Arena REIT Annual Report 2017

Plain-text annual report

Arena REIT Annual Report 2017 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. 2 Arena REIT / Annual Report 2017 Contents Highlights Letter from the Chair Managing Director’s Report Portfolio Summary 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 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). 4 6 8 12 14 15 16 17 36 37 41 75 76 80 82 3 Highlights $96.8m Statutory Net Profit up 33% $28.7m Net operating profit up 12% 12.3¢ Distributable income (earnings) per security (EPS) up 11% 12.0¢ Distributions per security (DPS) up 10% 4 $621.3m Total Assets up 21% $528.3m Market capitalisation $1.84 Net Asset Value (NAV) per security up 19% 19.8% Annual ASX total securityholder return 27.5% Gearing 24.7% Annual return on equity (ROE) 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. Arena REIT4.3% Average like-for-like rental growth $66.1m Revaluation uplift up 12.6% 12.8 yrs Weighted average lease expiry (WALE) 19% Annual total direct property return Petit Early Learning Journey, Clifton Hill, VIC 5 Arena REIT / Annual Report 2017Letter from the Chair ASX total securityholder return % 0 1 3 . % 8 9 1 . % 8 3 1 . % 6 5 - . % 2 2 1 . % 6 6 . David Ross Chairman One year Three year compound average ARF ASX 300 A-REIT Index ASX 300 Index Source: UBS Australian REIT Month in Review, June 2017. Dear securityholder, I am proud to report another year of positive financial performance and operational achievements for Arena. We finished the 2017 financial year with an annual ASX total securityholder return of 19.8%, a significant achievement when compared to the ASX 300 A-REIT index annual total return of -5.6%. On a three year basis, Arena’s compound average annual return was 31.0% per annum, which significantly outperformed the ASX 300 A-REIT sector return of 12.2% per annum. We see this outcome as a strong endorsement of both our strategy and our ability to deliver against our investment objective – to generate attractive and predictable distributions to investors with earnings growth prospects over the medium to long term. Our financial performance has again been strong, with statutory net profit of $96.8 million recorded for the year, up 33% on our 2016 result. A key contributor to this outcome was the increase in net operating profit, which was up 12% to $28.7 million, primarily as a result of growing rental income from annual rent reviews and the completion of a record eight development projects. This growth in underlying earnings resulted in an increase of 10% in the annual distribution per security to 12.0 cents. Since listing, we have consistently delivered attractive earnings growth, with four year compound average growth in distributions per security of 10% per annum. 6 The other major contributor to the strong statutory net profit result was the revaluation uplift of $66.1 million recorded across the portfolio, which was underpinned by a firming in capitalisation rates for early learning and healthcare assets in the direct property market. Following the development project completions and the revaluation of the portfolio, Arena’s total assets increased to $621.3 million, and pleasingly we finished the year with a Net Asset Value per security of $1.84, up 19% on 30 June 2016. Operationally we continue to differentiate Arena’s brand in the marketplace through our partnership approach, priding ourselves on our ability to work collaboratively with our tenants and business partners to deliver outstanding results. During the year we extended the portfolio’s weighted average lease expiry to 12.8 years by partnering with tenants to extend, renew or renegotiate over 50% of our leases – enabling us to enhance both the long term value of our tenant’s businesses and the growth and predictability of Arena’s rental income stream. In our development portfolio, we partnered with existing tenants to secure new sites, and design, develop and construct purpose built properties to add to the portfolio. Strategically, we continue to focus on providing long- term accommodation solutions to operators of social infrastructure, with our investments in early learning centres and healthcare properties to date delivering an attractive average total direct property portfolio return since listing of 19% per annum. Arena REITDuring the year, operating conditions in these sectors continued to intensify, with some sections of the early learning sector impacted by families reaching the non-indexed government subsidy cap earlier than prior years (impacting demand), and a net increase in the number of centres (new supply). The new ‘Jobs for Families’ package, which will commence on 1 July 2018, is expected to improve childcare affordability for Australian families. Given the purpose built nature of our assets, the ability to understand demand and supply drivers in local markets and the operating performance of our tenants is critical to making informed investment decisions. To this end, we continue to build on our knowledge in each sector, and have invested further in both tools and resources to more accurately identify demographic and operating trends that affect our investment portfolio. As a long-term investor, our focus is on maximising the quality of our portfolio, through the sale of assets that no longer fit our investment criteria, the enhancement of existing properties, and the development of new high quality assets. Pleasingly, we sold two assets at a premium to the prior valuation, completed eight developments and added a further five development projects to the portfolio over the course of 2017. When combined with the nine-property development portfolio acquisition announced after year end, we head into 2018 with a $113 million development pipeline of 18 projects, 17 of which are expected to be completed in the 2018 financial year. As investor interest in social infrastructure real estate continues to grow, we believe our specialised management and development expertise, execution track record and successful partnering reputation are key differentiators for operators looking for a long term real estate partner. The efficient management of our capital base has enabled us to optimise our funding mix, and our gearing of 27.5% sees us well positioned to secure new projects in an increasingly competitive marketplace. The post year end $55 million equity raising has further improved our capacity to access new opportunities to grow income and enhance portfolio value and quality. As we head into 2018 we are well placed to continue to deliver against our investment objective – to generate attractive and predictable distributions to investors with earnings growth prospects over the medium to As investor interest in social infrastructure real estate continues to grow, we believe our specialised management and development expertise, execution track record and successful partnering reputation are key differentiators for operators looking for a long term real estate partner long term – with our structured annual rental reviews continuing to generate income growth and our accretive development pipeline providing a further uplift. As in previous years, I am pleased to advise that we are forecasting distribution growth, announcing distribution guidance of 12.8 cents per security for the 2018 financial year (reflecting growth of 6.7% over the 2017 financial year)1. Finally, on behalf of the Board and management team I would like to thank all of our securityholders, tenants and business partners for their continued support. I would also like to acknowledge and express appreciation to our management team for their ongoing commitment and contribution to Arena’s performance. I encourage you to join us for our Annual General Meeting on 15 November 2017 to meet the Board and management team. Yours sincerely, David Ross, Chair 1. Estimated on a status quo basis assuming no new acquisitions or disposals, all developments in progress are completed in line with forecast assumptions, and tenants comply with their lease obligations. 7 Arena REIT / Annual Report 2017Managing Director’s Report Bryce Mitchelson Managing Director Throughout the 2017 financial year we have continued to build on our core strengths, actively working to enhance the key metrics of the existing portfolio, successfully executing on our development pipeline and identifying new opportunities for growth. Financial results I am pleased to report another strong year for Arena, with net operating profit of $28.7 million, up 12% on the prior year. Key drivers of this result were income growth from annual rent reviews, which averaged a 4.3% increase for the year, and new income from the twelve development projects completed in the 2016 and 2017 financial years. We also benefited from a lower relative cost of borrowing, as the full year benefit of the December 2015 debt refinance took effect. This result equated to distributable income (earnings) per security (EPS) of 12.3 cents, an increase of 11% over 2016. In line with the guidance upgrade issued in February 2017, Arena paid an annual distribution of 12.0 cents per security, reflecting a payout ratio of 98%. Statutory net profit for the year was up 33% to $96.8 million, as a result of both the increase in net operating profit and a $66.1 million increase in property valuations. The revaluation uplift also contributed to a $0.30 increase in Net Asset Value (NAV) per security, up 19% to $1.84 at 30 June 2017. Portfolio update Portfolio composition At 30 June 2017, Arena’s property portfolio comprised 198 Early Learning Centre (ELC) properties and development sites (86% of portfolio value) and seven healthcare properties (14% of portfolio value). The portfolio is 100% occupied by 19 tenants, the largest three being Goodstart Early Learning (40% portfolio income), Primary Health Care (15% of portfolio income) and Affinity Education (15% portfolio income). The majority of Arena’s portfolio is located in Australia’s eastern states of Queensland (33% of portfolio value); Victoria (32% of portfolio value); and NSW (22% of portfolio value). Distributions per security ¢ 0 0 2 1 . ¢ 0 9 0 1 . ¢ 0 0 0 1 . ¢ 5 7 8 . ¢ 0 0 8 . 2013 2014 2015 2016 2017 Net Asset Value (NAV) per security (as at 30 June) 4 5 1 $ . 3 3 1 $ . 2 0 1 $ . . 3 1 1 $ 4 8 1 $ . 