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1 US RESIDENTIAL FUND Investor Update November 2016

2 Disclaimer This Presentation is not a prospectus, product disclosure statement or other offering document under Australian law, including the Corporations Act 2001 (CwIth) ("Corporations Act") or any other law. The Presentation has not been, nor will it be, lodged with the Australian Securities and Investments Commission. Images of properties in this presentation may not be assets of USR. DISCLAIMER Summary Information The information in this Presentation is INFORMATION ONLY of a general nature and is not intended to be used as the basis for making an investment decision. This Presentation does not purport to be complete nor does it contain all the information which a prospective investor may require in evaluating a possible investment in USR or that would be required in a prospectus or product disclosure statement prepared in accordance with the requirements of the Corporations Act. This Presentation is not a recommendation nor financial product advice. No member of USR or any of its related bodies corporate and their respective directors, employees, officers and advisers offer any warranties in relation to the statements and information in this Presentation. Statements made in this Presentation are made only as of the date of this Presentation. The information in this Presentation remains subject to change without notice. 2

3 Contents I. About the Fund 4 II. Why US Residential Properties? 6 III. Why North Carolina in Southern US? 11 IV. Why US Residential Fund (USR)? 14 V. Why Multifamily Apartment Complexes? 20 CONTENTS 3

4 ABOUT THE FUND 4

5 US Residential Fund About the Fund Yield play on the strengthening US residential rental market Currently own 122 houses in Texas, Georgia, Ohio, with Patriots Pointe multifamily apartment complex in North Carolina under contract Significant growth potential in yield and narrowing of current NTA discount of 49.3% Listed on ASX on February 2015 ABOUT THE FUND Strategy Targeting returns from the following areas: Strategic shift to focus on higher returning US multifamily properties Redeployment of capital into multifamily apartment complexes where single family properties value is realised Enhancing operations through management restructuring including reduced directors and internalisation of the management Corporate Overview Portfolio valued at AUD 22m, with market capitalisation at AUD 8.0m Currency Unhedged Management Hands on US residential experience 5

6 WHY US RESIDENTIAL PROPERTIES? 6

7 Market Trends Highlights Strong Rental Property Growth US Rental Property Market Continuing Expansionary Phase We believe the US residential property outlook should remain positive for the following reasons Housing prices are well below their long-term trend, indicate optimal time to invest Despite all time low mortgage rate, typical homeowners have difficulty obtaining financing Owner occupier finance remains tight Home ownership rate is at 50 year low Strong demand for rental property in key markets WHY US RESIDENTIAL PROPERTIES? Housing prices are well below their long-term trend Shortage of residential accommodation due to under development post Global Financial Crisis Rental occupancy rates are at 25 year high Increasing demand for rental accommodation over past 10 years Many properties still lower than replacement value, especially at the regions we are focused on, such as Texas, Georgia and North Carolina 7

8 Home Ownership Rate (%) HPI (1980 = 100) Occupied Housing Units Mortgage Rate (%) Market Trends Highlights Strong Rental Property Growth Housing prices are well below their long-term trend, indicate optimal time to invest Housing prices have dropped significantly post US subprime mortgage crisis, and have yet to recover to its long term trend, indicating plenty of room for housing prices to further increase. However, typical homeowners have difficulty obtaining financing to leverage on this trend. US Housing Price Index Home ownership rate is at 50 year low Home Ownership Rate for US Subprime Crisis Despite the housing affordability, US subprime crisis have affected the American middle class ability to afford a home, putting home ownership on a 50 year low with no end in sight Despite all time low mortgage rate, typical homeowners have difficulty obtaining financing All time low mortgage rate minimises financing cost. However, typical homeowners have been affected by poor credit ratings and stringent mortgage requirements post US subprime crisis. Companies are in better position to negotiate for optimal financing terms. 30 Year Fixed Rate Mortgage in US Steady increase in home rental over the past 15 years Over the last 15 years, number of home rental units have been steadily increasing, indicating the rising demand for such homes. Rental Occupied Housing Units in US WHY US RESIDENTIAL PROPERTIES? 70 Subprime Crisis Source: Federal Reserve Bank of St Louis, Census.gov, Bureau of Labor Statistics 45,000 40,000 35,000 30,

9 Rental Occupancy Rate (%) No. of Units ( 000) CPI Monthly Housing Rental Housing Units Per Household Market Trends Highlights Strong Rental Property Growth New housing starts below sustainability level since 2008 Following the subprime crisis, constructions have greatly reduced and have not picked up till sustainable level of 1.3m units per year, based on increase in number of families in US. New housing starts are further decreasing rather than moving towards equilibrium level. 2,500 2,000 1,500 1, New Privately Owned Housing Units Started in US Excess supply Subprime crisis Rental occupancy rates are at 25 year high Rental occupancy rate is at a 25 year high, and minimises any losses from unrented units. The high occupancy rate is also a driving factor for increasing rent US Rental Occupancy Rate Sustainability level Supply shortage Housing availability at 15 year low and still plunging Housing shortage can be seen by the clearly reducing number of housing units available per household. The supply shortage causes increasing rent and high rental occupancy rate. Housing Units Per Household in US Steady increase in home rental over the past 10 years As a result of supply shortage and rising demand for rental houses, monthly housing rental have been increasing, and shows no sign of slowing down over the past 10 years, even during the period of US subprime mortgage crisis. US Consumer Price Index for Monthly Housing Rental WHY US RESIDENTIAL PROPERTIES? Source: Federal Reserve Bank of St Louis, Census.gov, Bureau of Labor Statistics 9

