RETAIL PROPERTY FUND ANNUAL REPORT 2018 ELANOR RETAIL PROPERTY FUND ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2018 2 | Elanor Retail Property Fund Annual Report 2018 Tweed Mall, Tweed Heads, NSW Contents Highlights Message from the Chairman CEO’s Message Financial Report Directors’ Report Auditor’s Independence Declaration Financial Statements Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Corporate Governance Security Holder Analysis Corporate Directory 4 6 7 8 9 18 19 25 47 48 52 53 55 Financial Calendar December 2018 Estimated interim distribution announcement and securities trade ex-distribution February 2019 Interim results announcement March 2019 Interim distribution payment June 2019 Estimated final distribution announcement and securities trade ex-distribution August 2019 Full-year results announcement September 2019 Final distribution payment September 2019 Annual tax statements Responsible Entity Elanor Funds Management Limited ABN 39 125 903 031. AFSL 398196 Highlights Darwin NORTHERN TERRITORY QUEENSLAND WESTERN AUSTRALIA SOUTH AUSTRALIA Brisbane Perth NEW SOUTH WALES Sydney Canberra VICTORIA Adelaide Melbourne TAS Hobart Auckland NZ Wellington CORE EARNINGS for the financial year 2018 $14.0m DISTRIBUTIONS (per security) for the financial year 2018 10.31c SECURITY PRICE as at 30 June 2018 $1.29 PORTFOLIO VALUE as at 30 June 2018 $317.7m NET ASSET VALUE (per security) as at 30 June 2018 $1.50 GEARING as at 30 June 2018 38.2% 61.1% listed 9 November 2016 61.1% listed 9 November 2016 5.8% 21.8% 5.6% from 29.3% 4 | Elanor Retail Property Fund Annual Report 2018 Perth Darwin Elanor Retail Property Fund’s assets are located in urban and regional areas across Australia NORTHERN TERRITORY QUEENSLAND WESTERN AUSTRALIA SOUTH AUSTRALIA Brisbane NEW SOUTH WALES Sydney Canberra VICTORIA Adelaide Melbourne TAS Hobart Auckland NZ Wellington Geographic Diversification1 Key Tenants2 TAS 6% QLD 24% 70% NSW Other Specialties 58% Woolworths 13% Coles 12% 8% Big W 6% Target Supa IGA (3%) 1. By asset value 2. By base rent Message from the Chairman On behalf of the Board, I am pleased to present Elanor Retail Property Fund’s Annual Report, including its Financial Statements for the year ended 30 June 2018. As at 30 June 2018, the Fund’s Net Tangible Assets per security was $1.50, reflecting the ongoing execution of initiatives to deliver the operational and strategic upside across the investment portfolio. Outlook The Fund’s strategy will remain focused on actively managing and growing earnings from its investment portfolio and acquiring additional high investment quality retail properties. With this focus, the Fund is strongly positioned to enhance value for security holders. I wish to thank my fellow Board members, our executive leadership team and the Fund team led by Michael Baliva, for their hard work, dedication and enthusiasm. Finally, thank you to all Elanor Retail Property Fund security holders for their continued support and confidence. Yours sincerely, Paul Bedbrook Chairman The Fund is an externally managed real estate investment fund investing in Australian retail property focusing on high investment quality neighbourhood and sub-regional shopping centres. The Fund’s objective is to provide investors with strong, stable and growing income returns and capital growth in the asset portfolio, and in other retail properties that may be acquired in the future. It has been another successful year for the Fund in terms of achieving our financial objectives and executing the Fund’s strategy. The Fund has delivered Core Earnings of $14.0 million for the year and has distributed $13.3 million, or 10.31 cents per security. Achievements During the year, the value of the portfolio grew from $260.8 million to $317.7 million, an increase of 21.8%. The portfolio value as at 30 June 2018 represents a weighted average capitalisation rate of 6.8%. In July 2017, the Fund acquired the Gladstone Square Shopping Centre for $31.5 million and in January 2018 it acquired the Moranbah Fair Shopping Centre for $25.0 million. These acquisitions increased the Fund’s distribution yield, and improved the geographic diversification, portfolio WALE, occupancy and debt maturity of the Fund. The Fund has maintained its conservative capital structure. As at 30 June 2018, ERF’s gearing level was 38.2%, within the Fund’s stated target range of 30% to 40%. 6 | Elanor Retail Property Fund Annual Report 2018 CEO’s Message We have continued to deliver on the Fund’s strategy over the year. I am pleased to present Elanor Retail Property Fund’s Annual Report for financial year ended 30 June 2018. We have continued to deliver on the Fund’s strategy over the year. Core Earnings for the year ended 30 June 2018 were $14.0 million, or 10.86 cents per security. Furthermore, by the ongoing execution of initiatives to deliver the operational and strategic upside across the portfolio, NTA per security increased to $1.50 per security as at 30 June 2018. We remain firmly of the view that the Fund is a low risk retail REIT that represents strong value and provides a sector leading yield to security holders with significant upside potential in NTA per security. Strategy The Fund’s objective is to provide investors with strong and growing income returns, and capital growth. To achieve this objective, the Fund’s strategy is to: • • Invest in non-discretionary focused retail properties that provide quality earnings from rental income across a diversified retail tenant mix; Implement leasing and other asset management initiatives to grow the income and value of the retail properties; • Acquire additional high investment quality retail properties with a significant component of non- discretionary retailers; • Implement development and repositioning strategies within the Portfolio; and to • Optimise the capital structure of the Fund based on a conservative approach to gearing. The successful execution of the Fund’s strategy over the course of the year has delivered strong results for the Fund. Key Results Capital Management • Core Earnings for the period of $14.0 million, or 10.86 cents per security • Distributions for the Period were $13.3 million, or 10.31 cents per security, reflecting a payout ratio of 95% of Core Earnings • Net Tangible Assets per security of $1.50 as at 30 June 2018, reflecting a 20% increase since listing The Fund is focused on maintaining a conservative capital structure with a target gearing range of between 30% and 40%. At 30 June 2018, the Funds gearing was 38.2%. During the year ending 30 June 2019, we will continue to explore capital management opportunities to deliver value to security holders. Investment Portfolio Outlook The Fund has delivered on its strategy to grow and enhance the value of the portfolio. In particular, our active asset management approach has grown both the income and the value of the portfolio. Some of the key initiatives included: • Completing the accretive acquisitions of the Gladstone Square and Moranbah Fair assets; • Substantially completing the divestment of the non-core podium strata tenancies at Auburn Central, with sales reflecting an average capitalisation rate of 6.05%; • Executing an Agreement for Lease with ALDI at Tweed Mall, for a 15 year term with 2 five year options (ALDI is scheduled to open in mid-2019); and • Execution of various energy and other operating cost efficiency initiatives. This has resulted in: • Strong revaluation gains for Auburn Central and Tweed Mall; • An increase in portfolio valuation to $317.7 million at 30 June 2018, reflecting a weighted average capitalisation rate of 6.8%; • NTA per security increasing by 20% since listing from $1.25 to $1.50; and • Portfolio occupancy remaining strong at 98.5%. The Fund’s core strategy will remain focused on actively managing and growing Core Earnings and capital value from its investment portfolio. Furthermore, we will continue to focus on acquiring additional high investment quality retail properties. The Fund’s properties present strong operational and strategic opportunities to further increase value. We are focused on executing initiatives to extract value, consistent with our highly active and results orientated approach to asset management. I wish to thank my fellow Board members, my executive leadership team and the Fund’s management team, led by Michael Baliva, for their hard work, dedication and successful execution of the Fund’s strategy. Yours sincerely, Glenn Willis Managing Director and Chief Executive Officer Elanor Retail Property Fund Annual Report 2018 | 7 ELANOR RETAIL PROPERTY FUND TABLE OF CONTENTS Financial Report for the year ended 30 June 2018 Directors’ Report..........................................................................................................................3 Contents Auditor’s Independence Declaration ..........................................................................................12 Directors’ Report Consolidated Statements of Profit or Loss .................................................................................13 Auditor’s Independence Declaration Consolidated Statements of Comprehensive Income ................................................................. 