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STRICTLY CONFIDENTIAL
Emerging opportunities for PBSA investment
Sammy Isreb, Division Director Macquarie Capital
30 November 2016
01 Divider title goes here 3 02 Divider title goes here 8
STRICTLY CONFIDENTIAL
Contents 01
PBSA Sector as an Asset Class 3
02 Strategies to Maximise Reward 10
03 Market Views on PBSA Investment Opportunities 13
04 Relationships with Key Stakeholders 20
05 Conclusion 22
STRICTLY CONFIDENTIAL
01 PBSA Sector as an
Asset Class
PAGE 4 *
How to characterise the PBSA Sector as an asset class? Certainly not a homogenous class of investment
Apples and apples... or apples and jellyfish...?
The PBSA sector as an asset class
and
PROPERTY? INFRASTRUCTURE? SOMETHING ELSE?
PAGE 5 *
Investor profile / appetite
How to characterise the PBSA Sector as an asset class? Why is this so important?
Horses for courses...
The PBSA sector as an asset class
Property Infrastructure
• Revenue characteristics
• Costs
• Capital structure
• Risks
or
PAGE 6 *
How to characterise the PBSA sector as an asset class? What are the differences?
Linked to risk profile, capital structure, and investor profile
The PBSA sector as an asset class
Some PBSA examples below – indicia on continuum of Infrastructure ß à Property
– Concession tenure – On campus stock – Supply Side Protections – “Infrastructure like” demand characteristics (inelastic rent /
demand) – May even be demand enhancement – Contracted cost base (e.g. FM) – Stronger covenants to University (student experience), but
University “manages” students – Could include infrastructure / PPP structural features – Hedging of base rate risk
– Stronger tenure – May include off-campus stock – Less / no supply side protections – Demand enhancement would be unusual – Perhaps some ability to let as non-student accommodation
Infrastructure Property
PAGE 7 *
Risk management will be fundamentally linked to the underlying PBSA asset characteristics
Student experience drivers will affect commercial / financial risk profile...
Managing the risks
What can Universities do to maximise value? No right or wrong answer, as Universities student experience drivers will be different:
01 02 03
Demand characteristics – Occupancy levels – Demand side support
Supply side characteristics – ROFR, other mechanisms
Development risk – Construction Risk – Occupancy ramp-up risk
Tenure arrangements – Freehold vs leasehold vs
concession – PBSA as part of broader
mixed use tertiary developments
04
PAGE 8 *
l Gotham University is a top tier University located in a top capital city location
l Significant portfolio (5000 beds) of on campus PBSA, with monopolistic style characteristics
l Modest longer term growth requirements
l Monetisation / balance sheet opportunity?
Key considerations
What should Gotham and Quahog do.....?
Some fictitious examples
l University of Quahog is not a G8 institution, and is located in a regional centre
l It has a small PBSA portfolio (500 beds), and is also serviced by steady supply of affordable off-campus housing
l It now wishes to enhance student experience, procuring another 1000 on campus PBSA beds which are contemporary in design
What should the Universities in question do to maximise outcomes and value?
PAGE 9 *
l Metropolis University is a top tier University located in a top capital city location
l Whilst leading in a number of fields, its medical sciences offering has lagged its main competitor
l It now wishes to partner with private sector to procure a Biomedical Hub – a 50,000m2
facility comprised of new teaching and research areas, industry tenants (established and start ups), and post graduate PBSA
Key considerations
And what about Metropolis....?
Some fictitious examples
What should the Universities in question do to maximise outcomes and value?
STRICTLY CONFIDENTIAL
02 Strategies to Maximise
Reward
PAGE 11 *
Commercial structuring/capital structure will be driven by underlying asset characteristics
Significant scope for WACC reduction, and value enhancement, through infrastructure asset positioning
Maximising reward
Infrastructure Property
WACC $ WACC $$$
Capital structure
Debt
Equity
PAGE 12 *
l Importance of process certainty l Consider cost implications of commercial structure
and options to maximise value whilst enhancing outcomes
Focusing on the key student experience outcomes
Significant value can be gained from astute structuring...
Considerations for universities
Examples of key outcomes and approach:
l Balance sheet opportunity (ie monetisation)
l Catalyst for new PBSA stock
— Transfer construction risk?
— Ramp up demand risk?
l Broader precinct wide development opportunities?
l Other?
Important to prioritise outcomes and structure commercially to maximise value
STRICTLY CONFIDENTIAL
03 Market Views on PBSA
Investment Opportunities
PAGE 14 *
l Steady flow of PBSA transactions l Capital exceeds pipeline, provided however there exists:
— Process certainty — Strong underlying investment characteristics
No shortage of capital seeking quality assets, provided PBSA investment opportunities are well structured with clear processes
Significant value can be gained from astute structuring...
