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Iron MountainArena REIT
Annual Report 2016
For the year ended 30 June 2016
Contents
Highlights
Letter from the Chairman
Managing Director’s Report
Property Portfolio
Corporate Governance
Financial Report
Contents
Directors’ Report
Auditor’s independence declaration
Consolidated financial statements
Notes to the consolidated financial statements
Directors’ declaration
Independent auditor’s report
ASX additional information
Investor Information
Corporate Directory
4
6
8
12
14
15
16
17
34
35
39
74
75
77
79
81
About this report
The financial statements in this report cover Arena REIT
(the ‘Group’) comprising Arena REIT Limited, Arena REIT
No. 1, Arena REIT No. 2, and their controlled entities.
The financial statements are presented in Australian
currency.
The Responsible Entity of Arena REIT No.1
and Arena REIT No.2 (the ‘Trusts’) is Arena REIT
Management Limited (ACN 600 069 761,
AFSL 465754).
2
Important Notice
This report has been prepared by Arena REIT (Arena)
comprising Arena REIT Limited (ACN 602 365 186),
Arena REIT Management Limited (ACN 600 069 761
AFSL No. 465754) as responsible entity of Arena REIT
No.1 (ARSN 106 891 641) and Arena REIT No.2 (ARSN
101 067 878). The information contained in this report is
current only as at the date of this report or as otherwise
stated herein. This report may not be reproduced or
distributed without Arena’s prior written consent. The
information contained in this report is not investment or
financial product advice and is not intended to be used
as the basis for making an investment decision. Arena
has not considered the investment objectives, financial
circumstances or particular needs of any particular
recipient. You should consider your own financial
situation, objectives and needs, conduct an independent
investigation of, and if necessary obtain professional
advice in relation to, this report. Past performance is not
an indicator or guarantee of future performance.
Except as required by law, no representation or warranty,
express or implied, is made as to the fairness, accuracy,
completeness or correctness of the information, opinions
and conclusions, or as to the reasonableness of any
assumption, contained in this report. By receiving this
report and to the extent permitted by law, you release
Arena and its directors, officers, employees, agents,
advisers and associates from any liability (including,
without limitation, in respect of direct, indirect or
consequential loss or damage or any loss or damage
arising from negligence) arising as a result of the reliance
by you or any other person on anything contained in or
omitted from this report.
This report is for information purposes only and should
not be considered as a solicitation, offer or invitation
for subscription, purchase or sale of securities in any
jurisdiction, or to any person to whom it would not be
lawful to make such an offer or invitation.
This report contains forward-looking statements including
certain forecast financial information. The words
“anticipate”, “believe”, “expect”, “project”, “forecast”,
“estimate”, “outlook”, “upside”, “likely”, “intend”,
“should”, “could”, “may”, “target”, “plan”, and other
similar expressions are intended to identify forward-
looking statements. The forward-looking statements
are made only as at the date of this announcement
and involve known and unknown risks, uncertainties,
assumptions and other factors, many of which are beyond
the control of Arena and its directors. Such statements
are not guarantees of future performance and actual
results may differ materially from anticipated result,
performance or achievements expressed or implied by
the forward-looking statements. Other than as required
by law, although they believe there is a reasonable
basis for the forward-looking statements, neither Arena
nor any other person (including any director, officer, or
employee of Arena or any related body corporate) gives
any representation, assurance or guarantee (express
or implied) as to the accuracy or completeness of each
forward-looking statement or that the occurrence of any
event, result, performance or achievement will actually
occur. You should not place undue reliance on any of the
forward-looking statements.
Arena REIT Annual Report 2016 Arena REIT is an ASX300
listed group that owns,
manages and develops
specialised real estate assets
across Australia.
Our objective is to deliver
an attractive and predictable
distribution to investors with
earnings growth prospects
over the medium to long
term.
Since listing on the ASX in
2013, Arena has delivered a
three year compound average
total return of 33.4% per
annum to investors.
Petit Early Learning Journey, Clifton Hill, VIC
3
Arena REIT Annual Report 2016 Arena REIT Annual Report 2016 \ Highlights
Financial
Highlights
“Arena has enjoyed another successful
year, with our focussed investment
strategy, active management of the
portfolio and control of borrowing
and overhead costs delivering growth
in both income and capital value for
our investors.”
Statutory net profit ($m)
Net operating profit ($m)
Earnings per security (¢)
72.6
61.0
44.6
25.6
22.1
18.5
11.10
10.20
8.85
FY14
FY15
FY16
FY14
FY15
FY16
FY14
FY15
FY16
19%
16%
9%
Distributions per security (¢)
Net Asset Value per security ($)
Total assets ($m)
10.90
10.00
8.75
1.54
1.33
1.13
514.0
450.6
375.3
FY14
FY15
FY16
FY14
FY15
FY16
FY14
FY15
FY16
9%
16%
14%
Gearing (%)
ASX annual total return (%)
Return on Equity (%)
33.3
29.1
26.8
36.3
37.6
26.7
20.0
22.0
22.2
FY14
FY15
FY16
FY14
FY15
FY16
FY14
FY15
FY16
4
Arena REIT Annual Report 2016 \ Highlights
Portfolio
Highlights
W Like for like rental
income growth of 3.6%
achieved
W Occupancy increased to
100%
W Weighted average lease
expiry extended to 9.7
years
W 100% renewal rate
achieved on 32 lease
option expiries
W Revaluation uplift of
$51.1 million
W Weighted average
passing portfolio yield
firmed 70 basis points to
7.3%
W Four childcare
development projects
successfully completed
W Development pipeline
replenished with
14 projects due for
completion in the next
two years
“Our proactive management
of the portfolio over the course
of the year has resulted in
improvement in all our key
portfolio metrics - we have
grown rental income, increased
portfolio occupancy, extended
the weighted average lease term,
and through asset transactions
and development completions,
enhanced the overall quality of
the portfolio.”
5
Arena REIT Annual Report 2016 \ Letter from the Chairman
David Ross Chairman
Letter from the
Chairman
I have pleasure in reporting on
another strong year of performance
for Arena REIT (Arena).
Annual ASX security
price performance (%)
S&P/
ASX 300
A-REIT
Index
14.6
27.2
Arena
REIT
S&P/
ASX 300
Index
(4.8)
6
In June this year we celebrated three years of
listing on the Australian Securities Exchange
(ASX). Since that time we have successfully
grown Arena’s specialised asset base, further
diversified the portfolio by both sector
and tenant, and through internalisation of
management, enhanced the transparency
and alignment of our business.
Arena’s investment strategy remains robust. Our focus
on providing real estate solutions to sectors that exhibit
strong underlying macro and socio-economic drivers
has resulted in growing demand for our specialised
expertise and opportunities to invest capital.
In childcare, we have benefited from the growth in
both population and childcare participation, which has
supported our tenant’s operational performance and
created opportunities to strategically grow and enhance
the quality of the portfolio.
In healthcare, the ageing population and growth in
chronic disease have continued to underpin demand
for large scale low cost medical care. This has increased
investor demand for healthcare property backed by long
term leases to established operators.
Arena REIT Annual Report 2016 Arena REIT Annual Report 2016 \ Letter from the Chairman
With interest rates at an historic low in Australia, Arena’s
strategy of investing in property with relatively long
leases on terms which provide opportunity for real
growth in income and minimal capital expenditure
obligations is attractive to investors. This is reflected
in Arena’s strong security price performance on the
ASX during 2016 and the net asset value per security
increasing by 16% over the year.
The weighted average lease expiry (WALE) of Arena’s
leases has been extended to 9.7 years, with the 100%
lease renewal rate during the year again highlighting the
merit of investing in specialised sectors where tenants’
premises have strategic importance for the operation
and value of their business.
Earnings per security grew by 9% for the year, driven
in part by Arena’s like for like rental income growth
of 3.6%. This was achieved through a combination of
lease renegotiations, strong market rent reviews which
averaged a 5.7% increase, and the structure of Arena’s
leases where a large proportion have an annual increase
of the greater of 2.5% or the growth in the relevant
Consumer Price Index (CPI). This rent review structure is
advantageous in the current low inflation environment.
A key platform of our strategy continues to be the
development of new childcare centres that meet our
long-term investment criteria – being in attractive
locations and leased on our preferred lease terms to
established childcare operators. Our collaborative
approach to building value has seen us not only deliver
four successful childcare development projects this year,
which also contributed to earnings growth, but also add
to our growing pipeline of projects for the future.
During 2016, Arena’s capital position was also enhanced,
with a renegotiation of our borrowing facility extending
the average debt maturity and reducing the average
cost of debt. The balance sheet remains strong with
borrowing at 26.8% of total assets and capacity to fund
the existing development pipeline and new investment
opportunities.
Operating expenses were largely unchanged compared
to the prior year, reflecting efficient cost management
despite an increase in the total asset base, reinforcing
the benefits of our internalised management structure.
As we head into the 2017 financial year, the
management team’s focus continues to be on actively
managing the existing portfolio and successful
execution of development projects.
1. Estimated on a status quo basis assuming no new acquisitions
or disposals, developments in progress are completed in line
with forecast assumptions, and tenants comply with their lease
obligations.
“Over the past three years, Arena
has delivered a compound average
total return of 33.4% per annum,
and compound average distribution
growth of 11% per annum. In
relative terms, this has consistently
positioned Arena in the top quartile
of A-REITs listed on the ASX.”
As in previous years, I am pleased to advise that we
are again forecasting distribution growth, providing
distribution guidance of 11.7 cents per security for the
2017 financial year1.
In line with Arena’s investment strategy, we are also
focussed on continuing to seek new opportunities to
grow income and mitigate risk – through investment
in assets, projects and sectors that offer defensive
characteristics and attractive risk adjusted return profiles.
Thank you for your continued support of Arena.
Yours sincerely,
David Ross,
Chairman
7
Arena REIT Annual Report 2016 Arena REIT Annual Report 2016 \ Managing Director’s Report
Bryce Mitchelson Managing Director
Managing
Director’s Report
Arena’s strategy to invest in
specialised real estate sectors that
exhibit strong underlying demand
drivers has underpinned growth in
both earnings and valuations. These
positive market dynamics, coupled
with our proactive management of
the portfolio, successful execution
of development projects and focus
on cost control have contributed to
our strong 2016 result and see us well
placed as we head into 2017.
8
Financial results
I am pleased to advise that Arena has delivered a net
operating profit of $25.6 million, up 16% on the result
for 2015. Underpinning this strong result was growth in
rental income from both the underlying portfolio and
completed development projects, as well as lower net
operating and borrowing costs.
Statutory net profit for the year was $72.6 million, and
included unrealised gains from the $51.1 million increase
in property valuations recorded across the portfolio.
On a per security basis, Arena delivered earnings of
11.1 cents and paid an annual distribution of 10.9 cents,
reflecting growth of 9% over 2015. This was in line with
our upgraded guidance and represents a payout ratio of
98% of net operating profit.
At 30 June, our total assets had increased by 14% to
$514 million, predominantly as a result of the $51.1
million revaluation uplift on the property portfolio. This
uplift also contributed to a $0.21 increase in Net Asset
Value per security to $1.54 at 30 June 2016.
Importantly, operating expenses were unchanged at
$3.2 million, reflecting efficient cost management over
our increased asset base, and reinforcing the benefits
being derived from our internalised structure.
Arena REIT Annual Report 2016 Arena REIT Annual Report 2016 \ Managing Director’s Report
“Our favourable lease structure
Portfolio overview
has provided attractive rental
income growth, and our execution
of quality childcare development
projects continues to deliver
earnings accretion and enhance
the quality of the portfolio.”
Capital management
Our proactive approach to capital management has
made a positive contribution to 2016 earnings and
through the extension of the borrowing facility and new
hedging arrangements, we have laid the foundations for
a competitive cost of borrowing over the medium term.
Borrowing facility renegotiated on favourable
terms
In December 2015 we completed the renegotiation of
terms for our $175 million borrowing facility. As a result,
we added a third lender to the syndicate, extended the
facility average duration to 3.5 years and reduced the
weighted average cost of debt to 3.85% pa at 30 June
2016, down from 4.30% pa at 30 June 2015.
At the end of the 2016 financial year, we had 72% of
drawn debt hedged, at a weighted average interest rate
of 2.48%.
Capacity to fund growth
At 30 June 2016, gearing has decreased to 26.8%,
predominantly as a result of the positive impact of
revaluations. A further $37 million is available within the
existing debt facility to fund the development pipeline,
and the DRP remains open, after raising $6.2 million this
year.
Lease expiry profile (by income) (%)
41
25
10
6
15
1
2
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25
FY26+
Rent review structure delivering real income
growth
Like-for-like rental income increased by 3.6% in FY16,
through a combination of annual rent reviews and
renegotiated leases.
The majority of rent reviews were subject to a fixed
amount or an increase equivalent to the greater of
2.5% or growth in the relevant CPI. In Australia’s current
low inflation environment, having the 2.5% minimum
floor was advantageous, and enabled us to deliver real
growth in rental income. This was further buoyed by
the positive outcomes received on the 13 market rent
reviews completed to date, which recorded an average
increase of 5.7%. A further 18 market rent reviews are still
in independent determination.
Portfolio defensive characteristics enhanced
through active management
The portfolio was further strengthened throughout the
financial year, with occupancy increased to 100% and
the portfolio’s weighted average lease expiry (WALE)
extended to 9.7 years through the renewal of 32 lease
options and the renegotiation of 12 existing leases on
new 20 year terms.
The 32 lease option renewals for leases expiring in FY21
reflect a 100% renewal rate, and are a strong indication
of the quality of the portfolio’s assets and the strength of
Arena’s tenant relationships. The portfolio management
team’s focus continues to be on de-risking future
income. Only 3.5% of portfolio income is subject to
lease expiry over the next five years, and leases on over
75% of portfolio income are not due to expire until 2024
or beyond.
Portfolio valuation uplift of $51.1 million
In accordance with Arena’s valuation policy, 39% of the
portfolio was independently valued during the 2016
financial year, with assets not valued independently
subject to a Directors’ valuation. At 30 June 2016, the
portfolio recorded a revaluation uplift of $51.1 million, an
increase of 11.5%.
This increase was the result of a combination of rental
income growth, proactive portfolio management and
a firming in passing yields, with strong transaction
evidence in the direct market contributing to the
weighted average passing yield on the portfolio firming
70 basis points to 7.3% at 30 June 2016.
9
Arena REIT Annual Report 2016 Arena REIT Annual Report 2016 \ Managing Director’s Report
Development projects
Outlook
Our growing origination and development management
capability has enabled us to access attractive
development margins on completed developments, as
well as identify and secure new projects for the pipeline.
Completed developments
In the 2016 financial year, we completed four childcare
centre developments for a total cost of $19.1 million,
delivering a weighted average yield on cost of
8.7%. Since completion, these centres have been
independently valued at $26.6 million, resulting in an
attractive development margin of $7.5 million.
The centres are now all open and operating, with leases
of 15-20 years in place to existing tenants.
Developments completed in the 2016 financial year
As we commence the 2017 financial year, the portfolio’s
structured rental growth, with its limited exposure to
lower inflation expectations, coupled with the progress
on the development pipeline, underpin our recently
announced distribution guidance of 11.7 cents per
security1. This reflects forecast distribution growth of
7.4% over the 2016 distribution.
Looking forward, we will continue to monitor the
resolution of the proposed Federal Government funding
changes for the childcare sector, as well as the impact of
increased regulation and additions to supply on tenant
profitability.
On behalf of all of the Arena team, I would like to thank
you for your continued support over the past twelve
months, and look forward to again reporting a positive
result for the 2017 financial year.
Project
Tenant
Cost
($m)
Lease term
(years)
Yours sincerely
Bryce Mitchelson,
Managing Director
Murwillumbah,
NSW
Petit Early Learning
Journey
Kawana,
QLD
Clifton Hill,
VIC
Richmond,
VIC
Green Leaves Early
Learning Centres
Petit Early Learning
Journey
Petit Early Learning
Journey
2.4
3.2
6.6
6.9
15
15
20
20
Development pipeline
The development pipeline continues to grow as new
opportunities are identified and assessed against our
rigorous investment criteria.
As we commence the 2017 financial year we have
14 projects underway or in various stages of planning
and negotiation across the portfolio. Six of these
projects are integrated on new primary school sites as
part of our transaction with the State of Victoria.
Prior to commencement, each project in the pipeline has
a pre-commitment in place with an established childcare
operator on a long-term lease. Together these projects
have a forecast total cost of $52.0 million and a target
weighted average yield on cost of 8%.