14 Consolidated Statements of Profit or Loss Consolidated Statements of Financial Position ..........................................................................15 Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Equity .........................................................................16 Consolidated Statements of Financial Position Consolidated Statements of Cash Flows ....................................................................................18 Consolidated Statements of Changes in Equity Notes to the Consolidated Financial Statements ........................................................................19 Consolidated Statements of Cash Flows Directors’ Declaration to Stapled Security Holders .....................................................................41 Notes to the Consolidated Financial Statements Independent Auditor’s Report ....................................................................................................42 Directors’ Declaration Independent Auditor’s Report 9 18 19 20 21 22 24 25 47 48 8 | Elanor Retail Property Fund Annual Report 2018 Directors’ Report ELANOR RETAIL PROPERTY FUND DIRECTORS’ REPORT Directors’ Report The Directors of Elanor Funds Management Limited (Responsible Entity or Manager), as responsible entity of the Elanor Retail Property Fund I and Elanor Retail Property Fund II, present their report together with the consolidated financial report of Elanor Retail Property Fund (Group, Consolidated Group or Fund) and the consolidated financial report of the Elanor Retail Property Fund I (ERPF I Group) for the year ended 30 June 2018. The financial report of the Consolidated Group comprises Elanor Retail Property Fund II (ERPF II) and its controlled entities, including Elanor Retail Property Fund I (ERPF I) and its controlled entities. The financial report of the ERPF I Group comprises Elanor Retail Property Fund I and its controlled entities. The Responsible Entity is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is Level 38, 259 George Street, Sydney NSW 2000. ERPF I and ERPF II were registered as managed investments schemes on 13 October 2016. The units of ERPF I and the units of ERPF II are combined and issued as stapled securities in the Group. The Group's securities are traded on the Australian Securities Exchange (ASX: ERF), having listed on 9 November 2016. The units of each scheme cannot be traded separately and can only be traded as stapled securities. Although there is no ownership interest between ERPF I and ERPF II, ERPF II is deemed to be the parent entity of the Group in accordance with the Australian Accounting Standards. The Directors' report is a combined Directors' report that covers both schemes. The financial information for the Group is taken from the consolidated financial reports and notes. 1. Directors The following persons have held office as Directors of the Responsible Entity during the period and up to the date of this report: Paul Bedbrook (Chair) Glenn Willis (Managing Director and Chief Executive Officer) Nigel Ampherlaw William (Bill) Moss AO 2. Principal activities The principal activities of the Fund are the investment in Australian retail properties, with the focus predominantly on quality, high yielding neighbourhood and sub-regional shopping centres. 3. Distributions Distributions relating to the year ended 30 June 2018 comprise: A provision for the Final Distribution has not been recognised in the financial statements for the period as the distribution had not been declared at the reporting date. Elanor Retail Property Fund Annual Report 2018 | 9 3 Directors’ Report ELANOR RETAIL PROPERTY FUND continued DIRECTORS’ REPORT 4. Operating and financial review OVERVIEW AND STRATEGY The Fund is an externally managed real estate investment fund investing in Australian retail property, focusing on high investment quality neighbourhood and sub-regional shopping centres. The Fund’s objective is to provide investors with strong and growing income returns, and capital growth. To achieve this objective, the Fund’s strategy is to: Invest in non-discretionary focused retail properties that provide quality earnings from rental income across a diversified retail tenant mix; Implement leasing and other asset management initiatives to grow the income and value of the retail properties; Acquire additional high investment quality retail properties with a significant component of non-discretionary retailers; Implement development and repositioning strategies in the Portfolio; and Optimise the capital structure of the Fund based on a conservative approach to gearing. INVESTMENT PORTFOLIO The following table shows the Group's investment portfolio as at balance date: Note 1: The Auburn Central Podium asset comprised 19 podium strata lots. The Fund commenced disposal of these non-core strata lots in August 2017. As at 30 June 2018, 17 strata lots have been sold for total net proceeds of $15.8 million. On 19 January 2018, the Fund completed the acquisition of the Moranbah Fair Shopping Centre at a purchase price of $25.0 million. Moranbah Fair is located within the regional township of Moranbah, Queensland, anchored by a strong performing 3,921 square metre Coles supermarket leased to 2028 with further renewal options. The acquisition of Moranbah Fair has improved the Fund’s geographic diversification, Portfolio weighted average lease expiry and occupancy. The acquisition of Moranbah Fair is consistent with the Fund’s strategy of achieving accretive growth through the acquisition of high investment quality neighbourhood and sub-regional shopping centres with a significant component of non-discretionary retailers. 10 | Elanor Retail Property Fund Annual Report 2018 4 Directors’ Report ELANOR RETAIL PROPERTY FUND continued DIRECTORS’ REPORT 4. Operating and financial review (continued) FINANCIAL RESULTS The Fund recorded a statutory profit of $23.0 million for the year ended 30 June 2018. Core Earnings for the year ended 30 June 2018 were $14.0 million or 10.86 cents per stapled security. A Final Distribution of 5.16 cents per stapled security has been declared for the six month period ended 30 June 2018 (95% pay- out ratio on Core Earnings). Core Earnings is considered more relevant than statutory profit as it represents an estimate of the underlying recurring cash earnings of the Fund, and has been determined in accordance with ASIC Regulatory Guide 230. A summary of the Group and ERPF I Group's results for the year ended 30 June 2018 is set out below: The table below provides a reconciliation from statutory net profit / (loss) to distributable Core Earnings: Note 1: Core Earnings has been determined in accordance with ASIC RG 230 and represents the Directors’ view of underlying earnings from ongoing operating activities for the period, being net profit / (loss), adjusted for one-off realised items (being formation or other transaction costs that occur infrequently or are outside the course of ongoing business activities), and non-cash items (being fair value movements, amortisation and lease straight-lining). Note 2: Straight lining of rental income is a non-cash accounting adjustment recognised in rental income in the Statement of Profit or Loss. Note 3: Amortisation expense includes the amortisation of capitalised leasing costs and debt establishment costs, recognised in rates, taxes and other outgoings, other expenses and borrowing costs in the Statement of Profit or Loss. Elanor Retail Property Fund Annual Report 2018 | 11 5 Directors’ Report ELANOR RETAIL PROPERTY FUND continued DIRECTORS’ REPORT 4. Operating and financial review (continued) SUMMARY AND OUTLOOK The Fund's core strategy will remain focused on actively managing and growing earnings from its investment portfolio, realising value-add opportunities across the portfolio, and acquiring additional high investment quality retail properties. Risks to the Fund in the coming year primarily comprise potential earnings variability associated with general economic and market conditions, including retailer demand, domestic retail spending, the availability of capital for acquisition opportunities, movement in property valuations and possible weather related events. These risks are mitigated through actively managing the investment portfolio, continuing to focus on broadening the Fund's tenant mix, insurance arrangements and active management of the Fund's capital structure. During the coming months, the Fund anticipates completing the disposal of the remaining non-core podium strata lots at Auburn Central as well as introducing Aldi as a tenant at Tweed Mall. Other asset recycling opportunities in the investment portfolio are currently being considered. The Fund is committed to growing its investment portfolio and continues to evaluate further high investment quality shopping centre acquisition opportunities. The Fund is strongly positioned to enhance value for security holders. The active asset management of the portfolio is generating improved operational performance and returns. Furthermore, targeted strategic initiatives to increase the capital value of the Fund are in progress. 5. Value of assets 12 | Elanor Retail Property Fund Annual Report 2018 6 Directors’ Report ELANOR RETAIL PROPERTY FUND continued DIRECTORS’ REPORT 6. Directors The following persons have held office as Directors of the Responsible Entity during the period and up to the date of this report: Name Particulars Paul Bedbrook Independent Non-Executive Chairman Paul was appointed a Director of the Responsible Entity and Elanor Investors Limited in June 2014. Paul has had a career of over 30 years in financial services, originally as an analyst, fund manager and then the GM & Chief Investment Officer for Mercantile Mutual Investment Management Ltd (ING owned) from 1987 to 1995. Paul was an executive for 26 years with the Dutch global banking, insurance and investment group, ING, retiring in 2010. Paul’s career included the roles of: President and CEO of ING Direct Bank, Canada (2000 – 2003), CEO of the ING Australia/ANZ Bank Wealth JV (2003-2008) and Regional CEO, ING Asia Pacific, Hong Kong (2008 – 2010). Paul is currently the Chairman of Zurich Financial Services Australia and its Life, General and Investment Companies, a non-executive director of Credit Union Australia and the National Blood Authority. Former listed directorships in the last three years: None Interest in stapled securities: None Qualifications: B.Sc, F FIN, FAICD Glenn Willis Managing Director and Chief Executive Officer Glenn was appointed a Director of the Responsible Entity and Elanor Investors Limited in June 2014. Glenn has extensive industry knowledge with over 25 years’ experience in the Australian and international capital markets. Glenn was most recently co-founder and Chief Executive