2013 2014 2015 2016 2017 8 Arena REITAverage annual rental growth of 4.3% Portfolio revaluation uplift of $66.1 million Annual rent reviews across the portfolio have recorded an average like-for-like rental increase of 4.3%. Key contributors to this result were the completion of 31 market rent reviews (average increase of 6.8%)1; the renegotiation of 12 leases in the first half of the financial year for new 20 year terms on market rents; and the completion of all 2017 annual fixed, CPI and CPI ratchet reviews.2 The four ELC market rent reviews due in the 2018 financial year have also now been completed, with an average increase of 6.3% achieved. Lease extensions increase WALE to 12.8 years Throughout the year, occupancy was maintained at 100% and the portfolio’s weighted average lease expiry (WALE) was extended from 9.7 years at 30 June 2016 to 12.8 years. This significant increase was due to: • the negotiation of extensions on 102 leases by an A revaluation uplift of $66.1 million was recorded across Arena’s portfolio, equivalent to an increase of 12.6%. The portfolio’s passing yield firmed 54 basis points to 6.76%, as a result of further tightening in transaction yields in the direct property market and portfolio management initiatives that increased lease terms. Valuation 30 June 2017 Change $m 507.6 84.1 591.7 $m 60.3 5.8 66.1 % 13.5 7.4 12.6 Early Learning Healthcare Total Portfolio Development projects average of 6.2 years; Eight developments completed during the year • the renewal of 14 five-year lease options (100% renewal rate); • new leases commencing at eight completed developments for an average 23 year term; and • renegotiation of 12 existing leases on new 20 year terms. Arena’s 100% lease renewal rate over the past three years has resulted in an attractive lease expiry profile, with only 3.2% of portfolio income subject to expiry over the next six years. A record eight ELC development projects were completed during the year, for a total cost of $20.4 million. The projects, which are predominantly located in high population growth areas of Victoria, were completed on an attractive initial yield on cost of 8.6%. The average size of the completed centres is 101 childcare places, and the weighted average lease term is 23 years. Five of the projects were completed as part of the relationship with the State of Victoria to deliver early learning centres alongside new primary schools. These centres are operated by YMCA, a new not-for-profit tenant to the Arena portfolio. Lease expiry profile (by income) % 4 5 7 . Project Cost Lease term Childcare places % 9 0 2 . % 6 0 . % 6 2 . % 5 0 . FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27+ Early Learning Healthcare $m years Heather Grove, VIC Pakenham, VIC Casey Central, VIC Mernda South, VIC Epping North, VIC Horsham, VIC Epsom, VIC Griffin – Stage 2, QLD 2.5 2.5 2.5 2.6 2.5 3.1 2.7 2.0 Total / Weighted Average 20.4 26 26 26 26 26 20 15 20 23 1. Includes 18 FY16 market rent reviews completed in FY17. 2. CPI ratchet reviews are defined as reviews that are the greater of either 2.5% or CPI. no. 104 104 104 104 104 100 130 54 804 9 Arena REIT / Annual Report 2017Managing Director’s Report ELC development portfolio acquisition in July 2017 Post year end, Arena acquired a portfolio of nine ELCs in development for a total cost of $65 million3. The properties are expected to be completed on a progressive basis over the next 12 months and were acquired on a fund through basis4, with Arena earning a yield on total cost of 6.25%. The new portfolio was independently valued (on completion) at $66.8 million, reflecting a portfolio passing yield of 6.0%.The property purchase price3 represents a 5.2% discount to the independent valuation (on completion), and once completed, the portfolio will improve Arena’s WALE, further diversify the tenant mix and enhance the rent review profile. The proportion of hedged debt has increased to 79% of drawn debt to accommodate upcoming hedge expiries and increased borrowings to fund development capex for the 2018 financial year. New Equity The distribution reinvestment plan remains in operation, having contributed $5.7 million in new equity during the 2017 financial year. On 28 July 2017 Arena completed a $55 million institutional placement to partially fund the July 2017 ELC portfolio acquisition. The accompanying security purchase plan raised a further $10 million in September 2017. Development pipeline increased to $113 million Market outlook Following the above acquisition, the ELC development pipeline now comprises 18 projects with a forecast total cost of $113 million and an initial yield on cost of 6.6%. Seventeen projects are expected to be completed in the 2018 financial year, with one further project due for completion in 2019. The development pipeline now comprises a mix of Arena originated projects and fund through projects, whereby Arena receives a lower relative initial yield on cost but reduces its risks associated with the project. By undertaking projects with a range of development structures and risk and return profiles we are able to deliver earnings growth, manage our exposure to development risk and deliver assets that enhance the overall quality of the portfolio. Capital management Borrowings In January 2017 Arena secured additional borrowing capacity of $30 million, bringing the total facility to $205 million. At 30 June 2017, total borrowings were $171 million, up from $138 million at 30 June 2016. The additional borrowings were used to fund acquisitions and development capital expenditure. At 30 June 2017, gearing was 27.5%. Arena’s cost of debt was 3.75% at 30 June 2017. This is lower than the previous year, and reflects the positive impact of the December 2015 refinance, together with lower market interest rates. Demand for high quality and well located early learning and healthcare property continues to be underpinned by growing community demand and supportive demographic trends. Capitalisation rates have continued to firm in both property sectors during 2017. In the early learning sector, some operators have experienced pressure on centre occupancies as the non- indexation of current childcare subsidy arrangements has negatively impacted on childcare affordability, particularly in the latter half of the financial year. The new ‘Jobs for Families’ package was approved by the Federal parliament in May 2017, and once introduced on 1 July 2018 will provide funding of approximately $37 billion to the sector over the next four years. Growth in net new supply of ELCs has accelerated, with federal government data indicating a 4% increase in the total number of centres in the year to 30 September 2016 (up from 2.3% in the prior corresponding period). Planning approval data indicates an increase in the number of ELC projects with planning approval, however more competitive operating conditions in some markets may reduce the number of projects that reach completion. As the number of centres increases and competition intensifies, it is expected that well located, newer, more efficient centres will be less vulnerable to occupancy pressures. In this environment, ongoing detailed analysis of demand and supply in individual micro-markets remains critical to assessing long-term sustainable investment. 3. Total cost includes property purchase price and project costs of $63.3 million plus stamp duty and associated transaction costs. 4. A fund through acquisition involves the acquisition of land and progressive payment of development costs on which a return is derived. 10 Arena REITArena continually reviews its portfolio, recycling assets where appropriate and reinvesting in its development pipeline. Distribution guidance for 2018 Arena has provided distribution guidance of 12.8 cents per security for the 2018 financial year5. This reflects growth of 6.7% over the 2017 financial year, and forecast FY14-FY18 compound average growth in distributions of 9.3% per annum. I look forward to reporting to you on our progress and performance in 2018. Yours sincerely Bryce Mitchelson, Managing Director 5. Estimated on a status quo basis assuming no new acquisitions or disposals, all developments in progress are completed in line with forecast assumptions, and tenants comply with their lease obligations. Petit Early Learning Journey, Richmond, VIC 11 Arena REIT / Annual Report 2017Portfolio summary (as at 30 June 2017) Arena’s portfolio of social infrastructure properties is leased to a diversified tenant base in the early learning and healthcare sectors. NT Metro 1 1 205 Total properties 188 Early Learning Centres 7 Healthcare 10 development sites $591.7m Total portfolio value $507.6m Early Learning Centres $84.1m Healthcare 12.8 yr WALE 14.2 years Early Learning Centres 5.5 years Healthcare 12 WA Metro 17 WA Regional 5 Early Learning Centres (188 properties) Healthcare (7 properties) Development sites (10 properties) Arena REITSector Diversification (by value) Early Learning 86% Healthcare 14% Geographic Diversification (by value) 22% 8% 2% 2% 1% 33% 32% Queensland Victoria New South Wales Western Austrlia South Australia Tasmania Northern Territory QLD Regional 37 1 QLD Metro 33 1 NSW Metro 2 5 2 Tenant Diversification (by income) 15% 15% SA Metro 5 VIC Regional 25 2 NSW Regional 24 1 1 VIC Metro 33 3 TAS Regional 1 TAS Metro 5 40% 5% 5% 5% 4% 3% 8% Goodstart Early Learning Primary Health Care Affinity Education Oxanda Childcare Petit Early Learning Journey G8 Education Green Leaves Early Learning Centres YMCA Other 13 Arena REIT / Annual Report 2017Corporate Governance The board of directors (left to right): Dennis Wildenburg, Bryce Mitchelson, David Ross, Simon Parsons and Gareth Winter The board of directors for Arena REIT Limited and Arena REIT Management Limited work together and take a coordinated approach to corporate governance. 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: • Continuous Disclosure Policy • Diversity Policy • Privacy Policy • Communications Policy • Summary of Risk Management Framework • 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. View Arena’s key policies and the full Corporate Governance Statement for the 2017 financial year at www.arena.com.au/about/governance 14 Arena REITArena REIT Financial Report 2017 For the year ended 30 June 2017 15 Contents 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 Notes to the consolidated financial statements Directors’ declaration Independent auditor’s report ASX additional information 17 36 37 37 38 39 40 41 75 76 80 About this report 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 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 2017. 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, the units and shares of which 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. 