Estia Health Ltd
Annual Report 2019

Plain-text annual report

ANNUAL REPORT 2018-19 Contents Industry Trends Key Highlights Chairman and CEO's Message Our Executive Team Our Customers Growing and Evolving Our Network Environmental, Social and Governance (ESG) Tax Transparency Report Corporate Governance Our Board Shareholder Information Annual Financial Report Directory of Estia Homes 04 06 08 10 14 16 20 30 34 35 38 43 130 Thank you to all the residents and employees who feature in this report. 2018-19 Annual Report | Estia Health 3 Resident Allan enjoys time in the garden. Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG Industry Trends Influencing our Strategy 1. SECTOR REFORM 4. SUSTAINABILITY The aged care sector has seen significant change in the past 18 months including the calling of the Royal Commission into Aged Care Quality and Safety. The establishment of the Aged Care Quality and Safety Commission and the new Aged Care Quality and Safety Standards inform how providers design services to meet community expectations and build trust in the sector. Estia Health strongly supports reforms that deliver sustainable, high quality and safe aged care services. We look forward to the Interim Report from the Royal Commission into Aged Care Quality and Safety due in October 2019. As awareness of environmental issues increases, including the impacts of climate change, waste and finite natural resources, residential aged care providers are incorporating sustainability into their broader business strategies. In FY19 Estia completed a formal Materiality Assessment, asking over 2,000 of our stakeholders what they believe our priority areas are for sustainability. This assessment will form the basis of our first formal Sustainability Strategy in FY20. 2. AGEING POPULATION 5. AGED CARE WORKFORCE The demographic trends that support the growth in demand for aged care are undeniable. Australia has one of the highest life expectancies in the world and the number of Australians over 85 years of age will double by 20421. As people live longer, the need for specialist aged care increases with dementia and Alzheimer’s disease now the second leading cause of death in Australia2. Residential aged care is a critical aspect of the health system providing specialist aged care services to people that can no longer live at home. The Aged Care Workforce Strategy Taskforce’s 2018 report ‘A Matter of Care – Australia’s Aged Care Workforce Strategy’ outlined priority areas for training, developing and retaining employees and providing career pathways to increase the skills required to meet community expectations and the changing requirements of aged care. Estia is implementing strategies to address matters identified by the Taskforce to build the capacity of our employees and shape our workforce to meet emerging trends. 3. GROWTH AND MARKET CONSOLIDATION 6. CUSTOMER CHOICE The Aged Care Financing Authority (ACFA) has identified the need for structural reform to the residential aged care sector. ACFA has identified the need for regulatory certainty and sustainable funding arrangements including greater contribution by consumers according to capacity to pay. We support reforms that provide greater consumer choice and policy settings that enable aged care providers such as Estia, who have the scale and capacity to respond to regulatory change and invest in their people, portfolio and services. As community expectations of quality care continue to rise, building trust and confidence in the residential aged care sector is essential. The introduction of Consumer Directed Care (CDC) into home care, means customers have more control over the types of care and services they can access, and are remaining at home for as long as possible. At Estia we train and educate our people to understand and deliver true person-centred care, combined with developing services and products that offer choice and flexibility to the residents in our care. 1. www.abs.gov.au/ausstats/abs@.nsf/mediareleasesbytitle/58FF5A2527DDD70ECA2568A90013634F?OpenDocument 2. www.aihw.gov.au/reports/life-expectancy-death/deaths-in-australia/contents/leading-causes-of-death 4 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 5 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia HomesIndustry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG Key Highlights Financial Performance OPERATIONAL BEDS AVERAGE OCCUPANCY¹ REVENUE 5,909 6,046 6,102 93.5% 94.2% 93.6% $524.6m $546.9m $586.0m2 FY17 FY18 FY19 FY17 FY18 FY19 FY17 FY18 FY19 PROFIT AFTER TAX EARNINGS PER SHARE DIVIDENDS PER SHARE Key Highlights Growth and Network of Homes Statistics are as at 16 August 2019 (except as noted) Total number of operational homes — Metro — Regional Freehold sites Total operational places – 30 June 2019 Total operational places – 16 August 20191 69 53 16 62 6,102 6,180 $40.7m $41.2m $41.3m 18.2¢ 15.8¢ 15.8¢ 15.8¢ 15.8¢ Number of single rooms 5,091 8¢ FY17 FY18 FY19 FY17 FY18 FY19 FY17 FY18 FY19 1. Mature homes only 2. Total revenue includes the $10.3 million temporary funding increase Single rooms as percentage of total rooms Average number of places per home Number of homes receiving significant refurbishment supplement 91% 90 34 QLD 8 homes 851 places NSW 17 homes 1,890 places VIC 27 homes 2,091 places SA 17 homes 1,348 places 1. Total operational places reflects the removal of 48 beds on 1 July 2019 from the mature home portfolio and the new Maroochydore home (126 beds) which opened for first residents on 26 August 2019. Health and Safety Gender Diversity Professional Development Employees LTIFR1 FY17 FY18 9.1 FY19 7.6 16.9 BOARD COMPOSITION EXECUTIVE POSITIONS EMPLOYEES TRAINED ACROSS PROFESSIONAL DEVELOPMENT PROGRAMS EMPLOYEE TURNOVER FY17 FY18 FY19 3,894 3,092 4,959 21% 1. Lost Time to Injury Frequency Rate (LTIFR). 12 month rolling average. 57% Male 43% Female 56% Male 44% Female 6 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 7 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG Chairman and CEO’s Message Access to affordable, quality residential aged care is one of the major challenges facing older Australians. Estia Health plays a significant role in meeting this need. As a result, your Company is well placed to capture emerging growth opportunities in residential aged care, while creating value for all our stakeholders. Estia Health has delivered sound results for the 2019 financial year that reflect our disciplined approach to delivering high quality and safe residential aged care services to everyday Australians. Our focus is on continually improving the quality of care and amenity for residents while sustainably growing earnings through measured, well- executed investment in new homes and refurbishments across our portfolio. Total revenue increased 7.1 per cent to $586.0 million, earnings before interest, tax, depreciation and amortisation are up 4.3 per cent to $94.0 million and net profit of $41.3 million is in line with last year. The Company’s performance for the year is testament to the hard work and dedication of our 7,500 people. Access to affordable, quality residential aged care is one of the major challenges facing older Australians. Estia plays a significant role in meeting this need. As a result, your Company is well placed to capture emerging growth opportunities in residential aged care, while creating value for all our stakeholders. THE FUTURE OPPORTUNITIES AND CHALLENGES FOR AGED CARE With the number of Australians over 85 years of age expected to double by 20421, Australians’ confidence and trust in our aged care sector is critical. Estia strongly supports further reform in the aged care sector to ensure delivery of sustainable, high quality and safe aged care services for the future. We look forward to the Interim Report from the Royal Commission into Aged Care Quality and Safety due in October 2019 that may provide the Government and the sector with further guidance for reform. Estia supports the recommendations in the Aged Care Financing Authority (ACFA) submission to the Royal Commission for significant structural reform in the way aged care is funded to achieve stable, predictable and equitable arrangements for allocating appropriate funding for the sector. We support strong prudential and governance oversight systems to ensure protections for residents and transparency on how Government aged care funding is applied by providers. Future sector funding should be flexible to effectively and efficiently meet Australia’s growing need for aged care and increasing community expectations including expanded opportunities for contribution by those with capacity to pay. INVESTING IN SUSTAINABLE GROWTH Estia’s focus is sustainable growth by continually improving clinical governance, quality management and resident care systems through employee education, technology development and service enhancement. This is supported by disciplined investment in acquisition, construction of new homes and redevelopment of existing properties to grow bed capacity and drive future earnings. As a result, we were well prepared for the introduction of the new Aged Care Quality Standards from 1 July 2019. During the period under review we invested $93.8 million, our highest level of capital investment since listing in 2014, in expanding and refurbishing our portfolio of homes. Including a new 110 bed home at Southport which opened in May and a 126 bed home at Maroochydore which opened in August 2019, both in Queensland. Refurbishments across the portfolio have enhanced resident amenity, improved the marketability of the homes and are generating incremental earnings through Higher Accommodation Supplements. We have 34 of our 69 homes qualifying for the Higher Accommodation Supplement as of 16 August 2019. 1. www.abs.gov.au/ausstats/abs@.nsf/mediareleasesbytitle/58FF5A2527DDD70ECA2568A90013634F?OpenDocument Estia has outstanding leaders at all levels of the Company who understand both the opportunities and challenges of the aged care sector. We have strong teams in each of our homes, including Registered Nurses rostered in every home 24 hours a day, seven days a week, who work hard to ensure the right level of care is delivered to each resident to address their increasingly complex and varying needs. To continue to attract, train and retain the highest calibre employees we regularly assess and refine our skills development and leadership pathway programs. We are building our workforce in anticipation of the rising demand for skilled and empathetic employees to care for the increasing number and complexity of care needs of our residents. We would like to thank our employees and our leadership group for their ongoing commitment, compassion, professionalism and hard work in ensuring our residents receive the best care. We also thank our shareholders for their continued support. We believe the future of residential aged care in Australia will be driven by well-governed, quality-focused providers like Estia with capacity to meet the demands for choice in how we care for our elderly as the country's population ages. As one of Australia’s largest residential aged care providers, we look forward to continuing to play a critical role in delivering sustainable, high quality and safe aged care services for all Australians. Yours sincerely, Dr Gary Weiss, AM Chairman Ian Thorley Chief Executive Officer Dr Gary Weiss, AM Chairman Ian Thorley Chief Executive Officer We experienced lower RAD inflows of $14.6 million throughout the year and anticipate this trend of lower RAD preferences and higher level of concessional residents will continue in the short term ahead of major sector reform. Our balance sheet remains strong with net bank debt of $110.4 million at 30 June 2019. With available debt facilities of $201.0 million we are well capitalised and have flexibility to manage changing resident payment preferences, as well as capacity to execute our growth plans. Planned investment for FY20 includes between $120.0–150.0 million for the continuation of the significant refurbishment program and construction and pre-planning for new greenfield and brownfield projects. COMMUNITY FOCUS Our strong local community engagement program is reflected in Estia’s average occupancy of 93.6% for the year. SUSTAINABILITY With a network of 69 homes across four states, it is vital that we maintain clear visibility on the impact we might have on the communities in which we operate. Recognising the growing significance of non-financial considerations for the long-term sustainability of the organisation, we developed our first Sustainability Charter during the year. We also conducted a materiality review with over 2,000 of our key stakeholders including residents, families and employees to help determine and prioritise the issues Estia will address to ensure sustainable social value creation throughout our operations. We are committed to delivering the highest quality care to people who choose to trust us at an important time in their lives. We understand that people want to stay at home for as long as possible and when entering residential aged care, have a strong preference to remain in their own community. From this review we are developing a Sustainability Strategy and framework to report to stakeholders and benchmark our progress on the initiatives to support the sustainable social value we create in our communities and against our targets for reduced energy consumption and waste minimisation. We aim to be the provider of choice in the communities in which we operate and ensure that each of our homes and the services they offer are reflective of their location and the preferences of that community. ESTIA IS A PEOPLE BUSINESS There is no greater priority for Estia than striving for the highest quality of care, safety and wellbeing for the 8,000 residents we care for annually and 7,500 employees. 8 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 9 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia HomesIndustry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG From left to right: Standing: Damian Hiser, Rita Sheridan, Ian Thorley, Mark Brandon OAM, Jane Murray. Seated: Steve Lemlin, Leanne Laidler, Sean Bilton, Fiona Caldwell Our Executive Team Our Executive Team is responsible for ensuring we provide consistently high quality residential aged care to all the communities we serve. Led by Chief Executive Officer Ian Thorley, the team brings extensive expertise across the health care, aged care and corporate sectors. As a team, they are responsible for setting and implementing a strategy for Estia Health to become Australia’s most trusted residential aged care provider, providing access to high quality residential aged care to all who need it. DAMIAN HISER Chief Customer Officer RITA SHERIDAN General Manager Development and Property IAN THORLEY Chief Executive Officer and Managing Director MARK BRANDON, OAM Chief Policy and Regulatory Officer JANE MURRAY Chief People Officer STEVE LEMLIN Chief Financial Officer LEANNE LAIDLER Chief Quality and Risk Officer SEAN BILTON Chief Operating Officer and Deputy Chief Executive Officer FIONA CALDWELL Chief Information Officer IAN THORLEY Chief Executive Officer and Managing Director Ian has over 30 years’ health and aged care experience in both Australia and overseas. Appointed as Chief Executive Officer in October 2018, Ian was previously Estia's Chief Operating Officer from October 2016, where he was responsible for leading Estia’s operations and care teams, embedding key improvements resulting in revenue growth and operational efficiencies, while delivering consistently high standards of quality care to residents across a growing portfolio of homes. Ian’s executive experience includes CEO and COO roles in large aged care groups, acute private hospital groups and diagnostic services. Ian has been at the forefront of major developments that have shaped Australia’s healthcare sector, including the privatisation of public hospitals, new reimbursement and funding models, and a broad range of public/private sector service models. Ian has held the position of Non-executive Director in private equity owned, and ASX listed companies and has consulted to aged care operators, private hospital groups, health insurers, health logistics and specialist health recruitment businesses throughout Australia. Ian is a Graduate of the Australian Institute of Company Directors (GAICD) and holds a Master of Commerce from the University of NSW. DAMIAN HISER Chief Customer Officer Damian is a senior healthcare executive, with nearly 30 years’ experience in the private health care sector in Australia and the Middle East, and the last eight years in aged care in Australia. Damian brings a wealth of experience and understanding of the complexities of health care systems, looking at opportunities to improve the customer experience to contribute to business sustainability and growth. Appointed to the role of Chief Customer Officer in October 2017, Damian is responsible for programs that improve the experience for residents and their families as they navigate the difficult and emotional journey into aged care, to help make the transition as easy as possible. He leads a team in the areas of hospitality and lifestyle, marketing and communications and client services in building Estia’s brand as one of the most respected and preferred aged care providers in the local communities in which it operates. Damian holds a Bachelor of Optometry (UNSW) and a Master of Business Administration (UTS). RITA SHERIDAN General Manager Development and Property Rita Sheridan’s career spans capital development in the aged care and accommodation sectors, residential construction and commercial interior design. Appointed to the role of General Manager Development and Property in March 2018, Rita leads Estia’s capital development and property maintenance programs. Prior to joining Estia, Rita was General Manager Property for Amana Living and previously Southern Cross Care (WA) Inc where her responsibilities included leadership and management roles in strategic planning and developments, asset and maintenance services, retirement living and affordable community housing. She has a significant record of successful completion of major capital developments in both aged care and retirement living, bringing together strategic market insight and functional service details that support the key requirements of the business. Rita holds a Business degree majoring in Accounting and has held committee positions with ACSWA and the Property Council WA. 10 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 11 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia HomesIndustry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG MARK BRANDON, OAM Chief Policy and Regulatory Officer STEVE LEMLIN Chief Financial Officer With 40 years’ experience in the health and aged care sectors, Mark is an internationally recognised leader on strategy, quality, accreditation and government relations. Steve holds 30 years’ experience in senior financial and operational leadership roles across a range of professional services businesses in Europe and Australasia. Joining Estia in February 2017 as Chief Financial Officer, Steve is responsible for corporate finance and investor relations and also leads the broader finance team in supporting our homes deliver the best experience for our residents through accurate and timely management information. Prior to joining Estia, Steve was Finance Director at private equity owned Careers Training Group, which followed his role as CFO and then COO at leading digital advertising and engagement company, the White Agency, part of STW Australia’s largest listed communications group. Steve has held senior financial leadership roles at MYOB/Solution 6, Reckon and Ramsay Health Care as well as leading a management buyout, turnaround and subsequent sale of a corporate training business. Steve is a Fellow of the ICAEW and holds an Honours Degree in Accounting and Finance from the University of Lancaster, UK. He is a member of the panels of experts for the International Society for Quality in Healthcare and the International Federation on Ageing. His experience also includes Vice Chair of the International Accreditation Council and advisor to governments. As Chief Policy and Regulatory Officer, Mark’s remit includes key stakeholder relationship management and oversight of regulatory compliance. Mark was CEO at the Australian Government Aged Care Standards and Accreditation Agency Ltd from 2002 to 2013. He previously held senior executive positions at Medibank Private and Medicare and was a member of the Aged Care Minister's Advisory Council. He is a member of the Advisory Board in the School of Business at University of Notre Dame Australia and a mentor in the International Society for Quality in Healthcare mentoring program. JANE MURRAY Chief People Officer Appointed to the role of Estia’s People and Culture Director in July 2017, Jane has had senior human resources and change leadership roles for top ASX listed companies and government agencies, including AXA Asia Pacific, AMP, Australian Casualty and Life and the Victorian Funds Management Corporation. Jane leads the delivery of Estia’s people strategy, founded on building a strong employee culture and positioning Estia as the employer of choice in the aged care sector. Her role includes delivering strategies for attracting and retaining a high quality skilled workforce and developing career pathways to ensure the sustainability of Estia’s workforce. She is also responsible for learning and development programs for all of our employees, as well as specialist role based training around clinical care and leadership. Jane is also responsible for work health and safety programs. As an internationally accredited Organisational and Executive Coach, Jane has proven capability in unlocking leadership potential within organisations. Jane attained her International Coaching Federation Associate Certified Coach (ACC) credential for organisational coaching in early 2017. Jane holds qualifications across Human Resources, Project Management and Organisational Change. LEANNE LAIDLER Chief Quality and Risk Officer SEAN BILTON Chief Operating Officer and Deputy CEO Appointed in May 2019 as the Chief Quality and Risk Officer, Leanne is a senior healthcare executive with over 40 years’ experience in the hospital sector in Australia and overseas. Appointed as Estia’s Chief Operating Officer and Deputy CEO in October 2018, Sean brings a breadth of experience from more than a decade as a senior executive in the sector across a diverse range of roles. Prior to her appointment with Estia, Leanne was National Deputy Clinical Governance Manager for Ramsay Health Care and previously Group Vice President Nursing, Learning and Operational Excellence with Parkway Health based in Singapore. Leanne is responsible for leading Estia’s delivery of high quality care to our residents in safe and supportive environments. This involves the development and implementation of a person-centred care framework that combines quality and risk management strategies. Leanne’s role is focused on embedding a continuous improvement culture, using quality indicator measurement and a risk management framework that enables transparent incident reporting, data analysis, trending and benchmarking with validation of compliance via audit. Leanne is a Registered Nurse with a post registration Bachelor of Nursing awarded from Deakin University and a Master of Business from Monash University. She is currently enrolled in a Master of Gerontology program. Sean is responsible for leading Estia’s operations teams, initiating improvements to ensure the highest level of care is delivered to the 8,000 residents in our homes annually. Sean ensures that every one of our 69 homes engage with their local communities and works closely with teams on the ground, supporting and empowering them to deliver exceptional and compassionate care to all residents as they make the journey into aged care. Prior to joining Estia, Sean was Commercial Director at Opal Aged Care and previous to that was an Investment Manager with AMP Capital Investors, responsible for managing assets in aged care, agriculture and resources sectors. Sean commenced his career in the Financial Advisory business of PricewaterhouseCoopers. He holds a Bachelor of Economics from UNSW and is a Fellow of the Financial Services Institute of Australia. FIONA CALDWELL Chief Information Officer With over 25 years’ experience in various IT strategic and operational leadership capacities, Fiona brings to Estia a wealth of practised knowledge and a sound background in managing IT solutions and projects. Appointed to the role of Chief Information Officer in October 2017, Fiona leads Estia’s IT team in the delivery of modern and innovative technologies and services and seeks to advance the level of assistance and amenities available at Estia. Fiona is a recognised leader in optimising the IT user experience. She has extensive experience in the Government and Commercial sectors, including Village Roadshow, Cenitex and the Tatts Group. Fiona holds a Bachelor of Computing and Master of Business Administration from Monash University. 12 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 13 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia HomesIndustry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG Our Customers • The care we deliver is monitored by uniform clinical quality indicators, which are measured and reviewed by our Quality Improvement Committee. • As part of our culture of continuous improvement and to address feedback from our residents and families on the care and services they receive, we conduct internal benchmarking on customer satisfaction. This benchmarking is against The Aged Care Quality and Safety Commission’s (ACQSC) Consumer Experience Report (CER) Surveys conducted at assessment visits at Estia homes. Across our homes, we have received an average satisfaction result of over 90% for CER Surveys conducted by the ACQSC during FY19. • We have also launched a pilot program of a digital customer pulse survey for our homes to seek continuous feedback across the customer journey, including the CER Survey. ENGAGING ACTIVITIES Providing a range of activities for our residents is key to the care we deliver. All of our homes have a lifestyle team, who program daily activities based on residents’ input and feedback. This includes games, cooking and craft, the arts, cultural activities, and spiritual and religious events. Our lifestyle team also schedule regular outings to help our residents remain connected to their community, family and friends. FRESH FOOD PHILOSOPHY Our food philosophy is ‘thoughtfully sourced, freshly prepared, served with love’. Each home’s menu is crafted based on residents’ preferences. Where possible, we source from Australian producers with a focus on fresh ingredients and from suppliers who are recognised as the best in their field. We are continuing to invest in training our Chefs, running masterclasses to upskill them in delivering nutritious, quality meals for all residents. Our food is prepared fresh on-site every day. At Estia Health, our priority is to ensure that our residents settle into their new home. This means our experienced clinical, hospitality and lifestyle teams work closely together to provide tailored experiences that best suit each resident’s needs. With the introduction of the new Aged Care Quality and Safety Standards on 1 July 2019, we have been training and educating our people to understand the changes and strive to deliver true person-centred care. Supported by our revised brand purpose of enriching and celebrating life together, we will continue to embed our core values and principles through our family code. Our teams understand that each resident has their own story to tell; with different experiences, memories, preferences, identity, values, beliefs, hobbies, likes and dislikes. Of the 8,000 residents we care for annually, there are over 95 cultural backgrounds and 22 languages spoken. We have a diverse family of employees and where we see the opportunity, we will utilise their breadth of experience and backgrounds to help our residents settle into the home. WHAT WE PROVIDE Access to quality care • Estia provides short-term respite care for people that may need additional support if they are being cared for at home by a loved one, or following a hospital stay when they are unable to return home immediately. • We provide permanent care for people that are no longer able to live at home. A number of our homes have Memory Support Units, providing a safe and supportive environment for residents requiring additional specialist dementia care. • Our homes are managed and led by Executive Directors to ensure every resident has the best experience possible. They work closely with Care Directors, who lead an experienced team of Registered Nurses and carers to provide support and care, tailored to our resident’s needs. We have Registered Nurses rostered on in all homes 24/7. • When new residents are welcomed into an Estia home, our skilled team assess each resident’s individual needs to develop tailored clinical care plans. We also include families in the process to learn more about each resident beyond expected care needs, helping us identify meaningful ways to assist them to feel comfortable and supported in their new home. When Ian Stock came to stay Initially Ian was apprehensive about coming into aged care, but he had suffered a series of falls in his family home and was struggling to cope, so began to come into Estia for short periods of respite care. Ian says ‘The best thing about coming in for short-term care was that it was so much easier for my wife – when I was falling it was not fair on her. I’m a big guy, and she would struggle to pick me up and help me’. ‘She bought me a special chair (which cost a fortune) to try and make me more comfortable and help me get up and out of it - but it was quite low and it was just terrible and it was so hard to get in and out. I’ve learnt you have to be very careful where you sit!’ ‘I would come in for a week and we would both feel better after having a period of respite – then I would go home and I’d have another bad fall. I came in about five or six times, but after this, we decided it was best I moved in permanently. Since moving in, I haven’t felt like I’m about to have a fall. I think it’s the fact that I’ve always got something to hang on to, either the railing or a seat, and I have people here to help me - these have made me feel much safer and more stable.’ When Ian first moved in, all the staff were very friendly – they all knew his name and took the time to get to know him. Ian quickly started to like Estia and appreciated the daily care he received. Regular outings are an important part of the care ‘I like to go to the Men’s Shed on Thursdays and Fridays – in fact I love it. I used to be a mechanic by trade, but I don’t do anything like that anymore. I just like to go down and play snooker and have a rest. The thing I enjoy most about the Men’s Shed is the company and the friendly banter’, says Ian. ‘It’s nice when my wife comes to visit – we sit in my room and we just get to talk. The most important thing to me living here is the staff, they all respect you and they treat you well.’ “I came in about five or six times, but after this, we decided it was best I moved in permanently. Since moving in, I haven’t felt like I’m about to have a fall.” — Ian, Resident at Estia Estia resident Ian, is cared for by Registered Nurse, Charizza. 14 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 15 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia HomesIndustry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG Growing and Evolving Our Network At Estia Health, we are continually looking at ways to provide local communities with access to quality residential aged care. Our approach involves a combination of new homes, redevelopment and refurbishment to enhance and expand our network. This year we have invested a total of $93.8 million to increase the number of beds available in our network, as well as continuing our overall refurbishment program focused on enhancing the resident experience and meeting community expectations. EXPANDING OUR NETWORK OF HOMES This year we opened Estia Southport in May and Estia Maroochydore in August. Both are examples of our strategy to grow and expand our network of homes and deliver high quality residential aged care facilities, that meets community needs and expectations. The homes were each constructed on time and within budget with an integrated approach between the architects, builders and commissioning teams, to ensure a smooth transition from building design, through to commissioning and launch. Estia Southport is an example of capital recycling where we developed the former 60 bed home into a contemporary 110 bed home. ENHANCING OUR HOMES Our significant refurbishments program began in 2017 and has prioritised investment on the needs of each home to improve the resident experience. During FY19, 13 homes with a total 1,105 beds were refurbished through capital investment of $15.5 million. A further 15 homes with an additional 1,562 beds are scheduled for refurbishment during FY20. This will result in 49 homes with 4,801 beds being eligible for the Higher Accommodation Supplement by 30 June 2020. The remaining homes are being assessed for potential refurbishment or redevelopment opportunities. Estia Grovedale Estia Health breaks ground at $39.2 million Blakehurst site In June 2019, Estia turned the first sod at an official ground-breaking ceremony to mark the start of construction of Estia Blakehurst. This shows the benefits of redeveloping within the existing portfolio, with the original home demolished in 2018. It is now being developed as a new 108 bed home. Gamilaroi representatives performed an Acknowledgment to Country and smoking ceremony before construction began. Estia Southport Opened May 2019 • 110 single rooms with ensuite. • Integrated café, hairdresser, cinema. • Project capital investment - $28.7 million. • Dedicated 17 bed Memory Support Unit with courtyard, provides a safe and supportive environment for residents requiring specialist dementia care. • Private internal garden atrium. Estia Maroochydore is a greenfield development providing 126 single rooms with a dedicated 18 bed Memory Support Unit. Located within close proximity to the recently developed Maroochydore town centre, this tranquil location allows residents and their families to continue to be part of their community. Estia Maroochydore Opened August 2019 • 126 single rooms with ensuite. • Integrated café, hairdresser, cinema. • Project capital investment – $32.5 million. • Dedicated 18 bed Memory Support Unit with courtyard. • Resort style design reflects the local community setting. 