Officer of Moss Capital. Prior to Moss Capital, Glenn co-founded Grange Securities and led the team in his role as Managing Director and CEO. Grange Securities was a pre-eminent Australian owned investment bank with businesses in fixed income, equities, corporate finance and funds management. Grange Securities grew to be Australia’s major independent fixed income house. After 12 years of growth, Grange Securities, a business with approximately 150 personnel, was acquired by Lehman Brothers International in 2007, as the platform for Lehman’s Australian investment banking and funds management operations. Glenn was appointed Managing Director and Country Head in March 2007. In 2008, Glenn was appointed executive Vice Chairman of Lehman Brothers Australia. Glenn previously held senior positions at Fay Richwhite and Challenge Bank. Former listed directorships in the last three years: None Interest in stapled securities: 278,775 Qualifications: B.Bus (Econ & Fin) Elanor Retail Property Fund Annual Report 2018 | 13 7 Directors’ Report ELANOR RETAIL PROPERTY FUND continued DIRECTORS’ REPORT 6. Directors (continued) Name Particulars Nigel Ampherlaw Independent Non-Executive Director Chairman, Audit and Risk Committee Nigel was appointed a Director of the Responsible Entity and Elanor Investors Limited in June 2014. Nigel was a Partner of PricewaterhouseCoopers for 22 years where he held a number of leadership positions, including heading the financial services audit, business advisory services and consulting businesses. He also held a number of senior client Lead Partner roles. Nigel has extensive experience in risk management, technology, consulting and auditing in Australia and the Asia-Pacific region. Nigel’s current Directorships include Chairman of Credit Union Australia and non-executive Director of the Australia Red Cross Blood Service, where he is a member of the Finance and Audit Committee and a member of the Risk Committee. Former listed directorships in the last three years: Quickstep Holdings Ltd Interest in stapled securities: 109,630 Qualifications: B.Com, FCA, MAICD William (Bill) Moss AO Non-Executive Director Bill was appointed a Director of the Responsible Entity and Elanor Investors Limited in June 2014. Bill is an Australian businessman and philanthropist with expertise in real estate, banking, funds and asset management. Bill spent 23 years as a senior executive and Executive Director with Macquarie Group, the pre- eminent Australian investment bank, where Bill managed the Global Banking and Real Estate businesses. Bill founded, grew and led Macquarie Real Estate Group to a point where it managed over $23 billion worth of investments around the world. Bill is Chairman of Moss Capital, Boston Global Group, and Non-Executive Director of Northern Territory Infrastructure Development Fund. He is also Chairman and Founder of The FSHD Global Research Foundation. Bill is a commentator on the Australian finance and banking sectors, the global economy and the ongoing need for Australia to do more to advance the interests of the country’s disabled and disadvantaged. In 2015, Bill was awarded one of Australia’s highest honours, Office of the Order of Australia (AO), for services to the banking, charity, and finance sectors. Former listed directorships in the last three years: None Interest in stapled securities: 903,704 Qualifications: B.Ec 14 | Elanor Retail Property Fund Annual Report 2018 8 Directors’ Report ELANOR RETAIL PROPERTY FUND continued DIRECTORS’ REPORT 7. Directors’ relevant interests Other than as disclosed in the Annual Financial Report, no contracts exist where a director is entitled to a benefit. 8. Meetings of Directors The attendance at meetings of Directors of the Responsible Entity and the Audit and Risk Committee of the Group during the year is set out in the following table: 9. Company Secretary Symon Simmons held the position of Company Secretary of the Responsible Entity during the period. Symon is the Chief Financial Officer of the Group, and has extensive experience as a company secretary, is a Justice of the Peace in NSW and is a Responsible Manager on the Australian Financial Services Licence held by the Responsible Entity. 10. Indemnification and insurance of officers and auditors During the financial year, the Responsible Entity paid a premium in respect of a contract insuring the Directors of the Responsible Entity (as named above), the company secretary, and all executive officers of the Responsible Entity and of any related body corporate against a liability incurred in their capacity as Directors and officers of the Responsible Entity to the extent permitted by the Corporations Act 2001 (Cth). The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. The Responsible Entity 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 of the Responsible Entity or of any related body corporate against a liability incurred in their capacity as an officer. The auditor of the Fund is not indemnified out of the assets of the Fund. 11. Environmental regulation To the best of their knowledge and belief after making due enquiry, the Directors have determined that the Fund has complied with all significant environmental regulations applicable to its operations in the jurisdictions in which it operates. 12. Significant changes in state of affairs There was no significant change in the state of affairs of the Fund during the year. Elanor Retail Property Fund Annual Report 2018 | 15 9 Directors’ Report ELANOR RETAIL PROPERTY FUND continued DIRECTORS’ REPORT 13. Auditor’s independence declaration A copy of the auditor's independence declaration, as required under section 307C of the Corporations Act 2001 (Cth), is included on the page following the Directors' Report. 14. Non-audit services Details of amounts paid or payable to the auditor for non-audit services provided during the year by the auditor are outlined in Note 17 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 (Cth). The Directors are of the opinion that the services as disclosed in Note 17 to the financial statements do not compromise the external auditor’s independence, based on advice received from the Audit and Risk Committee, for the following reasons: all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in 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 Fund, acting as advocate for the Fund or jointly sharing economic risks and rewards. 15. Likely developments and expected results of operations The financial statements have been prepared on the basis of the current known market conditions. The extent of any potential deterioration in either the capital or physical property markets on the future results of the Fund is unknown. Such results could include property market valuations, the ability of the Fund to raise or refinance debt, and the cost of such debt and the ability to raise equity. At the date of this report and to the best of the Directors’ knowledge and belief, there are no other anticipated changes in the operations of the Fund which would have a material impact on the future results of the Fund. 16. Events occurring after reporting date Subsequent to year end, a distribution of 5.16 cents per stapled security has been declared by the Board of Directors. The Fund has agreed with its bank to extend the $10.4 million facility, originally due to expire in July 2018, for three years to July 2021. Other than the above, the Directors of the Responsible Entity are not aware of any other matter since the end of the period that has or may significantly affect the operations of the Group, the result of those operations, or the state of the Group’s affairs in future financial periods that are not otherwise referred to in this Directors’ Report. 17. Rounding of amounts to the nearest thousand dollars In accordance with Legislative Instrument 2016/191 issued by the Australian Securities and Investments Commission, amounts in the financial statements have been rounded to the nearest thousand dollar, unless otherwise indicated. 16 | Elanor Retail Property Fund Annual Report 2018 10 Directors’ Report ELANOR RETAIL PROPERTY FUND continued DIRECTORS’ REPORT This report is made in accordance with a resolution of the Board of Directors of the Responsible Entity. Signed in accordance with a resolution of the Directors pursuant to section 298(2) of the Corporations Act 2001 (Cth). Paul Bedbrook Chairman Glenn Willis CEO and Managing Director Sydney, 17 August 2018 Elanor Retail Property Fund Annual Report 2018 | 17 11 Auditor’s Independence Declaration 18 | Elanor Retail Property Fund Annual Report 2018 ELANOR RETAIL PROPERTY FUND Consolidated Statements of Profit or Loss CONSOLIDATED STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 30 JUNE 2018 ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 CONSOLIDATED STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 30 JUNE 2018 Cons olidated Statements of Profit or Loss Cons olidated Statements of Profit or Loss The above Consolidated Statements of Profit or Loss should be read in conjunction with the accompanying notes The above Consolidated Statements of Profit or Loss should be read in conjunction with the accompanying notes Elanor Retail Property Fund Annual Report 2018 | 19 13 13 ELANOR RETAIL PROPERTY FUND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2018 Consolidated Statements of Comprehensive Income ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2018 Cons olidated Statements of Comprehensi ve I ncome Cons olidated Statements of Comprehensi ve I ncome The above Consolidated Statements of Comprehensive Income should be read in conjunction with the accompanying notes The above Consolidated Statements of Comprehensive Income should be read in conjunction with the accompanying 20 | Elanor Retail Property Fund Annual Report 2018 notes 14 14 ELANOR RETAIL PROPERTY FUND CONSOLIDATED STATEMENTS OF FINANCIAL POSITION FOR THE YEAR ENDED 30 JUNE 2018 ELANOR RETAIL PROPERTY FUND Consolidated Statements of Financial Position Consoli