Ingenia Communities Group Annual Report 2014

Plain-text annual report

ANNUAL REPORT 2014 Ingenia Communities Holdings Limited 57 quality Australian seniors living communities and growing $11.6m Underlying proﬁt Increased by 97% on FY13 $14.2m 49% Operating cashﬂow Increased by 27% on FY13 Increase in Total segment revenue www.ingeniacommunities.com.au Annual Report 2014 1 Garden Villages Settlers Lifestyle Active Lifestyle Estates Business Strategy Ingenia Communities Group (ASX ticker: INA) is a leading property group that owns, operates and develops a diversiﬁed portfolio of seniors living communities in Australia. Since February 2013 Ingenia has become the largest owner, operator and developer of lifestyle and tourism parks in NSW and is presently assessing opportunities in South East Queensland. 2 Ingenia Communities Holdings Limited Ingenia Communities Holdings Limited Annual Reports for the year ended 30 June 2014 CONTENTS Directors’ Report Auditors’ Independence Declaration Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Cash Flow Statement Statement of Changes in Equity Notes to the Financial Statements 1. Summary of signiﬁcant accounting policies 2. Accounting estimates and judgements 3. Segment information 4. Earnings per security 5. Revenue 6. Finance expense 7. Income tax beneﬁt 8. Discontinued operations and assets held for sale 9. Cash and cash equivalents 10. Trade and other receivables 11. Inventories 12. Investment properties 13. Plant and equipment 14. Trade and other payables 15. Borrowings 16. Retirement village resident loans 17. Provisions 18. Derivatives 19. Deferred tax liabilities 20. Issued securities 21. Reserves 22. Accumulated losses 23. Commitments 24. Contingent liabilities 25. Share-based payment transactions 26. Capital management 27. Financial instruments 28. Fair value measurement 29. Auditor’s remuneration 30. Related parties 31. Company ﬁnancial information 32. Subsidiaries 33. Notes to the cash ﬂow statement 34. Subsequent events Directors’ Declaration Independent Auditors’ Report 3 39 40 42 43 44 45 45 53 54 56 57 57 57 58 60 61 61 61 66 66 67 68 68 68 69 69 70 70 71 71 72 73 74 80 80 81 81 82 83 84 85 86 Annual Report 2014 3 Philip Clark AM Mr Clark is the Chair of SCA Property Group Limited and Hunter Hall Global Value Limited. He is a member of the J.P. Morgan Advisory Council and also chairs a number of government and private company boards. He was Managing Partner and Chief Executive Officer of Minter Ellison and worked with that ﬁrm from 1995 until June 2005. Prior to joining Minter Ellison, Mr Clark was Director and Head of Corporate with ABN Amro Australia and prior to that he was Managing Partner with Mallesons Stephen Jaques for 16 years. Mr Clark is Chair of the Remuneration and Nomination Committee. Amanda Heyworth Ms Heyworth is a professional company director. She previously served as Executive Director of Playford Capital Venture Capital Fund. She has a wealth of experience in the ﬁnance, technology and government sectors and teaches in the Australian Graduate School of Management’s MBA program. Ms Heyworth brings a ﬁnance and growth focus to the Group, having worked on many product launches and geographic expansions and over 40 capital raisings and M&A transactions. She sits on a number of public sector and private boards. Ms Heyworth is Chair of the Audit and Risk Committee and a member of the Remuneration and Nomination Committee. Robert Morrison Mr Morrison has extensive experience in property investment and funds management. During his 21 years at AMP, Mr Morrison’s executive roles included Head of Property for Asia Paciﬁc and Director of Asian Investments. Mr Morrison’s investment experience includes senior portfolio management roles where he managed both listed and unlisted property funds on behalf of institutional investors. Mr Morrison was previously an Executive Director of AMP Capital and a National Director of the Property Council of Australia. He is a founding partner and Executive Director of alternative investments ﬁrm, Barwon Investment Partners and is a Non-executive Director to the Board of Mirvac Funds Management Limited. Mr Morrison is a member of the Audit and Risk Committee. Directors’ Report for the year ended 30 June 2014 The directors of Ingenia Communities Holdings Limited (“ICH” or the “Company”) present their report together with the Company’s ﬁnancial report for the year ended 30 June 2014 (the “current year”) and the Independent Auditor’s Report thereon. The Company’s ﬁnancial report comprises the consolidated ﬁnancial report of the Company and its controlled entities, including Ingenia Communities Fund (“ICF” or the “Fund”) and Ingenia Communities Management Trust (“ICMT”) (collectively, the “Trusts”). The shares of the Company are “stapled” with the units of the Trusts and trade on the Australian Securities Exchange (“ASX”) effectively as one security. Ingenia Communities RE Limited (“ICRE” or “Responsible Entity”), a wholly owned subsidiary of the Company is the responsible entity of the Trusts. In this report, the Company and the Trusts are referred to collectively as the Group. In accordance with Accounting Standard AASB 3 Business Combinations, the stapling of the Company and the Trusts is regarded as a business combination. The Company has been identiﬁed as the parent for preparing consolidated ﬁnancial reports. 1. DIRECTORS The directors of the Company at any time during or since the end of the ﬁnancial year were: Non-executive Directors (“NEDs”) Jim Hazel (Chairman) Appointed 1 March 2012 Philip Clark AM Appointed 4 June 2012 Amanda Heyworth Appointed 16 April 2012 Robert Morrison Appointed 8 February 2013 Norah Barlow NZOM Appointed 31 March 2014 Executive Directors Simon Owen (Managing Director and CEO) Appointed 24 November 2011 1.1 Qualiﬁcations, Experience and Special Responsibilities Jim Hazel – Chairman Mr Hazel has an extensive corporate career in both the banking and retirement sectors. His retirement village operations experience includes being Managing Director of Primelife Corporation Limited (now part of Lend Lease). Other listed company directorships include Bendigo and Adelaide Bank Limited since 2010, Centrex Metals Limited since 2010 and Impedimed Limited since 2006. Mr Hazel also serves on the Boards of Motor Accident Commission, Coopers Brewery Limited and the Council for Ageing (SA) Inc. Mr Hazel is a member of the Remuneration and Nomination Committee. 4 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued Norah Barlow NZOM Ms Barlow is a professional company director. For the past 12 years, she served as the Chief Executive Officer of Summerset Group, the third largest retirement village operator and the second largest developer of villages in New Zealand. Ms Barlow is also a past President of Retirement Villages Association of New Zealand, a role she held for six years. Ms Barlow currently sits on the Board of Cigna Life Insurance Limited, Vigil Monitoring Limited and Cooks Global Food Group Limited. She serves as a member of the New Zealand Government’s National Advisory Council for the Employment of Women and remains with Summerset as a Non-executive Director. Ms Barlow is a member of the Audit and Risk Committee. Simon Owen – Managing Director and CEO Mr Owen joined the Group in November 2009 as the Chief Executive Officer. He initiated the internalisation of management and exit from the ING Group as well as Ingenia’s recent focus on lifestyle parks. Mr Owen brings to the Group in-depth experience in the retirement sector and is the immediate past National President of the Retirement Villages Association (now part of the Retirement Living Council), the peak industry advocacy group for the owners, operators, developers and managers of retirement communities in Australia. Mr Owen’s experience spans multiple disciplines including ﬁnance, funds management, mergers and acquisitions, business development and sales and marketing. Prior to Ingenia Communities, Mr Owen was the CEO of Aevum, a formerly listed retirement company. Mr Owen is a qualiﬁed accountant (CPA) with postgraduate diplomas in ﬁnance and investment, and advanced accounting. 1.2 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 was as follows: Jim Hazel Philip Clark AM Amanda Heyworth Robert Morrison Norah Barlow Simon Owen Board Audit & Risk Committee Remuneration & Nomination Committee A 20 20 20 20 4 20 B 20 19 20 20 4 20 A – 4 5 5 1 – B – 4 5 5 1 – A 4 4 4 – – – B 4 4 4 – – – A: Meetings eligible to attend B: Meetings attended 1.3 Interests of Directors Securities in the Group held by directors as at 30 June 2014 were: Jim Hazel Philip Clark AM Amanda Heyworth Robert Morrison Norah Barlow Simon Owen Issued stapled securities Performance quantum rights Retention quantum rights 1,333,334 208,334 561,334 221,667 178,000 – – – – – – – – – – 2,179,667 4,720,000 1,070,000 Annual Report 2014 5 2. COMPANY SECRETARIES 3.1 Corporate Governance Structure Leanne Ralph Ms Ralph was appointed to the position of Company Secretary in April 2012. Ms Ralph has over 20 years experience in chief ﬁnancial officer and company secretarial roles for various publicly listed and unlisted entities. Ms Ralph is a member of the Governance Institute of Australia and the Australian Institute of Company Directors. Ms Ralph is the principal of Boardworx Australia Pty Ltd, which supplies bespoke outsourced Company Secretarial services to a number of listed and unlisted companies. Tania Betts Ms Betts was appointed as Chief Financial Officer (“CFO”) in May 2012, after a six-year career at Stockland Group where she held various positions including National Finance Manager within their Retirement Living Division. Ms Betts’ previous experience includes several years within the chartered accounting profession as well as working for a leading health care provider. She holds a Bachelor of Business in Accounting and Finance, and is a member of both the Institute of Chartered Accountants and the Governance Institute of Australia. Ms Betts was the 2011 winner of the Urban Development Institute of Australia NSW and SMEC Young Developers’ Award for Excellence. 3. CORPORATE GOVERNANCE STATEMENT This statement outlines the main corporate governance practices currently in place for Ingenia Communities Group and also addresses the 2nd Edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (ASX Recommendations). The Board believes the Group accords with the majority of the principles and recommendations of the ASX Corporate Governance Council with the exception of one recommendation, which is outlined in the report. The corporate governance policies and practices described below are those that have been in place for the 2013-14 ﬁnancial year, or as at the date of this report where indicated. The Board continues to review the governance framework and practices of the Group to ensure they meet the interests of securityholders. As at the date of this report, a process to review the Group’s governance practices against the 3rd Edition of the ASX Recommendations is underway. All references to the Group’s website are to: www.ingeniacommunitites.com.au a. Ingenia Communities Group and its Constitutions Ingenia Communities Group is a triple stapled structure comprising the parent company, Ingenia Communities Holdings Limited, Ingenia Communities Fund and Ingenia Communities Management Trust, (together known as the Group). ICF and ICMT each have their own Constitution (the Constitutions) both of which have been lodged with the Australian Securities and Investments Commission (“ASIC”). The rights and obligations of unitholders are governed by these Constitutions and the Corporations Act 2001. The terms contained in each Constitution are substantially the same. The responsible entity of ICF and ICMT, Ingenia Communities RE Limited is the holder of an Australian Financial Services Licence (“AFSL”). As a result of the stapling, ICH and ICRE operate as a coordinated Group with the Boards of both companies having the same composition and the meetings held concurrently where appropriate. References to the ‘Board’ in this statement are references to the Board of ICH and ICRE (as the Responsible Entity of ICF and ICMT). b. Compliance Plans In accordance with Corporations Act requirements, the Responsible Entity has registered compliance plans for ICF and ICMT with ASIC. The compliance plans describe the procedures that the Responsible Entity will apply in operating ICF and ICMT to ensure compliance with the Corporations Act and the Constitutions of ICF and ICMT. The Board of the Responsible Entity is responsible for monitoring the Group’s compliance with the compliance plans. Further details are provided under the section on risk management. 3.2 Role of the Board The Board of Ingenia Communities Group is responsible for overseeing the effective management and operation of the Group. The Board operates under a formal charter, which can be found on the Group’s website. In addition to the functions prescribed by law, the Board has the following responsibilities outlined in its charter: Corporate Strategy – Evaluate, approve and monitor the strategic and ﬁnancial plans for the Group. – Evaluate, approve and monitor the annual ﬁnancial budgets of the Group. – Evaluate, approve and monitor major capital expenditure, capital management and all major corporate transactions. Board Composition and Structure – Review the composition of the Board and consider Board succession. – Ensure an annual review of the performance of the Board, its committees and directors is carried out. 6 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued Other Corporate – Approve changes to the Group’s capital structure. – Approve the establishment and issue of any equity rights in the Group via incentive plans. Investor Communications – Approve all material reporting and other external communications by the Group in accordance with the Group’s Continuous Disclosure Policy. – Establish and approve a distribution policy to securityholders and any changes to that policy. – Oversee the effective management and operation of the Group. – Approve the issue of Public Disclosure Statements. Executive Management – Appointment and removal of the Chief Executive Officer (“CEO”). – Approve the employment terms and conditions of the CEO. – Review and provide feedback on the performance of the CEO. – Approve the appointment of the CEO’s direct reports and oversee their performance and remuneration. – Review and ratify the employment terms of the CEO’s direct reports (as recommended by the CEO). – Review management succession planning. – Approve the level of delegated authority to the CEO, via the Delegations and Authorities Policy. – Appointment and removal of the Company Secretary. Governance and Risk Management – Monitor and review the overall Risk Management framework for the Group. – Approve and monitor compliance with the Group’s key corporate policies, and conduct a review of these policies on an annual basis. – Monitor the Group’s operations in relation to, and compliance with, relevant regulatory requirements, and any other contractual, statutory or legal obligation. – Monitor compliance with the Group Delegations and Authorities Policy. – Recommending to securityholders the appointment of the external auditor. – Review and approve at least annually the Group’s Corporate Governance Statement. Financial Reporting – Review and approve all ﬁnancial reports of the Group. – Establish an Audit and Risk Committee to review the Group’s ﬁnancial reporting and oversee the independence of the external auditors, and to review reports provided by the Audit and Risk Committee. – Review and approve the disclosure in the annual report and any departures from the ASX Corporate Governance Principles and Recommendations. – Review management’s strategy and program for investor communications annually. – Review management’s written policies and procedures to ensure compliance with the ASX continuous disclosure requirements. Generally, the CEO is responsible for all matters not speciﬁcally identiﬁed as the responsibility of the Board. 3.3 Role of the Board of the Responsible Entity As the Responsible Entity, the Board of Ingenia Communities RE Limited has additional responsibilities for the operation of ICF and ICMT. The Responsible Entity must exercise its powers and perform the obligations conferred on it under the Constitutions and the Corporations Act 2001 and ensure that the activities of the Group are conducted in a proper and efficient manner in the best interests of unitholders. The Responsible Entity must also ensure compliance with the conditions of the AFSL and approve and monitor compliance with compliance plans. 3.4 Board size and Composition The Constitution of the Group provides that there will be a minimum of three directors and not more than ten directors. Directors are appointed with the aim of ensuring the Board has: – – – an appropriate range of skills, experience and expertise; a proper understanding of, and competence to deal with, current and emerging issues in the industry in which it engages; the ability to effectively review and challenge the performance of management and exercise independent judgement; and – a majority of independent directors. If additional directors are required speciﬁc skill sets deemed appropriate for the Board to collectively possess are identiﬁed and if required, an executive search may be engaged to assist in this recruitment process. a. Terms of Appointment Non-executive directors are appointed pursuant to formal letters of appointment which, among other things, set out the key terms and conditions of the appointment, the Board’s expectations in relation to the performance of the director, procedures for dealing with a director’s potential conﬂict of interest and the disclosure obligations of the director, together with the details of the director’s remuneration. Annual Report 2014 7 b. Directors’ Interests Directors are required to keep the Board advised of any interest that may be in conﬂict with those of the Group, and restrictions are applied to directors’ rights to participate in discussion and to vote, as circumstances dictate when a conﬂict has been identiﬁed. In particular, where a potential conﬂict of interest may exist, directors concerned may be required to leave the Board meeting while the matter is considered in their absence. The Group has also entered into a deed of disclosure with each director, which is designed to facilitate the Group’s compliance with its obligations under the ASX Listing Rules relating to disclosure of changes in directors’ security holdings. Directors and their nominated related party security holdings, are also monitored to identify changes that may require urgent disclosure. c. Independent Advice The Board has a policy of enabling directors to seek independent professional advice for Group related matters at the Group’s expense, subject to the prior notiﬁcation of the Chairman and where the estimated costs are considered to be reasonable. d. Directors’ Independence The Board has considered speciﬁc principles in relation to directors’ independence. The Board considers an independent director to be a non-executive director who is not a member of the Group’s management and who is free of any business or other relationship that could materially interfere with, or could reasonably be perceived to interfere with, the independent exercise of their judgement. The Board will consider the materiality of any given relationship on a case-by-case basis, having regard to both quantitative and qualitative principles. At the date of this report, the Board comprises ﬁve non- executive directors, and one executive director. The Boards of ICH and ICRE have the same directors. The current members of the Board are: – Mr Jim Hazel (Chairman) – Ms Amanda Heyworth (Non-executive Director) – Mr Philip Clark (Non-executive Director) – Mr Robert Morrison (Non-executive Director) – Ms Norah Barlow (Non-executive Director) – Mr Simon Owen (Managing Director and CEO) Mr Jim Hazel, Ms Amanda Heyworth, Mr Philip Clark, Mr Robert Morrison and Ms Norah Barlow are considered by the Board to be independent. The Group recognises that having a majority of independent non-executive directors provides assurance that the Board is structured properly to fulﬁl its role in holding management accountable for the Group’s performance. The Board considers that the existing Board structure is appropriate for the Group’s current operations and stage of development. Directors’ details are listed in the Directors Report, including details of their other listed entity directorships and experience. e. Chairman The role of Chairman and CEO is not occupied by the same individual. The Board has agreed that it should continue to have a majority of independent non-executive directors, that the positions of Chairman and CEO must be separate, and that the Chairman should be an independent non- executive director. Mr Jim Hazel was appointed Chairman of the Group on 1 March 2012 and is considered an independent director in accordance with recommendation 2.1 of the ASX recommendations. f. Diversity In appointing members to the Board, consideration is given to the skills, business experience and educational backgrounds of candidates. The advantage of having a mix of relevant business, executive and professional experience on the Board; the importance of cultural and ethical values; and the beneﬁts of diversity, including gender diversity is also recognised. These factors will also be considered in any future appointments to the Board including any identiﬁed skills ‘gaps’. The Remuneration and Nomination Committee oversees the director nomination process. Ultimately, the full Board determines who is invited to ﬁll a casual vacancy after extensive one-on-one and collective interviews with candidates and thorough due diligence and reference checking. The Group Board has two female non-executive directors out of six directors. Ms Amanda Heyworth was appointed to the Board for her speciﬁc skills and ﬁnancial, investment and marketing experience. Ms Norah Barlow was appointed to the Board on 31 March 2014 for her extensive industry experience. A formal diversity policy has been adopted by the Board that outlines the Group’s commitment to diversity in the workplace and the provision of a work environment that is free from discrimination and promotes equal opportunity for all. Ingenia promotes an inclusive workplace where employee differences in areas like gender, age, culture, disability and lifestyle choice are valued. The unique skills, perspectives and experience that the Group’s employees bring to the table encourage creativity and innovation in thought that better represents Ingenia’s diverse customer base, ultimately driving improved business performance. The policy does not include measurable objectives for achieving gender diversity as the Group has always had a policy of actively encouraging gender diversity at all levels in the organisation, and a culture that supports workplace diversity. This is evidenced by: – The proportion of female directors: 33% – The proportion of female employees on the executive committee: 60% – The proportion of female employees in the whole organisation: 70% – The proportion of female employees in senior positions: 48% In accordance with the requirements of the Workplace Gender Equality Act 2012, the Group has lodged its 2014 annual public report with the Workplace Gender Equality Agency which is available on the Group’s website. 8 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued g. Board Meetings The Board typically schedules meetings on a monthly basis, with additional meetings convened as required. Agendas for each meeting are prepared by the Company Secretary together with the CEO and input from the Chairman, and are distributed prior to the meeting together with supporting papers. Standing items include the CEO’s report and the ﬁnancial report, as well as reports addressing matters of strategy, governance and compliance. Senior executives are directly involved in Board discussions, and directors have a number of further opportunities to contact a wider group of employees, including visits to business operations. Board papers include minutes of Board committees and subsidiaries as well as papers on material issues requiring consideration. Signiﬁcant matters are presented to the Board by senior executives, and the Board may seek further information on any issue, from any executive. h. Board and Director Performance The Board is committed to enhancing its effectiveness through performance management and review. The Board review process is designed to help enhance performance by providing a mechanism to raise and resolve issues and to provide recommendations to enhance its effectiveness. The Board has recently conducted its second performance review in accordance with the principles in this statement. 3.5 Board Committees The ultimate responsibility for the oversight of the operations of the Group rests with the Board. However, the Board may discharge any of its responsibilities through committees of the Board in accordance with the Constitutions and the Corporations Act 2001. The Board has established the following committees, which assist it with the execution of its responsibilities. The composition and effectiveness of the committees are reviewed on an annual basis: – Audit and Risk Committee – Remuneration and Nomination Committee Each of these committees operate in accordance with speciﬁc charters approved by the Board which can be found on the Group’s website. a. Audit and Risk Committee The Board has established an Audit and Risk Committee (“ARC”), which assists the Board in fulﬁlling its governance and disclosure responsibilities. The ARC has a written charter outlining its role and responsibilities. The purpose of the ARC is to review the integrity of the Group’s ﬁnancial reporting practices; oversee the independence of the external auditors; maintain open lines of communication among the Board and external auditors, serve as an independent and objective party to review the ﬁnancial information submitted by management to the Board for issue to securityholders, regulatory authorities and the general public; review the adequacy of the reporting and accounting controls of the Group; and to oversee the Group’s legislative compliance and risk management policies and procedures. The ARC has the following responsibilities: i. Review of the Group’s ﬁnancial reports • Review the Group’s ﬁnancial reports and commentary prepared by management. • Review any matters raised on the ﬁnancial reports by the Group’s external auditor. • Assess the appropriateness of the accounting policies adopted in preparing the Group’s ﬁnancial reports. • Assess whether the ﬁnancial reports are adequate for securityholder needs. • Review compliance with disclosure requirements. • Assess the adequacy of representations by management as to presentation of the ﬁnancial reports. • Recommend approval of the ﬁnancial reports by the Board. • Review the Group’s ﬁnancial budget. ii. External auditors • Establish and maintain procedures for the appointment and rotation of the Group’s external auditor. • Assess the performance of the external auditor. • Assess the independence of the external auditor, having regard to the provision of non-audit services. • Review the reasonableness of the external audit fees. iii. Internal control framework • Review the written policies and procedures designed to ensure accurate external ﬁnancial reporting and make recommendations to the Board thereon. • Whilst the Group does not currently have an internal audit function, should there be one in the future, the ARC will receive reports from the internal audit function including all incidents of actual or suspected fraud or theft. • Review of operational risk management framework. • Review of the internal compliance and control systems in relation to functions other than ﬁnancial reporting. iv. Compliance • Review the adequacy of the Group’s system for compliance with relevant laws, regulations, standards and codes. Annual Report 2014 9 v. Risk management • The ARC shall be responsible for implementing and overseeing the Group’s risk management policies. • Identifying and assessing the Group’s material business risks. • Regularly reviewing and updating the Group’s risk proﬁle. • Approving treasury and hedge policies. • Overseeing the risk management policies and systems. • Considering whether the Group has any material exposure to economic, environmental and social sustainability risks, and if applicable, review and monitor the systems in place to manage these risks. The ARC consists of three non-executive directors, all of whom are independent directors, and is chaired by an independent director, who is not chair of the Board. The chair satisﬁes the test of independence. The current members of the ARC are: – Ms Amanda Heyworth (Chair); – Mr Robert Morrison; and – Ms Norah Barlow. Mr Philip Clark AM was a member of the ARC until April 2014. At least one member of the ARC has relevant accounting qualiﬁcations and experience and all members have a good understanding of ﬁnancial reporting. Details of these directors’ qualiﬁcations and attendance at ARC meetings are set out in the Directors’ report. The external auditor attends the annual general meeting and is available to answer securityholder questions about the conduct of the audit and the preparation and content of the audit report, accounting policies adopted by the Group, and the independence of the auditor in relation to the conduct of the audit. b. Remuneration and Nomination Committee The Board has an established Remuneration and Nomination Committee (“RNC”). The RNC has a written charter deﬁning its role and responsibilities. The RNC has been established by the Board to assist in the review of the overall strategies of the remuneration of the Group’s non-executive directors and executives and for the review of the composition of the Board. The purpose of the RNC is to support and advise the Board in the following areas: – Review the on-going appropriateness and relevance of the executive remuneration policy to enable the Group to attract and retain executives and directors who will create value for securityholders. – Ensure that the executive remuneration policy demonstrates a clear relationship between key executive performance and remuneration. – Recommend to the Board the remuneration of executive and non-executive directors. – Fairly and responsibly reward executives having regard to the performance of the Group, the performance of the executive and the prevailing remuneration expectations in the market. – Review the Group’s recruitment, retention and termination policies and procedures for senior management. – Review and recommend to the Board the remuneration of direct reports to the CEO, and as appropriate other senior executives. – Review and recommend to the Board any equity based plans and other incentive schemes. – Develop a process for evaluation of the performance of the Board, its committees and directors. – Oversee the annual performance evaluations of senior executives of the Group. – Make recommendations to the Board on the appointment and re-election of directors. – Review and report to the Board on the mix of skills and experience of the Board with the aim of ensuring it remains an effective decision-making body. The RNC consists of three non-executive directors all of whom are independent directors and is chaired by an independent director, who is not chair of the Board. The chair satisﬁes the test of independence. The current members of the RNC are: – Mr Philip Clark AM (Chair); – Ms Amanda Heyworth; and – Mr Jim Hazel. Each member of the senior executive team, including the executive director, signed formal employment contracts at the time of their appointment, covering a range of matters including their duties, rights, responsibilities and any entitlements on termination. Each contract refers to a speciﬁc formal job description. Each contract sets out the remuneration of the executive, including their entitlements to any rights under incentive plans. The Group aims to have a clear process for evaluating the performance of senior executives. The Board has delegated to the RNC the responsibility to oversee the annual performance evaluation of the Group’s senior executives, but retains the performance evaluation of the CEO. The evaluation for all executives is based on speciﬁc criteria, including the business performance of the Group, whether strategic objectives are being achieved, and the development of management and personnel. Non-executive directors receive director’s fees outlined in their letters of appointment and reviewed on an annual basis pursuant to advice from an external remuneration consultant. No non-executive director has any entitlement to participate in any executive incentive plan. Further information on directors’ and executives’ remuneration, including principles used to determine remuneration, is set out in the Directors’ Report under the heading ‘’Remuneration Report’’. The compliance officer is primarily responsible for reviewing compliance on an ongoing basis; reporting on compliance matters, including breaches, to the ARC; and acting on recommendations of the ARC. Matters are escalated to the ICRE Board or ASIC when necessary. The compliance officer has direct access to the Chair of the ARC to ensure the compliance officer is well placed to adequately deal with compliance issues. Management, via the compliance officer, is required to assess risk management and associated internal compliance and control procedures, and is required to report back quarterly to the ARC as to whether those risks are being managed effectively. A quarterly risk and compliance report is prepared by the compliance officer for review and consideration by the Board. a. Compliance Plans ICF and ICMT both have formal compliance plans that have been adopted by the Board and lodged with ASIC. The purpose of each compliance plan is to set out key processes, systems and measures the Responsible Entity will apply to ensure compliance with: – – – – the Corporations Act 2001; the Constitutions of ICF and ICMT; industry practice standards relevant to the particular scheme; and internal policies and procedures. Each compliance plan is a ‘how to’ document and has been prepared following a structured and systematic process to consider the Responsible Entity’s key obligations under the Act, and the Constitutions; the risk of non-compliance; and measures required to meet the risks of non-compliance. Each compliance plan describes the key obligations that must be met by the Responsible Entity, and how compliance with these measures will be monitored. In addition, the compliance plans detail the risk of not complying with these obligations, and how breaches are to be reported and addressed. 10 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued c. Investment Committee The Investment Committee (“IC”) has been established to assist the Board oversee the investment activities of the Group by reviewing and making recommendations to the Board on: – major capital expenditure; – capital management; – all major corporate transactions including acquisitions and divestment; and – developments and refurbishments. The IC reviews investment activities greater than $250,000 and provides endorsement to the CEO for execution. Investment activities greater than $500,000 are submitted to the Board for approval. The IC monitors the performance of the Group’s investments by conducting quarterly reviews on development activities and bi-annual reviews on acquisitions. The IC consists of: – Chief Executive Officer; – Chief Financial Officer; – Chief Operating Officer; – General Manager Operations; – Senior Fund Analyst; and – General Manager Commercial. The Committee is chaired by the Senior Fund Analyst. 3.6 Risk Management The Board is responsible for ensuring that sound risk management strategy and polices are in place. The Board has delegated to the ARC the responsibility for identifying and overseeing major risks and ensuring that systems are in place to manage them. In addition, the ARC: – – identiﬁes and assesses the Group’s material business risks; regularly reviews and updates the Group’s risk proﬁle; and – oversees the risk management policies and systems. The Group’s risk management framework is integrated with its day-to-day business processes and functional responsibilities, and is supported by a dedicated compliance officer. The compliance officer has been appointed under the rules of the compliance plans of ICF and ICMT. The compliance officer is responsible for ensuring adequate internal systems and controls have been implemented to ensure compliance with the Corporations Act 2001, ICF and ICMT’s Constitutions, the Responsible Entity’s AFSL, and internal and industry standards. These duties include promoting a strong compliance culture within the organisation and to external service providers. Annual Report 2014 11 3.9 Code of Conduct and Ethical Behaviour The Board acknowledges the need for high standards of corporate governance practice and ethical conduct by all directors and employees of the Group. The Board has endorsed a code of conduct which outlines ‘acceptable behaviour’ and attitudes expected from all staff to promote and maintain the conﬁdence and trust of all those dealing with the Group. Various measures have been established to ensure that a high standard of ethical business behaviour is observed by all staff members, including policies and procedures for: – managing conﬂicts of interests; – personal security trading; – whistleblower procedures; – acceptance of gifts and entertainment as part of the Gifts, Entertainment and Anti-bribery Policy; and – handling conﬁdential information. In addition to their obligations under the Corporations Act 2001 in relation to inside information, all directors, employees and consultants have a duty of conﬁdentiality to the Group in relation to conﬁdential information they possess. 3.10 Employee and Director Trading in Ingenia Communities Group Securities The Group has a Personal Trading Policy that governs the ability of directors, executives and employees to trade in the Group’s securities. Subject to necessary prior written consents being obtained, the Group’s directors, executives and employees may trade in the Group’s securities at any time outside closed periods which cover the following: – between 1 January and the release of half yearly results; – between 1 July and the release of annual results; or – for any other time period determined by the Board. Directors and senior executives may, in exceptional circumstances as deﬁned in the policy, trade during a closed period but only with the prior written consent of the Chair for directors, the CEO for key executives, and the CFO for other employees. Notwithstanding the closed periods and approval requirements, a person is prohibited from trading at any time if they possess material, price- sensitive information about the Group that is not generally available to the public. The Group’s Securities Trading Policy may be viewed on the Group’s website. 3.7 External Auditors a. Compliance Plan Audit The external auditors conduct annual audits on the compliance plans and report on: – whether the Responsible Entity has complied with the compliance plans of the Trusts’ for the ﬁnancial year end; and – whether the compliance plans continue to meet the requirements of Part 5C.4 of the Corporations Act 2001 as at year end. b. Australian Financial Services Licence Audit The AFSL audit is conducted annually by the external auditor. The auditor reports on the following: – whether the Responsible Entity has complied with the speciﬁed provisions of Part 7.8 of the Corporations Act 2001; – whether the Responsible Entity has complied with sections 981B and 982B of the Act (relating to the control and operation of trust accounts); – whether the Responsible Entity has complied with speciﬁc AFSL conditions relating to ﬁnancial requirements, including internal procedures used by the Licensee to comply with the ﬁnancial requirements under the licence; and – whether the cash projections meet the cash need requirement conditions of the AFSL. 3.8 Other External Review a. ASIC ASIC may undertake a review of the Responsible Entity’s risk and compliance processes and systems at any time. b. Executive Conﬁrmations In accordance with the Group’s legal obligations, the CEO and CFO have made the following certiﬁcations to the Board: – – – – the Group’s ﬁnancial records have been properly maintained in accordance with Section 286 of the Corporations Act 2001; the Group’s ﬁnancial statements, and notes thereto; present a true and fair view, in all material respects, of the consolidated group’s ﬁnancial condition and operational results and are prepared in accordance with relevant Australian Accounting Standards, Corporations Regulations 2001 and other mandatory professional reporting requirements; the statements made with respect to the integrity of the Group ﬁnancial reports are founded on a sound system of risk management and internal compliance and control systems which, in all material respects, implement the policies adopted by the Board; and the risk management and internal compliance and control systems, to the extent they relate to the ﬁnancial reporting, were operating efficiently and effectively in all material respects throughout the period. Since 30 June 2014, the CEO and the CFO conﬁrm there has been no material change to any of the statements made above. 12 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued The Board aims to ensure that its securityholders are kept well-informed of all major developments and business events that are likely to materially affect the Group’s operations and ﬁnancial standing, and the market price of its securities. Information is communicated to securityholders through: – – – – annual and half year ﬁnancial reports lodged with the ASX and made available to all securityholders; announcement of market-sensitive and other information, including annual and half year results announcements and analyst presentations released to the ASX; the Chair’s and CEO’s addresses to, and the results of, the annual general meeting; and copies of announcements, presentations, past and current reports to securityholders made available on the Group website. 