1. Estimated on a status quo basis assuming no new acquisitions
or disposals, developments in progress are completed in line
with forecast assumptions, and tenants comply with their lease
obligations.
10
Arena REIT Annual Report 2016 \ Managing Director’s Report
“Four development projects
were completed during
the year for a total cost of
$19.1 million. Our growing
origination and development
management capability
has enabled us to access
attractive development
margins on completed
developments, as well as
identify and secure new
projects for the pipeline.”
Petit Early Learning Journey, Richmond, VIC
11
Arena REIT Annual Report 2016 \ Property Portfolio
Portfolio summary
Arena invests in a portfolio of specialised assets in growing sectors
that are supported by favourable demographic and economic
trends. Our current portfolio of 189 social infrastructure facilities
is 100% leased to a diversified tenant base in the growing childcare
and healthcare sectors.
NT
– 1 property
Qld
– 72 properties
– 2 development sites
NSW
– 32 properties
WA
– 22 properties
Childcare
Healthcare
SA
– 5 properties
SYDNEY
METRO
Tas
– 6 properties
Vic
– 51 properties
– 12 development sites
Sector Diversification (%)
Geographic Diversification (%)
Tenant diversification (%)
Childcare 84%
Healthcare 16%
Qld 33%
VIC 29%
NSW 24%
WA 9%
TAS 2%
SA 2%
NT 1%
Goodstart Early Learning 42%
Primary Health Care 16%
Affinity Education 16%
Petit Early Learning Journey 6%
Oxanda 5%
G8 4%
Green Leaves Early Learning Centres 3%
Other 6%
12
Arena REIT Annual Report 2016 \ Property Portfolio
Arena innovation
delivers a
customised
solution for the
State of Victoria
Date
JUNE 2015
OCT 2015
-
-
Learning Communities
ICTORIA
Discipline
NTS @A1
Scale
Date
JUNE 2015
ARCHITECTURAL
Revision
A
P1
-
BID SUBMISSION
POST BID SUBMISSION
-
-
A1
Project
Typical Early Learning Centre
In October 2015 we
announced an innovative
transaction with the
State of Victoria to
develop six early learning
centres (ELCs) alongside
new primary school
developments. The
transaction involved Arena
developing a unique
solution to the delivery
of integrated childcare
centres on new primary
school sites.
Arena was granted a 26 year
tenure on each site, and has
secured YMCA, a well established
not-for-profit childcare service
provider, to lease the completed
centres.
Artist’s Impression
Main Entry
AR-CF-A000 P1
Drawing No.
Drawing
All of the projects are located
in areas that are relatively
undersupplied with childcare,
and have high population growth
projections.
The $15 million in projects began
construction in early 2016 and the
first five centres are scheduled to
open for the commencement of
the 2017 school year.
Location of new ELCs
10KM
Torquay
Mernda South
Epping North
Melbourne
Casey Central
Pakenham
Heather Grove
13
Arena REIT Annual Report 2016 \ Corporate Governance
The board of directors (left to right): Dennis Wildenburg, Bryce Mitchelson, David Ross, Simon Parsons and Gareth Winter
Corporate
Governance
The board of directors for Arena
REIT Limited and Arena REIT
Management Limited work together
and take a coordinated approach to
corporate governance.
View Arena’s key policies and the full
Corporate Governance Statement for
the 2016 financial year at
www.arena.com.au/about/governance
14
Each Board has a Board Charter which
details the composition, responsibilities, and
protocols of the Board. In addition, the Boards
have a Code of Conduct which sets out the
standard of business practices required of
directors and staff.
Arena conducts its business in accordance with
these charters and codes, as well as other key
policies which are published on its website.
These include:
t Arena REIT Continuous Disclosure Policy
t Arena REIT Diversity Policy
t Arena REIT Privacy Policy
t Arena REIT Communications Policy
t Arena REIT Summary of Risk Management
Framework
t Arena REIT Securities Trading Policy.
In compliance with ASX Listing Rule 4.10.3,
Arena has also published on its website a
statement disclosing the extent to which
Arena has followed the recommendations for
good corporate governance set by the ASX
Corporate Governance Council (Corporate
Governance Principals and Recommendations
3rd Edition) during the reporting period.
Arena REIT Annual Report 2016 Arena REIT
Financial Report 2016
For the year ended 30 June 2016
15
Contents
Financial report
Directors’ Report
Auditor’s independence declaration
Financial Statements
− Consolidated statement of comprehensive
income
− Consolidated balance sheet
− Consolidated statement of changes in equity
− Consolidated statement of cash flows
Contents of the notes to the consolidated
financial statements
Notes to the consolidated financial statements
Directors’ declaration
Independent auditor’s report
ASX additional information
17
34
35
35
36
37
38
39
40
74
75
77
These financial statements cover Arena REIT (the
‘Group’) comprising Arena REIT No. 1, Arena REIT No.
2, Arena REIT Limited, and their controlled entities. The
financial statements are presented in Australian currency.
The Responsible Entity of Arena REIT No. 1 and Arena
REIT No. 2 (the ‘Trusts’) is Arena REIT Management
Limited (ACN 600069761). The Responsible Entity’s
registered office is:
Level 5, 41 Exhibition Street
Melbourne VIC 3000
16
Petit Early Learning Journey, Clifton Hill, VIC
Arena REIT Annual Report 2016 \ Financial Report Directors’
Report
The directors of Arena REIT Limited (‘ARL’) and Arena REIT Management Limited (‘ARML’),
the Responsible Entity of Arena REIT No. 1 and Arena REIT No. 2 (the ‘Trusts’), present their
report together with the financial statements of Arena REIT for the year ended 30 June 2016.
The financial report covers ARL, Arena REIT No. 1 (‘ARF1’), Arena REIT No. 2 (‘ARF2’), and their
controlled entities.
ARF1, ARF2 and ARL are separate entities for which the units and shares have been stapled together to enable
trading as one security. The units of ARF1, ARF2 and shares of ARL cannot be traded separately. None of the stapled
entities controls any of the other stapled entities, however for the purposes of statutory financial reporting the entities
form a consolidated group.
The financial report combines the results of ARF1, ARF2 and ARL. The comparative information presented is that of
ARF1 and ARF2 for the entire period and ARL from 12 December 2014.
Directors
The following persons held office as directors of ARL during the whole of the financial year and up to the date of this
report:
• David Ross (Chairman) (Independent, non-executive)
• Simon Parsons (Independent, non-executive)
• Dennis Wildenburg (Independent, non-executive)
• Bryce Mitchelson (Executive)
The following persons held office as directors of ARML during the whole of the financial year and up to the date of
this report:
• David Ross (Chairman) (Independent, non-executive)
• Simon Parsons (Independent, non-executive)
• Dennis Wildenburg (Independent, non-executive)
• Bryce Mitchelson (Executive)
• Gareth Winter (Executive)
Principal activities
Arena REIT invests in a portfolio of investment properties and is listed on the Australian Securities Exchange under
the code ARF.
There were no changes in the principal activities of the Group during the year.
Distributions to securityholders
The following table details the distributions to securityholders declared during the financial year:
September quarter
December quarter
March quarter
June quarter
2016
$’000
6,128
6,158
6,413
6,437
2015
$’000
5,156
5,211
5,803
5,821
2016
cps
2.6750
2.6750
2.7750
2.7750
2015
cps
2.4375
2.4625
2.5500
2.5500
Total distributions to securityholders
25,136
21,991
10.9000
10.0000
1717
Arena REIT Annual Report 2016 \ Financial Report Operating and financial review
The Group operates with the aim of generating attractive and predictable distributions for securityholders with
earnings growth prospects over the medium to long term.
The Group’s strategy is to invest in property underpinned by relatively long leases and in sectors with supportive
macro-economic trends. The Group will consider investment in sectors with the required characteristics, which may
include:
• Childcare/early learning services;
• Healthcare – including medical centres, diagnostic facilities, hospitals, aged care and associated facilities;
• Education – including schools, colleges and universities and associated facilities.
Key financial metrics
Net profit (statutory)
Net operating profit (distributable income)
Distributable income per security
Distributions per security
Total assets
Investment properties
Borrowings
Net assets
NAV per security
Gearing *
* Gearing calculated as Borrowings/Total assets.
FY16 highlights
30 June 2016
30 June 2015
Change
$72.6 million
$61.0 million
$25.6 million
$22.1 million
11.1 cents
10.9 cents
10.2 cents
10.0 cents
$514.0 million
$450.6 million
$491.4 million
$420.5 million
$138.0 million
$131.0 million
$357.5 million
$303.5 million
$1.54
26.8%
$1.33
29.1%
+19%
+16%
+9%
+9%
+14%
+17%
+5%
+18%
+16%
-230 bps
• Net operating profit was $25.6 million, up 16% on the previous year;
• 9% growth in distributable income per security and 9% growth in distributions paid to investors;
• The property portfolio increased with the completion of four purpose-built childcare centre developments and the
acquisition of one operational childcare centre;
• Arena commenced the development of six childcare centres in conjunction with the Victorian Government Schools
PPP;
• The portfolio occupancy increased to 100%;
• Gearing was 26.8% at 30 June 2016, below the maximum gearing range of 35%-45%;
• NAV per security at 30 June 2016 was $1.54, an increase of 16% on 30 June 2015. This was primarily due to the
increase in investment property values during the period.
1818
Directors’ ReportArena REIT Annual Report 2016 \ Financial Report Financial results
Rental income
Other income
Total operating income
Direct property expenses
Operating expenses
Former responsible entity management fees
Finance costs
Net operating profit (distributable income) *
Non-distributable items:
Straight-line rental income
Revaluation gain on investment properties
Change in fair value of derivatives
Profit/(loss) on sale of investment properties
Stapling and other transaction costs
Amortisation of security-based payments (non-cash)
Other
Statutory net profit
* Net operating profit (distributable income) is not a statutory measure of profit.
Financial results summary
Net operating profit (distributable income) ($’000)
Weighted average number of ordinary securities (‘000)
Distributable income per security (cents)
30June 2016
30June 2015
$’000
33,316
638
33,954
(1,003)
(3,249)
–
(4,131)
25,571
(327)
51,062
(2,915)
(121)
(242)
(365)
(42)
$’000
31,196
480
31,676
(1,306)
(1,875)
(1,353)
(5,048)
22,094
23
39,828
(1,781)
2,232
(1,438)
(112)
120
72,621
60,966
30 June 2016
30 June 2015
25,571
230,165
11.11
22,094
216,627
10.20
• Net operating profit is the measure used to determine securityholder distributions and represents the underlying
cash-based profit of the Group for the relevant period. Net operating profit excludes fair value changes from asset
and derivative revaluations and items of income or expense not representative of the Group’s underlying operating
earnings or cashflow.
• The increase in net operating profit during the year is primarily due to:
– Ongoing annual rent increases on the Group’s property portfolio;
– Commencement of rental income from the four childcare developments completed during the year;
– The full year effect of acquisitions and developments completed during FY15;
– A full year of savings in management operating expenses, notwithstanding the 27% increase in total assets since
the December 2014 internalisation of management;
– Lower cost of debt compared to the prior year following the completion of the debt refinance and extension in
December 2015.
• Non-distributable items primarily increased due to a higher investment property revaluation gain compared to the
prior period.
1919
Arena REIT Annual Report 2016 \ Financial Report Investment property portfolio
Key property metrics
Total value of investment properties
Number of properties under lease
Development sites
Properties available for lease or sale
Total properties in portfolio
Portfolio occupancy
Weighted average lease expiry (WALE)
30 June 2016
30 June 2015
$491.4 million
$420.5 million
189
14
–
203
184
11
2
197
100%
9.7 years
99%
8.9 years
• The increase in the value of investment properties is primarily due to the addition of:
– New childcare development expenditure of $13.7 million;
– The purchase of an operational childcare centre for $4.9 million;
– A net revaluation increment to the portfolio of $51.1 million for the year.
• Offset by the following investment property disposals during the year:
– Two vacant childcare centres with a book value of $1.15 million were sold during the year.
Capital management
Equity
• During the year, 3.7 million securities were issued at an average price of $1.69 to raise $6.2 million of equity pursuant
to the Distribution Re-investment Plan (DRP);
• A fully underwritten placement to institutional and professional investors was completed in the prior year, raising
$25 million through the issue of 16.25 million stapled securities at a price of $1.60.
Bank facilities & gearing
• Arena REIT completed a refinancing of its syndicated debt facility during the year to extend the facility term to
December 2018 (50% of facility) and December 2020 (50% of facility);
• The balance drawn increased by $7 million to fund acquisitions and development capital expenditure;
• Gearing was 26.8% at 30 June 2016 (30 June 2015: 29.1%);
• The Group was fully compliant with all bank facility covenants throughout FY16 and as at 30 June 2016. At 30 June
2016 the Loan to Valuation Ratio was 31.2% (Covenant: 50%) and the Interest Cover Ratio was 6.2 times (Covenant:
2.0 times).
Interest rate management
• During the year the Group managed its interest rate risk in accordance with its interest rate risk management policy.
The swap portfolio average term was extended due to near term swap expiry;
• As at 30 June 2016, 72% of Arena REIT borrowings are hedged for a weighted average term of 4.0 years (2015: 69%
for 3.5 years). The average swap fixed rate at 30 June 2016 is 2.48% (2015: 2.62%);
• The Group will manage its interest rate swaps to deal with near term expiry and as debt is drawn in accordance with
its interest rate risk management policy.
2020
Directors’ ReportArena REIT Annual Report 2016 \ Financial Report FY17 outlook
The Group has provided market guidance for FY17 distribution of 11.7 cents per security, which represents an increase
of 7.4% on FY16.
The distribution outlook assumes a status quo basis, with no new acquisitions or disposals, developments in progress
are completed in line with budget assumptions and tenants comply with their lease obligations.
Significant changes in state of affairs
In the opinion of the directors, other than the matters identified in this report, there were no significant changes in the
state of affairs of the Group that occurred during the financial year.
Matters subsequent to the end of the financial year
No matter or circumstance has arisen since 30 June 2016 that has significantly affected, or may significantly affect:
(i) the operations of the Group in future financial years; or
(ii) the results of those operations in future financial years; or
(iii) the state of affairs of the Group in future financial years.
Likely developments and expected results of operations
The Group will continue to be managed in accordance with its existing investment objectives and guidelines.
The results of the Group’s operations will be affected by a number of factors, including the performance of investment
markets in which the Group invests. Investment performance is not guaranteed and future returns may differ from past
returns. As investment conditions change over time, past returns should not be used to predict future returns.
Material business risks
The material business risks that could adversely affect the achievement of the Group’s financial prospects are as
follows. The Responsible Entity has in place a Risk Management Policy and Framework under which it identifies,
assesses, monitors and manages these risks.
Concentration risk
The Group’s property portfolio is presently 84% invested in childcare centres and childcare centre development sites
and 16% in healthcare assets. Adverse events to the childcare sector or healthcare sector may result in a general
deterioration of tenants’ ability to meet their lease obligations and the future growth prospects of the current
portfolio. As at 30 June 2016, 74% of the portfolio by income (excluding developments) is leased to the largest three
tenants (Goodstart Early Learning Ltd with 42%, Primary Health Care Limited with 16% and Affinity Education Group
with 16%). Any material deterioration in the operating performance of these tenants may result in them not meeting
their lease obligations which could reduce the Group’s income.
Tenant risk
The Group relies on tenants to generate its revenue. Tenants may be not for profit companies limited by guarantee,
private entities or listed public companies. If a tenant is affected by financial difficulties they may default on their
rental or other contractual obligations which may result in loss of rental income and loss in value of the Group’s
properties. Typically, tenants are required to provide an unconditional and irrevocable bank guarantee, which must
not expire until at least six months after the ultimate expiry date of the lease, for an amount generally equivalent to six
months’ rent (plus GST) as security for their performance under the lease.
Refer to note 9(d) for further details on tenancy risk for the portfolio.
2121
Arena REIT Annual Report 2016 \ Financial Report Information on directors
The directors at the date of this report are:
David Ross, Independent Non-Executive Chairman
David has over 30 years’ experience in the real estate and investment management sectors.
He held senior positions with Lend Lease Corporation over a period of 10 years, including Global
and US Chief Executive Officer Real Estate Investments, Chief Executive Officer Asia Pacific and
Chief Executive Officer of General Property Trust. He was also Chief Operating Officer of Babcock
and Brown, responsible for the Group’s corporate and administrative support functions globally.
David holds a Bachelor of Commerce, a Property Valuation qualification and is a Fellow of the Australian Institute of
Company Directors (FAICD).
Other current directorships: Arena Investment Management Limited.
Former directorships in last 3 years: None.
