ANNUAL FINANCIAL REPORT 2017/2018 HOUSING WITH CARE ­AEDIFICA­IS­POSITIONED­AS­A LEADING­BELGIAN­LISTED­COMPANY­INVESTING­ IN­HEALTHCARE­REAL­ESTATE­IN­EUROPE­–­SENIOR­HOUSING­IN­PARTICULAR. IT­AIMS­TO­CREATE­A BALANCED­PORTFOLIO­THAT­GENERATES­RECURRING­ REVENUES­AND­OFFERS­POTENTIAL­FOR­CAPITAL­GAINS. ­AEDIFICA’S­ STRATEGY­ IS­ FOCUSED­ ON­ THE­ DEMOGRAPHIC­ TREND­ OF­ POPULATION­ AGEING­ IN­ EUROPE­ AND­ THE­ SPECIFIC­ CARE­ AND­ HOUSING­ NEEDS­THIS­TREND­IMPLIES. ACTIVITIES­ARE­MAINLY­CONCENTRATED­IN­THE­HEALTHCARE­REAL­ESTATE­ SEGMENT­(WITH­A­FOCUS­ON­SENIOR­HOUSING),­BUT­THE­GROUP­IS­ALSO­ ACTIVE­IN­APARTMENT­BUILDINGS­AND­HOTELS. ­AEDIFICA­HAS­BEEN­QUOTED­ON­EURONEXT­BRUSSELS­(REGULATED­MARKET)­ SINCE­2006. ­AEDIFICA­OFFERS­THE­INVESTOR­AN­ALTERNATIVE­TO­DIRECT­INVESTMENT­ IN­REAL­ESTATE. 4 AEDIFICA - ANNUAL FINANCIAL REPORT 2017/2018 TABLE OF CONTENTS RISK FACTORS 2 1. Market risks 2 2. Risks related to Aedifica’s property portfolio 4 3. Financial risks 6 4. Regulatory risks 9 5. Corporate risks 10 6. Risks related to support processes 11 KEY FIGURES 2017/2018 12 LETTER TO THE SHAREHOLDERS 14 TIMELINE 16 EVOLUTION SINCE 2006 18 CONSOLIDATED BOARD OF DIRECTORS’ REPORT 24 1. Strategy 27 2. Operations carried out before and after the 30 June 2018 closure 29 3. Analysis of the 30 June 2018 consolidated financial statements 45 4. Appropriation of the result 52 5. Key risks (excluding those linked to financial instruments) 52 6. Use of financial instruments 52 7. Related party transactions 52 8. Subsidiaries 53 9. Research and development 54 10. Treasury shares 54 11. Outlook for 2018/2019 54 12. Conflicts of interest 57 13. Capital increases carried out within the framework of the authorised 58 capital 14. Environmental, ethical, and social matters 58 15. In case of a takeover bid 60 16. Independence and competence of at least one member of the Audit 63 Committee with respect to audit and accounting 17. Corporate governance statement 63 EPRA 64 PROPERTY REPORT 74 1. The real estate market 76 2. Evolution of the consolidated property portfolio as of 30 June 2018 82 3. Portfolio analysis as of 30 June 2018 82 4. Summary table of investment properties as of 30 June 2018 89 5. Investment property fact sheets 98 6. Management team 129 7 Experts’ report 130 AEDIFICA ON THE STOCK MARKET 132 1. Stock price and volume 135 2. Dividend policy 136 3. Shareholding structure 136 4. Shareholders’ calendar 137 CORPORATE GOVERNANCE STATEMENT1 138 1. Code of reference 140 2. Internal audit and risk management 140 3. Shareholder structure 144 4. Board of Directors and Committees 144 5. Diversity policy 152 6. Preventing conflicts of interest 153 7. Evaluation process 154 8. Rights to acquire shares 155 9. Remuneration report 155 FINANCIAL STATEMENTS 158 STANDING DOCUMENTS 224 GLOSSARY 239 1. This chapter is part of the Consolidated Board of Directors’ Report. * Alternative Performance Measure (APM) in accordance with ESMA (European Securities and Market Authority) guidelines published on 5 October 2015. For many years, Aedifica has been using Alternative Performance Measures in its financial communications based on the guidelines issued by the ESMA. Some of these APM are recommended by the European Public Real Estate Association (EPRA) while others have been defined by the industry or by Aedifica; the aim is to provide readers with a better understanding of the Company’s results and performance. The APM used in this Annual Financial Report are identified with an asterisk (*). Performance measures defined by IFRS standards or by Law are not considered APM, nor are those measures that are not based on the consolidated income statement or the balance sheet. The APM are defined, annotated and connected with the most relevant line, total or subtotal of the financial statements, in Note 57 of the consolidated financial statements below. RISK FACTORS AEDIFICA CARRIES OUT ITS ACTIVITIES IN A CONSTANTLY CHANGING ENVIRONMENT, WHICH IMPLIES CERTAIN RISKS. THE OCCURRENCE OF THESE RISKS COULD HAVE A NEGATIVE IMPACT ON THE COMPANY AS A WHOLE, OR ON ITS OPERATIONS, OUTLOOK, FINANCIAL POSITION OR FINANCIAL RESULT. THUS, THESE RISKS MUST BE DULY CONSIDERED AS PART OF ANY INVESTMENT DECISION. Aedifica aims to manage these risks to the best of its abil- ity, in order to generate recurring rental income and realise 1. MARKET RISKS future capital gains. 