ANNUAL FINANCIAL REPORT 2015/2016 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 12 LETTER TO THE SHAREHOLDERS 14 TIMELINE 16 10 YEARS ON THE STOCK MARKET 18 CONSOLIDATED BOARD OF DIRECTORS’ REPORT 24 1. Strategy 27 2. Operations carried out before and after the 30 June 2016 closure 29 3. Analysis of the 30 June 2016 Consolidated Financial Statements 39 4. Appropriation of the results 44 5. Key risks (excluding those linked to financial instruments) 45 6. Use of financial instruments 46 7. Related party transactions 46 8. Subsidiaries 46 9. Research and development 47 10. Treasury shares 47 11. Outlook for 2016/2017 47 12. Conflicts of interest 50 13. Capital increases carried out within the framework 51 of the authorised capital 14. Environmental, ethical, and social matters 52 15. In the event of a takeover bid 54 16. Independence and competence with respect to accounting and 57 audit of at least one member of the Audit Committee 17. Corporate governance statement 57 EPRA 58 PROPERTY REPORT 68 1. The real estate market 70 2. Growth of the consolidated property portfolio as of 30 June 2016 74 3. Portfolio analysis as of 30 June 2016 75 4. Summary table of investment properties as of 30 June 2016 82 5. Investment property fact sheets 88 6. Management team 110 7. Experts’ report 112 AEDIFICA ON THE STOCK MARKET 114 1. Stock price and volume 117 2. Dividend policy 118 3. Shareholding structure 118 4. Shareholders’ calendar 118 CORPORATE GOVERNANCE STATEMENT 1 120 1. Code of reference 122 2. Internal control and risk management 122 3. Shareholding structure 126 4. Board of Directors and Committees 126 5. Preventing conflicts of interest 133 6. Assessment process 134 7. Rights to acquire shares 134 8. Remuneration report 135 FINANCIAL STATEMENTS 140 STANDING DOCUMENTS 191 GLOSSARY 208 1. This chapter is part of the Consolidated Board of Directors’ Report. HOUSING WITH Aedifica aims to position itself CARE as a market leader among listed Belgian healthcare real estate companies, particularly in terms of senior housing. Its strategy is focused on the underlying demographic trend toward population ageing in Europe and the specific needs this trend implies in terms of care and housing. The Company aims to create a balanced portfolio that generates recurring revenues and offers potential for capital gains. The Group mainly concentrates its activity in the senior housing segment, but is also active in apartment buildings and hotels and other building types. Aedifica has been quoted on Euronext Brussels (continuous market) since 2006. Aedifica offers the investor an alternative to direct investment. 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 ability, in order to generate recurring rental income and realise future capital gains. The Executive Managers and the Board of Directors monitor Aedifica’s main risk factors closely. They set con- servative policies in this respect, which are updated and adapted as necessary to reflect changing risk factors and circumstances. Please note that completeness in respect of risk factors cannot be ensured, and that the following VINKENBOSCH HASSELT BE list is based on information available as of 2 Sep tem- ber 2016. It is acknowledged that other risk factors may exist, which are currently unknown, remote or consid- ered as benign for the Company, its operations and/or its financial position. 1. MARKET RISKS 1.1 ECONOMIC RISKS Given the fact that supply and demand in the real estate market is impacted by general economic conditions, any negative shift in the main macro-economic indicators could hurt Aedifica’s activity level and outlook. The Company’s operations are indeed subject to economic cycles, since RESIDENTIE these affect the available income of existing tenants (and POORTVELDEN hence their ability to respect their financial commitments), BELGIUM – SENIOR HOUSING new demand, and the availability of funds for new invest- ments. The Company can also be affected by the default SAKSEN WEIMAR of its various partners: service providers, credit provid- THE NETHERLANDS – SENIOR HOUSING ers, hedge providers, contractors, etc. To mitigate these economic risks, Aedifica has diversified its investments across several segments in the real estate market, which tend to respond differently to economic changes. Since 2013, the Company also diversifies its investments also SAKSEN WEIMAR ARNHEM NL from geographical point of view (Belgium, Germany, The Netherlands). The Company internalised certain functions which were previously outsourced (property management, project management); it ensures a strategic monitoring and endeavours to manage information flows so as to antici- pate risks. Finally, it should be noted that the vast major- ity of assets (invested in healthcare real estate) serves, by nature, to support the Group’s growth, given that healthcare ANNUAL FINANCIAL REPORT 2015/2016 2 — RISK FACTORS LEOPOLDSPARK BELGIUM – SENIOR HOUSING real estate, in the countries where Aedifica is active, faces increasing demand increase while supply tends to stagnate due to diverse restrictions imposed by public authorities in various forms. 