• AnnuAl REpoRt • 2011 Front cover: Main heritage image of Young & Jackson Hotel, Melbourne c1967 © newspix /Herald Sun. Small oval framed image of Young & Jackson Hotel, Melbourne c1864–1875 © State Library of victoria. Back cover: Main heritage image of exeter Hotel, adelaide: by australian tourist Publication Limited c1950. Small framed image of Breakfast creek Hotel, Brisbane c1983. ALE ProPErty GrouP (ALE) Comprising Australian Leisure and Entertainment Property trust and its controlled entities report for the year Ended 30 June 2011 ABN 92 648 441 429 02 21 DirECtors’ rEPort stAtEmENt of ChANGEs iN Equity 18 AuDitor’s iNDEPENDENCE DECLArAtioN 19 fiNANCiAL stAtEmENts 19 stAtEmENt of ComPrEhENsivE iNComE 20 stAtEmENt of fiNANCiAL PositioN CoNtENts • ANNuAL rEPort • 2011 ALE ProPErty GrouP (Asx:LEP) ALE Property Group (ASX:LEP) is Australia’s largest listed freehold owner of pubs. Established in November 2003, ALE owns a property portfolio of 87 pubs across the five mainland states of Australia. All of the pubs in the portfolio are leased to members of Australian Leisure and Hospitality Group Limited (ALH) for a remaining initial term averaging 17 years. w ww.ALEGrouP.Com.Au 22 CAsh fLow stAtEmENt 23 NotEs to thE fiNANCiAL stAtEmENts 53 DirECtors’ DECLArAtioN 54 iNDEPENDENt AuDitor’s rEPort to stAPLED sECurityhoLDErs 57 AustrALiAN LEisurE AND ENtErtAiNmENt ProPErty mANAGEmENt LimitED ANNuAL rEPort 2011 ibc iNvEstor iNformAtioN AND CorPorAtE DirECtory 2 ALE Annual Report 2011 • DirECtors’ rEPort • For the year ended 30 June 2011 DirECtors’ rEPort ALE Property Group (“ALE”) comprises Australian Leisure and Entertainment Property Trust (“Trust”) and its controlled entities including ALE Direct Property Trust (“Sub Trust”), ALE Finance Company Pty Limited (“Finance Company”) and Australian Leisure and Entertainment Property Management Limited (“Company”) as the responsible entity of the Trust. The registered office and principal place of business of the Company is: Level 10 6 O’Connell Street Sydney NSW 2000 The directors of the Company present their report, together with the financial statements of ALE, for the year ended 30 June 2011. 1 DirECtors The following persons were directors of the Company during the year and up to the date of this report unless otherwise stated: Name Type P H Warne (Chairman) J P Henderson H I Wright A F O Wilkinson (Managing Director) J T McNally Independent non-executive Independent non-executive Independent non-executive Executive Executive Appointed 8 September 2003 19 August 2003 8 September 2003 16 November 2004 26 June 2003 2 PriNCiPAL ACtivitiEs The principal activities of ALE consist of investment in property and property funds management. There has been no significant change in the nature of these activities during the year. 3 siGNifiCANt ChANGEs iN thE stAtE of AffAirs In the opinion of the directors, the following significant changes in the state of affairs of ALE occurred during the year: • a new CMBS issue of $160 million; • debt with a book value of $179.83 million was repaid; and • property values increased 6.2% to $758.28 million. Net Tangible Assets rose by 8.9% to $351.39 million and net borrowings as a percentage of total assets remained stable at 50.9%. 4 LikELy DEvELoPmENts AND ExPECtED rEsuLts of oPErAtioNs ALE will continue to maintain its defined strategy of identifying opportunities to increase the profitability of ALE and its value to its stapled securityholders. In accordance with the leases of its investment properties, ALE expects to receive increases in rental income in line with increases in the consumer price index. The directors are not aware of any other future development likely to significantly affect the operations and/or results of ALE. In early 2008, ALH commenced proceedings in the Supreme Court of Victoria in relation to the lease over the Vale Hotel in Mulgrave, Victoria. On 16 December 2009, Justice Judd delivered judgment in the proceedings which endorsed ALE’s interpretation of the relevant provisions of the lease. On 23 April 2010, Justice Judd made orders reflecting the findings set out in the judgment of 16 December 2009, including an order that ALH pay ALE’s costs. ALH is now appealing the 23 April 2010 judgment and orders to the Victorian Court of Appeal. The appeal is being heard on 1 and 2 August 2011. A final judgement is expected to be a number of months away. 2 ALE Annual Report 2011 3 ALE Annual Report 2011 5 DistriButioNs AND DiviDENDs Trust distributions paid out and payable to stapled securityholders, based on the number of stapled securities on issue at the respective record dates, for the year were as follows: Final Trust income distribution for the year ending 30 June 2011 to be paid on 31 August 2011 Interim Trust income distribution for the year ending 30 June 2011 paid on 28 February 2011 total distribution for the year ending 30 June 2011 30 June 2011 cents per security 9.75 10.00 19.75 30 June 2010 cents per security 12.00 12.00 30 June 2011 $’000 15,404 15,550 30 June 2010 $’000 18,183 18,403 24.00 30,954 36,586 No provisions for or payments of Company dividends have been made during the year (2010: nil). 6 mAttErs suBsEquENt to thE END of thE fiNANCiAL yEAr In the opinion of the Directors of the Company, no transaction or event of a material and unusual nature has occurred between the end of the financial year and the date of this report that may significantly affect the operations of ALE, the results of those operations or the state of the affairs of ALE in future financial years. 7 rEviEw AND rEsuLts of oPErAtioNs ALE produced a profit after tax of $50.9 million for the year ended 30 June 2011 (30 June 2010: Loss of $15.5 million). ALE produced a distributable profit (before fair value adjustments and other non cash items) of $31.3 million for the year ended 30 June 2011 (30 June 2010: $38.1 million). The table below separates the cash components of profit that are available for distribution from the non-cash components of ALE’s profit. The directors believe this will assist stapled securityholders in understanding the results of operations and distributions of ALE. Profit/(loss) after income tax for the year Adjustment for non-cash items Fair value increments/(decrements) to derivatives and investment properties Loss/(Gain) on disposal of investment properties Employee share based payments Finance costs – non-cash Income tax expense/(benefit) Adjustments for non-cash items total profit available for distribution Distribution paid or provided for Available and under distributed for the year Earnings and distribution per stapled security: Basic and diluted earnings Earnings available for distribution Total distribution 30 June 2011 $’000 30 June 2010 $’000 50,870 (15,524) (36,547) – 80 17,315 (489) (19,641) 31,229 30,954 275 30 June 2011 Cents 32.49 19.95 19.75 38,045 1,271 130 13,999 149 53,594 38,070 36,586 1,484 30 June 2010 Cents –10.94 26.84 24.00 Percentage Increase/ (Decrease) 396.98% –25.67% –17.71% summary of financial highlights for the year: Total distribution per stapled security decreased by 17.71% from 24.0 cents to 19.75 cents compared to the June 2010 year. Investment property acquisitions, disposals and revaluations increased portfolio value by 6.22% from $713.85 million to $758.28 million compared to June 2010. Net assets per stapled security increased by 8.93% from $2.10 to $2.22 compared to June 2010. 4 ALE Annual Report 2011 • DirECtors’ rEPort • For the year ended 30 June 2011 8 iNformAtioN oN DirECtors Mr Peter Warne B.A, MAICD, Chairman and Non-executive Director. Experience and expertise Peter was appointed as Chairman and Non-executive Director of the Company in September 2003. Peter began his career with the NSW Government Actuary’s Office and the NSW Superannuation Board before joining Bankers Trust Australia Limited (“BTAL”) in 1981. Peter held senior positions in the Fixed Income Department, the Capital Markets Division and the Financial Markets Group of BTAL and acted as a consultant to assist with integration issues when the investment banking business of BTAL was acquired by Macquarie Bank Limited in 1999. Peter is also a board member of three other listed entities, being ASX Limited, Macquarie Group Limited, and WHK Group Limited. Peter graduated from Macquarie University with a Bachelor of Arts, majoring in Actuarial Studies. He qualified as an associate of, and received a Certificate of Finance and Investment from, the Institute of Actuaries, London. Mr John Henderson B.Bldg, MRICS, AAPI, Non-executive Director. Experience and expertise John was appointed as a Non-executive Director of the Company in August 2003. John has been a director of Marks Henderson Pty Ltd since 2001 and is actively involved in the acquisition of investment property. Previously an International Director at Jones Lang LaSalle and Managing Director of the Sales and Investment Division, he was responsible for overseeing the larger property sales across Australasia, liaising with institutional and private investors, and coordinating international investment activities. John graduated from the University of Melbourne and is a member of the Royal Institution of Chartered Surveyors, is an associate of the Australian Property Institute and is a licensed real estate agent. Ms Helen Wright LL.B, MAICD, Non-executive Director. Experience and expertise Helen was appointed as a Non-executive Director of the Company in September 2003. Helen was a partner of Freehills, a leading Australian firm of lawyers, from 1986 to 2003. She practised as a commercial lawyer specialising in real estate projects, including development and financing and related taxation and stamp duties. Helen is the Chair of Screen NSW (formerly Film & Television Office), the Local Government Remuneration Tribunal for NSW and recently was reappointed as The Statutory and Other Offices Remuneration Tribunal of NSW. Prior appointments include the Boards of Sydney Harbour Foreshore Authority and subsidiaries, Australia Day Council of NSW, Darling Harbour Authority, UNSW Press Limited and MLC Homepack Limited. Helen has a Bachelor of Laws from the University of NSW, and in 1994 completed the Advanced Management Program at the Harvard Graduate School of Business. Mr Andrew Wilkinson B.Bus. CFTP, MAICD, Managing Director. Experience and expertise Andrew was appointed Managing Director of the Company in November 2004. He joined ALE as Chief Executive Officer at the time of its listing in November 2003. Andrew has over 30 years experience in banking, corporate finance and funds management. He was previously a corporate finance partner with PricewaterhouseCoopers and spent 15 years in finance and investment banking with organisations including ANZ Capel Court and Schroders. Mr James McNally B.Bus (Land Economy), Dip. Law, Executive Director. Experience and expertise James was appointed as an Executive Director of the Company in June 2003. James has over 16 years experience in the funds management industry, having worked in both property trust administration and compliance roles for Perpetual Trustees Australia Limited and MIA Services Pty Limited, a company that specialises in compliance services to the funds management industry. James’ qualifications include a Bachelor of Business in Land Economy (Hawkesbury Agricultural College) and a Diploma of Law (Legal Practitioners Admission Board). He is a registered valuer and licensed real estate agent. Mr Brendan Howell B.Econ, G.Dip App Fin (Sec Inst), Company Secretary. Experience and expertise Brendan was appointed to the position of Company Secretary in April 2007, having previously held the position from September 2003 to September 2006. Brendan has a Bachelor of Economics from the University of Sydney and a Graduate Diploma in Applied Finance and Investment from the Securities Institute of Australia, and over 19 years experience in the funds management industry. He was formerly an associate member of both the Securities Institute of Australia and the Institute of Chartered Accountants in Australia. Brendan has a property and accounting background and has previously held senior positions with a leading Australian trustee company administrating listed and unlisted property trusts. For over ten years Brendan has been directly involved with MIA Services Pty Limited, a company which specialises in funds management compliance, and acts as an independent consultant and external compliance committee member for a number of property, equity and infrastructure funds managers. Brendan also acts as an independent director for several unlisted public companies, some of which act as responsible entities. 4 ALE Annual Report 2011 5 ALE Annual Report 2011 independent member of the Audit, Compliance and risk management Committee (ACrmC) Mr David Lawler B.Bus, CPA, Independent ACRMC Member. Experience and expertise David was appointed to ALE’s ACRMC on 9 December 2005 and has over 25 years experience in internal auditing in the banking and finance industry. He was the Chief Audit Executive for Citibank in the Philippines, Italy, Switzerland, Mexico, Brazil, Australia and Hong Kong. He was Group Auditor for the Commonwealth Bank of Australia. David is an audit committee member of the Australian Office of Financial Management, the Defence Materiel Organisation, the Australian Trade Commission, the Australian Sports Anti-Doping Authority, the Australian Agency for International Development and National ICT Australia. David is a director of Australian Settlements Limited and chairman of its audit and risk committee. David has a Bachelor of Business Studies from Manchester Metropolitan University in the UK. He is a Fellow of CPA Australia and a past President of the Institute of Internal Auditors-Australia. Directorships of listed entities within the last three years The following director held directorships of other listed entities within the last three years and from the date appointed up to the date of this report unless otherwise stated: Director P H Warne P H Warne P H Warne P H Warne Directorships of listed entities Type Appointed Resigned ASX Limited WHK Group Limited Macquarie Group Limited Teys Limited Non-executive Non-executive Non-executive Non-executive July 2006 May 2007 July 2007 October 2007 June 2009 special responsibilities of directors The following are the special responsibilities of each director: Director P H Warne H I Wright J P Henderson Special responsibilities Chairman of the Board Member of the Audit, Compliance and Risk Management Committee (ACRMC) Chair of the Nominations Committee Chair of the Remuneration Committee Chair of the ACRMC Member of the Nominations Committee Member of the Remuneration Committee Member of the ACRMC Member of the Nominations Committee Member of the Remuneration Committee A F O Wilkinson Chief Executive Officer and Managing Director of the Company Responsible Manager of the Company under the Company’s Australian Financial Services Licence (AFSL) J T McNally Responsible Manager of the Company under the Company’s AFSL 6 ALE Annual Report 2011 • DirECtors’ rEPort • For the year ended 30 June 2011 Directors’ and key management personnel interests in stapled securities and performance rights The following directors, key management personnel and their associates held or currently hold the following stapled security interests in ALE: Name Role P H Warne J P Henderson H I Wright A F O Wilkinson A J Slade M J Clarke D J Shipway Non-executive Director Non-executive Director Non-executive Director Executive Director Capital Manager Finance Manager Asset Manager Number held at the start of the year 1,185,000 355,365 150,000 208,468 31,064 4,564 – Net Movement Number held at 30 June 2011 – 1,000 – (3,164) 3,177 5,000 1,185,000 356,365 150,000 208,468 27,900 7,741 5,000 The following key management personnel currently hold performance rights over stapled securities in ALE: Name Role A F O Wilkinson A J Slade Executive Director Capital Manager Number held at the start of the year 160,026 77,309 Net Movement Number held at 30 June 2011 – (16,065) 160,026 61,244 meetings of directors The number of meetings of the Company’s Board of Directors held and of each Board committee held during the year ended 30 June 2011 and the number of meetings attended by each director at the time the director held office during the year were: Director P H Warne J P Henderson H I Wright A F O Wilkinson J T McNally Board ACRMC Remuneration Committee Held 1 Attended Held 1 Attended Held 1 Attended 17 17 17 17 17 16 16 17 17 17 8 8 8 n/a n/a 8 8 7 8 n/a n/a 8 6 6 6 n/a n/a n/a 6 6 6 n/a n/a n/a Member of Audit, Compliance and Risk Management Committee D J Lawler n/a n/a 1 “Held” reflects the number of meetings which the director or member was eligible to attend. 6 ALE Annual Report 2011 7 ALE Annual Report 2011 9 rEmuNErAtioN rEPort (AuDitED) This report provides details on ALE’s remuneration structure, decisions and outcomes for the year ended 30 June 2011 for employees of ALE including the directors, the Managing Director and key management personnel. The format and content of the Remuneration Report has changed compared with previous years. This reflects changes to the remuneration policies over the year, changes to reporting requirements and the desire to increase the transparency of the remuneration decisions made by ALE. 9.1 rEmuNErAtioN oBJECtivEs AND APProACh In determining a remuneration framework the Board aims to ensure the following: • attract, reward and retain high calibre executives; • motivate executives to achieve performance that creates value for stapled securityholders; and • links remuneration to performance. The framework aligns executive reward with achievement of strategic objectives and creation of value for stapled securityholders. To do this the Board ensures that executive reward satisfies the following objectives: • alignment with ALE’s financial, operational, compliance and risk management objectives so as to achieve alignment with positive outcomes for stapled securityholders; • alignment with ALE’s overall performance; • transparent, reasonable and acceptable to employees and securityholders; • rewards the responsibility, capability, experience and contribution made by executives; and • market competitive and complementary to the reward strategy of the organisation. The framework provides a mix of fixed and variable pay and a blend of short and long term incentives. As executives gain seniority within ALE, the balance of this mix shifts to a higher proportion of ‘at risk’ rewards, and is also dependent upon the nature of the executive’s role. 9.2 rEmuNErAtioN CommittEE The Remuneration Committee (“the Committee”) is a committee comprising non-executive directors of the Company. The Committee strives to ensure that ALE’s remuneration structure strikes an appropriate balance between the interests of ALE securityholders and rewarding, motivating and retaining employees. The Committee’s charter sets out its role and responsibilities. The charter is reviewed on an annual basis. In fulfilling its role the Committee endeavours to ensure the remuneration framework established will: • reward executive performance against agreed strategic objectives; • encourage alignment of the interests of executives and stapled securityholders; and • ensure there is an appropriate mix between fixed and “at risk” remuneration. The Committee operates independently of ALE senior management in its recommendations to the Board and engages remuneration consultants independently of ALE management. During FY11, the Committee consisted of the following: Peter Warne (Chairman) Helen Wright John Henderson Non-executive Director Non-executive Director Non-executive Director Refer page 4 of this report for information on the skills, experience and expertise of the Committee members. The number of meetings held by the Committee and the members’ attendance at them is set out on page 6. The Remuneration Committee considers advice from a wide range of external advisors in performing its role. During the current financial year ALE engaged Guerdon Associates Pty Limited to review the fixed remuneration structure and Ernst & Young to review the Long Term Incentive Plan of ALE. 9.3 ExECutivE rEmuNErAtioN Executive remuneration comprises both a fixed component and an ‘at risk’ component. It specifically comprises: • Fixed annual remuneration (FAR) • Short term incentives (STI) • Long term incentives (LTI) 8 ALE Annual Report 2011 • DirECtors’ rEPort • For the year ended 30 June 2011 9.3.1 fixed Annual remuneration (fAr) what is fAr? how is fAr set? FAR is the guaranteed salary of the executive and includes superannuation and salary sacrificed components such as motor vehicles, laptops and superannuation. FAR is set by reference to external market data for comparable roles and responsibilities within similar listed entities within Australia. when is fAr reviewed? FAR is reviewed in December each year with any changes being effective from 1 January of the following year. 9.3.2 short term incentive (sti) what is sti? STI is an annual “at risk” component of an executive remuneration. how are sti targets and objectives chosen? STI is used to reward executives for achieving annual business targets and their own individual key performance indicators (KPIs). The maximum STI opportunity for executives varies according to the role and responsibility of the executive. At the beginning of each year the Board sets a number of strategic objectives for ALE for that year. These objectives are dependent on the strategic issues facing ALE for that year and may include objectives that relate to longer term performance of ALE. Additionally individual specific KPIs are established for all executives with reference to their individual responsibilities that are linked to improving business processes, ensuring compliance with legislative requirements, ensuring compliance with risk management policies and protecting securityholder value as well as other key strategic non-financial measures linked to drivers of performance in future economic periods. how is sti performance accessed? The Board is responsible for assessing whether the KPIs have been met. To facilitate this assessment, the Board receives detailed reports on performance from management. The STI payments may be adjusted up or down in line with over or under achievement against the specific KPIs. This is at the discretion of the Board who have regard to the achievements of the objectives outlined above. how are sti awards delivered? STI payments are made in cash in August each year following the release of ALE’s annual results. 9.3.3 Long term incentive (Lti) what is Lti? what are the Lti performance conditions? The LTI currently provides for the granting of Performance Rights over stapled securities in ALE. If performance conditions are met, then the Performance Rights vest and stapled securities are issued to the executive, subject to any delayed delivery conditions. If performance conditions are not met by the final testing date the Performance Rights lapse. The performance conditions for LTIs are as follows: A service period retention hurdle, whereby the employee must be employed by ALE at the vesting date for the Performance Rights to vest. A Total Securityholder Return (TSR) performance hurdle based on ALE’s absolute TSR. A TSR performance hurdle where ALE’s TSR is ranked against a comparative group consisting of companies classified as Real Estate Investment Trusts in the S&P/ASX 300 Index. 8 ALE Annual Report 2011 9 ALE Annual Report 2011 what are the periods for the performance conditions? The performance periods for grants are determined on an individual basis. Presently LTI have been granted to Andrew Wilkinson and Andrew Slade. Andrew Wilkinson The performance period for grants to Mr Wilkinson are over the period of his service agreement covered by the grant. This is generally two to three years. As the grant covers the period of the service agreement contract there is no retesting performed on any failed vesting tests. Andrew Slade The performance period for grants to Mr Slade are split over the three years covered by each grant. One third of the performance rights granted are tested on 30 June of each of the three years following the grant date. For grants prior to 30 June 2009 no retesting is performed on failed vesting tests. For grants made on and after 30 June 2009, any failed TSR performance hurdle is retested at the next anniversary until the performance period concludes. Up to one third of total LTIs awarded are subject to a Relative TSR ranking over the performance period established in the grant. ALE tsr rank vesting scale Below 50th percentile Between 50th percentile and 75th percentile At or above 75th percentile Nil vesting Linear scale: 50% to 99% vesting 100% vesting what is the vesting scale for the relative tsr performance hurdles? what is the vesting scale for the Absolute tsr performance hurdles? Up to one third of total LTIs awarded are subject to an Absolute TSR ranking over the performance period established in the grant. when are Lti delivered? ALE tsr rank vesting scale Below 12% TSR performance Between 12% and 17% TSR performance At or above 17% TSR performance Nil vesting Linear scale: 50% to 99% vesting 100% vesting Andrew Wilkinson Any stapled securities issued under LTI granted in 2009 will be delivered to Andrew Wilkinson two years after the vesting date provided that, in the reasonable opinion of the Board, he has not engaged in any conduct that: (i) results in ALE having to make any material financial restatement; (ii) causes ALE to incur a material financial loss; or (iii) causes any significant harm to ALE and/or its businesses. Andrew Slade For grants prior to 30 June 2009 LTIs are delivered on an annual basis once testing has been performed and vesting established. For grants subsequent to 30 June 2009 any securities are delivered to Mr Slade two years after the vesting date subject to the same conditions as Andrew Wilkinson’s listed above. what changes have been made to Lti for 2012 and subsequent period grants? Given the time and material costs of maintaining the current LTI plan the Remuneration Committee has engaged Ernst & Young to review the arrangements with a view to simplifying the administration of the plan while maintaining proper alignment to securityholders long term interests. Any changes arising from this review will be announced when completed. 10 ALE Annual Report 2011 • DirECtors’ rEPort • For the year ended 30 June 2011 9.3.4 summary of key Contract terms Contract Details Executive Position Andrew Wilkinson Managing Director Andrew Slade Capital Manager Contract Length Fixed Annual Remuneration Notice by ALE Notice by Executive 3 years $365,000 Per contract 6 months Ongoing $200,000 3 months 3 months Michael Clarke Finance Manager and Assistant Company Secretary Ongoing $175,000 3 months 3 months Don Shipway Asset Manager James McNally Executive Director Ongoing $163,500 1 month 1 month Ongoing $100,000 1 month 1 month Brendan Howell Company Secretary and Compliance Officer Ongoing $90,000 1 month 1 month managing Director Andrew Wilkinson’s current employment contract concluded on 1 June 2011. The Company has agreed terms of a service agreement with Managing Director, Andrew Wilkinson, relating to the period starting 1 July 2011 and ending on 1 July 2014. The agreement stipulates the minimum base salary, inclusive of superannuation, for each of the first three years as being $365,000 for Andrew Wilkinson, to be reviewed annually each 31 December by the Board. A STI (which if earned, would be paid as a cash bonus in August each year) and a LTI in a form consistent with ALE’s LTI arrangements. Following the finalisation of Andrew Wilkinson’s service agreement and the Remuneration Committee’s consideration of a restructure of ALE’s LTI arrangements, a grant of LTI will be made to him, subject to approval at ALE’s 2011 AGM. In the event of the termination of Andrew Wilkinson’s service agreement and depending on the reason for the termination, amounts may be payable for unpaid accrued entitlements and a proportion of bonus entitlements as at the date of termination. In the event of redundancy termination, amounts are payable for base salary, inclusive of superannuation and bonus and long term incentive entitlements for the balance of the contract. 