10 Demographic Shifts Supports Rental Demand Young adults prefer renting apartments over home purchases Prefers the convenience and flexibility rental property provides, allowing greater job flexibility Low maintenance of rental properties, as maintenance are generally provided by the landlords Greater affordability of rental properties as compared to home ownership Source: Huffington Post, Are Millennials Choosing to Rent, Or Just Choosing Not to Buy, 15/3/2016 US residents have difficulty affording home purchases amidst down payment requirements, poor credit ratings and tighter lending standards Post US subprime crisis in 2008, many US residents have poor credit ratings and difficulty obtaining sufficient debt to fund their home purchases Slow job recovery in US worsen the situation as young adults have insufficient income to buy a home Cultural shift away from home ownership among young adults as a result Source: Market Watch, Half of Americans Can t Afford Their Homes, 31/1/2015 Greater preference for rental properties, even among the higher income group A study of U.S. Census Bureau data by apartment search website RentCafé indicated that From 2005 to 2015, the number of renter households who earn more than USD150,000/year increased by 217 percent, while there was only an 82 percent increase in the number of homeowner households within the same income bracket WHY US RESIDENTIAL PROPERTIES? Source: Digital Trends, Even People Who Can Afford to Buy Their Homes Increasingly Prefer to Rent, 8/11/2016 High preference among retirees for rented homes with facilities Renting apartments frees up disposable income to fund retirement expenses, and is overall cheaper than home purchases Multifamily homes provides access to facilities suitable for retirees During the period of 2005 to 2015, the largest group of renters to increase was Baby Boomers or those 50 and older with a 55% gain Source: The Street, Retirees Are Opting to Rent Homes Like Millennials, 1/5/

11 WHY NORTH CAROLINA IN SOUTHERN US? 11

12 Strong Growth in Southern US US Region as defined by US Census Bureau Southern US has the largest population in US US Population by Region % 1.4% 1.2% Outside key cities in far west US, strongest GDP growth are in south-eastern US in 2015 US Population Growth by Region Legend 4.50% 5.90% 3.81% 4.49% 3.11% 3.80% 1.78% 3.10% -9.06% 1.77% US Average = 3.50% Southern US has the greatest population growth in US, in both percentage and absolute figure WHY NORTH CAROLINA IN SOUTHERN US? 38% 1.0% 0.8% 21% 0.6% 0.4% 0.2% 24% 0.0% Northeast Midwest West South Northeast Midwest West South Source: Usmap.facts.co, Bureau of Economic Analysis, US Department of Commerce, Census.gov 12

13 Overview of North Carolina 2015 Population 10m 2015 Median Household Income USD 50,797 Major Employers Highlight of North Carolina Progress Energy, Wakemed, Fidelity Investments, Wakemed Health, ACS, Red Hat, Allscripts, INC Research, First Citizens Bank, Longistics, Martin Marietta, IBM Cisco, GlaxoSmithKline, NC State University, Biogen, Toshiba Raleigh-Durham, The Research Triangle Chapel Hill, Durham, and Raleigh make up the three corners of the Research Triangle, so named in 1959 with the creation of Research Triangle Park (RTP), a research park between Durham and Raleigh. RTP is the largest research and development park in the world, anchored by leading technology firms, government and world-class universities, medical centres and schools, the area's economy has performed exceptionally well. Significant increases in employment, earnings, personal income, and retail sales are projected over the next 15 years. Growing high tech community, with talented labour pool Relatively high quality of life at lower costs than key US cities Strong innovation through collaborations with universities: University of North Carolina Duke University North Carolina State University's Centennial Campus University of North Carolina Healthcare Hospital Major regional medical centre Excellent airport connectivity, including international flights WHY NORTH CAROLINA IN SOUTHERN US? Population Growth Top 10 GDP Growth in US % 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% California Texas New York Florida Illinois Pennsylvania Ohio New Jersey North Carolina Georgia US Population Growth NC Population Growth 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 13

14 WHY US RESIDENTIAL FUND (USR)? 14

15 Recent Transactions and Operational Changes Enhance Value of USR Focus On Higher Return Assets Recent Sale of Properties at NTA Strong Projected Returns Patriot s Pointe Multifamily Property Under Contract Management Restructuring Internalisation of Management Rights WHY US RESIDENTIAL FUND? Increased Cashflow, via Capital Redeployment Clear Market Trends Supports Business Model Increased Profitability of Existing Single Family Houses Potential Returns from Further Exiting of Single Family Portfolio Simplified Board Structure Removal of conflicts of interest 15

