INVESTOR REVIEW HY18 CONTENTS HY18 Highlights 1 Chairman and Managing 2 Directors Report Listed A-REIT 7 A-REIT Securities Fund 8 Private Funds 9 Direct Investments 18 Directory 30 Folkestone’s real estate expertise spans the residential (land and apartment), non-residential and real estate related social infrastructure sectors. Folkestone own, manage and develop real estate for the benefit of our shareholders and investors in our funds. Schematic of 11 Murray Rose Ave, Sydney Olympic Park, an asset of the Folkestone SOP Opportunity Fund. HY18 HIGHLIGHTS Folkestone continued to execute on its strategy of growing its funds management platform and its on-balance sheet exposure to quality residential and non-residential developments. $9.9m 6.7C 1 2 NPAT EPS 209.8% 204.5% $1.5bn $1.264 3 FUM TOTAL RETURN 14.1% 33.4%5 1. Statutory net profit for the 6 months to 31 December 2017. 2. Statutory earnings per share for the 6 months to 31 December 2017. 3. Growth in Funds Under Management for the 6 months to 31 December 2017. 4. Share price as at 31 December 2017. 5. Total return 12 months to 31 December 2017. FOLKESTONE INVESTOR REVIEW HY18 1 CHAIRMAN AND MANAGING DIRECTOR’S REPORT Folkestone delivered a strong undrawn debt facilities, providing the result in HY18 driven by a focused Company with financial flexibility to execution of our strategy to deliver take advantage of new investment real estate wealth solutions by opportunities when they arise. growing our funds management Gearing remains low despite platform and undertaking quality increasing from 5.2 per cent at 30 residential and non-residential June 2017 to 5.4 per cent 1 at 31 developments on our balance sheet. December 2017. Folkestone generated a statutory Folkestone’s strong operating result net profit after tax for the six months was also reflected in the return ended 31 December 2017 of $9.9 to shareholders, with Folkestone million, an increase of 209.8 per cent delivering a total return of 19.9 over HY17. Statutory earnings per per cent for the six months to 31 share are 6.7 cents compared to 2.2 December 2017, outperforming the cents for HY17. S&P/ASX300 Accumulation Index which returned 19.9 per cent. For the Folkestone’s net asset value (NAV) year, Folkestone generated a total was $1.12 per share at 31 December return of 33.4 per cent substantially 2017, up from $1.08 per share at outperforming the Index which 30 June 2017. Net tangible asset returned 11.9 per cent. (NTA) backing was $1.09 per share at 31 December 2017 compared with $1.04 per share at 30 June 2017. Folkestone’s balance sheet is in excellent shape with more than $30.0 million in available cash and 1 All debt, with the exception of a $25.0 million facility (drawn to $8.5 million at 31 December 2017) is held at the project level in special purpose vehicles. On a look through basis, the gearing is 13.3 per cent. 2 FOLKESTONE INVESTOR REVIEW HY18 FUNDS MANAGEMENT • Folkestone SOP Opportunity Fund Folkestone successfully completed a $50.0 million equity raising for Folkestone’s funds management In July 2017, Folkestone launched the Fund which closed significantly division is a specialist real estate the Folkestone SOP Opportunity oversubscribed. Folkestone funds manager for private clients Fund to acquire 11 Murray received an acquisition fee of and select institutional investors. Rose Avenue, Sydney Olympic $1.7 million on the successful Folkestone increased its funds under Park. The six level commercial completion of the equity raising in management to $1.5 billion at 31 building, which is currently under November 2017. December 2017, up 14.1 per cent construction, comprises 5,811 • Folkestone Green Square Hotel from 30 June 2017 and 23.0 per cent square metres across five levels of Fund over the year. office and ground floor retail with basement car parking. Practical In November 2017, Folkestone Total funds management revenue completion is forecast to occur in launched the Folkestone Green was $17.8 million, an increase of March 2018. Square Hotel Fund which will own 139.3 per cent on HY17. Folkestone received commitments a 144 room hotel to be constructed at 18 O’Riordan Street, Alexandria, Key features of the HY18 result are: of $24.7 million from a range of high net worth investors and family New South Wales. • launched three new funds raising offices. Folkestone received an $97.2 million; acquisition fee of $0.7 million on The project was initially secured the successful completion of the by Folkestone in November 2016, • 19.1 per cent increase in recurring equity raising in July 2017. when it announced that it had fee income and cost recoveries to entered a 50/50 joint venture with $4.4 million; • Folkestone Sydney Airport Hotel Furnished Property to develop