9.4 ExECutivE rEmuNErAtioN outComE for yEAr ENDED 30 JuNE 2011 Details of remuneration paid to Directors and Key Management Personnel is detailed in the table on page 15. sti outcomes ALE has performed relatively well compared to other Australian real estate investment trusts (AREITs) since the commencement of the global financial crisis (GFC). For FY11 ALE achieved a distributable profit of 19.95 cents per security, which compared favourably to the Board’s guidance of at least 18.50 cents per security. Management contribution to this performance was by way of: • completion of the final stage of the $500 million capital management plan launched in 2009; • completion of a new five year CMBS financing of $160 million at market competitive pricing – the first such issue in the Australian market since the GFC; • preservation of the long term and cost effective capital indexed bonds as part of the CMBS refinancing; • achievement of a Aaa rating on 90% of the new CMBS issue; • execution of a range of discounted debt buybacks and repayments on a basis that maximised earnings outcomes; and • delivery of a range of other strategic property, funding and hedging related initiatives. The remuneration committee considered these achievements and compared them to key performance indicators for each executive that were set at the beginning of the year. The STI result for the Managing Director and Capital Manager particularly reflect the positive contributions they made to the various capital management and refinancing activities, as outlined above. Other executives contributed to a range of the important and valuable outcomes outlined above that were recognised in the STI payments made. All the STI payments are included in staff remuneration expenses in the current year. The STI awarded to each member of the management team is detailed in table 9.8. Lti outcomes The LTI awards under the ALE Executive Performance Rights Plan were tested as at 30 June 2011. As detailed in section 9.3.3, the performance hurdles were based on a combination of Retention, Absolute TSR and Relative TSR. Andrew Slade was entitled to a grant of LTI for a value equivalent to $50,000 on 1 July 2010. At 30 June 2011 no grant has been made. A grant will be made following the completion of the remuneration committee’s review of ALE’s LTI arrangements. As outlined in section 9.5.3, the performance hurdles were partly achieved and applicable awards vested under the plan and remain subject to the delayed delivery restrictions that are set out in section 9.3.3. 10 ALE Annual Report 2011 11 ALE Annual Report 2011 ALE financial Performance history To provide context to ALE’s performance, the following data and graphs outline a seven year history on key financial metrics. Distributable profit ($m) Distribution per Security (cents) Property values ($m) (Continuing properties) Net gearing FY05 11.7 12.85 613.5 68.7% FY06 14.6 16.00 655.6 63.9% FY07 FY08 FY09 29.4 32.50 723.8 58.7% 28.9 33.60 722.7 64.3% 33.6 30.00 718.5 65.2% FY10 38.1 24.00 713.9 50.6% FY11 31.3 19.75 758.3 50.9% DistriButABLE Profit ($m) GEAriNG CoNtiNuiNG ProPErty vALuEs ($m) 38.1m 33.6m 31.3m 68.7% 63.9% 64.3% 65.2% 58.7% 29.4m 28.9m 50.6% 50.9% 613.5m 655.6m 723.8m 722.7m 718.5m 713.9m 758.3m 14.6m 11.7m 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 rELAtivE vALuE PErformANCE Index = 100 600 500 400 300 200 100 0 Nov 03 May 04 Nov 04 May 05 Nov 05 May 06 Nov 06 May 07 Nov 07 May 08 Nov 08 May 09 Nov 09 May 10 Nov 10 May 11 ALE Price with distributions reinvested All Ordinaries Accumulation Index UBS Commercial Property Accumulation Index sources: Asx, irEss, ALE 12 ALE Annual Report 2011 • DirECtors’ rEPort • For the year ended 30 June 2011 9.5 DisCLosurEs rELAtiNG to Equity iNstrumENts GrANtED As ComPENsAtioN 9.5.1 outstanding performance rights over equity instruments granted as compensation Details of performance rights over stapled securities that have been granted as compensation and remain outstanding at year end and details of performance rights that vested during the financial period are as follows: Executive A F O Wilkinson A J Slade A J Slade A J Slade Number of PR Issued 160,026 15,552 30,206 46,164 Grant Date 1 June 2009 30 June 2008 1 July 2008 1 July 2009 Performance period start date Fair value of PR at Grant Date ($) 1 June 2009 1 July 2007 1 July 2008 1 July 2009 1.00 2.57 1.67 1.08 Expiry Date 1 June 2011 30 June 2010 30 June 2011 30 June 2012 Number of PR Vested during 2011 2,3 45,200 4,542 16,222 12,319 1. Stapled Securities were issued at nil cost to the employee. 2. Stapled securities of 12,319 due to Mr Slade and 45,200 due to Mr Wilkinson in relation to the 2009 year grants have a delayed delivery of two years. 3. Stapled securities of 8,516 due to Mr Slade in respect of the 1 July 2008 grant will be issued during the 2012 financial year. Number of Stapled Securities Issued 1 – 4,542 7,706 – 9.5.2 modification of terms of equity settled share based payment transactions No terms of equity settled share based payment transactions (including options and rights granted as compensation to key management personnel) have been altered or modified by the issuing entity during the reporting period or the prior period. 9.5.3 Analysis of performance rights over equity instruments granted as compensation Details of the vesting profiles of performance rights granted as remuneration are detailed below. Executive A F O Wilkinson A J Slade Number 1 Date 160,026 6,813 11,558 12,774 12,898 14,115 21,457 1 June 2009 30 June 2008 1 July 2008 1 July 2008 1 July 2009 1 July 2009 1 July 2009 % vested in year 3 % forfeited in year 2 28.2% 66.7% 66.7% 66.7% 68.2% 23.4% –% 68.8% 33.3% 33.3% 33.3% –% –% –% Financial year in which grant vests 1 June 2011 1 July 2010 1 July 2010 1 July 2011 1 July 2010 1 July 2011 1 July 2012 Hurdle testing (b) (a) (a) (b) (a) (b) In accordance with the Rules of the Plan the number issued has been adjusted during the year for the rights issue that occurred in August 2009. 1. 2. The % forfeited in the year represents the reduction from the maximum number of performance rights available to vest due to performance criteria not being achieved and rights not being subject to any subsequent retesting. 3. The performance rights vesting in relation to 2009 year grants have a delayed delivery of two years. 12 ALE Annual Report 2011 13 ALE Annual Report 2011 (a) These performance rights were tested in the prior year, and as a result in the current year 12,248 performance rights that had vested were issued to Andrew Slade. Additionally 8,801 performance rights under the 1 July 2009 grant vested, but delivery is delayed for two years in accordance with the conditions attaching to the grant. (b) The performance hurdles were tested as at 30 June 2011 with the following results: Grant date A F O Wilkinson 1 June 2009 A J Slade 1 July 2008 1 July 2009 A F O Wilkinson 1 June 2009 A J Slade 1 July 2008 1 July 2009 Result Vested % Retention Absolute TSR Return Relative TSR Ranking Retention Absolute TSR Relative TSR Achieved 13.14% 28.00% 100.00% 22.80% –% Achieved Achieved 6.00% 9.00% 89.30% 28.00% 100.00% 100.00% –% –% 100.00% –% Vested – Number Total Retention Result Absolute TSR Result Relative TSR Result 45,200 32,880 12,320 – 8,516 3,518 4,258 3,518 – – 4,258 – Under the terms of the 2009 year grants to Andrew Slade, the performance hurdles that did not pass will be retested on the subsequent anniversary of the grant. Under the terms of the 2009 year grants to Andrew Wilkinson and Andrew Slade, the stapled securities that are to be issued over performance rights that vested have a delayed delivery date of two years. 9.5.4 Analysis of movements in performance rights The movement during the reporting period, by value of options over stapled securities in ALE is detailed below. Executive A F O Wilkinson A J Slade Granted in year $ (a) – – Vested and exercised in year $ (b) – 24,251 Lapsed in year $ (c) – 5,749 (a) The value of performance rights granted during the year is the assessed fair value at grant date of performance rights granted, allocated equally over the period from grant date to vesting date. The fair value at grant date has been independently determined by using a Black-Scholes option pricing model. (b) The value of performance rights vested during the year is calculated as the market price of the stapled securities of ALE as at the close of trading on the day the performance rights vested. (c) The value of performance rights lapsed during the year is calculated using the market price of the stapled securities of ALE as at the close of trading on the day the performance rights lapsed. 14 ALE Annual Report 2011 • DirECtors’ rEPort • For the year ended 30 June 2011 9.6 Equity BAsED ComPENsAtioN The performance rights value disclosed above as part of specified executive remuneration is the assessed fair value at grant date of performance rights granted, allocated equally over the period from grant date to vesting date. The fair value at grant date has been independently determined by using a Black-Scholes option pricing model. This technique takes into account factors such as the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradable nature of the performance right, the security price at grant date and expected price volatility of the underlying security, the expected distribution yield, the risk-free interest rate for the term of the performance right and any delayed delivery in the securities to the executive. 9.7 NoN-ExECutivE DirECtors’ rEmuNErAtioN 9.7.1 remuneration Policy and strategy Non-executive directors’ individual fees are determined by the ALE Board within the aggregate amount approved by shareholders. The current aggregate amount which has been approved by shareholders at the AGM on 10 November 2010 was $500,000. The Board reviews its fees to ensure that ALE non-executive directors are remunerated fairly for their services, recognising the level of skill, expertise and experience required to conduct the role. The Board reviews its fees from time to time to ensure it is remunerating directors at a level that enables ALE to attract and retain the right non-executive directors. Fees and payments to non-executive directors reflect the demands which are made on them and the responsibilities of the Directors. Non-executive directors’ fees and payments were reviewed in the current financial year, the first review since 2007. The Board may obtain the advice of independent remuneration consultants to ensure that non-executive directors’ fees and payments are appropriate and in line with the market. The Chairman’s fees are determined independently from the fees of the other non-executive directors, based on comparative roles in the external market. The Chairman is not present at any discussion relating to the determination of his own remuneration. Non-executive directors do not receive any equity based payments, retirement benefits or other incentive payments. 9.7.2 remuneration structure ALE non-executive directors receive a cash fee for service and they have no entitlement to any performance based remuneration, nor can they participate in any security based incentive scheme. During FY11, fee increases to non-executive and executive directors (excluding the Managing Director) were made following the review by remuneration consultants Guerdon Associates Pty Limited. These overall increases of 14.00% reflect in part the additional responsibilities undertaken by non-executive directors as members of various committees and increased commitments required of the directors. The last review of directors, Board and Committee fees was in 2007. The current base remuneration was last reviewed with effect from January 2011. The Directors’ fees are inclusive of committee fees. Board ACRMC Remuneration Committee Chairman* Member Chairman Member Chairman Member Board and Committee fees $175,000 $85,000 $15,000 $10,000 $15,000 $5,000 * The Chairman of the Board’s fees are inclusive of all committee fees. James McNally’s (Executive Director) remuneration is determined in accordance with the above fees. He receives an additional $5,000 for being a Responsible Manager of the Company under the Company’s AFSL and $10,000 for being a director of ALE Finance Company Pty Limited. 14 ALE Annual Report 2011 15 ALE Annual Report 2011 9.8 DEtAiLs of rEmuNErAtioN Amount of remuneration Details of the remuneration of the key management personnel for the current year and for the comparative year are set out below in tables 1 and 2. The cash bonuses were dependent on the satisfaction of performance conditions as set out in the section headed “Short term incentives” above. Long term incentives are market and non-market based performance related as set out in section 9.4 above. All other elements of remuneration were not directly related to performance. Table 1 Remuneration details 1 July 2010 to 30 June 2011 Details of the remuneration of the Key Management Personnel for the year 30 June 2011 are set out in the following table: Key management personnel Name Role P H Warne Non-executive Director J P Henderson Non-executive H I Wright Director Non-executive Director Company Secretary B R Howell A F O Wilkinson Executive Director Executive Director J T McNally Capital Manager A J Slade Finance Manager M J Clarke Asset Manager D J Shipway Short term STI Cash Bonus $ Non monetary benefits $ Salary & Fees $ Post employment benefits Long service leave Equity based payment Super- annuation benefits $ Total $ Termination benefits $ Performance Rights $ $ Total $ S300A(1)(e)(i) proportion of remuneration performance based $ S300A(1)(e) (vi) Value of performance rights as proportion of remuneration $ 149,083 92,500 – – 87,156 90,000 342,926 95,000 172,397 148,164 123,269 – – 135,000 – 80,000 35,000 25,000 – 149,083 13,417 – 92,500 – – – – – 6,764 8,917 – 87,156 90,000 477,926 95,000 259,161 192,081 148,269 7,844 – 15,199 – 15,199 13,466 11,094 – – – – 5,200 – 2,853 1,738 328 1,300,495 275,000 15,681 1,591,176 76,219 10,119 – – – – – – – – – – – 162,500 – 92,500 – – 80,000 – – – – 95,000 90,000 578,325 95,000 277,213 207,285 159,691 80,000 1,757,514 – – – – 37.2% – 28.9% 16.9% 15.7% – – – – 13.8% – – – – Table 2 Remuneration details 1 July 2009 to 30 June 2010 Details of the remuneration of the Key Management Personnel for the year 30 June 2010 are set out in the following table: Salary & Fees $ 137,615 85,000 Key management personnel Name Role P H Warne Non-executive Director J P Henderson Non-executive H I Wright Director Non-executive Director B R Howell Company Secretary A F O Wilkinson Executive Director Executive Director J T McNally Capital Manager A J Slade Finance Manager M J Clarke Short term STI Cash Bonus $ Non monetary benefits $ Post employment benefits Long service leave Equity based payment Super- annuation benefits $ Total $ Termination benefits $ Performance Rights $ $ Total $ S300A(1)(e)(i) proportion of remuneration performance based $ S300A(1)(e) (vi) Value of performance rights as proportion of remuneration $ – – – 137,615 12,385 – 85,000 – 77,982 90,000 321,789 90,000 172,274 136,525 – – 100,000 – 60,000 45,000 – – – – – 9,280 77,982 90,000 421,789 90,000 232,274 190,805 7,018 – 14,461 – 14,461 12,554 1,111,185 205,000 9,280 1,325,465 60,879 2,021 – – – – 2,021 – – – – – – – – – – – – – 150,000 – 85,000 – – 80,000 – 50,000 – 85,000 90,000 518,271 90,000 296,735 203,359 130,000 1,518,365 – – – – 34.7% – 37.1% 22.1% – – – – 15.4% – 16.9% – 16 ALE Annual Report 2011 • DirECtors’ rEPort • For the year ended 30 June 2011 10 stAPLED sECuritiEs uNDEr oPtioN No Performance Rights over unissued stapled securities of ALE were granted during or since the end of the year. 11 stAPLED sECuritiEs issuED oN thE ExErCisE of oPtioNs The following stapled securities were issued on the exercise of performance rights during the financial year. Executive A F O Wilkinson A J Slade Number of Stapled Securities Issued – 12,248 12 iNsurANCE of offiCErs During the financial year, the Company paid a premium of $37,350 (2010: $37,750 ) to insure the directors and officers of the Company. The auditors of the Company are in no way indemnified out of the assets of the Company. Under the constitution of the Company, current or former directors and secretaries are indemnified to the full extent permitted by law for liabilities incurred by these persons in the discharge of their duties. The constitution provides that the Company will meet the legal costs of these persons. This indemnity is subject to certain limitations. 13 NoN-AuDit sErviCEs The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Company are important. The Board of Directors has considered the position and in accordance with the advice received from the ACRMC is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed by the ACRMC to ensure that they do not impact the impartiality and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in Professional Statement F1, including reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing economic risk and rewards. Details of amounts paid or payable to the auditor (KPMG) for audit and non-audit services provided during the year are set out below: Audit services KPMG Australian firm: Audit and review of the financial reports of the Group and other audit work required under the Corporations Act 2001 – in relation to current year – in relation to prior year total remuneration for audit services other services KPMG Australian firm: Transaction compliance services total other services 30 June 2011 $ 30 June 2010 $ 164,500 37,500 202,000 167,712 30,000 197,712 – – 150,983 150,983 16 ALE Annual Report 2011 17 ALE Annual Report 2011 14 ENviroNmENtAL rEGuLAtioN While ALE is not subject to significant environmental regulation in respect of its property activities, the directors are satisfied that adequate systems are in place for the management of its environmental responsibilities and compliance with various licence requirements and regulations. Further, the directors are not aware of any material breaches of these requirements. At three properties, ongoing testing and monitoring is being undertaken and minor remediation work is required, however, ALE is indemnified by third parties against any remediation amounts likely to be required. 15 AuDitor’s iNDEPENDENCE DECLArAtioN A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 18. 16 rouNDiNG of AmouNts ALE is an entity of the kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the directors’ report. Amounts in the Directors’ Report and Financial Report have been rounded off in accordance with the Class Order to the nearest thousand dollars, unless otherwise indicated. This report is made in accordance with a resolution of the directors. PEtEr h wArNE DIRECTOR Sydney Dated this 2nd day of August 2011 18 ALE Annual Report 2011 • AuDitor’s iNDEPENDENCE DECLArAtioN • Lead Auditor’s independence Declaration under section 307C of the Corporations Act 2001 To: the directors of Australian Leisure and Entertainment Property Management Limited, the Responsible Entity for Australian Leisure and Entertainment Property Trust. I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June 2011, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. kPmG N virGo PARTNER Sydney 2 August 2011 Liability is limited by a scheme approved under Professional Standards Legislation. 18 ALE Annual Report 2011 19 ALE Annual Report 2011 • stAtEmENt of ComPrEhENsivE iNComE • For the year ended 30 June 2011 Note 2011 $’000 2010 $’000 6 7 17 17 8 10 9 12 revenue Rent from investment properties Interest from cash deposits total revenue other income Discount on debt buybacks Fair Value Increments to investment properties Other income total other income total revenue and other income Expenses Loss on disposal of investment properties Loss on termination of CPI hedging Fair value decrements to investment properties Fair value decrements to derivatives Finance costs (cash and non-cash) Queensland land tax expense Other expenses total expenses Profit/(Loss) before income tax Income tax expense/(benefit) Profit/(Loss) after income tax Profit/(Loss) attributable to stapled securityholders of ALE other comprehensive income other comprehensive income for the period after income tax total comprehensive income for the period Profit/(Loss) attributable to: Members of ALE Non-controlling interest Profit/(Loss) for the period total comprehensive income attributable to: Members of ALE Non-controlling interest total comprehensive income for the period Basic and diluted earnings per stapled security 14(a) The above statement of comprehensive income should be read in conjunction with the accompanying Notes. 50,242 7,296 57,538 197 44,425 33 44,655 102,193 – – – 7,878 37,418 2,422 4,094 51,812 50,381 (489) 50,870 50,870 – – 50,870 50,870 – 50,870 50,870 – 50,870 Cents 32.49 53,330 5,607 58,937 5,661 – 5,661 64,598 1,271 2,025 4,130 33,915 32,027 2,857 3,748 79,973 (15,375) 149 (15,524) (15,524) – – (15,524) (15,524) – (15,524) (15,524) – (15,524) Cents (10.94) 20 ALE Annual Report 2011 • stAtEmENt of fiNANCiAL PositioN • As at 30 June 2011 Current assets Cash and cash equivalents Derivatives Receivables Other total current assets Non-current assets Investment properties Derivatives Plant and equipment Deferred tax asset total non-current assets total assets Current liabilities Payables Borrowings Provisions total current liabilities Non-current liabilities Borrowings Derivatives total non-current liabilities total liabilities Net assets Equity Contributed equity Retained profits Reserve total equity Note 2011 $’000 2010 $’000 15 11 16 17 11 13 18 20 19 20 11 21 22 23 110,178 1,534 11,229 166 123,107 758,275 9,857 74 2,722 770,928 894,035 7,421 71,755 15,448 94,624 437,672 10,351 448,023 542,647 351,388 178,661 172,494 233 351,388 132,062 – 17,807 863 150,732 713,850 21,190 40 2,233 737,313 888,045 6,708 158,185 18,412 183,305 356,610 25,537 382,147 565,452 322,593 169,838 152,572 183 322,593 Net assets per stapled security $2.22 $2.10 The above statement of financial position should be read in conjunction with the accompanying Notes. 20 ALE Annual Report 2011 21 ALE Annual Report 2011 • stAtEmENt of ChANGEs iN Equity • For the year ended 30 June 2011 Note Share Capital $’000 Share based payments reserve $’000 Retained Earning $’000 Total $’000 2011 total equity at the beginning of the year Total comprehensive income for the period Profit/(Loss) for the year Other comprehensive income Total comprehensive income for the year Employee share based payments expense Securities issued – dividend reinvestment plan Vesting of performance rights Distribution paid or payable total equity at the end of the year 2010 total equity at the beginning of the year Total comprehensive income for the period Profit/(Loss) for the year Other comprehensive income Total comprehensive income for the year Employee share based payments expense Securities issued – institutional placement Securities issued – rights issue Securities issued – dividend reinvestment plan Institutional placement and rights issue costs Vesting of performance rights Distribution paid or payable total equity at the end of the year 23 21 23 14 23 21 21 21 21 23 14 The above statement of changes in equity should be read in conjunction with the accompanying Notes. rECoNCiLiAtioN of DistriButioNs to stAPLED sECurityhoLDErs Profit attributable to the stapled securityholders of ALE Adjustments for non-cash items total available for distribution Distribution paid or provided for Available and undistributed for the year 169,838 183 152,572 322,593 – – – – 8,799 24 178,661 – – – 80 – (30) – 233 50,870 – 50,870 – – 6 (30,954) 172,494 50,870 – 50,870 80 8,799 – (30,954) 351,388 64,761 84 204,677 269,522 – – – – 29,596 75,634 4,636 (4,815) 26 169,838 – – – 130 – – – – (31) – 183 Note 14 14 (15,524) – (15,524) – – – – – 5 (36,586) 152,572 (15,524) – (15,524) 130 29,596 75,634 4,636 (4,815) – (36,586) 322,593 2011 $’000 50,870 (19,641) 31,229 30,954 275 2010 $’000 (15,524) 53,594 38,070 36,586 1,484 22 ALE Annual Report 2011 • CAsh fLow stAtEmENt • For the year ended 30 June 2011 Cash flows from operating activities Receipts from tenant and others Payments to suppliers and employees Interest received – bank deposits Interest received – interest rate swaps Borrowing costs paid Net cash inflow from operating activities Cash flows from investing activities Net proceeds from disposal of properties Payments for plant and equipment Net cash inflow from investing activities Cash flows from financing activities Proceeds from ALE Notes 2 issue Proceeds from CMBS issue Borrowing costs paid Proceeds from stapled securities issue Derivatives fair value termination payments Borrowings repaid CPI hedge indexation payment NAB bank debt facility ALE Notes CIB CMBS Distributions paid (net of DRP securities issued) Net cash inflow/(outflow) from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year The above cash flow statement should be read in conjunction with the accompanying Notes. Note 2011 $’000 2010 $’000 50,272 (5,421) 7,857 9,795 (29,668) 32,835 6,250 (64) 6,186 – 160,000 (2,851) – (13,264) (7,393) – (14,134) – (158,108) (25,155) (60,905) (21,884) 132,062 110,178 53,394 (9,207) 4,323 8,539 (26,516) 30,533 98,423 – 98,423 125,000 – (3,405) 100,416 (5,760) (4,692) (55,000) (68,112) (11,476) (83,070) (26,700) (32,799) 96,157 35,905 132,062 15 15 22 ALE Annual Report 2011 23 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 (d) use of estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in the following notes: • Note 4(a) – investment property • Note 4(c) and Note 33 – valuation of financial instruments • Note 24 – measurement of share based payments NotE 3 summAry of siGNifiCANt ACCouNtiNG PoLiCiEs The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented unless otherwise stated. The financial statements include financial statements for the ALE Property Group (“ALE”), consisting of the Australian Leisure and Entertainment Property Trust and its subsidiaries. Summarised financial information in relation to Australian Leisure and Entertainment Trust as the parent entity is presented in Note 34 to the financial statements. (a) Principles of consolidation The financial statements incorporate the assets and liabilities of all subsidiaries as at balance date and the results for the period then ended. The Trust and its controlled entities together are referred to in this financial report as ALE. Entities are fully consolidated from the date on which control is transferred to the Trust. They are deconsolidated from the date that control ceases. Subsidiaries are all those entities (including special purpose entities) over which ALE has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether ALE controls another entity. All balances and effects of transactions between the subsidiaries of ALE have been eliminated in full. NotE 1 rEPortiNG ENtity ALE, the stapled entity, was formed in November 2003 by stapling together the units in the Trust and the shares in the Company. For the purposes of financial reporting, the stapled entity reflects the consolidated entity. The parent entity and deemed acquirer in this arrangement is the Trust. The basis of this approach is consistent with current practice in relation to the financial reporting obligations of stapled entities under UIG 1013 Interpretation Consolidated Financial Reports in relation to Pre-Date-of-Transition Stapled Arrangements. The results reflect the performance of the Trust and its subsidiaries including the Company from 1 July 2010 to 30 June 2011. The stapled securities of ALE are quoted on the Australian Stock Exchange under the code LEP and comprise one unit in the Trust and one share in the Company. The unit and the share are stapled together under the terms of their respective constitutions and cannot be traded separately. Each entity forming part of ALE is a separate legal entity in its own right under the Corporations Act 2001 and Australian Accounting Standards. The Company is the Responsible Entity of the Trust. NotE 2 BAsis of PrEPArAtioN This general purpose financial statement has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. (a) Compliance statement The financial statements are general purpose financial statements which have been prepared in accordance with Australian Accounting Standards (AASs) (including Australian Interpretations) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The financial statements also comply with the International Financial Reporting Standards (IFRS) and interpretations adopted by the International Accounting Standards Board. (b) Basis of measurement The financial statements are prepared on the historical cost basis except for the following: • derivative financial instruments are measured at fair value • financial instruments at fair value through profit or loss are measured at fair value • investment property is measured at fair value The methods used to measure fair values are discussed further in Note 4. (c) functional and presentation currency These financial statements are presented in Australian dollars, which is ALE’s functional currency. ALE is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 (updated by CO 05/641 effective 28 July 2005 and CO 06/51 effective 31 January 2006) and in accordance with that Class Order, all financial information presented in Australian dollars has been rounded to the nearest thousand unless otherwise stated. 