dated Stateme nts of Fina ncial Position as at 30 June 2018 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION FOR THE YEAR ENDED 30 JUNE 2018 Consoli dated Stateme nts of Fina ncial Position The above Consolidated Statements of Financial Position should be read in conjunction with the accompanying notes 15 The above Consolidated Statements of Financial Position should be read in conjunction with the accompanying notes Elanor Retail Property Fund Annual Report 2018 | 21 15 D N U F Y T R E P O R P L A T E R R O N A L E I I Y T U Q E N I S E G N A H C F O S T N E M E T A T S D E T A D L O S N O C I 8 1 0 2 E N U J 0 3 D E D N E R A E Y E H T R O F t s e o n i g n 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 j n i d a e r l e b d u o h s y t i u q E n i s e g n a h C f o s 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 6 1 t s e o n i g n 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 j n i d a e r l e b d u o h s y t i u q E n i s e g n a h C f o s 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 6 1 8 1 0 2 E N U J 0 3 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 d e d n e r a e y e h t r o f y t i u q E n i s e g n a h C f o s t n e m e t a t S d e t a d i l o s n o C I Y T U Q E N I I i D N U y S F E t G i Y u N T A q R H E E C P F n O O R S T P s N e L E M g A E n T T E A a T R h S R D C O E T N f A A o D L L s E O t S n N O e C m e t a t S d e t a d I i l o s n o C s e g n a h C y t i u q E n i f o s t n e m e t a t S d e t a d i l o s n o C 22 | Elanor Retail Property Fund Annual Report 2018 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 j n o c n i d a e r e b d l u o h s y t i u q E n i s e g n a h C f o s 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 6 1 D N U F Y T R E P O R P L A T E R R O N A L E I D N U F Y T R E P O R P L I A T E R R O N A L E Y T I U Q E N I S E G N A H C F O S T N E M E T A T S D E T A D I L O S N O C 8 1 0 2 E N U J 0 3 D E D N E R A E Y E H T R O F y t i u q E n i s e g n a h C f o s t n e m e t a t S d e t a d i l o s n o C 8 1 0 2 E N U J 0 3 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 d e d n e r a e y e h t r o f t s e o n i g n 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 j n i d a e r l e b d u o h s y t i u q E n i s e g n a h C f o s 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 7 1 t s e o n i g n 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 j n i d a e r l e b d u o h s y t i u q E n i s e g n a h C f o s 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 7 1 Elanor Retail Property Fund Annual Report 2018 | 23 I Y T U Q E N I S E G N A H C F O S T N E M E T A T S D E T A D L O S N O C I I I Y T U Q D E N N 8 U y 1 S F 0 E t 2 G i Y u E N T N A q R U H J E E C 0 P F 3 n O O D R i S E T D P s N N e L E E M I g A R E A n T T E E A a Y T R h E S H R D C T O E R T N f O A A o D F L L s E O t S n N O e C m e t a t S d e t a d I i l o s n o C ELANOR RETAIL PROPERTY FUND Consolidated Statements of Cash Flows CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2018 ELANOR RETAIL PROPERTY FUND Consoli dated State nts of Ca sh Flows for the year ended 30 June 2018 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2018 Consoli dated State nts of Ca sh Flows The above Consolidated Statements of Cash Flows should be read in conjunction with the accompanying notes 24 | Elanor Retail Property Fund Annual Report 2018 The above Consolidated Statements of Cash Flows should be read in conjunction with the accompanying notes 18 18 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Notes to the Consolidated Financial Statements About this Report Elanor Retail Property Fund (the Fund, Group or Consolidated Group) is a 'stapled' entity comprising of Elanor Retail Property Fund I (formerly Elanor Retail Property Fund) (ERPF I) and its controlled entities, and Elanor Retail Property Fund II (formerly Auburn Central Syndicate) (ERPF II) and its controlled entities. The units in ERPF I are stapled to units in ERPF II. The stapled securities cannot be traded or dealt with separately. The stapled securities of the Fund were listed on the Australian Securities Exchange (ASX:ERF) on 9 November 2016. For the purposes of the consolidated financial report, ERPF II has been deemed the parent entity of ERPF I in the stapled structure. The Directors applied judgement in the determination of the parent entity of the Fund and considered various factors including asset size and capital structure. The financial report of the Fund comprises the consolidated financial report of Elanor Retail Property Fund II and its controlled entities, including Elanor Retail Property Fund I and its controlled entities (ERPF I Group). As permitted by Class Order 05/642 issued by the Australian Securities and Investments Commission (ASIC), this report is a combined report that presents the consolidated financial statements and accompanying notes of both the Fund and ERPF I Group. These general purpose financial statements have been prepared in accordance with the Corporations Act 2001, the Scheme Constitutions and Australian Accounting Standards. Compliance with Australian Accounting Standards ensures compliance with International Financial Reporting Standards (‘IFRS’). Basis of consolidation The consolidated financial report of the Fund incorporates the assets and liabilities of ERPF II (the Parent) and all of its subsidiaries, including ERPF I and its subsidiaries as at 30 June 2018. ERPF II is the parent entity in relation to the stapling. The results and equity of ERPF I (which is not directly owned by ERPF II) have been treated and disclosed as a non-controlling interest. Whilst the results and equity of ERPF I are disclosed as a non-controlling interest, the stapled security holders of ERPF I are the same as the stapled security holders of ERPF II. This consolidated financial report also includes a separate column representing the financial report of ERPF I, incorporating the assets and liabilities of ERPF I and all of its subsidiaries, as at 30 June 2018. For the purpose of preparing the financial statements, the Fund is a for-profit entity. The financial report is presented in Australian Dollars. Going Concern As at 30 June 2018, the Group is in a net current liability position of $48.8 million (ERPF I: $48.6 million), due to the maturity of ERPF I’s debt facility of $10.4m in July 2018 and $42.9 million in December 2018. The Group has $326.2 million (ERPF I: $238.0 million) of total assets and a net asset position of $193.2 million (ERPF I: $78.1 million) at balance date. Subsequent to year end, the Fund has agreed with its bank to extend the $10.4 million facility, originally due to expire in July 2018, for three years to July 2021. Given the conservative gearing level below 40% of asset value and strong cash flow for servicing of financing facilities, Management are confident that the refinancing of the $42.9 million debt facility will be completed prior to its maturity, and that the Group will be able to pay its liabilities in the next 12 months as and when they fall due. Elanor Retail Property Fund Annual Report 2018 | 25 19 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 The notes to the consolidated financial statements have been organised into the following sections: RESU LTS .............................................................................................................................. 27 1. 2. 3. 4. 5. Segment information .........................................................................................................................27 Revenue ............................................................................................................................................27 Distributions ......................................................................................................................................28 Earnings / (losses) per stapled security ............................................................................................28 Cash flow information ........................................................................................................................29 OPERATING ASSETS ............................................................................................................ 31 6. Investment properties ........................................................................................................................31 FIN ANCE AND CAPI TAL STRUCTU RE .................................................................................... 34 7. 8. 9. 10. Interest bearing liabilities...................................................................................................................34 Derivative financial instruments ........................................................................................................35 Contributed equity .............................................................................................................................36 Financial risk management ...............................................................................................................36 OTHER ITEMS ....................................................................................................................... 