centuria.com.au C e n t u r i a C a p i t a l G r o u p A n n u a l R e p o r t 2 0 1 8 Centuria Capital Group Annual Report 2018 1231-1241 SANDGATE ROAD, BRISBANE, QLD Contents CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 01 About Centuria 02 Key Financial Metrics 03 Chairman’s Report 04 Chief Executive’s Report 08 Unlisted Property 10 Listed Property 14 Centuria Life 16 Centuria in the Community 18 Board of Directors 20 Senior Executive Committee 23 Directors’ Report 36 Lead Auditor’s Independence Declaration 37 Financial statements 83 Directors’ Declaration 84 Independent Auditor’s Report 90 Additional stock exchange information 91 Disclaimers 91 Corporate directory About Centuria Centuria Capital Group (CNI) is an ASX-listed specialist investment manager with $4.9 billion of assets under management. Our core business is the management of listed property funds (AREITS) together with a range of unlisted property funds. We have a 20 year track record in property funds management and we are one of Australia’s leading real estate platforms. Centuria’s integrated property platform delivers expertise in origination, capital sourcing and funds management along with asset and property management, facilities management and property value add initiatives. At Centuria, we put investors first and we work relentlessly to discover new investment opportunities. We invest along-side our clients and we encourage them to expect a strong focus on returns together with complete transparency. Further information can be found on our website centuria.com.au Centuria Capital Group (CNI) $428m Market Capitalisation1 $4.9bn2 ASSETS UNDER MANAGEMENT (AUM) $0.3bn CO-INVESTMENTS $4.0bn2 $0.9bn PROPERTY FUNDS MANAGEMENT AUM INVESTMENT BONDS AUM CENTURIA INDUSTRIAL REIT (CIP)3,4 CENTURIA METROPOLITAN REIT (CMA)3,4 PROPERTYLINK GROUP4 19.9% 19.9% 9.3% LISTED PROPERTY $2.1bn2 UNLISTED PROPERTY $1.9bn INDUSTRIAL REIT (CIP) METROPOLITAN REIT (CMA) FIXED TERM FUNDS $1.1bn $1.0bn2 15 AUM AUM CENTURIA DIVERSIFIED PROPERTY FUND Includes 2 Kendall Street, Williams Landing, VIC, as if complete 1 As at 30 June 2018 2 3 Co-investment ownership percentage includes the ownership by associates of Centuria Capital Group 4 As at 21 September 2018, CIP 22.9%, CMA 20.4%, PLG 11.4% Figures above as at 30 June 2018 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 01 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Key financial metrics 191% Increase in FY18 Operating net profit after tax 217% Increase in FY18 Statutory net profit after tax 9.3% Increase in FY18 Distributions per security OPERATING NET PROFIT AFTER TAX ($m)1 OPERATING NET PROFIT AFTER TAX ($m) OPERATING EARNINGS PER SECURITY2 OPERATING EARNINGS PER SECURITY (CENTS) (CENTS) $50m 40 30 20 10 0 15.5 11.3 5.9 6.3 16.3 14.8 10.3 7.6 8.1 45.1 16c 12 8 4 0 FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 STATUTORY NET PROFIT AFTER TAX ($m)3 STATUTORY NET PROFIT AFTER TAX ($m) NET TANGIBLE ASSETS PER SECURITY ($) NET ASSETS PER SECURITY ($) $60m 50 40 30 20 10 0 $1.80 54.8 1.32 1.20 1.54 1.42 1.29 1.16 17.3 9.1 8.6 12.3 0.60 0 FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY174 FY18 4 DISTRIBUTIONS PER SECURITY (CENTS) DISTRIBUTIONS PER SECURITY (CENTS) FUNDS UNDER MANAGEMENT ($bn) ASSETS UNDER MANAGEMENT ($bn) 7.50 4.75 5.25 10.0c 7.5 5.0 2.5 2.75 0 4.9 3.8 $5.0b 8.20 4.0 3.0 2.0 1.0 0 1.9 1.6 1.5 FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 1 Operating NPAT of the Group comprises of the results of all operating segments and excludes non-operating items such as transaction costs, mark to market movements on property and derivative financial instruments, the results of Benefit Funds and Controlled Property Funds 2 Operating EPS is calculated based on the Operating NPAT of the Group divided by the weighted average number of securities 3 Attributable to securityholders 4 Number of securities on issue at 30 June 2018: 304,793,174 (at 30 June 2017: 229,815,736) 02 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Chairman’s report Garry Charny CHAIRMAN | Centuria Capital Group During my third year as chairman, the Group has continued to expand its entire platform and I am delighted to report that this has been supported by the strong performance of our core operating businesses. Financial year 2018 delivered an operating profit1 of $45.1 million for Centuria, up from $15.5 million in the preceding year. Total securityholder return for the period was 23.3%2, in fact total securityholder returns over the past four years have averaged over 20.0%2 per annum. In addition, during FY18, Centuria delivered operating earnings3 of 16.3 cents per stapled security (cps) and total distributions of 8.2cps, up 9.3% on FY17. One of Centuria’s key strategic focuses in recent years has been executing on our growth agenda. Pleasingly, 2018 has seen the benefits of a material step change in the size of the Group and the benefits that can be unlocked from our scalable platform. The Centuria Board works in close co- operation with the management team, to refine and implement our strategic planning. This clear focus on our strategic goals helps define Centuria and I am sure I speak for my fellow directors, as well as myself, when I say it is rewarding to be involved in such a positive and co- operative environment. The acquisition of the 360 Capital platform during FY17, now fully integrated, is a good example. Whilst the acquisition required a major capital raising, the resulting security price accretion and market capitalisation increase are testimony to the Group’s ability to plan and execute on its major strategies. Centuria continues to evolve as one of Australia’s leading property fund managers, now with a platform of $4.0 billion in real estate assets under management. The Centuria platform includes Australia’s largest ASX listed metropolitan office REIT in Centuria Metropolitan REIT and Australia’s largest ASX listed income focused industrial REIT in Centuria Industrial REIT. Collectively, these REITs represent $2.1 billion4 of assets under management with the balance of the platform consisting of $1.9 billion of unlisted property assets under management including 15 fixed term funds and the Centuria Diversified Property Fund. Whilst this growth continues, it is important to never forget our roots. To that end, Centuria remains among the country’s leading unlisted managers with strong distribution channels and a proven track record of delivering results on behalf of our investors. Our Investment Bonds subsidiary, Centuria Life, is the fourth largest operator in Australia with $0.9 billion under management at FY18 close. Headwinds in alternative savings and investment vehicles such as superannuation continue to provide opportunities for growth in the investment bond market and we are committed to exploring opportunities for participating in this growth. It is worth noting some important departures and appointments in the Group. During the year, Nick Collishaw stepped down from his role in charge of our REITs. An industry veteran, Nick’s experience and wise counsel could have been sorely missed, however I am pleased to say that Nick accepted our invitation to remain on both the CNI and Centuria Property Funds Limited (CPFL) Boards. As a result, Jason Huljich stepped up to head both our listed and unlisted divisions. Whilst a broad and challenging remit, the board is comfortable that he is more than up to the challenge – and his track record in the unlisted division is testament to his ability. Importantly, we are committed to improving the representation of women at board level and in senior management and it has been an important mandate since my appointment as Chair, together with our Group CEO, to redress the balance. Susan Wheeldon-Steele sits on the CNI Board and I was equally delighted that Evelyn Horton agreed to join the Centuria Life Board. I am also pleased that Anna Kovarik has joined us as General Counsel and Company Secretary. It goes without saying that all these people succeeded on merit and not because of gender. As ever, the inexhaustible John McBain continues to lead from the front. I would also be remiss not to mention the exceptional financial and strategic work done by both Jason Huljich, our Head of Real Estate and Funds Management, and Simon Holt, our CFO. I thank all the Centuria management team for your continued drive towards excellence and enhancing Centuria’s platform. It would be remiss of me not to mention that on 13 September 2018, Propertylink Group (PLG) announced to the market an unsolicited, non-binding and indicative proposal to acquire all of the outstanding units in the Centuria Industrial REIT (CIP). In response, on 2 October 2018, an Independent Board Committee of Centuria Property Funds No. 2 Limited as responsible entity of CIP, formally rejected that proposal. Further, on 20 September 2018 CNI called on PLG to requisition an Extraordinary general meeting to vote on a board spill of PLG. These steps were taken reluctantly but with the sole interests of CNI unit holders as we hold a substantial interest in PLG. Events may have overtaken the print lead time of this letter but we will keep all CNI securityholders informed of any developments. To conclude, I would once again like to thank my fellow directors on both the group and responsible entity boards for their commitment and dedication towards delivering quality results in 2018. Your collegiate approach to developing a framework for success makes it a pleasure to serve alongside you. Finally, to our securityholders, thank you for your ongoing support for Centuria. We remain committed to creating value on your behalf. I look forward to discussing our results with you at our upcoming AGM. GARRY CHARNY Chairman, Centuria Capital Group 1 Operating NPAT of the Group comprises of the results of all operating segments and excludes non-operating items such as transaction costs, mark to market movements on property and derivative financial instruments, the results of Benefit Funds and Controlled Property Funds 2 Past performance is not indicative of future performance. Refer to page 91 for calculation methodology 3 Operating EPS is calculated based on the Operating NPAT of the Group divided by the weighted average number of securities Includes 2 Kendall Street, Williams Landing, VIC as if complete 4 03 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Chief Executive’s Report John McBain GROUP CEO | Centuria Capital Group I have great pleasure in presenting the 2018 Centuria Capital Group (Centuria) Annual Report. The 2018 annual report provides investors the first opportunity to see Centuria’s results over a full year period following the significant scaling up of our platform in 2017. This growth was achieved alongside strong securityholder returns with a 23.3% total securityholder return1 delivered to investors in FY18. Moreover, operating earnings2 per stapled security of 16.3cps were delivered, along with a distribution per stapled security of 8.2cps. Many of you will be aware that the financial services market is undergoing public review, which we believe will bring about significant changes within the sector and in the manner that investment products are generated and distributed. Centuria remains abreast of these developments and we believe that our reputation, our strong performance record and most of all the position of trust we enjoy with our investors positions us well for the future. Centuria’s strong performance over the FY18 financial year has been underpinned by the scalable nature of our funds management platform. Our strong growth in assets under management has translated into a significant increase in property funds management operating profit in particular. I am very pleased by our progress to date against our stated objective to build a larger scale business driven by high quality, recurring earnings. FY18 has seen continued momentum towards expanding Centuria’s platform with total assets under management increasing 29% to $4.9 billion. Additionally, recurring revenues increased to $67.0 million, representing 66.5% of total revenues (90% excluding performance fees revenue). Total securityholder returns (including dividends) have performed strongly and consistently over the past four financial periods averaging over 20% per annum. EXPANDED PROPERTY FUNDS MANAGEMENT PLATFORM Centuria manages two leading listed A-REITs, each with different mandates, Centuria Metropolitan REIT (CMA) and Centuria Industrial REIT (CIP) as well as unlisted property funds management and an investment bonds subsidiary. Because of this increased breadth of capital sources, Centuria has significantly greater opportunities to acquire a wider range of assets, positioning the real estate platform for further growth. Co-investments also continued to contribute strongly, increasing to $278 million as at 30 June 2018. In particular, increased stakes in both CMA and CIP throughout the year further aligned Centuria’s interests with CMA and CIP unitholders. During 2018, Centuria Capital acquired a 9.3% strategic stake in Propertylink Group (ASX:PLG), which further increased to 11.4%3. The holding had a carrying value of $59 million as at 30 June 2018 and contributed $4.1 million to Group revenue during FY18. 1 Past performance is not indicative of future performance. Refer to page 91 for calculation methodology 2 Operating EPS is calculated based on the Operating NPAT of the Group divided by the weighted average number of securities 3 11.4% as at 21 September 2018 04 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 FINANCIAL METRICS Operating net profit after tax1 Operating earnings per stapled security2 Statutory net profit after tax3 Statutory earnings per stapled security Distribution per stapled security $m cps $m cps cps FY18 45.1 16.3 54.8 19.8 8.2 FY17 15.5 10.3 17.3 11.5 7.5 VARIANCE 191% 58% 217% 72% 9.3% $45.1m Operating net profit after tax1 8.2cps Distribution per security 16.3cps Operating earnings per security2 $4.9b Assets under management $1.29 Net assets per security4 $54.8m Statutory net profit after tax3 Distribution per security attribution (CPS) Total securityholder return5 25.0% 20.0 15.0 10.0 5.0 0.0 -5.0 22.2% 18.5% 24.3% 2.75c 4.75c 5.25c 7.50c 22.2% 18.5% 24.3% 2.75c 4.75c 5.25c 7.50c 23.3% 8.20c 23.3% 8.20c 3.60c 25.0% 20.0 5.50c 15.0 10.0 3.90c 2.70c 5.0 3.60c 5.50c 3.90c 2.70c FY15 FY16 FY17 FY18 TRUST DISTRIBUTION DIVIDEND (FULLY FRANKED) FY15 FY16 FY17 FY18 TRUST DISTRIBUTION DIVIDEND (FULLY FRANKED) FY14 FY15 FY16 FY17 FY18 0.0 -5.0 FY14 FY15 FY16 FY17 FY18 1 Operating NPAT of the Group comprises of the results of all operating segments and excludes non-operating items such as transaction costs, mark to market movements on property and derivative financial instruments, the results of Benefit Funds and Controlled Property Funds 2 Operating EPS is calculated based on the Operating NPAT of the Group divided by the weighted average number of securities 3 Attributable to securityholders 4 Number of securities on issue at 30 June 2018: 304,793,174 5 Past performance is not indicative of future performance. Refer to page 91 for calculation methodology CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 05 Chief Executive’s Report $4.0bn FY18 Real estate AUM 59% Core Property Management operating profit1 $0.9bn Investment bonds AUM PROPERTY FUNDS MANAGEMENT The Property Funds Management business, led by Jason Huljich, has enjoyed great success throughout the year. During FY18, Jason was appointed Head of Real Estate and Funds Management. This appointment follows his leadership of Centuria’s unlisted property funds division for the past 12 years. Real estate assets under management grew to $4.0 billion in FY18, a 33.3% increase on the prior year. This was driven by a $1.1 billion increase from acquisitions and revaluations. Concurrently, Centuria divested $0.3 billion of AUM, including the sale of 10 Spring Street, Sydney NSW, which attracted a substantial performance fee. Core Property Management operating profit grew 59%1 year on year excluding the effect of significant performance fees generated in the period. These strong, underlying earnings are a major profit driver for the group. Along with launching three new unlisted funds, attracting strong investor demand, our listed REITs, CMA and CIP continued to generate strong interest. Both REITs are now included in the S&P/ASX 300 index, representing $1.0 billion2 and $1.1 billion of assets under management and market capitalisations of $601 million3 and $638 million3 at 30 June 2018, respectively. During FY18 we continued to expand the Centuria Diversified Property Fund. This is an open-ended unlisted fund, which is independently rated and is principally accessed by financial advisers on investment and superannuation wrap platforms. The fund is growing strongly and is an important adjunct to Centuria’s traditional single asset unlisted property funds. Centuria’s property division is supported by Centuria’s in-house management platform and continues to source opportunities in metropolitan office and industrial markets across Australia. CENTURIA LIFE The Centuria Life subsidiary, led by Michael Blake, continues to build on more than a 35 year heritage of managing and distributing tax-effective investment bonds under the APRA- regulated Friendly Society regime. Michael was appointed as Head of Centuria Life during FY18 after holding a senior executive position in Centuria’s property division for the past three years. Michael is an experienced operator and has a remit to refocus the investment bond division on a new, contemporary suite of investment products and to widely market these products through our financial adviser ‘approved product list’ channel. 1 Excluding performance fees 2 3 Based on CMA closing prise of $2.48 and CIP closing prise $2.57 on 30 June 2018 Includes 2 Kendall Street, Williams Landing, VIC as if complete 06 Presently, Centuria is the fourth largest Insurance Bond manager in Australia, managing $0.9 billion of AUM at FY18 close, up 12.5% over the year from $0.8 billion. We have made a concentrated effort to expand our distribution capacity across our national footprint. During FY18, we strengthened our distribution team and refocused our representatives such that they now market both property and investment bond products. OUTLOOK Now, more than ever, it is important we maintain our client-first philosophy and ensure that investors both in our managed funds and in Centuria Capital itself are confident in the transparency and fairness in our dealings. Our reputation, carefully built over twenty years, differentiates us when clients are seeking to entrust us with their funds and is a fundamental driver of Centuria’s success in equity raisings. Centuria Capital continues to be well placed for near-term inclusion in the S&P/ASX 300 index, and management remains focused on continued, strong organic funds growth whilst remaining active in assessing and executing on corporate initiatives where these are logical and support the overall growth of Centuria Capital. I want to take a personal opportunity to thank our extremely committed and driven staff and my fellow senior managers for their hard work and dedication during FY18. The appointment of Jason Huljich as Head of Real Estate and Funds Management is an important step for the Group. Jason’s experience and reputation are second to none. Our Chairman and my fellow directors are highly committed and extremely generous with their time and expertise. They give unendingly of their time as we go through this period of strong growth and I want to personally thank the directors of the Group board and the responsible entity boards for their immense contributions in FY18. Finally, I assure you that the team at Centuria is dedicated to continuing our pace of growth, and I wish to thank securityholders sincerely for the confidence you place in us and the support you give us. JOHN MCBAIN Group CEO, Centuria Capital Group CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 THE ZENITH, CHATSWOOD, NSW CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 07 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Property funds management Jason Huljich Head of Real Estate and Funds Management Unlisted Property Centuria operates one of Australia’s leading unlisted property funds management businesses. DIVESTMENT OF 10 SPRING STREET, SYDNEY, NSW DELIVERS STRONG PERFORMANCE FEE Assets under management (AUM) increased 18.9% to $1.9 billion in FY18. Three new unlisted funds were established and the Centuria Diversified Property Fund continued to increase its AUM. – 10 Spring Street, Sydney, NSW was divested in October 2017 for $270.1 million, reflecting a sale price of $19,447 per square metre and delivering a pre-tax net performance fee of $25.8 million. Property funds management fees continue to be a high contributor towards Centuria’s group revenues. Moreover, the unlisted funds continue to be recognised for their high performance with six funds being listed in the top 10 Property Council/IPD Unlisted Core Retail Property Fund Index each quarter over the last five quarters1. GROWING THE PLATFORM WITH HIGH-QUALITY ASSETS During the year, we continued to improve the quality of our unlisted portfolio with the purchase of three assets: – 80 Grenfell Street, Adelaide, SA was purchased for $184.6 million and comprises a 50% unlisted fund known as the Centuria 80 Grenfell Street Fund and a 50% partnership with the Lederer Group. At the time of acquisition, the A Grade asset had a 7.3 year weighted average lease expiry (WALE) by income and was 96% occupied by Bendigo & Adelaide Bank, Australia’s fifth largest retail bank. – 60 Brougham Street, Geelong, VIC was purchased for $115.25 million. At acquisition, the asset was 100% occupied with 94% of its income underpinned by a long-term lease to the AAA-rated Victorian Government entity, TAC. – 1231-1241 Sandgate Road, Brisbane, QLD was purchased for $106 million in the growing metropolitan market of Nundah. At the time of acquisition, the property had an attractive 9.4 year WALE and over 80% of the income is underpinned by state government owned entities. EXPANDING DISTRIBUTION TO ALIGNED ADVISERS AND RETAIL INVESTORS The Centuria Diversified Property Fund (CDPF) continued to expand its reach throughout the year. The unlisted property fund increased its assets under management from $13 million to $37 million. In comparison to close-ended funds, this multi- asset open-ended fund has daily unit pricing and applications, monthly distributions and offers liquidity through a limited monthly redemption feature. CDPF recorded a 10.99%2 12 month total return. CDPF has a diversified asset allocation across a mix of unlisted property schemes, listed index REITs and cash, and is well positioned to consider opportunities for acquiring direct assets. CDPF is accepted on eight investment and superannuation wrap platforms. INVESTOR APPETITE FOR UNLISTED FUNDS CONTINUES As we continue to pursue our objective of delivering quality investment products, we remain committed to unlocking opportunities that offer attractive yields and asset fundamentals. We anticipate continued demand for well-managed property investment products, amid the current environment of increased investor appetite and low interest rates. 