24 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 (e) Plant and equipment Plant and equipment including office fixtures, fittings and operating equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to its acquisition. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to ALE and the cost of the item can be reliably measured. All other repairs and maintenance are charged to the Statement of Comprehensive Income during the financial period in which they are incurred. Depreciation Depreciation on depreciable plant and equipment (office fixtures, fittings and operating equipment) is calculated using the straight line method or diminishing method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives. The estimated useful life of depreciable plant and equipment is as follows: Furniture, fittings and equipment Software Leasehold improvements 4–13 years 3 years 3 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the statement of comprehensive income. (f) investments and financial assets Financial assets classified as loans and deposits are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and arise when money and services are provided to a debtor with no intention of selling the receivable. Loans and receivables are carried at amortised cost using the effective interest rate method. Under this method, fees, costs, discounts and premiums directly related to the financial asset are spread over its effective life. (g) trade and other payables These amounts represent liabilities for goods and services provided to ALE prior to the end of the period which are unpaid at the balance sheet date. The amounts are unsecured and are usually paid within 30 days of recognition. NotE 3 summAry of siGNifiCANt ACCouNtiNG PoLiCiEs (CoNtiNuED) (b) investment property Properties (including land and buildings) held for long term rental yields and that are not occupied by ALE are classified as investment properties. Investment property is initially brought to account at cost which includes the cost of acquisition, stamp duty and other costs directly related to the acquisition of the properties. The properties are subsequently revalued and carried at fair value. Fair value is based on active market prices, adjusted for any difference in the nature, location or condition of the specific asset or where this is not available, an appropriate valuation method which may include discounted cash flow projections and the capitalisation method. The fair value reflects, among other things, rental income from the current leases and assumptions about future rental income in light of current market conditions. It also reflects any cash outflows that could be expected in respect of the property. Subsequent expenditure is capitalised to the properties’ carrying amount only when it is probable that future economic benefits associated with the item will flow to ALE and the cost of the item can be reliably measured. Maintenance and capital works expenditure is the responsibility of the tenant under the triple net leases in place over 84 of the 87 properties. For the remaining three hotels capital works expenditure and structural maintenance is the responsibility of ALE. ALE undertakes periodic condition and compliance reviews by a qualified independent consultant to ensure properties are properly maintained. Land and buildings (including integral plant and equipment) that comprise investment property are not depreciated. The carrying value of the investment property is reviewed at each reporting date and each property is independently revalued at least every three years. Changes in the fair values of investment properties are recorded in the Statement of Comprehensive Income. Gains and losses on disposal of a property are determined by comparing the net proceeds on disposal with the carrying amount of the property at the date of disposal. Net proceeds on disposal are determined by subtracting disposal costs from the gross sale proceeds. (c) Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents includes cash at bank, deposits at call and short term money market securities which are readily convertible to cash. (d) receivables Trade debtors are recognised initially at fair value and subsequently measured at amortised cost, less provision for doubtful debts. Trade receivables are generally due for settlement within 30 days. Collectibility of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for doubtful receivables is established when there is objective evidence that all amounts due may not be collected according to the original terms of the receivables. The amount of any provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the statement of comprehensive income. 24 ALE Annual Report 2011 25 ALE Annual Report 2011 (h) Borrowings Interest bearing liabilities are initially recognised at cost, being the fair value of the consideration received, net of issue and other transaction costs associated with the borrowings. After initial recognition, interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method. Under this method, fees, costs, discounts and premiums directly related to the financial liability are spread over the expected life of the borrowings on an effective interest rate basis. Interest bearing liabilities are classified as current liabilities unless an unconditional right exists to defer settlement of the liability for at least 12 months after the balance sheet date. (i) Derivatives ALE documents, at the inception of any hedging transaction, the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. ALE also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of various derivative financial instruments used for hedging purposes are disclosed in Note 11. To date ALE has not designated any of its derivatives as cash flow hedges or fair value hedges and accordingly ALE has valued them all at fair value with movements recorded in the Statement of Comprehensive Income. (j) Provisions Provisions are recognised when there is a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses. (k) Distributions and dividends Provisions are made for the amounts of any distributions or dividends declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the financial year but not distributed at the balance date. Interest and investment income is brought to account on a time proportion basis using the effective interest rate method and if not received at balance date is reflected in the statement of financial position as a receivable. (n) Expenses Expenses including operating expenses, Queensland land tax and other outgoings (if any) are brought to account on an accruals basis. Borrowing costs are recognised using the effective interest rate method. (o) Employee benefits (i) Wages and salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits and annual leave due to be settled within 12 months of the reporting date, are recognised as a current liability in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for accumulating sick leave are recognised as an expense when the leave is taken and measured at the rates paid or payable. (ii) Share based payments The grant date fair value of performance rights granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the performance rights. The amount recognised as an expense is adjusted to reflect the actual number of performance rights that vest, except for those that fail to vest due to performance hurdles not being met. The fair value at grant date is independently determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the performance right, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the performance right, the share price at grant date and expected price volatility of the underlying security, the expected dividend yield and the risk-free interest rate for the term of the performance right. The fair value of the performance rights granted excludes the impact of any non-market vesting conditions. Non-market vesting conditions are included in assumptions about the number of performance rights that are expected to become exercisable. At each balance date, the entity revises its estimate of the number of performance rights that are expected to become exercisable. The employee benefit expense recognised each period takes into account the most recent estimate. (l) Contributed equity Ordinary units and ordinary shares are classified as contributed equity. Incremental costs directly attributable to the issue of new units, shares or options are shown in contributed equity as a deduction, net of tax, from the proceeds. Distributions to stapled securityholders that include a return of capital are shown in equity as a transfer from (or reduction of) contributed equity. Upon the exercise of performance rights, the balance of the share based payments reserve relating to those performance rights is transferred to contributed equity. (iii) Bonus plans Liabilities and expenses for bonuses are recognised where contractually obliged or where there is a past practice that has created a constructive obligation. (m) revenue recognition Rental income from operating leases is recognised on a straight line basis over the lease term. Rentals that are based on the future amount that changes other than the passage of time, including CPI linked rental increases, are only recognised when contractually due. An asset will be recognised to represent the portion of an operating lease revenue in a reporting period relating to fixed increases in operating lease revenue in future periods. These assets will be recognised as a component of investment properties. (iv) Long service leave ALE recognises liabilities for long service leave when employees reach a qualifying period of continuous service (five years). The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with the terms to maturity and currency that match, as closely as possible, the estimated future cash flow. 26 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 (v) Retirement benefit obligations ALE pays fixed contributions to employee nominated superannuation funds and ALE’s legal or constructive obligations are limited to these contributions. The contributions are recognised as an expense as they become payable. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. (p) income tax (i) Trusts Under current legislation, Trusts are not liable for income tax, provided that their taxable income and taxable realised gains are fully distributed to securityholders each financial year. (ii) Companies The income tax expense or benefit for the reporting period is the tax payable on the current reporting period’s taxable income, based on the Australian company tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of the assets and liabilities and their carrying amounts in the financial statements and to unused tax losses. Deferred tax balances are calculated using the balance sheet method. Under this method, temporary differences arise between the carrying amount of assets and liabilities in the financial statements and the tax bases for the corresponding assets and liabilities. However, an exception is made for certain temporary differences arising from the initial recognition of an asset or liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. Similarly, no deferred tax asset or liability is recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities settled. Deferred tax assets are recognised for temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. (q) Earnings per stapled security (i) Basic earnings per stapled security Basic earnings per stapled security are calculated by dividing the profit attributable to the equity holders of ALE by the weighted average number of stapled securities outstanding during the reporting period. (ii) Diluted earnings per stapled security Diluted earnings per stapled security adjusts the figures used in the determination of basic earnings per stapled security to take into account the after income tax effect of interest and other financing costs associated with dilutive potential stapled securities and the weighted average number of stapled securities assumed to have been issued for no consideration in relation to dilutive potential stapled securities. (r) Goods and services tax (Gst) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flow. (s) financial risk management ALE’s activities expose it to a variety of financial risks – market risk, credit risk and liquidity risk. ALE’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of ALE. ALE uses derivative financial instruments such as interest rate swaps and CPI Hedges to hedge certain risk exposures (Notes 5 and 33 provide further information). (t) New accounting standards and uiG interpretation A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 July 2010, and have not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the Group, except for AASB 9 Financial Instruments, which becomes mandatory for the Group’s 2014 consolidated financial statements and could change the classification and measurement of financial assets. The Group does not plan to adopt this standard early and the extent of the impact has not yet been determined. (u) segment reporting An operating segment is a component of ALE that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of ALE’s other entities. All operating segments’ operating results are regularly reviewed by ALE’s Managing Director to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results that are reported to the Managing Director include items directly attributable to a segment, as well as those that can be allocated on a reasonable basis. 26 ALE Annual Report 2011 27 ALE Annual Report 2011 NotE 4 DEtErmiNAtioN of fAir vALuEs A number of ALE’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (a) investment property Investment property is property which is held either to earn rental income or for capital appreciation or for both. Investment property is measured at fair value with any change therein recognised in profit or loss. ALE has a valuation process for determining the fair value at each reporting date. An independent valuer, having an appropriate professional qualification and recent experience in the location and category of property being valued, values individual properties every three years on a rotation basis or on a more regular basis if considered appropriate and as determined by management in accordance with the Board’s approved valuation policy. These external independent valuations are taken into consideration when determining the fair value of the investment properties. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The average weighted lease term of the properties is 17 years. The valuations of each independent property are prepared by considering the aggregate of the net annual passing rental receivable from the individual properties and where relevant, associated costs. A capitalisation rate, which reflects the specific risks inherent in the net cash flows, is then applied to the net annual passing rentals to arrive at the property valuation. The independent valuer may have regard to other valuation methods in cross-checking the primary capitalisation of income method. A table showing the range of capitalisation rates applied to individual properties for each state in which the property is held is included below. New South Wales Victoria Queensland South Australia Western Australia 2011 yields 5.90% – 7.69% 5.35% – 7.06% 5.10% – 6.95% 6.39% – 6.78% 6.26% – 7.33% 2010 Yields 5.80% – 7.30% 5.50% – 7.25% 5.80% – 7.25% 6.50% – 6.80% 6.00% – 6.80% 2011 Average 6.76% 6.33% 6.38% 6.66% 6.88% 2010 Average 6.68% 6.65% 6.53% 6.68% 6.60% Valuations reflect, where appropriate, the tenant in occupation, the credit worthiness of the tenant, the triple-net nature of the leases (84 of 87 properties), land tax (Queensland only) and insurance responsibilities between lessor and lessee, and the remaining economic life of the property. It has been assumed that whenever rent reviews or lease renewals are pending with anticipated reversionary increases, all notices, and where appropriate, counter-notices have been served validly and within the appropriate time. (b) trade and other receivables The fair value of trade and other receivables, excluding construction work-in-progress, is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. (c) Derivatives The fair value of interest rate swaps is based on mark-to-market valuation provided by swap counterparties. Those mark to market quotes are tested for reasonableness by discounting estimated future cash flows based on the terms and maturity of each contract and using the appropriate market interest rates (including credit margins where appropriate) for a similar instrument at the measurement date. The fair value of CPI hedges are calculated based on the present value of future principal and interest cash flows, discounted at the appropriate market rate of interest (including credit margins where appropriate) as at the reporting date. 28 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 5 fiNANCiAL risk mANAGEmENt overview The Trust and Group have exposure to the following risks from their use of financial instruments: • credit risk • liquidity risk • market risk This note presents information about ALE’s exposure to each of the above risks, their objectives, policies and processes for measuring and managing risk, and the management of capital. Further quantitative disclosures are included throughout this financial report. The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. The Board has established an Audit, Compliance and Risk Management Committee, which is responsible for developing and monitoring risk management policies. The committee reports regularly to the Board of Directors on its activities. Risk management policies are established to identify and analyse the risks faced by ALE, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and ALE’s activities. ALE, through its training and management standards and procedures, has developed a disciplined and constructive control environment in which all employees understand their roles and obligations. The Audit Compliance and Risk Management Committee oversees how management monitors compliance with ALE’s risk management policies and procedures and reviews the adequacy of the risk management framework. Credit risk Credit risk is the risk of financial loss to ALE if its tenant or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from ALE’s receivables from the tenant, investment securities and derivatives contracts. Trade and other receivables ALE’s exposure to credit risk is influenced mainly by the individual characteristic of its tenant. ALE has one tenant (Australian Leisure and Hospitality Group Limited) and therefore there is significant concentration of credit risk with that tenant. Credit risk has been minimised primarily by ensuring, on a continuous basis, that the tenant has appropriate financial standing. There are also cross default provisions in the leases and the properties are essential to the tenant’s business operations. Liquidity risk Liquidity risk is the risk that ALE will not be able to meet its financial obligations as they fall due. ALE’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to ALE’s reputation. ALE manages its liquidity risk by using detailed forward cash flow planning and by maintaining strong relationships with banks and investors in the capital markets. ALE has liquidity risk management policies which assist it in monitoring cash flow requirements and optimising its cash return on investments. Typically ALE ensures that it has sufficient cash on demand to meet expected operational expenses and commitments for the purchase/sale of assets for a period of 90 days (or longer if deemed necessary), including the servicing of financial obligations. market risk Market risk is the risk that changes in market prices, such as the consumer price index and interest rates, will affect ALE’s income or the value of its holdings of leases and financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. ALE enters into derivatives and financial liabilities in order to manage market risks. All such transactions are carried out within the guidelines set by the Audit, Compliance and Risk Management Committee. Interest rate risk and consumer price index risk ALE adopts a policy of ensuring that all exposure to changes in interest rates on borrowings is hedged. This is achieved by entering into interest rate swaps to fix the interest rate and CPI hedges to match, where possible, liability movements with movement in property values. Property valuation risk ALE owns a number of investment properties. Those property valuations may increase or decrease from time to time. Some of ALE’s financing facilities contain gearing covenants. ALE reviews the risk of gearing covenant breaches by constantly monitoring gearing levels and has contingency capital management plans to ensure that sufficient headroom is maintained. Capital management ALE regards share capital and some of its financial liabilities as capital, and monitors and manages these to address risks and add value where appropriate. The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board of Directors monitors the return on capital, which ALE defines as distributable income divided by total shareholders’ equity, excluding minority interests. The Board of Directors also monitors the level of gearing. The Board seeks to maintain a balance between the higher returns that may be achieved with higher levels of borrowings and the advantages and security afforded by a sound capital position. While ALE does not have a specific return on capital target, it seeks to ensure that capital is being most efficiently used at all times. In seeking to manage its capital efficiently, ALE from time to time may undertake on-market buybacks of ALE stapled securities, ALE Notes and ALE Notes 2. ALE has also previously made ongoing capital distribution payments to stapled securityholders on a fully transparent basis. Additionally, the available total returns on all new acquisitions are tested against the anticipated weighted cost of capital at the time of the acquisition. ALE assesses the adequacy of its capital requirements, cost of capital and gearing as part of its broader strategic plan. Gearing ratios are monitored in the context of any increase or decrease from time to time based on existing property value movements, acquisitions completed, the levels of debt financing used and a range of prudent financial metrics, both at the time and on a projected basis going forward. The outcomes of ALE’s strategic planning process plays an important role in determining acquisition and financing priorities over time. The total gearing ratios at 30 June 2011 and 30 June 2010 were 60.7% and 63.7% respectively. The net gearing ratios at 30 June 2011 and 30 June 2010 were 50.9% and 50.6% respectively. 28 ALE Annual Report 2011 29 ALE Annual Report 2011 NotE 6 rENt from iNvEstmENt ProPErtiEs Rent from continuing properties Rent from properties sold 2011 $’000 2010 $’000 50,199 43 50,242 48,857 4,473 53,330 During the current and previous financial years, ALE’s investment property lease rentals were reviewed to state based CPI annually and are not subject to fixed increases, apart from the lease for the Pritchard’s Hotel which has fixed increases. During the previous financial year properties were sold. Settlement on one property occurred in July 2010 and ALE was entitled to receive rent for the property until settlement occurred. NotE 7 iNtErEst iNComE Operating bank and term deposit interest 7,296 5,607 As at 30 June 2011 the weighted average interest rate earned on cash was 5.62% (2010: 5.73%) NotE 8 CurrENt yEAr fAir vALuE ADJustmENts to DErivAtivEs Fair value increments/(decrements) to interest rate swap derivatives Fair value increments/(decrements) to CPI hedge derivatives NotE 9 othEr ExPENsEs Annual reports Audit, accounting, tax and professional fees Corporate advisory services Depreciation expense – plant and equipment Insurance Legal fees Dispute costs Occupancy costs Other expenses Property condition and compliance audits Registry fees Salaries, fees and related costs Staff training Travel and accommodation Trustee and custodian fees (6,682) (1,196) (7,878) 56 267 102 30 115 244 200 132 427 111 94 2,104 37 37 138 4,094 (11,238) (22,677) (33,915) 73 264 97 46 97 223 300 122 332 141 125 1,705 33 43 147 3,748 30 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 10 fiNANCE Costs (CAsh AND NoN-CAsh) finance costs – cash Capital Indexed Bonds (CIB) Commercial Mortgage Backed Securities (CMBS) National Australia Bank Loan Facility ALE Notes ALE Notes 2 Interest rate derivative payments/(receipts) Other finance expenses finance costs – non-cash Accumulating indexation – CIB Accumulating indexation – CPI Hedges Amortisation – CIB and CMBS Amortisation – NAB facility Amortisation – CPI Hedges Amortisation – ALE Notes Amortisation – ALE Notes premium Amortisation – ALE Notes 2 finance costs (cash and non-cash) (i) Amounts represent gross cash finance costs before derivative payments and receipts. (ii) Other borrowing costs such as rating agency fees and liquidity fees. (iii) Establishment costs of the various borrowings are amortised over the period of the borrowing on an effective rate basis. (iv) Premium of $2.50 per outstanding note payable on maturity of ALE Notes is accruing over the period of November 2003 to September 2011 on an effective rate basis. NotE 11 DErivAtivEs Current assets Non current assets Total assets Non current liabilities Net assets/(liabilities) Note 20(a) 20(b) 20(d) 20(e) 20(f) 20 (ii) (i) 20(a) 20(c) (iii) (iii) (iii) (iii) (iv) (iii) 2011 $’000 2010 $’000 4,408 8,568 – 5,653 11,063 (9,840) 251 20,103 3,637 10,464 327 – 14 1,880 311 682 17,315 37,418 4,553 8,099 2,416 9,642 1,864 (8,758) 212 18,028 2,666 8,481 259 206 4 1,727 547 109 13,999 32,027 1,534 9,857 11,391 (10,351) 1,040 – 21,190 21,190 (25,537) (4,347) instruments used by ALE ALE uses derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest rates and the consumer price index in accordance with ALE’s financial risk management policies. As at balance date, ALE has hedged all non CIB net borrowings through the use of CPI Hedges. In addition to CPI Hedges, interest rates on certain floating rate borrowings had previously been subject to interest rate swaps. Following the implementation of the CPI Hedges the interest rates swaps were no longer required and were matched with counter swaps. Interest rate swaps and CPI Hedges are carried on the statement of financial position at fair value. Changes in the mark to market fair value of these derivatives are recognised in the Statement of Comprehensive Income. Note 20 contains further information on the derivative financial instruments in place over current net borrowings. 