Centuria Capital Group Annual Report 2016

Plain-text annual report

CENTURIA CAPITAL2016ANNUAL REPORT Centuria Capital Limited ABN: 22 095 454 336. Directors' reportNICTA Building , Australian Technology Park , Eveleigh NSW 2 ""Contents About Centuria .................................................................................................................................................................................2 Key Financial Metrics .....................................................................................................................................................................3 Chairman’s Report ..........................................................................................................................................................................4 Chief Executive's Report ..............................................................................................................................................................5 Unlisted Property .........................................................................................................................................................................11 Listed Property ..............................................................................................................................................................................14 Centuria Life ....................................................................................................................................................................................17 Centuria in the Community .....................................................................................................................................................19 Meet the Directors ......................................................................................................................................................................20 Directors' Report ..........................................................................................................................................................................21 Lead Auditor's Independence Declaration .....................................................................................................................38 Financial Statements ..................................................................................................................................................................39 Directors' Declaration ................................................................................................................................................................79 Corporate Directory ....................................................................................................................................................................84 1 About Centuria 203 Pacific Highway, St Leonards NSW Centuria Capital’s Annual General Meeting of Shareholders will be held: Date: Time: Location: Tuesday, 29 November 2016 10:00am Sofitel Sydney Wentworth Hobart Room, Lobby level 61-101 Phillip Street, Sydney Centuria Capital Limited (ASX: CNI) is an ASX-listed specialist investment manager with $1.9 billion in funds under management. We are focused on creating wealth for our investors and offer our clients a range of investment opportunities including listed and unlisted property funds as well as tax-effective investment bonds. Our in-depth knowledge of these sectors, together with our intimate understanding of our clients, allows us to transform opportunities into rewarding investments. This, in turn, drives increased shareholder wealth and produces consistent returns for investors. Further information can be found on our website www.centuria.com.au 2 Key Financial Metrics Underlying Net Proﬁt A(cid:15)er Tax ($m) Underlying Earnings Per Share (cents) Net Tangible Assets Per Share ($) 12 10 8 6 4 2 0 12 10 8 6 4 2 0 5.3 5.9 6.3 10.4 FY13 FY14 FY15 FY16 Statutory Proﬁt A(cid:20)er Tax ($m) 7.3 9.1 8.6 10.5 FY13 FY14 FY15 FY16 15 12 9 6 3 0 6 5 4 3 2 1 0 1.0 0.8 0.6 0.4 0.2 0.0 0.54 0.65 0.86 0.97 FY13 FY14 FY15 FY16 6.8 7.6 8.1 13.7 FY13 FY14 FY15 FY16 Dividends Per Share (cents) Funds Under Management ($bn) 2.0 1.5 1.0 0.5 0.0 1.76 1.63 1.59 1.92 30 June 2013 30 June 2014 30 June 2015 30 June 2016 3 1.25 2.75 4.75 5.25 FY13 FY14 FY15 FY16 Chairman’s Report In my inaugural year as Chairman, it gives me great pleasure to introduce the annual report of Centuria Capital Limited. Centuria has been demonstrably successful during the financial year 2015–16. The Group achieved a net profit after tax of $10.4 million, up from $6.3 million in 2014-15, which is our best result to date and at the upper end of our guidance. That success naturally flows to our investors and has allowed the Board to increase the total 2016 financial year dividend by 11 per cent resulting in a fully franked dividend of 5.25 cents per share. Still, we can do better. Our target is growth in distributions to shareholders We expect to further increase the dividend per share as Centuria’s recurring revenue grows - a task we are firmly focused on. Our goal is to provide consistent growth in earnings and distributions in future years. Clear plans for improvement in the 2017 financial year Centuria is poised and ready for the next stage of growth, both organically and, if possible, through prudent corporate activity. Our Chief Executive’s report outlines the Group’s strategy for achieving that growth, both in funds under management and higher recurring revenue. I recommend it to you as essential reading. In particular, we will look for opportunities to expand by acquiring fund managers when they align with our strategy and have the potential to provide additional value to our shareholders. Board Retirements and Additions It would be remiss of me not to offer the Board’s and my personal, thanks to Roger Dobson, who resigned as Chairman on 30 March 2016. Roger joined the Centuria Board in 2007 and has been at the forefront of repositioning the company and laying solid footings for the future. This year’s success is in great part his. We thank Roger for his leadership and commitment, and hope that he will continue to contribute to our ongoing successes in the future. It is also opportune to announce the appointment of our new non-executive director, Susan Wheeldon-Steele. Currently Industry Head – Performance Solutions at Google, Susan will help future-proof both Centuria and the Board, adding valuable input and experience in our dealings with the digital environment we now exist in. Finally, I must thank my fellow directors, our indefatigable CEO, John McBain, and the entire Centuria team for their hard work and contribution to the Group’s success during the year. We are well positioned to achieve these goals, with clear plans to improve our business in the 2017 financial year. Garry Charny Chairman Centuria Capital Limited Chairman Garry Charny " The Group achieved a net profit after tax of $10.4 million, up from $6.3 million last year, which is our best result to date..." 4 Chief Executive's Report The 2016 financial year was exceptionally strong for Centuria. The group achieved a record profit and substantially increased funds under management. This success provides a sound capital base to fund near-term expansion. Record FY16 result driven by an exceptional year for Unlisted Property Centuria reported an underlying net profit of $10.4m for the 2016 financial year, an increase of 65% on the previous corresponding period. This strong growth was largely due to fees from the significant profits on the sale of our Macquarie Park assets and 175 Castlereagh Street, as outlined in the Unlisted Property Division report. Financial summary Group CEO John McBain targeting a 25% " In FY17 we are increase in FUM." Underlying net profit after tax Underlying earnings per share (basic) Dividend per share (fully franked) Net assets per share FY16 FY15 $10.4m $6.3m 8.1c 13.7c 5.25c 4.75c $1.67 $1.55 This profit result was at the upper-end of our guidance and underpinned an 11% increase in fully franked dividends to 5.25 cents per share. Net assets per share also increased by 8% to $1.67 per share. Highlights for the year included a 21% increase in funds under management (FUM), from $1.6bn to $1.9bn. In FY17 we are targeting a 25% increase in FUM. Unlisted Property acquired $265m of assets, including the $104m purchase of three buildings in Australian Technology Park (ATP) in Sydney and the $109m acquisition of the remaining interest in the Seven Group’s headquarters in the same park. Unlisted Property has had a strong start to the 2017 financial year having recently acquired a landmark office asset, The Zenith in Chatswood, for $280m. These acquisitions demonstrate the strength of our integrated platform. Centuria co-invested with one of the world’s largest asset managers, BlackRock, on The Zenith acquisition. Partnering with a global institution of BlackRock’s calibre is a validation of Centuria’s active management model and our reputation within the property market. In addition, we co-tendered with leading Australian property group, Mirvac Group, on the successful ATP bid. FY16 marked the first full year of operation for our listed property platform, Centuria Metropolitan REIT (ASX: CMA). Distribution forecasts were met and the Trust also partnered with our Unlisted Property Division to acquire a 50% interest in 203 Pacific Highway, St Leonards for $43m. We are pleased that in FY16 CMA delivered on its financial forecast distributing 17c per stapled security. CMA's portfolio holdings grew by 9.3% to approximately $400m and NTA increased by 21c to $2.18 per stapled security. CMA utilises Centuria’s capabilities in property management, development and accounting. 5 Chief Executive's Report It is particularly pleasing that during FY16 Centuria achieved significant leasing success for CMA with occupancy lifting to 97.2% from 96.7%. Wealth. The division is targeting more white-labelling opportunities, focusing specifically on boutique high net worth advisers. We will continue to focus on generating value in CMA through our integrated business approach. This will be achieved in part by maximising tenant retention, initiating refurbishment and repositioning strategies and identifying fit for purpose assets to complement the existing portfolio. CMA is well positioned for growth in income and capital. Where appropriate, Centuria’s strategy is to co-invest with our listed funds and provide balance sheet support for our unlisted funds. We also will continue to partner with leading domestic and global institutions. Our Investment Bond division reported an underlying profit of $4.7m (vs. $5.8m in the previous corresponding period). Profit was down year-on-year as a result of increased marketing and staff costs as we reposition this business for growth. Total Investment Bond FUM increased in FY16 and we are forecasting further FUM growth in FY17 for the non-legacy book. The steady growth in policy holders that we saw in FY15 continued in FY16, increasing from approximately 83.8k in FY15 to 85.1k in FY16 and we expect this growth trajectory to continue. The four main unitised bonds ranked 1st or 2nd in the Morningstar peer rankings and our Investment Bond product suite is rated “Investment Grade” by Lonsec. In FY16 the division successfully diversified its product offering by launching its White Labelling strategy. The first bond offering was co-branded with Providence We continue to be excited about the medium and long term growth prospects for this business. Its annuity style profits fit well with our strategy of building a portfolio with secure, stable income growth. Strengthened balance sheet Our strengthened balance sheet and modest gearing has facilitated larger property fund acquisitions. We recently participated in the Cash Alternative Facility in the GMF takeover offer from Growthpoint Properties Australia. The release of capital from our combined 16.1% interest in GPT Metro Office Fund (GMF) further strengthens our balance sheet and leaves us in a strong position to pursue future growth initiatives. Platform acquisitions remain a strong focus for the Group where scale and market position are meaningfully enhanced. We will continue to deploy capital with discipline and to the benefit of all our investors. Earnings quality to improve from strong growth in recurring income streams We expect the underlying profit result for the 2017 financial year to benefit from higher recurring fee income as we continue to add to our funds under management. This anticipated improvement in earnings quality is already well supported by the management fees to come from the recent acquisition of The Zenith in Chatswood and the first full year contribution from the Centuria ATP Fund. We expect to augment this fee income with targeted growth from our existing funds under management. Centuria has implemented a corporate restructure. The change, introduces a new stapled entity and provides a more efficient platform to support our current and future property fund co-investments. The restructure, in and of itself, does not change the underlying business, however, the new structure will potentially increase distributions to investors. The restructure proposal was presented to shareholders and approved by ordinary resolution at an Extraordinary General Meeting held on Monday, 10 October 2016. Centuria Stapled Security holders Centuria Capital Limited Stapled Centuria Capital Fund Centuria Fund Investments 6 Chief Executive's Report Group Strategy predicated on sustainable growth Centuria’s unwavering goal is to provide shareholders with consistent growth in earnings and distributions per share, in the short and long term. We have developed, and are executing on, our strategy to support this primary goal. We have a solid foundation on which to build our funds under management across both property and investment bonds. Our platform is unique and its success is the result of a long history of consistently delivering solid returns to our investors. We have unparalleled reach across our large existing network of retail and high net worth, financial advisors and institutions. Our high-net-worth distribution model is unrivaled in property funds management. It is the ability to raise funds across this comprehensive and established network that strengthens our position when competing for assets. Our recent partnerships with BlackRock, Mirvac and our Centuria Metropolitan REIT were complemented by overwhelming support from our retail investor network with the 203 Pacific Highway, ATP and Zenith Funds closing fully subscribed. We are very proud of our achievements to date and are confident that we now have the foundations in place to acquire larger and higher quality assets. This will have a positive effect on recurring income as management fees and distributions from future co-investments generate a greater proportion of earnings. The group is committed to providing strong parent company support to Centuria Metropolitan REIT (CMA) and our Unlisted Property Funds division and Investment Bond division. Integrated property model drives outperformance Our integrated business model and active asset management approach has been a fundamental part of why we have been able to consistently deliver solid returns for our stakeholders. What differentiates us is the diverse and deep experience embedded in our property and asset management teams that allows us to extract more value from our assets. Asset performance is optimised by having our own experienced team originate the right investment opportunities, actively manage these assets to add value as well as to take care of every aspect of the management of these properties from leasing and tenant administration to building services. What this means is we capture margin across the whole property value chain and, at the same time, maximise the value of the assets we manage. We will continue to implement this approach with our property funds under management to drive outperformance for the group and our investors. Centuria’s Integrated Property Model Fu n d s Mana g e m e n t Develop m e n t T r a n s a c t i o n s End-to-End Property Capability g n i s a e L s Facilities & A s Manag e m e e t s t n 7 Chief Executive's Report The strength of the Centuria brand and asset management expertise has been a critical success factor in attracting strong interest from global institutional investors to partner in large acquisitions. These partnerships will continue to be an important component of Centuria’s strategy. party distributers and selected aligned financial advisers. Investment bonds are a tax-effective means of accumulating wealth and income and act as an attractive supplement to superannuation. Positive outlook for the 2017 financial year The strong start to the 2017 financial year by our Unlisted Property business means that we are confident in our targeted 25% FUM growth having already acquired more than half of the requisite growth. The launch of the Centuria Diversified Property Fund during this financial year by the Unlisted Property Funds division will also add to our funds under management. This fund will give Centuria access to a different capital base via platforms and wraps and is aimed at attracting investment through larger financial planners and dealer groups. In addition, by being an open-ended fund, the assets can be retained in the fund for a longer term. Our Listed Property Funds division, CMA, is targeting growth in the 2017 financial year by acquiring ‘fit for purpose’ assets to complement the existing portfolio as well as pursuing acquisition opportunities similar to the GMF bid. Growth in our Investment Bond Division is expected to come from building long-term, sustainable relationships in the retail advice market and positioning Centuria Investment Bonds as the provider of choice for third- Realising our plans to further benefit shareholders We are passionate about building our business and have a clear vision of how to achieve our goals. It is our clear intent to say what we do and do what we say. We are pleased that in FY16 we were able to do just this and we will continue to do so in FY17. Strategy scorecard In meeting these objectives, we strive to be more focused and agile than our competitors. We have the experience and expertise plus a scalable model, solid balance sheet and a diverse distribution network. We will use these attributes to build a more robust and larger scale business underpinned by high-quality, stable, recurring earnings. Centuria has never been in a stronger position to realise our growth strategies to the benefit of investors and shareholders. We look forward to keeping the market informed of our progress throughout the 2017 financial year (see Strategy Scorecard on opposite page). I consider it an honour to lead such an experienced and motivated management team. Our considerable achievements to date are due to their commitment and that of our entire staff. I would like to extend my thanks to the whole Centuria team for their efforts in FY16. There have been significant changes to our Board in FY16. I would like to echo our Chairman’s thanks to Roger Dobson, who resigned as Chairman earlier this calendar year. We have benefited greatly from the guidance and support that Roger has given us and he has contributed significantly to making Centuria what it is today. I wish to welcome our new Chairman, Garry Charny, to the Board. Garry understands our business intimately and we look forward to his guidance and insights in the forthcoming period of growth. The addition of our latest non-executive director, Susan Wheeldon-Steele, rounds out the considerable experience within Centuria’s Board. I would personally like to acknowledge the counsel of my fellow Board members and thank them for their continued dedication to the growth of the business. In conclusion, I would like to thank our shareholders for their continued support. Our unflagging goal is to reward their loyalty with steady growth in shareholder returns. John McBain Group CEO 8 Strategy Scorecard Disciplined commitment to set strategy Expand and diversify product range • Continued expansion of Centuria Metropolitan REIT (CMA) to gross assets above $400m • • Successful launch of $280m Centuria Zenith Fund partnering with BlackRock Launched “White Label” Investment Bond offering Utilise and recycle balance sheet • Enhanced balance sheet afforded: 0 participation in successful joint bid for ATP site with Mirvac; 0 acquisition of The Zenith (largest acquisition by Centuria); and 0 acquisition of stake in GPT Metro Office Fund (GMF) Corporate activity • Stake taken in GMF supporting CMA takeover bid. CMA subsequently withdrew its bid and Centuria elected to sell its total stake for cash to Growthpoint Properties Australia at an increased share price. Delivering attractive returns to third-party investors • Realised significant total returns 0 175 Castlereagh Street, Sydney c.30% IRR (2.65 years) 0 80 Waterloo Road/16 Byfield Street, Macquarie Park c.20% IRR (9.08 years - post stapling) Expansion of Investment Bond business • Net FUM gain in FY16 • Expectation of net FUM gain in FY17 • Broadened distribution capabilities Co-invest with clients • Belmont Road, Mosman - development on target for successful completion (100% pre-sold) with settlement due December 2016 • Modest balance sheet co-investments in property markets where CNI is experienced. 9 Centuria Capital Limited Overview* Experienced specialist Fund Manager with proven and disciplined growth Centuria Capital Limited (ASX: CNI) $1,919m Total funds under management (FUM) Centuria Property Funds FUM Centuria Investment Bonds FUM $783m Unlisted Property $416m Listed Property (ASX: CMA) $350m Centuria Life Investment Bonds $370m Over Fifty Guardian Friendly Society Bonds 10 * All figures as of 30 June 2016 Unlisted Property Record profit for Unlisted Property In 2015–16 the Unlisted Property achieved strong growth, met guidance targets and produced exceptionally high profits. The positive results were supported by successful asset sales that generated substantial performance fees for Centuria. How knowledge and skill improve asset values In FY16, the division realised significant profits on the sale of three properties. To attract buyers for 175 Castlereagh Street, Sydney, which we bought for $56 million in April 2013, we leased formerly vacant areas and created a development scheme for a hotel and apartments. We sold the property for $98 million. In 2001−02 we purchased 80 Waterloo Road and 16 Byfield Street, Macquarie Park, in Sydney’s north- 203 Pacific Highway, St Leonards NSW west, for $25 million. These Funds were subsequently stapled together in July 2007. By skillfully managing the assets we improved their value and devised a development plan for 350 apartments on the site. We sold the properties for $101 million. Good buying continues to support our goals During the year we acquired assets that underpinned two new investment funds. The Unlisted Property acquired a 50-per-cent interest in 203 Pacific Highway, St Leonards, on Sydney’s lower north shore, for $43 million. The Division invested as equal partners with Centuria Metropolitan Real Estate Investment Trust (REIT), listed on the ASX as CMA. This joint investment, established for the benefit of investors, was enthusiastically received. After some 450 expressions of interest, the fund closed over-subscribed. CEO Unlisted Property Jason Huljich profits on the sale of three " ...we realised significant properties." 