AR ENA REIT 2 01 9 ANNU A L RE P O RT C ONT ENTS FY19 HIGHLIGHTS CHAIR AND 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 CORPORATE DIRECTORY 4 6 10 12 13 14 15 33 34 38 74 75 80 82 84 2 Further information can be found online at: www.arena.com.au 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). 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. A R E N A R E I T 2 0 1 9 A N N U A L R E P O R T 3 FY19 HIGHLIGHTS Arena REIT is an ASX300 listed group that owns, manages and develops social infrastructure property across Australia. Our objective is to deliver an attractive and predictable distribution to investors with earnings growth prospects over the medium to long term. $59.3m Statutory Net Profit Down 8% on FY18 $37.7m Net Operating Profit Up 9% on FY18 13.8¢ Earnings per security (EPS) Up 5.3% on FY18 13.5¢ Distributions per security (DPS) Up 5.5% on FY18 $825.7m Total assets Up 14% on 30 June 2018 $2.10 Net Asset Value (NAV) per security Up 7% on 30 June 2018 4 3.6% Average like-for-like rental growth $32.4m Revaluation uplift 4.6% increase in value 14.1yrs Weighted average lease expiry (WALE) $72m Acquisitions and development completions in FY19 $798m 25% Market Capitalisation As at 30 June 2019 Per annum, five year total ASX return performance 22.8% 82% Gearing 3.3 years average facility term Interest rate hedge cover 4.8 years weighted average hedge term A R E N A R E I T 2 0 1 9 A N N U A L R E P O R T 5 ARENA REIT 2019 ANNUAL REPORT C HAIR AN D MANA GIN G DIRECTOR’ S REP ORT We are pleased to report that Arena continues to execute on its strategy and has achieved another year of strong financial and operational results for our securityholders. Arena has produced strong earnings and capital growth, successfully delivered development completions, replenished the development pipeline, reduced gearing and increased the average duration of its leases with its tenant partners during financial year 2019 (FY19). These positive outcomes are a result of the quality of Arena’s property portfolio, the proactive approach of Arena’s management team and the strong macro-economic themes that support investment in social infrastructure property. It is also an endorsement of Arena’s disciplined strategy and ability to deliver against our investment objectives. Arena has delivered a one year ASX total return of 34.3% and five year ASX total return of 25% per annum to 30 June 20191. FINANCIAL RESULTS Arena’s net operating profit increased by 8.7% to $37.7 million in FY19. Key contributors to the result were rental income growth from annual rent reviews and income from acquisitions and development projects completed in financial year 2018 (FY18) and FY19. This result represents distributable income (earnings) per security (EPS) of 13.8 cents, an increase of 5.3% over the prior year. Arena has paid a full-year distribution of 13.5 cents per security, an increase of 5.5% on the prior year. Statutory net profit for the year was $59.3 million, 7.9% lower than the prior year, primarily due to the negative revaluation of interest rate hedges during the year. David Ross Chair Rob de Vos Managing Director 34.3 25.0 19.4 17.6 8.4 14.1 12.8 12.9 2.10 1.97 1.84 1.54 13.8 9.7 8.9 1.33 1.13 1 yr 3 yrs p.a. 5 yrs p.a. FY15 FY16 FY17 FY18 FY19 FY14 FY15 FY16 FY17 FY18 FY19 ASX total return performance1 To 30 June 2019 (%) Arena REIT ASX300 A-REIT Accumulation Index Portfolio WALE (years) NAV per security ($) 1. UBS, UBS Australian REIT month in review, June 2019; ASX total return includes security price growth and reinvestment of distributions. 6 66.3 0.7 2.2 1.4 16.9 7.3 5.2 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29 FY30 FY31 FY32+ Lease expiry profile by income (%) Early Learning Healthcare Arena’s total assets increased by 13.8% to $825.7 million as a result of acquisitions, development capital expenditure and the positive revaluation of the portfolio. The revaluation uplift was the primary contributor to the 7% increase in net asset value (NAV) per security to $2.10 at 30 June 2019. P O RTFO LIO OV ERVI EW Portfolio composition At 30 June 2019, Arena’s property portfolio comprised 216 early learning centre (ELC) properties and development sites (85% of portfolio by value) and 10 healthcare properties (15% of portfolio by value). The portfolio is 100% occupied. Acquisition of specialist disability accommodation portfolio During the year Arena acquired a $24 million portfolio of three specialist disability accommodation (SDA) properties in metropolitan Adelaide, all leased to SACARE, a leading provider of disability care and rehabilitation services in South Australia. The acquisition of SDA properties is consistent with Arena’s strategy to grow and diversify its existing healthcare portfolio and further diversify its portfolio of social infrastructure property. The quality of the assets, our tenant partner and the underlying demand for the services they provide are demonstrative of the characteristics Arena seeks when considering such opportunities. Partnership approach to healthcare portfolio lease extension Arena’s healthcare portfolio leases with Healius were extended from an average of 4 years to 14.6 years during FY19 with the expiries on the initial lease terms now staggered from FY29 to FY36. Average annual rental growth of 3.6% Annual rent reviews across the portfolio have recorded an average like-for-like rental increase of 3.6%. Key contributors to this result were 39 market rent reviews completed during FY19 at an average increase of 9.4%2. 2. Ten market rent reviews scheduled for FY19 had not been agreed as at 30 June 2019. “We remain focused on selective new investments that deliver predictable earnings and earnings growth prospects while maintaining our investment discipline.” Weighted average lease expiry increased to 14.1 years Throughout the year the portfolio’s weighted average lease expiry (WALE) was extended from 12.9 years at 30 June 2018 to 14.1 years. The primary drivers of this extension were the renegotiation of leases over the Healius portfolio, property acquisitions and ELC development completions. Arena now has less than 3% of portfolio income subject to expiry over the next eight years. Portfolio revaluation uplift of $32.4 million A revaluation uplift of $32.4 million was recorded across Arena’s portfolio, equivalent to an increase of 4.6%. The portfolio’s weighted average passing yield firmed 14 basis points to 6.38%. ELC acquisitions and development completions Arena acquired five operating ELC properties during FY19 at a net initial yield on cost of 6.7% and average initial lease term of 19 years. Four ELC development projects were completed during FY19 at a net initial yield on cost of 6.4% all on new 20 year leases. 7 ARENA REIT 2019 ANNUAL REPORT CHAIR AND MANAGING DIR E C T O R ’ S R E PO RT c o n t i n u e d via the dividend and distribution reinvestment plan (DRP) during FY19, which remains open. date to fund development capital expenditure and potential new investments. Development pipeline of $50 million Arena acquired eight new ELC development projects during FY19 taking the current development pipeline to nine ELC projects with a forecast total cost of $50 million and an anticipated weighted average initial yield on cost of 6.7%. CA PITAL MAN AG EMENT Increase in debt facility limit Arena increased its total debt facility limit to $280 million though the establishment of an additional $50 million facility during FY19. Arena’s weighted average cost of debt fell to 3.65% as at 30 June 2019 compared with 3.85% as at 30 June 2018. Low risk funding profile Arena raised $50 million via a fully underwritten institutional placement in May 2019 and a further $16.4 million via a security purchase plan in July 2019. An additional $6.5 million was raised Capacity to fund new investment opportunities At 30 June 2019, Arena’s balance sheet debt gearing was 22.8%, compared with 24.7% at 30 June 2018 with undrawn debt capacity of $91.5 million as at balance Financial year 2020 (FY20) distribution guidance Arena has provided FY20 distribution per security (DPS) guidance of 14.3 cents per security3 reflecting growth of 5.9% over last year. CORPORATE GOVERNANCE During FY19, Arena announced the retirement of Bryce Mitchelson and the appointment of his successor Rob de Vos (formerly Arena’s Head of Property) as the new Chief Executive Officer and Managing PO RT FOLIO VAL UAT IONS Number of assets 30 June 2019 valuation Net valuation movement 30 June 2019 passing yield Change No. 216 10 226 $m 676.2 122.1 798.3 $m 21.6 10.8 32.4 % 3.5 12.7 4.6 % 6.44 6.08 6.38 bps (2) (77) (14) ELC portfolio Healthcare portfolio Total portfolio AC QUISITIO NS AND D EVELO P MENT COMPLETION S Operating ELC acquisitions Operating healthcare acquisitions ELC development completions Total/weighted average Number of properties Total cost Initial yield on cost Initial lease terms No. 5 3 4 12 $m 23.0 24.0 25.0 72.0 % 6.7 6.0 6.4 6.4 years 19.0 15.0 20.0 18.1 3. Estimated on a status quo basis assuming no new acquisitions or disposals, developments in progress are completed in line with forecast assumptions, and tenants comply with their lease obligations. 8 Director. We would like to thank Bryce for his leadership of Arena and acknowledge his passion for the business and substantial contribution to the strong performance of Arena since its ASX listing in June 2013. Bryce retires after close to 10 years with Arena and its predecessor business and we wish him all the best. Arena also recently welcomed Ms Rosemary Hartnett as a new non- executive director. Rosemary is currently the independent chair of IPST and has more than 30 years’ experience in the Australian property sector, including extensive senior management experience in property finance, funds management, investment and social enterprise. Rosemary will make a valuable contribution to Arena and her broad experience will complement the Board’s existing mix of skills and experience. OU TLO OK Arena’s outlook is positive and our portfolio remains in a strong position, supported by: t 100% occupancy; t long term predominantly triple net leases with minimum annual rent escalations; t market rent reviews scheduled for FY20 and financial year 2021; t annualisation of FY19 development completions; and t debt capacity to execute on selective new investment opportunities. Demand for high quality and well located early learning and healthcare property continues to be underpinned by growing community demand and supportive domestic macro-economic trends including: t actual and projected population growth4; t record and growing female workplace participation rate5; t strong long day care participation rate6; t improved affordability for early learning from the federal government’s Child Care Subsidy (CCS)7; and t aging population and increased prevalence of chronic health conditions8. Arena remains focused on maximising the quality of its portfolio and sees opportunities to enhance existing properties for increased return, to acquire and develop new high quality assets and sell assets that no longer meet our investment criteria. Arena’s management team has specialist asset management and development expertise and a strong track record that includes the successful delivery of 37 development projects over the past seven years at a total cost of $170 million. Arena continues to differentiate its brand in the marketplace through a partnership approach, working collaboratively with our tenants and business partners. In closing, we are pleased to confirm that Arena is well placed to continue to deliver on its investment objective – to generate attractive and predictable distributions to investors with earnings growth prospects over the medium to long term. On behalf of the Board we would like to thank our investors, tenants and business partners for their ongoing support, and the Arena team for their ongoing commitment and contribution to Arena’s performance. We encourage you to join us for our Annual General Meeting on 22 November 2019 to meet the Board and management team. We will continue to work hard for our securityholders and look forward to reporting to you in FY20. Yours sincerely, David Ross, Chair Rob de Vos, Managing Director 4. ABS Australian Demographic Statistics. 5. ABS Female Labour Force Participation Rate (aged 20-74 at least one dependent child of ELC age). 6. Australian Government ’Early Childhood and Child Care in Summary’ Reports 2012-2018. 7. Arena analysis based on operating data provided by Arena’s tenant partners as at 31 March 2019. 8. ABS National Health Survey. 