30 ALE Annual Report 2011 31 ALE Annual Report 2011 NotE 12 iNComE tAx Current tax expense/(benefit) Deferred tax expense income tax expense/(benefit) Deferred income tax expense included in income tax expense/(benefit) comprises: Decrease/(increase) in deferred tax asset (Note 13) reconciliation of income tax expense to prima facie tax payable Profit/(loss) before income tax expense Profit/(loss) attributable to entities not subject to tax Profit/(loss) before income tax expense subject to tax Tax at the Australian tax rate of 30% Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Share based payments Other Under/(over) provision in prior years income tax expense/(benefit) NotE 13 DEfErrED tAx AssEts Deferred tax asset the balance is attributable to: Derivatives – interest rate swaps Employee benefits Acquisition proposal due diligence costs Amortised borrowing costs Accruals Other items Tax losses Net deferred tax assets movements: Opening balance Credited/(charged) to the income statement (Note 12) Credited/(charged) to equity Closing balance Deferred tax assets to be recovered within 12 months Deferred tax assets to be recovered after more than 12 months 2011 $’000 – (489) (489) (489) (489) 50,381 52,088 (1,707) (513) 24 – – (489) 2010 $’000 1 148 149 148 148 (15,375) (15,680) 305 92 39 23 (5) 149 2,722 2,233 1,330 13 5 (430) 128 (6) 1,682 2,722 2,233 489 – 2,722 140 2,582 2,722 2,187 3 4 (246) 128 (15) 172 2,233 2,381 (148) – 2,233 206 2,027 2,233 32 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 14 DistriButioNs AND EArNiNG PEr stAPLED sECurity Reconciliation of profit after tax to amounts available for distribution: Profit after income tax for the year Plus/(less) Loss/(profit) on sale of investment properties Fair value decrements to investment properties Fair value increments/(decrements) to derivatives Employee share based payments Finance costs – non cash Income tax expense/(benefit) Adjustments for non-cash items total available for distribution Distribution paid or provided for Available and under/(over) distributed for the year Weighted average number of stapled securities used as the denominator in calculating earnings per stapled security at (a) and (b) below Weighted average number of stapled securities and potential stapled securities used as the denominator in calculating diluted earnings per stapled security Stapled securities on issue at the end of the year used in calculating total available for distribution per stapled security at (c) below (a) Basic and diluted earnings per stapled security (b) Basic and diluted earnings per stapled security excluding non cash items (Distributable Profit) (c) Total available for distribution (d) Distribution per stapled security (e) Available and under/(over) distributed for the year cps = cents per security. Note 2011 $’000 2010 $’000 (a) 50,870 (15,524) 10 (b) (d) (e) – (44,425) 7,878 80 17,315 (489) (19,641) 31,229 30,954 275 1,271 4,130 33,915 130 13,999 149 53,594 38,070 36,586 1,484 Number of stapled securities on issue Number of Stapled Securities On Issue 156,564,420 141,837,573 156,564,420 141,837,573 157,990,976 153,354,571 2011 cps 32.49 19.95 19.77 19.75 0.02 2010 cps (10.94) 26.84 24.82 24.00 0.82 32 ALE Annual Report 2011 33 ALE Annual Report 2011 NotE 15 CAsh AssEts AND CAsh EquivALENts Cash at bank and in hand Deposits at call Cash reserve An amount of $8.4 million is required to be held as a cash reserve as part of the terms of the CMBS and CIB issues in order to provide liquidity for CMBS and CIB obligations to scheduled maturities of 20 May 2015 and 20 November 2023 respectively. During the year ended 30 June 2011 all cash assets were placed on deposit with either the National Australia Bank Limited, Westpac Banking Corporation, Commonwealth Bank of Australia Limited, Bankwest Limited, or Macquarie Bank Limited. As at 30 June 2011, the weighted average interest rate on all cash assets was 5.62% (2010: 5.73%). Reconciliation of profit after income tax to net cash inflows from operating activities Profit for the year Plus/(less): Fair value decrements/(increments) to investment property Fair value decrements/(increments) to derivatives Finance costs amortisation Loss/(gain) on disposal of investment property Discount of debt buybacks Accumulated indexation on CIB Accumulated indexation on CPI Hedges Share based payments expense Depreciation Decrease/(increase) in receivables Decrease/(increase) in deferred tax asset Decrease/(increase) in other assets Increase/(decrease) in payables Increase/(decrease) in provisions Net cash inflow from operating activities for the year 2011 $’000 2010 $’000 9,494 92,294 8,390 110,178 3,494 123,068 5,500 132,062 50,870 (15,524) (44,425) 7,878 3,214 – (197) 3,637 10,464 80 30 328 (489) 697 713 35 32,835 4,130 33,915 2,852 1,271 (5,661) 2,666 8,481 130 46 (1,638) 148 (781) 510 (12) 30,533 (a) During February/March 2010 five properties were sold. Settlement of one of these properties occurred post 30 June 2010, therefore proceeds from that disposal of property were received in the current year. (b) Distribution payments totalling $8,799,000 were satisfied by the issue of securities under the Distribution Reinvestment Plan. 34 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 16 rECEivABLEs Accounts receivable Land resumption compensation receivable Net property sale proceeds receivable Interest receivable NotE 17 iNvEstmENt ProPErtiEs Investment properties – at fair value reconciliation A reconciliation of the carrying amounts of investment properties at the beginning and end of the year is set out below: Carrying amount at beginning of the year Disposals – at fair value Resumptions – at fair value Net gain/(loss) from fair value adjustments Carrying amount at the end of the year 2011 $’000 1,250 8,080 – 1,899 11,229 2010 $’000 1,061 8,080 6,250 2,416 17,807 758,275 713,850 713,850 – – 44,425 758,275 804,765 (78,705) (8,080) (4,130) 713,850 All investment properties are freehold and 100% owned by ALE and comprise land, buildings and fixed improvements. The plant and equipment, liquor, gaming licences and certain development rights are held by the tenant. Leasing arrangements 84 of the 87 properties in the portfolio are leased to ALH on a triple net basis for 25 years, mostly starting in November 2003, with four 10 year options for ALH to renew. The remaining three properties are leased on long term leases to ALH on a double net basis. valuation of investment properties The basis of valuation of investment properties is fair value, being the amounts for which the properties could be exchanged between willing parties in an arm’s length transaction, based on current prices in an active market for similar properties in the same location and condition and subject to similar leases. As at 30 June 2011 the weighted average investment property capitalisation rate used to determine the value of all investment properties was 6.44% (2010: 6.60%). independent valuations as at 30 June 2011 In accordance with ALE’s policy of independently valuing at least one-third of its property portfolio annually, 29 properties were independently valued as at 30 June 2011. The independent valuations are identified as “A” in the investment property table under the column labelled “Valuation type and date”. These valuations were completed by Urbis Valuations. Directors’ valuations as at 30 June 2011 29 of ALE’s portfolio of 87 properties were independently valued as at 30 June 2011. The remaining 58 properties were subject to Directors’ valuations as at 30 June 2011, identified as “B”. The Directors’ valuations of the 58 properties were determined by taking each property’s net rent as at 30 June 2011 and capitalising it at a rate equal to the prior year capitalisation rate for that property, adjusted by the average change in capitalisation rate evident in the 29 independent valuations completed at 30 June 2011 on a state by state basis. 34 ALE Annual Report 2011 35 ALE Annual Report 2011 NotE 17 iNvEstmENt ProPErtiEs (CoNtiNuED) Property Date acquired Cost including additions $’000 Valuation type and date fair value at 30 June 2011 $’000 Fair value at 30 June 2010 $’000 fair value gains/(losses) 30 June 2011 $’000 New south wales Blacktown Inn, Blacktown Brown Jug Hotel, Fairfield Heights Colyton Hotel, Colyton Crows Nest Hotel, Crows Nest Melton Hotel, Auburn Narrabeen Sands Hotel, Narrabeen New Brighton Hotel, Manly Pioneer Tavern, Penrith Pritchard’s Hotel, Mount Pritchard Smithfield Tavern, Smithfield total New south wales properties queensland Albany Creek Tavern, Albany Creek Alderley Arms Hotel, Alderley Anglers Arms Hotel, Southport Balaclava Hotel, Cairns Breakfast Creek Hotel, Breakfast Creek Burleigh Heads Hotel, Burleigh Heads Camp Hill Hotel, Camp Hill Chardons Corner Hotel, Annerly Dalrymple Hotel, Townsville Edge Hill Tavern, Manoora Edinburgh Castle Hotel, Kedron Four Mile Creek, Strathpine Hamilton Hotel, Hamilton Holland Park Hotel, Holland Park Kedron Park Hotel, Kedron Park Kirwan Tavern, Townsville Lawnton Tavern, Lawnton Miami Tavern, Miami Mount Gravatt Hotel, Mount Gravatt Mount Pleasant Tavern, Mackay Noosa Reef Hotel, Noosa Heads Nudgee Beach Hotel, Nudgee Palm Beach Hotel, Palm Beach Pelican Waters, Caloundra Prince of Wales Hotel, Nundah Racehorse Hotel, Booval Redland Bay Hotel, Redland Bay Royal Exchange Hotel, Toowong Springwood Hotel, Springwood Stones Corner Hotel, Stones Corner Vale Hotel, Townsville Wilsonton Hotel, Toowoomba total queensland properties Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Mar-09 Nov-03 Nov-03 Oct-07 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-08 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Jun-04 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Jun-04 Nov-03 Nov-03 Jun-04 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 5,472 5,660 8,208 8,772 3,114 8,945 8,867 5,849 21,130 4,151 80,168 8,396 3,303 4,434 3,304 10,659 6,685 2,265 1,416 3,208 2,359 3,114 3,672 6,604 3,774 2,265 4,434 4,434 4,057 3,208 1,794 6,874 3,020 6,886 4,237 3,397 1,794 5,189 5,755 9,150 5,377 5,661 4,529 B A B B B A B A A B B A B B B B A B B B B A B B B B B B A B B A B A A B A A B B A B 8,000 8,450 12,800 11,850 5,150 10,325 12,050 8,725 18,300 6,190 7,930 8,140 12,690 11,750 5,110 10,020 11,950 8,460 18,710 6,140 101,840 100,900 11,070 4,925 7,210 5,310 13,530 10,790 3,150 1,770 5,200 4,270 4,530 5,775 8,620 5,970 3,190 7,840 6,590 7,980 4,650 3,080 11,680 3,975 10,560 6,250 5,375 2,520 6,900 8,200 12,760 8,450 9,450 7,430 10,160 4,600 6,550 4,830 11,760 9,840 2,980 1,600 4,820 3,920 4,260 5,380 6,530 5,500 2,850 7,210 6,030 6,620 4,440 2,950 10,650 3,770 9,580 6,020 4,970 1,610 3,800 7,620 11,710 7,810 8,950 6,820 70 310 110 100 40 305 100 265 (410) 50 940 910 325 660 480 1,770 950 170 170 380 350 270 395 2,090 470 340 630 560 1,360 210 130 1,030 205 980 230 405 910 3,100 580 1,050 640 500 610 145,254 219,000 196,140 22,860 36 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 17 iNvEstmENt ProPErtiEs (CoNtiNuED) Property Date acquired Cost including additions $’000 Valuation type and date fair value at 30 June 2011 $’000 Fair value at 30 June 2010 $’000 fair value gains/(losses) 30 June 2011 $’000 south Australia Aberfoyle Hub Tavern, Aberfoyle Park Eureka Tavern, Salisbury Exeter Hotel, Exeter Finsbury Hotel, Woodville North Gepps Cross Hotel, Blair Athol Hendon Hotel, Royal Park Stockade Tavern, Salisbury total south Australian properties victoria Ashley Hotel, Braybrook Bayswater Hotel, Bayswater Berwick Inn, Berwick Blackburn Hotel, Blackburn Blue Bell Hotel, Wendouree Boundary Hotel, East Bentleigh Burvale Hotel, Nunawading Club Hotel – FTG, Ferntree Gully Cramers Hotel, Preston Deer Park Hotel, Deer Park Doncaster Inn, Doncaster Ferntree Gully Hotel/Motel, Ferntree Gully Gateway Hotel, Corio Keysborough Hotel, Keysborough Mac’s Melton Hotel, Melton Meadow Inn Hotel/Motel, Fawkner Mitcham Hotel, Mitcham Morwell Hotel, Morwell Olinda Creek Hotel, Lilydale Pier Hotel, Frankston Plough Hotel, Mill Park Prince Mark Hotel, Doveton Royal Exchange, Traralgon Sandbelt Club Hotel, Moorabbin Sandown Park Hotel/Motel, Noble Park Sandringham Hotel, Sandringham Somerville Hotel, Somerville Stamford Inn, Rowville Sylvania Hotel, Campbellfield Tudor Inn, Cheltenham The Vale Hotel, Mulgrave Victoria Hotel, Shepparton Village Green Hotel, Mulgrave Young & Jackson, Melbourne total victorian properties Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Feb-06 Nov-03 Nov-03 Jun-08 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 Nov-03 3,303 3,303 1,888 1,605 2,171 1,605 4,435 18,310 3,963 9,905 15,888 9,433 1,982 17,943 9,717 5,095 8,301 6,981 12,169 4,718 3,114 9,622 6,886 8,113 8,584 1,511 3,963 8,019 8,490 9,810 2,171 10,849 6,321 4,529 2,642 12,733 5,377 5,472 5,566 2,265 12,546 6,132 A A B A B B B B B B A B B B B B A B B B B A A A B B B B B B A A B B B B A A B A B 5,250 5,425 3,300 2,800 3,910 2,890 6,970 5,120 5,290 3,210 2,680 3,800 2,810 6,770 30,545 29,680 6,560 16,710 18,310 13,375 3,990 19,425 15,590 8,900 14,000 11,325 18,620 8,740 5,900 13,610 10,825 12,750 13,050 3,270 6,430 11,680 12,320 15,500 4,550 16,400 9,625 8,550 5,230 18,690 9,390 8,900 8,800 4,330 17,200 9,440 6,190 15,780 17,220 12,650 3,770 19,810 14,720 8,400 13,220 10,630 17,580 8,250 5,570 12,850 10,160 11,980 12,260 3,090 6,070 11,030 11,630 14,630 4,300 15,510 9,110 8,070 4,940 17,640 8,860 8,420 8,330 4,090 16,290 8,910 130 135 90 120 110 80 200 865 370 930 1,090 725 220 (385) 870 500 780 695 1,040 490 330 760 665 770 790 180 360 650 690 870 250 890 515 480 290 1,050 530 480 470 240 910 530 250,810 381,985 361,960 20,025 36 ALE Annual Report 2011 37 ALE Annual Report 2011 NotE 17 iNvEstmENt ProPErtiEs (CoNtiNuED) Property Date acquired Cost including additions $’000 Valuation type and date fair value at 30 June 2011 $’000 Fair value at 30 June 2010 $’000 fair value gains/(losses) 30 June 2011 $’000 western Australia Balmoral Hotel, East Victoria Park The Brass Monkey Hotel, Northbridge Queens Tavern, Highgate Sail & Anchor Hotel, Fremantle total western Australian properties total investment properties Jul-07 Nov-07 Nov-03 Nov-03 6,377 7,815 4,812 3,114 22,118 516,660 reconciliation of fair value gains/losses for year ending 30 June 2011 Fair value as at 30 June 2010 Disposals during the year ended 30 June 2011 Additions during year ended 30 June 2011 Carrying amount before 30 June 2011 valuations Fair value as at 30 June 2011 fair value gain/(loss) for year ended 30 June 2011 A B A B 5,775 7,350 7,200 4,580 24,905 6,150 7,400 6,990 4,630 25,170 (375) (50) 210 (50) (265) 758,275 713,850 44,425 713,850 – – 713,850 758,275 44,425 valuation type and date A Independent valuations conducted during June 2011 with a valuation date of 30 June 2011. B Directors’ valuations conducted during June 2011 with a valuation date of 30 June 2011. 38 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 18 PAyABLEs Trade creditors Interest accrued on CIB Interest accrued on CMBS Interest accrued on ALE Notes Interest accrued on ALE Notes 2 Other accruals NotE 19 ProvisioNs Provision for distribution Provision for annual leave NotE 20 BorrowiNGs Current borrowings CMBS – maturing May 2011 ALE Notes – maturing September 2011 Non-current borrowings CIB – maturing November 2023 CMBS – maturing May 2016 CPI Hedge – maturing November 2023 CPI Hedge – repaid NAB Facility – repaid ALE Notes – maturing September 2011 ALE Notes 2 – maturing August 2014 The maturity dates indicated are the scheduled maturity dates. Capital indexed Bonds (CiB) Opening balance Repayment of borrowings Accumulating indexation Amortisation of establishment costs Closing balance Commercial mortgage Backed securities (CmBs) Opening balance Proceeds from CMBS issue Repayment of borrowings Borrowing establishment costs capitalised Amortisation of establishment costs Closing balance Note (b) (e) (a) (b) (c) (c) (d) (e) (f) 2011 $’000 247 499 1,962 1,285 1,295 2,133 7,421 15,404 44 15,448 – 71,755 71,755 130,022 157,225 28,030 – – – 122,395 437,672 126,349 – 3,637 36 130,022 158,185 160,000 (158,400) (2,851) 291 157,225 2010 $’000 315 484 881 1,535 1,864 1,629 6,708 18,403 9 18,412 158,185 – 158,185 126,349 – 20,449 4,496 – 83,603 121,713 356,610 138,362 (14,710) 2,666 31 126,349 244,557 – (86,600) – 228 158,185 38 ALE Annual Report 2011 39 ALE Annual Report 2011 NotE 20 BorrowiNGs (CoNtiNuED) CPi hedge – maturing November 2023 Opening balance Accumulating indexation Amortisation of establishment costs Closing balance CPi hedge – maturing may 2023 Opening balance Repayment of borrowings Accumulating indexation Amortisation of establishment costs Closing balance NAB – working capital facility Opening balance Repayment of borrowings Amortisation of establishment costs Closing balance ALE Notes Opening balance Repayment of borrowings Amortisation of establishment costs Premium payable at maturity – accrued Closing balance ALE Notes 2 Opening balance Proceeds of borrowings Borrowing establishment costs capitalised Amortisation of establishment costs Closing balance 2011 $’000 2010 $’000 20,449 7,577 4 28,030 4,496 (7,393) 2,887 10 – – – – – 83,603 (14,039) 1,880 311 71,755 121,713 – – 682 122,395 15,218 5,226 5 20,449 5,932 (4,692) 3,255 1 4,496 54,794 (55,000) 206 – 148,349 (67,020) 1,727 547 83,603 – 125,001 (3,397) 109 121,713 (a) CiB $125 million of CIB was issued in May 2006. A fixed rate of interest of 3.40% p.a. (including credit margin) applies to the CIB and is payable quarterly, with the outstanding balance of the CIB accumulating quarterly in line with the national consumer price index. The total amount of the accumulating indexation is not payable until maturity of the CIB in November 2023. During the prior year $13.1 million of the notional balance of the CIB with a book value of $14.7 million were bought back by ALE at a discount of $3.23 million to their face value. (b) CmBs During the year CMBS issued between May 2006 and August 2007 were repaid on the scheduled maturity date of 20 May 2011. On 29 April 2011 $160 million of replacement CMBS were issued with a scheduled maturity of 20 May 2016. As required by the new CMBS issue on 29 April 2011, ALE put in place $160 million of interest rate swap contracts to cover 100% of the CMBS interest payments. Under these swap contracts, ALE is obliged to receive a floating rate interest and pay fixed rate interest. Given the CPI hedging arrangements, counterswaps were entered into which fully offset the new swap contracts for interest on the $160 million CMBS. ALE will continue to receive or pay net amounts until 2020 arising from the difference between fixed rates payable and fixed rates receivable in respect of the offsetting swaps. 40 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 20 BorrowiNGs (CoNtiNuED) (c) CPi hedges At the beginning of the financial year, ALE had in place two CPI Hedges to hedge its floating nominal rate debt, consisting of CMBS, ALE Notes and ALE Notes 2. The original hedges were transacted with two separate counterparties and covered $245 million of debt (maturing in November 2023) and $80 million of debt (maturing in May 2023). During the period the full $80 million of the May 2023 hedge was terminated to match ALE’s reduced net outstanding borrowings. At balance date, all of ALE’s outstanding floating rate debt has been fully hedged up to November 2023 by the remaining CPI Hedge. CPI Hedge – Maturing November 2023 Since 7 December 2007, ALE has had a 16 year CPI Hedge in place in respect of the $245 million of floating rate debt. Under the hedge, ALE receives floating interest rates plus a margin of 0.2575% and pays a fixed rate of 3.61% on a balance escalating with CPI until November 2023. The CPI Hedge indexation is calculated with reference to the national CPI. The indexation that accumulates is added to the $245 million notional balance of the CPI Hedge. The accumulated indexation is payable by ALE on maturity of the CPI Hedge which is scheduled for November 2023. The hedge counterparty has a right to break the hedge such that the accumulated indexation and any mark to market revaluation amount may become payable/receivable in December 2012 or December 2017. During the year ending 30 June 2011, $2.831 million of net swap interest from the CPI Hedge was received/receivable (2010: $0.375 million received/receivable). CPI Hedge – maturing May 2023 In July 2008 and August 2008, a CPI Hedge was established in respect of $205 million of floating rate debt. On 2 November 2009, $125 million of the nominal amount of this hedge was terminated, leaving a notional balance of $80 million at the beginning of the current financial year. On 29 June 2011, the remaining $80 million of the nominal amount of the hedge was terminated. A real base interest rate of 3.77% p.a. applied to the CPI Hedge and it was settled quarterly, with the notional balance of the CPI Hedge escalating quarterly in line with the national CPI. During the year ending 30 June 2011, $0.568 million of net swap interest from the CPI Hedge was received (2010: $0.263 million paid/payable). (d) NAB facility In October 2007, ALE established a $55 million facility with National Australia Bank. The NAB facility had a floating interest rate and a maturity date of May 2011. During the previous financial year the facility was repaid in full. (e) ALE Notes $150 million of ALE Notes were issued on 7 November 2003, with a scheduled maturity date of 30 September 2011. A fixed rate interest of 7.265% is payable semi-annually on the Notes. A 2.5% redemption premium is also payable on the maturity date. The outstanding balance of ALE Notes base interest rate exposure (and the ALE Notes 2 that replaces it) is fully hedged until November 2023. On 9 July 2008, ALE put in place an interest rate swap to counter swap 100% of the fixed interest payments on the $150 million ALE Notes borrowings. Under the swap contract, ALE is obliged to receive fixed interest and pay floating interest. On 8 July 2010 ALE put in place a counter hedge that locks in the benefit existing in the original swap at that date and allows the benefit to be realised over the remaining term of the swap. During the financial years ended 30 June 2010 and 30 June 2011 ALE conducted on-market and off-market buybacks of ALE Notes. Additionally, existing ALE Noteholders were given the option of converting their holding of ALE Notes into ALE Notes 2 via a reinvestment option at the time the ALE Notes 2 were issued (see (f) below). Each of these initiatives was completed at a premium to the book value of the ALE Notes at the time they were undertaken. In total a notional amount of $84.29 million of ALE Notes were bought back or reinvested. (f) ALE Notes 2 $125 million of ALE Notes 2 were issued on 30 April 2010, with a scheduled maturity date of 20 August 2014. Under the terms of the issue, ALE has the right to extend the maturity date by one or two years, at which time a redemption premium of $1 and $2 respectively becomes due and payable upon maturity. Interest is payable on the ALE Notes 2 on a floating rate basis. (g) interest rate swaps At 30 June 2011, the notional principal amounts and periods of expiry of the interest rate swap contracts are as follows: Less than 1 year 1 – 2 years 2 – 3 years 3 – 4 years 4 – 5 years Greater than 5 years* Nominal Interest Rate Swaps and CPI Hedges Counter Swaps on Nominal Interest Rate Swaps Net Derivative position 2011 $’000 150,000 – – – – 405,000 555,000 2010 $’000 – 150,000 – – – 500,000 650,000 2011 $’000 (150,000) – – – – (160,000) (310,000) 2010 $’000 – (150,000) – – – (175,000) (325,000) 2011 $’000 – – – – – 245,000 245,000 2010 $’000 – – – – – 325,000 325,000 * The periods of expiry shown assume the rights not to break and rights to extend are exercised by the hedge counterparties. 40 ALE Annual Report 2011 41 ALE Annual Report 2011 NotE 20 BorrowiNGs (CoNtiNuED) The above notional amounts do not include the accumulated indexation associated with the remaining CPI Hedge. The swap and hedge contracts require settlement of net interest receivable or payable on a quarterly basis. The settlement dates coincide with the dates on which interest is payable on the underlying borrowings. The contracts are settled on a net basis. Assuming rights to break and rights to extend are not exercised by the hedge counterparties, the average weighted term of the interest rate hedges and fixed rate securities in relation to the total borrowings of ALE has decreased from 12.9 years at 30 June 2010 to 12.4 years at 30 June 2011. The gain or loss from marking to market the interest rate hedges (derivatives) at fair value is taken directly to the statement of comprehensive income. In the year ended 30 June 2011 a decrement in value of $7.878 million was recognised to the Statement of Comprehensive Income (2010: decrement in value of $33.915 million). Assets pledged as security The ALE Notes and ALE Notes 2 are unsecured. The carrying amounts of assets pledged as security as at the balance date for CMBS borrowings, CIB borrowings, and certain interest rate derivatives are: Current assets Cash reserve Non-current assets Total investment properties Less: Properties not subject to mortgages Boundary Hotel, East Bentleigh, VIC Pritchard’s Hotel, Mt Pritchard, NSW The Brass Monkey Hotel, Northbridge, WA Properties subject to first mortgages total assets pledged as security (including cash reserve) 2011 $’000 2010 $’000 8,390 5,500 758,275 713,850 – – – 758,275 766,665 (19,810) (18,710) (7,400) 667,930 673,430 In the event of a default by the properties’ tenant, Australian Leisure and Hospitality Group Limited (ALH), and if the assets pledged as security are insufficient to fully repay CMBS and CIB borrowings, the CMBS and CIB holders are also entitled in certain circumstances to recover certain unpaid amounts from the business assets of ALH. financial Covenants ALE is required to comply with certain financial covenants in respect of its borrowing facilities. The major financial covenants are summarised as follows: Loan to Value Ratio Covenants (LVR) Borrowing LVR Covenant CIB CMBS ALE Notes ALE Notes Outstanding value of CIB not to exceed 25% of the CMBS property security pool Outstanding value of CIB and CMBS not to exceed 60% of the CMBS property security pool Senior borrowings not to exceed 60% of total assets Total borrowings not to exceed 87.5% of total assets ALE Notes 2 Total borrowings not to exceed 67.5% of total assets CPI Hedge Senior borrowings not to exceed 60% of total property values Consequence ALE cannot borrow additional funds or buy back equity that would cause the LVR to be exceeded ALE cannot borrow additional funds or buy back equity that would cause the LVR to be exceeded ALE cannot borrow additional funds or buy back equity that would cause the LVR to be exceeded ALE cannot borrow additional funds or buy back equity that would cause the LVR to be exceeded ALE cannot borrow additional funds or buy back equity that would cause the LVR to be exceeded Counterparty can terminate the CPI Hedge Interest Rate Derivatives Market value of certain derivatives not to exceed 50% of Boundary and Pritchard’s Hotels property values Counterparty can terminate the Interest Rate Derivatives covered by the covenant ALE currently considers that significant headroom exists with respect of all the above covenants. 