11 Unlisted Property Increasing strength in a productive partnership In the first joint bid of its kind, Centuria tendered in partnership with Mirvac Group to acquire assets worth $104 million in the Australian Technology Park, just south-west of the Sydney CBD at Eveleigh. Centuria purchased three commercial buildings within the Park. Before settling on the properties, we added considerable value for investors by negotiating a new 10-year lease with the major tenant at a significantly increased rent. This extended the weighted average lease expiry (WALE) from 2.5 years to 5.6 years. Developing new products to meet the demand Our unrelenting goal is to meet our clients’ need for quality investment products that offer strong, stable yields. As we move into the new financial year, we expect firm demand for well-managed property investment products to continue amid current low interest rates. To date in FY17, Centuria has partnered with BlackRock to acquire "The Zenith", an iconic $280 million Chatswood office complex. Australian Technology Park, Eveleigh NSW The Zenith, Chatswood NSW Funds continue to produce sound returns Asset values and distributions are rising in our existing unlisted funds. We continue to improve the quality of our portfolio by acquiring larger and higher quality assets. Properties in New South Wales dominate the portfolio. We are well placed to benefit from what we believe will be rising demand for property amid significant state infrastructure spending and the number of office buildings being repurposed for residential occupation and being withdrawn for the Sydney Metro rail project. Through our only development fund, we have constructed a residential property at Belmont Road in the prestigious Sydney suburb of Mosman. The fund is performing to forecast. We have sold all 62 townhouses and units and at 30 June 2016 construction was on track for completion late in 2016. Belmont Road, Mosman NSW 12 Unlisted Property - Sale Case Studies 175 Castlereagh Street, Sydney The Centuria team added significant value to the asset utilising its strong asset management experience. The team identified an asset strategy to reposition the leasing profile of the property and capture market rents. Additional growth was sought via a mixed-use redevelopment scheme. Under the management of Centuria, a total of 22 leasing transactions over c.13% of the total NLA of the property were completed within 16 months to quality tenants. The average rental in the property increased by 23% during the 2.6 years Centuria managed the property. We completed a comprehensive mixed use residential development scheme Investment Returns Purchase date Combined Purchase Price (prior to stapling) Sale date April 2013 $56.0 million Sale price December 2015 Capital Gain (pre fees) IRR (post fees) Average Income Return^ Performance and sale fees $98.0m 75.0% c.30.0% 9.5% c.$7.2m Purchase date Purchase price Sale date Sale price Capital Gain IRR (Post Fees) Average Income Return^ Performance and sale fees 175 Castlereagh Street, Sydney NSW 80 Waterloo Road and 16 Byfield St, Macquarie Park, Sydney Centuria’s asset strategy targeted a precinct with future strategic significance and mixed use development potential. Centuria prepared a redevelopment scheme and development proposal that maximised the future residential redevelopment potential of the Property and to enhance its sale, following the properties being recognised as being of strategic significance and benefiting from a significant rezoning in late 2015. 80 Waterloo Road & 16 Byfield Street, Macquarie Park NSW 2001 & 2002 $25.3 million June 2016 $101.0m 310% c.20.0% 3.5% c.$9.6m * Sold via a put and call option with settlement in July 2016. ^ Returns post stapling in July 2007. 13 Listed Property CEO Listed Property Nicholas Collishaw " We expect that distributions will increase to 17.5 cents per stapled security, a rise of three per cent on the distribution in the 2016 financial year." 14 producing a rise in Net Tangible Assets (NTA) of 11 per cent to $2.18 per security. Despite the increased demand for properties, CMA has still been able to secure value-based acquisitions, demonstrated by the purchase of a 50-per-cent interest in 203 Pacific Highway, St Leonards, for $43.0 million, in partnership with a Centuria unlisted fund. The investment aligns with CMA’s strategy to buy quality buildings in metropolitan markets in which competing supply is restrained. CMA also endeavoured to acquire GPT Metro Office Fund (GMF) during the year, however competitive bidding increased the cost of the acquisition beyond CMA’s fair value assessment resulting in a withdrawal of its proposal and a sale of its initial investment in GMF. CMA’s disciplined and conservative approach to the use of debt has ensured its debt levels have remained within its target band of 25-35 per cent. At 30 June 2016 CMA had debt facilities totalling $150 million, drawn to $142 million, with a weighted average expiry of 3.8 years. CMA’s total cost of debt is calculated at 3.9 per cent, with 59 per cent of debt hedged; gearing at financial year’s end was 33.2 per cent. CMA meets targets in its first full year Centuria Metropolitan REIT (ASX-listed as CMA) had a successful first full year of operation. CMA met its financial forecast, distributing 17.0 cents per stapled security to investors in four equal instalments. At 30 June 2016 CMA’s portfolio comprised 13 properties in Sydney, Brisbane, Canberra and Adelaide with a combined value of $398.7 million. The metropolitan location of CMA’s properties make them attractive to many of Australia’s small to medium enterprise (SME) tenants, as they are either close to a skilled workforce or convenient for customer access. CMA properties accommodate over 320 tenants. Whilst small in occupancy area, three-quarters of the portfolio’s tenants are ASX-listed companies, multinationals or government agencies. This diversity ensures that CMA does not rely too heavily on a single occupier or industry grouping. Demand for commercial property is growing Occupancy levels have grown in metropolitan markets. The increase has come from higher occupier demand and from the withdrawal of office buildings that are being converted to residential and alternative uses. These trends, together with growing investor demand for metropolitan properties, have increased rents and tightened capitalisation rates. As a result, CMA properties have increased in value across the portfolio, Listed Property Keeping a clear focus on sound returns CMA’s investment strategy and focus remain unchanged. The Trust is conservatively managed and has a strong tenancy base. This provides predictable and growing returns with an expectation of capital growth over the medium term. The portfolio continues to be actively managed with an emphasis on retaining tenants to maximise occupancy and income. In addition, targeted asset repositioning strategies designed to generate further capital growth in the portfolio are applied to each asset. For the 2017 financial year CMA’s distributable earnings guidance range is 18.7 cents to 19.0 cents per stapled security with distributions to investors targeted to increase to 17.5 cents per stapled security, a rise of three per cent over the distribution in the 2016 financial year. CMA will continue to pay distributions in convenient quarterly instalments. CMA has continued to benefit from the scale of Centuria Capital’s vertically integrated platform with much of the income and capital growth achieved in the past financial year attributed to Centuria’s skills in property and facility management, refurbishment and development advice and importantly, active lease management. Centuria will continue to support CMA’s growth The Centuria Capital Group derives various fees for managing CMA and its portfolio. These include: a trust management fee of 0.55 percent of CMA’s gross asset value, property management fees (generally recoverable from tenants) and project fees for the provision of leasing and development management services. These fees generated revenue of $2.7m for the Group during the financial year to 30 June 2016. It is Centuria Capital’s intention to foster the continued growth of CMA and it anticipates providing the market with additional listed investment products when it determines the investment climate is suitable. These initiatives will build on Centuria’s strengths and widen the range of product offerings to meet investors’ requirements. Following a good performance in the 2016 financial year, CMA is in a strong position to continue to deliver predictable and growing returns to security holders in the year ahead. We will continue to seek opportunities to extract additional value from the portfolio. From time to time we may dispose of assets when, in our assessment, forecast investment returns do not match the risks associated with continued ownership. Interior of 203 Pacific Hwy, St Leonards NSW 15 Listed Property Key facts about CMA’s performance Financial snapshot Stapled security price at 30 June, 2016 FY17 distributable earnings guidance1 FY17 distribution guidance per stapled security1 Annualised distributable earnings yield2 Annualised distribution yield2 Total assets3 NTA per stapled security3 Gearing3 ($) 2.14 (cps) 18.7 – 19.0 (cps) 17.5 (%) 8.7 – 8.9 (%) 8.2 ($m) $415.6 ($) (%) 2.18 33.2 CMA portfolio overview Portfolio snapshot Number of assets Book value Occupancy2 WALE2 (#) ($m) (%) (years) FY16 13 398.7 97.2 4.4 FY15 12 323.1 96.7 4.8 1 Distributable earnings provide a financial measurement that is not prescribed by Australian Accounting Standards (AAS). It represents the profit under AAS, adjusted for specific non-cash and significant items. The Directors consider that distributable earnings reflect the core earnings of CMA. 2 Based on a closing price at 30 June 2016 of $2.14 per stapled security. 3 As at 30 June 2016. 16 NTA 21cps +11% $2.18 FY16 NTA movements ($ per stapled security) Strong metropolitan office market fundamentals and valuation uplift driving NTA growth. ($0.02) ($0.02) $0.27 $2.30 $2.25 $2.20 $2.15 $2.10 $2.05 $2.00 $1.95 $1.90 $1.85 $1.80 ($0.02) $1.97 FY15 203 Pac Hwy1 Acquisi(cid:5)on Revalua(cid:5)on MTM Hedge Other2 FY16 1. Net transaction costs associated with the acquisition. 2. Other include movements in cash, payables, receivables and revaluation of GMF stake. Centuria Life Investment Bond Division Structure Centuria Life Limited Centuria Life Friendly Society Over Fifty Guardian Friendly Society • Manages total FUM of $350m • Unitised Investment Bond Funds 0 Established in 1998 0 7 Investment options 0 Tax effective alternatives to superannuation • Manages total FUM of $370m • Prepaid Funeral Plans: 0 Strong growth 11% year on year 0 Prepaid funeral plan fund 0 Potential for further growth in sector. • Capital Guaranteed Funds 0 Established in 1981 0 Legacy funds. Centuria Life Limited (CLL) continued to grow during the 2016 financial year. Since 30 June 2015 we welcomed 1372 new policyholders, taking the total number of primary policyholders from 83,814 to 85,186 over the financial year to 30 June 2016. $350m + $370m = $720m Total FUM of Centuria Life Investment Bonds Total FUM of Over Fifty Guardian Friendly Society Bonds Total FUM 30 June 2016 30 June 2015 Total FUM increased $720m $715m Total policyholders increased Inflows increased 85.1k 83.8k $67.0m $46.8m Redemptions $95.8m $70.9m CLL remains the fourth-largest market participant CLL maintained its strong position as the fourth-largest friendly society and insurance bond issuer in Australia, with 10.4 per cent market share. (Source: Plan for Life, June 2016). 17 General Manager Investment Bonds Neil Rogan " At 30 June 2016, CLL had total funds under management (FUM) of $720 million. This compares with FUM of $715 million at 30 June 2015." Centuria Life Centuria Life Limited is a wholly-owned subsidiary of the Centuria Group, operating two friendly societies: Centuria Life Friendly Society and the Over Fifty Guardian Friendly Society. Both are regulated by APRA and authorised to issue insurance bonds and prepaid funeral plans. Earning the confidence of financial advisers and investors In the retail financial services market, CLL continues to build the confidence of financial advisers and direct investors. Increasing uncertainty about the proposed changes to concessional and non-concessional contributions to superannuation has increased the appeal of investment bonds as a supplement to superannuation savings. The bonds are internally taxed at a maximum rate of 30 per cent, and no personal tax is paid on withdrawals after 10 years. We remain focused on building long-term, sustainable relationships in the retail advice market and to position the Investment Bond Division as the investment bond provider of choice for third party distributors, financial advisors and direct investors. 18 Further confirmation of the strength and reliability of CLL’s Australian Shares Investment Bond comes from Morningstar’s assessment, under which the bond retains its Five-Star Rating and is also rated first among the 40 funds in the category for performance over one, three and five years. Expert reviewers confirm the quality of our products Among affirmations we received during the year, CLL was a finalist in the Plan for Life AFA Life Company of the Year Awards for Investment Bonds. Lonsec Research awarded an Investment Grade Rating to four of our funds: Australian Shares, Balanced, Growth and High Growth. In addition, 3 of our 4 unitised fund funds have been recognised by Morningstar and rated number one for their consistent performance over one, three and five years. Fund Total Return 1 Yr Total Return 3 Yr Total Return 5 Yr Morningstar Ranking(2) Centuria High Growth Centuria Australian Shares Centuria Growth Bond Centuria Balanced 4.00% 9.77% 7.92% 4.75% After tax returns demonstrated in the table 7.80% 9.82% 8.47% 6.36% 8.92% High Growth Bond 9.86% Australian Shares Bond 7.78% Growth & Balanced Bonds 7.25% Growth & Balanced Bonds 1/23 1/38 1/88 2/88 TM Morningstar Rating **** ***** **** **** 1. The Changing Face of Financial Service Distribution, IFA 2. Performance rankings from the universe of investment/insurance providers as at 31 July 2016. © 2016 Morningstar, Inc. All rights reserved. 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Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. Centuria in the Community The Centuria team are very community focused and regularly take part in fundraising events throughout the year. FY16 saw funds raised for Jeans for Genes Day, Daffodil Day and Tour De PIF in aid of the Property Industry Foundation. Centuria’s participation in these events help to raise a combined total of approximately $4000 for these charities. St Lucy’s School Centuria continues to support St Lucy’s School. Staff participate in a number of initiatives and events each year. The Company continues to host an annual trivia night to raise funds for the school. The FY16 event attracted over 150 attendees and raised $36,600. The funds raised by the event will go towards St Lucy’s ‘Literacy for Life’ programme. The programme focuses on intensive training of volunteers, parents and other professionals who have day-to-day contact with students who attend the School. Literacy for Life involves the use of specific resources and ongoing research to monitor best practice in teaching students to read. We would like to thank all our partners and volunteers who supported this cause, and in particular, our thanks to CBA who kindly donated their function space for the event. We look forward to hosting the event again in 2017. In FY16, our staff continued to take part in volunteering days at the School. Our staff participate in a wide range of activities at the School ranging from assisting with general maintenance, gardening and providing administration help. The time spent at St. Lucy’s gives our staff the opportunity to see the difference the School makes to the lives of its students first hand. 19 Meet the Directors From left to right: Chairman - Garry Charny, Nicholas Collishaw, Jason Huljich, John McBain, Peter Done and John Slater (Photo dated July '16, prior to the appointment of Susan Wheeldon-Steele on 31 August '16) 20 Directors' Report For the year ended 30 June 2016 The directors present their report together with the consolidated financial statements of the Group comprising Centuria Capital Limited (the ‘Company’), and its controlled entities for the financial year ended 30 June 2016 and the auditor’s report thereon. The Company is the head entity of the Centuria Capital Limited Group, its shares are listed on ASX Limited under the code “CNI”. Directors The directors of the Company at any time during or since the end of the financial year are: Name, qualifications and independence status Experience, special responsibilities and other directorships Mr Garry S. Charny, BA. LL.B Chairman Independent Non-Executive Director Mr Roger W. Dobson, LL.B, LL.M Independent Non-Executive Director Mr Peter J. Done, B.Comm, FCA Independent Non-Executive Director Mr John R. Slater, Dip.FS (FP), F Fin Independent Non-Executive Director Garry was appointed to the Board on 23 February 2016, and appointed as Chairman of the Board on 30 March 2016. Garry is also Chairman of the Nomination and Remuneration Committee and a member of the Audit, Risk Management and Compliance Committee. Garry is the Managing Director and founder of Wolseley Corporate, an Australian corporate advisory and investment house. He has had broad experience in both listed and unlisted companies across a diverse range of sectors including property, retail, technology and media. Roger was appointed to the Board in 2007 and was Chairman until his retirement on 30 March 2016. He was also Chairman of the Nomination and Remuneration Committee and a member of the Audit, Risk Management and Compliance Committee. Peter was appointed to the Board in 2007 and is the Chairman of the Audit, Risk Management and Compliance Committee. He is also a member of the Nomination and Remuneration Committee and the Investment Committee. Peter was a partner of KPMG for 27 years until his retirement in June 2006. He has extensive knowledge in accounting, audit and financial management in the property development and financial services industries, corporate governance, regulatory issues and Board processes through his many senior roles. John was appointed to the Board in 2013 having been an adviser to the Centuria Life Friendly Society Investment Committees since 2011. John was a senior executive in the KPMG Financial Services practice from 1989 to 1999 and acted as State director of the Brisbane practice. He has also served on the Investment Committees of KPMG Financial Services, Berkley Group and Byron Capital. In 2008, John founded boutique Financial Advisory firm Riviera Capital and has a wealth of financial services experience. John is also a member of the Audit, Risk Management and Compliance Committee and the Nomination and Remuneration Committee. 21 For the year ended 30 June 2016Directors' Report For the year ended 30 June 2016 Name, qualifications and independence status Experience, special responsibilities and other directorships Mr John E. McBain, Dip. Urban Valuation Chief Executive Officer Mr Jason C. Huljich, B. Comm Executive Director Mr Nicholas R. Collishaw, SAFin, FAAPI, FRICS Executive Director John was a founding director and major shareholder in boutique property funds manager Century Funds Management, which was established in 1999 and was acquired by the Over Fifty Group in July, 2006. He joined the Over Fifty Group Board on 10 July, 2006 and was appointed Chief Executive Officer in 2008. In 2011 the company was renamed Centuria Capital. John is also a director of QV Equities Limited, a licensed investment company listed on the ASX. Prior to forming Century, in 1990 John founded Hanover Group, a specialist property investment consultancy and in 1995 he formed Waltus Investments Australia, a dedicated property fund manager. John formerly held senior positions in a number of property development and property investment companies in Australia, New Zealand and the United Kingdom. John holds a Diploma in Urban Valuation (University of Auckland). Jason was appointed to the Board in 2007. As CEO – Unlisted Property Funds, Jason is responsible for providing strategic leadership and ensuring the effective operation and growth of Centuria’s unlisted property portfolio. Jason has been involved in the unlisted property sector in Australia since 1996 and has considerable expertise in investment property selection, fund feasibility and funds management. Jason is the President of the National Executive Committee of the Property Funds Association of Australia, the peak industry body representing the $125 billion direct property investment industry. Nicholas was appointed CEO – Listed Property Funds at Centuria Property Funds on 1 May, 2013. Prior to this role, Nicholas held the position of CEO and Managing Director at the Mirvac Group. During his time at Mirvac (2005-2012), Nicholas was responsible for successfully guiding the business through the GFC and implementing a strategy of sustained growth for the real estate development and investment company. During Nicholas’ 30 year career, he has held senior positions with James Fielding Group, Paladin Australia, Schroders Australia and Deutsche Asset Management. He has extensive experience in all major real estate markets in Australia and investment markets in the United States, United Kingdom and the Middle East. Nicholas is Deputy Chair of the UNSW Built Environment Advisory Council. The above named directors held office during the entire financial year and up to the date of this report, unless otherwise noted. 