ASPEN GROUP — Capital/Financing Update 2019

Oct 21, 2019

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Aspen Group Limited ABN 50 004 160 927 Aspen Property Trust ARSN 104 807 767 21 Oxford Street Bondi Junction NSW 2022 Telephone: 02 9151 7500

Email: homemail@aspengroup.com.au

ASX ANNOUNCEMENT 22 October 2019

Investor Update – Acquisition of Perth Residential Portfolio

Aspen Group (which comprises Aspen Group Limited and the Aspen Property Trust) (ASX: APZ) (Aspen) is pleased to announce that it has entered into contracts to acquire a portfolio of 84 residential properties in Perth, Western Australia. The contracts are now unconditional and are expected to settle in early December 2019.

The properties are located in the high population growth corridors of Rockingham LGA, in the southern beaches and Swan LGA in the north east. These are attractive regions for lifestyle, located along beaches and national parks, with easy access to Perth CBD. They also have good quality education, healthcare, retail and recreation facilities. The dwellings are family-oriented, typically with 3-4 bedrooms, 2 bathrooms and 2 car garages or carports. The average dwelling size is 190sqm and the average land size is 414sqm per dwelling.

The portfolio is being acquired for $20 million (pre transaction costs), which equates to approximately $238,000 per dwelling and $1,258psm of dwelling area. The price reflects discounts of at least 20% to current retail prices of the individual houses and 33% to replacement cost, in our opinion. The average gross rent across the portfolio is $351 per week and the expected fully let yields are 7.7% gross and 4.2% net (after all costs including management, leasing, rates and taxes, insurance, repairs and maintenance). The passing net yield is approximately 3.5% at 90% occupancy.

Post the acquisition, the majority of Aspen’s portfolio will be located in major metropolitan areas and leased on a long-term basis (ie. not short stay).

FY20 guidance remains unchanged for underlying earnings per security of 6.75-7.00 cents and distribution per security of 6.00 cents.

Please refer to the attached presentation for more information.

END

For further information, please contact: David Dixon John Carter Joint Chief Executive Officer Joint Chief Executive Officer Phone: (+61) 2 9151 7584 Phone: (+61) 2 9151 7586 Email: davidd@aspengroup.com.au Email: johnc@aspengroup.com.au

Aspen is a leading provider of quality accommodation on competitive terms in the Retirement, Residential and Short Stay sectors. Aspen has a fully integrated platform across operations, asset management, development and capital management which enables it to provide a broad spectrum of products and services to its customers under different regulatory regimes and schemes: Rentals – Shared Equity – Sales.

Perth Residential Portfolio Acquisition

22 October 2019

Port Kennedy, WA

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Residents at Four Lanterns Estate, NSW

Contents

1

Summary

2 Acquisition of Perth Residential Portfolio 3 Aspen Group Financials

4

Appendix

Sweet Water Grove – marketing campaign, NSW

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Perth, WA
Perth, WA
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Summary[1]

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3

1.1

Summary

• Aspen is a fully integrated provider of quality accommodation on competitive terms in the residential, retirement and short stay sectors, under various regulatory regimes and schemes: Rentals - Shared Equity – Sales (refer to Appendix for summary of Aspen’s business model)

• Aspen continues to grow its business and has entered into contracts to acquire a portfolio of 84 residential dwellings in Perth:

• Located in the local government areas of Rockingham and Swan – high population growth corridors, near education, healthcare, retail and recreation facilities, with good transport links to Perth

• Typically family homes with 3-4 bedrooms, 2 bathrooms and 2 car garage / carports with an average build date of 2008

• Average rent of $351 per week

• Purchase price of $20 million (pre transaction costs):

• Equates to:

  • Approximately $238,000 per dwelling

  • $1,258psm of dwelling floorspace (with land value included)

  • $604psm of dwelling floorspace (excluding Valuer General land value of approx. $10.4m at 30 June 2019)

• Estimated to be at least 20% discount to current retail price and 33% discount to replacement cost

• Expected fully leased gross yield of 7.7% and net yield of 4.2% (current net yield of 3.5% at c.90% occupancy)

• Aspen continues to possess good growth prospects post the acquisition:

• Aspen’s total portfolio valued at an average of c.$72,000 per approved site and weighted average capitalisation rate (WACR) of 8.3%