40 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Other assets and liabilities ................................................................................................................40 Net tangible assets ............................................................................................................................40 Related parties ..................................................................................................................................40 Non-cancellable operating lease receivables. ..................................................................................42 Unrecognised items. .........................................................................................................................42 Parent entity disclosure.....................................................................................................................43 Auditors’ remuneration ......................................................................................................................44 Subsequent events ...........................................................................................................................44 Accounting policies ...........................................................................................................................44 Business Combinations.....................................................................................................................46 26 | Elanor Retail Property Fund Annual Report 2018 20 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Results This section focuses on the operating results and financial performance of the Fund. It includes disclosures of revenue, distributions and cash flow including the relevant accounting policies adopted in each area. 1. Segment information OVERVIEW The Fund only operates in one business segment, being the investment in retail shopping centres in Australia. 2. Revenue OVERVIEW The Fund’s main source of revenue is rental income from its investment in retail shopping centres. (a) Rental income ACCOUNTING POLICY Rental income The Fund is the lessor of operating leases. Rental income arising from operating leases is recognised as revenue on a straight-line basis over the lease term. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense over the term of the lease on the same basis as the lease income. Lease incentives Lease incentives (including rent free periods, fit out and other payments) are accounted for on a straight-line basis over the lease term and offset against rental income in the statement of profit or loss. The lease term is the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease, where, at the inception of the lease, it is reasonably certain that the tenant will exercise that option. Elanor Retail Property Fund Annual Report 2018 | 27 21 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 3. Distributions OVERVIEW In accordance with the Fund’s Constitutions, the Responsible Entity determines Core Earnings attributable to the security holders as the net profit for the year, excluding certain non-recurring and non-cash items. The Fund aims to distribute between 90% and 100% of Core Earnings each year. (a) Distributions during the year Consolidated Group The following distributions were declared by the Consolidated Group either during the year or post balance date: (1) The distribution of 5.16 cents per stapled security for the half-year ended 30 June 2018 was not declared prior to 30 June 2018. The distribution was declared on 17 August 2018. Please refer to the Director’s Report for the calculation of Core Earnings and the Distribution. ERPF I Group The following distributions were declared by the ERPF I Group either during the year or post balance date: (1) The distribution of 3.05 cents per unit for the half-year ended 30 June 2018 was not declared prior to 30 June 2018. The distribution was declared on 17 August 2018. Please refer to the Director’s Report for the calculation of Core Earnings and the Distribution. ACCOUNTING POLICY Distributions are recognised when declared. Distributions paid and payable are recognised as distributions within equity. A liability is recognised where distributions have been declared but not been paid. Distributions paid are included in cash flows from financing activities in the statement of cash flows. 4. Earnings / (losses) per stapled security OVERVIEW Basic earnings per stapled security is calculated as net profit or loss attributable to security holders divided by the weighted average number of ordinary stapled securities issued. Diluted earnings per stapled security is calculated as profit or loss attributable to security holders adjusted for any profit or loss recognised in the period in relation to dilutive potential stapled securities divided by the weighted average number of stapled securities and dilutive stapled securities. 28 | Elanor Retail Property Fund Annual Report 2018 22 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 4. Earnings / (losses) per stapled security (continued) Earnings used in the calculation of basic and diluted earnings per stapled security reconciles to the net profit or loss in the consolidated statements of comprehensive income as follows: 5. Cash flow information OVERVIEW This note provides further information on the consolidated cash flow statements of the Fund. It reconciles profit for the year to cash flows from operating activities, reconciles liabilities arising from financing activities and provides information about non-cash transactions. (a) Reconciliation of profit for the year to net cash provided by operating activities Elanor Retail Property Fund Annual Report 2018 | 29 23 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 5. Cash flow information (continued) (b) Reconciliation of liabilities arising from financing activities Consolidated Group ERPF I Group 30 | Elanor Retail Property Fund Annual Report 2018 24 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Operating Assets This section includes information about the assets used by the Fund to generate profits and revenue, specifically information relating to its investment properties. 6. Investment properties OVERVIEW Investment properties are held solely for the purpose of earning rental income and / or for capital appreciation. At balance date, the Fund’s investment property portfolio comprises 7 retail shopping centres in Australia. (a) Carrying values of investment properties Note 1: The Auburn Central podium asset comprised of 19 podium strata lots. The Fund commenced disposal of these non-core strata lots in August 2017. As at 30 June 2018, 2 strata lots remained. (b) Movement in investment properties (c) Fair value measurement Highest and best use For all investment properties, the current use equates to the highest and best use. Fair value hierarchy and valuation techniques The fair value measurement for investment properties has been categorised as Level 3 fair value based on the key inputs to the valuation techniques used below: Elanor Retail Property Fund Annual Report 2018 | 31 25 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 6. Investment properties (continued) (c) Fair value measurement (continued) Valuation Techniques Significant unobservable inputs Range Relationship with fair value Discounted cash flows – involves the projection of a series of inflows and outflows to which a market-derived discount rate is applied to establish an indication of the present value of the income stream associated with the property. Capitalisation method – involves determining the net market income of the investment property. This net market income is then capitalised at the adopted capitalisation rate to derive a core value. Adopted discount Rate(1) 7.25% - 8.75% Adopted terminal yield(2) 6.25% - 8.75% Adopted capitalisation rate(3) 6.50% - 7.75% The higher/lower the rate, the lower/higher the fair value. The higher/lower the rate, the lower/higher the fair value. The higher/lower the rate, the lower/higher the fair value. (1) Adopted discount rate: The rate of return used to convert cash flows, payable or receivable in the future, into present value. It reflects the opportunity cost of capital, that is the rate of return the cash can earn if put to other uses having similar risk. The rate is determined with regard to market evidence. (2) Adopted terminal yield: The capitalisation rate used to convert the future net market rental revenue into an indication of the anticipated value of the property at the end of the holding period when carrying out a discounted cash flow calculation. The rate is determined with regard to market evidence. (3) Adopted capitalisation rate: The rate at which net market rental revenue is capitalised to determine the value of a property. The rate is determined with regard to market evidence. ACCOUNTING POLICY Recognition and measurement Investment properties are measured initially at cost, including transaction costs. Subsequent to initial recognition, investment properties are measured at fair value. Gains and losses arising from changes in the fair value of investment properties are included in the statement of profit or loss in the year in which they arise. Fair value is defined as the price at which an asset or liability could be exchanged in an arm’s length transaction between knowledgeable, willing parties, other than in a forced or liquidation sale. An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from the 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 the statement of profit or loss in the year in which the property is derecognised. Valuation process In reaching estimates of fair value, management judgment needs to be exercised. The level of management judgment required in establishing fair value of the investments for which there is no quoted price in an active market is reduced through the use of external valuations. The aim of the valuation process is to ensure that assets are held at fair value and that the Fund is compliant with applicable Australian Accounting Standards, regulations, and the Fund’s Constitutions. 