Simon Parsons, Independent Non-Executive Director
Simon has over 30 years’ experience in the commercial property industry. He is presently Managing
Director of Parsons Hill Stenhouse Pty Ltd, a commercial property practice.
Simon is a Fellow of the Royal Institution of Chartered Surveyors (RICS), a Fellow of the Australian
Institute of Company Directors (FAICD), and is a member of the RICS Oceania Property Board.
Simon holds a Master of Science (Real Estate) and a Master of Social Science (Env & Planning).
Other current directorships: Arena Investment Management Limited.
Former directorships in last 3 years: None.
Dennis Wildenburg, Independent Non-Executive Director, Chairman of Board Audit
Committee
Dennis has over 30 years’ experience in the financial services and funds management industry
including senior management, Board and compliance committee roles.
Dennis is a member of the Institute of Chartered Accountants in Australia.
Other current directorships: Investa Wholesale Funds Management Limited; Arena Investment
Management Limited.
Former directorships in last 3 years: None.
Bryce Mitchelson, Executive Director
Bryce is Managing Director of Arena and joined Arena in May 2009.
Bryce has more than 20 years’ experience in listed and unlisted property funds management as well
as property investment, development, valuation and real estate agency.
Bryce holds a Bachelor of Economics (Accounting), Bachelor of Business (Property) and Graduate
Diploma of Applied Finance and Investment.
Other current directorships: None.
Former directorships in last 3 years: Arena Investment Management Limited.
2222
Directors’ ReportArena REIT Annual Report 2016 \ Financial Report Gareth Winter, Executive Director and Company Secretary
Gareth was appointed Chief Financial Officer of Arena in March 2012, and Executive Director
of Arena REIT Management Limited in December 2014. Gareth was formerly a partner at
PricewaterhouseCoopers and has over 20 years’ professional experience.
Throughout his professional career Gareth specialised in advising the listed and unlisted property
and infrastructure funds management sector on corporate finance, capital management, risk
management, transaction structuring and financial systems and reporting.
Gareth is a member of the Institute of Chartered Accountants in Australia and holds a Bachelor of Commerce.
Other current directorships: None.
Former directorships in last 3 years: None.
Meetings of directors
The number of meetings of the Responsible Entity’s board of directors and of each board committee held during the
year ended 30 June 2016, and the number of meetings attended by each director were:
ARL Board
ARML Board
Audit Committee
A
11
11
11
11
*
B
11
10
11
11
*
A
22
22
22
22
22
B
22
21
22
22
22
A
11
11
11
*
*
B
11
10
11
*
*
David Ross
Simon Parsons
Dennis Wildenburg
Bryce Mitchelson
Gareth Winter
Remuneration
& Nomination
Committee
A
4
4
4
*
*
B
4
4
4
*
*
A - Number of meetings held during the year.
B - Number of meetings attended.
* = Not a member of the relevant committee.
Remuneration report
This remuneration report presents Arena REIT’s remuneration arrangements for Key Management Personnel (KMP) for
the year ended 30 June 2016. The report has been prepared and audited in accordance with the requirements of the
Corporations Act and Regulations.
1. Overview
1.1 Governance
The directors have appointed a Remuneration and Nomination Committee (the “Committee”) to advise the Board
on remuneration policy and practices. The Committee is comprised of independent directors and is chaired by Mr
David Ross. The Committee will, as required, appoint remuneration advisers to review and advise on aspects of
a remuneration policy and associated frameworks. The Committee engaged Ernst & Young (EY) to advise on the
establishment of remuneration policy and structure that is consistent with market practice in the A-REIT sector. EY did
not provide any remuneration recommendations in respect of KMP.
2323
Arena REIT Annual Report 2016 \ Financial Report Remuneration report (continued)
1.2 Key Management Personnel (KMP)
KMP are persons identified as having authority and responsibility for planning, directing and controlling the activities
of Arena REIT. There has been no change in KMP since the end of the reporting period.
Position
FY16 KMP
FY15 KMP
Non-Executive Directors
David Ross
Simon Parsons
Dennis Wildenburg
Executive KMP
Bryce Mitchelson
Gareth Winter
Non-Executive Chairman
Chair – Remuneration & Nomination
Committee Member – Audit Committee
Non-Executive Director
Member – Remuneration & Nomination
Committee Member – Audit Committee
Non-Executive Director
Chair – Audit Committee
Member – Remuneration & Nomination Committee
Managing Director
Executive Director & Chief Financial Officer
Robert de Vos
(from 12 December 2014)
Head of Property
1.3 Remuneration Policy
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
The Directors of Arena REIT have adopted a remuneration policy that recognises the need to attract, motivate and
retain employees to deliver sustainable and superior business performance. The remuneration policy is underpinned
by the following principles:
• Remuneration is externally competitive in terms of quantum, mix and design to support the attraction and retention
of employees and takes into account the relative size and nature of the Arena REIT business, its ability to pay and
the role and experience of employees;
• The remuneration framework supports the delivery of Arena REIT’s business strategy;
• Remuneration is made up of fixed and variable reward;
• Variable reward will be used to recognise performance in both the short term and longer term and will depend on
performance against key targets and objectives.
2. Non-Executive Director Remuneration Framework
Each non-executive director of Arena REIT is paid an amount determined by the Board to a maximum aggregate
amount approved by securityholders of $650,000 per annum.
Fees are set to ensure non-executive directors are remunerated fairly for their services, recognising the level of skill,
expertise and experience required to perform the role. Non-executive directors do not receive any equity based
payments, retirement benefits or incentive payments.
Annual fees in respect of FY16 (inclusive of applicable superannuation) were:
Board Fees
Audit Committee Fees
Remuneration & Nomination
Committee Fees
Chairman1
$180,000
Member
$91,000
Chairman
$10,000
Member
$5,000
Chairman
$10,000
Member
$5,000
1. The Board fee received by the Chairman of the Board fee is inclusive of all Committee fees.
2424
Directors’ ReportArena REIT Annual Report 2016 \ Financial Report Remuneration report (continued)
3. Executive KMP Remuneration Framework
In FY16, Executive KMP remuneration comprised:
• total fixed remuneration (TFR);
• short term incentive (STI); and
• long-term incentive (LTI).
The FY16 Total Maximum Remuneration (TMR) mix for the Executive KMP is set out in the table below:
Executive KMP
Position
Bryce Mitchelson
Managing Director
Gareth Winter
Robert de Vos
Chief Financial Officer
Head of Property
3.1 Total Fixed Remuneration
TFR
50%
60%
55%
Variable Performance
Based Remuneration
STI
25%
20%
25%
LTI
25%
20%
20%
TFR consists of base salary, employer superannuation contribution, salary sacrifice benefits and other non-monetary
benefits. TFR is set based on the role responsibilities, experience and qualifications of the individual, and with
reference to market data of comparable organisations. TFR will generally be reviewed on an annual basis.
3.2 Short Term Incentive Plan (STI)
The short term incentive is a performance based component of remuneration and is designed to reward annual
performance and focus Executive KMP on meeting business plan objectives. Executive KMP participation in the STI is
at the discretion of the Board.
The STI opportunity for each Executive KMP is based on the STI proportion of their TMR mix. The actual award is
based on the achievement of the specific Key Performance Indicators (KPIs) for each Executive KMP.
STI objectives for each Executive KMP take into account their respective role and the objectives of the organisation
to which they are expected to contribute. The link between the organisations objectives and the Executive KMP’s
incentive plans is designed to align Executive KMP to Arena REIT’s objectives and includes, where relevant, stretch
targets.
FY16 performance was measured across two categories of KPIs:
• Financial – target Distributions per Security and Distributable Income per Security;
• Non-financial – linked to non-financial metrics specific to each role eg. strategy development and execution,
business performance, risk management, people, stakeholder management and relationships and specific personal
objectives.
STI’s are paid in cash following the end of the relevant financial year following Board approval. Taking into
consideration circumstances over the course of the financial year, the Board has discretion to reduce, cancel or
increase STI payments.
3.3 Long Term Incentive Plan (LTI)
The LTI Plan is an equity based incentive scheme designed to align the interests of key management personnel and
investors over the long term and retain high performing individuals. Executive KMP participation in the LTI is at the
discretion of the Board.
The LTI opportunity for each Executive KMP is based on the LTI proportion of their TMR mix. The actual benefit
delivered to the Executive KMP will depend on the quantum of rights granted, the extent to which the performance
hurdles are achieved and security price performance. The LTI will be satisfied through the issue of one fully paid
ordinary stapled security for each Right that vests.
2525
Arena REIT Annual Report 2016 \ Financial Report Remuneration report (continued)
3.3.1 LTI - Performance Rights
Arena REIT’s ongoing LTI Plan is in the form of Performance Rights. The vesting of each grant of Performance Rights
is subject to the achievement of threshold and stretch performance hurdles measured over a 3 year period. The
number of Performance Rights granted is based on the value of the LTI award opportunity divided by an independent
valuation of the fair value of a Performance Right as at the grant date. The fair value and the face value of each grant
of Performance Rights on the relevant grant date is set out in Section 5 of this report.
Under the LTI Plan grants for FY16 there are two independent hurdles to the vesting of Performance Rights, each with
a 50% weighting:
Hurdle 1: Relative total shareholder return (TSR)
Relative TSR performance is determined based on Arena REIT’s total ASX return (assuming reinvestment of
distributions) ranked against the members of the comparator group over the performance period.
The comparator group in respect of the FY16 Performance Rights grant are the members of the S&P/ASX 300 A-REIT
Index.
The Relative TSR vesting schedule is as follows:
Arena REITs TSR ranking
Proportion of TSR Hurdle Performance Rights that vest
Below 50th percentile
50th to 75th percentile
0%
50% at the threshold plus progressive pro-rata vesting between 50% and 100% (ie on a
straight-line basis)
At or above the 75th percentile
100%
Relative TSR was selected as a performance condition because:
• It aligns Executive KMP rewards with Arena REIT securityholder returns;
• The effects of market cycles are reduced as it measures Arena REIT’s performance relative to its peers, which are
presently considered to be the A-REIT members of the S&P/ASX 300 Index.
Hurdle 2: Distributable Income per Security (DIS)
The DIS hurdle is based on a target range to be assessed in the final year of a three year performance period. DIS is
determined in accordance with Arena REIT’s Distribution Policy.
The DIS vesting schedule is as follows:
Arena REITs DIS (in year 3 of
the performance period)
Proportion of DIS Hurdle Performance Rights that vest
Below the Target Range
0%
In the Target Range
50% plus progressive pro-rata vesting between 50% and 100% (ie on a straight-line basis)
Above the Target Range
100%
DIS was selected as a performance condition (for STI and LTI) because:
• It aligns Executive KMP rewards with Arena REIT securityholder returns;
• DIS is a key performance indicator referenced by the Board in preparing the annual budget and business plan and
in measuring Arena REIT’s underlying performance.
The Board retains discretion to adjust the conditions and/or the performance outcome used for assessing whether
the performance related conditions have been satisfied to ensure that executive KMP are neither advantaged nor
disadvantaged by matters that affect the conditions, for example the timing of a material equity raising or excluding
the effects of one-off/non recurrent items.
2626
Directors’ ReportArena REIT Annual Report 2016 \ Financial Report Remuneration report (continued)
3.3.2 LTI - Recognition Rights
Executive KMP received a once-off grant of Recognition Rights in FY15 to recognise their commitment to the Arena
REIT internalisation and reward ongoing effort to deliver Arena REIT’s business performance.
Recognition Rights are subject to an employment retention period ending on 30 June 2017. The Board considered
the Recognition Rights to be an important incentive for Executive KMP to remain with the business during Arena
REIT’s transition to an internalised management structure.
3.3.3 Other LTI Plan Terms
Other key terms of the LTI Plan are:
• Participants do not receive distributions or dividends on unvested LTI awards during the performance period;
• No payment for Performance Rights or Recognition Rights is required;
• No payment is required on the issue of stapled securities in respect of a vested Performance Right or Recognition
Right;
• In the event of termination of employment, the following treatment applies to unvested awards:
– Dismissal for cause or resignation: unvested awards will lapse unless the Board determines otherwise;
– In all other circumstances: unvested awards will remain on-foot subject to the original performance conditions
and vesting period. The Board will have discretion to pro-rate awards which remain on foot (eg to reflect the
portion of the performance/vesting period that has elapsed). The Board may lapse an award in full and also allow
accelerated vesting (pro-rated for time and performance) in special circumstances subject to termination benefit
rules);
• In the event of an actual or proposed change of control event that the Board in its discretion determines should be
treated as a change of control, a pro-rata number of unvested grants vest at the time of the relevant event, based
on the performance period elapsed and the extent to which performance hurdles have been achieved at the time
(unless the Board determines another treatment in its discretion);
• The LTI Plan restricts Executive KMP from entering into transactions (through the use of derivatives or otherwise)
that would have the effect of limiting the economic risk from participating in the LTI Plan.
4. Performance and Variable Remuneration Outcomes
Arena REIT’s remuneration policy assesses variable remuneration outcomes in the context of performance and change
in securityholder wealth. The Remuneration and Nomination Committee is responsible for assessing performance
against KPIs and determining the STI to be paid and the extent to which the LTI vests. To assist in this process the
Committee receives detailed financial reports, data capable of independent confirmation and individual performance
assessments.
2727
Arena REIT Annual Report 2016 \ Financial Report Remuneration report (continued)
4.1 Performance Indicators
The table below summarises information on Arena REIT’s key financial and performance metrics over the five year
period to 30 June 2016.
Metric
FY16
FY15
FY14
FY13
FY12
Net Profit (Statutory) ($million)
Distributable Income ($million)
Distributable Income per Security (cents)
Distributions per Security (cents)
Net Asset Value per Security ($)
ASX Security Price ($)
Gearing (%)
Annual Total Shareholder Return (TSR) (%)
Annual TSR of ASX-300 A-REIT Index (%)
72.6
25.6
11.11
10.90
1.54
1.99
26.8
37.6
24.6
61.0
22.1
10.20
10.00
1.33
1.54
29.1
36.3
20.2
44.6
18.5
8.85
8.75
1.13
1.20
33.3
26.7
11.1
17.2
11.2
8.20
8.00
1.02
1.02
10.4
n/a1
n/a1
15.7
8.5
6.40
6.50
1.00
n/a1
41.7
n/a1
n/a1
1. Arena REIT listed on ASX in June 2013. Prior data is not available or relates to a period when the fund was unlisted.
4.2 FY16 STI Performance Measures
A key measure of Arena REIT’s performance and contributor to STI performance assessment is the annual underlying
profit and distribution.
STI Financial Objective
Result
Underlying Profit Performance:
• Deliver a minimum FY16 Distribution of 10.7cents per
• Actual FY16 Distribution of 10.9 cents per security (9%
security (7% growth on FY15)
growth on FY15)
• Deliver FY16 distributable income above 10.9 cents per
• Actual FY16 distributable income of 11.11 cents per
security (7% growth on FY15)
security (9% growth on FY15)
STI Non-Financial Objectives
The Committee set each Executive KMP relevant objectives and KPIs in relation to strategy development and
execution, progression of developments, business performance, risk management, people, stakeholder management,
funding and liquidity. The achievement of KPIs was assessed by the Committee in the determination of each
Executive KMP’s STI award.
4.3 FY16 STI Awards
As a result of the performance assessment, the Board awarded STI’s in respect of FY16 as set out below.
Executive KMP
Bryce Mitchelson
Gareth Winter
Robert de Vos
1. Any STI opportunity not awarded is forfeited.
2828
STI Award ($)
Award as a % of STI Opportunity1
208,250
107,667
122,715
85%
95%
90%
Directors’ ReportArena REIT Annual Report 2016 \ Financial Report Remuneration report (continued)
4.4 LTI Performance Measures
No assessment of Performance Rights vesting conditions was required in FY16. No Performance Rights or Recognition
Rights were eligible for exercise during FY16.
LTI Year
Measurement
Period
LTI Performance
Measure
Performance Hurdle
Result
Vesting
Outcome
FY15
12 December 2014
to 30 June 2017
Relative TSR
FY17
Distributable
Income per Security
FY16
FY16 – FY18
Relative TSR
FY18
Distributable
Income per Security
Ranking greater than 50th percentile of
the members of the S&P ASX 300 A-REIT
Accumulation Index
Target range of 11.0 cents to 12.0 cents
Ranking greater than 50th percentile of
the members of the S&P ASX 300 A-REIT
Accumulation Index
Target range of 11.5 cents to 12.5 cents
N/A
N/A
4.5 LTI Grants
LTI Grants to Executive KMP during FY16 are set out in the table below.