Market views on PBSA opportunities
PAGE 15
Globally funds continue to increase allocations to infrastructure with both direct investors and fund managers increasing their dry powder
Source: Towers Watson – Global Pension Assets Study 2015, Preqin as at Nov-16, Deloitte, Rainmaker
3,204 2,746
1,525 1,484 1,378 804 545 427 190 181 180 177 159 151 128 123 94 41
-
1,000
2,000
3,000
4,000
US
UK
Japa
n
Can
ada
Aus
tralia
Net
herla
nds
Sw
itzer
land
Sou
th K
orea
Ger
man
y
Mal
aysi
a
Sou
th A
frica
Bra
zil
Mex
ico
Chi
le
Fran
ce
Irela
nd
Hon
g K
ong
Indi
a
Spa
in
US
$m
Australian superannuation has a strong growth of net inflows and is forecast to double in the next decade
2000 2002 2004 2006 2008 2010 2012 2014 2016 2040
Dry powder (equity) – global unlisted infrastructure funds ($USbn) Australian Superannuation Asset Allocation: CY15 net flows
Global pension assets under management – US$35 trillion pool of capital
Growth in pool of available capital
US$142 billion as at Nov-16
Of unlisted infrastructure fund managers:
95% plan to increase or maintain their infrastructure allocation over the next year
55% plan to increase their direct investments in infrastructure in the next year
21,779
~9% pa growth
Australian super assets ~$A2.1 trillion forecast to double in a decade and grow to $9 trillion by 2040
Mandatory contributions increased to 9.5% of wages and gradually increasing to 12%
~0.5 ~0.9 ~1.4
~4
~2.1
~9
(10)
40
90
140
Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15
Rest of World Asia Europe North America
Source: Towers Watson – Global Pension Assets Study 2015, Preqin as at Nov-16, Deloitte, Rainmaker
(17) (29)
(21) (1) (3)
15 14
50
(20%)
(10%)
-%
10%
20%
30%
40%
(40)
(20)
-
20
40
60
Aust. Equities
Int'l. Equities
Aust. Bonds
Int'l. Bonds
Unlisted property
Listed property
Cash Infra/Other
(A$b
n)
$netflows (LHS) %netflows (RHS)
PAGE 16
Transaction Investors Value Date
$10bn November 2015
$12bn August 2016
$10bn September 2016
$1bn October 2016
$10bn October 2016
Putting it into perspective..... Significant infrastructure capital has been deployed in the last twelve months spread across key lead investors – PBSA transactions are a drop in the ocean
RAIL MIRA
PAGE 17 Source: LoanConnector, Bloomberg
l Market dynamic has been in favour of borrowers for the past several years which has seen:
— Accommodative monetary policy and quantitative easing driving global credit spreads
— Low default environment supporting credit as an attractive asset class
— Low credit growth stemming from lower capital investments due to weak commodities environment and transitioning economy
l The market encountered some reversals over the final half of 2015 and first quarter 2016:
— End of Federal Reserve quantitative easing and market focus on the Fed tightening cycle
— Credit stress in energy and commodities
— Offshore fixed income investor uncertainties around the outlook for Australia – commodities cycle, China outlook and housing “bubble”
l Post-Brexit central bank liquidity and low global interest rates are supporting demand for credit:
— Australian bank funding spreads starting to come in however still at competitive funding disadvantage to many offshore banks
Domestic bank funding costs
102 95 96
90 86 85 84 78
114 108
95 106
88 94 90 88 88
82 85 82 82
67
85 85 83
57
90
70 73 78 82 82
87
60
80 90 90
103 108 110
128 118 115 118
140
118 117 122 130
124 121
140
113 113
65 68 59
73
61
78 73
85
47
80
35 26
35
20
40 40 31
49 40
65 58
50
65
30
72
57
96
121
20
40
60
80
100
120
140
2013 2014 2015 2016
bps
Big 4 Avg 5-year CDS Big 4 unsecured bond 5-year (bps) Australian 5-year Swap Rate
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5
2011 2012 2013 2014 2015 2016
Rat
e %
Global central bank stimulus continues to underpin demand for loan assets
Australian markets – Loans Overview
Overall decrease in five year swap rate over last five years (~410bps fall from
five year high)
6.00%
~1.90%
PAGE 18 Source: Loanconnector, Dealogic
l Australian banks are under margin pressure when competing for high quality corporate, infrastructure and real estate assets
l Liquidity from banks across Asia – Japanese, Chinese, Korean, Singaporean – creating strong competition for high quality assets:
— Supported by subdued demand for credit across Asia