22 For the year ended 30 June 2016Directors' Report For the year ended 30 June 2016 Directors' meetings The following table sets out the number of directors' meetings (including meetings of committees of directors) held during the financial year and the number of meetings attended by each director (while they were a director or committee member). Directors’ interests The following table sets out each director’s relevant interest in shares in the Company as at the date of this report. Director Board Meetings Audit, Risk, Management & Compliance Committee Meetings Nomination & Remuneration Committee Meetings A 11 12 21 22 23 22 23 G. Charny R. W. Dobson P. J. Done J. R. Slater J. E. McBain J. C. Huljich N. R. Collishaw B 11 14 23 23 23 23 23 A 1 2 6 6 # # # B 1 4 6 6 # # # A 1 2 3 3 # # # B 1 2 3 3 # # # A – Number of meetings attended B – Number of meetings held during the time the director held office during the year # – Not a member of the committee Directors Number of Fully Paid Ordinary Shares G. Charny P. J. Done J. R. Slater J. E. McBain(i) J. C. Huljich(i) N. R. Collishaw(i) 1,627 500,000 1,700,000 4,604,549 2,342,715 850,051 (i) These directors have also been granted Performance Rights as detailed in the Remuneration Report. Directors hold ordinary interests, with equal rights to other shareholders. 23 Operating and financial review The Group recorded a consolidated statutory net profit after tax for the year of $12.1 million (FY15 $8.6 million). Underlying net profit after tax was $10.4 million (FY15 $6.3 million). Underlying net profit after tax is the statutory net profit after tax adjusted for changes in the fair value of financial instruments and significant items of a non-recurring nature. Reconciliation of Statutory Profit to Underlying Profit FY16 FY15 Statutory Profit after tax Less non-recurring items: Unrealised gain on fair value movements in derivatives Impairment charges in relation to seed capital valuations Accounting gains on sale of non-core assets Unrealised profit on non-core investment (net of costs) Tax impact of the above Underlying Profit after tax $ million $ million 12.123 8.561 5.493 (2.779) 0.990 (1.998) 10.417 1.148 (1.795) 5.194 - (2.266) 6.280 Directors' Report For the year ended 30 June 2016 Company secretary Mr James Lonie was appointed Company Secretary on 14 August 2015. James is a partner in the Sydney office of HWL Ebsworth Lawyers and has extensive financial services experience with a particular focus on: • funds management including advising on licensing issues; • general securities/corporate transactions and advice; and • mergers and acquisitions including off-market takeover bids, schemes, capital reductions and buy-backs and in preparing and negotiating offer, disclosure and shareholder meeting documentation. James’ experience includes addressing regulatory and compliance issues relating to, and documenting transactions and investment vehicles regulated by, the Corporations Act. James graduated from Sydney University and holds a Bachelor of Arts, a Bachelor of Laws and a Masters of Laws. Mr Matthew Coy was the previous Company Secretary, appointed on 21 October 2009 and resigned effective 14 August 2015. Principal activities The principal activities of the Group during the financial year were the marketing and management of investment products (including friendly society investment bonds and property investment funds), management of Over Fifty Guardian Friendly Society Limited and management of a reverse mortgage lending portfolio. There were no significant changes in the nature of the activities of the Group during the financial year. 24 Directors' Report For the year ended 30 June 2016 Operational highlights for the year at a divisional level were as follows: Property Funds Management • Underlying net profit after tax of $11.8 million was up 97% on the prior year (FY15: $6.0 million). Earnings growth was driven by growth in fee income due to a number of significant acquisitions and divestments during the year. • The following acquisitions were completed during the year; o o 203 Pacific Highway, St Leonards - acquired in December 2015 as a co-investment between Centuria’s unlisted funds and the Centuria Metropolitan REIT for $86 million. Australian Technology Park, Eveleigh (ATP) – a $104 million stake in ATP was purchased in April 2016 by an unlisted fund. • During the year the Group also realised value of its existing portfolio via the following assets sales; o o 175 Castlereagh Street, Sydney – acquired by an unlisted fund in 2013 for $56 million, the Group completed the sale of the asset for $98.0 million in December 2015. 80 Waterloo Road and 16 Byfield Street, North Ryde (“Macquarie Park”) – acquired for $25.3 million in 2001 & 2002, the Group completed the sale of the assets for $101 million. Investment Bonds Division • • • • The Group’s key focus continues to be on growing Funds Under Management (“FUM”) through creating new and innovative products that meet market demand, prudent investment decision making and maintaining informative and regular policyholder communication. Underlying net profit after tax of the division was $2.5 million compared with $3.4 million for the prior year as a result of newer funds having lower fees than the older capital guaranteed funds. The number of primary policy holders under administration continued to steadily increase throughout the year with 85,186 primary policyholders at 30 June 2016 (30 June 2015: 83,814). FUM increased modestly during the year – up from $715.2 million at 30 June 2015 to $720 million at 30 June 2016. Dividends Dividends paid or declared by the Company during the current financial year were: Declared and paid during the current financial year Final 2015 dividend Interim 2016 dividend Total amount Cents per share Total amount $’000 Date paid 2.75 2.25 5.00 18 September 2015 18 March 2016 2,111 1,724 3,835 Subsequent to year end, the following dividend was declared by the directors. The financial effect of this dividend has not been brought to account in the consolidated financial statements for the year ended 30 June 2016 and will be recognised in subsequent financial reports. Declared after the end of the current financial year Final 2016 dividend Cents per share Total amount $’000 Date payable 3.00 2,299 14 September 2016 Events subsequent to the reporting date a) Final Dividend On 18 August 2016, the Company declared a dividend of 3.0 cents per share franked to 100%. The dividend is expected to be paid on 14 September 2016. b) Investment in GPT Metro Office Fund In May 2016, the group announced the acquisition of a 12.6% stake in GPT Metro Office Fund (GMF). On 24 May 2016, the Group’s subsidiary Centuria Property Funds Limited (CPFL) in its capacity as responsible entity of the Centuria Metropolitan REIT (CMA) submitted a non-binding proposal to merge CMA and GMF via a trust scheme. This was followed on 16 June 2016 with a takeover bid for GMF via an off market takeover. At the same time the Company entered into a number of agreements, including a Facilitation and Property Rights Deed with the GPT Group. On 1 August 2016, GMF’s Independent Board Committee announced its support for a competing offer. Also on 1 August 2016, CMA announced it would not be proceeding with its offer for GMF. 25 Directors' Report For the year ended 30 June 2016 Events subsequent to the reporting date (continued) As at the date of this report, the Group retains its 12.6% interest in GMF. Other than the matters discussed above, there has not arisen in the interval between 30 June 2016 and the date hereof any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years. Likely developments The Group continues to pursue its strategy of focusing on its core operations, utilising a strengthened balance sheet to provide support to grow and develop these operations. Further information about likely developments in the operations of the Group and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Group. Environmental regulation The Group’s operations are not subject to any significant environmental regulation. Indemnification of officers and auditors The Company has agreed to indemnify all current and former directors and executive officers of the Company and its controlled entities against all liabilities to persons (other than the Company or a related body corporate) which arise out of the performance of their normal duties as a director or executive officer unless the liability relates to conduct involving a lack of good faith. The Company has agreed to indemnify the directors and executive officers against all costs and expenses incurred in defending an action that falls within the scope of the indemnity and any resulting payments. The directors have not included details of the nature of the liabilities covered or the amount of premium paid in respect of the Directors' and Officers' Liability and legal expenses insurance contracts, as such disclosure is prohibited under the terms of the contracts. The Company has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed to indemnify an officer or auditor of the Company or any related body corporate against a liability incurred as such an officer or auditor. 26 Non-audit services During the financial year, KPMG, the Group’s auditor, has performed services in addition to the audit and review of the financial statements. Details of amounts paid or payable to KPMG are outlined in Note 20 to the financial statements. The directors are satisfied that the provision of non-audit services during the year, by the auditor (or by another person or firm on the auditor's behalf) is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services as disclosed in the financial statements do not compromise the external auditor's independence, based on advice received from the Audit, Risk Management & Compliance committee, for the following reasons: • • all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in Code of Conduct APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional & Ethical Standards Board, including reviewing or auditing the auditor's own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. Lead auditor's independence declaration The lead auditor's independence declaration is set out on page 38 and forms part of the Directors’ Report for the year ended 30 June 2016. Rounding of amounts to the nearest thousand dollars The Group is an entity of a kind referred to in the “ASIC Corporations (Rounding in Financial/ Directors’ Report) Instrument 2016/191”. Amounts in the Directors’ Report and Financial Report have been rounded off, in accordance with that Class Order, to the nearest thousand dollars, unless otherwise indicated. Directors' Report For the year ended 30 June 2016 Remuneration Report - Audited This Remuneration Report, which forms part of the Directors' Report, sets out information about the remuneration of the Company’s directors and its senior management for the financial year ended 30 June 2016. The prescribed details for each person covered by this report are detailed under the following headings: 1. Director and senior management details; 2. Remuneration policy; 3. Relationship between the remuneration policy and company performance; 4. Non-executive director remuneration; 5. 6. 7. Remuneration of executive directors and senior management; Key terms of employment contracts; and Director and senior management equity holdings and other transactions. 1. Director and senior management details The following persons acted as directors of the Company during or since the end of the financial year: • Mr G. S. Charny (Independent Chairman) appointed as Independent Director 23 February 2016 and appointed Chairman 30 March 2016. 2. Remuneration policy The Company recognises the important role people play in the achievement of its long-term objectives and as a key source of competitive advantage. To grow and be successful, the Company must be able to attract, motivate and retain capable individuals. The Company's remuneration policy focuses on the following: • • • • • • Ensuring competitive rewards are provided to attract and retain executive talent; Linking remuneration to performance so that higher levels of performance attract higher rewards; Aligning rewards of all staff, but particularly executives, to the creation of value to shareholders; Making sure the criteria used to assess and reward staff include financial and non-financial measures of performance; Ensuring the overall cost of remuneration is managed and linked to the ability of the Company to pay; and Ensuring severance payments due to the Chief Executive Officer on termination are limited to pre-established contractual arrangements which do not commit the Group to making any unjustified payments in the event of non-performance. • Mr R. W. Dobson (Independent Chairman) retired 30 March 2016 3. Relationship between the remuneration policy and company performance • Mr P. J. Done (Independent Director) • Mr J. R. Slater (Independent Director) • • • Mr J. E. McBain (Group CEO - Centuria Capital and Executive Director) Mr J. C. Huljich (CEO – Unlisted Property Funds and Executive Director) Mr. N. R. Collishaw (CEO - Listed Property Funds and Executive Director) The term 'senior management' is used in this remuneration report to refer to the following persons in addition to the directors listed above: • Mr S. W. Holt (Chief Financial Officer), appointed 4 May 2016. The main objective in rewarding the Company executives for their performances is to ensure that shareholders' wealth is maximised through the Company's continued growth. It is necessary to structure and strengthen this focus to drive this strategy so that they are aligned with the Company's objectives and successes. Under the remuneration policy, senior management's remuneration includes a fixed remuneration component, short-term and long-term incentive arrangements. The long-term incentives are based on the Company‘s performance for the year 27 Directors' Report For the year ended 30 June 2016 Remuneration Report – Audited (continued) 5. Remuneration of executive directors and senior management in reference to specific Earnings per Share (EPS) hurdles and Key Strategic Goals being met. The Group‘s remuneration is directly related to the performance of the Group through the linking of short and long-term incentives to these financial measures. The short-term incentives are based on the individual's performance in the preceding 12 months compared to pre-agreed goals. Where senior management is remunerated with shares, the Remuneration Policy places no limitations to their exposure to risk in relation to the shares. Target incentive remuneration refers to the incentive pay provided for meeting performance requirements. Actual incentive remuneration can vary for executive directors and senior management depending on the extent to which they meet performance requirements. In accordance with the Company's corporate governance, the structure of non-executive director and executive remuneration is separate and distinct. 4. Non-executive director remuneration Objective The Board seeks to set aggregate remuneration at a level that provides the Company with the ability to attract and retain directors of the highest calibre, whilst incurring a cost that is acceptable to shareholders. Structure The Constitution and the ASX Listing Rules specify that the aggregate remuneration of non- executive directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the directors as agreed. Clause 63.2 of the Constitution provides an aggregate maximum amount of not more than $750,000 per year. Directors' Fees Each director receives a fee for being a director of Group companies and an additional fee is paid to the Chairman and to the Chairman of each Board Committee. The payment of the additional fees to each Chairman recognises the additional time commitment and responsibility associated with the position. Objective The Company aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within the Company so as to: • Reward executives for company, business unit and individual performance against targets set by reference to appropriate benchmarks; • Align the interests of executives with those of stakeholders; • • Link rewards with the strategic goals and performance of the Company; and Ensure total remuneration is competitive by market standards. Structure In determining the level and make-up of executive remuneration, the CEO and Board have regard to market levels of remuneration for comparable executive roles. Remuneration packages include a mix of fixed and variable remuneration and short and long- term performance-based incentives. The proportion of fixed and variable remuneration is established for each executive by the CEO after consultation with the Nomination & Remuneration Committee. While the allocation may vary from period to period, the table below details the approximate fixed and variable components for the executives. Executive directors Mr J. E. McBain Mr J. C. Huljich Mr N. R. Collishaw Senior management Mr S. W. Holt % of Total Target Annual Remuneration Fixed remuneration Variable remuneration 80% 80% 80% 80% 20% 20% 20% 20% 28 Directors' Report For the year ended 30 June 2016 Remuneration Report – Audited (continued) 5. Remuneration of executive directors and senior management (continued) (a) Fixed Remuneration Fixed remuneration consists of base remuneration (which is calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles), as well as employer contributions to superannuation funds. This is reviewed annually by the CEO and the Nomination & Remuneration Committee. The process consists of a review of Company, business unit and individual performance as well as relevant comparative remuneration in the market. The same process is used by the Nomination & Remuneration Committee when reviewing the fixed remuneration of the CEO. The CEO and senior management are given the opportunity to receive their fixed (primary) remuneration in a variety of forms including cash and salary sacrifice items such as motor vehicles, motor vehicle allowances and/or additional superannuation contributions. (b) Variable Remuneration Under the Company’s Senior Management Remuneration Policy, long and short-term performance incentives may be made under the Company’s incentive plans. These are discussed further below. (i) Short-term Incentives (STI) The objective of the STI program is to link the achievement of the Group's operational and financial targets with the remuneration received by the executives charged with meeting those targets. The total potential STI available is set at a level so as to provide sufficient incentive to the executive to achieve operational targets and such that the cost to the Group is reasonable in the circumstances. At the Board’s absolute discretion, employees may be provided with the opportunity to receive an annual, performance-based incentive, either in the form of cash or the issue of shares in the Company, or a combination of both. During the current financial year, the Company issued Nil (FY15 320,000) ordinary shares to employees in addition to cash bonuses provided to employees. (ii) Long-term incentive (LTI) The Company has an Executive Incentive Plan (“LTI Plan”) which forms a key element of the Company’s incentive and retention strategy for senior executives under which Performance Rights (“Rights”) are issued. The primary objectives of the Plan include: • • • focusing executives on the longer term performance of the Group to drive long term shareholder value creation; ensure executive remuneration outcomes are aligned with shareholder interests, in particular, the strategic goals and performance of the Group; and ensure remuneration is competitive and aligned with general market practice by ASX listed companies. Rights issued under the LTI Plan are issued in accordance with the thresholds approved at the 2013 AGM. A summary of the key terms of the Performance Rights are set out below. Term Detail Performance Rights (“Rights”) Each Right is a right to receive a fully paid ordinary share in the Company (“Share”), subject to meeting the Performance Conditions. Upon meeting the Performance Conditions, the Rights vest and Shares are allocated. Rights do not carry a right to vote or to dividends or, in general, a right to participate in other corporate actions such as bonus issues. Vesting conditions The Rights will vest to the extent that the board determines that: • The Performance Conditions that apply to the Rights were satisfied; and • The employee was continuously employed by the Company until the end of the Performance Period. Vesting date Performance Conditions The date on which the Board determines the extent to which the Performance Conditions are satisfied and the Rights vest. The Performance Conditions set out in the LTI Plan relate to: • Growth in Earnings Per Share (“EPS hurdle”); • Growth in property and friendly society funds under management (“Growth in FUM Hurdle”); and • Absolute Total Shareholder Return Performance (“Absolute TSR Hurdle”). 29 Directors' Report Remuneration Report – Audited (continued) 5. Remuneration of executive directors and senior management (continued) The Performance Conditions and their associated weighting applicable to each tranche is summarised in the following table: There have been three tranches of Rights granted under the LTI plan to date: EPS Hurdle Tranche Grant Date Performance Period 1 2 3 1 January 2014 1 July 2013 to 30 June 2016 1 February 2015 1 July 2014 to 30 June 2017 1 February 2016 1 July 2015 to 30 June 2018 The percentage of Rights subject to the EPS Hurdle that vest, if any, will be determined as follows: Compound Annual Growth Rate Portion of Rights that vest Compound Annual Growth Rate Portion of Rights that vest Tranche 1 (70%) Tranches 2 and 3 (45%) Maximum % or above 12.5% or greater 100% 10% or greater 100% Between threshold % and maximum % More than 7.5%, less than 12.5% Pro-rata between 50% to 100% More than 6%, less than 10% More than 4%, less than 6% Threshold % Less than the threshold % 7.5% 50% 4% Less than 7.5% 0% Less than 4% Pro-rata between 50% to 100% Pro-rata between 25% to 50% 25% 0% The Board has discretion to adjust the EPS performance hurdle to ensure that participants are neither advantaged nor disadvantaged by matters outside managements’ control that affect EPS (for example, by excluding one-off non-recurrent items or the impact of significant acquisitions or disposals). 