Annual Report 2018 BLACKWALL TY T UST PROPER R CONTENTS 03 2018 Results 04 Directors’ Report 08 Statement of Cash Flows 18 Directors’ Report - Continued 09 Statement of Changes in Equity 22 Directors’ Declaration 06 Statement of Profit or Loss and Balance Sheet 10 Notes to the Financial Statements 23 Auditor’s Independence Declaration and Report 2018 Results Units on issue 66.6 million Gross assets $273 million Gearing 44% NTA per unit $1.55 Distributions Final 5 cpu to be paid 17 October 2018 Total for 2018 10 cpu Total Return Trust We refer to BWR as a total return REIT, that is, we focus on a combination of the distributions we pay plus the NTA growth we generate. Although this is not a unique concept to the LPT market, we think the means by which we achieve it differentiates the Trust from its larger peers. looks In managing the Trust, BlackWall for active opportunistic, development and distressed situations. In the short term these positions may negatively impact on the earnings per unit but once mature should grow both earnings and NTA per unit beyond general market movements. The graph shows the Trust’s total return performance over the past 4 years. Total Return from $1 Invested in July 2014 $2.00 $1.75 $1.50 $1.25 $1.00 2014 2015 2016 2017 2018 Directors’ Report BWR to Grow Balance Sheet Liquidity Post Transaction Strategy Bakehouse Quarter Update For over 25 years BlackWall’s founders have adopted a patient property investment philosophy. We aim to acquire real estate at a discount with the intention of owning it for the long term. We grow rent by creating leasing opportunities through adaptive reuse and development. Our debt levels reflect our assets’ cash flow rather than the amount a financier will lend from time to time. If we sell an asset it is when we have exhausted it’s growth opportunities or the after tax capital gains on sale are more than the returns we can make by holding the asset. Our intention is that the cash generated by the transactions described earlier is allocated in accordance with this philosophy. Our strategy will mean that, for a period, BWR’s earnings per unit are stagnant or may decline. However, if we can identify and execute opportunities of the kind we have in the past we expect BWR can significantly grow both NTA per unit and distributable earnings. Later we give an update on the sale of the Bakehouse Quarter, one of BWR’s largest investment positions. As you will see, we are confident that the sale will complete in late February 2019. Because of this we have written the value of the Bakehouse Quarter investment up to $36 million which reflects the sale price. Once completion occurs, this amount will be cash on the Trust’s balance sheet. On the back of the Bakehouse Quarter sale, BlackWall is structuring a proposal, subject to BWR unitholder approval, for the Trust to make a takeover bid for the Kirela Development Unit Trust (Kirela) - the owner of the Bakehouse Quarter. This offer will be by way of cash or BWR units as consideration for all of Kirela unitholders’ position in Kirela. Although the extent of take up of the offer is not certain we expect it to add $100 million of cash to the BWR balance sheet. As part of this transaction, BlackWall will also seek approval for BWR to make the following investments: 1. The acquisition of BlackWall’s position in the Pyrmont Bridge Trust; 2. The acquisition of the properties housing WOTSO Adelaide and WOTSO Fortitude Valley. If the offer and transactions proceed it is likely the Trust will have over $120 million of cash. In June 2017 Yuhu Group entered into a call option to purchase the Bakehouse Quarter paying a $38 million option fee. The option was exercisable between 1 July and 31 August 2018 with settlement within 2 months, that is, no later than 31 October 2018. Recently Yuhu and BlackWall (on behalf of Kirela) agreed an amendment to the option arrangement as follows: • settlement is to occur on 20 February 2019; • Yuhu may make a payment of $5 million to extend the option by 1 month up to three times - that is the period in which the option can be exercised may be extended by a maximum of three months on the payment of $15 million in total; and • Yuhu has agreed to make a pre-payment of the purchase price of $5 million in early December 2018. At the date of this report Yuhu has served an Option Extension Notice and paid the $5 million fee extending the call option to 30 September 2018. We expect that Yuhu will extend the call option at the end of September and again at the end of October paying a total of $15m in option extension fees. As was the case with the initial $38 million option fee paid in June 2017, these payments are non-refundable and released to Kirela when received. If the arrangement proceeds described above, prior to Christmas Yuhu will have paid up to $58 million in call option fees and pre-payments which will be deducted from the purchase price ($380 million) to be paid on settlement in February 2019. 4 BlackWall Property Trust - June 2018 55 Pyrmont Bridge Road Canberra North If the Bakehouse Quarter sale completes, the Trust will grow its investment in 55 Pyrmont Bridge Road. At December 2017 the Trust’s control of 55 Pyrmont Bridge Road was such that it was consolidated onto the balance sheet. This project is a good example of the type of turnaround deals we hope to find. In 2014 BlackWall structured the acquisition of the then half empty office building. That transaction was a complex distressed debt purchase in joint venture with NAB at a value of $80 million. Since then the asset has been repositioned, is fully tenanted and NAB’s investment has been purchased. The property was independently valued at $111 million in June 2017. BlackWall has successfully completed negotiations with the property’s largest tenant, US telco, Verizon, who occupies roughly 4,500 sqm. Under this deal Verizon has committed a further term of 5 years through to November 2023, with two additional option terms of 5 years each. The terms of this deal have been signed off commercially and the lease is being drafted. To reflect the Verizon renewal the directors have adjusted the value of the property up by $6 million from the last independent valuation. Below is an extract from the 2017 Annual Report: Canberra North was previously 100% occupied by Telstra (and was then known as Telstra House). The property is a prominent office building in the Northbourne Avenue commercial zone and adjacent to the Dickson retail precinct. Since Telstra vacated the building, BlackWall has been repositioning it as a multi-tenant commercial hub including a WOTSO WorkSpace. In June 2016, the property was generating annualised gross revenue of $1.5 million, which has grown by 47% to $2.2 million. Fully-let, the building is expected to generate gross revenue of $3 million. Canberra North will soon benefit from the completion of the Canberra Metro providing light rail from Gungahlin to the CBD. In fact, the Dickson interchange linking local bus services with the new light rail system is being constructed in front of our building. Since June 2017 the demand for WOTSO’s flexible office space has grown. To meet this demand Canberra North has been repositioned to allow all areas of the building to attract and house WOTSO’s tenants. This change has led to a restructure of the arrangement between WOTSO and BWR, as building owner. The conventional lease structure has been replaced with a management arrangement. Like a hotel management arrangement, all revenue goes to the property owner and all operating costs are covered from that revenue with WOTSO earning a fee based on turnover. Under the new structure, the revenue projections set out in the above extract (which were based on conventional lease arrangements) will be exceeded. The current annualised gross revenue is now $2.8 million and fully-let gross revenue should reach $4 million. 