sammy isreb - macquarie capital

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


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


01 PBSA Sector as an

Asset Class

*

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?

*

Investor profile / appetite

How to characterise the PBSA Sector as an asset class? Why is this so important?

Horses for courses...


Property Infrastructure

•  Revenue characteristics

•  Costs

•  Capital structure

•  Risks

or

*

How to characterise the PBSA sector as an asset class? What are the differences?

Linked to risk profile, capital structure, and investor profile


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

*

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

*

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?

*

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?


02 Strategies to Maximise

Reward

*

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

*

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


03 Market Views on PBSA

Investment Opportunities

*

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


Market views on PBSA opportunities

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)

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

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%

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

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


04 Relationships with Key

Stakeholders

*

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


Its all about the students!

Example structure

University Marketing

Students

Project Co Equity

Lenders

Subcontractors / Providers

Concession

Subcontract


05 Conclusion

*

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

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