9 ARENA REIT 2019 ANNUAL REPORT 2 PORTFOLIO SUMMARY AS AT 30 JUNE 2019 Arena’s portfolio of social infrastructure properties is leased to a diversified tenant base in the early learning and healthcare sectors. 226 Total properties – 210 Early Learning Centres – 10 Healthcare – 6 development sites 17 $798.3m Total portfolio value – $676.2m Early Learning Centres – $122.1m Healthcare 5 Early Learning Centres (210 properties) Healthcare (10 properties) ELC development sites (6 properties) 14.1yrs WALE – 14.1 years Early Learning Centres – 14.2 years Healthcare 10 Sector Diversification By value (%) Early Learning 85% Healthcare 15% Geographic Diversification By value (%) 23 7 5 3 1 33 28 Queensland Victoria New South Wales Western Australia South Australia Tasmania Northern Territory Tenant Diversification By income (%) 12 14 11 31 7 5 3 17 Goodstart Early Learning Green Leaves Healius Affinity Education G8 Education Petit Early Learning Oxanda Education Other 11 40 40 1 3 4 5 1 26 1 1 6 3 26 37 1 6 1 ARENA REIT 2019 ANNUAL REPORT C ORPORATE G OVERNAN CE 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: t Communications Policy; t Continuous Disclosure Policy; t Diversity Policy; t Privacy Policy; t Securities Trading Policy; t Summary of Risk Management Framework. 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 2019 Financial Year at: www.arena.com.au/about/governance 12 AR ENA REIT 2 01 9 FI NAN CIAL RE P ORT FO R THE YEAR ENDED 30 JU NE 201 9 CON TENTS DIRECTORS’ REPORT AUDITOR’S INDEPENDENCE DECLARATION FINANCIAL STATEMENTS 15 33 34 Consolidated statement of comprehensive income 34 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 35 36 37 38 74 75 ABO U T THIS RE PORT 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 14 DIREC TOR S’ REPO RT D IRECT ORS ’ 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 2019. The financial report covers ARL, Arena REIT No. 1 (‘ARF1’), Arena REIT No. 2 (‘ARF2’), and their controlled entities. ARF1, ARF2 and ARL are separate entities for which the units and shares have been stapled together to enable trading as one security. The units of ARF1, ARF2 and shares of ARL cannot be traded separately. None of the stapled entities controls any of the other stapled entities, however for the purposes of statutory financial reporting the entities form a consolidated group. D IRECT ORS The following persons held office as directors of ARL during the financial year and up to the date of this report: t David Ross (Chairman) (Independent, non-executive) t Simon Parsons (Independent, non-executive) t Dennis Wildenburg (Independent, non-executive) t Bryce Mitchelson (Executive) (retired from his executive position and resigned from the board on 19 February 2019) t Rob de Vos (Executive) (appointed 19 February 2019) The following persons held office as directors of ARML during the financial year and up to the date of this report: t David Ross (Chairman) (Independent, non-executive) t Simon Parsons (Independent, non-executive) t Dennis Wildenburg (Independent, non-executive) t Bryce Mitchelson (Executive) (retired from his executive position and resigned from the board on 19 February 2019) t Rob de Vos (Executive) (appointed 19 February 2019) t Gareth Winter (Executive) P RIN C IPAL ACT IV ITI ES Arena REIT invests in a portfolio of investment properties and is listed on the Australian Securities Exchange under the code ARF. There were no changes in the principal activities of the Group during the year. D ISTRIB UTIONS TO SE CURITY HOLDERS The following table details the distributions to securityholders declared during the financial year: September quarter December quarter March quarter June quarter 2019 $’000 9,138 9,157 9,179 9,832 2018 $’000 8,570 8,583 8,600 8,619 2019 cps 3.375 3.375 3.375 3.375 2018 cps 3.200 3.200 3.200 3.200 Total distributions to securityholders 37,306 34,372 13.500 12.800 15 ARENA REIT 2019 ANNUAL REPORT OP ERAT ING AND FI NANC IAL RE V IEW 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: t Early learning / child care services; t Healthcare - including medical centres, diagnostic facilities, hospitals, aged care and associated facilities; t Education - including schools, colleges and universities and associated facilities. KE Y FINA NCIAL ME TRIC S 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 30 June 2019 30 June 2018 Change $59.3 million $64.4 million $37.7 million $34.7 million 13.8 cents 13.5 cents 13.1 cents 12.8 cents $825.7 million $725.8 million $798.3 million $699.4 million $188.5 million $179.5 million $610.3 million $531.6 million $2.10 22.8% $1.97 24.7% - 8% + 9% + 5% + 5% + 14% + 14% + 5% + 15% + 7% - 190 bps FY19 H IGHLIGHT S t Net statutory profit was $59.3 million, down 8% on the prior year. This is primarily due to the revaluation of interest rate hedge derivatives compared to the prior year (FY19: $8.6 million; FY18: $0.6 million); t Net operating profit was $37.7 million, up 9% on the previous year; t Distributions for the year were 13.5 cents per security, up 5.5% on the prior year; t NAV per security at 30 June 2019 was $2.10, an increase of 7% on 30 June 2018. This was primarily due to an increase in the value of investment property, offset by the revaluation of derivatives; t Gearing was 22.8% at 30 June 2019, down from 24.7% at 30 June 2018; t The Group completed a fully underwritten Institutional Placement in May 2019, raising $50 million through the issue of 18.7 million securities; t In December 2018, the Group extended the lease term on six healthcare properties leased to Healius Limited (formerly Primary Health Care Limited) for further terms ranging from 10-14 years beyond the previous expiry date. The lease extensions have contributed to an increase in the portfolio WALE to 14.1 years as at 30 June 2019 (30 June 2018: 12.9 years); and t The property portfolio increased with the addition of five Early Learning Centre (‘ELC’) development sites, five operational ELCs, and three specialised disability accommodation properties. During the year, four ELC developments were completed and leases commenced. 16 DIRECTORS’ REPORT continued FY1 9 H IG HLI GHTS c o n t i n u e d Financial results Property income Other income Total operating income Property expenses Operating expenses Finance costs Net operating profit (distributable income)* Non-distributable items: Investment property revaluation and straight-lining of rent Change in fair value of derivatives Profit/(loss) on sale of investment properties Transaction costs Amortisation of equity-based remuneration (non-cash) Other Statutory net profit * Net operating profit (distributable income) is not a statutory measure of profit FIN ANCIAL RESULTS S UMMARY Net operating profit (distributable income) ($’000) Weighted average number of ordinary securities (‘000) Distributable income per security (cents) 30 June 2019 30 June 2018 $’000 $’000 48,744 583 49,327 (360) (3,937) (7,337) 37,693 32,362 (8,619) (223) (474) (1,169) (247) 59,323 42,673 770 43,443 (377) (3,493) (4,883) 34,690 31,591 (553) 30 (566) (830) 70 64,432 30 June 2019 30 June 2018 37,693 273,055 13.80 34,690 264,878 13.10 t 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 cash flow. t 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 four ELC developments completed during the year; – Commencement of rental income following the acquisition of five operational ELCs and three specialised disability accommodation properties during the year; and – The full year effect of acquisitions and developments completed during FY18. t Non-distributable items primarily decreased due to the greater loss on revaluation of derivatives compared to the prior year. 17 ARENA REIT 2019 ANNUAL REPORT INVE STMEN T P ROPERTY P ORT F OLIO 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 2019 30 June 2018 $798.3 million $699.4 million 220 6 – 226 209 5 – 214 100% 100% 14.1 years 12.9 years t The increase in the value of investment properties is primarily due to the addition of: – Property acquisition, development and capital expenditure of $70.9 million; and – A net revaluation increment to the portfolio of $32.4 million for the year, inclusive of straight-lining of rent accrual. t Offset by the following investment property disposals during the year: – One operating ELC was sold during the year with sale proceeds of $4.3 million. CA PITAL MANAG EMENT Equity t During the year, 2.74 million securities were issued at an average price of $2.38 to raise $6.5 million of equity pursuant to the Distribution Re-investment Plan (DRP); t On 27 May 2019, 18,726,592 securities were issued at a price of $2.67 following the completion of a fully underwritten placement to institutional and professional investors; t A Security Purchase Plan (SPP) was offered in June 2019 to eligible investors, in conjunction with the Institutional Placement. Bank facilities & gearing t The Group refinanced its syndicated debt facility during the year, increasing the facility limit by $50 million to $280 million. The Group’s debt facility now comprises a $130 million facility expiring 31 March 2022 and a $150 million facility expiring 31 March 2023, providing a remaining weighted average term of 3.3 years as at 30 June 2019; t The balance drawn increased by $9 million to fund acquisitions and development capital expenditure, offset by Institutional Placement proceeds; t Gearing was 22.8% at 30 June 2019 (30 June 2018: 24.7%); t The Group was fully compliant with all bank facility covenants throughout FY19 and as at 30 June 2019. At 30 June 2019 the Loan to Valuation Ratio was 24.8% (Covenant: 50%) and the Interest Cover Ratio was 5.5 times (Covenant: 2.0 times). Interest rate management t As at 30 June 2019, 82% of Arena REIT borrowings are hedged for a weighted average term of 4.8 years (2018: 78% for 5.9 years). The average swap fixed rate at 30 June 2019 is 2.42% (2018: 2.44%). 18 DIRECTORS’ REPORT continued FY2 0 OU TLOOK The Group has provided FY20 distribution guidance of 14.3 cents per security, which represents an increase of 5.9% on FY19. 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. SIGN IFICANT C HANGE S IN S TAT E 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. MATT ERS S UBSEQUE NT TO T HE END OF THE FINANCIAL YEAR In conjunction with the Institutional Placement, the Group offered a Security Purchase Plan (SPP) to eligible investors in June 2019. $16.37 million was raised through the issue of 6.2 million securities on 1 July 2019. Other than the matter identified above, no other significant events have occurred since 30 June 2019 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. LI KELY DEV ELOPMENT S AND E XPECTED 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. MATERI AL BUSI NESS RI SK S 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 85% invested in ELCs and ELC development sites and 15% in healthcare assets. Adverse events to the early learning 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 2019, 68% of the portfolio by income (excluding developments) is leased to the largest four tenants (Goodstart Early Learning Ltd 31%, Green Leaves Group Ltd 14%, Healius Limited 12% and Affinity Education Group 11%). 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 8(d) for further details on tenancy risk for the portfolio. 19 ARENA REIT 2019 ANNUAL REPORT INFO RMATIO N O N DI REC TOR S The directors at the date of this report are: David Ross, Independent Non-Executive Chairman David has over 30 years’ ASX listed company and corporate experience in the property and property funds management industries in Australia and overseas, including Global and US Chief Executive Officer Real Estate Investments and Chief Executive Officer Asia Pacific for Lend Lease, Chief Executive Officer for General Property Trust and Chief Operating Officer for Babcock and Brown. He is currently an independent non-executive Director at Charter Hall Group and was formerly a non- executive Director of Sydney Swans Foundation Limited. David holds a Bachelor of Commerce from the University of Western Australia, an Associate Diploma in Valuation from Curtin University in Western Australia 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. Dr Simon Parsons, Independent Non-Executive Director Simon has over 35 years’ experience in the commercial property industry including former senior positions and directorships with Property Investment Research, Colliers International, Jones Lang Wootton (now Jones Lang LaSalle) and Parsons Hill Stenhouse. Simon holds a Master of Science (Real Estate), a Master of Social Science (Environment & Planning), and a PhD in land use planning, public policy and land economics. He is a Fellow of both the Royal Institution of Chartered Surveyors (RICS) and the Australian Institute of Company Directors (FAICD). 