morning Ladies and Gentlemen and welcome to the Annual General Meeting for Generation Healthcare REIT. As it is now 10:00 am and we have a quorum present, I have the pleasure in declaring the meeting open. [Slide 2 - Agenda] My name is Geoff Brunsdon and I m the Independent Chairman of APN Funds Management Limited, the Responsible Entity of your Fund, Generation Healthcare REIT. The meeting today has three principal objectives: To present the results and activities of the Fund for the 2016 financial year; Review the Fund s recent activities and performance; and To give you the opportunity to ask any questions you may have of Directors, Management or Advisers who are present here today. Shortly I will hand over to the CEO of the Fund, Miles Wentworth. Miles will provide you with an overview of the year to 30 June 2016 and update you on the Fund s recent activities. [Slide 3 - Directors] I would now like to introduce my fellow Directors of the Responsible Entity: Michael Johnstone who has been an independent Director since 2009 and is also Chair of the Audit, Compliance & Risk Management Committee. Jennifer Horrigan who has been an independent Director since 2012 and is also Chair of the Nomination & Remuneration Committee. Howard Brenchley who has been a Director since 1998 and a Nonexecutive Director since 2014. [Slide 4 NorthWest Representatives] I would like to extend a special welcome to a representative from NorthWest Healthcare Properties REIT, the new owner of GHC s Investment Manager, Bernard Crotty who is a Trustee of NorthWest. Page 1 of 4
[Slide 5 GHM Directors and Company Secretary] I would also like to welcome: Miles Wentworth who is the CEO of your Fund and who will be known to most of you; Chris Adams, Director of Generation Healthcare Management; and John Freemantle, Company Secretary of APN Funds Management Limited. Also present in the audience are our external advisers: Peter Caldwell - from our auditor, Deloitte Touche Tohmatsu; James Morvell - from our legal counsel, Hall & Wilcox; and Julie Stokes from our share registry, Link Market Services. [Slide 6 - GHC] [Slide 7 Highlights] [Financial highlights] Ladies and Gentlemen, Generation Healthcare REIT delivered another strong result for the 2016 financial year reflecting the defensive nature of the sector and active management of the Fund. Most notably, Underlying Net Operating Income increased 27% from the previous year, to $21.8 million. Distributions per unit totalled 8.84 cents for the year, up 3% on the previous year and representing an 88% payout ratio to underlying net operating income. The Fund delivered a total return (being the movement in the unit price plus reinvestment of distributions) of 41.6% for the 12 months to 30 June 2016, significantly outperforming the S&P/ASX 300 A-REIT Accumulation Index by 17%. The Fund s exposure to the unique and growing demand for healthcare services which are predominantly a need and not a want, sees the Fund well positioned to provide investors with attractive risk adjusted returns. We have a solid balance sheet and continue to focus on enhancing and growing the property portfolio of the Fund in a value adding way. A couple of key milestones during the year included the commencement of construction at two of the Fund s key organic growth projects totalling just under $160 million, of which the Fund s joint venture share is forecast to be approximately $74 million. The two projects, being Casey Stage 2 with St John of God Healthcare and the expansion of Frankston Private with Healthscope Group, are both now well underway. Page 2 of 4
[Slide 8 Highlights] On 27 June 2016, we reported the sale of the Investment Manager of GHC, Generation Healthcare Management Pty Limited, by APN Property Group Limited and interests associated with Miles Wentworth and Chris Adams to the Canadian listed NorthWest Healthcare Properties Real Estate Investment Trust. It is very much business as usual at present, with the Responsible Entity, senior management and staff working on the Fund, remaining unchanged. The transaction provides GHC investors with access to the resources and expertise of NorthWest, a leading global healthcare real estate investment and management platform, which has operations and investments in Australia and New Zealand as well as in Canada, Germany and Brazil. I am sure that Bernard, a representative from NorthWest who is present here today, would be happy to chat informally with any interested investor at the close of this meeting. Looking at the health sector from a macro perspective the funding pressures on Government, insurers and the private individual continue unabated. This is a result of the particularly unique demand drivers being the ageing and growing population, people living longer and technology driving more health solutions. Cost increases are tracking