5 BlackWall Property Trust - June 2018 Financial Statements Consolidated Balance Sheet at 30 June 2018 Consolidated Statement of Profit or Loss for the year ended 30 June 2018 Note 2018 $’000 2017 $’000 Assets Current Assets Cash and cash equivalents Trade and other receivables Bakehouse Quarter investment Other assets Total Current Assets Non-current Assets Property investment portfolio Total Non-current Assets Total Assets Liabilities Current Liabilities Trade and other payables Other liabilities Borrowings Interest rate hedges Total Current Liabilities Non-current Liabilities Borrowings Interest rate hedges Total Non-current Liabilities Total Liabilities Net Assets Equity Issued capital Retained earnings / (accumulated losses) Attributable to owners of the Trust Non Controlling Interests Total Equity Net tangible assets Number of units on issue NTA per unit 6 Note 3 5 6 7 7 7 7 2018 $’000 1,083 115 36,133 131 37,462 2017 $’000 1,690 5,078 28,216 173 35,157 235,350 235,350 128,077 128,077 272,812 163,234 1,471 713 53,882 255 56,321 65,000 57 65,057 631 383 - 296 1,310 68,882 368 69,250 Revenue Property income Net gain / (loss) on assets Interest income Other income Total Revenue Expenses Property outgoings Depreciation expense Finance costs Administration expenses Amortisation of lease incentive Loss on sale of assets Total Expenses Profit From Continuing Operations Profit from discontinued operations Profit for the year Other comprehensive income 121,378 70,560 Profit and other comprehensive income 151,434 92,674 Profit and other comprehensive income attributable to: 136,036 (33,040) 102,996 48,438 151,434 136,036 (43,362) 92,674 - 92,674 102,996 66,635,378 $1.55 92,674 66,635,378 $1.39 Owners of the Trust Non Controlling Interests Earnings Per Unit Basic earnings per unit Calculated as follows: Profit for the year Weighted average number of units for EPU 4 2 19,075 20,457 19 4 10,994 15,658 13 - 39,555 26,665 (6,025) (4,025) (4,133) (1,920) (396) (8) (2,885) (2,672) (2,897) (1,365) - - (16,507) (9,819) 23,048 - 23,048 - 23,048 17,985 5,063 23,048 16,846 - 16,846 - 16,846 16,846 - 16,846 27.0 cents 27.0 cents 17,985 16,846 66,635,378 62,371,703 BlackWall Property Trust - June 2018 Directors’ Report Management Commentary BWR’s property investments are by direct ownership or as positions in property investment structures originated and managed by BlackWall. Where possible, and if appropriate, BWR aims to grow its investment in these structures. The Trust’s investment in 55 Pyrmont Bridge Road is such that the Trust has control of the entity holding the asset. As a consequence, the asset has been consolidated on to the BWR balance sheet from 31 December 2017. Unless stated otherwise, the carrying values are based on Director valuations having regard to independent valuations save that the Bakehouse Quarter investment carrying value has been adjusted to reflect the sale transaction described earlier. As settlement is to occur in February 2019 the investment is held as a current asset. The movement in carrying values of BWR’s investments are reflected in the Statement of Profit or Loss through gains on assets. In addition to the Bakehouse, the most significant event in the portfolio is the renewal of the Verizon lease at 55 Pyrmont Bridge Road. Verizon occupies roughly 4,500 sqm of the building’s 14,500 sqm net lettable area under a 5-year lease expiring in November 2018. BlackWall has negotiated for Verizon to take up a new 5 year term to November 2023, with an option for a further 5 years. From time to time, real estate investment structures in which BWR is invested will have carried forward tax losses (often derived from the development process). Where this is the case, distributions are received as returns of capital. To account for this, distributions are applied against the carrying value of the position in the Balance Sheet and then shown in the Statement of Profit or Loss as an unrealized gain. At June 2018 BWR had $16 million in carried forward capital and $19 million in revenue tax losses. Because of this, distributions from the Trust have been paid as tax deferred returns of capital. If the transaction with respect to the Bakehouse completes, most, if not all of the tax losses will be taken up and distributions in the future are likely to be revenue with some tax deferred components. Property Investment Portfolio ($’000) Ownership Passing Yield Fully Let Yield 2018 2017 Commercial Canberra North, ACT Varsity Lakes, QLD Pyrmont Bridge Road, NSW* Hobart, TAS Canberra South, ACT Mixed Use Bakehouse Quarter, NSW Sippy Downs, QLD Industrial Yandina, QLD Toowoomba, QLD 100% 100% 32% 100% 100% 14% 100% 100% 100% 5.70% 6.10% 6.50% 7.70% 2.60% 6.50% 6.10% 9.70% 7.60% 6.60% 8.00% 7.20% 6.60% 7.10% 13.60% 2.20% 13.60% 7.40% 30,000 18,200 117,000 8,800 8,250 36,133 26,400 20,100 6,600 Total property investment portfolio *Consolidated in the 2018 financial year and the property value has been written up from $111 million to $117 million. 271,483 Reconciliation of Property Investment Portfolio ($’000) 25,000 18,000 13,677 8,400 8,100 28,216 26,200 22,200 6,500 156,293 2017 136,197 5,461 8,680 6,258 110 694 593 622 (2,626) (2,054) (190) (1,473) - 7,800 909 (3,400) (1,288) 2018 156,293 99,319 8,679 6,240 4,761 2,346 1,998 850 (4,421) (1,921) (1,900) (743) (18) - - - - 271,483 156,293 36,133 235,350 271,483 28,216 128,077 156,293 7 Opening Balance Pyrmont net acquisition / consolidation Revaluation of Bakehouse Quarter Revaluation of Pyrmont Revaluation of Canberra North Revaluation of Other property investments Capital improvements Straight-line rental income Depreciation Revaluation of Yandina Returns of capital – Pyrmont Returns of capital – Bakehouse Quarter Other disposal Hobart acquisition Bakehouse Quarter net acquisition Coolum property sale Other property investment sales Closing Balance Disclosed as follows: Bakehouse Quarter investment – current asset Property investment portfolio – non-current asset Total BlackWall Property Trust - June 2018 Financial Statements Consolidated Statement of Cash Flows for the year ended 30 June 2018 Reconciliation of Operating Cash Flows ($’000) Profit for the year Non-cash flows in profit: Depreciation and amortisation Net gain on assets Straight-line rental income RE fees settled in BWR units Changes in operating assets and liabilities: (Increase) / decrease in trade and other receivables (Increase) / decrease in other assets Increase / (decrease) in trade and other payables Increase / (decrease) in other liabilities Net cash flows from operating activities 2018 23,048 4,401 (20,449) (850) - (268) 184 235 305 6,606 2017 16,846 2,745 (15,658) (611) 180 185 (22) (1,035) 135 2,765 Cash Flows From Operating Activities Receipts from tenants Payments to suppliers Interest paid Distributions received from Woods Pipes Interest received Borrowing costs paid Net Cash Flows From / (Used in) Operating Activities Cash Flows From Investing Activities Proceeds from sale of The Woods units Returns of capital from Pyrmont Bridge Trust Returns of capital from Bakehouse Quarter Cash acquired on consolidation of Pyrmont Proceeds from sale of other investments Payment for additional Pyrmont investment Payment for capital expenditure Proceeds from sale of Coolum property Purchase of Hobart property Payment for additional Bakehouse Quarter investment Payment for BlackWall Telstra House Trust units Net Cash Flows From / (Used in) Investing Activities Cash Flows From Financing Activities Distributions paid Repayment of other borrowings Repayment of bank borrowings Proceeds from issue of units Proceeds from Hobart borrowings Increase in Canberra North borrowings Payments for purchase of BWR units Payment for capital raising costs Payment for buy-back of units Net Cash Flows From / (Used in) Financing Activities Net Increase / (Decrease) in Cash Held Cash and cash equivalents at the beginning of the year Less opening balance of subsidiaries that have left the group Cash and Cash Equivalents at End of the Period 8 2018 $’000 20,132 (9,576) (3,969) - 19 - 6,606 3,992 2,470 1,568 62 9 (3,772) (1,998) - - - - 2,331 (8,244) (1,100) (200) - - - - - - (9,544) (607) 1,690 - 1,083 2017 $’000 12,128 (6,645) (2,630) 61 14 (163) 2,765 - - 459 - 1,810 (3,633) (676) 3,600 (8,135) (2,195) (1,851) (10,621) (5,232) - - 10,512 3,882 3,000 (4,537) (197) (27) 7,401 (455) 2,154 (9) 1,690 BlackWall Property Trust - June 2018 Consolidated Statement of Changes in Equity for the year ended 30 June 2018 Balance at 1 July 2017 Acquisition of subsidiary Profit for the year Distributions paid Balance at 30 June 2018 Buy-back since 30 June Balance at signing date Balance at 1 July 2016 Issue of units Transaction costs on units On-market buy-back Profit / (loss) for the period Distributions paid Balance at 30 June 2017 Issued Capital No.’000 66,636 Issued Capital $’000 136,036 - - - 66,636 - 66,636 57,838 8,807 - (9) - - - - - 136,036 - 136,036 126,216 10,569 (738) (11) - - 66,636 136,036 Retained Earnings / (Accumulated Losses) $’000 Attributable to Owners of the parent $’000 Non Controlling Interests $’000 (43,362) - 17,985 (7,663) (33,040) (55,042) 53 - - 16,846 (5,219) (43,362) 92,674 - 17,985 (7,663) 102,996 71,174 9,884 (738) (11) 16,846 (5,219) 92,674 - 43,956 5,063 (581) 48,438 640 (640) - - - - - Total Equity $’000 92,674 43,956 23,048 (8,244) 151,434 71,814 9,244 (738) (11) 16,846 (5,219) 92,674 9 BlackWall Property Trust - June 2018 Notes 1. Segment Reporting The Trust operates in one business segment being the ownership and leasing of investment properties in Australia. 