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 35 years’ experience in the financial services, funds management and property industries including senior management, board and compliance committee roles. Dennis is a member of Chartered Accountants Australia and New Zealand (CA ANZ) 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. Rob de Vos, Executive Director Rob was appointed Managing Director of Arena on 19 February 2019. Rob has over 20 years’ experience in the real estate and property funds management industry including acquisitions, developments, funds management, portfolio management and strategy, with expertise across both traditional and specialised property assets. Prior to joining Arena, Rob held senior roles with Jones Lang LaSalle, Becton Property Group and Ceramic Funds Management. Rob is a licensed real estate agent (VIC) and holds diplomas in Financial Markets and Property Operations. Other current directorships: None. Former directorships in last 3 years: None. 20 DIRECTORS’ REPORT continued IN FO RMATION ON DI REC TOR S c o n t i n u e d Gareth Winter, Executive Director and Company Secretary Gareth was appointed Chief Financial Officer of Arena in March 2012 and Executive Director of Arena REIT Management Limited in December 2014. Gareth was formerly a partner at PricewaterhouseCoopers and has over 25 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 Chartered Accountants Australia and New Zealand (CA ANZ) and holds a Bachelor of Commerce. Other current directorships: None. Former directorships in last 3 years: None. ME ETINGS OF DI REC TORS The number of meetings of the Responsible Entity’s board of directors and of each board committee held during the year ended 30 June 2019, and the number of meetings attended by each director were: ARL Board ARML Board Audit Committee Remuneration & Nomination Committee A 15 15 15 10 6 * B 15 14 15 9 6 * A 16 16 16 11 6 16 B 16 15 16 10 6 16 A 10 10 10 * * * B 10 10 10 * * * A 3 3 3 * * * B 3 3 3 * * * David Ross Simon Parsons Dennis Wildenburg Bryce Mitchelson Rob de Vos Gareth Winter A - Number of meetings held during the time the director held office or was a member of the committee during the year. B - Number of meetings attended. * = Not a member of the relevant board/committee. REM U NERAT IO N RE PO RT The Board’s Remuneration and Nomination Committee (Committee) presents the Remuneration Report which includes information on the remuneration arrangements for Arena’s Key Management Personnel (KMP) for the year ended 30 June 2019. The report has been prepared and audited in accordance with the requirements of the Corporations Act and Regulations. Governance Who are the members of the Committee? What does the Committee do? Who is included in the remuneration report? The Committee is comprised of the independent directors and is chaired by Mr David Ross. Advises the Board on remuneration policy and practices. The Committee also appoints remuneration advisers to review and advise on aspects of a remuneration policy and associated frameworks. The independent non-executive directors; and The Executive KMP: t Mr Rob de Vos - appointed Managing Director on 19 February 2019 (formerly Head of Property); t Mr Gareth Winter – Executive Director & Chief Financial Officer; and t Mr Bryce Mitchelson – retired as Managing Director on 19 February 2019. 21 ARENA REIT 2019 ANNUAL REPORT REMUNERATION RE PORT c o n t i n u e d Key Committee Decisions and remuneration outcomes in FY19 Governance The Committee engaged Conari Partners to undertake an independent review of Arena’s remuneration framework for implementation in FY18. No further changes were introduced in FY19. Remuneration Mix No change in the weighting of at-risk remuneration for Executive KMP in FY19. Total Fixed Remuneration (TFR) Short Term Incentive (STI) Long Term Incentive (LTI) Retirement of Managing Director KMP received an average TFR increase of 3.9% in FY19. 50% of an STI award to Executive KMP is deferred for 1 year with payment delivered in the form of Arena Stapled Securities. Executive KMP were awarded between 70-100% of their FY19 STI opportunity based on the achievement of financial targets, period of service and the assessment of individual performance against non-financial KPIs. The testing of hurdles and other conditions in relation to the FY16 LTI Grant occurred during FY19. The FY16 LTI grant vested in August 2018: t Arena’s FY18 Distributable Income per Security exceeded the performance hurdle range; and t Arena’s 3 year Total Securityholder Return (TSR) of 63% ranked at the 89th percentile of the comparator group comprising the members of the ASX300 A-REIT Index over the performance period. Mr Mitchelson received a termination payment of 9 months TFR for his contractual notice period. In recognition of Mr Mitchelson’s near 10 years of service prior to his retirement on 19 February 2019, the Committee determined that Mr Mitchelson would also retain: t An entitlement to an FY19 STI (50% deferred); t Deferred STI rights granted in respect of his FY18 STI; t LTI performance rights granted in FY17 and a proportion of his FY18 and FY19 LTI performance rights representative of the performance period elapsed (including the notice period) and progress towards achievement of performance hurdles. The vesting of Deferred STI and LTI performance rights will be assessed in conjunction with the normal periodic assessment of performance and other vesting conditions. Key Decisions in respect to FY20 Remuneration and LTI Assessment Governance No change to the remuneration framework is proposed in FY20. Fixed Remuneration (TFR) The Managing Director’s TFR will increase to $500,000 from 1 July 2019 (previously $435,000) in recognition of performance since appointment and comparison to market remuneration. The FY20 STI opportunity will be $333,334 (previously $290,000) based on the target remuneration mix. Short Term Incentive (STI) Deferred STI Rights in respect of the deferred component of the FY19 STI are granted after 30 June 2019. The number of Rights granted is based on the volume weighted average price (VWAP) of Arena Stapled Securities in the 15 days prior to 30 June 2019. Long Term Incentive (LTI) The testing of hurdles and other conditions in relation to the FY17 LTI Grant occurred after 30 June 2019. The FY17 LTI grant will vest in August 2019: t Arena’s FY19 Distributable Income per Security exceeded the performance hurdle range; and t Arena’s 3 year TSR of 66% ranked at the 68th percentile of the comparator group comprising the members of the ASX300 A-REIT Index over the performance period. 22 DIRECTORS’ REPORT continued RE MUNERAT ION RE PORT c o n t i n u e d Executive KMP Remuneration Framework linked to performance Executive KMP Remuneration Framework Objectives Attract, retain and incentivise Executive KMP Align remuneration to performance and strategy t Market competitive rewards t Incentivise with opportunity for performance based pay t Generate market competitive returns for securityholders t Assess incentives against financial and non-financial measures aligned with strategy and values t Deliver a meaningful component of KMP remuneration in the form of equity subject to performance hurdles Remuneration Components Fixed Remuneration STI (variable) LTI (variable) t Base level of annual remuneration t Set based on role, experience and qualifications t Market data of comparable organisations considered t Generally reviewed annually t Performance based focused on t Performance based aligned with security holder returns t Discretionary participation t Opportunity based on a percentage of fixed remuneration t 3 year performance period t Payable in equity to align KMP and securityholders t Vesting determined by performance against Distributable Income Target and Relative TSR ranking against the members of the ASX300 AREIT Index t Independently assessed fair value used to allot LTI opportunity and the face value of LTI opportunity disclosed to securityholders t Taking into consideration circumstances over the course of the performance period, the Board has discretion to reduce, cancel or increase LTI payments business plan objectives including delivery of distributions to securityholders t Discretionary participation t Opportunity based on a percentage of fixed remuneration t Financial measures based on DPS and an EPS growth target t Non-financial measures consider role and objectives of the organisation to which they are expected to contribute t Non-financial objectives based on leadership, strategy development and execution, risk management, funding, liquidity, people, culture and values, stakeholder management, key relationships, and project delivery t Payable 50% in cash and 50% in equity with vesting of equity component deferred for 1 year t Taking into consideration circumstances over the course of the financial year, the Board has discretion to reduce, cancel or increase STI payments 23 ARENA REIT 2019 ANNUAL REPORT REMUNERATION RE PORT c o n t i n u e d Executive KMP Remuneration Mix At Risk Performance Based Remuneration Cash Equity STI % 15 12.5 Deferred STI % 15 12.5 15 15 LTI % 25 25 25 TFR % 45 50 45 Executive KMP Robert de Vos Gareth Winter Former Executive KMP Bryce Mitchelson Executive KMP Employment Agreements Contract duration Ongoing Termination by the Executive KMP Managing Director: 9 months’ notice Chief Financial Officer: 6 months’ notice. Unvested STI or LTI entitlements lapse unless the Board determines otherwise. Termination by Arena REIT without cause, mutually agreed resignation, retirement or other circumstance Standard notice period applies or equivalent payment in lieu of notice based on TFR. Unvested STI or LTI 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 (for time and performance). The Board may lapse an award in full and also allow accelerated vesting in special circumstances subject to termination benefit rules. Termination by Arena REIT for cause No notice period or termination payment unless the board determines otherwise. Unvested STI or LTI entitlements lapse unless the Board determines otherwise. Post-employment restraints Restrained from soliciting suppliers, customers and staff for the term of the relevant notice period post-employment. Performance & Variable Remuneration Outcomes 5 Year Performance Indicators Metric Net Profit (Statutory) Distributable Income Distributable Income per Security Distributions per Security Net Asset Value per Security ASX Security Price at 30 June Gearing Annual Total Shareholder Return (TSR) Annual TSR of ASX-300 A-REIT Index FY19 FY18 FY17 FY16 FY15 $m $m cents cents $ $ % % % 59.3 37.7 13.8 13.5 2.10 2.74 22.8 34.3 11.4 64.4 34.7 13.1 12.8 1.97 2.15 24.7 1.2 13.2 96.8 28.7 12.3 12.0 1.84 2.25 27.5 19.8 (5.6) 72.6 25.6 11.1 10.9 1.54 1.99 26.8 37.6 24.6 61.0 22.1 10.2 10.0 1.33 1.54 29.1 36.3 20.2 24 DIRECTORS’ REPORT continued RE MUNERAT ION RE PORT c o n t i n u e d Executive KMP FY19 STI Performance Measures and Assessment STI Financial Objective Underlying Profit Performance: t Deliver a minimum FY19 Distribution of 13.5 cents per security (5.5% increase on FY18) t Achieve a stretch target distributable income per security Result Achieved Achieved Executive KMP FY19 STI Awards Executive KMP Robert de Vos Gareth Winter Former Executive KMP Bryce Mitchelson4 Award as a % of STI Opportunity1 % 100 100 STI Award $ 243,334 187,500 Cash Component Equity Component2,3 $ $ 121,667 93,750 121,667 93,750 250,000 70 125,000 125,000 1. The Board awards STIs based on a performance assessment of financial and individual non-financial objectives. An STI opportunity not awarded is forfeited. 2. Number of Deferred STI Rights which convert into Arena Stapled Securities on meeting vesting conditions. The number of rights is based on dividing the value of the award by the VWAP of Arena Stapled Securities in the 15 days prior to the end of the financial year. 3. Deferred STI Rights do not receive cash distributions. However, additional rights will be granted equivalent to the distribution paid on Arena Stapled Securities during the 12 month deferral period. 4. Bryce Mitchelson retired as Managing Director on 19 February 2019. 