l European and Canadian banks providing competition in specific areas of competency or relationships – eg PPPs and renewable energy
Bond volume - quarterly
0 20 40 60 80 100
0 10 20 30 40 50
1Q11
2Q
11
3Q11
4Q
11
1Q12
2Q
12
3Q12
4Q
12
1Q13
2Q
13
3Q13
4Q
13
1Q14
2Q
14
3Q14
4Q
14
1Q15
2Q
15
3Q15
4Q
15
1Q16
2Q
16
3Q16
# de
als
Vol (
US
$bn)
Volume (US$bn) Number of Deals Reduced loan volumes creating competition for high quality assets
0 20 40 60
0
10
20
1Q11
2Q
11
3Q11
4Q
11
1Q12
2Q
12
3Q12
4Q
12
1Q13
2Q
13
3Q13
4Q
13
1Q14
2Q
14
3Q14
4Q
14
1Q15
2Q
15
3Q15
4Q
15
1Q16
2Q
16
3Q16
# de
als
Vol (
US
$bn)
Volume (US$bn) Number of Deals
Loan volume - quarterly
Recent trends
PAGE 19
Australian commercial bank league tables remain dominated by the Big 4, with growing presence of Japanese and Chinese banks
Source: Loanconnector Notes: 1. All figures in US $ billions 2. BR: Bookrunner 3. MLA: Mandated Lead Arranger 4. As of 1H2016
Bank league table
Bank BR MLA Total 1 ANZ 9.99 12.83 22.83 2 National Australia Bank 6.45 11.53 17.98 3 Westpac Banking Corp 4.71 10.31 15.02 4 Commonwealth Bank of Australia 5.57 8.59 14.17 5 Bank of Tokyo-Mitsubishi UFJ 2.49 3.47 5.97 6 Sumitomo Mitsui Banking Corp 2.44 3.30 5.74 7 Mizuho Corporate Bank 2.80 2.94 5.73 8 HSBC 0.43 2.31 2.74 9 BOS International Australia 0.32 1.88 2.20 10 Bank of America Merrill Lynch 0.25 1.40 1.65 11 Credit Agricole CIB 0.42 1.14 1.56 12 JP Morgan 0.07 1.19 1.26 13 Standard Chartered Bank - 1.02 1.02 14 Sumitomo Mitsui Trust Bank 0.30 0.65 0.95 15 Export Development Canada - 0.89 0.89 16 Bank of China - 0.83 0.83 17 Industrial & Commercial Bank of
China 0.23 0.59 0.83
18 OCBC Bank - 0.81 0.81 19 Societe Generale 0.24 0.56 0.80 20 RBC Capital - 0.78 0.78
2015 Bank BR MLA Total
1 ANZ 7.02 12.63 19.65 2 Westpac Banking Corp 7.50 10.66 18.16 3 Commonwealth Bank of Australia 5.35 10.04 15.39 4 National Australia Bank 4.63 8.98 13.61 5 HSBC 2.31 4.08 6.39 6 Bank of Tokyo-Mitsubishi UFJ 2.05 3.55 5.60 7 Sumitomo Mitsui Banking Corp 0.61 3.22 3.83 8 Mizuho Bank 0.46 2.46 2.92 9 Barclays 0.98 1.37 2.35 10 Scotiabank 0.73 1.48 2.21 11 Bank of China 0.47 1.50 1.97 12 JP Morgan - 1.76 1.76 13 DBS Bank 0.29 1.30 1.59 14 Bank of America Merrill Lynch - 1.59 1.59 15 UOB - 1.24 1.24 16 Credit Agricole CIB 0.38 0.83 1.21 17 Industrial & Commercial Bank of
China 0.29 0.78 1.07
18 RBC Capital - 1.02 1.02 19 OCBC Bank 0.17 0.80 0.97 20 Goldman Sachs 0.38 0.53 0.91
20164
Bank BR MLA Total 1 National Australia Bank 4.62 3.92 8.54 2 Commonwealth Bank of Australia 3.03 4.33 7.36 3 ANZ 3.35 3.29 6.64 4 Westpac Banking Corp 2.30 3.24 5.54 5 HSBC 1.78 1.88 3.66 6 Credit Agricole CIB 0.38 0.94 1.32 7 Bank of China - 1.12 1.12 8 Mizuho Bank 0.44 0.66 1.10 9 BOS International Australia 0.75 0.32 1.07
10 Industrial & Commercial Bank of China - 0.96 0.96
11 ING Bank 0.69 0.27 0.96 12 Bank of Tokyo-Mitsubishi UFJ 0.17 0.77 0.94 13 Bank of Communications - 0.74 0.74 14 DBS Bank - 0.66 0.66 15 BNP Paribas 0.28 0.34 0.62 16 Sumitomo Mitsui Banking Corp - 0.57 0.57 17 China Construction Bank - 0.48 0.48 18 Societe Generale - 0.44 0.44 19 Agricultural Bank of China - 0.38 0.38 20 Banco Santander - 0.36 0.36
2012
STRICTLY CONFIDENTIAL
04 Relationships with Key
Stakeholders
PAGE 21 *
l Sector exists due to underlying need and consequent positive contribution to student outcomes – view interfaces through this lens
l Stakeholders are key (from an investor’s perspective):
— University
— Students
— “Soft” / Marketing provider, if applicable
— Outsourced providers, (eg FM) , if applicable
— Lenders
l Role of the “SPV”
Stakeholder relationships are critical to enhance the student experience. Important lessons can be transferred from the social infrastructure sector
Significant value can be gained from astute structuring...
Its all about the students!
Example structure
University Marketing
Students
Project Co Equity
Lenders
Subcontractors / Providers
Concession
Subcontract
STRICTLY CONFIDENTIAL
05 Conclusion
PAGE 23 *
l Process certainty is key — Certainty of outcome — Familiar documents
l How to maximise value — What outcomes are sought? — What risks should be retained / transferred — Balance sheet outcome
Process certainty and careful structuring is key to maximising value
Well structured PBSA can be a very attractive asset class....
Conclusion