ASPEN GROUP - Call Transcript 2015

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Good Morning and welcome to this presentation call from Aspen Group. My name is Clem Salwin, the chief executive of Aspen Group.

Today we have announced a major, strategic transaction for the business: the proposal to merge with Aspen Parks Property Fund. This is a major step forward for Aspen Group and the strategic change we have been undertaking over the last few years.

The merger will result in Aspen Group being one of the largest listed groups in value‐for‐ money accommodation.

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Today, I will cover off with an outline of the merger proposal and then give an overview of the new Merged Group.

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Turning to the merger proposal

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Aspen Parks Property Fund (or APPF) is an unlisted property fund with 21 properties valued at almost 200 million dollars. The Fund has about 3000 investors, with Aspen Group having a cornerstone investment of 42%. Aspen Group is also the manager of the Fund.

This transaction completes Aspen Group’s strategic change of the last few years. The business now has a clear, singular focus: owning, managing and developing value for money accommodation. The Merged Group will be one of the market leaders. The merger also completes the structural simplification of the Aspen Group into a much more straightforward, transparent and easy to understand business.

The merger is immediately accretive to distributions. The Merged Group is forecasting FY16 annualised distribution of 12c per security. This is an accretion of 28% over the current FY16 distribution guidance provided at the annual results last month. This 12 cent distribution reflects a 9.8% yield on the Aspen Group share price as at close of trade on Friday.

The merger creates a strengthened, fully integrated management and development platform for value creation. The Merged Group will have a national portfolio of 25 assets with over 5,000 sites. We have more than 400 staff. The Merged Group is an industry leader, well positioned to execute on growth through optimising operations, organic development and acquisitions.

The Directors of Aspen Group and APPF consider that the merger is a compelling proposition for both sets of securityholders. We unanimously recommend the merger and we intend to vote our securities in favour of the merger.

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Turning now to the key merger terms. Aspen Group securityholders will receive Merged Group securities on a 1 for 1 basis.

The APPF securityholders have a choice of Merged Group scrip or cash. As at the close of trading on Friday, the consideration to APPF securityholders was a value of $0.50, representing a 8.2% premium to the APPF NAV as at 30 June.

The form of consideration will be at each APPF securityholder’s election. APPF securityholders will receive Merged Group securities at a merger ratio of 0.386 Merged Group securities for every APPF security.

In addition there is a cash option. APPF securityholders may choose to participate in a buy‐back from the Merged Group at $0.52 cents per APPF security. The cash option of $0.52 is equivalent to the scrip option value at $1.347 per Merged Group security, which is an 8.9% yield on the Merged Group FY16 proforma distribution of 12 cents. This cash option is subject to an overall cap of $35 million, which is about half the merger consideration.

The APPF securityholders may elect to receive a combination of both scrip and cash. Implementation will be by way of schemes of arrangement requiring approval by both Aspen Group securityholders and APPF securityholders. The current timetable is for implementation in December.

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The Merged Group creates simplified and integrated platform to value creation and further growth.

The merger eliminates Aspen Group’s current equity position in APPF; this structural simplification, streamlines both our business operations and reporting.

The merger brings together the 4 accommodation properties in Aspen Group and the 21 properties in APPF to 25 in total. There are over 5000 sites, one of the largest portfolios in the market. The Merged Group’s average weighted capitalisation rate is a bit over 12.5%.

The merger results in a portfolio even more focused on the accommodation sector. Only 11% of the portfolio will comprise non‐core legacy assets; the vast bulk of this exposure relates to the Spearwood South industrial property in Perth, which is fully leased with a near 5 year lease duration and it is an asset held for sale. The Merged Group will also have a reduced exposure to the resources sector, down to about 15%.

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The Merged Group will be a simple business solely focused on owning, managing and developing value for money accommodation. There are four main customer bases.

First, the permanent residents – these are largely retirees. This is a land lease business model, where the Merged Group owns the land, rents it to the residents, and the resident owns the cabin. This provides highly attractive, stable annuity residential rental cashflows, as well as the potential for development margin on cabin sales.

The second group of customers are annual tourists. These are a type of tourists, with the same land lease model, where the customer owns their own cabin and the Merged Group owns the land. This generates annuity land rental streams, much like the permanent residents.

Thirdly, we have short stay customers ‐ tourists and business customers, particularly contractors. These are cabins or caravan sites rentals. These are typically shorter stays of less than a week or so, but for contractors in particular, may be longer.

Finally we have some parks with a particular focus on the resources industry. These are typically business and contractors in the resources industry and as well as tourist customers, leasing both cabins, mainly for the business side, and caravans sites typically for tourists. Typical lengths of stay are several months for the business contractors and less than a week for tourists. The exception to this is at Karratha worker accommodation facility where we have a long term lease in place until January 2018.