30 For the year ended 30 June 2016 Directors' Report Remuneration Report – Audited (continued) 5. Remuneration of executive directors and senior management (continued) Growth in FUM Hurdle The percentage of Rights subject to the Growth in FUM Hurdle that vest, if any, will be determined as follows: Compound Annual Growth Rate Portion of Rights that vest Compound Annual Growth Rate Portion of Rights that vest Tranche 1 (15%) Tranches 2 and 3 (15%) 25% or greater 100% 18% or greater 100% More than 15%, less than 25% Pro-rata between 50% to 100% More than 14%, less than 18% Pro-rata between 50% to 100% Maximum % or above Between threshold % and maximum % Maximum % or above Between threshold % and maximum % Threshold % 15% Less than the threshold % Less than 15% 50% 0% More than 10%, less than 14% Pro-rata between 25% to 50% 10% 25% Less than 10% 0% Threshold % 12% Less than the threshold % Less than 12% 50% 0% Absolute TSR Hurdle The percentage of Rights subject to the Absolute TSR Hurdle that vest, if any, will be determined as follows: Compound Annual Growth Rate Portion of Rights that vest Compound Annual Growth Rate Portion of Rights that vest Tranche 1 (15%) Tranches 2 and 3 (40%) 18% or greater 100% 18% or greater 100% More than 12%, less than 18% Pro-rata between 50% to 100% More than 15%, less than 18% Pro-rata between 50% to 100% More than 12%, less than 15% Pro-rata between 25% to 50% 12% 25% Less than 12% 0% 31 For the year ended 30 June 2016Directors' Report Remuneration Report – Audited (continued) 5. Remuneration of executive directors and senior management (continued) Rights Granted The following Rights were granted to key management personnel. Employee No. of Rights Granted Vesting Conditions Fair value at Grant Date Tranche 1 (grant date of 1 January 2014) Mr J.E. McBain Mr J.C. Huljich Mr N. R. Collishaw Total Tranche 2 (grant date of 1 February 2015) Mr J.E. McBain Mr J.C. Huljich Mr N. R. Collishaw Mr M. J. Coy Mr D. B. Govey Other executives Total 32 376,903 80,765 80,765 231,837 49,679 49,680 231,837 49,679 49,680 1,200,825 216,496 72,165 192,441 135,000 45,000 120,000 135,000 45,000 120,000 60,037 20,012 53,366 44,270 14,757 39,350 233,564 77,855 207,613 1,831,926 EPS Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle EPS Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle EPS Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle EPS Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle EPS Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle EPS Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle EPS Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle EPS Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle EPS Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle $0.73 $0.73 $0.18 $0.73 $0.73 $0.18 $0.73 $0.73 $0.18 $0.81 $0.81 $0.28 $0.81 $0.81 $0.28 $0.81 $0.81 $0.28 $0.81 $0.81 $0.28 $0.81 $0.81 $0.28 $0.81 $0.81 $0.28 For the year ended 30 June 2016Directors' Report Remuneration Report – Audited (continued) 5. Remuneration of executive directors and senior management (continued) Rights Granted During the year ended 30 June 2016, the following rights lapsed due to the resignation of the Tranche 2 – lapsed grants (grant date of 1 February 2015) Mr M. J. Coy Mr D. B. Govey Other executives 60,037 20,012 53,366 44,270 14,757 39,350 94,143 31,381 83,683 EPS Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle EPS Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle EPS Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle Total 440,999 Tranche 3 (grant date of 1 February 2016) Mr J.E. McBain Mr J.C. Huljich Mr N. R. Collishaw Other executives 216,496 72,165 192,441 135,000 45,000 120,000 135,000 45,000 120,000 317,976 105,993 282,645 EPS Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle EPS Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle EPS Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle PS Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle Total 1,787,715 $0.81 $0.81 $0.28 $0.81 $0.81 $0.28 $0.81 $0.81 $0.28 $0.87 $0.87 $0.19 $0.87 $0.87 $0.19 $0.87 $0.87 $0.19 $0.87 $0.87 $0.19 relevant employee: Subject to the Boards’ overriding discretion, unvested Rights lapse upon the earliest of ceasing employment, corporate restructuring, divestment of a material business or subsidiary, change of control, clawback and lapse for fraud and breach, failure to satisfy the Performance Conditions and the 7th anniversary of the date of the grant. The Company’s overall objective is to reward senior management based on the Company's performance and build on shareholders' wealth but this is subject to market conditions for the year. The table below sets out summary information about the Group's earnings for the past five years. 30 June 2016 $’000 30 June 2015 $’000 30 June 2014 $’000 30 June 2013 $’000 30 June 2012 $’000 12,123 8,561 9,078 7,338 1,967 $0.93 $0.80 $0.82 $0.42 $0.57 $1.05 $0.93 $0.80 $0.82 $0.42 2.25cps 2.0cps 1.25cps 1.25cps 1.25cps 3.00cps 2.75cps 1.50cps - - 15.8cps 11.0cps 11.6cps 9.4cps 2.5cps 15.1cps 10.8cps 11.6cps 9.4cps 2.5cps 5 year summary Net profit after tax Share price at start of year Share price at end of year Interim dividend Final dividend Basic earnings per share Diluted earnings per share 33 For the year ended 30 June 2016Directors' Report Remuneration Report – Audited (continued) 5. Remuneration of executive directors and senior management (continued) Remuneration for the year ended 30 June 2016 Short-term employee benefits Post employment benefits Other long-term benefits Share-based payments Bonus $ Superannuation $ Long service leave $ Directors G. Charny R.W. Dobson P.J. Done J.R. Slater J.E. McBain J.C. Huljich N.R. Collishaw (i) Sub-total Senior management S.W. Holt Sub-total Grand total Salaries $ - - - - 621,000 530,692 530,692 Fees $ 53,308 113,400 129,600 97,200 - - - 1,682,384 393,508 66,576 66,576 - - 1,748,960 393,508 - - - - 375,000 250,000 110,000 735,000 20,000 20,000 755,000 5,064 10,773 12,312 9,005 24,000 19,308 19,308 99,770 3,218 3,218 - - - - 30,947 17,763 - 48,710 - - Total $ 58,372 124,173 141,912 106,205 1,308,615 977,620 819,857 3,536,754 89,794 89,794 $ - - - - 257,668 159,857 159,857 577,382 - - 102,988 48,710 577,382 3,626,548 (i) As part of his employment agreement, Mr Collishaw is entitled to receive a one-off $500,000 incentive payment upon successful listing of a listed property fund once the fund reaches $500 million of assets under management. Mr Collishaw is not currently entitled nor has any remuneration been paid in relation to this incentive. 34 For the year ended 30 June 2016 Directors' Report Remuneration Report – Audited (continued) 5. Remuneration of executive directors and senior management (continued) No directors or senior management person appointed during the period received a payment as part of his or her consideration for agreeing to hold the position. Remuneration for the year ended 30 June 2015 Short-term employee benefits Post employment benefits Other long-term benefits Share-based payments Directors R.W. Dobson P.J. Done J.R. Slater J.E. McBain J.C. Huljich N.R. Collishaw (i) Sub-total Senior management M.J. Coy (ii) D.B. Govey Sub-total Grand total Salaries $ - - - 541,199 490,431 493,716 Fees $ 140,000 120,000 90,000 - - - 1,525,346 350,000 359,967 321,286 681,253 - - - 2,206,599 350,000 Bonus $ Superannuation $ Long service leave $ - - - 150,000 100,000 100,000 350,000 - 30,000 30,000 380,000 13,300 11,400 8,550 24,000 18,783 18,783 94,817 18,783 25,000 43,783 138,600 - - - 11,549 10,505 - 22,054 7,137 7,144 14,282 36,336 Total $ 153,300 131,400 98,550 942,134 753,018 745,797 2,824,199 431,136 403,040 834,176 $ - - - 215,387 133,298 133,298 481,983 45,248 19,610 64,858 546,841 3,658,376 (i) As part of his employment agreement, Mr Collishaw is entitled to receive a one-off $500,000 incentive payment upon successful listing of a listed property fund once the fund reaches $500 million of assets under management. Mr Collishaw is not currently entitled nor has any remuneration been paid in relation to this incentive. (ii) Mr Coy was awarded 20,000 shares during the year as a short-term incentive in recognition of the achievement of a strategic objective of the Group to monetise a large portion of the reverse mortgage portfolio. The expense is included in the share-based payment amount disclosed in the table above. 35 For the year ended 30 June 2016 Directors' Report Remuneration Report – Audited (continued) 5. Remuneration of executive directors and senior management (continued) 6. Key terms of employment contracts CEO Mr John McBain, was appointed as CEO of the Company in April 2008. He is also an executive director of the Company. Mr McBain is employed under contract. The summary of the major terms and conditions of Mr McBain's employment contract are as follows: • Fixed Compensation plus superannuation contributions; • Car parking within close proximity to the Company’s office; • • • Eligible to participate in the bonus program determined at the discretion of the Board; The Company may terminate this employment contract by providing 6 months written notice or provide payment in lieu of the notice period. Any payment in lieu of notice will be based on the Total Fixed Compensation Package; and The Company may terminate the employment contract at any time without notice if serious misconduct has occurred. When termination with cause occurs the CEO is only entitled to remuneration up to the date of termination. 7. Director and senior management equity holdings and other transactions Other executives (standard contracts) All executives are employed under contract. The Company may terminate the executive's employment agreement by providing between 1 and 6 months written notice or providing payment in lieu of the notice period (based on the Total Fixed Compensation package). (a) Director and senior management equity holdings Set out below are details of movements in fully paid ordinary shares held by directors and senior management as at the date of this report. 36 Number of shares 2016 G. Charny P.J. Done J.R. Slater J.E. McBain J.C. Huljich N.R. Collishaw 2015 R.W. Dobson P.J. Done J.R. Slater J.E. McBain J.C. Huljich N.R. Collishaw M.J. Coy D.B. Govey Balanced at 1 July Shares purchased /Issued as Part of Renumeration Shares sold Balance at 30 June - 500,000 1,630,000 4,600,040 2,342,715 850,051 997,728 400,000 1,402,297 4,590,286 2,387,715 850,051 583,311 715,272 1,627 - 70,000 4,509 - - 201,614 100,000 227,703 9,754 - - 37,360 - - - - - - - - - - - (45,000) - - - 1,627 500,000 1,700,000 4,604,549 2,342,715 850,051 1,199,342 500,000 1,630,000 4,600,040 2,342,715 850,051 620,671 715,272 (b) Transactions with key management personnel As a matter of Board policy, all transactions with directors and director-related entities are conducted on arms-length commercial or employment terms. During the financial year, the following transactions occurred between the Company and key management personnel: • • • Wolseley Corporate Pty Ltd, a related party of G. Charny, was paid $88,000 (inclusive of GST) for corporate advisory fees. Henry Davis York, a related party of R. Dobson, was paid $16,374 (inclusive of GST) (2015: $806,856) for legal consultancy fees. Mr J. R. Slater (personally) and Riviera Capital Pty Ltd, a related party of Mr. Slater, were paid a total of $141,840 (inclusive of GST) (2015: $141,643) for consultancy services. For the year ended 30 June 2016Directors' Report This Directors' Report is signed in accordance with a resolution of the Directors. G. Charny Chairman Sydney 18 August 2016 P. J. Done Director Chairman - Audit, Risk Management & Compliance Committee 37 For the year ended 30 June 2016 Lead Auditor's Independence Declaration ABCD Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To: the directors of Centuria Capital Limited I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June 2016 there have been: (i) (ii) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Nigel Virgo Partner Sydney 18 August 2016 38 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative Liability limited by a scheme approved under (“KPMG International”), a Swiss entity. Professional Standards Legislation 22 Centuria Capital Limited and Controlled Entities Consolidated Statement of Comprehensive Income Profit attributable to shareholders Revenue Gains on sales of non-core assets Unrealised gain arising from fair value movements of derivative financial instruments Expenses Finance costs Profit before tax attributable to shareholders Income tax expense (i) Benefit funds Revenue attributable to Benefit Funds(ii) Expenses attributable to Benefit Funds(ii) Income tax expense relating to Benefit Funds(i), (ii) Note 6(a) 6(b) 2016 $'000 2015 $'000 46,009 - 37,201 5,194 23(c)(iv) 5,493 1,148 8 (29,252) (24,930) (2,707) 19,543 (3,890) 14,723 9(a) (7,420) (6,162) 16(a) 16(a) 16(a) 20,927 22,015 (19,578) (20,395) (1,349) (1,620) Benefit funds contribution to profit, net of tax - - Profit after tax for the period 12,123 8,561 Other comprehensive income: Gain on cash flow hedges taken to equity Income tax expense on other comprehensive income Other comprehensive income for the year (net of tax) - - - 54 (16) 38 Total comprehensive income for the period 12,123 8,599 Profit attributable to: Owners of the Company Non-controlling interests Total comprehensive income attributable to: Owners of the Company Non-controlling interests Earnings per share From continuing operations: Basic (cents per share) Diluted (cents per share) Note 2016 $'000 12,303 (180) 12,123 12,303 (180) 12,123 2015 $'000 8,566 (5) 8,561 8,604 (5) 8,599 10 10 15.8 15.1 11.0 10.8 (i) Total consolidated income tax expense including the benefit funds is $8.8 million (FY15: $7.8 million). (ii) A subsidiary of the Company, Centuria Life Limited (CLL), is a friendly society in accordance with the Life Insurance Act 1995 (“the Act”). The funds operated by CLL, and any trusts controlled by those funds, are treated as statutory funds in accordance with the Act. These statutory funds are required to be consolidated in accordance with accounting standards and are shown separately from shareholder funds in the financial statements. Notes to the consolidated financial statements are included on pages 43 to 78. 39 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Consolidated Statement of Financial Position Assets Cash and cash equivalents Trade and other receivables Assets classified as held for sale Prepayments Income tax receivable Financial assets at fair value Property held for development Reverse mortgages at fair value Plant and equipment Deferred tax assets Intangible assets Note 22(a) 11 21(d)(iii) 9(b) 12 12 9(c) 13 30 June 2016 $'000 13,157 19,656 - 1,054 - 47,194 35,716 51,561 863 - 30 June 2015 $'000 25,487 8,619 1,040 797 1,804 5,456 23,011 43,754 1,134 819 53,025 53,025 222,226 164,945 Equity Contributed equity Retained earnings Share-based payment reserve Equity attributable to equity holders of the Company Non-controlling interests Total equity Note 30 June 2016 $'000 30 June 2015 $'000 17 88,058 28,452 1,459 88,112 19,982 784 117,969 108,878 9,698 9,973 127,667 118,851 The consolidated financial statements include the financial position of the Benefit Funds of Centuria Life Limited (refer to the footnote on page 39). Notes to the consolidated financial statements are included on pages 43 to 78. Assets in respect of benefit fund policy holders 16(b) 353,528 386,401 Total assets Liabilities Trade and other payables Provisions Borrowings Interest rate swap at fair value Income tax payable Deferred tax Liability 14 15 23(c)(iv) 9(b) 9(c) 575,754 551,346 9,190 1,155 59,951 20,778 985 2,500 94,559 6,343 1,264 20,912 17,576 - - 46,095 Liabilities in respect of Benefit Funds policy holders 16(b) 353,528 386,401 Total liabilities Net assets 40 448,087 432,496 127,667 118,851 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Consolidated Statement of Changes in Equity Balance at 30 June 2014 Profit for the year Other comprehensive income for the period Total comprehensive income for the period Acquisition of subsidiary with NCI Share-based payment Employee share scheme Dividends paid Share buy-back/shares cancelled Balance at 30 June 2015 Balance at 1 July 2015 Profit for the year Total comprehensive income for the period Fund Establishment costs Share-based payment Employee share scheme Dividends paid Share buy-back/shares cancelled Balance at 30 June 2016 Contributed equity $'000 89,167 Retained earnings $'000 14,151 Cash flow hedge reserve $'000 (38) Share-based payment reserve $'000 164 Attributable to equity holders of the parent $'000 103,444 Non-controlling interests $'000 - - - - - - 284 - (1,339) 88,112 88,112 - - - - 57 - (111) 88,058 8,566 - 8,566 - - - (2,735) - 19,982 19,982 12,303 12,303 - - - (3,833) - 28,452 - 38 38 - - - - - - - - - - - - - - - - - - - 620 - - - 784 784 - - - 675 - - - 1,459 8,566 38 8,604 - 620 284 (2,735) (1,339) 108,878 108,878 12,303 12,303 - 675 57 (3,833) (111) 117,969 (5) - (5) 9,978 - - - - 9,973 9,973 (180) (180) (95) - - - - 9,698 Notes to the consolidated financial statements are included on pages 43 to 78. Total equity $'000 103,444 8,561 38 8,599 9,978 620 284 (2,735) (1,339) 118,851 118,851 12,123 12,123 (95) 675 57 (3,833) (111) 127,667 41 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Consolidated Statement of Cash Flows Note 2016 '000 2015 '000 Note 2016 '000 2015 '000 Cash flows from operating activities Management fees received Rent, trust distributions and other income received Payments to suppliers and employees Interest received Payments for property held for development Income tax paid Benefit Funds net cash used in operating activities 25,310 1,275 29,734 2,392 (21,771) (25,424) 1,089 776 (12,705) (23,011) (3,199) (10,001) (35,572) (6,819) (22,352) (27,855) Cash flows from financing activities Payment for shares (buy-back)/issued Collections from reverse mortgage holders Repayment of borrowings (reverse mortgages) Interest paid on reverse mortgage borrowings Proceeds from partial sale of reverse mortgage loan portfolio Repayment of borrowings on sale of reverse mortgages loan portfolio Repayment of borrowings (corporate) Proceeds from borrowings (corporate) Net cash used in operating activities 22(b) (45,573) (50,207) Proceeds from borrowings (development) Cash flows from investing activities Benefit Funds net cash provided by investing activities Payments for plant and equipment Acquisition of investments in managed funds Net proceeds from sale of insurance subsidiary Net cash provided by investing activities Proceeds from non-controlling interests Dividends paid 90,903 5,408 Financing costs paid on corporate borrowings (59) (539) (38,574) (6,154) - 52,270 4,873 3,588 Net cash provided by financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Less cash attributable to benefit funds Cash and cash equivalents attributable to shareholders at 30 June 16(b) 22(a) (111) 3,446 (1,503) (2,208) - - - 26,750 13,792 - (1,339) 12,994 (8,395) (3,765) 126,566 (94,864) (12,000) - 9,609 9,696 (3,833) (2,735) (28) 36,304 776 36,543 43,001 (10,076) 41,324 51,400 84,325 71,168 13,157 41,324 15,838 25,487 Notes to the consolidated financial statements are included on pages 43 to 78. 42 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 1. General information Centuria Capital Limited (the ‘Company’) is a public company listed on the Australian Stock Exchange (trading under the symbol CNI), incorporated and operating in Australia. These consolidated financial statements comprise the Company and its controlled entities (together referred to as the ‘Group’). The Company is a for-profit entity and its principal activities are the marketing and management of investment products (including friendly society investment bonds and property investment funds), management of Over Fifty Guardian Friendly Society Limited and management of a reverse mortgage lending portfolio. The Company is required by AASB 10 Consolidated Financial Statements to recognise the assets, liabilities, income, expenses and equity of the Benefit Funds of its subsidiary, Centuria Life Limited (the “Benefit Funds”). The assets and liabilities of the Benefit Funds do not impact the net profit after tax or the equity attributable to the shareholders of the Company and the shareholders of the Company have no rights over the assets and liabilities held in the Benefit Funds. The Company’s registered office is Level 39, 100 Miller Street, Sydney NSW 2060. 2. Basis of accounting The consolidated financial statements are general purpose financial statements which have been prepared in accordance with Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial statements comply with International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB). They were authorised for issue by the directors on 18 August 2016. 3. Basis of preparation The financial statements have been prepared on the basis of historical cost, except for derivative financial instruments, financial assets at fair value through profit and loss and other financial assets, which have been measured at fair value at the end of each reporting period. Cost is based on the fair values of the consideration given in exchange for assets. All amounts are presented in Australian dollars, which is the company’s functional currency, unless otherwise noted. The Company is an entity of a kind referred to in the “ASIC Corporations (Rounding in Financial/ Directors’ Report) Instrument 2016/191”. Amounts in the consolidated financial statements have been rounded off, in accordance with that Class Order, to the nearest thousand dollars, unless otherwise indicated. 4. Use of judgements and estimates In preparing these consolidated financial statements, management has made judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. The judgements, estimates and assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively. (i) Key judgements Information about critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is included in the following notes: • Note 13 – Intangible Assets • Note 23 – Financial Instruments 5. Operating Segments The Group has four reportable segments. These reportable segments are the divisions used to report to the Group's CEO and Board for the purpose of resource allocation and assessment of performance. The operations of the reportable segments are: • • Property Funds Management: management of listed and unlisted property funds through Centuria Property Funds Limited and Centuria Strategic Property Limited. Investment Bonds: management of the Benefit Funds of Centuria Life Limited and management of the Guardian Over Fifty Friendly Society Limited. The Benefit Funds include a range of financial products, including single and multi-premium investments. • Reverse Mortgages: management of a reverse mortgage lending portfolio. • Corporate: includes returns from investment activities. The accounting policies of reportable segments are the same as the Group's accounting policies. Following is an analysis of the Group's revenue and results by reportable segment in a format consistent with that presented to the Group’s CEO and Board. 