16 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 17 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia HomesFUTURE DEVELOPMENT AND ACQUISITION PLANS AND OPPORTUNITIES Estia will continue to grow via development and future acquisition opportunities within existing geographic networks. DEVELOPMENT TOTAL NEW PLACES NET ADDITIONAL PLACES LAND HELD DEVELOPMENT APPROVAL LICENSES SECURED STATUS EXPECTED OPENING COMPLETE Twin Waters, QLD Kogarah, NSW Southport, QLD 114 72 110 Maroochydore, QLD 126 UNDERWAY/IN PROGRESS Blakehurst, NSW 108 St Ives, NSW Wollongong, NSW Burton, SA Aldgate, SA Maitland, NSW* Mona Vale, NSW 118 115 28 120 108 54 114 22 110 126 108 118 115 28 90 108 –                           Open Open Open Open Sep 2017 Mar 2018 May 2019 Aug 2019  Under Development 1HFY21 Partial Under Development 2HFY21      Advanced Planning 1HFY22 Advanced Planning FY22 Advanced Planning FY23 Contract subject to approvals FY22 Detailed Assessment TBA *Contract subject to closing terms and conditions (including the transfer of licences) and is expected to be completed by 31 December 2019. Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG Estia Southport – Part of your Community QUALITY AGED CARE FOR THE SOUTHPORT COMMUNITY BUILDING FOR THE FUTURE – ENVIRONMENTAL CONSIDERATIONS The new home is a $28.7 million brownfield development replacing the original home built in the 1970s. Bed capacity has increased from 60 to 110 beds. Through close consultation with the architects, the home was developed to adapt to changing climate as well as reducing negative environmental impact. Estia Southport expanded our network of homes in Queensland to eight homes, including Estia Maroochydore. This is part of Estia’s strategy to provide a breadth of choice for the local communities within the South East Queensland region. Key features • Spacious single rooms with ensuite offer a comfortable environment for residents. • A 17 bed Memory Support Unit provides a safe and supportive environment for people needing more specialist care. • Large café open to the local community. • Lifestyle activities encouraging ongoing community interactions. • 1,800 LED lights installed resulting in an estimated reduction of energy consumption of 20-30% compared to traditional fluorescent lights. • 368 solar panels installed with a solar capacity of 98 kW, reducing CO2 emissions by an estimated 107 tonnes per year. • 110 POD bathrooms, pre-constructed and then installed onsite, streamlining manufacturing process resulting in total wastage of materials during production is less than 1%. • 10 solar pre-heat warm water systems will save an estimated 203,670 MJ/year and approximately $5,000 annual gas cost. • The home is located alongside a sensitive mangrove habitat and the design ensured low impact on the environment, while presenting views and amenity for our residents. 18 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 19 Architects, builders and commissioning teams work together to ensure a smooth transition from building design, through to commissioning and launch. Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia HomesIndustry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG Environmental, Social and Governance (ESG) A snapshot from FY19 GOVERNANCE: Materiality: Whistleblowing Policy: ENVIRONMENTAL: Carbon: SOCIAL: Our People: • Completed first formal Materiality Assessment of Environmental, Social and Governance related issues in line with Global Reporting Initiative (GRI) Standards, engaging more than 2,000 internal and external stakeholders. • Updated Estia’s Whistleblowing Policy to comply with the Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019 that came into effect on 1 July 2019 providing greater legislative protections for whistleblowers. Estia’s Sustainability Committee: Nil Political donations • Implemented Executive Sustainability Committee representing all business units, meeting quarterly formalising integration of ESG issues into wider business strategy. • Published Sustainability Charter on website. • Commissioned a formal Sustainability Strategy to guide focus areas and initiatives over the next three years. Sustainability and Corporate Social Responsibility Memberships: • Member of the Ethics Alliance. Estia’s Organisation Governance: • Organisation risk management and risk profiling framework updated and approved by Board Risk Committee. Data Protection: • Developed Information Security Policy and security incident response plan. • Established Information Security Steering Committee reporting to the Audit and Risk Committee. Privacy Policy: Tax Governance: • Tax Transparency report provided in this Annual Report. Estia’s tax governance is overseen by the Board’s Audit Committee and is guided by its Board Tax Policy and Tax Risk Management Framework. Materialit y O u r P e o p e l S o c i a l O u r C o m m u n i t i e s s t a i n a b i l i ty C o m m i t t e e u S Organisation Governance G o v T a e r n x Our ESG Approach l a t n e m e t s a E n viron C a r b o n E n ergy W • Updated Privacy Policy demonstrating commitment to ensuring employee and consumer privacy is respected in accordance with the Australian Privacy Principles. O ur Supply Chain • Completed a carbon footprint assessment of Estia’s operations and supply chain based on FY18 baseline. Energy: • Solar panels installed at an additional 19 homes by the end of 2019, bringing the total number of Estia homes with panels installed to 58 (84% of portfolio). • LED lighting upgrade program will be completed to additional 28 homes by the end of 2019, bringing the total to 57 homes with upgraded lighting (82% of portfolio). • This second tranche of energy efficiency initiatives will deliver a further reduction in energy consumption of 3,606MWh across the portfolio, reflecting an approximate cost saving of $659,000. • Completed various energy efficiency projects in FY19 that will deliver an additional reduction of 3,361Te of carbon dioxide across the organisation, combined with initiatives from FY18 that targeted a reduction of 6,109Te. • Training and development: 4,959 employees trained in professional development programs and industry specialisation. • Gender diversity: CEW highest ranked gender balanced ASX200 company for second consecutive year.1 • Employee experience survey: 66% of all employees surveyed in second bi-annual company-wide Employee Experience Survey, higher than FY17 participation rate of 49%. • Health and safety: continued to reduce lost time to injury frequency rate from 9.1 in FY18 to 7.6 in FY19. • Employee Assistance Program (EAP): counselling service available to all employees 24/7 and extended to residents and families in FY19. Our Communities: • Partnerships: major corporate sponsor in New South Wales and Queensland of the Centenarian Project for Teenagers; an intergenerational program between 100 young artists and 100 centenarians. • Registered Training Organisations (RTOs) and Universities: continued working relationships with RTOs and Universities in local communities to provide vocational education including student nurse placements. • Maintained total water consumption at FY18 levels Our Supply Chain: across the portfolio including the addition of two new homes in FY19. • Human Rights: Modern Slavery Supply Chain Risk Assessment undertaken for all major suppliers in compliance with the Modern Slavery Act 2018. 1. CEW Senior Executives Survey 2019. G o vernance a n c e Waste: r e t a W Water: • Maintained a 16% diversion rate of waste to landfill. 20 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 21 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG Our approach to Environmental, Social, and Governance (ESG) Governance As one of Australia's largest residential aged care providers, we understand the impact we have on our residents, their families, our employees and the wider community in which we operate. Recognising the growing significance of these non-financial considerations for the long-term sustainability of the organisation, in FY19 we continued our commitment to understanding ESG risks and opportunities and considering these across all elements of governance and decision making. This approach aims to identify where our major impacts occur and where we need to focus our efforts to understand our stakeholders, our communities and the environment. We have established the strategic, operational and governance related foundations across the organisation to ensure we deliver to our potential. This year’s focus areas are summarised on the previous page. These will be further refined in a formal Impact Measurement Framework, which will be part of the Sustainability Strategy published next year. Residents enjoy a catch up over breakfast. 22 Estia Health | 2018-19 Annual Report Our FY19 focus has been maturing our approach to ESG risks and opportunities across the organisation. Driven by Estia Health’s Sustainability Committee, Estia has adopted a strategic roadmap to advance the sustainability agenda across the organisation, consisting of four phases to be rolled out over a period of FY19-FY22: 1 RESTRUCTURING ESG GOVERNANCE A review of the original ESG Committee Terms of Reference, resulted in a revision of membership to include the CEO and Executive team to ensure all aspects of the organisation are involved in the development of Estia Health’s Sustainability Strategy within the broader business strategy. The Committee meets four times a year and has refined the Sustainability Charter which is publicly available on our website and outlines the Committee’s objectives, authority, responsibilities, composition and operation. The Committee reviews and approves key deliverables outlined in the future roadmap and Sustainability Strategy. 2 DEFINING KEY MATERIAL TOPICS TO FOCUS ON OVER THE NEXT THREE YEARS In FY19 the Committee commissioned a formal Materiality Assessment and an Environmental and Social Impact Baseline Review. The Materiality Assessment is a standard process within international reporting standards. We asked a range of stakeholders, including employees, residents, families, and industry bodies which issues mattered most to them and what should be of most strategic importance to Estia. This was conducted via quantitative and qualitative research, engaging over 2,000 stakeholders through online surveys, phone interviews and focus groups. The Environmental and Social Impact Baseline Review is in development and will establish a formal baseline to measure the environmental and social impact of Estia’s operations and supply chain. The insights gained through the Materiality Assessment, in combination with the Environmental and Social Impact Baseline Review will inform Estia’s Sustainability and broader business strategy. 3 DEVELOPING A FORMAL ROADMAP TO ADDRESS KEY HOTSPOTS 4 ADVANCED ENGAGEMENT AND REPORTING The Committee commissioned the development of a formal Sustainability Strategy in FY20. This will include a formal Impact Measurement Framework, which will outline the focus areas and measures of success, key short and long-term initiatives as well as appropriate targets for a three-year plan. The Committee investigated the most appropriate reporting framework. Options are still being considered with the objective of publishing a more integrated Annual Report for FY20. The Committee is also exploring opportunities to increase knowledge and best practice ESG and sustainability management within the organisation. This includes being active members of ESG/Sustainability working groups, including the Ethics Alliance, which Estia became a member of in FY19. 2018-19 Annual Report | Estia Health 23 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia HomesIndustry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG BROADER ORGANISATION GOVERNANCE DATA SECURITY In addition to the ESG governance in place, Estia has corporate governance practices which are contained within Estia’s Corporate Governance Statement. Summarised information is available on page 34 of this Annual Report. There has been further refinement of the organisation risk management and risk profiling framework, which has been updated and approved by the Board Risk Committee. WHISTLEBLOWING POLICY The Whistleblowing Policy has been updated to comply with the Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019, that came into effect on 1 July and provides greater legislative protections for whistleblowers. Employees can make a disclosure under this new legislation, via email, online through the website, by phone or fax as well as via Estia’s Say Something Hotline. This hotline is independently administered by Deloitte and was introduced into Estia in 2017. PRIVACY POLICY Estia has a Chief Privacy Officer and our Privacy Policy demonstrates our commitment to ensuring employees and consumer privacy is respected in accordance with the Australian Privacy Principles and the relevant State laws. Our Policy describes how Estia protects the privacy of personal and sensitive information that is collected, used, disclosed and accessed. The Policy statement is supported by detailed processes which are available to all employees. Customer privacy and data security are focus areas for Estia. Internal governance structures include an Information Security Committee that reports into the Executive Risk Committee. Estia has continued to improve data security and fraud prevention with new threat identification and remediation capabilities and ongoing employee training programs. Third-party security risk assessments and audits are conducted to assess and validate security controls and are performed annually with internal self-assessments performed on a monthly basis. To monitor Estia’s cyber security maturity, the security program is aligned to a best practice cyber security framework (National Institute of Standards and Technology, NIST) which is updated and reviewed bi-annually. TAX GOVERNANCE Estia’s tax governance is overseen by the Board Audit Committee and is guided by its Board Tax Policy and Tax Risk Management Framework. These policies set out Estia’s approach to conducting its tax affairs and the management of tax risk. The policies include internal escalation processes, including to the Audit Committee, dependent on the nature of the risk and are reviewed on a periodic basis by Estia’s tax team with recommendations referred to the Audit Committee for approval. Estia’s philosophy on Tax Risk Management is to ensure that all tax related matters are treated responsibly in line with the relevant tax laws. Estia has a commitment to transparency and providing accurate disclosures and acting with integrity. Environment The Sustainability Committee recognised that to effectively demonstrate progress on reducing environmental impact, baseline data and measurement was needed. BASELINE ENVIRONMENTAL AND SOCIAL IMPACT ASSESSMENT In FY19, Estia Health began a formal Environmental Impact Baseline Review for its portfolio of homes and offices. The collated data from utilities, suppliers and internal systems was used to identify the carbon footprint of Estia’s operations and supply chain, as well as establish a baseline for electricity and water consumption and waste diversion. The full results will be published in Estia’s first dedicated Sustainability Strategy in FY20. CONTINUED ENERGY UPGRADES Estia Health has in progress a continuation of the energy savings projects across the portfolio. This includes installation of solar panels on an additional 19 homes and LED lighting upgrade on an additional 28 homes by the end of 2019. The combined impact of these will deliver a further reduction in energy consumption of 3,606MWh across the portfolio, reflecting a cost saving of $659,000 and 3,361Te of carbon dioxide per year. 24 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 25 Solar panels at Estia Bannockburn. Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia HomesIndustry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG Social OUR PEOPLE CAREER PATHWAYS AND PROGRESSION DIVERSITY As a residential aged care provider, we exist to enrich and celebrate our resident’s lives, through the skills, dedication and compassionate care of our people. Attracting and retaining skilled clinicians, carers and hospitality employees is a key risk for the aged care industry. Estia Health has focused on strategies that will evolve and grow aged care as an attractive profession to clinicians, carers and those that want to make a real difference to people’s lives. ATTRACTING AND HIRING THE RIGHT PEOPLE The Aged Care Workforce Strategy1 identified the need to attract and recruit experienced people and create career pathways to build the skills and sustainability of the aged care workforce. In FY19 we commissioned Korn Ferry to undertake a review of the competencies of our customer facing roles. We are developing competency-based recruitment, training and development to equip our people with the skills to deliver person-centred care. TRAINING AND DEVELOPMENT Training and development remains central to retaining and supporting our employees to ensure they can confidently deliver quality care and the best overall experience to our residents and their families. This year almost 5,000 of our employees have been trained in professional development programs and industry specific initiatives. In the past year we have designed and implemented a suite of leadership programs aimed at developing and retaining our people. Estia continues to provide role specific development and training, including our Emerging Leaders Program, which provides leadership growth in our future leaders. CULTURE AND SUPPORT We understand the importance of listening to our people to understand what matters most to them in working for Estia. We are currently completing our second biannual Employee Experience Survey with Best Practice Australia (BPA) and results show a completion rate of 66%, which is both above the industry average and the 49% participation rate in 2017. Results will be delivered to every home by Estia’s Executive team and will include action plans and culture workshops to embed positive change and develop the organisation’s culture. We have refined Estia’s brand strategy including our employee values and principles with the intention to embed the right behaviors to deliver a quality experience to all in our care. This includes building a strong employee culture that becomes recognised within our local communities, supporting our recruitment strategies. In addition to this, in FY19 Estia’s People and Culture team undertook culture programs to reinforce the importance of resident-focused care. Utilisation of our Employee Assistance Program has had a 25% increase in usage from FY18. This is a free and confidential counselling service which can be accessed by all Estia employees and their immediate families. In FY19 it has been made available to residents and their families. Estia is committed to creating a diverse work environment and embraces diversity as a core value and attribute of our organisation. Diversity can increase opportunity for recruitment of high-quality employees from a range of backgrounds, which can help foster closer connections with our diverse cohort of residents, families and employees. Estia is committed to gender diversity and our Board lead by example with 43% of positions held by women, and 44% of Executive level roles held by women. This year we have launched a new Diversity Policy. The Policy will be reviewed annually and covers a variety of factors such as gender, work and life balance. HEALTH AND SAFETY The safety of our residents, their families and our employees remains paramount to our organisation. In FY19 Estia has continued to build a strong culture of health and safety, which has resulted in Lost Time to Injury Frequency Rate (LTIFR) improving from 16.9 in FY17, 9.1 in FY18 to 7.6 in FY19. All employees participate in mandatory work ready programs including manual handling, fire and emergency and infection prevention. This training continues with regular toolbox training delivered by Estia’s Work Health and Safety teams. All incidents are captured via a centralised reporting system and there is regular communication and training on how to use the system, with a mobile app also available to record any incidents, which is utilised by the leadership, Work Health and Safety and Quality teams. Each Estia home has a Work Health and Safety Committee, who meet monthly and review reported incidents. Our independent Dial-a-Doctor service using specialists in occupational medicine has also been readily utilised by our employees. Early intervention using this service, enables employees to return to work following an injury. HUMAN RIGHTS AND SUPPLY CHAIN RISK In accordance with the requirements of the Federal Modern Slavery Act 2018 the Sustainability Committee commissioned a review of Estia’s supply chain for risk of modern slavery violation (Supply Chain Social Risk Screening). Results show that whilst overall risk is low, the procurement categories of construction and machinery and equipment contain the highest level of risk for Estia. Over FY20 Estia will be working to establish a category management plan to ensure these risks are appropriately mitigated. OUR COMMUNITIES As a national residential aged care organisation, it is vital we develop lasting and meaningful relationships with our local communities All of our homes engage with their communities in a variety of ways. This includes visiting and supporting local clubs, Churches and cultural groups, collaborating with bowls clubs, men’s sheds and sports teams, as well as developing intergenerational projects with schools and kindergartens. Moving forward as part of next year’s Sustainability Strategy, we aim to implement a consistent and streamlined approach to increasing community engagement across Estia’s network, which will enhance the social value of our homes within their local communities. 1. Aged Care Workforce Strategy - agedcare.health.gov.au/reform/aged-care-workforce-strategy-taskforce 26 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 27 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia HomesIndustry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG Case Studies Emerging Leaders Program Estia’s Emerging Leaders Program supports leadership growth in our potential future leaders. This 12-month program focuses on modules that include communications, financial management, leadership and coaching. Recent graduate of the inaugural program, Rohit Tiwari, Senior Quality Manager for Estia said of the program ‘The Emerging Leaders program has certainly added a lot of value to the way I work and the way I communicate with my colleagues. The various modules that were included in the program have helped build my confidence in these areas and assist me in the journey to becoming an influential leader’. The Centenarian Portrait Project by Teenagers Estia is a major corporate sponsor in New South Wales and Queensland of the Centenarian Project for Teenagers, matching 100 teenage artists with 100 centenarians. From storytelling, reminiscing, joy and laughter, comes unique portraits of the centenarians. These portraits which are exhibited at major community centres give the general public the opportunity to see what 100 years of life looks like. The project often results in unlikely friendships as the students and centenarians build relationships helping them remain connected with their community, while changing some of the perceptions that younger generations may have around ageing. Recent graduate of the ‘Emerging Leaders Program’ – Rohit Tiwari. Estia resident Ilga with student artist. 28 Estia Health | 2018-19 Annual Report Residents enjoy a friendly game of pool. Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia HomesTax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes CHIEF FINANCIAL OFFICER’S INTRODUCTION Estia Health Limited (“Estia” or the “Company”) is one of Australia’s largest residential aged care providers caring for over 8,000 residents in the year across 69 homes in New South Wales, Queensland, Victoria and South Australia. The Company’s core focus is on providing high-quality residential aged care which is formally recognised in our Family Code and spreads through the Company in a range of initiatives across operations and corporate governance. The Company approaches tax risk in a way that minimises risk and aims to maintain appropriate relationships with the Australian Tax Office (“ATO”) and other relevant tax authorities. To minimise tax risk, Estia: • Maintains a framework to ensure compliance with all statutory tax obligations; • Maintains a tax risk management framework including undertaking tax assessments before implementing material transactions or arrangements that may lead to an increase in tax risk; • Manages its tax affairs in a proactive manner in accordance with the “spirit of the law”; and • Maintains appropriate relationships with the ATO and other relevant tax authorities. The information provided in this Report is released on a voluntary basis in accordance with the recommendations contained in the Board of Taxation’s Voluntary Tax Transparency Code. The Report should be read in conjunction with the financial statements on pages 43 to 128 of this Annual Report. We are pleased to disclose our taxes paid in Australia and to detail our approach to tax management. Stephen Lemlin Chief Financial Officer Tax Transparency Report For the year ended 30 June 2019 ESTIA HEALTH LIMITED ABN 37 160 986 201 Chief Financial Officer’s Introduction A TAX PAYMENTS & RECONCILIATIONS A1 Income Tax Expense Reconciliation A2 Reconciliation of Income Tax Expense to Current Tax Liability / Receivable A3 Identification of Material Temporary and Non-Temporary Differences B OUR APPROACH TO TAX B1 Tax Governance and Strategy B2 Summary of Tax Contributions B3 International Related Party Dealings 31 32 32 32 33 33 33 2018-19 Annual Report | Estia Health 31 TAX TRANSPARENCY REPORT FY19 PART A: TAX PAYMENTS & RECONCILIATIONS A1 INCOME TAX EXPENSE RECONCILIATION The below information is presented in accordance with the relevant Australian Accounting Standards and is an extract from the information disclosed in Note B7 of this Annual Report. Accounting profit before income tax At the Australian statutory income tax rate of 30% (2018: 30%) Adjustments in respect of income tax of previous year Permanent differences Utilisation of unrecognised tax losses Other Income tax expense Effective tax rate 2019 $’000 57,829 17,349 (632) 4 (182) - 16,539 29% 2018 $’000 57,165 17,150 (1,113) (115) - 89 16,011 28% Estia’s Effective Tax Rate (“ETR”) is calculated as its income tax expense divided by accounting profit before income tax. The ETR deviates from the Australian statutory tax rate of 30% due to differences between accounting standards and tax legislation. A2 RECONCILIATION OF INCOME TAX EXPENSE TO CURRENT TAX LIABILITY / RECEIVABLE Income tax expense in the consolidated income statement Add/(subtract): Net deferred tax liabilities charged to income Over/(under) provision in prior years Current tax expense included in income tax expense Add/(subtract): Tax payments to tax authorities Net opening balance Net current tax receivable A3 2019 $’000 16,539 (642) 341 16,238 (15,932) (913) (607) 2018 $’000 16,011 190 966 17,167 (22,307) 4,227 (913) IDENTIFICATION OF MATERIAL TEMPORARY AND NON-TEMPORARY DIFFERENCES A detailed reconciliation of accounting profit to income tax expense and material temporary and non-temporary differences is disclosed in Note B7 of this Annual Report. The non-temporary difference of $4,000, as set out above, was driven by a number of small offsetting items including share-based payment expenses. These expenses are considered to be non-temporary differences as they have no cash settlement option and therefore are not deductible for tax purposes. The temporary differences of $300,000 were driven by changes in accrued expenses, payroll related liabilities such as annual leave and differences in tax and accounting depreciation rates of buildings. The temporary differences are as a result of different timing rules between tax and accounting, however the differences will eventually align. Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes TAX TRANSPARENCY REPORT FY19 PART B: OUR APPROACH TO TAX B1 TAX GOVERNANCE AND STRATEGY Estia’s tax governance is overseen by the Board’s Audit Committee and is guided by its Board Tax Policy and Tax Risk Management Framework. These policies set out Estia’s approach to conducting its tax affairs and the management of tax risk. The policies include internal escalation processes, including to the Board’s Audit Committee, dependent on the nature of the risk and are reviewed on a periodic basis by Estia’s tax team with recommendations referred to the Audit Committee for approval. Estia’s philosophy on Tax Risk Management is to ensure that all tax related matters are treated responsibly in line with the relevant tax laws. Estia has a commitment to transparency and providing accurate disclosures and act with integrity in all our dealings. Where there is uncertainty around a tax position in relation a transaction or category of transactions, the Company will perform an analysis prior to adopting a tax position. No tax position will be taken unless the position taken is considered to be more likely than not to be correct, as defined in the Taxation Administration Act 1953. All tax matters that are considered to be high risk are to be reported to the Board’s Audit Committee. Where appropriate, Estia engages with its external advisers to receive tax advice. Estia seeks to have appropriate relationships with the ATO and other relevant tax authorities. Estia adopts structures and positions that align to its business outcomes and values and are not driven by tax outcomes. B2 SUMMARY OF TAX CONTRIBUTIONS Taxes paid by Estia Income Tax Payroll Tax Fringe Benefits Tax Council Rates Land Tax Stamp Duty Total Taxes collected by Estia Pay As You Go (PAYG) withholding GST (collected and remitted) GST (paid but reclaimed) Total Australian Federal Government State Governments Local Governments Total All taxes paid and collected by Estia are to Australian revenue authorities. B3 INTERNATIONAL RELATED PARTY DEALINGS Estia has no international related party dealings. 