2. Expenses ($’000) Administration expenses: Responsible entity fees Compliance expenses (listing, registry etc) Total 2018 1,388 532 1,920 3. Current Assets – Trade and Other Receivables ($’000) Trade and other receivables Asset sale (The Woods) Distributions Other Total 2018 - - 115 115 No debtors have been provided for as at 30 June 2018 (2017: $Nil) or at the date of this report. 4. Net gain / (loss) on assets ($’000) Bakehouse Quarter, NSW Pyrmont Bridge Road, NSW Canberra North, ACT Varsity Lakes, QLD Hobart, TAS Canberra South, ACT Sippy Downs, QLD Toowoomba, QLD Yandina, QLD Coolum, QLD Total net gain / (loss) on property investment portfolio Net gain / (loss) on interest rate hedges Gain on sale of BWR units from option transaction Total net gain / (loss) on assets 10 2018 8,679 6,240 4,761 852 484 433 370 208 (1,921) - 20,106 351 - 20,457 2017 923 442 1,365 2017 3,992 1,015 71 5,078 2017 8,680 6,258 110 391 (226) 285 321 132 14,142 780 735 15,658 5. Current Liabilities – Trade and Other Payables ($’000) Trade payables Related parties – BlackWall Limited Other parties Tenant deposits Total 6. Current Liabilities – Other Liabilities ($’000) Rental income received in advance Total 7. Borrowings and Interest Rate Hedges Borrowings 2018 116 1,187 168 1,471 2018 713 713 2017 1 454 176 631 2017 383 383 All facilities are priced off BBSY. The total undrawn balance across all facilities is less than $200k. The LVR (loan to value ratio) shown below is calculated against the carrying value in these financial statements with the facility LVR covenant shown in parenthesis. Security Various* Hobart Total current Pyrmont Canberra North Total non-current Total June 2018 Various* (2,054) Canberra North 245 Hobart Total June 2017 LVR 43% (65%) 44% (50%) 43% (90%) 50% (61%) 39% (65%) 60% (61%) 46% (50%) Balance $’000 50,000 3,882 53,882 50,000 15,000 65,000 118,882 50,000 15,000 3,882 68,882 Expiry 10/18 02/19 12/19 09/19 10/18 09/19 02/19 Margin 2.10% 2.10% 2.20% 2.10% 2.10% 2.10% 2.10% Lender NAB NAB NAB NAB NAB NAB NAB *Secured against all assets held by the Trust save those specifically mentioned above. BlackWall Property Trust - June 2018 Interest Rate Hedges 9. Distributions Bank $’000 Type Floor Cap Expiry June 2018 Total June 2017 Total NAB NAB NAB NAB 20,000 30,000 50,000 20,000 30,000 50,000 Collar Collar 2.72% 2.24% 4.55% 3.24% Collar Collar 2.72% 2.24% 4.55% 3.24% 07/19 01/20 07/19 01/20 MTM Value $’000 (166) (146) (312) (355) (309) (664) A distribution of 5.0 cents per unit has been declared to be paid on 17 October 2018. Distributions paid before the balance date are listed below: Prior year final distribution Current year interim distribution Total 2018 6.5 cpu 5.0 cpu 2018 $’000 4,331 3,332 7,663 2017 4.0 cpu 4.5 cpu 2017 $’000 2,313 2,906 5,219 10. Lease Commitments Receivable ($’000) Balance Sheet - the mark to market value of all interest rate hedged are calculated at 30 June and shown in Future minimum rent receivable under non-cancellable operating leases as at 30 June are as follows: this note as a negative number if they are out of the money and a positive if they are in the money. The value is prorated to the remaining hedge term and the portion with less than 12 months to run carried as a current liability / asset with the balance as non-current. Profit or Loss - the gain or loss on interest rate hedge valuation is recognized in the net gain / (loss) on assets. 8. Acquisition of Subsidiary ($’000) In December 2017 the Trust gained control of 55 Pyrmont Bridge Road through control of the following Receivable within 1 year Receivable within 2 – 5 years Receivable for more than 5 years Total 2018 16,306 33,517 24,795 74,618 2017 8,849 25,332 10,361 44,542 entities: • • Pyrmont Bridge Property Pty Limited (PBP) – the registered proprietor of the property; and There were no operating leases, capital commitments or contingencies as at 30 June 2018 (June 2017: Nil). 11. Commitments and Contingencies Pyrmont Bridge Trust (PBT) – a wholesale investment trust, managed by BlackWall which holds a $55 million subordinated debt instrument secured by a registered second mortgage over the property. 12. Subsequent Events Special note should be taken of the update in relation to the sale of the Bakehouse Quarter, the Verizon lease at 55 Pyrmont Bridge Road and the acquisition proposal all of which are explained on pages 4 and 5 of this report. Other than these matters, to the best of the Directors’ knowledge, there have been no other matters or circumstances that have materially affected the Trust’s operations or may materially affect its operations, state of affairs or the results of operations in future financial years. As BWR controls both entities the subordinated debt instrument held by PBT eliminates on consolidation. Interests in both PBP and PBT held by third parties are show as non controlling interests. The assets and liabilities recognised are as follows: Cash Borrowing costs Property investment Trade payables Borrowings Net assets acquired Less: non-controlling interests Group share of assets acquired The purchase of the investments was paid in cash, and there were no acquisition related costs. Fair value $’000 63 146 111,000 (534) (51,300) 59,375 (44,001) 15,374 11 BlackWall Property Trust - June 2018 13. Controlled Entities Name Parent entity: BlackWall Property Trust Controlled entity of parent entity: Yandina Sub-Trust BlackWall Telstra House Trust BlackWall Hobart Unit Trust Pyrmont Bridge Property Pty Limited Pyrmont Bridge Trust Parent and controlled entities are all domiciled in Australia. 14. Auditor’s Remuneration ($’000) Remuneration of ESV for: Audit and assurance services Total 15. Related Party Transactions (a) Related Entities Percentage Owned 2018 100% 100% 100% 100% 32% 25% 2017 100% 100% 100% 100% - 27% (c) Related Entity Transactions In accordance with the terms of the Trust Constitution and the Information Memorandum, the Responsible Entity is entitled to receive a management fee based on 0.65% p.a. of the value of the Trust’s assets and the recovery of other administrative costs. All transactions with related parties were made on normal commercial terms and conditions, at market rates and were approved by the Board. Related party transactions that occurred during the year are as follows: Expenses Remuneration paid to Responsible Entity Property management, leasing fees and accounting fees Transaction fees Revenue 2018 $’000 1,335 582 - 1,917 2017 $000 922 501 74 1,497 2018 2017 52 52 43 43 WOTSO WorkSpace rent, outgoings and utilities 1,219 738 Refer to Directors’ Report for Key Management Personnel’s relevant interests in the Trust. 16. Parent Entity Disclosures The following summarises the financial information of the Trust’s parent entity, BlackWall Property Trust, as at and for the year ended 30 June. In these financial statements, related parties are parties as defined by AASB 124 Related Party Disclosures Profit for the year rather than the definition of related parties under the Corporations Act 2001 and ASX Listing Rules. Total comprehensive income for the year (b) Interests in Related Parties As at year end the Trust owned units in the following funds. The funds and the Trust have a common Responsible Entity or are related entities of BlackWall: Unlisted Funds / Entities Kirela Development Unit Trust Pyrmont Bridge Trust Bakehouse Quarter Trust Woods PIPES Fund Holdings (No.’000) $’000 Distribution 2018 82 - - - 2017 82 7,599 2 - 2018 742 2,280 1 - 2017 1,473 190 - 16 3,023 1,679 For further details refer to the Reconciliation of Property Investment Portfolio table. Income received from Kirela was in the form of returns of capital. Pyrmont Bridge Trust has been consolidated from January 2018. 12 Financial position: Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets The parent entity had no contingencies at 30 June 2018 (2017: Nil). The parent entity has not entered into any capital commitments as at 30 June 2018 (2017: Nil). 