25 ARENA REIT 2019 ANNUAL REPORT REMUNERATION RE PORT c o n t i n u e d LTI Performance Measures and Assessment Performance Measurement Period LTI Performance Measure4 LTI Year FY16 FY16 – FY18 Relative TSR1 FY18 DIS2,3 FY17 FY17 – FY19 Relative TSR1 Performance Hurdle Result 50% of rights vest at the 50th percentile; with pro rata vesting until 100% vesting at the 75th percentile. Arena’s TSR of 63% ranked at the 89th percentile of the comparator group over the Performance Measurement Period. Target range of 11.5 cents to 12.5 cents5 Target range exceeded. Actual DIS of 13.1 cents 50% of rights vest at the 50th percentile; with pro rata vesting until 100% vesting at the 75th percentile. Arena’s TSR of 66% ranked at the 68th percentile of the comparator group over the Performance Measurement Period. Vesting Outcome6 100% 100% 100%7 FY19 DIS2,3 Target range of 12.5 cents to 13.25 cents5 Target range exceeded. Actual DIS of 13.8 cents 100% FY18 FY18-FY20 Relative TSR1 FY20 DIS2,3 FY19 FY19-FY21 Relative TSR1 FY21 DIS2,3 50% of rights vest at the 50th percentile; with pro rata vesting until 100% vesting at the 75th percentile. N/A Target range of 13.5 cents to 14.25 cents5 50% of rights vest at the 50th percentile; with pro rata vesting until 100% vesting at the 75th percentile. N/A Target range of 14.3 cents to 15.0 cents5 1. Relative TSR versus a comparator group comprising the members of the ASX300 A-REIT Index at the commencement of each 3 year performance period (assuming reinvestment of distributions). Relative TSR performance reduces the effect of market cycles as it measures Arena’s performance relative to its peers. 2. DIS (Distributable Income per Security) is a key performance indicator referenced by the Board in preparing business plans and measuring Arena’s performance. DIS is determined in accordance with Arena’s Distribution Policy. 3. The DIS performance hurdle is based on a target range assessed in the final year of a three year performance period. 4. A 50% weighting is attributed to each performance measure. 5. 50% vesting at the threshold of the target range plus progressive pro-rata vesting between 50% and 100% (ie on a straight-line basis) with 100% vesting at or above the upper target. 6. The Board retains full discretion in respect of the LTI award including adjust the conditions and / or performance outcomes 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 items. 7. Based on a TSR ranking at the 68th percentile of the comparator group as at 30 June 2019, 93% of the FY17 LTI would have vested. The Committee noted that Arena’s TSR was ranked at the 84th percentile of the comparator group as at 20 May 2019, being the day prior to undertaking an Institutional Placement and announcing a Security Purchase Plan which collectively raised $66.4 million to support future investment and growth opportunities. The Committee is of the view that the capital raisings undertaken for the benefit of securityholders has influenced the short term relative performance of Arena in the period between 20 May 2019 and 30 June 2019 and this impacted the outcome. On that basis, and in recognition of the strong operating performance over the duration of the 3 year performance period, the Committee recommended to the Board that it exercise discretion in respect of the TSR outcome and award 100% to the Executive KMP. 26 DIRECTORS’ REPORT continued RE MUNERAT ION RE PORT c o n t i n u e d Executive KMP Remuneration Summary (Actual Amounts Received)1 Short Term Benefits Equity Based Payments3 Salary2 Cash STI Non- Monetary Benefits LTI Performance Rights LTI Recognition Rights Termination Accrued Leave Entitlements $ $ $ $ Executive KMP Robert de Vos FY19 FY18 371,304 96,000 320,000 147,250 11,862 10,615 Gareth Winter FY19 FY18 375,000 81,000 360,000 120,909 11,862 10,615 261,155 142,979 271,313 157,275 $ – 73,443 – 80,788 $ – – – – $ – – – – Total $ 740,321 694,287 739,175 729,587 Former Executive KMP Bryce Mitchelson4 FY19 FY18 350,310 147,333 520,000 227,250 7,627 12,116 586,516 339,575 – 401,250 241,070 1,734,106 174,427 – – 1,273,368 1. Voluntary disclosure of actual remuneration received by Executive KMP. It does not align with information required by accounting standards. 2. Salary includes mandatory superannuation contributions. 3. The value of vested equity based payments is based on the ASX price of an Arena Stapled Security on the date of issue of a stapled security. 4. Mr Mitchelson retired as Managing Director on 19 February 2019. Executive KMP Remuneration measured in accordance with accounting standards (statutory) Short Term Benefits Equity Based Payments Salary1 Cash STI Non- Monetary Benefits Deferred STI Rights LTI Performance Rights Long Service Leave Termination Total $ $ $ $ $ $ Executive KMP Robert de Vos FY19 FY18 371,304 121,667 320,000 96,000 Gareth Winter FY19 FY18 375,000 93,750 360,000 81,000 11,862 10,615 11,862 10,615 114,045 48,000 172,854 111,495 91,768 40,500 175,418 116,620 22,065 10,552 11,531 9,427 $ – – – – $ 813,797 632,370 759,329 652,260 Former Executive KMP Bryce Mitchelson FY19 FY18 350,310 125,000 520,000 147,333 7,627 12,116 206,662 73,667 367,680 221,566 3,895 11,489 401,250 1,462,424 – 1,026,573 1. Salary includes mandatory superannuation contributions. 27 ARENA REIT 2019 ANNUAL REPORT REMUNERATION RE PORT c o n t i n u e d Executive KMP Statutory Remuneration Mix1,2 Executive KMP Robert de Vos Gareth Winter Former Executive KMP Bryce Mitchelson TFR % 47 51 34 STI % 29 24 31 LTI % 24 25 35 1. Variation between TMR and actual remuneration mix is a result of non-vesting of opportunities and timing differences between granting an LTI and the amortisation for accounting of the LTI expense over the vesting period. 2. Excludes amounts paid on termination. Executive KMP Interests in Securities Ordinary Stapled Securities Balance 30 June 2018 Acquired Disposed Received as Remuneration Other Changes1 Balance 30 June 2019 No. No. No. No. No. No. Executive KMP Robert de Vos Gareth Winter 134,606 185,357 Former Executive KMP Bryce Mitchelson 1,012,530 – – – – – – 110,192 114,478 – – 244,798 299,835 247,475 (1,260,005) – 1. Represents the balance of securities held on the date ceased to be an Executive KMP. Deferred STI Rights Year1 Opening Balance Rights Granted2 Rights Vested Rights Lapsed Closing Balance Grant Value3 No. No. No. No. No. $ Executive KMP Robert de Vos Gareth Winter Former Executive KMP Bryce Mitchelson FY18 FY18 FY18 – – – 43,636 36,818 66,970 – – – – – – 43,636 36,818 96,000 81,000 66,970 147,333 1. Represents the period in respect of which the STI was awarded. The actual grant of Deferred STI Rights occurs in the following financial year. 2. 50% of total STI award divided by the 15 day VWAP to the end of the relevant financial year (FY18 $2.20). 3. Represents the value of the STI award at grant date. This also represents a reasonable estimation of the fair value of the grant as Deferred STI Rights are entitled to distribution equivalents during the 12 month vesting period. 28 DIRECTORS’ REPORT continued RE MUNERAT ION RE PORT c o n t i n u e d LTI Performance Rights5,6,7,8 Grant Year Opening Balance Rights Granted1,2 Rights Vested3 Rights Lapsed Closing Balance Fair Value at Grant Date2 Face Value at Grant Date4 No. No. No. No. No. $ $ Executive KMP Robert de Vos Gareth Winter FY19 FY18 FY17 FY16 FY19 FY18 FY17 FY16 – 139,410 119,314 120,156 110,192 – – – – 140,450 120,805 123,326 114,478 – – – Former Executive KMP Bryce Mitchelson FY19 – 222,638 FY18 FY17 FY16 193,885 195,736 247,745 – – – – – – (110,192) – – – (114,478) – – – (247,745) – – – – – – – – 139,410 119,314 120,156 – 140,450 120,805 123,326 – $186,112 $299,732 $177,779 $155,000 $109,090 $268,457 $240,312 $173,001 $187,500 $301,968 $180,000 $159,091 $113,333 $271,811 $246,652 $179,730 (111,319) 111,319 $297,222 $478,672 (38,777) 155,108 – – 195,736 – $288,890 $252,500 $245,000 $436,241 $391,472 $388,536 1. LTI opportunity divided by an independent valuation of the fair value of a Performance Right as at the grant date. 2. FY19 Grants have a grant date of 1 July 2018 and a vesting date of 30 June 2021. The Fair Value per Right of $1.335 was determined by an independent valuation. Refer to Note 23 of the financial report for information on the valuation inputs. 3. Testing of the performance and other hurdles in relation to the Rights issued in FY16 occurred post 30 June 2018. Vesting of Rights in accordance with the FY17 LTI assessment will be reflected in FY20. 4. Number of Rights granted multiplied by the security price on the relevant grant date. If Rights vest (subject to performance and other conditions), the security price on the date of issue of securities may be higher or lower than grant date. The value of the unvested Rights may be nil if the vesting conditions are not met and the rights lapse. 5. Distributions are not paid on unvested LTI awards; 6. No payment is required on issue of performance rights or stapled securities respect of a vested performance right; 7. 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 will 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); 8. 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. 29 ARENA REIT 2019 ANNUAL REPORT REMUNERATION RE PORT c o n t i n u e d Non-Executive Director Remuneration Framework How are Non-Executive Director fees set? 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. Who approves the fees? Each non-executive director of Arena REIT is paid an amount determined by the Board. Non- executive directors do not receive any equity based payments, retirement benefits or incentive payments. Is there a maximum fee? Non-Executive Director fees are subject to a maximum aggregate amount approved by securityholders of $650,000 per annum. FY19 Board and Committee Fees Board Fee1 Audit Committee $ 199,000 101,000 $ 10,000 5,000 Remuneration & Nomination Committee $ 10,000 5,000 Chairman Member 1. The Board fee received by the Chairman of the Board is inclusive of all Committee fees. 2. All Fees are inclusive of Superannuation. Non-Executive Director Reported Remuneration (statutory) Fee1 $ 199,000 193,000 111,000 108,000 116,000 113,000 David Ross (Chairman) Simon Parsons Dennis Wildenburg FY19 FY18 FY19 FY18 FY19 FY18 1. Fee includes mandatory superannuation contributions Non-Executive Director Security Holdings Balance 30 June 2018 Acquired Disposed Balance 30 June 2019 No. No. No. No. 200,000 204,079 154,079 – – – – – – 200,000 204,079 154,079 Ordinary Securities David Ross Simon Parsons Dennis Wildenburg 30 DIRECTORS’ REPORT continued IN DEMNI FIC ATI ON AND I NS URAN CE 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. NO N-AUDIT SERV ICE S Details of the non-audit services provided to the Group by the Independent Auditor during the year ended 30 June 2019 are disclosed in note 24 of the financial statements. FE ES PAID TO AND IN TERES T S HELD IN THE GROUP BY THE RESPONSIB LE E NTITY OR I TS ASSOCI AT ES Fees paid to the Responsible Entity and its associates out of Group property during the year are disclosed in note 22 of the financial statements. IN TERESTS IN THE G ROUP The movement in securities on issue in the Group during the year is disclosed in note 13 to the financial statements. CO RPORATE G OV ERNANC E S TATEMEN T 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. The Group conducts its business in accordance with these policies and code, as well as other key policies which are published on its website. These include: t Communications Policy; t Continuous Disclosure Policy; t Diversity Policy; t Privacy Policy; t Securities Trading Policy; t Summary of Risk Management Framework. In compliance with ASX Listing Rule 4.10.3, the Group 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. E NVIRO NMENTAL REG ULATI ON The operations of the Group are not subject to any particular or significant environmental regulations under a Commonwealth, State or Territory law. 31 ARENA REIT 2019 ANNUAL REPORT ROUN DING OF AMOUNTS TO T HE NEAREST THOUSAND DOLLAR S 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 IND EPE ND ENCE D E CLA RAT ION The Auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 33. This report is made in accordance with a resolution of directors. David Ross, Chairman Melbourne, 13 August 2019 32 DIRECTORS’ REPORT continued AU DITOR’ S INDEPEND ENCE DEC LARATIO N Auditor’s Independence Declaration As lead auditor for the audit of Arena REIT No. 1 for the year ended 30 June 2019, 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. Charles Christie Partner PricewaterhouseCoopers Melbourne 13 August 2019 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. 