• The majority of Aspen’s portfolio by asset value and net operating income is now in major metropolitan locations and leased on extended terms (ie. not short stay)

• The Perth Residential Portfolio and the recently acquired Lindfield Apartments have material embedded capital growth in our opinion

• Aspen Karratha Village and Darwin Freespirit Resort are in highly cyclical markets that have been in downturns

• Aspen has an addressable market valued at over $1 trillion from which to take advantage of opportunities

• FY20 EPS and DPS guidance maintained at 6.75-7.00 cents and 6.00 cents respectively

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4

Port Kennedy – Freestanding House

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2 Acquisition of Perth Residential Portfolio

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5

2.1

Typical Dwellings

• 84 residential dwellings

• Family-oriented housing product:

• Typically 3 or 4 bedrooms, 2 bathrooms and 2 car garage / carports averaging 189sqm per dwelling (total floorspace of c.16,000sqms)

• Good mixture of land sizes - courtyards through to large yards averaging 414sqms of land per dwelling (total land area of c.35,000sqms)

• Built between 2000 – 2016 (average age - 11 years)

• Built for rental purposes with durable maintenance-saving initiatives – eg. external and internal brick, floor tiles in living areas, high use of paving and some artificial turf

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Baldivis - Townhouses Port Kennedy - Freestanding House
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Port Kennedy Bay Reserve - Port Kennedy
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6

2.2

Perth Residential Portfolio – Location Overview

• Perth Metropolitan growth corridors:

• Predominantly in the City of Rockingham’s southern beachside suburbs of Port Kennedy, Waikiki, Cooloongup, Baldivis and Bertram (southern cluster with Mandurah Gardens)

• Ellenbrook in the City of Swan, northeast of Perth

• Attractive lifestyle locations near beaches and national parks

• Along major transport routes:

• Proposed new rail line to Ellenbrook

• Proposed new train/bus station near Port Kennedy (Karnup)

• Good quality education, healthcare, retail and recreation facilities

Composition of Portfolio Value by Location

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11%
4%
6%
46%
16%
17%
Port Kennedy Baldivis Waikiki Bertram Cooloongup Ellenbrook
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7

2.3

Perth Residential Portfolio – Location Overview

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Perth CBD
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Murdoch University - Warnbro Beach, Waikiki
Rockingham
Rockingham Regional Mall
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Rockingham Regional Mall
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Karratha Gas Plant – North West Shelf

Rockingham General Hospital

Rockingham Railway Station

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8

2.4

Perth Residential Portfolio - Demographics

ABS Census 2011 and 2016:

• High population growth regions over the period:

• Rockingham +3.7% per annum

• Swan +4.5% per annum

• Relatively young families – median age of 34 years versus 38 years Australia wide

• Household incomes – around average for WA and 10% above Australian average

• Relatively high levels of home ownership with mortgages

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Annual Population Growth: 2011-2016
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5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Australia WA Greater Perth Rockingham Swan (SA3)
(SA3)
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Home Tenure: 2016
60%
50%
40%
30%
20%
10%
0%
Australia WA Greater Perth Rockingham Swan (SA3)
(SA3)
Owned Outright Mortgaged Renting
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Median Weekly Household Income: 2016

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$2,000
$1,900
$1,800
$1,700
$1,600
$1,500
$1,400
$1,300
$1,200
$1,100
$1,000
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9

2.5

Perth Residential Market

• Over the long run, WA and Perth have experienced higher population and economic growth than the Australian average

• WA’s economy has a relatively high exposure to the mining and resources sector. The latest boom ended around 2013 and the economy contracted in the subsequent 5 years – it has stabilised and is showing early signs of recovery

• Perth’s residential markets have also been in cyclical decline over the same period

• Housing prices have fallen around 2030% from peak, are at 10+ year lows, and now often well below replacement cost of comparable product (in regions with new housing estates)

• Growth in supply of new dwellings has halved over the past 3 years

• Residential vacancy rates have quickly declined over the past year from the highest in the country at above 6% to below 3%

• Rents have generally started to rise

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10

2.6

Perth Residential Portfolio - Pricing

• Purchase price of $20m pre transaction costs:

• Approximately $238,000 per dwelling

• $1,258 per sqm of dwelling floorspace

• Valuer General’s (VG) unimproved land value of approx. $10.4m equates to $300psm of land:

  • At its new land releases, PEET is asking c.$425psm at Golden Bay (near Rockingham) and c.$450psm at Greenlea Baldivis

• VG land value implies residual dwelling price of $9.6m which equates to $604psm of dwelling floorspace

• Estimated to be at least 20% ($5m) discount to current total retail price and 33% ($10m) discount to replacement cost

• Government support for buyers:

• WA Keystart loans with only 2% deposit and no mortgage insurance

• First Home Buyers stamp duty exemption for houses up to $430k = $14k saving

Purchase Price v. Suburb Median Price

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$450,000
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
Port Kennedy Baldivis Waikiki Bertram Cooloongup Ellenbrook
Average Purchase Price
Median Suburb Price (realestate.com.au Sept 2019 - same # beds)
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Port Kennedy: 16 Cambernon Green - amongst the portfolio’s 12 houses on the same street - Aspen’s average price $272k

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Waikiki: 1 Abbeytown Circle – nearby portfolio’s #7 and #11 Ennerdale Boulevard – Aspen’s average price $362k

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Baldivis: 27 Starflame Road – comparable to Aspen’s Baldivis properties – Aspen’s average price $173k

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11

2.7

Perth Residential Portfolio - Returns

Yield

• Average rent of $351 per week

• Commonwealth Rent Assistance (CRA) of up to $91 per week for a family with 2 or more children

• Yields - fully leased basis (pre transaction costs): o 7.7% gross

• 4.2% net after all costs including management, leasing, rates and taxes, insurance, repairs and maintenance

• 55% NOI margin

• Passing net yield of 3.5% at 90% occupancy

Growth Opportunities

• Opportunities to refurbish homes and provide better customer service to improve occupancy and rent, whilst keeping a lid on operating costs (cluster synergies with Mandurah Gardens)

Cashflows (per house)	Household Renters	Landlord Aspen	Household Buyers
Rent / Interest* - per week Rent / Interest - per annum	$351 $18,277	$18,277	$229 $11,905
Rates, Water, Insurance, R&M	$0	-$5,182	$5,182
Management & Leasing	$0	-$1,451	$0
Land Tax Net Cashflows - no CRA	$0 $18,277	-$1,540 $10,103	$0 $17,087
CRA - maximum (family)	-$4,761
Net Cashflows - with CRA	$13,516
Purchase Price / Retail Price*	$238,095	$238,095	$297,619
Cash Yield - no CRA Cash Yield - with CRA	7.7% 5.7%	4.2%	7.2%

• Assumes no transaction costs and household buyer pays retail price and is 100% debt funded at 4% interest

• Opportunities to reposition portfolio / recycle capital which would generate capital profits and improve ROCE given retail prices are already higher than purchase price

• Capital growth as population growth outstrips new supply and pushes vacancy rates lower causing rents and values to recover towards replacement cost to justify new supply

• Potential upside above replacement cost given highly cyclical nature of WA / Perth

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12

2.8

Aspen Portfolio Post Acquisition

• Aspen has doubled the size of its accommodation portfolio over 2 years

• Portfolio valued at $158m – average value per approved site of only c.$72,000 and weighted average capitalisation rate (WACR) of 8.3%

• The majority of the portfolio by value and NOI:

• Is located in major capital city metro locations

• Relates to properties that are leased (eg. Four Lanterns) or predominantly leased (eg. Barlings Beach) on an extended basis and therefore not subject to the seasonality and volatility of lower margin short stay business

• At Aspen’s two large short stay parks - Darwin Freespirit Resort and Highway One – we are progressively converting underutilised short stay cabins and spare land into more profitable longer term leased accommodation

• We continue to pursue short stay customers where this is the most profitable opportunity. For instance, at two of our pure short stay parks – Adelaide Caravan Park and Tween Waters Merimbula – we generate an attractive cash yield of 8.5% whilst waiting for the best opportunity to take advantage of their existing medium density residential zoning

Portfolio Aggregates	Aspen Group	Funds/ Projects	Combined
Properties* (#)	12	3	15
Value ($m)	$158
Land Area (Hectares)	61	577	638
Value per Hectare ($m)	$2.58
Approved Sites (#) Value per Approved Site	2,183 $72,478	983	3,166
Sites per Hectare	36	2	5
Dwellings Owned (#)	760	91	851
Dwelling / Sites Ratio	35%	9%	27%