2018 $’000 9,302 9,302 661 153,908 154,569 (50,606) (1,975) (52,581) 2017 $000 17,964 17,964 6,801 143,730 150,531 (182) (50,000) (50,182) 101,988 100,349 BlackWall Property Trust - June 2018 17. Financial Risk Management Financial risk management Liquidity risk The major liquidity risk faced by the Trust is its ability to realise assets. The Trust has borrowings of $119 million and total gross assets of $273 million, of which $235 million are income producing real estate assets The main risks the Trust is exposed to through its financial instruments are market risk (including interest for which there is a deep and active market. At the end of the reporting period, the Trust held the following rate risk and price risk), credit risk and liquidity risk. The Trust’s principal financial instruments are property financial arrangements: investment structures and borrowings (including interest rate hedges). Additionally, the Trust has various other financial instruments such as trade debtors and trade creditors, which arise directly from its operations. This note presents information about the Trust’s exposure to each of the above risks, their objectives, policies and processes for measuring and managing risk, and the management of capital. The Board of Directors of the Responsible Entity has overall responsibility for the establishment and overseeing of the risk management framework. The Board monitors the Trust’s risk exposure by regularly reviewing finance and property markets. Major financial instruments held by the Trust which are subject to financial risk analysis are as follows: $’000 At 30 June 2018 Financial liabilities Trade and other payables Other liabilities Borrowings Interest rate hedges Financial assets Property investment structures Financial liabilities Borrowings 2018 $’000 2017 $000 At 30 June 2017 36,133 41,893 Financial liabilities Trade and other payables 118,882 68,882 Other liabilities The property investment structures referred to above represent the Trust’s investment in The Bakehouse Quarter (2017: The Bakehouse Quarter and Pyrmont). Borrowings Interest rate hedges Sensitivity analysis The Group is not exposed to any material credit or liquidity risks. In relation to interest rate risk, if interest rates on borrowings were to increase by 1% profit before tax would Fair value measurements Fair value hierarchy Maturing Maturing Maturing Within 1 year 2 – 5 years over 5 years Total 1,303 713 53,882 255 56,153 455 383 - - 838 168 - 65,000 57 65,225 176 - 68,882 664 69,722 - - - - - - - - - - 1,471 713 118,882 312 121,378 631 383 68,882 664 70,560 be reduced by $1,189,000. Capital management The Trust’s objectives when managing capital are to: • safeguard its ability to continue as a going concern, so that it can continue to provide returns for unitholders and benefits for other stakeholders, and • maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Trust may adjust the amount of return of capital paid to unitholders, issue new units, buy-back units, purchase or sell assets. AASB 7 Financial Instruments: Disclosures requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: • Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities; • Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset, either directly (as prices) or indirectly (derived from prices); and • Level 3 – Inputs for the asset that are not based on observable market data (unobservable inputs). The Trust currently does not have any assets or liabilities that are traded in an active market. The fair value of financial assets and financial liabilities that are not traded in an active market is determined using valuation techniques. For investments in related party unlisted unit trusts, fair values are determined by reference to published unit prices of these investments which are based on the net tangible assets of the investments. 13 BlackWall Property Trust - June 2018 The following table presents the Trust’s financial assets and financial liabilities measured at fair value as at 30 The following table is a reconciliation of the movements in financial assets classified as Level 3 for the year June. Refer to the Critical Accounting Estimates and Judgement note for further details of assumptions used ended 30 June: and how fair values are measured. Level 1 Level 2 Level 3 Total At 30 June 2018 ($’000) Property investment portfolio Interest rate hedges At 30 June 2017 ($’000) Property investment portfolio Interest rate hedges - - - - - (312) - (664) 36,133 - 41,893 - Valuation techniques used to derive Level 3 fair values 36,133 (312) At 30 June 2018 Balance at the beginning of the year Purchase of Pyrmont units Return of capital Fair value movement through the profit and loss 41,893 Consolidation of Pyrmont (664) Other Balance at the end of the year The fair value of the unlisted securities is determined by reference to the net assets of the underlying entities. At 30 June 2017 All these instruments are included in Level 3. There were no transfers between Level 1, 2 and 3 financial instruments during the year. For all other financial assets and financial liabilities, carrying value is an approximation of fair value Balance at the beginning of the year Purchase of investments Sale of investments Return of capital Significant unobservable inputs within the income capitalisation method associated with the valuations of the Fair value movement through the profit and loss property investment portfolio are as follows: Balance at the end of the year $’000 41,893 3,772 (2,643) 8,515 (15,388) (16) 36,133 24,397 12,300 (6,597) (2,949) 14,742 41,893 Significant unobservable inputs used to measure fair value Capitalisation rate (%) Net market rent ($ per sqm) Range of unobservable inputs 6.5 – 10.2 116 – 1,043 Impact of increase in input on fair value Decrease Increase Impact of decrease in input on fair value Increase 18. Critical Accounting Estimates and Judgements The Directors of the Responsible Entity evaluate estimates and judgements incorporated into the financial statements based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data, obtained both Decrease externally and within the Trust. Key estimates - impairment The Trust assesses impairment at each reporting date by evaluating conditions specific to the Trust that may lead to impairment of assets. Refer to Trade and Other Receivables note for impairment details. Key estimates – financial assets The property investment portfolio contains a portion of financial assets being property investment structures at FVTPL. All gains and losses in relation to financial assets are recognised in profit or loss. The fair value of the unlisted securities is determined by reference to the net assets of the underlying entities. Key estimates – fair values of investment properties The Trust carries its investment properties at fair value with changes in the fair values recognised in profit or loss. At the end of each reporting period, the Directors of the Responsible Entity update their assessment of the fair value of each property, taking into account the most recent independent valuations. The key assumptions used in this determination are set out in Property Investment Portfolio table. If there are any material changes 14 BlackWall Property Trust - June 2018 in the key assumptions due to changes in economic conditions, the fair value of the investment properties may differ and may need to be re-estimated. Comparative figures 19 . Changes in Liabilities Arising from Financing Activities ($’000) Total liabilities from financing activities as at 1 July 2016 (62,000) (62,000) Net cash from / (used in) financing activities – Hobart borrowings Net cash from / (used in) financing activities – Canberra North borrowings (3,882) (3,000) (3,882) (3,000) Borrowings Total When required by Accounting Standards, comparative figures have been adjusted to conform to changes in presentation for the current financial year. Any change of presentation has been made in order to make the financial statements more relevant and useful to the user. Segment Reporting AASB 8 requires operating segments to be identified on the basis of internal reports about components of the Trust that are regularly reviewed by the chief operating decision maker in order to allocate resources to the Total liabilities from financing activities as at 30 June 2017 (68,882) (68,882) segment and to assess its performance. Net cash from / (used in) financing activities Acquisition