1 Property Council/IPD Unlisted Core Retail Property Funds Index to 30 June 2018 2 1 July 2017 to 30 June 2018. Past performance is not an indicator of future performance. See page 91 for calculation methodology 08 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Property funds management Case Study 10 Spring Street, Sydney, NSW A Centuria fund acquired a Sydney CBD office building in June 2013 for $91.6 million. Following acquisition, Centuria’s in house property management team commenced executing several key strategic initiatives to maximise value within the asset. Notably, these included a comprehensive refurbishment of foyers, amenities and the retail arcade. Additionally, significant leasing was achieved, resulting in 100% occupancy1 at the time of divestment, reflecting an increase from 81% at the time of acquisition. Average passing rental levels also increased by 32% over the same timeframe. In October 2017, the property was divested for $270.1 million, representing an uplift in property value from purchase to sale of 300% and an average price of $19,447 per square metre. The sale of 10 Spring Street, Sydney delivered a pre-tax net performance fee of $25.8 million, an average income return to investors of 8.0%2 per annum over 4.3 years and an investor IRR of 35%2 per annum. ASSET METRICS Value Average net rental Occupancy1 WALE Sale price OCT 2017 JUN 2013 $m $/sqm % years $/sqm 270.1 882 100 3.2 19,447 91.6 668 81 3.7 6,597 1 By income 2 Past performance is not indicative of future performance The following case study provides an example of Centuria’s fund performance highlights for the year. The case study is provided in summary form and provided for the information of securityholders only 09 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Property funds management $1.2bn Combined market capitalisations1 CIP & CMA $2.1bn Listed Property AUM1 $0.2bn Group Co-Investment2 CIP & CMA 9 HELP STREET, CHATSWOOD, NSW Listed Property Our listed property division has excelled at executing on a broad range of strategic initiatives and milestones throughout the year. Management has remained focused on fostering extensive relationships across investment markets, allowing both REITs to unlock ‘pockets of value’. During FY18, both CMA and CIP increased in scale and relevance. The combined AUM of both REITs increased to $2.1 billion and both entities were included in the S&P/ASX 300 Index. Core to our business is an attentive focus on establishing and enhancing relationships with our tenant customers. Both REITs have remained committed to identifying and delivering active asset management initiatives that are relevant to the needs of our quality customer base. 1 As at 30 June 2018. Includes 2 Kendall Street, Williams Landing, VIC as if complete 2 As at 30 June 2018 10 These outcomes have had the added benefit of improving the occupancy and WALE for both of CMA’s and CIP’s portfolios. During the financial period, our strong push towards active management initiatives have also resulted in CIP delivering record leasing volumes and CMA achieving its highest occupancy rate since inception. Centuria Capital Group continued to increase its commitment to the REIT sector during the year. The Group’s co-investments in both CMA and CIP represented around $193 million as at 30 June 2018. This made Centuria the largest investor in CMA and CIP, further aligning the Group’s interests to unitholders. Additionally, these co-investments, along with management fees, contributed to the growth in the Group’s recurring revenues during the financial year. Investment sentiment continues to support quality office assets in metropolitan markets while occupiers seek accommodation that is well suited to their business requirements. Underlying rental conditions remain favourable in several sub-markets, particularly those that have been impacted by low vacancy and relative supply constraints in the near term. CMA’s expertise in metropolitan markets has it well placed to continue building Australia’s pre-eminent metropolitan office REIT. Industrial markets remain well supported by economic tailwinds regarding e-commerce and last mile logistics requirements while manufacturing is benefitting from technological advancements and lower exchange rates. As demand for well located, quality industrial space continues to develop, CIP remains focused on meeting tenant requirements and assessing opportunities to unlock further investment opportunities as we continue to build Australia’s dominant income focused industrial REIT. CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 WOOLWORTHS WAY, WARNERVALE, NSW CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 11 Centuria Metropolitan REIT CMA Centuria Metropolitan REIT (CMA) is Australia’s largest ASX listed metropolitan office REIT. CMA was listed in December 2014 and has operated under the Group’s structure since its inception. During that time CMA has grown to around $1.0 billion in assets under management. CMA accounts for around 20% percent of Centuria Capital Group’s total assets under management. CMA is included in the S&P/ASX 300 index with a market capitalisation of $601 million at 30 June 2018. PORTFOLIO SNAPSHOT Number of assets Book value WACR NLA Occupancy by area WALE gross income GEOGRAPHIC SNAPSHOT 10% WA FY181,2 19 930.5 6.68 $m % FY17 15 610.0 7.19 sqm 184,339 131,011 % years 98.9 4.0 97.3 3.9 31% NT SA QLD NSW ACT 6% VIC 7% 36%2 10% In FY18, CMA joined the S&P/ASX 300 index, an important milestone enhancing the REIT’s relevance within the Australian equity market. CMA’s portfolio contains 19 high quality, nationally diversified assets with a book value of $930.5 million. With a total net lettable area of over 184,000 square metres, CMA’s portfolio is underpinned by quality tenants with diverse income streams. Since its initial public offering in December 2014 through to 30 June 2018, CMA has delivered a strong total return of 58.8%3, outperforming the S&P/ASX 300 AREIT index, which returned 45.7%3 over the same period. CONTINUING TO IMPROVE THE QUALITY OF CMA’S PORTFOLIO During the year CMA acquired four assets for a total of $210.9 million. The assets increased CMA’s portfolio exposure to NSW and WA. At acquisition, these assets provided an average initial yield of 7.8%4, 3.9 year WALE by income and 100% occupancy by area. Additionally, CMA divested of two assets for a combined $46.3 million and at an average 24.1% premium to book value. ACTIVE MANAGEMENT DRIVES PORTFOLIO OCCUPANCY TO HIGHEST SINCE INCEPTION Centuria’s concentrated effort towards asset repositioning, hands on active management and enhancing tenant relationships has contributed to 17,790 square metres (9.75% of portfolio NLA) of leasing activity through the year. These transactions have led to an occupancy by area of 98.9%, the portfolio’s highest since inception and a WALE by income of 4.0 years. Additionally, CMA benefitted from an NTA uplift of 7.3% to $2.495 per unit with revaluations underpinned by leasing initiatives and continued investment demand. During the year CMA also generated a return on equity (ROE) of 14.9%6 for unitholders. Includes 3 Carlingford Road, Epping, NSW held for sale 1 Excluding WACR, includes Williams Landing, VIC, as if complete 2 3 Source: Moelis Australia 4 Before transaction costs. Acquisition price for 144 Stirling Street, Perth and 201 Pacific Highway, St Leonards are gross price before adjustment for existing outstanding incentives 5 NTA per unit is calculated as net assets less goodwill divided by closing units on issue 6 Return on equity calculated as (closing NTA minus opening NTA plus distributions) divided by opening NTA 12 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Centuria Industrial REIT CIP Centuria Industrial REIT (CIP) has operated under the Centuria platform throughout FY18 and accounts for around 22% percent of Centuria Capital Group’s assets under management. CIP’s portfolio of 38 high quality assets, with a book value of around $1.0 billion, continues to be recognised as Australia’s largest income focused, ASX listed industrial REIT. CIP is included in the S&P/ASX 300 index with a market capitalisation of $638 million at 30 June 2018. PORTFOLIO SNAPSHOT Number of assets Book value WACR GLA Average asset size Occupancy by income WALE by income GEOGRAPHIC SNAPSHOT 13% WA FY181 37 999.0 6.76 735,384 19,352 94.5 5.1 $m % sqm sqm % years FY172 961.2 7.33 757,944 19,945 92.1 4.4 19% NT SA QLD NSW ACT 1% VIC 24% 42% 2% 38 RECORD LEASING DEALS BUILDING A QUALITY PROPERTY PORTFOLIO CIP’s portfolio benefitted from over $160 million in transactions through FY18. Four direct real estate assets were acquired off market for a combined $78.4 million. These assets provided an average initial yield of 8.2%3 with an average WALE over 7 years. Three of the properties also adjoin existing CIP assets within the portfolio. Two assets were divested for a combined $40.1 million. These assets provided an average 9.9% premium to book value and average internal rate of return of 17.0% during Centuria’s management period. Post 30 June 2018, CIP exchanged contracts for the $15.9 million acquisition of a logistics property in QLD. CIP continued to remain extremely active within the leasing markets throughout the year. Leases were agreed across almost one third of the portfolio’s lettable area, improving occupancy to 94.5% by income and the portfolio WALE by income to 5.1 years. Over 65% of the agreed leases were generated with the portfolio’s top ten tenants. ACCELERATED DE-LEVERAGING AND NTA UPLIFT CIP recorded revaluation gains of $61 million3 in FY18, driving an NTA increase of 8.9%. The uplift was underpinned by strong success in leasing outcomes and capitalisation rate compression. As a result, return on equity (ROE) of 17.2%5 was achieved in FY18. Importantly, CIP also delivered on a key focus of lowering its gearing6, which fell 4.7% to 38.4% in FY18. This result is the first time that gearing has fallen below 40% since the initial public offering (IPO). CIP purchased a 7.7% interest in Propertylink (ASX: PLG), in September 2017, for $44.2 million. The stake was sold in August 2018 with the capital being recycled into direct real estate opportunities. The stake provided a 13.0% per annum IRR during the holding period. 1 Excludes 39-45 Wedgewood Drive, Hallam, VIC, divested on 13 July 2018 and acquisition of 616 Boundary Road, Richlands, QLD 4 Gross revaluation of investment properties. Excludes capital expenditure during the year 5 Return on equity is calculated as closing NTA minus opening NTA plus distributions 2 Includes post 30 June 2017 acquisitions of Lot 14 Sudlow Road, Bibra Lake, WA and 207- divided by opening NTA 219 Browns Road, Noble Park, VIC 6 Gearing is defined as total borrowings less cash divided by total assets minus cash and 3 Acquisition prices and initial yields before transaction costs goodwill 13 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Centuria Life Michael Blake Head of Centuria Life OUTLOOK There is growing interest in investment bonds as a long term tax effective savings structure. With caps being imposed on superannuation contributions and fund balances, investors and financial planners are looking for proven tax effective alternatives. Investment bonds offer a simple structure with added benefits around estate planning, regular savings and access to funds. As a result, interest in investment bonds is expected to continue, with current and proposed regulatory changes motivating financial advisers and self-directed investors to find alternative ways to create, transfer and protect wealth. The business continues to assess opportunities for capitalising on the changing investment landscape. The strategies include improvements to the product and accessing an increased national distribution footprint supporting Investment Bonds and Property Funds across Centuria’s platform. Two new investment professionals were appointed during the year to further boost the in house investment capability. We are finalising major enhancements to the product range that will be implemented over the coming 12 months. This includes a new range of features and benefits to ensure the Centuria Life offering is positioned as market leading. Centuria Life achieved market outperformance in FY18. As the fourth largest friendly society in Australia, the business represents 11.0% of a total $7.6 billion Australian market. The business is comprised of two friendly societies: Centuria Life and the Over Fifty Guardian Friendly Society (Guardian). In FY18, Investment Bonds represented $0.9 billion in assets under management including $0.4 billion under Centuria Life and $0.5 billion under Guardian Friendly Society; up 12.5% from $0.8 billion in the prior year. DEMAND GROWING FOR CENTURIA LIFE’S UNITISED BONDS With a 35-year heritage, Centuria Life offers flexible, tax-effective investments through unitised investment bonds. It has a range of funds across the risk/return curve, ranging from cash plus to growth funds. Centuria Life has five investment options and is strongly supported by non-aligned adviser approved product lists. In FY18, unitised bonds increased 23%, with AUM reaching $141 million. CONTINUED SECTOR GROWTH FOR FUNERAL PLANS Guardian’s pre-paid funeral plans assets under management reached $508 million, an increase of 14% from 30 June 2017. Guardian manages the proceeds of pre-paid funeral plans, which are distributed by Invocare Limited. BUILDING STRONG RELATIONSHIPS WITH ADVISERS Centuria Life is well-positioned in the non-aligned financial adviser market and wants to continue to build its relationships in this sector. The business remains focused on building long-term, sustainable relationships in the retail financial advice market as the preferred investment bond provider for self-directed investors and non-aligned financial advisers. 14 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 CENTURIA INVESTMENT BOND DIVISIONS GROWTH VS INVESTMENT BOND MARKET1 200 190 180 170 160 150 140 130 120 110 100 2013 2014 2015 2016 2017 2018 GUARDIAN FRIENDLY SOCIETY CENTURIA LIFE UNITISED BONDS INVESTMENT BOND MARKET TOTAL AUM FY18 ($M) FY17($M) CHANGE(%) Unitised Bonds (Centuria Life) Capital Guaranteed (Centuria Life) Prepaid funeral plans (Guardian) Total FLOWS BREAKDOWN Applications Redemptions UNITISED BONDS 19 8 1 Source: QDS Bond Report for March 2018 141 216 508 865 CAP GUAR 3 23 115 238 446 799 PRE-PAID FUNERAL PLANS 39 38 23 (9) 14 8 TOTAL 61 69 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 15 Centuria in the community Through our volunteering activities we hope to increase the profiles of the organisations we work with Centuria engages in various activities with a commitment towards providing positive contributions towards our community. Centuria actively participated in activities to support St Lucy’s School during the year, including Centuria staff volunteering at the school. We take great pride in developing strong relationships and great results through our Employee Volunteering Program, which provides opportunities for staff to enhance skills and raise awareness of the challenges faced by charities and community organisations. Through our volunteering activities we also hope to increase the profiles of the organisations we work with and help them provide an increased service to the community. RECORD FUNDRAISING FOR ST LUCY’S SCHOOL St Lucy’s School is a primary school for students with disabilities. It provides excellence in education that empowers students with the values, knowledge, attitudes and skills to flourish and participate fully in society. Our annual trivia night once again generated significant interest and support with over 200 attendees and $85,000 raised resulting in our most successful fundraising to date. Monies raised will go to support the school’s Psychological Support Program, which provides cognitive and educational support for incoming and existing students. We sincerely thank all of our partners and volunteers whose generosity and involvement supported the cause. OTHER ACTIVITIES Centuria remains involved in various other initiatives within the community, including: – Jeans for Genes Day – Tour De PIF in aid of the Property Industry Foundation 16 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 60 BROUGHAM STREET, GEELONG, VIC CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 17 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Board of Directors Garry Charny John McBain Peter Done CHAIRMAN EXECUTIVE DIRECTOR - GROUP CEO INDEPENDENT NON-EXECUTIVE DIRECTOR Peter joined Peat Marwick Mitchell & Co (now known as KPMG) in 1968, where he held the position of partner from 1979 until his retirement in 2006. During his 27 years as partner, he was the lead audit partner for many clients, including those involved in property development, primary production and television and film production and distribution. Peter was appointed to the Board of Centuria Capital on 28 November 2007. He is Chairman of CPFL & CPF2L, Chairman of Centuria Capital’s Audit, Risk Management and Compliance Committee (ARMCC) and a Non-Executive Director of Centuria Capital. Peter holds a Bachelor of Commerce (Accounting) from the University of New South Wales, and is a Fellow of Chartered Accountants Australia and New Zealand. Mr Charny is the Managing Director and founder of Wolseley Corporate, an Australian corporate advisory and investment house, advising on local and international transactions including USA, United Kingdom, Malaysia, India and throughout South- East Asia. Wolseley specializes in mergers and acquisitions, strategic corporate advice and contentious matters resolution. Garry is also Chairman of Spotted Turquoise Films, an international Film and Television Company based in Sydney and Los Angeles. He has had broad board experience in both listed and unlisted companies across a diverse range of sectors including property (Trafalgar Corporate , now 360 Capital, Manboom); retail (Apparel Group, Sportscraft, Saba); technology (General Electric EcXpress, 1st Available) and media (Boost Media, Macquarie Radio, April Entertainment). He was co-founder and Chairman of Boost Media International, an international media advisory business with offices in Sydney, New York, Toronto, Kuala Lumpur and Delhi and President of Boost Media LLC (USA). From 1983-1995 he practised as a Barrister-at Law at the Sydney Bar with a specialty in corporate, commercial, equity and media and was an Adjunct Lecturer in Law at the University of NSW. Garry was appointed to the Centuria Capital Board on 23 February 2016, and appointed as Chairman of the Board on 30 March 2016. John joined the Centuria Board (formerly Over Fifty Group) on 10 July 2006. He was appointed as Chief Executive Officer of the then Over Fifty Group in April 2008. John was also a founding director and major shareholder in boutique funds manager Century Funds Management, which was established in 1999 and acquired by Over Fifty Group in July 2006. Prior to 1990 John held senior positions in a number of property development and property investment companies in Australia, New Zealand and the United Kingdom. Prior to forming Century, John founded property funds manager Waltus Investments Australia Limited and Hanover Group Pty Limited a specialised property consultancy. Since his appointment as Group CEO in 2007, John has overseen the transformation of Centuria Capital from an unlisted property fund manager to a substantial Australian real estate platform with listed and unlisted fund vehicles. John has worked alongside Jason Huljich, a fellow Century Funds Management securityholder, for over 20 years and this partnership has proved to be effective and long- lasting. John holds a Diploma in Urban Valuation (University of Auckland). 18 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 John Slater Nicholas Collishaw Susan Wheeldon-Steele Jason Huljich INDEPENDENT NON-EXECUTIVE DIRECTOR NON-EXECUTIVE DIRECTOR INDEPENDENT NON-EXECUTIVE DIRECTOR EXECUTIVE DIRECTOR 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 and has been an adviser to the Centuria Life Friendly Society Investment Committees since 2011. In 2008 John founded boutique Financial Advisory firm Riviera Capital and has a wealth of financial services experience. Nicholas Collishaw joined Centuria and was appointed CEO – Listed Property Funds, in May 2013. Nicholas was appointed to the Boards of Centuria Capital, Centuria Property Funds Limited and Centuria Property Funds No.2 Limited as a Non-Executive Director in October 2017, having previously served as an Executive Director from 27 August 2013. Prior to this position, Nicholas held the position of CEO and Managing Director at the Mirvac Group. 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 currently Executive Director and Co-Founder of Lincoln Place, an Australian funds manager specialising in the retirement sector. Susan is the Head of Performance at Google where she works with major national and global companies to develop and deliver growth strategies that future proof and build clients’ businesses and brands in a constantly changing environment. She has previous experience in retail property asset management at AMP Capital Shopping Centres, as Head of Brand & Retail, responsible for delivering alternative revenue from 38 retail assets across Australia and New Zealand with combined annual sales in excess of $5 billion. During her career Susan has held a number of senior roles in Australia and the United Kingdom across a diverse range of industries including global law firms DLA Piper and King & Wood Mallesons, working with the Virgin Australia & Virgin Atlantic airline brands, and as Vice President of Groupon. She holds an MBA from the Australian Graduate School of Management (AGSM) and is a member of Australian Institute of Company Directors. Jason is the Head of Real Estate and Funds Management and has been with Centuria since its formation in 1999. He has extensive experience in the commercial property sector with specialist skills in property investment and funds management. He is the immediate past President of the Property Funds Association (PFA) and currently sits on the National Executive Committee. The PFA is the peak industry body representing the $125 billion direct property investment industry. Jason is an Executive Director of Centuria Capital and was appointed Head of Real Estate and Funds Management in 2018. He is responsible for management of Centuria’s unlisted property funds management business and Centuria’s two listed REITS, CMA and CIP. Jason holds a Bachelor of Commerce (Commercial Law) from the University of Auckland, New Zealand. 19 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Senior Executive Committee John McBain GROUP CEO Jason Huljich Simon Holt HEAD OF REAL ESTATE AND FUNDS MANAGEMENT CHIEF FINANCIAL OFFICER John joined the Centuria Board (formerly Over Fifty Group) on 10 July 2006. He was appointed as Chief Executive Officer of the Over Fifty Group in April 2008. John was also a founding director and major shareholder in boutique funds manager Century Funds Management, which was established in 1999 and acquired by Over Fifty Group in July 2006. Prior to forming Century, John founded property funds manager Waltus Investments Australia Limited and Hanover Group Pty Limited a specialised property consultancy. Waltus was formed in 1995 and was one of the first dedicated property funds managers in Australia. Prior to 1990 John 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 leads Centuria’s $4 billion Property Funds Management business, which is responsible for both listed and unlisted property funds, the property services business, property acquisition and disposal and special property and debt opportunities. He is also an Executive Director of Centuria Capital Group. In this role he provides strategic leadership, ensuring the effective operation of Centuria’s property business. He has extensive experience in the commercial property sector, with specialist skills in property investment and funds management. He is also the immediate past President of the Property Funds Association (PFA), which represents the $125 billion direct property investment body in Australia, and continues to serve on their national executive. Jason holds a Bachelor of Commerce (Commercial Law) from the University of Auckland, New Zealand. Simon joined Centuria Capital as Chief Financial Officer in May 2016. He brings with him a wealth of local and global experience covering the corporate, treasury and listed securitisation areas. He is accountable for financial and treasury management of the Group and, with the CEO, is also tasked with a specific focus on expanding the parent company, Centuria Capital. Simon was most recently Chief Financial Officer of WorleyParsons where he spent eight years. Previously, he held a range of senior Finance positions at Westfield Group and Westfield Trust, again spanning eight years. Simon is a Chartered Accountant and holds a degree in Business (major in Accounting and Marketing). He is also a Member of Australian Institute of Company Directors. 20 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Anna Kovarik Victor Georos Michael Blake GENERAL COUNSEL AND COMPANY SECRETARY HEAD OF PORTFOLIO AND ASSET MANAGEMENT HEAD OF CENTURIA LIFE Anna joined Centuria in July 2018 in the role of General Counsel and Company Secretary. Prior to joining Centuria, Anna held the position of Group Risk Manager at Mirvac and was previously Head of Group Insurance for AMP, Senior Legal Counsel at AMP Capital and General Counsel and Company Secretary at AMP Capital Brookfield. Anna holds a Masters of Information Technology, a BA (Hons) in Systems Management, and was awarded a distinction in the Global Executive MBA program at the University of Sydney. She is qualified as a solicitor in both the UK and NSW and was a senior associate at Allens law firm in Sydney where she specialised in the areas of real estate and funds management. Victor joined Centuria as Senior Portfolio Manager in April 2013 and was appointed Head of Portfolio and Asset Management in July 2015. Michael was appointed Head of Centuria Life in July 2018. Prior to this appointment, Michael was the Head of Distribution for Centuria Capital Group. He commenced his career with AAP Reuters Economic Services. He went on to hold senior positions with Heine Funds Management, Mercantile Mutual, Zurich, HSBC Asset Management and Cromwell Property Group. Michael holds a Bachelor of Financial Administration, Diploma of Financial Planning, Masters of Business Administration and is a Graduate of the Institute of Company Directors. Michael has held board positions locally and offshore. In his role he is responsible for overseeing portfolio and asset management of Centuria’s portfolio, including the development and implementation of strategies to enhance value through active asset management and development. Victor works closely with the Funds Management team and the Development team. In addition Victor manages the Centuria Property Fund’s Valuation program and is actively involved with the constant review of best practice policies and procedures. Victor has extensive experience in asset and investment management, development and funds management, across the office, retail and industrial sectors, with a key focus on results and ability to build high performance teams across all sectors. Prior to joining Centuria Victor held senior positions with GPT Group and Lend Lease, including Head of Industrial & Business Parks at GPT. Victor holds a Bachelor of Land Economy and a Graduate Diploma of Finance and Investment (FINSIA). 