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 The Group 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 2017 $’000 6,807 6,834 7,205 7,222 2016 $’000 6,128 6,158 6,413 6,437 2017 cps 2.9250 2.9250 3.0750 3.0750 2016 cps 2.6750 2.6750 2.7750 2.7750 Total distributions to securityholders 28,068 25,136 12.0000 10.9000 17 Arena REIT / Financial Report 2017Operating 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: • Early learning / childcare 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. FY17 highlights 30 June 2017 30 June 2016 Change $96.8 million $72.6 million $28.7 million $25.6 million 12.3 cents 12.0 cents 11.1 cents 10.9 cents $621.3 million $514.0 million $591.7 million $491.4 million $171.0 million $138.0 million $432.5 million $357.5 million $1.84 27.5% $1.54 26.8% + 33% + 12% + 11% + 10% + 21% + 20% + 24% + 21% + 19% + 70 bps • Net operating profit was $28.7 million, up 12% on the previous year; • 11% growth in distributable income per security and 10% growth in distributions paid to investors; • The property portfolio increased with the addition of 5 Early Learning Centre (‘ELC’) development sites. During the year, 8 ELC development projects were completed and leases commenced; • Gearing was 27.5% at 30 June 2017; • NAV per security at 30 June 2017 was $1.84, an increase of 19% on 30 June 2016. This was primarily due to the increase in investment property values during the year; • Weighted average lease expiry (WALE) extended to 12.8 years at 30 June 2017 (30 June 2016: 9.7 years) following the renegotiation of leases within the portfolio. 18 Directors’ ReportArena REITFinancial results Rental income Other income Total operating income Property expenses Operating expenses Finance costs Net operating profit (distributable income) * Non-distributable items: Straight-line rental income Revaluation gain on investment properties Change in fair value of derivatives Profit/(loss) on sale of investment properties Transaction costs Amortisation of security-based payments (non-cash) Other Statutory net profit * Net operating profit (distributable income) is not a statutory measure of profit. Financial results summary Net operating profit (distributable income) ($’000) Weighted average number of ordinary securities (‘000) Distributable income per security (cents) 30 June 2017 30 June 2016 $’000 37,437 689 38,126 (1,152) (3,535) (4,714) 28,725 732 66,124 1,805 12 (77) (576) 46 $’000 33,316 638 33,954 (1,003) (3,249) (4,131) 25,571 (327) 51,062 (2,915) (121) (242) (365) (42) 96,791 72,621 30 June 2017 30 June 2016 28,725 233,557 12.30 25,571 230,165 11.11 • 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 fixed annual rent increases and market rent reviews on the Group’s property portfolio; – Commencement of rental income from the 8 ELC development projects completed during the year, and the acquisition of new ELC development projects during the year; – The full year effect of acquisitions and developments completed during FY16; – 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. 19 Arena REIT / Financial Report 2017Investment 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 2017 30 June 2016 $591.7 million $491.4 million 195 10 – 205 189 14 – 203 100% 12.8 years 100% 9.7 years • The increase in the value of investment properties is primarily due to the addition of: – A net revaluation increment to the portfolio of $66.1 million for the year; and – New ELC development expenditure and capital expenditure of $40.0 million. • Offset by the following investment property disposals during the year: – One ELC development and one operating ELC were sold in June 2017 with sale proceeds of $6.8 million to be received in FY18. Capital management Equity • During the year, 2.9 million securities were issued at an average price of $1.99 to raise $5.7 million of equity pursuant to the Distribution Re-investment Plan (DRP). Bank facilities & gearing • The total facility limit of the Group was extended by $30 million in January 2017. At 30 June 2017, the Group had $102.5 million of debt facility expiring on 31 December 2018 and $102.5 million of debt facility expiring on 31 December 2020; • The balance drawn increased by $33 million to fund acquisitions and development capital expenditure; • Gearing was 27.5% at 30 June 2017 (30 June 2016: 26.8%); • The Group was fully compliant with all bank facility covenants throughout FY17 and as at 30 June 2017. At 30 June 2017 the Loan to Valuation Ratio was 32.0% (Covenant: 50%) and the Interest Cover Ratio was 5.6 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 2017, 79% of the Group’s borrowings are hedged for a weighted average term of 4.3 years (2016: 72% for 4.0 years). The average swap fixed rate at 30 June 2017 is 2.39% (2016: 2.48%); • 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. 20 Directors’ ReportArena REITFY18 outlook The Group has provided market guidance for FY18 distribution of 12.8 cents per security, which represents an increase of 6.7% on FY17. 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 On 28 July 2017, the Group announced the acquisition of a portfolio of nine ELC properties under development for a total cost of $65 million. In conjunction with this acquisition, the Group undertook a fully underwritten Institutional Placement of $55 million. On 7 August 2017, the Group issued a Security Purchase Plan for eligible Australian and New Zealand investors to raise up to $10 million. This offer remains open as at the date of this report. Other than those matters identified above, no other significant events have occurred since 30 June 2017 that have 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 86% invested in childcare centres and childcare centre development sites and 14% 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 2017, 70% of the portfolio by income (excluding developments) is leased to the largest three tenants (Goodstart Early Learning Ltd with 40%, Primary Health Care Limited with 15% and Affinity Education Group with 15%). 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. 21 Arena REIT / Financial Report 2017Information 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 was appointed as an Independent Non-Executive Director of Charter Hall Group in December 2016. 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: Charter Hall Group. 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: None. 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 and is a Fellow of the Australian Institute of Company Directors (FAICD). Other current directorships: Investa Wholesale Funds Management Limited, ICPF Holdings Limited. Former directorships in last 3 years: None. Bryce Mitchelson, Executive Director Bryce is Managing Director of the Group and joined 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: None. 22 Directors’ ReportArena REITGareth Winter, Executive Director and Company Secretary Gareth was appointed Chief Financial Officer of the Group 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 2017, and the number of meetings attended by each director were: ARL Board ARML Board Audit Committee Remuneration & Nomination Committee David Ross Simon Parsons Dennis Wildenburg Bryce Mitchelson Gareth Winter A 8 8 8 8 * B 8 8 8 8 * A 11 11 11 11 11 B 11 11 11 11 11 A 8 8 8 * * B 8 8 8 * * 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 Arena REIT’s (‘Arena’) Remuneration and Nomination Committee presents the Remuneration Report which includes information on the remuneration arrangements for Key Management Personnel (KMP) for the year ended 30 June 2017. The report has been prepared and audited in accordance with the requirements of the Corporations Act and Regulations. Remuneration Report Summary Key Decisions and Remuneration outcomes in respect of FY17 Section KMP Remuneration Mix No change in KMP in FY17 The relative weighting of at-risk remuneration for Executive KMP attributable to LTI opportunity was increased by 5% (excluding the Managing Director). Fixed Remuneration (TFR) Executive KMP received an average TFR increase of 3% in FY17. Short Term Incentive (STI) Executive KMP were awarded between 90-95% of STI opportunity based on exceeding financial targets and the assessment of individual performance against non-financial KPIs. Long Term Incentive (LTI) No LTI vested in FY17. 1.2 3 4.2 4.4 23 Arena REIT / Financial Report 2017Remuneration report (continued) Remuneration Report Summary Key Decisions in respect to FY18 Remuneration Framework and LTI Assessment The Committee engaged Conari Partners to undertake an independent review of Arena’s remuneration framework, incentive plans, performance hurdles and benchmarked the level of remuneration in comparison to market practice. Arena will introduce a deferred component to the STI plan from FY18 whereby the vesting of 50% of any STI awarded to Executive KMP will be deferred for a period of 1 year and payment will be delivered in the form of Arena Stapled Securities. The testing of hurdles and other conditions in relation to the FY15 LTI Grant occurred after 30 June 2017. The FY15 LTI grant was 100% vested in August 2017 as: • Arena’s relative TSR ranked in the top quartile of the comparator group comprising the members of the ASX300 A-REIT Index over the performance period; and • Arena’s FY17 Distributable Income per Security exceeded the performance hurdle range. 1.1 4.4 Governance and Independent Review Short Term Incentive (STI) Long Term Incentive (LTI) 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 the 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. During the year, the Committee engaged Conari Partners to conduct an independent review of Arena’s remuneration framework, incentive plans and benchmarked the level of remuneration in comparison to market practice in the A-REIT sector. Conari Partners did not provide any remuneration recommendations in respect of KMP. 1.2 Key Management Personnel (KMP) KMP are persons identified as having authority and responsibility for planning, directing and controlling the activities of Arena. There has been no change in KMP since the end of the reporting period. Non-Executive Directors Position FY17 KMP FY16 KMP David Ross Simon Parsons Dennis Wildenburg 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 Yes Yes Yes Yes Yes Yes Executive KMP Position FY17 KMP FY16 KMP Bryce Mitchelson Managing Director Gareth Winter Robert de Vos Executive Director & Chief Financial Officer Head of Property Yes Yes Yes Yes Yes Yes 24 Directors’ ReportArena REITRemuneration report (continued) 1.3 Remuneration Framework The directors of Arena have adopted a remuneration framework 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 business, its ability to pay and the role and experience of employees; • The remuneration framework supports the delivery of Arena’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 is paid an amount determined by the Board to a maximum aggregate amount approved by security holders 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 FY17 (inclusive of applicable superannuation) were: Board Fees Audit Committee Fees Remuneration & Nomination Committee Fees Chairman1 $187,000 Member $95,000 Chairman $10,000 Member $5,000 Chairman $10,000 Member $5,000 1. The Board fee received by the Chairman of the Board is inclusive of all Committee fees. 3. Executive KMP Remuneration Framework In FY17, Executive KMP remuneration comprised: • total fixed remuneration (TFR); • short term incentive (STI); and • long-term incentive (LTI). The FY17 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 At Risk Performance Based Remuneration TFR 50% 55% 50% STI 25% 20% 25% LTI 25% 25% 25% 25 Arena REIT / Financial Report 2017Remuneration report (continued) 3.1 Total Fixed Remuneration TFR consists of base salary, employer superannuation contributions, 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. The actual award is based on the achievement of specific Key Performance Indicators (KPI’s) 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 organisation’s objectives and the Executive KMP’s short term incentive KPI’s is designed to align Executive KMP to Arena’s objectives. FY17 performance was measured across two categories of KPI’s: • 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, leadership, human resources, stakeholder management and relationships and specific personal objectives. The FY17 STI will be paid in cash 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 (and other Arena staff) participate in the LTI at the discretion of the Board. The LTI opportunity for each Executive KMP is based on the LTI proportion of their TMR. 