42 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 20 BorrowiNGs (CoNtiNuED) Definitions Senior borrowings excludes the ALE Notes and ALE Notes 2 All covenants, except the Interest Rate Swap Derivatives covenant, exclude the market value of derivatives EBITDAR – Earnings before Interest, Tax, Depreciation, Amortisation and Rent Interest Cover Ratio Covenants (ICR) Borrowing CIB/CMBS CIB/CMBS CPI Hedges ALE Notes ALE Notes 2 LVR Covenant Consequence ALH EBITDAR to be greater than 4.5 times CIB/CMBS interest ALH EBITDAR to be greater than 3.0 times CIB/CMBS interest No covenant ALE EBITDAR to be greater than 1.2 times total interest No covenant Stapled security distributions lock up Stapled security distributions and ALE Notes Interest lock up Nil Stapled security distributions and ALE Notes Interest lock up Nil Definitions CIB/CMBS interest excludes ALE Notes and ALE Notes 2 interest Interest amounts include all derivative rate swap payments and receipts ALE currently considers that significant headroom exists with respect of all the above covenants. At 30 June 2011 and 30 June 2010, ALE and its subsidiaries were in compliance with all the above covenants. NotE 21 CoNtriButED Equity Balance at the beginning of the period Securities issued – ALE Executive Performance Rights Plan Securities issued – Distribution Reinvestment Plan Securities issued – institutional placement Securities issued – rights issue Institutional placement and rights issue costs movements in the number of fully paid stapled securities during the period were as follows: Stapled securities on issue: Balance at the beginning of the period Securities issued – ALE Executive Performance Rights Plan Securities issued – Distribution Reinvestment Plan Securities issued – institutional placement Securities issued – rights issue Balance at the end of the period 2011 $’000 2010 $’000 169,838 24 8,799 – – – 178,661 64,761 26 4,636 29,596 75,634 (4,815) 169,838 2011 Number of stapled securities 2010 Number of Stapled Securities 153,354,571 12,248 4,624,157 – – 87,692,019 11,088 2,074,471 13,153,803 50,423,190 157,990,976 153,354,571 42 ALE Annual Report 2011 43 ALE Annual Report 2011 NotE 21 CoNtriButED Equity (CoNtiNuED) stapled securities Each stapled security comprises one share in the Company and one unit in the Trust. They cannot be traded or dealt with separately. Stapled securities entitle the holder to participate in dividends/distributions and the proceeds on any winding up of ALE in proportion to the number of, and amounts paid on, the securities held. On a show of hands, every holder of stapled securities present at a meeting in person or by proxy, is entitled to one vote. On a poll, each ordinary shareholder is entitled to one vote for each fully paid share and each unit holder is entitled to one vote for each fully paid unit. No income voting units (Nivus) The Trust issued 9,080,010 of no income voting units (NIVUS) to the Company, fully paid at $1.00 each in November 2003. The NIVUS are not stapled to shares in the Company, have an issue and withdrawal price of $1.00, carry no rights to income from the Trust and entitle the holder to no more than $1.00 per NIVUS upon the winding-up of the Trust. The Company has a voting power of 5.42% in the Trust as a result of the issue of NIVUS. The NIVUS are disclosed in the Company and the Trust financial reports but are not disclosed in the ALE Property Group financial report as they are eliminated on consolidation. institutional placement and rights issue During the previous financial year, the ALE Property Group undertook an Institutional Placement of stapled securities of 15% of the issued stapled securities. These stapled securities were issued at $2.25 each. In addition, a 1 for 2 rights issue was conducted, with the stapled securities issued at $1.50 per stapled security. NotE 22 rEtAiNED Profits Balance at the beginning of the year Profit attributable to stapled securityholders Transfer from share based payments reserve Total available for appropriation Distributions provided for or paid during the year Balance at the end of the year NotE 23 shArE BAsED PAymENts rEsErvE Balance at the beginning of the year Employee share based payments Transfer to Retained Profits on lapsing of Performance Rights Vesting of performance rights transferred to equity Balance at the end of the year Share based payments are detailed further in Note 24. 2011 $’000 2010 $’000 152,572 50,870 6 203,448 (30,954) 172,494 183 80 (6) (24) 233 204,677 (15,524) 5 189,158 (36,586) 152,572 84 130 (5) (26) 183 44 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 24 shArE BAsED PAymENts During 2007, ALE established a Performance Rights Plan that entitles key management personnel, subject to performance, to become entitled to acquire stapled securities at nil cost to the employee. Under the Performance Rights Plan, grants of performance rights have been made to Mr Wilkinson and Mr Slade. In accordance with the plan the performance rights vest upon performance hurdles being achieved. The terms and conditions of the grants are as follows: Employee entitled Grant date Number of PRs Vesting conditions Mr A F O Wilkinson 1 June 2009 160,026 1. Service period 2. Absolute Total Securityholder Return 3. Total Securityholder Return compared to comparative group Contractual Life of PRs 1 June 2011 Mr A J Slade 1 July 2008 1 July 2009 12,774 39,669 1. Service period 2. Absolute Total Securityholder Return 3. Total Securityholder Return compared to comparative group 30 June 2011 30 June 2012 The vesting conditions for Mr Slade’s performance rights are tested annually soon after 30 June each year. One third of the number of performance rights issued are tested at each 30 June over a three year period. The number and weighted average fair values of the performance rights on issue are as follows: Outstanding at 1 July Granted during period Vested during year Lapsed during year outstanding at 30 June Number of performance rights 2011 weighted average fair value 2011 $ 237,335 – (12,248) (3,817) 221,270 1.11 – 1.98 1.98 1.05 Number of performance rights 2010 41,013 210,583 (11,088) (3,173) 237,335 Weighted average fair value 2010 $ 1.88 0.98 1.97 1.97 1.11 During the year 12,319 performance rights vested to Andrew Slade and 45,200 vested to Andrew Wilkinson. Under the terms of the grants delivery of stapled securities is delayed for 2 years until 1 July 2013. The performance rights outstanding at 30 June 2011 will be issued at nil cost to the employee if and when they vest. The performance rights value is the assessed fair value at grant date of the performance rights, allocated equally over the period from grant date to vesting date. The fair value at grant date has been independently determined by using a Black-Scholes option pricing model. This technique takes into account factors such as the exercise price, the term of the performance rights, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the performance rights, the security price at grant date and expected price volatility of the underlying security, the expected distribution yield and the risk-free interest rate for the term of the performance rights. 44 ALE Annual Report 2011 45 ALE Annual Report 2011 NotE 25 kEy mANAGEmENt PErsoNNEL DisCLosurEs (a) Directors The following persons were Directors of ALE Property Group, comprising Australian Leisure and Entertainment Property Trust and its controlled entities during the financial year: Name P H Warne (Chairman) J P Henderson H I Wright A F O Wilkinson (Managing Director) J T McNally Type Non-executive Non-executive Non-executive Executive Executive Appointed 8 September 2003 19 August 2003 8 September 2003 16 November 2003 26 June 2003 (b) other key management personnel The following persons also had authority and responsibility for planning, directing and controlling the activities of ALE, directly or indirectly, during the year: Name A J Slade B R Howell M J Clarke D J Shipway Title Capital Manager Company Secretary and Compliance Officer Finance Manager and Assistant Company Secretary Asset Manager (c) Compensation for key management The following table sets out the compensation for key management personnel in aggregate. Refer to the remuneration report in the Directors’ Report for details of the remuneration policy and compensation details by individual. Short term employee benefits Post employment benefits Other long term benefits Share based payments NotE 26 rEmuNErAtioN of AuDitors Audit services KPMG Australian firm: Audit and review of the financial reports of the Group and other audit work under the Corporations Act 2001 – in relation to current year – in relation to prior year total remuneration for audit services other services KPMG Australian firm: Transaction compliance services total other services 2011 $ 1,591,176 76,219 10,119 80,000 1,757,514 2010 $ 1,325,465 60,879 2,021 130,000 1,518,365 164,500 37,500 202,000 167,712 30,000 197,712 – – 150,983 150,983 46 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 27 rELAtED PArty trANsACtioNs (a) Parent entity, subsidiaries and associates Details are set out in Note 34. (b) key management personnel Key management personnel and their compensation is set out in Note 25. (c) transactions with related parties For the year ended 30 June 2011, the Company received $3,501,676 of expense reimbursement from the Trust (2010: $3,034,011), and the Finance Company charged the Sub Trust $15,699,415 in interest (2010: $20,704,572). Peter Warne is also a director of Next Financial Limited (Next Financial) which acts as an Investment Manager. At 30 June 2011, Next Financial held on behalf of its clients (other than Peter Warne) 2,537,389 (2010: 3,396,558) stapled securities in the ALE Property Group. With the exception of his own holding, Peter Warne is not involved in any of the decision making processes regarding those securities in ALE Property Group that are held by Next Financial for its clients. Procedures have been put into place to ensure Peter Warne’s independence and confidentiality of information are maintained. Peter Warne is a non-executive director of Macquarie Group Limited (“Macquarie”). Macquarie has provided banking services, underwriting services and corporate advice to ALE in the past and may continue to do so in the future. Mr Warne does not take part in any decisions to appoint Macquarie in relation to any of the above matters. (d) terms and conditions All related party transactions are conducted on normal commercial terms and conditions. Outstanding balances are unsecured and are repayable in cash and callable on demand. NotE 28 CommitmENts (a) Capital commitments The Directors are not aware of any capital commitments as at the date of this report. (b) Lease commitments The Company has entered into a non-cancellable operating lease for office premises at Level 10, 6 O’Connell Street, Sydney starting November 2010. The Company has also entered into a non-cancellable operating lease for office equipment. The minimum net lease commitments under these leases are: Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Within one year Later than one year but not later than five years Later than five years 2011 $’000 108 266 – 374 2010 $’000 88 253 22 363 NotE 29 CoNtiNGENt LiABiLitiEs AND CoNtiNGENt AssEts Put and call options For most of the investment properties, at the end of the initial lease term of 25 years (2028 for most of the portfolio), and at the end of each of four subsequent ten year terms, there is a call option for ALE (or its nominee) and a put option for the tenant to require the landlord (or its nominee) to buy plant, equipment, goodwill, inventory, all then current consents, licences, permits, certificates, authorities or other approvals, together with any liquor licence, held by the tenant in relation to the premises. The gaming licence is to be included or excluded at the tenant’s option. These assets are to be purchased at current value as determined by the valuation methodology set out in the lease. ALE must pay the purchase price on expiry of the lease. Any leasehold improvements funded and completed by the tenant will be purchased by ALE from the tenant for an amount of $1. Bank guarantee ALE has entered into a bank guarantee of $184,464 in respect of the office tenancy at Level 10, 6 O’Connell Street, Sydney. 46 ALE Annual Report 2011 47 ALE Annual Report 2011 NotE 30 iNvEstmENts iN CoNtroLLED ENtitiEs The Trust owns 100% of the issued equity of the Sub Trust. The Sub Trust owns 100% of the issued equity of the Finance Company. The Trust owns none of the issued equity of the Company, but is deemed to be its “acquirer” under IFRS. In addition, the Trust owns 100% of the issued equity of ALE Direct Property Trust No.2, which in turns owns 100% of the issued equity of ALE Finance Company No.2 Pty Limited. Both of these Trust subsidiaries are dormant. NotE 31 sEGmENt iNformAtioN Business segment The results and financial position of ALE’s single operating segment, ALE Strategic Business Unit, are prepared for the Managing Director on a quarterly basis. The strategic business unit covers the operations of the responsible entity for the ALE Property Group. Comparative information has been presented in conformity with the requirements of AASB 8 Operating Segments. All ALE Property Group’s properties are leased to ALH, and accordingly 100% of the rental income is received from ALH. Geographical segment ALE owns property solely within Australia. NotE 32 EvENts oCCurriNG AftEr rEPortiNG DAtE There has not arisen in the interval between the end of the financial year and the date of this report, any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Company, to affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years. NotE 33 fiNANCiAL iNstrumENts (a) Credit risk ALE’s major credit risk is the risk that the tenant will fail to perform its contractual obligations including honouring the terms of the lease agreements, either in whole or in part. Credit risk is monitored on a continuous basis to determine if the tenant has appropriate financial standing having regard to the various security arrangements that are in place. Credit risk on cash is managed through ensuring all cash deposits are held with major domestic banks. The credit risk on the financial assets of ALE which have been recognised in the statement of financial position is generally the carrying amount net of any provision for doubtful debts. Exposure to credit risk Receivables Derivatives Cash and cash equivalents Impairment losses The ageing of trade receivables at balance date was: Not past due Past due 0–30 days Past due 31–120 days Past due 121–365 days More than one year Note 16 11 15 2011 $’000 11,229 11,391 110,178 132,798 2010 $’000 17,807 21,190 132,062 171,059 2011 2010 Gross receivable $’000 impairment $’000 Gross Receivable $’000 Impairment $’000 1,881 143 – 91 9,114 11,229 – – – – 995 995 16,980 – – – 827 17,807 – – – – 795 795 Based on historic default rates, ALE believes that no impairment allowances are necessary in respect of trade receivables, as the receivables relate to tenants assessed by ALE as having good credit history. 48 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 33 fiNANCiAL iNstrumENts (CoNtiNuED) (b) Liquidity risk The following are the contracted maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements. 30 June 2011 Carrying amount $’000 Contractual cash flows $’000 6 months or less $’000 6–12 months $’000 1–2 years $’000 2–5 years $’000 More than five years $’000 – (222,251) – – – – (14,771) (193,925) – (137,823) 661 5,582 (3,052) (130,910) Non-derivative financial liabilities Trade and other payables CIB CMBS ALE Notes ALE Notes 21 7,421 130,022 157,225 71,755 122,395 Derivative financial instruments Interest rate swaps CPI Hedges2 (1,040) 28,030 (7,421) (246,623) (217,431) (73,614) (160,354) 2,692 (120,242) (7,421) (2,633) (5,917) (73,614) (5,671) 2,228 1,351 – (2,292) (5,852) – (5,610) 1,145 1,338 – (4,676) (11,737) – (11,250) 1,710 2,397 515,808 (822,993) (91,677) (11,271) (23,556) (340,276) (356,213) 1 Assumes the rights to extend for a further one or two years are not exercised. 2 Assumes the counterparty’s right to break is not exercised. 30 June 2010 Carrying amount $’000 Contractual cash flows $’000 6 months or less $’000 6–12 months $’000 1–2 years $’000 2–5 years $’000 More than five years $’000 Non-derivative financial liabilities Trade and other payables CIB CMBS ALE Notes ALE Notes 21 6,708 126,349 158,185 83,603 121,713 Derivative financial instruments Interest rate swaps CPI Hedges2 4,347 24,945 525,850 (6,708) (246,133) (169,713) (91,455) (171,084) 14,659 (146,692) (817,126) (6,708) (2,189) (5,907) (3,087) (5,516) 3,160 915 – (2,218) (163,806) (3,037) (5,529) 2,930 1,801 – (4,521) – (85,331) (11,181) 7,003 3,388 – (14,250) – – (148,858) 1,566 8,152 (19,332) (169,859) (90,642) (153,390) – (222,955) – – – – (160,948) (383,903) 1 Assumes the rights to extend for a further one or two years are not exercised. 2 Assumes the counterparty’s right to extend are exercised and the counterparty’s right to break is not exercised. Interest rates used to determine contractual cash flows The interest rates used to determine the contractual cash flows, where applicable, are based on interest rates, including the relevant credit margin, applicable to the financial liabilities at balance date. The contractual cash flows have not been discounted. The inflation rates used to determine the contractual cash flows, where applicable, are based on inflation rates applicable at balance date. (c) interest rate risk Potential variability in future distributions arise predominantly from financial assets and liabilities bearing variable interest rates. For example, if financial liabilities exceed financial assets and interest rates rise, to the extent that interest rate derivatives (swaps) are not available to fully hedge the exposure, distribution levels would be expected to decline from the levels that they would otherwise have been. ALE also has long term leased property assets and fixed interest rate liabilities that are currently intended to be held until maturity. The market value of these assets and liabilities are also expected to change as long term interest rates fluctuate. For example, as long term interest rates rise, the market value of both property assets and fixed or hedged interest rate liabilities may fall (all other market variables remaining unchanged). These movements in property assets and fixed interest rate liabilities impact upon the net equity value of ALE. 48 ALE Annual Report 2011 49 ALE Annual Report 2011 NotE 33 fiNANCiAL iNstrumENts (CoNtiNuED) Profile At the reporting date, the interest rate profile of ALE’s interest rate sensitive financial instruments was as follows: Derivative financial assets Derivative financial liabilities Borrowings CIB CMBS CPI Hedge – maturing November 2023 CPI Hedge – terminated June 2011 ALE Notes ALE Notes 2 2011 $’000 11,391 (10,351) (130,022) (157,225) (28,030) – (71,755) (122,395) (508,387) 2010 $’000 21,190 (25,537) (126,349) (158,185) (20,449) (4,496) (83,603) (121,713) (519,142) Sensitivity analysis A change of 100 basis points in the prevailing nominal market interest rates at the reporting date would have increased/(decreased) equity and profit and loss by the amounts shown below. This analysis assumes that all other variables, in particular the CPI, remain constant. The analysis is performed on the same basis for 2010. Statement of Comprehensive Income Equity 30 June 2011 Interest rate swaps CPI hedges CIB CMBS CPI Hedge – maturing November 2023 CPI Hedge – maturing May 2023 ALE Notes ALE Notes 2 30 June 2010 Interest rate swaps CPI hedges CIB CMBS CPI Hedge – maturing November 2023 CPI Hedge – maturing May 2023 ALE Notes ALE Notes 2 100 bps increase $’000 38 22,900 – – – – – – 22,938 (1,868) 31,400 – – – – – – 29,532 100 bps decrease $’000 (38) (25,600) – – – – – – (25,638) 1,851 (35,500) – – – – – – (33,649) 100 bps increase $’000 38 22,900 – – – – – – 22,938 (1,868) 31,400 – – – – – – 29,532 100 bps decrease $’000 (38) (25,600) – – – – – – (25,638) 1,851 (35,500) – – – – – – (33,649) The impact on the Statement of Comprehensive Income and Equity arising from a 100 bps movement in interest rates is based on shifting the projected forward rates by 100 bps at the reporting date, in order to determine the present value of future principal and interest cash flows. 50 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 33 fiNANCiAL iNstrumENts (CoNtiNuED) (d) Consumer price index risk Potential variability in future distributions arise predominantly from financial assets and liabilities through movements in the consumer price index (CPI). For example, ALE’s investment properties are subject to annual rental increases based on movements in the CPI. This will in turn flow through to investment property valuations. ALE’s CPI Hedge liabilities are also impacted by movements in the CPI. Profile At the reporting date, ALE’s CPI sensitive financial instruments were as follows: financial instruments Investment properties CIB CPI Hedge – fair value of derivative CPI Hedge – accumulating indexation 2011 $’000 2010 $’000 758,275 (130,022) (5,009) (28,030) 595,214 713,850 (126,349) (14,880) (24,945) 547,676 Sensitivity analysis for variable rate instruments A change of 100 bps in CPI at the reporting date would have increased/(decreased) Statement of Comprehensive Income and Equity by the amounts shown below. This analysis assumes that all other variables, in particular the interest rates and capitalisation rates applicable to investment properties, remain constant. The analysis is performed on the same basis for 2010. 30 June 2011 Investment properties CPI Hedge – fair value of derivative CPI Hedge – accumulated indexation CIB 30 June 2010 Investment properties CPI Hedge – fair value of derivative CPI Hedge – accumulated indexation CIB Statement of Comprehensive Income Equity 100 bps increase $’000 8,237 (24,400) – – (16,163) 6,826 (33,300) – – (26,474) 100 bps decrease $’000 (7,532) 22,100 – – 14,568 (7,444) 30,200 – – 22,756 100 bps increase $’000 8,237 (24,400) – – (16,163) 6,826 (33,300) – – (26,474) 100 bps decrease $’000 (7,532) 22,100 – – 14,568 (7,444) (59,500) – – (66,944) Investment properties have been included in the sensitivity analysis as, although they are not financial instruments, the long term CPI linked leases attaching to the investment properties are similar in nature to financial instruments. There is no impact on the Statement of Comprehensive Income or Equity arising from a 100 bps movement in CPI at the reporting date on the CIB or CPI Hedge – accumulated indexation, as the terms of these instruments use CPI rates for the quarters ending the preceding March and December to determine their values at 30 June. 50 ALE Annual Report 2011 51 ALE Annual Report 2011 NotE 33 fiNANCiAL iNstrumENts (CoNtiNuED) (e) fair values Fair values versus carrying amounts The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows: Cash and cash equivalents Receivables Derivatives Other assets Trade and other payables CIB CMBS ALE Notes ALE Notes 2 2011 2010 Carrying amount $’000 110,178 11,229 1,040 166 (7,421) (130,022) (157,225) (71,755) (122,395) fair value $’000 110,178 11,229 1,040 166 (7,421) (106,218) (160,000) (72,675) (125,876) (366,205) (349,577) Carrying amount $’000 132,062 17,807 (4,347) 863 (6,708) (126,349) (158,185) (83,603) (121,713) (350,173) Fair value $’000 132,062 17,807 (4,347) 863 (6,708) (100,710) (153,847) (87,662) (126,876) (329,418) Basis for determining fair values The basis for determining fair values is disclosed in Note 4. The ALE Notes and ALE Notes 2 are traded debt securities on the Australian Securities Exchange. The fair value disclosed above reflects the market value of the ALE Notes and ALE Notes 2 at the balance date. (f) fair value hierarchy The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: Level 1 quotes prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 inputs for the asset or liability that are not based on observable market data (unobservable inputs). 30 June 2011 Derivative financial assets Derivative financial liabilities 30 June 2010 Derivative financial assets Derivative financial liabilities Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 – – – – – – 11,391 (10,351) 1,040 21,190 (25,537) (4,347) – – – – – – 11,391 (10,351) 1,040 21,190 (25,537) (4,347) 52 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 34 PArENt ENtity DisCLosurEs As at, and throughout, the financial year ending 30 June 2011 the parent entity of ALE was Australian Leisure and Entertainment Property Trust. result of the parent entity Profit for the period Other comprehensive income Total comprehensive income for the period financial position of the parent entity Current assets Cash Receivables Other Non current assets Investments in controlled entities Total assets Current liabilities Payables Provisions Non current liabilities Borrowings Total liabilities Net assets Total equity of the parent entity comprising: Issued units Retained earnings Total equity 2011 $’000 2010 $’000 31,229 – 31,229 20,232 69,272 13 275,656 365,173 2,579 15,441 194,150 212,170 153,003 175,623 (22,620) 153,003 36,598 – 36,598 65,315 30,229 13 275,656 371,213 3,433 18,403 205,316 227,152 144,061 167,056 (22,995) 144,061 52 ALE Annual Report 2011 53 ALE Annual Report 2011 • DirECtors’ DECLArAtioN • In the opinion of the directors of the Company: (a) the financial statements and notes that are set out on pages 19 to 52 and the Remuneration report contained in Section 9 of the Directors’ report, are in accordance with the Corporations Act 2001, including (i) giving a true and fair view of ALE’s financial position as at 30 June 2011 and of its performance for the financial year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that ALE will be able to pay its debts as and when they become due and payable. (c ) The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Managing Director, Finance Manager, and Company Secretary as required for the financial year ended 30 June 2011. (d) The directors draw attention to Note 2 to the financial statements, which includes a statement of compliance with International Financial Reporting Standards. This declaration is made in accordance with a resolution of the Directors. PEtEr h wArNE DIRECTOR Sydney Dated this 2nd day of August 2011 54 ALE Annual Report 2011 • iNDEPENDENt AuDitor’s rEPort • To stapled securityholders Independent auditorÕ s report to the stapled security holders of ALE Property Group Report on the financial report We have audited the accompanying financial report of ALE Property Group (Ò the GroupÓ ) comprising Australian Leisure and Entertainment Property Trust (Ò the TrustÓ ) and the entities it controlled at yearÕ s end or from time to time during the financial year, which comprises the statement of financial position as at 30 June 2011, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, notes 1 to 34 comprising a summary of significant accounting policies and other explanatory information and the directorsÕ declaration. DirectorsÕ responsibility for the financial report The directors of Australian Leisure and Entertainment Property Management Limited, the Responsible Entity of the Trust (Responsible Entity) are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In note 2, the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. AuditorÕ s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditorÕ s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entityÕ s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entityÕ s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the GroupÕ s financial position and of its performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 54 ALE Annual Report 2011 55 ALE Annual Report 2011 • iNDEPENDENt AuDitor’s rEPort • To stapled securityholders AuditorÕ s opinion In our opinion: (a) the financial report of ALE Property Group is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the GroupÕ s financial position as at 30 June 2011 and of its performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 2. Report on the remuneration report We have audited the Remuneration Report included in Section 9 on pages 7 to 15 of the directorsÕ report for the year ended 30 June 2011. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards. AuditorÕ s opinion In our opinion, the remuneration report of ALE Property Group for the year ended 30 June 2011, complies with Section 300A of the Corporations Act 2001. KPMG Nigel Virgo Partner 2 August 2011 56 ALE Annual Report 2011 i m a g e i m a g e - - t o b e u p d a t e d t o b e u p d a t e d 56 ALE Annual Report 2011 57 57 ALE Annual Report 2011 ALE Annual Report 2011 Australian Leisure and Entertainment Property management Limited ABN 45 105 275 278 58 76 DirECtors’ rEPort stAtEmENt of ChANGEs iN Equity 73 AuDitor’s iNDEPENDENCE DECLArAtioN 74 fiNANCiAL stAtEmENts 74 stAtEmENt of ComPrEhENsivE iNComE 75 stAtEmENt of fiNANCiAL PositioN CoNtENts • ANNuAL rEPort • 2011 AustrALiAN LEisurE AND ENtErtAiNmENt ProPErty mANAGEmENt LimitED w ww.ALEGrouP.Com.Au 77 CAsh fLow stAtEmENt 78 NotEs to thE fiNANCiAL stAtEmENts 90 DirECtors’ DECLArAtioN 91 iNDEPENDENt AuDitor’s rEPort to thE shArEhoLDErs ibc iNvEstor iNformAtioN AND CorPorAtE DirECtory 58 ALE Annual Report 2011 • DirECtors’ rEPort • For the year ended 30 June 2011 The Directors of Australian Leisure and Entertainment Property Management Limited (the “Company”) present their report for the year ended 30 June 2011. The registered office and principal place of business of the Company is: Level 10 6 O’Connell Street Sydney 2000 1 DirECtors The following persons were directors of the Company during the whole of the year and up to the date of this report unless otherwise stated: Name Type P H Warne (Chairman) J P Henderson H I Wright A F O Wilkinson (Managing Director) J T McNally Independent non-executive Independent non-executive Independent non-executive Executive Executive Appointed 8 September 2003 19 August 2003 8 September 2003 16 November 2004 26 June 2003 2 PriNCiPAL ACtivitiEs During the year the principal activities of the Company consisted of property funds management and acting as responsible entity for the Australian Leisure and Entertainment Property Trust (the “Trust”). There has been no significant change in the nature of these activities during the year. 3 DiviDENDs No provisions for or payments of Company dividends have been made during the year (2010: nil). 4 rEviEw of oPErAtioNs A summary of the revenue and results for the year is set out below: revenue Expense reimbursement Interest income total revenue Expenses Salaries, fees and related costs Other expenses total expenses Profit/(loss) before income tax Income tax expense/(benefit) Profit/(loss) attributable to the shareholders of the Company Basic and diluted earnings per share Dividend per share for the year Net assets per share 30 June 2011 $ 30 June 2010 $ 3,501,676 23,425 3,525,101 2,084,662 1,417,014 3,501,676 23,425 31,027 (7,602) 3,034,011 13,607 3,047,618 1,680,565 858,446 2,539,011 508,607 187,184 321,423 Cents Cents (0.00) – 7.31 0.23 – 7.33 58 ALE Annual Report 2011 59 ALE Annual Report 2011 5 siGNifiCANt ChANGEs iN thE stAtE of AffAirs In the opinion of the Directors, there were no significant changes in the state of affairs of the Company that occurred during the year. 6 mAttErs suBsEquENt to thE END of thE fiNANCiAL yEAr In the opinion of the Directors of the Company, no transaction or event of a material and unusual nature has occurred between the end of the financial year and the date of this report that may significantly affect the operations of the Company, the results of those operations or the state of the affairs of the Company in future financial years. 7 LikELy DEvELoPmENts AND ExPECtED rEsuLts of oPErAtioNs The Company will continue to maintain its defined strategy of identifying opportunities to increase the profitability of the Company and its value to its shareholders. The Directors are not aware of any future developments likely to significantly affect the operations and/or results of the Company. Ms Helen Wright LL.B, MAICD, Non-executive Director. Experience and expertise Helen was appointed as a Non-executive Director of the Company in September 2003. Helen was a partner of Freehills, a leading Australian firm of lawyers, from 1986 to 2003. She practised as a commercial lawyer specialising in real estate projects, including development and financing and related taxation and stamp duties. Helen is the Chair of Screen NSW (formerly Film & Television Office), the Local Government Remuneration Tribunal for NSW and recently was reappointed as The Statutory and Other Offices Remuneration Tribunal of NSW. Prior appointments include the Boards of Sydney Harbour Foreshore Authority and subsidiaries, Australia Day Council of NSW, Darling Harbour Authority, UNSW Press Limited and MLC Homepack Limited. Helen has a Bachelor of Laws from the University of NSW, and in 1994 completed the Advanced Management Program at the Harvard Graduate School of Business. Mr Andrew Wilkinson B. Bus. CFTP, MAICD, Managing Director. Experience and expertise Andrew was appointed Managing Director of the Company in November 2004. He joined ALE as Chief Executive Officer at the time of its listing in November 2003. Andrew has over 30 years experience in banking, corporate finance and funds management. He was previously a corporate finance partner with PricewaterhouseCoopers and spent 15 years in finance and investment banking with organisations including ANZ Capel Court and Schroders. Mr James McNally B.Bus (Land Economy), Dip. Law, Executive Director. Experience and expertise James was appointed as an Executive Director of the Company in June 2003. James has over 16 years experience in the funds management industry, having worked in both property trust administration and compliance roles for Perpetual Trustees Australia Limited and MIA Services Pty Limited, a company which specialises in compliance services to the funds management industry. James’ qualifications include a Bachelor of Business in Land Economy (Hawkesbury Agricultural College) and a Diploma of Law (Legal Practitioners Admission Board). He is a registered valuer and licensed real estate agent. 8 iNformAtioN oN DirECtors Mr Peter Warne B.A, MAICD, Chairman and Non-executive Director. Experience and expertise Peter was appointed as Chairman and Non-executive Director of the Company in September 2003. Peter began his career with the NSW Government Actuary’s Office and the NSW Superannuation Board before joining Bankers Trust Australia Limited (“BTAL”) in 1981. Peter held senior positions in the Fixed Income Department, the Capital Markets Division and the Financial Markets Group of BTAL and acted as a consultant to assist with integration issues when the investment banking business of BTAL was acquired by Macquarie Bank Limited in 1999. Peter is also a board member of three other listed entities, being ASX Limited, Macquarie Bank Limited and WHK Group Limited. Peter graduated from Macquarie University with a Bachelor of Arts, majoring in Actuarial Studies. He qualified as an associate of, and received a Certificate of Finance and Investment from, the Institute of Actuaries, London. Mr John Henderson B.Bldg, MRICS, AAPI, Non-executive Director. Experience and expertise John was appointed as a Non-executive Director of the Company in August 2003. John has been a Director of Marks Henderson Pty Ltd since 2001 and is actively involved in the acquisition of investment property. Previously an International Director at Jones Lang LaSalle and Managing Director of the Sales and Investment Division, he was responsible for overseeing the larger property sales across Australasia, liaising with institutional and private investors, and coordinating international investment activities. John graduated from the University of Melbourne and is a member of the Royal Institution of Chartered Surveyors, is an associate of the Australian Property Institute and is a licensed real estate agent. 60 ALE Annual Report 2011 • DirECtors’ rEPort • For the year ended 30 June 2011 8 iNformAtioN oN DirECtors (CoNtiNuED) Brendan Howell B.Econ, G.Dip App Fin (Sec Inst), Company Secretary. Experience and expertise The Company Secretary is Mr Brendan Howell. Brendan was appointed to the position of Company Secretary in April 2007, having previously held the position from September 2003 to September 2006. Brendan has a Bachelor of Economics from the University of Sydney and a Graduate Diploma in Applied Finance and Investment from the Securities Institute of Australia, and over 19 years experience in the funds management industry. He was formerly an associate member of both the Securities Institute of Australia and the Institute of Chartered Accountants in Australia. Brendan has a property and accounting background and has previously held senior positions with a leading Australian trustee company administrating listed and unlisted property trusts. For over ten years Brendan has been directly involved with MIA Services Pty Limited, a company which specialises in funds management compliance, and acts as an independent consultant and external compliance committee member for a number of property, equity and infrastructure funds managers. Brendan also acts as an Independent Director for several unlisted public companies, some of which act as responsible entities. independent member of the Audit, Compliance and risk management Committee (ACrmC) Mr David Lawler B.Bus, CPA, Independent ACRMC Member. Experience and expertise David was appointed to ALE’s ACRMC on 9 December 2005 and has over 25 years’ experience in internal auditing in the banking and finance industry. He was the Chief Audit Executive for Citibank in the Philippines, Italy, Switzerland, Mexico, Brazil, Australia and Hong Kong. He was Group Auditor for the Commonwealth Bank of Australia. David is an audit committee member of the Australian Office of Financial Management, the Defence Materiel Organisation, the Australian Trade Commission, the Australian Sports Anti-Doping Authority, the Australian Agency for International Development and National ICT Australia. David is a Director of Australian Settlements Limited and chairman of its audit and risk committee. David has a Bachelor of Business Studies from Manchester Metropolitan University in the UK. He is a Fellow of CPA Australia and a past President of the Institute of Internal Auditors-Australia. Directorships of listed companies within the last three years The following Director held directorships of other listed entities within the last three years and from the date appointed up to the date of this report unless otherwise stated: Director P H Warne P H Warne P H Warne P H Warne Directorships of listed entities Type ASX Limited WHK Group Limited Macquarie Group Limited Teys Limited Non-executive Non-executive Non-executive Non-executive Appointed July 2006 May 2007 July 2007 Oct 2007 Resigned June 2009 special responsibilities of Directors The following are the special responsibilities of each Director: Director P H Warne H I Wright J P Henderson Special responsibilities Chairman of the Board Member of the Audit, Compliance and Risk Management Committee (ACRMC) Chair of the Nominations Committee Chair of the Remuneration Committee Chair of the ACRMC Member of the Nominations Committee Member of the Remuneration Committee Member of the ACRMC Member of the Nominations Committee Member of the Remuneration Committee A F O Wilkinson Chief Executive Officer and Managing Director of the Company Responsible Manager of the Company under the Company’s Australian Financial Services Licence (AFSL) J T McNally Responsible Manager of the Company under the Company’s AFSL 60 ALE Annual Report 2011 61 ALE Annual Report 2011 Directors’ and key management personnel interests in stapled securities and options The following Directors, key management personnel and their associates hold the following stapled security interests in the Company: Name Role P H Warne J P Henderson H I Wright A F O Wilkinson A J Slade M J Clarke D J Shipway Non-executive Director Non-executive Director Non-executive Director Executive Director Capital Manager Finance Manager Asset Manager Number held at the start of the year 1,185,000 355,365 150,000 208,468 31,064 4,564 – Net movement Number held at 30 June 2011 – 1,000 – – (3,164) 3,177 5,000 1,185,000 356,365 150,000 208,468 27,900 7,741 5,000 The following key management personnel currently hold performance rights over stapled securities in ALE: Name Role A F O Wilkinson A J Slade Executive Director Capital Manager Number held at the start of the year 160,026 77,309 Net movement Number held at 30 June 2011 – (16,065) 160,026 61,244 meetings of Directors The number of meetings of the Company’s Board of Directors held and of each Board committee meeting held during the year ended 30 June 2011 and the number of meetings attended by each Director at the time the Director held office during the year were: Director P H Warne J P Henderson H I Wright A F O Wilkinson J T McNally Board meetings ACRMC Remuneration Committee Held1 Attended Held1 Attended Held1 Attended 17 17 17 17 17 16 16 17 17 17 8 8 8 n/a n/a 8 7 8 n/a n/a 6 6 6 n/a n/a 6 6 6 n/a n/a Member of Audit, Compliance and Risk Management Committee D J Lawler n/a n/a 8 8 n/a n/a 1 “Held” reflects the number of meetings which the Director or member was eligible to attend. 62 ALE Annual Report 2011 • DirECtors’ rEPort • For the year ended 30 June 2011 9 rEmuNErAtioN rEPort (AuDitED) This report provides details on ALE’s remuneration structure, decisions and outcomes for the year ended 30 June 2011 for employees of ALE including the directors, the Managing Director and key management personnel. The format and content of the Remuneration Report has changed compared with previous years. This reflects changes to the remuneration policies over the year, changes to reporting requirements and the desire to increase the transparency of the remuneration decisions made by ALE. 9.1 rEmuNErAtioN oBJECtivEs AND APProACh In determining a remuneration framework the Board aims to ensure the following: • attract, reward and retain high calibre executives; • motivate executives to achieve performance that creates value for stapled securityholders; and • links remuneration to performance. The framework aligns executive reward with achievement of strategic objectives and creation of value for stapled securityholders. To do this the Board ensures that executive reward satisfies the following objectives: • alignment with ALE’s financial, operational, compliance and risk management objectives so as to achieve alignment with positive outcomes for stapled securityholders; • alignment with ALE’s overall performance; • transparent, reasonable and acceptable to employees and securityholders; • rewards the responsibility, capability, experience and contribution made by executives; and • market competitive and complementary to the reward strategy of the organisation. The framework provides a mix of fixed and variable pay and a blend of short and long term incentives. As executives gain seniority within ALE, the balance of this mix shifts to a higher proportion of ‘at risk’ rewards, and is also dependent upon the nature of the executive’s role. 9.2 rEmuNErAtioN CommittEE The Remuneration Committee (“the Committee”) is a committee comprising non-executive directors of the Company. The Committee strives to ensure that ALE’s remuneration structure strikes an appropriate balance between the interests of ALE securityholders and rewarding, motivating and retaining employees. The Committee’s charter sets out its role and responsibilities. The charter is reviewed on an annual basis. In fulfilling its role the Committee endeavours to ensure the remuneration framework established will: • reward executive performance against agreed strategic objectives; • encourage alignment of the interests of executives and stapled securityholders; and • ensure there is an appropriate mix between fixed and “at risk” remuneration. The Committee operates independently of ALE senior management in its recommendations to the Board and engages remuneration consultants independently of ALE management. During FY11, the Committee consisted of the following: Peter Warne (Chairman) Helen Wright John Henderson Non-executive Director Non-executive Director Non-executive Director Refer page 59 of this report for information on the skills, experience and expertise of the Committee members. The number of meetings held by the Committee and the members’ attendance at them is set out on page 61. The Remuneration Committee considers advice from a wide range of external advisors in performing its role. During the current financial year ALE engaged Guerdon Associates Pty Limited to review the fixed remuneration structure and Ernst & Young to review the Long Term Incentive Plan of ALE. 9.3 ExECutivE rEmuNErAtioN Executive remuneration comprises both a fixed component and an ‘at risk’ component. It specifically comprises: • Fixed annual remuneration (FAR) • Short term incentives (STI) • Long term incentives (LTI) 62 ALE Annual Report 2011 63 ALE Annual Report 2011 9.3.1 fixed Annual remuneration (fAr) what is fAr? how is fAr set? FAR is the guaranteed salary of the executive and includes superannuation and salary sacrificed components such as motor vehicles, laptops and superannuation. FAR is set by reference to external market data for comparable roles and responsibilities within similar listed entities within Australia. when is fAr reviewed? FAR is reviewed in December each year, with any changes being effective from 1 January of the following year. 9.3.2 short term incentive (sti) what is sti? STI is an annual “at risk” component of an executive’s remuneration. how are sti targets and objectives chosen? STI is used to reward executives for achieving annual business targets and their own individual key performance indicators (KPIs). The maximum STI opportunity for executives varies according to the role and responsibility of the executive. At the beginning of each year the Board sets a number of strategic objectives for ALE for that year. These objectives are dependent on the strategic issues facing ALE for that year and may include objectives that relate to longer term performance of ALE. Additionally individual specific KPIs are established for all executives with reference to their individual responsibilities that are linked to improving business processes, ensuring compliance with legislative requirements, ensuring compliance with risk management policies and protecting securityholder value as well as other key strategic non-financial measures linked to drivers of performance in future economic periods. how is sti performance accessed? The Board is responsible for assessing whether the KPIs have been met. To facilitate this assessment, the Board receives detailed reports on performance from management. The STI payments may be adjusted up or down in line with over or under achievement against the specific KPIs. This is at the discretion of the Board who have regard to the achievements of the objectives outlined above. how are sti awards delivered? STI payments are made in cash in August each year following the release of ALE’s annual results. 9.3.3 Long term incentive (Lti) what is Lti? what are the Lti performance conditions? The LTI currently provides for the granting of Performance Rights over stapled securities in ALE. If performance conditions are met, then the Performance Rights vest and stapled securities are issued to the executive, subject to any delayed delivery conditions. If performance conditions are not met by the final testing date the Performance Rights lapse. The performance conditions for LTIs are as follows: A service period retention hurdle, whereby the employee must be employed by ALE at the vesting date for the Performance Rights to vest. A Total Securityholder Return (TSR) performance hurdle based on ALE’s absolute TSR. A TSR performance hurdle where ALE’s TSR is ranked against a comparative group consisting of companies classified as Real Estate Investment Trusts in the S&P/ASX 300 Index. what are the periods for the performance conditions? The performance periods for grants are determined on an individual basis. Presently LTI have been granted to Andrew Wilkinson and Andrew Slade. Andrew Wilkinson The performance period for grants to Mr Wilkinson are over the period of his service agreement covered by the grant. This is generally two to three years. As the grant covers the period of the service agreement contract there is no retesting performed on any failed vesting tests. Andrew Slade The performance period for grants to Mr Slade are split over the three years covered by each grant. One-third of the performance rights granted are tested on 30 June of each of the three years following the grant date. For grants prior to 30 June 2009, no retesting is performed on failed vesting tests. For grants made on and after 30 June 2009, any failed TSR performance hurdle is retested at the next anniversary until the performance period concludes. 64 ALE Annual Report 2011 • DirECtors’ rEPort • For the year ended 30 June 2011 what is the vesting scale for the relative tsr performance hurdles? Up to one third of total LTIs awarded are subject to a Relative TSR ranking over the performance period established in the grant. ALE TSR Rank Vesting Scale Below 50th percentile Between 50th percentile and 75th percentile At or above 75th percentile Nil vesting Linear scale: 50% to 99% vesting 100% vesting what is the vesting scale for the Absolute tsr performance hurdles? Up to one third of total LTIs awarded are subject to an Absolute TSR ranking over the performance period established in the grant. when are Ltis delivered? ALE TSR Rank Vesting Scale Below 12% TSR performance Between 12% and 17% TSR performance At or above 17% TSR performance Nil vesting Linear scale: 50% to 99% vesting 100% vesting Andrew Wilkinson Any stapled securities issued under LTIs granted in 2009 will be delivered to Andrew Wilkinson two years after the vesting date provided that, in the reasonable opinion of the Board, he has not engaged in any conduct that: (i) results in ALE having to make any material financial restatement; (ii) causes ALE to incur a material financial loss; or (iii) causes any significant harm to ALE and/or its businesses. Andrew Slade For grants prior to 30 June 2009 LTIs are delivered on an annual basis once testing has been performed and vesting established. For grants subsequent to 30 June 2009, any securities are delivered to Mr Slade two years after the vesting date, subject to the same conditions as Mr Wilkinson’s listed above. what changes have been made to Ltis for 2012 and subsequent period grants? Given the time and material costs of maintaining the current LTI plan the Remuneration Committee has engaged Ernst & Young to review the arrangements with a view to simplifying the administration of the plan, while maintaining proper alignment to securityholders’ long term interests. Any changes arising from this review will be announced when completed. 64 ALE Annual Report 2011 65 ALE Annual Report 2011 9.3.4 summary of key Contract terms Contract Details Executive Position Andrew Wilkinson Managing Director Andrew Slade Capital Manager Michael Clarke Finance Manager and Assistant Company Secretary Ongoing Don Shipway Asset Manager James McNally Executive Director Ongoing Ongoing Brendan Howell Company Secretary and Compliance Officer Ongoing 2 years Ongoing Contract Length Fixed Annual Remuneration Notice by ALE Notice by Executive $365,000 Per contract 6 months $200,000 3 months 3 months $175,000 3 months 3 months $163,500 1 month 1 month $100,000 1 month 1 month $90,000 1 month 1 month managing Director Mr Wilkinson’s current employment contract concluded on 1 June 2011. The Company has agreed terms of a service agreement with Managing Director, Andrew Wilkinson, relating to the period starting 1 July 2011 and ending on 1 July 2014. The agreement stipulates the minimum base salary, inclusive of superannuation, for each of the first three years as being $365,000 for Andrew Wilkinson, to be reviewed annually each 31 December by the Board. A STI (which if earned, will be paid as a cash bonus in August each year) and a LTI in a form consistent with ALE’s LTI arrangements. Following the finalisation of Andrew Wilkinson’s service agreement and the Remuneration Committee’s consideration of a restructure of ALE’s LTI arrangements, a grant of LTI will be made to him, subject to approval at ALE’s 2011 AGM. In the event of the termination of Andrew Wilkinson’s service agreement, and depending on the reason for the termination, amounts may be payable for unpaid accrued entitlements and a proportion of bonus entitlements as at the date of termination. In the event of redundancy, termination amounts are payable for base salary, inclusive of superannuation and bonus and long term incentive entitlements for the balance of the contract. 9.4 ExECutivE rEmuNErAtioN outComE for yEAr ENDED 30 JuNE 2011 Details of remuneration paid to Directors and Key Management Personnel is detailed in the table on page 70. sti outcomes ALE has performed relatively well compared to other Australian real estate investment trusts (AREITs) since the commencement of the global financial crisis (GFC). For FY11 ALE achieved a distributable profit of 19.95 cents per security, which compared favourably to the Board’s guidance of at least 18.50 cents per security. Management contribution to this performance was by way of: • completion of the final stage of the $500 million capital management plan launched in 2009; • completion of a new five year CMBS financing of $160 million at market competitive pricing – the first such issue in the Australian market since the GFC; • preservation of the long term and cost effective capital indexed bonds as part of the CMBS refinancing; • achievement of a Aaa rating on 90% of the new CMBS issue; • execution of a range of discounted debt buybacks and repayments on a basis that maximised earnings outcomes; and • delivery of a range of other strategic property, funding and hedging related initiatives. The remuneration committee considered these achievements and compared them to key performance indicators for each executive that were set at the beginning of the year. The STI result for the Managing Director and Capital Manager particularly reflect the positive contributions they made to the various capital management and refinancing activities, as outlined above. Other executives contributed to a range of the important and valuable outcomes outlined above that were recognised in the STI payments made. All the STI payments are included in staff remuneration expenses in the current year. The STI awarded to each member of the management team is detailed in table 9.8 66 ALE Annual Report 2011 • DirECtors’ rEPort • For the year ended 30 June 2011 Lti outcomes The LTI awards under the ALE Executive Performance Rights Plan were tested as at 30 June 2011. As detailed in section 9.3.3, the performance hurdles were based on a combination of Retention, Absolute TSR and Relative TSR. Andrew Slade was entitled to a grant of LTI for a value equivalent to $50,000 on 1 July 2010. At 30 June 2011 no grant has been made. A grant will be made following the completion of the remuneration committee’s review of ALE’s LTI arrangements. As outlined in section 9.5.3, the performance hurdles were partly achieved and applicable awards vested under the plan and remain subject to the delayed delivery restrictions that are set out in section 9.3.3. ALE financial Performance history To provide context to ALE’s performance, the following data and graphs outline a seven year history on key financial metrics. Distributable profit ($m) Distribution per Security (cents) Property values ($m) (Continuing properties) Net gearing FY05 11.7 12.85 613.5 68.7% FY06 14.6 16.00 655.6 63.9% FY07 FY08 FY09 29.4 32.50 723.8 58.7% 28.9 33.60 722.7 64.3% 33.6 30.00 718.5 65.2% FY10 38.1 24.00 713.9 50.6% FY11 31.3 19.75 758.3 50.9% DistriButABLE Profit ($m) GEAriNG CoNtiNuiNG ProPErty vALuEs ($m) 38.1m 33.6m 31.3m 68.7% 63.9% 64.3% 65.2% 58.7% 29.4m 28.9m 50.6% 50.9% 613.5m 655.6m 723.8m 722.7m 718.5m 713.9m 758.3m 14.6m 11.7m 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 rELAtivE vALuE PErformANCE Index = 100 600 500 400 300 200 100 0 Nov 03 May 04 Nov 04 May 05 Nov 05 May 06 Nov 06 May 07 Nov 07 May 08 Nov 08 May 09 Nov 09 May 10 Nov 10 May 11 ALE Price with distributions reinvested All Ordinaries Accumulation Index UBS Commercial Property Accumulation Index sources: Asx, irEss, ALE 66 ALE Annual Report 2011 67 ALE Annual Report 2011 9.5 DisCLosurEs rELAtiNG to Equity iNstrumENts GrANtED As ComPENsAtioN 9.5.1 outstanding Performance rights over equity instruments granted as compensation Details of performance rights over stapled securities that have been granted as compensation and remain outstanding at year end and details of performance rights that vested during the financial period are as follows: Executive A F O Wilkinson A J Slade A J Slade A J Slade Number of PR Issued 160,026 15,552 30,206 46,164 Grant Date 1 June 2009 30 June 2008 1 July 2008 1 July 2009 Performance period start date Fair value of PR at Grant Date ($) 1 June 2009 1 July 2007 1 July 2008 1 July 2009 1.00 2.57 1.67 1.08 Expiry Date 1 June 2011 30 June 2010 30 June 2011 30 June 2012 Number of PR Vested during 2011 2 & 3 45,200 4,542 16,222 12,319 1. Stapled Securities were issued at nil cost to the employee. 