16 Sale of Properties At Fair Value Highlights Strong Exit for Existing Properties 20 Properties Successfully Sold for USD 1.2m Consistent with Fair Value 19 Single Family Houses in Cleveland, Ohio and One in Atlanta, Georgia Sold at around NTA Markets Number of Single Family Houses Prior % of Number of Single Family Houses Post % of to Sales Portfolio Sale Portfolio Dallas & Houston 48 34% 48 39% Atlanta, Georgia 52 37% 51 42% Cleveland, Ohio 42 30% 23 19% Total % % WHY US RESIDENTIAL FUND? Single Family Properties Breakdown Pre-Sale Single Family Properties Breakdown Post-Sale 30% 34% 19% 39% 37% 42% Dallas & Houston Atlanta, Georgia Cleveland, Ohio Dallas & Houston Atlanta, Georgia Cleveland, Ohio 16

17 Strong Projected Performance for Patriots Pointe Patriots Pointe Under Exclusive Contract for USD 22m and Projected to have Strong Returns Low Financing Cost 3.65% 30 Years Fixed Interest Rate Property Highlights A grade multifamily asset Built in apartments 1, 2 & 3 bedroom units Under rented No development risk Strong Demand >95% Leased As at % 9.0% 8.0% 7.0% 6.0% 5.0% Strong Projected Returns 12 15% Total Average Return per Annum Patriots Pointe 5-Year Projected Unlevered Yield Average 5-Year Yield: 9.40% Year 1 Year 2 Year 3 Year 4 Year 5 WHY US RESIDENTIAL FUND? 17

18 Management Restructuring for Cost Savings and Enhanced Decision Making Internalisation of Management Through Acquisition of Management Rights for AUD 750k cash and AUD 250k in Performance Shares for Nimble Syndication Simpler operational structure Long-term cost savings through reduced management fees Enhanced management quality and control Pre-Internalisation External Party Post-Internalisation Internal Party WHY US RESIDENTIAL FUND? Management Rights Internalised Property Portfolio Property Portfolio 18

19 Management Restructuring for Cost Savings and Enhanced Decision Making Simple Board Structure and Small Number of Directors WHY US RESIDENTIAL FUND? Current Board of Directors (US Residential Limited and USA Residential Funds Management Ltd) James Hyndes Non-Executive Chairman Andrew Meakin Executive Director Ken Lawrence Non-Executive Director US-based Same board of directors for both company and responsible entity Simplified board structure and small number of directors enhance efficiency of decision making process 19

20 WHY MULTIFAMILY APARTMENT COMPLEXES? 20

21 Shift in Strategy to Focus on Multifamily Apartment Complexes in US USR plans to profitably exit from existing single family houses, and shift resources and focus to multifamily apartment complexes in US US Multifamily Apartment Complex Market Multifamily apartment complexes are commercial property Estimated more than 77,000 multifamily properties with more than 50 apartments on one title Upwards of USD 75b trading each year Slowing completions of new stock Typical US Multifamily Apartment Complex Selection Criteria 240+ apartments within complex In preferred locations based on USR research Typical price range from USD 15m to USD 30m Examples of comparable transactions WHY MULTIFAMILY APARTMENT COMPLEXES? Location: Nashville, TN Asking Price: USD 22m No. of Units: 261 Location: Palm Harbor, FL Asking Price: USD 28.25m No. of Units: 250 Location: Dallas, TX Asking Price: USD 18.8m No. of Units:

22 Why Multifamily Apartment Complexes? Multifamily properties rent growth exceeds that of single family properties 3.3% Rent Growth Multifamily vs Single Family 4.3% 4.1% 3.7% 3.7% 3.2% Q % 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Multifamily Single Family As at 2015, net absorption rate for multifamily units exceeds units completion Vacancy rate of multifamily properties are consistently below that of single family properties 50,000 40,000 30,000 20,000 10,000 - Multifamily Completion Vs Net Absorption Completions (Units) Average US Residential Vacancy Against Average US Multifamily Vacancy Net Absorption (Units) WHY MULTIFAMILY APARTMENT COMPLEXES? Average Residential Vacancy Average Multifamily Source: JLL US Multifamily Investment Outlook Q42014 Q32016, Reis Q2 Apartment Cap Rate Trends, Federal Reserve Bank of St Louis, Census.gov 22

23 Multifamily Apartment Complexes vs Single Family Houses - Comparison Multifamily Has a Number of Advantages Over Single Houses Including: Lower management fees Typical single family management fees are approximately 6% while multifamily is approximately 3.5% Turn (vacancy following a tenant moving out) is lower for multifamily Lower operational cost Maintenance cost for multifamily is substantially lower, given scale Finance available is at lower rates for multifamily, multifamily is a commercial asset class Single Family Houses Multifamily Apartment Complexes WHY MULTIFAMILY APARTMENT COMPLEXES? *Pictures are for reference only, which are not any promise or offers of the company *Pictures are for reference only, which are not any promise or offers of the company 23