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 1 fully paid ordinary stapled security for each Right that vests. 3.3.1 LTI - Performance Rights Arena’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 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 FY17 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’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 FY17 Performance Rights grant are the members of the S&P / ASX 300 A-REIT Index at the commencement of the performance period. 26 Directors’ ReportArena REITRemuneration report (continued) The Relative TSR vesting schedule is as follows: Arena’s 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 security holder returns; • The effects of market cycles are reduced as it measures Arena’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’s Distribution Policy. The DIS vesting schedule is as follows: Arena’s DIS (in year 3 of the performance period) Below the Target Range In the Target Range Proportion of DIS Hurdle Performance Rights that vest 0% 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 security holder returns; • DIS is a key performance indicator referenced by the Board in preparing the annual budget and business plan and in measuring Arena’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. 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’s business performance. Recognition Rights were subject to an employment retention period ended 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’s transition to an internalised management structure. 27 Arena REIT / Financial Report 2017Remuneration report (continued) 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 cancel 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 & Variable Remuneration Outcomes Arena’s remuneration policy assesses variable remuneration outcomes in the context of performance and change in security holder 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. 4.1 Performance Indicators The table below summarises information on Arena’s key financial and performance metrics over the 5 year period to 30 June 2017. Metric FY17 FY16 FY15 FY14 FY13 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 96.8 28.7 12.30 12.00 $1.84 $2.25 27.5% 19.8% (5.6%) 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 $1.02 10.4% n/a1 n/a1 1. Arena listed on ASX in June 2013. Prior data is not available or relates to a period when the fund was unlisted. 28 Directors’ ReportArena REITRemuneration report (continued) 4.2 FY17 STI Performance Measures A key measure of Arena’s performance and contributor to STI performance assessment is the annual underlying profit and distribution. STI Financial Objective Result Underlying Profit Performance: • Deliver a minimum FY17 Distribution of 11.7 cents per • Actual FY17 Distribution of 12.0 cents per security (10% security (7% growth on FY16) growth on FY16) • Deliver a target distributable income per security • Target Exceeded STI Non-Financial Objectives The Committee set each Executive KMP relevant KPIs in relation to strategy development & execution, progression of developments, business performance, risk management, leadership, human resources, stakeholder management, funding and liquidity. The achievement of KPIs was assessed by the Committee in the determination of each Executive KMP’s STI award. 4.3 FY17 STI Awards As a result of the performance assessment, the Board awarded STI’s in respect of FY17 as set out below. Executive KMP Bryce Mitchelson Gareth Winter Robert de Vos 1. Any STI opportunity not awarded is forfeited. STI Award ($) Award as a % of STI Opportunity1 227,250 120,909 147,250 90% 95% 95% 29 Arena REIT / Financial Report 2017Remuneration report (continued) 4.4 LTI Performance Measures No Performance Rights or Recognition Rights were vested or eligible for exercise during FY17. An assessment of the FY15 LTI grant was performed following 30 June 2017 to determine if the relevant vesting conditions were met as set out in the table below. LTI Year FY15 Performance Measurement Period LTI Performance Measure 12 December 2014 to 30 June 2017 Relative TSR1 FY17 FY16 FY16 – FY18 FY18 FY17 FY17 – FY19 FY19 Distributable Income per Security (DIS) Relative TSR1 Distributable Income per Security (DIS) Relative TSR1 Distributable Income per Security (DIS) Performance Hurdle Result 50% of rights vest at the 50th percentile; with pro rata vesting until 100% vesting at the 75th percentile. Target exceeded. Arena ranked in the top quartile of the comparator group over the Performance Measurement Period. Vesting Outcome 100% Target range of 11.0 cents to 12.0 cents Target exceeded. Actual DIS of 12.3 cents 100% 50% of rights vest at the 50th percentile; with pro rata vesting until 100% vesting at the 75th percentile. Target range of 11.5 cents to 12.5 cents 50% of rights vest at the 50th percentile; with pro rata vesting until 100% vesting at the 75th percentile. Target range of 12.5 cents to 13.25 cents N/A N/A 1. Relative TSR versus a comparator group comprising the members of the ASX300 A-REIT Index at the commencement of each relevant 3 year performance period. 4.5 LTI Grants LTI Grants to Executive KMP during FY17 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% 45% 50% Performance Rights 1 July 2016 30 June 2019 Performance Rights 1 July 2016 30 June 2019 Performance Rights 1 July 2016 30 June 2019 195,736 123,326 120,156 $1.29 $1.29 $1.29 1. Grants were approved by security holders at the AGM held on 17 November 2016. 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. 30 Directors’ ReportArena REITRemuneration report (continued) 4.6 Remuneration Summary (Actual Amounts Received) The table below is a voluntary disclosure of the remuneration actually received by Executive KMP. It does not align with information required by accounting standards (which is set out in section 4.7) as it does not include accounting accruals for STI awards or LTI grants that may not be received as they are based on performance and other conditions. Short Term Benefits Equity Based Payments Long Term Post Employment $ Salary STI1,2 Non- Monetary Benefits Perfor- mance Rights Recog- nition Rights Long Service Leave Super- annuation Total Executive KMP Bryce Mitchelson FY17 485,384 208,250 11,329 FY16 470,692 111,791 Gareth Winter FY17 330,384 107,667 FY16 320,692 60,914 Robert de Vos FY17 290,384 122,715 FY16 280,692 69,220 10,361 9,961 9,201 9,961 9,201 – – – – – – – – – – – – – – – – – – 19,616 724,579 19,308 612,152 19,616 467,628 19,308 410,115 19,616 442,676 19,308 378,421 1. The STI represents the payment of the STI earned in the prior financial year. 2. The STI paid in FY16 is for the period from 12 December 2014 to 30 June 2015. 4.7 Remuneration Summary (Statutory) The following tables disclose 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 STI Non- Monetary Benefits Perfor- mance Rights Recog- nition Rights Long Service Leave Super- annuation Total Non-Executive Director David Ross FY17 160,250 FY16 148,521 Simon Parsons FY17 95,890 FY16 92,237 Dennis Wildenburg FY17 91,456 FY16 88,901 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 26,750 187,000 31,479 180,000 9,110 105,000 8,763 101,000 18,544 110,000 17,099 106,000 31 Arena REIT / Financial Report 2017Remuneration report (continued) Short Term Benefits Equity Based Payments Long Term Post Employment $ Salary STI Executive KMP Non- Monetary Benefits Perfor- mance Rights1,2 Recog- nition Rights1 Long Service Leave3 Super- annuation Total Bryce Mitchelson FY17 485,384 227,250 11,329 221,566 37,205 11,077 19,616 1,013,427 FY16 470,692 208,250 10,361 137,776 37,307 Gareth Winter FY17 330,384 120,909 9,961 116,620 17,232 FY16 320,692 107,667 9,201 63,765 17,279 Robert de Vos FY17 290,384 147,250 9,961 111,495 15,665 FY16 280,692 122,715 9,201 59,992 15,708 9,351 7,770 3,282 6,013 1,680 19,308 893,045 19,616 622,492 19,308 541,194 19,616 600,384 19,308 509,296 1. Represents change in accounting accrual. Entitlement subject to vesting conditions. 2. FY17 amount reflects the amortisation of three separate LTI grants since the management internalisation. By comparison, the FY16 amount reflects the amortisation of two separate LTI grants. 3. Represents change in accounting accrual. Entitlement subject to legislated minimum period of employment. 4.8 Executive KMP Remuneration Mix The following table summarises the relative proportions of total remuneration based on the FY17 Remuneration Summary (Statutory). Executive KMP Bryce Mitchelson Gareth Winter Robert de Vos TFR 51% 57% 53% STI 22% 20% 25% LTI 27% 23% 22% Variation between TMR and total actual 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. 5. Interests in Securities Interests in Arena securities held by directors and executive KMP is set out below. Ordinary Securities Ordinary Securities Independent Directors David Ross Simon Parsons Dennis Wildenburg 32 Balance 30 June 2016 Acquired Disposed Received as Remuneration Balance 30 June 2017 200,000 200,000 150,000 – – – – – – – – – 200,000 200,000 150,000 Directors’ ReportArena REITRemuneration report (continued) Ordinary Securities Executive KMP Bryce Mitchelson Gareth Winter Robert de Vos Balance 30 June 2016 Acquired Disposed Received as Remuneration Balance 30 June 2017 753,907 75,000 27,941 21,000 – 1,675 – – – – – – 774,907 75,000 29,616 Performance Rights and Recognition Rights Executive KMP Bryce Mitchelson Performance Rights Performance Rights Performance Rights Recognition Rights Gareth Winter Performance Rights Performance Rights Performance Rights Recognition Rights Robert de Vos Performance Rights Performance Rights Performance Rights Recognition Rights Grant Year Opening Balance Rights Granted Rights Vested1 Rights Lapsed Closing Balance1 Fair Value at Grant Date2 Face Value at Grant Date3 FY17 FY16 FY15 FY15 FY17 FY16 FY15 FY15 FY17 FY16 FY15 FY15 – 195,736 247,745 151,596 77,869 – – – – 123,326 114,478 70,213 36,066 – – – – 120,156 110,192 63,830 32,787 – – – – – – – – – – – – – – – – 195,736 $252,500 $391,472 – – – 247,475 $245,000 $388,536 151,596 $142,500 $224,362 77,869 $95,000 $115,246 – 123,326 $159,091 $246,652 – – – 114,478 $113,333 $179,730 70,213 36,066 $66,000 $108,128 $44,000 $55,542 – 120,156 $155,000 $240,312 – – – 110,192 $109,090 $173,001 63,830 32,787 $60,000 $40,000 $98,298 $50,492 1. Testing of the performance and other hurdles in relation to the Rights issued in FY15 did not occur until post 30 June 2017. Vesting of Rights in accordance with the LTI assessment in Section 4.4 of this Remuneration Report will be reflected in the following year. 2. Fair value determined by independent valuation. 