21 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Contents Centuria Capital Group comprises of Centuria Capital Limited ABN 22 095 454 336 (the ‘Company’) and its subsidiaries and Centuria Capital Fund ARSN 613 856 358 (‘CCF’) and its subsidiaries. The Responsible entity of CCF is Centuria Funds Management Limited ACN 607 153 588, AFSL 479 873, a wholly owned subsidiary of the Company. Directors' report Audited remuneration report Auditor's Independence Declaration Consolidated financial statements Directors’ declaration Independent auditor's report to the members Additional stock exchange information Page 23 28 36 37 83 84 90 These consolidated financial statements are the financial statements of the consolidated entity consisting of Centuria Capital Limited and its subsidiaries. A list of material subsidiaries is included in note E2. The consolidated financial statements are presented in the Australian currency. Centuria Capital Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Centuria Capital Limited Level 39, 100 Miller Street North Sydney NSW 2060 The consolidated financial statements were authorised for issue by the Directors on 14 August 2018. The Directors have the power to amend and reissue the consolidated financial statements. Through the use of the internet, we have ensured that our corporate reporting is timely and complete. All press releases, financial reports and other information are available at our Investor Centre on our website: centuria.com.au The directors of Centuria Capital Limited (the ‘Company’) present their report together with the consolidated financial statements of the Company and its controlled entities (the ‘Group’) for the financial year ended 30 June 2018 and the auditor’s report thereon. ASX listed Centuria Capital Group consists of the Company and its controlled entities including Centuria Capital Fund (‘CCF’). The shares in the Company and the units in CCF are stapled, quoted and traded on the Australian Securities Exchange (‘ASX’) as if they were a single security under the ticker code ‘CNI’. DIRECTORS AND DIRECTORS’ INTERESTS MR GARRY S. CHARNY, BA. LL.B. Independent Non-Executive Director and Chairman Experience and expertise Garry was appointed to the Board on 23 February 2016 and appointed Chairman of CNI on 30 March 2016. Garry is also Chairman of Centuria Life and Over Fifties Guardian Friendly Society. He is Managing Director and founding principal of Wolseley Corporate, an Australian based corporate advisory and investment house which transacts both domestically and internationally. He has had a broad range experience in both listed and unlisted companies across a diverse range of sectors including property, retail, technology and media. He formerly practised as a barrister in the fields of commercial and equity. Other directorships Garry is Chairman of Wolseley Corporate. He is also Chairman of Spotted Turquoise Films, an international Film and Television company based in Sydney and Los Angeles. He is Chairman of Shero Investments, a Sydney based investment company. Special responsibilities Chairman of the Board Chairman of the Conflicts Committee Chairman of the Nomination and Remuneration Committee Member of the Audit, Risk Management and Compliance Committee Interests in CNI Ordinary stapled securities: 237,314 MR PETER J. DONE, B.COMM, FCA. Independent Non-Executive Director Experience and expertise Peter was appointed to the Board on 28 November 2007. 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. Other directorships None. Special responsibilities Chairman of the Audit, Risk Management and Compliance Committee Member of the Nomination and Remuneration Committee Member of the Investment Committee Interests in CNI Ordinary stapled securities: 1,083,676 MR JOHN R. SLATER, DIP.FS (FP), F FIN. Independent Non-Executive Director Experience and expertise John was appointed to the Board on 22 May 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, subsequently sold in 2016 and has a wealth of financial services experience. Other directorships None. Special responsibilities Member of the Audit, Risk Management and Compliance Committee Member of the Nomination and Remuneration Committee Interests in CNI Ordinary stapled securities: 2,889,075 MS SUSAN WHEELDON-STEELE, MBA. Independent Non-Executive Director Experience and expertise Susan was appointed to the Board on 31 August 2016. Susan is the Head of Performance at Google where she works with major national and global companies to develop and deliver growth strategies that future proof and build clients’ businesses and brands in a constantly changing environment. She has previous experience in retail property asset management at AMP Capital Shopping Centres, as Head of Brand & Retail, responsible for delivering alternative revenue from 38 retail assets across Australia and New Zealand with combined annual sales in excess of $5 billion. Other directorships Director of Nimble Australia Special responsibilities Member of the Conflicts Committee Interests in CNI Ordinary stapled securities: Nil. 23 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 MR NICHOLAS R. COLLISHAW, SAFIN, FAAPI, FRICS. MR JASON C. HULJICH, B. COMM. Non-Executive Director Experience and expertise Nicholas was appointed CEO - Listed Property Funds at Centuria Property Funds on 1 May 2013 and to the Board on 27 August 2013. Effective 1 January 2018, Nicholas resigned as CEO - Listed Property Funds and became a Non-Executive Director. 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. Executive Director and Head of Real Estate and Funds Management Experience and expertise Jason was appointed to the Board on 28 November 2007. Jason leads Centuria’s Property Funds Management business, which is responsible for both listed and unlisted property funds, the property services business, property acquisition and disposal and special property and debt opportunities. In this role he provides strategic leadership, ensuring the effective operation of Centuria’s property business. He has extensive experience in the commercial property sector, with specialist skills in property investment and funds management. He is also the immediate past President of the Property Funds Association (PFA), which represents the $125 billion direct property investment body in Australia, and continues to serve on their national executive. Other directorships Chairman of Redcape Hotel Group Management Ltd (“RHGM”) Other directorships None. Special responsibilities CEO - Listed Property Funds- resigned 1 January 2018 Interests in CNI Ordinary stapled securities: 3,086,227 Performance rights granted: 858,811 Special responsibilities Head of Real Estate and Funds Management Interests in CNI Ordinary stapled securities: 5,186,039 Performance rights granted: 872,740 MR JOHN E. MCBAIN, DIP. URBAN VALUATION Executive Director and Chief Executive Officer Experience and expertise 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 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. 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. Other directorships John is also a director of QV Equities Limited, a licensed investment company listed on the ASX. Special responsibilities Chief Executive Officer Interests in CNI Ordinary stapled securities: 5,191,995 Performance rights granted: 1,495,515 24 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 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). Board Meetings Audit, Risk, Management & Compliance Committee Meetings Nomination & Remuneration Committee Meetings Conflicts Committee Meetings Director Mr Garry S. Charny Mr Peter J. Done Mr John R. Slater Ms Susan Wheeldon-Steele Mr Nicholas R. Collishaw Mr John E. McBain Mr Jason C. Huljich A 24 24 24 24 24 24 24 B 24 22 23 22 23 23 20 A 6 6 6 # # # # B 5 6 4 # # # # A 4 4 4 # # # # B 4 4 3 # # # # A 6 # # 6 # # # B 6 # # 6 # # # A = Number of meetings held during the time the Director held office during the year B = Number of meetings attended # = Not a member of committee COMPANY SECRETARY Anna Kovarik was appointed to the position of Company Secretary on 5 July 2018. Anna holds a Masters of Information Technology, a BA (Hons) in Systems Management and was awarded a distinction in the Global Executive MBA program at the University of Sydney. She is qualified as a solicitor in both the UK and NSW and was a senior associate at Allens law practice in Sydney. Prior to joining Centuria, Anna held the position of Group Risk Manager at Mirvac and was previously Head of Group Insurance for AMP, Senior Legal Counsel at AMP Capital and General Counsel and Company Secretary at AMP Capital Brookfield. Mr James Lonie held the position of company secretary from 16 June 2017 until his resignation on 5 July 2018. 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 as well as direct interest in property funds and other liquid investments. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Significant changes in the state of affairs of the Group during the financial year, in addition to the operating and financial review below were as follows: – Contributed equity attributable to Centuria Capital Group increased by $95,705,000 from $247,995,000 to $343,700,000 as a result of equity raisings and vesting of rights under the Employee share scheme.Details of changes in contributed equity are disclosed in Note C10 to the consolidated financial statements. – On 11 September 2017, the Group issued Tranche 2 of 7% fixed rate secured notes to the value of $23,000,000. These notes mature on 21 April 2021 along with $100,000,000 of fixed and floating rate secured notes which were issued during the year ended 30 June 2017. – The Group increased its stake in Centuria Metropolitan REIT by 2.7% to 11.4% and Centuria Industrial REIT by 3.8% to 19.5%. – The Group acquired a 9.3% strategic stake in Propertylink Group (PLG). 25 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 OPERATING AND FINANCIAL REVIEW The Group recorded a consolidated statutory net profit after tax for the year of $56,190,000 (2017: $26,295,000). Statutory net profit after tax has been prepared in accordance with the Corporations Act 2001 and Australian Accounting Standards, which comply with International Financial Reporting Standards. The Group recorded an operating profit after tax of $45,087,000 (2017: $15,489,000). Operating profit after tax excludes non- operating items such as transaction costs and fair value movements. The statutory net profit after tax includes a number of items that are not operating in nature, the table below provides a reconciliation from statutory profit to operating profit. Reconciliation of statutory profit to operating profit Statutory profit after tax Less non-operating items: Unrealised loss/(gain) on fair value movements in derivatives, property and investments Corporate restructure & transaction costs Impairment charges in relation to seed capital valuations Profit attributable to controlled property funds Eliminations between the operating and non-operating segment Tax impact of above non-operating adjustments Operating profit after tax 2018 $’000 2017 $’000 56,190 26,295 (8,604) 230 380 (8,061) 5,761 (809) 45,087 (4,434) 2,749 190 (10,934) 2,643 (1,020) 15,489 Operating profit after tax provides an assessment of performance of the Group aligned with the reporting to the Group’s CEO for resource allocation purposes. Operational highlights for the key segments were as follows: Segment Property Funds Management Investment Bonds Division Co-Investments Operating profit after tax $’000 2018 34,221 3,473 11,717 2017 11,041 2,648 5,423 Increase/ (Decrease) $’000 23,180 825 6,294 Increase/ (Decrease) % 210 31 116 Highlights (A) (B) (C) (A) PROPERTY FUNDS MANAGEMENT For the year ended 30 June 2018, Property Funds Management operating profit after tax of $34,221,000 was higher than the prior year ending 30 June 2017 by $23,180,000 primarily due to the impact of performance fees of $25,830,000 earned in the current year on the sale of 10 Spring Street property. Excluding the after tax impact of performance fees the Property Funds Management segment profit increased by $15,330,000 or 52% reflecting the growth in assets under management (AUM) in addition to the contribution arising from the 360 Capital transaction that occurred part way during the prior year. Operational highlights for the year included: – Increase in recurring Property Funds Management fees of $12,935,000 or 67% from $19,265,000 for the year ended 30 June 2017 to $32,200,000 for the year ended 30 June 2018 – 27% increase in Unlisted AUM from $1.5 billion as at 30 June 2017 to $1.9 billion as at 30 June 2018 – 40% increase in Listed AUM from $1.5 billion as at 30 June 2017 to $2.1 billion as at 30 June 2018 – Centuria Industrial REIT acquired four properties with a total value of $78.4 million – Centuria Metropolitan REIT acquired four properties with a total value of $210.9 million – Performance fees of $25,830,000 earnt on the sale of 10 Spring St property – Establishment of three Unlisted Property Funds: – July 2017: Centuria Sandgate Road Fund ($106 million) – March 2018: Centuria Geelong Office Fund ($115 million) – July 2018: Centuria 80 Grenfell Street Fund ($185 million, 50% unlisted fund and 50% partnership with The Lederer Group). 26 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 (B) INVESTMENT BONDS MANAGEMENT For the year ended 30 June 2018, the Investment Bonds Management segment increased its operating profit after tax by $825,000 or 31% to $3,473,000. The Investment Bonds Management business delivered net overall AUM growth to $0.9 billion across its product range representing a 12.5% increase in AUM from prior year. Centuria’s Investment Bonds Management business is the fourth largest friendly society/insurance bond issuer in Australia. (C) CO-INVESTMENTS For the year ended 30 June 2018, the Co-Investments segment operating profit after tax increased by $6,294,000 or 116% reflecting a $127 million increase in co-investment holdings across listed and unlisted investments including various Funds managed by the Group. With an increase in recurring investment revenue from $6,068,000 for the year ended 30 June 2017 to $20,705,000 for the year ended 30 June 2018 the Co-investments segment has contributed to improvement in the Group’s overall recurring revenue which increased by 77% compared to the prior year. The Co-investments segment has contributed over 20% of the Group’s total operating revenue for the year ended 30 June 2018. The Co-investments of $278 million as at 30 June 2018 included a $124.3 million or a 19.48% stake in Centuria Industrial REIT as well as a $68.6 million or 11.39% stake in the Centuria Metropolitan REIT and a $59.3 million or 9.28% stake in PropertyLink Group (PLG). The operating profit after tax for the Co-investments segment represents the distributions and returns generated from those investments after the applicable financing costs. EARNINGS PER SECURITY (EPS) Basic EPS (cents/security) Diluted EPS (cents/security) 2018 2017 Operating Statutory Operating Statutory 16.3 14.9 19.8 18.1 10.3 10.1 11.5 11.4 DIVIDENDS AND DISTRIBUTIONS Dividends and distributions paid or declared by the Group during the current financial year were: Dividends/distributions paid during the year Final 2017 dividend (100% franked) Final 2017 Trust distribution (66% tax deferred) Interim 2018 dividend (100% franked) Interim 2018 Trust distribution (estimated 60% tax deferred) Dividends/distributions declared during the year Final 2018 dividend (100% franked) Final 2018 Trust distribution (estimated 60% tax deferred) Total amount Cents per security Total amount $’000 Date paid/payable 2.4 2.8 1.7 2.4 1.0 3.1 13.4 5,453 6,361 5,184 7,314 3,048 9,449 36,809 24 August 2017 24 August 2017 31 January 2018 31 January 2018 27 July 2018 27 July 2018 EVENTS SUBSEQUENT TO THE REPORTING DATE There has not arisen in the interval between 30 June 2018 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, that would affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years. 27 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 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. 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 F4 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 28 – 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. A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 36. ROUNDING OF AMOUNTS The Group is an entity of a kind referred to in ASIC Legislative Instrument 2016/191, related to the ‘rounding off’ of amounts in the Directors’ Report and financial statements. Amounts in the Directors’ Report and financial statements have been rounded off, in accordance with the instrument to the nearest thousand dollars, unless otherwise indicated. AUDITED REMUNERATION REPORT The remuneration report provides information about the remuneration arrangements for key management personnel (KMP), which includes Non-executive Directors and the Group’s most senior management, for the year to 30 June 2018. The report is structured as follows: – Details of KMP covered in this report – Remuneration policy and link to performance – Remuneration of executive directors and senior management – Key terms of employment contracts – Non-executive director remuneration – Director and senior management equity holdings and other transactions DETAILS OF KMP COVERED IN THIS REPORT The following persons are considered KMP of the Company during or since the end of the most recent financial year: Name Role Mr Garry S. Charny Mr Peter J. Done Mr John R. Slater Ms Susan Wheeldon-Steele Independent Non-Executive Director and Chairman Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Mr Nicholas R. Collishaw Non-Executive Director Mr John E. McBain Mr Jason C. Huljich Executive Director and Chief Executive Officer Executive Director and Head of Real Estate and Funds Management Mr Simon W. Holt Chief Financial Officer The term ‘senior management’ is used in this remuneration report to refer to the executive directors and the Chief Financial Officer. Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 REMUNERATION POLICY AND LINK TO PERFORMANCE The Group 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 Group must be able to attract, motivate and retain capable individuals. The Group’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 senior management, 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 Group 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. The main objective in rewarding the Group’s senior management for their performances is to ensure that shareholders’ wealth is maximised through the Group’s continued growth. It is necessary to structure and strengthen this focus to drive this strategy so that they are aligned with the Group’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 Group’s performance for the year in reference to specific Earnings per Security (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 and non-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 senior management depending on the extent to which they meet performance requirements. In accordance with the Group’s corporate governance, the structure of non-executive director and senior management remuneration is separate and distinct. REMUNERATION OF SENIOR MANAGEMENT Objective The Group aims to reward senior management with a level and mix of remuneration commensurate with their position and responsibilities within the Group so as to: – Reward senior management for company, business unit and individual performance against targets set by reference to appropriate benchmarks; – Align the interests of senior management with those of stakeholders; – Link rewards with the strategic goals and performance of the Group; and – Ensure total remuneration is competitive by market standards. Structure In determining the level and make-up of senior management remuneration, the Chief Executive Officer 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 for senior management (excluding the Chief Executive Officer) is established by the Chief Executive Officer and the Nomination & Remuneration Committee. The proportion of fixed and variable remuneration for the Chief Executive Officer is established solely by the Nomination & Remuneration Committee. While the allocation may vary from period to period, the graph below details the approximate fixed and variable components for senior management. CEO 40% 30% 30% OTHER SENIOR MANAGEMENT 45% 30% 25% 0% 20% 40% 60% 80% 100% FIXED REMUNERATION VARIABLE REMUNERATION (STI) VARIABLE REMUNERATION (LTI) 29 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 (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. For senior management excluding the Chief Executive Officer, this is reviewed annually by the Chief Executive Officer and the Nomination & Remuneration Committee. The process consists of a review of Group, 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 Chief Executive Officer. Senior management are given the opportunity to receive their fixed 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 Group’s Senior Management Remuneration Policy, long and short-term performance incentives may be made under the Group’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 non-financial and financial targets with the remuneration received by senior management charged with meeting those targets. The total potential STI available is set at a level so as to provide sufficient incentive to senior management to achieve operational targets and such that the cost to the Group is reasonable in the circumstances. Term Detail 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 Group, or a combination of both. During the current financial year, the Group issued Nil (2017: Nil) ordinary securities to employees in addition to cash bonuses provided to employees. (ii) Long-term Incentives (LTI) The Group has an Executive Incentive Plan (“LTI Plan”) which forms a key element of the Group’s incentive and retention strategy for senior management 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 senior management 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 entities. Rights issued under the LTI Plan are issued in accordance with the thresholds approved at the Annual General Meeting (AGM). A summary of the key terms of the Performance Rights are set out below. Performance Rights (“Rights”) Each Right is a right to receive a fully paid ordinary stapled security in the Group (“Security”), subject to meeting the Performance Conditions. Upon meeting the Performance Conditions, the Rights vest and securities 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 The date on which the Board determines the extent to which the performance conditions are satisfied and the Rights vest. Performance Conditions 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 (“FUM Hurdle”); and – Absolute Total Securityholder Return Performance (“Absolute TSR Hurdle”). The Group currently operates three tranches of the Executive Incentive Plan (“Plan”) as below. Tranche Grant Date Performance Period 3 4 5 1 February 2016 1 January 2017 1 November 2017 1 July 2015 to 30 June 2018 1 July 2016 to 30 June 2019 1 July 2017 to 30 June 2020 The performance objectives for performance rights granted under Tranche 3 were met in full by 30 June 2018. As a result, these rights will vest on 31 August 2018. 