2019 $’000 15,932 17,584 180 1,946 1,065 325 37,032 2019 $’000 63,730 246 (17,795) 46,181 2019 $’000 62,293 18,974 1,946 83,213 2018 $’000 22,307 16,361 205 2,014 136 - 41,023 2018 $’000 58,377 98 (13,384) 45,091 2018 $’000 67,603 16,497 2,014 86,114 Estia Health Limited 32 Estia Health | 2018-19 Annual Report 4 Estia Health Limited 2018-19 Annual Report | Estia Health 33 5 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG Corporate Governance CORPORATE GOVERNANCE STATEMENT BOARD COMMITTEES Under ASX Listing Rule 4.10.3, Estia Health is required to benchmark its corporate governance practices against the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, 3rd edition. Estia confirms that it has complied with all the ASX Governance Recommendations for the period 1 July 2018 to 30 June 2019 as outlined in our Corporate Governance Statement and Appendix 4G. The Corporate Governance Statement is current as at 16 August 2019 and has been approved by the Board. Our Corporate Governance Statement and Appendix 4G are available on the Estia website at estiahealth.com.au The Board and management are committed to achieving the highest standards of professional conduct across all Estia operations. There is regular review and enhancement of mechanisms to achieve these standards. Some of the governance activities conducted during the year include: • Continued Board succession, including the appointment of Ms Karen Penrose, supported by a refresh of the Board skills matrix. • Regularly scheduled meetings with external auditors. • Engagement of an independent external internal auditor resource. • Overseeing the succession of the CEO. Mr Ian Thorley was appointed MD/CEO of Estia, replacing Ms Norah Barlow who moved into a Non-executive Director position. • Overseeing a review of the Company’s risk management framework and practices and endorsing the findings and actions. • Engaging with key regulators. • Inviting industry experts to Board meetings. • Board visits to homes, annual leadership conference and new home openings. • Undertaking a Board performance review. • Reviewing the Company’s strategy. • Reviewing key Corporate Governance policies and processes, including a review of the Board and Board Committee charters. • Formation of an executive ESG Committee with agreed focus areas. Estia’s four standing Board Committees assist the Board in its oversight role. The Audit Committee, Risk Management Committee, Nomination and Remuneration Committee, and Property and Investment Committee comprise members who are independent Directors and each Board Committee has an independent Director as its Chairman. All Board members are sent Board Committee papers and may attend any Board meeting. Subsequent to each Board Committee meeting, the Chair presents matters discussed and puts forward recommendations to the Board. The Directors’ Report includes the membership of each Board Committee. In August 2019, an additional Board Committee was formed, Class Action and Regulatory Committee. RESPONSIBILITIES OF MANAGEMENT The MD/CEO has been granted authority for matters not reserved for the Board or a Board Committee. The CEO, COO and CFO report to the Board at each meeting. In addition to regular reporting from management, the Board has unlimited access to senior management and external advisers. For further information on Corporate Governance at Estia, refer to the Corporate Governance Statement and the following documents, all found on the Company website at estiahealth.com.au/investor- centre/corporate-governance: • Board and Committee Charters • Disclosure and Communication Policy • Diversity Policy • Trading Policy • Code of Conduct • WEGA Report • Investment Policy and Liquidity Management Strategy Additional information on Environmental, Social and Governance is available on the Company website at estiahealth.com.au Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes From left to right Dr Gary Weiss AM, Ian Thorley, Norah Barlow ONZM, Helen Kurincic, Paul Foster, The Hon. Warwick L Smith AO, Karen Penrose Our Board DR GARY WEISS, AM Non-executive Director and Chairman LL.B (Hons), LL.M (with Dist), JSD Gary holds the degrees of LL.B (Hons) and LL.M (with dist.) from Victoria University of Wellington, as well as a Doctor of Juridical Science (JSD) from Cornell University, New York. Gary has extensive international business experience and has been involved in numerous cross-border mergers and acquisitions. Gary is Chairman of Ridley Corporation Limited and Ardent Leisure Group Limited, Executive Director of Ariadne Australia Limited, and a Director of several other public companies including Thorney Opportunities Limited, Hearts and Minds Investments Limited and The Straits Trading Company Limited. Gary is also a Commissioner of the Australian Rugby League Commission and a Director of the Victor Chang Cardiac Research Institute. Gary was Chairman of Clearview Wealth Ltd from 2013 to May 2016, Executive Director of Guinness Peat Group plc from 1990 to April 2011 and has held directorships of numerous companies, including Tag Pacific Limited, Pro-Pac Packaging Limited, Coats Group plc (Chairman), Premier Investments Ltd, Westfield Group, Tower Australia Limi, Australian Wealth Management Limited, Tyndall Australia Limited (Deputy Chairman), Joe White Maltings Limited (Chairman), CIC Limited, Whitlam Turnbull & Co Limited and Industrial Equity Limited. Gary has authored numerous articles on a variety of legal and commercial topics. Committees: Nomination and Remuneration Committee, Audit Committee, Property and Investment Committee, Class Action and Regulatory Committee (Chair). Listed Company Directorships (including those in the last three years): Ridley Corporation Limited, Ariadne Australia Limited, Ardent Leisure Group Limited, Thorney Opportunities Ltd, Hearts and Minds Investments Limited, Tag Pacific Limited (resigned 31 August 2017), Premier Investments Limited (28 July 2018), Pro-Pac Packaging Limited (resigned 27 November 2017). IAN THORLEY Chief Executive Officer and Managing Director Ian has over 30 years’ health and aged care experience in both Australia and overseas. Appointed as Chief Executive Officer in October 2018, Ian was previously Estia Health's Chief Operating Officer from October 2016, where he was responsible for leading Estia’s operations and care teams, 34 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 35 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGembedding key improvements resulting in revenue growth and operational efficiencies, while delivering consistently high standards of quality care to residents across a growing portfolio of homes. Ian’s executive experience includes CEO and COO roles in large aged care groups, acute private hospital groups and diagnostic services. Ian has been at the forefront of major developments that have shaped Australia’s healthcare sector, including the privatisation of public hospitals, new reimbursement and funding models, and a broad range of public/private sector service models. Ian has held the position of Non-executive Director in private equity owned, and ASX listed companies and has consulted to aged care operators, private hospital groups, health insurers, health logistics and specialist health recruitment businesses throughout Australia. Ian is a Graduate of the Australian Institute of Company Directors (GAICD) and holds a Master of Commerce from the University of NSW. NORAH BARLOW, ONZM Non-executive Director BCA, ACA Norah holds a Bachelor of Commerce and Administration from Victoria University, and is a Chartered Accountant. Norah is amongst Australasia’s most experienced and respected executives and directors, with an in-depth knowledge of the aged and health care sector. Norah also holds extensive experience as the highly-respected former CEO and former Director of Summerset Group, a NZX and ASX-listed company named Australasia’s best retirement village operator four years running. Norah has a strong background across business leadership and management, strategy, corporate finance, governance, tax and accounting. Norah is a member of the National Advisory Council on the Employment of Women, was President of the Retirement Villages Association (NZ) for seven years and made an Officer of the New Zealand Order of Merit for services to business in 2014. Norah was also a Non-executive Director of Ingenia Communities Group and chair of the Audit Committee for Methven Limited. Norah stepped down as CEO of Estia in November 2018 and remains on the board as a Non-executive Director. Norah is currently Chief Executive of Heritage Lifecare. Listed Company Directorships (including those in the last three years): Evolve Education Group Limited, Ingenia Communities Group (resigned 15 November 2016), Methven Limited (resigned 11 October 2017). HELEN KURINCIC Non-executive Director MBA, Grad Dip Wom Stud, PBC Crit Care, Cert Nsg, FAICD Helen holds a Master of Business Administration from Victoria University. Helen has extensive executive and Non-executive experience across the healthcare sector. Helen is Chairman of Integral Diagnostics Limited, and a Non-executive Director of HBF Health Limited and McMillan Shakespeare Limited. Helen was previously the Chief Operating Officer and Director of Genesis Care for seven years from early inception in 2007, creating Australia’s largest radiation oncology and cardiology service business. Previous roles also include Non-executive Director of Sirtex Medical Limited, Non-executive Director of DCA Group Limited which included residential aged care in Australia and New Zealand, Non-executive Director of AMP Capital Investor’s aged care business Domain Principal Group, CEO and Executive Director of residential aged care provider Benetas and Board member of Melbourne Health and Orygen Research Centre. Helen has also been actively involved in healthcare government policy reform across various areas of the healthcare sector. Committees: Risk Management Committee (Chair), Nomination and Remuneration Committee. Listed Company Directorships (including those in the last three years): Integral Diagnostics Ltd (Chair), McMillan Shakespeare Limited, Sirtex Medical Limited (resigned 19 September 2018). PAUL FOSTER Non-executive Director B.Comm, MA, MAICD Paul holds a Bachelor of Commerce from the University of Wollongong and a Master of Arts from UNSW Australia. Paul is an experienced financial services professional and Company Director, with more than 20 years’ investment experience in the infrastructure, private equity and real estate asset classes, including substantial investments in the healthcare sector. Paul is a Managing Director at Pacific Equity Partners, one of Australia’s largest alternative investment management firms. Paul is also an alternate Director of Intellihub Holdings Pty Ltd. Until May 2015, he was head of AMP Capital’s Infrastructure investment business in Australia and New Zealand, where he was responsible for the management of $4.5 billion of infrastructure investments on behalf of Australian and global superannuation funds and investors. Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes In this role, and amongst investments spanning the aged care, transport, timberland and social infrastructure sectors, Paul was responsible for the investment that created the second largest for profit aged care business in Australia. Paul was a Director of the Opal Aged Care Group (formerly Domain Principal Group) between 2010 and 2015 and was Chairman of the Group in 2011. Prior to AMP Capital, Paul was an investment professional at Macquarie Bank Group and Perpetual Investments. Committees: Nomination and Remuneration Committee (Chair), Risk Management Committee, Property and Investment Committee. THE HON. WARWICK L. SMITH, AO Non-executive Director LLB Warwick is Chairman of the Advisory Board of Australian Capital Equity, which has significant interests in media, entertainment, research and technology development, as well as property and industrial activities. He is a Director of Seven Group Holdings, a leading Australian diversified operating and investment group with market leading businesses and investments in industrial services, oil and gas, and media, Chairman of the Australia–China Council and newly announced Chairman-designate of the National Foundation for Australia-China Relations and Chairman of the China Leadership Group of the Business Council of Australia. In addition, he is Global Trustee of the Asia Society and Chairman Emeritus of the Asia Society in Australia. KAREN PENROSE Non-executive Director B.Com (UNSW), FAICD and CPA Karen is an experienced Company Director who has served as a Non-executive Director on the boards of ASX listed companies in financial services, resources, aged care and infrastructure sectors for the past five years. Karen's executive career was in leadership and CFO roles, mainly in financial services. She is passionate about customer outcomes, financial management and well-versed in operating in a rapidly changing regulatory environment. Karen is a Director and Chair of the Audit Committee of Bank of Queensland, Spark Infrastructure RE Limited and Vicinity Centres. She is also Deputy Chairman of Marshall Investments. Karen is a member of Chief Executive Women and Women Corporate Directors. Committees: Audit Committee (Chair), Risk Management Committee, Class Action and Regulatory Committee. Listed Company Directorships (including those in the last three years): Bank of Queensland Limited, Vicinity Centres, Spark Infrastructure Group, Future Generation Investment Company Limited (resigned October 2018), AWE Limited (resigned April 2018). LEANNE RALPH Company Secretary Formerly, he was Chairman of E*TRADE, Chairman New South Wales & Australian Capital Territory and Senior Managing Director of the Australia New Zealand Banking Group Limited (ANZ), Chairman, ANZ Thailand and Director, ANZ Greater China. Leanne is an experienced Company Secretary with over 15 years in this field, and holds this position for a number of ASX-listed entities. Leanne is a fellow of the Governance Institute of Australia and a Graduate Member of the Australian Institute of Directors. He was an Executive Director with Macquarie Bank for 10 years and an Australian Federal Government Minister, with a parliamentary career spanning 15 years, including Minister for Family Services and Aged Care. He was also Australia's first Telecommunications Ombudsman and has received a Centenary Medal and has twice been awarded an Order of Australia. Committees: Property and Investment Committee (Chair), Audit Committee, Class Action and Regulatory Committee. Listed Company Directorships (including those in the last three years): Seven Group Holdings Limited, Magnis Energy Technologies Limited, Coates Hire Limited (resigned January 2019). 36 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 37 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGShareholder Information Additional information required under ASX Listing Rule 4.10 and not shown elsewhere in this Annual Report is as follows. This information is current as at 23 August 2019. DISTRIBUTION OF SHAREHOLDERS The distribution of issued capital is as follows: SIZE OF HOLDING NO. OF SHAREHOLDERS ORDINARY SHARES % OF ISSUED CAPITAL 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total 75 959 1,185 3,135 1,655 7,009 220,174,413 22,121,928 8,938,591 8,577,009 804,501 260,616,442 84.48 8.49 3.43 3.29 0.31 100.00 DISTRIBUTION OF PERFORMANCE RIGHTS HOLDERS The distribution of unquoted Performance Rights on issue are: SIZE OF HOLDING NO. OF HOLDERS UNLISTED PERFORMANCE RIGHTS % OF TOTAL PERFORMANCE RIGHTS 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total 3 6 0 0 0 9 1,219,074 303,629 0 0 0 1,522,703 80.06 19.94 0.00 0.00 0.00 100.00 LESS THAN MARKETABLE PARCELS OF ORDINARY SHARES There are 357 shareholders with unmarketable parcels totalling 20,059 shares. UNQUOTED EQUITY SECURITIES The Company had the following unquoted performance rights on issue as at 23 August 2019: 9 holders of performance rights issued as part of an employee incentive scheme 1,522,703 100.0% RESTRICTED SECURITIES The Company had no restricted securities on issue as at 23 August 2019. Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes 20 LARGEST SHAREHOLDERS The 20 largest shareholders of quoted equity securities are as follows: NAME NO. OF FULLY PAID ORDINARY SHARES % OF ISSUED CAPITAL HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited Network Investment Holdings Pty Ltd Citicorp Nominees Pty Limited Argo Investments Limited BNP Paribas Noms Pty Ltd National Nominees Limited BNP Paribas Nominees Pty Ltd Emalyn Holdings Pty Limited Custodial Services Limited 3rd Wave Investors Ltd Peter & Lyndy White Foundation Pty Ltd Mr Mark Edward Kennedy UBS Nominees Pty Ltd Mr Vincent Michael O'sullivan Jenny Lynn Properties Pty Ltd Mark Edward Kennedy AMP Life Limited Kennbros Pty Limited National Nominees Limited Total for top 20 shareholders Total Quoted Equity Securities 57,749,844 40,307,082 24,665,858 23,854,361 11,809,250 10,376,833 8,683,995 5,703,835 4,102,766 3,204,274 3,000,000 2,181,568 1,910,678 1,822,154 1,485,000 1,315,963 1,277,438 1,186,593 1,156,834 854,684 206,649,010 260,616,442 22.16 15.47 9.46 9.15 4.53 3.98 3.33 2.19 1.57 1.23 1.15 0.84 0.73 0.70 0.57 0.50 0.49 0.46 0.44 0.33 79.29 SUBSTANTIAL SHAREHOLDERS The names of the Substantial Shareholders listed as disclosed by notices submitted to the ASX as at 23 August 2019: NAME NO. OF ORDINARY FULLY PAID SHARES % OF ISSUED CAPITAL Perpetual Limited and Subsidiaries Citigroup Global Markets Australia Pty Ltd Seven Group Holdings Limited, Network Investment Holdings Pty Ltd & SGHs other subsidiaries Vanguard Group Dimensional Entities 31,417,247 18,232,894 22,262,396 13,551,233 13,039,266 12.06 7.00 8.54 5.20 5.00 38 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 39 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGTax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes VOTING RIGHTS SHARE REGISTRY In accordance with the Constitution each member present at a meeting whether in person, or by proxy, or by power of attorney, or in a duly authorised representative in the case of a corporate member, shall have one vote on a show of hands, and one vote for each fully paid ordinary share, on a poll. Performance rights have no voting rights. ON-MARKET BUY-BACKS There is no current on-market buy-back in relation to the Company’s securities. SHARE TRADING AND PRICE Estia Health shares are traded on the Australian Stock Exchange (ASX). The stock code under which they are traded is ‘EHE’ and details of trading activity and share price are available online through the ASX website, asx.com.au. Share price data is also available on the Company website at estiahealth.com.au/investor-centre WEBSITE ACCESS You can access Estia’s online Investor Centre by visiting estiahealth.com.au/investor-centre. The Investor Centre provides you with access to important information about Estia’s performance, including ASX announcements, Annual Reports, share price graphs and details about Estia’s corporate governance framework. Shareholders are also able to access and update their shareholding information online by visiting the Investor Centre and clicking on ‘Your Account’. Shareholders are able to: • Register and create a portfolio view of their holdings; • Update or amend details; • Download forms, and; • View transaction history and download statements. Shareholders with enquiries about their shares can also contact Estia’s Share Registry as follows: Estia Share Registry C/- Link Market Services Limited Locked Bag A14, Sydney South, NSW, 1235 Telephone: 1300 554 474 ASX Code: EHE Email: registrars@linkmarketservices.com.au Website: linkmarketservices.com.au When communicating with the Share Registry, please quote your Security Reference Number (SRN) or Holder Identification Number (HIN) as shown on your Issuer Sponsored/CHESS statements together with your current address. For Company related requirements, please email investor@estiahealth.com.au. CHANGE OF NAME, ADDRESS OR BANKING DETAILS Issued sponsored shareholders should contact the Share Registry to advise of a change of personal details. CHESS sponsored shareholders should notify their sponsoring broker in writing of a change in their personal details and instruct them to update the Share Registry. DIVIDEND REINVESTMENT PLAN On 19 June 2019 Estia announced the reinstatement of its DRP which allows eligible shareholders to reinvest all or part of their dividends into Estia shares. Further information on the DRP can be found at estiahealth.com.au/investor-centre/dividend- reinvestment-plan TFN/ABN NUMBER Shareholders are strongly advised to lodge their TFN, ABN or relevant TFN exemption. For shareholders who have not provided these details then Estia is obliged to deduct tax at the highest marginal rate (plus the Medicare levy) from the unfranked portion of any dividend payment. Shareholders can obtain TFN/ABN notification forms by contacting the Share Registry. REGISTERED OFFICE Estia Health Limited Level 9, 227 Elizabeth Street Sydney, NSW 2000 Telephone: +61 2 9265 7900 Website: estiahealth.com.au 40 Estia Health | 2018-19 Annual Report Marcia, Client Services Officer with resident Margaret. Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGAnnual Financial Report For the year ended 30 June 2019 ESTIA HEALTH LIMITED ABN 37 160 986 201 Corporate information Directors' report Auditor's independence declaration Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Section A: About this report Section B: Our performance Section C: Assets and liabilities Section D: Capital, financing, RADs and risk Section E: Other information Directors' declaration Auditor's report 44 45 74 75 76 77 78 79 81 90 99 111 121 122 Registered Nurses and carers work closely together to deliver care to our residents. 2018-19 Annual Report | Estia Health 43 REGISTERED OFFICE Level 9, 227 Elizabeth Street Sydney NSW 2000 PRINCIPAL PLACE OF BUSINESS Level 9, 227 Elizabeth Street Sydney NSW 2000 SOLICITORS King & Wood Mallesons Governor Phillip Tower 1 Farrer Place Sydney NSW 2000 BANKERS Westpac Banking Corporation 275 Kent Street Sydney NSW 2000 AUDITORS Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Corporate Information ABN 37 160 986 201 DIRECTORS Dr. Gary Weiss AM Chairman Ian Thorley Managing Director and CEO Appointed 23 November 2018 Norah Barlow ONZM Non-executive Director Resigned as Managing Director and CEO on 23 November 2018, resumed as Non-executive Director on that date Andrew Harrison Resigned 17 October 2018 Paul Foster Nomination and Remuneration Committee Chair Hon. Warwick L Smith AO Property and Investment Committee Chair Helen Kurincic Risk Management Committee Chair Karen Penrose Audit Committee Chair Appointed 17 October 2018 COMPANY SECRETARY Suzy Watson Appointed 23 January 2019 Resigned 03 April 2019 Leanne Ralph Resigned 23 January 2019 Re-appointed 03 April 2019 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes DIRECTORS' REPORT Your Directors submit their report for the year ended 30 June 2019. DIRECTORS The names and qualifications of the Group’s Directors in office during the financial year and until the date of this report are set out below. Directors were in office for the entire period unless otherwise stated. More information relating to the Directors can be found in the investor centre section of the Group's website (http://www.estiahealth.com.au/investor-centre/corporate-profile). DR. GARY H WEISS AM (CHAIRMAN) Gary was appointed as an Independent Non-executive Director in February 2016 and was appointed as Chairman on 31 December 2016. Gary holds the degrees of Bachelor of Laws (Hons) and Master of Laws (with distinction) from Victoria University of Wellington, as well as a Doctor of Juridical Science (JSD) from Cornell University, New York. IAN THORLEY (MANAGING DIRECTOR AND CEO) Ian was appointed as the Managing Director and CEO on 23 November 2018. Ian previously held the roles of Chief Operating Officer and Deputy CEO prior to the appointment. Ian holds a Master of Commerce from the University of NSW. NORAH BARLOW ONZM Norah was appointed to the Board in November 2014 as an Independent Non-executive Director. Norah was appointed Acting CEO from September 2016, and appointed permanently to the roles of Managing Director and CEO in November 2016. Norah stepped down from the roles of Managing Director and CEO on 23 November 2018 and remains on the Board as a Non-executive Director. Norah holds a Bachelor of Commerce and Administration from Victoria University of Wellington and is a Chartered Accountant. PAUL FOSTER (NOMINATION AND REMUNERATION COMMITTEE CHAIR) Paul was appointed as an Independent Non-executive Director in February 2016. Paul holds a Bachelor of Commerce from the University of Wollongong and a Master of Arts from the University of NSW. HON. WARWICK L SMITH AO (PROPERTY AND INVESTMENT COMMITTEE CHAIR) Warwick was appointed as an Independent Non-executive Director in May 2017. Warwick holds a Bachelor of Laws from the University of Tasmania. HELEN KURINCIC (RISK MANAGEMENT COMMITTEE CHAIR) Helen was appointed as an Independent Non-executive Director in July 2017. Helen originally qualified as a Registered Nurse specialising in Intensive Care and holds the degrees of Graduate Diploma in Women's Studies and an MBA from Victoria University, Melbourne and has also attended Harvard Business School where she completed programs in Best Practice Leadership and Business Innovations in Global Healthcare. KAREN PENROSE (AUDIT COMMITTEE CHAIR) Karen was appointed to the Board on 17 October 2018 as an Independent Non-executive Director. Karen holds a Bachelor of Commerce from UNSW, CPA and FAICD. ANDREW HARRISON Andrew was appointed to the Board in November 2014 as an Independent Non-executive Director. Andrew resigned from the Board on 17 October 2018. Estia Health Annual Financial Report 2018 - 2019 4 44 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 45 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGDIRECTORS' REPORT COMMITTEE MEMBERSHIP During the financial year, the Group had the following committees: Membership Audit Committee Nomination and Remuneration Committee Risk Management Committee Property and Investment Committee Chair Member Member Former member Karen Penrose Dr. Gary H Weiss AM Hon. Warwick L Smith AO Helen Kurincic Andrew Harrison Paul Foster Dr. Gary H Weiss AM Paul Foster Helen Kurincic Karen Penrose Andrew Harrison Hon. Warwick L Smith AO Dr. Gary H Weiss AM Paul Foster DIRECTORS' MEETINGS The number of meetings of directors (including meetings of committees of directors) held during the year and the number of meetings attended by each Director were as follows: Directors’ meetings Audit Committee Nomination and Remuneration Committee Risk Management Committee Property and Investment Committee No. of meetings held: Dr. Gary H Weiss AM Ian Thorley Norah Barlow ONZM Paul Foster Hon. Warwick L Smith AO Helen Kurincic Karen Penrose Andrew Harrison DIRECTORS' HOLDINGS 12 4 Eligible Attended Eligible Attended Eligible Attended Eligible Attended Eligible Attended 5 7 2 12 9 12 12 12 12 10 2 12 9 12 11 12 12 9 2 5 - - - 5 - 4 1 5 - - - 4 - 4 1 4 - - 4 - 4 - - 3 - - 4 - 4 - - - - - 7 - 7 3 1 - - - 7 - 7 3 1 2 - - 2 2 - - - 2 - - 2 2 - - - As at the date of this report, the interest of the directors in the ordinary shares of Estia Health Limited were: Director Number of ordinary shares Dr. Gary H Weiss AM Ian Thorley Norah Barlow ONZM Paul Foster Hon. Warwick L Smith AO Helen Kurincic Karen Penrose COMPANY SECRETARY SUZY WATSON 45,312 82,534 129,474 24,000 90,000 25,000 18,833 Suzy was appointed as Company Secretary on 23 January 2019 and resigned from the position on 3 April 2019. Suzy remains employed as the General Counsel for the Group. LEANNE RALPH Leanne was appointed as Company Secretary on 21 December 2017. Leanne resigned from the position on 23 January 2019 and was re-appointed as Company Secretary on 3 April 2019. Leanne is an experienced Company Secretary and is a Fellow of the Governance Institute of Australia and a member of the Australian Institute of Company Directors. Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes DIRECTORS' REPORT PRINCIPAL ACTIVITIES AND STRATEGY The principal activities of the Estia Health Group during the year ended 30 June 2019 continued to be the provision of services in residential aged care homes in Australia as an Approved Provider under the Aged Care Act 1997. The Group’s strategy remains to: • • • Be a market leader in owning and developing high quality residential aged care homes in Australia; Provide residents in our homes with the highest standards of aged care services in an innovative, supportive and caring environment; and Deliver earnings growth through a development pipeline, enhancement of current homes, and acquisitions. THE MARKET IN WHICH ESTIA OPERATES In order to access Government supported residential aged care services, potential residents must be assessed as qualifying for such services by a Government Aged Care Assessment Team (known as 'ACAT'), and may then choose a residential aged care home of their choice. Only Approved Providers, such as Estia, with approved bed licences in accredited homes are eligible to provide services which qualify for Government funding support. The Aged Care Funding Authority's ('ACFA') 2018 Annual Report identified 200,689 operating beds/places in Australia, and ACFA has further reported that 241,723 people accessed residential aged care services in 2017-18, across 886 providers. The ageing of the Australian population and in particular the ageing of the “baby boomers” will see a marked increase in the number of Australians likely to need aged care, including residential aged care in coming years. The Group’s growth strategy is to expand services to meet this growing demographic demand. ACFA has also reported in its submission to the Aged Care Royal Commission in April 2019, that there has been a significant overall decline in the financial performance of the sector in the last two years as a result of increases in Government funding not being at a sufficient rate to cover the increase in operating cost, principally staff costs. THE GROUP’S PORTFOLIO The Group delivers services across 68 homes in New South Wales, Queensland, South Australia and Victoria, 61 of which are freehold sites. As at 30 June 2019, these homes had 6,102 operational bed licences, and the Group holds a further 356 off-line and provisional licences pending activation through future developments. During the year, the Group opened a new home at Southport, QLD, with 110 beds, and expects to open a new home at Maroochydore, QLD in August 2019 which has been constructed during FY19. An older home at Mona Vale, NSW was closed in May 2019 to prepare the site for a new more contemporary home. Further information on future developments is referred to later in this report. The Group employs in excess of 7,500 employees as nurses, care workers, catering staff, support and administration staff and management. REGULATORY ENVIRONMENT, REFORM AND THE AGED CARE ROYAL COMMISSION The residential aged care sector in which the Group operates is highly regulated within the provisions of the Aged Care Act 1997. The Government approves providers, monitors the quality of care and services delivered, issues bed licences on a strictly controlled basis, and governs the fees and services which are delivered and funded. As such Government policy settings have a major impact on the financial performance of providers. The Royal Commission into Aged Care was called by the Prime Minister in September 2018 amid growing community concern about the quality of care in the sector. The Terms of Reference are broad, focussing on the quality of care, and also future sustainability of the sector. Along with all major aged care providers, the Group was requested to make an initial submission to the Royal Commission in January 2019. The costs of this exercise and the ongoing monitoring and preparation for future involvement, if required, by the Royal Commission during the year amounted to $1.7 million. Other than the initial submission in January 2019, the Group has not been requested to provide further information nor appear before the Royal Commission. The Royal Commission is expected to hand down an interim report in October 2019 and a final report in April 2020. Estia Health Annual Financial Report 2018 - 2019 5 Estia Health Annual Financial Report 2018 - 2019 6 46 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 47 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGDIRECTORS' REPORT DIRECTORS' REPORT REGULATORY ENVIRONMENT, REFORM AND THE AGED CARE ROYAL COMMISSION (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes Since the publication of the Aged Care Roadmap in 2016 there have been and continue to be a number of significant reviews and reports commissioned by Government into the operation of the sector. The Group has contributed to these reviews, and continues to advocate with industry bodies, Government and review committees for a consumer-focussed sector, where funding and financing arrangements are such as to provide a high quality of care, and to generate the level of investment required to meet existing and prospective demand for services. OPERATING AND FINANCIAL REVIEW REVIEW OF FINANCIAL PERFORMANCE During the year the impact of increases in Government regulated revenue rates were below the increases in staff wage and other costs in the sector which impacted the Group. Declining sector occupancy rates were also seen although the impact on the Group was mitigated by the performance of the Group's occupancy management teams. Average occupancy during the year was 93.6%. In March 2019 the Government announced a temporary funding increase from the 20th March to the 30th June 2019, to all Approved Providers, including Estia, which contributed an additional $10.3m of revenue in the year. This additional funding ceased on 30 June 2019. Costs associated with the closure of the older style non-contemporary home at Mona Vale in May 2019 were $0.5m. The initial ramp-up costs of opening Southport in May 2019, and preparing for the opening of Maroochydore in August 2019 were $0.7m in the period. As a result of these factors, operating profit for the year of $64.8m was broadly in line with 2018. Government funded residential care subsidies & supplements Temporary funding increase Resident & other revenue Total operating revenues Employee benefits expense Non wage costs Direct costs associated with the Royal Commission EBITDA* Depreciation, amortisation & impairment expense Profit on sale of non-current assets Operating profit for the year Net finance costs Profit before income tax Income tax expense 2019 $'000 427,987 10,336 147,662 585,985 386,804 103,493 1,721 93,967 29,184 (36) 64,819 6,990 57,829 16,539 2018 $'000 404,064 - 142,990 547,054 360,216 96,755 - 90,083 26,002 (363) 64,444 7,279 57,165 16,011 2017 $'000 388,099 - 136,531 524,630 339,515 98,615 - 86,500 18,859 (1,037) 68,678 9,623 59,055 18,356 Profit for the year *EBITDA is categorised as non-IFRS financial information prepared in accordance with ASIC Regulatory Guide 230 - Disclosing non-IFRS financial information, issued in December 2011. EBITDA is a measure consisting of earnings before interest, tax, depreciation, amortisation and impairment expenses and gain/loss on sale of assets held for sale and has been adjusted from the reported information to assist readers to better understand the financial performance of the business in each financial period. This non-IFRS financial information, while not subject to audit, has been extracted from the financial report, which has been subject to an audit by the external auditors. 