3. 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. 33 Arena REIT / Financial Report 2017Remuneration 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 Ongoing Termination by the Executive KMP 9 months’ notice. Ongoing 6 months’ notice. Unvested STI or LTI entitlements lapse unless the Board determines otherwise. Unvested STI or LTI entitlements lapse unless the Board determines otherwise. Termination by Arena without cause or mutually agreed resignation 9 months’ notice or equivalent payment in lieu of notice based on TFR. 6 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 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 9 months post-employment. Restrained from soliciting suppliers, customers and staff for a maximum of 6 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 2017 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 of the financial statements. Interests in the Group The movement in securities on issue in the Group during the year is disclosed in note 14 of the financial statements. 34 Directors’ ReportArena REITCorporate 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 36. This report is made in accordance with a resolution of directors. David Ross, Chairman Melbourne, 24 August 2017 35 Arena REIT / Financial Report 2017Auditor’s independence declaration Auditor’s Independence Declaration As lead auditor for the audit of Arena REIT No. 1 for the year ended 30 June 2017, I declare that to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Arena REIT No. 1 and the entities it controlled during the period. Elizabeth O’Brien Partner PricewaterhouseCoopers Melbourne 24 August 2017 36 Arena REITConsolidated statement of comprehensive income For the year ended 30 June 2017 Income Property rental Management fee income Interest Net gain/(loss) on fair value of derivative financial instruments Revaluation of investment properties Total income Expenses Property expenses Management and administration expenses Finance costs Other expenses 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 2017 30 June 2016 Notes $’000 $’000 9(c) 9 9(c) 3 6 6 6 6 38,169 582 152 1,805 66,124 106,832 (1,152) (4,061) (4,714) (114) (10,041) 32,989 429 167 (2,915) 51,062 81,732 (1,003) (3,544) (4,333) (231) (9,111) 96,791 72,621 – 96,791 – 72,621 87,161 10,256 (626) 96,791 Cents 37.32 37.08 41.44 41.18 59,155 14,175 (709) 72,621 Cents 25.70 25.59 31.55 31.41 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 37 Arena REIT / Financial Report 2017Consolidated balance sheet As at 30 June 2017 Current assets Cash and cash equivalents Trade and other receivables Total current assets Non-current assets Receivables Plant and equipment Investment properties Intangible assets Total non-current assets Total assets Current liabilities Trade and other payables Provisions Distributions payable 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 2017 30 June 2016 Notes $’000 $’000 7 8 8 9 10 11 13 12 14 15 16 9,082 8,613 17,695 860 199 591,712 10,816 603,587 621,282 9,305 288 7,221 16,814 1,031 337 170,624 171,992 188,806 432,476 202,179 161,929 68,368 432,476 9,446 969 10,415 1,062 219 491,439 10,816 503,536 513,951 8,687 250 6,437 15,374 3,030 467 137,587 141,084 156,458 357,493 197,224 99,187 61,082 357,493 The above consolidated balance sheet should be read in conjunction with the accompanying notes. 38 Arena REITConsolidated 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 2015 Profit for the year 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 Balance at 30 June 2016 Balance at 1 July 2016 Profit for the year 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 191,845 – – 5,379 – – 197,224 197,224 – – 4,955 – – 61,900 59,155 59,155 – – (21,868) 99,187 99,187 87,161 87,161 – – (24,419) 49,746 13,466 13,466 788 350 (3,268) 61,082 61,082 9,630 9,630 744 561 (3,649) 303,491 72,621 72,621 6,167 350 (25,136) 357,493 357,493 96,791 96,791 5,699 561 (28,068) Balance at 30 June 2017 202,179 161,929 68,368 432,476 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 39 Arena REIT / Financial Report 2017Consolidated statement of cash flows For the year ended 30 June 2017 Consolidated 30 June 2017 30 June 2016 Notes $’000 $’000 Cash flows from operating activities Receipts in the course of operations Payments in the course of operations Finance costs paid Interest received Net cash inflow from operating activities 23 Cash flows from investing activities Acquisition of subsidiaries Net payments/proceeds from sale of investment properties Payments for investment properties and capital expenditure Net cash (outflow) from investing activities Cash flows from financing activities 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 inflow/(outflow) from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year 7 41,664 (8,290) (4,531) 146 28,989 – (43) (40,545) (40,588) (27) (21,557) (104) 33,117 (194) 11,235 (364) 9,446 9,082 37,331 (7,292) (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 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 40 Arena REITContents 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 42 42 54 54 55 55 56 56 58 61 61 61 63 63 65 65 66 66 67 68 69 73 74 74 74 41 Arena REIT / Financial Report 2017Notes 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’) comprises Arena REIT No. 1 (‘ARF1’), Arena REIT No. 2 (‘ARF2’) and Arena REIT Limited (‘ARL’). The Responsible Entity of ARF1 and ARF2 is Arena REIT Management Limited (the ‘Responsible Entity’). The financial statements were authorised for issue by the directors on 24 August 2017. 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. (i) New and amended standards adopted by the Group The Group has applied the following standards and amendments for the first time for their annual reporting period commencing 1 July 2016: • AASB 2014-4 Amendments to Australian Accounting Standards - Clarification of Acceptable Methods of Depreciation and Amortisation; • AASB 2015-1 Amendments to Australian Accounting Standards - Annual Improvements to Australian Accounting Standards 2012-2014 Cycle; • AASB 2015-2 Amendments to Australian Accounting Standards - Disclosure Initiative: Amendments to AASB 101. The adoption of these amendments did not result in any adjustments to the values included in the 30 June 2017 financial statements. The disclosure requirements of the above standards have been incorporated into this financial report. (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. 42 Arena REIT2. 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 2017, 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. (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. (e) Parent entity financial information Parent entity information has been prepared on the same basis as the rest of the financial report. 43 Arena REIT / Financial Report 20172. Summary of significant accounting policies (continued) (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 accruals 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. 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). 44 Notes to the consolidated financial statementsArena REIT2. Summary of significant accounting policies (continued) (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. 45 Arena REIT / Financial Report 20172. 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). 46 Notes to the consolidated financial statementsArena REIT2. 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 security holders, 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. 47 Arena REIT / Financial Report 20172. 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) Plant and equipment 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. 48 Notes to the consolidated financial statementsArena REIT2. 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). 49 Arena REIT / Financial Report 20172. Summary of significant accounting policies (continued) (t) Financial instruments (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. 50 Notes to the consolidated financial statementsArena REIT2. 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 gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash 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 of each property 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. 51 Arena REIT / Financial Report 20172. 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 2017 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 1 January 2018 30 June 2019 Standard / Interpretation Impact 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. 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. 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. AASB 9 Financial Instruments AASB 15 Revenue from contracts with customers 52 Notes to the consolidated financial statementsArena REIT2. 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. 53 Arena REIT / Financial Report 20173. 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 2017 30 June 2016 $’000 $’000 4,496 218 – 4,714 1,040 5,754 3,951 181 201 4,333 1,172 5,505 (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 2017 30 June 2016 $’000 96,791 $’000 72,621 Tax at the applicable Australian tax rate of 30% (2016 - 30%) (29,037) (21,786) Profit attributable to entities not subject to tax Deferred tax assets not recognised Income tax expense 29,225 (188) – 21,999 (213) – Unrecognised deferred tax assets are $0.2 million (2016: $0.2 million). These have not been recognised as it is not probable that future taxable profit will arise to offset these deductible temporary differences. 54 Notes to the consolidated financial statementsArena REIT5. 