33 ARENA REIT 2019 ANNUAL REPORT CON SOLIDATED STATEMENT OF C OMPREHENS IVE I NCOME For the year ended 30 June 2019 Income Property income Management fee income Interest Realised gain on sale of investment properties Revaluation of investment properties Total income Expenses Property expenses Management and administration expenses Net (loss)/gain on change in fair value of derivative financial instruments 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 June2019 30 June 2018 Notes $’000 $’000 8(c) 55,235 47,785 372 206 – 25,964 81,777 (453) (5,375) (8,619) (7,337) (670) 411 429 30 26,479 75,134 (377) (4,300) (553) (5,183) (289) (22,454) (10,702) 59,323 – 59,323 45,995 14,404 (1,076) 59,323 Cents 16.84 16.74 21.73 21.59 64,432 – 64,432 58,593 6,287 (448) 64,432 Cents 22.12 21.99 24.33 24.18 8 8(c) 3 5 5 5 5 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 34 CON SOLIDATED BALAN C E SHEE T As at 30 June 2019 Current assets Cash and cash equivalents Trade and other receivables Total current assets Non-current assets Receivables Property, plant and equipment Investment properties Intangible assets Total non-current assets Total assets Current liabilities Trade and other payables Provisions 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 2019 30 June 2018 Notes $’000 $’000 6 7 7 8 9 10 12 11 13 8,134 7,711 15,845 603 139 798,318 10,816 809,876 825,721 8,364 167 9,832 18,363 9,180 278 187,570 197,028 215,391 610,330 306,368 204,155 99,807 610,330 8,654 6,146 14,800 668 154 699,409 10,816 711,047 725,847 5,887 312 8,619 14,818 561 334 178,491 179,386 194,204 531,643 259,780 190,618 81,245 531,643 35 The above consolidated balance sheet should be read in conjunction with the accompanying notes. ARENA REIT 2019 ANNUAL REPORT CON SOLIDATED STATEMENT OF C HA NGES IN E QUIT Y Contributed equity Accumulated profit $’000 $’000 202,179 – – 3,773 45,478 8,350 – – 161,929 58,593 58,593 – – – (29,904) – Consolidated Non-controlling interests - ARL & ARF2 Total equity $’000 68,368 5,839 5,839 568 8,544 1,564 (4,468) 830 $’000 432,476 64,432 64,432 4,341 54,022 9,914 (34,372) 830 259,780 190,618 81,245 531,643 259,780 – – 5,640 40,948 – – 190,618 45,995 45,995 – – (32,458) – 81,245 13,328 13,328 849 8,064 (4,848) 1,169 531,643 59,323 59,323 6,489 49,012 (37,306) 1,169 306,368 204,155 99,807 610,330 Balance at 1July 2017 Profit for the year Total comprehensive income for the year Transactions with owners in their capacity as owners: Issue of securities under the DRP Issue of securities under the Institutional Placement Issue of securities under the Security Purchase Plan Distributions to securityholders Equity-based remuneration Balance at 30 June 2018 Balance at 1July 2018 Profit for the year Total comprehensive income for the year Transactions with owners in their capacity as owners: Issue of securities under the DRP Issue of securities under the Institutional Placement Distributions to securityholders Equity-based remuneration Balance at 30 June 2019 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 36 CO NS OLI DATED STAT EMENT OF C ASH FLO WS Consolidated 30 June 2019 30 June 2018 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 16 Cash flows from investing activities Proceeds from sale of investment properties Payments for investment properties and capital expenditure Net cash (outflow) from investing activities Cash flows from financing activities Net proceeds from issue of securities Distributions paid to securityholders Loan establishment costs paid Capital receipts from lenders Capital payments to lenders Net cash inflow 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 6 54,523 (10,786) (7,076) 206 36,867 3,518 (69,143) (65,625) 48,973 (29,565) (170) 59,000 (50,000) 28,238 (520) 8,654 8,134 47,658 (9,430) (4,837) 409 33,800 7,120 (83,034) (75,914) 63,908 (28,607) (1,093) 23,500 (16,022) 41,686 (428) 9,082 8,654 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 37 ARENA REIT 2019 ANNUAL REPORT CON TENTS NOTE S TO TH E FI NANCI AL S TAT E MENT S 1 General information FINANCIAL RESULTS, ASSETS AND LIABILITIES 2 3 4 5 6 7 8 9 10 11 Segment information Finance costs Income taxes Earnings per security (‘EPS’) Cash and cash equivalents Trade and other receivables Investment properties Intangible assets Trade and other payables Interest bearing liabilities 12 Derivative financial instruments 13 Contributed equity 14 Accumulated profit 15 Non-controlling interests 16 Cashflow information RISK 17 Financial risk management and fair value measurement 18 Capital management GROUP STRUCTURE 19 Investments in controlled entities UNRECOGNISED ITEMS 20 Contingent assets and liabilities and commitments 21 Events occurring after the reporting period FURTHER DETAILS Related party disclosures Equity-based remuneration Remuneration of auditors Parent entity financial information Summary of other significant accounting policies 22 23 24 25 26 38 39 41 41 42 43 44 44 46 50 50 51 53 54 55 56 57 58 62 63 63 63 64 65 67 67 68 NO TES TO TH E C ON SO LIDATED FINANC IAL STATEMENTS 1. G ENE RAL I NFOR MATI ON 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 13 August 2019. The directors have the power to amend and reissue the financial statements. (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. Arena REIT is a for-profit unit trust for the purpose of preparing the financial statements. The financial report has been prepared on an accruals and historical cost basis except for investment properties, financial assets at fair value through profit or loss, derivative financial instruments which are measured at fair value, and assets held for sale which are recognised at fair value less costs to sell. Cost is based on the fair value of consideration given in exchange for assets. Comparative information is reclassified where appropriate to enhance comparability. Compliance with International Financial Reporting Standards The financial statements of the Group also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. Going Concern As at 30 June 2019, the Group had a net working capital deficiency of $2.5 million. This deficiency is due to working capital management within the Arena stapled group, and the difference in the timing of drawdowns from the Group’s debt facility and the timing of capital expenditure on developments and asset acquisitions. As at the date of this report, the Group has in excess of $90 million of unused debt facility which can be drawn to fund cashflow requirements. After taking into account all available information, the directors of the Group have concluded that there are reasonable grounds to believe: t The Group will be able to pay its debts as and when they fall due; and t The basis of preparation of the financial report on a going concern basis is appropriate. (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 2018: t AASB 9 Financial Instruments t AASB 15 Revenue from Contracts with Customers The impact of the adoption of these standards is summarised below: AASB 9 Financial Instruments The revised AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial instruments and introduces new rules for hedge accounting. As the Group classifies its investments at fair value 39 ARENA REIT 2019 ANNUAL REPORT 1. GENERAL INFORMATI ON c o n t i n u e d through profit or loss and does not apply hedge accounting, there is no impact to the Group due to the adoption of this standard. In December 2014, the AASB also introduced a new impairment model (an expected credit loss model). As the impairment requirements of AASB 9 do not apply to financial assets at fair value through profit or loss and the Group also has a history of recovering all trade debtors, there is no impact on the financial statements due to the adoption of this standard. AASB 15 Revenue from Contracts with Customers 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 previous notion of risk and reward. The Group’s primary source of income is rent from investment properties, which is excluded from the scope of AASB 15 as it falls within the scope of AASB 140 Investment Property. The Group has assessed the impact of the application of AASB 15 and concludes that it does not have any material revenue streams within the scope of AASB 15. Therefore the adoption of this standard has no material impact on the financial statements. (b) Critical accounting estimates and judgements The Group makes estimates and judgements 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. Estimates and judgements which are material to the financial report are found in the following notes: t Investment properties – Note 8 t Impairment of goodwill – Note 9 t Financial instruments – Notes 12,17 40 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued F IN AN CIAL RESULTS, ASSETS AND LIAB ILITIE S This section provides additional information about those individual line items in the financial statements that the directors consider most relevant in the context of the operations of the Group, including: (a) accounting policies that are relevant for an understanding of the items recognised in the financial statements (b) analysis and sub-totals (c) information about estimates and judgements made in relation to particular items. 2. SEGMENT I NFORMAT ION 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 Board (as 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. 3. FINANC E COS TS 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 (a) Accounting policy - Finance costs Consolidated 30 June 2019 30 June 2018 $’000 $’000 7,008 329 – 7,337 478 7,815 4,646 237 300 5,183 1,498 6,681 Finance costs include interest and amortisation of costs incurred in connection with the arrangement of borrowings. Finance 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 for the acquisition, construction or production of a qualifying asset, the finance costs capitalised are those incurred in relation to that qualifying asset. 41 ARENA REIT 2019 ANNUAL REPORT 4. INC O M E TAXE S 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 Tax at the applicable Australian tax rate of 27.5% (2018 - 27.5%) Profit attributable to entities not subject to tax Deferred tax assets not recognised Income tax expense Consolidated 30 June 2019 30 June 2018 $’000 $’000 (59,323) 16,314 16,610 (296) – (64,432) 17,719 17,842 (123) – Unrecognised deferred tax assets are $0.3 million (2018: $0.1 million). These have not been recognised as it is not probable that future taxable profit will arise to offset these deductible temporary differences. (b) Accounting policy - 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. 42 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 4. INC O ME TA XES c o n t i n u e d (iii) Tax consolidation legislation ARL 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, ARL, 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, ARL 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 ARL. As there is no tax sharing agreement in place the current tax receivable or payable is transferred from each controlled entity to ARL as a contribution to (or distribution from) wholly owned entities. 5. EARNI NGS P ER SEC URI TY(‘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 2019 Cents 16.84 16.74 21.73 21.59 2018 Cents 22.12 21.99 24.33 24.18 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 Rights granted under employee incentive plans Adjusted weighted average number of ordinary securities used in calculating diluted EPS 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 2019 2018 Number of securities Number of securities ‘000 ‘000 273,055 1,730 274,785 264,878 1,615 266,493 30 June 2019 30 June 2018 $’000 45,995 45,995 59,323 59,323 $’000 58,593 58,593 64,432 64,432 43 ARENA REIT 2019 ANNUAL REPORT 5. E ARN ING S PER SE CURI TY (‘EP S ’) c o n t i n u e d (a) Accounting policy - earnings per security (i) Basic earnings per security Basic earnings per security is calculated by dividing: t the profit attributable to the securityholders, excluding any costs of servicing equity other than ordinary securities; t 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: t the effect of interest and other financial costs associated with dilutive potential ordinary securities; t the weighted average number of additional ordinary securities that would have been outstanding assuming the conversion of all dilutive potential ordinary securities. 6. CASH AND CAS H EQ UI VAL EN T S Cash at bank Total cash and cash equivalents Consolidated 30 June 2019 30 June 2018 $’000 8,134 8,134 $’000 8,654 8,654 (a) Accounting policy - 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. 