well ahead of inflation and the Federal Government has a number of reviews underway, looking for ways to reduce cost, waste, be more efficient and invest more into preventative health. This is with a view to getting more value from the dollar invested into health services. There is no doubt that changes will be made. Where these changes will be felt is unknown until they are determined and agreed. Health though is one of the most politically sensitive sectors and as such changes are likely to be measured and whilst this is likely to come with significant public scrutiny, we believe any impact on GHC will be limited given the scale and quality of the tenants that we have within the portfolio. With the Fund investing into: high quality property; in quality locations with well-credentialed operators; on long term leases with structured reviews; and in a sector that has inherent and material growth the Fund is well positioned. Finally today, I reiterate our previously announced earnings and distribution guidance for the financial year ended June 2017. We currently forecast underlying net operating income of 10.21 cents per unit and distribution per unit of 8.973 cents, an 88% payout ratio. Page 3 of 4
[Slide 9 Fund Review Miles Wentworth] I would now like to hand over to Miles, who will take you through the operational highlights of FY16 and provide you with an update on activities since year-end. [Refer to Miles Wentworth, CEO Speech] 10111213141516171819202122232425 [Slide 26 GHC Slide] [Concluding address after Miles speech] Thank you Miles. [General business] Ladies and Gentlemen, given there is no formal business to consider at this meeting, we can move straight to general business. I would be happy to take any questions you may have about the activities of the Fund. [Questions] [Meeting close] If there are no further questions, I will call a close to the meeting. Thank you for your attendance today and to those unitholders who participated by proxy. The Directors, Management and the representative of NorthWest would be pleased if you would join them for light refreshments and an opportunity to ask additional questions. Page 4 of 4
1234 5678 CEO (Miles Wentworth) speech 2016 Generation Healthcare REIT AGM [Slide 9 Fund Review] Thank you Geoff. Well, ladies and gentlemen, good morning and thank you for making the effort to come to today s Annual General Meeting of Generation Healthcare REIT. In this morning s address, I would like to: Provide an overview of the 2016 financial year, specifically highlighting the performance of the portfolio and our key achievements; Update you on the activity and performance since year end; and Thirdly, to leave you with an Outlook for the Fund. [Slide 10 Year In Review] Moving firstly to the Year in Review and the Key Results and Performance for the Year ended 30 June 2016. [Slide 11 Key Results and Portfolio Performance] The 2016 financial year saw a strong Underlying Net Operating Income result of $21.8 million, up 27% on the prior year. Net Property Income increased by 23% to $29.8 million. This was driven primarily by solid underlying rental growth of the portfolio, a full year contribution from the RSL Care acquisition in late FY15, completion of the Casey Stage 1 project in February 2015 and a reduction in the ground rent expense following the acquisition of the land freehold interest at Epworth Freemasons Victoria Parade. There was significant, successful leasing activity during the year, with 22 new and renewed leases representing $2.87 million of rent. Continued strong occupancy of 98.6% was achieved, being marginally higher due to further leasing at Casey Specialist Centre, which is now fully let, and at Spring Hill, partially offset by lower occupancy at Pacific Private given the structural changes in that market. On a like-for-like basis, rental income increased by 2.9% and of the leases that were due to expire, we continued to experience a high level of tenant retention at over 84%. [Slide 12 Property valuations] On a like-for-like basis property values increased by 13% over the year. This predominately came from yield compression on the existing assets that are subject to future stages or expansion via organic growth, demonstrating the high quality of the tenant covenants, attractive locations and the opportunity that presents on each campus. The weighted average capitalisation rate of the portfolio firmed from 7.88% in 2015 to 7.01% as at 30 June 2016. This resulted in the net tangible asset backing of the Fund increasing by 16 cents (or 13%) to $1.38 per unit. 1 of 5