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 Consolidated 30 June 2017 30 June 2016 $ $ 105,550 10,150 115,700 42,213 42,213 104,000 10,000 114,000 31,673 31,673 Total remuneration of PricewaterhouseCoopers 157,913 145,673 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 2017 Cents 37.32 37.08 41.44 41.18 2016 Cents 25.70 25.59 31.55 31.41 The following information reflects the income and security numbers used in the calculations of basic and diluted EPS. Weighted average number of ordinary securities used in calculating basic EPS Unvested LTI performance rights Adjusted weighted average number of ordinary securities used in calculating diluted EPS 2017 2016 Number of securities Number of securities ‘000 233,557 1,506 235,063 ‘000 230,165 1,012 231,177 55 Arena REIT / Financial Report 20176. 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 2017 30 June 2016 $’000 87,161 87,161 96,791 96,791 $’000 59,155 59,155 72,621 72,621 Consolidated 30 June 2017 30 June 2016 $’000 7,782 1,300 9,082 $’000 8,146 1,300 9,446 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 Deferred performance fees receivable Consolidated 30 June 2017 30 June 2016 $’000 149 7,758 459 247 8,613 $’000 75 391 503 - 969 Other receivables as at 30 June 2017 includes $6.8 million of sales proceeds payable to the Group following the disposal of two ELC assets in June 2017. 56 Notes to the consolidated financial statementsArena REIT8. 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 2017 $’000 Impairment 2017 $’000 Gross 2016 $’000 Impairment 2016 $’000 129 20 – – – 149 – – – – – – 75 – – – – 75 – – – – – – 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 receivable Consolidated 30 June 2017 30 June 2016 $’000 860 $’000 1,062 Consolidated 30 June 2017 Carrying amount Fair value $’000 860 $’000 860 57 Arena REIT / Financial Report 20179. Investment properties (a) Valuations and carrying amounts Property Portfolio Carrying amount Most recent external valuation ELC properties ELC developments Healthcare properties Total 2017 $’000 468,627 38,989 84,096 2016 $’000 391,037 22,216 78,186 2017 $’000 430,205 20,930 78,000 591,712 491,439 529,135 2016 $’000 354,388 13,570 74,128 442,086 The Group 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. Independent valuations were performed on 38 Early Learning Centres (‘ELC’) as at 31 December 2016, and a further 62 ELCs and 3 healthcare centres as at 30 June 2017. The directors have reviewed these valuations and has determined they are appropriate to adopt during the financial period ending 30 June 2017. Director valuations were performed on investment properties which were not independently valued. The key inputs into valuations are: • Passing rent; • Market rents; • Capitalisation rates; • Lease terms; • Discount rates (healthcare properties); and • Capital expenditure contingencies (healthcare properties). 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 - ELCs Market rent per licenced place Capitalisation rates Passing yields (ii) Key assumptions - Healthcare properties Capitalisation rates Passing yields 58 30 June 2017 30 June 2016 $1,500 to $3,900 $1,400 to $3,900 5.5% to 8.5% 6.0% to 8.5% 4.5% to 10.25% 5.25% to 10.0% 30 June 2017 30 June 2016 6.0% to 7.0% 6.5% to 7.5% 6.0% to 7.75% 6.25% to 8.0% Notes to the consolidated financial statementsArena REIT9. 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 Revaluation gain on investment properties Consolidated 30 June 2017 30 June 2016 $’000 $’000 491,439 39,971 (6,622) 66,124 800 420,532 21,277 (1,150) 51,062 (282) 591,712 491,439 Consolidated 30 June 2017 30 June 2016 $’000 37,437 732 (765) (387) 66,124 $’000 33,316 (327) (724) (279) 51,062 (d) Tenancy risk Set out below are details of the major tenants who lease properties from the Group: Goodstart Early Learning Ltd (“Goodstart”) - representing 40% of the Group’s investment property portfolio by income. Like many 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 15% 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 15% 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 the Group with a pooled bank guarantee as security against each of the properties leased. 59 Arena REIT / Financial Report 20179. Investment properties (continued) Other Tenants Operator Petit Early Learning Journey Oxanda Education G8 Education Green Leaves % of Investment Property Portfolio by Income 5% 5% 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 ELCs 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 2017 30 June 2016 $’000 12,719 $’000 14,456 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 2017 30 June 2016 $’000 $’000 37,882 157,933 383,856 579,671 34,015 142,989 201,204 378,208 60 Notes to the consolidated financial statementsArena REIT10. Intangible assets Goodwill Consolidated 30 June 2017 30 June 2016 $’000 10,816 10,816 $’000 10,816 10,816 The intangible asset held by the Group represents goodwill on acquisition. There are no other intangibles held by the Group. Goodwill has been allocated to the Group’s lowest cash generating unit representing funds management across the Group’s business as a whole. The Group tests impairment of goodwill annually by comparing its carrying amount with its recoverable amount. The recoverable amount is determined by a value in use calculation which uses the discounted cash flow methodology based on five years of cash flow projections, based on financial budgets, plus a terminal value. Key assumptions include: • growth rates set in the range of 2% to 3% per annum; and • cash flows are discounted at a rate of 8.33% per annum. The Group has considered and assessed reasonably possible changes in key assumptions and have not identified any instances that could cause the carrying amount to exceed its recoverable amount. 11. Trade and other payables Prepaid rental income Sundry creditors and accruals 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 2017 30 June 2016 $’000 2,020 7,285 9,305 $’000 2,059 6,628 8,687 Consolidated 30 June 2017 30 June 2016 $’000 $’000 171,000 (376) 170,624 138,000 (413) 137,587 61 Arena REIT / Financial Report 201712. Interest bearing liabilitiess (continued) (a) Financing arrangements Consolidated 30 June 2017 30 June 2016 $’000 $’000 Committed facilities available at the end of the reporting period Interest bearing liabilities 205,000 175,000 Facilities used at the end of the reporting period Interest bearing liabilities 171,000 138,000 In January 2017, the total facility limit of the Group was extended by $30 million. At 30 June 2017, the Group had $102.5 million of debt facility expiring on 31 December 2018 and $102.5 million of debt facility expiring on 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 2017 30 June 2016 $’000 $’000 6,052 8,171 14,223 6,444 613 7,057 591,712 591,712 491,439 491,439 The covenants over the Group’s bank facility require an interest cover ratio of greater than 2.0 times (Actual at 30 June 2017 of 5.6 times) and a loan to market value of investment properties ratio of less than 50% (Actual at 30 June 2017 of 32.0%). The Group was in compliance with its covenants throughout the year. 62 Notes to the consolidated financial statementsArena REIT13. Derivative financial instruments Non-current liabilities Interest rate swaps Consolidated 30 June 2017 30 June 2016 $’000 $’000 1,031 1,031 3,030 3,030 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 79% (2016: 72%) of the facility principal outstanding. The weighted average fixed interest swap rate at 30 June 2017 was 2.39% (2016: 2.48%), and the weighted average term was 4.3 years (2016: 4.0 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 2017 30 June 2016 $’000 – 10,000 35,000 22,500 22,500 45,000 $’000 – 25,000 10,000 20,000 22,500 22,500 135,000 100,000 30 June 2017 30 June 2016 30 June 2017 30 June 2016 Securities ‘000 Securities ‘000 $’000 $’000 Consolidated Ordinary Securities Fully paid 234,843 231,966 202,179 197,224 Other contributed equity attributable to securityholders of the Group relating to ARF2 and ARL of $40.4 million is included within Non-controlling interests - ARF2 and ARL (30 June 2016: $39.7 million). 63 Arena REIT / Financial Report 201714. Contributed equity (continued) (b) Movements in ordinary securities Date Details 1 July 2015 Opening balance Issue of securities under DRP (i) 30 June 2016 Closing balance 1 July 2016 Opening balance Issue of securities under DRP (i) 30 June 2017 Closing balance (i) Distribution Re-investment Plan (DRP) Number of securities ‘000 228,290 3,676 231,966 231,966 2,877 234,843 $’000 191,845 5,379 197,224 197,224 4,955 202,179 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. (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. The Group monitors capital through the analysis of a number of financial ratios, including the Gearing ratio. 2017 $’000 171,000 621,282 27.5% 2016 $’000 138,000 513,951 26.8% Gearing Ratio Interest bearing liabilities Total assets Gearing ratio 64 Notes to the consolidated financial statementsArena REIT15. Accumulated profit Movements in accumulated profit were as follows: Opening accumulated profit Net profit for the year attributable to ARF1 Distribution paid or payable attributable to ARF1 Closing accumulated profit Distributions to securityholders Consolidated 30 June 2017 30 June 2016 $’000 $’000 99,187 87,161 (24,419) 161,929 61,900 59,155 (21,868) 99,187 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 $3.6 million (30 June 2016: $3.3 million). Distributions declared September quarter December quarter March quarter June quarter 2017 $’000 6,807 6,834 7,205 7,222 2016 $’000 6,128 6,158 6,413 6,437 2017 cps 2.9250 2.9250 3.0750 3.0750 2016 cps 2.6750 2.6750 2.7750 2.7750 Total distributions to securityholders 28,068 25,136 12.0000 10.9000 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 2015 Securities issued under DRP Net profit/(loss) for the year 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 65 Arena REIT / Financial Report 201716. Non-controlling interests (continued) Opening balance - 1 July 2016 Securities issued under DRP Net profit/(loss) for the year attributable to non-controlling interests Distributions paid or payable attributable to non-controlling interests Increase/(decrease) in reserves (i) ARF2 ARL Total 30 June 2017 30 June 2017 30 June 2017 46,954 744 10,256 (3,649) – 14,128 - (626) – 561 61,082 744 9,630 (3,649) 561 Closing balance - 30 June 2017 54,305 14,063 68,368 (i) Reserves Opening balance Security-based benefts expense for the period Balance 30 June Consolidated 30 June 2017 30 June 2016 $’000 462 561 1,023 $’000 112 350 462 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 benefits expense Detailed remuneration disclosures are provided in the Remuneration report. 66 30 June 2017 30 June 2016 $ $ 1,980,409 113,251 24,860 – 519,783 1,869,119 115,265 14,313 – 331,827 2,638,303 2,330,524 Notes to the consolidated financial statementsArena REIT18. 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) is Responsible Entity of the Trusts. 