3.11 Securityholder Conﬁrmation The Group has a Continuous Disclosure Policy that includes a formal procedure for dealing with potentially price- sensitive information. The policy sets out how the Group meets its disclosure obligations under ASX Listing Rule 3.1. The Group’s policy is to lodge with the ASX and place on its website all market-sensitive information, including annual and half year result announcements and analyst presentations, as soon as practically possible. The Group produces two sets of ﬁnancial information each ﬁnancial year: the half year ﬁnancial report for the six months ended 31 December and the annual ﬁnancial report for the year ended 30 June. Both are made available to securityholders and other interested parties. Securityholders have the right to attend the Group annual general meeting, held in November each year, and are provided with an explanatory memorandum on the resolutions proposed through the notice of meeting. A copy of the notice of meeting is also posted on the Group website and lodged with the ASX. Securityholders are encouraged to vote on all resolutions. Unless speciﬁcally stated otherwise in the notice of meeting, all securityholders are eligible to vote on all resolutions. Securityholders who cannot attend the annual general meeting may lodge a proxy in accordance with the Corporations Act 2001. Proxy forms may be lodged by facsimile or electronically. Transcripts of the Chair and CEO’s reports to securityholders are also released to the ASX upon the commencement of the annual general meeting. These transcripts, together with the results of the annual general meeting are also posted on the Group website. 3.12 Continuous Disclosure Ingenia Communities Group is committed to continuous disclosure of material information as a means of promoting transparency and investor conﬁdence. The Group’s Continuous Disclosure Policy incorporates the continuous disclosure framework as set out in the ASX Listing Rules Chapter 3, as well as the revised ASX Listing Rules Guidance Note 8. The company secretaries have been nominated as the persons responsible for communications with the ASX. This role includes the responsibility for monitoring compliance with the continuous disclosure requirements in the ASX listing rules and overseeing and coordinating information disclosure to the ASX. The Group has written policies and procedures that focus on continuous disclosure of any information concerning the Group that a reasonable person would expect to have a material effect on the price of the Group’s securities. 4. OPERATING AND FINANCIAL REVIEW a. Ingenia Communities Overview The Group owns, manages and develops a diversiﬁed portfolio of seniors living communities across Australia. Its real estate assets are valued at $355 million and include lifestyle parks, rental villages, deferred management fee villages, and three non-core New Zealand Student accommodation buildings. The Group is a triple stapled structure, being a combination of a unit in Ingenia Communities Management Trust, a unit in Ingenia Communities Fund and a share in Ingenia Communities Holdings Limited, which are traded together on the ASX. The Group is in the ASX 300 with a market capitalisation of approximately $315 million. The Group’s vision is to be a leading Australian provider of affordable seniors living accommodation whilst delivering value to all stakeholders, including delivering strong earnings growth to securityholders and providing an affordable community environment for residents. Annual Report 2014 13 b. Strategy The Group’s strategy is to grow its Australian seniors living portfolio with a strong focus on the lifestyle parks sector. Using a disciplined investment framework, the Group is continuing to increase its exposure to lifestyle parks through targeted acquisitions and building out its development pipeline. The Group remains focused on divestment of its non-core New Zealand Students portfolio and reducing its investment in DMF assets. It is the Group’s intention to grow its investment in lifestyle parks through capital recycling, efficient inventory management and monetisation of stock. A key element to achieving growth is efficient operational and capital management. The Group is committed to maintaining loan to value ratio (“LVR”) within a target range of 30-35% and considering diversiﬁed sources of funding. In August 2014, indicative terms were agreed for a new multilateral Australian debt facility of $175 million, which replaces the existing facility and facilitates continued growth. The key immediate business priorities of the Group are: – increase rate of new home delivery within the Active Lifestyle Estates development pipeline; – grow occupancy of the Garden Villages portfolio towards the mid-term target of 92%; – – sell recently completed homes and explore opportunities to reduce exposure to the Settlers portfolio; and invest available capital into further accretive lifestyle parks. c. FY14 Financial Results FY14 has been a year of strong acquisitive growth resulting in an underlying proﬁt of $11.6m and a statutory proﬁt of $11.5m, which respectively represent an increase of $5.7m and $21.8m on prior year. The results are underpinned by a signiﬁcantly increased contribution from the Active Lifestyle Estates and Garden Villages portfolios following the acquisition of a further thirteen lifestyle parks and ﬁve rental villages during the year. Furthermore, Ingenia Communities Management Trust and its subsidiaries formed a tax consolidation group, which is the primary driver for the $7.3m income tax beneﬁt recorded. During the year, the Group funded the acquisition of numerous properties using a mix of debt and equity raised from a June 2013 institutional placement of $21.2m and a September 2013 rights issue of $61.7m. The total purchase value of assets acquired during the year was $116.9m, being thirteen lifestyle parks for $106.3m and ﬁve rental villages for $10.6m. Operating cash ﬂow for the Group was strong at $14.2m, up $3.0m from prior year. The improvement in operating cash ﬂow reﬂects increasing contribution from the recurring rental income streams of both the Active Lifestyle Estates and Garden Villages portfolios offset by cessation of US distributions following divestment in the prior year. The Group has continued to adopt a conservative capital management approach with LVR at 33.9%, which is comfortably within the 30-35% target range and the all in cost of Australian debt has reduced by 126 basis points to 5.1%. The Group has today announced a full year distribution of 1.15 cents which is a 15% increase on prior year, which reﬂects the Board’s commitment to increasing securityholder returns. The Board announced in May 2014 the reinstatement of the dividend reinvestment plan which will help fund lifestyle park acquisitions and their development. d. Key Metrics – Full year distribution of 1.15 cent per security, with ﬁnal distribution up 30%. – Underlying proﬁt was $11.6m, up 97% from FY13. – Underlying proﬁt per security was 1.8 cents, up 50% from FY13. – Net asset value grew by 1.1 cents per security to 35.5 cents. – Total Securityholder Return (TSR) of 55.8% for the twelve months.(1) – Statutory proﬁt was $11.5m, up $21.8m from FY13. – Statutory proﬁt per security was 1.8 cents, up 3.8 cents from FY13. (1) TSR is the percentage gain from investment in the Group’s securities over the twelve months to 30 June 2014 assuming distributions are reinvested into the Group’s securities. 14 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued e. Group Results Summary Underlying proﬁt for the ﬁnancial year has been calculated as follows: EBIT – continuing operations Net interest expense Tax benefit associated to underlying profit Underlying profit – continuing operations Underlying profit – discontinued operations Underlying profit Net foreign exchange gain/(loss) Net loss on disposal of investment properties Net gain/(loss) on change in fair value of: Investment properties Derivatives Retirement village resident loans Gain on revaluation of newly constructed retirement villages Amortisation of intangible assets Other Discontinued operations (below underlying profit), net of tax Tax benefit associated with items below underlying profit Statutory profit 2014 $’000 12,144 2013 $’000 8,933 (4,077) (5,549) 2,896 10,963 605 11,568 (147) – (341) 41 (616) (43) 3,341 2,526 5,867 37 (107) 3,457 752 327 (3,320) (4,619) – – (585) (185) (35) (15,644) 4,368 11,518 410 (10,290) Underlying Proﬁt is a non-IFRS measure designed to present, in the opinion of the Directors, the results from the on-going operating activities in a way that appropriately reﬂects underlying performance. Underlying proﬁt excludes items such as unrealised fair value gains/(losses) and adjustments arising from the effect of revaluing assets/liabilities (such as derivatives and investment properties). These items are required to be included in Statutory Proﬁt in accordance with Australian Accounting Standards. f. Segment Performance and Priorities Active Lifestyle Estates Active Lifestyle Estates launched in March 2013 and the Group now owns ﬁfteen lifestyle parks and is the largest owner and operator in New South Wales. This business is the key focus of growth for the Group as it provides an affordable yield focused housing alternative for seniors and short-term residents with a capital light, low risk development cycle. The carrying value of these assets at 30 June 2014 is $119.3m. i. Performance Active Lifestyle Estates New and refurbished home settlements # Development income $m Residential rental income $m Short-term rental income $m EBIT $m FY14 15 $1.3m $4.2m $5.4m $3.9m FY13 Variance 2 $0.1m $0.4m $0.1m $0.4m 13 $1.2m $3.8m $5.3m $3.5m Annual Report 2014 15 Active Lifestyle Estates delivered a contribution of $3.9m in FY14, of which $1.3m was attributable to development of new manufactured homes. The lead time from property acquisition to achieving set up for delivery of the ﬁrst new homes has taken longer than anticipated. Supply agreements have been negotiated with two key manufactured home builders to construct homes and further council approvals have been achieved in recent months. As delivery and settlement of homes continue to build each half, the business is forecast to produce a stronger result in FY15. ii. Strategic priorities The key strategic priorities for this business over the coming year are securing any approvals required to deliver FY16 settlements, repositioning parks to grow both short-term and permanent rental returns and leveraging scale efficiencies across a larger portfolio. The Group expects to deploy funds into the sector with expansion into the Southeast Queensland market likely in the near future. Garden Villages Garden Villages is comprised of 34 rental villages located across the eastern seaboard and Western Australia. These villages accommodate more than 1800 residents, and generate $21.0 million in gross rental income per annum. The carrying value of these assets at 30 June 2014 is $114.3m. i. Performance metrics Garden Villages Occupancy % Like for like occupancy % Rental income $m Catering income $m EBIT $m FY14 84.6% 90.1% $21.0m $3.2m $9.9m FY13 Variance 85.1% 85.1% $17.4m $2.6m $7.7m (0.5%) 5.0% $3.6m $0.6m $2.2m Garden Villages delivers a consistent stream of recurring cash income for the Group. The results are up $2.2m on prior year due to growing occupancy levels which are up 5% on a like for like basis. In January 2014, the Group acquired ﬁve low occupancy rental villages with the intention of repositioning them to grow occupancy and be accretive to the results. Since acquisition, the occupancy level for these ﬁve villages has increased by 7% with repositioning efforts continuing to further enhance the performance of these assets. The Ingenia Care Assist program launched in October 2013 has also been a strong contributor to the growing occupancy levels across this portfolio. This program enables residents to live independently for longer in the villages. Since this program was launched, it has achieved 58 move-out preventions and 45 new move-ins. ii. Strategic priorities The key strategic priorities of this business over the coming year continue to be growing village occupancy, in particular within the ﬁve recently acquired villages, improving cash operating margins, ensuring residents are actively engaged and maintaining affordability whilst leveraging scale efficiencies across the portfolio. Beyond continuing reinvestment in existing villages it is unlikely that any capital will be deployed in the Garden Villages portfolio. Settlers Lifestyle Settlers Lifestyle is comprised of nine deferred management fee villages, including those in the process of being converted from the rental to deferred management fee model. These villages are located in Queensland, New South Wales and Western Australia and accommodate more than 800 residents generating income from accrued deferred management fees, rental income where villages are not yet fully converted and development income from unit conversions and village expansion. The carrying value of these assets at 30 June 2014, net of resident loans and lease liabilities is $76.2m. The Group is exploring opportunities of reducing its exposure to this portfolio with the ﬁrst divestment settling on 31 July 2014, when the Settlers Lifestyle Noyea Park village settled for an adjusted sales price of $5.4m. i. Performance Settlers Lifestyle Occupancy % New unit settlements # Development income $m Accrued Deferred Management Fee income $m EBIT $m FY14 92.1% 57 $3.3m $5.3m $4.5m FY13 Variance 89.9% 65 $4.6m $4.7m $5.6m 2.2% (8) ($1.3m) $0.6m ($1.1m) 16 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued The Settlers Lifestyle business delivered a lower result than the prior year due to reduced settlement volumes with some development projects nearing completion and new product being under construction at Cessnock and Ridge Estate Villages. There has also been a weakening in the Hunter Valley residential market, where the Cessnock and Ridge Estate villages are located, which means incoming residents are requiring longer to sell their existing home in order to settle their new unit within our village. The Gladstone and Rockhampton Villages are both nearly sold out. ii. Strategic priorities The key strategic priorities of this business over the coming year are completing the construction and sell down of the ﬁnal stage at Ridge Estate and the sell down of remaining conversion units at Cessnock Gardens, Forest Lake, Rockhampton and Gladstone. There will also be a continued focus on exploring opportunities to reduce the investment in these assets. Discontinued Operations A sales campaign was undertaken for the sale of the New Zealand Students portfolio and terms have been agreed with a global real estate investment ﬁrm. The carrying value of these assets at 30 June 2014 is $45.9m. g. Tax Consolidation During the year ICMT and its Australian domiciled subsidiaries formed a tax consolidation group. The impact of entering into this tax consolidated group was that tax cost bases for certain assets were reset resulting in income tax beneﬁts being recorded. Additionally, unrecognised tax losses incurred by entities within this tax consolidated group are now available for utilisation resulting in an additional income tax beneﬁt being recorded. h. Capital Management The Group adopts a prudent and considered approach to capital management. During the period, the Group strengthened its capital position by undertaking a capital raising and renegotiating its core debt facility. The Group has maintained a strong focus on prudent balance sheet management with an LVR at 33.9%, well within its target range of 30-35%. On 23 August 2013, the Group reﬁnanced its Bank of New Zealand debt facility, which funds the New Zealand Students portfolio with a NZ$32.7m core debt facility expiring 31 July 2018. On 17 October 2013, the Group completed a non-renounceable rights issue to raise $61.7m (excluding transaction costs) to fund the expansion of lifestyle parks. A total of 169.1m securities were issued at 36.5 cents each. The Group has increased its full year distributions to 1.15 cents, in line with its commitment to grow distributions over the medium term. The ﬁnal distribution represents a 30% increase over the previous period. i. Financial position The following table provides a summary of the Group’s ﬁnancial position as at 30 June 2014: $’000 Cash and cash equivalents Inventories Investment properties Assets held for sale Assets of discontinued operations Other assets Total assets Borrowings Retirement village resident loans Liabilities from discontinued operations Other liabilities Total liabilities Net assets/equity 30 Jun2014 30 Jun 2013 Change % 12,894 2,208 38,531 285 498,863 370,931 5,439 47,657 7,863 – 36,576 13,251 574,924 459,574 98,356 190,122 30,449 15,820 70,806 175,703 21,528 16,885 334,747 284,922 240,177 174,652 (67%) 675% 34% n/m 30% (41%) 25% 39% 8% 41% (6%) 17% 38% Inventories increased by $1.9m reﬂecting the Group’s growing investment in the lifestyle sector. A key element of the Group’s strategy is development of new manufactured homes, which are classiﬁed as inventory until they are sold to new residents. This element of the Group’s balance sheet will continue to grow as the number of active development projects increases. Investment properties increased by $127.9m largely from the acquisition of thirteen lifestyle parks and ﬁve rental villages during the year. Annual Report 2014 17 Assets and liabilities of discontinued operations grew by $11.1m and $8.9m respectively which reﬂects completion of capital refurbishment works on the New Zealand Students portfolio in line with the divestment strategy. Borrowings increased by $27.6m due to the lifestyle park acquisitions being funded with a mix of debt and equity. Movements in other assets and liabilities mainly reﬂects the collection of US$6.8m of escrows from the divestment of US operations in prior periods together with movements in deferred tax balances following the tax consolidation of the ICMT group. j. Cashﬂow $’000 Operating cashflows Investing cashflow Financing cashflow Net change in cash and cash equivalents Effects of exchange rate fluctuation on cash held Cash at the end of the period 30 Jun 2014 30 Jun 2013 Change 14,240 (126,084) 11,240 17,314 3,000 (143,398) 89,012 (23,804) 112,816 (22,832) 4,750 (27,582) (167) 14,551 (12) (155) 37,550 (22,999) Operating cash ﬂow for the Group was strong at $14.2m, up $3.0m from prior year. The improvement in operating cash ﬂow reﬂects increasing contribution from the recurring rental income streams of both the Active Lifestyle Estates and Garden Villages portfolios offset by a decrease in US distributions the Group no longer receives subsequent to divestment. Investing cash ﬂows reﬂect the acquisition of thirteen lifestyle parks and ﬁve rental villages for $113.3m, along with capital refurbishment works of $18.7m, including $9.1m on the New Zealand Students portfolio. US sale proceeds account for $7.0m of the Investing cash ﬂows, being $1.2m proceeds from sale of investment properties and $5.8m proceeds from sale of equity accounted investments. Financing cash ﬂows include net proceeds of $58.9m from the September rights issue along with net proceeds from borrowings of $36.3m to partly fund the acquisition of lifestyle parks. k. Distributions The following distributions were made during or in respect of the period: – On 25 February 2014 the directors declared an interim distribution of 0.5 cps (2012: 0.5 cps) amounting to $3,381,201, which was paid on 21 March 2014. – On 26 August 2014, the directors resolved to declare a ﬁnal distribution of 0.65 cps (2013: 0.5 cps) amounting to $4,407,379, to be paid on 17 September 2014. The distributions are 100% tax deferred and the dividend reinvestment plan will apply to the ﬁnal distribution. The Group is committed to continuing to grow distributions in the near term. l. Outlook The Group is well positioned to continue growing its lifestyle parks business and has agreed indicative terms for a new multilateral Australian debt facility of $175m. Whilst delays were encountered during FY14 delivering new manufactured homes, Ingenia is conﬁdent these issues have been largely resolved and the rate of delivery and sale of new manufactured homes will signiﬁcantly increase during FY15. There will be a strong focus on ﬁnalising divestment of the New Zealand Students portfolio and exploring opportunities for recycling capital from the Settlers Lifestyle portfolio. At the same time, the Group will continue to regularly assess the performance of its existing assets and where appropriate to recycle that capital into other opportunities delivering superior returns. Ingenia is conﬁdent of delivering further improved ﬁnancial returns for securityholders during FY15 assuming no material decline in market conditions. Consistent with prior years, these returns will likely be skewed to the second half of the ﬁnancial year. 5. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Changes in the state of affairs during the ﬁnancial year are set out in the various reports in this ﬁnancial report. Refer to Note 8 of the accompanying ﬁnancial statements for discontinued operations and assets held for sale, Note 12 for Australian investment properties acquired or disposed of during the year, Note 15 for details of Australian debt reﬁnanced and Note 20 for issued securities. 18 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued 6. EVENTS SUBSEQUENT TO REPORTING DATE a. Retention Quantum Rights Vesting On 1 July 2014, 1,818,000 Retention Quantum Rights (“RQRs”) granted to key management personnel (“KMP”) in 2012 vested. As a result, 1,818,000 fully paid stapled securities have been issued to the following KMP: Simon Owen Tania Betts Nicole Fisher 1,070,000 374,000 374,000 b. Sale of Noyea Settlement on the sale of Settlers Lifestyle Noyea Riverside Village (“Noyea”) was completed on 31 July 2014 at an adjusted sales price of $5.4 million resulting in $nil gain or loss recognised upon completion. c. Bank Guarantee On 1 July 2014, the Group obtained a bank guarantee of $10 million from the bank facility in relation to cash requirements under the Australian Financial Services Licence. d. Sale of New Zealand Students Business On 5 September 2014, the Group announced it had contracted to divest the New Zealand Students business for consideration of NZ$49.4 million, representing the book value at 30 June 2014. Upon settlement, disposal costs and a foreign currency translation reserve (“FCTR”) gain will be released through proﬁt. At 30 June 2014, the FCTR balance was A$1.0 million. e. Reﬁnance of Australian Debt The Group’s current Australian banking facility expires in September 2015. The Group has recently undertaken a debt reﬁnance and obtained credit approval for a new $175 million Australian Multilateral banking facility. This facility will be split between a three year and ﬁve year maturity proﬁle. 7. LIKELY DEVELOPMENTS Ingenia will continue to pursue strategies aimed at improving its cash earnings, proﬁtability and market share within the seniors living industry during the next ﬁnancial year, with a strong focus on the development and acquisition of manufactured home estates. Other information about certain likely developments in the operations of Ingenia and the expected results of those operations in future ﬁnancial years is included in the various reports in this Annual Report. 8. ENVIRONMENTAL REGULATION The Group’s operations are not subject to any particular and signiﬁcant environmental regulation under a law of the Commonwealth or of a State or Territory. 9. INDEMNITIES The Group has purchased various insurance policies to cover a range of risks (subject to speciﬁed exclusions) for directors, officers and employees of the Group serving in their respective capacities. Key insurance policies include: directors and officers insurance, professional indemnity insurance and management liability insurance. To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young, 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. 10. AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 39. Annual Report 2014 19 11. ROUNDING OF AMOUNTS Ingenia Communities Group is an entity of the kind referred to in ASIC Class Order 98/100, and in accordance with that Class Order, amounts in the ﬁnancial report and Director’s report have been rounded to the nearest thousand dollars, unless otherwise stated. 12. MESSAGE FROM THE REMUNERATION AND NOMINATION COMMITTEE Dear Securityholders, The Board of Ingenia Communities Group (“Ingenia”) is pleased to present the Remuneration Report for FY14. 12.1 Introduction Ingenia has made signiﬁcant changes to its executive remuneration arrangements for FY15. The changes are detailed in the Remuneration Report which follows. The purpose of this message is to highlight those changes, explain why we have made them and to put them into the context of Ingenia’s strategy and performance. 12.2 Ingenia’s Performance The Board has established a strong nexus between remuneration for executives and Ingenia’s performance and returns to securityholders. We are pleased to report that in 2014, Ingenia sustained the strong performance record it has established since internalisation in June 2012. Some highlights of that performance are: Ingenia was included in S&P/ASX 300 Index in September 2013 – Ranked # 1 in BDO A-REIT Survey 2012 and 2013 – – Ranked # 1 TSR performer in FY14 National Australia Bank review of S&P/AREIT 300 – – Ingenia’s market capitalisation increased from $175m at 30 June 2013 to $338m at 30 June 2014, an increase of 93% In FY14 Ingenia’s underlying proﬁt increased by 97% to $11.6m and the ﬁnal six months distribution increased from 0.5 cents to 0.65 cents per security – Securities are currently trading at a 41% premium to NAV – The graph below compares Ingenia’s 1, 3 and 5 year percentage returns to 30 June 2014 against S&P/ASX 300 Property Index 80 70 60 50 40 30 20 10 0 67.2 60.8 55.8 11.1 15.2 14.3 1 Year 3 Years 5 Years INA (%) S&P/ASX 300 (Property) (%) 12.3 Ingenia’s Corporate Strategy Ingenia has reﬁned its corporate strategy over the past three years to focus on affordable, yield orientated Australian seniors accommodation, principally through the two core cash yielding businesses, outlined below, which now comprise 75% of the portfolio. 20 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued Active Lifestyle Estates (lifestyle parks) Ingenia is a market leader in lifestyle parks and our business offers signiﬁcant opportunities for expansion. Ingenia is the largest lifestyle parks owner, operator and developer in NSW, with 15 parks acquired since March 2013. We have integrated tourism within our lifestyle parks business model. Garden Villages (rental accommodation) Ingenia is now the largest owner and operator of seniors rental villages in Australia. Ingenia has been able to signiﬁcantly turnaround the performance of its Garden Villages rental business, which was previously seen as a poor quality asset class. Occupancy growth has increased signiﬁcantly on a like for like basis, new operational management has been recruited and over the past two years ten additional low-occupancy villages have been acquired from a mortgagee in possession at very reasonable prices. Other Operations Ingenia’s New Zealand student accommodation has been contracted for sale and its DMF villages are under review to free up capital to be reinvested in Active Lifestyle Estates. 12.4 Ingenia’s Remuneration Strategy FY15 The Board has aligned Ingenia’s remuneration objectives and strategy to its corporate strategy. The Remuneration and Nominations Committee (RNC) has established the following three key objectives for our remuneration strategy in FY15: – Focus management on delivering outcomes, particularly underlying proﬁt growth in the short to medium term. Feedback from numerous investor and analyst meetings has sent a very clear message: investors support our strategy but want to see Ingenia deliver on that strategy and demonstrate that lifestyle parks can deliver proﬁts for securityholders in FY15 and subsequent years. – Provide long term value creation for securityholders and strong alignment between executive management and securityholders’ interests. – Attract, retain and motivate key executive personnel. More detailed information on those objectives in set out in Section 2.12 (b) of the Remuneration Report. 12.5 Overview of Signiﬁcant Changes in Remuneration Structure The Board has focussed our revised remuneration strategy on areas where we believe management can create the most value for securityholders. To implement the remuneration objectives, the RNC has made signiﬁcant changes to the structure of our remuneration arrangements for executive Key Management Personnel in FY15. Those changes have been made after extensive consultation with key stakeholders, including investors and proxy advisors, following Ingenia’s inclusion in the S&P/ASX 300 Index. The changes made and the reasons for them are outlined below. Additional detail is included in the Remuneration Report which we recommend you read. a. Appointment of new Independent Remuneration Consultants In March 2014 the Board engaged Guerdon Associates Pty Ltd (Guerdon) to provide independent remuneration advice and to review the structure and operation of the Group’s remuneration and incentive plans for FY15. Guerdon worked closely with the RNC in a wide ranging review, which led to signiﬁcant changes. b. Change Review Date Guerdon suggested that Ingenia should change the effective date for implementation of remuneration reviews from 1 July to 1 October each year. The Board resolved to do so on a recommendation from the RNC. The rationale for this change was: – The later review date allows time for results to be audited for assessment of Short Term Incentives (STI) awards and for basing Long Term Incentives (LTI). It allows ample time for release and market assessment of annual results so equity grants are priced on an informed market. – – Assessment of Total Shareholder Returns (TSR) is made in an informed market. Annual Report 2014 21 c. Short Term Incentives – Signiﬁcant Changes in FY15 i. Increase STI The percentage of total remuneration allocated to STI for each KMP has been increased. The FY15 maximum STI cash awards have only increased $20,000 for the CEO and have been reduced for other executive KMP, because of the introduction of deferred equity. All FY14 STI awards were paid in cash. In FY15 50% of the STI award will be paid in cash and the other 50% will be deferred for 12 months and paid in equity. Deferred STI is subject to a malus or forfeiture provision if earnings are not sustained at a level within a set threshold of prior year’s earnings. The primary reason for the increase in STI (which is partially offset by a decrease in LTI) is to focus executive KMP on the key objective, delivering on our strategy, particularly delivering underlying proﬁt growth and the key operational drivers of that growth, to meet investor expectations. The deferral has been introduced to recognise how important it is that Ingenia’s high growth expectations are achieved and sustained, and to align STI awards with securityholder interests. ii. Deferred STI Deferred STI will be awarded in Rights to stapled securities, plus additional securities equal to distributions paid on a reinvestment basis upon vesting. KMP will not receive cash distributions on unvested Rights, they will receive additional deferred Rights. The rationale behind this change is to incentivise KMP to maintain and increase the level of distributions, in line with investor expectations. iii. KPIs KPIs for STI have been set to incorporate a strong focus on earnings (40%), strategic and operational metrics (50%) and people (10%). Quantiﬁed metrics have been preferred and KMP have been set challenging KPIs, with ‘Threshold’, ‘Target’ and ‘Stretch’ performance levels, based on Ingenia’s budget and business plan and taking account of analyst consensus. iv. 2013-2014 bonuses In FY14 all bonuses paid to other direct reports of the CEO and other senior executives, who are not KMP, were paid in cash. The STI arrangements outlined above (50% cash and 50% deferred equity) have been extended to all executive KMP in FY15. Again, deferred equity has been introduced to recognise how important it is that Ingenia’s high growth expectations are achieved and sustained, and to align executive remuneration with securityholders’ interests. d. Long Term Incentives – Signiﬁcant Changes in FY15 i. Reduction in LTI The percentage of total remuneration allocated to LTI for each KMP has been reduced. This partially offsets the increases in STI. FY15 LTI awards are still material, so management will continue to focus on long term value creation. ii. TSR hurdle FY15 LTI awards in the form of Rights will be assessed on a relative TSR hurdle rather than the absolute TSR hurdle applied in FY14. This change is in line with investors’ expressed preferences. The comparator for the relative TSR hurdle will be the S&P ASX 300 Industrials Index (“Index”). This change is to align to investor preference of relative TSR and the Industrial Index was chosen because the Board considers it is better aligned to Ingenia’s core business operations and because it is transparent and readily available. iii. Zero vesting at threshold There will be zero vesting at Threshold, which is Index plus 1%. Ingenia must outperform the Index by at least 1% for LTI awards to vest. There will be no cliff vesting. Vesting will be straight line between Threshold (at Index plus 1%) to Maximum (at Index plus 6% or more). 22 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued iv. Rights vesting The assessment date for LTI Rights vesting will be 30 September three years after grant and grants will be based on 30 day VWAP. The timing helps to ensure an informed market post release of audited results and 30 day VWAP reduces the risk and impact of security price volatility. v. Vested Rights Vested Rights will be converted to stapled securities, plus additional securities equal to distributions paid on a reinvestment basis upon vesting. The rationale for this change is to incentivise executive KMP to maintain and increase distributions, in line with investor expectations. vi. Forfeiture provision A ‘malus’ or forfeiture provision will be applied to all LTIs. e. Equity Grants – Signiﬁcant Changes in FY15 The basis of allocating LTI Rights has been changed in FY15. This change will reduce executive KMP entitlements to LTI awards and move towards market best practice. In FY14, the formula provided by Ingenia’s Independent Remuneration Consultant to determine security value for the purpose of calculating the number of LTI Rights, included a 0.5% ‘probability of vesting’ factor, which effectively doubled the maximum LTI entitlement for each KMP. It was subject to some adverse comments from investors and proxy advisors. The RNC and Board have consulted with proxy advisors and investors and have accepted a recommendation from our new Independent Remuneration Consultant to change the formula in FY15 to eliminate the ‘probability of vesting’ multiple. f. Plan Rules – Signiﬁcant Changes in FY15 Guerdon’s review has included a comprehensive review of Ingenia’s Plan Rules to accommodate the changes the Board wishes to make. The changes to Plan Rules will be the subject of a Resolution at the 2014 AGM and details are set out in the Notice of Meeting and Explanatory Memorandum. We urge securityholders to support that Resolution. 12.6 Conclusion The advice we have received from our Independent Remuneration Consultant and extensive consultations undertaken by the RNC has led to change. The Board believes those changes have resulted in a better remuneration strategy and structure which will achieve the remuneration objectives we set and which will serve all Ingenia’s stakeholders well. I wish to thank all those involved, my RNC and Board colleagues, Guerdon, investors and proxy holders for their valuable input. We recommend Ingenia’s Remuneration Report to investors and seek your support for the resolution to adopt the Remuneration Report at the Ingenia AGM on 12 November 2014. Yours faithfully Philip Marcus Clark AM Chairman – Remuneration and Nomination Committee Annual Report 2014 23 13. REMUNERATION REPORT (AUDITED) 13.1 Introduction The Board presents the Remuneration Report for the Group for the year ended 30 June 2014, which forms part of the Directors’ report and has been prepared in accordance with section 300A of the Corporations Act 2001 (“Act”). The data provided in the Remuneration Report was audited as required under section 308(3C) of the Act. 13.2 Remuneration Governance a. Remuneration and Nomination Committee (RNC) The Board has an established the RNC, which is directly responsible for reviewing and recommending remuneration arrangements for directors, the Chief Executive Officer (“CEO”) and senior executives who directly report to the CEO. The RNC comprises the following NEDs: – Philip Marcus Clark AM (Chairman); – – Amanda Heyworth. Jim Hazel; and The RNC provides oversight for general remuneration levels of the Group ensuring they are set at appropriate levels to access the skills and capabilities the Group needs to operate successfully. The RNC operates under the delegated authority of the Board for some matters related to remuneration arrangements for both executives and non-executives, and is required to make recommendations to the Board. The RNC also reviews and makes recommendations to the Board on incentive schemes. The RNC is required to meet regularly throughout the year, and in any event at least twice per year, and considers recommendations from internal management and external consultants. The Board is ultimately responsible for decisions made on recommendations from the RNC. b. External Remuneration Advisers The Board engaged Godfrey Remuneration Group Pty Ltd (“GRG”) to provide independent recommendations in relation to remuneration of the executive roles within the Group for FY14. GRG provided a report on market benchmarking of executive remuneration which outlined the following: new legislation requirements and regulatory developments; – – overall remuneration framework and strategy; – – market data and trends in remuneration structures. considerations relating to termination of contracts; and GRG also provided recommendations on ﬁxed remuneration and the design of short-term and long-term incentive plans for the key executives of the Group, including the CEO. GRG provided a further report on market benchmarking of senior executive remuneration for the CEO, Chief Financial Officer (“CFO”) and Chief Operating Officer (“COO”) roles and made recommendations on their base remuneration and incentive schemes. They also provided a benchmarking report and recommendations on NED remuneration. For the provision of the advice for FY14, GRG were commissioned by, engaged with, and addressed reports directly to the Chairman of the RNC. In March 2014, the Board rotated external remuneration advisors and engaged Guerdon Associates to provide independent remuneration advice for Key Management Personnel (KMP), including senior executives and NEDs and to review the rules of the Group’s LTI and STI Plans for FY15. For the provision of the advice and recommendations to date, Guerdon Associates have been commissioned by, engaged with, and addressed reports directly to the Chairman of the RNC. The Board is satisﬁed that the remuneration advice from both GRG and Guerdon Associates was made free from undue inﬂuence by the KMP to whom the advice related, due to there being no engagement with the remuneration consultants outside of the Chairman of the RNC. Declarations of independence from GRG and Guerdon Associates were received by the Board prior to the acceptance of their engagements and accompanied their reports. GRG were paid $26,400 for the remuneration advice work outlined above that they provided during the FY14. While remuneration services were received, no remuneration recommendations as deﬁned under Division 1, Part 1.2.98 (1) of the Act, were made by Guerdon Associates. For the remuneration advice they have provided, Guerdon Associates have been paid $49,325 to the date of this report. 