the Fund Hotel. Folkestone and Furnished • $3.3 million in acquisition fees in Property will develop the hotel on respect of the Folkestone Sydney In October 2017, Folkestone behalf of the Fund, with the Fund Airport Hotel Fund, Folkestone launched the Folkestone Sydney not taking any development risk. Green Square Hotel Fund and Airport Hotel Fund to acquire the Folkestone SOP Opportunity Fund; Mercure Sydney International Folkestone successfully raised Airport Hotel. The 271 room hotel, $23.2 million to assist in funding • $5.1 million in performance fees operated by the Accor Group under the acquisition of the Hotel. The in respect of the Wollongong and their Mercure brand, is located Fund has a target equity IRR of Sydney Olympic Park Income approximately 1.0 kilometre from 12.0 per cent per annum (post- Funds; the Sydney Airport International fees, pre-tax) over the life of the • $1.5 million leasing fee in respect Terminal, 3.0 kilometres from the Fund. Folkestone received an of the Folkestone CIB Fund; and Sydney Airport Domestic Terminal acquisition fee of $0.9 million on and 9.0 kilometres from the the successful completion of the • 6.4 per cent increase in Sydney CBD. equity raising in December 2017. distributions from FLK’s co-investment in the ASX listed Folkestone plans to undertake We are delighted with the positive Folkestone Education Trust to $2.3 an extensive refurbishment and response to our new funds, with million. repositioning of the Hotel to drive all three closing oversubscribed. revenue, increase occupancy and Three New Funds Launched Folkestone raised $97.9 million from enhance its capital value. The high net worth and family office Fund has a target equity IRR of During HY18, Folkestone generated clients, which reflects the strong 14.4 per cent per annum (post- $3.3 million in acquisition fees from distribution network we have created fees, pre-tax) over the life of the the launch of three new funds: over the past few years. We continue Fund. FOLKESTONE INVESTOR REVIEW HY18 3 to focus on identifying suitable cent of the office space leased DIRECT INVESTMENTS - investment opportunities that we can to Thales, a leading international DEVELOPMENTS package up into funds to allow our electronics and systems group for investors access to a range of high another five years. Folkestone’s development quality real estate investments and division focuses on value-add developments. Investors in the Fund received a and opportunistic real estate total return since inception of circa developments. Folkestone’s Performance and Leasing Fees 17.2 per cent per annum (post- development division generated a net fees, pre-tax) compared to the development profit2 of $3.1 million, During HY18, Folkestone generated performance hurdle benchmark up 9.3 per cent on HY17. $6.6 million in performance and of 10.0 per cent per annum. As leasing fees from the following funds: a result of the Fund’s extension Key features of the HY18 result are: and outperformance, Folkestone • Folkestone Real Estate Income received a performance fee of $2.2 • $3.3 million in net development Fund at Wollongong million. profits from Millers Junction Business at Altona North, Industria In October 2017, Unitholders in the • Folkestone CIB Fund at Knoxfield, Northside at Officer Folkestone Real Estate Income and Elements at Truganina (via Fund at Wollongong voted in Folkestone’s CIB Fund owns Folkestone’s 18.8 per cent interest favour of the sale the Fund’s sole a portfolio of 9 police stations in the Folkestone Truganina asset, 43 Burelli Street Wollongong and 2 courthouses leased to the Development Fund); and the windup of the Fund. Victorian Government. As a result The property was sold for $46.1 of renewing the leases from a • $0.5 million in preferred equity million, a 67.5 per cent premium common expiry date of 2020 to interest in HY18 from four projects to the April 2013 acquisition varying dates between August (South Dural, Hornsby, Wollert and price (inclusive of capitalised 2023 and August 2028, Folkestone Green Square); expenditure since acquiring the received a leasing fee of $1.5 • $0.8 million share of development property). million. costs expensed in respect of the Folkestone Education Trust South Dural project; and Investors in the Fund received $1.80 for each $1.00 invested The largest fund managed • continued strong sales and which represents an internal rate of by Folkestone, the ASX listed settlements in respect of our return of 23.6 per cent per annum Folkestone Education Trust (ASX: residential land projects and (post fees, pre-tax) since inception FET) increased its gross assets by enterprise park projects in of the Fund four and a half years 5.6 per cent to $954 million in the six Melbourne.