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: 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 Increase/(decrease) in fair value of performance fee receivable by the Group from other related parties Amounts receivable: 30 June 2017 30 June 2016 $ $ 50,000 389,089 46,550 28,000 344,234 43,163 44,770 (127,326) Amount receivable from other related parties at the end of the reporting period 71,971 52,752 Deferred management and performance fees receivable at the end of the reporting period 1,106,580 1,061,811 Amounts payable: Amounts payable to other related parties at the end of the reporting period – – 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 REIT Management Limited Arena REIT Operations Pty Limited Australia Australia Australia Ordinary Ordinary Ordinary 2017 % 100 100 100 2016 % 100 100 100 The management function of the Group was internalised 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 and Arena REIT Management Limited. 67 Arena REIT / Financial Report 201720. 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 2017 Number 523,916 523,916 – – – – 2016 Number 535,655 535,655 (4,848) (16,162) – – 2015 Number 304,987 304,987 - (9,574) – – Total Number 1,364,558 1,364,558 (4,848) (25,736) – – Closing balance 523,916 514,645 295,413 1,333,974 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 (b) Rights expense 2017 Number 2016 Number – – – – – – – – – – – – – – 2015 Number 186,660 186,660 (10,000) (4,918) – – Total Number 186,660 186,660 (10,000) (4,918) – – 171,742 171,742 Total expenses relating to the Rights recognised during the year as part of employee benefit expense was as follows: Performance Rights and Recognition Rights 30 June 2017 30 June 2016 $’000 561 561 $’000 350 350 68 Notes to the consolidated financial statementsArena REIT20. Security-based benefits expense (continued) (c) Rights valuation inputs Rights issued were independently valued for the purposes of valuation and accounting using a Binomial Tree or Monte Carlo method, as applicable. The model inputs for the Rights issued during FY17 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 2016 $2.00 $1.29 20% 1.53% 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. 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 2017 30 June 2016 $’000 $’000 Financial assets Cash and cash equivalents (floating interest rate) 9,082 9,446 Financial liabilities Interest bearing liabilities - floating interest rate Derivative financial instruments (notional principal amount) - fixed rate interest rate swaps Net Exposure (171,000) 135,000 (26,918) (138,000) 100,000 (28,554) 69 Arena REIT / Financial Report 201721. Financial risk management and fair value measurement (continued) 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 (2016: 100 bp) Market interest rate decreased by 100 basis points (2016: 100 bp) Instruments with fair value risk: Derivative financial instruments Consolidated 2016 $’000 (286) 286 2017 $’000 (269) 269 135,000 100,000 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 (2016: 100 bp) Market interest rate decreased by 100 basis points (2016: 100 bp) 5,530 (5,530) 3,571 (3,571) 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. (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 Consolidated 30 June 2017 30 June 2016 $’000 9,082 2,214 – $’000 9,446 1,528 – Maximum exposure to credit risk 11,296 10,974 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. 70 Notes to the consolidated financial statementsArena REIT21. 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 2017 Trade and other payables Interest rate swaps Interest bearing liabilities Less than 12 months $’000 16,526 1,041 4,977 1-2 years $’000 – 1,020 106,058 Greater than 2 years $’000 – 2,762 71,688 Contractual cash flows (excluding gross settled derivatives) 22,544 107,078 74,450 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 (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. 71 Arena REIT / Financial Report 201721. 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) (level 3). 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 2017 and 30 June 2016 on a recurring basis: Consolidated 30 June 2017 Financial liabilities Interest rate swaps Total Consolidated 30 June 2016 Financial liabilities Interest rate swaps Total Level 1 $’000 Level 2 $’000 Level 3 $’000 – – Level 1 $’000 – – 1,031 1,031 Level 2 $’000 3,030 3,030 – – Level 3 $’000 – – Total $’000 1,031 1,031 Total $’000 3,030 3,030 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 2017. 72 Notes to the consolidated financial statementsArena REIT21. 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 2017 30 June 2016 $’000 $’000 87,161 59,155 Total comprehensive income attributable to Arena REIT No. 1 87,161 59,155 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 12,662 507,616 520,278 14,347 141,823 156,170 202,179 161,929 364,108 6,330 413,253 419,583 13,161 110,010 123,171 197,224 99,188 296,412 73 Arena REIT / Financial Report 201723. 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 Other Asset transaction costs Changes in operating assets and liabilities Decrease/(increase) in trade and other receivables (Decrease)/increase in trade and other payables (Decrease)/increase in provisions Consolidated 30 June 2017 30 June 2016 $’000 96,791 141 (66,124) (732) – (1,805) 561 81 – (47) 215 (92) $’000 72,621 103 (51,062) 327 121 2,915 350 174 201 79 303 54 Net cash inflow from operating activities 28,989 26,186 24. Contingent assets and liabilities and commitments There are no material outstanding contingent assets or liabilities as at 30 June 2017 and 30 June 2016. For details of commitments of the Group as at 30 June 2017, refer to note 9. 25. Events occurring after the reporting period On 28 July 2017, the Group announced the acquisition of a portfolio of nine ELC properties under development for a total cost of $65 million. In conjunction with this acquisition, the Group undertook a fully underwritten Institutional Placement of $55 million. On 7 August 2017, the Group issued a Security Purchase Plan for eligible Australian and New Zealand investors to raise up to $10 million. This offer remains open as at the date of this report. Other than those matters identified above, no other 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 2017 or on the results and cash flows of the Group for the year ended on that date. 74 Notes to the consolidated financial statementsArena REITDirectors’ declaration In the opinion of the directors: (a) the financial statements and notes set out on pages 37 to 74 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 2017 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, 24 August 2017 75 Arena REIT / Financial Report 2017Independent auditor’s report Independent auditor’s report to the security holders of Arena REIT No. 1 Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Arena REIT No. 1 (ARF1) and its controlled entities (together the Group or the Arena REIT Stapled Group) is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its financial performance for the year then ended b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises:       the consolidated balance sheet as at 30 June 2017 the consolidated statement of comprehensive income for the year then ended the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended the notes to the consolidated financial statements, which include a summary of significant accounting policies the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. PricewaterhouseCoopers, ABN 52 780 433 757 2 Riverside Quay, 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. 76 Arena REITMateriality Audit scope Key audit matters  For the purpose of our audit we used  Our audit focused on areas where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. overall group materiality of $1.44 million which represents approximately 5% of the Group’s profit before tax adjusted for significant non-cash fair value movements.  We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole.  We chose profit before tax adjusted for significant non-cash fair value movements because, in our view, it is the key performance measure used by shareholders to measure the performance of the Group and it underpins the basis of distributable income. We adjusted Group profit before tax for fair value movements in investment properties and fair value changes in derivatives. Amongst other relevant topics, we communicated the following key audit matter to the Audit Committee:  Fair value of investment properties This is further described in the ‘key audit matters’ section of our report. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. Key audit matter Fair value of investment properties (Refer to note 9 in the financial report) The Group’s portfolio of investment properties was recognised as an asset in the financial report at $591.7m at 30 June 2017 and comprised of 205 properties in the Early Learning Centres (ELC) and healthcare sectors in Australia. The investment properties are recognised at fair value, with changes in the fair values recognised in the profit and loss. The estimation of fair value for investment properties was a key audit matter because of:  the magnitude of the investment properties asset balance relative to the net assets of the Group How our audit addressed the key audit matter As at 30 June 2017, the Group obtained independent valuations on 62 ELC properties and 3 healthcare centres. We checked that investment properties were valued by external experts as required by the Group’s valuation program. For a sample of investment properties with external valuations, we assessed the objectivity, competency, and independence of the external experts. In addition, for a sample of the investment properties where the Group involved external valuation experts, we:   considered the external valuer’s terms of engagement and checked for factors such as caveats or limitations that may have influenced the outcomes. We did not note any such factors agreed the passing rents and lease terms applied in the valuations to the underlying leases 77 Arena REIT / Financial Report 2017Independent auditor’s report Key audit matter How our audit addressed the key audit matter    the level of judgement involved in the underlying assumptions used in the models determining the fair value of investment properties (the fair value models) the sensitivity of fair value to any changes in key inputs and assumptions used in the models the potential impact to profit as a result of the revaluation of investment properties. The fair value of investment properties is influenced by:   the valuation methodology adopted key judgemental assumptions used in the fair value models, such as capitalisation rate, market rent per licensed place (ELC properties) and passing yields other key inputs in the fair value models, such as passing rent and lease terms.    