43 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements Property Funds Management $'000 Investment Bonds $'000 Reverse Mortgages $'000 Corporate $'000 101 29,538 78 29,716 16,911 11,823 174 9,513 31 9,718 4,677 2,516 2,318 - 17 2,335 (260) (182) 1,879 75 2,285 4,239 (5,489) (3,740) Group $'000 4,472 39,126 2,411 46,009 15,839 10,417 5,493 (2,779) 990 (1,998) 12,123 (15) (8,966) - (2) (1,418) (2,779) (1,949) (174) - (741) (3,820) - (2,707) (14,378) (2,779) 5. Operating Segments (continued) Financial year ended 30 June 2016 Revenue Interest, dividends and distribution revenue Fee income Commissions, other income and gains Total segment revenue Underlying profit before tax Underlying profit after tax Reconciliation to Statutory Profit after tax Unrealised gains of fair value movements in derivatives Impairment charges in relation to seed capital valuations Unrealised gains on non-core investments (net of costs) Tax impact of above Statutory Profit after tax Additional segment information Finance costs Employee benefits expense Impairment of related party receivable 44 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 5. Operating Segments (continued) Financial year ended 30 June 2015 Revenue Interest, dividends and distribution revenue Fee income Commissions, other income and gains Total segment revenue Underlying profit before tax Underlying profit after tax Reconciliation to Statutory Profit after tax Unrealised gains of fair value movements in derivatives Impairment charges in relation to seed capital valuations Accounting gains on sale of non-core assets Tax impact of above Statutory Profit after tax Additional segment information Finance costs Employee benefits expense Impairment of related party receivable Property Funds Management $'000 Investment Bonds $'000 Reverse Mortgages $'000 Insurance $'000 Corporate $'000 139 20,324 154 20,617 8,774 5,977 213 9,856 9 10,078 5,803 3,420 5,194 - 402 5,596 777 612 - - 287 287 244 170 838 - 4,979 5,817 (5,422) (3,899) Group $'000 6,384 30,180 5,831 42,395 10,176 6,281 1,148 (1,795) 5,194 (2,266) 8,561 (113) (8,360) - 415 (969) (2,218) (3,662) (230) - 48 - - (578) (2,905) - (3,890) (12,464) (2,218) 45 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 7. Expenses Employee benefits Impairment of related party receivable Rental expense (operating leases) Depreciation and amortisation 8. Finance costs Corporate working capital facility Reverse mortgage facility Unwinding of discount) on non-current related party receivable Other finance costs 2016 $'000 14,378 2,779 806 330 2016 $'000 730 1,949 - 28 2,707 2015 $'000 12,464 2,218 760 341 2015 $'000 473 3,662 (423) 178 3,890 6. Revenue (a) Group revenue (excluding Benefit Funds) Interest revenue - from reverse mortgages Interest revenue - from other sources Distribution revenue Management fees from property funds Sales fees Incentive fees Property acquisition fees Management fees from Benefit Funds Unrealised gain on listed investment Other income (b) Gains on sale of non-core assets Gain on sale of Over Fifty Insurance Pty Ltd Gain on sale of reverse mortgage loan portfolio In October 2014, the Group announced: 2016 $'000 2,300 1,089 1,083 9,541 1,143 15,813 3,041 9,513 2,232 254 46,009 2016 $'000 - - - 2015 $'000 5,144 776 464 9,161 3,880 4,741 2,542 9,856 - 637 37,201 2015 $'000 4,873 321 5,194 the sale of its subsidiary, Over Fifty Insurance Pty Ltd for $5.2 million; and the sale of a large portion of its reverse mortgage portfolio, releasing $31.7 million cash to the Group (before transaction costs and taxation). The Group sold its variable rate reverse mortgages with a balance of $124.4 million and retained a $27.0 million portfolio of fixed rate reverse mortgages. • • 46 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 9. Income taxes The Company is the head entity of the tax consolidated group, which includes Centuria Life Limited and the Benefit Funds. As a result of tax consolidation, the Company recognises current tax related receivables and corresponding payables from its subsidiaries and the Benefit Funds. The tax rate used in the reconciliation following is the corporate tax rate of 30% payable by Australian corporate entities on taxable profits under Australian tax law. There has been no change in the corporate tax rate when compared with the previous reporting period. (a) Income tax recognised in profit or loss (b) Current tax assets and liabilities Current tax assets /(liabilities) attributable to: Benefit Funds Shareholders 2016 $'000 841 (1,826) (985) 2015 $'000 1,998 (194) 1,804 Profit before tax 2016 $'000 19,543 2015 $'000 14,723 Income tax expense calculated at 30% 5,863 4,417 Add/(deduct) tax effect of amounts which are not deductible/(assessable) - Non-allowable expenses - seed capital impairment - Non-allowable expenses - other - Adjustments to current tax in relation to prior years Income tax expense Current tax expense in respect of the current year Adjustments to current tax in relation to prior years Deferred tax expense relating to the origination and reversal of temporary differences Income tax expense 834 723 - 7,420 4,100 - 4,100 3,320 7,420 665 1,091 (11) 6,162 5,444 (11) 5,433 729 6,162 47 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements Opening balance $'000 Charged to income $'000 Utilised $'000 Closing balance $'000 9. Income taxes (continued) (c) Deferred tax balances Financial year ended 30 June 2016 Deferred tax assets Provisions Financial derivatives Capital losses Deferred tax liabilities Accrued income Deferred capital gain on financial assets Prepayments Fair value movements in mortgage assets 1,211 3,396 92 (525) (25) (75) (3,255) 819 584 (666) 111 (1,984) (669) 69 (765) (3,320) Financial year ended 30 June 2015 Opening balance restated $'000 Charged to income $'000 Deferred tax assets Provisions Financial derivatives Capital losses Deferred tax liabilities Accrued income Deferred capital gain on financial assets Prepayments Fair value movements in mortgage assets Other 48 1,211 3,719 2,258 - (189) (171) (3,208) (17) 3,603 - (323) (111) (525) 164 96 (47) 17 (729) - - - - - - - - Utilised $'000 - - (2,055) - - - - - (2,055) 1,795 2,730 203 (2,509) (694) (5) (4,020) (2,500) Closing balance restated $'000 1,211 3,396 92 (525) (25) (75) (3,255) - 819 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 10. Earnings per share 12. Financial assets Basic earnings per share Diluted earnings per share 2016 cents 15.8 15.1 2015 cents 11.0 10.8 The earnings used in the calculation of basic and diluted earnings per share is the profit for the year attributable to owners of the Company as reported in the Consolidated Statement of Comprehensive Income. The weighted average number of ordinary shares used in the calculation of basic and diluted earnings per share is as follows: Weighted average number of ordinary shares (basic) 2016 No. '000 76,650 2015 No. '000 77,855 Weighted average number of ordinary shares (diluted)(i) (i) The weighted average number of ordinary shares used in the calculation of diluted earnings per share is determined as if 30 June 2016 was the end of the performance period of the grants of Rights under the LTI plan. All Rights that would have vested if 30 June 2016 was the end of the performance period are deemed to have been issued at the start of the financial year in accordance with the applicable accounting standard. 80,115 79,024 Financial assets at fair value Unit trusts (current) Unit trusts (related party) (non-current) (refer to Note 21(d)(ii)) Reverse mortgages at fair value Reverse mortgage receivables (i) Reverse mortgages (hedged item fair value adjustment) (refer to Note 23 (c) (iv)) (i) 2016 $'000 40,516 6,678 47,194 26,507 25,054 2015 $'000 26 5,430 5,456 26,552 17,202 Reverse mortgages at fair value (i) Whilst some mortgages are likely to be repaid during the next 12 months, Centuria does not control the 51,561 43,754 repayment date and accordingly all amounts are treated as non-current. 11. Trade and other receivables Amount owing by related entities (current) (refer to Note 21(d)(i)) Sundry debtors (current) 2016 $'000 18,853 803 19,656 2015 $'000 8,384 235 8,619 The Group does not hold any collateral or other credit enhancements over these balances nor does it have a legal right of offset against any amounts owed by the Group to the counterparty. 49 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 13. Intangible assets Sensitivity to changes in assumptions Goodwill (non-current) 2016 $'000 53,025 2015 $'000 53,025 There was no movement in the carrying value of goodwill during the current or prior reporting period. Goodwill is solely attributable to the Property Funds Management business with recoverability determined by a value in use calculation using profit and loss projections covering a five-year period, with a terminal value determined after 5 years. The key assumptions used in the value in use calculations for the property funds management cash-generating unit are as follows: Assumptions used in value in use calculation Rate required for recoverable amount to equal carrying value As at 30 June 2016, the estimated recoverable amount of goodwill relating to the property funds management business exceeded its carrying amount by $49.7 million (2015: $15.3 million). The table below shows the key assumptions used in the value in use calculation and the amount by which each key assumption must change in isolation in order for the estimated recoverable amount to be equal to its carrying value: Revenue growth rate (average) Pre-tax discount rate 7.50% 2.40% 10.68% 18.10% Expenses growth rate 5.00% 11.33% Revenue: Revenues in 2017 are based on the budget for FY2017 and are assumed to increase at a rate of 7.5% (2015: 7.5%) per annum for the years 2017-2020. The directors believe this is a prudent and achievable growth rate based on past experience. 14. Trade and other payables Expenses: Expenses in 2017 are based on the budget for FY2017 and are assumed to increase at a rate of 5.0% (2015: 5.0%) per annum for the years 2017-2020. The directors believe this is an appropriate growth rate based on past experience. Sundry creditors (current) (i) Accrued expenses (current) Tax payable to Benefit Funds (current) (refer to Note 16(b)) 2016 $'000 3,391 4,958 841 9,190 2015 $'000 2,120 2,225 1,998 6,343 Post-tax discount rate: Discount rates are determined to calculate the present value of future cash flows. A pre-tax rate of 10.68% (2015: 11.24%) is applied to cash flow projections. In determining the appropriate discount rate, regard has been given to relevant market data as well as Company specific inputs. Terminal growth rate: Beyond 2020, a growth rate of 3% (2015: 3%), in line with long term economic growth, has been applied to determine the terminal value of the asset. 50 (i) Sundry creditors are non-interest bearing liabilities, payable on commercial terms of 7 to 60 days. For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 15. Borrowings Corporate working capital facility (current) Development facility (current) Reverse mortgage bill facilities and notes - secured (non-current) (a) Terms and conditions 2016 $'000 26,750 23,401 9,800 2015 $'000 - 9,609 11,303 59,951 20,912 (iii) Reverse mortgage bill facilities and notes – secured At reporting date, the Group has $9.8 million (30 June 2015: $11.3 million) non-recourse notes on issue to the ANZ, secured over the remaining reverse mortgages held in Senex Warehouse Trust No.1 (a subsidiary of the Group) maturing on 30 September 2017. The facility limit is $15.0 million (30 June 2015: $18.0 million) and is reassessed every 6 months with a view to reducing the facility in line with the reduction in the reverse mortgage book. Under the facility agreement, surplus funds (being mortgages repaid (including interest) less taxes, administration expenses and any hedge payments) are required to be applied against the facility each month. During the year ended 30 June 2016, $1.5 million surplus funds have been applied against the facility (30 June 2015: $8.4 million). The terms and conditions relating to the above facilities are set out below. (b) Available facilities (i) Corporate working capital facility The Group has access to the following lines of credit(i): The Company entered into a new revolving cash advance facility with National Australia Bank during the reporting period to replace its previous working capital facility. As at 30 June 2016, the total facility limit was $30.0 million (including $3.25 million of bank guarantees). $5.0 million of the facility matures 30 November 2016, with the remaining $25.0 million due to mature 28 February 2017. (ii) Development facility - secured Centuria Belmont Road Management Pty Limited has entered into a facility agreement with Commonwealth Bank of Australia. The facility is $38.75 million across three tranches, maturing 31 August 2017. The facility is recourse only to the underlying property assets of the Belmont Road Development Fund. Corporate working capital facility Amount used at reporting date Amount unused at reporting date Reverse mortgage bill facilities and notes (secured) Amount used at reporting date Amount unused at reporting date (i) Excludes the undrawn portion of the development facility. 2016 $'000 26,750 26,750 - 15,000 9,800 5,200 2015 $'000 12,000 - 12,000 18,000 11,303 6,697 51 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements (a) Contribution to profit or loss of benefit funds Income Interest and dividends Realised gains Unrealised gains / (losses) Premiums (Discretionary Participation Features only) Other income Expenses Claims (Discretionary Participation Features only) Net movement in policyholder liabilities Management fee expense Bad debts - mortgage loans Profit before tax Income tax expense Profit after tax attributable to benefit funds 2016 $'000 11,152 682 3,330 5,762 1 20,927 2016 $'000 41,705 (29,539) 7,199 213 19,578 1,349 (1,349) - 2015 $'000 11,414 3,784 2,500 4,315 2 22,015 2015 $'000 36,559 (26,265) 7,735 2,366 20,395 1,620 (1,620) - 16. Policyholders’ funds Policyholder liabilities for benefit funds, other than the Funeral Benefit Fund, are valued using the accumulation method and are equal to the contributions made by members, net of fees, together with bonus additions to date. The balance of each fund is the unvested policyholder benefit liabilities (or surplus). Each year’s bonus declaration results in a movement from unvested policyholder benefit liabilities to the vested policy liability. The bonus rate is limited to ensure that the amount vesting is no more than the distributable portion of unvested policyholder benefit liabilities. For the Funeral Benefit Fund, the policyholder liability has been taken to be the value of assets of the fund net of other liabilities less the value of the current period bonus. This liability represents the present value of guaranteed benefits (pre-bonus) plus the present value of future bonuses. Following declaration of the bonus, there would then be no surplus under this arrangement. The main variables that determine the bonus rate for a Benefit Fund are the value of the net assets of each benefit fund at the end of the year, the amounts standing to the credit of each investment account through the previous year and the investment return (net of fees and taxes where applicable) earned by the fund throughout the year. The excess of the net assets of the benefit fund over the liabilities after meeting the prudential capital requirements is the surplus that is generally able to be distributed to members as a bonus. There is no provision in the funds’ rules for any surplus to be transferred to the Management Fund. The Management Fund receives specified fee transfers from the funds to cover expenses. All remaining assets are to be used to provide benefits to members. Changes in economic conditions and demographics will alter the unallocated surplus. The Capital Requirements, as set by APRA, aim to ensure there is sufficient unallocated surplus to cover the effect of these changes. Transactions with the benefit funds are shown gross on the basis that the shareholders of the company do not have access nor are exposed to the revenue, expenses, assets and liabilities of the benefit funds other than the requirement to maintain capital in the Centuria Capital Guaranteed Bond fund and the Income Accumulation Fund. 52 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 16. Policyholders' funds (continued) (c) Movement in benefit fund policyholder’s funds The composition and balances of the assets and liabilities held by the Benefit Funds are as follows: (b) Benefit fund policyholder’s assets and liabilities Cash Trade and other receivables Financial assets at fair value Income tax receivable Total assets Trade and other payables Policyholders' funds (i) Deferred tax liabilities Total liabilities 2016 $'000 71,168 3,971 277,548 841 353,528 27 349,878 3,623 353,528 2015 $'000 15,838 11,184 357,381 1,998 386,401 - 382,914 3,487 386,401 (i) Included within policyholders' funds at 30 June 2016 is $35.2 million (30 June 2015: $25.2 million) of reserves of which $6.2 million (30 June 2015: $6.2 million) is seed capital repayable to Centuria Life Limited. This seed capital receivable by Centuria Life Limited has been impaired and discounted to present value. The carrying value of the receivable in the books of Centuria Life Limited (and therefore the Group) at 30 June 2016 is $0.4 million (30 June 2015: $2.8 million). Bonus Rated Benefit Funds (with Discretionary Participation Features) Opening balance Movement in seed capital Applications received Redemptions paid Current period income Closing balance Unitised Benefit Funds (with non Discretionary Participation Features) Opening balance Applications received Redemptions paid Current period income Closing balance Total policyholders' funds 2016 $'000 297,513 - 5,762 (41,705) 1,303 262,873 85,401 17,186 (20,681) 5,099 87,005 349,878 2015 $'000 328,616 370 4,315 (36,559) 771 297,513 80,661 5,472 (5,909) 5,177 85,401 382,914 53 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 16. Policyholders’ funds (continued) (d) Guarantees to Benefit Fund policyholders Centuria Life Limited (CLL) provides a guarantee to policyholders of two of its Benefit Funds, Centuria Capital Guaranteed Bond Fund and Centuria Income Accumulation Fund as follows: "If, when CLL, in right of the Bonds, is required under the Bond rules to pay Policy Benefits to a Policy Owner as a consequence of the termination of the Bond or the Maturity or Surrender of a Policy, and CLL determines that the sums to be paid to the Policy Owner from the Bonds shall be less than the amounts standing to the credit of the relevant Accumulation Account Balance, (or in the case of a partial surrender, the relevant proportion of the Accumulation Account Balance), CLL guarantees to take all action within its control, including making payment from its Management Fund to the Policy Owner to ensure that the total sums received by the Policy Owner as a consequence of the termination, Maturity or Surrender equal the relevant Accumulation Account Balance, (or) in the case of a partial surrender, the relevant proportion thereof." No provision has been raised in respect of these guarantees at this time for the following reasons: 17. Issued Capital Balance at beginning of financial year Employee share scheme Share buy-back/shares cancelled Balance at end of financial year 2016 2015 No. of shares $'000 No. of shares $'000 76,756,929 88,112 78,130,764 89,167 - (125,230) 57 (111) - 284 (1,373,835) (1,339) 76,631,699 88,058 76,756,929 88,112 Fully paid ordinary shares carry one vote per share and carry the right to dividends. Unless otherwise stated, ordinary shares have the right to receive dividends as declared and, in the event of winding up the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of the Company. The funds follow an investment strategy that is appropriate for the liabilities of the fund. The Fund cannot alter their investment strategy without the approval of the members and APRA, following a report from the Appointed Actuary; 18. Dividends • • The funds must meet the Capital Adequacy standards of APRA which results in additional reserves being held within the funds to enable the funds to withstand a "shock" in the market value of assets. If the Funds can withstand a shock in asset values and still meet their liabilities from their own reserves, then this further reduces the likelihood of the Funds calling on the guarantee provided; and Recognised amounts Interim dividend (fully franked) Final dividend (fully franked) 2016 2015 Cents per share Total $'000 Cents per share Total $'000 2.25(i) 2.75(ii) 5.00(ii) 1,724 2,109 3,833 2.00(iii) 1.50(iv) 3.50(ii) 1,563 1,172 2,735 (i) The Company declared an interim dividend in respect of the year ended 30 June 2016 of 2.25 cents fully franked to 100% with a record date of 26 February 2016 which was paid on 18 March 2016. (ii) The Company declared a final dividend in respect of the year ended 30 June 2015 of 2.75 cents fully franked to 100%. The final dividend had a record date of 28 August 2015 and was paid on 18 September 2015. (iii) The Company declared an interim dividend in respect of the year ended 30 June 2015 of 2.00 cents fully franked to 100% with a record date of 5 March 2015 which was paid on 26 March 2015. (iv) The Company declared a final dividend in respect of the year ended 30 June 2014 of 1.50 cents fully franked to 100%. The final dividend had a record date of 12 September 2014 and was paid on 29 October 2014. • CLL also continues to meet the ongoing capital requirements set by APRA. 54 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 18. Dividends (continued) (a) Franking credits Franking credits available at 30% (2015: 30%) are: Amount of franking credits available to shareholders of the Company for subsequent financial years (i) 2016 $'000 8,417 2015 $'000 7,704 (i) Before taking into account the impact of the dividend declared on 18 August 2016. 