Executive KMP
Maximum
LTI Award
as % of TFR
Type
Grant Date Vesting Date
Rights
Granted
Fair value
per Right2
Bryce Mitchelson1
Gareth Winter1
Robert de Vos
50%
33%
36%
Performance Rights
1 July 2015
30 June 2018
Performance Rights
1 July 2015
30 June 2018
Performance Rights
1 July 2015
30 June 2018
247,475
114,478
110,192
$0.99
$0.99
$0.99
1. Grants were subject to securityholder approval received at the AGM held on 19 November 2015.
2. Fair Value per Right was determined by an independent valuation. Refer to Note 20 of the financial report for further information on the valuation
inputs.
2929
Arena REIT Annual Report 2016 \ Financial Report Remuneration report (continued)
4.6 Remuneration Summary (Statutory)
The table below shows details of the remuneration in respect of the KMP measured in accordance with the
requirements of accounting standards.
Short Term Benefits
Equity Based
Payments
Long
Term
Post
Employment
Salary &
Fees
Non-
Monetary
Benefits
STI
Perfor-
mance
Rights2
Recog-
nition
Rights2
Long
Service
Leave3
Super-
annuation
Total
$
Non-Executive Director
David Ross
Simon Parsons
FY16
FY151
FY16
FY151
Dennis Wildenburg FY16
FY151
Executive KMP
148,521
82,104
92,237
49,308
88,901
44,832
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Bryce Mitchelson
FY16
470,692 208,250
10,361
137,776
Gareth Winter
Robert de Vos
FY151
FY16
FY151
FY16
FY151
252,635 111,791
320,692 107,667
173,334
60,914
280,692 122,715
141,881
69,220
6,468
9,201
5,786
9,201
5,786
30,732
63,765
14,234
59,992
12,490
–
–
–
–
–
–
37,307
20,488
17,279
9,489
15,708
8,627
–
–
–
–
–
–
9,351
5,590
3,282
2,522
1,680
2,037
31,479
180,000
14,804
96,908
8,763
101,000
4,684
53,992
17,099
106,000
11,928
56,760
19,308
893,045
9,392
437,096
19,308
541,194
8,728
275,007
19,308
509,296
10,227
250,718
1. Remuneration disclosed for FY15 is for the period from 12 December 2014 (being the date the KMP commenced employment with Arena REIT) to
30 June 2015.
2. Represents change in accounting accrual. Entitlement subject to vesting conditions.
3. Represents change in accounting accrual. Entitlement subject to legislated minimum period of employment.
4.7 Executive KMP Remuneration Mix
The following table summarises the relative proportions of total remuneration based on the FY16 Remuneration
Summary.
Executive KMP
Bryce Mitchelson
Gareth Winter
Robert de Vos
TFR
56%
64%
61%
STI
23%
20%
24%
LTI
21%
16%
15%
Variation between TMR and actual total remuneration mix occurs as a result of non-vesting of opportunities and
timing differences between the granting of an LTI and the accounting recognition of the LTI expense which is
generally amortised over the relevant vesting period.
3030
Directors’ ReportArena REIT Annual Report 2016 \ Financial Report Remuneration report (continued)
5. Interests in Securities
Interests in Arena REIT securities held by Directors and Executive KMP is set out below.
Ordinary Securities
Ordinary Securities
Independent Directors
David Ross
Simon Parsons
Dennis Wildenburg
Executive KMP
Bryce Mitchelson
Gareth Winter
Robert de Vos
Balance
30 June 2015
Acquired
Disposed
Received as
Remuneration
Balance
30 June 2016
200,000
200,000
150,000
753,907
75,000
26,235
–
–
–
–
–
1,706
–
–
–
–
–
–
–
–
–
–
–
–
200,000
200,000
150,000
753,907
75,000
27,941
Performance Rights and Recognition Rights
Executive KMP
Bryce Mitchelson
Performance Rights
Performance Rights
Recognition Rights
Gareth Winter
Performance Rights
Performance Rights
Recognition Rights
Robert de Vos
Performance Rights
Performance Rights
Recognition Rights
Grant
Year
Opening
Balance
Rights
Granted
Rights
Vested
Rights
Lapsed
Closing
Balance
Fair Value at
Grant Date1
Face Value at
Grant Date2
FY16
FY15
FY15
FY16
FY15
FY15
FY16
FY15
FY15
–
247,475
151,596
77,869
–
–
–
114,478
70,213
36,066
–
–
–
110,192
63,830
32,787
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
247,475
151,596
77,869
$245,000
$142,500
$95,000
114,478
$113,333
70,213
36,066
$66,000
$44,000
$388,536
$224,362
$115,246
$179,730
$108,128
$55,542
110,192
$109,090
$173,001
63,830
32,787
$60,000
$40,000
$98,298
$50,492
1. Fair value determined by independent valuation.
2. Number of Rights granted multiplied by the security price on the relevant grant date. If Rights vest (subject to performance and vesting
conditions), the actual security price on the date of issue of securities may be higher or lower than at the relevant grant date. The value of the
unvested Rights may be nil if the relevant vesting conditions are not met and the Rights lapse or are forfeited.
3131
Arena REIT Annual Report 2016 \ Financial Report Remuneration report (continued)
6. Service Agreements
Executive KMP Service Agreements detail the individual terms and conditions applying to the employment of the
Executive KMP. Key employment terms in addition to the remuneration arrangements set out in this report are set out
below:
Managing Director
Other Executive KMP
Contract Term
Termination by the
Executive KMP
Termination by Arena REIT
without cause or mutually
agreed resignation
Ongoing
Nine months’ notice.
Ongoing
Six months’ notice.
Unvested STI or LTI entitlements lapse
unless the Board determines otherwise.
Unvested STI or LTI entitlements lapse
unless the Board determines otherwise.
Nine months’ notice or equivalent payment
in lieu of notice based on TFR.
Six months’ notice or equivalent payment
in lieu of notice based on TFR.
Any unvested STI and LTI awards will be
governed by the applicable STI or LTI plan
rules summarised above.
Any unvested STI and LTI awards will be
governed by the applicable STI or LTI plan
rules summarised above.
Termination by Arena REIT
for serious misconduct
No notice period or termination payment
unless the board determines otherwise.
No notice period or termination payment
unless the Board determines otherwise.
Post-employment restraints
Restrained from soliciting suppliers,
customers and staff for a maximum of nine
months post-employment.
Restrained from soliciting suppliers,
customers and staff for a maximum of six
months post- employment.
Indemnification and insurance of officers and auditors
During the year, the Group has paid insurance premiums to insure each of the directors, and officers of the Group
against liabilities for costs and expenses incurred by them in defending any legal proceedings arising out of their
conduct while acting in the capacity of the Group other than conduct involving a wilful breach of duty in relation to
the Group.
The contract of insurance prohibits disclosure of the nature of the liability covered and the amount of the premium.
The Group has not, during or since the end of the financial year indemnified or agreed to indemnify an auditor of the
Group or of any related body corporate against a liability incurred in their capacity as an auditor.
Non-audit services
Details of the non-audit services provided to the Group by the Independent Auditor during the year ended 30 June
2016 are disclosed in note 5 of the financial statements.
Fees paid to and interests held in the Group by the Responsible Entity or its associates
Fees paid to the Responsible Entity and its associates out of Group property during the year are disclosed in note 18
to the financial statements.
Interests in the Group
The movement in securities on issue in the Group during the year is disclosed in note 14 to the financial statements.
3232
Directors’ ReportArena REIT Annual Report 2016 \ Financial Report Corporate governance statement
The board of directors for Arena REIT Limited and Arena REIT Management Limited work together and take a co-
ordinated approach to the corporate governance of the Group.
Each Board has a Board Charter which details the composition, responsibilities, and protocols of the Board. In
addition, the Boards have a Code of Conduct which sets out the standard of business practices required of the
Group’s directors and staff.
Arena conducts its business in accordance with these policies and code, as well as other key policies which are
published on its website. These include:
• Arena REIT Continuous Disclosure Policy;
• Arena REIT Diversity Policy;
• Arena REIT Privacy Policy;
• Arena REIT Communications Policy;
• Arena REIT Summary of Risk Management Framework;
• Arena REIT Securities Trading Policy.
In compliance with ASX Listing Rule 4.10.3, Arena has also published a statement disclosing the extent to which the
Group has followed the recommendations for good corporate governance set by the ASX Corporate Governance
Council (3rd Edition) during the reporting period on its website, www.arena.com.au/about/governance.
Environmental regulation
The operations of the Group are not subject to any particular or significant environmental regulations under a
Commonwealth, State or Territory law.
Rounding of amounts to the nearest thousand dollars
The Group is an entity of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument
2016/191, relating to the ‘rounding off’ of amounts in the Directors’ report. Amounts in the Directors’ report have
been rounded to the nearest thousand dollars in accordance with that Instrument, unless otherwise indicated.
Auditor’s independence declaration
The Auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on
page 34.
This report is made in accordance with a resolution of directors.
David Ross, Chairman
Melbourne, 25 August 2016
3333
Arena REIT Annual Report 2016 \ Financial Report Auditor’s independence
declaration
Auditor’s Independence Declaration
As lead auditor for the audit of Arena REIT for the year ended 30 June 2016, I declare that to the best
of my knowledge and belief, there have been:
1.
no contraventions of the auditor independence requirements of the Corporations Act 2001 in
relation to the audit; and
2.
no contraventions of any applicable code of professional conduct in relation to the audit.
This declaration is in respect of Arena REIT which comprises the stapled entities Arena REIT No. 1,
Arena REIT No. 2 and Arena REIT Limited and the entities they controlled during the period.
Elizabeth O’Brien
Partner
PricewaterhouseCoopers
Melbourne
25 August 2016
PricewaterhouseCoopers, ABN 52 780 433 757
Freshwater Place, 2 Southbank Boulevard, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001
T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
34
Arena REIT Annual Report 2016 \ Financial Report Consolidated statement
of comprehensive income
Income
Property rental
Management fee income
Interest
Revaluation of investment properties
Profit/(loss) on sale of direct properties
Total income
Expenses
Direct property expenses
Former Responsible Entity’s management fee
Employee benefits expense
Administration and other expenses
Net loss on fair value of derivative financial instruments
Finance costs
Total expenses
Net profit for the year
Other comprehensive income
Total comprehensive income for the year
Total comprehensive income for the year is attributable to Arena REIT
stapled group investors, comprising:
Unitholders of Arena REIT No. 1
Unitholders of Arena REIT No. 2 (non-controlling interest)
Unitholders of Arena REIT Limited (non-controlling interest)
Earnings per security:
Basic earnings per security in Arena REIT No. 1
Diluted earnings per security in Arena REIT No. 1
Basic earnings per security in Arena REIT Group
Diluted earnings per security in Arena REIT Group
Consolidated
30 June 2016
30 June 2015
Notes
$’000
$’000
9(c)
9
9(c)
18
3
6
6
6
6
32,989
429
167
51,062
(121)
84,526
(1,003)
–
(2,526)
(1,128)
(2,915)
(4,333)
31,219
488
112
39,828
2,232
73,879
(1,306)
(1,353)
(1,214)
(2,211)
(1,781)
(5,048)
(11,905)
(12,913)
72,621
60,966
–
72,621
–
60,966
59,155
14,175
(709)
72,621
Cents
25.70
25.70
31.55
31.55
55,354
5,626
(14)
60,966
Cents
25.55
25.55
28.14
28.14
The above consolidated statement of comprehensive income should be read in conjunction with the accompanying
notes.
35
Arena REIT Annual Report 2016 \ Financial Report Consolidated
balance sheet
Current assets
Cash and cash equivalents
Trade and other receivables
Total current assets
Non-current assets
Receivables
Property, plant and equipment
Investment properties
Intangible assets
Total non-current assets
Total assets
Current liabilities
Trade and other payables
Provisions
Total current liabilities
Non-current liabilities
Derivative financial instruments
Provisions
Interest bearing liabilities
Total non-current liabilities
Total liabilities
Net assets
Equity
Contributed equity - ARF1
Accumulated profit
Non-controlling interests - ARF2 and ARL
Total equity
Consolidated
30 June 2016
30 June 2015
Notes
$’000
$’000
7
8
8
9
10
11
13
12
14
15
9,446
969
10,415
1,062
219
491,439
10,816
503,536
513,951
15,124
250
15,374
3,030
467
137,587
141,084
156,458
357,493
197,224
99,187
61,082
357,493
10,888
7,163
18,051
1,189
121
420,532
10,730
432,572
450,623
15,297
212
15,509
398
451
130,774
131,623
147,132
303,491
191,845
61,900
49,746
303,491
The above consolidated balance sheet should be read in conjunction with the accompanying notes.
36
Arena REIT Annual Report 2016 \ Financial Report Consolidated statement
of changes in equity
Consolidated
Contributed
equity
Accumulated
profit
Non-controlling
interests -
ARL & ARF2
Total equity
$’000
$’000
$’000
$’000
Balance at 1 July 2014
Profit for the period
Total comprehensive income for the year
Transactions with owners in their capacity as owners:
Arising on stapling
Contributions of equity, net of transaction costs
Securities issued under DRP
Employee - LTI Performance Plan
Distributions to securityholders
Balance at 30 June 2015
Balance at 1 July 2015
Profit for the period
Total comprehensive income for the year
Transactions with owners in their capacity as owners:
Securities issued under DRP
Employee - LTI Performance Plan
Distributions to securityholders
183,221
–
–
(13,000)
19,980
1,644
–
–
191,845
191,845
–
–
5,379
–
–
25,991
55,354
55,354
–
–
–
–
(19,445)
61,900
61,900
59,155
59,155
–
–
(21,868)
28,990
5,613
5,613
13,000
4,361
216
112
(2,546)
49,746
49,746
13,466
13,466
788
350
(3,268)
238,202
60,967
60,967
–
24,341
1,860
112
(21,991)
303,491
303,491
72,621
72,621
6,167
350
(25,136)
Balance at 30 June 2016
197,224
99,187
61,082
357,493
The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.
37
Arena REIT Annual Report 2016 \ Financial Report Consolidated statement
of cash flows
Consolidated
30 June 2016
30 June 2015
Notes
$’000
$’000
Cash flows from operating activities
Property rental receipts
Property management receipts
Payments to suppliers
Finance costs paid
Interest received
Net cash inflow from operating activities
23
Cash flows from investing activities
Cash arising on stapling
Acquisition of subsidiaries
Net proceeds from sale of investment properties
Payments for investment properties and capital expenditure
Other stapling cash flows
Net cash (outflow) from investing activities
Cash flows from financing activities
Proceeds from equity placement
Payment of transaction costs from issue of securities
Distributions paid to securityholders
Loan establishment costs paid
Capital receipts from lenders
Capital payments to lenders
Net cash (outflow)/inflow from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the financial period
Cash and cash equivalents at the end of the financial period
7
33,460
477
(3,898)
(4,018)
165
26,186
–
(995)
7,139
(21,579)
–
(15,435)
–
(28)
(18,325)
(491)
10,500
(3,849)
(12,193)
(1,442)
10,888
9,446
31,761
432
(4,464)
(4,911)
112
22,930
1,510
(4,862)
14,938
(28,973)
(1,027)
(18,414)
25,000
(658)
(19,227)
(112)
41,000
(43,578)
2,425
6,941
3,947
10,888
The above consolidated statement of cash flows should be read in conjunction with the accompanying notes.
38
Arena REIT Annual Report 2016 \ Financial Report Contents
Notes to the financial statements
1. General information
2. Summary of significant accounting policies
3. Finance costs
4.
Income taxes
5. Remuneration of auditors
6. Earnings per security (‘EPS’)
7. Cash and cash equivalents
8. Trade and other receivables
9.
Investment properties
10. Intangible assets
11. Trade and other payables
12. Interest bearing liabilities
13. Derivative financial instruments
14. Contributed equity
15. Accumulated profit
16. Non-controlling interests
17. Segment information
18. Related party disclosures
19. Investments in subsidiaries
20. Security-based benefits expense
21. Financial risk management and fair value
measurement
22. Parent entity financial information
23. Reconciliation of profit to net cash inflow from
operating activities
24. Contingent assets and liabilities and
commitments
25. Events occurring after the reporting period
40
40
52
52
53
53
54
54
56
59
59
59
61
61
63
63
64
64
66
66
67
72
73
73
73
3939
Arena REIT Annual Report 2016 \ Financial Report Notes to the consolidated
financial statements
1. General information
These financial statements cover Arena REIT (the ‘Group’) comprising Arena REIT No. 1, Arena REIT No. 2, Arena REIT
Limited, and their controlled entities. Arena REIT is listed on ASX and registered and domiciled in Australia.