assessed the external experts’ valuations against our industry and market knowledge inspected the final valuation reports and agreed the fair value to the Group’s accounting records noting no exceptions. In respect to other investment properties, we:     checked that Group staff with relevant professional qualification assisted in estimating the fair value on a sample basis, agreed the passing rent and lease terms applied in the fair value models to the underlying leases on a sample basis, compared key assumptions (e.g. capitalisation rates, market rent per licensed place, passing yields) applied in the fair value models to independent sources and similar sized properties in the market, with consideration of historical data and known external factors. In instances where key assumptions fell outside of our anticipated ranges, we challenged the rationale supporting the assumptions applied in the fair value models by discussing with management and obtaining supporting evidence. We note that the reasons provided by management were appropriate. considered the independent valuers report on the directors’ valuation assessment and checked for indicators that may suggest the director valuations are outside a reasonable range Other information The directors are responsible for the other information. The other information included in the Group’s annual report for the year ended 30 June 2017 comprises the Directors’ report, ASX additional information and Corporate directory (but does not include the financial report and our auditor’s report thereon), which we obtained prior to the date of this auditor’s report. We also expect other information to be made available to us after the date of this auditor’s report, including the Highlights, Letter from the Chairman, Managing Director’s Report, Portfolio Summary, Corporate Governance and Investor Information. Our opinion on the financial report does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the other information not yet received as identified above, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action to take. Responsibilities of the directors for the financial report The directors of Arena REIT Management Limited (the responsible entity of the ARF1) 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 controls as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. 78 Arena REITAuditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor’s report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 23 to 34 of the directors’ report for the year ended 30 June 2017. In our opinion, the Remuneration Report of Arena REIT No. 1 for the year ended 30 June 2017 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of Arena REIT Management Limited (the responsible entity of the ARF1) 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. PricewaterhouseCoopers Elizabeth O’Brien Partner 24 August 2017 Melbourne 79 Arena REIT / Financial Report 2017ASX additional information Additional Securities Exchange Information as at 17 August 2017 There were 262,431,895 fully paid ordinary securities on issue, held by 4,296 securityholders. There were 170 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 Number of securityholders Total securities held % of total securities on issue 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 The Vanguard Group, Inc Commonwealth Bank of Australia BT Investment Management Limited 559 864 703 2,069 101 239,289 2,552,422 5,656,678 62,791,438 191,192,068 0.09 0.97 2.16 23.93 72.85 4,296 262,431,895 100.00 Number of securities 27,677,037 16,352,388 15,907,988 11,748,203 Fully Paid (%) 12.08 8.10 6.94 5.00 80 Arena REITTwenty largest securityholders Holder Name HSBC Custody Nominees (Australia) Limited BNP Paribas Noms Pty Ltd J P Morgan Nominees Australia Limited Citicorp Nominees Pty Limited National Nominees Limited The Trust Company Limited BNP Paribas Nominees Pty Ltd Sandhurst Trustees Ltd HSBC Custody Nominees (Australia) Limited - A/c 2 Mr David Calogero Loggia Brispot Nominees Pty Ltd Keith David Kirk Navigator Australia Ltd Austral Capital Pty Ltd Mr Jiebo Huang Mr David Stewart Field Norcad Investments Pty Ltd National Nominees Limited Mr Philippe Denis Georges Perez Netwealth Investments Limited Number of securities Fully Paid (%) 48,920,540 34,305,895 28,045,434 18,601,644 18,025,519 10,370,309 6,754,755 2,664,364 2,509,977 1,127,260 808,699 722,195 627,684 600,000 547,030 545,780 495,050 475,882 470,251 463,008 18.64 13.07 10.69 7.09 6.87 3.95 2.57 1.02 0.96 0.43 0.31 0.28 0.24 0.23 0.21 0.21 0.19 0.18 0.18 0.18 Totals 177,081,276 67.48 81 Arena REIT / Financial Report 2017Investor Information ASX listing Distribution payments Arena REIT is listed on the Australian Securities Exchange (ASX) under the code ARF. Arena REIT securities A stapled security in Arena REIT comprises: • one share in Arena REIT Limited; • one unit in Arena REIT No.1; and • one unit in Arena REIT No.2; Arena makes distribution payments on a quarterly basis, typically within six weeks of the quarter end. Details of the 2017 financial year distributions are provided in the table below. FY17 distributions Quarter ended Payment date Distribution amount (cps) stapled and traded together as one security. 30 September 2016 11 November 2016 Accessing information on Arena The Arena website www.arena.com.au provides access to the latest announcements, reports and presentations released by Arena. It also provides information on Arena’s Board and management team, as well as access to information on your investment via the Investor Centre. Receiving information electronically By electing to receive information from Arena electronically, you will receive secure and environmentally friendly email notifications of ASX announcements, distribution and annual tax statements, annual reports and upcoming events. If you wish to register for electronic communications you can log in and update your details online, download the form from the registry website at www.boardroomlimited.com.au/ investor-forms/or call 1800 008 494 to request a form. Managing your investment online You can manage your holding online by registering at the Investor Centre on the Arena website. To register, please call 1800 008 494 and request an online password. Once received, go to the Investor Centre at www.arena.com.au/Investor-Centre and click on ‘Investor Login’ to register. 82 31 December 2016 9 February 2017 31 March 2017 11 May 2017 30 June 2017 10 August 2017 2.925 2.925 3.075 3.075 To ensure timely receipt of your distribution, please consider the following: Direct credit Arena encourages investors to receive distribution payments by direct credit to their nominated bank account. If you wish to register for direct credit or update your payment details you can log in and amend your details online, download the form from the registry website at www.boardroomlimited.com.au/investor- forms/ or call 1800 008 494 to request a form. Dividend and distribution reinvestment plan The dividend and distribution reinvestment plan (DRP) is currently in operation and allows investors to reinvest their distribution payments automatically into additional securities, without brokerage or other transaction costs. Participation is optional and investors can join, vary their participation or withdraw from the DRP at any time. Please visit the Investor Centre www.arena.com.au/ Investor-Centre for further details. Tax File Number (TFN) notification You are not required by law to provide your TFN, Australian Business Number (ABN) or exemption status. However, if you do not provide your TFN, ABN or exemption, withholding tax at the highest marginal rate for Australian resident members may be deducted from distributions paid to you. If you wish to update your TFN, ABN or exemption status, you can log in and amend your details online, download the form from the registry website at www.boardroomlimited.com.au/ investor-forms/ or call 1800 008 494 to request a form. If you are a chess holder, please contact your sponsoring broker. Arena REITAnnual tax statement and 2017 tax guide Arena calendar* An annual tax statement is dispatched to investors in August each year. To assist in completion of your tax return, Arena also publishes an annual tax guide each year. The 2017 tax guide is available for download from the Investor Centre www.arena.com.au/Investor-Centre. Investor feedback or complaints February • Interim results released • Distribution paid for quarter ended 31 December May • Distribution paid for quarter ended 31 March If you have any complaints or feedback, please direct these in writing to: August Arena REIT Locked Bag 32002 Collins Street East Melbourne VIC 8003 Telephone: 1800 008 494 Email: complaints@arena.com.au • Annual results released • Distribution paid for quarter ended 30 June • Annual tax statements dispatched September • Annual Report released If you make a complaint and do not receive a satisfactory outcome, you can contact the Financial Ombudsman Service Limited (FOS), of which Arena is a member, on the details below. FOS is an external dispute resolution scheme approved by the Australian Securities and Investments Commission (ASIC). Please note that FOS will not deal with complaints that have not first been referred to Arena for resolution. • Notice of Annual General Meeting dispatched November • Distribution paid for quarter ended 30 September • Annual General Meeting *The dates listed above are indicative only and subject to change. FOS can be contacted at: Financial Ombudsman Service Limited GPO Box 3 Melbourne VIC 3001 Telephone: 1800 367 287 Email: info@fos.org.au Privacy policy Arena is committed to ensuring the confidentiality and security of investors’ personal information. Arena’s privacy policy, detailing how we handle personal information, is available on the Arena website www.arena.com.au 83 Arena REIT / Annual Report 2017Corporate Directory Arena REIT Limited ACN 602 365 186 Arena REIT Management Limited ACN 600 069 761 AFSL 465754 Registered Office Level 5, 41 Exhibition Street Melbourne VIC 3000 Phone: +61 3 9093 9000 Fax: +61 3 9093 9093 Email: info@arena.com.au Website: www.arena.com.au Directors David Ross (Independent, Non-Executive Chairman) Simon Parsons (Independent, Non-Executive Director) Dennis Wildenburg (Independent, Non-Executive Director) Bryce Mitchelson (Managing Director) Gareth Winter (Executive Director) Company Secretary Gareth Winter Auditor PricewaterhouseCoopers 2 Riverside Quay Southbank VIC 3006 Registry Boardroom Pty Limited Level 12, 225 George Street Sydney NSW 2001 Telephone: 1300 737 760 Investor inquiries and correspondence Arena REIT Locked Bag 32002 Collins Street East Melbourne VIC 8003 Telephone: 1800 008 494 Website: www.arena.com.au Email: info@arena.com.au Stock exchange listing Arena REIT stapled securities are listed on the Australian Securities Exchange (ASX)

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