30 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 EPS Hurdle 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 3 (45% of rights granted) Tranche 4 (30% of rights granted) Maximum % or above 10% or greater 100% 10% or greater 100% Between threshold % and maximum % 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 % 4% Less than the threshold % Less than 4% 25% 0% More than 6%, less than 10% More than 4%, less than 6% 4% Less than 4% Pro-rata between 50% and 100% Pro-rata between 25% and 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). Tranche 5 did not include an EPS hurdle. FUM Hurdle The percentage of Rights subject to the growth in FUM 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 Compound annual growth Rate Portion of Rights that vest Tranche 3 (15% of rights granted) Tranche 4 (20% of rights granted) Tranche 5 (25% of rights granted) 18% or greater 100% 15% or greater 100% 20% or greater 100% More than 14% less than 18% Pro-rata between 50% and 100% More than 12%, less than 15% More than 10%, less than 14% Pro-rata between 25% and 50% More than 10%, less than 12% Pro-rata vesting between 50% to 100% Pro-rata vesting between 25% to 50% More than 10%, less than 20% Pro-rata vesting between 25% to 100% Threshold % 10% Less than the threshold % Less than 10% 25% 0% 10% Less than 10% 25% 0% 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 Compound annual growth Rate Portion of Rights that vest Tranche 3 (40% of rights granted) Tranche 4 (50% of rights granted) Tranche 5 (75t% of rights granted) 18% or greater 100% 18% or greater 100% 15% or greater 100% More than 15% less than 18% Pro-rata between 50% and 100% More than 15%, less than 18% More than 12%, less than 15% Pro-rata between 25% and 50% More than 12%, less than 15% Pro-rata vesting between 50% to 100% Pro-rata vesting between 25% to 50% More than 10%, less than 15% Pro-rata vesting between 25% to 100% Threshold % 12% Less than the threshold % Less than 12% 25% 0% 12% Less than 12% 25% 0% 10% Less than 10% 25% 0% 31 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Rights Granted The following Rights were granted to senior management: Key management personnel Tranche 3 (grant date of 1 February 2016) (i) Mr John E. McBain Mr Jason C. Huljich Mr Nicholas R. Collishaw Total No. of Rights granted Vesting conditions Fair value at Grant Date 216,496 72,165 192,441 135,000 45,000 120,000 135,000 45,000 120,000 1,081,102 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 $0.87 $0.87 $0.19 $0.87 $0.87 $0.19 $0.87 $0.87 $0.19 (i) The performance objectives for performance rights granted under Tranche 3 were met in full by 30 June 2018. As a result, these rights will vest on 31 August 2018. Tranche 4 (grant date of 1 January 2017) Mr John E. McBain Mr Jason C. Huljich Mr Nicholas R. Collishaw Mr Simon W. Holt Total Tranche 5 (grant date of 1 November 2017) Mr John E. McBain Mr Jason C. Huljich Mr Nicholas R. Collishaw Mr Simon W. Holt Total 153, 409 102,273 255,682 76,875 51,250 128,125 76,875 51,250 128,125 35,642 23,761 59,403 1,142,670 No. of Rights granted 125,762 377,287 79,055 237,165 75,640 266,921 43,834 131,502 1,297,166 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 $0.88 $0.88 $0.16 $0.88 $0.88 $0.16 $0.88 $0.88 $0.16 $0.88 $0.88 $0.16 Vesting conditions Fair value at Grant Date FUM Growth Hurdle Absolute TSR Growth Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle FUM Growth Hurdle Absolute TSR Growth Hurdle $1.24 $0.62 $1.24 $0.62 $1.24 $0.62 $1.24 $0.62 Subject to the Boards’ discretion, unvested Rights lapse upon the earliest of ceasing employment, corporate restructuring, divestment of a material business or subsidiary, change of control, clawback and lapse for fraud and breach, failure to satisfy the Performance Conditions and the 7th anniversary of the date of the grant. 32 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 The Group’s overall objective is to reward executive directors and senior management based on the Group’s performance and build on shareholders’ wealth but this is subject to market conditions for the year. The table below sets out summary information about the Group’s earnings for the past five years. 5 year summary Statutory profit after tax attributable to Centuria Capital Group securityholders ($’000) Operating profit after tax ($’000) Share price at start of year Share price at end of year Interim dividend Final dividend 30 June 2018 30 June 2017 30 June 2016 30 June 2015 30 June 2014 54,765 45,087 $1.23 $1.40 4.1cps 4.1cps 17,323 15,489 $1.05 $1.23 2.3cps 5.2cps 12,303 11,344 $0.93 $1.05 8,566 6,280 $0.80 $0.93 9,078 5,904 $0.82 $0.80 2.25cps 2.0cps 1.25cps 3.0cps 2.75cps 1.5cps 15.8cps 14.8cps 11.0cps 11.6cps 8.1cps 7.6cps Statutory basic earnings per Centuria Capital Group security 19.8cps 11.5cps Operating basic earnings per Centuria Capital Group security 16.3cps 10.3cps Rights vested During the year, 1,081,102 performance rights granted on 1 January 2015 under Tranche 2 to senior management vested. There were no performance rights under Tranche 2 that lapsed during the year. Statutory remuneration table The following table discloses total remuneration of executive directors and senior management in accordance with the Corporations Act 2001: Short-term employee benefits Post employment benefits Other long-term benefits Share- based payments Year 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Salaries ($) Bonus ($) 804,951 1,118,750 725,999 775,000 679,076 1,025,000 544,134 282,000 345,340 544,134 459,201 416,009 - 782,000 412,500 210,750 2,288,568 2,556,250 2,230,276 2,049,750 Super- annuation ($) 20,049 24,000 20,049 19,616 8,160 19,616 20,049 19,616 68,307 82,848 Long service leave ($) 33,495 37,052 $ Total $ 620,019 2,597,264 246,618 1,808,669 (38,845) 187,742 1,873,022 12,264 149,358 1,007,372 – – – – 184,229 537,729 149,358 1,495,108 63,926 955,676 8,396 654,771 (5,350) 1,055,916 5,963,691 49,316 553,730 4,965,920 Mr John E. McBain (i) Mr Jason C. Huljich Mr Nicholas R. Collishaw (ii) Mr Simon W. Holt (iii) Total (i) Mr McBain’s bonus for the year ended 30 June 2017 included a one-off $200,000 transaction bonus which was paid following the successful completion of the 360 Capital acquisition. (ii) Mr Collishaw’s bonus for the year ended 30 June 2017 included a one-off $500,000 incentive payment which he was entitled to receive as part of his employment contract upon successful listing of a listed property fund once the fund reaches $500 million of assets under management. This incentive was paid during the year ended 30 June 2017. Also, Mr Collishaw’s role changed from Executive Director and CEO- Listed Property Funds to Non-Executive Director effective 1 January 2018. (iii) Mr Holt’s bonus for the year ended 30 June 2017 included a one-off $80,000 transaction bonus which was paid following the successful completion of the 360 Capital acquisition. 33 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 KEY TERMS OF EMPLOYMENT CONTRACTS NON-EXECUTIVE DIRECTOR REMUNERATION Chief Executive Officer Mr John E. McBain, was appointed as Chief Executive Officer of the Group in April 2008. Mr John E. McBain is employed under contract. The summary of the major terms and conditions of his employment contract are as follows: Objective The Board seeks to set aggregate remuneration at a level that provides the Group with the ability to attract and retain directors of the highest calibre, whilst incurring a cost that is acceptable to shareholders. – 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 Group may terminate this employment contract by providing six months written notice or provide payment in lieu of the notice period plus an additional six months. Any payment in lieu of notice will be based on the total fixed compensation package; and – The Group 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. Other senior management (standard contracts) All senior management are employed under contract. The Group may terminate their employment agreement by providing between three and six months written notice or providing payment in lieu of the notice period (based on the total fixed compensation package), and in the case of Mr Jason C. Huljich by payment of an additional six months. 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 aggregate amount determined is then divided between the directors as agreed. An aggregate maximum amount of not more than $2,000,000 per year was approved at the 2017 Annual General Meeting. 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. Mr Garry S. Charny Mr Peter J. Done Mr John R. Slater Ms Susan Wheeldon-Steele Mr Nicholas R. Collishaw (i) Total Shot-term benefits Post-employment benefits Board fees $ Superannuation $ 205,479 190,000 164,384 156,000 118,722 142,000 87,671 71,160 54,795 - 631,051 559,160 19,521 15,675 15,616 11,308 11,278 10,070 8,329 6,760 5,205 - 59,949 43,813 Year 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Total $ 225,000 205,675 180,000 167,308 130,000 152,070 96,000 77,920 60,000 - 691,000 602,973 (i) Mr Collishaw’s role changed from Executive Director and CEO - Listed Property Funds to Non-Executive Director effective 1 January 2018. 34 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 DIRECTOR AND SENIOR MANAGEMENT EQUITY HOLDINGS AND OTHER TRANSACTIONS 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. Name Mr Garry S. Charny Mr Peter J. Done Mr John R. Slater Ms Susan Wheeldon-Steele Mr Nicholas R. Collishaw Mr John E. McBain Mr Jason C. Huljich Mr Simon W. Holt Balance at 1 July 2017 Movement Balance at 30 June 2018 Changes prior to signing Balance at signing date 196,573 900,000 2,400,000 – 2,263,136 5,035,745 4,499,054 250,000 40,741 183,676 489,075 – 156,250 686,985 823,091 51,021 237,314 1,083,676 2,889,075 – 2,419,386 5,722,730 5,322,145 301,021 – – – – – – – 237,314 1,083,676 2,889,075 – 2,419,386 5,722,730 5,322,145 301,021 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 Group and key management personnel: – Wolseley Corporate Pty Ltd, a related party of Mr Garry S. Charny, was paid $611,796 (inclusive of GST) (2017: $478,500) for corporate advisory fees. – Tailwind Consulting Pty Ltd, a related party of Mr John R. Slater was paid a total of $198,000 (inclusive of GST) (2017: $198,985) for consultancy services. In addition, Tailwind Consulting paid the Group $5,280 for rental of office space (2017: $2,200). – Mr Nicholas R. Collishaw was paid a total of $62,570 (inclusive of GST) (2017: $nil) for consultancy services. This report is made in accordance with a resolution of Directors. Mr Garry S. Charny Director Sydney Mr Peter J. Done Director Sydney Sydney 14 August 2018 35 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 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 of Centuria Capital Group for the financial year ended 30 June 2018 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. KPM_INI_01 KPMG Nigel Virgo Partner Sydney 14 August 2018 PAR_SIG_01 PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 21 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 36 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Financial statements 30 June 2018 Contents Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements A About the report A1 General information A2 Significant accounting policies A3 Use of judgements and estimates A4 Segment summary B Business performance B1 Segment profit and loss B2 Revenue B3 Expenses B4 Finance costs B5 Taxation B6 Earnings per security B7 Dividends and distributions C Assets and liabilities C1 Segment balance sheet C2 Receivables C3 Financial assets C4 Investment properties held for sale C5 Investment properties C6 Intangible assets C7 Payables C8 Borrowings C9 Commitments and contingencies C10 Contributed equity D Cash flows D1 Operating segment cash flows D2 Cash and cash equivalents D3 Reconciliation of profit for the period to net cash flows from operating activities E Group Structure E1 Business combination E2 Interests in material subsidiaries E3 Parent entity disclosure F Other F1 Share-based payment arrangements F2 Guarantees to Benefit Fund policyholders F3 Financial instruments F4 Remuneration of auditors F5 New Accounting Standards and Interpretations effective 1 July 2018 F6 Other new Accounting Standards and Interpretations F7 Events subsequent to the reporting date Directors' declaration Independent auditor’s report to the members Page 38 39 40 42 43 43 43 43 43 44 45 45 47 48 49 50 53 53 54 54 56 56 58 59 61 62 62 63 64 65 65 66 66 67 67 69 70 71 71 72 72 79 79 81 81 83 84 37 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Consolidated statement of comprehensive income For the year ended 30 June 2018 Revenue Expenses Fair value movements of financials instruments and property Finance costs Net movement in policyholder liability Profit before tax Income tax expense Profit after tax Profit after tax is attributable to: Centuria Capital Limited Centuria Capital Fund (non-controlling interests) External non-controlling interests Profit after tax Other comprehensive income Total comprehensive income for the year Total comprehensive income for the year is attributable to: Centuria Capital Limited Centuria Capital Fund (non-controlling interests) External non-controlling interests Total comprehensive income Profit after tax attributable to: Centuria Capital Limited Centuria Capital Fund (non-controlling interests) Profit after tax attributable to Centuria Capital Group securityholders Earning per Centuria Capital Group security Basic (cents per stapled security) Diluted (cents per stapled security) Earnings per Centuria Capital Limited share Basic (cents per share) Diluted (cents per share) Notes 2018 $’000 2017 $’000 B2 B3 B4 B5 B6 B6 134,513 127,429 (67,617) 10,103 (15,989) 9,053 70,063 (13,873) 56,190 24,540 30,225 1,425 56,190 - 56,190 24,540 30,225 1,425 56,190 24,540 30,225 54,765 Cents 19.8 18.1 8.9 8.1 (120,327) 15,394 (7,366) 16,589 31,719 (5,424) 26,295 5,500 11,823 8,972 26,295 – 26,295 5,500 11,823 8,972 26,295 5,500 11,823 17,323 Cents 11.5 11.4 3.7 3.6 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 38 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Consolidated statement of financial position As at 30 June 2018 Notes 2018 $’000 2017 $’000 101,914 21,164 644,832 63,400 147,100 2,036 157,663 74,382 16,380 535,459 – 257,100 1,551 157,663 1,138,109 1,042,535 Assets Cash and cash equivalents Receivables Financial assets Investment properties held for sale Investment properties Other assets Intangible assets Total assets Liabilities Payables Liability to 360 Capital Group Provisions Borrowings Interest rate swaps at fair value Benefit Funds policyholder’s liability Provision for income tax Deferred tax liabilities Total liabilities Net assets Equity Equity attributable to Centuria Capital Limited Contributed equity Reserves Retained earnings Total equity attributable to Centuria Capital Limited Equity attributable to Centuria Capital Fund (non-controlling interests) Contributed equity Retained earnings Total equity attributable to Centuria Capital Fund (non-controlling interests) Total equity attributable to Centuria Capital Group securityholders Equity attributable to external non-controlling interests Contributed equity Retained earnings Total equity attributable to external non-controlling interests Total equity D2 C2 C3 C4 C5 C6 C7 C8 B5(b) B5(c) C10 C10 32,405 41,161 1,597 245,739 23,411 349,677 (161) 3,119 696,948 441,161 98,770 1,896 28,005 128,671 244,930 18,183 263,113 391,784 32,927 16,450 49,377 441,161 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 33,895 56,456 1,301 236,103 19,324 348,014 3,171 2,320 700,584 341,951 77,323 1,551 11,694 90,568 170,672 4,844 175,516 266,084 45,367 30,500 75,867 341,951 39 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Consolidated statement of changes in equity For the year ended 30 June 2018 ) 7 5 1 , 1 2 ( ) 5 3 0 , 1 2 ( ) 5 9 5 , 8 ( ) 0 4 4 , 2 1 ( ) 2 2 1 ( ) 2 2 1 ( ) 2 2 1 ( – – 1 5 9 , 1 4 3 7 6 8 , 5 7 0 0 5 , 0 3 7 6 3 , 5 4 4 8 0 , 6 6 2 6 1 5 , 5 7 1 4 4 8 , 4 2 7 6 0 7 1 , l a t o T y t i u q e 0 0 0 ’ $ l a t o T 0 0 0 ’ $ 0 0 0 ’ $ i d e n a t e R i s g n n r a e d e t u b i r t n o C - y t i r u c e S y t i u q e 0 0 0 ’ $ 0 0 0 ’ $ s r e d o h l l a t o T 0 0 0 ’ $ 0 0 0 ’ $ i d e n a t e R i s g n n r a e y t i u q e 0 0 0 ’ $ d e t u b i r t n o C s t s e r e t n i g n i l l o r t n o c - n o n p u o r G l a t i p a C l a t o T l e b a t u b i r t t a a i r u t n e C o t l a n r e t x E ) s t s e r e t n i g n i l l o r t n o c - n o n ( 0 9 1 , 6 5 5 2 4 , 1 5 2 4 , 1 0 8 8 – – 0 9 1 , 6 5 5 2 4 , 1 5 2 4 , 1 ) 0 7 4 , 3 ( 0 4 6 , 8 9 – – – – ) 3 7 8 , 1 3 ( ) 0 8 8 , 6 ( ) 0 8 8 , 6 ( – – – – – – 5 6 7 , 4 5 5 2 2 , 0 3 5 2 2 , 0 3 0 8 8 – – 5 6 7 , 4 5 5 2 2 , 0 3 5 2 2 , 0 3 ) 3 9 9 , 4 2 ( ) 4 6 7 , 6 1 ( ) 4 6 7 , 6 1 ( – – – – 0 4 6 , 8 9 6 4 1 , 7 7 ) 0 7 4 , 3 ( ) 8 8 8 , 2 ( – – ) 8 8 8 , 2 ( ) 2 8 5 ( 6 4 1 , 7 7 4 9 4 , 1 2 d e t i m i L l a t i p a C a i r u t n e C l a t o T 0 0 0 ’ $ 8 6 5 , 0 9 0 4 5 , 4 2 0 0 0 ’ $ i d e n a t e R i s g n n r a e 4 9 6 , 1 1 0 4 5 , 4 2 0 4 5 , 4 2 0 4 5 , 4 2 0 0 0 ’ $ s e v r e s e R y t i u q e 0 0 0 ’ $ d e t u b i r t n o C 1 5 5 , 1 3 2 3 , 7 7 7 1 0 2 y l u J 1 t a e c n a l a B – – – – e v i s n e h e r p m o c l a t o T r a e y e h t r o f e m o c n i r a e y e h t r o f t fi o r P 0 8 8 – 5 4 3 5 3 5 t n e m y a p d e s a b y t i u q E ) 9 2 2 , 8 ( ) 9 2 2 , 8 ( – – – – – – – – i d e r u c c a / d a p s n o i t u b i r t s i d 4 9 4 , 1 2 d e u s s i s e i t i r u c e s d e p a t S l ) 2 8 5 ( g n i s i a r y t i u q e f o t s o C d n a s d n e d v D i i f o n o i t a d i l o s n o c e D – s d n u f y t r e p o r p d e l l o r t n o c 1 6 1 , 1 4 4 7 7 3 , 9 4 0 5 4 , 6 1 7 2 9 , 2 3 4 8 7 , 1 9 3 3 1 1 , 3 6 2 3 8 1 , 8 1 0 3 9 , 4 4 2 1 7 6 , 8 2 1 5 0 0 , 8 2 6 9 8 , 1 0 7 7 , 8 9 8 1 0 2 e n u J 0 3 t a e c n a l a B . s e t o n g n i y n a p m o c c a e h t h t i w n o i t c n u n o c n j i l d a e r e b d u o h s y t i u q e n i s e g n a h c f o t n e m e t a t s d e t a d i l o s n o c e v o b a e h T d n u F l a t i p a C a i r u t n e C 40 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Consolidated statement of changes in equity For the year ended 30 June 2018 l a t o T y t i u q e 0 0 0 ’ $ 7 6 6 , 7 2 1 5 9 2 , 6 2 l a t o T 0 0 0 ’ $ 8 9 6 9 , 2 7 9 , 8 s t s e r e t n i g n i l l o r t n o c - n o n d n u F l a t i p a C a i r u t n e C p u o r G l a t i p a C l a t o T l e b a t u b i r t t a a i r u t n e C o t l a n r e t x E ) s t s e r e t n i g n i l l o r t n o c - n o n ( d e t i m i L l a t i p a C a i r u t n e C 0 0 0 ’ $ i d e n a t e R i s g n n r a e d e t u b i r t n o C - y t i r u c e S y t i u q e 0 0 0 ’ $ 0 0 0 ’ $ s r e d o h l l a t o T 0 0 0 ’ $ 0 0 0 ’ $ i d e n a t e R i s g n n r a e y t i u q e 0 0 0 ’ $ d e t u b i r t n o C l a t o T 0 0 0 ’ $ 0 0 0 ’ $ i d e n a t e R i s g n n r a e 0 0 0 ’ $ s e v r e s e R y t i u q e 0 0 0 ’ $ d e t u b i r t n o C 5 9 2 , 6 2 2 7 9 , 8 2 7 9 , 8 ) 5 8 1 ( 2 7 9 , 8 3 8 8 , 9 9 6 9 , 7 1 1 – – – – 3 2 3 , 7 1 3 2 8 , 1 1 3 2 8 , 1 1 3 2 3 , 7 1 3 2 8 , 1 1 3 2 8 , 1 1 8 4 4 – – ) 8 2 0 , 4 2 ( ) 2 2 1 , 8 ( ) 2 2 1 , 8 ( – ) 0 5 7 , 6 ( ) 3 8 8 , 9 ( 0 0 0 , 3 5 1 – – – ) 3 8 8 , 9 ( – – – – – – – – – 2 0 2 , 5 7 2 0 2 , 5 7 5 3 8 , 9 2 7 6 3 , 5 4 – 8 4 4 – – – – ) 6 0 9 , 5 1 ( ) 9 7 9 6 ( , ) 9 7 9 6 ( , ) 3 8 8 , 9 ( – – – 6 3 5 , 2 5 0 0 0 , 3 5 1 4 7 1 , 4 2 1 ) 0 5 7 , 6 ( ) 8 3 0 6 ( , – – – – – – ) 8 3 0 6 ( , ) 2 1 7 ( – – – – – – 6 3 5 , 2 5 4 7 1 , 4 2 1 0 0 5 , 5 9 6 9 , 7 1 1 2 5 4 , 8 2 0 0 5 , 5 0 0 5 , 5 0 0 5 , 5 – 8 4 4 – – ) 7 2 9 , 8 ( ) 7 2 9 , 8 ( ) 6 3 5 , 2 5 ( ) 1 3 3 , 3 1 ( 6 2 8 , 8 2 – – – 9 5 4 , 1 8 5 0 , 8 8 6 1 0 2 y l u J 1 t a e c n a l a B – – – 2 9 – – – – – – – – – 6 5 3 i s e i r a d i s b u s f o n o i t i s i u q c A e v i s n e h e r p m o c l a t o T r a e y e h t r o f e m o c n i r a e y e h t r o f t fi o r P g n i l l o r t n o c - n o N h t i w i d e u r c c a / d a p s n o i t u b i r t s i d d n a s d n e d v D i i t n e m y a p d e s a b y t i u q E s t s e r e t n i i d n e d v d g n i i l p a t S ) 5 0 2 , 9 3 ( l a t i p a c f o n r u t e r d n a d e t s e v n e r i 6 2 8 , 8 2 d e u s s i s e i t i r u c e s d e p a t S l – ) 2 1 7 ( g n i s i a r y t i u q e f o t s o C l a t i p a c f o n r u t e R 1 5 9 , 1 4 3 7 6 8 , 5 7 0 0 5 , 0 3 7 6 3 , 5 4 4 8 0 , 6 6 2 6 1 5 , 5 7 1 4 4 8 , 4 2 7 6 , 0 7 1 8 6 5 , 0 9 4 9 6 , 1 1 1 5 5 , 1 3 2 3 , 7 7 7 1 0 2 e n u J 0 3 t a e c n a l a B . s e t o n g n i y n a p m o c c a e h t h t i w n o i t c n u n o c n j i l d a e r e b d u o h s y t i u q e n i s e g n a h c f o t n e m e t a t s d e t a d i l o s n o c e v o b a e h T 41 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Consolidated statement of cash flows For the year ended 30 June 2018 Notes 2018 $’000 2017 $’000 Cash flows from operating activities Management fees received Rent received Interest received Distributions received Interest paid Income taxes paid Payments to suppliers and employees Proceeds from sale of property held for development Payments for property held for development Applications – Benefits Funds Redemptions – Benefits Funds Net cash provided by operating activities D3 Cash flows from investing activities Proceeds from sale of related party investments Purchase of investments in related parties Loans to related parties for purchase of properties Repayment of loans by related parties Purchase of other investments Proceeds from sale of investments Loans provided to other parties Loans repaid by other parties Proceeds from sale of investment property Payments in relation to investment properties Benefit Funds (acquisitions)/disposals of investments in financial assets Cash balance on acquisition of subsidiaries Cash balance on consolidation of property funds Collections from reverse mortgage holders Payments for property, plant and equipment Purchase of subsidiaries Return of investment to external non-controlling interests Deconsolidation of controlled property funds cash balance Net cash used in investing activities Cash flows from financing activities Proceeds from issues of securities to securityholders of Centuria Capital Group Equity raising costs paid Proceeds from borrowings Repayment of borrowings Capitalised borrowing costs paid Distributions paid to securityholders of Centuria Capital Group Proceeds from issues of securities to external non-controlling interests Distributions paid to external non-controlling interests Net cash provided by financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at end of year 74,090 23,349 9,985 22,760 (14,162) (16,817) (53,440) - - 21,942 (30,777) 36,930 62,494 (123,760) (5,865) 2,000 (52,723) - (25,980) 25,980 22,000 (8,840) 13,202 - - 2,113 (788) 35,422 16,440 10,146 7,976 (5,918) (7,042) (45,008) 65,175 (12,844) 27,711 (40,561) 51,497 20,763 (150,138) (13,669) 7,072 (1,186) 40,387 - - - (1,300) (55,021) 10,619 6,937 1,209 (115) - (104,419) (5,366) (766) - - (96,299) (238,861) 98,639 (3,710) 37,748 153,000 (6,750) 163,604 (14,185) (114,108) (446) (24,310) - (6,835) 86,901 27,532 74,382 101,914 (1,937) (4,092) 5,526 (17,820) 177,423 (9,941) 84,323 74,382 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 42 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 A About the report A1 GENERAL INFORMATION A2 SIGNIFICANT ACCOUNTING POLICIES The shares in Centuria Capital Limited, (the ‘Company’) and the units in Centuria Capital Fund (‘CCF’) are stapled to trade together as a single stapled security (‘Stapled Security’) on the ASX as ‘Centuria Capital Group’ (the ‘Group’) under the ticker code ‘CNI’. The accounting policies and methods of computation in the preparation of the consolidated financial statements are consistent with those adopted in the previous financial year ended 30 June 2017 unless specifically outlined below or in the relevant notes to the consolidated financial statements. The Group is a for-profit entity and its principal activities are the marketing and management of investment products, including property investment funds and friendly society investment bonds, and co-investment in property investment funds. When the presentation or classification of items in the consolidated financial statements has been amended, comparative amounts are also reclassified, unless it is impractical. STATEMENT OF COMPLIANCE The consolidated financial statements are general purpose financial statements which have been prepared in accordance with Australian Accounting Standards 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). The consolidated financial statements of the Group comprising the Company (as ‘Parent’) and its controlled entities for the year ended 30 June 2018 were authorised for issue by the Group’s Board of Directors on 14 August 2018. BASIS OF PREPARATION The consolidated financial statements have been prepared on the basis of historical cost, except for financial assets at fair value through profit and loss, other financial assets, investment properties and derivative financial instruments 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. Assets and liabilities have been presented on the face of the statement of financial position in decreasing order of liquidity and do not distinguish between current and non-current items. ROUNDING OF AMOUNTS The Group is an entity of a kind referred to in ASIC Legislative Instrument 2016/191, related to the ‘rounding off’ of amounts in the Directors’ Report and financial statements. Amounts in the Directors’ Report and financial statements have been rounded off, in accordance with the instrument to the nearest thousand dollars, unless otherwise indicated. Accounting policies are selected and applied in a manner that ensures that the resulting financial information satisfies the concepts of relevance and reliability, thereby ensuring that the substance of the underlying transactions or other events are reported. These financial statements contain all significant accounting policies that summarise the recognition and measurement basis used and which are relevant to provide an understanding of the financial statements. Accounting policies that are specific to a note to the financial statements are described in the note to which they relate. A3 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 expense that are not readily apparent from other sources. 