of Pyrmont 1,300 (51,300) 1,300 (51,300) Total liabilities from financing activities as at 30 June 2018 (118,882) (118,882) 20. Statement of Significant Accounting Policies The financial statements cover BlackWall Property Trust and its controlled entities. BlackWall Property Trust is a managed investment scheme registered in Australia. All controlled funds are established and domiciled in Australia. The Trust invests in property in Australia and reports to management in a single segment. As a result, there is only one segment to report for the Trust. Presentation currency Both the functional and presentation currency of the Trust is Australian dollars. Principles of Consolidation The financial statements for the Trust were authorised for issue in accordance with a resolution of the Directors Controlled entities of the Responsible Entity on the date they were issued. Basis of Preparation The consolidated financial statements comprise the financial statements of the Trust (refer to the Controlled Entities note). The controlled entity has a June financial year end and uses consistent accounting policies. Investments in the controlled entity held by the parent entity are accounted for at cost less any impairment These financial statements are general purpose financial statements that have been prepared in accordance charges (refer to the Parent Entity Disclosures note). with Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. Subsidiaries are all those entities over which the consolidated entity has control. The consolidated entity controls an entity when the consolidated entity is exposed to, or has rights to, variable returns from its The financial statements of the Trust also comply with IFRS as issued by the International Accounting involvement with the entity and has the ability to affect those returns through its power to direct the activities of Standards Board. the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the consolidated entity. They are de-consolidated from the date that control ceases. The financial statements have been prepared on an accruals basis and are based on historical costs modified by the revaluation of selected non-current assets, financial assets and financial liabilities for which the fair Inter-entity balances value basis of accounting has been applied. The Trust is a group of the kind referred to in ASIC Class Order 2016/191 and, in accordance with that Class Order, amounts in the Directors’ Report and the financial statements are rounded off to the nearest thousand dollars, unless otherwise indicated. All inter-entity balances and transactions between entities in the Trust, including any unrealised profits or losses, have been eliminated on consolidation. Accounting policies of the controlled entity have been changed where necessary to ensure consistencies with those policies applied by the parent entity. The following is a summary of the material accounting policies adopted by the Trust in the preparation of the Impairment of assets financial statements. The accounting policies have been consistently applied, unless otherwise stated. At each reporting date, the Trust reviews the carrying values of its assets to determine whether there is any Going concern These financial statements have been prepared on a going concern basis, which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the asset’s fair value less costs to sell and value in use, is compared to the asset’s carrying value. In assessing value in use, either the 15 BlackWall Property Trust - June 2018 estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset, or the income of Fair value the asset is capitalised at its relevant capitalisation rate. For investments in unlisted unit trusts, fair values are determined by reference to published unit prices of these investments which are based on the net tangible assets of each of the investments. An impairment loss is recognised if the carrying value of an asset exceeds its recoverable amount. Impairment losses are expensed to the income statement. Impairment Impairment losses recognised in prior periods are assessed at each reporting date for any indication that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of At each reporting date, the Trust assesses whether there is objective evidence that a financial instrument has been impaired. A financial instrument is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. depreciation or amortisation, if no impairment loss has been recognised. Individually significant financial instruments are tested for impairment on an individual basis. The remaining Financial Instruments Interest rate hedges The Trust uses derivative financial instruments such as interest rate swaps to hedge its risks associated with interest rates. Such derivative financial instruments are initially recognised at fair value on the date the derivative contract is entered into and are subsequently remeasured to fair value. Derivatives are carried as assets when their net fair value is positive and as liabilities when their net fair value is negative. The fair values of interest rate swap and collar are determined by reference to market values for similar instruments. Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss for the year. Non-derivative financial instruments Non-derivative financial instruments comprise financial assets (including property investment structures), loans and borrowings, and trade and other payables. financial assets are assessed collectively in groups that share similar credit risk characteristics. Impairment losses are recognised in the statement of profit or loss and other comprehensive income. Financial liabilities Non-derivative financial liabilities are recognised at amortised cost, comprising original debt less principal payments and unrealised movements. Financial assets (property investment portfolio) The property investment portfolio contains property investment structures at FVTPL. All gains and losses in relation to financial assets are recognised in profit or loss. The Trust classifies its financial assets. All equity investments are measured at fair value. Equity investments that are held for trading are measured at fair value through profit or loss. Measurement At initial recognition, the Trust measures a financial asset at its fair value. Transaction costs of financial assets Non-derivative financial instruments are recognised at fair value plus, for instruments not at fair value through carried at fair value through profit or loss are expensed in profit or loss. profit or loss, any directly attributable transaction costs. Subsequent to initial recognition non- derivative financial instruments are measured as described below. The Trust subsequently measures all equity investments at fair value. Changes in the fair value of financial assets at fair value through profit or loss are recognised in profit or loss as applicable. Recognition A financial instrument is recognised if the Trust becomes a party to the contractual provisions of the instrument. Financial assets are recognised if the Trust’s contractual rights to the cash ow from the financial assets expire or if the Trust transfers the financial assets to another party without retaining control or substantially all risks and rewards of the asset. Purchases and sales of financial assets are accounted for at trade date, i.e. the date that the Trust commits itself to purchase or sell the asset. Financial liabilities are derecognised if the Trust’s obligations specified in the contract expire or are discharged or cancelled. Loans and receivables Loans and receivables include loans to related entities. Gains and losses are recognised in profit and loss when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Held for sale properties Properties are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather through continuing use and a sale is considered highly probable. They are measured at their carrying amount. Any subsequent increases or decreases in carrying amount is recognised in the profit and loss. Investment properties Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met and excludes the costs of day-to-day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at fair value, which is based on active market prices, 16 BlackWall Property Trust - June 2018 adjusted if necessary, for any difference in the nature, location or condition of the specific asset at the balance tax losses, such distributions are brought