• The 2 Lindfield Apartment Buildings and the 84 Perth Residential Dwellings are counted as 2 portfolios

Property Type by Location (value weighted)

Property Type by Lease Tenure (value weighted)

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Regional Metropolitan

Short Stay Predominantly Short Stay Predominantly Leased Leased

13

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3 Aspen Group Financials

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14

3.1

Aspen Group Financials

Pro Forma Adjustments ($m)			Balance Sheet ($m)	30 June 2019	Adjustments	Adjustments	Pro Forma
			Property plant & equipment	$128.0	$30.2		$158.2
Source of Funds			Cash	$6.5	$0.0		$6.5
			Other assets	$7.2	-$0.9		$6.3
Lindfield - release of 10% deposit		$0.9	Total assets	$141.7	$29.3		$171.0
Debt		$29.3	Debt	$24.5	$29.3		$53.8
Total		$30.2	Payables & provisions Total liabilities	$8.5 $33.0	$0.0 $29.3		$8.5 $62.3
Application of Funds			Net assets	$108.7	$0.0		$108.7
Acquisition of Lindfield Apartments		$9.1	Securities NAV – cents	96.3 113	0.0		96.3 113
Acquisition of Perth Residential		$21.1
Total		$30.2	Gearing (net debt / TA less cash)	13%			29%
▪ Since 30 June 2019, Aspen has settled the acquisition of Lindfield Apartments and entered into			Underlying Earnings ($m)	FY20 Guidance	Subsequent Adjustments		Updated Guidance
contracts to acquire the Perth Residential Portfolio			Property NOI	$12.4	$0.3		$12.7
▪ Upon settling the Perth Residential Portfolio, Aspen’s total assets will be $171m and gearing will be 29% on a pro forma basis			Development profit Total income Corporate overheads	$1.0 $13.4 -$5.2	$0.0 $0.3 $0.0		$1.0 $13.7 -$5.2
▪ Aspen’s FY20 EPS and DPS guidance remains unchanged at 6.75-7.00 cents and 6.00 cents respectively			EBITDA Net interest expense Tax	$8.2 -$1.6 $0.0	$0.3 -$0.2 $0.0		$8.5 -$1.8 $0.0
			Underlying earnings	$6.6	$0.1		$6.7
			Securities	96.3	0.0		96.3
			EPS – cents	6.75-7.00			6.75-7.00
			DPS – cents	6.00			6.00
			Total distribution	$5.8			$5.8
			Retained earnings	$0.8			$0.9
			Interest cover ratio (ICR)	5.1x			4.8x

15

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Waikiki dwelling
Warnbro Beach, WaikikiEllenbrook
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Appendix [4]
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16

A.1

Aspen’s Business Model

• Fully integrated platform with strong operating, asset management, development and capital management capabilities that enables us to provide the broad spectrum of products and services that our target customer base needs:

• Provider of capital under different regulatory regimes and ownership schemes: Rentals – Shared Equity (eg. land lease) – Sales

ASPEN’S TARGET MARKET > $1 trillion

• Low to moderate level of ongoing services at an effective cost (not high care, aged care or social)

• Target market is enormous:

• Australia’s residential market is worth over $6.5 trillion

• 70% of households either have a mortgage (37%) or rent (33%)

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ACCOMMODATION PRODUCTS
▪ Significant unsatisfied demand for suitable accommodation at
below median price and rent Sales – Rentals – Shared Equity
‘‘Downsizing” Retirees
Owned With a Rented Rented
Owned
Mortgage with
Outright
Commonwealth
Rent Assistance
Social
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Composition of Australia’s 9.3 Million Households by Tenure (source: ABS)

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17

A.2

Significant Unsatisfied Demand for More Affordable Accommodation

• About 1.5 million or 17% of households are considered “stressed” – ie. pay more than 30% of their gross income on housing costs:

• 57% are renters (despite Commonwealth Rent Assistance)

• 39% are owners with a mortgage (despite historically low interest rates)

• Commonwealth Rent Assistance (CRA) is the major policy tool to help make private (non-social) housing more accessible:

• Total expenditure of $4.4 billion per annum (growing at >5% pa)

• About 45% of renters of private housing receive a subsidy

• Not just for retirees:

HOUSING COSTS AND STRESS

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35%
30%
25%
20%
15%
10%
5%
0%
Owned Outright Owned with Mortgage Rented
Average Housing Cost as % of Household Income
Proportion of Households Paying More Than 30% of Income
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• 61% of recipients are under 50 years old

• 37% have dependent children (average of 2 per household)

• Subsidy is limited:

• About $65 per week average subsidy per household

• Subsidy caps out at $91 per week (for large families with 5+ members)

• Rent above $153 per week for a single person with no children and $240 per week for large families is not subsidised

CRA RECIPIENTS BY HOUSEHOLD STRUCTURE

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Couple - no
children
Couple -
children
Single - no
children
Single -
children
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Source: ABS

18

A.3

Aspen’s Product Offering Considers the Needs of its Target Market

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Land Dwelling
Aspen is highly selective and opportunistic when
Leases Rentals
acquiring and developing properties to ensure they
are suitable for the delivery of quality accommodation
on competitive terms to our customer base
Newstart (no children)
o Aspen’s accommodation products consider our
customers’ needs and the availability of government
Aged Pension (no children) Single
subsidies (eg. CRA, first-homeowner grant, pension
Person
loan scheme, stamp duty exemptions, land tax
exemptions) Minimum Wage (1-2 children)
o CRA incentivises the lower cost accommodation
products such as: AWOTE
▪ Land leases at around $150-225 per week –
LLCs (eg. Four Lanterns, Mandurah Gardens)
and park sites (eg. Highway 1)
▪ Small, second-hand dwelling rentals (eg. Newstart (no children)
Darwin FreeSpirit Resort)
Couple
Aged Pension (no children)
o But there are significantly greater opportunities in
supplying customers with limited or no access to
subsidies and/or are located where production costs Minimum Wage (1-2 children)
and land values, and therefore rents, are higher than
the CRA caps. They need: AWOTE
▪ Lower cost dwelling products with low land
value at around $300-500 per week – eg. high $100 $300 $500 $700 $900 $1,100 $1,300 $1,500 $1,700
density apartment rentals for singles/couples
Affordable Rent per Week - Assuming 30% Rent / Income and Full
(eg. Lindfield Apartments) and house rentals CRA Subsidy (exept AWOTE earners)
Gross Income per week
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• Lower cost dwelling products with low land value at around $300-500 per week – eg. high density apartment rentals for singles/couples (eg. Lindfield Apartments) and house rentals that are suitable for families (eg. Perth Portfolio)

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*AWOTE: Average Weekly Ordinary Time Earnings

19

Disclaimer

This presentation has been prepared by Aspen Group Limited on behalf of Aspen Group Limited and Aspen Property Trust (“Aspen”) and should not be considered in any way to be an offer, invitation, solicitation or recommendation with respect to the subscription for, purchase or sale of any security, and neither this document nor anything in it shall form the basis of any contract or commitment. Prospective investors should make their own independent evaluation of an investment in Aspen. Nothing in this presentation constitutes investment, legal, tax or other advice. The information in this presentation does not take into account your investment objectives, financial situation or particular needs. The information does not purport to constitute all of the information that a potential investor may require in making an investment decision.

Aspen has prepared this presentation based on information available to it. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information, opinions and conclusions contained in this presentation. To the maximum extent permitted by law, none of Aspen, its directors, employees or agents, nor any other person accepts any liability, including, without limitation, any liability arising from fault or negligence on the part of any of them or any other person, for any loss arising from the use of this presentation or its contents or otherwise arising in connection with it.

This presentation contains forward looking information. Indications of, and guidance on, future earnings, distributions and financial position and performance are forward looking statements. Forward looking statements are based on Aspen’s current intentions, plans, expectations, assumptions, and beliefs about future events and are subject to risks, uncertainties and other factors which could cause actual results to differ materially. Aspen and its related bodies corporate and their respective directors, officers, employees, agents, and advisers do not give any assurance or guarantee that the occurrence of any forward-looking information, view or intention referred to in this presentation will actually occur as contemplated. All references to dollar amounts are in Australian currency.

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