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. Information about critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is included in the following notes: – Note C5 Investment properties – Note C6 Intangible assets – Note F3 Financial instruments 43 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 A About the report A4 SEGMENT SUMMARY As at 30 June 2018 the Group has four reportable operating segments. These reportable operating segments are the divisions which report to the Group’s Chief Executive Officer and Board of Directors for the purpose of resource allocation and assessment of performance. The reportable operating segments are: Operating Segments Description Property Funds Management Management of listed and unlisted property funds Investment Bonds Management Co-Investments Corporate Management of the Benefit Funds of Centuria Life Limited and management of the Over Fifty Guardian Friendly Society Limited. The Benefit Funds include a range of financial products, including single and multi-premium investments. Direct interest in property funds and other liquid investments Overheads for supporting the Group’s operating segments and management of a reverse mortgage lending portfolio For the year ended 30 June 2018, Reverse Mortgages is no longer considered a separated operating segment on the basis that it is not significant to the Group and has been included in the Corporate operating segment. In addition, the Group also provides disclosures in relation to a further four non-operating segments, which are: Non-operating segments Description Non-operating items Benefit Funds Controlled Property Funds Eliminations Comprises transaction costs, mark-to-market movements on property and derivative financial instruments, and all other non-operating activities Represents the operating results and financial position of the Benefit Funds which are required to be consolidated in the Group’s financial statements in accordance with accounting standards Represents the operating results and financial position of property funds which are controlled by the Group and consolidated under accounting standards Elimination of transactions between the operating segments and the other three non-operating segments above Where relevant, comparative financial information has been restated to ensure consistency in presentation of financial information across the applicable comparative periods. The accounting policies of reportable segments are the same as the Group’s accounting policies. Refer below for an analysis of the Group’s segment results: – Note B1 Segment profit and loss – Note C1 Segment balance sheet – Note D1 Operating segment cash flows 44 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 ) 9 8 9 , 5 1 ( 2 1 1 ) 0 9 4 , 5 ( ) 3 ( 3 5 0 , 9 3 6 0 , 0 7 - - ) 1 6 7 , 5 ( 1 6 0 , 8 ) 3 7 8 , 3 1 ( - - 0 9 1 , 6 5 ) 1 6 7 , 5 ( 1 6 0 , 8 0 4 5 , 4 2 5 2 2 , 0 3 ) 2 3 1 ( 7 4 ) 9 2 6 , 5 ( 9 8 5 , 6 5 6 7 , 4 5 ) 1 6 7 , 5 ( 6 3 6 6 , 5 2 4 , 1 - 0 9 1 , 6 5 ) 1 6 7 , 5 ( 5 2 4 , 1 1 6 0 , 8 - - - - - - 3 5 0 9 , 8 4 1 , 3 ) 8 4 1 , 3 ( B Business performance ) 7 1 6 , 7 6 ( 2 8 8 , 7 ) 7 9 5 , 1 1 ( ) 1 5 7 , 9 2 ( ) 0 1 6 ( ) 1 4 5 , 3 3 ( ) 7 1 1 , 0 1 ( ) 4 3 1 ( 3 1 5 , 4 3 1 ) 7 3 2 , 8 ( 1 0 8 , 1 2 9 7 1 , 0 2 - 0 7 7 , 0 0 1 5 4 8 , 2 5 0 7 , 0 2 2 9 7 , 0 1 ) 6 1 8 , 5 ( ) 4 7 4 , 7 1 ( 8 2 4 , 6 6 t fi o r p 0 0 0 ’ $ y r o t u t a t S 0 0 0 ’ $ s n o i t a n m i i l E d e l l o r t n o C n o N y t r e p o r P s t fi e n e B g n i t a r e p o g n i t a r e p O - o C s d n o B s d n u F t n e m t s e v n I y t r e p o r P I S S O L D N A T F O R P T N E M G E S 1 B s d n u F 0 0 0 ’ $ s d n u F 0 0 0 ’ $ s m e t i 0 0 0 ’ $ t fi o r p 0 0 0 ’ $ e t a r o p r o C s t n e m t s e v n I t n e m e g a n a M t n e m e g a n a M 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ s e t o N d e d n e r a e y e h t r o F 8 1 0 2 e n u J 0 3 3 0 1 , 0 1 ) 8 1 5 , 5 ( 7 4 3 , 3 0 7 6 , 3 4 0 6 , 8 - - - - - 4 9 9 , 7 9 0 8 3 0 8 , 8 - - - ) 8 0 6 , 0 1 ( ) 8 1 9 , 1 ( ) 0 8 6 , 8 ( - ) 1 ( - - ) 9 ( - ) 4 3 5 , 1 1 ( 6 6 8 , 4 ) 4 7 1 ( 7 8 0 , 5 4 ) 4 2 3 , 4 ( 7 1 7 , 1 1 ) 2 0 5 , 1 ( 3 7 4 , 3 ) 4 2 7 , 4 1 ( 1 2 2 , 4 3 1 2 6 6 5 , ) 0 9 1 , 9 ( 1 9 8 , 1 1 5 7 9 , 4 5 4 9 , 8 4 x a t e r o f e b ) s s o L ( / t fi o r P ) 7 6 2 , 2 ( 0 7 0 , 1 1 2 9 8 , 6 2 5 9 1 , 8 1 ) 8 0 2 , 1 1 ( 4 8 8 , 6 6 0 4 1 1 3 , 1 1 - 3 7 4 , 3 - 1 2 2 , 4 3 3 0 8 , 8 7 8 0 , 5 4 ) 4 2 3 , 4 ( 7 1 7 , 1 1 3 7 4 , 3 1 2 2 , 4 3 - - - - - - s t s e r e t n i 3 0 8 , 8 7 8 0 , 5 4 ) 4 2 3 , 4 ( 7 1 7 , 1 1 3 7 4 , 3 1 2 2 , 4 3 x a t r e t f a ) s s o l ( / t fi o r P 45 2 B 3 B 4 B s t n e m e v o m e u a v r i a F l e u n e v e R s e s n e p x E s t n e m u r t s n i l i a c n a n fi f o n i t n e m e v o m t e N s t s o c e c n a n F i y t r e p o r p d n a s e i t i l i b a i l l r e d o h y c i l o p 5 B e s n e p x e x a t e m o c n I d e t i m i L l a t i p a C a i r u t n e C x a t r e t f a ) s s o l ( / t fi o r P l : o t e b a t u b i r t t a d n u F l a t i p a C a i r u t n e C p u o r G l a t i p a C a i r u t n e C l s r e d o h y t i r u c e s r e t f a ) s s o l ( / t fi o r P l o t e b a t u b i r t t a x a t x a t r e t f a ) s s o L ( / t fi o r P g n i l l o r t n o c - n o N CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 B Business performance ) 7 2 3 , 0 2 1 ( 3 8 6 9 , ) 7 3 2 , 1 6 ( ) 6 6 3 , 8 3 ( ) 9 3 9 , 2 ( ) 8 6 4 , 7 2 ( ) 6 9 6 , 7 ( ) 5 4 5 ( 9 2 4 , 7 2 1 ) 3 0 6 , 1 1 ( 5 3 9 0 7 , 2 5 5 , 7 1 - 5 4 5 , 0 5 7 9 1 9 9 3 , 2 ) 2 5 1 ( 1 6 6 , 8 1 9 7 , 9 7 9 4 , 9 2 ) 0 9 3 , 5 ( ) 5 8 6 , 3 1 ( t fi o r p 0 0 0 ’ $ y r o t u t a t S 0 0 0 ’ $ s n o i t a n m i i l E s d n u F 0 0 0 ’ $ s d n u F 0 0 0 ’ $ s m e t i 0 0 0 ’ $ t fi o r p 0 0 0 ’ $ e t a r o p r o C s e g a g t r o M s t n e m t s e v n I t n e m e g a n a M t n e m e g a n a M 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ s e t o N d e d n e r a e y e h t r o F 7 1 0 2 e n u J 0 3 d e l l o r t n o C n o N y t r e p o r P s t fi e n e B g n i t a r e p o g n i t a r e p O e s r e v e R - o C s d n o B s d n u F t n e m t s e v n I y t r e p o r P ) D E U N T N O C I I ( S S O L D N A T F O R P T N E M G E S 1 B 46 ) 6 6 3 , 7 ( 9 8 5 , 6 1 9 1 7 , 1 3 - - ) 3 4 6 , 2 ( 4 3 9 , 0 1 - ) 4 2 4 , 5 ( - - 5 9 2 , 6 2 ) 3 4 6 , 2 ( 4 3 9 , 0 1 0 0 5 , 5 3 2 8 , 1 1 ) 3 1 6 , 1 ( ) 0 3 0 , 1 ( 8 5 2 4 0 7 , 1 3 2 3 , 7 1 ) 3 4 6 , 2 ( 2 6 9 , 1 2 7 9 , 8 - 5 9 2 , 6 2 ) 3 4 6 , 2 ( 2 7 9 , 8 4 3 9 , 0 1 - - - - - - 9 8 5 , 6 1 5 0 6 , 3 ) 5 0 6 , 3 ( - - 5 9 4 , 1 0 2 0 , 1 5 1 5 , 2 - - 8 2 3 , 8 1 ) 9 2 1 , 8 ( ) 9 3 8 , 2 ( 0 9 4 , 4 9 8 4 , 5 1 ) 9 3 6 , 3 ( ) 7 9 2 , 3 ( 2 1 8 , 5 6 0 7 , 8 3 8 7 , 6 ) 5 5 9 6 ( , 6 1 3 , 3 5 1 5 , 2 9 8 4 , 5 1 ) 9 3 6 , 3 ( - - - 5 1 5 , 2 9 8 4 , 5 1 ) 9 3 6 , 3 ( - 3 2 ) 7 ( 6 1 - 6 1 6 1 - 6 1 4 9 3 , 5 1 ) 3 2 7 ( 2 5 8 , 3 1 3 8 , 7 4 3 4 , 4 - - - - ) 6 1 6 , 2 ( ) 1 ( ) 9 4 7 , 4 ( ) 0 3 6 ( ) 1 3 8 , 1 ( ) 9 4 2 , 2 ( - - - - - ) 9 3 ( - 0 6 2 , 6 1 0 4 , 4 3 7 7 , 5 1 x a t e r o f e b ) s s o L ( / t fi o r P ) 7 3 8 ( 3 2 4 , 5 ) 3 5 7 , 1 ( 8 4 6 , 2 ) 2 3 7 , 4 ( 1 4 0 , 1 1 5 B e s n e p x e x a t e m o c n I x a t r e t f a ) s s o L ( / t fi o r P x a t r e t f a ) s s o l ( / t fi o r P l : o t e b a t u b i r t t a 6 5 9 , 1 7 6 4 , 3 - - 8 4 6 , 2 1 4 0 , 1 1 d e t i m i L l a t i p a C a i r u t n e C 3 2 4 , 5 8 4 6 , 2 1 4 0 , 1 1 - - - s t s e r e t n i 3 2 4 , 5 8 4 6 , 2 1 4 0 , 1 1 x a t r e t f a ) s s o l ( / t fi o r P d n u F l a t i p a C a i r u t n e C p u o r G l a t i p a C a i r u t n e C l s r e d o h y t i r u c e s r e t f a ) s s o l ( / t fi o r P l o t e b a t u b i r t t a x a t g n i l l o r t n o c - n o N 2 B 3 B 4 B s t n e m e v o m e u a v r i a F l e u n e v e R s e s n e p x E s t n e m u r t s n i l i a c n a n fi f o n i t n e m e v o m t e N s t s o c e c n a n F i y t r e p o r p d n a s e i t i l i b a i l l r e d o h y c i l o p CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 B Business performance B2 REVENUE Management fees from property funds Property acquisition fees Property performance fees Property sales fees Management fees from Benefit Funds Proceeds from sale of property held for development Interest revenue Rent and recoverable outgoings Distribution/dividend revenue Premiums - discretionary participation features only Other income 2018 $’000 29,705 4,070 26,738 2,971 3,706 - 11,108 21,553 29,621 2,711 2,330 134,513 2017 $’000 18,294 6,948 1,239 966 2,992 59,250 12,871 11,098 9,633 3,961 177 127,429 RECOGNITION AND MEASUREMENT 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. (i) Management fees Management fees are recognised on an accruals basis when the Group has the right to receive payment. (ii) Property transaction fees, sale fees and performance fees Property acquisition fees are recognised when an investment property has been acquired in a fund managed by the Group. Sales and performance fees derived from managed funds are recognised upon satisfaction of all conditions precedent to the sale of an investment property. (iii) 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. (iv) Interest revenue Interest revenue is accrued on a time basis, by reference to the principal outstanding using the effective interest rate method. (v) Rent and recoverable outgoings Rental income from investment property is recognised in profit or loss on a straight line basis over the term of the lease. Recoverable outgoings are recognised on an accrual basis. (vi) Distribution/dividend revenue Distribution/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). 47 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 B Business performance B2 REVENUE (CONTINUED) (A) TRANSACTIONS WITH RELATED PARTIES Management fees are charged to related parties in accordance with the respective trust deeds and management agreements. 2018 $ 2017 $ Management fees from Property Funds managed by Centuria 29,704,620 18,293,876 Distributions from Property Funds managed by Centuria Property acquisition fees from Property Funds managed by Centuria Sales fees from Property Funds managed by Centuria Management fees from Over Fifty Guardian Friendly Society Performance fees from Property Funds managed by Centuria Interest income on loans to Property Funds managed by Centuria Fees from Debt funds managed by Centuria Distributions and interest from Debt Funds managed by Centuria 14,467,430 4,070,177 2,970,550 3,552,177 26,737,500 501,525 1,054,857 108,825 5,452,630 6,947,527 966,160 2,991,534 1,239,839 513,622 - - 83,167,661 36,405,188 (i) Terms and conditions of transactions with related parties Investments in property funds 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 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 nor-mal market prices and on normal commercial terms. The Group pays some expenses on behalf of related entities and receives a reimbursement for these payments. 2018 $’000 21,260 4,558 8,531 230 2,316 380 - 23,144 7,198 67,617 2017 $’000 17,468 3,097 6,578 2,749 2,570 190 50,670 31,708 5,297 120,327 B3 EXPENSES Employee benefits expense Consulting and professional fees Property outgoings and fund expenses Corporate restructure and transaction costs Administration fees Impairment of seed capital Cost of property held for development sold Claims - discretionary participation features only Other expenses 48 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 B Business performance B3 EXPENSES (CONTINUED) (A) TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL (i) Transactions with directors For transactions with directors, refer to details included in the Audited remuneration report on page 28. (ii) 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 Detailed information on key management personnel is included in the Audited remuneration report. B4 FINANCE COSTS Operating interest charges Bank loans in Controlled Property Funds interest charges Reverse mortgage facility interest charges (Gain)/loss on derivatives on fair value hedges Loss/(gain) on financial assets fair value hedges Other finance costs RECOGNITION AND MEASUREMENT The Group’s finance costs include: – Interest expense recognised using the effective interest method. – The net gain or loss on hedging instruments that are recognised in profit or loss. 2018 $ 2017 $ 5,475,869 4,803,187 128,256 (5,350) 1,055,916 6,654,691 126,660 49,316 553,731 5,532,894 2018 $’000 8,567 5,490 1,741 1,115 (1,115) 191 15,989 2017 $’000 2,871 2,616 1,832 (6,566) 6,566 47 7,366 49 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 B Business performance B5 TAXATION 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 Deferred tax charged directly to equity Income tax expense 2018 $’000 13,203 (102) 13,101 772 - 13,873 2017 $’000 9,227 - 9,227 (4,126) 323 5,424 (A) RECONCILIATION OF INCOME TAX EXPENSE The prima facie income tax expense on profit before income tax reconciles to the income tax expense in the consolidated financial statements as follows: Profit before tax Less: profit not subject to income tax Income tax expense calculated at 30% Add/(deduct) tax effect of amounts which are not deductible/(assessable) Tax offset for franked dividends Non-allowable expenses – seed capital impairment Non-allowable expenses – other Recognition of previously unbooked capital losses Adjustments to current tax in relation to prior years Income tax expense 2018 $’000 70,063 (20,222) 49,841 14,952 (1,032) 114 181 (240) (102) 13,873 2017 $’000 31,719 (10,863) 20,856 6,257 (313) 57 706 (1,193) (90) 5,424 The tax rate used in the above reconciliation 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. 50 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 B Business performance B5 TAXATION (CONTINUED) (B) CURRENT TAX ASSETS AND LIABILITIES Current tax assets/(liabilities) attributable to: Benefit Funds Securityholders (C) MOVEMENT OF DEFERRED TAX BALANCES Financial year ended 30 June 2018 Deferred tax assets Provisions Financial derivatives Capital losses Transaction costs Deferred tax liabilities Indefinite life management rights Accrued income Unrealised gain/(loss) on financial assets Prepayments Fair value measurements in mortgage assets Financial year ended 30 June 2017 Deferred tax assets Provisions Financial derivatives Capital losses Transaction costs Deferred tax liabilities Indefinite life management rights Accrued income Unrealised gain/(loss) on financial assets Prepayments Fair value measurements in mortgage assets 2018 $’000 690 (529) 161 Movement $’000 436 - (826) (28) - - (1,522) - 1,141 (799) Movement $’000 412 1,290 27,437 374 (27,638) 2,219 (711) - 420 3,803 Opening balance $’000 2,207 4,020 27,640 374 (27,638) (290) (5,027) (6) (3,600) (2,320) Opening balance $’000 1,795 2,730 203 - - (2,509) (4,316) (6) (4,020) (6,123) 2017 $’000 (387) (2,784) (3,171) Closing balance $’000 2,643 4,020 26,814 346 (27,638) (290) (6,549) (6) (2,459) (3,119) Closing balance $’000 2,207 4,020 27,640 374 (27,638) (290) (5,027) (6) (3,600) (2,320) 51 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 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 companies 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 their separate financial statements using a ‘standalone tax payer’ approach. Under the tax funding arrangement between members of the tax consolidated group, amounts are recognised as payable to or receivable by each member in relation to the tax contribution amounts paid or payable between Company and the members of the tax consolidated group. Centuria Capital Fund (CCF) and its subsidiaries are not part of the tax consolidation group. Under current Australian income tax legislation, Trusts are not liable for income tax, provided their securityholders are presently entitled to the taxable income of the Trust including realised capital gains each financial year. 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 Income taxes relating to items recognised directly in equity are recognised directly in equity and not in the statement of comprehensive income. In the case of a business combination, the tax effect is included in the accounting for the business combination. B Business performance B5 TAXATION (CONTINUED) (D) CAPITAL TAX LOSSES At 30 June 2018, the Group has $nil (2017: $373,750) tax effected unrecognised capital tax losses. RECOGNITION AND MEASUREMENT 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. 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. (ii) Deferred tax Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities and the corresponding tax bases. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are recognised for all deductible temporary differences, unused tax losses and tax offsets, to the extent that it is probable that sufficient future taxable profits will be available to utilise them. However, deferred tax assets and liabilities are not recognised for: – taxable temporary differences that arise from the initial recognition of assets or liabilities in a transaction that is not a business combination which affects neither taxable income nor accounting profit; – taxable temporary differences relating to investments in subsidiaries, associates and joint ventures to the extent that the Group is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future; and – taxable temporary differences arising from goodwill 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. 52 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 B Business performance B6 EARNINGS PER SECURITY Basic (cents per stapled security) Diluted (cents per stapled security) 2018 Cents 19.8 18.1 2017 Cents 11.5 11.4 The earnings used in the calculation of basic and diluted earnings per security is the profit for the year attributable to Centuria Capital Group securityholders as reported in the consolidated statement of comprehensive income. The weighted average number of ordinary securities used in the calculation of basic and diluted earnings per security is as follows: Weighted average number of ordinary securities (basic) Weighted average number of ordinary securities (diluted) (i) 2018 2017 277,224,977 150,835,465 301,789,890 152,619,939 (i) The weighted average number of ordinary securities used in the calculation of diluted earnings per security is determined: – as if 30 June 2018 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 2018 was the end of the performance period are deemed to have been issued at the start of the financial year. – as if 20,098,470 unexercised options with an exercise price of $1.30 per option have been converted to ordinary securities at the start of the financial year. B7 DIVIDENDS AND DISTRIBUTIONS Dividends/distributions paid during the year Stapling dividend (fully franked) Final year-end dividend (fully franked) Final year-end distribution Interim dividend (fully franked) Interim distribution Dividends/distributions declared during the year Final dividend (fully franked) (i) Final distribution (i) 2018 2017 Cents per security Total $’000 Cents per security - 2.40 2.80 1.70 2.40 1.00 3.10 - 5,453 6,361 5,184 7,314 3,048 9,449 Total $’000 13,331 2,316 - 1,158 618 5,453 6,361 29,237 17.27 3.00 - 1.50 0.80 2.40 2.80 27.77 Dividends/distributions paid/declared to Centuria Capital Group securityholders (ii) 13.40 36,809 (i) The Group declared a final dividend/distribution in respect of the year ended 30 June 2018 of 4.1 cents per stapled security which included a dividend of 1.00 cents per share and a distribution of 3.10 cents per security. The final dividend had a record date of 29 June 2018 and was subsequently was paid on 27 July 2018. The total amount payable of $12,497,000 has been provided as a liability in these financial statements. (ii) In addition to the dividends and distributions paid to Centuria Capital Group securityholders, the Group paid distributions of $6,880,000 to external non- controlling interests. (A) FRANKING CREDITS Amount of franking credits available to shareholders of the Company for subsequent financial years (i) (i) Before taking into account the impact of the final dividend payable on 27 July 2018. 2018 $’000 2017 $’000 15,682 5,919 53 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 C Assets and liabilities t e e h s 0 0 0 ’ $ e c n a l a b y r o t u t a t S 0 0 0 ’ $ s n o i t a n m i i l E d e l l o r t n o C s d n u F 0 0 0 ’ $ s d n u F 0 0 0 ’ $ y t r e p o r P s t fi e n e B t e e h s 0 0 0 ’ $ e c n a l a b g n i t a r e p O e t a r o p r o C s t n e m t s e v n I t n e m e g a n a M t n e m e g a n a M - o C s d n o B s d n u F t n e m t s e v n I y t r e p o r P d e d n e r a e y l a c n a n F i i 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ s e t o N 8 1 0 2 e n u J 0 3 s t e s s A T E E H S E C N A L A B T N E M G E S 1 C 54 4 1 9 , 1 0 1 4 6 1 , 1 2 - ) 9 0 0 , 2 ( ) 8 7 3 ( 7 7 3 , 5 8 4 1 , 0 2 0 0 4 , 6 9 8 3 , 6 7 1 5 1 , 7 1 2 3 8 , 4 4 6 ) 1 5 6 , 1 1 ( - 5 0 5 , 0 3 3 8 7 9 , 5 2 3 0 0 4 , 3 6 0 0 1 , 7 4 1 6 3 0 , 2 3 6 6 , 7 5 1 - - - - - - 0 0 4 , 3 6 0 0 1 , 7 4 1 - - - - 9 0 1 , 8 3 1 , 1 ) 0 6 6 , 3 1 ( 9 9 4 , 5 1 2 3 5 0 , 7 5 3 - - 6 3 0 , 2 3 6 6 , 7 5 1 7 1 2 , 9 7 5 9 9 4 , 6 3 0 9 2 , 3 9 5 0 , 8 4 - - - 0 3 7 , 1 - - - - 1 3 5 , 1 1 4 3 3 , 6 9 1 9 , 7 7 2 0 7 1 , 6 8 1 3 , 1 - - - - 4 4 2 8 7 5 , 9 8 4 8 7 , 5 9 2 2 3 7 , 7 1 6 1 , 1 4 7 9 5 , 1 - - 5 0 4 , 2 3 ) 9 0 0 , 2 ( - 2 5 6 , 5 9 9 5 , 4 3 9 3 7 , 5 4 2 ) 0 0 0 , 2 ( 8 5 7 , 5 1 1 1 1 4 , 3 2 ) 1 6 1 ( 9 1 1 , 3 7 7 6 , 9 4 3 - - - - - - - 2 7 4 8 4 9 , 6 9 6 ) 9 0 0 , 4 ( 1 6 1 , 1 4 4 ) 1 5 6 , 9 ( 1 8 4 , 6 5 1 8 1 0 , 9 5 6 1 9 , 1 6 4 8 , 6 2 6 2 4 , 1 1 - - - - ) 0 9 6 ( 0 5 1 , 6 , 7 7 6 9 4 3 - 3 5 0 , 7 5 3 2 6 5 , 6 7 9 5 , 1 1 8 9 , 1 3 1 9 3 9 , 2 2 - 9 2 5 - 2 1 7 9 2 4 , 8 9 3 9 , 2 2 - 7 3 9 ) 1 3 0 , 3 ( ) 0 6 8 , 3 ( 3 2 4 , 7 8 1 4 9 7 , 1 9 3 3 8 5 , 0 4 5 9 9 , 8 4 - 3 8 7 , 2 1 2 6 5 , 6 2 5 5 , 3 2 1 - - - - 7 9 8 , 2 4 1 7 8 8 , 2 5 1 - - - - - 9 2 7 2 8 ) 4 9 ( 7 1 7 5 1 0 , 7 - - - 9 8 1 , 2 2 9 0 2 , 6 2 6 3 6 6 , 7 5 1 3 2 1 , 6 8 1 - - - - 5 8 8 8 0 9 , 1 ) 0 9 4 ( 3 2 9 6 2 2 , 3 7 9 8 , 2 8 1 2 D 2 C 3 C 4 C 5 C 6 C 7 C 8 C ) b ( 5 B ) c ( 5 B l i s t n e a v u q e h s a c d n a h s a C l s e b a v e c e R i s t e s s a l i a c n a n F i l d e h s e i t r e p o r p t n e m t s e v n I s e i t r e p o r p t n e m t s e v n I s t e s s a r e h t O l e a s r o f s t e s s a e b g n a t n i l I s t e s s a l a t o T s e i t i l i b a i L l s e b a y a P l e u a v r i a f t a p a w s e t a r t s e r e t n I s n o i s i v o r P i s g n w o r r o B p u o r G l a t i p a C 0 6 3 o t y t i l i b a i L ' l s r e d o h y c i l o p s d n u F t fi e n e B y t i l i b a i l x a t e m o c n i r o f n o i s i v o r P y t i l i b a i l x a t d e r r e f e D s e i t i l i b a i l l a t o T s t e s s a t e N CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 C Assets and liabilities t e e h s 0 0 0 ’ $ e c n a l a b y r o t u t a t S 0 0 0 ’ $ s n o i t a n m i i l E 1 5 5 , 1 0 0 1 , 7 5 2 3 6 6 , 7 5 1 - - - 2 8 3 , 4 7 0 8 3 , 6 1 - ) 5 7 7 ( 9 5 4 , 5 3 5 ) 2 1 8 , 2 1 ( s d n u F 0 0 0 ’ $ - - 9 8 8 9 7 7 , 8 0 6 4 , 0 1 0 0 1 , 7 5 2 s d n u F 0 0 0 ’ $ 9 6 8 , 9 4 2 9 , 2 - - - - - - - 2 2 t e e h s 0 0 0 ’ $ e c n a l a b g n i t a r e p O 4 3 7 , 5 5 2 4 3 , 3 1 - 1 5 5 , 1 8 3 9 , 7 1 0 3 , 1 0 9 1 , 8 1 6 6 2 , 7 0 1 5 3 5 , 2 4 0 , 1 ) 7 8 5 , 3 1 ( 8 2 2 , 7 7 2 4 6 0 , 3 5 3 0 3 8 , 5 2 4 1 8 4 , 1 1 3 1 4 , 7 4 1 3 3 , 3 8 1 6 0 6 , 5 4 8 5 , 0 0 7 ) 5 2 4 , 3 ( 1 5 9 , 1 4 3 ) 2 6 1 , 0 1 ( 4 6 9 , 1 9 1 4 6 2 , 5 8 4 6 0 , 3 5 3 1 8 9 , 8 5 1 - 9 4 8 , 6 6 2 4 2 3 , 9 1 1 7 1 , 3 0 2 3 , 2 4 1 0 , 8 4 3 - - - - 5 9 8 , 3 3 6 5 4 , 6 5 1 0 3 , 1 - - ) 5 7 7 ( 3 0 1 , 6 3 2 ) 0 5 6 , 2 ( - 5 2 8 , 0 1 8 1 5 , 8 4 4 3 1 , 1 7 8 4 , 1 3 1 - - - 4 1 0 , 8 4 3 - 7 8 3 1 4 6 , 4 4 8 7 , 2 ) 1 2 3 , 2 ( 3 2 8 , 3 2 2 4 5 , 2 1 5 3 2 , 1 - - - - 7 7 6 ) 7 9 4 , 2 ( ) 4 2 7 , 2 ( 8 9 9 , 7 3 8 4 , 3 - - 7 4 1 , 9 0 9 1 , 8 1 ) 1 ( - 0 2 7 , 1 1 9 2 , 0 3 2 2 1 , 7 1 - - - 7 6 1 , 8 8 3 9 , 7 5 2 1 , 8 9 - ) 3 2 1 ( 7 0 1 , 4 1 1 4 2 2 , 9 6 - - - - - 7 5 9 ) 8 1 ( 9 9 1 8 3 1 , 1 8 6 4 , 4 1 7 2 , 0 4 3 0 4 5 , 7 9 1 3 6 6 , 7 5 1 - - - 5 7 6 7 1 4 , 9 9 8 3 , 1 - - - - - - ) 5 2 ( 2 5 2 , 1 1 1 2 , 9 2 6 6 7 , 2 6 8 1 , 6 4 4 5 3 , 1 5 1 - - - 8 3 1 5 4 , 4 7 1 1 , 1 d e l l o r t n o C y t r e p o r P s t fi e n e B e t a r o p r o C s e g a g t r o M s t n e m t s e v n I t n e m e g