7. TRADE AND OT HER R ECE I VAB L ES (a) Trade and other receivables - Current Consolidated 30 June 2019 30 June 2018 $’000 258 6,418 975 60 7,711 $’000 192 5,510 364 80 6,146 Trade receivables Other receivables Prepayments Deferred management fees receivable 44 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 7. TR A DE AND OT HER RECEI VABLES c o n t i n u e d Other receivables as at 30 June 2019 includes $4.3 million of sales proceeds payable to the Group following the disposal of an ELC asset in June 2019 (30 June 2018: $3.6 million). (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 Impairment Gross Impairment 2019 $’000 233 – 25 – – 258 2019 $’000 – – – – – - 2018 $’000 60 132 – – – 192 2018 $’000 – – – – – - 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 Consolidated 30 June 2019 30 June 2018 $’000 603 $’000 668 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 30 June 2019 30 June 2018 Carrying amount $’000 603 Fair value $’000 603 Carrying amount $’000 668 Fair value $’000 668 45 ARENA REIT 2019 ANNUAL REPORT 7. TRADE AND OT HER R ECE I VAB L ES c o n t i n u e d (c) Accounting policy - Receivables Receivables may include amounts for interest and trust distributions. 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. 8. INV ESTMENT PR OP ERTI E S (a) Valuations and carrying amounts Property Portfolio Carrying amount Latest external valuation ELC properties ELC developments Healthcare properties Total 2019 $’000 662,692 13,492 122,134 2018 $’000 596,678 17,338 85,393 2019 $’000 639,470 9,055 109,770 798,318 699,409 758,295 2018 $’000 551,225 9,420 80,400 641,045 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 40 Early Learning Centres (‘ELC’) as at 31 December 2018, and a further 45 ELCs and two healthcare centres as at 30 June 2019. The directors have reviewed these valuations and has determined they are appropriate to adopt during the financial period ending 30 June 2019. Director valuations were performed on investment properties not independently valued. The key inputs into valuations are: t Passing rent; t Market rents; t Capitalisation rates; t Lease terms; t Discount rates (healthcare properties); and t Capital expenditure and vacancy contingencies (healthcare properties). 46 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 8. INVE STMENT P ROPERTI ES c o n t i n u e d The key inputs into the valuation are based on market information for comparable properties. The majority of early learning 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 (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 Property income Other property income (recognised on a straight line basis) Direct operating expenses from property that generated property income Revaluation gain on investment properties 30 June 2019 30 June 2018 $1,600 to $5,000 $1,500 to $5,000 5.0% to 8.25% 5.0% to 8.5% 4.5% to 9.0% 4.0% to 9.0% 30 June 2019 30 June 2018 5.25% to 6.50% 6.0% to 7.0% 5.50% to 6.75% 6.0% to 7.75% Consolidated 30 June 2019 30 June 2018 $’000 $’000 699,409 591,712 70,936 (4,455) 25,964 6,464 80,498 (4,402) 26,479 5,122 798,318 699,409 Consolidated 30 June 2019 30 June 2018 $’000 48,744 6,491 (453) 25,964 $’000 42,673 5,112 (377) 26,479 47 ARENA REIT 2019 ANNUAL REPORT 8. INV ESTMENT PR OP ERTI E S c o n t i n u e d (d) Tenancy risk Set out below are details of the major tenants who lease properties from the Group: t Goodstart Early Learning Ltd (‘Goodstart’) - representing 31% 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. t Green Leaves Group Limited (‘Green Leaves’) - representing 14% of the Group’s investment property portfolio by income. Green Leaves is a privately held provider of early childhood education, owning and operating approximately 30 ELCs throughout Australia. t Healius Limited (‘Healius’) - representing 12% of the Group’s investment property portfolio by income. Healius is an ASX listed company and a major operator of multi-disciplinary medical clinics throughout Australia. Healius leases property from the Group through a wholly-owned subsidiary, providing a corporate guarantee from the listed entity to provide security for their performance under the leases. t Affinity Education Group Limited (‘Affinity’) - representing 11% of the Group’s investment property portfolio by income. Affinity is a privately held provider of early childhood education, owning and operating over 150 ELCs throughout Australia. Other Tenants Operator G8 Education Petit Early Learning Journey Oxanda Education % of Investment Property Portfolio by Income 7% 5% 3% All of the above tenants are ELC operators. G8 Education is listed on the Australian Securities Exchange. The other tenants are privately owned with experience operating ELCs. 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 of the lease, for an amount generally equivalent to six months’ rent (plus GST) as security for their performance under the lease. (e) Assets pledged as security Refer to note 11 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 2019 30 June 2018 $’000 13,770 $’000 7,178 The above commitments include the costs associated with developments, and the acquisition of early learning properties. 48 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 8. INVE STMENT P ROPERTI ES c o n t i n u e d (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 2019 30 June 2018 $’000 $’000 50,348 212,812 591,779 854,939 44,415 182,820 460,790 688,025 (h) Accounting policy - 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. 49 ARENA REIT 2019 ANNUAL REPORT 9. INTA NGI BLE AS S ETS Goodwill Consolidated 30 June 2019 30 June 2018 $’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 Arena REIT 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: t growth rates set in the range of 2% to 3% per annum; and t cash flows are discounted at a rate of 6.76% 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. (a) Accounting policy - 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. 10. TR A DE AND OT HER PAYABLE S Consolidated 30 June 2019 30 June 2018 $’000 2,128 6,236 8,364 $’000 1,640 4,247 5,887 Prepaid rental income Sundry creditors and accruals Trade and other payables are non-interest bearing. 50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 11. INTE REST BE AR ING LI A BI LI TIES Non-current: Secured Syndicated facility Unamortised transaction costs Total secured non-current borrowings (a) Financing arrangements Consolidated 30 June 2019 30 June 2018 $’000 $’000 188,500 (930) 179,500 (1,009) 187,570 178,491 Consolidated 30 June 2019 30 June 2018 $’000 $’000 Committed facilities available at the end of the reporting period Interest bearing liabilities 280,000 230,000 Facilities used at the end of the reporting period Interest bearing liabilities 188,500 179,500 The Group refinanced its syndicated debt facility during the year, increasing the facility limit by $50 million to $280 million. The Group now has a $130 million facility expiring 31 March 2022 and a $150 million facility expiring 31 March 2023, providing a remaining weighted average term of 3.3 years as at 30 June 2019. 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. 51 ARENA REIT 2019 ANNUAL REPORT 11. INTEREST BEAR ING LI ABILI T IE S c o n t i n u e d (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 ARF1 and ARF2. 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 2019 30 June 2018 $’000 $’000 3,749 7,498 11,247 5,087 6,102 11,189 30 June 2019 30 June 2018 $’000 $’000 798,318 798,318 699,409 699,409 The covenants over the Group’s bank facility require an interest cover ratio of greater than 2.0 times (actual at 30 June 2019 of 5.5 times) and a loan to market value of investment properties ratio of less than 50% (actual at 30 June 2019 of 24.8%). The Group was in compliance with its covenants throughout the year. (d) Accounting policy - 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. Transaction costs are 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. 52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 12. DERI VATI VE FI NANCI AL INSTRUMEN TS Non-current liabilities Interest rate swaps Consolidated 30 June 2019 30 June 2018 $’000 $’000 9,180 9,180 561 561 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 82% (2018: 78%) of the facility principal outstanding. The weighted average fixed interest swap rate at 30 June 2019 was 2.42% (2018: 2.44%), and the weighted average term was 4.8 years (2018: 5.9 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 Consolidated 30 June 2019 30 June 2018 $’000 $’000 – 22,500 15,000 30,000 15,000 72,500 – – 22,500 15,000 15,000 87,500 155,000 140,000 (a) Accounting policy - Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The Group does not designate any derivatives as hedges in a hedging relationship and therefore changes in the fair value of any derivative instrument are recognised immediately in the statement of comprehensive income. (b) Key estimate - Fair value of financial instruments The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives or unquoted securities) is determined using valuation techniques. 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. 53 ARENA REIT 2019 ANNUAL REPORT 13. C ON TRIBUT ED E QUIT Y (a) Securities 30 June 2019 30 June 2018 30 June 2019 30 June 2018 Securities ’000 Securities ’000 $’000 $’000 Consolidated Ordinary Securities Fully paid 291,325 269,351 306,368 259,780 Other contributed equity attributable to securityholders of the Group relating to ARF2 and ARL of $61.0 million is included within non-controlling interests - ARF2 and ARL (30 June 2018: $51.6 million). (b) Movements in ordinary securities Date Details 1 July 2017 Opening balance Issue of securities under the DRP (i) Vesting of equity-based remuneration (ii) 3 August 2017 Issue of securities under the Institutional Placement (iii) 5 September 2017 Issue of securities under the Security Purchase Plan 30 June 2018 Closing balance 1 July 2018 Opening balance Issue of securities under the DRP (i) Vesting of equity-based remuneration (ii) 27 May 2019 Issue of securities under the Institutional Placement (iii) 30 June 2019 Closing balance (i) Distribution Re-investment Plan (DRP) Number of securities ‘000 $’000 234,843 2,022 467 27,094 4,925 269,351 202,179 3,773 – 45,478 8,350 259,780 269,351 259,780 2,738 510 18,726 5,640 – 40,948 291,325 306,368 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. (ii) Equity-based remuneration In September 2018, 509,999 performance rights granted to employees of an associate of the Responsible Entity in FY16 vested as a result of performance conditions being fulfilled. (iii) Institutional Placement The Group completed a fully underwritten placement to institutional and professional investors in May 2019 which raised $50 million through the issue of 18,726,592 stapled securities at a price of $2.67 per stapled security. Settlement of the new stapled securities under the placement occurred on 27 May 2019. 54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 14. A C CUMULATE D PR OFI T 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 2019 30 June 2018 $’000 $’000 190,618 45,995 (32,458) 161,929 58,593 (29,904) 204,155 190,618 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 $4.8 million (30 June 2018: $4.5 million). Distributions declared September quarter December quarter March quarter June quarter 2019 $’000 9,138 9,157 9,179 9,832 2018 $’000 8,570 8,583 8,600 8,619 2019 cps 3.375 3.375 3.375 3.375 2018 cps 3.200 3.200 3.200 3.200 Total distributions to securityholders 37,306 34,372 13.500 12.800 55 ARENA REIT 2019 ANNUAL REPORT 15. NO N-C ONTR OL LI NG I NT ERES TS 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 2017 Securities issued under DRP Issue of securities under the Institutional Placement Issue of securities under the Security Purchase Plan Vesting of equity-based remuneration 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 2018 30 June 2018 30 June 2018 $’000 $’000 $’000 54,305 14,063 68,368 568 6,787 1,242 – 6,287 (4,468) – – 1,757 322 487 (448) – 343 568 8,544 1,564 487 5,839 (4,468) 343 Closing balance - 30 June 2018 64,721 16,524 81,245 Opening balance - 1 July 2018 Issue of securities under the DRP Issue of securities under the Institutional Placement Vesting of equity-based remuneration 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 2019 30 June 2019 30 June 2019 $’000 $’000 $’000 64,721 16,524 81,245 849 6,577 – 14,404 (4,848) – – 1,487 505 (1,076) – 664 849 8,064 505 13,328 (4,848) 664 Closing balance - 30 June 2019 81,703 18,104 99,807 (i) Reserves Opening balance Vesting of equity-based remuneration Equity-based remuneration expense Balance 30 June Consolidated 30 June 2019 30 June 2018 $’000 1,366 (505) 1,169 2,030 $’000 1,023 (487) 830 1,366 The equity-based remuneration reserve is used to recognise the fair value of rights issued under the Group’s Deferred Short Term and Long Term Incentive Plan. 56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 16. C ASH F LOW INF ORMATIO N (a) Reconciliation of profit/(loss) to net cash inflow/(outflow) 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 Equity-based remuneration expense Other Changes in operating assets and liabilities Decrease/(increase) in trade and other receivables (Decrease)/increase in trade and other payables (Decrease)/increase in provisions Consolidated 30 June 2019 30 June 2018 $’000 $’000 59,323 249 (25,964) (6,491) 223 8,619 1,168 150 229 (438) (201) 64,432 460 (26,479) (5,112) (30) 553 830 67 194 (1,136) 21 Net cash inflow from operating activities 36,867 33,800 (b) Net debt reconciliation This section sets out an analysis of the net debt movements for the financial year: Net debt as at 30 June 2018 Cash flows Other non-cash movements Cash and cash equivalents $’000 8,654 (520) – Interest bearing liabilities $’000 (178,491) (8,830) (249) Derivative financial instruments $’000 (561) – (8,619) Total $’000 (170,398) (9,350) (8,868) Net debt as at 30 June 2019 8,134 (187,570) (9,180) (188,616) 57 ARENA REIT 2019 ANNUAL REPORT RIS K This section of the notes discusses the Group’s exposure to various risks and shows how these could affect the Group’s financial position and performance. 