19. Commitments and contingencies Operating leases The Group has commercial leases with respect to its Sydney and Melbourne office premises. Future minimum rentals payable under operating leases are as follows: Not longer than 1 year Longer than 1 year and not longer than 5 years 2016 $'000 770 1,769 2,539 2015 $'000 739 2,539 3,278 20. Remuneration of auditors Amounts received or due and receivable by KPMG: Audit and review of the financial report Investigating Accounts Report in respect of Centuria Metropolitan REIT Other services(i) Taxation services 2016 $'000 381 - 93 96 570 2015 $'000 361 300 630 72 1,363 (i) Other advisory services in the prior year include costs incurred for services provided in relation to the sale of the insurance agency and a large portion of the variable rate reverse mortgage portfolio. Refer to Note 6(b) for further details. 55 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 21. Related party transactions (a) Equity interests in related parties Details of the percentage of ordinary shares held in subsidiaries are disclosed below: Name of subsidiary Centuria Capital Limited Over Fifty Capital Pty Ltd Centuria Life Limited Over Fifty Seniors Equity Release Pty Ltd Over Fifty Investments Pty Ltd OFM Direct Property Trust No. 2 "Dominion" Over Fifty Funds Management Pty Ltd OFM Direct Property Trust No. 3 Chisholm National Leisure Trust OFM Bluegums Leisure Trust Senex Warehouse Trust No. 1 Centuria Property Funds Limited Centuria Strategic Property Limited Centuria Investment Holdings Pty Limited Centuria Investment Management Services Pty Ltd Centuria Investment Services Pty Limited Centuria Property Services Pty Limited Centuria SPC West Gosford Pty Ltd Centuria SPV Pty Limited Country of incorporation Ownership interest % 2016 2015 Name of subsidiary Country of incorporation Ownership interest % 2016 2015 Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 0% 0% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Centuria Bulky Goods SPV Pty Limited Centuria 4-8 Woodville Street Pty Limited Centuria 100 Bennelong Road Pty Limited Centuria 110 Pacific Highway Pty Limited Centuria 519 Cross Keys Road Pty Limited Centuria Opportunity Fund 2 Pty Limited Centuria 601 Bourke Street Pty Limited Centuria 339 Military Road Pty Ltd Centuria DPF Pty Ltd Centuria Employee Share Fund Pty Ltd Strategic Property Holdings Pty Ltd Strategic Property Holdings No3 Pty Limited Strategic Property Holdings No. 5 Pty Ltd Strategic Property Holdings No. 7 Pty Limited 30A Nominees Pty Ltd Centuria Capital Private Limited Belmont Road Management Pty Limited Belmont Road Development Pty Limited Centuria Belmont Road Development Fund Centuria Special Opportunities Fund Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Singapore Australia Australia Australia Australia 0% 0% 0% 0% 0% 100% 0% 0% 0% 100% 0% 0% 0% 100% 0% 100% 100% 100% 27% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 27% 0% All subsidiaries with a 0% ownership interest as at 30 June 2016 were deregistered during the year. 56 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 21. Related party transactions (continued) (b) Transactions with key management personnel As a matter of Board policy, all transactions with directors and director-related entities are conducted on arms-length commercial or employment terms. The Company and its related parties entered into transactions, which are insignificant in amount, with directors and their director-related entities in their domestic dealings and are made in arm's length transactions at normal market prices and on normal commercial terms. The Group pays some expenses on behalf of related entities and receives a reimbursement for these payments. During the financial year, the following transactions occurred between the Company and key management personnel: (d) Related party balances • • • Wolseley Corporate Pty Ltd, a related party of G. Charny, was paid $88,000 (inclusive of GST) for corporate advisory fees. Henry Davis York, a related party of R. Dobson, was paid $16,374 (inclusive of GST) (2015: $806,856) for legal consultancy fees. Mr J. R. Slater (personally) and Riviera Capital Pty Ltd, a related party of Mr. Slater, were paid a total of $141,840 (inclusive of GST) (2015: $141,643) for consultancy services. (c) Transactions with other related parties Management fees are charged to related parties in accordance with the respective trust deeds and management agreements. Management fees: Centuria Life Limited Benefit Funds Over Fifty Guardian Friendly Society Property funds managed by Centuria 2016 $'000 7,199 2,314 29,538 39,051 2015 $'000 7,735 2,121 20,324 30,180 (i) Terms and conditions of transactions with related parties Investments in property trusts and benefit funds held by certain directors and director-related entities are made on the same terms and conditions as all other persons. Directors and director-related entities receive the same returns on these investments as all other investors and policyholders. The following balances were outstanding at the end of the financial period between the Group and other related parties: (i) Trade and other receivables Monthly management fees owing from Benefit Funds Monthly management fees owing from Property Trusts Acquisition fee, loan receivable and cost recoveries owing from Centuria 8 Central Avenue Fund No. 2 Sales Fee receivable Opportunity Fund No. 2 Receivable from Centuria Zenith Fund Receivable from Over Fifty Guardian Friendly Society Limited Distribution receivable from Centuria Metropolitan REIT Present value of $5.800m seed capital investment in Centuria Income Accumulation Fund Short-term loan receivable from Property Trust Present value of $0.370m seed capital investment in Centuria Capital Guaranteed Bond Fund 2016 $'000 561 923 2015 $'000 630 673 - 3,534 9,600 7,072 216 110 - - 370 - - 191 106 2,779 101 370 18,853 8,384 57 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 21. Related party transactions (continued) (ii) Financial assets carried at fair value through profit or loss. The following table details related party investments carried at fair value through profit and loss. 2015 Units held Ownership % 2016 Units held Fair value $'000 Ownership % 503 5,544 74 500 - - - 22 17 18 6,678 141,531 2,590,837 75,452 500,000 - - 18 10,000 9,821 10,000 764 1,327 357,143 1,458,635 0.69% 2.17% 0.48% 0.81% 0.00% 0.00% 0.00% 0.22% 0.11% 0.27% 0.30% 7.69% Fair value $'000 146 5,231 - - 0 1 - 20 15 17 5,430 141,531 2,539,382 - - 3,765 395 - 10,000 9,000 10,000 736 1,307 357,143 1,458,635 0.69% 2.13% 0.00% 0.00% 0.01% 0.03% 0.00% 0.22% 0.13% 0.28% 0.30% 7.69% 10,142 4,739,200 3.97% 9,763 4,739,200 3.98% Financial assets held by the Group Centuria Opportunity Fund 2 Centuria Metropolitan REIT Centuria 19 Corporate Drive Fund Centuria ATP Fund Centuria Diversified Direct Property Fund Centuria Australian Property and Mortgage Bond Fund Centuria 2 Wentworth Street Fund Centuria Australian Shares Bond Centuria Balanced Bond Centuria High Growth Bond Financial assets held by the Benefit Funds Centuria Balanced Bond Centuria Metropolitan REIT Centuria 8 Australia Avenue Fund Centuria Growth Bond Fund Centuria Metropolitan REIT 58 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 21. Related party transactions (continued) (b) Reconciliation of profit for the period to net cash flows from operating activities (iii) Assets classified as held for sale During the prior reporting period the Company acquired 100% of the acquisition units in Centuria 2 Wentworth Street Fund (“the Fund”) to seed the Fund and enable the acquisition of the underlying investment property. Acquisition units rank equally with Ordinary Units, except that the proceeds from the allotment of Ordinary Units may be used to redeem any Acquisition Units. As at 30 June 2015, the Company held 1,040,018 Acquisition Units which were value at $1,040,018. All Acquisition Units in the Fund (except for 18 units to be retained) were redeemed on 1 July 2015. 22. Notes to the statement of cash flows (a) Reconciliation of cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents includes cash on hand and in banks. Cash and cash equivalents at the end of the reporting period as shown in the statement of cash flows are reconciled to the related items in the statement of financial position as follows: Cash and cash equivalents 2016 $'000 13,157 2015 $'000 25,487 Included in cash and cash equivalents attributable to shareholders is $7.2 million (2015: $9.6 million) relating to amounts held by Centuria Life Limited and Senex Warehouse Trust No.1 which is not readily available for use by the Group. Profit for the year Add (deduct) non-cash items: Depreciation and amortisation Impairment of related party receivable Share-based payment expense Gross proceeds on disposals Fair value gain on interest rate swap Loss on disposal of property, plant and equipment Fair value gain on unit trusts Interest revenue - from reverse mortgages Interest expense- reverse mortgage facility Unwinding of discount on non-current related party receivable Unrealised foreign exchange loss Changes in net assets and liabilities: (Increase)/decrease in assets: Trade receivables Prepayments Investment in Associates Decrease in deferred income tax assets Property held for development Increase/(decrease) in liabilities: Trade and other liabilities Tax provision Increase in Deferred Tax Liability Provisions Policyholder liability Net cash flows used in operating activities 2016 $'000 12,123 330 2,779 732 - (5,493) - (2,219) (2,300) 1,949 - 28 (13,816) (256) - 2,623 2015 $'000 8,561 341 2,218 904 (7,050) (1,148) 95 (57) (5,144) 3,662 (423) 178 (17) (313) 668 1,507 (12,705) (23,011) 4,004 (172) 2,500 (109) (3,403) - - 79 (35,572) (27,855) (45,573) (50,207) 59 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 23. Financial instruments These consolidated results comprise the assets and liabilities of the Group, including the Benefit Funds as required by AASB 10 Consolidated Financial Statements. The assets and liabilities of the Benefit Funds do not impact the net profit after tax or the equity attributable to the shareholders of the Company and the shareholders of the Company have no rights over the assets and liabilities held in the Benefit Funds. As a result, this note does not include disclosures in respect of those financial assets and liabilities held by the Benefit Funds (as set out in Note 16). The only risk to the shareholders of the Company in respect to the Benefit Funds is limited to capital reserving. Centuria Life Limited, (CLL), being a subsidiary of the Company, acts in the capacity of manager for two capital guaranteed benefit funds as described in Note 16(c). To mitigate the risk of these guarantees being called upon, the Benefit Funds set aside prescribed reserving which is determined upon a “1 in 400 year event” stress testing scenario. The reserving calculations are performed by an independent actuary appointed by CLL. The Benefit Funds at 30 June 2016 have set aside the requisite reserving as determined by the investment profile of the two respective funds. If the required reserving under the “Capital Adequacy Test” increases, CLL may be required to inject additional seed capital. Seed capital is later repaid to CLL when reserving is returned to a normal sustainable level. The expected recovery of, or future injection of, seed capital into the Society’s Benefit Funds is dependent on the underlying performance of the Funds’ assets. (a) Management of financial instruments The Board is ultimately responsible for the Risk Management Framework of the Group. The Group employs a cascading approach to managing risk, facilitated through delegation to specialist committees and individuals within the Group. CLL has also established an Investment Committee. The Investment Committee’s function is to manage and oversee the Benefit Fund investments in accordance with the investment objectives and framework. Specifically, it has responsibility for setting and reviewing strategic asset allocations, reviewing investment performance, reviewing investment policy, monitoring and reporting on the performance of the investment risk management policy and performing risk management procedures in respect of the investments. The Group is exposed to a variety of financial risks as a result of its activities. These risks include market risk (including interest rate risk and price risk), credit risk and liquidity risk. The Group's 60 risk management and investment policies, approved by the Board, seek to minimise the potential adverse effects of these risks on the Group's financial performance. These policies may include the use of certain financial derivative instruments. The Group outsources the investment management of the Benefit Funds to specialist investment managers, who provide services to the Group, co-ordinate access to domestic and international financial markets, and manage the financial risks relating to the operations of the Group in accordance with an investment mandate set out in the Group's constitution and the Benefit Funds' product disclosure statements. The Benefit Funds' investment mandates are to invest in equities and fixed interest securities via unit trusts, discount securities and may also invest in derivative instruments such as futures and options. The Group uses interest rate swaps to manage interest rate risk and not for speculative purposes in any situation. Hedging is put in place where the Group is either seeking to minimize or eliminate cash-flow variability, i.e., converting variable rates to fixed rates, or changes in the fair values of underlying assets or liabilities, i.e., to convert fixed rates to variable rates. Derivative financial instruments of the Benefit Funds, consolidated into the financial statements of the Group under AASB 10 Consolidated Financial Statements, are used only for hedging of actual or anticipated exposures relating to investments. The use of financial derivatives in respect of Benefit Funds is governed by the Fund's investment policies, which provide written principles on the use of financial derivatives. (b) Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to stakeholders through the optimisation of debt and equity capital. This overall strategy remains unchanged from the prior year. The Group's capital structure consists of net debt (borrowings, offset by cash and cash equivalents) and equity of the Group (comprising issued capital, reserves and retained earnings). The Group carries on business throughout Australia, primarily through subsidiary companies that are established in the markets in which the Group operates. The operations of Centuria Life Limited are regulated by APRA and the Management Fund of the Society has a minimum Prescribed Capital Amount (PCA) that must be maintained at all times. It is calculated monthly and these results are reported to the Board each month. The current level of share capital of Centuria Life Limited meets the PCA requirements. For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 23. Financial instruments (continued) (b) Capital risk management (continued) In addition, Centuria Property Funds Limited and Centuria Strategic Property Limited have AFSL licences so as to operate registered property trusts. Regulations require these entities to hold a minimum net asset amount which is maintained by way of bank guarantees. Where necessary, the bank guarantees will be increased to ensure the net asset requirement is always met. Operating cash flows are used to maintain and, where appropriate, expand the Group's funds under management as well as to make the routine outflows of tax, dividends and repayment of maturing debt. The Group reviews regularly its anticipated funding requirements and the most appropriate form of funding (capital raising or borrowings) depending on what the funding will be used for. The capital structure of the Benefit Funds (and management fund) consists of cash and cash equivalents, bill facilities and mortgage assets. The Benefit Funds also hold a range of financial assets for investment purposes including investments in unit trusts, equity and floating rate notes. The Investment Committee aims to ensure that there is sufficient capital for possible redemptions by unit holders of the Benefit Funds by regularly monitoring the level of liquidity in each fund. The Benefit Funds have no restrictions or specific capital requirements on the application and redemption of units. The Benefit Fund's overall investment strategy remains unchanged from the prior year. (c) Fair value of financial instruments (i) Valuation techniques and assumptions applied in determining fair value The fair values of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices (includes listed redeemable notes, bills of exchange, debentures and perpetual notes). The fair values of other financial assets and financial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions and dealer quotes for similar instruments. Discount rates are determined based on market rates applicable to the financial asset or liability. The valuation technique used to determine the fair value of the Group's reverse mortgage loan book is as follows: • the weighted average reverse mortgage holders’ age is 79 years; • the future cash flows calculation is related to borrowers' mortality rates and mortality improvements. The data is sourced from mortality tables provided by the actuary; • fixed or variable interest rates charged to borrowers are used to project future cash flows; • a redemption rate, which is based on historical loan redemption experience, applies to future cash flow forecast; and • year-end yield curve is used to discount future cash flows back to 30 June 2016 to determine the fair value. (ii) Valuation techniques and assumptions applied in determining fair value of derivatives The fair values of derivative instruments are calculated using quoted prices. Where such prices are not available, discounted cash flow analysis is performed using the applicable yield curve for the duration of the instruments for non-optional derivatives, and option pricing models for optional derivatives. The valuation technique used to determine the fair value of the Fixed for Life interest rate swaps is as follows: • the weighted average reverse mortgage holders’ age is 79 years; • the expected future cash flows in relation to the swaps are based on reverse mortgage borrowers' expected life expectancy sourced from mortality tables provided by the actuary; and the difference between the fixed swap pay rates and forward rates as of 30 June 2016 is used to calculate the future cash flows in relation to the swaps; and year-end yield curve plus a credit margin is used to discount future cash flows back to 30 June 2016 to determine the fair value. 61 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 23. Financial instruments (continued) (c) Fair value of financial instruments (continued) (iii) Fair value measurements recognised in the statement of financial position The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy for financial instruments measured at fair value. The table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable. 30 June 2016 Financial assets Measurement basis Fair value hierarchy Carrying amount $'000 Cash and cash equivalents Amortised cost Not applicable 13,157 Trade and other receivables Amortised cost Not applicable 19,656 Financial assets at fair value Financial assets at fair value Reverse mortgages at fair value Fair value Fair value Fair value Level 1 5,544 Level 2 41,650 Level 3 51,561 Fair value $'000 13,157 19,656 5,544 41,650 51,561 • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. Financial liabilities 131,568 131,568 • Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Trade and other payables Amortised cost Not applicable 8,349 Borrowings Amortised cost Not applicable 59,951 Interest rate swaps Fair value Level 3 20,778 • Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). 30 June 2015 Financial assets 89,078 8,349 59,951 20,778 89,078 There were no transfers between Level 1, 2 and 3 in the period. Cash and cash equivalents Amortised cost Not applicable 25,487 25,487 Trade and other receivables Amortised cost Not applicable Assets classified as held for sale Fair value Financial assets at fair value Reverse mortgages at fair value Fair value Fair value Level 2 Level 1 8,619 1,040 5,456 8,619 1,040 5,456 Level 3 43,754 43,754 84,356 84,356 Financial liabilities Trade and other payables Amortised cost Not applicable 4,345 Borrowings Amortised cost Not applicable 20,912 Interest rate swaps Fair value Level 3 17,576 42,833 4,345 20,912 17,576 42,833 62 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 23. Financial instruments (continued) (c) Fair value of financial instruments (continued) (iv) Reconciliation of Level 3 fair value measurements of financial assets and liabilities (iii) Fair value measurements recognised in the statement of financial position (continued) The Group determines Level 2 fair values for financial assets and liabilities without an active market based on broker quotes and other observable market data. Level 2 fair values for simple over-the-counter derivatives are also based on broker quotes. Those quotes are tested for reasonableness by discounting expected future cash flows using market interest rates for a similar instrument at the measurement date. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the entity and counterparty where appropriate. Set out below is a reconciliation of Level 3 fair value movements of financial assets and liabilities. The Level 3 financial asset held by the Group is the fair value of the reverse mortgage receivables attributable to interest rate risk. The Level 3 financial liability held by the Group is the fixed-for-life interest rate swaps. These two items are designated in a fair value hedging relationship, with the fair value movements on the swaps, offset by the fair value movements attributable to interest rate risk in the mortgage receivables (refer to Note 23(c)(iv). However, as the Group has only designated the fair value movements attributable to interest rate risk in the hedging relationship, any other fair value movements impact the profit and loss directly, such as movements attributable to credit risk. Year ended 30 June 2016 Balance at 1 July 2015 Total gains in profit or loss: Accrued interest Attributable to interest rate risk Attributable to credit risk Balance at 30 June 2016 Reverse mortgages fair value Interest rate swaps at fair value $'000 17,202 114 7,738 - 25,054 $'000 (17,576) (957) (7,738) 5,493 (20,778) Total $'000 (374) (843) - 5,493 4,276 Year ended 30 June 2015 $'000 $'000 $'000 Balance at 1 July 2014 Total gains in profit or loss: Accrued interest Attributable to interest rate risk Attributable to credit risk 13,130 (14,075) (945) 184 3,888 - (761) (3,888) (577) - 1,148 1,148 Balance at 30 June 2015 17,202 (17,576) (374) 63 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 23. Financial instruments (continued) (c) Fair value of financial instruments (continued) (v) Significant assumptions used in determining fair value The fair value of the 50 year reverse mortgage loans and 50 years swaps are calculated using a valuation technique based on assumptions that are not supported by prices from observable current market transactions in the same instrument and not based on available observable market data due to the illiquid nature of the instruments. Use is made of discounted cash flow analysis using the applicable yield curve out to 20 years, with the yield curve at 20 years employed as the best proxy for subsequent rates due to non-observable market data. Mortality rates for males and females have been assumed to be consistent with 2013 Life Tables. Mortality improvements of 3% p.a. are assumed starting at age 70. The improvement factor tapers down to 1% p.a. at age 90 and then zero at age 100. Joint life mortality is calculated based on last death for loans with joint borrowers. 