24 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued 13.3 Details of KMP KMP for the year ended 30 June 2014 are those persons who are identiﬁed as having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including any executive or NED of the Group. The KMP of the Group for the year ended 30 June 2014 are: Position Appointment/Resignation date Non-Executive Directors Jim Hazel Chairman of the Board NED Member – Remuneration and Nomination Committee Amanda Heyworth NED Chair – Audit and Risk Committee Member – Remuneration and Nomination Committee Philip Clark AM NED Chair – Remuneration and Nomination Committee Member – Audit and Risk Committee (until April 2014) Robert Morrison NED Member – Audit and Risk Committee Norah Barlow NED Appointed 31 March 2014 Executive Director Simon Owen Other Executives Tania Betts Nicole Fisher Member – Audit and Risk Committee Managing Director and CEO CFO COO 13.4 Remuneration of KMP (Excluding Non-Executive Directors) a. Remuneration Policy The Group’s Remuneration Policy is to ensure that remuneration packages properly reﬂect the person’s duties and responsibilities and that the remuneration is competitive in attracting, retaining and motivating people of suitable quality. The structure of remuneration, as explained below, is designed to attract suitably qualiﬁed candidates, reward the achievement of strategic objectives, and achieve the broader outcome of long-term value creation for securityholders. The remuneration structures take into account a range of factors, including the following: ability to impact achievement of the strategic objectives of the Group; capability, skills and experience; – – – performance of the KMP in their roles; – the Group’s overall performance; – – the need to ensure continuity of executive talent. remuneration levels being paid by competitors for similar positions; and Refer below for detail of the mechanisms in place, which link the remuneration outcomes to individual and the Group’s performance. Annual Report 2014 25 b. Link between Remuneration and Performance The Board understands the importance of the relationship between the Group’s remuneration policy for KMP and the Group’s performance. The remuneration packages for KMP are aimed at achieving this balance and aligning KMP remuneration with the interests of securityholders. Remuneration Component Link to Group Performance Fixed remuneration Short-term incentive (STI) Long-term incentive (LTI) Fixed remuneration is not directly linked to Group performance. It is set with reference to the individual’s role, responsibilities and performance and remuneration levels for similar positions in the market. STIs are awarded to individuals whose achievements, behaviour and focus meets the Group’s business plan and key result expectations measured over the financial year. In FY14 the payment is in cash. For FY15 payment will be in cash and a deferred equity element linked to earnings growth sustainability. LTIs are granted to individuals to align their focus with the Group’s required TSR performance measured over three financial years. The Board maintains sole discretion over the granting of the LTI to eligible employees. Payment will be received in equity for alignment with securityholders. The table below sets out summary information about the Group’s earnings and movement in securityholder wealth for the ﬁve years to 30 June 2014: Underlying profit ($000) Statutory profit/(loss) ($000) EPS (cents) Net asset value per security (cents) Security price 30 June (cents) Distributions (cents) 30 June 2014 11,568 11,518 1.8(2) 35.5(2) 50.5 1.0 30 June 2013 5,867 (10,290) (2.0)(1) 34.4(1) 34.5 1.0 30 June 2012 30 June 2011 30 June 2010 7,434 33,627 7.6 34.3 19.5 – 6,889 13,051 3.0 25.9 11.5 – 18,260 (67,717) (15.4) 24.9 5.0 – (1) During the year ended 30 June 2013, the Group issued 66,150,000 shares under an institutional placement. (2) During the year ended 30 June 2014, the Group issued 169,061,000 shares under the non-renounceable rights issue. c. Target mix of Remuneration Components Executive remuneration packages include a mix of ﬁxed remuneration, STI’s and LTI’s. The Group aims to reward executives with a mix of remuneration commensurate with their position and responsibilities and aligned with market practice. The Group’s policy is to set the total employment cost of KMP by reference to the 50th percentile range of comparable industry peers and other Australian listed companies of similar size and complexity, whilst also taking into account the individual’s competence and the potential impact of incentives. 26 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued The target remuneration mix for executives for the year ended 30 June 2014, expressed as a percentage of total remuneration, is detailed in the table below: Target mix CEO CFO COO (1) PQRs: Performance Quantum Rights Total Fixed Remuneration (TFR) (%) 50.0% 62.5% 62.5% STI (%) 20.0% 18.75% 18.75% LTI PQRs(1) (%) 30.0% 18.75% 18.75% Total Remuneration (%) 100.0% 100.0% 100.0% 13.5 Total Fixed Remuneration (Excluding Non-Executive Directors) Total ﬁxed remuneration (TFR) is a guaranteed annual salary, which is calculated on a total cost basis, which may include salary-packaged beneﬁts grossed up for FBT payable, as well as employer contributions to superannuation funds and other non-cash beneﬁts that may be agreed from time to time. The RNC reviews and makes recommendations to the Board in relation to ﬁxed remuneration levels for KMP on an annual basis. The table below details the TFR for each of the executives for the year ended 30 June 2014: Executive Simon Owen Tania Betts Nicole Fisher Position Total Fixed Remuneration Managing Director and CEO CFO COO $612,746(1) $297,633(2) $243,389(3) (1) Additional payment was made during the current year due to underpayment in the prior ﬁscal year. (2) Leave without pay was taken during the year. (3) Based on four days per week. 13.6 Short-Term Incentive Scheme (STI) The STI scheme aims to reward eligible employees whose achievements, behaviour and focus meets the Group’s business plan and key result expectations during one or more speciﬁed measurement periods. Initial participation in the scheme is completely at the discretion of the Board. The quantum of the STI opportunity for the year ended 30 June 2014 was determined based upon recommendations from GRG. For those employees who participate in the scheme, the opportunity for reward is assessed against speciﬁc KPI’s for each employee, which are documented in a written statement (Plan Statement) identifying: – The percentage weighting and measurement period for each KPI; – The KPI outcome measures set with a threshold, on target and stretch performance measure; and – The maximum STI award amount payable for achieving each of the performance levels, calculated on the employee’s base remuneration at the time the Plan Statement is issued. The Board has structured the KPIs around both ﬁnancial metrics, such as underlying proﬁt and non-ﬁnancial metrics around strategy development and execution, business performance, people and stakeholder relationships. Annual Report 2014 27 KPIs, their applicability, targets, and outcomes are tabulated below: Key Performance Indicator Executives to which KPI applied Key Considerations in assessments Financial CEO, CFO, COO Strategy Operational CEO, CFO, COO CEO, CFO, COO People and Reporting CEO, CFO, COO Operating income within 5% of threshold Access to debt and equity capital on acceptable terms Execution of agreed business strategy Achievement of operational metrics that deliver on business strategy, established for each KMP speciﬁc for their area of responsibility Minimal regretted turnover Recruit and retain leading industry talent High quality level reporting and analysis For the year ended 30 June 2014 the Board assessed the performance of the CEO and the CEO assessed the performance of the CFO and COO, against their respective KPIs. The RNC then recommended and the Board approved STI awards. The Board approved STI awards for the year ended 30 June 2014 for each executive KMP as follows: KMP Position Actual STI Awarded $ Actual STI Awarded as a % of Maximum STI Simon Owen Tania Betts Nicole Fisher(1) Managing Director and CEO $205,200 CFO COO $70,875 $56,160 85.5% 75.0% 78.0% (1) The actual amount awarded was calculated on a pro-rata basis allowing for 4 days per week. a. STI – Termination of Employment The following table outlines the treatment of the short-term incentive scheme in place for FY14 at the time of a termination of employment: Termination Circumstance Dismissal (termination for cause) Resignation Other circumstances STI Awards All are forfeited. All are forfeited, unless otherwise determined by the Board at its complete discretion. A pro rata reduction in the STI opportunity for each KPI with the assessor taking into account a variety of relevant factors applicable to each KPI. No STI award for the year ended 30 June 2014 was affected by termination of employment. 28 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued 13.7 Long-Term Incentive Scheme The objective of the Group’s LTI scheme is to align long-term securityholder returns with the ‘at risk’ compensation payable to executive level employees whilst also acting as a mechanism to retain key talent. The scheme comprises two types of security rights, RQRs and PQRs (together referred to as “quantum rights”). RQRs are applied for retention purposes. No RQRs were granted in 2013-2014. PQRs are applied to focus and reward executives on long term performance over 3 or more years. PQRs were granted during FY14. Upon vesting of a number of quantum rights, the holder will be issued with securities equivalent to the value of vested quantum rights on the vesting date, provided and to the extent that the value of the quantum rights on the vesting date exceeds $1,000. The value of each quantum right on the vesting date shall be equivalent to the security price on the vesting date. The FY14 LTI components of Simon Owen’s remuneration were approved by securityholders at the Annual General Meeting held on 19 November 2013. Any LTI components of Simon Owen’s remuneration for FY15 will be subject to securityholder approval at the 2014 Annual General Meeting to be held on 12 November 2014. a. PQRs The Board has adopted an LTI plan (“LTIP”) with the aim of rewarding executives for delivering returns to securityholders that are consistent with, or exceed, expectations. PQRs granted in FY14 vest based on the Group’s performance as measured by the absolute TSR. TSR is calculated as the percentage gain from an investment in Ingenia Communities securities over the vesting period, assuming that distributions are reinvested. GRG was speciﬁcally asked to advise on this practice in 2012. GRG advised that they considered absolute TSR to be the appropriate measure for the Group to use. They conﬁrmed that advice in 2013 and 2014. For 2015, Guerdon Associates has recommended that the performance criterion be relative TSR from 1 October to 30 September 3 years later, against ASX 300 Industrials Index. The Board has accepted this recommendation. The vesting period for PQRs granted in FY14 is 3 years from 1 July 2013. The vesting conditions are based on Group performance over the vesting period as measured by the actual TSR. The Board has absolute discretion to vary the vesting conditions outlined in the table below. i. PQRs issued in FY13 In respect of the 2012-13 year, the percentage of PQRs held by an eligible employee on the vesting date in respect of a Scheme Year that may vest shall be determined in accordance with the table below: Where Group’s Actual TSR over the 3 Year Vesting Period is: Percentage of Employee’s RQRs that may Vest in respect of the Scheme Year: Below 26% - below threshold performance. 26% (approximately 8%pa compound), on threshold performance. 0% 25% At or above 26% but below 40% performance, between threshold and target performance. 25%-50%, in the same proportion as the Group’s actual TSR bears to the threshold and target performance. 40% (approximately 12%pa compound), on target performance. 50% Above 40% but below 56% performance, between target and stretch performance. 50%-100%, in the same proportion as the Group’s actual TSR bears to the target TSR and stretch performance. 56% or above (approximately 16%pa compound), stretch performance. 100% Annual Report 2014 29 ii. PQRs Issued in FY14 In respect of FY14, the percentage of PQRs held by an eligible employee on the vesting date in respect of a Scheme Year that may vest shall be determined in accordance with the table below: Where Group’s Actual TSR over the 3 Year Vesting Period is: Percentage of Employee’s PQRS that may Vest in respect of the Scheme Year: Below 26% - below threshold performance. 26% (approximately 8%pa compound), on threshold performance. 0% 25% At or above 26% but below 33% performance, between threshold and target performance. 25%-50%, in the same proportion as the Group’s actual TSR bears to the threshold and target performance. 33% (approximately 10%pa compound), on target performance. 50% Above 33% but below 40% performance, between target and stretch performance. 50%-100%, in the same proportion as the Group’s actual TSR bears to the target TSR and stretch performance. 40% or above (approximately 12%pa compound), stretch performance. 100% The table below sets out the participation level of KMP in the LTI Scheme – PQRs, in terms of grant size, fair value and the maximum amount to be expensed in the future. These PQRs were granted during the years ended 30 June 2013 and 30 June 2014 year. KMP Position Simon Owen Managing Director and CEO Tania Betts CFO Nicole Fisher COO LTI Scheme – RQRs Number of Performance Rights Granted Grant Date Fair Value of Performance Rights $ Vesting Date Maximum to Expense in Future Years $ 2013 2014 2013 2014 2013 2014 2,260,000 31 May 2012 230,520 30 June 2015 76,840 2,460,000 19 November 2013 799,500 30 June 2016 533,243 791,000 14 May 2012 71,032 30 June 2015 23,730 641,000 19 November 2013 208,325 30 June 2016 138,947 791,000 4 June 2012 80,287 30 June 2015 26,874 615,000 19 November 2013 199,875 30 June 2016 133,311 No PQRs vested or lapsed during the year ended 30 June 2014. No other PQRs were granted during the year ended 30 June 2014. b. Legacy RQRs These are rights that were granted at the time the Group was internalised, to encourage the retention of key executives and were subject to the holder remaining an employee of the Group until the end of the retention period, which was two years. An employee is not required to pay for a RQR. RQRs were granted to the following employees during the year ended 30 June 2012 as a one off retention bonus of between 25% and 50% of the Executive’s total ﬁxed annual remuneration in FY13 only. They were aimed at incentivising them to remain with the business during the important transitional phase of Internalisation. These rights vested on 1 July 2014 and have been converted to Ingenia securities as at that date. Grant Date Retention Period Vesting Date Simon Owen 31 May 2012 2 years 1 July 2014 Tania Betts 14 May 2012 2 years 1 July 2014 Nicole Fisher 4 June 2012 2 years 1 July 2014 Vesting Conditions Remaining employed at vesting date Remaining employed at vesting date Remaining employed at vesting date Value of RQRs 50% of TFR in year 1, $200,000 Number of RQRs 1,070,000 25% of TFR in year 1, $70,000 374,000 25% of TFR in year 1, $70,000 374,000 There have been no additional RQRs issued during the year ended 30 June 2014 or to the date of this report. 30 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued c. LTI – Termination of Employment The following table outlines the treatment of unvested rights at the time of a termination of employment: Termination Circumstance Unvested Quantum Rights Dismissal (termination for cause) All are forfeited. Resignation Other circumstance All are forfeited unless and to the extent otherwise determined by the Board. Rights granted in the financial year of termination of employment are forfeited in the same proportion as the remainder of the financial year bears to the full financial year. Rights that do not lapse at the termination of employment will continue to be held by participants with a view to testing for vesting at the end of the measurement period. If the security price at the end of the measurement period is less than the security price at the date of cessation of employment then: PQR – the rights will lapse and an amount up to the value of the Rights that would otherwise have vested will be paid in cash. If the security price at the end of the measurement period is not less than the security price at the date of termination of employment then: PQR – the rights will be tested for vesting in accordance with the terms of rights. 13.8 KMP Employment Contracts Managing Director and CEO – Simon Owen Contract duration Commenced 4 June 2012, open-ended. Fixed remuneration Total remuneration package includes fixed remuneration and superannuation. Variable remuneration eligibility Eligible for STI of up to 40% for any one year of the executive’s total cost fixed annual remuneration. Eligible for LTI of up to 80% for any one year of the executive’s total cost of fixed annual remuneration. The Board may withdraw or vary the STI and LTI schemes at any time by written notice to the executive, provided that the scheme will not be varied or withdrawn part way through a financial year in respect of that same financial year. Non-compete period Non-solicitation period Notice by Ingenia Notice by executive Treatment on termination 12 months. 12 months. 12 months. 12 months. Payment in lieu of notice: Payment may be made in lieu of notice, which would include pro rata fixed remuneration and statutory entitlements. Treatment of Incentives: As outlined above. Annual Report 2014 31 Chief Financial Officer – Tania Betts Contract duration Commenced 14 May 2012, open-ended. Fixed remuneration Total remuneration package includes fixed remuneration and superannuation. Variable remuneration eligibility Eligible for STI of up to 30% for any one year of the executive’s total cost fixed annual remuneration. Eligible for LTI of up to 30% for any one year of the executive’s total cost of fixed annual remuneration. The Board may withdraw or vary the STI and LTI schemes at any time by written notice to the executive, provided that the scheme will not be varied or withdrawn part way through a financial year in respect of that same financial year. Non-compete period Non-solicitation period Notice by Ingenia Notice by executive Treatment on termination 12 months. 12 months. 6 months. 6 months. Payment in lieu of notice: Payment may be made in lieu of notice, which would include pro rata fixed remuneration and statutory entitlements. Treatment of Incentives: As outlined above. Chief Operating Officer – Nicole Fisher Contract duration Commenced 4 June 2012, open-ended. Fixed remuneration Total remuneration package includes fixed remuneration and superannuation. Variable remuneration eligibility Eligible for STI of up to 30% for any one year of the executive’s total cost fixed annual remuneration. Eligible for LTI of up to 30% for any one year of the executive’s total cost of fixed annual remuneration. The Board may withdraw or vary the STI and LTI schemes at any time by written notice to the executive, provided that the scheme will not be varied or withdrawn part way through a financial year in respect of that same financial year. Non-compete period Non-solicitation period Notice by Ingenia Notice by executive Treatment on termination 12 months. 12 months. 6 months. 6 months. Payment in lieu of notice: Payment may be made in lieu of notice, which would include pro rata fixed remuneration and statutory entitlements. Treatment of Incentives: As outlined above. 32 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued 13.9 Remuneration Tables The following tables outline the remuneration provided to KMP excluding NEDs for the years ended 30 June 2014 and 30 June 2013. No executive KMP appointed during the period received a payment as part of their consideration for agreeing to hold the position. Key Management Personnel – Executive Remuneration Short-Term Non- Monetary Benefits $ Other Payments $ Super- Annuation Benefits $ Salary $ STI(2) $ Total Short- Term $ Other Long- Term Long Service Leave $ Performance Quantum Rights $ LTI(3) Retention Quantum Rights $ Termination Benefits Total $ Performance Related STI+LTI Percent of Total % LTI Percent of Total % Executive Director Simon Owen Managing Director and CEO 2014 Senior Executives Tania Betts CFO Nicole Fisher COO Total Executive KMP 2013 2014 2013 2014 588,915 340,155 279,989 262,516 225,780 2013(1) 154,064 2014 2013 1,094,684 756,735 – – – – – – – – – – – – – – – – 23,831 205,200 817,946 19,017 108,000 467,172 17,644 17,585 17,609 12,355 70,875 368,508 52,500 332,601 56,160 299,549 21,882 188,301 59,084 332,235 1,486,004 48,957 182,382 988,074 (1) Nicole Fisher was on maternity leave from 19 November to 30 June 2013. (2) STIs were accrued in the year ended 30 June 2014 and 30 June 2013. (3) No rights vested or lapsed during the year. The RQRs vested on 1 July 2014 and 1,818,000 fully paid stapled securities were issued at that time. LTI expense for the year ended 30 June 2014 was $680,600 (2013: 293,113). – – – – – – – – 343,097 76,840 93,108 23,677 93,458 26,762 529,663 127,279 91,085 99,243 30,222 31,902 29,630 34,689 150,937 165,834 $ – – – – – – – – 1,252,128 643,255 491,838 388,180 422,637 249,752 2,166,604 1,281,187 51 44 39 28 42 33 47 37 35 27 25 14 29 25 31 23 Annual Report 2014 33 13.9 Remuneration Tables 30 June 2013. the position. The following tables outline the remuneration provided to KMP excluding NEDs for the years ended 30 June 2014 and No executive KMP appointed during the period received a payment as part of their consideration for agreeing to hold Key Management Personnel – Executive Remuneration Executive Director Managing Director Simon Owen and CEO 2014 Senior Executives Tania Betts CFO Nicole Fisher COO Total Executive KMP 588,915 340,155 279,989 262,516 225,780 1,094,684 756,735 2013 2014 2013 2014 2014 2013 2013(1) 154,064 $ – – – – – – – – $ – – – – – – – – 23,831 205,200 817,946 19,017 108,000 467,172 17,644 17,585 17,609 12,355 70,875 368,508 52,500 332,601 56,160 299,549 21,882 188,301 59,084 332,235 1,486,004 48,957 182,382 988,074 (1) Nicole Fisher was on maternity leave from 19 November to 30 June 2013. (2) STIs were accrued in the year ended 30 June 2014 and 30 June 2013. (3) No rights vested or lapsed during the year. The RQRs vested on 1 July 2014 and 1,818,000 fully paid stapled securities were issued at that time. LTI expense for the year ended 30 June 2014 was $680,600 (2013: 293,113). Short-Term Non- Monetary Benefits Other Payments Super- Annuation Benefits $ STI(2) $ Total Short- Term $ Salary $ Other Long- Term Long Service Leave $ Performance Quantum Rights $ LTI(3) Retention Quantum Rights $ Termination Benefits $ Total $ Performance Related STI+LTI Percent of Total % LTI Percent of Total % – – – – – – – – 343,097 76,840 93,108 23,677 93,458 26,762 529,663 127,279 91,085 99,243 30,222 31,902 29,630 34,689 150,937 165,834 – – – – – – – – 1,252,128 643,255 491,838 388,180 422,637 249,752 2,166,604 1,281,187 51 44 39 28 42 33 47 37 35 27 25 14 29 25 31 23 34 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued 13.10 Non-Executive Directors Remuneration a. Directors’ Fees The maximum aggregate fee pool available to NEDs is $1,000,000 as stipulated in the Constitution that was adopted pre-internalisation. b. Performance-based Remuneration NEDs are remunerated by way of cash beneﬁts. They are not permitted to participate in performance based remuneration practices unless approved by securityholders. The Group currently has no intention to remunerate NEDs by any way other than cash beneﬁts. c. Equity-based Remuneration There is currently no equity-based remuneration plan in place for NEDs, however all NEDs have self funded the purchase of securities on market thereby aligning their interests with securityholders. Details are shown below in Section 2.11. d. NED Remuneration Table The following table outlines the remuneration provided to NEDs for the year ended 30 June 2014 and 30 June 2013: Non-Executive Directors Jim Hazel Amanda Heyworth Philip Clark Robert Morrison(1) Norah Barlow(2) Total Non-Executive KMP Directors Fees ($) 170,000 150,000 90,000 70,000 90,000 70,000 90,000 29,167 22,500 – 462,500 319,167 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 (1) Robert Morrison was appointed as Director on 8 February 2013. (2) Norah Barlow was appointed as Director on 31 March 2014. In addition to the above fees, all NEDs receive reimbursement for reasonable travel, accommodation and other expenses incurred while undertaking Ingenia business. NEDs do not receive additional remuneration for chairing or being a member of Board committees. The Board has introduced a policy guideline for Non-Executive Directors to hold the equivalent of one years gross fees in INA Securities within a period of two years from the date of appointment. 13.11 KMP Interests Securities held directly, indirectly or beneﬁcially by each key management person, including their related parties, were: Directors Jim Hazel Philip Clark AM Amanda Heyworth Robert Morrison Norah Barlow Simon Owen Balance 1 July 2013 1,000,000 100,000 421,000 110,000 – 1,517,750 Acquisitions Disposals On Exercise of Options Balance 30 June 2014 333,334 108,334 140,334 111,667 178,000 661,917 – – – – – – – – – – – – 1,333,334 208,334 561,334 221,667 178,000 2,179,667 35 Performance quantum rights held by key management personnel were: Director Simon Owen Executives Tania Betts Nicole Fisher Balance 1 July 2013 Granted Vested Balance 30 June 2014 2,260,000 2,460,000 791,000 791,000 641,000 615,000 – – – 4,720,000 1,432,000 1,406,000 Retention quantum rights held by key management personnel were: Director Simon Owen Executives Tania Betts Nicole Fisher Balance 1 July 2013 Granted Vested Balance 30 June 2014 1,070,000 374,000 374,000 – – – – – – 1,070,000 374,000 374,000 The retention quantum rights vested on 1 July 2014 and 1,818,000 fully paid stapled securities were issued at that time. 13.12 FY15 Remuneration This section of the Remuneration Report deals with the period from 1 July 2014 to the date of this report. Significant changes have been made to the Group’s approach to executive KMP remuneration for the FY15 year. These changes are detailed and highlighted below. a. External Remuneration Consultants Guerdon Associates were appointed by the Board to provide independent remuneration advice for KMP remuneration in respect of FY15, including latest market practices and a review of the STI and LTI scheme rules. b. Remuneration Drivers The following are considered key drivers in dictating the direction of the remuneration structures for FY15: i. Focus management on delivering outcomes in the short to medium term, particularly significant underlying profit growth • Operationalising strategy: management must deliver tangible results on the strategy presented to securityholders • Re-mix of remuneration components, increase STI (and include a 50% deferred equity element) and reduce LTI • A significant proportion of total remuneration at risk for all executive KMP ii. Provide long-term value creation for securityholders and strong alignment between management and securityholders • Introduce STI awards with 50% deferred equity • KPIs for STI: primary focus is delivery of underlying profit growth; additional focus on value adding metrics: lifestyle park sales, increasing occupancy, capital recycling • LTI 100% deferred equity • Rights to be allocated based on the 30 day volume weighted average price after results are announced • Shift from absolute TSR to relative TSR against S&P ASX 300 Industrials Index • Rights hurdle requires performance above Index with progressive vesting • All deferred equity (STI and LTI) has a forfeiture provision iii. Attracting, retaining and motivating KMP • FY12 Retention Rights vested 1 July 2014 • Small, cohesive senior management team • A significant proportion of total remuneration for all executive KMP is performance based c. Details of KMP There have been no changes to the KMP since 30 June 2014 and before the date of this report. Annual Report 201436 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued d. Review Date Guerdon recommended that the Group change the annual remuneration review date from 1 July to 1 October each year, to ensure that remuneration reviews are based on ﬁnal audited results and equity grants for deferred STI and LTI are based on an informed market. e. Target mix of Remuneration Components Based on market data from Guerdon Associates and recommendations from the RNC, the Board has set the target remuneration mix for executives for FY15, expressed as a percentage of total remuneration, as detailed in the table below: Target mix CEO CFO COO TFR 43.5% 62.5% 62.5% STI 34.8% 25.0% 25.0% LTI Total Remuneration 21.7% 12.5% 12.5% 100.0% 100.0% 100.0% The target mix reﬂects implementation of the key remuneration drivers set out above. f. Total Fixed Remuneration Based on market data from Guerdon Associates and recommendations from the RNC, the Board has set TFR for each of the executives for FY15 as detailed in the table below: Executives Simon Owen Tania Betts Nikki Fisher(1) Position TFR (p.a.) Managing Director and CEO $650,000 CFO COO $328,000 $315,000 (1) Currently pro-rated for 4 days per week. The increases in FY15 ﬁxed remuneration for the Managing Director and CEO is 8.3% and for the CFO and COO is 5.0% each. The Board considers these increases reasonable in the context of: – Over 90% increase in the total market capitalisation of the Group during FY14 – Over 55% total securityholder returns on a fully reinvested basis, during FY14 Data for TFR ranges for the CFO and COO for FY15 were provided by Guerdon Associates. The RNC used an element of judgement to determine the appropriate positioning within this range and arrived at the TFR amounts set out above. Those recommendations were approved by the Board. g. Revised LTI and STI Scheme Rules Guerdon Associates was engaged to review the rules of the plans for the STI and LTI scheme. Guerdon Associates proposed new Rights Plan Rules, which were endorsed by the RNC and approved by the Board. These new rules will be subject to securityholder approval at the Annual General Meeting to be held on 12 November 2014. h. STI A structural change has been implemented for the FY15 STI with 50% of the maximum STI for the executive KMP being paid in cash and the remaining 50% being a deferred equity element, subject to forfeiture where earnings growth is not sustained. The deferral is for 12 months and sustainability has been deﬁned as earnings growth in the following year to be equal to or above a set threshold on prior year. The deferral is to be rights to INA stapled securities, plus additional stapled securities equal to distributions during the deferral period on a reinvestment basis. Executives Simon Owen Tania Betts Nicole Fisher Maximum STI Cash Maximum STI Deferred (STI Rights) Total Maximum STI Available 40% of FY15 TFR 40% of FY15 TFR 80% of FY15 TFR $260,000 $260,000 $520,000 20% of FY15 TFR 20% of FY15 TFR 40% of FY15 TFR $65,600 $65,600 $131,200 20% of FY15 TFR 20% of FY15 TFR 40% of FY15 TFR $63,000 $63,000 $126,000 (1) Subject to securityholder approval at the Annual General Meeting to be held on 12 November 2014. Annual Report 2014 37 The STI deferral rights are subject to the following terms and conditions: a ‘malus’ (forfeiture) provision during the deferral period – – – on the vesting date Ingenia will cause the relevant number of INA securities to be issued to the executive in accordance a one-year deferral period and are eligible to vest on or following 1 October 2016 with a prescribed formula – no amount is payable by the executive for the issue or transfer of INA securities to the executive. The STI award is subject to STI performance conditions (KPIs) that focus on underlying proﬁt, strategic, operational and people and reporting metrics. In each case, the KPIs are set with ‘threshold’, ‘target’ and ‘stretch’ performance levels, with entitlements calculated on a pro-rata basis between these levels. Details of the KPI split for each executive KMP is as follows: CEO CFO COO Underlying Profit % Strategic % Operational % People % 40 40 40 30 25 10 20 25 40 10 10 10 i. LTI There were no RQRs issued during the year ended 30 June 2014 or since then and before the date of this report, but note the comment in Section 2.7(b) above in relation to RQR which vested on 1 July 2014. i. Long term incentive plan Since 1 July 2014 and before the date of this report, the value and number of Rights that have been offered to executives are: Simon Owen(1) Tania Betts Nicole Fisher Value of LTIP Rights Vesting Date 50% of FY15 TFR 30 September 2017 $325,000 20% of FY15 TFR 30 September 2017 $65,600 20% of FY15 TFR 30 September 2017 $63,000 (1) Subject to securityholder approval at the Annual General Meeting to be held on 12 November 2014. ii. Rights Performance Conditions On advice from Guerdon, the RNC has recommended and the Board has approved, signiﬁcant changes in FY15 to: – – the performance conditions for vesting of Rights, and the methodology used to convert dollar amount awards to Rights entitlements. The Rights are subject to the LTIP Performance Condition, which is based on growth in INA’s TSR relative to the ASX 300 Industrials Index return over the Rights Performance Period. The ASX 300 Index was chosen because the Board considers it to be transparent and more closely aligned to the Group’s core business operations. Total TSR is the growth in the security price plus distributions, assuming distributions are reinvested. To minimise the impact of any short-term volatility, INA’s TSR will be calculated using the weighted average of the closing security price over the 30 days up to and including the trading day prior to the start and the 30 days up to and including the end trading day of the Rights Performance Period. 38 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014(cid:13)|(cid:13)continued The Rights will vest on the following basis: Growth Rate in INA’s TSR % of Rights that Vest Below Threshold At Threshold Index + less than 1% CAGR Index + 1% CAGR Nil 10% Between Threshold and Maximum Between Index + 1% and 6% CAGR 10% plus an additional amount progressively vesting on a straight line basis between Threshold and Maximum Maximum Index + 6% CAGR 100% CAGR: compound annual growth rate It is important to note that executive KMP must outperform the Index to qualify for an award of Rights. The methodology recommended by the Group’s Independent Remuneration Consultant and used to calculate Rights entitlement in FY14 was subject to some criticism. That formula included a 0.5 “probability of vesting” factors, which effectively doubled Rights grants. A different methodology has been used to calculate Rights entitlements in FY15 which has been recommended by Guerdon and adopted by the RNC and the Board. The FY15 methodology determines security value as the volume weighted average price (“VWAP”) of INA securities in the period of 30 trading days ending on 30 September 2014. The number of Rights granted in FY15 will be calculated by dividing the Rights by the 30 day VWAP of the INA security price. Each Right vested equals one INA security plus an additional number of INA securities calculated on the basis of the distributions that would have been paid during the relevant period being reinvested. iii. Entitlement to Distribution adjustment LTI grants will be entitlements to Rights to stapled securities plus additional stapled securities equal to distributions paid during the vesting period. The Board is keen to see executive KMP incentivised to grow distributions to securityholders. j. Total Maximum FY15 Remuneration Executive Simon Owen Tania Betts Nicole Fisher Fixed Remuneration Maximum STI Cash Maximum STI Deferred(1) Maximum LTI(1) Maximum Total Remuneration $650,000 $260,000 $260,000 $325,000 $1,495,000 $328,000 $65,600 $65,600 $65,600 $315,000 $63,000 $63,000 $63,000 $524,800 $504,000 (1) Subject to securityholder approval at the Annual General Meeting to be held on 12 November 2014. In accordance with the Board’s objective, a signiﬁcant proportion of each executive KMP’s total maximum remuneration in FY15 is performance based. The percentage of total maximum remuneration at risk for each executive KMP is: CEO CFO COO 56.5% 37.5% 37.5% It is worth noting that Simon Owen’s total maximum remuneration has reduced from an effective level of $1,971,600 in FY14 to a level of $1,495,000 in FY15. The principle factor contributing to that reduction is the change in the methodology used to calculate the Rights entitlement, detailed above. k. Non-Executive Directors’ Remuneration Guerdon Associates was engaged to provide a benchmarking report on the levels of NED remuneration in determining the appropriate level of fees for FY15. Based on the Guerdon Associates report, the RNC recommended that the Chair’s remuneration for FY15 remain unchanged at $170,000 per annum. The Board approved the RNC’s recommendation. The Chair did not participate in that decision. Based on the Guerdon Associates report, the RNC recommended that remuneration for FY15 be set at $93,000 per annum for each NED other than the Chair. The Board approved the RNC’s recommendation. Signed in accordance with a resolution of the directors. Jim Hazel Chairman Sydney, 19 September 2014 Auditors’ Independence Declaration for the year ended 30 June 2014 Annual Report 2014 39 40 Ingenia Communities Holdings Limited Consolidated Statement of Comprehensive Income for the year ended 30 June 2014 Continuing Operations Revenue Rental income Accrued deferred management fee income Manufactured home sales Catering income Other property income Interest income Property expenses Employee expenses Administration expenses Operational, marketing and selling expenses Cost of manufactured homes sold Finance expenses Net foreign exchange gain/(loss) Net loss on disposal of investment properties Net gain/(loss) on change in fair value of: Investment properties Derivatives Retirement village resident loans Amortisation of intangible assets Other expenses Profit from continuing operations before income tax Income tax benefit Profit from continuing operations Profit/(loss) from discontinued operations Net profit/(loss) for the year Other comprehensive income, net of income tax Items that may be reclassified subsequently to profit or loss: Foreign currency translation differences arising during the year Release of foreign currency translation reserve on disposal of foreign operations Total comprehensive income for the year, net of tax Note 2014 $’000 2013 $’000 5(a) 16(b) 5(b) 31,643 5,333 3,442 3,178 1,819 369 19,287 4,850 405 2,616 872 563 45,784 28,593 (11,613) (7,650) (15,341) (10,239) (4,371) (3,136) (2,130) 6 (4,446) (147) – (341) 41 (616) – – 3,684 7,264 10,948 570 11,518 269 – 11,787 16(b) 7 8(b) 21 21 (3,172) (2,358) (297) (6,112) 37 (107) 3,457 752 327 (585) (185) 2,461 367 2,828 (13,118) (10,290) 327 17,463 7,500 Annual Report 2014 41 2014 $’000 2013 $’000 (2,736) 15,313 (1,059) (1,245) (644) (8,401) 11,518 (10,290) (2,736) 15,533 (1,010) 11,787 2014 Cents 1.0(2) 1.7 (0.4) 1.8 (0.4) 1.7 (0.4) 1.8 (0.4) (1,731) 16,898 (7,667) 7,500 2013 Cents 1.0 0.6 (0.2) (2.0) (0.2) 0.5 (0.2) (2.0) (0.2) Note 4 4 4 4 4 4 4 4 Profit/(loss) attributable to securityholders of: Ingenia Communities Holdings Limited Ingenia Communities Fund Ingenia Communities Management Trust Total comprehensive income attributable to securityholders of: Ingenia Communities Holdings Limited Ingenia Communities Fund Ingenia Communities Management Trust Distributions per security Earnings per security(1): Basic earnings from continuing operations Per security Per security attributable to parent Basic earnings Per security Per security attributable to parent Diluted earnings from continuing operations Per security Per security attributable to parent Diluted earnings Per security Per security attributable to parent (1) Prior period weighted average number of securities and EPS have been adjusted in accordance with AASB 133 “Earnings per Share” (“AASB 133”). The weighted average number of securities on issue for the current period, prior to the rights issue in September 2013, has also been adjusted as required by AASB 133. (2) Distributions relate to the amount paid during FY14. Subsequent to the end of the year, a ﬁnal distribution was declared for 0.65 cents for a total full year distribution of 1.15 cents. 