2. Stapled securities of 12,319 due to Mr Slade and 45,200 due to Mr Wilkinson in relation to the 2009 year grants have a delayed delivery of two years. 3. Stapled securities of 8,516 due to Mr Slade in respect of the 1 July 2008 grant will be issued during the 2012 financial year. Number of Stapled Securities Issued 1 – 4,542 7,706 – 9.5.2 modification of terms of equity settled share based payment transactions No terms of equity settled share based payment transactions (including options and rights granted as compensation to key management personnel) have been altered or modified by the issuing entity during the reporting period or the prior period. 9.5.3 Analysis of performance rights over equity instruments granted as compensation Details of the vesting profiles of performance rights granted as remuneration are detailed below. Executive A F O Wilkinson A J Slade Number 1 Date 160,026 6,813 11,558 12,774 12,898 14,115 21,457 1 June 2009 30 June 2008 1 July 2008 1 July 2008 1 July 2009 1 July 2009 1 July 2009 % vested in year 3 % forfeited in year 2 28.2% 66.7% 66.7% 66.7% 68.2% 23.4% –% 68.8% 33.3% 33.3% 33.3% –% –% –% Financial year in which grant vests 1 June 2011 1 July 2010 1 July 2010 1 July 2011 1 July 2010 1 July 2011 1 July 2012 Hurdle testing (b) (a) (a) (b) (a) (b) In accordance with the Rules of the Plan the number issued has been adjusted during the year for the rights issue that occurred in August 2009. 1. 2. The % forfeited in the year represents the reduction from the maximum number of performance rights available to vest due to performance criteria not being achieved and rights not being subject to any subsequent retesting. 3. The performance rights vesting in relation to 2009 year grants have a delayed delivery of two years. (a) These performance rights were tested in the prior year, and as a result in the current year 12,248 performance rights that had vested were issued to Mr Slade. Additionally 8,801 performance rights under the 1 July 2009 grant vested but delivery is delayed for two years in accordance with the conditions attaching to the grant. (b) The performance hurdles were tested as at 30 June 2011 with the following results: 68 ALE Annual Report 2011 • DirECtors’ rEPort • For the year ended 30 June 2011 Grant date A F O Wilkinson 1 June 2009 A J Slade 1 July 2008 1 July 2009 A F O Wilkinson 1 June 2009 A J Slade 1 July 2008 1 July 2009 Result Absolute TSR Return Retention Relative TSR Ranking Retention Result Vested % Absolute TSR Result Relative TSR Result Achieved 13.14% 28.00% 100.00% 22.80% –% Achieved Achieved 6.00% 9.00% 89.30% 28.00% 100.00% 100.00% –% –% 100.00% –% Total Retention Result Vested – Number Absolute TSR Result Relative TSR Result 45,200 32,880 12,320 – 8,516 3,518 4,258 3,518 – – 4,258 – Under the terms of the 2009 year grants to Andrew Slade, the performance hurdles that did not pass will be retested on the subsequent anniversary of the grant. Under the terms of the 2009 year grants to Andrew Wilkinson and Andrew Slade, the stapled securities that are to be issued over performance rights that vested have a delayed delivery date of two years. 9.5.4 Analysis of movements in performance rights The movement during the reporting period, by value of options over stapled securities in ALE is detailed below. Executive A F O Wilkinson A J Slade Granted in year $ (a) – – Vested and exercised in year $ (b) – 24,251 Lapsed in year $ (c ) – 5,749 (a) The value of performance rights granted during the year is the assessed fair value at grant date of performance rights granted, allocated equally over the period from grant date to vesting date. The fair value at grant date has been independently determined by using a Black-Scholes option pricing model. (b) The value of performance rights vested during the year is calculated as the market price of the stapled securities of ALE as at the close of trading on the day the performance rights vested. (c) The value of performance rights lapsed during the year is calculated using the market price of the stapled securities of ALE as at the close of trading on the day the performance rights lapsed. 68 ALE Annual Report 2011 69 ALE Annual Report 2011 9.6 Equity BAsED ComPENsAtioN The performance rights value disclosed above as part of specified executive remuneration is the assessed fair value at grant date of performance rights granted, allocated equally over the period from grant date to vesting date. The fair value at grant date has been independently determined by using a Black-Scholes option pricing model. This technique takes into account factors such as the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the performance right, the security price at grant date and expected price volatility of the underlying security, the expected distribution yield, the risk-free interest rate for the term of the performance right and any delayed delivery in the securities to the executive. 9.7 NoN-ExECutivE DirECtors’ rEmuNErAtioN 9.7.1 remuneration Policy and strategy Non-executive directors’ individual fees are determined by the ALE Board within the aggregate amount approved by shareholders. The current aggregate amount which has been approved by shareholders at the AGM on 10 November 2010 was $500,000. The Board reviews its fees to ensure that ALE non-executive directors are remunerated fairly for their services, recognising the level of skill, expertise and experience required to conduct the role. The Board reviews its fees from time to time to ensure it is remunerating directors at a level that enables ALE to attract and retain the right non-executive directors. Fees and payments to non-executive directors reflect the demands which are made on them and the responsibilities of the Directors. Non-executive directors’ fees and payments were reviewed in the current financial year, the first review since 2007. The Board may obtain the advice of independent remuneration consultants to ensure that non-executive directors’ fees and payments are appropriate and in line with the market. The Chairman’s fees are determined independently from the fees of the other non-executive directors, based on comparative roles in the external market. The Chairman is not present at any discussion relating to the determination of his own remuneration. Non-executive directors do not receive any equity based payments, retirement benefits or other incentive payments. 9.7.2 remuneration structure ALE non-executive directors receive a cash fee for service and they have no entitlement to any performance based remuneration, nor can they participate in any security based incentive scheme. During FY11 fee increases to non-executive and executive directors (excluding the Managing Director) were made following the review by remuneration consultants Guerdon Associates Pty Limited. These overall increases of 14.00% reflect in part the additional responsibilities undertaken by non-executive directors as members of various committees and increased commitments required of the directors. The last review of directors, Board and Committee fees was in 2007. The current base remuneration was last reviewed with effect from January 2011. The Directors’ fees are inclusive of committee fees. Board ACRMC Remuneration Committee Chairman* Member Chairman Member Chairman Member Board and Committee fees $175,000 $85,000 $15,000 $10,000 $15,000 $5,000 * The Chairman of the Board’s fees are inclusive of all committee fees. James McNally’s (Executive Director) remuneration is determined in accordance with the above fees. He receives an additional $5,000 for being a Responsible Manager of the Company under the Company’s AFSL and $10,000 for being a director of ALE Finance Company Pty Limited. 70 ALE Annual Report 2011 • DirECtors’ rEPort • For the year ended 30 June 2011 9.8 DEtAiLs of rEmuNErAtioN Amount of remuneration Details of the remuneration of the key management personnel for the current year and for the comparative year are set out below in tables 1 and 2. The cash bonuses were dependent on the satisfaction of performance conditions as set out in the section headed “Short term incentives” above. Long term incentives are market and non-market based performance related as set out in section 9.7 above. All other elements of remuneration were not directly related to performance. Table 1 Remuneration details 1 July 2010 to 30 June 2011 Details of the remuneration of the Key Management Personnel for the year ended 30 June 2011 are set out in the following table: Key management personnel Short term Post employment benefits Other long term Equity based payment Salary & Fees $ STI Cash Bonus $ Non monetary benefits $ Super- annuation benefits $ Total $ Termination benefits $ Performance Rights $ $ Total $ S300A(1)(e)(i) proportion of remuneration performance based $ S300A(1)(e) (vi) Value of performance rights as proportion of remuneration $ 149,083 92,500 – – 87,156 90,000 342,926 95,000 172,397 148,164 123,269 – – 135,000 – 80,000 35,000 25,000 – 149,083 13,417 – 92,500 – – – – – 6,764 8,917 – 87,156 90,000 477,926 95,000 259,161 192,081 148,269 7,844 – 15,199 – 15,199 13,466 11,094 – – – – 5,200 – 2,853 1,738 328 1,300,495 275,000 15,681 1,591,176 76,219 10,119 – – – – – – – – – – – 162,500 – 92,500 – – 80,000 – – – – 95,000 90,000 578,325 95,000 277,213 207,285 159,691 80,000 1,757,514 – – – – 37.2% – 28.9% 16.9% 15.7% – – – – 13.8% – 0.0% – – Table 2 Remuneration details 1 July 2009 to 30 June 2010 Details of the remuneration of the Key Management Personnel for the year ended 30 June 2010 are set out in the following table: Key management personnel Short term Post employment benefits Other long term Equity based payment Salary & Fees $ STI Cash Bonus $ Non monetary benefits $ Super- annuation benefits $ Total $ Termination benefits $ Performance Rights $ $ Total $ S300A(1)(e)(i) proportion of remuneration performance based $ S300A(1)(e) (vi) Value of performance rights as proportion of remuneration $ Name Role P H Warne Non-executive Director J P Henderson Non-executive H I Wright Director Non-executive Director Company Secretary B R Howell A F O Wilkinson Executive Director Executive Director J T McNally Capital Manager A J Slade Finance Manager M J Clarke Asset Manager D J Shipway Name Role P H Warne Non-executive Director J P Henderson Non-executive H I Wright Director Non-executive Director B R Howell Company Secretary A F O Wilkinson Executive Director Executive Director J T McNally Capital Manager A J Slade Finance Manager M J Clarke 137,615 85,000 – – – 137,615 12,385 – 85,000 – 77,982 90,000 321,789 90,000 172,274 136,525 – – 100,000 – 60,000 45,000 – – – – – 9,280 77,982 90,000 421,789 90,000 232,274 190,805 7,018 – 14,461 – 14,461 12,554 – – – – 2,021 – – – 1,111,185 205,000 9,280 1,325,465 60,879 2,021 – – – – – – – – – – 150,000 – 85,000 – – 80,000 – 50,000 – 85,000 90,000 518,271 90,000 296,735 203,359 130,000 1,518,365 – – – – 34.7% – 37.1% 22.1% – – – – 15.4% – 16.9% – 70 ALE Annual Report 2011 71 ALE Annual Report 2011 10 stAPLED sECuritiEs uNDEr oPtioN No performance rights over unissued stapled securities of ALE were granted during or since the end of the year. 11 stAPLED sECuritiEs issuED oN thE ExErCisE of oPtioNs The following stapled securities were issued on the exercise of performance rights during the financial year. Executive A F O Wilkinson A J Slade Number of Stapled Securities Issued – 12,248 12 iNsurANCE of offiCErs During the financial year, the Company paid a premium of $37,350 (2010: $37,750) to insure the Directors and officers of the Company. The auditors of the Company are in no way indemnified out of the assets of the Company. Under the constitution of the Company, current or former Directors and secretaries are indemnified to the full extent permitted by law for liabilities incurred by that person in the discharge of their duties. The constitution provides that the Company will meet the legal costs of that person. This indemnity is subject to certain limitations. 13 ENviroNmENtAL rEGuLAtioN While the Company is not subject to significant environmental regulation in respect of its property activities, the directors are satisfied that adequate systems are in place for the management of its environmental responsibility and compliance with various licence A108 requirements and regulations. Further, the directors are not aware of any material breaches of these requirements. At three properties, ongoing testing and monitoring is being undertaken and further minor remedial work is required, however, the Company is indemnified by third parties against any remediation costs likely to be required. 72 ALE Annual Report 2011 • DirECtors’ rEPort • For the year ended 30 June 2011 14 NoN-AuDit sErviCEs The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Company are important. The Board of directors has considered the position, and in accordance with the advice received from the ACRMC is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed by the ACRMC to ensure that they do not impact the impartiality and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in Professional Statement F1, including reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing economic risk and rewards. Details of amounts paid or payable to the auditor (KPMG) for audit and non-audit services provided during the year are set out below: Audit services KPMG Australian firm: Audit and review of the financial reports of the ALE Property Group and other audit work required under the Corporations Act 2001 • in relation to current year • in relation to prior year total remuneration for audit services other services KPMG Australian firm: Transaction compliance services total other services 30 June 2011 $ 30 June 2010 $ 164,500 37,500 202,000 167,172 30,000 197,172 – – 150,983 150,983 15 AuDitor’s iNDEPENDENCE DECLArAtioN A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 73. This report is made in accordance with a resolution of the Directors. PEtEr h wArNE DIRECTOR Sydney Dated this 2nd day of August 2011 72 ALE Annual Report 2011 73 ALE Annual Report 2011 • AuDitor’s iNDEPENDENCE DECLArAtioN • Lead Auditor’s independence Declaration under section 307C of Corporations Act 2001 To: the Directors of Australian Leisure and Entertainment Property Management Limited I declare that, to the best of my knowledge and belief, in relation to the audit of the financial year ended 30 June 2011 there have been: (i) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit. kPmG N virGo PARTNER Sydney 2 August 2011 74 ALE Annual Report 2011 • stAtEmENt of ComPrEhENsivE iNComE • For the year ended 30 June 2011 revenue Expense reimbursement Interest income total revenue Annual Report and Annual Review Audit, accounting, tax and professional fees Corporate advisory services Depreciation expense and asset write-offs Insurance Legal fees Occupancy costs Other expenses Registry fees Salaries, fees and related costs Staff training Travel and accommodation total expenses Profit/(loss) before income tax Income tax expense/(benefit) Profit/(loss) after income tax Profit/(loss) attributable to the shareholders of the Company other comprehensive income other comprehensive income for the period after income tax total comprehensive income for the period Profit/(loss) attributable to: Equity holders of the Company Minority interest total profit/(loss) for the period Comprehensive income attributable to: Equity holders of the Company Minority interest total comprehensive income for the period Basic and diluted earnings/(loss) per share Dividends paid and payable per share The above statement of comprehensive income should be read in conjunction with the accompanying Notes. Note 5 7 30 June 2011 $ 30 June 2010 $ 3,501,676 23,425 3,525,101 56,463 258,845 101,584 29,919 114,825 244,200 132,187 310,981 94,409 2,084,662 36,953 36,648 3,501,676 23,425 31,027 (7,602) 3,034,011 13,607 3,047,618 73,306 253,822 97,262 45,756 97,319 (272,404) 122,001 239,763 124,954 1,680,565 33,463 43,204 2,539,011 508,607 187,184 321,423 (7,602) 321,423 – – – – (7,602) 321,423 (7,602) – (7,602) (7,602) – (7,602) Cents (0.00) – 321,423 – 321,423 321,423 – 321,423 Cents 0.23 – 74 ALE Annual Report 2011 75 ALE Annual Report 2011 • stAtEmENt of fiNANCiAL PositioN • As at 30 June 2011 Current assets Cash and cash equivalents Receivables Prepayments and other assets total current assets Non-current assets Plant and equipment Investment in related party Deferred tax asset total non-current assets total assets Current liabilities Payables Provisions total current liabilities total liabilities Net assets Equity Contributed equity Retained losses Reserves total equity Net assets per share The above statement of financial position should be read in conjunction with the accompanying Notes. 30 June 2011 $ 30 June 2010 $ Note 8 9 10 11 12 13 14 15 16 295,231 2,673,271 152,475 3,120,977 73,910 9,080,010 162,887 9,316,807 273,462 1,521,074 837,805 2,632,341 40,379 9,080,010 193,914 9,314,303 12,437,784 11,946,644 850,553 43,725 894,278 894,278 698,019 9,146 707,165 707,165 11,543,506 11,239,479 12,118,181 (808,008) 233,333 11,543,506 11,862,301 (806,155) 183,333 11,239,479 Cents 7.31 Cents 7.33 76 ALE Annual Report 2011 • stAtEmENt of ChANGEs iN Equity • For the year ended 30 June 2011 2011 total equity at the beginning of the year Total comprehensive income for the period Profit/(loss) for the year Other comprehensive income Total comprehensive income for the year Issue of units in ALE Property Trust under ALE Property Group Executive Performance Rights Plan Shares issued – dividend reinvestment plan Employee share based payments expense total equity at the end of the year 2010 Total equity at the beginning of the year Total comprehensive income for the period Profit/(loss) for the year Other comprehensive income Total comprehensive income for the year Issue of units in ALE Property Trust under ALE Property Group Executive Performance Rights Plan Shares issued – institutional placement Shares issued – rights issue Shares issued – dividend reinvestment plan Employee share based payments expense Total equity at the end of the year Share Capital $ Share based payments reserve $ Retained Earning $ Total $ 11,862,301 183,333 (806,155) 11,239,479 – – – – – – 708 255,172 – (30,000) – 80,000 (7,602) (7,602) 5,749 – – (7,602) (7,602) (23,543) 255,172 80,000 12,118,181 233,333 (808,008) 11,543,506 8,813,743 83,333 (1,132,630) 7,764,446 – – – 723 602,766 2,310,617 134,452 – 11,862,301 – – – (30,000) – – – 130,000 183,333 321,423 – 321,423 5,052 – – – – 321,423 – 321,423 (24,225) 602,766 2,310,617 134,452 130,000 (806,155) 11,239,479 The above statement of changes in equity should be read in conjunction with the accompanying Notes. 76 ALE Annual Report 2011 77 ALE Annual Report 2011 • CAsh fLow stAtEmENt • For the year ended 30 June 2011 Cash flows from operating activities Management fee received and expense reimbursements Payments to suppliers and employees Interest received – bank deposits and investment arrangements Net cash inflow/(outflow) from operating activities Cash flows from investing activities Payments for plant and equipment Net cash (outflow) from investing activities Cash flows from financing activities Loan from related party Shares issued Net cash (outflow) from financing activities Net increase/(decrease) in cash and cash equivalents held Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year The above statement of cash flows should be read in conjunction with the accompanying Notes. 30 June 2011 $ 30 June 2010 $ Note 4,269,110 (4,201,961) 18,069 85,218 (63,449) (63,449) – – – 21,769 273,462 295,231 7,324,240 (7,276,416) 12,652 60,476 – – (3,072,060) 3,047,835 (24,225) 36,251 237,211 273,462 8 8 78 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 1 BAsis of PrEPArAtioN (a) statement of compliance The financial statements are general purpose financial statements which have been prepared in accordance with Australian Accounting Standards (AASs) (including Australian Interpretations) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The financial statements also comply with the IFRS and interpretations adopted by the International Accounting Standards Board. The stapled securities of ALE are quoted on the Australian Stock Exchange under the code LEP and comprise one unit in Australian Leisure and Entertainment Property Trust and one share in the Company. The unit and the share are stapled together under the terms of their respective constitutions and can not be traded separately. Each entity forming part of ALE is a separate legal entity in its own right under the Corporations Act 2001 and Australian Accounting Standards. (b) Basis of measurement The financial statements are prepared on the historical cost basis. The methods used to measure fair values are discussed further in Note 3. (c) functional and presentation currency These financial statements are presented in Australian dollars, which is the Company’s functional currency. (d) use of estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in the following Notes: • Note 20 – measurement of share based payments NotE 2 summAry of siGNifiCANt ACCouNtiNG PoLiCiEs The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. The accounting policies applied by the Company in these financial statements are the same as those applied by the Company in its financial report as at and for the year ended 30 June 2010. (a) Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents includes cash at bank, deposits at call and short term money market securities which are readily convertible to cash. (b) receivables Trade debtors are recognised initially at fair value and subsequently measured at amortised cost, less provision for doubtful debts. Trade receivables are generally due for settlement within 30 days. Collectibility of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for doubtful receivables is established when there is objective evidence that all amounts due may not be collected according to the original terms of the receivables. The amount of any provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the Statement of Comprehensive Income. (c) investments and financial assets Financial assets classified as loans and deposits are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and arise when money and services are provided to a debtor with no intention of selling the receivable. Loans and deposits are carried at amortised cost using the effective interest rate method. Under this method, fees, costs, discounts and premiums directly related to the financial asset are spread over its effective life. (d) Plant and equipment Plant and equipment including office fixtures, fittings and operating equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to its acquisition. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation Depreciation on depreciable plant and equipment (office fixtures, fittings and operating equipment) is calculated using the straight line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives. The estimated useful life of depreciable plant and equipment is as follows: Furniture, fittings and equipment Software Leasehold improvements 4 – 13 years 3 years 3 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the Statement of Comprehensive Income. 78 ALE Annual Report 2011 79 ALE Annual Report 2011 NotE 2 summAry of siGNifiCANt ACCouNtiNG PoLiCiEs (CoNtiNuED) (e) trade and other payables These amounts represent liabilities for goods and services provided to the Company prior to the end of the period which are unpaid at the balance sheet date. The amounts are unsecured and are usually paid within 30 days of recognition. The fair value at grant date is independently determined using a Black- Scholes option pricing model that takes into account the exercise price, the term of the performance right, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the performance right. (f) Provisions Provisions are recognised when there is a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. Provisions are not recognised for future operating losses. (g) Dividends Provision is made for the amount of any dividends declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the financial year but not distributed at the balance date. (h) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the equity holders of the Company by the weighted average number of shares outstanding during the reporting period. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential shares. (i) Contributed equity Ordinary shares are classified as contributed equity. Incremental costs directly attributable to the issue of new units, shares or options are shown in contributed equity as a deduction, net of tax, from the proceeds. (j) Employee benefits (i) Wages and salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months of the reporting date are recognised as a current liability in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised as an expense when the leave is taken and measured at the rates paid or payable. (ii) Share based payments The grant date fair value of performance rights granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the performance rights. The amount recognised as an expense is adjusted to reflect the actual number of performance rights that vest, except for those that fail to vest due to performance hurdles not being met. The fair value of the performance rights granted excludes the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of performance rights that are expected to become exercisable. At each balance date, the entity revises its estimate of the number of performance rights that are expected to become exercisable. The employee benefit expense recognised each period takes into account the most recent estimate. Upon the exercise of options, the balance of the share-based payments reserve relating to those performance rights is transferred to contributed equity. (iii) Bonus plans Liabilities and expenses for bonuses are recognised where contractually obliged or where there is a past practice that has created a constructive obligation. (iv) Long service leave The Company will begin to recognise liabilities for long service leave when employees reach a qualifying period of continuous service. The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with the terms to maturity and currency that match, as closely as possible, the estimated future cash flow. (v) Retirement benefit obligations The Company pays fixed contributions to employee superannuation funds and the Company’s legal or constructive obligations are limited to these contributions. The contributions are recognised as an expense as they become payable. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. (k) revenue Management fee income is brought to account on an accruals basis, and if not received at balance date is reflected in the balance sheet as a receivable. (l) interest income Interest income is recognised on a time proportion basis using the effective interest method. 