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The Merged Group will have one of the largest portfolios in the industry with over 5,000 sites. It will have a nation‐wide footprint. The portfolio is concentrated in major population centres and tourist and retirees destinations; particularly metropolitan Perth; the NSW/Victorian border; and with our recent acquisitions, the NSW coast, northwards from Sydney. Looking forward, we will continue to focus on these types of locations and existing asset clusters.

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The merger will result in very significant accretions to distributions.

For Aspen Group securityholders, distribution guidance is increased from 9.4 cents as per our guidance at the financial year results presentation, to 12 cents. This represents a 28% increase.

For APPF securityholders who retain their Merged Group scrip, their distribution accretion will be 16%, increasing from the current distribution of 4.0 cents to 4.6 cents equivalent.

These substantial levels of accretion reflect the Merged Group having a balance sheet gearing consistent with its target range, as well as merger synergies being achieved.

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The level of gearing in the Merged Group will depend on the extent of takeup of the cash option by APPF securityholders.

The range is from 25% to 37% based on whether there is no take up, or is full take up of the cash option. This level is consistent with the Merged Groups target gearing range.

In addition, as I mentioned, the non‐core legacy asset, the Spearwood South industrial, is held for sale; on its eventual sale, gearing would fall on a proforma basis to between 16% and 30%.

The Merged Group’s capital structure provides good capacity for continued development and for acquisition capability.

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To summarise the benefits for the Aspen Group securityholders.

It is a unique opportunity to increase its exposure to a quality portfolio of assets. As a result of the Merger, the group will achieve substantial scale, with one of the largest portfolios in the industry comprising over 5,000 sites. The APPF portfolio is valued at a weighted average capitalisation rate of about 13%. The transaction is efficient and a de‐ risked structure, given Aspen Group’s knowledge of APPF.

There will be significant synergies from the merger, estimated at about $1.7m per annum once fully implemented, equating to about 10% of proforma FY16 distributable earnings. Importantly it completes the structure simplification of the Aspen Group. Thirdly the distribution accretion is very significant at 28%, with an appropriate capital structure in place.

And finally it is expected to lead to improved access to equity and debt capital markets given the increased scale. Importantly its enlarged investor base and equity holdings create the potential for increased trading of securities on the ASX.

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Likewise summarising the benefits for the APPF securityholders.

They have much improved liquidity, which is important for an open‐ended unlisted property fund that has been in existence for over 11 years. The APPF securityholders will have the option: of receiving up to 100% cash consideration subject to the $35m cap; or remaining invested in the Merged Group which will be a leading owner, manager and developer of value for money accommodation listed on the ASX. They will have the flexibility to reduce or increase their holdings on the ASX.

The Merger consideration represents a material increase in value over the APPF NAV of over 8%.

Distributions, for those remaining in the Merged Group, will likewise be higher – a 16% increase over the APPF current distribution rate. The Merged Group will have internalised management, an appropriate capital structure and improved access to capital and equity markets. They would also continue to have a clear and consistent investment strategy, in a transaction with low execution risk and little business disruption.

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Turning now to the Merged Group profile in a bit more detail.

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The Merged Group portfolio will have over 5,000 sites.

Over the last year, we have been expanding the portfolio overall and shifted the emphasis of the business towards permanent residents. There have been six acquisitions since 1 July 2014, three in Aspen Group and 3 in APPF. And they have on balance been 56% permanent residential. APPF has also sold three tourism/resort‐style properties in Western Australia.

As a result, the number of permanent residents in the Merged Group has increased and represent about 20% of the portfolio. There has been a decline in the portfolio percentage of short stay from over 40% to about 36%.

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The Merged Group will have a diverse customer base across its portfolio.

The single largest property type, at 59% of the portfolio, comprises properties with a mix of permanent residents and short stay customers. This mixed exposure is frequently a regulatory requirement. Importantly, however, it provides a much greater flexibility to maximise the highest and best use of particular sites. In addition there is the ability to cross sell to customers between the shorty stay and residential uses, as well as converting between uses. We see an ability to manage mixed parks, and thus maximising opportunities, to be an important competitive advantage.

The second group of assets are the resource parks, and as I mentioned the single largest one of these with about half the exposure, is largely leased to January 2018 underpinning the income security. As part of our optimising use of capital, we have been moving cabins from the resource parks to Perth to use as permanent residential cabins; we will continue to look to undertake that process going forward. We are also focused on maximising the operation efficiencies, as well as the revenue generating ability of increasing our grey‐nomad tourism market.

About 16% of the portfolio is in pure 100% short stay parks. There our focus is on secure income from a strong and diversified short stay customer base. Most of this exposure is in metropolitan Melbourne and our focus is on optionality of long term land use.

And finally 8% of the portfolio is in parks with 100% permanent residents. These parks have been two of our recent acquisitions and they provide an attractive, stable, annuity residential yield, plus the potential for development opportunities down the track.