42 Ingenia Communities Holdings Limited Consolidated Balance Sheet as at 30 June 2014 Current assets Cash and cash equivalents Trade and other receivables Inventories Income tax receivable Assets held for sale Assets of discontinued operations Total current assets Non-current assets Trade and other receivables Investment properties Plant and equipment Total non-current assets Total assets Current liabilities Trade and other payables Borrowings Retirement village resident loans Provisions Derivatives Liabilities of discontinued operations Total current liabilities Non-current liabilities Trade and other payables Borrowings Provisions Derivatives Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Issued securities Reserves Accumulated losses Total equity Attributable to securityholders of: Ingenia Communities Holdings Limited Issued securities Reserves Retained earnings/(accumulated losses) Ingenia Communities Fund Ingenia Communities Management Trust Net asset value per security (cents) Note 9 10 11 8(a) 8(b) 10 12 13 14 15 16 17 18 2014 $’000 2013 $’000 12,894 3,745 2,208 960 5,439 47,657 72,903 2,168 498,863 990 502,021 574,924 10,409 283 38,531 8,789 285 757 – 36,576 84,938 2,671 370,931 1,034 374,636 459,574 8,559 267 190,122 175,703 718 84 507 – 8(b) 30,449 232,065 21,528 206,564 14 15 17 18 19 20 21 22 20 21 22 4,000 98,073 249 84 276 102,682 334,747 240,177 569,116 2,023 – 70,539 140 209 7,470 78,358 284,922 174,652 510,141 1,074 (330,962) (336,563) 240,177 174,652 7,377 988 (2,659) 5,706 224,254 10,217 240,177 35.5 6,078 308 77 6,463 164,953 3,236 174,652 34.4 Consolidated Cash Flow Statement for the year ended 30 June 2014 Annual Report 2014 43 Cash flows from operating activities Rental and other property income Payment of management fees Property and other expenses Proceeds from resident loans Repayment of resident loans Proceeds from sale of manufactured homes Purchase of manufactured homes Distributions received from formerly equity accounted investments Interest received Borrowing costs paid Income tax paid Cash flows from investing activities Purchase and additions of plant and equipment Payments for investment properties Additions to investment properties Proceeds from sale of investment properties Proceeds from sale of equity accounted investments Amounts received from/(advanced to) villages Payments for lease arrangements Cash flows from financing activities Proceeds from issue of stapled securities Payments for security issue costs Receipts from derivatives Payments for derivatives Finance lease payments Payments for internalisation Distributions to securityholders Payments for debt issue costs Proceeds from borrowings Repayment of borrowings Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate fluctuation on cash held Note 2014 $’000 2013 $’000 16(b) 16(b) 43,274 29,514 (29) (166) (34,847) (26,270) 22,021 (10,361) 3,511 (4,035) 301 358 (5,811) (142) 19,338 (7,118) 450 (275) 2,350 578 (7,085) (76) 33 14,240 11,240 (443) (626) (113,255) (31,023) (18,724) (16,890) 1,200 5,811 72 (745) (126,084) 61,707 (2,771) – – (81) – (5,885) (216) 104,258 29,322 37,560 (330) (699) 17,314 21,168 (1,056) 1,650 (150) (13) (600) (4,235) (587) 16,261 (68,000) (56,242) 89,012 (23,804) (22,832) 37,550 (167) 4,750 32,812 (12) Cash and cash equivalents at the end of the year 9 14,551 37,550 44 Ingenia Communities Holdings Limited Statement of Changes in Equity for the year ended 30 June 2014 ATTRIBUTABLE TO SECURITYHOLDERS INGENIA COMMUNITIES HOLDINGS LIMITED Note Issued capital $’000 Reserves $’000 Retained earnings $’000 Total $’000 ICF and ICMT $’000 Total equity $’000 Carrying amount at 1 July 2012 Net loss for the year Other comprehensive income Total comprehensive income for the year Transactions with securityholders in their capacity as securityholders: Issue of securities Share-based payment transactions Payment of distributions to securityholders Carrying amount at 30 June 2013 Net profit/(loss) for the year Other comprehensive income Total comprehensive income for the year Transactions with securityholders in their capacity as securityholders: Issue of securities Share-based payment transactions Payment of distributions to securityholders Carrying amount at 30 June 2014 20 21 22 20 21 22 6,000 15 – – – 78 – – – – – – 293 – 1,808 (1,245) 7,823 143,349 151,172 (1,245) (9,045) (10,290) (486) (486) 18,276 17,790 (1,731) (1,731) 9,231 7,500 – – – 78 20,019 20,097 293 – 293 – (4,410) (4,410) 6,078 308 77 6,463 168,189 174,652 – – – 1,299 – – – – – – 680 – (2,736) (2,736) 14,254 11,518 – – 269 269 (2,736) (2,736) 14,523 11,787 – – – 1,299 57,676 58,975 680 – 680 – (5,917) (5,917) 7,377 988 (2,659) 5,706 234,471 240,177 Notes to the Financial Statements for the year ended 30 June 2014 Annual Report 2014 45 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. The Group The ﬁnancial report of Ingenia Communities Holdings Limited (the “Company”) comprises the consolidated ﬁnancial report of the Company and its controlled entities, including Ingenia Communities Fund (“ICF” or the “Fund”) and Ingenia Communities Management Trust (“ICMT”) (collectively, the “Trusts”). The shares of the Company are “stapled” with the units of the Trusts and trade on the Australian Securities Exchange (“ASX”) effectively as one security. Ingenia Communities RE Limited (“ICRE”), a wholly owned subsidiary of the Company, is the Responsible Entity of the Trusts. In this report, the Company and the Trusts are referred to collectively as the Group. The constitutions of the Company and the Trusts require that, for as long as they remain jointly quoted on the ASX, the number of shares in the Company and of units in each trust shall remain equal and those securityholders in the Company and unitholders in each trust shall be identical. The stapling structure will cease to operate on the ﬁrst to occur of: – – the Company or either of the Trusts resolving by special resolution in accordance with its constitution to terminate the stapling provisions; or the commencement of the winding up of the Company or either of the Trusts. The ﬁnancial report as at and for the year ended 30 June 2014 was authorised for issue by the directors on 19 September 2014. b. Basis of Preparation The ﬁnancial report is a general purpose ﬁnancial report which has been prepared in accordance with Australian Accounting Standards, Australian Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board (“AASBs”) and the Corporations Act 2001. The ﬁnancial report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Board and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. As permitted by Class Order 05/642, issued by the Australian Securities and Investments Commission, the ﬁnancial statements and accompanying notes of the Group have been presented in the attached combined ﬁnancial report. The ﬁnancial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000) unless otherwise stated. The ﬁnancial report is prepared on an historical cost basis, except for investment properties, retirement village resident loans and derivative ﬁnancial instruments, which are measured at fair value. At 30 June 2014, the Group recorded a net current asset deﬁciency of $159,162,000. This deﬁciency includes retirement village resident loans of $190,122,000 and liabilities from discontinued operations of $30,449,000. Resident loans obligations of the Group are classiﬁed as current liabilities due to the demand feature of these obligations despite the unlikely possibility that the majority of the loans will be settled within the next twelve months. Furthermore, if required, the proceeds from new resident loans could be used by the Group to settle its existing loan obligations should those incumbent residents vacate their units. The liabilities of the discontinued operations consist mainly of borrowings of $30,081,000 related to a facility with the Bank of New Zealand and will be repaid upon disposal of the corresponding assets. Accordingly, 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 the ﬁnancial report of the Group has been prepared on a going concern basis. c. Adoption of New and Revised Accounting Standards The Group has adopted all of the new and revised standards and interpretations issued by the Australian Accounting Standards Board that are relevant to its operations and effective for the current period. The following standards were most relevant to the Group: – AASB 10 “Consolidated Financial Statements” and AASB 2011-7 “Amendments to Australian Accounting Standards arising from consolidation and Joint Arrangements standards”; – AASB 13 “Fair Value Measurement” and AASB 2011-8 “Amendments to Australian Accounting Standards arising from AASB 13”; – AASB 119 “Employee Beneﬁts” (2011) and AASB 2011-10 “Amendments to Australian Accounting Standards arising from AASB 119 (2011)”; – AASB 2012-2 “Amendments to Australian Accounting Standards-Disclosures-Offsetting Financial Assets and Financial Liabilities”; and – AASB 2011-4 “Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements”. 46 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The impact of application of each Standard is as follows: Accounting Standard Impact on the Group AASB 10 and AASB 2011-7 AASB 13 and AASB 2011-8 AASB 119 and AASB 2011-10 AASB 2012-2 AASB 2011-4 AASB 10 amends the definition of control such that an investor controls an investee when a) it has power over an investee; b) it is exposed, or has rights, to variable returns from its involvement with the investee and c) has the ability to use its power to affect its returns. All three conditions have to be met for an investor to have control. The application of the standard did not have any impact on the Group. AASB 13 establishes a single source of guidance for fair value measurements and disclosures about fair value. The standard is broad in scope and applies to both financial instrument and non-financial instrument items with the exception of a few items like share-based payments and leases, which are covered by other standards. AASB 13 defines fair value as the price that would be received to sell an asset or liability in an orderly transaction in the principal (or the most advantageous) market at the measurement date under current market conditions. Valuations made are categorised into three levels based on the inputs used. However, regardless of the valuation methodology applied, fair value represents the exit price in relation to the asset or liability. The standard applies prospectively from 1 January 2013. The Group has applied requirements of the Standard in all its valuations, in particular of investment properties. Additionally, the disclosure requirements of the standard, which include information about assumptions made and the qualitative impact of those assumptions on fair value, have been complied with. AASB 119 amends the definition of short-term employee benefits, with the distinction now being based on whether the benefits are expected to be settled within 12 months after reporting date (short-term benefit). Long term employee benefits are required to be measured using the actuarial valuation method. The method involves projecting future cash flows and discounting back to present value. This requirement applies to the annual leave balance for the Group. The application of the standard’s requirement for both current and previous periods did not result in amendment to the figures disclosed, as the changes were not material. The standard provides application and presentation guidance to AASB 132 ‘Financial Instruments: Presentation’ for applying some offsetting criteria. The Group has applied the requirements of the Standard, which necessitates disclosure of information about rights of offset and related arrangements for financial instruments under an enforceable master netting arrangement or similar arrangement. This has resulted in changes to disclosure principally for retirement village resident loans for the Group. The standard amends AASB 124 ‘Related Party Disclosures’ to remove individual key management personnel disclosures required by Australian specific paragraphs. The application of the standard did not have any financial impact on the Group, though there have been some changes to disclosures as mandated by the standard. d. Principles of Consolidation The Group’s consolidated ﬁnancial statements comprise the Company and its subsidiaries (including the Trusts). Subsidiaries are all those entities (including special purpose entities) over which the Company or the Trusts have the power to govern the ﬁnancial and operating policies so as to obtain beneﬁts from their activities. The ﬁnancial statements of the subsidiaries are prepared for the same reporting period as the parent, using consistent accounting policies. Inter-company balances and transactions including dividends and unrealised gains and losses from intra-group transactions have been eliminated. Subsidiaries are consolidated from the date on which the parent obtains control. They are de-consolidated from the date that control ceases. Investments in subsidiaries are carried at cost in the parent’s ﬁnancial statements. The Company was incorporated on 24 November 2011. In accordance with Accounting Standard AASB 3 Business Combinations, the stapling of the Company and the Trusts was regarded as a business combination. Under AASB 3, the stapling was accounted for as a reverse acquisition with ICF “acquiring” the Company and the Company subsequently being identiﬁed as the ongoing parent for preparing consolidated ﬁnancial reports. Consequently, the consolidated ﬁnancial statements are a continuation of the ﬁnancial statements of the Trusts, and include the results of the Company from the date of incorporation. Annual Report 2014 47 e. Business Combinations and Goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the Group elects whether it measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identiﬁable net assets. Acquisition costs incurred are expensed and included in other expenses. When the Group acquires a business, it assesses the ﬁnancial assets and liabilities assumed for appropriate classiﬁcation and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through proﬁt or loss. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interest over the net identiﬁable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in proﬁt or loss. f. Discontinued Operations and Assets Held for Sale The Group has classiﬁed certain components as discontinued operations. A discontinued operation is a component of the entity that has been disposed of, or is classiﬁed as held for sale, and that represents a separate major line of business or geographical area of operations, or is part of a single co-ordinated plan to dispose of such a line of business or area of operations. The results of discontinued operations are presented separately on the face of the income statement. Components of the entity are classiﬁed as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. They are measured at the lower of their carrying amount and fair value less costs to sell, except for assets such as investment property, which are carried at fair value. An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset (or disposal group), but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset (or disposal group) is recognised at the date of derecognition. Non-current assets classiﬁed as held for sale, and the assets of a disposal group classiﬁed as held for sale, are presented separately from the other assets on the face of the balance sheet. The liabilities of a disposal group classiﬁed as held for sale are presented separately from other liabilities on the face of the balance sheet. Details of discontinued operations and assets held for sale are given at Note 8. g. Dividends and Distributions A liability for any dividend or distribution declared on or before the end of the reporting period is recognised on the balance sheet in the reporting period to which the dividend or distribution pertains. h. Foreign Currency i. Functional and presentation currencies The presentation currency of the Group, and functional currency of the Company, is the Australian dollar. ii. Translation of foreign currency transactions Transactions in foreign currency are initially recorded in the functional currency at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currency are retranslated at the rate of exchange prevailing at the balance date. All differences in the consolidated ﬁnancial report are taken to the income statement with the exception of differences on foreign currency borrowings designated as a hedge against a net investment in a foreign entity. These are taken directly to equity until the disposal of the net investment at which time they are recognised in the income statement. A non-monetary item that is measured at fair value in a foreign currency is translated using the exchange rates at the date when the fair value was determined. iii. Translation of ﬁnancial statements of foreign subsidiaries The functional currency of certain subsidiaries is not the Australian dollar. At reporting date, the assets and liabilities of these entities are translated into the presentation currency of the Group at the rate of exchange prevailing at balance date. Financial performance is translated at the average exchange rate prevailing during the reporting period. The exchange differences arising on translation are taken directly to the foreign currency translation reserve in equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that foreign operation is recognised in the income statement. 48 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) i. Leases Finance leases, which transfer to the Group substantially all the risks and beneﬁts incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the ﬁnance charges and reduction of the lease liability to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised as an expense in the income statement. Finance leases, which transfer away from the Group substantially all the risks and beneﬁts incidental to ownership of the leased item, are recognised at the inception of the lease. A ﬁnance lease receivable is recognised on inception at the present value of the minimum lease receipts. Finance lease receipts are apportioned between the interest income and reduction in the lease receivable to achieve a constant rate of interest on the remaining balance of the receivable. Interest is recognised as income in the income statement. Leases of properties that are classiﬁed as investment properties, are classiﬁed as ﬁnance leases under AASB 140 Investment Properties. Leases where the lessor retains substantially all the risks and beneﬁts of ownership are classiﬁed as operating leases. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the term of the lease. j. Plant and Equipment Plant and equipment is stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. Such cost includes the cost of replacing part of the property, plant and equipment and borrowing costs for long-term construction projects if the recognition criteria are met. When signiﬁcant parts of property, 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. Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisﬁed. All other repair and maintenance costs are recognised in proﬁt or loss as incurred. The present value of the expected cost for the decommissioning of an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met. k. Financial Assets and Liabilities Current and non-current ﬁnancial assets and liabilities within the scope of AASB 139 Financial Instruments: Recognition and Measurement are classiﬁed as fair value through proﬁt or loss; loans and receivables; held-to- maturity investments or as available-for-sale. The Group determines the classiﬁcation of its ﬁnancial assets and liabilities at initial recognition with the classiﬁcation depending on the purpose for which the asset or liability was acquired or issued. Financial assets and liabilities are initially recognised at fair value, plus directly attributable transaction costs unless their classiﬁcation is at fair value through proﬁt or loss. They are subsequently measured at fair value or amortised cost using the effective interest method. Changes in fair value of available-for-sale ﬁnancial assets are recorded directly in equity. Changes in fair values of any other ﬁnancial assets and liabilities classiﬁed as at fair value through proﬁt or loss are recorded in the income statement. The fair values of ﬁnancial instruments that are actively traded in organised ﬁnancial markets are determined by reference to quoted market bid prices at the close of business on the balance sheet date. For those with no active market, fair values are determined using valuation techniques. Such techniques include: using recent arm’s length market transactions; reference to the current market value of another instrument that is substantially the same; discounted cash ﬂow analysis and option pricing models, making as much use of available and supportable market data as possible and keeping judgemental inputs to a minimum. l. Impairment of Non-Financial Assets Assets other than investment property and ﬁnancial assets carried at fair value, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identiﬁable cash inﬂows that are largely independent of the cash inﬂows from other assets or groups of assets. Non-ﬁnancial assets excluding goodwill which have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. m. Cash and Cash Equivalents Cash and cash equivalents in the balance sheet and cash ﬂow statements comprise cash at bank and in hand and short-term deposits that are readily convertible to known amounts of cash and are subject to an insigniﬁcant risk of changes in value. n. Trade and Other Receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. An allowance for impairment is made when there is objective evidence that collection of the full amount is no longer probable. o. Inventories The Group holds inventory in relation to the acquisition and development of manufactured homes within its Active Lifestyle Estates segment. Inventories are held at the lower of cost and net realisable value. Costs of inventories comprise all acquisition costs, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Inventory includes work in progress and raw materials used in the production of manufactured home units. Net realisable value is determined on the basis of an estimated selling price in the ordinary course of business less estimated costs of completion and the estimated costs necessary to make the sale. p. Derivative Financial Instruments The Group uses derivative ﬁnancial instruments such as foreign currency contracts and interest rate swaps to hedge its risks associated with foreign currency and interest rate ﬂuctuations. Such derivative ﬁnancial instruments are initially recognised at fair value on the date in which the derivative contract is entered into and are subsequently remeasured to fair value. q. Investment Property Land and buildings have the function of an investment and are regarded as composite assets. In accordance with applicable accounting standards, the buildings, including plant and equipment, are not depreciated. Investment property includes property under construction and tourism cabins. 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 the income statement in the period in which they arise, including corresponding tax effect. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal market for the asset or liability or in its absence, the most advantageous market. It is the Group’s policy to have all investment properties externally valued at intervals of not more than two years and that such valuation be reﬂected in the ﬁnancial reports of the Group. It is the policy of the Responsible Entity to review the fair value of each investment property every six months and to cause investment properties to be revalued to fair values whenever their carrying value materially differs to their fair values. Changes in the fair value of the an investment property are recorded in the statement of comprehensive income. In determining fair values, expected net cash ﬂows are discounted to their present value using a market determined risk adjusted discount rate. The assessment of fair value of investment properties does not take into account potential capital gains tax assessable. Annual Report 2014 49 r. Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination are their fair values as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. Internally generated intangible assets are not capitalised and expenditure is reﬂected in the income statement in the year in which the expenditure is incurred. The useful lives of intangible assets have been assessed as ﬁnite. Consequently, intangible assets are amortised on a straight-line basis over their useful economic lives and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amortisation expense is recognised in the income statement in the expense category consistent with the function of the intangible assets. s. Payables Trade and other payables are carried at amortised cost and due to their short-term nature are not discounted. They represent liabilities for goods and services provided to the Group prior to the end of the ﬁnancial year that are unpaid and are recognised when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. t. Provisions, including Employee Beneﬁts i. 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. When the Group expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognised as a separate asset, but only when the reimbursement is virtually certain. The expense relating to a provision is presented in the statement of proﬁt or loss net of any reimbursement. ii. Wages, salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary beneﬁts and annual leave expected to be settled within twelve months of the reporting date are recognised in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Expenses for non- accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. iii. Long service leave The liability for long service 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 government bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash outﬂows. 50 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) u. Retirement Village Resident Loans These loans, which are repayable on the departure of the resident, are classiﬁed as ﬁnancial liabilities at fair value through proﬁt and loss with resulting fair value adjustments recognised in the income statement. The fair value of the obligation is measured as the ingoing contribution plus the resident’s share of capital appreciation to reporting date. Although the expected average residency term is more than ten years, these obligations are classiﬁed as current liabilities, as required by Accounting Standards, because the Group does not have an unconditional right to defer settlement to more than twelve months after reporting date. This liability is stated net of accrued deferred management fees at reporting date, because the Group’s contracts with residents require net settlement of those obligations. Refer to Notes 27(k) and 1(aa) for information regarding the valuation of retirement village resident loans. v. Borrowings Borrowings are initially recorded at the fair value of the consideration received less directly attributable transaction costs associated with the borrowings. After initial recognition, borrowings are subsequently measured at amortised cost using the effective interest rate method. Under this method fees, costs, discounts and premiums that are yield related are included as part of the carrying amount of the borrowing and amortised over its expected life. Borrowings are classiﬁed as current liabilities unless the Group has an unconditional right to defer settlement to more than twelve months after reporting date. Borrowing costs are expensed as incurred except where they are directly attributable to the acquisition, construction or production of a qualifying asset. When this is the case, they are capitalised as part of the acquisition cost of that asset. w. Issued Equity Issued and paid up securities are recognised at the fair value of the consideration received by the Group. Any transaction costs arising on issue of ordinary securities are recognised directly in equity as a reduction of the security proceeds received. x. Revenue Revenue from rents, interest and distributions is recognised to the extent that it is probable that the economic beneﬁts will ﬂow to the entity and the revenue can be reliably measured. Revenue brought to account but not received at balance date is recognised as a receivable. Rental income from operating leases is recognised on a straight-line basis over the lease term. Contingent rentals are recognised as income in the ﬁnancial year that they are earned. Fixed rental increases that do not represent direct compensation for underlying cost increases or capital expenditures are recognised on a straight-line basis until the next market review date. Rent paid in advance is recognised as unearned income. Deferred management fee income is calculated as the expected fee to be earned on a resident’s ingoing loan, allocated pro-rata over the resident’s expected tenure, together with any share of capital appreciation that has occurred at reporting date. Revenue from the sale of manufactured homes within the Active Lifestyle Estate segment is recognised when the signiﬁcant risks, rewards of ownership and effective control has been transferred to the buyer. Government incentives are recognised where there is reasonable assurance the incentive will be received and all attached conditions will be complied with. When the incentive relates to an expense item, it is recognised as income on a systematic basis over the periods that the incentive is intended to compensate. Interest income is recognised as the interest accrues using the effective interest rate method. y. Share-Based Payment Transactions Certain senior executives of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (equity-settled transactions). The Group does not have any cash-settled share-based payment transactions in the ﬁnancial year. The cost of equity-settled transactions is recognised, together with a corresponding increase in reserves in equity, over the period in which the performance and service conditions are fulﬁlled. The cumulative expense recognised for these 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 income statement expense or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period and is recognised in employee expenses. 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 service conditions are satisﬁed. When the terms of an equity-settled transaction are modiﬁed, the minimum expense recognised is the expense as if the terms had 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 transaction, or is otherwise beneﬁcial to the employee as measured at the date of modiﬁcation. When an equity-settled award is cancelled, it is treated as if it vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. This includes any award where non-vesting conditions within the control of either the Group or the employee are not met. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modiﬁcation of the original award, as described in the previous paragraph. Annual Report 2014 51 The dilutive effect of outstanding rights is reﬂected as additional share dilution in the computation of diluted earnings per share. z. Income Tax i. Current income tax Under the current tax legislation, ICF and its subsidiaries are not liable to pay Australian income tax provided that its taxable income (including any assessable capital gains) is fully distributed to securityholders each year. Tax allowances for building and ﬁxtures depreciation are distributed to securityholders in the form of the tax- deferred component of distributions. However, the Company, ICMT and their subsidiaries are subject to Australian income tax. Current tax assets and liabilities for the current period are measured at the amount expected to be recovered from, or paid to, the taxation authorities based on the current period’s taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date. The subsidiaries that hold the Group’s foreign properties may be subject to corporate income tax and withholding tax in the countries in which they operate. Under current Australian income tax legislation, securityholders may be entitled to receive a foreign tax credit for this withholding tax. ii. Deferred income tax Deferred income tax represents tax (including withholding tax) expected to be payable or recoverable by taxable entities on the differences between the tax bases of assets and liabilities and their carrying amounts for ﬁnancial reporting purposes. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised through continuing use or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at reporting date. Income taxes related to items recognised directly in equity are recognised in equity and not against income. iii. Tax Consolidation Each of the Company and ICMT and their respective subsidiaries have formed a tax consolidation group with the Company or ICMT being the head entity. The head entity and the controlled entities in the tax consolidation group continue to account for their own current and deferred tax amounts. Each tax consolidated group has applied a group allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to the members therein. In addition to its own current and deferred tax amounts, each tax consolidated group also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from entities in their respective tax consolidated group. Assets of 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. aa. Fair Value Measurement The Group measures ﬁnancial instruments, such as, derivatives, and non-ﬁnancial assets such as investment properties, at fair value at each balance sheet date. Also, fair values of ﬁnancial instruments measured at amortised cost are disclosed in Note 27. Fair value is the price that would be received to sell 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 to 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. 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 the reporting period. The Group’s Audit and Risk Committee determines the policies and procedures for both recurring fair value measurement, such as investment properties and resident loans and for non-recurring measurement. External valuers are involved for valuation of signiﬁcant assets, such as properties and signiﬁcant liabilities. Selection criteria include market knowledge, experience and qualiﬁcations, reputation, independence and whether professional standards are maintained. On a six monthly basis management presents valuation results to the Audit and Risk Committee and the Group’s auditors. This includes a discussion of the major assumptions used in the valuations. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. 52 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) bb. Goods and Services Tax (“GST”) Revenue, expenses and assets (with the exception of receivables) are recognised net of the amount of GST to the extent that the GST is recoverable from the taxation authority. Where GST is not recoverable, it is recognised as part of the cost of the acquisition, or as an expense. Receivables and payables are stated inclusive of GST. The net amount of GST recoverable from or payable to the tax authority is included in the balance sheet as an asset or liability. Cash ﬂows are included in the cash ﬂow statement on a gross basis. The GST components of cash ﬂows arising from investing and ﬁnancing activities, which are recoverable from or payable to the tax authorities, are classiﬁed as operating cash ﬂows. cc. Earnings per Share (“EPS”) Basic EPS is calculated as net proﬁt attributable to members of the Group, divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted EPS is calculated as net proﬁt attributable to the Group divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element. dd. Pending Accounting Standards AASB 9 Financial Instruments is applicable to reporting periods beginning on or after 1 January 2018. The Group has not early adopted this standard. This standard provides requirements for the classiﬁcation and measurement of ﬁnancial assets and accounting for ﬁnancial liabilities. These requirements seek to improve and simplify the requirements listed in AASB 139 Financial Instruments: Recognition and Measurement. The Group is currently evaluating the impact of this standard. AASB 2012-3 Amendments to Australian Accounting Standards-Offsetting Financial Assets and Liabilities is applicable for annual ﬁnancial periods beginning on or after 1 January 2014. The standard makes amendments to AASB 132 Financial Instruments-Presentation as a result of the issuance of International Financial Reporting Standard Offsetting Financial Assets and Financial Liabilities and provides application guidance to certain criteria mentioned in AASB 132. The application of the Standard does not have any impact on the results of the Group as retirement village resident loans are already offset as there is a current legally enforceable right and there is an intention to settle on a net basis. AASB 2014-1 Amendments to Australian Accounting Standards is applicable for periods beginning on or after 1 July 2014. This standard clariﬁes that judgement is needed to determine whether an acquisition of investment property is solely the acquisition of an investment property or whether it is an acquisition of a group of assets or a business combination within the scope of AASB 3 Business Combinations that includes an investment property. The Group currently makes an assessment about this classiﬁcation for each investment property acquired, therefore no impact is expected from this change except for additional disclosures regarding judgements and estimates. Other new accounting standards, amendments to accounting standards and interpretations have been published that are not mandatory for the current reporting period. These are not expected to have any material impact on the Group’s ﬁnancial reporting future reporting periods. ee. Current versus Non-Current Classiﬁcation The Group presents assets and liabilities in the balance sheet based on current/non-current classiﬁcation. An asset is current when it is: – Expected to be realised or intended to be sold or consumed in the normal operating cycle – Held primarily for the purpose of trading – Expected to be realised within twelve months after the reporting period, or – Cash or cash equivalents unless restricted from being exchanged or used to settle a liability for at least twelve months after reporting period. All other assets are classiﬁed as non-current. A liability is current when: – – – It is expected to be settled in the normal operating cycle It is held primarily for the purpose of trading It is due to be settled within twelve months after the reporting period, or – There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period. The Group classiﬁes all other liabilities as non-current. Deferred tax assets and liabilities are classiﬁed as non- current assets and liabilities. Annual Report 2014 53 2. ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of ﬁnancial statements requires the use of certain critical accounting estimates. It also requires the Group to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are signiﬁcant to the ﬁnancial statements are disclosed below. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. a. Critical Accounting Estimates and Assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates, by deﬁnition, will seldom equal the related actual results. The estimates and assumptions that have a signiﬁcant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁnancial year are discussed below. i. Valuation of investment property The Group has investment properties with a carrying amount of $498,863,000 (2013: $370,931,000) (refer Note 12), and retirement village residents’ loans with a carrying amount of $190,122,000 (2013: $175,703,000) (refer Note 16), which together represent the estimated fair value of the Group’s interest in seniors living properties. In addition, the Group holds investment properties with carrying amounts of $45,902,000 (2013: $35,343,000) which are included in assets of discontinued operations (refer Note 8(b)). These carrying amounts reﬂect certain assumptions about expected future rentals, rent-free periods, operating costs and appropriate discount and capitalisation rates. The valuation assumptions for deferred management fee villages reﬂect assumptions relating to average length of stay, unit market values, estimates of capital expenditure, contract terms with residents, discount rates and projected property growth rates. In forming these assumptions, the Responsible Entity considered information about current and recent sales activity, current market rents, and discount and capitalisation rates, for properties similar to those owned by the Group, as well as independent valuations of the Group’s property. ii. Valuation of inventories The Group has inventory in the form of manufactured homes, which it carries at the lower of cost or net realisable value. Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made, of the amount the inventories are expected to realise and the estimate of costs to complete. Key assumptions require the use of management judgement, which are continually reviewed. iii. Fair value of derivatives The fair value of derivative assets and liabilities is based on assumptions of future events and involves signiﬁcant estimates. Given the complex nature of these instruments and various assumptions that are used in calculating mark-to-market values, the Group relies on counterparty valuations for derivative values. The counterparty valuations are usually based on mid-market rates and calculated using the main variables including the forward market curve, time and volatility. iv. Valuation of share-based payments Valuation of share-based payment transactions is performed using judgements around the fair value of equity instruments on the date at which they are granted. The fair value is determined using a Monte Carlo based simulation method. Refer to Note 25 for assumptions used in determining the fair value. v. Valuation of assets acquired in business combinations Upon recognising the acquisition, management uses estimations and assumptions of the fair value of assets and liabilities assumed at the date of acquisition, including judgements related to valuation of investment property as discussed above. vi. Valuation of retirement village resident loans The fair value of the retirement village resident loans is calculated by reference to the initial loan amount plus the resident’s share of any capital gains in accordance with their contracts less any deferred management fee income accrued to date by the Group as operator. The key assumption for calculating the capital gain and deferred management fee income components is the value of the dwelling being occupied by the resident. This value is determined by reference to the valuation of investment property as referred to above. vii. Calculation of deferred management fee (“DMF”) Deferred management fees are recognised by the Group over the estimated period of time the property will be leased by the resident and the accrued DMF is realised upon exit of the resident. The accrued DMF is based on various inputs including the initial price of the property, estimated length of stay of the resident, various contract terms and projected price of property at time of re-leasing. b. Critical Judgements in Applying the Entity’s Accounting Policies There were no judgements, apart from those involving estimations, that management has made in the process of applying the entity’s accounting policies that had a signiﬁcant effect on the amounts recognised in the ﬁnancial report. 54 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 3. SEGMENT INFORMATION a. Description of Segments The Group invests in seniors living properties located in Australia with three reportable segments: – Garden Villages – rental villages; – Settlers Lifestyle – deferred management fee villages; and – Active Lifestyle Estates – comprising permanent and short stay rentals within lifestyle parks and the sale of manufactured homes. The Group has identiﬁed its operating segments based on the internal reports that are reviewed and used by the chief operating decision maker in assessing performance and in determining the allocation of resources. Other parts of the Group are neither an operating segment nor part of an operating segment. Assets that do not belong to an operating segment are described below as “unallocated”. b. 30 June 2014 i.°Segment revenue External segment revenue Interest income Reclassification of gain on revaluation of newly constructed villages Total revenue ii.