on to the balance sheet by an adjustment in the carrying value of sheet date. Gains or losses arising from changes in the fair values of investment properties are recognised in the relevant investment and then reflected in the profit and loss as an unrealised gain. profit or loss in the year in which they arise. Included in the value measurement are adjustments for straight- lining of lease income. Cash and cash equivalents Income tax Under current income tax legislation the Trust is not liable to Australian income tax provided the unitholders are presently entitled to the taxable income of the Trust. The Trust has over $17 million of carried forward Cash and cash equivalents include cash on hand, deposits held at call with banks, other short term highly revenue tax losses and $17 million carried forward capital losses. liquid investments with original maturities of three months or less, and bank overdrafts. GST Trade and other receivables Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST Trade receivables are recognised and carried at original invoice amount less a provision for any uncollectable incurred is not recoverable from the Australian Taxation Office. In these circumstances the GST is recognised debts. An estimate for doubtful debts is made when there is objective evidence that the Trust will not be able as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables to collect the receivable. Financial difficulties of the debtor and default payments are considered objective in the balance sheet are shown inclusive of GST. Cash flows are presented in the cash flow statement on a evidence of impairment. Bad debts are written off when identified as uncollectable. gross basis for the operating cash flows only. Trade and other payables EPU Liabilities for trade creditors are carried at cost which is the fair value of the consideration to be paid in the The Trust presents basic and diluted EPU. Basic EPU is calculated by dividing the profit or loss attributable future for goods or services received, whether or not billed to the Trust at balance date. The amounts are to ordinary unitholders of the Trust by the weighted average number of units outstanding during the period. unsecured and are usually paid within 30 days of recognition. Diluted EPU is determined by adjusting the profit or loss attributable to ordinary unitholders and the weighted Interest bearing borrowings Interest bearing borrowings are initially recognised at fair value less any related transaction costs. Subsequent average number of units outstanding for the effects of all dilutive potential units. New Accounting Standards and Interpretations to initial recognition, interest bearing borrowings are stated at amortised cost. Certain new accounting standards and interpretations have been published that are not mandatory for the Revenue Rent current reporting period. The Trust’s assessment of the impact of these new standards and interpretations is set out below. AASB 9 Financial Instruments (effective for annual reporting periods beginning on or after 1 January 2018) Rent comprises rental and recovery of outgoings from property tenants. Rental income from investment The Trust has adopted AASB 9 early on 1 January 2013. properties is accounted for on a straight-line basis over the lease term Lease incentives Rent free incentives granted are recognised as an integral part of total rental income. AASB 15 Revenue from Contracts with Customers (effective for annual reporting periods beginning on or after 1 January 2018) The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer. The Trust is currently assessing the effects of applying the new standard on the Cash incentives paid or payable to tenants are capitalised as part of investment properties and amortised on financial statements and has not identified any material changes. a straightlined basis over the lease term as a reduction in lease income. Investment income Interest income is recognised as interest accrues using the effective interest method. Property investment structure income is recognised when the right to receive distribution has been established. For tax deferred distributions (returns of capital) earned from any trusts that have significant carried forward 17 BlackWall Property Trust - June 2018 Directors’ Report Continued Subsequent Events ASX Additional Information Special note should be taken of the update in relation to the sale of the Bakehouse Quarter, the Verizon lease Additional information required by the Australian Securities Exchange and not shown elsewhere in this report at 55 Pyrmont Bridge Road and the acquisition proposal all of which are explained on pages 4 and 5 of this is as follows. The unitholder information set out below was current as at 24 August 2018. report. Other than these matters, to the best of the Directors’ knowledge, there have been no other matters or circumstances that have materially affected the Trust’s operations or may materially affect its operations, Unitholders state of affairs or the results of operations in future financial years. Directory of Properties Property Canberra North Varsity Lakes Property address 490 Northbourne Ave, Dickson ACT 2602 194 Varsity Pde, Varsity Lakes QLD 4227 Pyrmont Bridge Road 55 Pyrmont Bridge Rd, Pyrmont NSW 2009 Hobart 162 Macquarie St, Hobart TAS 7000 Canberra South 10-14 Wormald St, Symonston ACT 2609 Bakehouse Quarter George St, North Strathfield NSW 2137 Sippy Downs Yandina Toowoomba 30 Chancellor Village Blvd, Sippy Downs QLD 4556 54 Pioneer Rd, Yandina QLD 4561 50 Industrial Ave, Toowoomba QLD 4350 The Trust’s top 20 largest unitholdings were: Investor BlackWall Fund Services Limited Pelorus Private Equity Limited Seno Management Pty LtdMr Archibald Geoffrey Loudon Vintage Capital Pty Limited Sao Investments Pty Ltd Alerik Pty Limited Lymkeesh Pty Ltd Koonta Pty Ltd 1 2 3 4 5 6 7 8 9 10 Mr Peter Joy 11 12 13 14 15 16 17 18 Koonta Pty Ltd Frogstorm Pty Ltd HSBC Custody Nominees (Australia) Limited Castlebay Pty Limited Pinnatus Pty Ltd Glenahilty Ltd Rigi Investments Pty Limited Plane Sailing Trails Pty Ltd 19 Methuselah Capital Management Pty Ltd 20 Mr Simon Charles Farr Units(No.) Units(%) 10,798,898 9,702,168 4,800,000 3,707,894 3,510,000 2,000,000 1,925,000 1,459,917 1,032,532 1,000,000 800,227 725,526 689,435 685,799 679,320 670,746 610,000 517,435 444,651 400,000 16.21 14.56 7.20 5.56 5.27 3.00 2.89 2.19 1.55 1.50 1.20 1.09 1.03 1.03 1.02 1.01 0.92 0.78 0.67 0.60 18 BlackWall Property Trust - June 2018 Distribution of Unitholders Key Management Personnel’s Relevant Interests The distribution of unitholders by size of holding on 24 August 2018 is shown below: shown below: The current relevant interests in the Trust held by Key Management Personnel of the Responsible Entity are Category 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 The Trust has 66,635,378 units on issue. All units carry one vote per unit without restrictions. All units are quoted on the Australian Securities Exchange (ASX: BWR). Substantial Unitholders The Trust’s substantial unitholders are set out below: Investor BlackWall Limited Pelorus Private Equity Limited Joseph (Seph) Glew Paul Tressider Robin Tedder Mr Archibald Geoffrey Loudon Units(No.) 10,798,898 9,632,621 8,734,100 5,982,512 5,398,034 3,707,894 Units(%) 16.21 14.46 13.11 8.98 8.10 5.56 No. of Holders Director 8 August 2017 Net Change 10 August 2018 305 537 207 324 Richard Hill (non-executive director) Seph Glew (non-executive director) Robin Tedder (non-executive director) Stuart Brown (executive director and CEO) Timothy Brown (executive director and CFO) Jessica Glew (COO) Total 663,039 7,239,351 4,727,067 463,197 70,099 14,168 - 1,494,749 670,967 513,907 279,659 250,000 663,039 8,734,100 5,398,034 977,104 349,758 264,168 13,176,921 3,209,282 16,386,203 No salary, cash bonus or monetary benefit was paid out of the Trust’s assets to any KMP during the period. 