The Arena REIT Stapled Group (the ‘Group’) now comprises Arena REIT No. 1 (‘ARF1’), Arena REIT No. 2 (‘ARF2’)
and Arena REIT Limited (‘ARL’), following the stapling of ARL (the ‘Aggregation’). The Responsible Entity of ARF1
and ARF2 is Arena REIT Management Limited (the ‘Responsible Entity’). The stapling occurred in conjunction with
the internalisation of corporate governance and management rights of the Group approved by securityholders in
December 2014.
The financial statements were authorised for issue by the directors on 25 August 2016. The directors have the power
to amend and reissue the financial statements.
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of these financial statements are set out below. These
policies have been consistently applied to all years presented, unless otherwise stated.
(a) Basis of preparation
These general purpose financial statements have been prepared in accordance with Australian Accounting Standards
and interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. Arena REIT
is a for-profit unit trust for the purpose of preparing the financial statements.
The financial report has been prepared on an accruals and historical cost basis except for investment properties,
financial assets at fair value through profit or loss, derivative financial instruments which are measured at fair value,
and assets held for sale which are recognised at fair value less costs to sell. Cost is based on the fair value of
consideration given in exchange for assets. Comparative information is reclassified where appropriate to enhance
comparability.
Compliance with International Financial Reporting Standards
The financial statements of the Group also comply with International Financial Reporting Standards as issued by the
International Accounting Standards Board.
Going Concern
As at 30 June 2016, the Group had a net working capital deficiency of $4.96 million. This deficiency is due to working
capital management within the Arena stapled group, and the difference in the timing of drawdowns from the Group’s
debt facility and the timing of capital expenditure on developments and asset acquisitions. The Group has $37 million
of unused debt facility which can be drawn to fund cashflow requirements.
After taking into account all available information, the directors of the Group have concluded that there are
reasonable grounds to believe:
• The Group will be able to pay its debts as and when they fall due; and
• The basis of preparation of the financial report on a going concern basis is appropriate.
(i) New and amended standards adopted by the Group
There were no new accounting standards adopted during the year which had a significant impact on the reported
performance of the Group or required disclosures within the financial statements.
(b) Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating
Decision Maker.
The Board as the Chief Operating Decision Maker is responsible for making strategic decisions about the Group,
assessing the financial performance and financial position of the Group, determining the allocation of resources, and
risk management.
4040
Arena REIT Annual Report 2016 \ Financial Report 2. Summary of significant accounting policies (continued)
(c) Principles of consolidation
(i) Stapled entities
The units of ARF1, ARF2 and the shares of ARL are combined and issued as stapled securities in the Arena REIT
Stapled Group. The units of ARF1, ARF2 and shares of ARL cannot be traded separately and can only be traded as
a stapled security. This financial report consists of the consolidated financial statements of the Arena REIT Stapled
Group, which comprises ARF1, ARF2, and ARL and its controlled entities.
AASB 3 Business Combinations requires one of the stapled entities in a stapling structure to be identified as the
parent entity for the purpose of preparing consolidated financial reports. In accordance with this requirement, ARF1
has been identified as the parent entity in relation to the stapling with ARF2 and ARL.
The consolidated financial statements of the Arena REIT Stapled Group incorporate the assets and liabilities of the
entities controlled by ARF1 at 30 June 2016, including those deemed to be controlled by ARF1 by identifying it as
the parent of the Arena REIT Stapled Group, and the results of those controlled entities for the year then ended. The
effects of all transactions between entities in the consolidated entity are eliminated in full.
Non-controlling interests in the results and equity are shown separately in the Statement of Comprehensive Income
and Statement of Financial Position respectively. Non-controlling interests are those interests in ARF2 and ARL which
are not held directly or indirectly by ARF1.
Securityholders approved the stapling effective from 12 December 2014 and this is the date the consolidation has
occurred for financial reporting purposes.
(ii) Subsidiaries
Subsidiaries are all entities (including structured entities) over which the group has control. The group controls an
entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the
ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated
from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases.
The acquisition method of accounting is used to account for business combinations by the group (refer to note 2(f)).
Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated.
Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred
asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies
adopted by the group.
Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement
of comprehensive income, statement of changes in equity and balance sheet respectively.
(iii) Changes in ownership interests
When the Group ceases to have control, joint control or significant influence, any retained interest in the entity is
remeasured to its fair value with the change in carrying amount recognised in profit or loss. The fair value becomes
the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint
venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect
of that entity are accounted for as if the group had directly disposed of the related assets or liabilities. This may mean
that amounts previously recognised in other comprehensive income are reclassified to profit or loss.
If the ownership interest in a joint venture or an associate is reduced but joint control or significant influence is
retained, only a proportionate share of the amounts previously recognised in other comprehensive income are
reclassified to profit or loss where appropriate.
(d) Presentation of members interests in ARF2 and ARL
As ARF1 has been assessed as the parent entity of the Group, the securityholders interests in ARF2 and ARL are
included in equity as “non-controlling interests” relating to the stapled entity. Securityholders interests in ARF2 and
ARL are not presented as attributable to owners of the parent reflecting the fact that they are not owned by ARF1, but
by the securityholders of the stapled group.
4141
Arena REIT Annual Report 2016 \ Financial Report 2. Summary of significant accounting policies (continued)
(e) Parent entity financial information
Parent entity information has been prepared on the same basis as the rest of the financial report.
(f) Business combinations
The acquisition method of accounting is used to account for all business combinations, regardless of whether equity
instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises
the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The
consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration
arrangement and the fair value of any pre-existing equity interest in the subsidiary.
Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the
acquisition-date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the
acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable
assets.
The excess of the consideration transferred and the amount of any non-controlling interest in the acquiree over the
fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value
of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the
difference is recognised directly in profit or loss as a bargain purchase.
Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted
to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate,
being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms
and conditions.
Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability
are subsequently remeasured to fair value with changes in fair value recognised in profit or loss.
(g) Revenue
Rental income from operating leases is recognised as income on a straight-line basis over the lease term. Where
a lease has fixed annual increases, the total rent receivable over the operating lease is recognised as revenue on a
straight-line basis over the lease term. This results in more income being recognised early in the lease term and less
late in the lease term compared to the lease conditions. The difference between the lease income recognised and the
actual lease payments received is shown within the fair value of the investment property on the consolidated balance
sheet.
When the Group provides lease incentives to tenants, the cost of the incentives are recognised over the lease term,
on a straight-line basis, as a reduction in rental income.
Contingent rents based on the future amount of a factor that changes other than with the passage of time, are only
recognised when contractually due.
Interest income is recognised in the consolidated statement of comprehensive income using the effective interest rate
method.
Distribution income is recognised when the right to receive a distribution has been established.
Management service fees earned from managed investment schemes or trusts are calculated based on the agreed
percentage of funds under management and agreed percentages of schemes or trust acquisitions and disposals.
Management fees are recognised on an accrual basis.
Performance fees earned from managed funds are recorded when the Group has a legal or constructive right as
a result of past events, and it is probable that an inflow of resources will occur and the amount can be reliably
estimated.
4242
Notes to the consolidated financial statementsArena REIT Annual Report 2016 \ Financial Report 2. Summary of significant accounting policies (continued)
(g) Revenue (continued)
Deferred management fees and performance fees are measured at the present value of the Responsible Entity’s
best estimate of the amount receivable at the end of the reporting period. The discount rate used to determine the
present value reflects current market assessments of the time value of money and the risks specific to the asset.
Other income is recognised when the right to receive the revenue has been established.
All income is stated net of goods and services tax (GST).
(h) Expenses
All expenses are recognised in profit or loss on an accruals basis.
(i) Employee benefits
(i) Short-term obligations
Liabilities for wages and salaries, including non-monetary benefits that are expected to be settled wholly within 12
months after the end of the period in which the employees render the related service are recognised in respect of
employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid
when the liabilities are settled. The liabilities are presented as current employee benefit obligations in the balance
sheet.
(ii) Other long-term employee benefit obligations
The liabilities for long service leave and annual leave that are not expected to be settled wholly within 12 months
after the end of the period in which the employees render the related service. They are therefore measured as the
present value of expected future payments to be made in respect of services provided by employees up to the end
of the reporting period. Consideration is given to expected future wage and salary levels, experience of employee
departures and periods of service.
The obligations are presented as current liabilities in the balance sheet if the entity does not have an unconditional
right to defer settlement for at least twelve months after the reporting period, regardless of when the actual
settlement is expected to occur.
(iii) Security-based payments
For information relating to the Group’s Long Term Incentive Plan, refer to note 20.
Employees may receive remuneration in the form of security-based incentives, whereby employees render services
as consideration for equity-based incentives (equity-settled transactions). The Group did not have any cash-settled
security-based incentives in the financial year.
The cost of equity-settled transactions is recognised, together with a corresponding increase in reserves in equity,
over the period in which the performance and service conditions are fulfilled. The cumulative expense recognised
for these transactions at each reporting date until the vesting date reflects the extent to which the vesting period has
expired and for awards subject to non-market vesting conditions, the Group’s best estimate of the number of equity
instruments that will ultimately vest in respect of the relevant rights. The income statement expense or credit for a
period represents the movement in cumulative expense recognised as at the beginning and end of that period and is
recognised in employee expenses.
If the terms of an equity-settled transaction are modified, the minimum expense recognised is the expense as if the
terms had not been modified, if the original terms of the award are met. An additional expense is recognised for
any modification that increases the total fair value of the transaction, or is otherwise beneficial to the employee as
measured at the date of modification.
If an equity-settled award is cancelled, it is treated as if it vested on the date of cancellation, and any expense not
yet recognised for the award is recognised immediately. This includes any award where non-vesting conditions within
the control of either the Group or the employee are not met. However, if a new award is substituted for the cancelled
award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are
treated as if they were a modification of the original award.
4343
Arena REIT Annual Report 2016 \ Financial Report 2. Summary of significant accounting policies (continued)
(j) Income tax
(i) Trusts
Arena REIT No.1 and Arena REIT No.2 (the Trusts) are not subject to Australian income tax provided their taxable
income is fully distributed to securityholders.
(ii) Companies
The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based
on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities
attributable to temporary differences and to unused tax losses.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the
tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However,
deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is
also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business
combination that at the time of the transaction affects neither accounting nor taxable profit or loss.
Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the
end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the
deferred income tax liability is settled.
Deferred tax assets are recognised for deductible 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 is recognised in profit or loss, except to the extent that it relates to items recognised in other
comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or
directly in equity, respectively.
(iii) Tax consolidation legislation
Arena REIT Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation
legislation. As a consequence, these entities are taxed as a single entity and the deferred tax assets and liabilities of
these entities are set off in the consolidated financial statements.
The head entity, Arena REIT Limited, and the controlled entities in the tax consolidated group account for their own
current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group
continues to be a standalone taxpayer in its own right.
In addition to its own current and deferred tax amounts, Arena REIT Limited also recognises the current tax liabilities
(or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled
entities in the tax consolidated group.
All current tax balances are transferred from the controlled entities in the group to Arena REIT Limited. As there is
no tax sharing agreement in place the current tax receivable or payable is transferred from each controlled entity to
Arena REIT Limited as a contribution to (or distribution from) wholly owned entities.
(k) Distributions
The Group distributes income adjusted for amounts determined by the Group. Provision is made for any distribution
amounts declared, being appropriately disclosed and no longer at the discretion of the entity, on or before the end of
the reporting date but not distributed at the end of the reporting period. The distributions are recognised within the
balance sheet and statement of changes in equity as a reduction in accumulated profit/(losses).
4444
Notes to the consolidated financial statementsArena REIT Annual Report 2016 \ Financial Report 2. Summary of significant accounting policies (continued)
(l) Earnings per security (EPS)
(i) Basic earnings per security
Basic earnings per security is calculated by dividing:
• the profit attributable to the securityholders, excluding any costs of servicing equity other than ordinary securities;
• by the weighted average number of ordinary securities outstanding during the financial year.
(ii) Diluted earnings per security
Diluted earnings per security adjust the figures used in the determination of basic earnings per security to take into
account:
• the effect of interest and other financial costs associated with dilutive potential ordinary securities;
• the weighted average number of additional ordinary securities that would have been outstanding assuming the
conversion of all dilutive potential ordinary securities.
(m) Cash and cash equivalents
For the purpose of presentation in the consolidated statement of cash flows, cash and cash equivalents includes
cash on hand, deposits held at call with financial institutions, other short term, highly liquid investments with original
maturities of three months or less from the date of acquisition that are readily convertible to known amounts of cash
and which are subject to an insignificant risk of changes in value.
(n) Receivables
Receivables may include amounts for dividends, interest and trust distributions. Dividends and trust distributions are
accrued when the right to receive payment is established. Interest is accrued at the end of each reporting period from
the time of last payment. Amounts are generally received within 30 days of being recorded as receivables.
Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible
are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade
receivables) is used when there is objective evidence that the Group will not be able to collect all amounts due
according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the
debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days
overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is
the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted
at the original effective interest rate. Cash flows relating to short term receivables are not discounted if the effect of
discounting is immaterial.
The amount of the impairment loss is recognised in the statement of comprehensive income within other expenses.
When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a
subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously
written off are credited against other expenses in the statement of comprehensive income.
(o) Assets held for sale
Assets are classified as held-for-sale when a sale is considered highly probable and their carrying amount will be
recovered principally through a sale transaction rather than through continued use. Assets classified as held-for-sale
are presented separately from the other assets in the consolidated balance sheet.
Assets classified as held-for-sale are measured at the lower of their carrying amount and fair value less costs to sell.
Changes to fair value are recorded in the consolidated statement of comprehensive income.
An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair
value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset
(or disposal group), but not in excess of any cumulative impairment loss previously recognised. A gain or loss
not previously recognised by the date of the sale of the asset (or disposal group) is recognised at the date of
derecognition.
4545
Arena REIT Annual Report 2016 \ Financial Report 2. Summary of significant accounting policies (continued)
(o) Assets held for sale (continued)
Assets (including those that are part of a disposal group) are not depreciated or amortised while they are classified as
held for sale. Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale
continue to be recognised.
(p) Property, plant and equipment
Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is
directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains or losses
on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment.
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 group and the cost
of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is
derecognised when replaced. All other repairs and maintenance are charged to profit or loss during the reporting
period in which they are incurred.
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting
period. 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 carrying amount. These are included in profit or loss.
(q) Investment properties
Investment property is real estate investments held to earn long-term rental income and for capital appreciation.
Investment properties are carried at fair value determined either by the Directors or independent valuers with
changes in fair value recorded in the statement of comprehensive income.
Land and buildings (including integral plant and equipment) that comprise investment property are not depreciated.
The carrying amount of investment properties may include the cost of acquisition, additions, refurbishments,
redevelopments, improvements, lease incentives, assets relating to fixed increases in operating lease rental in future
periods and borrowing costs incurred during the construction period of qualifying assets.
(i) Valuation basis
The basis of the valuation of investment properties is fair value, being the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The Directors may determine the requirement for a valuation at any time but has adopted a valuation program that
provides for each property to be independently valued by suitably qualified valuers at least once every three years.
Changes in market conditions may necessitate more frequent independent revaluations of properties.
Valuations are derived from a number of factors that may include a direct comparison between the subject property
and a range of comparable sales evidence, the present value of net future cash flow projections based on reliable
estimates of future cash flows, existing lease contracts, external evidence such as current market rents for similar
properties, and using capitalisation rates and discount rates that reflect current market assessments of the uncertainty
in the amount and timing of cash flows.
(r) Intangible assets - Goodwill
Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is not amortised but it is tested
for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired,
and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the
carrying amount of goodwill relating to the entity sold.
Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those
cash-generating units or groups of cash-generating units that are expected to benefit from the business combination
in which the goodwill arose. The units or groups of units are identified at the lowest level at which goodwill is
monitored for internal management purposes, being the operating segments.
4646
Notes to the consolidated financial statementsArena REIT Annual Report 2016 \ Financial Report 2. Summary of significant accounting policies (continued)
(s) Impairment of assets
Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested
annually for impairment, or more frequently if events or changes in circumstances indicate that they might be
impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.
An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable
amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the
purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable
cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating
units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the
impairment at the end of each reporting period.
(t) Financial instruments
(i) Classification
The Group’s investments are classified as at fair value through profit or loss. They comprise:
• Financial instruments held for trading
Derivative financial instruments such as futures, forward contracts, options and interest rate swaps are included under
this classification. The Group does not designate any derivatives as hedges in a hedging relationship.