41,154 41,290 40,699 REVIEW OF FINANCIAL POSITION AND CASH FLOWS The Group’s capital and funding position is a product of the efficiency of operating profit to cash conversion, net RAD flows, capital investment and dividend distributions. As at 30 June 2019, the Group had net bank debt of $110.4 million, representing a gearing ratio, excluding RAD liabilities of 1.2X EBITDA, and net assets of $761.5 million. Conversion of EBITDA to cash remained strong with a near 100% conversion of EBITDA to cash in the year. Total capital investment for the year ended 30 June 2019 was $93.8 million (2018: $61.3 million). REVIEW OF FINANCIAL POSITION AND CASH FLOWS (CONTINUED) Overall RAD balances increased from $791.5 million to $805.0 million over the course of the year, with Net RAD flows of $14.6 million, of which $12.1 million came from new homes which opened in the prior year. This net inflow was lower than seen in prior years as the number of incoming residents able or willing to pay a RAD fell. In the context of the fall in transactional activity in the Australian housing market and lower sector-wide occupancy levels, the maintenance of RAD levels consistent with the prior year was a positive result. The ability to refund RAD balances as and when required by departing residents is managed by maintaining sufficient undrawn debt facilities, in accordance with the Group's Liquidity Management Policy. More information in relation to RADs is included in Note D4. As at 30 June 2019, the Group had total bank facilities of $330.0 million with an expiry date of 22 August 2020, of which $201.0 million remained undrawn. These facilities provide the Group with significant levels of funding for future developments and acquisitions. DEVELOPMENTS AND ACQUISITIONS The two homes which opened in FY18 at Twin Waters (Queensland) and Kogarah (New South Wales) reached full capacity during the year ended 30 June 2019, delivering high quality of care in outstanding environments and delivering strong financial performance. In May 2019 the Group opened one new home at Southport (Queensland) which added a total of 110 new beds. Three new homes are currently under development, with a total of 352 new beds, with the first opening in Maroochydore (Queensland) in August 2019. In the 2-3 months preceding opening and in the early months of operation, new homes will operate at a loss. Net losses associated with the new homes at Southport and Maroochydore were $0.7 million in the year ended 30 June 2019. 13 homes with 1,105 beds completed a significant refurbishment program during the year, improving the quality of amenity provided to residents, and bringing the total number of homes qualifying for the higher accommodation supplements to 3,113, with a further 1,562 beds currently underway and due to completed by December 2019. In May 2019 the Group’s old, non-contemporary home at Mona Vale was closed in order to accelerate the re-development of a new home on a well-positioned site. All residents were assisted in finding new homes within the Group or at other local providers. Staff were supported via alternative employment at other Group homes, or redundancy packages, all with appropriate support. Costs associated with the closure were $0.5 million, mainly redundancy related. There were no acquisitions completed during the year, though the Group continues to identify and carefully consider single or multiple home acquisition opportunities within existing geographic networks, and/or portfolio acquisition opportunities. DIVIDENDS On 20 August 2019, the Directors resolved to pay a final fully franked dividend of 7.8 cents per share ($20,328,082) bringing dividends per share for the financial year ended 30 June 2019 to 15.8 cents per share. The record date for the final dividend will be 5 September 2019, with payment being made on 2 October 2019. Shares will trade excluding entitlement to the dividend on 4 September 2019. Dividends paid during the year were as follows: Dividend Date paid Fully franked dividend per share Total Dividend Final dividend for the year ended 30 June 2018 Interim dividend for the year ended 30 June 2019 28 September 2018 27 March 2019 8.0 cents 8.0 cents $20,848,220 $20,848,220 Estia Health Annual Financial Report 2018 - 2019 7 Estia Health Annual Financial Report 2018 - 2019 8 48 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 49 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGDIRECTORS' REPORT KEY BUSINESS RISKS The following business risks are considered to be key risks to the Group’s performance and growth. CHANGES TO REGULATORY OR FUNDING FRAMEWORK Risk Impact The Australian residential aged care industry is highly regulated, with more than 70% of the total revenue comprising funding from the Australian Government. Almost all of the Group’s revenues were derived from services provided in accordance with, and legislated by, the Aged Care Act 1997 and subsequent Amending Acts, and approximately 74% was paid to the Group from the Australian Government directly. Capital flows from Refundable Accommodation Deposits ('RADs') are also governed by the same legislation. Any regulatory change or changes in Government policies in relation to existing legislation for the industry may have an adverse impact on the way the Group promotes, manages and operates its homes, and its financial performance and the carrying value of its assets, including bed licences. Changes to the regulatory framework could also impact on competition through deregulation or changes to capital requirements. Regulatory restrictions may also become more burdensome in the future, which may require the Group to dedicate more time and expenditure to ensuring that the Group complies with such regulations. The new Aged Care Quality Standards are effective from 1st July 2019 and require additional time and resources to embed the required changes. Additional accreditation and or other requirements may emerge prior to or following the Aged Care Royal Commission report being released. Mitigant Ageing demographics point to increasing demand for Residential Aged Care places and services in the next decade, notwithstanding an expected increase in funding and take-up of Home Care. The Group monitors demand, services and competitive market dynamics as well as RAD funding levels and preferences and supports the Federal Government’s aspiration for the provision of the highest quality residential aged care and value for money to the Government and residents. ESTIA MAY EXPERIENCE SHORTAGE OF EMPLOYEES AND/OR UPWARD WAGE PRESSURE Risk Impact The Group’s business depends on a specialised health and aged care workforce. There is a risk that the Group may not be able to retain or expand a workforce that is appropriately skilled and trained to meet the existing or future demands of residents at its homes and/or a risk that a shortage of employees leads to upward wage pressure. Competition from other health care providers, such as hospitals and other residential aged care homes, for appropriately skilled staff and a general industry shortage of staff in key areas, such as nurses and other skilled staff may also increase the bargaining power of healthcare professionals and can lead to upward pressure on applicable wages and salaries. Increasing labour costs may adversely affect the Group’s business, financial performance and position and future prospects. This may arise as a result of increases in wages which the Group is unable to pass on to residents or is not recognised in full in the Aged Care Funding Instrument ('ACFI') consumer price index adjustments, and/or increase in the use of agency staff, which typically results in higher staffing costs to the Group. Mitigant The Group has a program to develop and deliver training for all staff in relation to specialised skills required for quality aged care provision. Importantly the Group's training is provided to, and focused on, both clinical and non-clinical staff. The Group is also focused on optimising its existing workforce mix to offer secure long-term opportunities to care employees, with extensive planning around leave and roster management to reduce dependence on casual and agency employees. RAD BALANCES Risk The Group is exposed to risks associated with a decline in RAD balances due to a range of factors. If a larger than expected number of RAD paying residents were to leave the Group’s aged care homes, the Group might be required to repay a large sum of RADs, all of which may not be able to be replaced immediately. The Group is also exposed to risks that may adversely affect the future value of the Group’s total accommodation bonds/RADs, including specific issues arising in the Group (such as a non- compliance or loss of certification at a home), a general reduction in the price that can be achieved for new RADs, a shift away from RAD payments due to a preference for other payment models by consumers, or demand for the Group’s aged care services changing over time due to general economic factors. Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes DIRECTORS' REPORT KEY BUSINESS RISKS (CONTINUED) RAD BALANCES (CONTINUED) Impact Mitigant There may be material impact on the Group’s cash flows and debt levels if a high number of departing RAD payers are subsequently replaced by non-RAD paying residents, such as residents who elect to make a daily accommodation payment or are concessional residents. The Group regularly monitors and analyses RAD movements across the portfolio, maintains a formal liquidity policy to ensure sufficient cash reserves are on-hand to refund RADs as and when they fall due, supported by the Group’s bank debt facility that is available for use to fund future developments and capital expenditure if RAD inflows reduce. OCCUPANCY LEVELS MAY FALL Risk The Group's occupancy levels may fall below expectations as a result of numerous factors, including but not limited to: Increased competition • • Changing consumer trends • Declining referrals from hospitals and other sources • Growth of home care services Impact Mitigant Reduced occupancy levels may adversely affect the Group’s financial performance as it will lead directly to reduced revenues, whilst costs may not be able to decrease in line with the negative changes in occupancy. Reduced occupancy levels may also have adverse effects on the cash flow of RADs. The Group proactively manages its relationships with referrers as well as its standing in the communities in which it operates. Due to the network structure of the homes, the Group is also able to provide prospective residents of homes with a number of options if they are on a waiting list for a home that may be at full capacity. The Group monitors demand, services and competitive market dynamics in relation to each home. FAILURE TO MEET CLINICAL CARE STANDARDS Risk As an approved aged care provider, the Group maintains an effective system of clinical governance to promote and support the health, safety and quality of care provision to residents, and to ensure compliance with the applicable legislation and departmental policies. The Group may experience a decline in its clinical outcomes in circumstances where incidents are not identified, assessed or reported, employees do not follow policies and procedures, or external health consultants do not provide the service, or the quality of service expected. Impact Mitigant Failures to meet clinical care standards may lead to adverse impacts on the Group’s reputation in the industry and community, leading to a reduction in occupancy, notification of serious risk, sanction or in certain circumstances, may lead to a loss of accreditation as an Approved Provider. As a result, there may be an overall decline to profitability due to decreased occupancy and/or additional costs required to ensure clinical care standards are improved. Additionally, there may be an increase in medico-legal risk, regulator action and an increase to medical indemnity and other costs. The Group seeks to ensure that its clinical care standards are of the highest quality and any decline in standards are addressed swiftly. The Risk and Quality Management Frameworks, systems and processes, with diligent oversight provided by the executive leadership team, provides clinical evaluation with corrective actions as need is identified. The Group employs a Chief Quality and Risk Officer, who is primarily responsible for clinical governance strategies and in partnership with People and Culture, the clinical education and development of the Group’s employees. ESTIA'S REPUTATION MAY BE DAMAGED Risk Impact The Group operates in an industry in which its reputation could be adversely impacted should it, or the aged care sector generally, suffer from any adverse publicity. The Group may also suffer reputational damage in the event of medical indemnity claims, litigation or coronial inquests. Any such damage to the Group’s reputation could result in existing residents moving from Estia’s homes to other competitor residential aged care homes or reduce Estia’s ability to attract new residents to its homes, both of which could adversely impact the Group’s financial performance, position and future prospects. Estia Health Annual Financial Report 2018 - 2019 9 Estia Health Annual Financial Report 2018 - 2019 10 50 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 51 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGDIRECTORS' REPORT DIRECTORS' REPORT Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes KEY BUSINESS RISKS (CONTINUED) ESTIA'S REPUTATION MAY BE DAMAGED (CONTINUED) Mitigant The Group has Risk and Quality Management Frameworks that seek to identify and profiles risk and quality outcomes across the business. These Frameworks are driven at Executive level by the Chief Quality and Risk Officer. Trends across the business are also tracked through frequent analysis of the feedback, complaints and other data and are reviewed by the home leadership and also by executive leadership. The focus is to respond rapidly to concerns and to resolve matters in the most efficient and effective manner. Incidents that may damage the Group's reputation at a home level are escalated to the Executive as part of the quality and risk policy in order to ensure investigation is conducted and actions taken as findings indicate. INFORMATION TECHNOLOGY (IT) SYSTEM BREACHES OR LOSS Risk Impact Mitigant Sensitive information is stored electronically, and there are risks of systems failure, cyber-attack, data theft or other malicious actions that could cause business interruption or leakage of information. These systems failures or breaches could adversely affect the Group’s operations, reputation and financial performance. The Group has implemented a framework of appropriate security and back-up protocols, including training of staff in relation to privacy and data security. The strength and effectiveness of this framework are regularly assessed, tested and improved. The Group also continually reviews and invests in its core IT systems. Reporting and management of IT risk is part of the Board Risk Committee Charter. GROWTH MAY BE CONSTRAINED BY ABILITY TO SECURE BED LICENCES Risk Impact Mitigant Approved Providers may only provide funded places to residents to the extent of bed licenses held. Bed licenses are allocated by the Government under an allocation process known as the Aged Care Approvals Round ('ACAR'). The process identifies geographical areas where it believes increased supply is required, a number of provisional licenses are allocated to an area and providers are able to apply for these. Past ACAR rounds have seen many more applications than has been available, and not all providers receive the number of bed licenses they would like to secure. Estia may not be able to secure bed licenses to allow it to grow the capacity as quickly as it might do if such a constraint did not exist. The Group applies for licences in ACAR rounds, will consider acquiring licences where they are available for sale/transfer, and will consider applying to move licenses within its portfolio of homes to maximise occupancy and development opportunities. The Company will not commit future significant development funds unless licenses are substantially secured for a development. INABILITY TO RECRUIT AND RETAIN KEY PERSONNEL Risk Impact Mitigant The Group may experience an inability to recruit and retain personnel to identified key positions at home and or executive level. This may be due to approaches by recruitment professionals active in the market or a decision to exit the sector due to the multiple challenges faced and or negative media sentiment in response to the Aged Care Royal Commission. The decision may be triggered by opportunities that have greater financial reward or other benefits. High levels of turnover at the home and or executive level can affect occupancy, standards of clinical care and operational efficiency and effectiveness. Replacement of key personnel is expensive and can be destabilising to the business. The Group People and Culture team works to develop an internal pipeline of management ready candidates for key roles via bespoke Emerging Leader Programs. Group wide employee engagement surveys are undertaken regularly to evaluate culture and the key personnel experience. Strategies are developed to address issues identified. Communication strategies that celebrate the resident life experience, recognise team initiatives and milestones and achievements are key elements to ensure employees are recognised. The “Be Proud” initiative regularly provides recognition of employees work in caring for residents. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS There were no significant changes in the state of affairs of the Group during the financial year ended 30 June 2019. SIGNIFICANT EVENTS AFTER THE BALANCE DATE CLASS ACTION On 16 July 2019, Estia was served with a class action proceeding filed by the law firm Phi Finney McDonald in the Federal Court of Australia. The proceeding alleges breaches of market disclosure obligations in 2015 and 2016 and has been filed on behalf of shareholders who, between 12 August 2015 and 6 October 2016: (i) acquired an interest in Estia shares; or (ii) acquired long exposure to Estia shares by entering into equity swap confirmations in respect of Estia shares. Estia will vigorously defend the proceeding. Estia is not in a position to state whether the proceeding is likely to have a material impact on its financial position or performance. ACQUISITIONS On 15 August 2019 Estia entered into a contract to purchase a new greenfield development in the Maitland region of NSW with 108 provisional licences attaching. The contract is subject to closing and settlement conditions including the transfer of the licences from the vendor to Estia. Settlement of the transaction is expected to occur before 31 December 2019. DIVIDENDS On 20 August 2019, the Directors resolved to pay a final fully franked dividend of 7.8 cents per share ($20,328,082) bringing dividends per share for the financial year ended 30 June 2019 to 15.8 cents per share. The record date for the final dividend will be 5 September 2019, with payment being made on 2 October 2019. Shares will trade excluding entitlement to the dividend on 4 September 2019. BANK FACILITIES On 16 August 2019 the Group elected to extend its existing $330 million syndicated debt facility with the support of a syndicate of three domestic banks. The new facility expires in November 2022. Other than those mentioned above, no matters or circumstances have arisen since the end of the reporting period which significantly affected or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. LIKELY DEVELOPMENTS AND EXPECTED RESULTS The Royal Commission into Aged Care commenced during the year and continues into FY20. The Commission is expected to produce an interim report in October 2019 and a final report in April 2020. The Commission has wide terms of reference including the financial sustainability of the sector and is likely to have recommendations which will impact the sector, and the Group, both operationally and financially. The Group continues to advocate for sector reform referred to earlier, including the recommendations from the Royal Commission to achieve a sustainable and high-quality aged care sector where funding and financing arrangements support the financial viability of efficient providers and provide investment returns sufficient to attract the capital required to meet the increase in expected demand and quality. The temporary funding increase which was announced in March 2019 contributed an additional $10.3 million of revenue during the year ended 30 June 2019. This additional funding ceased on 30 June 2019. The Group continued to pursue its strategy of growing the business through: • • • • improving the operational and financial performance of the Group’s existing assets through a range of operational initiatives; improving the home portfolio through refurbishment and capital recycling programs; opening new homes; and acquisition of homes. Estia Health Annual Financial Report 2018 - 2019 11 Estia Health Annual Financial Report 2018 - 2019 12 52 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 53 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGDIRECTORS' REPORT DIRECTORS' REPORT LIKELY DEVELOPMENTS AND EXPECTED RESULTS (CONTINUED) ROUNDING Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes The amounts contained in this report and in the financial report have been rounded to the nearest thousand dollars ($’000), under the option available to the Group under ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191. Estia Health Limited is an entity to which the class order applies. This report is made on 20 August 2019 in accordance with a resolution of Directors. Dr. Gary H Weiss AM Chairman Other than the likely developments disclosed above and elsewhere in this report, no matters or circumstances have arisen which significantly affected or may significantly affect the operations of the Group, the results of those operations, or the state of the affairs of the Group in future financial years. ENVIRONMENTAL REGULATION AND PERFORMANCE The Group is not subject to significant environmental legislation under either Commonwealth or State legislation. PERFORMANCE RIGHTS UNISSUED SHARES As at the date of this report, there were 1,522,703 unissued ordinary shares under performance rights (2018: 907,684). SHARES ISSUED AS A RESULT OF THE VESTING OF PERFORMANCE RIGHTS A total of 13,693 performance rights vested during the year ended 30 June 2019 (2018: nil) and were issued as shares on 18 July 2019. During the year ended 30 June 2019, 628,712 rights were granted (2018: 476,980) and no rights were forfeited (2018: 93,534). INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS In accordance with provisions in its constitution, the Estia Health Limited (the 'Company') has executed deeds of indemnity in favour of former and current directors and officers of the Company in relation to potential liabilities including: (a) (b) (c) (d) liabilities incurred by the person in the capacity as an officer where permitted under section 199A(2) of the Corporations Act 2001; legal costs incurred in relation to civil or criminal proceedings in which the officer becomes involved because of that capacity; legal costs incurred in connection with any investigation or inquiry of any nature because of that capacity; and legal costs incurred in good faith in obtaining legal advice on issues relevant to the performance of their functions and discharge of their duties as an officer. The terms of these indemnities require repayment of sums advanced by way of legal costs in the event that the relevant officer is found to have committed wrongs of a nature the Company is prohibited from indemnifying under section 199A(2) of the Corporations Act 2001. In accordance with its Constitution the Company has paid a premium for a contract insuring all directors, secretaries, executive officers, officers and senior managers of the Company against liabilities incurred by those persons in that capacity, on terms and conditions commonly available in the insurance market. In accordance with usual commercial practice, the insurance contract prohibits disclosure of details of the nature of the liabilities covered and the premium payable. The contract does not provide cover for the independent auditors. INDEMNIFICATION OF AUDITORS To the extent permitted by law, the Group has agreed to indemnify its auditors, Ernst & Young Australia, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the financial year. NON-AUDIT SERVICES The following non-audit services were provided by the Group's auditor, Ernst & Young Australia. The directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. Ernst & Young Australia received or are due to receive the following amounts for the provision of non-audit services: Tax compliance services Assurance and other services $ 157,000 50,000 207,000 Estia Health Annual Financial Report 2018 - 2019 13 Estia Health Annual Financial Report 2018 - 2019 14 54 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 55 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGDIRECTORS’ REPORT Remuneration report – audited Dear shareholders, The Estia Board is pleased to present the Remuneration Report for the year ended 30 June 2019 (FY19). Strategic and Operational Developments Estia Health Limited’s (the ‘Group’ or ‘Estia’) strategic and operational focus during FY19 was reflected in a number of key priorities that were pursued during the year: 1. Continued provision of leading quality residential care to each of the 8,000+ older Australians that the Group delivers services to each year; 2. Pursuit of organic growth opportunities, illustrated by the completion and opening of the Group’s new home at Southport in Queensland, the investment of $15.5 million in significant refurbishments across 13 of the Group’s existing homes, continued progress on further new homes being constructed at Maroochydore in Queensland (due to open in August 2019) and Blakehurst in NSW (due to open in the first half of FY21) and closure of the old Mona Vale home in NSW; 3. Preparation for and provision of information to the Royal Commission into Aged Care announced by the Federal Government in September 2018. This included the creation of a non-standing, non- remunerated Board Royal Commission and Regulatory sub-committee, led by Chairman Dr Gary Weiss alongside Norah Barlow and Warwick Smith. Executive leadership of the Group transitioned smoothly during FY19, with the Deputy CEO Ian Thorley replacing Norah Barlow as the Group’s Managing Director and experienced aged care industry professional Sean Bilton joining the Group as Chief Operating Officer and Deputy CEO. The Group was fortunate to retain Ms Barlow’s expertise and knowledge through this transition as a result of her agreement to remain on the Board as a Non- Executive Director, a position she had occupied prior to assuming the role of Managing Director in late 2016. The experience, skills and diversity of the Board were further enhanced with the appointment of Karen Penrose as a Non-Executive Director and Chair of Estia’s Audit Committee in October 2018, replacing Andrew Harrison. The Group is proud of the quality and ASX200-leading gender diversity of Estia’s Executive leadership team and Board. Changes to FY19 Remuneration Following a comprehensive review of the Group’s remuneration structures, the Board maintained a remuneration framework for the Group’s senior executives in FY19 that included separate short term (STI) and long term (LTI) incentive mechanisms, reflecting the conclusion from this review that this incentive structure provided better shareholder alignment, employee motivation and balance between short and long term performance focus than alternative Single Incentive Plan remuneration frameworks that were considered. Within the Group’s STI and LTI incentive framework, the following changes for FY19 were made: 1. The STI scorecard comprised financial and non-financial performance metrics agreed with the Board that are common across each KMP for 60% of the scorecard evaluation, with the remaining 40% comprised of role-specific measures. Eligibility for STI payment consideration remained subject to a clinical quality “gateway”, requiring achievement of compliance and accreditation targets; 2. 70% of LTI vesting entitlement had previously been measured against a Total Shareholder Return (TSR) comparator comprised of the performance of the ASX200 excluding mining and energy companies. Whilst 70% of the LTI vesting entitlement continued to be measured against a TSR comparator for FY19, to make the comparator measure more directly relevant to the Group’s performance against ASX- listed industry peers: • half of the TSR comparator was comprised of the performance of the ASX200 excluding mining and energy companies; and Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes DIRECTORS’ REPORT Remuneration report – audited (continued) • half of the TSR comparator was comprised of the market capitalisation weighted average performance of a peer group of ASX-listed companies operating in the provision of aged care services. FY19 Remuneration Outcomes Whilst FY19 performance targets were achieved across a number of STI scorecard areas the clinical quality gateway target was not met, resulting in no payments of STI’s for the year, apart from a payment that was agreed with incoming COO Sean Bilton, at the time of him joining the Group, in lieu of a foregone vested incentive payment from his prior employer. 25% of this agreed payment to the incoming COO is subject to deferral into performance rights that will convert into Estia shares after a period of 12 months, subject to continuation of service. No vesting occurred under previous year’s Long Term Incentive Plan grants in FY19. Looking Forward – Changes to FY20 Remuneration Whilst key principles remain unchanged in terms of the FY20 remuneration structure applying to the Group’s executive KMP’s, a number of mechanical changes to the operation of these principals have been made to reflect the evolving nature and challenges evident across the aged care industry. A clinical quality “gateway” to any STI entitlement remains in place, along with an expanded range of quality conditions that must be met for KMP’s to achieve this gateway and be eligible for consideration to receive STI payments. STI performance measures continue to comprise a mix of common and role-specific measures, with common measures comprising 50% of the scorecard evaluation (compared with 60% in FY19) and role specific measures comprising the other 50% (compared with 40% in FY19), to create enhanced role-specific performance accountability. Finally, the Group’s senior executive accountable for overseeing clinical quality and risk frameworks and processes has no financial performance metrics included in their STI scorecard, to eliminate the perceived or actual risk of conflict between financial and clinical quality performance objectives and outcomes. It is the Board’s policy that the remuneration of Non-Executive Directors should accord with market rates and the level of responsibilities involved with each Board position. The existing Non-Executive Director (‘NED’) fee pool of $900,000 per annum was established in 2014 upon the Group’s listing on the ASX. Fees paid to NEDs in FY19 totalled $852,159, making the Group unable to consider the appointment of an additional NED to the Board possessing relevant skills or to allow payment of NEDs currently serving on Board committees who are not being paid, in particular the non-standing, non-remunerated Royal Commission and Regulatory sub-committee, which was established in 2018 to address the requirements of the Group’s participation in the Aged Care Royal Commission and the increased regulatory environment of the sector. It is proposed, subject to shareholder approval, to increase the maximum aggregate remuneration that may be paid to NEDs by $200,000, from $900,000 per annum to $1,100,000 per annum. The proposed increase in the maximum aggregate amount payable to NEDs will provide sufficient headroom to attract an additional director should the board decide to. In addition, it will provide capacity to pay NEDs currently serving on Board committees who are not being paid. For clarity, there is no intention to increase the current level of individual fees paid annually to NEDs (Board Chair $250,000 per annum, Board Member $100,000 per annum, Board Committee Chair $15,000 per annum, Board Committee Member $10,000 per annum). On behalf of the Board, I am pleased to present to you the FY19 Remuneration Report for Estia and we look forward to welcoming you at the 2019 AGM. Yours sincerely Paul Foster Chair of the Nomination and Remuneration Committee Estia Health Annual Report 2018 - 2019 15 Estia Health Annual Financial Report 2018 - 2019 16 56 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 57 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG DIRECTORS’ REPORT DIRECTORS’ REPORT Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes Remuneration report – audited (continued) This report for the year ended 30 June 2019 (FY19) outlines the remuneration arrangements of the Group in accordance with the requirements of the Corporations Act 2001(Cth), as amended (the Act) and its regulations. This information has been audited as required by section 308(3C) of the Act. This report is presented under the following sections: 1. 2. 3. 4. 5. 6. 7. 8. 