17. FINANC IAL RIS K MANAG EMENT AND FAIR VALUE MEASUREM ENT 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 2019 30 June 2018 $’000 $’000 Financial assets Cash and cash equivalents (floating interest rate) 8,134 8,654 Financial liabilities Interest bearing liabilities - floating interest rate Derivative financial instruments (notional principal amount) - fixed rate interest rate swaps Net Exposure (188,500) 155,000 (179,500) 140,000 (25,366) (30,846) 58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 17 . FINANCI AL RI SK MANAG EMENT AND FAIR VALUE M EASUREM EN T c o n t i n u e d 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 (2018: 100 bp) Market interest rate decreased by 100 basis points (2018: 100 bp) Instruments with fair value risk: Derivative financial instruments Consolidated 30 June 2019 30 June 2018 $’000 (254) 254 $’000 (308) 308 155,000 140,000 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 (2018: 100 bp) Market interest rate decreased by 100 basis points (2018: 100 bp) 7,146 (7,146) 7,418 (7,418) 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 2019 30 June 2018 $’000 8,134 3,989 – $’000 8,654 2,850 – Maximum exposure to credit risk 12,123 11,504 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. 59 ARENA REIT 2019 ANNUAL REPORT 17. FINANC IAL RIS K MANAG EMENT AND FAIR VALUE MEASUREM ENT c o n t i n u e d (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 2019 Trade and other payables Interest rate swaps Interest bearing liabilities Contractual cash flows (excluding gross settled derivatives) Consolidated 30 June 2018 Trade and other payables Interest rate swaps Interest bearing liabilities Contractual cash flows (excluding gross settled derivatives) (d) Fair value estimation Less than 12 months 1-2 years Greater than 2 years $’000 $’000 $’000 18,196 1,740 5,456 25,392 – 1,662 5,446 7,108 – 5,446 195,506 200,952 Less than 12 months 1-2 years Greater than 2 years $’000 $’000 $’000 14,506 706 6,091 21,303 – 708 6,107 6,815 – 3,219 193,715 196,934 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. 60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 17 . FINANCI AL RI SK MANAG EMENT AND FAIR VALUE M EASUREM EN T c o n t i n u e d (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: t Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); t 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); t 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 2019 and 30 June 2018 on a recurring basis: Consolidated 30 June 2019 Financial liabilities Interest rate swaps Total Consolidated 30 June 2018 Financial liabilities Interest rate swaps Total Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 – – Level 1 $’000 9,180 9,180 Level 2 $’000 – – Level 3 $’000 – – 561 561 – – 9,180 9,180 Total $’000 561 561 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 2019. 61 ARENA REIT 2019 ANNUAL REPORT 17. FINANC IAL RIS K MANAG EMENT AND FAIR VALUE MEASUREM ENT c o n t i n u e d (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. 18. C A PITAL MANAG EMENT The objectives of the Stapled Group are to generate attractive and predictable income distributions to investors with earnings growth prospects over the medium to long term. The Group aims to invest to meet the Group’s investment objectives while maintaining sufficient liquidity to meet its commitments. The Group regularly reviews performance, including asset allocation strategies, investment and operational management strategies, investment opportunities, performance review, and risk management. In order to maintain its capital structure, the Group may adjust the amount of distributions paid to securityholders, return capital to securityholders, issue new securities or sell assets to reduce debt. Consistent with others in the industry, the Group monitors capital through the analysis of a number of financial ratios, including the Gearing ratio. Gearing Ratio Interest bearing liabilities Total assets Gearing ratio 30 June 2019 30 June 2018 $’000 $’000 188,500 825,721 22.8% 179,500 725,847 24.7% 62 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued G ROU P STRUCTURE This section provides information which will help users understand how the Group structure affects the financial position and performance of the Group as a whole. 19. INV ESTMENTS I N CONTR OL LED ENTITIES The consolidated financial statements incorporate the assets, liabilities and results of the following: Name of entity Country of incorporation Class of shares 2019 2018 Equity holding Citrus Investment Services Limited Australia Arena REIT Management Limited Arena REIT Operations Pty Ltd Australia Australia Ordinary Ordinary Ordinary % 100 100 100 % 100 100 100 UNRE COGN ISED ITE MS This section of the notes provides information about items that are not recognised in the financial statements as they do not satisfy the recognition criteria. 20. C ON TINGENT ASSE TS AND LIAB ILITIES AN D COMMITMENTS There are no material outstanding contingent assets or liabilities as at 30 June 2019 and 30 June 2018. For details of commitments of the Group as at 30 June 2019, refer to note 8. 21. EVE NTS OCCURRING AFTE R THE REPORTING PERIOD In conjunction with the Institutional Placement, the Group offered a Security Purchase Plan (SPP) to eligible investors in June 2019. $16.37 million was raised through the issue of 6.2 million securities on 1 July 2019. Other than the matter 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 2019 or on the results and cash flows of the Group for the year ended on that date. 63 ARENA REIT 2019 ANNUAL REPORT FURT HE R DETAILS This section of the notes includes other information that must be disclosed to comply with the accounting standards and other pronouncements, but that is not immediately related to individual line items in the financial statements. 22. RELATED PARTY D ISC LOSURES Subsidiaries Investments in controlled entities is set out in note 19. Key management personnel compensation Short term employee benefits Post-employment benefits Long term benefits Termination benefits Equity-based remuneration 30 June 2019 30 June 2018 $ $ 1,800,963 1,875,616 93,419 37,491 401,250 1,128,427 96,064 31,468 – 722,055 3,461,550 2,725,203 Detailed remuneration disclosures are provided in the Remuneration report. 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 2019 30 June 2018 $ $ 39,783 216,250 11,550 27,083 216,404 14,054 (5,330) 69,875 Amount receivable from other related parties at the end of the reporting period 29,754 26,755 Deferred management and performance fees receivable at the end of the reporting period 662,813 748,143 Amounts payable: Amounts payable to other related parties at the end of the reporting period – – 64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 23. EQUITY BASED RE MUNE RATION (a) Performance Rights and Deferred Short Term Incentive Rights Plan (Rights) The performance rights and deferred short term incentive rights are unquoted securities. Conversion to stapled securities is subject to performance conditions which are discussed in the Remuneration Report. Performance rights 2019 2018 2017 2016 Total Number Number Number Number Number Rights issued Performance rights issued 604,596 604,596 658,098 524,092 535,655 2,322,441 658,098 524,092 535,655 2,322,441 Number rights forfeited/lapsed in prior years – Number rights forfeited/lapsed in current year (111,319) Number rights vested in prior years Number rights vested in current year – – (56,118) (38,777) – – (21,394) (25,656) (103,168) (150,096) – – – (509,999) (509,999) – – – Closing balance 493,277 563,203 502,698 – 1,559,178 Deferred Short Term Incentive Rights 2019 2018 2017 2016 Total Number Number Number Number Number Rights issued Deferred Short Term Incentive 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 171,120 171,120 – – – – Closing balance 171,120 – – – – – – – – – – – – – – – – – – – – – 171,120 171,120 – – – – 171,120 (b) Rights expense Total expenses relating to the Rights recognised during the year as part of equity-based remuneration was as follows: Performance Rights Deferred Short Term Incentive Rights 30 June 2019 30 June 2018 $’000 752 417 1,169 $’000 645 185 830 65 ARENA REIT 2019 ANNUAL REPORT 23. EQ UIT Y-BASE D R EMUNER ATI O N c o n t i n u e d (c) Rights valuation inputs (i) Performance Rights Performance 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 FY19 to assess the fair value are as follows: Grant date Security price at grant date Fair value of right Expected price volatility Risk-free interest rate 1 July 2018 $2.15 $1.335 20% 2.10% (ii) Deferred Short Term Incentive Rights The valuation of Deferred Short Term Incentive Rights is based on the volume weighted average price (‘VWAP’)15 days prior to the commencement of the performance period. The VWAP is deemed to be a reasonable estimation of fair value, as the rights are entitled to distribution equivalents over the performance period. (d) Accounting policy - Equity-based remuneration 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 equity-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. 66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 24. R EM U NERAT IO N OF AU DI TORS 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 Tax consulting Total remuneration for taxation services Consolidated 30 June 2019 30 June 2018 $ $ 116,500 14,000 130,500 42,918 36,340 79,258 108,500 10,200 118,700 34,387 8,200 42,587 Total remuneration of PricewaterhouseCoopers 209,758 161,287 25 . PARENT ENT ITY FINANC IAL INFORMATION The financial information for the parent entity Arena REIT No. 1, has been prepared on the same basis as the consolidated financial statements. (a) 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 2019 30 June 2018 $’000 $’000 45,995 58,593 Total comprehensive income attributable to Arena REIT No. 1 45,995 58,593 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 9,898 676,184 686,082 18,718 156,841 175,559 306,368 204,155 510,523 8,541 614,016 622,557 14,964 157,195 172,159 259,780 190,618 450,398 67 ARENA REIT 2019 ANNUAL REPORT 26. SU M M ARY OF O THE R SI G NI F ICANT ACCOUNTING POLICIES This note provides a list of the significant accounting policies adopted in the preparation of these consolidated financial statements to the extent they have not already been disclosed in the other notes above. These policies have been consistently applied to all years presented, unless otherwise stated. (a) 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 2019, 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 26(c)). 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. (b) 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. 