a n a M t n e m e g a n a M 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ s e t o N e s r e v e R - o C s d n o B s d n u F t n e m t s e v n I y t r e p o r P ) D E U N T N O C I ( T E E H S E C N A L A B T N E M G E S 1 C - - 4 2 1 3 0 4 , 1 1 9 0 8 , 8 3 6 6 , 7 5 1 9 9 9 , 7 7 1 - 2 2 9 4 2 6 ) 6 ( - - 2 2 4 5 8 4 , 3 7 4 4 , 5 2 5 5 , 2 7 1 2 D 2 C 3 C 5 C 6 C 7 C 8 C ) b ( 5 B ) c ( 5 B l i s t n e a v u q e h s a c d n a h s a C 7 1 0 2 e n u J 0 3 s t e s s A l s e b a v e c e R i s e i t r e p o r p t n e m t s e v n I s t e s s a r e h t O s t e s s a l i a c n a n F i s t e s s a e b g n a t n i l I s t e s s a l a t o T s e i t i l i b a i L l s e b a y a P d e d n e r a e y l a c n a n F i i l e u a v r i a f t a p a w s e t a r t s e r e t n I s n o i s i v o r P i s g n w o r r o B ' l s r e d o h y c i l o p s d n u F t fi e n e B p u o r G l a t i p a C 0 6 3 o t y t i l i b a i L y t i l i b a i l x a t e m o c n i r o f n o i s i v o r P y t i l i b a i l x a t d e r r e f e D s e i t i l i b a i l l a t o T s t e s s a t e N 55 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 C Assets and liabilities C2 RECEIVABLES Receivables from related parties (refer to note C2(a)) Other receivables 2018 $’000 11,682 9,482 21,164 2017 $’000 8,896 7,484 16,380 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. (A) RECEIVABLES FROM RELATED PARTIES The following amounts were owed by related parties of the Group at the end of the financial year: Management fees owing from property funds manged by Centuria Acquisition fee receivable from Centuria 80 Grenfell Fund Acquisition fee receivable from Centuria Sandgate Road Fund Distribution receivable from Centuria Industrial REIT Recoverable expenses owing from property funds managed by Centuria Distribution receivable from Centuria Metropolitan REIT Receivable from Over Fifty Guardian Friendly Society Limited Interest receivable from Centuria Sandgate Road Fund Distribution receivable from Centuria Diversified Property Fund Distribution receivable from Centuria Scarborough House Fund Redemption funds receivable from Centuria Diversified Property Fund Receivables from debt funds managed by Centuria Interest receivable from Centuria 80 Grenfell Fund 2018 $ 2017 $ 3,483,289 1,765,177 2,627,836 - - 2,125,000 2,346,074 1,486,241 1,250,856 758,951 - 28,378 613 435,781 64,000 62,799 1,607,724 1,016,155 662,672 524,360 305,933 - 26,455 - - - 11,682,159 8,896,135 RECOGNITION AND MEASUREMENT Receivables are initially recognised at fair value and subsequently at amortised cost using the effective interest rate method, less an allowance for impairment. Due to the short-term nature of these financial rights, their carrying amounts are estimated to represent their fair values. C3 FINANCIAL ASSETS Investments in trusts, shares and other financial instruments at fair value Investment in related party unit trusts at fair value (refer to Note C3(a)) Loans receivable from related parties (refer to note C3(b)) Reverse mortgage receivables (i) Reverse mortgages – hedged item fair value adjustment 2018 $’000 362,799 228,109 5,865 28,289 19,770 644,832 2017 $’000 324,497 153,807 10,969 27,675 18,511 535,459 (i) Whilst some mortgages are likely to be repaid during the next 12 months, the Group does not control the repayment date. 56 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 C Assets and liabilities C3 FINANCIAL ASSETS (CONTINUED) (A) INVESTMENTS IN RELATED PARTY UNIT TRUSTS CARRIED AT FAIR VALUE THROUGH PROFIT OR LOSS The following table details related party investments carried at fair value through profit and loss. Fair value $ 2018 Units held Ownership % Fair value $ 2017 Units held Ownership % 0% 3,198,461 3,204,061 1,252,500 1,252,500 20.53% Financial assets held by the Group Centuria Industrial REIT 124,317,757 48,372,668 19.48% 81,877,894 33,148,975 Centuria Metropolitan REIT 68,555,158 27,643,209 11.39% 38,858,876 15,481,624 Centuria Diversified Property Fund 7,050,751 5,250,001 Centuria Bottleyard Fund Centuria Rouse Hill Debt Fund Centuria Zenith Fund 1,548,500 1,630,000 1,515,527 1,515,527 18.88% 14.17% 18.20% - - - - - - - - 0% 6,050,000 5,000,000 Centuria Scarborough House Fund 102,826 102,826 0.22% 4,365,826 4,622,826 Centuria SOP Fund Centuria Woden Green Estate Development Fund Centuria ATP Fund Centuria 203 Pacific Highway Fund Centuria 19 Corporate Drive Fund Centuria 2 Wentworth Street Fund Centuria 8 Central Avenue Fund 2 Centuria Australian Shares Bond Centuria Balanced Bond Centuria High Growth Bond - - - - - - - - - - Financial assets held by the Benefit Funds Centuria 8 Australia Avenue Fund - 203,090,519 - - - - - - - - - - - 0% 0% 0% 0% 0% 0% 0% 0% 0% 650,000 500,000 104,000 100,000 90,213 65,000 31,500 24,260 19,254 18,785 76,452 50,000 25,000 10,000 9,821 10,000 82.34% 136,606,569 0% 1,562,198 1,458,635 Centuria Metropolitan REIT 17,454,984 7,038,300 2.90% 13,168,321 5,246,343 Centuria Industrial REIT 2,601,467 1,012,244 0.41% 2,470,000 1,000,000 Centuria Iskia Development Fund 1,850,000 1,850,000 Centuria Bottleyard Fund Centuria SOP Fund Centuria Rouse Hill Debt Fund 1,425,000 1,500,000 951,400 1,000,000 735,716 735,716 15.83% 13.04% 3.28% 8.83% - - - - - - - - 25,018,567 228,109,086 44.29% 17,200,519 126.63% 153,807,088 (B) LOANS RECEIVABLE FROM RELATED PARTIES The following short-term loans were receivable from related parties of the Group at the end of the financial year: 15.64% 8.68% 0% 0% 0% 6.35% 10.03% 10.52% 0.81% 0.33% 0.48% 0.18% 0.04% 0.18% 0.09% 0.27% 74.13% 7.69% 2.94% 0.48% 0% 0% 0% 0% 11.11% 85.24% 2017 $ - Centuria 80 Grenfell Street Fund Centuria Sandgate Road Fund 2018 $ 5,865,000 - 10,968,500 5,865,000 10,968,500 57 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 C Assets and liabilities C3 FINANCIAL ASSETS (CONTINUED) RECOGNITION AND MEASUREMENT 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. 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 remeasurement 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. Reverse mortgage loan receivable financial assets are recorded at amortised cost using the effective interest method less impairment. C4 INVESTMENT PROPERTIES HELD FOR SALE In June 2018, the Group decided to sell the following properties held within Centuria Retail Fund: Property 2018 $’000 2017 $’000 2018 Capitalisation rate (%) Most recent independent valuer cap rate (%) 2018 Discount rate % Last independent valuation date 2018 Valuer Windsor Marketplace, Windsor NSW 23,400 City Centre Plaza, Rockhampton QLD 40,000 Total fair value 63,400 - - - 6.25% 7.50% 6.50% 7.00% 7.00% Nov 2017 Director 7.50% Jun 2018 Independent The fair values listed above do not include estimated selling costs which are expected to be incurred upon disposal. RECOGNITION AND MEASUREMENT Investment properties are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable. These investment properties are carried at fair value. The valuation techniques to determine the fair value of investment properties held for sale are the same as the valuation techniques of investment properties described in Note C5(a). 58 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 C Assets and liabilities C5 INVESTMENT PROPERTIES Opening balance Acquisition of investment properties Capital improvements and associated costs Make good contributions Gain/(loss) on fair value Change in deferred rent and lease incentives Deconsolidation of Havelock House Fund Sale of investment property Investment properties reclassified as held for sale Closing balance ^ 2018 $’000 257,100 2017 $’000 - - 249,700 3,985 - (3,041) 2,456 (28,000) (22,000) (63,400) 147,100 2,232 (675) 3,630 2,213 - - - 257,100 ^ The carrying amount of investment properties includes components related to deferred rent, capitalised lease incentives and leasing fees amounting to $9,387,000 (30 June 2017: $10,140,000). Property 2018 $'000 2018 Capitalisation rate % 2017 $'000 Most recent independent valuer cap rate % 2018 Discount rate % Last independent valuation date 2018 Valuer 111 St George Terrace, Perth WA 147,100 142,500 7.00% 7.00% 7.25% Nov 2017 Director City Centre Plaza, Rockhampton Qld Havelock House, West Perth WA Windsor Marketplace, Windsor NSW 441 Murray Street, Perth WA - - - - 46,000 28,000 22,100 18,500 -% -% -% -% -% -% -% -% -% -% -% -% Total fair value 147,100 257,100 RECOGNITION AND MEASUREMENT Investment properties are properties held either to earn rental income or for capital appreciation or for both. Investment properties are initially recorded at cost which includes stamp duty and other transaction costs. Subsequently, the investment properties are measured at fair value with any change in value recognised in profit or loss. The carrying amount of investment properties includes components relating to deferred rent, lease incentives and leasing fees. An investment property is derecognised upon disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period in which the property is derecognised. 59 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 C Assets and liabilities C5 INVESTMENT PROPERTIES (CONTINUED) KEY ESTIMATES AND JUDGEMENTS (A) VALUATION TECHNIQUES AND SIGNIFICANT UNOBSERVABLE INPUTS The fair value of the investment properties were determined by the Directors of the Responsible Entity of the relevant funds or by an external, independent valuer having an appropriate recognised professional qualification and recent experience in the location and category of the properties being valued. Fair value is based on market values, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The valuations were prepared by considering the following valuation methodologies: – Capitalisation approach: the annual net rental income is capitalised at an appropriate market yield to arrive at the property’s market value. Appropriate capital adjustments are then made where necessary to reflect the specific cash flow profile and the general characteristics of the property. – Discounted cash flow approach: this approach incorporates the estimation of future annual cash flows over a 10 year period by reference to expected rental growth rates, ongoing capital expenditure, terminal sale value and acquisition and disposal costs. The present value of future cash flows is then determined by the application of an appropriate discount rate to derive a net present value for the property. – Direct comparison approach: this approach identifies comparable sales on a dollar per square metre of lettable area basis and compares the equivalent rates to the property being valued to determine the property’s market value. The valuations reflect, when appropriate, the type of tenants actually in occupation or responsible for meeting lease commitments or likely to be in occupation after letting of vacant accommodation and the market’s general perception of their credit-worthiness; the allocation of maintenance and insurance responsibilities between the lessor and lessee; and the remaining economic life of the property. It has been assumed that whenever rent reviews or lease renewals are pending with anticipated reversionary increases, all notices and, where appropriate, counter notices have been served validly and within the appropriate time. (B) FAIR VALUE MEASUREMENT The fair value measurement of investment properties has been categorised as a Level 3 fair value as it is derived from valuation techniques that include inputs that are not based on observable market data (unobservable inputs). Significant unobservable inputs Capitalisation rate Discount rate Fair value measurement sensitivity to significant increase in input Fair value measurement sensitivity to significant decrease in input Decrease Decrease Increase Increase 60 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 C Assets and liabilities C6 INTANGIBLE ASSETS Indefinite life management rights Goodwill Balance at the beginning of the period Acquired goodwill Acquired management rights Goodwill and management rights are solely attributable to the Property Funds Management cash generating unit 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 five years. RECOGNITION AND MEASUREMENT (i) Indefinite life management rights Management rights acquired in a business combination are initially measured at fair value and reflect the right to provide asset and fund management services in accordance with the management agreements. (ii) Goodwill Goodwill acquired in a business combination is measured at cost and subsequently measured at cost less any impairment losses. The cost represents the excess of the cost of a business combination over the fair value of the identifiable assets, liabilities and contingent liabilities acquired. (iii) Impairment Goodwill and intangible assets that have an indefinite useful life are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash generating units or CGUs). Non-financial assets other than goodwill that were previously impaired are reviewed for possible reversal of the impairment at each reporting date. 2018 $’000 92,128 65,535 157,663 2018 $’000 157,663 - - 157,663 2017 $’000 92,128 65,535 157,663 2017 $’000 53,025 12,510 92,128 157,663 KEY ESTIMATES AND JUDGEMENTS The key assumptions used in the value in use calculations for the Property Funds Management cash-generating unit are as follows: REVENUE Revenues in 2019 are based on the Board approved budget for 2019 and are assumed to increase at a rate of 7.5% (2017: 7.5%) per annum for years 2020-2022. The directors believe this is a prudent and achievable growth rate based on past experience. EXPENSES Expenses in 2019 are based on the budget for 2019 and are assumed to increase at a rate of 5.0% (2017: 5.0%) per annum for the years 2020-2022. The directors believe this is an appropriate growth rate based on past experience. DISCOUNT RATE Discount rates are determined to calculate the present value of future cash flows. A pre-tax rate of 10.28% (2017: 10.59%) 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 2022, a growth rate of 3% (2017: 3%), in line with long term economic growth, has been applied to determine the terminal value of the asset. 61 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 C Assets and liabilities C6 INTANGIBLE ASSETS (CONTINUED) SENSITIVITY TO CHANGES IN ASSUMPTIONS As at 30 June 2018, the estimated recoverable amount of intangibles including goodwill relating to the Property Funds Management cash-generating unit exceeded its carrying amount by $175.2 million (2017: $76.8 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: Assumptions used in value in use calculation Rate required for recoverable amount to equal carrying value 7.50% (2.50)% 10.28% 18.68% 5.00% 15.50% Revenue growth rate (average) Pre-tax discount rate Expenses growth rate C7 PAYABLES Sundry creditors (i) Dividend/distribution payable Accrued expenses 2018 $’000 10,880 12,813 8,712 32,405 2017 $’000 15,322 12,351 6,222 33,895 (i) Sundry creditors are non-interest bearing liabilities and are payable on commercial terms of 7 to 60 days. RECOGNITION AND MEASUREMENT Payables are recognised when the Group becomes obliged to make future payments resulting from the purchase of goods and services. Due to the short-term nature of these financial obligations, their carrying amounts are estimated to represent their fair values. C8 BORROWINGS Fixed rate secured notes (refer to Note C8(A)) Floating rate secured notes (refer to Note C8(A)) Reverse mortgage bill facilities and notes (refer to NoteC8(C)) Bank loans in Controlled Property Funds (refer to Note C8(D)) Borrowing costs capitalised 2018 $’000 83,000 40,000 8,429 115,758 (1,448) 245,739 2017 $’000 60,000 40,000 9,147 128,837 (1,881) 236,103 The terms and conditions relating to the above facilities are set out below. (A) SECURED NOTES The Group issued Tranche 1 of secured corporate notes to the value of $100,000,000 on 21 April 2017. This consisted of an issue of $40,000,000 floating rate secured notes and $60,000,000 7% fixed rate secured notes. The Group issued Tranche 2 to the value of $23,000,000 7% fixed rate secured notes on 11 September 2017. These notes mature on 21 April 2021 and are secured against assets within certain subsidiaries of the Centuria Capital Fund Group. (B) CORPORATE FACILITY (SECURED) The Company had a multi option facility with National Australia Bank which matured on 28 February 2018. The facility limit was $30,500,000. Total facility available Bank guarantee utilised1 Unused facility available at the end of the period 1 Bank guarantee is not included in the borrowings note above 62 2018 $’000 - - - 2017 $’000 30,500 (8,032) 22,468 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 C Assets and liabilities C8 BORROWINGS (CONTINUED) (C) REVERSE MORTGAGE BILL FACILITIES AND NOTES (SECURED) As at 30 June 2018, the Group had $8,429,000 (2017: $9,147,000) non-recourse notes on issue to ANZ Bank, secured over the remaining reverse mortgages held in Senex Warehouse Trust No.1 (a subsidiary of the Group) due to mature on 30 September 2018. In July 2018, the notes maturity was extended to 30 September 2019. The facility limit as at 30 June 2018 is $10,000,000 (2017: $15,000,000) 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. In July 2018, the facility limit was reduced to $9,400,000. Facility Limit Amount used at reporting date Amount unused at reporting date 2018 $’000 10,000 (8,429) 1,571 2017 $’000 15,000 (9,147) 5,853 (D) BANK LOANS – CONTROLLED PROPERTY FUNDS (SECURED) Each controlled property fund has debt facilities secured by first mortgage over each of the fund’s investment property and a first ranking fixed and floating charge over all assets of each of the funds. Details of the amounts drawn and the maturity of each facility are as follows: Fund 30 June 2018 Centuria 111 St Georges Terrace Fund Current/ non-current classification Maturity date Facility limit $’000 Funds available $’000 Draw down $’000 Borrowing costs $’000 Draw down $’000 Current 30 June 2019 83,800 4,320 79,480 (130) 79,350 Centuria Retail Fund Current 31 July 2018** 37,400 992 36,408 - 36,408 30 June 2017 Centuria 111 St Georges Terrace Fund Non-current 30 June 2019 81,500 10,839 Centuria Retail Fund Current 30 June 2018 37,400 Centuria Havelock House Fund Current 31 May 2018 13,000 Centuria 441 Murray Street Fund Current 30 June 2018 12,000 1,823 1,000 1,159 115,758 70,661 35,577 12,000 10,841 (128) 70,533 (76) (14) (24) 35,501 11,986 10,817 128,837 ** Subsequent to 30 June 2018, the maturity date of Centuria Retail Fund’s debt facility was extended to 31 August 2018. The investment properties in the Centuria Retail Fund are classified as held for sale as at 30 June 2018 and the bank facility will be rolled over until properties are sold. RECOGNITION AND MEASUREMENT Borrowings are initially recognised at fair value, net of transaction costs. They are subsequently measured at amortised cost using the effective interest rate method. C9 COMMITMENTS AND CONTINGENCIES (A) OPERATING LEASES (i) Group as a leasee 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 2018 $’000 865 158 1,023 2017 $’000 831 1,023 1,854 63 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 C Assets and liabilities COMMITMENTS AND CONTINGENCIES (CONTINUED) C9 (ii) Group as a lessor The Group leases out its investment properties under operating leases. The future minimum lease payments receivable under non-cancellable leases are as follows: Not longer than 1 year Longer than 1 year and not longer than 5 years Longer than 5 years 2018 $’000 2017 $’000 13,574 39,120 27,176 79,870 16,212 48,310 45,432 109,954 (B) CONTINGENCIES The Group has bank guarantees of $532,304 for commercial leases with respect to its Sydney and Melbourne office premises. These bank guarantees are cash collateralised. The above guarantees are issued in respect of the Group and do not constitute an additional liability to those already existing in interest bearing liabilities on the statement of financial position. The Directors of the Group are not aware of any other contingent liabilities in relation to the Group, other than those disclosed in the financial statements, which should be brought to the attention of securityholders as at the date of completion of this report. RECOGNITION AND MEASUREMENT When the terms of a lease transfer substantially all the risks and rewards of ownership to the Group, the lease is classified as a finance lease. All other leases are classified as operating leases. (i) Group as a leasee Operating lease payments are recognised as an expense on a straight-line basis over the term of the lease, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. (ii) Group as a lessor Lease income from operating leases where the Group is a lessor is recognised in income on a straight-line basis over the lease term. C10 CONTRIBUTED EQUITY Centuria Capital Limited 2018 2017 No. of securities $’000 No. of securities Balance at beginning of the period 229,815,736 77,323 76,631,699 Equity based payment Return of capital reinvested in CCF Stapled securities issued Cost of equity raising Balance at end of period 875,401 - 74,102,037 - 304,793,174 535 - 21,494 (582) 98,770 563,034 152,621,003 - 229,815,736 - (39,205) Centuria Capital Fund (non-controlling interests) 2018 2017 No. of securities $’000 No. of securities Balance at beginning of the period 229,815,736 170,672 Equity based payment Stapling dividend and return of capital reinvested Stapled securities issued Cost of equity raising Balance at end of the period 875,401 - 74,102,037 - - - 77,146 (2,888) - - 77,194,733 152,621,003 - 304,793,174 244,930 229,815,736 Fully paid ordinary securities carry one vote per security and carry the right to distributions. On 29 June 2017, the Group issued 20,098,470 options to subscribe for stapled securities. The options have an exercise price of $1.30 per stapled security and expire on 29 June 2022. RECOGNITION AND MEASUREMENT Incremental costs directly attributed to the issue of ordinary shares are accounted for as a deduction from equity, net of any tax effects. 64 $’000 88,058 356 28,826 (712) 77,323 $’000 - - 52,536 124,174 (6,038) 170,672 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 D Cash flows D1 OPERATING SEGMENT CASH FLOWS (I) Cash flows from operating activities Management fees received Distributions received Interest received Payments to suppliers and employees Income tax paid Interest paid Net cash provided by operating activities Cash flows from investing activities Proceeds from sale of related party investments Purchase of investments in related parties Loans to related parties for purchase of properties Repayment of loans by related parties Purchase of other investments Proceeds from sale of investments Loans provided to other parties Loans repaid by other parties Collections from reverse mortgage holders Cash balance on acquisition of subsidiaries Purchase of subsidiaries Payments for plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of securities Equity raising costs paid Proceeds from borrowings Repayment of borrowings Capitalised borrowing costs paid Distributions paid Net cash provided by financing activities Net increase in operating cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period 2018 $’000 2017 $’000 81,370 15,529 2,268 (36,342) (15,353) (9,281) 38,191 64,009 (123,762) (5,865) 4,650 (52,723) - (25,980) 25,980 2,113 - - (788) 43,589 5,301 665 (33,061) (6,084) (3,343) 7,067 20,763 (145,697) (13,669) 7,072 (620) 47,757 - - 1,209 10,619 (104,419) (115) (112,366) (177,100) 98,639 (3,710) 25,375 (718) (446) (24,310) 94,830 20,655 55,734 76,389 153,000 (6,750) 155,000 (82,403) (1,936) (4,092) 212,819 42,786 12,948 55,734 (i) The operating segment cash flows support the segment note disclosures of Centuria Capital Group and provide details in relation to the Operating Segment cash flows performance of the Group. The Operating Segment cash flows exclude the impact of cash flows attributable to Benefit Funds and Controlled Property Funds. Refer to page 42 of the consolidated financial statements for the full statutory cash flow statement of the Group. 65 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 D Cash flows D2 CASH AND CASH EQUIVALENTS Included in cash and cash equivalents attributable to shareholders is $27,267,854 (2017: $15,572,198) relating to amounts held by Centuria Life Limited, Senex Warehouse Trust No.1 and the Benefit Funds which is not readily available for use by the Group. D3 RECONCILIATION OF PROFIT FOR THE PERIOD TO NET CASH FLOWS FROM OPERATING ACTIVITIES Profit for the year Add (deduct) non-cash items: Depreciation and amortisation Impairment of seed capital Share-based payment expense Amortisation of borrowing costs Profit on sale of investment property Fair value movement of financial assets Interest revenue from reverse mortgages Unrealised gain/(loss) on investment properties Amortisation of lease incentives Costs paid for debt issuance Provision for doubtful debts Changes in net assets and liabilities: (Increase)/decrease in assets: Receivables Prepayments Property held for development Increase/(decrease) in liabilities: Other payables Tax provision Deferred tax liability Provisions Policyholder liability Net cash flows provided by operating activities 2018 $’000 2017 $’000 56,190 26,295 370 380 662 58 (2,000) (13,894) (2,453) 5,790 1,650 446 100 (7,526) (67) - (2,660) (3,113) 820 515 1,662 36,930 365 - 447 167 - (4,171) (2,377) (3,631) 3,423 - - 5,762 117 35,716 (11,009) 2,186 (3,803) 146 1,864 51,497 RECOGNITION AND MEASUREMENT For the purposes of the statement of cash flows, cash and cash equivalents includes cash on hand and in banks. 