9. Introduction Remuneration governance Group performance Remuneration principles and strategy Executive remuneration Executive remuneration outcomes (including link to performance) Executive employment contracts Non-executive director fee arrangements Additional disclosures relating to performance rights and shares 10. Other transactions and balances with KMP and their related parties 1. Introduction This report details the remuneration arrangements for Key Management Personnel (KMP) who are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Group, directly or indirectly including any director (whether executive or otherwise) of the parent. The table below outlines the KMP of the Group during FY19. Key Management Personnel Dr. Gary H Weiss AM Non-Executive Chairman Paul Foster Non-Executive Director Hon. Warwick L Smith AO Non-Executive Director Helen Kurincic Non-Executive Director Full year Full year Full year Full year Karen Penrose Non-Executive Director From 17 October 2018 Andrew Harrison Non-Executive Director Until 17 October 2018 Norah Barlow ONZM Non-Executive Director From 23 November 2018 Chief Executive Officer (MD and CEO) Until 23 November 2018 Ian Thorley MD and CEO Deputy CEO and COO Sean Bilton Deputy Chief Executive Officer and Chief Operating Officer (Deputy CEO and COO) From 23 October 20181 Until 22 October 2018 From 23 October 2018 Steve Lemlin Chief Financial Officer (CFO) Full year Remuneration report – audited (continued) 2. Remuneration governance 2.1 Nomination and Remuneration Committee The Nomination and Remuneration Committee (the Committee) was established to assist and advise the Board on a range of matters including remuneration arrangements for KMP and ensuring the Board is of a size and composition conducive to making appropriate decisions, with the benefit of a variety of perspectives and skills in the best interests of the Group as a whole. The Committee comprises three independent Non-Executive Directors (NEDs): Paul Foster (Committee Chair), Dr. Gary H Weiss AM and Helen Kurincic. Further information on the Committee’s role, responsibilities and membership, which is reviewed annually by the Board, can be viewed at http://www.estiahealth.com.au/investor- centre/corporate-governance. The Committee met four times in FY19. The MD and CEO attends certain Committee meetings by invitation, where management input is required. The MD and CEO is not present during any discussions related to their own remuneration arrangements. 2.2 Use of Independent Remuneration Consultants The Committee seeks external remuneration advice to ensure it is fully informed when making remuneration decisions. Remuneration advisors are engaged by, and report directly to, the Committee. During the year ended 30 June 2019, the Nomination and Remuneration Committee engaged KPMG to provide remuneration benchmarking data, advice regarding market practice and trends, and assistance with other adhoc matters. The services provided by KPMG do not constitute a ‘remuneration recommendation’ as defined in section 9B of the Corporations Act 2001. The engagement with KPMG was based on an agreed set of protocols governing the manner in which the engagement would be carried out. These protocols ensure that the remuneration advice received from KPMG is free from undue influence from management. 3. Group performance The table below illustrates Estia’s historic performance (since listing) against the key metrics upon which the Group performance is measured. 30 June 2019 30 June 2018 30 June 2017 30 June 2016 30 June 2015 Revenue - $’000 Net profit after tax - $’000 EBITDA - $’000 Share price at start of the year Share price at the end of the year Dividends paid per share – cents Basic earnings per share – cents Diluted earnings per share – cents $585,985 $41,290 $93,967 $3.29 $2.64 16.0 15.8 15.8 $547,054 $41,154 $90,083 $3.05 $3.29 15.8 15.8 15.7 $524,630 $40,698 $86,500 $4.37 $3.05 8.0 18.2 18.0 $442,821 $27,640 $89,059 $5.70 $4.36 25.6 15.1 15.1 $284,798 ($22,523) $30,900 $5.75* $5.68 13.6 (16.3) (16.3) *share price at date of listing 4. Remuneration principles and strategy The remuneration strategy and framework set by the Nomination and Remuneration Committee is designed to support and drive the achievement of Estia’s business strategy, including effective governance and management of the Group’s risks. It aims to ensure that remuneration outcomes are linked to the Group’s performance and aligned with shareholder outcomes. 1 Ian commenced the role of MD and CEO on 23 October 2018, undertaking a one-month hand-over with Norah Barlow. Ian was formally appointed as MD and CEO on 23 November 2018. Estia Health Annual Financial Report 2018 - 2019 17 Estia Health Annual Financial Report 2018 - 2019 18 58 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 59 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes DIRECTORS’ REPORT Remuneration report – audited (continued) Estia is committed to creating and ensuring a diverse work environment in which everyone is treated fairly and with respect and where everyone feels responsible for the reputation and performance of the Group. The Board believes that Estia’s commitment to this policy contributes to achieving the Group’s corporate objectives and embeds the importance and value of diversity within the culture of the Group. Diversity can broaden the pool for recruitment of high quality employees, enhance employee retention, improve the Group’s corporate image and reputation and foster a closer connection with and better understanding of customers. The Board regularly reviews the remuneration framework against the evolving business strategy and in the context of the commercial environment to ensure that it remains relevant. 5. Executive remuneration 5.1 Remuneration Framework and link to strategy In FY19, the executive remuneration framework comprised a mix of fixed annual remuneration, and short and long-term performance-linked incentive plans. The Group aims to reward executives with a level and mix of remuneration appropriate to their position and responsibilities, while being market competitive and delivering outcomes that are aligned to the experience of Estia's shareholders. Component Approach Link to business and remuneration strategy Competitive remuneration packages that attract and retain high calibre employees from a diverse pool of talent. Short term incentives align the interests of executives with achievement of business strategic objectives over the short to medium term. The STI scorecard highlights Estia’s focus on achieving key financial and operational targets, while also continuing to deliver quality care. Deferral of 25% of any STI award into equity increases alignment with shareholder interests. Fixed Annual Remuneration (FAR) Short-Term Incentive Plan (STI) FAR is set with reference to role, market and experience of the employee with reference to external benchmarking data, particularly looking at competition in the same sector, both public and private. Group and individual performance are considered during the annual remuneration review. In FY19, the STI was measured against shared EBITDA, NPAT and Culture targets, as well as other role specific measures over a 12-month period. A resident quality gateway hurdle was also used which required ongoing compliance and accreditation targets to be met in order for any of the STI to be eligible to vest. For executive KMP's the STI award is delivered in a mix of cash and equity. 75% of the award is delivered in cash, with the remaining 25% delivered in performance rights, which require participants to remain employed for an additional 12 months for the performance rights to vest. Long-Term Incentive Plan (LTI) The LTI is delivered in the form of performance rights subject to the following performance conditions, measured over a three-year period: The LTI is designed to drive sustainable value creation for shareholders; encourage retention and encourage a multi-year performance focus. Estia Health Annual Financial Report 2018 - 2019 19 60 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 61 DIRECTORS’ REPORT Remuneration report – audited (continued) Estia Health Annual Financial Report 2018 -201920ComponentApproach Link to business and remuneration strategy•Total shareholder return (TSR)(70%)performance:-35%relative to the ASX200 excluding mining and energy companies; and-35%relative tothe weighted average performance of agroup of ASX-listed (including dual-listed NZX/ASX entities) companies involved in the provision of aged care services.•Earnings Per Share (EPS) (30%).Relative TSR focuses executives on generating returns for shareholders, while EPS challenges management to increase profitability by growing earnings over a long-termhorizon.A TSR comparator group of companies providing aged care services was introduced in order to assess performance against peers with which Estia competes for shareholder capital.The LTI is delivered in equity which aligns theinterests of executive with achievementof increased shareholder wealth over the long-term.Total remunerationThe overall remuneration framework is designed to support and drive the achievement of Estia’s business strategy: •be the leader in providing high quality residential aged care homes in Australia•providing our residents with the highest standards of aged care services in an innovative, supportive and caring environment•deliver profitable growth through our robust development pipeline, significant refurbishment opportunities and through maximising the performance of our core assets.5.2 FY19Remuneration Opportunity MixIndustry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG DIRECTORS’ REPORT DIRECTORS’ REPORT Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes Remuneration report – audited (continued) 5.4.1 STI remuneration outcomes Whilst FY19 performance targets were achieved across a number of STI scorecard areas the clinical quality gateway target was not met, resulting in no payments of STI’s for the year, apart from a payment that was agreed with incoming COO Sean Bilton, at the time of him joining the Group, in lieu of a foregone vested incentive payment from his prior employer. 25% of this agreed payment to the incoming COO is subject to deferral into performance rights that will convert into Estia shares after a period of 12 months, subject to continuation of service. The table below sets out each Executive KMP’s STI awarded and foregone in FY19. Senior Executive STI opportunity ($) STI awarded ($) STI awarded (%) STI foregone (%) Ian Thorley Sean Bilton Steve Lemlin 360,000 250,000 135,000 Nil 250,000 Nil 0% 100% 0% 100% 0% 100% Remuneration report – audited (continued) 5.3 Fixed Annual Remuneration FAR includes base salary, non-cash benefits such as travelling allowances (including any fringe benefits tax), as well as leave entitlements and superannuation contributions. Remuneration levels are reviewed annually by the Committee and the Board. As part of the review, the Committee engages KPMG to benchmark the remuneration of the current KMP against relevant roles from a comparator group of ASX-listed companies2. While having regard for the results of the benchmarking, the Committee considers the skills and experience of each individual, as well as the complexity and accountabilities associated with the role, in setting FAR. 5.4 Short-Term Incentive Plan The Group provides an annual STI to executives and awards a cash and deferred equity incentive subject to the attainment of clearly defined Group measures. Participation STI value Performance conditions Delivery of STI Ian Thorley, Sean Bilton and Steve Lemlin all participated in the FY19 STI plan. Norah Barlow did not participate. In FY19, Ian Thorley and Sean Bilton had a maximum STI opportunity of 50% of FAR and other executive KMP had a maximum STI opportunity of 30% of FAR. The FY19 performance measures were EBITDA, NPAT and Culture targets, as well as other role specific measures. The STI is subject to a resident quality gateway hurdle which requires ongoing compliance and accreditation targets to be met in order for any of the STI to be eligible to vest. Performance against the measures is tested annually after the end of the financial year. All payments under the STI plan are determined and approved by the Committee and the Board. Once STI payments have been approved, they are delivered in cash and equity. For senior executives 25% of any payment is deferred for a period of 12 months in the form of performance rights. The quantity of instruments granted in performance rights is determined using face value allocation methodology, using the VWAP for the 10 trading days immediately following the release of results (i.e. deferred STI amount divided by share price). Cessation of employment For “Bad Leavers” (defined by the Group as resignation or termination for cause), any unpaid or deferred STI is forfeited, unless otherwise determined by the Board. Clawback policy Changes in FY20 For any other reason, the Board has discretion to award STI on a pro-rata basis taking into account time and the current level of performance against performance hurdles. The Board has discretion to reduce, cancel or clawback any unvested performance-based remuneration in the event of serious misconduct or a material misstatement in the Group’s financial statements. The weighting of role specific performance measures in each KMP’s STI scorecard has been increased from 40% to 50% to enhance individual, role specific performance accountability. The range of clinical quality “gateway” performance measures that must be met for KMP’s to be eligible for consideration to receive STI payments has been expanded to further elevate the primacy of resident clinical quality and care. 2 The comparator group is comprised of ASX-listed companies within the Health Care, Real Estate and Consumer Discretionary sectors, with a market capitalization of 50% - 200% of Estia’s. Estia Health Annual Financial Report 2018 - 2019 21 Estia Health Annual Financial Report 2018 - 2019 22 62 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 63 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG DIRECTORS’ REPORT DIRECTORS’ REPORT Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes Remuneration report – audited (continued) 5.5 Long-Term Incentive Plan A longer-term incentive is offered to senior executives to assist in the reward, motivation and retention of personnel over the long-term and to improve alignment between executive and shareholder wealth. The LTI is also designed to recognise the abilities, efforts and contributions of participants to Estia’s performance and success and provide the participants with an opportunity to acquire or increase their ownership interest in the Group. Participation Delivery of LTI LTI value Allocation methodology LTI performance rights were offered to all members of executive KMP in FY19. LTIs are delivered in the form of performance rights. On exercise, performance rights entitle the holders to ordinary shares. In FY19, Ian Thorley had a LTI opportunity of 100% of FAR, both Sean Bilton and Steve Lemlin had a LTI opportunity of 70% of FAR. The quantity of instruments granted under the LTI is determined using face value allocation methodology, using the VWAP for the 10 trading days immediately following the release of results (i.e. LTI opportunity divided by share price). Performance conditions The performance conditions for FY19 performance rights are as follows. 70% of award will be subject to a relative TSR performance measure: • • 35% relative to the ASX200 excluding mining and energy companies; and 35% relative to the weighted average performance of a group of ASX- listed (including dual-listed NZX/ASX entities) companies involved in the provision of aged care services comprised of Regis Healthcare Limited (25%), Japara Healthcare Limited 25%, Aveo Healthcare Limited (25%), Oceania (12.5%) and Summerset Group Holdings Limited (12.5%). TSR vesting schedules are provided below. Estia’s TSR relative to the ASX200 (excluding mining and energy companies) Less than median of comparator group At median of comparator group Between median and 75th percentile of comparator group Percentage of performance rights that vest Nil 50% Straight line pro rata vesting between 50% and 100% Greater than 75th percentile of comparator group 100% Estia’s TSR relative to the weighted average performance of aged care services peer group Below weighted average performance At weighted average performance Straight line vesting Percentage of performance rights that vest 0% 50% 50% - 100% 15 percentage points above weighted average performance 100% 30% of award subject to EPS performance measure, with the below vesting schedule. Remuneration report – audited (continued) Between threshold and target rate (6% to 10.3%) At target rate or above (10.3% to 11%) Straight line pro rata vesting between 25% and 50% Straight line pro rata vesting between 50% and 100% When assessing performance against targets, EPS will be adjusted to account for acquisitions made during the performance period. Performance period The performance rights granted in FY19 have a performance period of three years. Lapse of performance rights Any performance rights that remain unvested at the end of the performance period will lapse immediately. Total shares issued Cessation of employment Change of control Clawback policy The number of shares allocated on the vesting of all outstanding rights may not exceed 5% of the total number of shares on issue at the time of the offer. For “bad leavers” (defined by the Group as resignation or termination for cause), all of the performance rights held by that employee upon cessation will automatically lapse. Cessation of employment for any other reason, a portion of the performance rights held by that employee upon cessation will lapse according to a formula which takes into account the length of time the participant has held the performance right and the performance period for the performance right, unless otherwise determined by the Board. The Board may exercise its discretion to allow all or some unvested rights to vest if a change of control event occurs, having regard for the performance of the Group during the vesting period up to the date of a change of control event. The Board has discretion to reduce, cancel or clawback any unvested performance-based remuneration in the event of serious misconduct or a material misstatement in the Group’s financial statements. Changes in FY20 There will be no change to the plan in FY20. 5.5.1 LTI Vesting Outcomes The FY17 LTI performance rights will be tested for vesting in FY20. As a result, no portion of the FY17 LTI have vested or have been forfeited at the date of this report. Group’s compound annual growth of EPS from FY18 base year Below threshold rate (<6%) At threshold rate (6%) Estia Health Annual Financial Report 2018 - 2019 Percentage of performance rights that vest Nil 25% 23 Estia Health Annual Financial Report 2018 - 2019 24 64 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 65 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG e c n a m r o f r e P d e t a l e r n o i t a r e n u m e r n o i t a n m r e T i s t n e m y a p d e x i f l a t o T ” k s i r t a “ d n a n o i t a r e n u m e r % $ $ 4 I T L $ d e r r e f e D 3 I T S d e s a b e r a h S s e s n e p x e l a u n n a d e x i F n o i t a r e n u m e r m r e t - g n o L s t i f e n e b e c i v r e s g n o L e v a e l s t n e m e l t i t n e $ $ $ $ $ $ n o i t a u n n a r e p u S s t i f e n e b - n o N y r a t e n o m s t i f e n e b s u n o b I T S d n a y r a l a S s e e f $ - t s o P t n e m y o p m e l s t i f e n e b s t i f e n e b m r e t - t r o h S 9 1 0 2 e n u J 0 3 o t 8 1 0 2 y l u J 1 m o r f r a e y e h t r o f n o i t a r e n u m e r e v i t u c e x E 1 . 6 ) d e u n i t n o c ( d e t i d u a – t r o p e r n o i t a r e n u m e R s e m o c t u o n o i t a r e n u m e r e v i t u c e x E . 6 T R O P E R ’ S R O T C E R I D % 8 1 % 5 2 - % 3 4 % 7 1 % 0 2 % 8 4 % 2 3 - / A N - - - - - - - - - 1 1 1 , 5 5 1 - 1 1 1 , 5 5 1 9 1 1 , 8 7 7 5 7 2 , 7 9 5 - 3 6 1 , 0 1 6 7 2 1 , 0 4 5 7 2 2 , 2 4 5 - 6 2 4 , 4 2 6 9 8 9 , 4 3 0 , 1 ) 4 5 0 , 0 2 ( 5 3 8 , 2 5 5 , 2 7 3 4 , 4 5 1 , 2 9 6 8 , 6 3 1 - 4 4 6 , 9 9 8 0 9 , 1 1 0 5 2 , 1 4 6 0 0 0 , 0 5 4 6 0 1 , 5 1 0 0 5 , 2 6 7 5 0 , 5 4 3 - 7 2 1 , 0 9 1 3 5 , 0 7 - - 3 9 7 , 9 - 0 0 0 , 0 5 4 5 2 5 , 2 3 4 - 9 7 9 , 7 9 2 9 8 3 , 9 5 2 ) 7 9 1 , 7 3 ( 1 8 0 , 0 4 5 7 6 3 , 2 9 3 - - - 0 0 9 , 8 1 0 0 5 , 2 6 1 0 6 , 0 4 - 7 4 4 , 6 2 3 0 0 0 , 0 0 7 3 4 1 , 7 1 4 5 7 , 2 6 7 , 1 8 6 6 , 9 9 5 , 1 - - - - - - - - - - - - 1 3 5 , 0 2 9 4 0 , 0 2 - 9 6 1 , 4 1 1 3 5 , 0 2 9 4 0 , 0 2 - 1 2 4 , 0 1 9 4 0 , 0 2 7 8 4 , 1 2 5 6 , 5 6 4 3 6 , 1 6 - - - - - - - - - - - - - 3 2 7 , 5 3 9 1 7 , 0 2 6 1 5 9 , 9 2 4 0 0 5 , 7 8 1 8 8 8 , 0 3 3 - - 8 7 3 , 9 2 - - - 0 0 7 , 6 5 0 0 5 , 7 8 1 1 0 8 , 1 2 1 - 9 6 4 , 9 2 4 6 7 4 , 2 1 4 - 6 2 0 , 6 1 3 1 5 9 , 9 7 6 6 5 6 , 5 1 2 0 1 , 7 9 6 , 1 4 3 0 , 8 3 5 , 1 9 1 0 2 8 1 0 2 9 1 0 2 8 1 0 2 9 1 0 2 8 1 0 2 9 1 0 2 8 1 0 2 9 1 0 2 8 1 0 2 9 1 0 2 8 1 0 2 e v i t u c e x E r o t c e r i d 5 y e l r o h T n a I n o t l i B n a e S e v i t u c e x e i r o n e S n i l m e L e v e t S 6 w o l r a B h a r o N s e v i t u c e x e r e m r o F i o n a g g o B e v e t S l a t o T . 8 1 0 2 r e b m e v o N 3 2 n o O E C d n a D M i s a d e t n o p p a y l l a m r o f s a w n a I . 8 1 0 2 r e b o t c O 3 2 n o w o l r a B h a r o N h t i w r e v o d n a h h t n o m - e n o e h t f o t n e m e c n e m m o c e h t t a O E C d n a D M e h t s a d e t a r e n u m e r s a w n a I 5 . d o i r e p g n i t r o p e r e h t r e t f a s h t n o m e v l e w t g n e b i , d o i r e p g n i t s e v e h t r e v o d e s i t r o m a s i t n e n o p m o c e r a h s d e r r e f e d e h t l f o e u a v r i a f e h T . d e l t t e s y t i u q e s i I T S d e r r e f e d e h T 3 . r a e y e h t n i d e s i n g o c e r e s n e p x e e h t l f o e u a v r i a f e h t s t n e s e r p e r s e s n e p x e d e s a b e r a h s I T L e h T 4 l . 4 8 e b a t n i d e d u l c n i s i r o t c e r i d e v i t u c e x e - n o n a s a e o r l s ' w o l r a B h a r o N f o t c e p s e r n i d e v i e c e r n o i t a r e n u m e R 6 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes DIRECTORS’ REPORT Remuneration report – audited (continued) 7. Executive employment contracts Remuneration arrangements for executives are formalised in employment agreements. Key conditions for executives are outlined below: Name FAR Agreement commence Agreement expire Notice of termination by Group Employee notice Ian Thorley $720,000 Sean Bilton $500,000 23 October 2018 No expiry, continuous agreement 6 months (or payment in lieu of notice) 6 months 23 October 2018 No expiry, continuous agreement 3 months (or payment in lieu of notice) 3 months Steve Lemlin $450,000 1 February 2017 No expiry, continuous agreement 3 months (or payment in lieu of notice) 3 months 7.1 Norah Barlow Norah Barlow stepped down from the role of MD & CEO effective 23 November 2018, and has reassumed her role as non-executive Director. Unvested equity based incentives granted to Norah in connection with her role as MD & CEO will remain on foot and be subject to performance testing in line with the ordinary terms of the plan. Details of such awards can be found in section 9 of this report. Norah is not a member of the Nomination and Remuneration Committee, and will not be involved in assessment of vesting levels of any of these plans. 8. Non-executive director fee arrangements The Board seeks to set NED fees at a level which provides the Group with the ability to attract and retain NEDs of the highest calibre, whilst incurring a cost which is acceptable to shareholders. In FY19, there were no increases to NED fees. 8.1 Fee Pool The NED fee pool at Estia is currently $900,000 (including superannuation contributions as required by law). 5 2 9 1 0 2 - 8 1 0 2 t r o p e R l i a c n a n F i l a u n n A h t l a e H a i t s E Estia Health Annual Financial Report 2018 - 2019 26 66 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 67 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG DIRECTORS’ REPORT DIRECTORS’ REPORT Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes Remuneration report – audited (continued) 8.2 Director’s 2019 Fee Structure The table below summarises the annual Base NED fees, inclusive of superannuation: Board Audit Committee Nominations & Remuneration Committee Risk Management Committee Property & Investment Committee Description Fees Chair $250,000 Director $100,000 Chair $15,000 Member $10,000 Chair $15,000 Member $10,000 Chair $15,000 Member $10,000 Chair $15,000 Member $10,000 A Board Royal Commission and Regulatory Committee was established in FY19. No fees were paid to the members of this committee due to lack of payment capacity under the current NED fee pool cap of $900,000 per annum. NEDs may be reimbursed for expenses reasonably incurred in attending to the Group’s affairs. NEDs do not receive retirement benefits, nor do they participate in any incentive programs. 8.3 Changes for FY20 It is proposed, subject to shareholder approval, to increase the maximum aggregate remuneration that may be paid to NEDs by $200,000, from $900,000 per annum to $1,100,000 per annum. The proposed increase in the maximum aggregate amount payable to NEDs will provide sufficient headroom to attract an additional director should the board decide to. In addition, it will provide capacity to pay NEDs currently serving on Board committees who are not being paid. For clarity, there is no intention to increase the current level of individual fees paid annually to NEDs (Board Chair $250,000 per annum, Board Member $100,000 per annum, Board Committee Chair $15,000 per annum, Board Committee Member $10,000 per annum). Remuneration report – audited (continued) 8.4 Non-Executive director remuneration The table below outlines NED remuneration for FY19 in accordance with statutory rules and applicable accounting standards. Non-Executive Director Gary Weiss Paul Foster Warwick Smith Helen Kurincic Karen Penrose7 Norah Barlow8 Former Non-Executive Director Andrew Harrison9 Patrick Grier10 Total Year 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 Board fees $ Superannuation $ Total fees $ 259,469 250,992 123,288 123,288 114,155 114,155 114,155 114,155 79,597 - 58,333 - 38,052 114,155 - 41,133 787,049 757,878 20,531 20,049 11,712 11,712 10,845 10,845 10,845 10,845 7,562 - - - 3,615 10,845 - 3,908 65,110 68,204 280,000 271,041 135,000 135,000 125,000 125,000 125,000 125,000 87,159 - 58,333 - 41,667 125,000 - 45,041 852,159 826,082 Estia Health Annual Financial Report 2018 - 2019 27 Estia Health Annual Financial Report 2018 - 2019 28 68 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 69 7 Karen Penrose was appointed on 17 October 2018. 8 Remuneration received in respect of Norah Barlow's role as executive is included in table 6.1, including the expense recognised for the year relating to the LTI performance rights issued during her time as MD and CEO. 9 Andrew Harrison resigned on 17 October 2018. 10 Patrick Grier retired on 14 November 2017. Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG DIRECTORS’ REPORT DIRECTORS’ REPORT Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes Remuneration report – audited (continued) 9.2 Performance rights holdings of KMP and related parties KMP, or their related parties directly, indirectly or beneficially held a number of performance rights in the Estia Group as detailed in the table below. Number of rights at 1 July 2018 Granted as remuneration Rights exercised Net change other Number of rights at 30 June 2019 Vested at 30 June 2019 Exercisable Not exercisable Executive director Ian Thorley Senior executive Sean Bilton Steve Lemlin Former executive Norah Barlow Total 181,748 205,338 - 141,644 484,233 807,625 81,454 109,547 110,257 506,596 - - - - - 387,086 4,016 - - - - 81,454 251,191 594,490 - 1,314,221 - 3,303 6,374 13,693 - - - - - Remuneration report – audited (continued) 9. Additional disclosures relating to performance rights and shares 9.1 Performance rights granted, vested and lapsed during the year The table below discloses the number of performance rights granted, vested or lapsed during the year. Performance rights do not carry any voting or dividend rights and can only be exercised once the vesting conditions have been met, until their expiry date. No options were granted to members of KMP during FY19. Number of rights granted during the year Grant date Fair value per right at grant date Vesting date Exercise price per right Expiry date Number of rights vested during the year Number of rights lapsed during the year Executive director Ian Thorley11 70,463 29/11/18 70,463 29/11/18 60,396 29/11/18 4,016 29/11/18 Senior executive Sean Bilton 28,509 29/11/18 28,509 29/11/18 24,436 29/11/18 Steve Lemlin 37,185 29/11/18 37,185 29/11/18 31,874 29/11/18 3,303 29/11/18 Former executive Norah Barlow12 36,359 29/11/18 36,359 29/11/18 31,165 29/11/18 6,374 29/11/18 Total 506,596 0.47 0.46 1.92 2.96 0.47 0.46 1.92 0.47 0.46 1.92 2.96 0.47 0.46 1.92 2.96 30/06/21 30/06/21 30/06/21 30/06/19 30/06/21 30/06/21 30/06/21 30/06/21 30/06/21 30/06/21 30/06/19 30/06/21 30/06/21 30/06/21 30/06/19 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 30/06/21 30/06/21 30/06/21 30/06/19 30/06/21 30/06/21 30/06/21 30/06/21 30/06/21 30/06/21 30/06/19 30/06/21 30/06/21 30/06/21 30/06/19 - - - 4,016 - - - - - - 3,303 - - - 6,374 13,693 - - - - - - - - - - - - - - - - 11 Shareholders approved the grant of 201,322 performance rights to Ian Thorley in respect of the FY19 LTI, at the Group’s FY18 AGM held on 29 November 2018. 12 Shareholders approved the grant of 103,883 performance rights to Norah Barlow in her role as MD and CEO in respect of the FY19 LTI, at the Group’s FY18 AGM held on 29 November 2018. Estia Health Annual Financial Report 2018 - 2019 29 Estia Health Annual Financial Report 2018 - 2019 30 70 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 71 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG DIRECTORS’ REPORT DIRECTORS’ REPORT Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes Remuneration report – audited (continued) 9.3 Value of performance rights awarded, exercised and lapsed during the year The table below discloses the value of performance rights granted, exercised or lapsed during the year. Value of rights granted during the year a Value of rights exercised during the year b Value of rights lapsed during the year c Remuneration consisting of rights for the year $ $ $ Executive director Ian Thorley Senior executive Sean Bilton Steve Lemlin Former executive Norah Barlow Total 124,020 45,360 68,957 76,750 315,087 a Determined at the time of grant per the AASB 2. b Determined at the time of exercise. c Determined at the time of lapse. - - - - - % 18% 43% 17% 48% - - - - - There were no alterations to the terms and conditions of options awarded as remuneration since their award date. Remuneration report – audited (continued) 9.4 Shareholdings of KMP and related parties KMP or their related parties directly, indirectly or beneficially held a number of shares in Estia Group as detailed in the table below. Number of shares at 1 July 201813,14 Granted as remuneration Exercise of rights Net change other Number of shares at 30 June 201915 Held nominally Non-Executive Director Gary Weiss Paul Foster Warwick Smith Helen Kurincic Norah Barlow Karen Penrose Andrew Harrison Senior executive Ian Thorley Sean Bilton Steve Lemlin Total 45,312 14,000 45,000 25,000 123,100 4,500 54,208 28,518 - 8,000 347,638 - - - - - - - - - - - - - - - - - - - - - 10,000 45,000 - - 14,333 - 50,000 - 8,500 45,312 24,000 90,000 25,000 45,312 24,000 90,000 25,000 123,100 123,100 18,833 54,208 18,833 54,208 78,518 78,518 - - 16,500 16,500 127,833 475,471 475,471 All equity transactions with KMP have been entered into under terms and conditions no more favourable than those the Group would have adopted if dealing at arm's length. 10. Other transactions and balances with KMP and their related parties There were no other transactions with KMP or their related parties during the year. Estia Health Annual Financial Report 2018 - 2019 31 Estia Health Annual Financial Report 2018 - 2019 32 72 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 73 13 The number of shares held for KMP who were appointed during the year are as at the date of their respective appointments. 14 The number of shares held for KMP at 1 July 2018 includes a restatement of prior period holdings for Andrew Harrison (previously reported as 25,542). 15 The number of shares held for KMP who have resigned during the year are as at the date of their respective resignations. Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESG Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2019 Revenues Other income Expenses Employee benefits expense Administrative expenses Occupancy expenses Resident expenses Depreciation and amortisation expense Impairment expense Impairment losses on trade receivables Direct costs associated with the Royal Commission Operating profit for the year Net finance costs Profit before income tax Income tax expense Profit for the year Notes B1 B1 B4 B2 B5 B3 B3 B1 2019 $'000 2018 $'000* 585,985 546,934 36 483 386,804 19,782 31,297 51,613 28,719 465 801 1,721 64,819 360,216 15,064 29,598 51,093 25,547 455 1,000 - 64,444 B6 6,990 7,279 57,829 57,165 B7 16,539 41,290 16,011 41,154 Other comprehensive income Other comprehensive income to be reclassified to profit or loss in subsequent periods, net of tax Other comprehensive income not to be reclassified to profit or loss in subsequent periods, net of tax Blank - - - - Total comprehensive income for the year, net of tax 41,290 41,154 Earnings per share Basic, profit for the year attributable to ordinary equity holders of the Parent Diluted, profit for the year attributable to ordinary equity holders of the Parent B8 B8 cents cents 15.84 15.77 15.79 15.75 *The comparative information above has been restated for classification purposes only. Amounts relating to impairment expenses as reported in the prior year of $3,384,000 have been reclassified to depreciation and amortisation expense. Refer to Note B3 for further information. The accompanying notes form part of these consolidated financial statements. Estia Health Annual Financial Report 2018 - 2019 34 74 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 75 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGCONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2019 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2019 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes As at 1 July 2017 Profit for the year Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Repayment of management equity plan Dividends Share-based payments As at 30 June 2018 Adjustment on adoption of AASB 9 (net of tax) Restated total equity at the beginning of the financial year Profit for the year Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Repayment of management equity plan Dividends Share-based payments As at 30 June 2019 D1 D1 D2 E9 D1 D1 D2 Issued capital $'000 Share-based payments reserve $'000 Accumulated losses $'000 Notes 801,830 - - - 6 - - 673 - - - - - 463 801,836 1,136 Total equity $'000 761,116 41,154 - 41,154 (41,387) 41,154 - 41,154 - (41,175) - (41,408) 6 (41,175) 463 761,564 - - (316) (316) 801,836 1,136 (41,724) 761,248 - - - - - - 41,290 - 41,290 41,290 - 41,290 7 - - 801,843 - - 658 1,794 - (41,696) - (42,130) 7 (41,696) 658 761,507 Current assets Cash and cash equivalents Trade and other receivables Income tax receivable Prepayments and other assets Assets held for sale Total current assets Non-current assets Property, plant and equipment Investment properties Goodwill Other intangible assets Total non-current assets Total assets Current liabilities Trade and other payables Income received in advance Refundable accommodation deposits and bonds Other financial liabilities Provisions Total current liabilities Non-current liabilities Deferred tax liabilities Loans and borrowings Provisions Other payables Total non-current liabilities Total liabilities Net assets Equity Issued capital Share-based payments reserve Accumulated losses Total equity Notes C3 C4 B7 C5 C1 C6 C2 C2 C7 D4 C9 C8 B7 D3 C8 C7 D1 2019 $'000 14,631 9,046 607 6,540 - 30,824 2018 $'000* 11,198 11,433 913 6,884 902 31,330 822,696 1,620 817,074 222,575 1,863,965 757,110 1,620 817,074 218,714 1,794,518 1,894,789 1,825,848 44,046 - 805,033 1,304 45,616 895,999 107,775 125,000 4,496 12 237,283 42,647 25 791,508 1,371 41,793 877,344 107,610 75,000 4,269 61 186,940 1,133,282 1,064,284 761,507 761,564 801,843 1,794 (42,130) 761,507 801,836 1,136 (41,408) 761,564 *The comparative information above has been restated for classification purposes only. Refer to Notes C4 and C7 for further information. The accompanying notes form part of these consolidated financial statements. The accompanying notes form part of these consolidated financial statements. Estia Health Annual Financial Report 2018 - 2019 35 Estia Health Annual Financial Report 2018 - 2019 36 76 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 77 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGCONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes Cash flows from operating activities Receipts from residents Receipts from government Payments to suppliers and employees Net operating cash flows before interest, income tax and RAD, accommodation bond and ILU entry contributions Interest received Finance costs paid Income taxes paid Net cash flows from operating activities excluding RAD, accommodation bond and ILU entry contributions RAD, accommodation bond and ILU entry contribution received RAD, accommodation bond and ILU entry contribution refunded Net cash flows from operating activities Cash flows from investing activities Payments for intangible assets Proceeds from sale of property, plant and equipment Proceeds from sale of assets held for sale Purchase of property, plant and equipment Net cash flows used in investing activities Cash flows from financing activities Proceeds from repayment of MEP loans Proceeds from borrowings Repayment of borrowings Dividends paid Net cash flows from/(used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Notes 2019 $'000 2018 $'000 148,427 437,556 (489,880) 96,103 70 (6,878) (15,932) 73,363 246,454 (231,888) 87,929 (4,850) 19 956 (88,932) (92,807) 7 225,000 (175,000) (41,696) 8,311 3,433 11,198 14,631 141,732 403,746 (442,438) 103,040 186 (6,940) (22,307) 73,979 269,566 (206,781) 136,764 (942) - 4,167 (60,323) (57,098) 6 65,000 (111,514) (41,175) (87,683) (8,017) 19,215 11,198 B9 C2 C5 C1 D1 D1 C3 SECTION A: ABOUT THIS REPORT A1 CORPORATE INFORMATION The consolidated financial statements of Estia Health Limited and its subsidiaries (collectively, the “Group”) for the year ended 30 June 2019 were authorised for issue in accordance with a resolution of the directors on 20 August 2019. Estia Health Limited (the “Company” or the “parent”) is a for-profit company limited by shares incorporated in Australia, whose shares are publicly traded on the Australian Securities Exchange (ASX) under the code 'EHE'. The nature of the operations and principal activities of the Group are described in the Directors’ Report. A2 BASIS OF PREPARATION The financial report is a general purpose financial report which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report has been prepared on a historical cost basis, except for investment properties and derivative financial instruments which have been measured at fair value. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand ($’000) unless otherwise stated. A3 STATEMENT OF COMPLIANCE The financial report also complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. A4 BASIS OF CONSOLIDATION The consolidated financial statements comprise the financial statements of the Group and its controlled subsidiaries as at 30 June 2019 (refer to Note E6 for the group structure). Control is achieved when the Group is exposed, or has rights, to the variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of profit or loss and other comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary. All intercompany balances and transactions, and any unrealised gains and losses arising from intra-group transactions, are eliminated in preparing the Consolidated Financial Statements. A5 CURRENT/NON-CURRENT CLASSIFICATION Assets are disclosed as current when they are expected to be converted to cash or receivable within 12 months of 30 June 2019. Liabilities are disclosed as current when they are due within 12 months of 30 June 2019 or when there is no unconditional right to defer settlement for at least 12 months after 30 June 2019. The accompanying notes form part of these consolidated financial statements. Estia Health Annual Financial Report 2018 - 2019 37 Estia Health Annual Financial Report 2018 - 2019 38 78 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 79 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes SECTION A: ABOUT THIS REPORT (CONTINUED) A6 GOING CONCERN The financial report has been prepared on a going concern basis which assumes that the Group will be able to meet its obligations as and when they fall due. The Group’s current liabilities exceed current assets by $865,175,000 as at 30 June 2019 (2018: $846,014,000) resulting in a net deficiency of current assets. This mainly arises because of the requirement to classify Refundable Accommodation Deposits ("RAD") and Independent Living Unit (ILU) entry contributions of $806,337,000 (2018: $792,879,000) as current liabilities. RADs and Bonds are classified as a current liability as the Group does not have an unconditional right to defer settlement of any specific RAD or Bond for at least twelve months after the reporting date. The total RAD and Bond liability represents the sum of separate payments from individual residents in different locations with differing circumstances, and frequently a departing RAD and Bond paying resident is replaced shortly afterwards with a new RAD paying resident. The repayment of individual balances that make up the total current balance will be dependent upon the actual tenure of individual residents, which can be more than ten years but averages approximately 2 - 2.5 years (refer Notes D4 and C9 for further details). The Group has a debt facility of $330,000,000 of which $201,000,000 remains undrawn as at 30 June 2019, which excludes $4,000,000 of bank guarantees disclosed in Note E2. This debt facility can be drawn down to re-pay RAD and Bond refunds should the Group experience significant RAD and Bond net outflows. A7 SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts and are reviewed on an ongoing basis. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. Information about critical judgements, estimates and assumptions that affect the application of the Group's accounting policies within the year ended 30 June 2019 are included in the following notes: Significant accounting judgements, estimates and assumptions Note B7 Recognition of deferred tax assets Note C2 Recoverability of Intangible assets Note C4 Recoverability of trade receivables and future credit risks Note D2 Measurement of equity-settled share-based payment transactions SECTION B: OUR PERFORMANCE B1 REVENUE AND OTHER INCOME Revenues Government funded residential care subsidies & supplements Resident daily care fees Other resident fees Total revenues Other income Net gain on disposals of assets held for sale Increase in fair value of investment property Net gain on disposals of property, plant and equipment Total other income 2019 $'000 2018 $'000 438,323 104,253 43,409 585,985 404,064 101,065 41,805 546,934 17 - 19 36 363 120 - 483 The Group is in the business of providing residential aged care services to residents. The terms and conditions for discretionary and non-discretionary services are agreed within a single customer contract with the resident, which are enforceable primarily on a daily basis. Contracts with customers contain provision for accommodation, use of common areas/facilities, provision of care and other services. Total revenue includes the provision of accommodation, that is accounted for in accordance with AASB 117 Leases. Operating lease revenue is recognised on a straight line basis over the length of stay. For residents that have chosen to pay a RAD or Bond, the adoption of AASB 16 as of 1 July 2019, would regard there being a reduction in, or no, cash charge for accommodation. The accounting treatment for the non-cash consideration component of this arrangement is expected to change and result in the recognition of an increase in revenue for accommodation and an increase in financing costs relating to the outstanding RAD liability, with no net impact on the Operating Profit for periods affected. Refer to Note E9 for further analysis of the impact on the new standard. Disaggregation of Revenue The Group has disaggregated revenue based on the source of the funding for the provision of residential aged care. (a) Government Funded Residential Care Subsidies & Supplements The Australian Government determines the amount of subsidies and supplements in accordance with the provisions of the Aged Care Act. In accordance with the Act the level of subsidy or supplement is dependent on a range of factors, including a resident’s care needs, supported resident ratios in a particular home and whether a home has been newly built or significantly refurbished on or after 20 April 2012. The subsidies and supplements are calculated as a daily rate and is payable for each day that a resident is in a home. The Government may require a resident to pay a proportion of that subsidy or supplement dependent on their own financial circumstances, referred to as a Means Tested Care Fee ('MTCF'). The MTCF reduces the amount the Government pays directly to the provider as a result. The total MTCF included within the total Government Funded Residential Care Subsidies and Supplements was $16,782,000 in the period (2018: $17,367,000). (b) Resident Daily Care Fees The Group receives Daily Care Fees in accordance with the Aged Care Act which are funded directly by the resident as a Daily Care Fee which is set by the Government. The Daily Care Fee is calculated as a daily rate and is payable by a resident for each day that a resident is in a home. Estia Health Annual Financial Report 2018 - 2019 39 Estia Health Annual Financial Report 2018 - 2019 40 80 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 81 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes SECTION B: OUR PERFORMANCE (CONTINUED) B1 REVENUE AND OTHER INCOME (CONTINUED) (c) Other Resident Fees The Group provides additional services and accommodation to residents that are funded directly by the resident, under mutually agreed terms and conditions. The services provided are determined on a standalone price, typically as a daily rate and the resident simultaneously receives and consumes the benefits provided by the Group. Impairment Losses on Receivables The Group recognised impairment losses on receivables arising from contracts with customers, included under Impairment losses on trade receivables in the statement of profit or loss of $801,000 for the year ended 30 June 2019 (2018: $1,000,000). Contract Assets and Liabilities AASB 15 requires presentation of the following items separately in the statement of financial position: (i) ‘contract asset’ for the right to consideration in exchange for services that have transferred to a customer; (ii) ‘contract liability’ for the obligation to transfer services to a customer for which the entity has received consideration (or an amount of consideration is due) from the customer; and (iii) ‘receivable’ for the right to consideration that is unconditional (only the passage of time is required before payment of that consideration is due). The Group presents these separately in the statement of financial position. The Standard allows an entity to use alternative descriptions and therefore the Group has used the description ‘Income received in advance’ to refer to contract liabilities. Other Income During the year, the Group sold two properties for a total of $956,000 (2018: five properties sold for a total of $4,167,000) and recognised a net gain on sale of $17,000 (2018: net gain on sale $363,000). The Group recognises gains and losses from the sale of assets held for sale at the point in time that control transfers to the purchaser, which is when the legal title is transferred between the parties, typically upon settlement. SIGNIFICANT ACCOUNTING POLICY The Group recognises revenue under AASB 15 Revenue from Contracts with Customers which supersedes AASB 118 Revenue and related interpretations and applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The Group uses the five-step model as set out in AASB 15 to account for revenue arising from contracts with customers. The transaction price is allocated to performance obligations on the basis of their relative standalone selling prices and recognised as revenue accordingly as those performance obligations are satisfied over time each day as the customer simultaneously receives and consumes the benefits provided by the Group. The provision of care to a resident is a single performance obligation. Other services, such as Additional Services (including services such as in-room foxtel and additional menu choices) and Accommodation charges contain a number of different performance obligations. The Group has applied the practical expedient not to disclose the transaction price allocation to unperformed performance obligations. All performance obligations are considered to be met on a daily basis and therefore the Group does not have any outstanding performance obligations that have not been met at the reporting date. SECTION B: OUR PERFORMANCE (CONTINUED) B2 ADMINISTRATIVE EXPENSES Advertising and marketing expenses Telephone and communication expenses Travel expenses Printing and stationery expenses Professional services expenses Other administrative expenses Total administrative expenses 2019 $'000 924 2,108 2,152 2,369 5,476 6,753 19,782 B3 DEPRECIATION, AMORTISATION AND IMPAIRMENT EXPENSES Depreciation expense Accelerated depreciation due to home closures Amortisation expense Impairment expense Total depreciation, amortisation and impairment expenses Notes C1 C1 C2 C1 2019 $'000 26,432 1,298 989 465 29,184 2018 $'000 672 1,797 1,605 2,625 3,065 5,300 15,064 2018 $'000* 21,019 3,384 1,144 455 26,002 The accelerated depreciation due to home closures above relates to the closing of the home at Mona Vale. In the prior year, the amounts relate to the closure of the home at Southport and Blakehurst. *The comparative information above has been restated for classification purposes only. Amounts relating to impairment expenses as reported in the prior year of $3,384,000 have been reclassified to accelerated depreciation due to home closures. The homes were depreciated at an accelerated rate due to changes in their useful life estimates based on decisions to redevelop the sites at an earlier date than previously anticipated. B4 EMPLOYEE BENEFITS EXPENSES Salaries and wages expense Superannuation expense Other employee expenses Total employee benefits expenses 2019 $'000 322,290 29,462 35,052 386,804 2018 $'000 303,027 27,837 29,352 360,216 Estia Health Annual Financial Report 2018 - 2019 41 Estia Health Annual Financial Report 2018 - 2019 42 82 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 83 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 SECTION B: OUR PERFORMANCE (CONTINUED) SECTION B: OUR PERFORMANCE (CONTINUED) Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes B5 OCCUPANCY EXPENSES Rent expense Repairs and maintenance expense Other occupancy expenses Total occupancy expenses B6 NET FINANCE COSTS Interest income from cash at banks Total finance income Interest expense on bank loans Interest capitalised1 Interest expense on accommodation bonds for departed residents Other finance costs Total finance costs 2019 $'000 5,849 9,578 15,870 31,297 2019 $'000 70 70 2,549 (960) 3,402 2,069 7,060 2018 $'000 5,703 8,509 15,386 29,598 2018 $'000 186 186 2,298 (338) 3,257 2,248 7,465 Net finance costs 6,990 7,279 1 Interest directly attributable to the construction of homes has been capitalised to construction in progress at a weighted average rate of 3.04% (2018: 2.99%). Assets have been funded through general borrowings and the capitalisation rate represents the average cost of interest on such borrowings. SIGNIFICANT ACCOUNTING POLICY Interest income Interest income is recognised based on the effective interest method. Borrowing costs Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the asset. All other borrowing costs are expensed in the period in which they occur. Refer to Note D3 for information relating to loans and borrowings. B7 INCOME TAX Current income tax Current income tax expense Adjustments in respect of income tax of previous year Deferred income tax Relating to origination and reversal of temporary differences Adjustments in respect of income tax of previous year 2019 $'000 2018 $'000 16,529 (290) 17,314 (788) 642 (342) (190) (325) Income tax expense reported in the consolidated statement of profit or loss and other comprehensive income 16,539 16,011 Reconciliation of income tax expense and the accounting profit: Accounting profit before income tax At the Australian statutory income tax rate of 30% (2018: 30%) Adjustments in respect of income tax of previous year Non-taxable income Utilisation of previously unrecognised tax losses Recognition of tax on bed licences Expenditure not allowable for income tax purposes - Other expenditure Income tax expense 2019 $'000 57,829 17,349 (632) - (182) - 2018 $'000 57,165 17,150 (1,113) (143) - 89 4 28 16,539 16,011 (74,368) (73,176) Estia Health Annual Financial Report 2018 - 2019 43 Estia Health Annual Financial Report 2018 - 2019 44 84 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 85 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 SECTION B: OUR PERFORMANCE (CONTINUED) SECTION B: OUR PERFORMANCE (CONTINUED) Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes B7 INCOME TAX (CONTINUED) Accelerated depreciation IPO transaction fees Other Assets held for sale Bed licences Share-based payments Provisions and accruals Investment properties Deferred tax expense Deferred tax assets/(liabilities), net Reflected in the statement of financial position as follows Deferred tax assets Deferred tax liabilities Deferred tax assets/(liabilities), net Reconciliation of deferred tax liabilities, net: Balance at 1 July 2017 Tax income during the year recognised in profit or loss Adjustments in respect of income tax of previous year Balance at 30 June 2018 Adjustment due to AASB9 adoption Adjusted balance as at 1 July 2018 Tax expense during the year recognised in profit or loss As at 30 June 2019 Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position 2019 $'000 1,003 (2,059) (184) (17) - (341) 1,298 - (300) (300) 2018 $'000 1,223 (2,059) (496) (119) (89) 139 1,627 (36) 190 190 2019 $'000 (59,848) 16 (825) - (64,571) - 17,489 (36) 2018 $'000 (60,851) 2,075 (641) 17 (64,571) 341 16,056 (36) (107,775) (107,775) (107,610) (107,610) 17,672 (125,447) (107,775) 18,665 (126,275) (107,610) $'000 (108,765) 190 965 (107,610) 135 (107,475) (300) (107,775) - - - - - - - - The Group has tax losses which arose as part of the acquisition of the Hutchinson component entities. These are subject to an available fraction which determines the annual rate at which the losses may be recouped. A deferred tax benefit has not been recognised in these financial statements in relation to these losses. B7 INCOME TAX (CONTINUED) SIGNIFICANT ACCOUNTING POLICY Current income tax Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date. Current income tax relating to items recognised directly in equity is recognised in equity and not in the statement of profit or loss. Positions taken in the tax returns are evaluated with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred tax Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred income tax liabilities are recognised for all taxable temporary differences except: • When the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and • In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Tax consolidation legislation Estia Health Limited and its wholly-owned controlled entities implemented the tax consolidation legislation as of 19 June 2013. The head entity, Estia Health Limited and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the Group allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, Estia Health Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the Group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. Estia Health Annual Financial Report 2018 - 2019 45 Estia Health Annual Financial Report 2018 - 2019 46 86 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 87 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 SECTION B: OUR PERFORMANCE (CONTINUED) SECTION B: OUR PERFORMANCE (CONTINUED) Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes B7 INCOME TAX (CONTINUED) SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are re-assessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. B8 EARNINGS PER SHARE Basic Earnings Per Share (EPS) amounts are calculated by dividing the profit for the year attributable to ordinary equity holders of the Parent by the weighted average number of ordinary shares outstanding during the year. Diluted EPS amounts are calculated by dividing the profit attributable to ordinary equity holders of the Parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive employee Performance Rights into ordinary shares. Profit attributable to ordinary equity holders of the Parent for basic and diluted earnings 2019 $'000 2018 $'000 41,290 41,154 2019 2018 Weighted average number of ordinary shares for basic EPS 260,602,749 260,580,283 Effect of dilution 1,270,857 791,893 Weighted average number of ordinary shares for the effect of dilution 261,873,606 261,372,176 Basic earnings per share Diluted earnings per share 2019 cents 15.84 15.77 2018 cents 15.79 15.75 B9 CASH FLOW RECONCILIATION (a) Reconciliation of net profit after income tax to net cash flows from operations Profit for the year 41,290 41,154 2019 $'000 2018 $'000 Adjustments to reconcile profit after income tax to net cash flows: Depreciation of property, plant and equipment Amortisation of intangibles Impairment of property, plant and equipment Net gain on disposal of property, plant and equipment Net gain on sale of assets held for sale Bond retention revenue Movement in allowance for expected credit losses Share-based payments Stepped lease costs Net gain on fair value of investment properties Changes in assets and liabilities Decrease in trade and other receivables Decrease/(Increase) in prepayments and other assets Decrease in deferred tax assets Decrease in deferred tax liabilities Increase/(Decrease) in current tax payable (Decrease)/Increase in trade and other payables Increase in provisions Increase in refundable accommodation deposits and bonds Net cash flows from operating activities SIGNIFICANT ACCOUNTING POLICY Operating cash flow 27,730 989 465 (19) (17) (1,041) (387) 658 209 - 2,000 344 1,129 (828) 306 (3,306) 3,841 14,566 87,929 24,403 1,144 455 - (363) (1,499) 74 463 134 (120) 809 (1,541) 638 (1,793) (5,141) 11,631 3,531 62,785 136,764 Daily inflows and outflows of refundable accommodation deposits are considered by the Group to be a normal part of the operations of the business and are utilised at the discretion of the Group within the guidelines set out by the Prudential Compliance Standards and are therefore classified as an operating activity for the purposes of cash flow reporting. (b) Reconciliation of liabilities arising from financing activities Non-current loans and borrowings Total liabilities from financing activities 75,000 75,000 50,000 50,000 125,000 125,000 2018 $'000 Net cash flows $'000 2019 $'000 Estia Health Annual Financial Report 2018 - 2019 47 Estia Health Annual Financial Report 2018 - 2019 48 88 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 89 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes SECTION C: ASSETS & LIABILITIES C1 PROPERTY, PLANT AND EQUIPMENT Reconciliation of property, plant and equipment Land $'000 Buildings $'000 Property Improvements $'000 Note Furniture, fixtures & equipment $'000 Motor vehicles $'000 Construction in progress $'000 Total $'000 Cost Balance at 1 July 2017 Additions Transfers Disposals Transfers to assets held for sale Balance at 30 June 2018 Additions Transfers Disposals Transfers to assets held for sale Balance at 30 June 2019 Accumulated depreciation Balance at 1 July 2017 Depreciation expense Impairment expense Disposals Balance at 30 June 2018 Depreciation expense Impairment expense Disposals Balance at 30 June 2019 Net book value As at 30 June 2018 As at 30 June 2019 193,441 446,487 - 38,247 (3,000) 2,187 - - (2,415) - 193,213 481,734 - 23,868 (786) - 192,840 504,816 99 - (435) (37) B3 B3 B3 B3 455 - 58 (513) - - - - - 19,256 12,576 - (3,000) 28,832 11,884 - (786) 39,929 36,199 2,259 11,091 (195) - 49,354 2,521 14,215 (1,267) - 64,823 1,019 1,349 - (194) 2,174 3,306 - (1,267) 49,230 11,212 8,588 (720) - 68,310 13,140 13,574 (2,979) - 92,045 16,422 10,244 - (719) 25,947 12,438 - (2,965) 4,213 35,421 900 45 - - - 945 87 - (43) - 989 554 234 - - 788 102 - (43) 847 34,998 761,255 60,323 44,620 - (57,926) (4,312) (397) - (2,415) 21,295 814,851 94,471 78,624 - (51,657) (6,179) (669) (37) - 47,593 903,106 - - 397 (397) - - 465 (465) 37,706 24,403 455 (4,823) 57,741 27,730 465 (5,526) - 80,410 193,213 452,902 192,840 464,887 47,180 60,610 42,363 56,624 157 142 21,295 757,110 47,593 822,696 SECTION C: ASSETS & LIABILITIES (CONTINUED) C1 PROPERTY, PLANT AND EQUIPMENT (CONTINUED) SIGNIFICANT ACCOUNTING POLICY Construction in Progress, Plant and Equipment and Land and Buildings are stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. Land is not depreciated. Such cost includes the cost of replacing part of the plant and equipment and borrowing costs for long-term construction projects if the recognition criteria is met. When significant parts of plant and equipment are required to be replaced at intervals, the Group recognises such parts as individual assets with specific useful lives and depreciates them accordingly. All other repair and maintenance costs are recognised in profit or loss as incurred. Property, plant and equipment transferred from vendors are initially measured at fair value at the date on which control is obtained. Depreciation is calculated on a straight-line or written down value basis over the estimated useful life of the asset as follows: Buildings and property improvements Furniture, fittings and equipment Motor vehicles 4 - 50 years 3 - 20 years 4 - 8 years An item of property, plant and equipment and any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (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 when the asset is derecognised. Property, plant and equipment forms part of one cash-generating unit (CGU) and has been tested for impairment in accordance with Note C2. The Group also assesses the indicators for impairment at each financial year end. If impairment indicators are present, the Group assesses the residual values, useful lives and methods of depreciation of property, plant and equipment and adjust prospectively, if appropriate. *The comparative information above has been restated for classification purposes only. Amounts relating to impairment expenses as reported in the prior year of $3,384,000 have been reclassified to depreciation due to home closures. The homes were depreciated at an accelerated rate due to changes in their useful life estimates based on decisions to redevelop the sites at an earlier date than previously anticipated. Estia Health Annual Financial Report 2018 - 2019 49 Estia Health Annual Financial Report 2018 - 2019 50 90 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 91 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes SECTION C: ASSETS & LIABILITIES (CONTINUED) C2 GOODWILL AND OTHER INTANGIBLE ASSETS Balance at 1 July 2017 Additions Balance at 30 June 2018 Additions Disposals Goodwill $'000 Bed licences $'000 Note 817,074 - 817,074 - - 214,940 296 215,236 2,695 - Software costs $'000 Total $'000 6,383 646 7,029 1,038,397 942 1,039,339 2,155 (89) 4,850 (89) Balance at 30 June 2019 817,074 217,931 9,095 1,044,100 Accumulated amortisation Balance at 1 July 2017 Amortisation expense Balance at 30 June 2018 Amortisation expense Disposals Balance at 30 June 2019 Net book value As at 30 June 2018 As at 30 June 2019 B3 B3 - - - - - - - - - - - - 2,407 1,144 3,551 989 (89) 2,407 1,144 3,551 989 (89) 4,451 4,451 817,074 817,074 215,236 217,931 3,478 1,035,788 4,644 1,039,649 SECTION C: ASSETS & LIABILITIES (CONTINUED) C2 GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) SIGNIFICANT ACCOUNTING POLICY Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. Internally generated intangibles, other than capitalised development and software costs, are not capitalised and the related expenditure is reflected as a profit or loss in the period in which the expenditure is incurred. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortisation period or method, as appropriate, and are treated as changes in accounting estimates and adjusted on a prospective basis. Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually, at the Cash Generating Unit (CGU) level. The CGU is consistent with the operating segment identified in Note E5. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. Software costs are amortised over the estimated useful life of 5 years. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the statement of profit or loss when the asset is derecognised. Bed licences Bed licences for the Group’s aged care homes are initially carried at cost or if acquired in a business combination, at fair value at the date of acquisition in accordance with AASB 3 Business Combinations. Following initial recognition, the licenses are not amortised but are measured at cost less any accumulated impairment losses. Bed licences are tested for impairment annually as at 30 June and when circumstances indicate that the carrying value may be impaired. Testing is performed in line with the procedures noted below in Goodwill. Bed Licenses are assessed as having an indefinite useful life as they are issued for an unlimited period and therefore are not amortised. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. Goodwill Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests, and any previous interest held, over the net identifiable assets acquired and liabilities assumed. Goodwill is tested for impairment annually as at 30 June and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of the CGU to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised. Impairment losses relating to goodwill cannot be reversed in future periods. Estia Health Annual Financial Report 2018 - 2019 51 Estia Health Annual Financial Report 2018 - 2019 52 92 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 93 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes SECTION C: ASSETS & LIABILITIES (CONTINUED) C2 GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Goodwill and bed licenses acquired through business combinations were tested for impairment at the reporting date. The recoverable amount of the CGU was assessed by reference to the CGU’s value in use based on financial forecasts covering a five year period (2020 to 2024) and a terminal value. A post-tax discount rate was applied in the value in use model, which was determined based on the specific circumstances of the Group and is derived from its weighted average cost of capital (WACC). Market-specific risk is incorporated by applying individual beta factors which are evaluated annually based on publicly available market data. Adjustments to the discount rate are made to factor in the specific amount of the future tax flows in order to reflect a pre-tax discount rate. The recoverable amount was determined to be higher than the carrying amount and therefore the Directors determined that the intangible assets with an indefinite useful life were not impaired. As impairment testing is based on assumptions and judgements, the Directors have considered changes in key assumptions that they believe to be reasonably possible. The recoverable amount exceeds the carrying amount when testing for reasonably possible changes in key assumptions. Post-tax discount rate Pre-tax discount rate Terminal growth rate C3 CASH AND CASH EQUIVALENTS Cash at bank Cash on hand Total cash and cash equivalents 2019 % 9.5 11.8 2.1 2018 % 9.5 11.8 2.1 2019 $'000 14,555 76 14,631 2018 $'000 11,123 75 11,198 Cash at bank earns interest at floating rates based on daily bank deposit rates. At 30 June 2019, the Group had available $201,000,000 (2018: $251,200,000) of undrawn committed borrowing facilities, which excludes $4,000,000 (2018: $3,800,000) of bank guarantees disclosed in Note E2. Refer to Note D3 for further details. SIGNIFICANT ACCOUNTING POLICY Cash and cash equivalents in the statement of financial position comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. For the purposes of the consolidated statement of cash flows, "cash and cash equivalents" are as defined above, net of outstanding bank overdrafts. SECTION C: ASSETS & LIABILITIES (CONTINUED) C4 TRADE AND OTHER RECEIVABLES Trade receivables Other receivables Allowance for expected credit losses Total trade and other receivables 2019 $'000 8,045 2,574 (1,573) 9,046 2018 $'000* 10,487 2,455 (1,509) 11,433 *The comparative information above has been restated for classification purposes only. Credit balances of $1,948,000 included in Trade receivables in 2018 have been reclassified to Trade and other payables. Allowance for expected credit loss Set out below is the movement in the allowance for expected credit losses of trade receivables for the year ended 30 June 2019. The comparative information for the year ended 30 June 2018 is based on the incurred loss model under AASB 139. As at 1 July AASB 9 Adjustment Provision for expected credit loss Utilised At 30 June Note E9 2019 $'000 1,509 451 801 (1,188) 1,573 2018 $'000 1,435 - 1,000 (926) 1,509 See Note D5 on credit risk which discusses how the Group manages and measures credit quality of trade receivables. SIGNIFICANT ACCOUNTING POLICY Trade receivables and other receivables are recognised and carried at original invoice amount less an allowance for lifetime expected credit losses. The Group uses a provision matrix based on days past due for groupings of customers with similar credit risk characteristics, adjusted for any material expected changes to the future credit risk of that group to determine the lifetime expected credit losses at the reporting date. Refer to Note E9 for further information relating to the change in accounting policy following the adoption of AASB 9. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS In calculating the allowance for expected credit loss, the Group applies judgements when identifying debtors with similar risk characteristics to group together in the provision matrix. The Group is also required to estimate the rate of allowance of expected credit loss for each group of debtor, which requires the use of historical rates of default and assumptions based on future economic conditions, for instance a downturn in the Australian economy or adverse changes to the aged pension, that may materially impact on the ability to collect outstanding debtor balances. Estia Health Annual Financial Report 2018 - 2019 53 Estia Health Annual Financial Report 2018 - 2019 54 94 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 95 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 SECTION C: ASSETS & LIABILITIES (CONTINUED) SECTION C: ASSETS & LIABILITIES (CONTINUED) Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes C7 TRADE AND OTHER PAYABLES Current trade and other payables Trade creditors Payroll liabilities Sundry creditors and accruals Total current trade and other payables Non-current other payables Sundry creditors and accruals Total non-current other payables 2019 $'000 12,865 14,832 16,349 44,046 12 12 2018 $'000 16,682 13,290 12,675 42,647 61 61 Total trade and other payables 44,058 42,708 *The comparative information above has been restated for classification purposes only. Credit balances of $1,948,000 included in Trade receivables in 2018 have been reclassified to Trade creditors. C5 ASSETS HELD FOR SALE Assets held for sale Total assets held for sale 2019 $'000 - - 2018 $'000 902 902 During the year, the Group sold two properties for a total of $956,000, including a parcel of land that was transferred to assets held for sale during the year of $37,000. The sales resulted in a profit of $17,000 and has been included in other income (see Note B1). SIGNIFICANT ACCOUNTING POLICY Non-current assets are classified as held-for-sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use. Such assets are generally measured at the lower of their carrying amount and fair value less costs to sell. Impairment losses on initial classification as held-for-sale or held-for-distribution and subsequent gains and losses on re-measurement are recognised in profit or loss. C6 INVESTMENT PROPERTIES Balance at beginning of period Fair value adjustments Total investment properties 2019 $'000 1,620 - 1,620 2018 $'000 1,500 120 1,620 Investment properties comprise Independent Living Units (ILUs) located in one retirement village located in Bendigo. The retirement village is subject to a loan licence agreement which confers the right to occupancy of the unit, until such time as the resident’s occupancy terminates and the occupancy rights are transferred to another resident. Upon entry, a resident will loan the Group an amount equal to the fair value of the unit. On termination the resident is entitled to repayment of the loan inclusive of any uplift in fair value since the agreement date less the deferred management fee. SIGNIFICANT ACCOUNTING POLICY Investment properties are measured initially at cost, including transaction costs. Subsequent to initial recognition, investment properties are stated at fair value, which reflects market conditions at the reporting date. Gains or losses arising from changes in the fair values of investment properties are included in profit or loss in the period in which they arise, including the corresponding tax effect. Fair values are determined based on an annual evaluation performed by an accredited external independent valuer applying a valuation model recommended by the International Valuation Standards Committee. Investment properties are derecognised either when they have been disposed of or when they are permanently withdrawn from use and no future economic benefit is expected from their disposal. The difference between the net disposal proceeds and the carrying amount of the asset is recognised in profit or loss in the period of derecognition. Transfers are made to (or from) investment property only when there is a change in use. For a transfer from investment property to owner-occupied property, the deemed cost for subsequent accounting is the fair value at the date of change in use. If owner-occupied property becomes an investment property, the Group accounts for such property in accordance with the policy stated under property, plant and equipment up to the date of change in use. Estia Health Annual Financial Report 2018 - 2019 55 Estia Health Annual Financial Report 2018 - 2019 56 96 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 97 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 SECTION C: ASSETS & LIABILITIES (CONTINUED) SECTION D: CAPITAL, FINANCING, RADS AND RISK Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes C8 PROVISIONS Current provisions Employee benefits Stepped lease provision Total current provisions Non-current provisions Employee benefits Total non-current provisions Total provisions 2019 $'000 44,558 1,058 45,616 4,496 4,496 2018 $'000 40,944 849 41,793 4,269 4,269 50,112 46,062 SIGNIFICANT ACCOUNTING POLICY General Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Long service leave and annual leave The Group does not expect its long service leave or annual leave benefits to be settled wholly within 12 months of each reporting date but is recognised as a current liability when the Group does not have an unconditional right to defer settlement. The liability for long service leave and annual leave is recognised and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures, and periods of service. Expected future payments are discounted using market yields at the reporting date on national corporate bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash outflows. C9 OTHER FINANCIAL LIABILITIES Independent living unit (ILU) entry contributions Total other financial liabilities 2019 $'000 1,304 1,304 2018 $'000 1,371 1,371 Terms and conditions relating to independent living units (ILUs) ILU entry contributions are non-interest bearing loans made by ILU residents to the Group upon entering into an agreement to occupy the ILU and are settled after a resident vacates the property based on the applicable State-based Retirement Village Acts. D1 SHARE CAPITAL AND RESERVES Issued and fully paid Ordinary shares Total share capital (a) Movements in ordinary shares on issue 2019 $'000 2018 $'000 801,843 801,843 801,836 801,836 Beginning of the financial year Movement in management equity plan End of the financial year 2019 Number of shares 2018 $'000 Number of shares 260,602,749 - 260,602,749 801,836 7 801,843 260,602,749 - 260,602,749 $'000 801,830 6 801,836 (b) Share-based payments reserve The share-based payments reserve is used to recognise the value of equity-settled share-based payments provided to employees, including key management personnel, as part of their remuneration. Refer to Note D2 for further details of these plans. (c) Franking credits The franking credit balance of Estia Health Limited for the year ended 30 June 2019 is $23,917,303 (2018: $25,855,432). (d) Dividends paid and proposed The final dividend for the year ended 30 June 2018 of $20,848,220 (8.0 cents per share) was paid on 28 September 2018. The interim dividend for the year ended 30 June 2019 of $20,848,220 (8.0 cents per share) (2018: $20,327,014) was paid on 27 March 2019. The Directors propose a fully franked final cash dividend for the year ended 30 June 2019 of 7.8 cents per share totalling $23,328,082. Proposed dividends on ordinary shares are not recognised as a liability at 30 June 2019. (e) Dividend reinvestment plan The Dividend Reinvestment Plan (DRP) was not applicable for the final dividend paid on 28 September 2018 or the interim dividend paid on 27 March 2019. The DRP has been reinstated which will allow eligible shareholders to reinvest all or part of their distribution into shares for the final dividend. Estia Health Annual Financial Report 2018 - 2019 57 Estia Health Annual Financial Report 2018 - 2019 58 98 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 99 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 SECTION D: CAPITAL, FINANCING, RADS AND RISK (CONTINUED) SECTION D: CAPITAL, FINANCING, RADS AND RISK (CONTINUED) Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes D2 SHARE-BASED PAYMENTS At 30 June 2019, the Group had the following share-based payments arrangements: (a) Long-Term Incentive Plan (LTIP) Under the LTIP, awards are made to executives who have a significant impact on the Group’s performance. LTIP awards are delivered in the form of performance rights entitling the holder to shares which vest following a period of three years subject to meeting performance measures. For rights granted prior to 1 July 2018, the Group uses Total shareholder return (TSR) performance relative to the ASX200 excluding mining and energy companies (70%) and Earnings Per Share (EPS) (30%) as performance measures for the LTIP. For rights granted post 1 July 2018, the TSR component is split into two components, half against the ASX200 excluding mining and energy companies and half against the market capitalisation weighted average performance of a peer group of ASX-listed companies operating in the provision of aged care services. The TSR component remains at 70% with EPS remaining at 30% of the performance measures of the LTIP. During the year, the Group granted a total of 615,019 rights to executives. Further details can be found in section 9 of the Remuneration Report. (b) Short-Term Incentive Plan (STIP) Under the STIP, awards are made to executives who have an impact on the Group’s performance. STIP awards are delivered in a mix of cash and equity. 75% of the award is delivered in cash, with the remaining 25% delivered in performance rights, which require participants to remain employed for an additional 12 months for the rights to vest. The STIP is measured against Earnings Before Interest, Tax and Depreciation and Amortisation, Net Profit After Tax and Lost Time Injury Frequency targets, as well as other role specific measures over a 12-month period. A resident quality gateway hurdle is also used, which requires ongoing compliance and accreditation targets to be met in order for any of the STIP to be eligible to vest. For awards made under the STIP from 1 July 2018, the Lost Time Injury Frequency target has been replaced with a Culture target. The number of performance rights granted and deferred under the STIP during the year ended 30 June 2019 relating to the incentive payments earned in the year ended 30 June 2018 was 13,693 (2018: nil). (c) Management Equity Plan (MEP) The MEP is a legacy plan which was approved by the Board and implemented prior to listing and other than for existing holders, it is no longer offered. Under the plan, the former Managing Director and a number of senior employees of the Group were invited to subscribe for shares on the terms specified in the MEP rules. Most MEP participants were also offered a 10 year limited recourse loan to subscribe for MEP shares. The following table details the MEP loans outstanding at 30 June 2019: Number of MEP shares Total amount subscribed ($’000) % of MEP Shares funded through MEP loans Interest rate on MEP loan Total 50,000 100 100% 5.95% All MEP shares listed above were released from escrow on 11 December 2017. D2 SHARE-BASED PAYMENTS (CONTINUED) (d) Movements during the year The following tables illustrate the number and weighted-average exercise prices (WAEP) of, and movements in, MEP shares and performance rights during the year: MEP shares only Outstanding at 1 July Outstanding at 30 June Exercisable at 30 June Performance rights only Outstanding at 1 July Granted during the year Forfeited during the year Outstanding at 30 June Exercisable at 30 June 2019 2018 Number WAEP Number WAEP 50,000 50,000 50,000 2.00 2.00 2.00 50,000 50,000 50,000 2.00 2.00 2.00 2019 2018 Number WAEP Number WAEP 907,684 628,712 - 1,536,396 13,693 - - - - - 524,238 476,980 (93,534) 907,684 - - - - - - The weighted average remaining contractual life for the MEP shares and performance rights outstanding as at 30 June 2019 was approximately 1.31 years. The exercise price for MEPs outstanding at the end of the year was $2.00. There is no exercise price for performance rights. The weighted average fair value of performance rights granted during the year was $0.61. (e) Expense recognised in profit or loss The share-based payments expense recognised in profit or loss as an employee benefit for each of the share arrangements were as follows: Long-term incentive plan Short-term incentive plan Management equity plan Share-based payments expense recognised in profit or loss 2019 $'000 605 41 12 658 2018 $'000 451 - 12 463 Estia Health Annual Financial Report 2018 - 2019 59 Estia Health Annual Financial Report 2018 - 2019 60 100 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 101 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 SECTION D: CAPITAL, FINANCING, RADS AND RISK (CONTINUED) SECTION D: CAPITAL, FINANCING, RADS AND RISK (CONTINUED) Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes D2 SHARE-BASED PAYMENTS (CONTINUED) SIGNIFICANT ACCOUNTING POLICY The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model. That cost is recognised in employee benefits expense, together with a corresponding increase in equity (other capital reserves), over the period in which the service and, where applicable, the performance conditions are fulfilled (the vesting period). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The expense or credit in the statement of profit or loss for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. Service and non-market performance conditions are not taken into account when determining the grant date fair value of awards, but the likelihood of the conditions being met is assessed as part of the Group’s best estimate of the number of equity instruments that will ultimately vest. Market performance conditions are reflected within the grant date fair value. Any other conditions attached to an award, but without an associated service requirement, are considered to be non-vesting conditions. Non-vesting conditions are reflected in the fair value of an award and lead to an immediate expensing of an award unless there are also service and/or performance conditions. No expense is recognised for awards that do not ultimately vest, except for equity-settled transactions for which vesting is conditional upon a market or non-vesting condition. These are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied. When the terms of an equity-settled award are modified, the minimum expense recognised is the expense had the terms not been modified, if the original terms of the award are met. An additional expense is recognised for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification. Where an award is cancelled by the entity or by the counterparty, any remaining element of the fair value of the award is expensed immediately through profit or loss. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS LTIP-Recognition and measurement of fair value As the exercise price is zero upon vesting, the fair value of the performance rights issued under the LTIP are determined by the fair value at grant date by utilising methodologies allowable under AASB 2 Share-Based Payments, including the use of a Monte Carlo simulation (TSR component) and the Binomial Model (EPS component). The contractual term of the performance rights is three years and there are no cash settlement alternatives for the employees. The Group does not have a past practice of cash settlement for these awards. Assumption FY19 Plan FY18 Plan FY17 Plan $3.02 - $3.51 $3.05 - $3.51 Share price at grant date Dividend yield Volatility Risk free rate Probability of achieving EPS $2.19 5.0% 38% 2.0% 40% 3.5% 40% 2.0% 50% Fair value of right - TSR $0.46 - $0.47 Fair value of right - EPS $1.92 $1.16 - $1.58 $2.73 - $3.21 6.5% 40% 1.7% - 2.0% 50% $0.76 - $1.82 $2.67 - $3.33 D2 SHARE-BASED PAYMENTS (CONTINUED) SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS (CONTINUED) STIP-Recognition and measurement of fair value The fair value of the performance rights issued under the STIP are determined by the volume weight average share price of the Group in the 10 trading days prior to the release of the Group's annual results. The performance rights issued under the STIP during the year had a fair value of $2.96 per right and related to the prior year's performance. The performance rights are deferred for a 12 month period and are settled in the Group's equity if the participants remains employed by the Group at the end of the 12 month period. MEP-Recognition and measurement of fair value In accordance with AASB 2 Share-Based Payments, the granting of shares in exchange for a limited recourse loan is effectively the same as granting a share option as it gives the MEP participant the right, but not the obligation, to subscribe to Estia’s shares at a fixed price for a specified period of time. Even though Estia records the MEP shares as issued for legal purposes, they are not considered to be issued for accounting purposes. When MEP shares are granted, limited recourse loans to assist in the purchase of the shares are recognised in equity. As the MEP holder repays the loan through the application of dividends and/or instalments, those payments are accounted for as partly paid capital. Effectively, the grant of MEP shares and limited recourse loan are set off against each other in equity. The grants of MEP loans were accounted for as an option and the fair value at grant date is independently determined using the binomial options pricing model that takes into account the discount to market price at grant date, the expected life/term of the loan and its limited recourse nature, the vesting terms, the expected price volatility, the expected dividend yield and the risk-free interest rate for the term. The fair value of the shares granted is recognised to profit or loss on a straight-line basis over the expected vesting period (i.e. 10 years) with a credit to the share-based payments reserve in equity. Loan payments received are credited to issued capital. In the case where MEP loans are not granted to assist in the purchase of MEP shares, the MEP shares are fully self-funded and are therefore treated as issued for accounting purposes, which is no different to legal purposes. The following table lists the inputs to the model used in the measurement of the fair value at grant date of the MEP loans: Share price at grant date $1.00 - $5.75 2015 Exercise price Volatility Risk free rate $1.80 - $5.75 30% 3.04% - 3.26% Expected life of options 10 years The expected life of the MEP shares are based on the assumption that these are exercised at the end of the MEP loan term and is not necessarily indicative of exercise patterns that may occur. The expected volatility is based on the historical volatility of the Group’s share since listing on 5 December 2014 and reflects the assumption that this volatility is indicative of future trends, which may not necessarily be the actual outcome. Estia Health Annual Financial Report 2018 - 2019 61 Estia Health Annual Financial Report 2018 - 2019 62 102 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 103 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 SECTION D: CAPITAL, FINANCING, RADS AND RISK (CONTINUED) SECTION D: CAPITAL, FINANCING, RADS AND RISK (CONTINUED) Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes D3 LOANS AND BORROWINGS Non-current loans and borrowings Bank loans, secured Total non-current loans and borrowings 2019 $'000 125,000 125,000 2018 $'000 75,000 75,000 Terms and conditions of loans The Facility may be used for general corporate purposes including funding acquisitions, capital expenditure, working capital requirements and providing sufficient liquidity to ensure repayment of RADs and Bonds as they fall due. The Facility is secured by real property mortgages over all freehold property, security over material leases, cross guarantees and indemnities from the Group and first ranking fixed and floating charges over the assets and undertakings of the Group. The total debt facility available to Estia at 30 June 2019 was $330,000,000. The maturity date of the Facility is 22 August 2020. SIGNIFICANT ACCOUNTING POLICY Borrowings are recognised initially at fair value. Directly attributable transaction costs are amortised over the life of the facility agreement. Subsequently, interest-bearing loans and borrowings are measured at amortised cost using the Effective Interest Rate (EIR) method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance costs in the statement of profit or loss. D4 REFUNDABLE ACCOMMODATION DEPOSITS AND BONDS Current residents Departed residents Total refundable accommodation deposits and bonds - amounts received 2019 $'000 698,242 106,791 805,033 2018 $'000 697,227 94,281 791,508 Terms and conditions relating to refundable accommodation deposits (RADs) and accommodation bonds (Bonds) The RADs and Bonds are paid by residents upon their admission to homes and are refunded after a resident departs a home in accordance with the Aged Care Act 1997. Providers must pay a base interest rate on all refunds of RADs and Bonds within legislated time frames and must pay a higher rate on refunds that are not made within legislated time frames. Accommodation bond balances held prior to 1 July 2014 may be reduced by annual retention fees charged in accordance with the Aged Care Act 1997. RAD and Bond refunds are guaranteed by the Government under the Accommodation Payment Guarantee Scheme, in the event that a provider is unable to refund the amounts. Providers are required to maintain sufficient liquidity to ensure that they can refund all amounts as they fall due. As required under legislation, the Group maintains a Liquidity Management Policy, which is monitored on regular basis and a full review is undertaken on an annual basis as a minimum, to ensure it has sufficient liquidity to meet its RAD and Bond refund and other financial obligations. To ensure that funds are readily available when required, the minimum level of funds chosen by the Group are to be held in cash (placed on deposit but readily available) or met by undrawn lines of credit from a bank or financial institution. RADs and Bonds are classified as a current liability as the Group does not have an unconditional right to defer settlement for at least twelve months after the reporting date. The total RAD and Bond liability represents the sum of separate payments from a significant number of individual residents in different locations with differing circumstances, and frequently a departing RAD- or Bond-paying resident is replaced shortly afterwards with a new RAD-paying resident. The repayment of individual balances that make up the total current balance will be dependent upon the actual tenure of individual residents, which can be more than ten years but averages approximately 2 - 2.5 years. D5 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group’s principal financial liabilities consist of interest-bearing loans and borrowings, trade and other payables and Refundable Accommodation Deposits. The main purpose of these financial liabilities is to finance the Group’s operations. The Group’s principal financial assets include trade and other receivables, and cash and short-term deposits that derive directly from its operations. The Group is exposed to market risk, credit risk and liquidity risk. The Group’s senior management oversees the management of these risks. It is the Group’s policy that no trading in derivatives for speculative purposes may be undertaken. Policies for managing each of these risks are summarised below. Market risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprise three types of risk: interest rate risk, currency risk and other price risk, such as equity price risk and commodity risk. Financial instruments affected by market risk include loans and borrowings and deposits. The sensitivity analyses in the following sections relate to the position as at 30 June 2019 and 30 June 2018. The Group is not exposed to commodity risk and equity risk. Estia Health Annual Financial Report 2018 - 2019 63 Estia Health Annual Financial Report 2018 - 2019 64 104 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 105 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 SECTION D: CAPITAL, FINANCING, RADS AND RISK (CONTINUED) SECTION D: CAPITAL, FINANCING, RADS AND RISK (CONTINUED) Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes D5 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) Market risk (continued) The sensitivity analyses have been prepared on the basis that the amount of net debt and the ratio of fixed to floating interest rates of the debt are all constant at 30 June 2019 and 30 June 2018. The following assumption has been made in calculating the sensitivity analyses: • The sensitivity of the relevant statement of profit or loss item is the effect of the assumed changes in respective market risks. This is based on the financial assets and financial liabilities held at 30 June 2019 and 30 June 2018. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s cash and cash equivalents and long-term debt obligations with floating interest rates. The Group’s exposure to interest rate risk and the effective interest rate of financial assets and liabilities both recognised and unrecognised at the reporting date are as follows: All other financial assets and liabilities are non-interest bearing. . Cash and liquid assets Bank loans Refundable accommodation deposits – departed residents Weighted average effective interest rates 2019 % 0.9 2.7 3.8 2018 % 1.4 3.1 3.8 Fixed or Floating Floating Floating Floating The details of debt are disclosed in Note D3 to the financial statements. Interest rate sensitivity The following table demonstrates the sensitivity to a reasonably possible change in interest rates on that portion of cash and cash equivalents and loans and borrowings affected. With all other variables held constant, the Group’s profit before tax and equity are affected through the impact on floating rate financial instruments existing at the end of the respective period, as follows: + 0.25% (25 basis points) - 0.25% (25 basis points) Effect on profit before tax Higher/(lower) Effect on equity Higher/(lower) 2019 $'000 (193) 193 2018 $'000 (112) 112 2019 $'000 (135) 135 2018 $'000 (78) 78 Foreign currency risk Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rates. The Group does not carry out any transactions or business that would give rise to foreign currency risk. Credit risk Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its operating activities (primarily trade receivables) and from its financing activities, including deposits with banks and financial institutions and other financial instruments. The Group’s exposure to credit risk arises from potential default of the counter party, with a maximum exposure equal to the carrying amount of the assets. D5 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) Credit risk (continued) Approximately 74% of the revenue of the Group is obtained from Commonwealth Government funding by way of payments for residential aged care residents. This funding is maintained for providers as long as they continue to comply with Accreditation standards and other requirements per the Aged Care Act 1997 and are paid in advance at the beginning of each month. Trade and other receivables Customer credit risk is managed subject to the Group’s established policy, procedures and controls relating to customer credit risk management. Outstanding customer receivables are regularly monitored and any outstanding balances regularly followed up. The Group limits its exposure to credit risk from trade receivables by establishing a maximum payment period of 30 days, and where possible, setting customers up to settle accounts on direct debits. An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on days past due for groupings of customers with similar credit risk characteristics, adjusted for any material expected changes to the future credit risk of that group. The Group applies the simplified approach for measuring expected credit losses, using the lifetime expected loss allowance for all trade and other receivables. The Group's other receivables are due from the Australian Government and other state based revenue offices. The Group does not believe that there is a material credit risk for amounts owing from the Australian Government or other state based revenue offices. The Group considers a financial asset in default when contractual payments are past due. Generally, financial assets are written-off when the Group have exhausted all reasonable avenues to recover the balances. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial asset. The Commonwealth Government accounts for approximately 23% (2018: 26%) of the trade receivables balance. There is no concentration of credit risk with respect to remaining trade receivables. In addition, receivables balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. The following table provides information about the expected credit losses for trade receivables, excluding the Commonwealth Government balance of $1,813,000 at 30 June 2019: As at 30 June 2019 Current (not past due) <30 days past due 30-60 days past due 61-90 days past due >90 days past due Expected credit loss rate % Gross carrying amount $'000 Allowance for expected credit loss $'000 1% 8% 11% 17% 53% 25% 756 1,792 838 491 2,355 6,232 8 135 95 83 1,252 1,573 Estia Health Annual Financial Report 2018 - 2019 65 Estia Health Annual Financial Report 2018 - 2019 66 106 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 107 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 SECTION D: CAPITAL, FINANCING, RADS AND RISK (CONTINUED) SECTION D: CAPITAL, FINANCING, RADS AND RISK (CONTINUED) Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes D5 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) Credit risk (continued) Comparative information under AASB 139 An analysis of the ageing of trade receivables at 30 June 2018 allowance for impairment under AASB 139 are tabled below: Neither past due nor impaired Past due but not impaired <30 days 30-60 days 61-90 days >90 days Past due and impaired Total 2018 $'000 3,565 1,646 948 768 2,051 1,509 10,487 Liquidity risk The Group monitors its risk to a shortage of funds on a regular basis. The Group maintains a balance between continuity of funding and flexibility through the use of bank loans that are available for potential business acquisitions and working capital requirements. The Group assessed the concentration of risk with respect to refinancing its debt and concluded it to be low. The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments. Year ended 30 June 2019 Trade and other payables Loans and borrowings Refundable accommodation deposits and bonds Other financial liabilities Year ended 30 June 2018 Trade and other payables Loans and borrowings Refundable accommodation deposits and bonds Other financial liabilities On demand Less than 12 months 1 to 5 years More than 5 years $'000 $'000 $'000 $'000 1,382 - 805,033 1,304 807,719 1,195 - 791,508 1,371 794,074 42,664 3,375 - - 46,039 41,452 2,325 - - 43,777 12 125,499 - - 125,511 61 77,669 - - 77,730 - - - - - - - - - - Total $'000 44,058 128,874 805,033 1,304 979,269 42,708 79,994 791,508 1,371 915,581 D5 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) Capital management For the purpose of the Group’s capital management, capital includes issued capital and all other equity reserves attributable to the equity holders of the parent. The primary objective of the Group’s capital management is to maximise the shareholder value. The Group manages its capital structure and considers adjustments in light of changes in economic conditions and the requirements of the financial covenants. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. In order to achieve this overall objective, the Group’s capital management, amongst other things, aims to ensure that it meets financial covenants attached to the interest-bearing loans and borrowings that define capital structure requirements. Breaches in meeting the financial covenants would permit the bank to immediately call loans and borrowings. There have been no breaches of the financial covenants of any interest-bearing loans and borrowings in the current period. No changes were made in the objectives, policies or processes for managing capital during the year ended 30 June 2019. D6 FAIR VALUE MEASUREMENT The Group uses various methods in estimating the fair value of its financial assets and liabilities which are categorised within the fair value hierarchy. The Group only uses fair value for Investment Properties, which are valued using Level 3 inputs. Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. Date of Valuation 30 June 2019 Total $'000 1,620 1,620 Fair value measurement using Level 1 Level 2 Level 3 $'000 $'000 - - - - $'000 1,620 1,620 Investment properties . Fair values of Investment Properties are determined based on an annual valuation performed by an accredited external independent valuer applying a valuation model recommended by the International Valuation Standards Committee. At the reporting date, the key unobservable inputs used by the Group in determining the fair value of its investment properties are summarised below: Unobservable inputs Discount rate Growth rate Cash flow term (years) 30 June 2019 30 June 2018 15.00% 2.85% 50 15.00% 2.84% 50 The carrying amounts of all financial assets and financial liabilities not measured at fair value are considered to be a reasonable approximation of their fair values. There were no transfers between levels during the financial year. Estia Health Annual Financial Report 2018 - 2019 67 Estia Health Annual Financial Report 2018 - 2019 68 108 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 109 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes SECTION D: CAPITAL, FINANCING, RADS AND RISK (CONTINUED) D6 FAIR VALUE MEASUREMENT (CONTINUED) SIGNIFICANT ACCOUNTING POLICY Construction in progress, plant and equipment and land and buildings are stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. Land is not depreciated. The Group measures other non-financial assets including investment properties, at fair value at each balance sheet date. Fair value is the price that would be received upon selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: • In the principal market for the asset or liability; or • In the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: • Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities; • Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable; and • Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. SECTION E: OTHER INFORMATION E1 RELATED PARTY DISCLOSURES Note E6 provides the information about the Group’s structure including the details of the subsidiaries and the holding company. Note D2 provides the information about the loans to related parties. There were no other transactions and outstanding balances that have been entered into with related parties for the relevant financial year. The table below discloses the compensation recognised as an expense during the reporting period related to Key Management Personnel. Short-term employee benefits Post-employment benefits Short-term incentive payments Share-based payments Termination payments Total compensation of key management personnel E2 COMMITMENTS AND CONTINGENCIES 2019 $'000 1,697 66 188 581 - 2,532 2018 $'000 1,538 62 122 392 155 2,269 Operating lease commitments – Group as lessee During the year, the Group had commercial property leases for two corporate offices in New South Wales and Victoria, and seven aged care homes. The remaining non-cancellable leases have remaining terms of between 1 and 17 years. Future estimated minimum rentals payable under non-cancellable operating leases, excluding future optional periods, as at 30 June are as follows: Within one year After one year but not more than five years More than five years Total operating lease commitments 2019 $'000 5,308 12,464 6,710 24,482 2018 $'000 5,368 14,986 7,111 27,465 Estia Health Annual Financial Report 2018 - 2019 69 Estia Health Annual Financial Report 2018 - 2019 70 110 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 111 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes SECTION E: OTHER INFORMATION (CONTINUED) E2 COMMITMENTS AND CONTINGENCIES (CONTINUED) SIGNIFICANT ACCOUNTING POLICY Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement. A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Group is classified as a finance lease. An operating lease is a lease other than a finance lease. Finance leases are capitalised at the commencement of the lease at the inception date at fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in the statement of profit or loss. A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Operating lease payments are recognised as an operating expense in the statement of profit or loss on a straight-line basis over the lease term. Refer to Note E9 for further information to the changes resulting from the implementation of AASB 16. Capital commitments During the year, the Group entered into contracts relating to the development of aged care homes. As at 30 June 2019, the remaining capital commitments amounted to $41,700,000 (2018: $54,300,000). Bank guarantees The Group has entered into a number of bank guarantees with its bankers in relation to the Group's rental agreements for leased properties, totalling $4,000,000 (2018: $3,800,000). These are secured against the borrowing facilities disclosed in Note D3. As at the date of signing this report, the Directors are not aware of any situations that have arisen that would require these bank guarantees to be presented. E3 AUDITOR REMUNERATION Audit of the financial report Tax compliance services Other assurance services Other services Total auditor remuneration The auditor of Estia Health Limited and its subsidiaries is Ernst & Young. 2019 $'000 688 157 14 36 895 2018 $'000 560 170 10 13 753 SECTION E: OTHER INFORMATION (CONTINUED) E4 SUBSEQUENT EVENTS CLASS ACTION On 16 July 2019, Estia was served with a class action proceeding filed by the law firm Phi Finney McDonald in the Federal Court of Australia. The proceeding alleges breaches of market disclosure obligations in 2015 and 2016 and has been filed on behalf of shareholders who, between 12 August 2015 and 6 October 2016: (i) acquired an interest in Estia shares; or (ii) acquired long exposure to Estia shares by entering into equity swap confirmations in respect of Estia shares. Estia will vigorously defend the proceeding. Estia is not in a position to state whether the proceeding is likely to have a material impact on its financial position or performance. ACQUISITIONS On 15 August 2019 Estia entered into a contract to purchase a new greenfield development in the Maitland region of NSW with 108 provisional licences attaching. The contract is subject to closing and settlement conditions including the transfer of the licences from the vendor to Estia. Settlement of the transaction is expected to occur before 31 December 2019. DIVIDENDS On 20 August 2019, the Directors resolved to pay a final fully franked dividend of 7.8 cents per share ($20,328,082) bringing dividends per share for the financial year ended 30 June 2019 to 15.8 cents per share. The record date for the final dividend will be 5 September 2019, with payment being made on 2 October 2019. Shares will trade excluding entitlement to the dividend on 4 September 2019. BANK FACILITIES On 16 August 2019 the Group elected to extend its existing $330 million syndicated debt facility with the support of a syndicate of three domestic banks. The new facility expires in November 2022. Other than those mentioned above, no matters or circumstances have arisen since the end of the reporting period which significantly affected, or may significantly affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. E5 SEGMENT REPORTING For management reporting purposes, the Group has identified one reportable segment. Estia operates predominantly in one business and geographical segment being the provision of residential aged care services in Australia. The Group’s operating performance is evaluated across the portfolio as a whole by the Chief Executive Officer on a monthly basis and is measured consistently with the information provided in these consolidated financial statements. Estia Health Annual Financial Report 2018 - 2019 71 Estia Health Annual Financial Report 2018 - 2019 72 112 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 113 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes SECTION E: OTHER INFORMATION (CONTINUED) E6 INFORMATION RELATING TO SUBSIDIARIES The consolidated financial statements of the Group include: Name Estia Finance Pty Ltd2 Estia Investments Pty Ltd3, 5 Estia Mezzco Pty Ltd6 Estia Midco Pty Ltd6 Spirytus Pty Ltd4, 6 Jaid Residential Services Pty Ltd4, 6 TGM Care Pty Ltd ATF the TGM Care Unit Trust1, 6 East Coast Senior Care Pty Ltd4, 6 William Kennedy Holdings Pty Ltd1, 5 Wollongong Nursing Home Pty Ltd4, 6 Kenna Investments Pty Ltd4, 5 Ranesta Holdings Pty Ltd6 Hayville Pty Ltd6 Eddystone Nursing Home Pty Ltd6 Merrylands Nursing Home Pty Ltd6 Kennedy Health Care Group Pty Ltd6 Camden Village Pty Ltd5 Camden Nursing Home Pty Ltd6 Camden House Pty Ltd6 Kilbride Village Pty Ltd5 Bankstown Aged Care Facility Pty Ltd6 Principal activities 1. Holding company 2. 3. 4. 5. 6. Holder of financing facilities Current accredited provider of aged care home Accredited provider status transferred to Estia Investments Pty Ltd Holder of assets Dormant entity Country of % Equity Interest Incorporation 2019 2018 Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% SECTION E: OTHER INFORMATION (CONTINUED) E7 PARENT ENTITY INFORMATION Information relating to Estia Health Limited Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Issued capital Reserves Retained earnings Total shareholders’ equity Profit of the parent company Total comprehensive income of the parent entity 2019 $'000 565,622 476,207 1,041,829 - 228,297 228,297 2018 $'000 675,197 174,802 849,999 - 22,841 22,841 813,532 827,158 801,843 1,794 9,895 813,532 27,405 27,405 801,836 1,136 24,186 827,158 36,316 36,316 The information presented above relating to the Parent is prepared using the same accounting policies that apply to the Group, except for the recognition and measurement of investments in subsidiaries. The Parent has issued the following guarantees in relation to the debts of its subsidiaries: Pursuant to Class Order 98/1418, Estia Health Limited entered into a deed of cross guarantee on 13 May 2016 with the following entities: • • • • • • • • Estia Finance Pty Ltd Estia Investments Pty Ltd Estia Midco Pty Ltd Estia Mezzco Pty Ltd William Kennedy Holdings Pty Ltd Wollongong Nursing Home Pty Ltd Kenna Investments Pty Ltd Camden House Pty Ltd The effect of the deed is that Estia Health Limited has guaranteed to pay any deficiency in the event of winding up of any controlled entity or if they do not meet their obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The controlled entities have also given a similar guarantee in the event that Estia Health Limited is wound up or if it does not meet its obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. Pursuant to Class Order 98/1418, relief has been granted to these entities from the Corporations Act 2001 requirements for the preparation, audit and lodgement of their financial reports. The Closed Group includes all entities listed in Note E6. The Statement of Financial Position and the Statement of Profit or Loss and Other Comprehensive Income of the Closed Group are the same as the Estia consolidated group. Estia Health Annual Financial Report 2018 - 2019 73 Estia Health Annual Financial Report 2018 - 2019 74 114 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 115 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 SECTION E: OTHER INFORMATION (CONTINUED) SECTION E: OTHER INFORMATION (CONTINUED) Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes E8 TREATMENT OF GST Revenues, expenses and assets are recognised net of the amount of GST, except: • • When the GST incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item, as applicable; and When receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Commitments and contingencies are disclosed net of the amount of GST, where the GST is expected to be recoverable. Cash flows are included in the statement of cash flows on a gross basis and the GST component of cash flows arising from investing and financing activities, are classified as part of operating cash flows. E9 NEW ACCOUNTING STANDARDS AND INTERPRETATIONS Changes in accounting policy, disclosures, standards and interpretations New and amended standards and interpretations The Group has adopted the following new or amended Australian Accounting Standards and AASB Interpretations as of 1 July 2018: AASB 15 Revenue from Contracts with Customers AASB 15 supersedes AASB 111 Construction Contracts, AASB 118 Revenue and related Interpretations and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The new Standard establishes a five-step model to account for revenue arising from contracts with customers. Under AASB 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The Standard requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The Group has adopted this Standard from 1 July 2018, using the full retrospective method of adoption, thereby restating the 2018 comparatives. The introduction of this Standard did not have a material impact on the Group's financial statements, accordingly there were no adjustments made to previously reported information. Refer to Note B1 for further details and disclosures relating to Revenue from Contracts with Customers. AASB 9 Financial Instruments AASB 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1 January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting. The adoption of AASB 9 did not result in any material changes to the Group's classification of financial assets and liabilities. Upon adoption, trade receivables were reclassified from 'loans and receivables' to 'financial assets at amortised cost', resulting in a change in balance from $9,845,000 to $9,394,000. The difference being due to the increase in allowance for expected credit losses, as shown below. AASB 9 replaces the 'Incurred Loss' model in AASB 139 with an 'Expected Credit Loss' model. The new impairment model applies to financial assets measured at amortised cost. Under AASB 9, credit losses are recognised earlier than under AASB 139. There were no changes in classification due to the nature of the Group's financial assets. E9 NEW ACCOUNTING STANDARDS AND INTERPRETATIONS (CONTINUED) Changes in accounting policy, disclosures, standards and interpretations (continued) AASB 9 Financial Instruments (continued) The Group applies the simplified approach for measuring expected credit losses, using the lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. A provision matrix is then determined based on historic credit loss rates for each group, adjusted for any material expected changes to the future credit risk of that group. The Group has adopted this Standard retrospectively and has recognised the following adjustments to the opening balances: Provision for doubtful debts Deferred tax liabilities Accumulated losses 30 June 2018 $'000 AASB 9 Adjustment $'000 1,509 107,610 (41,408) 451 (135) (316) 1 July 2018 $'000 1,960 107,475 (41,724) The change in the Standard has had an immaterial impact on the Group's profit for the year ended 30 June 2019. AASB 2016-5 Amendments to Australian Accounting Standards - Classification and Measurement of Share-based Payment Transactions The adoption of this amending Standard did not have any impact on the disclosures or the amounts recognised in the Group's consolidated financial statements. AASB 2017-1 Amendments to Australian Accounting Standards - Transfers of Investment Property, Annual Improvements 2014-2016 Cycle and Other Amendments The adoption of this amending Standard did not have any impact on the disclosures or the amounts recognised in the Group's consolidated financial statements. Accounting Standards and Interpretations issued but not yet effective Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective and have not been adopted by the Group for the annual reporting period ending 30 June 2019, are outlined below: AASB 2018-1: Annual Improvements to IFRS Standards 2015-2017 Cycle Effective for the Group from 1 July 2019. The amendments clarify certain requirements in: • • • AASB 3 Business Combinations AASB 112 Income Taxes - income tax consequences of payments on financial instruments classified as equity AASB 123 Borrowing Costs - borrowing costs eligible for capitalisation. The Group is in the process of evaluating the impact of the new standard with no material impact expected. The Group has not early adopted the amendments. Estia Health Annual Financial Report 2018 - 2019 75 Estia Health Annual Financial Report 2018 - 2019 76 116 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 117 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 SECTION E: OTHER INFORMATION (CONTINUED) SECTION E: OTHER INFORMATION (CONTINUED) Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes E9 NEW ACCOUNTING STANDARDS AND INTERPRETATIONS (CONTINUED) Accounting Standards and Interpretations issued but not yet effective (continued) AASB Interpretation 23, and relevant standards: Uncertainty over Income Tax Treatments Effective for the Group from 1 July 2019. The interpretation clarifies the application of the recognition and measurement criteria in AASB 112 Income Taxes when there is uncertainty over income tax treatments. The Interpretation specifically addresses the following: • Whether an entity considers uncertain tax treatments separately • • • The assumptions an entity makes about the examination of tax treatments by taxation authorities How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates How an entity considers changes in facts and circumstances The Group is in the process of evaluating the impact of the new standard with no material impact expected. The Group has not early adopted the interpretation. AASB 16: Leases Effective for the Group from 1 July 2019. AASB 16 requires lessees to account for all leases under a single on-balance sheet model in a similar way to finance leases under AASB 117 Leases. AASB 16 addresses the classification, recognition, measurement and disclosure requirements for both lessees and lessors. The Group has evaluated the full impact from the application of AASB 16 in relation to the following: • • leasehold properties under which it is a lessee; and arrangements that provide a resident with rights to occupy a room. As a lessee, the Group currently has seven aged care homes, two offices and various minor leases that are subject to operating leases. Adopting AASB 16 will result in the recognition of these leasehold properties on the balance sheet with adjustments to the recognition of rent expense and depreciation and interest. The Group has elected to adopt AASB 16 under the modified retrospective approach, and measured the right-to-use asset as if the standard has been applied since the commencement date of respective lease agreements. Based on Management’s preliminary analysis, the adoption of AASB 16 is expected to result in the recognition of lease liabilities in the range of $75.0 million to $85.0 million, and right of use assets in the range of $70.0 million to $78.0 million onto the Statement of Financial Position at 1 July 2019. The difference of amount of lease liability and right of use asset will be recognised in retained earnings and net of deferred taxes on adoption. Expenses in respect of leases will include depreciation of the right-of-use asset and interest expense in respect of the lease liability and will replace the ‘rent expenses’ charged in the superseded standard. As per preliminary analysis by Management, using FY19 as a base, the rent expenses of existing lease arrangements of $5.9 million will be replaced by depreciation and interest expenses of approximately $4.4 million to $5.0 million and $2.2 million to $2.6 million, respectively. The exact impact is subject to the finalisation of the work surrounding the reasonably certainty of extension options, determination of the discount rate and assessment of potential leases embedded in other contracts. E9 NEW ACCOUNTING STANDARDS AND INTERPRETATIONS (CONTINUED) Accounting Standards and Interpretations issued but not yet effective (continued) AASB 16: Leases (continued) For arrangements that provide a resident with the right to occupy a room, the Group has performed a detailed assessment of the contractual arrangements and has provisionally determined that adopting AASB 16 will result in the conclusion that the arrangements will generally be defined as a lease for accounting purposes. Where residents have opted to pay a Daily Accommodation Payment, adopting AASB 16 is not expected to result in a material change in the accounting treatment. However, for residents that have chosen to pay a Refundable Accommodation Deposit (RAD) or Bond, the application of AASB 16 would regard there being a non-cash charge for accommodation. The accounting treatment for the non-cash consideration component of this arrangement is expected to result in the recognition of an increase in revenue for accommodation and an increase in interest expense on the outstanding RAD liability, with no net impact on the result for the period. Below is an illustration of the potential impact on the Statement of profit or loss and other comprehensive income had AASB 16 been applied to the current year, for RADs and Bonds only. Overall, there would be a net nil impact to profit for the year. Potential impact of AASB 16 for Estia as a lessor on the Statement of profit or loss and other comprehensive income for the year ended 30 June 2019 (for changes to RADs and Bonds only) Revenue Net finance costs Increase $'000 43,820 43,820 The Group has not early adopted the standard. AASB 2018-6 Amendments to Australian Accounting Standards: Definition of a Business Effective for the Group from 1 July 2020. Clarifies the definition of a business to assist entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendment specifically addresses: • • • The new business definition is narrower; There is a new optional asset concentration test; and New considerations have been incorporated to help identify when an acquired process is substantive. The Group is in the process of evaluating the impact of the new standard with no material impact expected. The Group does not plan to early adopt the amendment. AASB 2018-7 Amendments to Australian Accounting Standards: Definition of Material Effective for the Group from 1 July 2020. Clarifies the definition of ‘material’ and its application across AASB Standards and other pronouncements. The principal amendments are to AASB 101 Presentation of Financial Statements. The Group is in the process of evaluating the impact of the new standard with no material impact expected. The Group does not plan to early adopt the amendment. Estia Health Annual Financial Report 2018 - 2019 77 Estia Health Annual Financial Report 2018 - 2019 78 118 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 119 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 DIRECTORS' DECLARATION Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes SECTION E: OTHER INFORMATION (CONTINUED) E9 NEW ACCOUNTING STANDARDS AND INTERPRETATIONS (CONTINUED) Accounting Standards and Interpretations issued but not yet effective (continued) The Conceptual Framework for Financial Reporting Effective for the Group from 1 July 2020. The revised Conceptual Framework for Financial Reporting is not standard, and none of the concepts override those in any standard or any requirements in a standard. The purpose is to assist the International Accounting Standards Board in developing standards, to help preparers develop consistent accounting policies if there is no applicable standard in place and to assist all parties to understand and interpret the standards. The changes in the Framework may affect the application of AASB in situations where no standard applies to a particular transaction or event. The Group is in the process of evaluating the impact of the new standard with no material impact expected. The Group does not plan to early adopt the Conceptual Framework for Financial Reporting. In accordance with a resolution of the directors of Estia Health Limited, I state that: 1. in the opinion of the directors: (a) the financial statements and notes of the consolidated entity for the financial year ended 30 June 2019 are in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2019 and of its performance for the year ended on that date; and complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; the financial statements and notes also comply with International Financial Reporting Standards as disclosed in Note A3; and there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable; and there are reasonable grounds to believe that the Company and the controlled entities identified in Note E6 of the financial statements will be able to meet any obligations or liabilities to which they are or may become subject to by virtue of the Deed of Cross Guarantee between the Company and those controlled entities pursuant to ASIC Class Order 98/1418. (b) (c) (d) 2. This declaration has been made after receiving the declarations required to be made to the directors by the Chief Executive Officer and Chief Financial Officer in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2019. On behalf of the Board Dr. Gary H Weiss AM Chairman 20 August 2019 Estia Health Annual Financial Report 2018 - 2019 79 Estia Health Annual Financial Report 2018 - 2019 80 120 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 121 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGTax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes 122 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 123 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGTax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes 124 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 125 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGTax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes 126 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 127 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGTax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes Intentionally Left Blank EV Building a better working world Report on the Audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 56 to 73 of the directors' report for the year ended 30 June 2019. In our opinion, the Remuneration Report of Estia Health Limited for the year ended 30 June 2019, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Paul Gower Partner Melbourne 20 August 2019 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 87 128 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 129 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGDirectory of Estia Homes For all new resident enquiries call 1300 682 833 NEW SOUTH WALES Albury Bankstown Bexley Camden Dalmeny Epping Figtree Forster Kilbride Kogarah Manly Vale Merrylands Ryde Taree Tea Gardens Tuncurry Willoughby SOUTH AUSTRALIA Aberfoyle Park Aldgate Burton Craigmore Daw Park Encounter Bay Flagstaff Hill Golden Grove Hope Valley Kadina 289 Elizabeth Mitchell Drive, Thurgoona, 2640 74 Chiswick Road, Greenacre, 2190 3-5 Eddystone Road, 2207 82 Old Hume Highway, 2570 25-29 Noble Parade, 2546 64-66 Norfolk Road, 2121 12 Suttor Place, 2525 105 Southern Parkway, 2428 70 Glendower Street, Rosemeadow, 2560 74-76 Rocky Point Road, 2217 5-13 King Street, 2093 42 Cumberland Road, Greystanes, 2145 94 Bowden Street, 2112 424 Wingham Road, 2430 42 Spinifex Avenue, 2324 4 Bonventi Close, 2428 202 Mowbray Road, 2068 39 Campus Drive, 5159 4 Gibb Road, 5154 367-379 Waterloo Corner Road, 5110 150 Adams Road, 5114 7 Lancelot Drive, 5041 150 Bay Road, 5211 40 Skyline Drive, 5159 27-31 Capt Robertson Avenue, 5125 1099 Grand Junction Road, 5090 8 Mine Street, 5554 Kensington Gardens 421 The Parade, 5068 Lockleys Parkside Salisbury Salisbury East Strathalbyn Toorak Gardens 8 Mellor Avenue, 5032 17 Robsart Street, 5063 7 Salisbury Highway, 5108 8 Oakmont Court, 5109 7 Langhorne Creek, 5255 401 Portrush Road, 5065 02 6057 4100 02 8709 9200 02 8318 1100 02 4655 2531 02 4476 8744 02 9877 4300 02 4271 6855 02 6555 5699 02 4633 1100 02 9053 1800 02 9951 0400 02 9631 1837 02 9809 3068 02 6539 3700 02 4919 7000 02 6554 7522 02 9958 8290 08 8370 5766 08 8370 9311 08 8280 2800 08 8256 8800 08 8397 2100 08 8552 5100 08 8296 3456 08 8251 9600 08 8396 3167 08 8821 2233 08 8331 8098 08 8128 8888 08 8271 5679 08 8182 6477 08 8285 4600 08 8536 3422 08 8431 5399 Tax Transparency Report | Corporate Governance | Our Board | Shareholder Information | Annual Financial Report | Directory of Estia Homes QUEENSLAND Albany Creek Gold Coast Maroochydore Mount Coolum Mudgeeraba Nambour Southport Twin Waters VICTORIA Altona Meadows Ardeer Bannockburn Benalla Bendigo Bentleigh Coolaroo Dandenong Epping Glen Waverley Grovedale 55 Faheys Road West, 4035 34 Scarborough Street, Southport, 4215 2-6 Amity Ave, Maroochydore, 4558 15 Suncoast Beach Drive, 4573 21-25 Old Coach Road, 4213 27 Glenbrook Drive, 4560 40 William Street, Southport, 4215 190 Ocean Drive, 4564 297 Queen Street, 3028 30 North Street, 3022 71 McPhillips Road, 3331 73 Samaria Road, 3672 9 Brown Street, Long Gully, 3550 34-36 Clairmont Avenue, 3204 15 Mladen Court, 3048 151 David Street, 3175 30 Epping Road, 3076 2B Grace Street, 3150 6A Perrett Street, 3216 Heidelberg West 413-415 Waterdale Road, 3081 Keilor Keysborough Knoxfield Leopold Melton South Oakleigh East Plenty Valley Prahran Ringwood South Morang Victoria Heights Wattle Glen Werribee Wodonga Yarra Valley 2-6 Copernicus Way, Keilor Downs, 3038 15 Stanley Road, 3173 428 Scoresby Road, 3180 52-60 Ash Road, 3224 34-42 Brooklyn Road, 3338 23A Elizabeth Street, 3166 806 Plenty Road, South Morang, 3752 241 Dandenong Road, Windsor, 3181 211-217 Wantirna Road, 3134 879 Plenty Road, 3752 41-47 Victoria Street, Ironbark, 3550 45 Silvan Road, 3096 8-10 Russell Street, 3030 240 Felltimber Creek Road, 3690 21 Hoddle Street, Yarra Junction, 3797 07 3264 4850 07 5551 0307 07 5391 4800 07 5343 0200 07 5565 0900 07 5459 3600 07 5646 4170 07 5646 4120 03 9369 4568 03 9360 4552 03 5281 1991 03 5762 6933 03 5449 2400 03 9557 2888 03 9309 0011 03 9792 4322 03 9408 8564 03 9562 5814 03 5247 2000 03 9455 0000 03 9367 1011 03 8788 2700 03 9763 1421 03 5250 2156 03 9747 5600 03 9544 8167 03 9404 8000 03 9533 7855 03 9879 5155 03 9404 8600 03 5443 2731 03 9718 2267 03 9749 8000 02 6043 5000 03 5967 5500 130 Estia Health | 2018-19 Annual Report 2018-19 Annual Report | Estia Health 131 Industry Trends | Key Highlights | Chairman and CEO’s Message | Our Executive Team | Our Customers | Growing and Evolving Our Network | ESGNew South Wales Registered Office Level 9, 227 Elizabeth Street Sydney NSW 2000 T +61 2 9265 7900 E info@estiahealth.com.au Victoria Office Level 2, 1155 Toorak Road Camberwell VIC 3124 T +61 3 9811 9777 F +61 3 8657 0899 E info@estiahealth.com.au Investor Relations Company Secretary T +61 2 9265 7900 E investor@estiahealth.com.au Shareholder Enquiries Link Market Services T +61 1300 554 474 E registrars@linkmarketservices.com.au estiahealth.com.au Resident, Rosemary and Care Director, Robyn. 

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