1.1 Economic risks The Executive Managers and the Board of Directors Given the fact that supply and demand in the real estate monitor Aedifica’s main risk factors closely. They set con- market is impacted by general economic conditions, servative policies in this respect, which are updated and any negative shift in the main macro-economic indica- adapted as necessary to reflect changing risk factors and tors could hurt Aedifica’s activity level and outlook. The circumstances. Please note that completeness in respect Company’s operations are indeed subject to economic of risk factors cannot be assured, and that the following cycles, since these affect the available income of existing list is based on information available as of 4 September tenants (and hence their ability to meet their financial com- 2018. It is acknowledged that other risk factors may exist, mitments), new demand, and the availability of funds for which are currently unknown, remote or considered as new investments. The Company can also be affected by benign for the Company, its operations and/or its financial the default of its various partners: service providers, credit position. providers, hedge providers, contractors, etc. To mitigate these risks, Aedifica continues to diversify its investments in accordance with various “diversification axes” (including building types, tenants, segments of the healthcare mar- ket, initial yields, changes in value, possibilities for alterna- tive use, public funding, etc.), which are fully aligned with Aedifica’s investment strategy. Since 2013, the Company also diversifies its investments from a geographical point of view (Belgium, Germany, The Netherlands). The Company has internalised certain functions which were previously outsourced (property management, project management); it ensures strategic monitoring and endeavours to manage information flows so as to anticipate risks. Finally, it should be noted that the Group’s most important asset segment —­Molenenk­–­Deventer­–­The­Netherlands­—­ (in particular healthcare real estate) has a strong growth potential, given that, in the countries where Aedifica is active, healthcare real estate faces increasing demand while supply tends to slow or stagnate due to the various restrictions imposed by public authorities. 1.2 Risks related to the real estate market Rent levels, vacancy rates, and property values are highly influenced by supply and demand in the real estate mar- ket, both in terms of space for sale and for let. The main risk factors faced by the Company arise from lower occu- pancy rates, decreases in contractual rents or building values on contract renewal, and capital losses when prop- erties are disposed of. An increase in acquisition prices could also cause a decrease in rental yield. 2 AEDIFICA - ANNUAL FINANCIAL REPORT 2017/2018 —­Molenenk­–­Deventer­–­The­Netherlands­—­ To mitigate these risks, Aedifica’s investment strategy is In the event of negative inflation, most contracts set a floor diversified, both geographically (having extended oper- at the level of the initial rent. ations beyond Belgium’s borders in 2013) and by sector. Aedifica has been active in the healthcare real estate mar- 1.4 Concentration risk of operators in the senior ket in Germany since 2013. In early 2016, it entered the housing segment Dutch healthcare real estate market. Given the dynamism of the large group of professional operators active in the healthcare real estate segment, and Each segment of the market in which Aedifica invests tar- the ongoing consolidation of this market, it is highly likely gets different types of tenants and has distinctive charac- that one or more business combinations will occur among teristics (with respect to regulation, lease terms, funding groups related to legal entities with which the Company of tenants, etc.). Given the high proportion of long-term has entered into lease agreements. This may impact the contracts (e.g. Belgian irrevocable contracts with a min- diversification level of the Company’s tenant base. Such imum initial maturity of 27 years called “emphytéoses / business combinations have occurred in the past among erfpachten”), which represent 88 % of the fair value of Aedifica’s portfolio operators, and have served to improve ­Aedifica­pursues­ marketable investment properties including assets classi- the professionalism of these legal entities. The impact of an­investment­ fied as held for sale* as of 30 June 2018, the weighted these consolidations on the diversification of Aedifica’s average lease term of Aedifica’s contracts stands at strategy­which­was­ tenant base has been offset by the growth in the portfolio, 20 years. This gives the Company a good view on future initially­focused­on­ which has led to the addition of new operators. Data con- revenue streams over the long term. the­Belgian­market.­ cerning these groups is provided in the Property Report Aedifica also intends to grow its portfolio in order to included in the Annual Financial Report and in Note 3 of Since 2013,­­Aedifica­ reduce the weight of each individual property, improve the Consolidated Financial Statements. has­been­active­in­ asset management, and increase the operating margin* the­healthcare­real­ Recall that (see Aedifica’s 2015/2016 Annual Financial by realising economies of scale. To this end, the Com- Report), as a result of the combination of Armonea and estate­segment­ pany maintains close relations with its main tenants and is Soprim@ groups, two Belgian operators in the senior in­Germany.­Early­ advised by qualified local experts in each country. care segment, the share of consolidated assets invested 2016,­it­entered­the­ by Aedifica in properties made available to entities of the Dutch­healthcare­ 1.3 Inflation risk Armonea group, represented approx.