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. 66 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 E Group Structure E1 BUSINESS COMBINATION (A) CURRENT YEAR During the current year, there were no business combinations. (B) PRIOR YEAR (i) Stapling The stapling of the Company and Centuria Captial Fund (CCF) was approved at an Extraordinary General Meeting of the shareholders of the Company on 10 October 2016. Following approval of the stapling, shares in the Company and units in CCF were stapled to one another on 17 October 2016 and are traded as a single security on the ASX. CCF was established by the transfer of the Company’s interest in Centuria Metropolitan REIT (‘CMA’) and other Co- investments to CCF in exchange for $52,535,795 in equity of CCF. Assets transferred to CCF were transferred at fair value. As the co-investments were already held at fair value, there was no impact on the consolidated net assets. CCL distributed $52,535,795 of its units in CCF to its shareholders through a $13,331,181 dividend and a capital distribution of $39,204,614. In relation to the stapling of the Company and CCF, the Company is identified as the parent of the Group with the acquisition accounted for as a change in ownership without a loss of control. The issued units of CCF are not owned by the Company and are presented as non-controlling interests in the Group even though units in CCF are held directly by the shareholders of the Company. The equity in the net assets of CCF and the profit/(loss) arising from those net assets have been separately identified in the statements of comprehensive income and financial position. CCF’s contributed equity and retained earnings/ accumulated losses are shown as a non-controlling interest in the consolidated financial statements in accordance with accounting standards. Purchase consideration Cash paid on 9 January 2017 Loan from 360 Capital Group (repaid on 21 April 2017) Call and put option liability Contingent consideration Total purchase consideration (i) 360 Capital acquisition On 23 November 2016, the Group announced the purchase of all of the shares in Centuria Property Funds No. 2 Limited (formerly 360 Capital Investment Management Limited) (‘CPF2L’) and associated management rights over listed and unlisted property investment funds for which CPF2L is the responsible entity from 360 Capital Group Limited (‘360 Capital’). Also as part of the acquisition, the Group agreed to acquire various stakes in those listed and unlisted funds. The acquisition of shares in CPF2L and the interests in the listed and unlisted property investment funds (collectively, the ‘Transaction’) was settled on 9 January 2017. This acquisition was funded by a combination of debt, equity and existing cash reserves, including $150,000,000 capital raised from new and existing institutional investors, and a vendor loan amounting to $50,000,000. The acquisition also included a call option and a put option over stakes in the four unlisted property investment funds managed by CPF2L with a maximum option period of 2 years following completion of the acquisition. This acquisition is part of the Group’s strategy in growing its property funds management platform and increasing recurring revenues through additional co-investment in managed funds. Details of the purchase consideration, the net assets acquired and goodwill recognised are as follows: 2017 $’000 169,836 50,000 60,123 1,763 281,722 As at 30 June 2018, the call and put option liability is $41,024,000 (2017: $54,693,000) and the contingent consideration is $123,000 (2017: $1,763,000). On 18 July 2018, the call and put option deed in relation to Centuria 111 St Georges Terrace Fund options was extended to 26 June 2019 from the original date of 9 January 2019. 67 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 E Group Structure E1 BUSINESS COMBINATION (CONTINUED) The assets and liabilities recognised as a result of the acquisition are as follows: Cash and cash equivalents Investment Properties Receivables Payables Borrowings Derivative Financial Instruments Co-investment in Centuria Industrial REIT (CIP) Co-investment in Centuria Urban REIT (CUA) Management rights (indefinite life) Net identifiable assets acquired Less: non-controlling interests Add: goodwill attributable to the acquisition of 360 Capital Net assets acquired Fair value $’000 17,608 249,700 2,748 (6,509) (128,495) (757) 81,414 30,725 92,128 338,562 (69,350) 12,510 281,722 TRANSACTION RELATED COSTS Transaction related costs of $9,591,064 were incurred of which $2,707,750 were included in expenses in profit or loss and $6,883,314 were recognised directly in contributed equity. CONTINGENT CONSIDERATION The contingent consideration arrangement requires the Group to guarantee the distribution yield on co-investment stakes in unlisted property funds subject to put and call options to 7.5%. The contingent consideration liability recognised reflects the Group’s expectation of the fair value of the amounts to be paid over the contingent period. The distributions are expected to be less than the guaranteed return. RECOGNITION AND MEASUREMENT 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. 68 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 E Group Structure E2 INTERESTS IN MATERIAL SUBSIDIARIES The Group’s principal subsidiaries at 30 June 2018 are set out below. Unless otherwise stated, they have issued capital consisting solely of ordinary shares or units that are held directly by the Group, and the proportion of ownership interests held equals the voting rights held by the Group. The subsidiaries of the Group were incorporated in Australia which is also their principal place of business. The parent entity of the Group is Centuria Capital Limited. Name of subsidiary Centuria Capital Fund Centuria Life Limited Over Fifty Seniors Equity Release Pty Ltd Senex Warehouse Trust No. 1 Centuria Property Funds Limited Centuria Property Funds No. 2 Limited Centuria Properties No. 3 Limited Centuria Institutional Investments No. 3 Pty Limited A.C.N. 062 671 872 Pty Limited Centuria Strategic Property Limited Centuria Funds Management Limited Centuria Investment Holdings Pty Limited Centuria Finance Pty Ltd Centuria Property Services Pty Limited Belmont Road Management Pty Limited Belmont Road Development Pty Limited Centuria Capital No. 2 Fund Centuria Capital No. 2 Office Fund Centuria Capital No. 2 Industrial Fund Centuria Capital No. 3 Fund Centuria Belmont Road Development Fund Centuria Diversified Property Fund*** Ownership interest % 2018 2017 0% (100% NCI) 0% (100% NCI) 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 27% n/a 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 27% 54% During the year ended 30 June 2017, as part of the 360 Capital Transaction, the Group gained control over four unlisted property funds including Centuria 111 St Georges Terrace Fund, Centuria Retail Fund, Centuria Havelock House Fund and Centuria 441 Murray Street Fund. In 2017, these funds have been consolidated in these financial statements. As at 30 June 2018, Centuria Havelock House Fund and Centuria Murray Street Fund have been deconsolidated from these financial statements. *** As at 30 June 2018, Centuria Diversified Property Fund has been deconsolidated from these financial statements. Recognition and measurement (i) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company. 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. Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. 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. 69 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 E Group Structure E3 PARENT ENTITY DISCLOSURE As at, and throughout the current and previous financial year, the parent entity of the Group was Centuria Capital Limited. Result of parent entity Profit or loss for the year Total comprehensive income for the year Financial position of parent entity at year end Total assets Total liabilities Net assets 2018 $’000 13,147 13,147 104,332 (11,830) 92,502 2017 $’000 15,557 15,557 76,921 (11,128) 65,793 The parent entity presents its assets and liabilities in order of liquidity. The assets of the parent entity mainly consist of cash, short term receivables, investments in subsidiaries and deferred tax assets. The liabilities of the parent entity mainly consist of short term payables. Total equity of the parent entity comprising of: Share capital Share-based incentive reserve Retained earnings/(loss) Total equity 98,770 1,896 (8,164) 92,502 77,323 1,551 (13,081) 65,793 (A) GUARANTEES ENTERED INTO BY THE PARENT ENTITY The parent entity has, in the normal course of business, entered into guarantees in relation to the debts of its subsidiaries during the financial year. (B) COMMITMENTS AND CONTINGENT LIABILITIES OF THE PARENT ENTITY The parent entity has bank guarantees of $532,304 for commercial leases with respect to its Sydney and Melbourne office premises. These bank guarantees are cash collateralised. The above guarantees are issued in respect of the parent entity and do not constitute an additional liability to those already existing in interest bearing liabilities on the statement of financial position. The Directors of the Company are not aware of any other contingent liabilities in relation to the parent entity, other than those disclosed in the financial statements. 70 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 F Other F1 SHARE-BASED PAYMENT ARRANGEMENTS (A) LTI PLAN DETAILS 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 security of the Group 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 Group 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 Group. Further details of the LTI Plan are included in the Audited remuneration report from page 30 to page 33. Performance rights outstanding at the beginning of the year Performance rights granted during the year Performance rights lapsed during the year Performance rights vested during the year Performance rights outstanding at the end of the year 2018 Number 5,103,963 2,113,780 (458,129) (1,390,927) 5,368,687 The performance objectives for 1,672,133 of the performance rights issued under Trance 3 were met in full by 30 June 2018. As a result, these rights will vest on 31 August 2018. (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 Share price at the grant date Expected life Volatility Risk free interest rate Dividend yield Tranche 3 Tranche 4 Tranche 5 31 August 2018 31 August 2019 31 August 2020 $0.96 2.6 years 20% 1.85% 5.4% $1.02 2.7 years 20% 1.94% 5.7% $1.46 2.8 years 20% 1.96% 5.7% The following table sets out the fair value of the rights at the respective grant date: Performance Condition Tranche 3 Tranche 4 Tranche 5 EPS Growth in FUM Absolute TSR $0.87 $0.87 $0.19 $0.88 $0.88 $0.16 N/A $1.24 $0.62 During the year, share based payment expenses were recognised of $1,478,291 (2017: $448,247). RECOGNITION AND MEASUREMENT 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 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. 71 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 F Other F2 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 light 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: – 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; – The funds must meet the capital adequacy standards of APRA which results in additional re-serves 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 – CLL also continues to meet the ongoing capital requirements set by APRA. F3 FINANCIAL INSTRUMENTS (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. 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 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. Centuria Life Limited (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. From time to time, the Group outsources certain parts of the investment management of the Benefit Funds to specialist investment managers including co-ordinating access to domestic and international financial markets, and managing 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 minimise 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 factual or anticipated exposures relating to investments. The use of financial derivatives in respect of Benefit Funds is governed by the Funds’ investment policies, which provide written principles on the use of financial derivatives. 72 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 F Other F3 FINANCIAL INSTRUMENTS (CONTINUED) (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. In addition, Centuria Property Funds Limited, Centuria Funds Management Limited and Centuria Property Fund No.2 Limited have AFS 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 Funds’ 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 2018 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 2018 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 2018 to determine the fair value. (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. – Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. – 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). – 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). 73 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 F Other F3 FINANCIAL INSTRUMENTS (CONTINUED) There were no transfers between Level 1, 2 and 3 in the period. Measurement basis Fair value hierarchy Reverse mortgages - hedged item fair value adjustment Fair value 30 June 2018 Financia assets Cash and cash equivalents Financial assets at fair value Receivables Financial assets at fair value Financial assets at fair value Reverse mortgages receivables Financial liabilities Payables Liability to 360 Capital Group Benefit Funds policy holders' liability Borrowings Interest rate swaps at fair value Interest rate swaps at fair value 30 June 2017 Financial assets Cash and cash equivalents Receivables Financial assets at fair value Financial assets at fair value Financial assets at fair value Amortised cost Fair value Amortised cost Fair value Fair value Amortised cost Amortised cost Amortised cost Amortised cost Amortised cost Fair value Fair value Amortised cost Amortised cost Fair value Fair value Fair value Measurement basis Fair value hierarchy Level 1 Level 1 Level 2 Level 2 Level 3 Level 3 Level 3 Level 2 Level 2 Level 2 Level 2 Level 2 Level 3 Level 1 Level 2 Level 1 Level 2 Level 3 Level 3 Level 3 Level 2 Level 2 Level 2 Level 2 Level 2 Level 3 Carrying amount $’000 101,914 495,837 21,164 99,721 1,215 28,289 19,770 767,910 32,405 41,161 349,677 245,739 472 22,939 692,393 Carrying amount $’000 74,382 16,380 142,894 345,164 1,215 27,675 18,511 Fair value $’000 101,914 495,837 21,164 99,721 1,215 28,289 19,770 767,910 32,405 41,161 349,677 246,854 472 22,939 693,508 Fair value $’000 74,382 16,380 142,894 345,164 1,215 27,675 18,511 626,221 626,221 33,895 56,456 348,014 236,103 1,134 18,190 693,792 33,895 56,456 348,014 237,019 1,134 18,190 694,708 Reverse mortgages receivables Amortised cost Reverse mortgages - hedged item fair value adjustment Fair value Financial liabilities Payables Liability to 360 Capital Group Benefit Funds policy holders' liability Borrowings Interest rate swaps at fair value Interest rate swaps at fair value Amortised cost Amortised cost Amortised cost Amortised cost Fair value Fair value The Group determines Level 2 fair values for financial assets and liabilities without an active market based on broker quotes. 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. The Level 3 financial asset held by the Group is the fair value of the residential 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 items are designated in a fair value hedging relationship, with the fair value movements on the swaps offset by the fair value movements in the mortgage receivables. 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 credit risk movements. 74 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 F Other F3 FINANCIAL INSTRUMENTS (CONTINUED) (iv) Reconciliation of Level 3 fair value measurements of financial assets and liabilities Year ended 30 June 2018 Balance at 1 July 2017 Loan repaid Accrued interest Attributable to interest rate risk Attributable to credit risk Balance at 30 June 2018 Year ended 30 June 2017 Balance at 1 July 2016 Loan repaid Accrued interest Attributable to interest rate risk Attributable to credit risk Balance at 30 June 2017 Other mortgage backed assets at fair value $’000 Reverse mortgages fair value $’000 Fixed-for-life interest rate swaps $’000 1,215 - - - - 46,187 (1,695) 2,453 1,114 - (18,191) 471 (1,466) (1,114) (2,639) 1,215 48,059 (22,939) Other mortgage backed assets at fair value $’000 Reverse mortgages fair value $’000 Fixed-for-life interest rate swaps $’000 Total $’000 29,211 (1,224) 987 - (2,639) 26,335 Total $’000 1,214 - 1 - - 1,215 51,561 (1,208) 2,400 (6,566) - 46,187 (20,753) 32,022 311 (1,422) 6,566 (2,893) (18,191) (897) 979 - (2,893) 29,211 KEY ESTIMATES AND JUDGEMENTS The fair value of the 50 year residential mortgage loans and 50 year 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 based on the ABS 2013-2015 mortality table with adjustments for the demographic profile of the mortgage holders. Mortality improvements are assumed starting at 3% p.a. at age 70 and tapering down to 1% p.a. from age 90. Joint life mortality is based on last death for loans with joint borrowers. RECOGNITION AND MEASUREMENT 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. The hedge is considered ineffective if it falls outside the range of 80% to 125%. 75 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 F Other F3 FINANCIAL INSTRUMENTS (CONTINUED) (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 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 2018, the highest loan to value ratio (LVR) of a loan in the reverse mortgage loan book is 107% (2017: 113%), and there are 58 out of 222 (2017: 52 out of 232) reverse mortgage loans where the LVR is higher than 50%. (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. (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 table summarises 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. 76 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 F Other F3 FINANCIAL INSTRUMENTS (CONTINUED) On demand $’000 Non-derivative financial liabilities Less than 3 months $’000 3 months to 1 year $’000 1-5 years $’000 5+ years $’000 Total $’000 2018 Borrowings Payables Liability to 360 Capital Group Benefit Funds policyholder's liability Total 2017 Borrowings Payables Liability to 360 Capital Group Benefit Funds policyholder's liability Total - - - 349,677 349,677 - - - 348,014 348,014 38,213 32,405 - - 90,160 148,460 - 41,161 - - - - 70,618 131,321 148,460 898 69,004 202,788 33,454 - - - - - - 56,456 - 34,352 69,004 259,244 - - - - - - - - - - 276,833 32,405 41,161 349,677 700,076 272,690 33,454 56,456 348,014 710,614 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. Derivative financial liabilities 2018 Interest rate swaps Total 2017 Interest rate swaps Total On demand $’000 Less than 3 months $’000 3 months to 1 year $’000 1-5 years $’000 5+ years $’000 - - - - - - 9 9 393 393 376 376 1,214 1,214 838 838 46,588 46,588 45,990 45,990 Total $’000 48,195 48,195 47,213 47,213 (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. (i) Interest rate risk management 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. 77 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 F Other F3 FINANCIAL INSTRUMENTS (CONTINUED) The tables below detail the Group’s interest bearing financial assets and liabilities. 2018 Financial assets Cash and cash equivalents Other financial assets held by Benefit Funds Reverse mortgage receivables Total financial assets Financial liabilities Borrowings Total financial liabilities Net interest bearing financial assets/(liabilities) 2017 Financial assets Cash and cash equivalents Other financial assets held by Benefit Funds Reverse mortgage receivables Total financial assets Financial liabilities Borrowings Total financial liabilities Net interest bearing financial assets/(liabilities) Weighted average effective interest rate % 1.63% 2.91% 8.72% 5.23% Weighted average effective interest rate % 1.23% 3.67% 8.75% 4.67% Variable rate $’000 Fixed rate $’000 Total $’000 75,522 205,035 1,316 281,873 (162,739) (162,739) 119,134 26,392 26,229 26,973 79,594 (83,000) (83,000) (3,406) 101,914 231,264 28,289 361,467 (245,739) (245,739) 115,728 Variable rate $’000 Fixed rate $’000 Total $’000 61,286 238,443 1,124 300,853 (176,103) (176,103) 124,750 13,396 1,515 26,551 41,462 (60,000) (60,000) (18,538) 74,682 239,958 27,675 342,315 (236,103) (236,103) 106,212 (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. Pay fixed for floating contracts designated as effective in fair value hedge Average contracted rate Notional principal amount 2018 % 2017 % 2018 $'000 2017 $'000 Controlled property funds interest rate swaps Benefit funds interest rate swaps 50 years swaps contracts 2.33% 2.02% 7.48% 2.73% 2.94% 7.47% 99,600 106,100 3,000 10,677 113,277 20,000 11,373 137,473 Fair value 2018 $'000 (472) 5 (22,939) (23,406) 2017 $'000 (1,133) (79) (18,910) (20,122) 78 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 F Other F3 FINANCIAL INSTRUMENTS (CONTINUED) (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 balance 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. At reporting date, if variable interest rates had been 100 (2016:100) basis points higher or lower and all other variables were held constant, the impact to the Group would have been as follows: Interest rate risk Interest rate risk Change in variable +1% -1% Effect on profit after tax 2018 $’000 568 (405) 2017 $’000 (1,574) 1,908 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. F4 REMUNERATION OF AUDITORS Amounts received or due and receivable by KPMG: Audit and review of the financial report Other services including AFSL and compliance plan audits Cyber security review Taxation services 2018 $’000 347,165 52,275 89,175 - 488,615 2017 $’000 308,000 76,810 - 30,000 414,810 F5 NEW ACCOUNTING STANDARDS AND INTERPRETATIONS EFFECTIVE 1 JULY 2018 AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers are new standards which are effective for annual periods beginning after 1 July 2018. Whilst earlier application was permitted, the Group has not early adopted the new or amended standards in preparing these consolidated financial statements. The Group is required to adopt AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 July 2018 and has assessed the estimated impact that the initial application of these standards will have on its consolidated financial statements. Based on the Group’s assessment, the Group does not believe that these new accounting standards will have a material impact on the Group’s equity as at 1 July 2018. This impact is assessed based on analysis performed to date. The actual impacts of adopting the standard at 1 July 2018 may vary because the new accounting policies are subject to change until the Group presents its first financial statements at the date of initial application. 