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- would generate additional rental income of approximately pancy rates, decreases in contractual rents or building €0.8 million. values on contract renewal, and capital losses when In the context of increasing nominal interest rates, lower AEDIFICA PURSUES properties are disposed of. An increase in acquisition inflation implies higher real interest rates, which in turn AN INVESTMENT prices could also cause a decrease of rental yield. implies that financial charges are growing faster than STRATEGY WHICH, To mitigate these risks, Aedifica’s investment strategy is indexation of rental income. Aedifica has taken some diversified, both geographically (having extended opera- important steps to mitigate this risk (see 3.3 below). UNTIL RECENTLY, tions beyond Belgium’s borders in 2013) and by sector. In the event of negative inflation, most contracts set HAS BEEN Aedifica has been active in the senior housing segment a floor at the level of the initial rent. in Germany since 2013. Early 2016, it entered the Dutch FOCUSED ON THE senior housing market. 1.4 CONCENTRATION RISK OF OPERATORS IN THE BELGIAN MARKET. Each segment of the market in which Aedifica invests tar- SENIOR HOUSING SEGMENT STARTING 2013, gets different types of tenants who rent premises under Given the dynamism of the large group of professional AEDIFICA HAS ALSO operators active in the senior housing segment, and the contracts with varying maturities (short-term or medi- BEEN ACTIVE IN THE um-term for apartments, and long-term for senior hous- ongoing consolidation of this market, it is highly likely that ing and hotels). Given the high proportion of long-term one or more business combinations will occur among SENIOR HOUSING contracts (e.g. Belgian irrevocable contracts with a min- groups related to legal entities with which the Company SEGMENT IN imum initial maturity of 27 years called “emphytéoses / has entered into lease agreements. This may impact the GERMANY. erfpachten”), which represent 74 % of the fair value of diversification level of the Company’s tenant base. Such marketable investment properties as of 30 June 2016), business combinations have occurred in the past among EARLY 2016, the average residual maturity of Aedifica’s contracts Aedifica’s portfolio operators, and have served to improve IT ENTERED THE stands at 20 years. This gives the Company a good the professionalism of these legal entities. The impact of view on future revenue streams over the long term. To these consolidations on the diversification ofAedifica’s DUTCH SENIOR this end, the Company maintains close relations with its tenant base has been offset by the growth in the portfolio, HOUSING MARKET. main tenants and is advised by qualified local experts in with addition of new operators. Data concerning these each country. groups is provided in the Property Report included in the Annual Financial Report and in Note 3 of the Consoli- Aedifica also intends to grow its portfolio in order to dated Financial Statements. reduce the weight of each individual property, improve asset management, and increase the operating margin As a result of the combination of Armonea and Soprim@ by realising economies of scale. groups, two Belgian operators in the senior care segment, the share of consolidated assets invested by Aedifica in 1.3 INFLATION RISK properties made available for entities controlled by the Armonea group now represents approx. 21 % (fair value: At constant interest rates, inflation risk is low for Aedifica, €248 million; acquisition price: €223 million; acquisition since rents are subject to indexation (in Belgium and The date: between 2008 and 2015; rental yield: 5.6 %). Netherlands: on an annual basis, mainly according to the local full CPI or, in Belgium, the health CPI; in Ger- All Aedifica sites rented out to entities of the Armonea many: the indexation formula is specific to each contract). group can be considered as a single property within the The impact of inflation on rental income can be summa- meaning of Article 30, para. 1, section 3 of the Belgian Act rised as follows: an increase of the index of 100 bps of 12 May 2014 on Regulated Real Estate Companies.