53% of reverse mortgage loan portfolio consists of joint lives. Adjusting the yield curve by an increase/(decrease) of 100 basis points as at 30 June 2016 would cause the fair value of the 50 year swaps to (decrease)/increase by $(4,686,814)/$5,587,039 (2015: ($781,885)/$943,428). Additionally, the valuations have been calculated with an assumption of deaths (as opposed to early voluntary repayment) of mortgagees during the life of the interest rate swaps. The swap agreements provide that in the event of death of a mortgagee there is no further cost associated with the prepayment. Accordingly, the assumption on the number of deaths and timing of such deaths will impact the valuation. If the assumption of the death rate was to increase/(decrease) by 10%, the fair value of fixed for life swaps at 30 June 2016 would (decrease)/increase by $(781,885)/$943,428 (2015: $(665,804)/$813,657). (d) Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral or other security, where 64 appropriate, as a means of mitigating risk of financial loss from default. The credit risk on financial assets of the Group and the parent recognised in the statement of financial position is generally the carrying amount, net of allowance for impairment loss. Concentration of risk may exist when the volume of transactions limits the number of counterparties. (i) Credit risk of reverse mortgages Concentration of credit risk in relation to reverse mortgage loans is minimal, as each individual reverse mortgage loan is secured by an individual residential property. The loan is required to be paid off from the proceeds of disposal of the secured property after the borrower's death. Individual property valuations are conducted at least every 3 years in accordance with financier's requirements. At 30 June 2016, the highest loan to value ratio (LVR) of a loan in the reverse mortgage loan book is 82% (2015: 74%), and there are only 41 out of 247 (2015: 32 out of 263) reverse mortgage loans where the LVR is higher than 50%. There are no reverse mortgage loans that are impaired. (ii) Credit risk on other financial assets Credit risk on other financial assets such as investments in floating rate notes, standard discount securities and unit trusts is managed through strategic asset allocations with creditworthy counterparties and the on-going monitoring of the credit quality of investments, including the use of credit ratings issued by well-known rating agencies. The exposure of credit risk in respect of financial assets is minimal. The Group does not have any significant credit risk exposure to any single entity in other financial assets or any group of counterparties having similar characteristics. For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 23. Financial instruments (continued) (e) Liquidity risk The Group's approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities. The liquidity risk is managed for the Group at a corporate level. Bank account balances across all entities, current and future commitments, and expected cash inflows are reviewed in detail when the monthly cash flow projection is prepared for management purposes and presented to the Board at its regular monthly meetings. By comparing the projected cash flows with the assets and liabilities shown in the individual and consolidated statements of financial position, which are also prepared on a monthly basis for management purposes and presented to the Board, liquidity requirements for the Group can be determined. Based on this review, if it is considered that the expected cash inflows plus liquidity on hand, may not be sufficient in the near term to meet cash outflow requirements, including repayment of borrowings, a decision can be made to carry out one or more of the following: • • renegotiate the repayment terms of the borrowings; sell assets that are held on the statement of financial position; and/or • undertake an equity raising. This, combined with a profitable business going forward, should ensure that the Group continues to meet its commitments, including repayments of borrowings, as and when required. The Group's overall strategy to liquidity risk management remains unchanged from the prior year. The following tables summarise the Group's remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group and the parent can be required to pay. The tables include both interest and principal cash flows. To the extent that interest flows are at floating rate, the undiscounted amount is derived from interest rate curves at the end of the reporting period. The policy holders in the Benefit Funds are able to redeem their policies at any time and the Benefit Funds are therefore exposed to the liquidity risk of meeting policyholders' withdrawals at any time. The Investment Committee aims to ensure that there is sufficient capital for possible redemptions by policyholders of the Benefit Funds by regularly monitoring the level of liquidity in each fund. On Demand $'000 Less than 3 months $'000 3 months to 1 year $'000 1-5 years 5+ years Total $'000 $'000 $'000 - - - - - - 26,850 23,851 9,250 8,349 - - 35,199 23,851 9,250 1,040 4,345 5,384 2,724 17,962 - - 2,724 17,962 - - - - - - 59,951 8,349 68,300 21,725 4,345 26,070 Non-derivative financial liabilities Consolidated 2016 Borrowings Other payables Total 2015 Borrowings Other payables Total The following table summarises the maturing profile of derivative financial liabilities. The table has been drawn up based on the undiscounted net cash flows on the derivative instruments that settle on a net basis. On Demand $'000 Less than 3 months $'000 3 months to 1 year $'000 1-5 years 5+ years Total $'000 $'000 $'000 Derivative financial liabilities Consolidated 2016 Interest rate swaps Total 2015 Interest rate swaps Total - - - - - - - - - - - - - - - - 48,405 48,405 48,405 48,405 45,552 45,552 45,552 45,552 65 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 23. Financial instruments (continued) (i) Interest rate risk management (f) Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises interest rate risk and price risk. Due to the nature of assets held by the Group (excluding the Benefit Funds), there is an asset and liability management process which determines the interest rate sensitivity of the statement of financial position and the implementation of risk management practices to hedge the potential effects of interest rate changes. The Group manages the market risk associated with its Benefit Funds by outsourcing its investment management. The Investment Manager manages the financial risks relating to the operations of the Benefit Funds in accordance with an investment mandate set out in the Benefit Funds’ constitution and product disclosure statement. There has been no change to the Group's exposure to market risks or the manner in which it manages and measures the risk. The Group is exposed to interest rate risk because entities in the Group borrow funds at floating interest rates. Management of this risk is evaluated regularly and interest rate swaps are used accordingly. The tables below detail the Group's interest bearing financial assets and liabilities. 2016 Financial assets Cash and cash equivalents Reverse mortgage receivables Total financial assets Financial liabilities Borrowings Total financial liabilities Net interest bearing financial (liabilities)/assets 2015 Financial assets Cash and cash equivalents Reverse mortgage receivables Total financial assets Financial liabilities Borrowings Total financial liabilities Net interest bearing financial (liabilities)/assets Weighted average effective interest rate % Variable rate Fixed rate Total $'000 $'000 $'000 1.51% 8.75% 13,157 - 1,130 25,377 14,287 25,377 4.12% (59,951) (59,951) - - (45,664) 25,377 13,157 26,507 39,664 (59,951) (59,951) (20,287) Weighted average effective interest rate % Variable rate Fixed rate Total $'000 $'000 $'000 2.06% 8.72% 9,771 1,664 11,435 15,717 25,488 24,888 40,605 26,552 52,040 3.82% (20,912) (20,912) (9,477) - - (20,912) (20,912) 40,605 31,128 66 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 23. Financial instruments (continued) (f) Market risk (continued) (ii) Interest rate swap contracts Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates on the fair value of fixed rate financial assets held and the cash flow exposures on the issued variable rate debt. The following table details the notional principal amounts and remaining expiry of the Group's outstanding interest rate swap contracts as at reporting date. These swaps are at fair value through profit and loss. At reporting date, if variable interest rates had been 100 (2015: 100) basis points higher or lower and all other variables were held constant, the impact to the Group would have been as follows: Change in variable Profit after tax Effect On Consolidated Interest rate risk Consolidated Interest rate risk +1% -1% 2016 $'000 2015 $'000 (2,196) (1,117) 2,647 1,410 Average contracted rate Notional principal amount 2016 2015 2016 2015 % % $'000 $'000 Fair value 2016 $'000 2015 $'000 The methods and assumptions used to prepare the sensitivity analysis have not changed in the year. The sensitivity analysis takes into account interest-earning assets and interest- bearing liabilities attributable to the shareholders only, and does not take into account the bank bill facility margin changes. Pay fixed for floating contracts designated as effective in fair value hedge 50 years swaps contracts 7.47% 7.48% 11,913 12,745 (20,778) (17,576) 11,913 12,745 (20,778) (17,576) (iii) Interest rate sensitivity The sensitivity analysis below has been determined based on the parent and the Group's exposure to interest rates at the reporting date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period, in the case of financial assets and financial liabilities that have variable interest rates. A 100 basis point (1%) increase or decrease represents management's assessment of the reasonably possible change in interest rate. 24. Key management personnel compensation The aggregate compensation paid to key management personnel of the Group is set out below: Short-term employee benefits Post-employment benefits Other long-term employment benefits Share-based payments 2016 $ 2,897,468 102,988 48,710 577,382 3,626,548 2015 $ 2,936,599 138,600 36,336 546,841 3,658,376 Detailed information on key management personnel is included in the Remuneration Report. 67 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 25. Share-based payment arrangements (a) Description The Company has an Executive Incentive Plan (“LTI Plan”) which forms a key element of the Company’s incentive and retention strategy for senior executives under which Performance Rights (“Rights”) are issued. Each employee receives ordinary shares of the Company on vesting of the performance rights. No amounts are paid or payable by the recipient on receipt of the performance rights or on vesting. The performance rights carry neither rights to dividends nor voting rights prior to vesting. It is expected that future annual grants of performance rights will be made, subject to the Board’s determination of the overall performance of the Company and market conditions. The vesting of any performance rights awarded will be subject to attainment of appropriate performance hurdles and on the basis of continuing employment with the Company. Performance rights granted under the plan carry no dividend or voting rights. All plans are equity-settled. The primary objectives of the Plan include: • • • focusing executives on the longer term performance of the Group to drive long term shareholder value creation; ensure executive remuneration outcomes are aligned with shareholder interests, in particular, the strategic goals and performance of the Group; and ensure remuneration is competitive and aligned with general market practice by ASX listed companies. Rights issued under the LTI Plan are issued in accordance with the thresholds approved at the 2013 AGM. There have been three tranches of Rights granted under the LTI plan to date: Tranche Grant date Performance period 1 2 3 1 January 2014 1 July 2013 to 30 June 2016 1 February 2015 1 July 2014 to 30 June 2017 1 February 2016 1 July 2015 to 30 June 2018 The following table summarises the number of rights granted for each tranche: Tranche # of rights granted # of rights lapsed # of rights outstanding 1 2 3 1,200,825 1,831,926 1,787,715 - 440,999 - 1,200,825 1,390,927 1,787,715 The Performance Conditions and their associated weighting applicable to each tranche is summarised in the following table: EPS Hurdle The percentage of Rights subject to the EPS Hurdle that vest, if any, will be determined as follows: Maximum % or above Between threshold % and maximum % Compound Annual Growth Rate Portion of Rights that vest Compound Annual Growth Rate Portion of Rights that vest Tranche 1 (70%) Tranche 2 and 3 (45%) 12.5% or greater 100% 10% or greater 100% More than 7.5%, less than 12.5% Pro-rata between 50% and 100% More than 6%, less than 10% More than 4%, less than 6% Pro-rata between 50% and 100% Pro-rata between 25% and 50% Threshold % 7.5% Less than 7.5% Less than the threshold % 50% 0% 4% Less than 4% 25% 0% 68 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 25. Share-based payment arrangements (continued) (a) Description (continued) The Board has discretion to adjust the EPS performance hurdle to ensure that participants are neither advantaged nor disadvantaged by matters outside managements’ control that affect EPS (for example, by excluding one-off non-recurrent items or the impact of significant acquisitions or disposals). Growth in FUM Hurdle The percentage of Rights subject to the Growth in FUM Hurdle that vest, if any, will be determined as follows: Compound Annual Growth Rate Portion of Rights that vest Compound Annual Growth Rate Portion of Rights that vest Tranche 1 (15%) Tranche 2 and 3 (15%) 25% or greater 100% 18% or greater 100% More than 15%, less than 25% Pro-rata between 50% and 100% More than 14%, less than 18% Pro-rata between 50% and 100% Maximum % or above Between threshold % and maximum % Threshold % 15% Less than the threshold % Less than 15% 50% 0% More than 10%, less than 14% Pro-rata between 25% and 50% 10% Less than 10% 25% 0% Absolute TSR Hurdle The percentage of Rights subject to the Absolute TSR Hurdle that vest, if any, will be determined as follows: Maximum % or above Between threshold % and maximum % Compound Annual Growth Rate Portion of Rights that vest Compound Annual Growth Rate Portion of Rights that vest Tranche 1 (15%) Tranches 2 and 3 (40%) 18% or greater 100% 18% or greater 100% More than 12%, less than 18% Pro-rata between 50% and 100% More than 15%, less than 18% More than 12%, less than 15% Pro-rata between 50% and 100% Pro-rata between 25% and 50% Threshold % 12% Less than the threshold % Less than 12% 50% 0% 12% Less than 12% 25% 0% 69 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 26. Parent entity disclosure As at, and throughout the current and previous financial year, the parent entity of the Group was Centuria Capital Limited. 25. Share-based payment arrangements (continued) (b) Measurement of fair values The fair value of the Rights was calculated using a binomial tree valuation methodology for the Rights with non-market vesting conditions and a Monte-Carlo simulation for the Rights with market vesting conditions. The inputs used in the measurement of the fair values at grant date of the Rights were as follows: Expected vesting date 31 August 2016 31 August 2017 31 August 2018 Tranche 1 Tranche 2 Tranche 3 Share price at the grant date Expected life Volatility Risk free interest rate Dividend yield $0.80 2.7 years 25% 2.85% 3.4% $0.91 2.6 years 25% 1.94% 4.3% $0.96 2.6 years 20% 1.85% 5.4% Result of parent entity Profit for the period Total comprehensive income for the year Financial position of parent entity at year end Total assets Total liabilities Total equity of the parent entity comprising of: Share capital The following table sets out the fair value of the rights at the respective grant date: Share-based incentive reserve Performance condition Tranche 1 Tranche 2 Tranche 3 EPS Growth in FUM Absolute TSR $0.73 $0.73 $0.18 $0.81 $0.81 $0.28 $0.87 $0.87 $0.19 During the year, share based payment expenses were recognised of $0.675 million (FY15 $0.620 million). Profits reserve Retained earnings Total equity 70 2016 $ '000 3,399 3,399 118,938 34,213 88,033 1,459 2,601 (7,368) 84,725 2015 $ '000 843 843 87,316 2,610 88,146 784 2,601 (6,825) 84,706 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 27. Events subsequent to the reporting date (a) Final Dividend On 18 August 2016, the Company declared a dividend of 3.00 cents per share franked to 100%. The dividend is expected to be paid on 14 September 2016. (b) Investment in GPT Metro Office Fund In May 2016, the group announced the acquisition of a 12.6% stake in GPT Metro Office Fund (GMF). On 24 May 2016, the Group’s subsidiary Centuria Property Funds Limited (CPFL) in its capacity as responsible entity of the Centuria Metropolitan REIT (CMA) submitted a non-binding proposal to merge CMA and GMF via a trust scheme. This was followed on 16 June 2016 with a takeover bid for GMF via an off market takeover. At the same time the Company entered into a number of agreements, including a Facilitation and Property Rights Deed with the GPT Group. On 1 August 2016, GMF’s Independent Board Committee announced its support for a competing offer. Also on 1 August 2016, CMA announced it would not be proceeding with its offer for GMF. As at the date of this report, the Group retains its 12.6% interest in GMF. Other than the matters discussed above, there has not arisen in the interval between 30 June 2016 and the date hereof any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years. 28. Significant accounting policies The Group has consistently applied the following accounting policies to all periods presented in these consolidated financial statements. (a) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (subsidiaries). The Group controls an entity when it 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 over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. The Company is required by AASB 10 Consolidated Financial Statements to recognise the assets, liabilities, income, expenses and equity of the benefit funds of its subsidiary, Centuria Life Limited (the “Benefit Funds”). The assets and liabilities of the Benefit Funds do not impact the net profit after tax or the equity attributable to the shareholders of the Company and the shareholders of the Company have no rights over the assets and liabilities held in the Benefit Funds. The Company has majority representation on the Board of the Over Fifty Guardian Friendly Society Limited (Guardian). However, as Guardian is a mutual organisation, the Company has no legal rights to Guardian's net assets, nor does it derive any benefit from exercising its power and therefore does not control Guardian. Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. This excludes transactions with the Centuria Life Limited benefit funds. Transactions with the benefit funds continue to be shown gross on the basis that the shareholders of the company do not have access nor are exposed to the revenue, expenses, assets and liabilities of the benefit funds other than the requirement to maintain capital in the Centuria Capital Guaranteed Bond fund and the Income Accumulation Fund. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. (b) Business combinations Acquisitions of subsidiaries and businesses are accounted for using the acquisition method when control is transferred to the Group. The consideration for each acquisition is measured at the aggregate of the fair values (at the date of acquisition) of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. 71 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 28. Significant accounting policies (continued) (e) Goods and services tax (c) Goodwill Goodwill arising in a business combination is recognised as an asset at the date that control is achieved (the acquisition date). Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer previously held equity interest in the acquiree (if any) over the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed. Goodwill is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except: • where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or • for receivables and payables which are recognised inclusive of GST. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Cash flows are included in the statement of cash flows on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified within operating cash flows. (f) Revenue Revenue is measured at the fair value of the consideration received or receivable to the extent it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. (d) Investments in associates (i) Management fees An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations. Under the equity method, investments in associates are initially carried in the consolidated statement of financial position at cost and subsequently adjusted for post- acquisition changes in the Group's share of the net assets of the associate, less any impairment in the value of individual investments. Management fees are recognised on an accruals basis when the Group has the right to receive payment. (ii) Distribution revenue Dividend revenue from investments is recognised when the shareholder’s right to receive payment has been established (provided that it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably). (iii) Interest revenue Interest revenue is accrued on a time basis, by reference to the principal outstanding using the effective interest rate method. 