32 | Elanor Retail Property Fund Annual Report 2018 26 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 6. (c) Investment properties (continued) Fair value measurement (continued) All properties are required to be internally valued every six months with the exception of those independently valued during that six month period. The internal valuations are performed by utilising the information from a combination of asset plans and forecasting tools prepared by the asset management team. Appropriate capitalisation rate, terminal yield and discount rates based on comparable market evidence and recent external valuation parameters are used to produce a capitalisation based valuation and a discounted cash flow valuation. The Fund's valuation policy requires that each property in the portfolio is valued by an independent valuer at least every three years. In practice, properties may be valued more frequently than every three years primarily where there may have been a material movement in the market and where there is a significant variation between the carrying value and the internal valuation. Independent valuations are performed by independent and external valuers who hold a recognised relevant professional qualification and have specialised expertise in the types of investment properties valued. Elanor Retail Property Fund Annual Report 2018 | 33 27 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Finance and Capital Structure This section provides further information on the Fund’s equity and debt structure, and also in relation to financial risk management for its exposure to credit, liquidity and market risks. 7. Interest bearing liabilities OVERVIEW The Fund has access to a combined $134.5 million facility. The drawn amount at 30 June 2018 is $129.5 million, and the interest rate risk of drawn facilities is hedged to 83.8%. ACCOUNTING POLICY Interest bearing liabilities are recognised initially at cost, being the fair value of the consideration received net of transaction costs associated with the borrowing. Subsequent to initial recognition, interest bearing liabilities are recognised at amortised cost using the effective interest method. Under the effective interest method, any transaction fees, costs, discounts and premiums directly related to the borrowings are recognised in the statement of profit or loss over the expected life of the borrowings. Interest bearing liabilities are classified as current liabilities where the liability has been drawn under a financing facility which expires within one year. Amounts drawn under financial facilities which expire after one year are classified as non- current. 34 | Elanor Retail Property Fund Annual Report 2018 28 ELANOR RETAIL PROPERTY FUND Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 for the year ended 30 June 2018 8. Derivative financial instruments OVERVIEW The Fund’s derivative financial instruments consist of interest rate swap contracts to hedge its exposure to movements in variable interest rates. The interest rate swap agreements allow the Fund to raise long term borrowings at a floating rate and effectively swap them into a fixed rate. (a) Valuation Specific valuation techniques used to value financial instruments include: - - The use of quoted market prices or dealer quotes for similar instruments (level 1); and The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves (level 2). All of the resulting fair value estimates are included in Level 2. The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. ACCOUNTING POLICY Derivatives are initially recognised at fair value at the date the derivative contract is entered into and are subsequently remeasured to their fair value at the end of 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. Hedge Accounting The Fund designates its hedging instruments, which include derivatives, as cash flow hedges. At the inception of the hedge relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Fund documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk. Cash flow hedges Hedge accounting is discontinued when the Fund revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in profit or loss. 29 Elanor Retail Property Fund Annual Report 2018 | 35 ELANOR RETAIL PROPERTY FUND Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 for the year ended 30 June 2018 9. Contributed equity OVERVIEW The Fund is a 'stapled' entity comprising of ERPF I and its controlled entities, and ERPF II and its controlled entities. The units in ERPF I are stapled to units in ERPF II. The stapled securities cannot be traded or dealt with separately. (a) Parent entity (b) ERPF I Group 10. Financial risk management OVERVIEW The Fund's principal financial instruments comprise cash, receivables, interest bearing loans and derivatives. The Fund's activities are exposed to a variety of financial risks: market risk (including interest rate risk), credit risk and liquidity risk. This note presents information about the Fund's exposure to each of the above risks, the Fund's objectives, policies and processes for measuring and managing risk and the Fund's management of capital. Further quantitative disclosures are included through these financial statements. The Board of Directors (Board) of Responsible Entity of the Fund has overall responsibility for the establishment and oversight of the Fund's risk management framework. The Board is responsible for monitoring the identification and management of key risks to the business. The Board has established Treasury Guidelines outlining principles for overall risk management and policies covering specific areas, such as mitigating foreign exchange, interest rate and liquidity risks. The Fund's Treasury Guidelines provide a framework for managing the financial risks of the Fund with a key philosophy of risk mitigation. Derivatives are exclusively used for hedging purposes, not as trading or other speculative instruments. The Fund uses derivative financial instruments such as interest rate swaps where possible to hedge certain risk exposures. The Fund uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate risk, ageing analysis for credit risk and cash flow forecasting for liquidity risk. There have been no other significant changes in the types of financial risks or the Fund's risk management program (including methods used to measure the risks). 36 | Elanor Retail Property Fund Annual Report 2018 30 ELANOR RETAIL PROPERTY FUND Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 for the year ended 30 June 2018 10. Financial risk management (continued) (a) Market risk Market risk refers to the potential for changes in the value of the Fund's financial instruments or revenue streams from changes in market prices, being interest rate risk. (b) Interest rate risk Interest rate risk refers to the potential fluctuations in the fair value or future cash flows of a financial instrument because of changes in market interest rates. As at reporting date, the Fund had the following undiscounted (including future interest payable) interest bearing assets and liabilities: 31 Elanor Retail Property Fund Annual Report 2018 | 37 ELANOR RETAIL PROPERTY FUND Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 for the year ended 30 June 2018 10. (b) Financial risk management (continued) Interest rate risk (continued) (c) Credit risk Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. The Fund manages credit risk on receivables by performing credit reviews of prospective debtors, obtaining collateral where appropriate and performing detailed reviews on any debtor arrears. Credit risk on derivatives is managed through limiting transactions to investment grade counterparties. Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: Where entities have a right of set-off and intend to settle on a net basis under netting arrangements, this set-off has been recognised in the consolidated financial statements on a net basis. Details of the Fund's contingent liabilities are disclosed in Notes 15 and 16. 38 | Elanor Retail Property Fund Annual Report 2018 32 ELANOR RETAIL PROPERTY FUND Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 for the year ended 30 June 2018 10. (c) Financial risk management (continued) Credit risk (continued) At balance date there were no other significant concentrations of credit risk. No allowance has been recognised for the GST from the taxation authorities. Based on historical experience, there is no evidence of default from these counterparties which would indicate that an allowance was necessary. The ageing profile of the trade and other receivables balance as at 30 June 2018 is as follows: (d) Capital risk management The Fund maintains its capital structure with the objective to safeguard its ability to continue as a going concern, to increase the returns for security holders and to maintain an optimal capital structure. The capital structure of the Fund consists of equity as listed in Note 9. The Fund assesses its capital management approach as a key part of the Fund's overall strategy and it is continuously reviewed by management and the Directors of the Responsible Entity. To achieve the optimal capital structure, the Board may use the following strategies: amend the distribution policy of the Fund; issue new units through a private placement; conduct a buyback of units; acquire debt; or dispose of investment properties. 33 Elanor Retail Property Fund Annual Report 2018 | 39 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Other Items This section provides information that is not directly related to the specific line items in the financial statements, including information about contingent liabilities, related parties, events after the end of the reporting period, remuneration of auditors and changes in accounting policies and disclosures. 11. Other assets and liabilities OVERVIEW This note provides further information about assets and liabilities that are incidental to the Fund’s trading activities, being trade and other payables. (a) Trade and other payables ACCOUNTING POLICY Payables represent liabilities and accrued expenses owing by the Fund at period end which are unpaid. The amounts are unsecured and usually paid within 30 days of recognition. Payables are recognised at amortised cost and normal commercial terms and conditions apply to payables. 12. Net tangible assets OVERVIEW This note sets out the net tangible assets of the Fund and the ERPF I Group. 