19 BlackWall Property Trust - June 2018 Information on Officeholders of the Responsible Entity Stuart Brown Executive Director and Chief Executive Officer The Responsible Entity is a wholly owned subsidiary of BlackWall Limited. BlackWall’s Officeholders comprise the board of the Responsible Entity. The Officeholders of the Responsible Entity during or since the end of Stuart has been involved in property investment for over 18 years. Stuart has run debt and equity raising in the year are set out below. Unless otherwise stated, Officeholders have been in office since the beginning of relation to listed and unlisted real estate structures with over a half a billion dollars in value. the financial year. Richard Hill Non-Executive Director and Independent Chairman In his earlier career, Stuart practised as a solicitor in the areas of real estate, mergers and acquisitions and corporate advisory with Mallesons and Gilbert + Tobin. Stuart is an independent Director of Coogee Boys’ Preparatory School and Randwick District Rugby Union Football Club. Richard Hill has extensive investment banking experience and was the founding partner of the corporate advisory firm Hill Young & Associates. Richard has invested in BlackWall’s projects since the early 1990s. Timothy Brown (appointed 29 January 2018) Executive Director and Chief Financial Officer Prior to forming Hill Young, Richard held a number of Senior Executive positions in Hong Kong and New York with HSBC. He was admitted as an attorney in New York State and was registered by the US Securities & Exchange Commission and the Ontario Securities Commission. Richard is Chairman of the Westmead Institute for Medical Research. In the last three years, Richard has served as a director (Chairman) of Sirtex Medical Limited (Sirtex), listed on ASX. Richard retired as director of Sirtex on 28 October 2017. Joseph (Seph) Glew Non-Executive Director Timothy Brown is the Chief Financial Officer for the BlackWall Group and its funds, and is responsible for this all aspects of the group’s financial reporting, debt management and accounting operations. Timothy joined the formerly listed Pelorus Property Group Limited in 2008 as Group Financial Controller and became Chief Financial Officer in 2009, continuing with BlackWall when it listed in 2011. He has a Bachelor of Commerce from the University of New South Wales, is a member of the Institute of Chartered Accountants of Australia and has a Graduate Diploma from the Financial Services Institute of Australasia. With over 20 years experience in the financial services and property industries, he started his career with Deloitte in their middle market audit division working on a wide variety of SMEs. In 2002 he joined Lend Lease Corporation and held a number of Seph has worked in the commercial property industry in New Zealand, the USA and Australia. Seph has finance roles across the Lend Lease portfolio from development and retail financial management to corporate driven large scale property development and financial structuring for real estate for over 40 years. In addition, treasury, including Treasury Manager for Lend Lease’s European operations based in London. since the early 1990s Seph has run many “turn-around” processes in relation to distressed properties and property structures for both private and institutional property owners. While working for the Housing Corporation of New Zealand and then AMP, Seph qualified as a registered Sophie Gowland Company Secretary valuer and holds a Bachelor of Commerce. In the 1980s he served as an Executive Director with New Zealand Sophie is a lawyer with 10 years of experience in legal practice and financial services. Prior to joining BlackWall, based property group Chase Corporation and as a Non-Executive Director with a number of other listed Sophie practiced in the areas of corporate advisory, equity capital markets and mergers and acquisitions with companies in New Zealand and Australia. Robin Tedder Non-Executive Director Robin has worked in finance and investment since 1976 during which time he has served as the CEO of an investment bank and as non executive director on the boards of public and private companies in banking, insurance, funds management, property, healthcare, retail and wine. He was a member of ASX for many years. He is the Chairman of investment company Vintage Capital and has been an investor in BlackWall Group projects since 1997. Robin is also the Chairman of the BlackWall Board Audit Committee firms including Gilbert + Tobin. Sophie was previously an investment banker with Credit Suisse, specialising in equity capital markets. Sophie holds a Bachelor of Commerce and Bachelor of Laws (First Class Honours) from the University of Queensland. Meeting Attendances Director Richard Hill Seph Glew Robin Tedder Stuart Brown Timothy Brown (appointed January 2018) No. of Board Meetings Held Board Meeting Attendance 10 10 10 10 10 5 10 10 10 5 20 BlackWall Property Trust - June 2018 Options Corporate Governance Statement There were no options granted during the year ended 30 June 2018. There are no options on issue as at the A description of the Trust’s current corporate governance practices is set out in the Trust’s corporate date of this report. governance statement which can be viewed at http://www.blackwall.com.au/about- us.html. Responsible Entity and Custodian Remuneration Auditor and Non-audit Services The Responsible Entity’s remuneration details can be found under the Related Party Transactions note of the $50,000 and $12,000 was paid to the auditor for audit and non-audit services respectively during the year financial statements. The Custodian is The Trust Company Limited. The custody fee is calculated at the greater of $15,000 p.a. or 0.025% p.a. of the gross asset value up to $100 million then 0.015% for gross assets value between (2017: $55,000 and $12,000). The Directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. $100-$500 million of the Trust, plus GST. In addition, the Custodian is entitled to be paid any out-of-pocket A copy of the auditor’s independence declaration as required under Section 307C of the Corporations Act expenses incurred in the performance of its duties. 2001 is set out in these financial statements. Interests in the Trust ESV continues in office in accordance with section 327 of the Corporations Act 2001. At the date of this report and at 30 June 2017, the Trust had 66,635,378 units on issue. The Responsible Entity Rounding of Amounts and its ultimate holding company held 10.8 million units in the Trust. The Trust is of a kind referred to in ASIC Legislative Instrument 2016/191, and in accordance with that Value of the Trust’s Assets legislative instrument amounts in the Directors’ Report and the financial statements are rounded off to the nearest thousand dollars, unless otherwise indicated. At 30 June 2018, the Trust’s assets value is set out in the Trust’s Consolidated Balance Sheet. Refer to the Signed in accordance with a resolution of the Board of Directors. Property Investment Portfolio table for valuation details. Environmental Regulation The Trust and its controlled entities operations are not regulated by any significant environmental law or regulation under either Commonwealth or State legislation. However, the Responsible Entity believes that the Trust and its controlled entities have adequate systems in place for the management of its environmental requirements and is not aware of any instances of non-compliance of those environmental requirements as Stuart Brown Director Sydney, 31 August 2018 they apply to the Trust. Indemnities of Officers During the financial year the Responsible Entity has paid premiums to insure each of the Directors named in report along with Officers of the Responsible Entity against all liabilities for costs and expenses incurred by them in defending any legal proceedings arising out of their conduct while acting in the capacity of Director or Officer of the Responsible Entity, other than conduct involving a wilful breach of duty. The insurance policy prohibits disclosure of the nature of the liability, the amount of the premium and the limit of liability. No indemnities have been given or insurance premiums paid, during or since the end of the financial year, for any person who is or has been an auditor to the Trust. 