80 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 2 summAry of siGNifiCANt ACCouNtiNG PoLiCiEs (CoNtiNuED) (m) Expenses Expenses including operating expenses and other outgoings are brought to account on an accruals basis and, if not paid at balance date, are reflected in the balance sheet as payables. (n) income tax The income tax expense or revenue for the reporting period is the tax payable on the current reporting period’s taxable income, based on the Australian company tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of the assets and liabilities and their carrying amounts in the financial statements and to unused tax losses. Deferred tax balances are calculated using the balance sheet method. Under this method, temporary differences arise between the carrying amount of assets and liabilities in the financial statements and the tax bases for the corresponding assets and liabilities. However, an exception is made for certain temporary differences arising from the initial recognition of an asset or liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. Similarly, no deferred tax asset or liability is recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities settled. Deferred tax assets are recognised for temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. (o) Goods and services tax (Gst) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable, to the taxation authority are presented as operating cash flow. (p) New accounting standards and uiG interpretation A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 July 2010, and have not been applied in preparing these financial statements. None of these are expected to have a significant effect on the financial statements of the Company. (q) segment reporting An operating segment is a component of ALE that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of ALE’s other entities. All operating segments’ operating results are regularly reviewed by ALE’s Managing Director to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results that are reported to the Managing Director include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. NotE 3 DEtErmiNAtioN of fAir vALuEs A number of the Company’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the Notes specific to that asset or liability. receivables The fair value of trade and other receivables, excluding construction work in progress, is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. 80 ALE Annual Report 2011 81 ALE Annual Report 2011 NotE 4 fiNANCiAL risk mANAGEmENt overview The Company has exposure to the following risks from its use of financial instruments: • credit risk • liquidity risk • market risk This note presents information about the Company’s exposure to each of the above risks, their objectives, policies and processes for measuring and managing risk, and the management of capital. Further quantitative disclosures are included throughout this financial report. The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. The Board has established the Audit, Compliance and Risk Management Committee, which is responsible for developing and monitoring risk management policies. The committee reports regularly to the Board of Directors on its activities. Risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company, through its training and management standards and procedures, has developed a disciplined and constructive control environment in which all employees understand their roles and obligations. The Audit, Compliance and Risk Management Committee oversees how management monitors compliance with the Company’s risk management policies and procedures and reviews the adequacy of the risk management framework. Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s receivables from customers and investment securities. Trade and other receivables The Company’s exposure to credit risk is influenced mainly by the individual characteristic of each customer. The Company has few customers and therefore there is significant concentration of credit risk. Credit risk has been minimised primarily by ensuring, on a continuous basis, that the customers have appropriate financial standing. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation. The Company has liquidity risk management policies, which assist it in monitoring cash flow requirements and optimising its cash return on investments. Typically the Company ensures that it has sufficient cash on demand to meet expected operational expenses and commitments for the purchase/sale of assets for a period of 90 days (or longer if deemed necessary), including the servicing of financial obligations. market risk Market risk is the risk that changes in market prices, such as the consumer price index and interest rates, will affect the Company’s income. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. NotE 5 ExPENsE rEimBursEmENts Reimbursement of expenses for managing the Head Trust and controlled entities 30 June 2011 $ 30 June 2010 $ 3,501,676 3,034,011 Fees are charged to the Trust and its controlled entities by the Company for reimbursement of expenses incurred in the management of the trust and responsible entity services. Expense reimbursement receipts of $4,269,110 (2010: $7,324,240) disclosed in the statement of cash flows is comprised predominantly of expenses paid for by the Company on behalf of the Trust and other ALE group entities and subsequently reimbursed from the entities. The legal obligations for these expenses are the responsibility of the individual ALE group entities and are not expenses of the Company. 82 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 6 AuDitors’ rEmuNErAtioN Audit services KPMG Australian firm: Audit and review of the financial reports of the ALE Property Group and other audit work under the Corporations Act 2001 – – total remuneration for audit services in relation to current year in relation to prior year NotE 7 iNComE tAx ExPENsE/(BENEfit) Current tax expense/(benefit) Deferred tax (benefit) Income tax expense Decrease/(increase) in deferred tax asset reconciliation of income tax expense to prima facie tax payable Profit/(loss) before income tax expense Tax at the Australian tax rate of 30% Tax effect of amounts which are deductible (taxable) in calculating taxable income: Share based payments Under provision in prior years income tax expense/(benefit) NotE 8 CAsh AND CAsh EquivALENts Cash at bank Deposits at call (a) As at 30 June 2011 the weighted average interest rate earned on cash was 5.03% (2010: 3.50%). (b) The deposits represent office occupancy security deposits. Reconciliation of profit after income tax to net cash inflows from operating activities Profit/(loss) for the year Depreciation Non-cash employee benefits expense – share based payments (Increase)/decrease in receivables (Increase)/decrease in other assets (Increase)/decrease in deferred tax asset Increase/(decrease) in loan from related party Increase/(decrease) in provisions Increase/(decrease) in payables Increase/(decrease) in current tax liability Net cash inflows from operating activities 30 June 2011 $ 30 June 2010 $ Note 164,500 37,500 202,000 – 31,027 31,027 31,027 31,027 167,172 30,000 197,172 1,138 186,046 187,184 186,046 186,046 23,425 508,607 7,027 152,582 24,000 – 31,027 110,767 184,464 295,231 (7,602) 29,918 80,000 (95,576) 685,330 31,027 (774,992) 34,579 102,534 – 85,218 39,000 (4,398) 187,184 205,029 68,433 273,462 321,423 44,828 130,000 624,855 (781,942) 186,046 (135,077) (12,240) (318,599) 1,182 60,476 (a) (b) 82 ALE Annual Report 2011 83 ALE Annual Report 2011 NotE 9 rECEivABLEs Accounts receivable Loan to related party Interest receivable NotE 10 iNvEstmENt iN rELAtED PArty Trust Non-Income Voting Units (NIVUS) The Company was issued 9,080,010 of non-income voting units (NIVUS) in the Trust fully paid at $1.00 each in November 2003. The NIVUS are not stapled to shares in the Company, have an issue and withdrawal price of $1.00, carry no rights to income from the Trust and entitle the holder to no more than $1.00 per NIVUS upon the winding-up of the Trust. The Company has a voting power of 5.42% in the Trust as a result of the issue of NIVUS. The NIVUS are disclosed in the Company but are not disclosed in the ALE Property Group financial statements as they are eliminated on consolidation. NotE 11 DEfErrED tAx AssEt Deferred tax assets The balance comprises temporary differences attributable to: Amounts recognised in statement of comprehensive income Employee benefits Acquisition proposal due diligence Other accruals Other Tax losses Net deferred tax assets movements: Opening balance Credited/(charged) to the statement of comprehensive income (Note 7) Closing balance at Deferred tax assets to be recovered within 12 months Deferred tax assets to be recovered after more than 12 months NotE 12 PAyABLEs Trade creditors Creditor accruals NotE 13 ProvisioNs Provision for employee entitlements 30 June 2011 $ 30 June 2010 $ 232,295 2,437,215 3,761 2,673,271 140,429 1,380,594 51 1,521,074 9,080,010 9,080,010 162,887 193,914 13,118 5,439 125,100 1,872 17,358 162,887 193,914 (31,027) 162,887 147,491 15,396 162,887 279,365 571,188 850,553 43,725 43,725 2,744 11,414 120,465 2,590 56,701 193,914 379,960 (186,046) 193,914 137,213 56,701 193,914 341,051 356,968 698,019 9,146 9,146 84 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 14 CoNtriButED Equity (a) share capital Issued share capital (b) movements in ordinary share capital Opening balance Shares issued – ALE Executive Performance Rights Plan Shares issued – Dividend Reinvestment Plan Shares issued – institutional placement Shares issued – rights issue Balance at the end of the period Shares on issue Opening balance Shares issued – ALE Executive Performance Rights Plan Shares issued – Dividend Reinvestment Plan Shares issued – institutional placement Shares issued – rights issue Closing balance 30 June 2011 $ 30 June 2010 $ 12,118,176 11,862,301 11,862,301 708 255,172 – – 12,118,181 8,813,743 723 134,452 602,766 2,310,617 11,862,301 No. of shares No. of shares 153,354,571 12,248 4,624,157 – – 87,692,019 11,088 2,074,471 13,153,803 50,423,190 157,990,976 153,354,571 (c) shares Fully paid stapled securities in the Company were issued at $1.00 per stapled security. Each stapled security comprises one $0.10 share in the Company and one $0.90 unit in the Trust. They cannot be traded or dealt with separately. Stapled securities entitle the holder to participate in dividends/ distributions and the proceeds on any winding up of the Company in proportion to the number of and amounts paid on the securities held. On a show of hands, every holder of stapled securities present at a meeting in person or by proxy, is entitled to one vote. On a Company poll, each ordinary shareholder is entitled to one vote for each fully paid share, and on a Trust poll each unitholder is entitled to one vote for each fully paid unit. During the previous financial year the ALE Property Group undertook an Institutional Placement of stapled securities of 15% of the issued stapled securities. These stapled securities were issued at $2.25 each. In addition a 1 for 2 rights issue was conducted, with the stapled securities issued at $1.50 per security. The share capital increase for the Company represents the Company’s share of the proceeds from the new stapled securities issued. NotE 15 rEtAiNED LossEs Balance at the beginning of the year Net profit/(loss) attributable to ordinary shareholders Transfer from share based payments reserve Balance at the end of the year NotE 16 rEsErvEs share-based payments reserve Balance at the beginning of the year Employee share based payments expense Transfer to Retained Profits on lapsing of performance rights Vesting of performance rights Balance at the end of the year 30 June 2011 $ 30 June 2010 $ (806,155) (7,602) 5,749 (808,008) (1,132,630) 321,423 5,052 (806,155) 233,333 183,333 183,333 80,000 (5,749) (24,251) 233,333 83,333 130,000 (5,052) (24,948) 183,333 84 ALE Annual Report 2011 85 ALE Annual Report 2011 NotE 17 sEGmENt iNformAtioN Business segment ALE has one reportable segment, as described below, which is ALE’s strategic business unit. The strategic business unit is based upon internal management reports that are reviewed by the Managing Director on at least a quarterly basis. The strategic business unit covers the operations of the responsible entity for the ALE Property Group. Comparative information has been presented in conformity with the requirements of AASB 8 Operating Segments. The Company received 100% of its expense reimbursement from the Head Trust. Geographical segment The Company operates solely within Australia. NotE 18 EvENts oCCurriNG AftEr rEPortiNG DAtE The Directors are not aware of any matter or circumstance occurring after balance date which may materially affect the Company’s operations, the results of those operations or the state of affairs of the Company. NotE 19 CoNtiNGENt LiABiLitiEs Bank guarantee The Company has entered into a bank guarantee of $184,464 in respect of an office tenancy at Level 10, 6 O’Connell Street, Sydney. The directors are not aware of any material contingent liabilities as at the date of this report. NotE 20 shArE BAsED PAymENts During 2007, ALE established a Performance Rights Plan that entitles key management personnel, subject to performance, to become entitled to acquire stapled securities at nil cost to the employee. Under the Performance Rights Plan grants of performance rights have been made to Mr Wilkinson and Mr Slade. In accordance with the plan the performance rights vest upon performance hurdles being achieved. The terms and conditions of the remaining grants are as follows: Employee entitled Grant date Number of PRs Vesting conditions Mr A F O Wilkinson 1 June 2009 160,026 1. Service period 2. Absolute Total Securityholder Return 3. Total Shareholder Return compared to comparative group Mr A J Slade 1 July 2008 1 July 2009 12,774 39,669 1. Service period 2. Absolute Total Securityholder Return 3. Total Shareholder Return compared to comparative group Contractual life of PRs 1 June 2011 30 June 2011 30 June 2012 The vesting conditions for Mr Slade’s performance rights are tested annually soon after 30 June each year. One third of the number of performance rights issued are tested at each 30 June over a three year period. 86 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 20 shArE BAsED PAymENts (CoNtiNuED) The number and weighted average fair values of the performance rights on issue are as follows: Outstanding at 1 July Granted during period Vested during year* Lapsed during year Outstanding at 30 June Number of performance rights 2011 weighted average fair value 2011 Number of performance rights 2010 Weighted average fair value 2010 237,335 – (12,248) (3,817) 221,270 1.11 – 1.98 1.98 1.05 41,013 210,583 (11,088) (3,173) 237,335 1.88 0.98 1.97 1.97 1.11 * During the year 8,801 performance rights vested to Mr Slade, under the condition of the grant these will not be issued to Mr Slade until 30 June 2012. The performance rights outstanding at 30 June 2011 will be issued at nil cost to the employee if and when they vest. The performance rights value is the assessed fair value at grant date of the performance rights, allocated equally over the period from grant date to vesting date. The fair value at grant date has been independently determined by using a Black-Scholes option pricing model. This technique takes into account factors such as the exercise price, the term of the performance rights, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the performance rights, the security price at grant date and expected price volatility of the underlying security, the expected distribution yield and the risk-free interest rate for the term of the performance rights. NotE 21 CommitmENts (a) Capital commitments The Directors are not aware of any capital commitments as at the date of this report. (b) Lease commitments The Company has entered into a non-cancellable operating lease for new office premises at Level 10, 6 O’Connell Street, Sydney starting November 2010. The Company has also entered into a non-cancellable operating lease for office equipment. The minimum net lease commitments under these leases are: Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Within one year Later than one year but not later than five years Later than five years 30 June 2011 $ 107,543 265,977 – 373,520 30 June 2010 $ 88,005 253,109 22,405 363,519 86 ALE Annual Report 2011 87 ALE Annual Report 2011 NotE 22 rELAtED PArty trANsACtioNs (a) Parent entity, subsidiaries, joint ventures and associates The Company has no parent entity, subsidiaries, joint ventures or associates. (b) key management personnel Key management personnel and their compensation is set out in Note 23. (c) transaction with related parties For the year ended 30 June 2011 the Company had charged the Trust $3,501,676 in expense reimbursement (2010: $3,034,011). Peter Warne is also a director of Next Financial Limited (Next Financial) which acts as an Investment Manager. At 30 June 2011, Next Financial held on behalf of its clients (other than Peter Warne) 2,537,389 (2010: 3,396,558) stapled securities in the ALE Property Group. With the exception of his own holding, Peter Warne is not involved in any of the decision making processes regarding those securities in the ALE Property Group held by Next Financial for its clients. Procedures have been put into place to ensure Peter Warne’s independence and confidentiality of information are maintained. Peter Warne is a non-executive director of Macquarie Group Limited (Macquarie). Macquarie has provided banking services and corporate advice to ALE in the past and may continue to do so in the future. Mr Warne does not take part in any decisions to appoint Macquarie in relation to banking services and corporate advice provided by Macquarie to ALE. (d) terms and conditions All related party transactions are conducted on normal commercial terms and conditions. Outstanding balances are unsecured and are repayable in cash and callable on demand. NotE 23 kEy mANAGEmENt PErsoNNEL (a) Directors The following persons were Directors of the Company during the financial year: Name Type P H Warne (Chairman) J P Henderson H I Wright A F O Wilkinson (Managing Director) J T McNally Independent non-executive Independent non-executive Independent non-executive Executive Executive Appointed 8 September 2003 19 August 2003 8 September 2003 16 November 2004 26 June 2003 (b) other key management personnel The following persons also had authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly, during the year. Name A J Slade B R Howell M J Clarke D J Shipway Title Capital Manager Company Secretary and Compliance Officer Finance Manager and Assistant Company Secretary Asset Manager 88 ALE Annual Report 2011 • NotEs to thE fiNANCiAL stAtEmENts • For the year ended 30 June 2011 NotE 23 kEy mANAGEmENt PErsoNNEL (CoNtiNuED) (c) Compensation for key management personnel The following table sets out the compensation for key management personnel in aggregate. Refer to the remuneration report in the Directors’ Report for details of the remuneration policy and compensation details by individual. Short term employee benefits Post employment benefits Other long term benefits Share based payments Total share based payments expense in the year Performance rights granted in 2009 Performance rights granted in 2010 Performance rights granted in 2011 Total NotE 24 EArNiNGs PEr shArE (a) Basic earnings per share Attributable to equity holders of the Company Basic and diluted earnings per equity holders of the Company Attributable to securityholders of the stapled entity Basic and diluted earnings per stapled security before financing costs attributable to the Company securityholders divided by the average number of securities Basic and diluted earnings per stapled security using realised operating income 30 June 2011 $ 1,591,176 76,219 10,119 80,000 1,757,514 80,000 – – 80,000 30 June 2011 cents 30 June 2010 $ 1,325,465 60,879 2,021 130,000 1,518,365 80,000 50,000 – 130,000 30 June 2010 cents (0.00) 0.23 (0.00) (0.00) Number 2011 0.23 0.23 Number 2010 (b) weighted average number of shares used as the denominator Weighted average number of shares used as the denominator in calculating earnings per share Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 156,564,420 141,837,573 156,564,420 141,837,573 88 ALE Annual Report 2011 89 ALE Annual Report 2011 NotE 25 fiNANCiAL iNstrumENts (a) Credit risk ALE’s major credit risk is the risk that the tenant will fail to perform its contractual obligations including honouring the terms of the lease agreements either in whole or in part. Credit risk has been minimised primarily by ensuring, on a continuous basis, that the tenant has appropriate financial standing. Credit risk on cash is managed through ensuring all cash deposits are held with major domestic banks. The credit risk on financial assets of the Company which have been recognised in the balance sheet is generally the carrying amount net of any provision for doubtful debts. Exposure to credit risk Receivables Cash and cash equivalents impairment losses Not past due Past due 0–30 days Past due 31–120 days Past due 120–365 days More than one year 2011 $ 236,056 295,231 531,287 2010 $ 140,480 273,462 413,942 2011 2010 Gross receivables $ impairment $ Gross Receivables $ Impairment $ 76,015 68,791 – 91,250 – 236,056 – – – – – – 129,844 – 10,636 – – 140,480 – – – – – – (b) Liquidity risk The Company has no contracted financial liabilities and therefore the Company’s liquidity risk to external parties is minimal. (c) interest rate risk The Company has no financial interest bearing obligations and accordingly the Company’s interest rate risk is minimal. 90 ALE Annual Report 2011 • DirECtors’ DECLArAtioN • For the year ended 30 June 2011 In the Directors’ opinion: (a) the financial statements and notes that are set out on pages 74 to 89 and the remuneration report contained in Section 9 of the Directors’ report, are in accordance with the Corporations Act 2001, including (i) giving a true and fair view of the company’s financial position as at 30 June 2011 and of its performance for the financial year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that ALE will be able to pay its debts as and when they become due and payable. (c ) The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Managing Director, Finance Manager, and Company Secretary as required for the financial year ended 30 June 2011. (d) The directors draw attention to Note 1 to the financial statements, which includes a statement of compliance with International Financial Reporting Standards. This declaration is made in accordance with a resolution of the Directors. PEtEr h wArNE DIRECTOR Sydney Dated this 2nd day of August 2011 90 ALE Annual Report 2011 91 ALE Annual Report 2011 • iNDEPENDENt AuDitor’s rEPort • To the shareholders Independent auditorÕ s report to the members of Australian Leisure and Entertainment Property Management Limited Report on the financial report We have audited the accompanying financial report of Australian Leisure and Entertainment Property Management Limited (Ò the CompanyÓ ), which comprises the statement of financial position as at 30 June 2011, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, notes 1 to 25 comprising a summary of significant accounting policies and other explanatory information and the directorsÕ declaration. DirectorsÕ responsibility for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In note 1, the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. AuditorÕ s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditorÕ s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entityÕ s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entityÕ s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the CompanyÕ s financial position and of its performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 92 ALE Annual Report 2011 • iNDEPENDENt AuDitor’s rEPort • To the shareholders AuditorÕ s opinion In our opinion: (a) the financial report of Australian Leisure and Entertainment Property Management Limited is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the GroupÕ s financial position as at 30 June 2011 and of its performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 1. Report on the remuneration report We have audited the Remuneration Report included in Section 9 on pages 62 to 70 of the directorsÕ report for the year ended 30 June 2011. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards. AuditorÕ s opinion In our opinion, the remuneration report of Australian Leisure and Entertainment Property Management Limited for the year ended 30 June 2011, complies with Section 300A of the Corporations Act 2001. KPMG Nigel Virgo Partner 2 August 2011 investor information stock exchange listing the aLe Property Group (aLe) is listed on the australian Stock exchange (aSX). Its stapled securities are listed under aSX code: LeP, its aLe notes are listed under aSX code: LePHB and aLe notes 2 are listed under aSX code: LePHc. DistriBution reinvestment plan aLe has established a distribution reinvestment plan. details of the plan are available on the aLe website. electronic payment of DistriButions Securityholders may nominate a bank, building society or credit union account for payment of distributions by direct credit. Payments are electronically credited on the payment dates and confirmed by mailed advice. Securityholders wishing to take advantage of payment by direct credit should contact the registry for more details and to obtain an application form. WeBsite the aLe website, www.alegroup.com.au, is a useful source of information for stapled securityholders. It includes details of aLe’s property portfolio, current activities and future prospects. aSX announcements are also included on the site on a regular basis. annual tax statement accompanying the final stapled security distribution payment, normally in august each year, will be an annual tax statement which details the tax components of the year’s distribution. DistriButions Stapled security distributions are paid twice yearly, normally in February and august. securityholDer enquiries Please contact the registry if you have any questions about your holding or payments. investor information major australian securities exchange (asx) announcements 2011 8 novemBer annUaL GeneraL MeetInG 2 august FULL Year reSULtS reLeaSed 1 july ProPertY vaLUatIonS IncreaSed 22 june FULL Year dIStrIBUtIon oF 19.75 centS decLared 21 april coMPLetIon oF SecUred reFInancInG 28 feBruary HaLF Year dIStrIBUtIon PaYMent date 16 feBruary HaLF Year reSULtS reLeaSed 15 feBruary orBIS IncreaSeS SUBStantIaL HoLdInG 11 january caLedonIa redUceS SUBStantIaL HoLdInG 2010 3 DecemBer coLonIaL ceaSeS SUBStantIaL HoLdInG 10 novemBer annUaL GeneraL MeetInG 3 novemBer cPI BaSed rentaL IncreaSe 23 septemBer cHanGe oF reGIStered oFFIce addreSS 22 septemBer aPPoIntMent oF aSSet ManaGer 17 august FULL Year reSULtS reLeaSed For emailed updates, visit the aLe website and join ‘email alerts’ at www.alegroup.com.au puBlications the annual review and annual report are the main sources of information for stapled securityholders. In august each year the annual review, annual report and Full Year Financial report, and in February each year, the Half-Year Financial report are released to the aSX and posted on the aLe website. the annual review is mailed to stapled securityholders unless we are requested not to do so. the Full Year and Half-Year Financial reports are only mailed on request. Periodically aLe may also send releases to the aSX covering matters of relevance to investors. these releases are also posted on the aLe website and may be distributed by email to stapled securityholders by registering on aLe’s website. the election by stapled securityholders to receive communications electronically is encouraged by aLe. designed and produced by ross Barr & associates corporate Directory registereD office Level 10, 6 o’connell Street Sydney nSW 2000 telephone (02) 8231 8588 company secretary Mr Brendan Howell Level 10, 6 o’connell Street Sydney nSW 2000 telephone (02) 8231 8588 auDitors kPMG 10 Shelley Street Sydney nSW 2000 laWyers allens arthur robinson Level 28, deutsche Bank Place Sydney nSW 2000 custoDian (oF aUStraLIan LeISUre and entertaInMent ProPertY trUSt) the trust company Limited Level 15, 20 Bond Street Sydney nSW 2000 trustee (oF aLe dIrect ProPertY trUSt) the trust company (australia) Limited Level 15, 20 Bond Street Sydney nSW 2000 registry computershare Investor Services Pty Ltd reply Paid GPo Box 7115 Sydney nSW 2000 Level 3, 60 carrington Street Sydney nSW 2000 telephone 1300 302 429 Facsimile (02) 8235 8150 www.computershare.com.au