• Financial instruments designated at fair value through profit or loss upon initial recognition
These include financial assets that are not held for trading purposes and which may be sold. These are investments in
exchange traded debt and equity instruments, unlisted trusts and commercial paper.
Financial assets designated at fair value through profit or loss at inception are those that are managed and their
performance evaluated on a fair value basis in accordance with the Group’s documented investment strategy. The
Group’s policy is for the Responsible Entity to evaluate the information about these financial instruments on a fair
value basis together with other related financial information.
(ii) Recognition/derecognition
Financial assets and financial liabilities are recognised on the date it becomes party to the contractual agreement
(trade date) and recognises changes in fair value of the financial assets or financial liabilities from this date.
Investments are derecognised when the right to receive cash flows from the investments have expired or the Group
has transferred substantially all risks and rewards of ownership.
(iii) Measurement
Financial assets and liabilities held at fair value through profit or loss
At initial recognition, financial assets are initially recognised at fair value. Transaction costs of financial assets carried at
fair value through profit or loss are expensed in the profit or loss.
The fair value of financial assets and liabilities traded in active markets is subsequently based on their quoted market
prices at the end of the reporting period without any deduction for estimated future selling costs. The quoted market
price used for financial assets held by the consolidated entity and the Group is the current bid price and the quoted
market price for financial liabilities is the current asking price.
The fair value of financial assets and liabilities that are not traded in an active market are determined using valuation
techniques. Accordingly, there may be a difference between the fair value at initial recognition and amounts
determined using a valuation technique. If such a difference exists, the Group recognises the difference in profit or
loss to reflect a change in factors, including time, that market participants would consider in setting a price.
Further detail on how the fair values of financial instruments are determined is disclosed in note 21(d).
4747
Arena REIT Annual Report 2016 \ Financial Report 2. Summary of significant accounting policies (continued)
(t) Financial instruments (continued)
(iii) Measurement (continued)
Loans and receivables
Loan assets are measured initially at fair value plus transaction costs and subsequently amortised using the effective
interest rate method, less impairment losses if any. Such assets are reviewed at the end of each reporting period to
determine whether there is objective evidence of impairment.
If evidence of impairment exists, an impairment loss is recognised in profit or loss as the difference between the
asset’s carrying amount and the present value of estimated future cash flows discounted at the original effective
interest rate.
If in a subsequent period the amount of an impairment loss recognised on a financial asset carried at amortised cost
decreases and the decrease can be linked objectively to an event occurring after the write-down, the write-down is
reversed through profit or loss.
(iv) Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the consolidated balance sheet when there
is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or
realise the asset and settle the liability simultaneously.
(u) Provisions
A provision is recognised when the Group has a legal or constructive obligation as a result of past events, it is
probable that an outflow of resources will be required to settle the obligation and the amount can be reliably
estimated. Provisions are measured at the present value of the Group’s best estimate of the expenditure required
to settle the present obligation at the end of the reporting period. The discount rate used to determine the present
value reflects current market assessments of the time value of money and the risks specific to the liability.
(v) Borrowings
Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently
measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption
amount is recognised in the consolidated statement of comprehensive income over the period of the borrowings
using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction
costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the
fee is deferred until the drawdown occurs. To the extent there is no evidence that it is probable that some or all of the
facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period
of the facility to which it relates.
Borrowings are removed from the consolidated balance sheet when the obligation specified in the contract is
discharged, cancelled or expired. The difference between the carrying amount of the financial liability that has been
extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or
liabilities assumed, is recognised in profit or loss as finance costs.
Borrowings are classified as current liabilities unless the entity has an unconditional right to defer settlement of the
liability for at least 12 months after the reporting period.
(w) Borrowing costs
Borrowing costs include interest and amortisation of costs incurred in connection with arrangement of borrowings.
Borrowing costs are expensed as incurred unless they relate to qualifying assets. Qualifying assets are assets which
take more than twelve months to get ready for their intended use or sale. Where funds are borrowed specifically for
the acquisition, construction or production of a qualifying asset, the amount of borrowing costs capitalised are those
incurred in relation to that borrowing. Where funds are borrowed generally, borrowing costs are capitalised using a
weighted average capitalisation rate.
4848
Notes to the consolidated financial statementsArena REIT Annual Report 2016 \ Financial Report 2. Summary of significant accounting policies (continued)
(x) Goods and Services Tax (GST)
Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of the GST
incurred is not recoverable from the relevant taxation authority. In these circumstances the GST is recognised as part
of the cost of acquisition of the asset or as part of an item of the expense.
Receivables and payables in the consolidated balance sheet are shown inclusive of GST.
The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables and
payables in the consolidated balance sheet.
Cashflows are presented on a net 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 flows.
(y) Use of estimates
The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next
financial year. Estimates are continually evaluated and based on historical experience and other factors, including
expectations of future events that are believed to be reasonable under the circumstances.
(i) Financial instruments
For certain Group’s financial instruments, quoted market prices are readily available. However, certain financial
instruments, for example over-the-counter derivatives or unquoted securities, are fair valued using valuation
techniques. Where valuation techniques (for example, pricing models) are used to determine fair values, they are
validated and periodically reviewed by experienced personnel of the Responsible Entity, independent of the area that
created them.
Models use observable data, to the extent practicable. However, areas such as credit risk (both own and
counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about
these factors could affect the reported fair value of financial instruments. For more information on how fair value is
calculated please refer to note 21.
For certain other financial instruments, the carrying amounts approximate fair value due to the short-term nature of
these financial instruments.
(ii) Investment properties
The Group carries its investment properties at fair value with changes in the fair values recognised in profit or loss. It
obtains independent valuations at least every 3 years. At the end of each reporting period, the directors update their
assessment of the fair value of each property, taking into account the most recent independent valuations. The key
assumptions used in this determination are set out in note 2(q) and 9.
(iii) Impairment of intangibles - Goodwill
The Group assesses the recoverability of intangibles and goodwill on at least an annual basis. In determining the
recoverability of these assets the Group uses a number of assumptions and estimates. The methodology and
assumptions used are disclosed in note 10.
(iv) Income taxes
The Group may be subject to income taxes in Australia. Certain judgment is required in determining the provision
for income taxes. There are many transactions and calculations undertaken during the ordinary course of business for
which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax outcomes based
on estimates of taxes which may be due. Where the final tax outcome of these matters is different from the amounts
that were initially recorded, such differences will impact the current and deferred tax provisions in the period in which
a determination is made.
4949
Arena REIT Annual Report 2016 \ Financial Report 2. Summary of significant accounting policies (continued)
(y) Use of estimates (continued)
(v) Deferred disposal and performance fees
The Group may receive management fees on the sale of property by an investment scheme for which it is the
responsible entity. Revenue for deferred disposal and performance fees is recognised for finite life schemes when the
performance criteria has been met, and for indefinite life schemes, in the period when the decision to sell a property
has been made. The amount of this “deferred” management fee is dependent on the sale price of the property. In
the calculation of deferred disposal and performance fees, the sale price is assumed to be the most current valuation
as reported in the investment scheme.
(z) Rounding of amounts
The Group is an entity of the kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports)
Instrument 2016/191, relating to the ‘rounding off’ of amounts in the financial statements. Amounts in the financial
statements have been rounded off to the nearest thousand dollars in accordance with that Instrument, unless
otherwise indicated.
(aa) New accounting standards and interpretations
Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2016
reporting periods. The Group has not early adopted these standards/interpretations. The Group’s assessment of the
impact of relevant new standards and interpretations is set out below:
Effective annual
reporting periods
beginning on or
after
Expected to be
initially applied in
the financial year
ending
1 January 2018
30 June 2019
Standard /
Interpretation
Impact
AASB 9 Financial
Instruments
The standard addresses the classification, measurement and
derecognition of financial instruments. For financial liabilities
that are measured under the fair value option, entities will need
to recognise the part of the fair value change that is due to
changes in their own credit risk in other comprehensive income
rather than profit or loss.
New hedge accounting rules align hedge accounting more
closely with common risk management processes. As a general
rule, it will be easier to apply hedge accounting going forward.
The new standard also introduces expanded disclosure
requirements and changes in presentation.
In December 2014, the AASB introduced a new impairment
model. The new impairment model is an expected credit loss
(ECL) model which may result in the earlier recognition of
credit losses.
Management does not expect the above changes to have a
significant impact on the Group’s financial statements.
AASB 15
Revenue from
contracts with
customers
The AASB has issued a new standard for the recognition of
revenue. This will replace AASB 118 which covers contracts for
goods and services and AASB 111 which covers construction
contracts.
1 January 2018
30 June 2019
The new standard is based on the principle that revenue is
recognised when control of a good or service transfers to a
customer - so the notion of control replaces the existing notion
of risks and rewards.
Management does not expect this to have an impact on the
Group’s financial statements.
5050
Notes to the consolidated financial statementsArena REIT Annual Report 2016 \ Financial Report 2. Summary of significant accounting policies (continued)
(aa) New accounting standards and interpretations (continued)
Standard /
Interpretation
Impact
IFRS 16 Leases
In February 2016, the AASB issued AASB 16 Leases. The
standard provides a single lessee accounting model, requiring
lessees to recognise an asset (the right to use the leased item)
and a financial liability to pay rentals. The only exemptions are
where the lease term is 12 months or less, or the underlying
asset has a low value.
Lessor accounting is substantially unchanged under AASB 16.
Management does not expect the above changes to have
a significant impact on the Group’s financial statements on
adoption.
Effective annual
reporting periods
beginning on or
after
Expected to be
initially applied in
the financial year
ending
1 January 2019
30 June 2020
There are no other standards that are not yet effective and that are expected to have a material impact on the entity
in the current or future reporting periods and on foreseeable future transactions.
5151
Arena REIT Annual Report 2016 \ Financial Report 3. Finance costs
Finance costs:
Interest paid or payable
Loan establishment and other finance costs
Write-off of loan establishment costs due to refinancing
Total finance costs expensed
Finance costs capitalised (a)
Total finance costs
Consolidated
30 June 2016
30 June 2015
$’000
$’000
3,951
181
201
4,333
1,172
5,505
4,730
318
–
5,048
1,268
6,316
(a) Finance costs are capitalised in relation to current property developments. The capitalisation rate used to
determine the amount of finance costs to be capitalised was the weighted average interest rate applicable to the
Group’s outstanding borrowings at the end of each month.
4. Income taxes
Under current Australian income tax legislation, ARF1 and ARF2 are not liable to Australian income tax, provided that
the members are presently entitled to the income of the Trusts. Trust distributions are subject to income tax in the
hands of securityholders.
ARL and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. ARL
as the head entity in the tax consolidated group, accounts for its own current and deferred tax amounts. ARL also
recognises the current and deferred tax liabilities (or assets) of the entities in the tax consolidation group. Where
appropriate, deferred tax assets and liabilities are offset.
(a) Numerical reconciliation of tax expense per the statutory income tax rate to income tax expense
recognised
Profit before income tax
Consolidated
30 June 2016
30 June 2015
$’000
72,621
$’000
60,966
Tax at the applicable Australian tax rate of 30% (2015 - 30%)
(21,786)
(18,290)
Profit attributable to entities not subject to tax
Deferred tax assets not recognised
Other movements
Income tax expense
21,999
(213)
–
–
18,294
(256)
252
–
Unrecognised deferred tax assets are $0.2 million (2015: $0.3 million). These have not been recognised as it is not
probable that future taxable profit will arise to offset these deductible temporary differences.
5252
Notes to the consolidated financial statementsArena REIT Annual Report 2016 \ Financial Report 5. Remuneration of auditors
During the year the following fees were paid or payable for services provided by the auditor of the Group:
PricewaterhouseCoopers Australian firm
Audit and other assurance services
Audit and review of financial statements
Audit of compliance plans
Total remuneration for audit and other assurance services
Taxation services
Tax compliance services, including review of income tax returns
Total remuneration for taxation services
Other services
Investigating Accountant report and due diligence in respect of the staplings and
management internalisation
Total remuneration of PricewaterhouseCoopers
6. Earnings per security (‘EPS’)
Basic EPS in Arena REIT No. 1
Diluted EPS in Arena REIT No. 1
Basic EPS in Arena REIT Group
Diluted EPS in Arena REIT Group
Consolidated
30 June 2016
30 June 2015
$
$
104,000
10,000
114,000
31,673
31,673
–
145,673
2016
Cents
25.70
25.70
31.55
31.55
86,000
6,000
92,000
21,156
21,156
135,648
248,804
2015
Cents
25.55
25.55
28.14
28.14
The following information reflects the income and security numbers used in the calculations of basic and diluted EPS.
2016
2015
Number of
securities
Number of
securities
Weighted average number of ordinary securities used in calculating basic EPS
Bonus element of security options which are dilutive
‘000
230,165
–
Adjusted weighted average number of ordinary securities used in calculating diluted EPS
230,165
‘000
216,627
–
216,627
5353
Arena REIT Annual Report 2016 \ Financial Report 6. Earnings per security (‘EPS’) (continued)
Earnings used in calculating basic EPS for Arena REIT No. 1
Earnings used in calculating diluted EPS for Arena REIT No. 1
Earnings used in calculating basic EPS for Arena REIT Group
Earnings used in calculating diluted EPS for Arena REIT Group
7. Cash and cash equivalents
Cash at bank
Term deposits
Total cash and cash equivalents
30 June 2016
30 June 2015
$’000
59,155
59,155
72,621
72,621
$’000
55,354
55,354
60,966
60,966
Consolidated
30 June 2016
30 June 2015
$’000
8,146
1,300
9,446
$’000
10,888
–
10,888
Term deposits are used to secure bank guarantees in respect of development properties.
8. Trade and other receivables
(a) Trade and other receivables - Current
Trade receivables
Other receivables
Prepayments
Consolidated
30 June 2016
30 June 2015
$’000
75
391
503
969
$’000
296
6,457
410
7,163
Other receivables as at 30 June 2015 includes $6.2 million of sales proceeds payable to the Group following the
auction of 3 childcare properties on 24 June 2015.
5454
Notes to the consolidated financial statementsArena REIT Annual Report 2016 \ Financial Report 8. Trade and other receivables (continued)
(i) Impairment and ageing
The ageing of trade receivables at the end of the reporting period was:
Not past due
Past due 0 - 30 days
Past due 31 - 60 days
Past due 61 - 90 days
Past due over 90 days
Gross
2016
$’000
Impairment
2016
$’000
Gross
2015
$’000
Impairment
2015
$’000
75
–
–
–
–
75
–
–
–
–
–
–
240
22
34
–
–
296
–
–
–
–
–
–
No other class of financial asset is past due.
Any receivables which are doubtful have been provided for.
From time to time, tenant payments are delayed for administrative reasons such as lease assignment. Management
have reviewed all receivables for impairment and are comfortable that the balances are due and payable, and that
recovery can be obtained. Past history also supports the recoverability of these receivables.
(b) Receivables - Non-current
Deferred management & performance fees receivable
(i) Impairment and ageing
None of the non-current receivables are impaired or past due but not impaired.
(ii) Fair values
The fair values and carrying values of non-current receivables are as follows:
Deferred management & performance fees
Consolidated
30 June 2016
30 June 2015
$’000
1,062
$’000
1,189
Consolidated
30 June 2016
Carrying amount
Fair value
$’000
1,062
$’000
1,062
5555
Arena REIT Annual Report 2016 \ Financial Report 9. Investment properties
(a) Valuations and carrying amounts
Property Portfolio
Carrying amount
Latest external valuation
Childcare properties
Childcare developments
Healthcare properties
Total
2016
$’000
391,037
22,216
78,186
2015
$’000
322,822
30,117
67,593
2016
$’000
354,388
13,570
74,128
491,439
420,532
442,086
2015
$’000
287,631
23,430
63,855
374,916
Independent valuations were performed on 35 childcare properties and 7 healthcare properties as at 31 December
2015, and a further 31 childcare properties as at 30 June 2016. The board of directors has reviewed these valuations
and has determined they are appropriate to adopt during the financial period ending 30 June 2016. Director
valuations were performed on investment properties not independently valued.
The key inputs into valuations are:
• Passing rent;
• Market rent per licensed place (childcare properties);
• Market rents (healthcare properties);
• Capitalisation rates;
• Lease terms.
The key inputs into the valuation are based on market information for comparable properties. The majority
of childcare and healthcare properties are located in markets with evidence to support valuation inputs and
methodology. The independent valuers have experience in valuing similar assets and have access to market evidence
to support their conclusions. Comparable assets are considered those in similar markets and condition.