13. Related parties OVERVIEW Related parties are persons or entities that are related to the Fund as defined by AASB 124 Related Party Disclosures. This note provides information about transactions with related parties during the year. 40 | Elanor Retail Property Fund Annual Report 2018 34 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 13. (a) Related parties (continued) Key management personnel Responsible Entity Elanor Funds Management Limited is the Responsible Entity of the Fund, and is the key management personnel (KMP) of the Fund. Directors of the Responsible Entity The Directors of Elanor Funds Management Limited are: Paul Bedbrook (Chair) Glenn Willis (Managing Director and Chief Executive Officer) Nigel Ampherlaw William (Bill) Moss AO Other Management Personnel In addition to the directors, the following persons were Management Personnel of the Responsible Entity with the authority for the strategic direction of the Fund: Michael Baliva – Fund Manager Symon Simmons – Chief Financial Officer Paul Siviour – Chief Operating Officer Remuneration of Management Personnel Compensation is paid to the Responsible Entity in the form of fees and is disclosed below. No other amounts are paid by the Fund directly or indirectly to the Management Personnel for services provided to the Fund. The Directors of the Responsible Entity and other management personnel are paid by the Responsible Entity. Payment made from the Fund to the Responsible Entity do not include any amounts attributable to the compensation of key management personnel. Consequently, no compensation as defined in AASB 124 Related Party Disclosures is paid by the Fund to its Management Personnel, other than that paid to the Responsible Entity. Michael Baliva, the Fund Manager, participates in the Fund’s executive loan security plan. Related party disclosure During the period, fees were paid by the Fund to Elanor Investors Group and its controlled entities, in accordance with the Constitution of each Scheme, including investment management fees (management and performance fees), acquisition fees and cost recoveries. Elanor Retail Property Fund Annual Report 2018 | 41 35 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 13. Related parties (continued) (a) Key management personnel (continued) Related party holdings Key Management Personnel and other Management Personnel of the Responsible Entity and of its related entities may hold investments in the Fund. Such investments were purchased on normal commercial terms and were at arm’s length. The number of securities held by Key Management Personnel and other Management Personnel are as follows: Cross-Staple Loan On 9 November 2016, as part of the internal funding structure on listing of the Fund, ERPF I entered into a 10 year interest-bearing loan with ERPF II at arm’s length commercial terms. As at 30 June 2018, the outstanding loan balance payable to ERPF II was $69.2 million. 14. Non-cancellable operating lease receivables OVERVIEW This note sets out the non-cancellable operating lease receivables of the Fund and the ERPF I Group. 15. Unrecognised items OVERVIEW Items that have not been recognised on the Fund’s balance sheet include contractual commitments for future expenditure and contingent liabilities which are not sufficiently certain to qualify for recognition as a liability on the balance sheet. This note provides details of any such items. (a) Contingent liabilities The Directors are not aware of any material contingent liabilities of the Fund (2017: nil). (b) Commitments The Fund has no capital commitments (2017: nil) in respect of capital expenditures contracted for at the date of the statement of financial position. The ERPF I Group has no capital commitments (2017: nil) in respect of capital expenditures contracted for at the date of the statement of financial position. 42 | Elanor Retail Property Fund Annual Report 2018 36 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 16. Parent entity disclosure OVERVIEW The financial information below on Elanor Retail Property Fund’s parent entity, ERPF II, and ERPF I Group’s parent entity, ERPF I, as stand-alone entity has been provided in accordance with the requirements of the Corporations Act 2001. (a) Summarised financial information As at 30 June 2018, ERPF II is in a net current asset deficiency of $0.3 million, as a result of the accounting treatment of intercompany balances with its subsidiaries. The Directors believe that ERPF I will be able to pay its debts as and when they become due. (b) Commitments At the balance date ERPF I and ERPF II had no commitments (2017: none) in relation to capital expenditure contracted for but not recognised as liabilities. (c) Guarantees provided At balance date ERPF I and ERPF II had no outstanding guarantees (2017: none). (d) Contingent liabilities At balance date ERPF I and ERPF II has no contingent liabilities (2017: none). ACCOUNTING POLICY With the exception of consolidation, the financial information of the parent entities of Elanor Retail Property Fund and ERPF I Group have been prepared on the same basis as the consolidated financial statements. Elanor Retail Property Fund Annual Report 2018 | 43 37 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 17. Auditors’ remuneration OVERVIEW During the year the following fees were paid or payable for services provided by the auditor of the Fund: 18. Subsequent events Subsequent to year end, a distribution of 5.16 cents per stapled security has been declared by the Board of Directors. The Fund has agreed with its bank to extend the $10.4 million facility, originally due to expire in July 2018, for three years to July 2021. Other than the above, since the end of the period, the Directors are not aware of any other matter or circumstance not otherwise dealt with in the financial reports or the Directors' Report that has significantly affected or may significantly affect the operations of the Fund, the results of those operations or the state of affairs of the Fund in financial periods subsequent to the year ended 30 June 2018. 19. Accounting policies OVERVIEW This note provides an overview of the Fund’s accounting policies that relate to the preparation of the financial report as a whole and do not relate to specific items. Accounting policies for specific items in the balance sheet or statement of comprehensive income have been included in the respective note. (a) Interest Income Interest income is recognised as it accrues using the effective interest rate method. (b) Expenses All expenses, including the responsible entity’s fees and custodian fees, are recognised in profit or loss on an accruals basis. (c) Income Taxation Under current legislation, the Fund is not subject to income tax as security holders are presently entitled to the income of the Fund. 44 | Elanor Retail Property Fund Annual Report 2018 38 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 19. (d) Accounting policies (continued) New accounting standards and interpretations New standards and interpretations not yet adopted Certain new Accounting Standards and Interpretations have been published that are not mandatory for the financial year ended 30 June 2018 but are available for early adoption. They have not been applied in preparing this financial report. The Responsible Entity’s assessment of the impact of these new standards and interpretations is set out below. Reference Description AASB 15 Revenue from Contracts with Customers (Applicable 1 January 2018) AASB 16 Leases (Applicable 1 January 2019 – early adoption allowed if AASB 15 is adopted at the same time) AASB 15 introduces a five-step model for recognising revenue earned from a contract with a customer and will replace the existing AASB 118 Revenue and AASB 111 Construction Contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer – so the notion of control replaces the existing notion of risks and rewards. It applies to all contracts with customers except leases, financial instruments and insurance contracts. AASB 16 introduces new requirements in relation to lease classification and recognition, measurement and presentation and disclosure of leases for lessees and lessors. For lessees a (right-of-use) asset and a lease liability will be recognised on the balance sheet in respect of all leases subject to limited exceptions. The accounting for lessors will not significantly change. Impact on the Fund’s financial statements The Fund’s main sources of income are rental income, fair value gains on investment properties and fair value gains on financial instruments. These sources of income are outside the scope of the new revenue standard. An assessment has been performed on the Fund’s lease contracts. It was noted that there are no non-lease services included in these contracts that would otherwise be in scope of AASB 15. Based upon the assessment, it is expected that AASB 15 will not have a material impact to the Funds financial statements. The Fund will adopt the standard in the financial year beginning 1 July 2018. Given that the Fund is not a party to any significant lease agreements as lessee, and on the basis that this remains the same, the new standard is not expected to have a material impact on the recognition and measurement of lease-related revenues, assets or liabilities. The Fund will adopt the standard in the financial year beginning 1 July 2019. Several other amendments to standards and interpretations will apply on or after 1 July 2018, and have not yet been applied, however they are not expected to impact the Fund’s consolidated financial statements. Elanor Retail Property Fund Annual Report 2018 | 45 39 Notes to the Consolidated Financial Statements ELANOR RETAIL PROPERTY FUND for the year ended 30 June 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 19. (e) Accounting policies (continued) Critical accounting judgments and key sources of estimation uncertainty The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amount of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised prospectively. In particular, information about significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements is provided in: - - Note 6 Investment properties; and Note 10 Financial risk management (Financial Instruments) 