°Segment underlying profit External segment revenue Interest income Property expenses Employee expenses Administration expenses Operational, marketing and selling expenses Manufactured home cost of sales Finance expense Income tax benefit Underlying profit/(loss) – continuing operations Reconciliation of underlying profit to profit from continuing operations: Active Lifestyle Estates $’000 Settlers $’000 Garden Villages $’000 Corporate/ Unallocated $’000 13,589 10,575 24,571 – – 13,589 – (3,320) 7,255 – – 24,571 13,589 10,575 24,571 – (2,640) (4,096) (384) (421) (2,130) – – – (1,900) (2,173) (226) (1,801) – – – – (6,798) (6,365) (996) (512) – – – – 369 – 369 – 369 (275) (2,707) (2,765) (402) – (4,446) 2,896 Total $’000 48,735 369 (3,320) 45,784 48,735 369 (11,613) (15,341) (4,371) (3,136) (2,130) (4,446) 2,896 3,918 4,475 9,900 (7,330) 10,963 Net foreign exchange loss – – – (147) (147) Net gain/(loss) on change in fair value of: ¶Investment properties ¶Derivatives ¶Retirement village resident loans Gain on revaluation of newly constructed villages Income tax benefit associated with reconciliation items Profit from continuing operations per the Consolidated Statement of Comprehensive Income iii.°Segment assets Segment assets Assets held for sale Discontinued operations Total assets (2,124) – – – – (599) – (616) (3,320) – 2,382 – – – – – 41 – – (341) 41 (616) (3,320) 4,368 4,368 1,794 (60) 12,282 (3,068) 10,948 130,243 262,498 115,293 13,794 521,828 5,439 47,657 574,924 Annual Report 2014 55 Active Lifestyle Estates $’000 Settlers $’000 Garden Villages $’000 Corporate/ Unallocated $’000 879 11,443 20,327 – – 879 879 – (37) (59) (51) (80) (297) – – – (4,619) 6,824 – – 20,327 11,443 20,327 – (2,390) (2,045) (218) (1,125) – – – – (5,312) (5,349) (991) (984) – – – Total $’000 32,649 563 (4,619) 28,593 32,649 563 (7,650) – 563 – 563 – 563 89 (2,786) (10,239) (1,912) (169) – (6,112) (43) (3,172) (2,358) (297) (6,112) (43) c. 30 June 2013 i.°Segment revenue External segment revenue Interest income Reclassification of gain on revaluation of newly constructed villages Total revenue ii.°Segment underlying profit External segment revenue Interest income Property expenses Employee expenses Administration expenses Operational, marketing and selling expenses Manufactured home cost of sales Finance expense Income tax expense Underlying profit/(loss) – continuing operations 355 5,665 7,691 (10,370) 3,341 Reconciliation of underlying profit to profit from continuing operations: Net foreign exchange gain Net loss on disposal of investment property Net gain/(loss) on change in fair value of: ¶Investment properties ¶Derivatives ¶Retirement village resident loans Gain on revaluation of newly constructed villages Amortisation of intangibles Other Income tax benefit associated with reconciliation items Profit from continuing operations per the Consolidated Statement of Comprehensive Income iii.°Segment assets Segment assets Discontinued operations Total assets – – – – – (107) (15) (1,512) 4,984 – – – – – – – 327 (4,619) – – – – – – – – – 37 – – 752 – – (585) (185) 37 (107) 3,457 752 327 (4,619) (585) (185) 410 410 340 (139) 12,568 (9,941) 2,828 18,559 255,006 101,108 48,325 422,998 36,576 459,574 56 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 4. EARNINGS PER SECURITY(1) a. Per Security Profit/(loss) attributable to securityholders ($’000) Profit from continuing operations ($’000) Profit/(loss) from discontinued operations ($’000) Weighted average number of securities outstanding (thousands): ¶Issued securities ¶Dilutive securities ¶¶Performance quantum rights ¶¶Retention quantum rights Note 2014 2013 11,518 10,948 570 (10,290) 2,828 (13,118) 646,603 509,716 25 2,310 1,818 3,842 1,818 Weighted average number of issued and dilutive potential securities outstanding (thousands) 650,731 515,376 Basic earnings per security from continuing operations (cents) Basic earnings per security from discontinued operations (cents) Basic earnings per security (cents) Dilutive earnings per security from continuing operations (cents) Dilutive earnings per security from discontinued operations (cents) Dilutive earnings per security (cents) b. Per Security Attributable to Parent Loss attributable to securityholders ($’000) Weighted average number of securities outstanding (thousands): Issued securities Dilutive securities Performance quantum rights Retention quantum rights Weighted average number of issued and dilutive potential securities outstanding (thousands) Basic earnings per security (cents) Dilutive earnings per security (cents) 1.7 0.1 1.8 1.7 0.1 1.8 0.6 (2.6) (2.0) 0.5 (2.5) (2.0) (2,734) (1,245) 646,603 509,716 25 2,310 1,818 3,842 1,818 650,731 515,376 (0.4) (0.4) (0.2) (0.2) (1) Prior year weighted average number of securities and EPS have been adjusted in accordance with AASB 133 “Earnings per Share (“AASB 133”). The weighted average number of securities on issue for the current year, prior to the rights issue in September 2013, has also been adjusted as required by AASB 133. 5. REVENUE a. Rental Income Residential rental income – Garden Villages Residential rental income – Settlers Lifestyle Residential rental income – Active Lifestyle Estates Short-term rental income – Active Lifestyle Estates Total rental income b. Other Property Income Government incentives Commissions and administrative fees Linen fees Land transfer duty refund Sundry income Utility recoveries Total other property income 6. FINANCE EXPENSE Interest paid or payable Finance lease interest paid or payable (1) Total finance expense Annual Report 2014 57 2014 $’000 2013 $’000 21,032 1,025 4,231 5,355 17,432 1,362 437 56 31,643 19,287 219 239 170 622 263 306 1,819 2014 $’000 4,189 257 4,446 127 426 138 – 181 – 872 2013 $’000 6,076 36 6,112 (1) Finance lease interest relates to a long term lease with Gosford City Council for the land and facilities of Ettalong Holiday Village and long term Crown leases in relation to One Mile Beach Holiday Park. Refer to Note 15(b). 7. INCOME TAX BENEFIT a. Income Tax Beneﬁt Current tax Decrease in deferred tax liabilities Income tax benefit b. Reconciliation between Tax Expense and Pre-Tax Proﬁt Profit before income tax Less amounts not subject to Australian income tax Income tax at the Australian tax rate of 30% (2013: 30%) ICMT tax consolidation impact Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: ¶Prior period income tax return true-ups ¶Movements in carrying value and tax cost base of investment properties ¶Movements in carrying value and tax cost base of DMF receivables ¶Other timing differences ¶Non-recognition of Australian tax losses Income tax benefit 2014 $’000 2013 $’000 84 7,180 7,264 3,684 (14,741) (11,057) 3,317 2,823 613 1,163 (1,232) 580 – 7,264 (84) 451 367 2,461 (7,365) (4,904) 1,471 – (52) (80) (907) 289 (354) 367 58 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 7. INCOME TAX BENEFIT (CONTINUED) c. Tax Consolidation Effective from 1 July 2011, ICH and its Australian domiciled wholly owned subsidiaries formed a tax consolidation group with ICH being the head entity. Under the tax funding agreement the funding of tax within the tax group is based on taxable income as if that entity was not a member of the tax group. Effective from 1 July 2012, ICMT and its Australian domiciled owned subsidiaries formed a tax consolidation group with ICMT being the head entity. Under the tax funding agreement the funding of tax within the tax group is based on taxable income as if that entity was not a member of the tax group. Upon entering into the ICMT tax consolidated group, the tax cost bases for certain assets were reset resulting in income tax beneﬁts being recorded. In addition, unrecognised losses incurred by entities within the ICMT tax consolidated group are now available for utilisation by the ICMT tax consolidated group resulting in an additional income tax beneﬁt being recorded. 8. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE a. Assets Held for Sale i. Details of assets held for sale Prior to 30 June 2014, the Group entered into discussions with a third party regarding the sale of Noyea Riverside Village (“Noyea”). Noyea was included within the Settlers Lifestyle segment. Settlement on the sale of Settlers Lifestyle Noyea was completed on 31 July 2014 at an adjusted sales price of $5.4 million resulting in $nil gain or loss recognised upon completion. ii. Assets held for sale The following is the breakdown of the assets held for sale at Noyea: Investment property Deferred management fee receivable b. Discontinued Operations Note 12(b) 16(b) 2014 $’000 – 5,439 5,439 i. Details of discontinued operations The Group’s investment in the New Zealand Students business has been classiﬁed as a discontinued operation since 30 June 2011, which is consistent with the previously announced strategy to focus on transitioning to an actively managed Australian seniors living business. The Group holds a 100% interest in three facilities in Wellington, New Zealand that are primarily leased for 15 years to Victoria University of Wellington and Wellington Institute of Technology. The Group has completed a sales campaign and terms have been agreed with a global real estate investment ﬁrm. Following divestment of these operations the proceeds will be reinvested into its Australian lifestyle parks business. The comparative ﬁgures include results from certain properties held is the United States, which had been classiﬁed as discontinued operations since November 2009. The Group completely exited US operations in February 2013 with some funds remaining in escrow. During the current year, the Group received US$6.8 million of escrows and based on an assessment of remaining amounts due an additional gain of $0.3 million has been booked. Annual Report 2014 59 ii. Financial performance The ﬁnancial performance of components of the Group disposed of or classiﬁed as discontinued operations was: Revenue Net loss on change in fair value of Investment properties Unrealised net foreign exchange gain/(loss) Other income Expenses Distributions from formerly equity accounted investments Disposal costs associated with overseas investments Profit/(loss) from operating activities before income tax Income tax expense Profit/(loss) from operating activities Gain on sale of discontinued operations Release of foreign currency translation reserve on disposal of foreign operations Profit/(loss) from discontinued operations for the year 2014 $’000 3,210 (1,630) 1,557 – (2,864) 274 (290) 257 (14) 243 327 – 570 2013 $’000 5,295 (2,783) (718) 31 (4,746) 2,350 (672) (1,243) (1,002) (2,245) 6,590 (17,463) (13,118) Proﬁt/(loss) from discontinued operations attributable to the Company for periods ending 30 June 2014 and 30 June 2013 is $nil. iii. Cash ﬂows The cash ﬂows of components of the Group disposed of or classiﬁed as discontinued operations were: Net cash flow from operating activities Net cash flows from investing activities: ¶(Payments)/proceeds on sale of discontinued operations ¶Additions to investment properties ¶Payments for lease arrangements Net cash flow from financing activities Transfer to continuing operations Net cash flows from discontinued operations 2014 $’000 1,135 2013 $’000 1,156 (120) 64,349 (9,081) (13,665) (745) 11,449 – 2,638 – (26,285) (29,786) (4,231) 60 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 8. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE (CONTINUED) iv. Assets and liabilities The assets and liabilities of components of the Group classiﬁed as disposal groups at each reporting date were: Assets Cash and cash equivalents Trade and other receivables Investment properties Total assets Liabilities Bank overdraft Payables Borrowings Total liabilities Net assets of disposal groups Note 9 2014 $’000 2013 $’000 1,657 98 45,902 47,657 – 368 30,081 30,449 17,208 974 259 35,343 36,576 1,955 2,051 17,522 21,528 15,048 The change in investment properties increased for the year due to capitalised expenditure of $7.8 million, lease incentive payments of $0.4 million and foreign exchange gain of $4.0 million offset by a fair value loss of $1.6 million. v. Capital commitments There were no capital commitments under construction contracts for the New Zealand Students business for the year ended 30 June 2014 (2013: A$9,208,234). vi. Capitalisation rate The weighted average capitalisation rate of the New Zealand Students internal valuation within discontinued operations is 8.6% (2013: 7.75%). 9. CASH AND CASH EQUIVALENTS Cash at bank and in hand Reconciliation to statements of cash flows Cash and cash equivalents attributable to: Continuing operations – cash at bank Discontinued operations – cash at bank Discontinued operations – bank overdraft Cash at the end of the year as per cash flow statement 2014 $’000 12,894 2013 $’000 38,531 12,894 1,657 – 14,551 38,531 974 (1,955) 37,550 10. TRADE AND OTHER RECEIVABLES Current Other receivables Prepayments and deposits Total current trade and other receivables Non-current Accrued income, prepayments and deposits Annual Report 2014 61 2014 $’000 2013 $’000 291 3,454 3,745 278 8,511 8,789 2,168 2,671 Rental amounts due are typically paid in advance and other amounts due are receivable within 30 days. There are no receivables which are neither past due nor impaired. 11. INVENTORIES Current assets Manufactured homes 12. INVESTMENT PROPERTIES a. Summary of Carrying Amounts Completed properties Land not yet under construction 2014 $’000 2013 $’000 2,208 285 2014 $’000 495,048 3,815 2013 $’000 367,116 3,815 498,863 370,931 62 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 12. INVESTMENT PROPERTIES (CONTINUED) b. Individual Valuations and Carrying Amounts Cost to date $’000 Latest external valuation date Date of purchase Valuation $’000 2014 $’000 2013 $’000 2014 % 2013 % CARRYING AMOUNT CAPITALISATION RATE Property Location Completed properties Garden Villages Yakamia Gardens Yakamia, WA Jun 04 5,459 Dec 12 2,900 2,730 2,500 10.0% 7.5% Mardross Gardens Albury, NSW Jun 04 5,610 Jun 14 2,400 2,400 2,320 10.0% 5.5%(2) Seville Grove Gardens Seville Grove, WA Jun 04 4,559 Dec 12 3,400 3,390 3,240 10.5% 9.8% Hertford Gardens Sebastopol, VIC Jun 04 4,119 Jun 14 3,770 3,770 3,780 10.8% 10.5% Carey Park Gardens Bunbury, WA Jun 04 4,944 Dec 12 2,600 3,520 2,840 11.0% 10.0% Jefferis Gardens Bundaberg North, QLD Jun 04 4,992 Dec 13 2,600 3,480 2,720 11.0% 10.0% Claremont Gardens Claremont, TAS Jun 04 4,293 Dec 13 3,320 3,230 2,900 10.5% 9.5% Taloumbi Gardens Coffs Harbour, NSW Jun 04 5,072 Dec 12 4,200 4,170 4,020 10.5% 10.3% Devonport Gardens Devonport, TAS Jun 04 4,028 Dec 12 2,500 2,100 2,120 9.0% 5.3%(2) Wheelers Gardens Dubbo, NSW Jun 04 4,362 Dec 13 3,800 4,300 3,950 10.0% 10.5% Elphinwood Gardens Launceston, TAS Jun 04 4,464 Dec 12 2,750 2,910 2,740 10.5% 10.0% Glenorchy Gardens Glenorchy, TAS Jun 05 4,164 Dec 13 3,250 3,370 3,010 10.5% 10.0% Chatsbury Gardens Goulburn, NSW Jun 04 4,828 Dec 13 2,940 3,430 3,340 10.5% 10.0% Grovedale Gardens Grovedale, VIC Jun 05 4,960 Dec 12 3,600 4,010 4,090 10.5% 10.5% Horsham Gardens Horsham, VIC Jun 04 4,467 Jun 14 3,300 3,300 3,170 10.8% 10.0% Sea Scape Gardens Erskine, WA Jun 04 4,577 Dec 12 4,200 4,170 4,180 11.0% 10.3% Marsden Gardens Marsden, QLD Jun 05 10,375 Dec 12 8,150 8,380 7,900 12.5% 10.5% Coburns Gardens Brookfield, VIC Jun 04 4,355 Dec 12 3,000 3,290 3,260 10.5% Brooklyn Gardens Brookfield, VIC Jun 04 4,186 Dec 12 2,400 3,270 2,790 10.5% 9.5% 9.5% Oxley Gardens Port Macquarie, NSW Jun 04 4,416 Dec 12 2,600 3,120 2,320 10.5% 10.0% Townsend Gardens St Albans Park, VIC Jun 04 4,811 Jun 14 3,800 3,800 3,390 St Albans Park Gardens St Albans Park, VIC Jun 04 5,099 Jun 14 4,140 4,140 4,030 11.0% 11.0% 9.8% 10.5% Swan View Gardens Swan View, WA Jan 06 7,888 Dec 12 5,650 5,990 5,780 11.5% 10.3% Taree Gardens Taree, NSW Dec 04 4,635 Dec 12 2,400 2,320 2,950 9.0% 10.0% Dubbo Gardens Dubbo, NSW Dec 12 2,700 Dec 13 3,290 2,670 2,652 10.3% 5.3%(2) Ocean Grove Gardens Mandurah, WA Feb 13 3,161 Dec 13 3,280 3,100 3,015 10.8% 11.0% Peel River Gardens Tamworth, NSW Mar 13 3,642 Dec 13 2,970 2,040 3,464 9.0% 7.3%(2) Sovereign Gardens Ballarat, VIC Jun 13 3,321 Jun 14 3,100 3,100 3,265 10.5% 5.3%(2) Wagga Gardens Wagga Wagga, NSW Jun 13 4,010 Jun 14 3,930 3,930 3,953 12.0% 11.8% Bathurst Gardens Bathurst, NSW Jan 14 2,405 Jun 14 2,580 2,580 Launceston Gardens Launceston, TAS Jan 14 2,462 Jun 14 Shepparton Gardens Shepparton, VIC Jan 14 1,668 Jun 14 Murray River Gardens Mildura, VIC Jan 14 2,316 Jun 14 2,510 1,780 2,170 2,510 1,780 2,170 Warrnambool Gardens Warrnambool, VIC Jan 14 1,933 Jun 14 1,800 1,800 – – – – – 9.0% 9.0% 8.0% 7.5% 8.0% – – – – – 148,281 114,270 99,689 Annual Report 2014 63 Property Location Settlers Lifestyle Cost to date $’000 Latest external valuation date Date of purchase Valuation $’000 2014 $’000 2013 $’000 2014 % 2013 % CARRYING AMOUNT DISCOUNT RATE Forest Lake Forest Lake, QLD Nov 05 14,324 Jun 13 12,662 14,194 12,663 16.7% 15.0% South Gladstone South Gladstone, QLD Nov 05 8,212 Jun 13 12,093 12,534 12,093 15.0% 15.0% Rockhampton Rockhampton, QLD Nov 05 10,785 Dec 13 13,900 14,314 13,768 17.9% 14.7% Cessnock Lakeside Cessnock, NSW Jun 04 7,476 Dec 12 3,190 6,009 4,871 19.0% 16.1% Ravenswood, WA Apr 07 71,167 Dec 12 77,584 77,242 78,673 14.2% 13.5% Noyea Riverside Mt Warren Park, QLD Apr 07 2,521 Dec 12 549 –(3) 324 13.8% 14.5% Meadow Springs Mandurah, WA Apr 07 18,430 Jun 13 17,066 16,510 17,066 14.0% 14.5% Ridgewood Ridgewood, WA Apr 07 85,378 Jun 13 105,104 103,552 105,104 14.3% 13.5% Ridge Estate Gillieston Heights, NSW Jul 12 10,174 – – 11,765 5,471 20.0% 15.0% 228,467 256,120 250,033 Active Lifestyle Estates CAPITALISATION RATE The Grange Morisset, NSW Mar 13 12,895 Dec 13 12,129 11,848 12,293 9.1% Ettalong Beach Holiday Village(1) Ettalong Beach, NSW Apr 13 5,581 Dec 13 5,850 5,811 5,101 21.0% Albury Citygate Caravan and Tourist Park Nepean River Holiday Village Mudgee Valley Tourist Park Mudgee Tourist and Van Resort Albury, NSW Aug 13 2,697 Jun 14 2,000 2,000 Penrith, NSW Aug 13 10,932 Jun 14 11,000 11,000 Mudgee, NSW Sep 13 4,519 Jun 14 4,250 4,250 Mudgee, NSW Oct 13 7,911 Jun 14 7,200 7,200 Drifters Holiday Village Kingscliff, NSW Nov 13 11,511 Lake Macquarie Holiday Village Morisset, NSW Nov 13 7,683 Macquarie Lakeside Holiday Village Chain Valley Bay, NSW Dec 13 4,045 One Mile Beach Holiday Park(4) Anna Bay, NSW Dec 13 11,975 Cessnock, NSW Feb 14 9,782 Cessnock, NSW Feb 14 1,665 Mulwala, NSW Apr 14 7,708 Marsden Park, NSW May 14 19,444 Rouse Hill, NSW Jun 14 7,362 Big4 Valley Vineyard Tourist Park Wine Country Caravan Park Sun Country Holiday Village Town and Country Estate Rouse Hill Lifestyle Residential Park Total completed properties – – – – – – – – – – – – – – – – – – 11,511 7,683 4,045 13,349 9,782 1,665 7,708 19,444 7,362 125,710 502,458 124,658 17,394 495,048 367,116 – – – – – – – – – – – – – 10.5% 10.4% 10.5% 8.8% –(5) –(5) –(5) –(5) –(5) –(5) –(5) –(5) –(5) –(5) –(5) – – – – – – – – – – – – – 64 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 12. INVESTMENT PROPERTIES (CONTINUED) Property Location Land not yet under construction Settlers CARRYING AMOUNT Cost to date $’000 Latest external valuation date Date of purchase Valuation $’000 2014 $’000 2013 $’000 South Gladstone Gardens – land South Gladstone, QLD Nov 05 199 Jun 13 750 750 750 Meadow Springs Active Lifestyle Estates Mandurah, WA Apr 07 2,470 Jun 13 2,455 2,455 2,455 The Grange Morisset, NSW Ettalong Beach Holiday Village (1) Ettalong Beach, NSW Land not yet under construction Total Investment Properties Mar 13 Apr 13 300 310 3,279 – – – – 300 310 300 310 3,815 3,815 505,737 498,863 370,931 (1) Ettalong Beach Holiday Village land component is leased from the Gosford City Council and is recognised as investment property with an associated ﬁnance lease. (2) The replacement value exceeds the value implied by the capitalisation rate valuation approach resulting in implied capitalisation rates below market. (3) Noyea Park was classiﬁed as held for sale at 30 June 2014. Refer to Note 8(a) for additional information. (4) One Mile Beach land component is leased from the Crown under 40 year and perpetual leases and is recognised as investment property with an associated ﬁnance lease. (5) Acquired during the year and carried at cost at balance date. Cost to date is deemed to represent fair value at the end of the year. Investment property that has not been valued by external valuers at reporting date is carried at the Responsible Entity’s estimate of fair value in accordance with the accounting policy detailed at Note 1(q). Properties acquired during the year are held at cost, which is reﬂective of the estimate of fair value. Valuations made in a foreign currency have been converted at the rate of exchange ruling at valuation date which are subsequently translated at exchange rates prevailing at reporting date. Valuations of retirement villages are provided net of residents’ loans (after deducting any accrued deferred management fees). For presentation in this note, the external valuations shown are stated before deducting this liability to reﬂect its separate balance sheet presentation. The carrying amounts include the fair value of units completed since the date of the external valuation. Select Settlers Lifestyle villages continue to be in the process of converting from a rental to a deferred management fee model. The discount rate reﬂects a combination of development risk on vacant units and DMF from both occupied and vacant units. Over time, these properties’ discount rates will likely revert downwards as project risk diminishes. c. Movements in Carrying Amounts Carrying amount at beginning of year Acquisitions Expenditure capitalised Disposals Sale of units – Strata title Transferred from plant and equipment Transfer to inventory Transferred to discontinued operations Net gain/(loss) on change in fair value Carrying amount at end of year 2014 $’000 370,931 118,303 10,336 – (492) 320 (194) – (341) 2013 $’000 327,632 39,313 4,076 (3,140) – – (195) (212) 3,457 498,863 370,931 The net change in fair value are recognised in proﬁt or loss as net gain/(loss) on change in fair value of investment properties. Fair value hierarchy disclosures for investment properties have been provided in Note 28. Annual Report 2014 65 Garden Villages $’000 Settlers Lifestyle $’000 Active Lifestyle Estates $’000 99,689 253,238 18,004 – 107,686 10,617 1,588 – – – 7,182 (492) – – 1,566 – 320 (194) (2,114) Total $’000 370,931 118,303 10,336 (492) 320 (194) (341) d. Reconciliation of Fair Value Carrying amount at 1 July 2013 Acquisitions Expenditure capitalised Sale of units – Strata title Transferred from plant and equipment Transferred to inventory Net gain/(loss) on change in fair value 2,376 (603) Carrying amount at 30 June 2014 114,270 259,325 125,268 498,863 e. Description of Valuations Techniques used and Key Inputs to Valuation on Investment Properties Valuation technique Significant unobservable inputs Range (weighted average) Relationship of unobservable input to fair value Garden Villages Capitalisation method Stabilised occupancy 62-98% (87%) As costs are fixed in nature, occupancy has a direct correlation to valuation (i.e. the higher the occupancy, the greater the value). Capitalisation rate 8-13% (11%) Capitalisation has an inverse relationship to valuation. Settlers Lifestyle Discounted cash flow Current market value per unit $115,000-$470,000 ($307,000) Market value and growth in value have a direct correlation to valuation, while length of stay and discount rate have an inverse relationship to valuation. Growth in value 0-4% Average length of stay – future residents Average length of stay – current residents 11.4 years 14.6 years Discount rate 14-20% (15%) Active Lifestyle Estates Capitalisation method (for existing rental streams) Short-term occupancy Residential occupancy Operating profit margin 15-70% based on seasonality and accommodation categories 90-100% 50-70% dependent upon short-term and residential accommodation mix Higher the occupancy, the greater the value. Higher the profit margin, the greater the value. Capitalisation rate 9-12% Capitalisation has an inverse relationship to valuation. Discount rate 15-25% Discount rate has an inverse relationship to valuation. Discounted cash flow (for future development) 66 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 12. INVESTMENT PROPERTIES (CONTINUED) Capitalisation Method Under the capitalisation method, fair value is estimated using assumptions regarding the expectation of future beneﬁts. The capitalisation method involves estimating the expected income projections of the property into perpetuity and applying a capitalisation rate. The capitalisation rate is based on current market evidence. Future income projections take into account occupancy, rental income and operating expenses. Discounted Cash Flow Method Under the discounted cash ﬂow method, fair value is estimated using assumptions regarding the beneﬁts and liabilities of ownership over the asset’s life including an exit or terminal value. This method involves the projection of a series of cash ﬂows on a real property interest. To this projected cash ﬂow series, a market-derived discount rate is applied to establish the present value of the income stream associated with the asset. The exit yield normally reﬂects the exit value expected to be achieved upon selling the asset and is a function of the risk adjusted returns of the asset and expected capitalisation growth rate. The duration of the cash ﬂows and the speciﬁc timing of inﬂows and outﬂows are determined by events such as rent reviews, lease renewal and related re-letting, redevelopment, or refurbishment as well as the development of new units. The appropriate duration is typically driven by market behaviour that is a characteristic of the class of real property. Periodic cash ﬂow is typically estimated as gross income less vacancy, non-recoverable expenses, collection losses, lease incentives, maintenance cost, agent and commission costs and other operating and management expenses. The series of periodic net underlying cash ﬂows, along with an estimate of the terminal value anticipated at the end of the projection period, is then discounted. 13. PLANT AND EQUIPMENT a. Summary of Carrying Amounts Plant and equipment Less: accumulated depreciation Total plant and equipment b. Movements in Carrying Amount Carrying amount at beginning of year Acquired through acquisitions Assets written off Transferred to investment property Additions Depreciation Carrying amount at end of year 14. TRADE AND OTHER PAYABLES Current liabilities Trade and other payables Deposits and other unearned income Total current liabilities Non-current liabilities Deferred land payment 2014 $’000 2013 $’000 1,880 (890) 990 1,034 – (82) (320) 569 (211) 990 1,774 (740) 1,034 769 320 – (173) 296 (178) 1,034 2014 $’000 2013 $’000 8,814 1,595 10,409 8,175 384 8,559 4,000 – 15. BORROWINGS Current liabilities Finance leases Non-current liabilities Bank debt Prepaid borrowing costs Finance leases Total non-current borrowings Annual Report 2014 67 Note 2014 $’000 2013 $’000 (c) (a) (c) 283 267 94,000 68,000 (312) 4,385 98,073 (578) 3,117 70,539 a. Bank Debt On 21 February 2014, the Group reﬁnanced its Australian dollar denominated bank debt facility to $129,500,000. The facility expires on 30 September 2015 and has the following principal ﬁnancial covenants: Loan to value ratio (“LVR”) is less than or equal to 50%; – – Total leverage ratio does not exceed 50%; and – Interest cover ratio (as deﬁned) of at least 1.50x in ﬁnancial year ending 2014 increasing to at least 1.75x in FY2015. As at 30 June 2014, the facility has been drawn to $94,000,000 (2013: $68,000,000). The carrying value of investment property net of resident liabilities at reporting date for the Group’s Australian properties pledged as security is $290,375,000 (2013: $179,320,000). b. Bank Guarantees The Group has the ability to utilise a portion of its $129.5 million bank facility to provide bank guarantees. Bank guarantees at 30 June 2014 were $4.4 million. Refer to Note 24. c. Finance Leases On 23 April 2013, the Group was assigned a commercial lease with 16.5 years remaining with the Gosford City Council for land and facilities as part of its Ettalong Beach Holiday Village acquisition. The lease is for an initial three years commencing September 2012 with two renewal options of seven years each. The below table is based on the expectation that the lease options will be exercised. In December 2013, the Group acquired One Mile Beach Holiday Park, accounted for as investment property. Two Crown leases are attached to the land, one for 40 years expiring on 19 September 2031 and one for perpetuity. i. Minimum lease payments – excluding perpetual lease Minimum lease payments: Within one year Later than one year but not later than five years Later than five years Total minimum lease payments Future finance charges Present value of minimum lease payments Present value of minimum lease payments: Within one year Later than one year but not later than five years Later than five years 2014 $’000 2013 $’000 292 1,242 3,761 5,295 (1,765) 3,530 283 1,056 2,191 3,530 267 1,135 3,766 5,168 (1,784) 3,384 258 962 2,164 3,384 68 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 15. BORROWINGS (CONTINUED) ii. Minimum lease payments – perpetual lease The perpetual lease is recognised as investment property and non-current liability at a value of $1.1 million based on a capitalisation rate of 10.6% applied to the current lease payment. Payments each period in relation to the lease are recognised as ﬁnance expenses in the statement of comprehensive income, therefore, there is no subsequent change to the originally determined present value of the minimum lease payments as calculated above. As this is a perpetual lease, the lease liability will not amortise and no fair value adjustments in relation to the lease will be recognised unless circumstances of the lease change. Under the terms of the lease, lease payments will continue into perpetuity. The current annual lease payment is $121,000. 16. RETIREMENT VILLAGE RESIDENT LOANS a. Summary of Carrying Amounts Gross resident loans Accrued deferred management fee Net resident loans b. Movements in Carrying Amounts Carrying amount at beginning of year Net (gain)/loss on change in fair value of resident loans Accrued deferred management fee income Deferred management fee cash collected Acquired resident loans Proceeds from resident loans Repayment of resident loans Transfer to assets held for sale Other Carrying amount at end of year Fair value hierarchy disclosures for retirement village resident loans have been provided in Note 28. 2014 $’000 2013 $’000 218,639 206,629 (28,517) (30,926) 190,122 175,703 175,703 162,603 616 (5,333) 1,811 – 22,021 (10,361) 5,439 226 (327) (4,850) 1,368 4,473 19,338 (7,118) – 216 190,122 175,703 2014 $’000 2013 $’000 718 249 507 140 Note 2014 $’000 2013 $’000 27 27 84 84 – 209 17. PROVISIONS Current liabilities Employee liabilities Non-current liabilities Employee liabilities 18. DERIVATIVES Current liabilities Interest rate swap contracts Non-current liabilities Interest rate swap contracts 19. DEFERRED TAX LIABILITIES Deferred tax assets Tax losses Other Deferred tax liabilities DMF receivable Investment properties Net deferred tax liabilities Annual Report 2014 69 2014 $’000 2013 $’000 14,228 1,081 8,176 7,409 276 8,317 430 6,756 9,461 7,470 Deductible temporary differences and carried forward losses tax effected for which no deferred tax asset has been recognised 7,488 4,220 The availability of carried forward tax losses of $7.5 million to the ICMT tax consolidated group is subject to recoupment rules at the time of recoupment. Further, the rate at which these losses can be utilised is determined by reference to market values at the time of tax consolidation and subsequent events. Accordingly, a portion of these carried forward tax losses may not be available in the future. The Group offsets tax assets and liabilities, if and only if, it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority. 20. ISSUED SECURITIES a. Carrying Values At beginning of year Issued during the year: ¶Institutional placement securities ¶Transaction costs of institutional placement securities ¶Rights issue ¶Rights issue costs At end of year The closing balance is attributable to the securityholders of: ¶Ingenia Communities Holding Limited ¶Ingenia Communities Fund ¶Ingenia Communities Management Trust b. Number of Issued Securities At beginning of year Issued during the year At end of year 2014 $’000 2013 $’000 510,141 490,044 – – 61,707 (2,732) 21,168 (1,071) – – 569,116 510,141 7,377 6,078 547,642 497,957 14,097 569,116 6,106 510,141 2014 Thousands 2013 Thousands 507,179 169,061 676,240 441,029 66,150 507,179 c. Terms of Securities All securities are fully paid and rank equally with each other for all purposes. Each security entitles the holder to one vote, in person or by proxy, at a meeting of securityholders. 70 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 21. RESERVES Foreign currency translation reserve Balance at beginning of year Translation differences arising during the year Amounts transferred to profit and loss on disposal of foreign operations Balance at end of year Share-based payment reserve Balance at beginning of year Share-based payment transactions Balance at end of year Total reserves at end of year The closing balance is attributable to the securityholders of: ¶Ingenia Communities Holding Limited ¶Ingenia Communities Fund ¶Ingenia Communities Management Trust 2014 $’000 2013 $’000 766 269 – 1,035 308 680 988 2,023 988 866 169 2,023 (17,024) 327 17,463 766 15 293 308 1,074 308 646 120 1,074 The foreign currency translation reserve records exchange differences arising from the translation of the ﬁnancial statements of foreign subsidiaries. The share-based payment reserve records the value of equity-settled share-based payment transactions provided to employees, including key management personnel, as part of their remuneration. Refer Note 25. 22. ACCUMULATED LOSSES Balance at beginning of year Net profit/(loss) for the year Distributions Balance at end of year The closing balance is attributable to the securityholders of: ¶Ingenia Communities Holding Limited ¶Ingenia Communities Fund ¶Ingenia Communities Management Trust 2014 $’000 2013 $’000 (336,563) (321,863) 11,518 (5,917) (10,290) (4,410) (330,962) (336,563) (2,659) 77 (324,254) (333,650) (4,049) (2,990) (330,962) (336,563) Annual Report 2014 71 23. COMMITMENTS a. Capital Commitments There were commitments for capital expenditure on investment property contracted but not provided for at reporting date of $3,266,000 (2013: $nil). For commitments for capital expenditure on discontinued operations, refer to Note 8(b)(v). b. Operating Lease Commitments The Group has two non-cancellable operating leases for its Sydney and Brisbane offices. These leases have remaining lives of 1.5 years and ﬁve years respectively. Future minimum rentals payable under these leases as at reporting date were: Within one year Later than one year but not later than five years 2014 $’000 482 1,106 1,588 2013 $’000 346 395 741 c. Finance Lease Commitments The Group was assigned a commercial lease with 16.5 years remaining with the Gosford City Council for land and facilities as part of its Ettalong Holiday Village acquisition. The lease is for an initial three years commencing September 2012 with two renewal options of seven years each. In December 2013, the Group acquired One Mile Beach Holiday Park, accounted for as investment property. Two Crown leases are attached to the land, one for 40 years expiring on 19 September 2031 and one for perpetuity. Refer to Note 15 for future minimum lease payments payable and the present value of minimum lease payments payable at reporting date for the ﬁnance leases at Ettalong Holiday Village and One Mile Beach Holiday Park. 24. CONTINGENT LIABILITIES There are no known contingent liabilities other than the bank guarantees of $4.4 million provided for under the $129.5 million bank facility (Note 15). Bank guarantees of $4.0 million are in relation to deferred land payments recognised as non-current payables (refer to Note 14). These guarantees will not be called by the counterparty unless the payable is not paid per the terms of the agreement. 