The further firming of capitalisation rates is the result of increasing levels of activity and interest for property in general and more specifically for health care property given its unique and defensive characteristics. [Slide 13 Total Return Performance] In terms of returns to investors for the 12 months to June, Generation Healthcare REIT delivered a total return (being distributions plus the change in unit price) of 41.6%, outperforming the S&P / ASX 300 AREIT Accumulation Index by 17 percent. Since the Fund s inception 10 years ago, strong outperformance has been delivered throughout the entirety of this period. Following year end though, 10 year Government bond yields (being a proxy for the risk free rate) have appreciated resulting in Real Estate Investment Trust s, utility and infrastructure stocks being rebased lower and GHC has not been immune from this. Defensive, long dated, high quality income though will still be strongly sought after. [Slide 14 Distributions] The Fund declared and paid two distributions totalling 8.84 cents per unit for the year, up 3% on the prior year. This represented an 88% payout ratio to the Underlying Net Operating Income. Unitholders also benefited from 35% of the distribution being tax deferred. [Slide 15 Transactions] As Geoff has already touched on, it has been another active and successful year for the Fund. [Slide 16 Transactions during the period] In September last year, the Fund acquired 6 ground floor suites and 30 carparks at Waratah Private Hospital for $5 million plus costs. Waratah Private Hospital is where the Fund holds a minority investment in the going concern with a view to a longer dated investment in the property. The suites have been leased to the hospital operator on a 20 year net lease with initial rental representing a 7% yield. In December, we lodged the town planning application for the two projects at Epworth Freemasons Clarendon Street, being the Grey Street Centre and the 309 bay Albert Street underground carpark. The two projects total approximately $69 million and are to be a 50/50 joint venture with Epworth Foundation. Also in December, we settled the acquisition of the freehold interest in the land at Epworth Freemasons Victoria Parade for $10.7 million plus costs. This property was acquired at the inception of the Fund with a condition to settlement of the land component being the subdivision of the site. This deferred the settlement until this time. 2 of 5
[Slide 17 Transactions during the period] December was a big month for the Fund and an important milestone, as we reached financial close on both the Casey 2 and Frankston Private expansion projects. Casey 2 is a joint venture with and will be operated by St John of God Healthcare, Australia s largest not for profit, private hospital operator, whilst the Frankston Private expansion project is being head leased by Australia s second largest private hospital operator, Healthscope Group. These two hospital projects combined have a total forecast cost of approximately $160 million. Both are in joint venture which sees GHC having a $74 million forecast investment cost. With both of these projects utilising the return on cost model at 8% and 8.5% respectively, they will add material growth to the funds future earnings and to the portfolio value. Both projects are well under construction as you can see. In regard to time and cost, the wet Melbourne winter has provided a few challenges for our two builders, but with resequencing they are on time from that guided to the market, and on or below cost. [Slide 18 Capital Management] I would now like to review the capital management initiatives during the year. [Slide 19 Capital Management] With transactions in prior financial years predominantly funded through equity, this positioned the Fund to source debt funding for the organic projects. Given this, over the past 12 months we have either increased existing facilities or entered into new facilities for a total of $88 million. As at 30 June 2016, the Fund s gearing, being net debt to total assets was 28.3%. Funding the projects will likely see this percentage increase to within our well communicated target range of 40 to 45%. In regard to the projects under construction, we have taken an active approach to hedging. This has been with a view to lock in the interest cost on the projects during construction providing additional certainty to our tenants, given their rental is based on a return on cost. In order to deliver certainty to the Fund s earnings contribution from the projects, we have also contracted forward start swaps out of practical completion. On the equity side, the distribution reinvestment plan has remained active during the year with a 2% discount. In the 2016 financial year, the program raised an additional $4.8 million. [Slide 20 Change of ownership of investment manager] As Geoff mentioned, in late June the Board noted the sale of the GHC management rights, to NorthWest Healthcare Properties REIT. With us here today is Bernard Crotty, a Trustee of NorthWest, so please make yourself known to him. 3 of 5