20. Business Combinations Refer to the Fund’s Consolidated Financial Statements for the year ended 30 June 2017 for further information on the business combination that occurred in the prior year. 46 | Elanor Retail Property Fund Annual Report 2018 40 Directors’ Declaration to Stapled Security Holders ELANOR RETAIL PROPERTY FUND DIRECTORS’ DECLARATION TO STAPLED SECURITY HOLDERS In the opinion of the Directors of Elanor Funds Management Limited as responsible entity for Elanor Retail Property Fund I and Elanor Retail Property Fund II: (a) the financial statements and notes set out on pages 19 to 46 are in accordance with the Corporations Act 2001 (Cth), including: i. ii. complying with Australian Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and giving a true and fair view of the Consolidated Group's and ERPF I Group's financial position as at 30 June 2018 and of their performance, for the financial year ended on that date; and (b) (c) (d) there are reasonable grounds to believe that the Consolidated Group and the ERPF I Group will be able to pay their debts as and when they become due and payable; and the financial statements comply with International Financial Reporting Standards as issued by the International Accounting Standards Board; and 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 (Cth). This declaration is made in accordance with a resolution of the Board of Directors in accordance with Section 295(5) of the Corporations Act 2001 (Cth). Glenn Willis CEO and Managing Director Sydney, 17 August 2018 Elanor Retail Property Fund Annual Report 2018 | 47 41 Independent Auditor’s Report 48 | Elanor Retail Property Fund Annual Report 2018 Independent Auditor’s Report continued We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key Audit Matter How the scope of our audit responded to the Key Audit Matter Investment property valuation At 30 June 2018, Elanor Retail Property Fund recognised investment properties valued at $317.7 million as disclosed in Note 6. Note 6 outlines two valuation methodologies used by Elanor Retail Property Fund. The capitalisation of net income method applies a capitalisation rate to normalised market net operating income. The discounted cash flow method uses a 10 year cash flow forecast and terminal value calculation discounted to present value. The valuation process requires significant judgment in the following key areas: forecast cash flows, capitalisation rates, and discount rates. Accordingly, internal and external valuers apply professional judgement concerning market conditions and factors impacting individual properties. The internal and external valuations are reviewed by management who recommends each property’s valuation to the Audit and Risk Committee and the Board of the Responsible Entity in accordance with Elanor Retail Property Fund’s valuation protocol. Our procedures included, but were not limited to: Assessing management’s process over the property valuations and the oversight applied by the directors; Assessing objectivity of the external and internal valuers; independence, the competence and Performing an analytical review and risk assessment of the portfolio, analysing the key inputs and assumptions; Assessing the assumptions used in the portfolio, focusing on the capitalisation rate and discount rate with trends and transactions and challenging those assumptions where appropriate; to external market reference Holding discussions with management to obtain an understanding of portfolio movements and their identification of any additional property specific matters; and Testing on a risk basis of properties, both externally and internally valued, the following: The integrity of the information in the valuation by agreeing key inputs such as net operating income to underlying records and source evidence; The forecasts used in the valuations with reference to current financial results such as revenues and expenses, capital expenditure lease requirements, vacancy renewals; and rates and The mathematical accuracy of the models. o o o We also assessed the appropriateness of the disclosures included in Note 6 to the financial statements. Other Information The directors of the Responsible Entity (the “Directors”) are responsible for the other information. The other information comprises the Directors’ Report, which we obtained prior to the date of this auditor’s report. The other information also includes the following information which will be included in the Annual Report (but does not include the financial report and our auditor’s report thereon): the Message from the Chairman, Message from the CEO and other documents which are expected to be made available to us after that date. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. 43 Elanor Retail Property Fund Annual Report 2018 | 49 Independent Auditor’s Report continued 50 | Elanor Retail Property Fund Annual Report 2018 Independent Auditor’s Report continued Elanor Retail Property Fund Annual Report 2018 | 51 Corporate Governance The Board of Directors of Elanor Funds Management Limited as responsible entity of the Elanor Retail Property Fund I and Elanor Retail Property Fund II (Fund) have approved the Fund’s Corporate Governance Statement as at 30 June 2018. In accordance with ASX Listing Rule 4.10.3, the Fund’s Corporate Governance Statement can be found on its website at: www.elanorinvestors. com/ERF The Board of Directors is responsible for the overall corporate governance of the Fund, including establishing and monitoring key strategy and performance goals. The Board monitors the operational and financial position and performance of the Fund, and oversees its business strategy, including approving the Fund’s strategic goals. The Board seeks to ensure that the Fund is properly managed to protect and enhance securityholder interests, and that the Fund, its Directors, officers and personnel operate in an appropriate environment of corporate governance. Accordingly, the Board has created a framework for managing the Fund, including Board and Committee Charters and various corporate governance policies designed to promote the responsible management and conduct of the Fund. 52 | Elanor Retail Property Fund Annual Report 2018 Security Holder Analysis (as at 24 August 2018) Stapled Securities The units of the Trusts are combined and issued as stapled securities in the Fund. The Fund’s securities are traded on the Australian Securities Exchange (ASX: ERF), having listed on 9 November 2016. The units of the Trusts cannot be traded separately and can only be traded as stapled securities. In accordance with the ASX’s requirements for stapled securities, the ASX reserves the right (but without limiting its absolute discretion) to remove a Trust from the ASX Official List if any of the units cease to be stapled together or any equity securities issued by the Trusts are not stapled to equivalent securities in the other entity. Top 20 Security Holders Number Security Holder No. of Securities 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Elanor Investment Nominees Pty LimitedPershing Australia Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited - A/C 2 Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited Kenxue Pty Ltd JP Morgan Nominees Australia Limited The Trust Company (Australia) Limited Armada Investments Pty Ltd B & J Investment Nominees Pty Ltd Berg Family Foundation Pty Ltd Pinwillow Pty Ltd Kindol Pty Ltd BNP Paribas Noms Pty Ltd Yarramalong Management Services Pty Limited National Nominees Limited Oksar Pty Ltd Basapa Pty Ltd Bond Street Custodians Limited 20 Carwoola Pty Ltd Total Balance of Register Grand Total 23,026,082 17,785,087 11,224,400 6,430,000 5,278,118 4,848,518 3,561,468 2,610,000 1,822,222 1,504,148 1,366,667 1,366,667 1,308,960 975,484 940,119 849,739 827,779 825,927 822,223 755,408 % 17.89 13.82 8.72 4.99 4.10 3.77 2.77 2.03 1.42 1.17 1.06 1.06 1.02 0.76 0.73 0.66 0.64 0.64 0.64 0.59 88,129,016 40,600,739 128,729,755 68.46 31.54 100.00 Elanor Retail Property Fund Annual Report 2018 | 53 Security Holder Analysis (as at 24 August 2018) continued Range Report Range 100,001 and over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total No. of Securities % No. of Holders 114,250,965 13,939,617 415,772 118,887 4,514 88.75 10.83 0.32 0.09 0.00 131 374 52 41 21 % 21.16 60.42 8.40 6.62 3.39 128,729,755 100.00 619 100.00 The total number of security holders with an unmarketable parcel of securities was 16. Substantial Security Holders Security Holder Elanor Investment Nominees Pty Ltd ATF Elanor Investment Trust Moelis Australia Asset Management Limited Ellerston Capital Voting rights No. of Securities 23,026,082 20,395,087 11,357,276 % 17.89 15.84 8.82 On a poll, each security holder has, in relation to resolutions of the Trusts, one vote for each dollar value of their total units held in the Trust. On-Market Buy-back There is no current on-market buy-back program in place. 54 | Elanor Retail Property Fund Annual Report 2018 Corporate Directory Elanor Investors Group (ASX Code: ERF) Elanor Funds Management Limited (ACN 125 903 031) is the Responsible Entity of Elanor Retail Property Fund I (ARSN 615 291 220) (ERPF I) and Elanor Retail Property Fund II (ARSN 615 291 284) (ERPF II) each a Trust and together the Elanor Retail Property Fund. Level 38, 259 George Street Sydney NSW 2000 T: +61 2 9239 8400 Directors of the Responsible Entity Paul Bedbrook (Chair) Glenn Willis (Managing Director and CEO) Nigel Ampherlaw William (Bill) Moss AO Company Secretary of the Responsible Entity Symon Simmons Security Registry Computershare Investor Services Pty Limited Level 4, 60 Carrington Street Sydney NSW 2000 Auditors Deloitte Touche Tohmatsu Grosvenor Place 225 George Street Sydney NSW 2000 Custodian The Trust Company (Australia) Limited Level 18, 123 Pitt Street, Sydney NSW 2000 Website www.elanorinvestors.com/ERF Elanor Retail Property Fund Annual Report 2018 | 55 Level 38, 259 George Street Sydney NSW 2000 T: +61 2 9239 8400 www.elanorinvestors.com/ERF