Investment properties have been classified as Level 2 in the fair value hierarchy.
There have been no transfers between the levels in the fair value hierarchy during the year.
(i) Key assumptions - Childcare properties
Market rent per licensed place
Capitalisation rates
Passing yields
(ii) Key assumptions - Healthcare properties
Capitalisation rates
Passing yields
5656
30 June 2016
30 June 2015
$1,400 to $3,900
$1,200 to $3,300
6.0% to 8.5%
7.0% to 10.75%
5.25% to 10.0%
7.0% to 10.75%
30 June 2016
30 June 2015
6.5% to 7.5%
7.5% to 8.5%
6.25% to 8.0%
6.5% to 8.5%
Notes to the consolidated financial statementsArena REIT Annual Report 2016 \ Financial Report 9. Investment properties (continued)
(b) Movements during the financial year
At fair value
Opening balance
Property acquisitions and capital expenditure
Disposals
Revaluations
Other IFRS revaluation adjustments
Closing balance
(c) Amounts recognised in profit or loss for investment properties
Rental income
Other rental income (recognised on a straight line basis)
Direct operating expenses from property that generated rental income
Direct operating expenses from property that did not generate rental income
Consolidated
30 June 2016
30 June 2015
$’000
$’000
420,532
355,831
21,277
(1,150)
51,062
(282)
29,839
(5,080)
39,828
114
491,439
420,532
Consolidated
30 June 2016
30 June 2015
$’000
33,316
(327)
(724)
(279)
$’000
31,196
23
(923)
(383)
Revaluation gain on investment properties
51,062
39,828
(d) Tenancy risk
Set out below are details of the major tenants who lease properties from the Group:
Goodstart Early Learning Ltd (“Goodstart”) – representing 42% of the Group’s investment property portfolio by
income. Like most not-for-profit entities, Goodstart is a company limited by guarantee. It therefore does not have
“shareholders,” rather, each of the member charities (Mission Australia, Benevolent Society, Brotherhood of St
Laurence and Social Ventures Australia) is a member of the company. Goodstart’s “capital” is loan capital of varying
degrees of risk and subordination.
Primary Health Care Limited (‘PRY’) – representing 16% of the Group’s investment property portfolio by income.
PRY is a listed company and a major operator of medical clinics throughout Australia. PRY has entered into a deed of
cross guarantee with its subsidiaries which are parties to the Group’s healthcare property leases. The Group also has a
parent entity guarantee with PRY to provide security for their performance under the leases.
Affinity Education Group Limited (“Affinity”) – representing 16% of the Group’s investment property portfolio by
income. Affinity is a privately held provider of early childhood education, owning and operating over 150 childcare
centres throughout Australia. Affinity have provided Arena with a pooled bank guarantee as security against each of
the properties leased.
5757
Arena REIT Annual Report 2016 \ Financial Report 9. Investment properties (continued)
Other Tenants
Operator
Petit Early Learning Journey
Oxanda Education
G8 Education
% of Investment Property Portfolio by Income
6%
5%
4%
All of the above tenants are childcare centre operators. G8 Education is listed on the Australian Securities Exchange.
The other tenants are privately owned with experience operating childcare centres and their lease obligations are
typically secured by bank guarantees and cross defaults.
(e) Assets pledged as security
Refer to note 12 for information on investment properties and other assets pledged as security by the Group.
(f) Contractual obligations
Capital expenditure contracted for at the end of the reporting period but not recognised as liabilities is as follows:
Investment properties
30 June 2016
30 June 2015
$’000
14,456
$’000
3,521
The above commitments include the costs associated with developments, and the acquisition of childcare properties.
(g) Leasing arrangements
Investment properties are leased to tenants under long-term operating leases with rentals payable monthly. Minimum
lease payments receivable on leases of investment properties are as follows:
Minimum lease receivable under non-cancellable operating leases of investment
properties not recognised in the financial statements are receivable as follows:
Within one year
Later than one year but not later than 5 years
Later than 5 years
Consolidated
30 June 2016
30 June 2015
$’000
$’000
34,015
142,989
201,204
31,138
130,599
146,760
378,208
308,497
5858
Notes to the consolidated financial statementsArena REIT Annual Report 2016 \ Financial Report 10. Intangible assets
Goodwill
Consolidated
30 June 2016
30 June 2015
$’000
10,816
10,816
$’000
10,730
10,730
Goodwill represents funds management (intangible rights) acquired by the Group on the management internalisation
of Arena REIT in December 2014.
The Group tests annually whether goodwill has been impaired on the basis of a value-in-use assessment:
• cash flow projections are based on internal financial budgets covering a 5 year period;
• methodology and key assumptions have been made with reference to, and are supported by, the Independent
Expert’s Report obtained at the time of internalisation;
• management fee rates used to assess cash flow savings are based on the Arena REIT Constitution and PDS;
• for the purposes of the assessment, growth rates have been set in the range of 2-3% per annum; and
• cash flows have been discounted at a rate of 8.25% per annum.
11. Trade and other payables
Prepaid rental income
Investment property acquisition
Sundry creditors and accruals
Distributions payable
Trade and other payables are non-interest bearing.
12. Interest bearing liabilities
Non-current:
Secured
Syndicated facility
Unamortised transaction costs
Total secured non-current borrowings
Consolidated
30 June 2016
30 June 2015
$’000
2,059
–
6,628
6,437
$’000
2,161
1,722
5,593
5,821
15,124
15,297
Consolidated
30 June 2016
30 June 2015
$’000
$’000
138,000
(413)
137,587
131,000
(226)
130,774
5959
Arena REIT Annual Report 2016 \ Financial Report 12. Interest bearing liabilities (continued)
(a) Financing arrangements
Consolidated
30 June 2016
30 June 2015
$’000
$’000
Committed facilities available at the end of the reporting period
Interest bearing liabilities
175,000
175,000
Facilities used at the end of the reporting period
Interest bearing liabilities
138,000
131,000
Arena REIT extended the term of its $175 million debt facility in December 2015 ($87.5 million for a 3 year term to
31 December 2018 and $87.5 million for a 5 year term to 31 December 2020). The facilities are available to both ARF1
and ARF2 and the assets of both Trusts are held as security under the facilities.
The interest rate applying to the drawn amount of the facilities is set on a monthly basis at the prevailing market
interest rates.
The undrawn amount of the bank facilities may be drawn at any time.
(b) Assets pledged as security
The bank facilities are secured by a registered first mortgage over investment property and a fixed and floating charge
over the assets of Arena REIT No. 1 and Arena REIT No. 2.
The carrying amounts of assets pledged as security are:
Financial assets pledged
Cash and cash equivalents
Trade and other receivables
Other assets pledged
Investment properties
(c) Covenants
Consolidated
30 June 2016
30 June 2015
$’000
$’000
6,444
613
7,057
6,966
6,718
13,684
491,439
491,439
420,532
420,532
The covenants over the Group’s bank facility require an interest cover ratio of greater than 2.0 times (Actual at 30 June
2016 of 6.2 times) and a loan to market value of investment properties ratio of less than 50% (Actual at 30 June 2016 of
31.2%). The Group was in compliance with its covenants throughout the year.
6060
Notes to the consolidated financial statementsArena REIT Annual Report 2016 \ Financial Report 13. Derivative financial instruments
Non-current liabilities
Interest rate swaps
Consolidated
30 June 2016
30 June 2015
$’000
$’000
3,030
3,030
398
398
The Group has entered into interest rate swap contracts under which they receive interest at variable rates and pay
interest at fixed rates to protect interest bearing liabilities from exposure to changes in interest rates.
Swaps currently in place cover 72% (2015: 69%) of the facility principal outstanding. The weighted average fixed
interest swap rate at 30 June 2016 was 2.48% (2015: 2.62%), and the weighted average term was 4.0 years (2015: 3.5
years).
Periodic swap settlements match the period for which interest is payable on the underlying debt, and are settled on a
net basis.
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
14. Contributed equity
(a) Securities
Consolidated
30 June 2016
30 June 2015
$’000
–
25,000
10,000
20,000
22,500
22,500
100,000
$’000
–
15,000
25,000
10,000
20,000
20,000
90,000
Consolidated
30 June 2016
30 June 2015
30 June 2016
30 June 2015
Securities ‘000
Securities’000
$’000
$’000
Ordinary Securities
Fully paid
231,966
228,290
197,224
191,845
Other contributed equity attributable to securityholders of the Group relating to ARF2 and ARL of $39.7 million is
included within Non-controlling interests - ARF2 and ARL (30 June 2015: $38.9 million).
6161
Arena REIT Annual Report 2016 \ Financial Report 14. Contributed equity (continued)
(b) Movements in ordinary securities
Date
Details
1 July 2014
Opening balance
Arising on stapling
Issue of securities under DRP (i)
10 March 2015
Issue of securities under institutional placement (ii)
30 June 2015
Closing balance
1 July 2015
Opening balance
Issue of securities under DRP (i)
30 June 2016
Closing balance
(i) Distribution Re-investment Plan (DRP)
Number of
securities
‘000
$’000
211,496
–
1,169
15,625
228,290
228,290
3,676
231,966
183,221
(13,000)
1,644
19,980
191,845
191,845
5,379
197,224
The Group has a Distribution Reinvestment Plan (DRP) under which securityholders may elect to have all or part of
their distribution entitlements satisfied by the issue of new securities rather than being paid in cash. The DRP first
came into operation with the distribution for the quarter-ended 30 September 2014 and remains open at the date of
these financial statements.
(ii) Institutional Placement
The Group completed a fully underwritten placement to institutional and professional investors in the prior year.
$25 million was raised through the issue of 15,625,000 stapled securities at a price of $1.60 per stapled security.
Settlement of the new stapled securities under the placement occurred 10 March 2015.
(c) Capital management
The objectives of the Stapled Group are to generate attractive and predictable income distributions to investors with
earnings growth prospects over the medium to long term.
The Group aims to invest to meet the Group’s investment objectives while maintaining sufficient liquidity to meet
its commitments. The Group regularly reviews performance, including asset allocation strategies, investment and
operational management strategies, investment opportunities, performance review, and risk management.
In order to maintain its capital structure, the Group may adjust the amount of distributions paid to securityholders,
return capital to securityholders, issue new securities or sell assets to reduce debt.
Consistent with others in the industry, the Group monitors capital through the analysis of a number of financial ratios,
including the Gearing ratio.
Gearing Ratio
Interest bearing liabilities
Total assets
Gearing ratio
6262
2016
$’000
138,000
513,951
26.8%
2015
$’000
131,000
450,623
29.1%
Notes to the consolidated financial statementsArena REIT Annual Report 2016 \ Financial Report 15. Accumulated profit
Movements in accumulated profit were as follows:
Opening accumulated profit
Net profit for the period attributable to ARF1
Distribution paid or payable attributable to ARF1
Closing accumulated profit
Distributions to securityholders
Consolidated
30 June 2016
30 June 2015
$’000
$’000
61,900
59,155
(21,868)
99,187
25,991
55,354
(19,445)
61,900
The following table details the distributions to securityholders during the financial year on a consolidated basis,
including distributions declared by ARF2 (classified as a non-controlling interest) of $3.3 million (30 June 2015:
$2.5 million).
Distributions declared
September quarter
December quarter
March quarter
June quarter
2016
$’000
6,128
6,158
6,413
6,437
2015
$’000
5,156
5,211
5,803
5,821
2016
cps
2.6750
2.6750
2.7750
2.7750
2015
cps
2.4375
2.4625
2.5500
2.5500
Total distributions to securityholders
25,136
21,991
10.9000
10.0000
16. Non-controlling interests
The financial statements reflect the consolidation of ARF1, ARF2 and ARL. For financial reporting purposes, one entity
in the stapled group must be identified as the acquirer or parent entity of the others. ARF1 has been identified as the
acquirer of ARF2 and ARL, resulting in ARF2 and ARL being disclosed as Non-controlling interests.
Movements in non-controlling interests were as follows:
Opening balance - 1 July 2014
Arising on stapling
Securities issued under DRP
Contributions of equity, net of transaction costs
Net profit for the period attributable to non-controlling interests
Distributions paid or payable attributable to non-controlling interests
Increase/(decrease) in reserves (i)
ARF2
ARL
Total
30 June 2015
30 June 2015
30 June 2015
28,992
–
216
2,971
5,626
(2,546)
–
–
13,000
–
1,389
(14)
–
112
28,992
13,000
216
4,360
5,612
(2,546)
112
Closing balance - 30 June 2015
35,259
14,487
49,746
6363
Arena REIT Annual Report 2016 \ Financial Report 16. Non-controlling interests (continued)
Opening balance - 1 July 2015
Securities issued under DRP
Net profit for the period attributable to non-controlling interests
Distributions paid or payable attributable to non-controlling interests
Increase/(decrease) in reserves (i)
ARF2
ARL
Total
30 June 2016
30 June 2016
30 June 2016
35,259
788
14,175
(3,268)
–
14,487
–
(709)
–
350
49,746
788
13,466
(3,268)
350
Closing balance - 30 June 2016
46,954
14,128
61,082
(i) Reserves
Opening balance
Security-based benefits expense for the period
Balance 30 June
Consolidated
30 June 2016
30 June 2015
$’000
$’000
112
350
462
–
112
112
The security-based benefits reserve is used to recognise the fair value of rights issued under the Group’s Long Term
Incentive Plan.
17. Segment information
The Group operates as one business segment being investment in real estate, and in one geographic segment
being Australia. The Group’s segments are based on reports used by the Chief Operating Decision Maker in making
strategic decisions about the Group, assessing the financial performance and financial position of the Group,
determining the allocation of resources, and risk management.
18. Related party disclosures
Subsidiaries
Investments in subsidiaries is set out in note 19.
Key management personnel compensation
Short-term employee benefits
Post-employment benefits
Long-term benefits
Termination benefits
Security-based payments
Detailed remuneration disclosures are provided in the Remuneration report.
6464
30 June 2016
30 June 2015
$
$
1,869,119
1,011,950
115,265
14,313
–
331,827
59,763
10,149
–
96,510
2,330,524
1,178,372
Notes to the consolidated financial statementsArena REIT Annual Report 2016 \ Financial Report 18. Related party disclosures (continued)
Stapled group
The Arena REIT Stapled Group comprises ARF1, ARF2, and ARL and its controlled entities.
Arena REIT Management Limited (a wholly owned subsidiary of ARL) replaced Arena Investment Management Limited
as responsible entity of the Trusts on 12 December 2014.
Responsible entity
The Responsible Entity or its related parties are entitled to receive fees in accordance with the Group’s constitution,
from the Group and its controlled entities.
The following transactions occurred with related parties:
Acquisition of interests in related parties
Property management income received from other related parties
Management fees received by the Group from other related parties
Property income received from other related parties
30 June 2016
30 June 2015
$
–
28,000
344,234
43,163
$
485,428
7,000
180,494
18,054
Increase/(decrease) in fair value of performance fee receivable by the Group from
other related parties
(127,326)
118,968
Amounts receivable:
Amount receivable from other related parties at the end of the reporting period
52,752
48,341
Deferred management and performance fees receivable at the end of the reporting
period
1,061,811
1,189,137
Amounts payable:
Amounts payable to other related parties at the end of the reporting period
–
–
Former Responsible Entity
On 11 December 2014, Arena Investment Management Limited (‘AIML’) retired as Responsible Entity of the funds
within the Arena REIT Stapled Group. The former Responsible Entity received the following fees during the year, up to
the date of retirement:
The following transactions occurred with the former Responsible Entity prior to
its retirement on 11 December 2014:
Management fees paid or payable by the Group to the former Responsible Entity
Property disposal and performance fees paid or payable by the Group to the former
Responsible Entity
Amounts payable:
Amounts payable to the former Responsible Entity at the end of the reporting period
30 June 2016
30 June 2015
$
–
–
–
$
1,352,599
284,150
–
6565
Arena REIT Annual Report 2016 \ Financial Report 19. Investments in subsidiaries
The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries of
ARL:
Name of entity
Country of incorporation
Class of shares
Equity holding
Citrus Investment Services Limited
Arena Property Services Pty Limited*
Arena REIT Management Limited
Arena REIT Operations Pty Limited
Australia
Australia
Australia
Australia
* wound-up during the year.
Ordinary
Ordinary
Ordinary
Ordinary
2016
%
2015
%
100
–
100
100
100
100
100
–
The management function of the Arena REIT Group was internalised in the prior year, taking effect from 12 December
2014. The internalisation process involved the stapling of each share in Arena REIT Limited (‘ARL’) to each existing
stapled security, as well as the acquisition by ARL of Citrus Investment Services Pty Ltd, Arena REIT Management
Limited and Arena Property Services Pty Ltd.