The business as usual approach to the purchase has provided continuity for all stakeholders of the Fund. Given NorthWest is a global investor into healthcare property and currently have investments in Canada, Germany, Brazil, New Zealand and Australia, investors will benefit from their global reach, knowledge and experience. [Slide 21 Post balance date update] Now moving to an update on progress since balance date. The first quarters performance to 30 September has been tracking in line with expectation as one would expect from a portfolio like ours. In August we were issued a planning permit by Melbourne City Council for the $69 million Albert and Grey Street projects which are to be in 50/50 joint venture with Epworth Foundation. Timing for this was ahead of that expected and a positive outcome. We have now progressed to schematic design and are working closely with Epworth to bring this project to financial close, noting it remains subject to finance. October saw us announce the Epping Medical Centre investment, which is an exciting opportunity. This initial $28.6 million plus costs, investment is here in the Northern suburbs of Melbourne and has been structured as a debt transaction until such time as we have repositioned the property. As part of the transaction, we also have an option over an adjacent site consisting of 10,000 sqm. This land provides for the establishment of a scale private hospital over time to meet the growing demand for services in the catchment. The vision being to create a major integrated health campus for the Northern suburbs, on a staged basis. [Slide 22 Summary and outlook] [Slide 23 Summary and outlook] As many of you know, the Fund s strategy is to invest exclusively into high quality healthcare properties that provide investors with attractive risk adjusted returns. With a 12.2 year weighted average lease term to expiry, strong leases subject to annual review and tenants operating in a defensive sector, Generation Healthcare REIT is well positioned. Over the next 12 months, the team is focussed on delivering its key objectives, being: 1. Continue to grow operational earnings and distributions; 2. Continue active management of the portfolio including leasing, to drive value; 3. Actively manage the construction of the Casey Stage 2 and the Frankston Private expansion projects; 4. Progress the Epworth Freemasons Clarendon Street projects; and 5. Consider growth opportunities that add value to the Fund, including via the Collaboration Agreement with RSL Care RDNS. 4 of 5
[Slide 24 Summary and outlook] In regard to our forecast earnings, as Geoff mentioned we reaffirm the guidance provided in August that we expect a 2017 financial year Underlying Net Operating Income per unit of 10.21 cents. The guidance for the distribution is 8.973 cents per unit paid equally between the first and second half. [Slide 25 GHC presents...] [END] The Fund presents a defensive investment backed by high quality assets, high occupancy rates, attractive long term rental flows and an experienced and committed management. The current portfolio of quality healthcare real estate offers attractive returns, with 2 of the 3 major organic growth projects well into their delivery phase. Both will become revenue generating in the 2017 calendar year providing strong upside to future earnings, predominantly in FY18 onward. Ladies and Gentlemen, thank you for your time and for attending today s meeting. 5 of 5
GENERATION HEALTHCARE REIT (ASX CODE: GHC) ANNUAL GENERAL MEETING 16 NOVEMBER 2016 generationreit.com.au 1
AGENDA 2016 financial year results Recent activities and performance Questions Geoff Brunsdon Chairman 2
APN FUNDS MANAGEMENT DIRECTORS Michael Johnstone Independent Director Jennifer Horrigan Independent Director Howard Brenchley Non-Executive Director 3
NORTHWEST REPRESENTATIVE Bernard Crotty Trustee, NorthWest Healthcare Properties REIT 4
CEO, DIRECTOR GHM AND APN FM COMPANY SECRETARY Miles Wentworth Chief Executive Officer, GHC Chris Adams Director, GHM John Freemantle Company Secretary, APN Funds Management 5
GENERATION HEALTHCARE REIT 6
HIGHLIGHTS Underlying net operating income $21.8 million (increase of 27% from last year) Distributions up 3% to cents 8.84 cents per unit for the year 12 month total return of 41.6% Outperformed the S&P/ASX 300 AREIT Accumulation Index by 17% Defensive sector : unique, growing demand for healthcare services Commenced construction at two of the Fund s key organic growth projects 7
HIGHLIGHTS Sale of Investment Manager to NorthWest Healthcare Properties REIT Business as usual Access to resources and expertise of NorthWest, a leading global healthcare real estate management platform Bernard Crotty a Trustee present here today Health sector outlook Reaffirm FY17 guidance: UNOI of 10.21 cpu and distribution of 8.973 cpu 8