21 BlackWall Property Trust - June 2018 Directors’ Declaration In the opinion of the Directors of BlackWall Fund Services Limited, the Responsible Entity of BlackWall Property Trust: ( a ) the financial statements and notes are in accordance with the Corporations Act 2001, including: ( i ) ( ii ) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and giving a true and fair view of the Trust’s financial position as at 30 June 2018 and of its performance for the financial year ended on that date; and ( b ) there are reasonable grounds to believe that the Trust will be able to pay its debts as and when they become due and payable. Statement of Significant Accounting Policies confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors of the Responsible Entity have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Board of Directors of the Responsible Entity. Stuart Brown Director Sydney, 31 August 2018 22 BlackWall Property Trust - June 2018 Auditors Independence Declaration and Audit Report AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 As auditor for the audit of Blackwall Property Trust and its Controlled Entities for the year ended 30 June 2018, I declare that, to the best of my knowledge and belief, there have been: (i) no contraventions of the auditor’s independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit. Dated at Sydney the 31st day of August 2018. ESV Accounting and Business Advisors Tim Valtwies Partner INDEPENDENT AUDITOR’S REPORT TO THE UNITHOLDERS OF BLACKWALL PROPERTY TRUST AND CONTROLLED ENTITIES Report on the Audit of the Financial Report Opinion We have audited the financial report of Blackwall Property Trust and its controlled entities (‘the Group’), which comprises the consolidated balance sheet as at 30 June 2018, the consolidated statement of profit or loss, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended on pages 6,8,9 notes including a summary of significant accounting policies on pages 10-17, and the directors’ declaration of the Group. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: giving a true and fair view of the Group’s financial position as at 30 June 2018 and of its financial performance for the year then ended; and complying with Australian Accounting Standards and the Corporations Regulations 2001. 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 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. We confirm that the Independence declaration required by the Corporations Act 2001, which has been given to the directors of Blackwall Fund Services Limited, the Responsible Entity of the Group, would be in the same terms if given to the directors at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 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 of the current period. These 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. 23 BlackWall Property Trust - June 2018 Key Audit Matter Valuation of Property Investment Portfolio How the scope of our audit responded to the risk Our procedures included, but were not limited to for both direct and indirect property investments : As at 30 June 2018, the total property investment portfolio of the group is valued at $271 million (2017: $156 million) which is significant to the balance sheet. The portfolio consists of directly owned properties valued at $235 million (2017: $114 million) and equity investments in property joint venture trusts of $36 million (2017: $42 million). The property investment portfolio is recorded at fair value. The external valuations and internal valuations make a number of property specific key estimates and assumptions; in particular, assumptions in relation to market comparable yields and estimates in relation to future rental income increases or decreases and discount rates and other inputs. The valuation of the property investment portfolio held is the key driver of the net assets value and total return. Incorrect valuation could have significant impact on the investment valuation and, therefore, the return generated for shareholders. Internal and external valuations are used by management to recommend to the board. We assessed the managements procedures in respect of property valuation for external and internal valuations. We assessed the independence and competence of the external valuers as experts and examined the engagement correspondence for any scope limitations or anything which may indicate that their objectivity may be impaired. For both the external and internal valuations on a sample basis, we assessed the reasonableness of the significant judgements and assumptions applied to the valuation model, including occupancy rates, lease incentives, lease terms and passing yields. We agreed the key inputs to underlying lease contracts and results. We compared the yield and capitalisation rates to published material for external market trends. And discussed with management anomalies, movements and property specific matters impacting valuations. Reviewed details of option agreements to director valuations Related Party Transactions Our procedures included but were not limited to: During the financial year, a number of related party transactions were undertaken by entities controlled by Blackwall Ltd the parent of the Responsible Entity. The nature and amount of these related party transactions are disclosed under note 15. Reviewed the Group structure and processes in place to identify related parties and inquired with management and those charged with governance of any transactions with those parties during the period. Given the number of material related party transactions occurring throughout the period, there is a risk that these transactions are not identified, disclosed and conducted on normal commercial terms and conditions. Reviewed the minutes of meetings of the Board of Directors and other management meetings for material transactions. Identified the related party transactions and on a sample basis verified the transactions with supporting documentation including the assumptions used by management in determining that transactions were made on normal commercial terms and conditions. We also assessed the appropriateness of the related party disclosures in note 15 to the consolidated financial statements. Accounting for the Consolidation of the Pyrmont entities Our procedures included, but were not limited to: The group’s property investments are by direct investment and property investment structures which are managed by Blackwall Ltd. Reviewed and discussed management’s basis for establishing control in accordance with AASB 10. As a result of a restructure of the Pyrmont entities during December 2017, BWR owns 32.44% of shares in Pyrmont Bridge Property Pty Ltd (PBP) and 25.42% of units Pyrmont Bridge Trust (PBT). Many factors need to be considered to establish that BWR gained control of the Pyrmont entities. The consolidation of the Pyrmont entities is significant as the following major assets, liabilities and results are consolidated on to the Group’s financial statements: - - Property assets of $117 million recorded within the Property Investment Portfolio and $50 million recorded as non-current borrowings in the Balance Sheet $5.8 million recorded as property income in the Statement of Profit or Loss Other Information We have examined and verified: - The Pyrmont entities’ share and unit registers Examined how widely disbursed the investor base is to understand investors impacting voting power. likelihood of other Understood the power delegated to related parties through contractual means. Subsequent to control being established, made an assessment whether there have been changes to decision making rights due to changes in ownership percentages and related party holdings. Other information is financial and non-financial information in the Group’s annual report which is provided in addition to the Financial Report and the Auditor’s Report for the year ended 30 June 2018. The directors of the Responsible Entity (‘the directors’) are responsible for the other information. The other information comprises the information included in the Directors’ report (pages 4, 5, 7, 18-21) which we obtained prior to the date of this auditor’s report but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express 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, 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. Directors’ Responsibilities for the Financial Report The directors of the responsible entity are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. 24 BlackWall Property Trust - June 2018 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 has 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/ar2.pdf This description forms part of our auditor’s report. Dated at Sydney the 31st day of August 2018. ESV Accounting and Business Advisors Tim Valtwies Partner 25 BlackWall Property Trust - June 2018 ARSN 109 684 773 EMAIL info@blackwall.com.au RESPONSIBLE ENTITY BlackWall Fund Services Limited WEBSITE www.blackwall.com.au REGISTRY Computershare Investor Services GPO Box 2975 ADDRESS 50 Yeo Street Neutral Bay NSW 2089 ABN 68 450 446 692 TELEPHONE +61 2 9033 8611 BLACKWALL TY T UST PROPER R