79 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 F Other F5 NEW ACCOUNTING STANDARDS AND INTERPRETATIONS EFFECTIVE 1 JULY 2018 (CONTINUED) (A) AASB 9 FINANCIAL INSTRUMENTS AASB 9 Financial Instruments sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces AASB 139 Financial Instruments: Recognition and Measurement. (i) Classification – Financial assets AASB 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. AASB 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit and loss (FVTPL). The standard eliminates the existing AASB 139 categories of held to maturity, loans and receivables and available for sale. Based on its assessment, the Group does not believe that the new classification requirements will have a material impact on its accounting for all receivables and financial assets (which are already carried at fair value) except for reverse mortgage loan receivables. Reverse mortgage loan receivables are currently recorded at amortised cost using the effective interest method less impairment. On transition to AASB 9, whilst these receivables will be reclassified to FVTPL, the Group does not expect a material change in their measurement and a result there is no expected impact on the Group’s equity at 1 July 2018. The implication of the change from amortised cost to FVTPL for future reporting periods may include increased volatility in the Group’s results as gains or losses arising from variations in fair value measurement assumptions will be reported through the profit and loss. (ii) Impairment – Receivables AASB 9 replaces the ‘incurred loss’ model in AASB 139 with a forward-looking ‘expected credit loss’ (ECL) model. This will require considerable judgement about how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis. The new impairment model will apply to the Group’s receivables which continue to be measured at amortised cost. The new impairment model will not apply to the Group’s reverse mortgage loan receivables which will be classified as FVTPL as described above under AASB 9. Based on its assessment, the Group does not believe that the new impairment model will have a material impact on its equity upon transition as at 1 July 2018. (iii) Classification – Financial liabilities There will be no impact on the Group’s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities. The derecognition rules have been transferred from AASB 139 Financial Instruments: Recognition and Measurement and have not been changed. (iv) Hedge accounting The new hedge accounting rules generally allow for more hedge relationships to be eligible for hedge accounting, as the standard introduces a more principles-based approach. The Group does not expect a significant impact as a result of the hedging changes on transition on 1 July 2018. (v) Transition Changes in accounting policies resulting from the adoption of AASB 9 will generally be applied retrospectively, however as there are no expected material impact on carrying amounts of financial assets and financial liabilities, there will no transitional implications on the Group’s equity at 1 July 2018 nor it’s comparatives. (B) AASB 15 REVENUE FROM CONTRACTS WITH CUSTOMERS The new revenue standard, AASB 15 Revenue from customers applies to all contracts with customers to deliver goods or services as part of the entity’s ordinary course of business excluding insurance contracts, financial instruments and leases which are addressed by other standards. It replaces existing revenue recognition guidance, including AASB 118 Revenue and AASB 111 Construction Contracts. AASB 15 replaces the considerations of risks and rewards under AASB 118 to the concept of when control passes to the customer as the trigger point for the recognition of revenue. The Group’s revenue streams which are in scope under the new standard include management fees from property funds, property acquisition fees, property sales fees and property performance fees. Rental income, interest income, distribution and dividend income and fair value movements in investment properties are excluded from the scope of this standard. Based on its assessment, the Group does not believe that the new standard will have a material transitional impact on the Group’s equity as at 1 July 2018. Performance fees are currently recognised upon satisfaction of all conditions precedent to the sale of an investment property and when significant risks and rewards have transferred. Whilst there is no expected material transitional impact from adoption of AASB 15, future performance fees will be recognised at an earlier point in time. In assessing the timing and measurement of performance fees to be recognised, consideration will be given to the facts and circumstances with respect to each investment property including external factors such as its current valuation, passage of time and outlook of the property market. Performance fees will only be recognised when they are deemed to be highly probable and the amount of the performance fees will not result in a significant reversal in future periods, 80 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 F Other F6 OTHER NEW ACCOUNTING STANDARDS AND INTERPRETATIONS Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2018 reporting periods and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below. (A) AASB 16 LEASES (i) Nature of change AASB 16 Leases was issued in February 2016. It will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases. The accounting for lessors will not significantly change. (ii) Impact The standard will affect primarily the accounting for the Group’s operating leases. As at the reporting date, the Group has non-cancellable operating lease commitments as outlined in note C9(A). However, the Group has not yet determined to what extent these commitments will result in the recognition of an asset and a liability for future payments and how this will affect the Group’s profit and classification of cash flows. Some of the commitments may be covered by the exception for short-term and low-value leases and some commitments may relate to arrangements that will not qualify as leases under AASB 16. (iii) Mandatory application date Mandatory for financial years commencing on or after 1 January 2019, but available for early adoption. Therefore mandatory application to the Group would be year ending 30 June 2020. At this stage, the Group has not concluded whether it intends to adopt AASB 16 before its mandatory date. F7 EVENTS SUBSEQUENT TO THE REPORTING DATE There has not arisen in the interval between 30 June 2018 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. 81 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018Notes to the consolidated financial statementsFor the year ended 30 June 2018 82 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Directors’ declaration In the opinion of the Directors’ of Centuria Capital Limited: (a) the consolidated financial statements and notes set out on pages 37 to 81 and the Remuneration Report set out on pages 28 to 35 in the Directors’ Report, are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and (ii) giving a true and fair view of the Group’s financial position as at 30 June 2018 and of its performance for the financial year ended on that date, and (b) there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable. Note A1 confirms that the consolidated financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the chief executive officer and chief financial officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of Directors. Mr Garry S. Charny Director Sydney Mr Peter J. Done Director Sydney 23 August 2017 83 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Independent Auditor’s Report To the stapled security holders of Centuria Capital Group Report on the audit of the Financial Report Opinion We have audited the Financial Report of Centuria Capital Limited (the Company) as the deemed parent presenting the stapled security arrangement of the Centuria Capital Group (the Stapled Group Financial Report). In our opinion, the accompanying Stapled Group Financial Report is in accordance with the Corporations Act 2001, including: • giving a true and fair view of the Stapled Group’s financial position as at 30 June 2018 and of its financial performance for the year ended on that date; and • complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion The Financial Report comprises: • Consolidated statement of financial position as at 30 June 2018 • Consolidated statement of comprehensive income, Consolidated statements of changes in equity, and Consolidated statement of cash flows for the year then ended • Notes including a summary of significant accounting policies • Directors’ Declaration. The Stapled Group comprises Centuria Capital Limited and the entities it controlled at the year-end or from time to time during the financial year and Centuria Capital Fund and the entities it controlled at the year-end or from the time to time during the financial year. We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Stapled Group and Company in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. 71 84 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Key Audit Matters The Key Audit Matters we identified are: • Recoverable amount of Goodwill and Indefinite Life Intangible Assets Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the current period. • Valuation of Investment Properties and Investment Properties Held for Sale • Hedge Accounting and Valuation of Derivatives These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Recoverable amount of Goodwill and Indefinite Life Intangible Assets ($157.7m) Refer to Note C6 to the Financial Report The key audit matter How the matter was addressed in our audit At 30 June 2018, the Stapled Group’s intangible assets comprise goodwill and management rights. A key audit matter was the Stapled Group’s annual testing of goodwill and management rights for impairment. We focused on the significant forward-looking assumptions the Stapled Group applied in their value in use model including: • Forecast operating cash flows, growth rates and terminal growth rates, which may reduce available headroom. This drives additional audit effort specific to their feasibility and consistency of application to the Stapled Group’s strategy; and • Discount rate - these are complicated in nature and vary according to the conditions and environment the specific cash generating unit (“CGU”) is subject to from time to time. The Stapled Group’s model is sensitive to changes in the discount rate. Accordingly, we involve our valuation specialist with the assessment. Our procedures included: • Assessing the value in use method applied by the Stapled Group in the annual test of goodwill for impairment against the requirements of the accounting standards; • Assessing the Stapled Group’s determination of their CGUs based on our understanding of the operations of the Stapled Group’s business, and how flows were generated, against the requirements of the accounting standards; independent cash • Comparing the forecast cash flows contained in the value in use model to Board approved forecasts; • Assessing the Stapled Group’s ability to accurately forecast by comparing historical forecasts to actual results; • Evaluating the sensitivity of the model by varying key assumptions, such as forecast growth rates, terminal growth rates and discount rates within a reasonably possible range, to identify those assumptions at higher risk of bias or inconsistency in application and to focus our further procedures; 72 85 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 • Assessed the consistency of the forecasts and growth rates to the Stapled Group’s stated plan and strategy and past performance of the Stapled Group, based on our experience in the regarding the feasibility of these economic environment in which they operate; and • Involving our valuation specialists, we analysed the discount rate against publicly available data of a group of comparable entities and assessed the valuation approach and methodology against market and industry practices and accounting standards. Valuation of Investment Properties ($147.1m) and Investment Properties Held for Sale ($63.4m) Refer to Notes C4 and C5 to the Financial Report The key audit matter How the matter was addressed in our audit The valuation of investment properties and investment properties held for sale is a key audit matter as they are significant in value to the Stapled Group (being 18% of total assets) and contain estimation uncertainty. assumptions with These estimates lead to additional audit effort due to differing assumptions based on asset classes, geographies and characteristics of individual investment properties. is The Stapled Group’s policy investment properties and investment properties held for sale are valued at fair value and the fair value is determined by the Stapled Group using internal methodologies and through the use of external valuation experts. We focussed on the following significant assumptions contained in the Stapled Group’s valuation methodology investment properties: for • capitalisation rates; • market rental yield; • vacancy levels; • projections of capital expenditure; and • leasing incentives. 86 Our procedures included: • Understanding the Stapled Group’s process investment valuation of the regarding properties; • Assessing the methodologies used in the valuations of for consistency with accounting standards and Stapled Group policies; investment properties • Assessing the scope, competence and objectivity of external experts engaged by the Stapled Group and internal valuers; • Worked with our real estate valuation specialists and read published reports and industry commentary to gain an understanding of prevailing market conditions; • On a portfolio basis, taking into account the asset classes, geographies and characteristics of individual investment properties, challenged, with reference to published reports or industry commentary, assumptions significant including: capitalisation rates, market rental yields, weighted average lease expiry and levels, capital adjustments and vacancy assessed the capitalisation rate and discounted cash-flow valuation approaches; and the difference between 73 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 • On a sample basis, assessed the appropriateness of specific valuation assumptions through comparison to market analysis published by industry experts, recent market transactions, inquiries with the Stapled Group and historical performance of the investment properties. Hedge Accounting and Valuation of Derivatives ($22.9m) Refer to Note F3(c) to the Financial Report The key audit matter How the matter was addressed in our audit The Stapled Group issues reverse mortgages and enters into an interest rate swap derivative interest rate risk contract to manage the associated with the reverse mortgage. The Stapled Group applies hedge accounting on the interest rate swap derivative contract. The hedge accounting and valuation of derivatives was identified as a key audit matter due to the complexity in auditing the hedging arrangement. This is a result of the complex hedge accounting the significant judgments made by the Stapled Group in the valuation of the derivative such as the credit spread which required our specialist involvement. requirements and Involving our specialist, our procedures included: • Reading the hedge documentation and assessing the accounting for the hedge arrangement and effectiveness against the requirements of the Australian Accounting Standards; • Comparing the Stapled Group’s determination of the weighted average maturity used in the credit spread model against the historical maturity and age of reverse mortgage borrower; • Evaluating the sensitivity of the hedge model by varying the weighted average maturity used in the credit spread model to identify bias or inconsistency in application; • Assessing the credit spread by comparing the relevant Australia Corporate Curve from Bloomberg to the Australian Dollar Swap Curve; and • Independently valuing the swap portfolio and comparing it to the Stapled Group’s valuation. Other Information Other Information is financial and non-financial information in Centuria Capital Group’s annual reporting which is provided in addition to the Financial Report and the Auditor’s Report. The Directors of the Company are responsible for the Other Information. The Other Information we obtained prior to the date of this Auditor’s Report was the Director’s Report. The Key Financial Metrics, Chairman’s Report, Chief Executive’s Report, Unlisted Property, Listed Property, Centuria Life and Centuria in the Community are expected to be made available to us after the date of the Auditor’s Report. 74 87 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of the Directors for the Financial Report The Directors of the Company are responsible for: • preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 • implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error • assessing the Stapled Group’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Stapled Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objective is: • • to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our Auditor’s Report. 75 88 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of Centuria Capital Limited for the year ended 30 June 2018, complies with Section 300A of the Corporations Act 2001. 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 responsibilities We have audited the Remuneration Report included in pages 9 to 20 of the Directors’ report for the year ended 30 June 2018. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPMG Nigel Virgo Partner Sydney 14 August 2018 76 89 Directors’ ReportCENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Additional stock exchange information The securityholder information set out below was applicable as at 31 July 2018. DISTRIBUTION OF SECURITIES Analysis of numbers of securityholders by size of holding: Holding 1 - 1000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over There were 311 holders of less than a marketable parcel of securities holding 62,724 securities. TOP 20 SECURITYHOLDERS The names of the twenty largest holders of securities are listed below: CS THIRD NOMINEES PTY LIMITEDHSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED PERSHING AUSTRALIA NOMINEES PTY LTD J P MORGAN NOMINEES AUSTRALIA LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2 CITICORP NOMINEES PTY LIMITED GH 2016 PTY LIMITED RESOLUTE FUNDS MANAGEMENT PTY LTD CICERONE CAPITAL PTY LTD BUTTONWOOD NOMINEES PTY LTD BRYSHAW MANAGEMENT PTY LTD PARITAI PTY LIMITED AVANTEOS INVESTMENTS LIMITED <2412987 JRSWJH A/C> UBS NOMINEES PTY LTD PARSONAGE PROVIDENT P/L HWM (NZ) HOLDINGS LIMITED NATIONAL NOMINEES LIMITED NATIONAL EXCHANGE PTY LTD ERSKINE IMPORT PTY LTD MR ROGER WILLIAM DOBSON SUBSTANTIAL HOLDERS Substantial holders in the Group are set out below: ESR CAYMAN LTD MAGIC TT PTY LTD ELLERSTON CAPITAL LIMITED VOTING RIGHTS All ordinary securities carry one vote per security without restriction. 90 Number of holders Number of securities 857 4,212 849 897 143 427,820 10,360,747 5,896,641 24,987,635 263,120,331 6,958 304,793,174 Number held 45,405,404 41,376,869 38,415,438 29,554,574 24,349,842 10,140,483 9,536,034 3,977,679 3,512,057 3,166,791 2,725,002 2,544,293 2,408,164 2,252,901 2,200,830 2,052,745 1,607,512 1,401,563 1,370,000 1,318,062 Percentage of issued securities 14.90 13.58 12.60 9.70 7.99 3.33 3.13 1.31 1.15 1.04 0.89 0.83 0.79 0.74 0.72 0.67 0.53 0.46 0.45 0.43 229,316,243 75.24 Number held Percentage 45,405,404 42,677,495 26,425,800 114,508,699 14.90% 14.00% 8.67% 37.57% CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 Corporate directory CONTACT US Shareholder Enquiries 1800 112 929 MAIL TO Centuria Capital Limited Reply Paid 695, Melbourne VIC 8060 (no stamp required) HEAD OFFICE Level 39, 100 Miller Street Sydney NSW 2060 Telephone: (02) 8923 8923 Facsimile: (02) 9460 2960 contactus@centuria.com.au SHAREHOLDER ENQUIRIES Computershare Centuria Capital Limited, Share Registry, GPO Box 2975 Melbourne VIC 3001 Telephone: 1800 112 929 FRIENDLY SOCIETY INVESTOR ENQUIRIES Centuria Life Limited, Level 32, 120 Collins Street Melbourne VIC 3000 Telephone: 1300 50 50 50 contactus@centuria.com.au COMPANY SECRETARY Anna Kovarik Level 39, 100 Miller Street North Sydney NSW 2060 Telephone: (02) 8923 8923 Facsimile: (02) 9460 2960 Disclaimers INVESTOR RETURNS INFORMATION CNI total security holder return: Based on the movement in security price from ASX opening on 1 July 2017 to ASX closing on 30 June 2018 plus distributions per security paid during the respective period(s) assuming re-investment of distributions. It is a performance figure provided strictly for the information of Securityholders only. Further information on the historical performance on Centuria’s listed funds can be found on our website. Centuria Diversified Property Fund 12 month total return: comprises capital component: closing price – opening price (1 July 2017 to 30 June 2018) and income component is the sum of income returned percentage for each month over the period. Income returned percentage at each distribution date is distribution payment divided by the number of units on issue at the point in time. The Lonsec Rating is published by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445. The Rating is limited to “General Advice” (as defined in the Corporations Act 2001 (Cth)) and based solely on consideration of the investment merits of the financial product(s). Past performance information is for illustrative purposes only and is not indicative of future performance. It is not a recommendation to purchase, sell or hold Centuria Property Fund Limited’s product(s), and you should seek independent financial advice before investing in this product(s). The Rating is subject to change without notice and Lonsec assumes no obligation to update the relevant document(s) following publication. Lonsec receives a fee from the Fund Manager for researching the product(s) using comprehensive and objective criteria. For further information regarding Lonseca’s Ratings methodology, please refer to Lonsec’s website at http://www.lonsecresearch.com.au/research-solutions/our-ratings DISCLAIMER This annual report is provided for general information purposes only. It is not a prospectus, product disclosure statement, pathfinder document or any other disclosure document for the purposes of the Corporations Act and has not been, and is not required to be, lodged with the Australian Securities & Investments Commission. It should not be relied upon by the recipient in considering the merits of CNI or the acquisition of securities in CNI. Nothing in this annual report constitutes investment, legal, tax, accounting or other advice and it is not to be relied upon in substitution for the recipient’s own exercise of independent judgment with regard to the operations, financial condition and prospects of CNI. The information contained in this annual report does not constitute financial product advice. Before making an investment decision, the recipient should consider its own financial situation, objectives and needs, and conduct its own independent investigation and assessment of the contents of this annual report, including obtaining investment, legal, tax, accounting and such other advice as it considers necessary or appropriate. This annual report has been prepared without taking account of any person’s individual investment objectives, financial situation or particular needs. It is not an invitation or offer to buy or sell, or a solicitation to invest in or refrain from investing in, securities in CNI or any other investment product. The information in this annual report has been obtained from and based on sources believed by CNI to be reliable. To the maximum extent permitted by law, CNI and the members of the Centuria Capital Group make no representation or warranty, express or implied, as to the accuracy, completeness, timeliness or reliability of the contents of this annual report. To the maximum extent permitted by law, CNI does not accept any liability (including, without limitation, any liability arising from fault or negligence) for any loss whatsoever arising from the use of this annual report or its contents or otherwise arising in connection with it. This annual report may contain forward-looking statements, guidance, forecasts, estimates, prospects, projections or statements in relation to future matters (‘Forward Statements’). Forward Statements can generally be identified by the use of forward looking words such as “anticipate”, “estimates”, “will”, “should”, “could”, “may”, “expects”, “plans”, “forecast”, “target” or similar expressions. Forward Statements including indications, guidance or outlook on future revenues, distributions or financial position and performance or return or growth in underlying investments are provided as a general guide only and should not be relied upon as an indication or guarantee of future performance. No independent third party has reviewed the reasonableness of any such statements or assumptions. Neither CNI nor any member of Centuria Capital Group represents or warrants that such Forward Statements will be achieved or will prove to be correct or gives any warranty, express or implied, as to the accuracy, completeness, likelihood of achievement or reasonableness of any Forward Statement contained in this annual report. Except as required by law or regulation, CNI assumes no obligation to release updates or revisions to Forward Statements to reflect any changes. The reader should note that this annual report may also contain pro-forma financial information. Distributable earnings is a financial measure which is not prescribed by Australian Accounting Standards (”AAS”) and represents the profit under AAS adjusted for specific non-cash and significant items. The Directors of CFML consider that distributable earnings reflect the core earnings of the Centuria Capital Fund. All dollar values are in Australian dollars ($ or A$) unless stated otherwise. 91 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 80 GRENFELL STREET, ADELAIDE, SA 93 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018 centuria.com.au C e n t u r i a C a p i t a l G r o u p A n n u a l R e p o r t 2 0 1 8 94 Centuria Capital Group Annual Report 2018 CENTURIA CAPITAL GROUP ANNUAL REPORT 2018