72 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 28. Significant accounting policies (continued) (f) Revenue (continued) The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. (iv) Property acquisition fees, sale and performance/incentive fees (ii) Deferred tax Property acquisition fees are recognised when an investment property has been acquired in a fund managed by the Group. Sales and performance/incentive fees derived from managed funds are recognised upon satisfaction of all conditions precedent to the sale of an investment property and when significant risks and rewards have transferred. (v) Commission and application fee income All insurance agency commissions and application fee income is recognised on an accruals basis when the Group has the right to receive the payment. (vi) Sale of development properties Revenue from the sale of apartments is recognised at the fair value of the consideration receivable when the significant risks and rewards of ownership have been transferred to the purchaser and where there is no continuing management involvement, which normally coincides with settlement of the contract for sale. (g) Finance costs The Group's finance costs include: • • • Interest expense; The net gain or loss on hedging instruments that are recognised in profit or loss; and The unwinding of the discount on the non-current receivables. Interest expense is recognised using the effective interest method. (h) Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. (i) Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated profit or loss because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Deferred tax liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Group is unable to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. 73 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 28. Significant accounting policies (continued) (h) Taxation (continued) (ii) Deferred tax (continued) Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. (iii) Tax consolidation The Company and all its wholly-owned Australian resident entities are part of a tax- consolidated group under Australian taxation law. The Company is the head entity in the tax-consolidated group. Tax expense/benefit, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of the tax-consolidated group using a 'stand-alone' approach based on the allocation specified in the tax funding arrangement. The Benefit Funds are part of the tax consolidated group, and they are allocated a share of the income tax liability attributable to Centuria Life Limited equal to the income tax liability that would have arisen to the Benefit Funds had they been stand-alone. (iv) Current and deferred tax for the period Current and deferred tax are recognised as an expense or income in profit or loss, except when they relate to items that are recognised outside profit or loss (whether in other comprehensive income or directly in equity), in which case the tax is also recognised outside profit or loss, or where they arise from the initial accounting for a business combination. In the case of a business combination, the tax effect is included in the accounting for the business combination. (i) Cash and cash equivalents Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, which are subject to an insignificant risk of changes in value and have a maturity of three months or less at the date of acquisition. Bank overdrafts are shown within borrowings in the statement of financial position. 74 (j) Financial assets All financial assets are recognised and derecognised on trade date where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned, and are initially measured at fair value plus transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value. (i) Effective interest method The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. (ii) Financial assets at fair value through profit and loss Financial assets are classified as financial assets at fair value through profit or loss when the financial asset is either held for trading or it is designated as at fair value through profit or loss. Financial assets at fair value through profit and loss are stated at fair value, with any gains or losses arising on re-measurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the statement of comprehensive income. (iii) Other financial assets Other financial assets include reverse mortgage loans. Reverse mortgage loans are held directly at amortised cost using the effective interest method except for commercial mortgage loans held by the Benefit Funds which are measured at fair value through profit and loss. An allowance for impairment loss is made at year end for specific amounts when there is objective evidence that collection of the full amount is no longer probable. Bad debts are written off when identified. For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 28. Significant accounting policies (continued) (j) Financial assets (continued) (iv) Derecognition of financial assets The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. (v) Impairment of financial assets Financial assets, other than those at fair value through profit and loss, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. (ii) Lease incentives Lease incentives received to enter into operating leases are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight- line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Lease incentives granted as part of operating leases are recognised as a reduction of rental income on a straight line basis over the life of the lease. (l) Employee benefits A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave when it is probable that settlement will be required and they are capable of being measured reliably. Contributions to defined contribution retirement benefit plans are recognised as an expense when employees have rendered service entitling them to the contributions. (i) Short-term employee benefits Liabilities recognised in respect of short-term employee benefits, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. When an event occurring after the impairment was recognised causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through the profit and loss. (ii) Long-term employee benefits (vi) Loans and receivables Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as 'loans and receivables'. Loans and receivables are measured at amortised cost using the effective interest method less impairment. (k) Leasing Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. (i) Group as a lessee Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Liabilities recognised in respect of long-term employee benefits, are measured as the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date. (iii) Share-based payment transactions Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest. At the end of each reporting period, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates with respect to non-market vesting conditions, if any, is 75 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 28. Significant accounting policies (continued) (l) Employee benefits (continued) (iii) Share-based payment transactions (continued) recognised in profit for the year such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the equity-settled employee benefits reserve. Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the goods and services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service. (m) Financial liabilities and equity instruments issued by the Group (i) Classification as debt or equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with AASB 132 Financial Instruments. (ii) Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs. (iii) Other financial liabilities Other financial liabilities, including borrowings and trade and other payables, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. (n) Derivative financial instruments The Group enters into derivative financial instruments such as interest rate swaps to manage its exposure to interest rate risk. Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting period. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event, the timing of the recognition in profit or loss depends on the nature of the hedge relationship. (i) Hedge accounting At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and hedged item, along with its risk management objectives and its strategy for undertaking the hedge. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument that is used in a hedging relationship is highly effective in offsetting changes in cash flows of the hedged item. The Group designates certain derivatives as either hedges of fair value of recognised assets or liabilities (fair value hedges) or hedges of highly probable forecast transactions (cash flow hedges). (ii) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in the other expenses or other income line item. Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item is recognised in profit or loss, in the same line of the statement of comprehensive income as the recognised hedged item. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously accumulated in equity are transferred from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability. Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer 76 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements 28. Significant accounting policies (continued) (n) Derivative financial instruments (continued) qualifies for hedge accounting. Any gain or loss accumulated in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in profit or loss. (iii) Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The change in the fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are recognised in the line of the statement of comprehensive income relating to the hedged item. Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. The fair value adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised to profit or loss from that date. (o) Product classification The accounting treatment of certain transactions varies depending on the nature of the contract underlying the transaction. The major contract classifications are insurance contracts and investment contracts. (i) Insurance contracts Insurance contracts are those containing significant insurance risk at the inception, or those where at the inception of the contract there is a scenario with commercial substance where the level of insurance risk may be significant. Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime, even if the insurance risk reduces significantly during the period. (ii) Investment contracts Contracts not considered insurance contracts are classified as investment contracts. The accounting treatment of investment contracts depends on whether the investment has a Discretionary Participation Feature. A Discretionary Participation Feature (DPF) means a contractual right to receive, as a supplement to guaranteed benefits, additional benefits: (a) that are likely to be a significant portion of the total contractual benefits; (b) whose amount or timing is contractually at the discretion of the issuer; and (c) that are contractually based on: • the performance of a specified pool of contracts or a specified type of contract; • realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or • the profit or loss of the Company, fund or other entity that issues the contract. Applications and redemptions on investment contracts with a DPF are accounted for through profit or loss. The gross change in the liability to these policyholders for the period, which includes any participating benefits vested in policyholders and any undistributed surplus attributed to policyholders, is also recognised through profit or loss. Applications and redemptions on investment contracts without a DPF are accounted for through the statement of financial position as a movement in policyholder liabilities. Distributions on these contracts are charged to profit or loss as a movement in the policyholder liability. Premiums and claims relating to the investment component are accounted for as a deposit through the statement of financial position. (p) Policyholders' funds Assets and liabilities held by the Benefit Funds are included in the statement of financial position of the Group. The liability to bonus fund policyholders is closely linked to the performance and value of the assets (after tax) that back those liabilities. The fair value of such liabilities is therefore the same as the fair value of those assets after tax. In accordance with the rules of the funds, any remaining surplus is attributed to the policyholders of the fund. In accordance with applicable accounting standards, applications to these funds are recorded as income, redemptions from these funds and amounts distributable to policyholders are recorded as expenses. The policyholders' funds liability for unit linked funds is equal to the number of units held, multiplied by the unit redemption price based on market value of the fund's investments as at the valuation date. Applications to these funds are not recorded 77 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Notes to the Consolidated Financial Statements AASB 15 Revenue from Contracts with Customers and the relevant amending standards are effective for annual reporting periods beginning on or after 1 January 2018. AASB 15 will be mandatory for the Group’s 30 June 2019 financial statements. AASB 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. AASB 15 will replace AASB 118 Revenue, AASB 111 Construction Contracts and the related Interpretations when it becomes effective. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognised. The Group is currently considering the financial impact of this accounting standard change. AASB 16 Leases is effective for annual reporting periods beginning on or after 1 January 2019. Early application is permitted, provided the new revenue standard, AASB 15, has been applied, or is applied at the same date as AASB 16. The Group is currently considering the financial impact of this accounting standard change. 28. Significant accounting policies (continued) (p) Policyholders' funds (continued) as income, redemptions from these funds are not recorded separately as expenses, but amounts distributable to policyholders are recorded as an expense. No guarantees are provided by the Society in respect of the unit linked funds. Claims incurred in respect of the Benefit Funds represent investment withdrawals (redemptions) and are recognised as a reduction in policyholder liabilities. Redemptions in respect of bonus funds are also disclosed as an expense as set out above. Benefit Fund expenses which are directly attributable to an individual policy or product are allocated directly to the benefit fund within which that class of business is conducted. The apportionment basis has been made in line with the principles set out in the Life Insurance Actuarial Standards Board (LIASB) Valuation Standard (Actuarial Standard AS1.04) and the apportionment is in accordance with Division 2 of Part 6 of the Life Act. (q) Property held for development Properties held for development in the ordinary course of business are carried at the lower of cost and net realisable value. Cost includes, where applicable, the cost of acquisition, construction, interest, rates, taxes and other expenses directly related to the development. (r) New Accounting Standards and Interpretations AASB 9 Financial Instruments and the relevant amending standards are effective for annual reporting periods beginning on or after 1 January 2018. AASB 9 will be mandatory for the Group’s 30 June 2019 financial statements. AASB 9 is a new Standard which will replace AASB 139 Financial Instruments: Recognition and Measurement. AASB 9 includes revised guidance on the classification and measurement of financial instruments, however it carries over the existing derecognition requirements from AASB 139. The Group is currently considering the financial impact of this accounting standard change. 78 For the year ended 30 June 2016 Centuria Capital Limited and Controlled Entities Directors' Declaration In the opinion of the directors of Centuria Capital Limited: (a) the consolidated financial statements and notes that are set out on pages 39 to 78 and the Remuneration Report set out on pages 27 to 36 in the Directors’ report, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2016 and of its performance, as represented by the results of its operations, changes in equity and its cash flows, for the financial year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; 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. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive officer and chief financial officer for the financial year ended on 30 June 2016. The directors draw attention to Note 2 to the consolidated financial statements, which includes a statement of compliance with International Financial Reporting Standards. Signed in accordance with a resolution of the directors. For and on behalf of the Board G. Charny Chairman Sydney 18 August 2016 P. J. Done Director Chairman - Audit, Risk Management & Compliance Committee 79 For the year ended 30 June 2016 Independent Auditor's Report ABCD Independent auditor’s report to the members of Centuria Capital Limited Report on the financial report We have audited the accompanying financial report of Centuria Capital Limited (the Company) and its controlled entities (the Group), which comprises the consolidated statement of financial position as at 30 June 2016, and consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended on that date, notes 1 to 28 comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration of the Group comprising the Company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement whether due to fraud or error. In note 2, the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements of the Group comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the Group’s financial position and of its performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 80 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative Liability limited by a scheme approved under (“KPMG International”), a Swiss entity. Professional Standards Legislation 72 For the year ended 30 June 2016 Independent Auditor's Report ABCD Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: (a) The financial report of Centuria Capital Limited is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the Group’s financial position as at 30 June 2016 and of its performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 2. Report on the remuneration report We have audited the Remuneration Report included in pages 9 to 20 of the directors’ report for the year ended 30 June 2016. The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards. Auditor’s opinion In our opinion, the remuneration report of Centuria Capital Limited for the year ended 30 June 2016, complies with Section 300A of the Corporations Act 2001. KPMG Nigel Virgo Partner Sydney 18 August 2016 73 81 For the year ended 30 June 2016 Annual Stock Exchange Information As at 30 September 2016 Additional information required by the ASX Limited Listing Rules and not disclosed elsewhere in this report is set out below. Distribution of holders of ordinary shares Range 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Holding less than a marketable parcel Number of holders Number of ordinary shares 845 4,742 818 636 72 7,113 426 429,090 11,632,525 5,582,017 16,085,836 43,465,265 77,194,733 122,568 On-market share buy-back The company bought-back 125,230 shares (2015; 1,373,835 shares) during the current financial year. All of the shares bought-back were settled by 30 June 2016. Substantial shareholders Ordinary shareholders J P MORGAN NOMINEES AUSTRALIA LIMITED RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED RESOLUTE FUNDS MANAGEMENT PTY LTD Number of ordinary shares held 7,385,583 5,233,237 4,283,440 82 Annual Stock Exchange Information As at 30 September 2016 Top 20 Shareholders 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. J P MORGAN NOMINEES AUSTRALIA LIMITED RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED RESOLUTE FUNDS MANAGEMENT PTY LTD PARITAI PTY LIMITED AVANTEOS INVESTMENTS LIMITED <2412987 JRSWJH A/C> NATIONAL EXCHANGE PTY LTD NATIONAL NOMINEES LIMITED AVANTEOS INVESTMENTS LIMITED <1259738 PARSONS A/C> AVANTEOS INVESTMENTS LIMITED <1703553 JOHNSON A/C> BRYSHAW MANAGEMENT PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2 STERLING GRACE CAPITAL MANAGEMENT LP STERLING GRACE INTERNATIONAL LLC AVANTEOS INVESTMENTS LIMITED <2469707 N SLATER A/C> PHILIP CAIRNS DIXON + JACQUELINE PATRICIA DIXON + STEPHEN THOMAS WRIGHT 16. MR ROGER WILLIAM DOBSON 17. VEXDAT PTY LTD 18. NATIONAL EXCHANGE PTY LTD 19. STRATEGIC VALUE PTY LTD 20. MRS ROSINA ANNA BLAKE Voting rights All ordinary shares (whether fully paid or not) carry one vote per share without restriction. Ordinary Shares Number Percentage 7,385,583 5,233,237 4,283,440 2,044,266 1,700,000 1,401,563 1,140,265 1,107,822 1,063,608 1,046,568 853,356 802,550 802,550 800,000 750,000 748,651 714,390 500,000 466,832 405,658 9.57 6.78 5.55 2.65 2.20 1.82 1.48 1.44 1.38 1.36 1.11 1.04 1.04 1.04 0.97 0.97 0.93 0.65 0.60 0.53 33,250,339 43.07 83 Corporate Directory Contact Us Shareholder Enquiries call: ............................ 1800 11 29 29 Investor Enquiries call: .................................. 1300 50 50 50 www.centuria.com.au Shareholder Enquiries Centuria Capital Limited, Share Registry, GPO Box 2975 Melbourne VIC 3001 Call ................................................................ 1800 11 29 29 Company Secretary James Lonie Level 39, 100 Miller Street Sydney NSW 2060 Call ............................................................... (02) 8923 8910 Fax .................................................................02) 9460 2960 Head Office Level 39, 100 Miller Street Sydney NSW 2060 Call .................................................................. 1300 50 50 50 Fax .................................................................(02) 9460 2960 enquiries@centuria.com.au Friendly Society Investor Enquiries Centuria Life Limited, Level 32, 120 Collins Street Melbourne VIC 3000 Call .................................................................1300 50 50 50 enquiries@centuria.com.au Mail to Centuria Capital Limited Reply Paid 695, Melbourne VIC 8060 (no stamp required) 84 CENTURIA CAPITAL2016ANNUAL REPORT CA-CNI-22/07/16-00344

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