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The Merged Group will have a market leading fully integrated and internalised operating platform.

It builds upon an over 11 year track record, with operations having commenced in 2004. It is a scale platform with 25 properties located in every mainland state and about 400 employees.

We have an exceptional customer franchise. We have over 200,000 customers on our electronic database which provides us with the competitive advantage of a large low cost proprietary distribution channel. This franchise continues to be built by our specialist in‐house sales and marketing team.

Clearly a major trend generally has been the internet and e‐commerce; we have an integrated digital strategy. This spans social media, online travel agencies and, of course, our own website. Overall online revenue growth is growing strongly at 10% year on year to August. We revamped the Aspen Parks website in June of this year and already we are seeing even stronger growth rates – 15% year on year growth in the month of August already achieved, improving our margins by eliminating third party commissions.

Another key focus for us is yield management; that is, dynamic pricing to optimise rates and occupancies. We have brought in a specialist in‐house manager, applying hospitality industry techniques and statistical analysis.

We continue to be focused on our asset clusters which generate efficiencies of resources use and management time, as well as on our supplier efficiencies with our large scale.

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We are progressing on the expansion of our development pipeline.

We have an in‐house team located both in Sydney and Perth that combines traditional residential and caravan park as well as manufactured housing experience.

Our approach to development is very much focused on creating high quality annuity rental streams. We are driven by market research and demographic analysis to understand customer demand for our product, in order to ensure an appropriate risk‐ return outcome from our projects. We also diversify across multiple suppliers of manufactured cabins.

We currently have multiple development works underway at varying stages. We are installing additional short stay cabins at Dubbo and Ashley Gardens in Melbourne. We are upgrading or converting existing sites at six properties. In terms of new sites, DAs are in train to utilise vacant land at three properties, from which we expect to start delivery from late FY 16. We expect to have a significant expansion in our manufactured housing delivery from our FY15 start.

Master planning is underway at a further 5 properties, so that this growth momentum continues over a multi year timeframe. Acquisitions also build our development pipeline – for example, Tomago was acquired with an in place DA for 24 sites and we see this as an opportunity for future growth.

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We have clear acquisition criteria: the locational focus is on metropolitan areas, existing assets to enhance clustering, or major regional population centres, particularly on the east coast.

Adding to the development pipeline is also a major consideration. We see positive demographics demand driving development volumes, with attractive returns on capital employed, as well as the growth in annuity rental streams.

I mentioned before that the mixed parks are a competitive advantage for us. Our existing operating platform provides for the capacity to integrate acquisitions to benefit from our existing scale platform. Such acquisitions, of course, then enhance and reinforce our scale our advantage.

We continue to see good deal flow, building on the six acquisitions over the last year. This reflects the fragmentation of ownership of the industry, with very high levels of individual ownership. In our view the industry is in the early stages of consolidation and corporatisation.

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The business is supported by positive and powerful social and industry fundamentals.

Demographics are a key driver with an increasing retiree population. But also lengthening life expectancy places greater strain on low level of savings, giving impetus to seeking capital release from residential downsizing. Overall, demographic trends are expected to drive stronger volumes over time.

Public policy is supportive. The government has moved away from direct accommodation provision the approach now is very much to focus on rental assistance. This is positive for our land rental model.

Housing affordability is a major factor. It is a driver for increasing demand. But in addition, with the huge shift in the relative price of housing, residential downsizing releases relatively more equity, making the downsizing for retirement a more attractive option. The land lease model is efficient and easy to understand, driving consumer acceptance.

The Merged Groups’ positioning is very attractive to take advantage of these broad trends. We have an 11 year experience in the business. We have scale business, one of the leaders in the industry. A clear strategic focus on accommodation is in place, with a focused and directed management.

Importantly there is already a strong income yield generated; plus there is a significant growth potential supported by an appropriate capital structure.

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So to conclude, the Merged Group will be a leading, owner, manager and developer of value for money accommodation with a geographically diversified portfolio across Australia, one of the largest portfolios in the industry.

The merger will create an enlarged and simplified platform to drive shareowner value. There are significant benefits for both by Aspen Group and APPF securityholders:

Significant increases in distributions for both sets of securityholders
Optional liquidity event for APPF securityholders at a premium to NAV
Increased scale
Material synergy benefits and costs savings; and
An appropriate capital structure.

The current timetable is for securityholder meetings in November and implementation in December.

The Directors of Aspen Group and APPF consider that the merger is a compelling proposition for both sets of securityholders. We unanimously recommend the merger.

We intend to vote our securities in favour of the merger.

Thank you for joining me on this call. As usual, please feel free to contact us with any questions you may have.

Thank you for your time and goodbye.

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ASPEN GROUP Call Transcript 2015

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ASPEN GROUP — Call Transcript 2015

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ASPEN GROUP Call Transcript 2015