72 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 25. SHARE-BASED PAYMENT TRANSACTIONS The Group has established a long-term incentive scheme (“Scheme”), which provides for the grant of conditional rights to receive securities in the Group. The intention of the Scheme is to align long-term securityholder returns with the ‘at-risk’ compensation potentially payable to executive level employees and to reward managers who remain in employment and perform at the required levels of performance. The Scheme encompasses two types of security rights: performance quantum rights (“PQRs”) and retention quantum rights (“RQRs”). PQRs vest on completion of a period of service, with the number of rights vesting based on the Group’s performance, as measured by total securityholder returns, and RQRs vest on completion of a period of service. On vesting, each right entitles the employee to receive one security of the Group for no consideration. Movements in rights during the year were: PQRs Outstanding at beginning of year Granted during the year Outstanding at end of year Exerciseable at end of year Weighted average remaining contractual life of outstanding rights (years) RQRs Outstanding at beginning of year Granted during the year Outstanding at end of year Exerciseable at end of year (1) Weighted average remaining contractual life of outstanding rights (years) 2014 Thousands 2013 Thousands 3,842 3,716 7,558 – 1.5 1,818 – 1,818 – – 3,842 – 3,842 – 2.0 1,818 – 1,818 – 0.9 (1) The RQRs vested on 1 July 2014 and 1,818,000 fully paid stapled securities were issued at that time. On 19 November 2013, 3,716,000 Performance Quantum Rights (“PQR”) were granted to senior executives of the Group under the long-term incentive scheme (“Scheme”). The number of PQRs that will vest under the Scheme depends on Total Securityholder Return (“TSR”) achieved and is also conditional on the individual being in employment of the Group on the vesting date (30 June 2016). The measurement period for the PQRs is 1 July 2013 to 30 June 2016 and full rights vest if a TSR above 40% is achieved during the measurement period. A sliding scale applies for lower TSRs with the number of PQRs vesting being nil for a TSR below 26%. One PQR equates to one security in the Group. The fair value of the PQRs issued during the year was estimated using a Monte Carlo Simulation model. Assumptions made in determining these fair value, and the results of these assumptions, are: Price of stapled securities at grant date Volatility of security price Distribution yield Risk-free rate at grant date Expected remaining life at grant date Fair value of each right $0.495 30.0% 3.93% 2.96% 2.6 years $0.325 The fair value of the rights is recognised as an employee beneﬁt expense with a corresponding increase in reserves. The fair value is expensed on a straight-line basis over the vesting period. The expense recognised for the ﬁnancial year was $680,600 (2013: $293,113). Annual Report 2014 73 26. CAPITAL MANAGEMENT The Group aims to meet its strategic objectives and operational needs and to maximise returns to securityholders through the appropriate use of debt and equity, while taking account of the additional ﬁnancial risks of higher debt levels. In determining the optimal capital structure, the Group takes into account a number of factors, including the views of investors and the market in general, the capital needs of its portfolio, the relative cost of debt versus equity, the execution risk of raising equity or debt, and the additional ﬁnancial risks of debt including increased volatility of earnings due to exposure to interest rate movements, the liquidity risk of maturing debt facilities and the potential for acceleration prior to maturity. In assessing this risk, the Group takes into account the relative security of its income ﬂows, the predictability of its expenses, its debt proﬁle, the degree of hedging and the overall level of debt as measured by gearing. The actual capital structure at a point in time is the product of a number of factors, many of which are market driven and to various degrees outside of the control of the Group, particularly the impact of revaluations on gearing levels, the availability of new equity and the liquidity in real estate markets. While the Group periodically determines the optimal capital structure, the ability to achieve the optimal structure may be impacted by market conditions and the actual position may often differ from the optimal position. The Group’s capital position is primarily monitored through its ratio of total liabilities to total assets (“Leverage Ratio”), calculated on a look-through basis. The Group’s medium term strategy is to maintain the Leverage Ratio in the range of 45% - 55%. At 30 June 2014, the Leverage Ratio was 58.2%, compared to 62.0% at 30 June 2013, calculated as follows: Total look-through liabilities Total look-through assets Leverage ratio 2014 $’000 2013 $’000 334,747 574,924 58.2% 284,922 459,574 62.0% In addition, the Group monitors the ratio of debt to total assets (“Gearing Ratio”), calculated on a look-through basis. At 30 June 2014, the Gearing Ratio was 30.7%, compared to 20.6% at 30 June 2013, calculated as follows: Total consolidated borrowings Less cash & cash equivalents (including associates) Total look-through debt Total consolidated assets Less cash & cash equivalents Less retirements village residents loans Total look-through assets Gearing ratio 2014 $’000 2013 $’000 128,437 88,328 (14,551) (37,550) 113,886 50,778 575,924 459,574 (14,551) (37,550) (190,122) (175,703) 371,251 30.7% 246,321 20.6% 74 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 27. FINANCIAL INSTRUMENTS a. Introduction The Group’s principal ﬁnancial instruments comprise cash and short-term deposits, receivables, payables, interest bearing liabilities, other ﬁnancial liabilities, and derivative ﬁnancial instruments. The main risks arising from the Group’s ﬁnancial instruments are interest rate risk, foreign exchange risk, credit risk and liquidity risk. The Group manages its exposure to these risks primarily through its treasury policy. The policy sets out various targets aimed at restricting the ﬁnancial risk taken by the Group. Management reviews actual positions of the Group against these targets on a regular basis. If the target is not achieved, or forecast not to be achieved, a plan of action is, where appropriate, put in place with the aim of meeting the target within an agreed timeframe. Depending on the circumstances of the Group at a point in time, it may be that positions outside of the treasury policy are accepted and no plan of action is put in place to meet the treasury targets, because, for example, the risks associated with bringing the Group into compliance outweigh the beneﬁts. The adequacy of the treasury policy in addressing the risks arising from the Group’s ﬁnancial instruments is reviewed on a regular basis. While the Group aims to meet its treasury policy targets, many factors inﬂuence its performance, and it is probable that at any one time it will not meet all its targets. For example, the Group may be unable to negotiate the extension of bank facilities sufficiently ahead of time, so that it fails to achieve its liquidity target. When reﬁnancing loans it may be unable to achieve the desired maturity proﬁle or the desired level of ﬂexibility of ﬁnancial covenants, because of the cost of such terms or their unavailability. Hedging instruments may not be available, or their cost may outweigh the beneﬁt of risk reduction or they may introduce other risks such as mark to market valuation risk. Changes in market conditions may limit the Group’s ability to raise capital through the issue of new securities or sale of properties. b. Interest Rate Risk The Group’s exposure to the risk of changes in market interest rates arises primarily from its use of borrowings. The main consequence of adverse changes in market interest rates is higher interest costs, reducing the Group’s proﬁt. In addition, one or more of the Group’s loan agreements may include minimum interest cover covenants. Higher interest costs resulting from increases in market interest rates may result in these covenants being breached, providing the lender the right to call in the loan or to increase the interest rate applied to the loan. The Group manages the risk of changes in market interest rates by maintaining an appropriate mix of ﬁxed and ﬂoating rate borrowings. Fixed rate debt is achieved either through ﬁxed rate debt funding or through derivative ﬁnancial instruments permitted under the treasury policy. The policy sets minimum and maximum levels of ﬁxed rate exposure over a ten-year time horizon. At 30 June 2014, after taking into account the effect of interest rate swaps, approximately 47% of the Group’s borrowings are at a ﬁxed rate of interest (2013: 26%). Exposure to changes in market interest rates also arises from ﬁnancial assets such as cash deposits and loan receivables subject to ﬂoating interest rate terms. Changes in market interest rates will also change the fair value of any interest rate hedges. c. Interest Rate Risk Exposure The Group’s exposure to interest rate risk and the effective interest rates on ﬁnancial instruments at reporting date was: FIXED INTEREST MATURING IN: Floating interest rate Less than 1 year 1 to 5 Years More than 5 years Total 30 June 2014 Principal amounts $’000 Financial assets Cash at bank Financial liabilities Bank debt denominated in AUD Finance leases (excluding perpetual lease) – 283 1,056 2,191 Interest rate swaps: - denominated in AUD; Group pays fixed rate (45,000) 45,000 – – – 12,894 94,000 – – – – – – 12,894 94,000 3,530 Annual Report 2014 75 The Group’s exposure to interest rate risk and the effective interest rates on ﬁnancial instruments at the end of the previous ﬁnancial year was: 30 June 2013 Principal amounts $’000 Financial assets Cash at bank Financial liabilities Bank debt denominated in AUD Finance leases Interest rate swaps: FIXED INTEREST MATURING IN: Floating interest rate Less than 1 year 1 to 5 Years More than 5 years Total 38,531 68,000 – – – – – – – 258 962 2,164 38,531 68,000 3,384 - denominated in AUD; Group pays fixed rate (45,000) 45,000 – – – Other ﬁnancial instruments of the Group not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk. d. Interest Rate Sensitivity Analysis The impact of an increase or decrease in average interest rates of 1% (100 basis points) at reporting date, with all other variables held constant, is illustrated in the tables below. This analysis is based on the interest rate risk exposures in existence at balance sheet date. As the Group has no derivatives that meet the documentation requirements to qualify for hedge accounting, there would be no impact on securityholders interest (apart from the effect on proﬁt). i. Increase in average interest rates of 1% The effect on net interest expense for one year would have been: Variable interest rate instruments denominated in: ¶Australian dollars The effect on change in fair value of derivatives would have been: Interest rate swaps denominated in: ¶Australian dollars EFFECT ON PROFIT AFTER TAX HIGHER/(LOWER) 2014 $’000 2013 $’000 (940) (680) EFFECT ON PROFIT AFTER TAX HIGHER/(LOWER) 2014 $’000 2013 $’000 417 793 76 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 27. FINANCIAL INSTRUMENTS (CONTINUED) ii. Decrease in average interest rates of 1% The effect on net interest expense for one year would have been: Variable interest rate instruments denominated in: ¶Australian dollars The effect on change in fair value of derivatives would have been: Interest rate swaps denominated in: ¶Australian dollars EFFECT ON PROFIT AFTER TAX HIGHER/(LOWER) 2014 $’000 2013 $’000 940 680 EFFECT ON PROFIT AFTER TAX HIGHER/(LOWER) 2014 $’000 2013 $’000 (297) (810) e. Foreign Exchange Risk By holding properties in offshore markets, the Group is exposed to the risk of movements in foreign exchange rates. Foreign exchange rate movements may reduce the Australian dollar equivalent of the carrying value of the Group’s offshore properties, and may result in lower Australian dollar equivalent proceeds when an offshore property is sold. In addition, foreign exchange rate movements may reduce the Australian dollar equivalent of the earnings from the offshore properties while they are owned by the Group. The Group reduces its exposure to the foreign exchange risk inherent in the carrying value of its offshore properties and interests in offshore investments by partly or wholly funding their acquisition using borrowings denominated in the particular offshore currency, and by using derivatives. The treasury policy sets a target for minimum and maximum hedging of the carrying value of its offshore properties. The Group’s exposure to the impact of exchange rate movements on its earnings from its offshore properties is partly mitigated by the foreign denominated interest expense of its foreign denominated borrowings and any derivative hedges. The Group aims to reduce any residual exposure to its earnings arising because of its investment in offshore markets by using forward exchange contracts. The Treasury Policy sets out targets of minimum and maximum hedging of its earnings from offshore properties over a ﬁve-year time horizon. f. Net Foreign Currency Exposure The Group’s net foreign currency monetary exposure, after taking into account the effect of foreign exchange derivatives, as at reporting date is shown in the following table. The net foreign currency exposure reported is of foreign currencies held by entities whose functional currency is the Australian dollar. It excludes assets and liabilities of entities, including equity accounted investments, whose functional currency is not the Australian dollar. Net foreign currency exposure: ¶United States dollars NET FOREIGN CURRENCY ASSETS/(LIABILITY) 2014 $’000 2013 $’000 157 1,282 Annual Report 2014 77 g. Foreign Exchange Sensitivity Analysis The impact of an increase or decrease in average foreign exchange rates of 10% at reporting date, with all other variables held constant, is illustrated in the tables below. This analysis is based on the foreign exchange risk exposures in existence at balance sheet date. In these tables, the effect on securityholders interest excludes the effect on proﬁt after tax. i. Effect of appreciation in Australian dollar of 10%: Foreign exchange risk exposures denominated in: ¶United States dollars ii. Effect of depreciation in Australian dollar of 10%: Foreign exchange risk exposures denominated in: ¶United States dollars EFFECT ON PROFIT AFTER TAX HIGHER/(LOWER) 2014 $’000 2013 $’000 (16) (128) EFFECT ON PROFIT AFTER TAX HIGHER/(LOWER) 2014 $’000 2013 $’000 16 128 The Group believes that the reporting date risk exposures are representative of the risk exposure inherent in its ﬁnancial instruments. These tables do not show the effect on equity that would occur from the translation of the ﬁnancial statements of foreign operations with a change in exchange rates. h. Foreign Exchange Derivatives Held Forward exchange contracts, options and foreign exchange swaps outstanding at reporting date are taken out to mitigate the effect of foreign exchange movements on the ﬁnancial statements. At balance sheet date, the Group did not hold any foreign exchange derivatives. There was no impact to the consolidated result for the year for the change in fair value for foreign exchange derivatives ended 30 June 2014 (2013: loss $9,000). i. Credit Risk Credit risk refers to the risk that a counterparty defaults on its contractual obligations resulting in a ﬁnancial loss to the Group. The major credit risk for the Group is default by tenants, resulting in a loss of rental income while a replacement tenant is secured and further loss if the rent level agreed with the replacement tenant is below that previously paid by the defaulting tenant. The Group assesses the credit risk of prospective tenants, the credit risk of in-place tenants when acquiring properties and the credit risk of existing tenants renewing upon expiry of their leases. Factors taken into account when assessing credit risk include the ﬁnancial strength of the prospective tenant and any form of security, for example a rental bond, to be provided. The decision to accept the credit risk associated with leasing space to a particular tenant is balanced against the risk of the potential ﬁnancial loss of not leasing up vacant space. Rent receivable balances are monitored on an ongoing basis and arrears actively followed up in order to reduce, where possible, the extent of any losses should the tenant subsequently default. The Group believes that its receivables that are neither past due nor impaired do not give rise to any signiﬁcant credit risk. Credit risk also arises from deposits placed with ﬁnancial institutions and derivatives contracts that may have a positive value to the Group. The Group’s treasury policy sets target limits for credit risk exposure with ﬁnancial institutions and minimum counterparty credit ratings. Counterparty exposure is measured as the aggregate of all obligations of any single legal entity or economic entity to the Group, after allowing for appropriate set offs which are legally enforceable. The Group’s maximum exposure to credit risk at reporting date in relation to each class of ﬁnancial instrument is its carrying amount as reported in the balance sheet. 78 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 27. FINANCIAL INSTRUMENTS (CONTINUED) j. Liquidity Risk The main objective of liquidity risk management is to reduce the risk that the Group does not have the resources available to meet its ﬁnancial obligations and working capital and committed capital expenditure requirements. The Group’s treasury policy sets a target for the level of cash and available undrawn debt facilities to cover future committed capital expenditure in the next year, 75% of forecast net operating cash ﬂow in the next year, six months estimated distributions and 5% of the value of resident loan liabilities. The Group may also be exposed to contingent liquidity risk under its term loan facilities, where term loan facilities include covenants which if breached give the lender the right to call in the loan, thereby accelerating a cash ﬂow which otherwise was scheduled for the loan maturity. The Group monitors adherence to loan covenants on a regular basis, and the treasury policy sets targets based on the ability to withstand adverse market movements and remain within loan covenant limits. In addition, the Group targets the following benchmarks to ensure resilience to breaking covenants on its primary debt facilities: – – 10% reduction in value of assets and 15% fall in the exchange rate for LVR covenants; and 2% nominal increase in interest rates combined with a 5% fall in income for ICR covenants. The contractual maturities of the Group’s non-derivative ﬁnancial liabilities at reporting date are reﬂected in the following table. It shows the undiscounted contractual cash ﬂows required to discharge the liabilities at market rates. Foreign currencies have been converted at rates of exchange ruling at reporting date. Although the expected average residency term is more than ten years, retirement village residents’ loans are classiﬁed as current liabilities, as required by Accounting Standards, because the Group does not have an unconditional right to defer settlement to more than twelve months after reporting date. 2014 Trade and other payables Retirement village residents loans Borrowings Provisions Finance leases (excluding perpetual lease) Finance lease (perpetual lease)(1) 2013 Trade and other payables Retirement village residents loans Borrowings Provisions Finance leases Less than 1 year $’000 10,624 190,122 1 to 5 Years $’000 4,398 – 4,521 99,653 718 292 121 249 1,242 483 More than 5 years $’000 – – – – 3,761 – Total $’000 15,022 190,122 104,174 967 5,295 604 206,398 106,025 3,761 316,184 8,559 175,703 3,271 507 267 – – 72,089 140 1,135 188,307 73,364 – – – – 3,766 3,766 8,559 175,703 75,360 647 5,168 265,437 (1) For purposes of the table above, the lease payments are included for ﬁve years for the perpetual lease. Refer to Note 15(c)(ii). The contractual maturities of the Group’s derivative ﬁnancial liabilities at reporting date are reﬂected in the following table. It shows the undiscounted contractual cash ﬂows required to discharge the instruments at market rates. Foreign currencies have been converted at rates of exchange ruling at reporting date. Annual Report 2014 79 2014 Liabilities Less than 1 year $’000 1 to 5 Years $’000 More than 5 years $’000 Total $’000 Derivative liabilities – net settled 84 84 2013 Liabilities Derivative liabilities – net settled – 209 – – 168 209 k. Other Financial Instrument Risk The Group carries retirement village residents’ loans at fair value with resulting fair value adjustments recognised in the income statement. The fair value of these loans is dependent on market prices for the related retirement village units. The impact of an increase or decrease in these market prices of 10% at reporting date, with all other variables held constant, is shown in the table below. This analysis is based on the retirement village residents’ loans in existence at reporting date. Increase in market prices of investment properties of 10% Decrease in market prices of investment properties of 10% EFFECT ON PROFIT AFTER TAX HIGHER/(LOWER) 2014 $’000 2013 $’000 (21,864) (20,700) 21,864 20,700 These effects are largely offset by corresponding changes in the fair value of the Group’s investment properties. The effect on equity would be the same as the effect on proﬁt. l. Fair Value The Group uses the following fair value measurement hierarchy: Level 1: fair value is calculated using quoted prices in active markets for identical assets or liabilities; Level 2: fair value is calculated using inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and Level 3: fair value is calculated using inputs for the asset or liability that are not based on observable market data. Quoted market price represents the fair value determined based on quoted prices on active markets as at the reporting date without any deduction for transaction costs. The following table presents the Group’s ﬁnancial instruments that were measured and recognised at fair value at reporting date: Financial assets/ financial liabilities Valuation technique(s) and key inputs Significant unobservable inputs Relationship of unobservable inputs to fair value Retirement village resident loans Deferred management fee accrued Loans measured as the ingoing resident’s contribution plus the resident’s share of capital appreciation to reporting date, less DMF accrued to reporting date. DMF measured using the initial property price, estimated length of stay, various contract terms and projected property price at time of re-leasing. Long-term capital appreciation rates for residential property between 0-4%. Estimated length of stay of residents based on life tables. Estimated length of stay of residents based on life tables. The higher the appreciation, the higher the value of resident loans. The longer the length of stay, the lower the value of resident loans. The longer the length of stay, the higher the DMF accrued, capped at a predetermined period of time. Derivative interest rate swaps Net present value of future cash flows discounted at market rates adjusted for the Group’s credit risk. N/A N/A There has been no movement from Level 3 to Level 2 during the current period. Changes in the Group’s retirement village resident loans which are Level 3 instruments are presented in Note 16. The carrying amounts of the Group’s other ﬁnancial instruments approximate their fair values. 80 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 28. FAIR VALUE MEASUREMENT The following table provides the fair value measurement hierarchy of the Group’s assets and liabilities: a. Assets Measured at Fair Value 30 June 2014 Date of valuation Investment properties 30 June 2014 Refer to Note 12 Discontinued operations- investment property 30 June 2014 Refer to Note 8(b) Assets held for sale – investment property 30 June 2014 Refer to Note 8(a) Assets held for sale – deferred management fee receivable 30 June 2014 Refer to Notes 8(a) and 16 b. Liabilities Measured at Fair Value 30 June 2014 Date of valuation Retirement village resident loans Derivatives 30 June 2014 Refer to Note 16 30 June 2014 FAIR VALUE MEASUREMENT USING Quoted prices in active markets (Level 1) $’000 Significant observable inputs (Level 2) $’000 Significant unobservable inputs (Level 3) $’000 – – – – – – – – 498,863 45,902 – 5,439 FAIR VALUE MEASUREMENT USING Quoted prices in active markets (Level 1) $’000 Significant observable inputs (Level 2) $’000 Significant unobservable inputs (Level 3) $’000 – – – 190,122 168 – Total $’000 498,863 45,902 – 5,439 Total $’000 190,122 168 There have been no transfers between Level 1 and Level 2 during the year. c. Fair Value Hierarchy for Financial Instruments Measured at Fair Value as at 30 June 2013: 30 June 2013 Retirement village resident loans Derivatives 29. AUDITOR’S REMUNERATION Amounts received or receivable by Ernst & Young for: ¶Audit or review of the financial reports ¶Other audit related services ¶Non-audit related services Total $’000 175,703 209 175,912 Level 1 $’000 Level 2 $’000 – – – – 209 209 Level 3 $’000 175,703 – 175,703 2014 $ 2013 $ 333,355 277,423 34,450 27,295 32,683 – 395,100 310,106 Annual Report 2014 81 30. RELATED PARTIES a. Key Management Personnel The aggregate compensation paid to Key Management Personnel (“KMP”) of the Group is as follows: Directors fees Salaries and other short-term benefits Short-term incentives Superannuation benefits Share-based payment Note 2014 $ 2013 $ 462,500 1,094,684 332,235 59,084 25 680,600 319,167 756,735 182,382 48,957 293,113 2,629,103 1,600,354 The amounts disclosed in the table are the amounts recognised as an expense during the reporting period related to key management personnel. The aggregate PQRs and RQRs (refer to Note 25) of the Group held directly, by KMP, are as follows: Issue date 2012 2012 2013 Rights RQR PQR PQR Expiry date 2014 2015 2016 31. COMPANY FINANCIAL INFORMATION Summary ﬁnancial information about the Company is: Current assets Total assets Current liabilities Total liabilities Net assets Securityholders’ equity ¶Issued securities ¶Reserves ¶Accumulated losses Total securityholders’ equity Profit from continuing operations Net profit attributable to securityholders Total comprehensive income NUMBER OUTSTANDING 2014 2013 1,818,000 1,818,000 3,842,000 3,842,000 3,716,000 – 2014 $’000 2013 $’000 – 7,870 7,320 7,320 550 7,377 988 190 6,459 3,494 3,117 3,342 6,078 308 (7,815) (3,044) 550 (4,771) (4,771) (4,771) 3,342 (3,636) (3,636) (3,636) The Company is a joint guarantor of the Commonwealth Bank of Australia debt facility, which has an outstanding balance of $94,000,000 at 30 June 2014 (2013: $68,000,000). 82 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 32. SUBSIDIARIES a. Names of Subsidiaries The consolidated ﬁnancial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in Note 1(d): Name Bridge Street Trust Browns Plains Road Trust Casuarina Road Trust Edinburgh Drive Trust Garden Villages Management Trust INA CC Holdings Pty Ltd INA CC Pty Ltd INA Community Living Lynbrook Trust INA Community Living Subsidiary Trust INA Community Living Subsidiary Trust No. 2 INA Garden Villages Pty Ltd INA Kiwi Communities Pty Ltd INA Kiwi Communities Subsidiary Trust No. 1 INA Management Pty Ltd INA CC Trust INA Regency Co Pty Ltd INA Settlers Co Pty Ltd INA Sunny Communities Pty Ltd INA Sunny Trust Ingenia Communities RE Limited Jefferis Street Trust Lovett Street Trust ILF Regency Operations Trust ILF Regency Subsidiary Trust Settlers Operations Trust Settlers Subsidiary Trust SunnyCove Gladstone Unit Trust SunnyCove Rockhampton Unit Trust Ridge Estate Trust Taylor Street (2) Trust INA Subsidiary Trust No.1 INA Subsidiary Trust No.2 INA Subsidiary Trust No.3 INA Operations Pty Ltd INA Operations Trust No.1 INA Operations Trust No.2 INA Operations Trust No.3 Noyea Pty Ltd Noyea Operations Pty Ltd IGC NZ Student Holdings Ltd INA NZ Subsidiary Trust No 1 OWNERSHIP INTEREST Country of residence 2014 % 2013 % Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand New Zealand 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – – 100 100 Name CSH Lynbrook GP LLC CSH Lynbrook LP Lynbrook Freer Street Member LLC Lynbrook Management, LLC INA Community Living LLC (formerly ING Community Living LLC) Country of residence United States of America United States of America United States of America United States of America United States of America INA Community Living II (formerly ING Community Living II) United States of America INA US Community Living Fund LLC (formerly ING US Community Living Fund LLC) United States of America The Group’s voting interest in its subsidiaries is the same as its ownership interest. 33. NOTES TO THE CASH FLOW STATEMENT Reconciliation of proﬁt to net cash ﬂow from operating activities Net profit for the year Adjustments for: ¶Net foreign exchange (gain)/loss ¶Release of FCTR on disposal of foreign operations ¶Net loss on disposal of investment properties - continuing ¶Net loss on disposal of investment properties - discontinuing ¶Disposal costs associated with overseas investments - continuing ¶Disposal costs associated with overseas investments - discontinued ¶Gain on disposal of equity accounted investments ¶Net (gain)/loss on change in fair value of: ¶¶Investment properties – continuing ¶¶Investment properties – discontinued ¶¶Derivatives ¶¶Retirement village residents’ loan ¶Income tax expense/(benefit): ¶¶Continuing ¶¶Discontinued ¶Amortisation of intangibles ¶Share-based payments expense ¶Other non-cash items Annual Report 2014 83 OWNERSHIP INTEREST 2014 % 2013 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 2014 $’000 2013 $’000 11,518 (10,290) (1,410) – – – – 290 (327) 341 1,630 (41) 616 (7,264) 14 – 681 211 718 17,463 107 994 150 672 (7,584) (3,457) 2,783 (752) (327) (367) 1,002 585 293 35 Operating profit for the year before changes in working capital 6,259 2,025 Changes in working capital: ¶(Increase)/decrease in receivables ¶Increase in inventory ¶Increase in retirement village residents’ loans ¶Increase/(decrease) in other payables and provisions Net cash provided by operating activities 5,237 (1,923) 6,327 (1,660) 14,240 (3,309) – 12,220 304 11,240 84 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued 34. SUBSEQUENT EVENTS a. RQR Vesting On 1 July 2014, 1,818,000 Retention Quantum Rights (“RQRs”) granted to KMP in 2012 vested. As a result, 1,818,000 fully paid stapled securities have been issued to the following KMP: Simon Owen Tania Betts Nicole Fisher 1,070,000 374,000 374,000 b. Sale of Noyea Settlement on the sale of Settlers Lifestyle Noyea was completed on 31 July 2014 at an adjusted sales price of $5.4 million resulting in $nil gain or loss recognised upon completion. c. Bank Guarantee On 1 July 2014, the Group obtained a bank guarantee of $10 million from the bank facility in relation to cash requirements under the Australian Financial Services Licence. d. Sale of New Zealand Students Business On 5 September 2014, the Group announced it had contracted to divest the New Zealand Students business for consideration of NZ$49.4 million, representing the book value at 30 June 2014. Upon settlement, disposal costs and a FCTR gain will be released through proﬁt. At 30 June 2014, the FCTR balance was A$1.0 million. e. Reﬁnance of Australian Debt The Group’s current Australian banking facility expires in September 2015. The Group has recently undertaken a debt reﬁnance and obtained credit approval for a new $175 million Australian Multilateral banking facility. This facility will be split between a three year and ﬁve year maturity proﬁle. Directors’ Declaration for the year ended 30 June 2014 Annual Report 2014 85 In accordance with a resolution of the directors of Ingenia Communities Holdings Limited, I state that: 1. In the opinion of the directors: a. the ﬁnancial statements and notes of Ingenia Communities Holdings Limited for the ﬁnancial year ended 30 June 2014 are in accordance with the Corporations Act 2001, including: i. ii. giving a true and fair view of its ﬁnancial position as at 30 June 2014 and of its performance for the year ended on that date; and complying with Accounting Standards (including Australian Accounting Interpretations) and Corporations Regulations 2001; and b. there are reasonable grounds to believe that Ingenia Communities Holdings Limited will be able to pay its debts as and when they become due and payable. The ﬁnancial statements and notes also comply with International Financial Reporting Standards as disclosed in Note 1(b). This declaration has been made after receiving the declarations required to be made to the directors in accordance with section 295A of the Corporations Act 2001. 2. 3. On behalf of the Board Jim Hazel Chairman Sydney, 19 September 2014 86 Ingenia Communities Holdings Limited Independent Auditors’ Report for the year ended 30 June 2014 Annual Report 2014 87 88 Ingenia Communities Holdings LimitedIngenia Communities Fund & Ingenia Communities Management Trust Annual Reports for the year ended 30 June 2014 Annual Report 2014 89 Directors’ Report Auditors’ Independence Declaration Consolidated Statements of Comprehensive Income Consolidated Balance Sheets Consolidated Cash Flow Statements Statements of Changes in Unitholders’ Interest Notes to the Financial Statements 1. Summary of signiﬁcant Accounting policies 2. Accounting estimates and judgements 3. Segment information 4. Earnings per unit 5. Finance expense 6. Income tax beneﬁt 7. Discontinued operations and assets held for sale 8. Cash and cash equivalents 9. Trade and other receivables 10. Inventories 11. Investment properties 12. Plant and equipment 13. Trade and other payables 14. Borrowings 15. Retirement village resident loans 16. Provisions 17. Derivatives 18. Deferred tax liabilities 19. Issued units 20. Reserves 21. Accumulated losses 22. Commitments 23. Contingencies 24. Capital management 25. Financial instruments 26. Fair value measurement 27. Auditor’s remuneration 28. Related parties 29. Parent ﬁnancial information 30. Subsidiaries 31. Notes to the cash ﬂow statements 32. Subsequent events Directors’ Declaration Independent Auditors’ Report Securityholder Information Investor Relations Corporate Directory 90 93 94 96 97 98 100 100 107 108 112 112 113 114 116 116 117 117 119 119 119 121 121 121 122 122 123 123 124 124 124 125 131 132 132 135 136 137 137 138 139 141 142 143 90 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014 The Ingenia Communities Fund (ARSN 107 459 576) and the Ingenia Communities Management Trust (ARSN 122 928 410) are Australian registered schemes. Ingenia Communities RE Limited (ACN 154 464 990; Australian Financial Services Licence number 415862), the Responsible Entity of both Trusts, is incorporated and domiciled in Australia. The parent company of Ingenia Communities RE Limited is Ingenia Communities Holdings Limited (the “Company”). The shares of the Company and the units of the Trusts are “stapled” and trade on the Australian Securities Exchange (“ASX”) as a single security. The Company and the Trusts along with their subsidiaries are collectively referred to as the Group in this report. The directors’ report is a combined directors’ report that covers both Trusts. DIRECTORS The directors of the Ingenia Communities RE Limited at any time during or since the end of the ﬁnancial year were: Jim Hazel (Chairman) Appointed 27 March 2012 Philip Clark AM Appointed 4 June 2012 Amanda Heyworth Appointed 16 April 2012 Robert Morrison Appointed 8 February 2013 Norah Barlow Appointed 31 March 2014 Simon Owen (Managing Director and CEO) Appointed 25 November 2011 PRINCIPAL ACTIVITY The principal activity of ICF is investment in seniors living communities in Australia. The principal activities of ICMT are the development, management and operation of seniors living communities in Australia. There was no signiﬁcant change in the nature of either Trust’s activities during the ﬁnancial year. OPERATING AND FINANCIAL REVIEW a. ICF and ICMT Overview ICF and ICMT are two of the entities forming part of Ingenia Communities Group which is a triple stapled structure traded on the ASX. The Group’s vision is to be a leading Australian provider of affordable seniors living accommodation whilst delivering value to all its stakeholders, including strong earnings growth for securityholders and providing an affordable community environment for residents. b. Strategy The strategies of ICF and ICMT are aligned with the Group’s strategy of growing its Australian seniors living portfolio with a focus on the lifestyle parks sector. Using a disciplined investment framework, the Group is continuing to increase its exposure to lifestyle parks through targeted acquisitions and building out its development pipeline. The Group remains focused on divestment of its non-core New Zealand Students portfolio and reducing its investment in DMF assets. It is the Group’s intention to grow its investment in lifestyle parks through capital recycling, efficient inventory management and monetisation of stock. c. FY14 Financial Results FY14 has been a year of strong acquisitive growth. The results are underpinned by a signiﬁcantly increased contribution from the Active Lifestyle Estates and Garden Villages portfolios following the acquisition of a further thirteen lifestyle parks and ﬁve rental villages during the year. Furthermore, ICMT and its subsidiaries formed a tax consolidation group which is the primary driver for the $6.5m income tax beneﬁt recorded in ICMT. During the year, the acquisition of numerous properties were funded using a mix of debt and equity raised from a June 2013 institutional placement of $21.2m and a September 2013 rights issue of $61.7m. d. Key Metrics – Net proﬁt for the year of $15.4 million for ICF and a loss of $1.2 million for ICMT – Full year distribution of 1.15 cent per security by ICF, nil for ICMT These results are reﬂective of execution of the strategy to divest overseas operations, which is now largely complete, and redeploy that capital into the Australian market to generate strong returns for securityholders. e. Continuing Operations The key strategic priorities of the continuing operations are: – increase rate of new home delivery within the Active Lifestyle Estates development pipeline; – grow occupancy of the Garden Villages portfolio towards the mid-term target of 92%; – – sell recently completed homes and explore opportunities to reduce exposure to the Settlers portfolio; and invest available capital into further accretive lifestyle parks. f. Discontinued Operations A sales campaign was undertaken for the sale of the New Zealand Students portfolio and terms have been agreed with a global real estate investment ﬁrm. The carrying value of these assets at 30 June 2014 is $45.9m. Annual Report 2014 91 b. Sale of Noyea Settlement on the sale of Settlers Lifestyle Noyea was completed on 31 July 2014 at an adjusted sales price of $5.4 million resulting in $nil gain or loss recognised upon completion. c. Bank Guarantee On 1 July 2014, ICF obtained a bank guarantee of $10 million from the bank facility in relation to cash requirements under the Australian Financial Services Licence. d. Sale of New Zealand Students Business On 5 September 2014, the Trusts announced they had contracted to divest the New Zealand Students business for consideration of NZ$49.4 million, representing the book value at 30 June 2014. Upon settlement, disposal costs and a foreign currency translation reserve (“FCTR”) gain will be released through proﬁt. At 30 June 2014, the FCTR balance was A$1.0 million. e. Reﬁnance of Australian Debt ICF’s current Australian banking facility expires in September 2015. ICF has recently undertaken a debt reﬁnance and obtained credit approval for a new $175 million Australian multilateral banking facility. This facility will be split between a three year and ﬁve year maturity proﬁle. LIKELY DEVELOPMENTS The Trusts will continue to pursue strategies aimed at improving cash earnings, proﬁtability and market share within the seniors living industry during the next ﬁnancial year, with a strong focus on the development and acquisition of manufactured home estates. Other information about certain likely developments in the operations of the Trusts and the expected results of those operations in future ﬁnancial years is included in the various reports in the Ingenia Communities Annual Report. ENVIRONMENTAL REGULATION The Trusts’ operations are not subject to any particular and signiﬁcant environmental regulation under a law of the Commonwealth or of a State or Territory. INDEMNITIES The Trusts have not indemniﬁed, nor paid any insurance premiums for, a person who is or has been an officer of the Responsible Entity or an auditor of either Trust. g. Capital Management ICF strengthened its capital position by undertaking a capital raising and renegotiating its core debt facility. On 23 August 2013, ICF reﬁnanced its Bank of New Zealand debt facility, which funds the New Zealand Students portfolio with a NZ$32.7m core debt facility in place expiring 31 July 2018. On 17 October 2013, ICF completed a non-renounceable rights issue to raise $61.7m (excluding transaction costs) to fund the expansion of lifestyle parks. A total of 169.1m securities were issued at 36.5 cents each. ICF has increased its full year distributions to 1.15 cents, in line with its commitment to grow distributions over the medium term. The ﬁnal distribution represents a 30% increase over the previous period. h. Outlook The Trusts are well positioned to continue growing their lifestyle parks business and ICF has agreed indicative terms for a new multilateral Australian debt facility of $175m, which replaces the existing facility. Whilst the lead time from property acquisition to achieving set up for delivery of the ﬁrst new homes has taken longer than anticipated, Ingenia is conﬁdent the rate of delivery and settlement of new homes will continue to slowly build each half and deliver a much stronger result in FY15. There will be a strong focus on ﬁnalising divestment of the New Zealand Students portfolio and exploring opportunities for recycling capital from the Settlers Lifestyle portfolio. At the same time, the Trusts will continue to regularly assess the performance of its existing assets and where appropriate to recycle that capital into other opportunities delivering superior returns. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Changes in the state of affairs during the ﬁnancial year are set out in the various reports in this Annual Report. Refer to Note 7 of the accompanying ﬁnancial statements for discontinued operations, Note 11 for Australian investment properties acquired or disposed of during the year, Note 14 for details of Australian debt reﬁnanced and Note 19 for units issued. EVENTS SUBSEQUENT TO REPORTING DATE a. Retention Quantum Rights Vesting On 1 July 2014, 1,818,000 Retention Quantum Rights (“RQRs”) granted to KMP in 2012 vested. As a result 1,818,000 fully paid stapled securities have been issued to the following KMP: Simon Owen 1,070,000 Tania Betts Nicole Fisher 374,000 374,000 92 Ingenia Communities Holdings Limited Directors’ Report for the year ended 30 June 2014 INTERESTS OF DIRECTORS OF THE RESPONSIBLE ENTITY Units in each Trust held by directors of the Responsible Entity as at 30 June 2014 were: Jim Hazel Philip Clark AM Amanda Heyworth Robert Morrison Norah Barlow Simon Richard Owen Number of units Performance quantum rights Retention quantum rights 1,333,334 208,334 561,334 221,667 178,000 – – – – – – – – – – 2,179,667 4,720,000 1,070,000 OTHER INFORMATION Fees paid to the Responsible Entity and its associates, and the number of units in each Trust held by the Responsible Entity and its associates as at the end of the ﬁnancial year; are set out in Note 28 in the ﬁnancial report. AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 93. ROUNDING OF AMOUNTS The Trusts are of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the ‘’rounding off’’ of amounts in this report and in the ﬁnancial report. Amounts in these reports have been rounded off in accordance with that Class Order to the nearest thousand dollars, unless otherwise stated. Signed in accordance with a resolution of the directors of the Responsible Entity. Jim Hazel Chairman Sydney, 19 September 2014 Auditors’ Independence Declaration for the year ended 30 June 2014 Annual Report 2014 93 94 Ingenia Communities Holdings Limited Consolidated Statements of Comprehensive Income for the year ended 30 June 2014 INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST Note 2014 $’000 2013 $’000 2014 $’000 2013 $’000 Revenue Rental income Accrued deferred management fee income Manufactured home sales Catering income Other property income Interest income Property expenses Employee expenses Administration expenses Operational, marketing and selling expenses Manufactured home cost of sales Finance expense Net foreign exchange gain/(loss) Net loss on disposal of investment properties Net gain/(loss) on change in fair value of: Investment properties Derivatives Retirement village resident loans 5 (3,955) (3,841) (10,145) 9,354 8,439 – – – – 10,339 19,693 (274) – (682) (295) – – – – 142 3,524 12,105 – – (797) (96) – (147) – 1,530 41 – 37 (107) 1,618 752 – (1,101) (185) 31,643 5,333 3,442 3,178 1,819 16 19,287 4,850 405 2,617 871 14 45,431 28,044 (20,693) (16,198) (11,131) (2,050) (2,734) (2,130) – – (1,871) – (616) (1,626) – (7,565) 6,506 (1,059) (111) (1,170) (111) (1,059) (1,170) (7,226) (1,439) (2,189) (297) (5,212) – 1,839 – 327 (1,456) – (3,807) (17) (3,824) (7,891) (11,715) (3,314) (8,401) (11,715) Responsible Entity’s fees and expenses 28 (1,170) Other expenses – Profit/(loss) from continuing operations before income tax Income tax benefit/(expense) Profit/(loss) from continuing operations Profit/(loss) from discontinued operations Net profit/(loss) for the year Attributable to unitholders of: Ingenia Communities Fund Ingenia Communities Management Trust 6 7 14,741 8,385 – – 14,741 681 15,422 15,422 – 15,422 8,385 (5,715) 2,670 2,670 – 2,670 Annual Report 2014 95 INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST Note 2014 $’000 15,422 2013 $’000 2,670 2014 $’000 2013 $’000 (1,170) (11,715) Net profit/(loss) for the year Other comprehensive income, net of income tax: Items that may be reclassified subsequently to profit or loss: Foreign currency translation differences arising during the year Release of foreign currency translation reserve on disposal of foreign operations 20 20 Total comprehensive income for the year, net of tax Total comprehensive income/(loss) for the year is attributable to: (226) 1,389 495 (1,064) – 15,196 15,507 19,566 – 2,444 (675) (10,335) Ingenia Communities Fund 15,196 19,566 335 Ingenia Communities Management Trust – – (1,010) (2,668) (7,667) 15,196 19,566 (675) (10,335) Distributions per unit Earnings per unit(1): Basic earnings from continuing operations Basic earnings Diluted earnings from continuing operations Diluted earnings Note 4 4 4 4 2014 Cents 1.0(2) 2.3 2.4 2.3 2.4 2013 Cents 1.0 1.6 0.5 1.6 0.5 2014 Cents – (0.2) (0.2) (0.2) (0.2) 2013 Cents – (0.8) (2.3) (0.7) (2.3) (1) Prior period weighted average number of units and earnings per unit have been adjusted in accordance with AASB 133 “Earnings per Share” (“AASB 133”). The weighted average number of units on issue for the current period, prior to the rights issue in September 2013, has also been adjusted as required by AASB 133. (2) Distributions relate to the amount paid during FY14. Subsequent to the end of the year, a ﬁnal distribution was declared for 0.65 cents for a total full year distribution of 1.15 cents. 