68 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 26. SUMMARY OF OTHER SI G NI FICANT ACCOUNTING POLICIES c o n t i n u e d (c) 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. (d) Revenue Rental income from operating leases is recognised as income on a straight-line basis over the lease term. Where a lease has fixed annual increases, the total rent receivable over the operating lease is recognised as revenue on a straight-line basis over the lease term. This results in more income being recognised early in the lease term and less late in the lease term compared to the lease conditions. The difference between the lease income recognised and the actual lease payments received is shown within the fair value of the investment property on the consolidated balance sheet. When the Group provides lease incentives to tenants, the cost of the incentives are recognised over the lease term, on a straight-line basis, as a reduction in rental income. Contingent rents based on the future amount of a factor that changes other than with the passage of time, are only recognised when contractually due. Interest income is recognised in the consolidated statement of comprehensive income using the effective interest rate method. Distribution income is recognised when the right to receive a distribution has been established. Management service fees earned from managed investment schemes or trusts are calculated based on the agreed percentage of funds under management and agreed percentages of schemes or trust acquisitions and disposals. Management fees are recognised on an accrual basis. Performance fees earned from managed funds are recorded when the Group has a legal or constructive right as a result of past events, and it is probable that an inflow of resources will occur and the amount can be reliably estimated. 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). 69 ARENA REIT 2019 ANNUAL REPORT 26. SU M M ARY OF O THE R SI G NI F ICANT ACCOUNTING POLICIES c o n t i n u e d (e) Expenses All expenses are recognised in profit or loss on an accruals basis. (f) 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. (g) 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). (h) 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. 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. 70 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 26. SUMMARY OF OTHER SI G NI FICANT ACCOUNTING POLICIES c o n t i n u e d (i) Property, plant and equipment Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains or losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit or loss. (j) 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. (k) Financial instruments (i) Classification The Group’s investments are classified as at fair value through profit or loss. They comprise: t 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. t 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. 71 ARENA REIT 2019 ANNUAL REPORT 26. SU M M ARY OF O THE R SI G NI F ICANT ACCOUNTING POLICIES c o n t i n u e d (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 17(d). 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. (l) 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. (m) 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. 72 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 26. SUMMARY OF OTHER SI G NI FICANT ACCOUNTING POLICIES c o n t i n u e d (n) 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. (o) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2019 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 2019 30 June 2020 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 has assessed the effects of applying the new standard on the Group’s financial statements and has determined that as of 1 January 2019, the impact is not expected to be material. 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. 73 ARENA REIT 2019 ANNUAL REPORT DIRECTO RS’ DEC LARATIO N In the opinion of the directors: (a) the financial statements and notes set out on pages 34 to 73 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and (ii) giving a true and fair view of the Group’s financial position as at 30 June 2019 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 1(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, 13 August 2019 74 INDEP ENDENT AUDITOR’S RE PORT Independent auditor’s report To the members 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 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 2019 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 2019 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 declaration of the directors. 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. 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. 75 ARENA REIT 2019 ANNUAL REPORT INDEP ENDENT A UDITOR’S R E P O RT c o n t i n u e d 76 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. Materiality Audit scope Key audit matters • For the purpose of our audit we used overall group materiality of $2.109 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 benchmark used to measure the performance of the Group. We adjusted Group profit before tax for fair value movements in investment properties and fair value changes in derivatives. • We utilised a 5% threshold based on our professional judgement, noting. it is within the range of commonly acceptable thresholds. • Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. • Amongst other relevant topics, we communicated the following key audit matters to the Audit Committee: − Fair value of investment properties • These are 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 8) The Group’s portfolio of investment properties was recognised as an asset in the financial report at $798.3m at 30 June 2019 and comprised of 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 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 How our audit addressed the key audit matter As at 30 June 2019, the Group obtained independent valuations on 45 ELC properties and two 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. • • 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 77 ARENA REIT 2019 ANNUAL REPORT INDEP ENDENT A UDITOR’S R E P O RT c o n t i n u e d Key audit matter How our audit addressed the key audit matter 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 comprises the information included in the annual report for the year ended 30 June 2019, but does not include the financial report and our auditor’s report thereon. Prior to the date of this auditor's report, the other information we obtained included the Directors’ report and Corporate directory. We expect the remaining other information to be made available to us after the date of this auditor's report. 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 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, 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 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 control 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. 78 79 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. Auditor’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 the 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 21 to 30 of the directors’ report for the year ended 30 June 2019. In our opinion, the remuneration report of Arena REIT No. 1 for the year ended 30 June 2019 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of Arena REIT Management Limited (the responsible entity of 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 Charles Christie Melbourne Partner 13 August 2019 ARENA REIT 2019 ANNUAL REPORT ASX ADD ITI ONAL INFO RMATIO N ADDITIONAL SE CURIT IES E XCH A NGE INFORMATION AS AT 16 AUGUST 20 19 There were 298,453,779 fully paid ordinary securities on issue, held by 4,805 securityholders. There were 262 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. DISTRIBUTIO N OF SEC URI TY HOLD ERS 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 SUBS TAN TIAL SE CURIT YHOL D E RS Name of substantial securityholder The Vanguard Group, Inc Australian Unity Funds Management Limited 757 922 834 2,178 114 274,699 2,717,442 6,427,427 61,468,440 227,565,771 0.09 0.91 2.15 20.60 76.25 4,805 298,453,779 100.00 Number of securities 26,562,449 23,775,729 Fully Paid (%) 8.90 7.97 80 TW EN TY LARGES T SEC UR ITY HOLDERS Holder Name HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED NATIONAL NOMINEES LIMITED BNP PARIBAS NOMS PTY LTDCITICORP NOMINEES PTY LIMITED THE TRUST COMPANY LIMITED BNP PARIBAS NOMINEES PTY LTD BUTTONWOOD NOMINEES PTY LTD CARBRY INVESTMENTS PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2 NATIONAL NOMINEES LIMITED AUSTRAL CAPITAL PTY LTD MR DAVID STEWART FIELD NETWEALTH INVESTMENTS LIMITED NEWECONOMY COM AU NOMINEES PTY LIMITED <900 ACCOUNT> HARRIETTE & CO PTY LTD AMP LIFE LIMITED SANDHURST TRUSTEES LTD BRISPOT NOMINEES PTY LTD MR PHILIPPE DENIS GEORGES PEREZ Number of securities Fully Paid (%) 65,189,226 39,325,254 36,000,808 27,628,947 18,185,934 11,081,919 4,711,818 961,657 889,633 855,349 746,007 705,000 685,780 631,174 626,916 566,691 559,437 500,000 492,059 470,251 21.842 13.176 12.062 9.257 6.093 3.713 1.579 0.322 0.298 0.287 0.250 0.236 0.230 0.211 0.210 0.190 0.187 0.168 0.165 0.158 Totals 210,813,860 70.635 81 ARENA REIT 2019 ANNUAL REPORT INVE STOR INFO RMATIO N ASX LISTIN G Arena REIT is listed on the Australian Securities Exchange (ASX) under the code ARF. ARENA REIT SEC URI TI ES A stapled security in Arena REIT comprises: t one share in Arena REIT Limited; t one unit in Arena REIT No.1; and t one unit in Arena REIT No.2; stapled and traded together as one security. AC C ESS IN G INFOR MATI ON ON ARENA The Arena website www.arena.com.au provides access to the latest announcements, financial reports, presentations and teleconferences 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. REC E IV IN G INF OR MATI ON ELEC TRO NIC ALLY 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 boardroomlimited.com.au/ investor-forms/ or call 1800 008 494 to request a form. MANAG IN G YOUR INV ESTMEN T ONL I NE You can manage your holding online at the Investor Centre on the Arena website www.arena.com.au/ Investor-Centre, please click on ‘Investor Login’ to register, or call 1800 008 494. 82 DISTRIBUTION PAYMENTS Arena makes distribution payments on a quarterly basis, typically within six weeks of the quarter end. Details of the 2019 financial year distributions are provided in the table below. FY19 distributions Quarter ended Payment date Distribution amount (cps) 30 September 2018 8 November 2018 31 December 2018 7 February 2019 31 March 2019 9 May 2019 30 June 2019 8 August 2019 3.375 3.375 3.375 3.375 To ensure timely receipt of your distribution, please consider the following: Direct credit Arena requires investors to receive distribution payments by direct credit to their nominated bank account. To register or update your payment details you can log in and amend your details online, download the form from the registry website at 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 status, 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 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. AMIT Member Annual Statement (AMMA Statement) and 2019 annual tax guide ARENA CALENDAR* An AMMA 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 2019 tax guide is available for download from the Investor Centre www.arena.com.au/Investor-Centre. IN VES TO R FEED BACK O R C OMPLAINTS If you have any complaints or feedback, please direct these in writing to: Arena Investor Relations Locked Bag 32002 Collins Street East Melbourne VIC 8003 Telephone: 1800 008 494 Email: complaints@arena.com.au If you make a complaint and do not receive a satisfactory outcome you may refer the complaint to the Australian Financial Complaints Authority (AFCA): t Online: www.afca.org.au t Email: info@afca.org.au t Phone:1800 931 678 (free call) t Mail: Australian Financial Complaints Authority, GPO Box 3, Melbourne VIC 3001 February t Half year results released t Distribution paid for quarter ended 31 December May t Distribution paid for quarter ended 31 March August t Annual results released t Distribution paid for quarter ended 30 June t Annual tax statements dispatched September t Annual Report released t Notice of Annual General Meeting dispatched November t Distribution paid for quarter ended 30 September t Annual General Meeting *The dates listed above are indicative only and subject to change. 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 2019 ANNUAL REPORT C O RP O RAT E D IR E C TO RY Arena REIT Limited ACN 602 365 186 Arena REIT Management Limited (ARML) ACN 600 069 761 AFSL 465754 PRINCI PAL PLACE OF BUSINESS 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 DI RECTORS David Ross (Independent, Non-Executive Chairman) Rosemary Hartnett (Independent, Non-Executive Director) Simon Parsons (Independent, Non-Executive Director) Dennis Wildenburg (Independent, Non-Executive Director) Rob de Vos (Managing Director) Gareth Winter (Executive Director of ARML) COMPAN Y SECRETARY Gareth Winter AUDI TOR PricewaterhouseCoopers 2 Riverside Quay Southbank VIC 3006 REGI STRY Boardroom Pty Limited Level 12, 225 George Street Sydney NSW 2000 Telephone: 1300 737 760 IN VESTOR I NQUI RIES AND CORRESPOND ENCE 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 EXCHANG E LISTING Arena REIT stapled securities are listed on the Australian Securities Exchange (ASX)