FUND REVIEW 2016 year in review Update on activities and performance since year end Outlook for the Fund Miles Wentworth Chief Executive Officer, GHC 9
2016 YEAR IN REVIEW 10
KEY RESULTS AND PERFORMANCE Underlying Net Operating Income up 27% to $21.8 million: Net property income 23% to $29.8 million Driven by: - underlying rental growth, - full year contribution from prior year acquisitions and completed project at Casey Stage 1, and - reduction in ground rent expense from freehold purchase Significant leasing success during the year with new leases and renewals of $2.9 million Continued strong occupancy at 98.6% Like-for-like rental growth of 2.9% High tenant retention at 84% 11
PROPERTY VALUATIONS Revaluations: Property values increased 13% (on a like-for-like basis) Revaluations predominantly due to yield compression on existing assets subject to future stages or expansion Demonstrates high quality tenant covenants, attractive locations and potential opportunities Weighted average capitalisation rate firmed to 7.01% 12
TOTAL RETURN PERFORMANCE GHC delivered a total return of 41.6% for FY16 Returns Per Annum GHC 1 Benchmark Over / (Under) Performance 600 GHC S&P/ASX 300 A-REIT Accumulation Index 1 year 41.6% 24.6% 17.0% 500 3 years 35.4% 18.5% 16.9% 400 5 years 32.3% 18.0% 14.3% 300 7 years 27.8% 16.5% 11.2% 200 10 years 17.0% 2.9% 14.1% 100 Since Inception (May 2006) 17.6% 3.1% 14.6% - May Jun 2006 2007 (inception) Jun 2008 Jun 2009 Jun 2010 Jun 2011 Jun 2012 Jun 2013 Jun 2014 Jun 2015 Jun 2016 Government Bond yields have increased recently which has impacted AREITs, Utility and Infrastructure stocks GHC not immune Source: IRESS as at 30 June 2016 close 1. Capital appreciation of GHC units during the year, assuming reinvestment of distributions paid 13
DISTRIBUTIONS FY16 declared and paid two distributions, totalling 8.84 cpu 3% increase on last year 88% payout ratio 35% tax deferred distribution 14
TRANSACTIONS DURING THE YEAR 15
TRANSACTIONS DURING THE PERIOD Asset acquisitions and organic projects update Acquired 6 ground floor suites and 30 car parks at Waratah Private Hospital for $5m plus costs In December lodged planning application for Grey Street Centre and Albert Street car park at Epworth Freemasons Clarendon Street 50 / 50 joint venture project with Epworth Foundation with forecast total cost of $69m Settled the acquisition of the freehold interest in land at Epworth Freemasons Victoria Parade for $10.7m plus costs 16
TRANSACTIONS DURING THE PERIOD Achieved financial close on Casey 2 in December Joint venture with St John of God Health Care 8.0% return on cost Frankston Private expansion project Head lease to Healthscope Group 8.5% return on cost Both projects: On time from that previously guided On or below budget 17
CAPITAL MANAGEMENT 18
CAPITAL MANAGEMENT INITIATIVES Debt facilities ($88 million) renegotiated with enhanced terms Existing balance sheet capacity utilised to debt fund organic projects 30 June 2016 net debt to total asset ratio of 28.3% with medium to longer term target level of debt in the range of 40-45% Distribution reinvestment plan remains active with a 2% discount raising $4.8 million during the year 19
CHANGE OF OWNERSHIP OF INVESTMENT MANAGER Sale of GHC management rights to Canadian listed NorthWest Healthcare Properties REIT Business as usual approach provides strong continuity for all stakeholders Ability to benefit from NorthWest s global reach, knowledge and experience 20
POST BALANCE DATE UPDATE First quarter operating performance in line with expectations In August we were issued a planning permit by Melbourne City Council for Epworth Freemason Clarendon Street projects Made an investment into Epping Medical Centre investment for $28.6m plus costs including option over adjacent site for hospital project on a staged basis 21
SUMMARY AND OUTLOOK 22
SUMMARY AND OUTLOOK Strategy - invest exclusively in high quality healthcare properties Focus over the next 12 months: 1. Continue to grow operational earnings and distributions 2. Continue active management of the portfolio including leasing to drive value 3. Actively manage the construction of the Casey 2 and Frankston Private expansion projects 4. Progress the two Epworth Freemasons projects 5. Explore potential growth opportunities that add value, including with RSL Care RDNS 23
SUMMARY AND OUTLOOK FY17 guidance reaffirmed: Underling Net Operating Income of 10.21 cpu Distribution guidance of 8.973 cpu Attractive returns from: Current portfolio 2 of 3 major organic growth projects well into their delivery phases Projects revenue generating in 2017 calendar year providing strong upside to earnings in predominantly FY18 onwards 24
GHC presents a defensive investment backed by quality assets, high occupancy rates, attractive long term rental income and an experienced, committed management 25
GENERATION HEALTHCARE REIT 26