96 Ingenia Communities Holdings Limited Consolidated Balance Sheets as at 30 June 2014 Current assets Cash and cash equivalents Trade and other receivables Inventories Income tax receivable Assets held for sale Assets of discontinued operations Total current assets Non-current assets Trade and other receivables Receivable from related party Investment properties Plant and equipment Total non-current assets Total assets Current liabilities Trade and other payables Borrowings Retirement village resident loans Provisions Derivatives Provision for income tax Payable to related party Liabilities of discontinued operations Total current liabilities Non-current liabilities Trade and other payables Borrowings Provisions Derivatives Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Issued units Reserves Accumulated losses Unitholders’ interest Non-controlling interest Total equity Attributable to unitholders of: Ingenia Communities Fund Ingenia Communities Management Trust INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST Note 2014 $’000 2013 $’000 2014 $’000 2013 $’000 8 9 10 7 9 28 11 12 13 14 15 16 17 28 7 13 14 16 17 18 19 20 21 2,658 4,280 – 975 – 3,874 11,787 39,334 135,805 134,488 239 309,866 321,653 31,014 9,204 – 882 – 3,874 44,974 39,472 31,870 120,167 339 191,848 236,822 1,210 1,569 – – – 84 – – – – – – – – – – 3,893 3,131 2,208 – 5,439 47,657 62,328 40 – 1,229 2,819 285 – – 36,576 40,909 438 – 364,375 250,764 180 364,595 426,923 547 251,749 292,658 8,480 3,461 6,305 3,589 190,122 175,703 590 – 29 133,249 30,449 507 – 126 30,769 21,527 1,294 1,569 366,380 238,526 – – 93,688 67,422 – 84 – 93,772 95,066 226,587 – 209 – 67,631 69,200 167,622 4,000 41,883 249 – 1,433 47,565 – 40,475 140 – 7,855 48,470 413,945 286,996 12,978 5,662 547,642 497,956 (226) – 14,097 169 6,106 120 (320,829) (330,334) (4,049) (2,990) 226,587 167,622 – – 226,587 167,622 226,587 167,662 – – 226,587 167,622 10,217 2,761 12,978 2,761 10,217 12,978 3,236 2,426 5,662 2,426 3,236 5,662 Consolidated Cash Flow Statements for the year ended 30 June 2014 Annual Report 2014 97 Cash flows from operating activities Rental and other property income Payment of management fees (including arrears) Property and other expenses Proceeds from resident loans Repayment of resident loans Proceeds from manufactured home sales Payments for manufactured homes Distributions received from equity accounted investments Interest received Borrowing costs paid Income taxes received/(paid) Cash flows from investing activities Payments for plant and equipment Additions to investment properties INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST Note 2014 $’000 2013 $’000 2014 $’000 2013 $’000 – – 33 – 43,274 29,478 (29) (167) (51) (210) (30,286) (21,487) – – – – 295 205 (4,123) (125) – – – – 2,353 243 22,021 (10,361) 3,511 (4,035) 6 12 19,338 (7,118) 450 (275) – 54 (5,249) (1,689) (1,836) (76) 4 – 31 (3,799) (2,906) 22,428 18,437 – (2) (81) (474) (150) (329) (18,723) (16,416) Proceeds/(costs) from sale of investment properties 1,321 3,030 (120) 26,292 Payments for investment properties (10,452) (23,315) (102,803) (7,708) Amounts received from/(advanced to) villages Payments for lease arrangements Proceeds of equity accounted investments – – – – 5,695 (3,438) 37,560 16,720 72 (745) 116 (122,353) (330) (699) – 810 Cash flows from financing activities Proceeds from the issue units Payment for issue costs Internalisation costs Distributions to unitholders Receipts from derivatives Payments for derivatives Finance lease payments (Repayment of)/proceeds from borrowings with related parties (100,124) Proceeds from borrowings Repayment of borrowings Payment of borrowing costs Net increase/(decrease) in cash Cash at beginning of the year Effects of exchange rate changes on cash Cash at the end of the year 8 61,707 (2,528) – 18,170 (907) (600) (5,885) (4,235) – – – 1,650 (150) – – 94,000 16,261 – (243) 2,900 (145) – – – – – – – – (81) (13) 108,231 – – – (68,000) (33,195) (2,581) (27,749) (142) (586) (75) – (20,972) (3,592) 105,251 (25,007) (28,209) 31,014 (147) 2,658 10,222 20,777 15 31,014 5,326 248 (24) 5,550 (5,760) 6,029 (21) 248 98 Ingenia Communities Holdings Limited Statements of Changes in Unitholders’ Interest for the year ended 30 June 2014 INGENIA COMMUNITIES FUND ATTRIBUTABLE TO UNITHOLDERS Note Issued capital $’000 Reserves $’000 Retained earnings $’000 Total $’000 Non- controlling interest $’000 Total equity $’000 Carrying amounts at 1 July 2012 Net profit for the year Other comprehensive income Total comprehensive income for the year Transactions with unitholders in their capacity as unitholders: Placement securities Distributions paid or payable Carrying amounts at 30 June 2013 Net profit for the year Other comprehensive income Total comprehensive income for the year Transactions with unitholders in their capacity as unitholders: Placement securities Distributions paid or payable Carrying amounts at 30 June 2014 19 21 20 19 21 480,693 (16,896) (328,594) 135,203 – – – – 2,670 2,670 16,896 – 16,896 16,896 2,670 19,566 17,263 – 497,956 – – – – – – – 17,263 (4,410) (4,410) (330,334) 167,622 15,422 15,422 (226) – (226) (226) 15,422 15,196 49,686 – – – – 49,686 (5,917) (5,917) 547,642 (226) (320,829) 226,587 – – – – – – – – – – – – – 135,203 2,670 16,896 19,566 17,263 (4,410) 167,622 15,422 (226) 15,196 49,686 (5,917) 226,587 Annual Report 2014 99 INGENIA COMMUNITIES MANAGEMENT TRUST ATTRIBUTABLE TO UNITHOLDERS Note Issued capital $’000 Reserves $’000 Retained earnings $’000 Total $’000 Non- controlling interest(1) $’000 Total equity $’000 Carrying amounts at 1 July 2012 Net profit for the year Other comprehensive income Total comprehensive income for the year Transactions with unitholders in their capacity as unitholders: 3,351 (614) 5,411 8,148 5,094 13,242 – – – – (8,401) (8,401) (3,314) (11,715) 734 – 734 646 1,380 734 (8,401) (7,667) (2,668) (10,335) Placement securities 19 2,755 Carrying amounts at 30 June 2013 Net loss for the year Other comprehensive income Total comprehensive income for the year Transactions with unitholders in their capacity as unitholders: 6,106 – – – – 120 – 49 49 – 2,755 – 2,755 (2,990) 3,236 2,426 5,662 (1,059) (1,059) (111) (1,170) – 49 (1,059) (1,010) 446 335 495 (675) Placement securities 19 7,991 – – 7,991 – 7,991 Carrying amounts at 30 June 2014 14,097 169 (4,049) 10,217 2,761 12,978 (1) Non-controlling interest relates to the portion in which ICF owns subsidiaries consolidated within ICMT. 100 Ingenia Communities Holdings Limited Notes to the Financial Statements for the year ended 30 June 2014 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. The Trusts The Ingenia Communities Fund (“ICF” or the “Fund”) (ARSN 107 459 576) and the Ingenia Communities Management Trust (“ICMT”) (ARSN 122 928 410) (together the “Trusts”) are Australian registered schemes. Ingenia Communities RE Limited (ACN 154 464 990; Australian Financial Services Licence number 415862), the Responsible Entity of the Trusts, is incorporated and domiciled in Australia. The parent company of Ingenia Communities RE Limited is Ingenia Communities Holdings Limited (the “Company”). The shares of the Company and the units of the Trust are “stapled” and trade on the Australian Securities Exchange (“ASX”) as a single security. The Company and the Trust along with their subsidiaries are collectively referred to as the Group in this report. The stapling structure will cease to operate on the ﬁrst to occur of: – – the Company or either of the Trusts resolving by special resolution in accordance with its constitution to terminate the stapling provisions; or the commencement of the winding up of the Company or either of the Trusts. b. Basis of Preparation The ﬁnancial report is a general purpose ﬁnancial report that has been prepared in accordance with Australian Accounting Standards (“AASB”), Australian Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board (the “Board”) and the Corporations Act 2001. As permitted by Class Order 05/642, issued by the Australian Securities and Investments Commission, this ﬁnancial report is a combined ﬁnancial report that presents the ﬁnancial statements and accompanying notes of both the Ingenia Communities Fund and Ingenia Communities Management Trust. The ﬁnancial statements and accompanying notes of the Trusts have been presented in the attached associated ﬁnancial report. The ﬁnancial report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Board and International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. The ﬁnancial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000) unless otherwise stated. The ﬁnancial report is prepared on an historical cost basis, except for investment properties, retirement village residents’ loans and derivative ﬁnancial instruments, which are measured at fair value. As at 30 June 2014, ICMT recorded a net current asset deﬁciency of $304,052,000. This deﬁciency includes retirement village resident loans of $190,122,000, liabilities from discontinued operations of $30,449,000 and payables to other entities within the Group of $133,249,000. Resident loan obligations of the Trusts are classiﬁed as current liabilities due to the demand feature of these obligations despite the unlikely possibility that the majority of the loans will be settled within the next twelve months. Furthermore, if required, the proceeds from new resident loans could be used by the Group to settle its existing loan obligations should those incumbent residents vacate their units. Intercompany loan balances are payable on demand, however ICF has undertaken not to call its loan receivable from ICMT within twelve months of the date of this report, if calling the loan would result in ICMT being unable to pay its debts as and when they are due and payable.The liabilities of the discontinued operations consist mainly of borrowings of $30,081,000 related to a facility with the Bank of New Zealand, which has been reﬁnanced recently for a ﬁve year period and will be repaid upon disposal of the corresponding assets. Accordingly, there are reasonable grounds to believe that ICMT will be able to pay its debts as and when they become due and payable; and the ﬁnancial report of ICMT has been prepared on a going concern basis. c. Adoption of New and Revised Accounting Standards The Group has adopted all of the new and revised standards and interpretations issued by the Australian Accounting Standards Board that are relevant to its operations and effective for the current period. The following standards were most relevant to the Group: – AASB 10 ”Consolidated Financial Statements” and AASB 2011-7 “Amendments to Australian Accounting Standards arising from consolidation and Joint Arrangements standards”; – AASB 13 ‘Fair Value Measurement’ and AASB 2011-8 ‘Amendments to Australian Accounting Standards arising from AASB 13’; – AASB 119 ‘Employee Beneﬁts’ (2011) and AASB 2011-10 ‘Amendments to Australian Accounting Standards arising from AASB 119 (2011); – AASB 2012-2 ‘Amendments to Australian Accounting Standards-Disclosures-Offsetting Financial Assets and Financial Liabilities’ – AASB 2011-4 ‘Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements’ Annual Report 2014 101 The impact of application of each Standard is as follows: Accounting Standard Impact on the Group AASB 10 and AASB 2011-7 AASB 10 amends the definition of control such that an investor controls an investee when a) it has power over an investee; b) it is exposed, or has rights, to variable returns from its involvement with the investee and c) has the ability to use its power to affect its returns. All three conditions have to be met for an investor to have control. The application of the standard did not have any impact on the Group. AASB 13 and AASB 2011-8 AASB 13 establishes a single source of guidance for fair value measurements and disclosures about fair value. The standard is broad in scope and applies to both financial instrument and non-financial instrument items with the exception of a few items like share-based payments and leases, which are covered by other standards. AASB 13 defines fair value as the price that would be received to sell an asset or liability in an orderly transaction in the principal (or the most advantageous) market at the measurement date under current market conditions. Valuations made are categorised into three levels based on the inputs used. However, regardless of the valuation methodology applied, fair value represents the exit price in relation to the asset or liability. The standard applies prospectively from 1 January 2013. The Group has applied requirements of the Standard in all its valuations in particular of investment properties. Additionally, the disclosure requirements of the standard, which includes information about assumptions made and the qualitative impact of those assumptions on fair value, have been complied with. AASB 119 and AASB 2011-10 AASB 119 amends the definition of short-term employee benefits, with the distinction now AASB 2012-2 being based on whether the benefits are expected to be settled within 12 months after reporting date (short-term benefit). Long term employee benefits are required to be measured using the actuarial valuation method. The method involves projecting future cash flows and discounting back to present value. This requirement applies to the annual leave balance for the Group. The application of the standard’s requirement for both current and previous periods did not result in amendment to the figures disclosed, as the changes were not material. The standard provides application and presentation guidance to AASB 132 ‘Financial Instruments: Presentation’ for applying some offsetting criteria. The Group has applied the requirements of the Standard, which necessitates disclosure of information about rights of offset and related arrangements for financial instruments under an enforceable master netting arrangement or similar arrangement. This has resulted in changes to disclosure principally for retirement village resident loans for the Group. AASB 2011-4 The standard amends AASB 124 ‘Related Party Disclosures’ to remove individual key management personnel disclosures required by Australian specific paragraphs. The application of the standard did not have any financial impact on the Group. d. Principles of Consolidation ICF’s consolidated ﬁnancial statements comprise the parent and its subsidiaries. ICMT’s consolidated ﬁnancial statements comprise ICMT and its subsidiaries. Subsidiaries are all those entities (including special purpose entities) whose ﬁnancial and operating policies a trust has the power to govern, so as to obtain beneﬁts from their activities. The ﬁnancial statements of the subsidiaries are prepared for the same reporting period as the parent, using consistent accounting policies. Adjustments are made to bring into line dissimilar accounting policies. Inter-company balances and transactions including unrealised proﬁts have been eliminated. Subsidiaries are consolidated from the date on which the parent obtains control. They are de-consolidated from the date that control ceases. Investments in subsidiaries are carried at cost in the parent’s ﬁnancial statements. 102 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) e. Business Combinations and Goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the Trusts elect whether it measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identiﬁable net assets. Acquisition costs incurred are expensed and included in other expenses. When the Trusts acquire a business, they assess the ﬁnancial assets and liabilities assumed for appropriate classiﬁcation and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through proﬁt or loss. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interest over the net identiﬁable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in proﬁt or loss. f. Discontinued Operations and Assets Held for Sale The Trusts have classiﬁed certain components as discontinued operations. A discontinued operation is a component of the entity that has been disposed of or is classiﬁed as held for sale and that represents a separate major line of business or geographical area of operations, or is part of a single co-ordinated plan to dispose of such a line of business or area of operations. The results of discontinued operations are presented separately on the face of the income statement. Components of the entity are classiﬁed as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. They are measured at the lower of their carrying amount and fair value less costs to sell, except for assets such as investment property, which are carried at fair value. An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset (or disposal group), but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset (or disposal group) is recognised at the date of derecognition. Non-current assets classiﬁed as held for sale, and the assets of a disposal group classiﬁed as held for sale are presented separately from the other assets on the face of the balance sheet. The liabilities of a disposal group classiﬁed as held for sale are presented separately from other liabilities on the face of the balance sheet. Details of discontinued operations and assets held for sale are given at Note 7. g. Distributions A liability for any distribution declared on or before the end of the reporting period is recognised on the balance sheet in the reporting period to which the distribution pertains. h. Foreign Currency i. Functional and presentation currencies The functional currency and presentation currency of the Trusts and their subsidiaries, other than foreign subsidiaries, is the Australian dollar. ii. Translation of foreign currency transactions Transactions in foreign currency are initially recorded in the functional currency at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currency are retranslated at the rate of exchange prevailing at the balance date. All differences in the consolidated ﬁnancial report are taken to the income statement with the exception of differences on foreign currency borrowings designated as a hedge against a net investment in a foreign entity. These are taken directly to equity until the disposal of the net investment at which time they are recognised in the income statement. A non-monetary item that is measured at fair value in a foreign currency is translated using the exchange rates at the date when the fair value was determined. iii. Translation of ﬁnancial statements of foreign subsidiaries The functional currency of certain subsidiaries is not the Australian dollar. At reporting date, the assets and liabilities of these entities are translated into the presentation currency of the Trusts at the rate of exchange prevailing at balance date. Financial performance is translated at the average exchange rate prevailing during the reporting period. The exchange differences arising on translation are taken directly to the foreign currency translation reserve in equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that foreign operation is recognised in the income statement. i. Leases Finance leases, which transfer to the Trusts substantially all the risks and beneﬁts incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the ﬁnance charges and reduction of the lease liability to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised as an expense in the income statement. Finance leases, which transfer away from the Trusts substantially all the risks and beneﬁts incidental to ownership of the leased item, are recognised at the inception of the lease. A ﬁnance lease receivable is recognised on inception at the present value of the minimum lease receipts. Finance lease receipts are apportioned between the interest income and reduction in the lease receivable to achieve a constant rate of interest on the remaining balance of the receivable. Interest is recognised as income in the income statement. Annual Report 2014 103 l. Cash and Cash Equivalents Cash and cash equivalents in the balance sheet and cash ﬂow statement comprise cash at bank and in hand and short-term deposits that are readily convertible to known amounts of cash and are subject to an insigniﬁcant risk of changes in value. m. Trade and Other Receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. An allowance for impairment is made when there is objective evidence that collection of the full amount is no longer probable. n. Inventories The Trusts hold inventory in relation to the acquisition and development of manufactured homes within their Active Lifestyle Estates segment. Inventories are held at the lower of cost and net realisable value. Costs of inventories comprise all acquisition costs, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Inventory includes work in progress and raw materials used in the production of manufactured home units. Net realisable value is determined on the basis of an estimated selling price in the ordinary course of business less estimated costs of completion and the estimated costs necessary to make the sale. o. Derivative Financial Instruments The Trusts use derivative ﬁnancial instruments such as foreign currency contracts and interest rate swaps to hedge its risks associated with foreign currency and interest rate ﬂuctuations. Such derivative ﬁnancial instruments are initially recognised at fair value on the date in which the derivative contract is entered into and are subsequently remeasured to fair value. Leases of properties that are classiﬁed as investment properties, are classiﬁed as ﬁnance leases under AASB 140 Investment Properties. Leases where the lessor retains substantially all the risks and beneﬁts of ownership are classiﬁed as operating leases. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the term of the lease. j. Financial Assets and Liabilities Current and non-current ﬁnancial assets and liabilities within the scope of AASB 139 Financial Instruments: Recognition and Measurement are classiﬁed as at fair value through proﬁt or loss; loans and receivables; held- to-maturity investments; or as available-for-sale. The Trusts determine the classiﬁcation of their ﬁnancial assets and liabilities at initial recognition with the classiﬁcation depending on the purpose for which the asset or liability was acquired or issued. Financial assets and liabilities are initially recognised at fair value, plus directly attributable transaction costs unless their classiﬁcation is at fair value through proﬁt or loss. They are subsequently measured at fair value or amortised cost using the effective interest method. Changes in fair value of available-for-sale ﬁnancial assets are recorded directly in equity. Changes in fair values of ﬁnancial assets and liabilities classiﬁed as at fair value through proﬁt or loss are recorded in the income statement. The fair values of ﬁnancial instruments that are actively traded in organised ﬁnancial markets are determined by reference to quoted market bid prices at the close of business on the balance sheet date. For those with no active market, fair values are determined using valuation techniques. Such techniques include: using recent arm’s length market transactions; reference to the current market value of another instrument that is substantially the same; discounted cash ﬂow analysis and option pricing models, making as much use of available and supportable market data as possible and keeping judgemental inputs to a minimum. k. Impairment of Non-Financial Assets Assets other than investment property and ﬁnancial assets carried at fair value are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identiﬁable cash inﬂows that are largely independent of the cash inﬂows from other assets or groups of assets. Non-ﬁnancial assets excluding goodwill which have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. 104 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) p. Investment Property Land and buildings have the function of an investment and are regarded as composite assets. In accordance with applicable accounting standards, the buildings, including plant and equipment, are not depreciated. Investment property includes property under construction and tourism cabins. 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 the income statement in the period in which they arise, including corresponding tax effect. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal market for the asset or liability or in its absence, the most advantageous market. It is the Trusts’ policy to have all investment properties externally valued at intervals of not more than two years and that such valuation be reﬂected in the ﬁnancial reports of the Trusts. It is the policy of the responsible trust to review the fair value of each investment property every six months and to cause investment properties to be revalued to fair values whenever their carrying value materially differs to their fair values. In determining fair values, expected net cash ﬂows are discounted to their present value using a market determined risk adjusted discount rate. The assessment of fair value of investment properties does not take into account potential capital gains tax assessable. q. Payables Trade and other payables are carried at amortised cost and due to their short-term nature are not discounted. They represent liabilities for goods and services provided to the Trusts prior to the end of the ﬁnancial year that are unpaid and are recognised when the Trusts become obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 60 days of recognition. r. Retirement Village Resident Loans These loans, which are non-interest bearing and repayable on the departure of the resident, are classiﬁed as ﬁnancial liabilities at fair value through proﬁt and loss with resulting fair value adjustments recognised in the income statement. The fair value of the obligation is measured as the ingoing contribution plus the resident’s share of capital appreciation to reporting date. Although the expected average residency term is more than ten years, these obligations are classiﬁed as current liabilities, as required by Accounting Standards, because the Trusts do not have an unconditional right to defer settlement to more than twelve months after reporting date. This liability is stated net of deferred management fee accrued to reporting date, because the Trusts contracts with residents require net settlement of those obligations. Refer to Notes 25(k) and 1(y) for information regarding the valuation of retirement village resident loans. s. Borrowings Borrowings are initially recorded at the fair value of the consideration received less directly attributable transaction costs associated with the borrowings. After initial recognition, borrowings are subsequently measured at amortised cost using the effective interest rate method. Under this method fees, costs, discounts and premiums that are yield related are included as part of the carrying amount of the borrowing and amortised over its expected life. Borrowings are classiﬁed as current liabilities unless the Trusts do not have an unconditional right to defer settlement to more than twelve months after reporting date. Borrowing costs are expensed as incurred except where they are directly attributable to the acquisition, construction or production of a qualifying asset. When this is the case, they are capitalised as part of the acquisition cost of that asset. t. Issued Units Issued and paid up units are recognised at the fair value of the consideration received by the Trusts. Any transaction costs arising on issue of ordinary units are recognised directly in unitholders’ interest as a reduction of the units proceeds received. u. Revenue Revenue from rents, interest and distributions is recognised to the extent that it is probable that the economic beneﬁts will ﬂow to the entity and the revenue can be reliably measured. Revenue brought to account but not received at balance date is recognised as a receivable. Rental income from operating leases is recognised on a straight-line basis over the lease term. Contingent rentals are recognised as income in the ﬁnancial year that they are earned. Fixed rental increases that do not represent direct compensation for underlying cost increases or capital expenditures are recognised on a straight-line basis until the next market review date. Rent paid in advance is recognised as unearned income. Deferred management fee income is calculated as the expected fee to be earned on a residents ingoing loan, allocated pro-rata over the resident’s expected tenure, together with any share of capital appreciation that has occurred at reporting date. Revenue from the sale of manufactured homes within the Active Lifestyle Estate segment is recognised when the signiﬁcant risks, rewards of ownership and effective control has been transferred to the buyer. Interest income is recognised as the interest accrues using the effective interest rate method. Annual Report 2014 105 v. Provisions, Including for Employee Beneﬁts i. General Provisions are recognised when the Trusts have 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. When the Trusts expect some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognised as a separate asset, but only when the reimbursement is virtually certain. The expense relating to a provision is presented in the statement of proﬁt or loss net of any reimbursement. ii. Wages, salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary beneﬁts and annual leave expected to be settled within twelve months of the reporting date are recognised in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Expenses for non- accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. iii. Long service leave The liability for long service 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 government bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash outﬂows. w. Income Tax i. Current income tax Under the current tax legislation, the Fund is not liable to pay Australian income tax provided that its taxable income (including any assessable capital gains) is fully distributed to unitholders each year. Tax allowances for building and ﬁxtures depreciation are distributed to unitholders in the form of the tax-deferred component of distributions. ii. Deferred income tax Deferred income tax represents tax (including withholding tax) expected to be payable or recoverable by taxable entities on the differences between the tax bases of assets and liabilities and their carrying amounts for ﬁnancial reporting purposes. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised through continuing use or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at reporting date. Income taxes related to items recognised directly in equity are recognised in equity and not against income. x. Goods and Services Tax (“GST”) Revenue, expenses and assets (with the exception of receivables) are recognised net of the amount of GST to the extent that the GST is recoverable from the taxation authority. Where GST is not recoverable, it is recognised as part of the cost of the acquisition, or as an expense. Receivables and payables are stated inclusive of GST. The net amount of GST recoverable from or payable to the tax authority is included in the balance sheet as an asset or liability. Cash ﬂows are included in the cash ﬂow statement on a gross basis. The GST components of cash ﬂows arising from investing and ﬁnancing activities, which are recoverable from or payable to the tax authorities, are classiﬁed as operating cash ﬂows. y. Fair Value Measurement The Trusts measure ﬁnancial instruments, such as, derivatives, and non-ﬁnancial assets such as investment properties, at fair value at each balance sheet date. Also, fair values of ﬁnancial instruments measured at amortised cost are disclosed in Note 26. Fair value is the price that would be received to sell 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. However, ICMT and its subsidiaries are subject to Australian income tax. The principal or the most advantageous market must be accessible to the Trusts. Current tax assets and liabilities for the current period are measured at the amount expected to be recovered from, or paid to, the taxation authorities based on the current period’s taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date. The subsidiaries that hold the Trusts foreign properties may be subject to corporate income tax and withholding tax in the countries in which they operate. Under current Australian income tax legislation, unitholders may be entitled to receive a foreign tax credit for this withholding tax. 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. 106 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Trusts use 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 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 Trusts determine 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 the reporting period. The Trusts’ Audit and Risk Committee determines the policies and procedures for both recurring fair value measurement, such as investment properties and resident loans and for non-recurring measurement. External valuers are involved for valuation of signiﬁcant assets, such as properties and signiﬁcant liabilities. Selection criteria include market knowledge, experience and qualiﬁcations, reputation, independence and whether professional standards are maintained. On a six monthly basis management presents valuation results to the Audit and Risk Committee and the Trusts’ auditors. This includes a discussion of the major assumptions used in the valuations. For the purpose of fair value disclosures, the Trusts have determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. z. Pending Accounting Standards AASB 9 Financial Instruments is applicable to reporting periods beginning on or after 1 January 2018. The Group has not early adopted this standard. This standard provides requirements for the classiﬁcation and measurement of ﬁnancial assets and accounting for ﬁnancial liabilities. These requirements seek to improve and simplify the requirements listed in AASB 139 Financial Instruments: Recognition and Measurement. The Group is currently evaluating the impact of this standard. AASB 2012-3 “Amendments to Australian Accounting Standards- Offsetting Financial Assets and Liabilities” is applicable for annual ﬁnancial periods beginning on or after 1 January 2014. The standard makes amendments to AASB 132 “Financial Instruments- Presentation” as a result of the issuance of International Financial Reporting Standard “Offsetting Financial Assets and Financial Liabilities” and provides application guidance to certain criteria mentioned in AASB 132. The application of the Standard does not have any impact on the results of the Group as retirement village resident loans are already offset as there is a current legally enforceable right and there is an intention to settle on a net basis. AASB 2014-1 Amendments to Australian Accounting Standards is applicable for periods beginning on or after 1 July 2014. This standard clariﬁes that judgement is needed to determine whether an acquisition of investment property is solely the acquisition of an investment property or whether it is an acquisition of a group of assets or a business combination within the scope of AASB 3 Business Combinations that includes an investment property. The Trusts are currently making an assessment about this classiﬁcation for each investment property acquired, therefore no impact is expected from this change except for additional disclosures regarding judgements and estimates. Other new accounting standards, amendments to accounting standards and interpretations have been published that are not mandatory for the current reporting period. These are not expected to have any material impact on the Group’s ﬁnancial reporting future reporting periods. aa. Current versus Non-Current Classiﬁcation The Trusts present assets and liabilities in the balance sheet based on current/non-current classiﬁcation. An asset is current when it is: – Expected to be realised or intended to be sold or consumed in the normal operating cycle – Held primarily for the purpose of trading – Expected to be realised within twelve months after the reporting period, or – Cash or cash equivalents unless restricted from being exchanged or used to settle a liability for at least twelve months after reporting period. All other assets are classiﬁed as non-current. A liability is current when: – – – It is expected to be settled in the normal operating cycle It is held primarily for the purpose of trading It is due to be settled within twelve months after the reporting period, or – There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period. The Group classiﬁes all other liabilities as non-current. Deferred tax assets and liabilities are classiﬁed as non- current assets and liabilities. Annual Report 2014 107 2. ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of ﬁnancial statements requires the use of certain critical accounting estimates. It also requires the Responsible Entity to exercise its judgement in the process of applying the Trusts accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are signiﬁcant to the ﬁnancial statements are disclosed below. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. a. Critical Accounting Estimates and Assumptions The Trusts make estimates and assumptions concerning the future. The resulting accounting estimates, by deﬁnition, will seldom equal the related actual results. The estimates and assumptions that have a signiﬁcant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁnancial year are discussed below. i. Valuation of investment property The Trusts have investment properties with a combined carrying amount of $498,863,000 (2013: $370,931,000) (refer Note 11), and combined retirement village residents’ loans with a carrying amount of $190,122,000 (2013: $175,703,000) which together represent the estimated fair value of the Trusts interest in retirement villages. In addition, the Trusts hold investment properties with carrying amounts of $45,902,000 (2013: $35,343,000) which are included in assets of discontinued operations. These carrying amounts reﬂect certain assumptions about expected future rentals, rent-free periods, operating costs and appropriate discount and capitalisation rates. The valuation assumptions for deferred management fee villages reﬂect assumptions relating to average length of stay, unit market values, estimates of capital expenditure, contract terms with residents, discount rates and projected property growth rates. In forming these assumptions, the Responsible Entity considered information about current and recent sales activity, current market rents, and discount and capitalisation rates, for properties similar to those owned by the Trusts, as well as independent valuations of the Trusts’ property. ii. Fair value of derivatives The fair value of derivative assets and liabilities is based on assumptions of future events and involves signiﬁcant estimates. Given the complex nature of these instruments and various assumptions that are used in calculating mark-to-market values, the Trusts rely on counterparty valuations for derivative values. The counterparty valuations are usually based on mid-market rates and calculated using the main variables including the forward market curve, time and volatility. iii. Valuation of assets acquired in business combinations Upon recognising the acquisition, management uses estimations and assumptions of the fair value of assets and liabilities assumed at the date of acquisition, including judgements related to valuation of investment property as discussed above. iv. Valuation of retirement village resident loans The fair value of the retirement village resident loans is calculated by reference to the initial loan amount plus the resident’s share of any capital gains in accordance with their contracts less any deferred management fee income accrued to date by the operator. The key assumption for calculating the capital gain and deferred management fee income components is the value of the dwelling being occupied by the resident. This value is determined by reference to the valuation of investment property as referred to above. v. Calculation of deferred management fee (“DMF”) Deferred management fees are recognised by the Trusts over the estimated period of time the property will be leased by the resident and the accrued DMF is realised upon exit of the resident. The accrued DMF is based on various inputs including the initial price of the property, estimated length of stay of the resident, various contract terms and projected price of property at time of re-leasing. b. Critical Judgements in Applying the Entity’s Accounting Policies There were no judgements, apart from those involving estimations, that management has made in the process of applying the entity’s accounting policies that had a signiﬁcant effect on the amounts recognised in the ﬁnancial report. 