20. Security-based benefits expense
(a) Performance Rights and Recognition Rights Plan (Rights)
The performance rights and recognition rights are unquoted securities. Conversion to stapled securities is subject to
service and performance conditions which are discussed in the Remuneration Report.
Performance rights
Rights issued
Performance rights issued
Number rights forfeited/lapsed in prior years
Number rights forfeited/lapsed in current year
Number rights vested in prior years
Number rights vested in current year
2016
Number
535,655
535,655
–
–
–
–
2015
Number
Total Number
304,987
304,987
840,642
840,642
–
–
–
–
–
–
–
–
Closing balance
535,655
304,987
840,642
Recognition rights
Rights issued
Recognition rights issued
Number rights forfeited/lapsed in prior years
Number rights forfeited/lapsed in current year
Number rights vested in prior years
Number rights vested in current year
Closing balance
6666
2016
Number
2015
Number
Total Number
–
–
–
–
–
–
–
186,660
186,660
–
(10,000)
–
–
186,660
186,660
–
(10,000)
–
–
176,660
176,660
Notes to the consolidated financial statementsArena REIT Annual Report 2016 \ Financial Report 20. Security-based benefits expense (continued)
(b) Rights expense
Total expenses relating to the Rights recognised during the year as part of employee benefit expense was as follows:
Performance Rights and Recognition Rights
(c) Rights valuation inputs
30 June 2016
30 June 2015
$’000
350
350
$’000
112
112
Rights issued were independently valued for the purposes of valuation and accounting using a Black-Scholes or
Monte Carlo method, as applicable. The model inputs for the Rights issued during FY16 to assess the fair value are as
follows:
Performance rights
Grant date
Security price at grant date
Fair value of right
Expected price volatility
Risk-free interest rate
1 July 2015
$1.57
$0.99
22%
2.05%
21. Financial risk management and fair value measurement
The Group’s investing activities expose it to various types of risk that are associated with the financial instruments and
markets in which it invests. The most important types of financial risk to which the Group is exposed to are market
risk, credit risk and liquidity risk. The exposure to each of these risks, as well as the Group’s policies and processes for
managing these risks are described below.
(a) Market risk
Market risk embodies the potential for both loss and gains and includes interest rate risk and price risk. The Group’s
strategy on the management of investment risk is driven by the Group’s investment objective. The Group’s market risk
is managed in accordance with the investment guidelines as outlined in the Group’s Product Disclosure Statement.
(i) Cash flow and fair value interest rate risk
The Group’s cash and cash equivalents, floating rate borrowings and interest rate swaps expose it to a risk of change
in the fair value or future cash flows due to changes in interest rates. The specific interest rate exposures are disclosed
in the relevant notes to the financial statements.
The Group economically hedges a portion of its exposure to changes in interest rates on variable rate borrowings
by using floating-to-fixed interest rate swaps. By hedging against changes in interest rates, the Group has limited its
exposure to changes in interest rates on its cash flows. The portion that is hedged is set by the Board of Directors and
is influenced by the hedging requirements set out in the Group’s debt facility documents, and the market outlook.
The Group ensures the maturity of individual swaps does not exceed the expected life of assets.
6767
Arena REIT Annual Report 2016 \ Financial Report 21. Financial risk management and fair value measurement (continued)
The Group’s exposure to interest rate risk at reporting date, including its sensitivity to changes in market interest rates
that were reasonably possible, is as follows:
Consolidated
30 June 2016
30 June 2015
$’000
$’000
Financial assets
Cash and cash equivalents (floating interest rate)
9,446
10,888
Financial liabilities
Interest bearing liabilities - floating interest rate
Derivative financial instruments (notional principal amount) - fixed rate interest rate swaps
Net Exposure
(138,000)
100,000
(131,000)
90,000
(28,554)
(30,112)
Sensitivity of profit or loss to movements in market interest rates for derivative instruments with cash flow risk:
Market interest rate increased by 100 basis points (2015: 100 bp)
Market interest rate decreased by 100 basis points (2015: 100 bp)
Instruments with fair value risk:
Derivative financial instruments
Consolidated
2016
$’000
(286)
286
2015
$’000
(301)
301
100,000
90,000
Sensitivity of profit or loss to movements in market interest rates for financial instruments with fair value risk:
Market interest rate increased by 100 basis points (2015: 100bp)
Market interest rate decreased by 100 basis points (2015: 100bp)
3,571
(3,571)
3,142
(3,142)
The interest rate range for sensitivity purposes has been determined using the assumption that interest rates
changed by +/- 100 basis points from year end rates with all other variables held constant. In determining the impact
of an increase/decrease in equity to securityholders arising from market risk the Group has considered prior period
and expected future movements of the portfolio information in order to determine a reasonable possible shift in
assumptions.
6868
Notes to the consolidated financial statementsArena REIT Annual Report 2016 \ Financial Report 21. Financial risk management and fair value measurement (continued)
(b) Credit risk
Credit risk is the risk that one party to a financial instrument will fail to discharge its obligation and cause the other
party to incur a financial loss.
The Group’s maximum credit risk exposure at balance date in relation to each class of recognised financial asset,
other than equity and derivative financial instruments, is the carrying amount of those assets as indicated in the
balance sheet. This does not represent the maximum risk exposure that could arise in the future as a result of changes
in values, but best represents the current maximum exposure at reporting date.
Cash at bank
Other receivables
Less: Allowance for impairment of trade receivables
Maximum exposure to credit risk
Consolidated
30 June 2016
30 June 2015
$’000
9,446
1,528
–
10,974
$’000
10,888
1,745
–
12,633
The Group manages credit risk and the losses which could arise from default by ensuring that parties to contractual
arrangements are of an appropriate credit rating, or do not show a history of defaults. Financial assets such as cash at
bank and interest rate swaps are held with high credit quality financial institutions (rated equivalent A or higher by the
major rating agencies). Before accepting a new tenant, the Group endeavours to obtain financial information from the
prospective tenant, and rental guarantees are sought before a tenancy is approved. Third party credit risk is secured
by corporate, personal and bank guarantees where possible.
All receivables are monitored by the Group. If any amounts owing are overdue these are followed up and if necessary,
allowances are made for debts that are doubtful.
At the end of the reporting period there are no issues with the credit quality of financial assets that are either past due
or impaired, and all amounts are expected to be received in full.
6969
Arena REIT Annual Report 2016 \ Financial Report 21. Financial risk management and fair value measurement (continued)
(c) Liquidity risk
Liquidity risk is the risk that the Group may not be able to generate sufficient cash resources to settle its obligations in
full as they fall due or can only do so on terms that are materially disadvantageous.
The Group monitors its exposure to liquidity risk by ensuring that as required there is sufficient cash on hand or debt
facility funding available to meet the contractual obligations of financial liabilities as they fall due. The Group sets
budgets to monitor cash flows.
The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining
period at the end of the reporting period. The amounts in the table are the contractual undiscounted cash flows.
Consolidated
30 June 2016
Trade and other payables
Interest rate swaps
Interest bearing liabilities
Less than
12 months
$’000
1-2 years
$’000
Greater than
2 years
$’000
15,124
625
3,347
–
613
3,347
–
1,373
146,775
Contractual cash flows (excluding gross settled derivatives)
19,096
3,960
148,148
Consolidated
30 June 2015
Trade and other payables
Interest rate swaps
Interest bearing liabilities
Less than
12 months
$’000
1-2 years
$’000
Greater than
2 years
$’000
15,297
914
3,632
–
434
90,122
90,556
–
1,726
48,317
50,043
Contractual cash flows (excluding gross settled derivatives)
19,843
(d) Fair value estimation
The carrying amounts of the Group’s assets and liabilities at the end of each reporting period approximate their fair
values.
Financial assets and liabilities held at fair value through profit or loss are measured initially at fair value excluding
any transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial
liability. Transaction costs on financial assets and financial liabilities at fair value through profit or loss are expensed
immediately. Subsequent to initial recognition, all instruments held at fair value through profit or loss are measured at
fair value with changes in their fair value recognised in profit or loss.
7070
Notes to the consolidated financial statementsArena REIT Annual Report 2016 \ Financial Report 21. Financial risk management and fair value measurement (continued)
(e) Fair value hierarchy
(i) Classification of financial assets and financial liabilities
AASB 13 requires disclosure of fair value measurements by level of fair value hierarchy. The fair value hierarchy has the
following levels:
• Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1);
• Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly
(that is, as prices) or indirectly (that is, derived from prices) (level 2);
• Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level3).
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined
on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose,
the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement
uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a level
3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires
judgement, considering factors specific to the asset or liability.
The determination of what constitutes ‘observable’ requires significant judgement by the Responsible Entity. The
Responsible Entity considers observable data to be that market data that is readily available, regularly distributed or
updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in
the relevant market.
The following table presents the Group’s financial assets and liabilities (by class) measured at fair value according to
the fair value hierarchy at 30 June 2016 and 30 June 2015 on a recurring basis:
Consolidated
30 June 2016
Financial liabilities
Interest rate swaps
Total
Consolidated
30 June 2015
Financial liabilities
Interest rate swaps
Total
Level 1
$’000
Level 2
$’000
Level 3
$’000
–
–
Level 1
$’000
–
–
3,030
3,030
Level 2
$’000
398
398
–
–
Level 3
$’000
–
–
Total
$’000
3,030
3,030
Total
$’000
398
398
The Group’s policy is to recognise transfers into and transfers out of fair value hierarchy levels as at the end of the
reporting period. There were no transfers between levels during the year.
The Group did not measure any financial assets or financial liabilities at fair value on a non-recurring basis as at 30
June 2016.
7171
Arena REIT Annual Report 2016 \ Financial Report 21. Financial risk management and fair value measurement (continued)
(ii) Valuation techniques used to derive level 2 and level 3 values
The fair value of financial instruments that are not traded in an active market (for example, over-the-counter
derivatives) is determined using valuation techniques. These valuation techniques maximise the use of observable
market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs
required to fair value an instrument are observable, the instrument is included in level 2.
If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.
The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on
observable yield curves, taking into account any material credit risk.
(f) AFSL financial compliance risk
The Group is exposed to the risk of having inadequate capital and liquidity. Arena REIT Management Limited, a
subsidiary of ARL, holds an Australian Financial Services License (‘AFSL’) and acts as a responsible entity for the
Group’s managed investment schemes. The AFSL requires minimum levels of net tangible assets, liquid assets, cash
reserves and liquidity, which may restrict the Group in paying dividends that would breach these requirements.
The directors regularly review and monitor the Group’s balance sheet to ensure ARML’s compliance with its AFSL
requirements.
22. Parent entity financial information
Summary of financial information
The individual financial statements for the parent entity show the following aggregate amounts:
Parent
Income statement information
Net profit attributable to Arena REIT No. 1
Comprehensive income information
30 June 2016
30 June 2015
$’000
$’000
59,155
55,354
Total comprehensive income attributable to Arena REIT No. 1
59,155
55,354
Balance Sheet
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Equity attributable to securityholders of Arena REIT No. 1
Contributed equity
Accumulated profit
7272
6,330
413,253
419,583
13,161
110,010
123,171
197,224
99,188
11,129
352,939
364,068
12,884
97,439
110,323
191,845
61,900
296,412
253,745
Notes to the consolidated financial statementsArena REIT Annual Report 2016 \ Financial Report 23. Reconciliation of profit to net cash inflow from operating activities
Profit for the year
Amortisation of borrowing costs
Net increase in fair value of investment properties
Straight lining adjustment on rental income
Net (gain)/loss on sale of direct property
Net (gain)/loss on derivative financial instruments
Security-based payments expense
Stapling and other transaction costs
Other
Changes in operating assets and liabilities
Decrease/(increase) in trade and other receivables
(Decrease)/increase in trade and other payables
(Decrease)/increase in provisions
30 June 2016
30 June 2015
$’000
72,621
103
(51,062)
327
121
2,915
350
201
174
79
303
54
$’000
60,966
75
(39,828)
(23)
(2,232)
1,781
112
1,027
(39)
890
150
51
Net cash inflow from operating activities
26,186
22,930
24. Contingent assets and liabilities and commitments
There are no material outstanding contingent assets or liabilities as at 30 June 2016 and 30 June 2015. For details of
commitments of the Group as at 30 June 2016, refer to note 9.
25. Events occurring after the reporting period
No significant events have occurred since the end of the reporting period which would impact on the financial
position of the Group disclosed in the consolidated balance sheet as at 30 June 2016 or on the results and cash flows
of the Group for the year ended on that date.
7373
Arena REIT Annual Report 2016 \ Financial Report Directors’ declaration
In the opinion of the directors:
(a) the financial statements and notes set out on pages 35 to 73 are in accordance with the Corporations Act 2001,
including:
(i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional
reporting requirements, and
(ii) giving a true and fair view of the Group’s financial position as at 30 June 2016 and of its performance for the
financial year ended on that date, and
(b) there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become
due and payable, and
(c) Note 2(a) confirms that the financial statements comply with International Financial Reporting Standards as issued
by the International Accounting Standards Board.
The directors have been given the declarations by the managing director and chief financial officer required by
section 295A of the Corporations Act 2001.
This declaration is made in accordance with a resolution of the directors.
David Ross, Chairman
Melbourne, 25 August 2016
74
Arena REIT Annual Report 2016 \ Financial Report
Independent auditor’s report
Independent auditor’s report to the securityholders of Arena
REIT
Report on the financial report
We have audited the accompanying financial report of Arena REIT (the Group), which comprises the
consolidated balance sheet as at 30 June 2016, the consolidated statement of comprehensive income,
consolidated statement of changes in equity and consolidated statement of cash flows for the year
ended on that date, a summary of significant accounting policies, other explanatory notes and the
directors’ declaration for Arena REIT (the consolidated entity). The consolidated entity comprises of
the stapled entities Arena REIT No. 1, Arena REIT No. 2, Arena REIT Limited, and the entities they
controlled at year’s end or from time to time during the financial year.
Directors' responsibility for the financial report
The directors of the Group 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 Accounting Standard AASB 101 Presentation of Financial
Statements, that the financial statements comply with International Financial Reporting Standards.
Auditor’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. Those 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 auditor’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 consolidated
entity’s preparation and fair presentation of the financial report 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 entity’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 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.
Auditor’s opinion
In our opinion:
PricewaterhouseCoopers, ABN 52 780 433 757
Freshwater Place, 2 Southbank Boulevard, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001
T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
75
Arena REIT Annual Report 2016 \ Financial Report Independent auditor’s report (continued)
(a)
the financial report of Arena REIT is in accordance with the Corporations Act 2001, including:
(i)
(ii)
giving a true and fair view of the consolidated entity's financial position as at 30 June
2016 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 and notes also comply with International Financial Reporting Standards as
disclosed in Note 2.
Report on the Remuneration Report
We have audited the remuneration report included in pages 9 to 18 of the directors’ report for the year
ended 30 June 2016. The directors of the Group 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 Australian Auditing Standards.
Auditor’s opinion
In our opinion, the remuneration report of Arena REIT for the year ended 30 June 2016 complies with
section 300A of the Corporations Act 2001.
PricewaterhouseCoopers
Elizabeth O’Brien
Partner
Melbourne
25 August 2016
76
Arena REIT Annual Report 2016 \ Financial Report ASX additional information
Additional Securities Exchange Information as at 1 August 2016
There were 231,965,539 fully paid ordinary securities on issue, held by 4,220 securityholders. There were 126 holders
holding less than a marketable parcel.
The voting rights attaching to the ordinary securities, set out in section 253C of the Corporations Act 2001, are:
(i) on a show of hands every person present who is a securityholder has one vote; and
(ii) on a poll each securityholder present in person or by proxy or attorney has one vote for each security they have in
the Group.
Distribution of securityholders
Number of
securities held
1-1,000
1,001-5,000
5,001-10,000
10,001-100,000
100,000 and over
Total
Substantial securityholders
Name of substantial securityholder
Australian Unity Funds Management Limited
Commonwealth Bank of Australia
The Vanguard Group, Inc
Number of
securityholders
Total
securities held
% of total
securities on issue
502
689
699
2,215
115
4,220
241,762
2,025,705
5,610,154
68,000,927
156,086,991
0.10
0.87
2.42
29.32
67.29
231,965,539
100.00
Number of securities
27,677,037
15,907,988
16,352,388
77
Arena REIT Annual Report 2016 \ Financial Report ASX additional information (continued)
Twenty largest securityholders
Holder Name
HSBC Custody Nominees (Australia) Limited
BNP Paribas Noms Pty Ltd
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