108 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 3. SEGMENT INFORMATION a. Description of Segments The Trusts invest in seniors living properties located in Australia with three reportable segments: – Garden Villages – rental villages; – Settlers Lifestyle – deferred management fee villages; and – Active Lifestyle Estates – comprising permanent and short stay rentals within lifestyle parks and the sale of manufactured homes. The Trusts have identiﬁed their operating segments based on the internal reports that are reviewed and used by the chief operating decision maker in assessing performance and in determining the allocation of resources. Other parts of the Trusts are neither operating segments nor part of an operating segment. Assets that do not belong to an operating segment are described below as “unallocated”. b. Ingenia Communities Fund – 30 June 2014 i. Segment revenue External segment revenue Interest income Total revenue ii. Segment underlying profit External segment revenue Interest income Property expenses Administration expenses Operational, marketing and selling expenses Finance expense Underlying profit – continuing operations Reconciliation of underlying profit to profit from continuing operations: Net foreign exchange gain Net gain/(loss) on change in fair value of: Investment properties Derivatives Responsible Entity fees Profit from continuing operations per the Consolidated Statement of Comprehensive Income iii. Segment assets Segment assets Discontinued operations Total assets Active Lifestyle Estates $’000 Settlers $’000 Garden Villages $’000 Corporate/ Unallocated $’000 Total $’000 – – – – – – – – – – – (852) – – (852) – – – – – – – – – – – – – – – 9,354 – – 10,339 9,354 10,339 9,354 10,339 19,693 9,354 – – – – – – 10,339 (274) (682) (295) 9,354 10,339 (274) (682) (295) (3,955) (3,955) 9,354 5,133 14,487 – (147) (147) 2,382 – – – 41 1,530 41 (1,170) (1,170) 11,736 3,857 14,741 6,904 53,992 114,286 142,597 317,779 3,874 321,653 Annual Report 2014 109 c. Ingenia Communities Fund – 30 June 2013 i. Segment revenue External segment revenue Interest income Total revenue ii. Segment underlying profit External segment revenue Interest income Administration expenses Operational, marketing and selling expenses Finance expense Underlying profit/(loss) – continuing operations Reconciliation of underlying profit to profit from continuing operations: Net foreign exchange gain Net gain/(loss) on disposal of investment property Net gain/(loss) on change in fair value of: Investment properties Derivatives Responsible Entity fees Other Profit from continuing operations per the Consolidated Statement of Comprehensive Income iii. Segment assets Segment assets Discontinued operations Total assets Active Lifestyle Estates $’000 Settlers $’000 Garden Villages $’000 Corporate/ Unallocated $’000 Total $’000 8,581 3,524 8,341 – 122 3,524 8,341 3,646 12,105 8,341 – – – – 8,341 – (107) 1,618 – – – 122 3,524 (797) (96) (3,841) (1,088) 37 – – 752 (1,101) (185) 8,581 3,524 (797) (96) (3,841) 7,371 37 (107) 1,618 752 (1,101) (185) 9,852 (1,585) 8,385 118 – 118 118 – – – – 118 – – – – – – 118 – – – – – – – – – – – – – – – – 7,154 54,009 99,704 72,081 232,948 3,874 236,822 110 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 3. SEGMENT INFORMATION (CONTINUED) d. Ingenia Communities Management Trust – 30 June 2014 Active Lifestyle Estates $’000 Settlers $’000 Garden Villages $’000 Corporate/ Unallocated $’000 i. Segment revenue External segment revenue Interest income Reclassification of gain on revaluation of newly constructed villages Total revenue ii. Segment underlying profit External segment revenue Interest income Property expenses Employee expenses Administration expenses Operational, marketing and selling expenses Manufactured home cost of sales Finance expense Income tax benefit 13,589 10,576 24,570 – – – (3,320) – – 13,589 7,256 24,570 13,589 10,576 24,570 – (2,570) (2,367) (320) (377) (2,130) – – – – (1,738) (16,385) (851) (157) (3) – – – (7,913) (1,129) (2,354) – – – Underlying profit/(loss) – continuing operations 5,825 7,827 (3,211) (8,436) Reconciliation of underlying profit to profit from continuing operations: Net loss on change in fair value of: Investment properties (1,273) Retirement village resident loans Gain on revaluation of newly constructed villages Responsible Entity fees Income tax benefit associated with reconciliation items Profit from continuing operations per the Consolidated Statement of Comprehensive Income iii. Segment assets Segment assets Assets held for sale Discontinued operations Total assets (598) (616) (3,320) – – – – – – – – – – (1,626) 4,369 – – – – 4,552 3,293 (3,211) (5,693) (1,059) 122,955 249,183 1,420 269 373,827 5,439 47,657 426,923 – 16 – 16 – 16 – – Total $’000 48,735 16 (3,320) 45,431 48,735 16 (20,693) (11,131) 2,137 2,005 (1,871) (616) (3,320) (1,626) 4,369 (444) (2,050) – – (2,734) (2,130) (10,145) (10,145) 2,137 Annual Report 2014 111 e. Ingenia Communities Management Trust – 30 June 2013 i. Segment revenue External segment revenue Interest income Reclassification of gain on revaluation of newly constructed villages Total revenue ii. Segment underlying profit External segment revenue Interest income Property expenses Employee expenses Administration expenses Operational, marketing and selling expenses Manufactured home cost of sales Finance expense Income tax benefit Active Lifestyle Estates $’000 Settlers $’000 Garden Villages $’000 Corporate/ Unallocated $’000 940 11,444 20,265 – – – (4,619) – – 940 6,825 20,265 940 – 11,444 20,265 – – (216) (3,577) (12,405) (59) (15) (80) (297) – – (939) (132) (1,087) (6,228) (1,058) (1,022) – – – – – – – 14 – 14 – 14 – – (234) – – (5,212) (427) Underlying profit/(loss) – continuing operations 273 5,709 (448) (5,859) Reconciliation of underlying profit to profit from continuing operations: Net loss on change in fair value of: Investment properties Retirement village resident loans Gain on revaluation of newly constructed villages Responsible Entity fees Income tax benefit associated with reconciliation items Profit from continuing operations per the Consolidated Statement of Comprehensive Income iii. Segment assets Segment assets Discontinued operations Total assets (15) (1,513) 3,367 – – – – 327 (4,619) – – – – – – – – – (1,456) 410 258 (96) 2,919 (6,905) (3,824) 11,489 241,674 1,390 1,529 256,082 36,576 292,658 Total $’000 32,649 14 (4,619) 28,044 32,649 14 (16,198) (7,226) (1,439) (2,189) (297) (5,212) (427) (325) 1,839 327 (4,619) (1,456) 410 112 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 4. EARNINGS PER UNIT Earnings per unit Profit/(loss) from continuing operations ($’000) Profit/(loss) from discontinued operations ($’000) Net profit/(loss) for the year ($’000) INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 2013 2014 2013 14,741 681 15,422 8,385 (5,715) 2,670 (1,059) (111) (1,170) (3,824) (7,891) (11,715) Weighted average number of units outstanding (thousands) 646,603 509,716 646,603 509,716 Dilutive securities: Performance quantum rights (thousands) Retention quantum rights (thousands) Weighted average number of issued and dilutive potential securities outstanding (thousands) Basic earnings per unit from continuing operations (cents) (1) Basic earnings per unit from discontinued operations (cents) (1) Basic earnings per unit (cents) (1) Diluted earnings per unit from continuing operations (cents) (1) Diluted earnings per unit from discontinued operations (cents) (1) Diluted earnings per unit (cents) (1) 2,310 1,818 3,842 1,818 2,310 1,818 3,842 1,818 650,731 515,376 650,731 515,376 2.3 0.1 2.4 2.3 0.1 2.4 1.6 (1.1) 0.5 1.6 (1.1) 0.5 (0.2) – (0.2) (0.2) – (0.2) (0.8) (1.5) (2.3) (0.7) (1.5) (2.3) (1) Prior period weighted average number of units and earnings per unit have been adjusted in accordance with AASB 133 “Earnings per Share” (“AASB 133”). The weighted average number of units on issue for the current period, prior to the rights issue in September 2013, has also been adjusted as required by AASB 133. 5. FINANCE EXPENSE Interest paid or payable INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 3,955 2013 $’000 3,841 2014 $’000 10,145 2013 $’000 5,212 Annual Report 2014 113 6. INCOME TAX BENEFIT a. Income Tax Beneﬁt/(Expense) Current tax Decrease in deferred tax liabilities Income tax benefit/(expense) INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 2013 $’000 – – – – – – 83 6,423 6,506 (83) 66 (17) b. Reconciliation between Tax Expense and Pre-Tax Net Proﬁt Profit/(loss) before income tax Less amounts not subject to Australian income tax 14,741 (14,741) 8,385 (8,385) Income tax at the Australian tax rate of 30% (2013: 30%) ICMT tax consolidation impact Tax effect of amounts which are not deductible/(taxable) in calculating taxable income Prior period income tax return true-ups Movement in carrying value and tax cost base of investment properties Movements in carrying value and tax cost base of DMF receivables Other timing differences Non-recognition of Australian tax losses Recognition of Australian tax losses Income tax benefit/(expense) – – – – – – – – – – – – – – – – – – (7,565) (3,807) – – (7,565) (3,807) 2,270 2,823 588 1,163 (1,232) 406 – 488 1,142 – (92) (80) (907) 101 (181) 6,506 (17) c. Tax Consolidation Effective from 1 July 2012, ICMT and its Australian domiciled owned subsidiaries formed a tax consolidation group with the ICMT being the head entity. Under the tax funding agreement the funding of tax within the tax group is based on taxable income as if that entity was not a member of the tax group. Upon entering into the ICMT tax consolidated group, the tax cost bases for certain assets were reset resulting in income tax beneﬁts being recorded. In addition, unrecognised losses incurred by entities within the ICMT tax consolidated group are now available for utilisation by the ICMT tax consolidated group resulting in an additional income tax beneﬁt being recorded. 114 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 7. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE a. Assets Held for Sale i. Details of assets held for sale Prior to 30 June 2014, a subsidiary of ICMT entered into discussions with a third party regarding the sale of Noyea Riverside Village (“Noyea”). Noyea was included within the Settlers Lifestyle segment. Settlement on the sale of Settlers Lifestyle Noyea was completed on 31 July 2014 at an adjusted sales price of $5.4 million resulting in $nil gain or loss recognised upon completion. ii. Assets held for sale The following is the breakdown of the assets held for sale at Noyea: Investment property Deferred management fee receivable b. Discontinued Operations Note 15 2014 $’000 – 5,439 5,439 i. Details of discontinued operations The Trusts’ investment in the New Zealand Students business has been classiﬁed as a discontinued operation since 30 June 2011, consistent with the previously announced strategy to focus on transitioning to an actively managed Australian seniors living business. The Trusts holds a 100% interest in three facilities in Wellington, New Zealand that are primarily leased for 15 years to Victoria University of Wellington and Wellington Institute of Technology. The Trusts have completed a sales campaign and terms have been agreed with a global real estate investment ﬁrm. Following divestment of these operations the proceeds will be reinvested into its Australian lifestyle parks business. ii. Financial performance The ﬁnancial performance of components of the Trusts disposed of or classiﬁed as discontinued operations at each reporting date were: Revenue Net loss on change in fair value of investment properties Unrealised net foreign exchange gain/(loss) Other income (Expenses)/income Gain on disposal of equity investments Distributions from formerly equity accounted investments Disposal costs associated with overseas investments Profit/(loss) from operating activities before income tax Income tax benefit/(expense) Profit/(loss) from operating activities Gain/(loss) on sale of discontinued operations Release of foreign currency translation reserve on disposal of foreign operations Net profit/(loss) for the year INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 – – 104 – (5) 320 268 – 687 (6) 681 – – 681 40 (43) – 31 759 – 2,262 – 3,049 (747) 2,302 7,490 (15,507) (5,715) 2014 $’000 3,211 (1,630) 1,453 – 2013 $’000 5,256 (2,740) (718) – (2,859) (5,505) 7 5 (290) (103) (8) (111) – – (111) – 24 (672) (4,355) (255) (4,610) (837) (2,444) (7,891) Net proﬁt attributable to the parent of ICF is $681,000 (2013: loss of $5,715,000), and net loss attributable to the parent of ICMT is $nil (2013: $4,577,000). Annual Report 2014 115 iii. Cash ﬂows The cash ﬂows of components of the Trusts disposed of or classiﬁed as discontinued operations at each reporting date were: Net cash flow from operating activities Net cash flow from investing activities: Proceeds/(payments) on sale of discontinued operations Additions to investment properties Payments for lease arrangements Net cash flow from financing activities Net cash flows from discontinued operations INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 – – – – – – 2013 $’000 1,155 2014 $’000 1,135 2013 $’000 – 28,531 (120) 35,818 – – (29,786) (100) (9,081) (13,666) (745) 11,448 2,637 – (26,283) (4,131) iv. Assets and liabilities The assets and liabilities of components of the Trusts classiﬁed as disposal groups at each reporting date were: INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 2013 $’000 Assets Cash and cash equivalents Trade and other receivables Investment properties Plant and equipment Equity accounted investments Total assets Liabilities Bank overdraft Payables Borrowings Deferred tax liabilities Total liabilities – – – – – – – – 3,874 3,874 3,874 3,874 – – – – – – – – – – Net assets of disposal groups 3,874 3,874 1,657 98 974 259 45,902 35,343 – – – – 47,657 36,576 – 368 30,081 – 30,449 17,208 1,955 2,050 17,522 – 21,527 15,049 The change in investment properties increased for the year due to capitalised expenditure of $7.8 million, lease incentive payments of $0.4 million and foreign exchange gain of $4.0 million offset by a fair value loss of $1.6 million. v. Capital commitments There were no capital commitments under construction contracts for the New Zealand Students business for the year ended 30 June 2014 (2013: A$9,208,234). vi. Capitalisation rate The weighted average capitalisation rate of the New Zealand Students properties within discontinued operations is 8.6% (2013: 7.75%). 116 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 8. CASH AND CASH EQUIVALENTS Cash at bank and in hand Reconciliation to statements of cash flows Cash and cash equivalents attributable to: Continuing operations – cash at bank Discontinued operations – cash at bank Discontinued operations – bank overdraft INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST Note 25 2014 $’000 2,658 2013 $’000 31,014 2014 $’000 3,893 2013 $’000 1,229 1,229 974 (1,955) 248 2,658 31,014 – – – – 3,893 1,657 – 5,550 Cash at end of the year as per cash flow statement 2,658 31,014 9. TRADE AND OTHER RECEIVABLES Current Rental and other amounts due Finance lease receivable from stapled entity Accrued income, prepayments and deposits Total current trade and other receivables Non-current Finance lease receivable from stapled entity Accrued income, prepayments and deposits Total non-current trade and other receivables INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 2013 $’000 866 3,322 92 4,280 37,356 1,978 39,334 4,822 3,322 1,060 9,204 37,358 2,114 39,472 1,648 – 1,483 3,131 – 40 40 1,336 – 1,483 2,819 – 438 438 Rental amounts due are typically paid in advance and other amounts due are receivable within 30 days. There are no receivables which are neither past due nor impaired. ICF has leased a number of its properties to ICMT under leases that are classiﬁed as ﬁnance leases. The remaining term of each agreement varies between 92 and 115 years. There are no purchase options. Minimum payments under the agreements and their present values are: INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 2013 $’000 Minimum lease payments receivable: Not later than one year Later than one year and not later than five years Later than five years Unearned finance income Net present value of minimum lease payments Net present value of minimum lease payments receivable: Not later than one year Later than one year and not later than five years Later than five years 3,322 13,287 3,322 13,287 301,540 304,862 318,149 321,471 (277,471) (280,791) 40,678 40,680 3,178 10,399 27,101 40,678 3,178 10,400 27,102 40,680 Finance income recognised and included in interest income in the income statement 3,320 3,160 Information about the related ﬁnance lease payable by ICMT is given in Note 14. – – – – – – – – – – – – – – – – – – – – – – Annual Report 2014 117 INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 2013 $’000 – – 2,208 285 INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 2013 $’000 134,188 119,867 360,860 247,249 300 300 3,515 3,515 134,488 120,167 364,375 250,764 INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 2013 $’000 119,867 100,357 247,249 225,005 10,616 2,175 – – – – – 1,530 134,188 300 – – – 300 23,317 108,300 474 – (2,830) – (3,069) – 1,618 7,551 320 – (495) – (194) (1,871) 16,006 3,070 – – – 3,069 (195) 294 119,867 360,860 247,249 310 300 – (310) 300 3,515 – – – 3,515 1,660 310 1,545 – 3,515 10. INVENTORIES Current assets Manufactured homes 11. INVESTMENT PROPERTIES a. Summary of Carrying Amounts Completed properties Land not yet under construction Total investment properties b. Movements in Carrying Amounts Completed investment property Carrying amount at beginning of year Acquisitions Expenditure capitalised Transferred from plant and equipment Disposals Sale of units – Strata title Transfer (to)/from finance lease Transfer to inventory Net gain/(loss) on change in fair value Carrying amount at end of year Land not yet under construction Carrying amount at beginning of year Expenditure capitalised Net gain/(loss) on change in fair value Disposals Carrying amount at end of year The net change in fair value is recognised in proﬁt or loss as net gain/(loss) on change in fair value of investment properties. Fair value hierarchy disclosures for investment properties have been provided in Note 26. 118 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 11. INVESTMENT PROPERTIES (CONTINUED) c. Description of Valuation Techniques used and Key Inputs to Valuation of Investment Properties: Valuation technique Significant unobservable inputs Range (weighted average) Garden Villages Capitalisation method Stabilised occupancy 62-98% (87%) Capitalisation rate 8-13% (11%) Settlers Lifestyle Discounted cash flow Current market value of property $115,000-$470,000 ($307,000) Growth in value 0-4% Average length of stay – future residents Average length of stay – current residents 11.4 years 14.6 years Discount rate 14-20% (15%) Relationship of unobservable input to fair value As costs are fixed in nature, occupancy has a direct correlation to valuation (ie. the higher the occupancy, the greater the value). Capitalisation has an inverse relationship to valuation. Market value and growth in value have a direct correlation to valuation, while length of stay and discount rate have an inverse relationship to valuation. Active Lifestyle Estates Capitalisation method (for existing rental streams) Short-term occupancy Residential occupancy Operating profit margin 15-70% based on seasonality and accommodation categories 90-100% Higher the occupancy, the greater the value. 50-70% dependent upon short-term and residential accommodation mix Higher the profit margin, the greater the value. Capitalisation rate 9-12% Discounted cash flow (for future development) Discount rate 15-25% Capitalisation has an inverse relationship to valuation. Discount rate has an inverse relationship to valuation. Capitalisation Method Under the capitalisation method, fair value is estimated using assumptions regarding the expectation of future beneﬁts. The capitalisation method involves estimating the expected income projections of the property into perpetuity and applying a capitalisation rate. The capitalisation rate is based on current market evidence. Future income projections take into account occupancy, rental income and operating expenses. Discounted Cash Flow Method Under the discounted cash ﬂow method, fair value is estimated using assumptions regarding the beneﬁts and liabilities of ownership over the asset’s life including an exit or terminal value. This method involves the projection of a series of cash ﬂows on a real property interest. To this projected cash ﬂow series, a market-derived discount rate is applied to establish the present value of the income stream associated with the asset. The exit yield normally reﬂects the exit value expected to be achieved upon selling the asset and is a function of the risk adjusted returns of the asset and expected capitalisation growth rate. The duration of the cash ﬂows and the speciﬁc timing of inﬂows and outﬂows are determined by events such as rent reviews, lease renewal and related re-letting, redevelopment, or refurbishment as well as the development of new units. The appropriate duration is typically driven by market behaviour that is a characteristic of the class of real property. Periodic cash ﬂow is typically estimated as gross income less vacancy, non-recoverable expenses, collection losses, lease incentives, maintenance cost, agent and commission costs and other operating and management expenses. The series of periodic net underlying cash ﬂows, along with an estimate of the terminal value anticipated at the end of the projection period, is then discounted. Annual Report 2014 119 INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 2013 $’000 423 (184) 239 423 (84) 339 339 342 – – – – (100) 239 – – – 81 (84) 339 824 (644) 180 547 – (82) (320) 102 (67) 180 1,185 (638) 547 427 320 – (173) 49 (76) 547 INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 2013 $’000 1,210 1,569 8,480 6,305 – – 4,000 – INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST Note 2014 $’000 2013 $’000 2014 $’000 2013 $’000 (c) (a) (c) – – – – 94,000 68,000 (312) – (578) – 93,688 67,422 3,461 3,461 – – 41,883 41,883 3,589 3,589 – – 40,475 40,475 12. PLANT AND EQUIPMENT a. Summary of Carrying Amounts Plant and equipment Less: accumulated depreciation Total plant and equipment b. Movements in Carrying Amount Carrying amount at beginning of year Acquired through acquisitions Assets written off Transferred to investment property Additions Depreciation Carrying amount at end of year 13. TRADE AND OTHER PAYABLES Current liabilities Trade and other payables Non-current liabilities Other payables 14. BORROWINGS Current liabilities Finance leases Non-current liabilities Bank debt Prepaid borrowing costs Finance leases 120 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 14. BORROWINGS (CONTINUED) a. Bank Debt On 21 February 2014, ICF reﬁnanced its Australian dollar denominated bank debt facility to $129,500,000. The facility expires on 30 September 2015 and has the following principal ﬁnancial covenants: Loan to value ratio (“LVR”) is less than or equal to 50%; – – Total leverage ratio does not exceed 50%; and – Interest cover ratio (as deﬁned) of at least 1.50x in ﬁnancial year ending 2014 increasing to at least 1.75x in FY2015. As at 30 June 2014, the facility has been drawn to $94,000,000 (2013: $68,000,000). The carrying value of investment property net of resident liabilities at reporting date for the Group’s Australian properties pledged as security is $290,375,000 (2013: $179,320,000). b. Bank Guarantees ICF has the ability to utilise a portion of its $129.5 million bank facility to provide bank guarantees. Bank guarantees at 30 June 2014 were $4.4 million. Refer to Note 23. c. Finance Leases Subsidiaries of ICMT have entered into agreements with subsidiaries of ICF. The subject of each agreement is to lease a retirement village. The remaining term of each agreement varies between 92 and 115 years. There are no purchase options. On 23 of April 2013, ICMT was assigned a commercial lease with 16.5 years remaining with the Gosford City Council for land and facilities as part of its Ettalong Holiday Beach acquisition. The lease is for an initial three years commencing September 2012 with two renewal options of seven years each. The below table is based on the expectation that the lease options will be exercised. In December 2013, ICMT acquired One Mile Beach Holiday Park, accounted for as investment property. Two Crown leases are attached to the land, one for 40 years expiring on 19 September 2031 and one for perpetuity. i. Minimum Lease Payments – excluding Perpetual Lease Minimum lease payments: Within one year Later than one year but not later than five years Later than five years Total minimum lease payments Future finance charges Present value of minimum lease payments Present value of minimum lease payments: Within one year Later than one year but not later than five years Later than five years INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 2013 $’000 – – – – – – – – – – – – – – – – – – – – 3,613 14,530 305,301 323,444 3,589 14,422 308,628 326,639 (279,237) (282,575) 44,207 44,064 3,461 11,456 29,290 44,207 3,436 11,362 29,266 44,064 ii. Minimum Lease Payments – Perpetual Lease The perpetual lease is recognised as investment property and non-current liability at a value of $1.1 million based on a capitalisation rate of 10.6% applied to the current lease payment. Payments each period in relation to the lease are recognised as ﬁnance expenses in the statement of comprehensive income therefore there is no subsequent change to the originally determined present value of the minimum lease payments as calculated above. As this is a perpetual lease, the lease liability will not amortise and no fair value adjustments in relation to the lease will be recognised unless circumstances of the lease change. Under the terms of the lease, lease payments will continue into perpetuity. The current annual lease payment is $121,000. Annual Report 2014 121 15. RETIREMENT VILLAGE RESIDENT LOANS a. Summary of Carrying Amounts Gross resident loans Accrued deferred management fee Net resident loans b. Movements in Carrying Amounts Carrying amount at beginning of year Net (gain)/loss on change in fair value of resident loans Accrued deferred management fee income Deferred management fee cash collected Acquired resident loans Proceeds from resident loans Repayment of resident loans Transfer to assets held for sale Other Carrying amount at end of year INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 2013 $’000 – – – – – – – – – – – – – – – – – – – – – – – – – – 218,639 206,629 (28,517) (30,926) 190,122 175,703 175,703 162,603 616 (5,333) 1,811 – 22,021 (10,361) 5,439 226 (327) (4,850) 1,368 4,473 19,338 (7,118) – 216 190,122 175,703 Fair value hierarchy disclosures for retirement village resident loans have been provided in Note 26. 16. PROVISIONS Current liabilities Employee liabilities Non-current liabilities Employee liabilities 17. DERIVATIVES Current liabilities Interest rate swap contracts Non-current liabilities Interest rate swap contracts INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 2013 $’000 – – – – 590 249 507 140 INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST Note 2014 $’000 2013 $’000 2014 $’000 2013 $’000 25 25 84 84 – 209 – – – – 122 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 18. DEFERRED TAX LIABILITIES Deferred tax assets Tax losses Other Deferred tax liabilities DMF receivable Investment properties Net deferred tax liabilities Deductible temporary differences and carried forward losses tax effected for which no deferred tax asset has been recognised INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 2013 $’000 – – – – – – – – – – – – 13,269 883 8,176 7,409 1,433 8,120 242 6,756 9,461 7,855 7,488 4,220 The availability of carried forward tax losses of $7.5 million to the ICMT tax consolidated group is subject to recoupment rules at the time of recoupment. Further, the rate at which these losses can be utilised is determined by reference to market values at the time of tax consolidation and subsequent events. Accordingly, a portion of these carried forward tax losses may not be available in the future. The Group offsets tax assets and liabilities, if and only if, it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority. 19. ISSUED UNITS a. Carrying Amounts At beginning of year Placement securities Transaction costs of institutional placement securities Rights issue Rights issue costs At end of year The closing balance is attributable to the unitholders of: Ingenia Communities Fund Ingenia Communities Management Trust b. Number of Issued Units At beginning and end of year Placement securities At end of year INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 497,956 480,693 – – 51,985 (2,299) 18,179 (916) – – 2014 $’000 6,106 – – 8,364 (373) 2013 $’000 3,351 2,908 (153) – – 547,642 497,956 14,097 6,106 547,642 497,956 – – 547,642 497,956 – 14,097 14,097 – 6,106 6,106 INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 Thousands 2013 Thousands 2014 Thousands 2013 Thousands 507,179 169,061 676,240 441,029 66,150 507,179 507,179 169,061 676,240 441,029 66,150 507,179 c. Terms of Units All units are fully paid and rank equally with each other for all purposes. Each unit entitles the holder to one vote, in person or by proxy, at a meeting of unitholders. Annual Report 2014 123 20. RESERVES Foreign currency translation reserve Balance at beginning of year Translation differences arising during the year Amounts transferred to profit and loss on disposal of foreign operations Deconsolidation of ICMT Balance at end of a year The closing balance is attributable to the unitholders of: Ingenia Communities Fund Ingenia Communities Management Trust INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 2013 $’000 – (16,896) (226) 1,389 – – (226) (226) – (226) 15,507 – – – – – 766 495 – – 1,261 1,092 169 1,261 (614) (1,064) 2,444 – 766 646 120 766 The foreign currency translation reserve records exchange differences arising from the translation of the ﬁnancial statements of foreign subsidiaries. 21. ACCUMULATED LOSSES Balance at beginning of year Net profit/(loss) for the year Distributions Balance at end of year The closing balance is attributable to the unitholders of: Ingenia Communities Fund Ingenia Communities Management Trust INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 (330,334) (328,594) (6,304) 2013 $’000 5,411 15,422 (5,917) 2,670 (4,410) (1,170) (11,715) – – (320,829) (330,334) (7,474) (6,304) (320,829) (330,334) – – (320,829) (330,334) (3,425) (4,049) (7,474) (3,314) (2,990) (6,304) 124 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 22. COMMITMENTS a. Capital Commitments ICMT had commitments for capital expenditure on investment property contracted but not provided for at reporting date amounting to $3,266,000 (2013: $nil), all payable within one year. b. Operating Lease Commitments A subsidiary of ICMT has entered into a non-cancellable operating lease for its Brisbane office. The lease has a remaining life of ﬁve years. Future minimum rentals payable under this lease as at reporting date were: Within one year Later than one year but not later than five years Later than five years INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 2013 $’000 – – – – – – – – 220 973 – 1,193 95 – – 95 c. Finance Lease Commitments A subsidiary of ICMT was assigned a commercial lease with 16.5 years remaining with the Gosford City Council for land and facilities as part of its Ettalong Holiday Beach acquisition. The lease is for an initial three years commencing September 2012 with two renewal options of seven years each. In December 2013, a subsidiary of ICMT acquired One Mile Beach Holiday Park, accounted for as investment property. Two Crown leases are attached to the land, one for 40 years expiring on 19 September 2031 and one for perpetuity. Refer to Note 14 for future minimum lease payments payable and the present value of minimum lease payments payable at reporting date for the ﬁnance leases at Ettalong Holiday Village and One Mile Beach Holiday Park. For commitments for inter-staple related party ﬁnance leases refer to Notes 9, 14 and 25. 23. CONTINGENCIES There are no known contingent liabilities other than the bank guarantees of $4.4 million provided for under the ICF $129.5 million bank facility (Note 14). Bank guarantees of $4.0 million are in relation to deferred land payments within ICMT recognised as non-current payables (refer to Note 13). These guarantees will not be called by the counterparty unless the payable is not paid per the terms of the agreement. 24. CAPITAL MANAGEMENT The capital management of ICF and ICMT is not managed separately, but rather, is managed at a consolidated Group level (ICH and subsidiaries). At the Group level, the aim is to meet strategic objectives and operational needs and to maximise returns to security holders through the appropriate use of debt and equity, while taking account of the additional ﬁnancial risks of higher debt levels. In determining the optimal capital structure, the Group takes into account a number of factors, including the views of investors and the market in general, the capital needs of its portfolio, the relative cost of debt versus equity, the execution risk of raising equity or debt, and the additional ﬁnancial risks of debt including increased volatility of earnings due to exposure to interest rate movements, the liquidity risk of maturing debt facilities and the potential for acceleration prior to maturity. In assessing this risk, the Group takes into account the relative security of income ﬂows, the predictability of expenses, debt proﬁle, the degree of hedging and the overall level of debt as measured by gearing. The actual capital structure at a point in time is the product of a number of factors, many of which are market driven and to various degrees outside of the control of the Group, particularly the impact of revaluations on gearing levels, the availability of new equity and the liquidity in real estate markets. While the Group periodically determines the optimal capital structure, the ability to achieve the optimal structure may be impacted by market conditions and the actual position may often differ from the optimal position. The Group’s capital position is primarily monitored through the ratio of total liabilities to total assets (“Leverage Ratio”), calculated on a look-through basis. In addition, the Trusts monitor the ratio of debt to total assets (“Gearing Ratio”), calculated on a look through basis. Annual Report 2014 125 25. FINANCIAL INSTRUMENTS a. Introduction The Trusts principal ﬁnancial instruments comprise receivables, payables, interest bearing liabilities, other ﬁnancial liabilities, cash and short-term deposits and derivative ﬁnancial instruments. The main risks arising from the Trusts’ ﬁnancial instruments are interest rate risk, foreign exchange risk, credit risk and liquidity risk. The Trusts manage the exposure to these risks primarily through the Treasury Policy. The policy sets out various targets aimed at restricting the ﬁnancial risk taken by the Trusts. Management reviews actual positions of the Trusts against these targets on a regular basis. If the target is not achieved, or forecast not to be achieved, a plan of action is, where appropriate, put in place with the aim of meeting the target within an agreed timeframe. Depending on the circumstances of the Trusts at a point in time, it may be that positions outside of the Treasury Policy are accepted and no plan of action is put in place to meet the treasury targets, because, for example, the risks associated with bringing the Trusts into compliance outweigh the beneﬁts. The adequacy of the Treasury Policy in addressing the risks arising from the Trust’s ﬁnancial instruments is reviewed on a regular basis. While the Trusts aim to meet the Treasury Policy targets, many factors inﬂuence the performance, and it is probable that at any one time, not all targets will be met. For example, the Trusts may be unable to negotiate the extension of bank facilities sufficiently ahead of time, so that they fail to achieve their liquidity target. When reﬁnancing loans they may be unable to achieve the desired maturity proﬁle or the desired level of ﬂexibility of ﬁnancial covenants, because of the cost of such terms or their unavailability. Hedging instruments may not be available, or their cost may outweigh the beneﬁt of risk reduction or they may introduce other risks such as mark to market valuation risk. Changes in market conditions may limit the Trusts ability to raise capital through the issue of units or sale of properties. The main risks arising from ICMT’s ﬁnancial instruments are interest rate risk, foreign exchange risk, credit risk and liquidity risk. These risks are not separately managed. Management of these risks for the ICF may result in consequential changes for ICMT. b. Interest Rate Risk The Trusts exposure to the risk of changes in market interest rates arises primarily from its use of borrowings. The main consequence of adverse changes in market interest rates is higher interest costs, reducing the Trust’s proﬁt. In addition, one or more of the Trust’s loan agreements may include minimum interest cover covenants. Higher interest costs resulting from increases in market interest rates may result in these covenants being breached, providing the lender the right to call in the loan or to increase the interest rate applied to the loan. The Trusts manage the risk of changes in market interest rates by maintaining an appropriate mix of ﬁxed and ﬂoating rate borrowings. Fixed rate debt is achieved either through ﬁxed rate debt funding or through derivative ﬁnancial instruments permitted under the Treasury Policy. The policy sets minimum and maximum levels of ﬁxed rate exposure over a ten-year time horizon. At 30 June 2014, after taking into account the effect of interest rate swaps, approximately 47% of ICF’s borrowings are at a ﬁxed rate of interest (30 June 2013: 26%). Exposure to changes in market interest rates also arises from ﬁnancial assets such as cash deposits and loan receivables subject to ﬂoating interest rate terms. Changes in market interest rates will also change the fair value of any interest rate hedges. c. Interest Rate Risk Exposure ICF’s exposure to interest rate risk and the effective interest rates on ﬁnancial instruments at reporting date were: 30 June 2014 Principal amounts $’000 Financial assets Cash at bank Financial liabilities Bank debt denominated in AUD Interest rate swaps: Floating interest rate 2,658 94,000 INGENIA COMMUNITIES FUND FIXED INTEREST MATURING IN: Less than 1 year One to five Years More than 5 years Total – – – – – – – – 2,658 94,000 – – denominated in AUD; Fund pays fixed rate (45,000) 45,000 ICMT’s exposure to interest rate risk and the effective interest rates on ﬁnancial instruments at reporting date were: 126 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 25. FINANCIAL INSTRUMENTS (CONTINUED) 30 June 2014 Principal amounts $’000 Financial assets Cash at bank Financial liabilities INGENIA COMMUNITIES MANAGEMENT TRUST FIXED INTEREST MATURING IN: Floating interest rate Less than 1 year One to five Years More than 5 years Total 3,893 – – – 3,893 Finance leases (excluding perpetual lease) – 3,461 11,456 29,290 44,207 ICMT’s exposure to interest rate risk and the effective interest rates on ﬁnancial instruments at the end of the previous ﬁnancial year were: 30 June 2013 Principal amounts $’000 Financial assets Cash at bank Financial liabilities Finance leases INGENIA COMMUNITIES MANAGEMENT TRUST FIXED INTEREST MATURING IN: Floating interest rate Less than 1 year One to five Years More than 5 years Total 1,229 – – – 1,229 – 3,436 11,362 29,266 44,064 Other ﬁnancial instruments of the Trusts not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk. d. Interest Rate Sensitivity Analysis The impact of an increase or decrease in average interest rates of 1% (100 basis points) at reporting date, with all other variables held constant, is illustrated in the tables below. This analysis is based on the interest rate risk exposures in existence at balance sheet date. As the Trusts have no derivatives that meet the documentation requirements to qualify for hedge accounting, there would be no impact on unitholders’ interest (apart from the effect on proﬁt). i. Increase in average interest rates of 1% The effect on net interest expense for one year would have been: EFFECT ON PROFIT AFTER TAX INGENIA COMMUNITIES FUND HIGHER/(LOWER) INGENIA COMMUNITIES MANAGEMENT TRUST HIGHER/(LOWER) 2014 $’000 2013 $’000 2014 $’000 2013 $’000 Variable interest rate instruments denominated in: Australian dollars (940) (680) – – The effect on change in fair value of derivatives would have been: Interest rate swaps denominated in: Australian dollars EFFECT ON PROFIT AFTER TAX INGENIA COMMUNITIES FUND HIGHER/(LOWER) INGENIA COMMUNITIES MANAGEMENT TRUST HIGHER/(LOWER) 2014 $’000 2013 $’000 2014 $’000 2013 $’000 417 793 – – Annual Report 2014 127 ii. Decrease in average interest rates of 1% The effect on net interest expense for one year would have been: EFFECT ON PROFIT AFTER TAX INGENIA COMMUNITIES FUND HIGHER/(LOWER) INGENIA COMMUNITIES MANAGEMENT TRUST HIGHER/(LOWER) 2014 $’000 2013 $’000 2014 $’000 2013 $’000 Variable interest rate instruments denominated in: Australian dollars 940 680 – – The effect on change in fair value of derivatives would have been: Interest rate swaps denominated in: Australian dollars EFFECT ON PROFIT AFTER TAX INGENIA COMMUNITIES FUND HIGHER/(LOWER) INGENIA COMMUNITIES MANAGEMENT TRUST HIGHER/(LOWER) 2014 $’000 2013 $’000 2014 $’000 2013 $’000 (297) (810) – – e. Foreign Exchange Risk By holding properties in offshore markets, the Trusts are exposed to the risk of movements in foreign exchange rates. Foreign exchange rate movements may reduce the Australian dollar equivalent of the carrying value of the Trusts offshore properties, and may result in lower Australian dollar equivalent proceeds when an offshore property is sold. In addition, foreign exchange rate movements may reduce the Australian dollar equivalent of the earnings from the offshore properties while they are owned by the Trusts. The Trusts reduce exposure to the foreign exchange risk inherent in the carrying value of its offshore properties and interests in offshore investments by partly or wholly funding their acquisition using borrowings denominated in the particular offshore currency, and by using derivatives. The Treasury Policy sets a target for minimum and maximum hedging of the carrying value of its offshore properties. The Trusts exposure to the impact of exchange rate movements on earnings from offshore properties is partly mitigated by the foreign denominated interest expense of its foreign denominated borrowings and any derivative hedges. The Trusts aim to reduce any residual exposure to earnings arising because of investment in offshore markets by using forward exchange contracts. The Treasury Policy sets out targets of minimum and maximum hedging of earnings from offshore properties over a ﬁve-year time horizon. The Trusts net foreign currency monetary exposure, after taking into account the effect of foreign exchange derivatives, as at reporting date is shown in the following table. The net foreign currency exposure reported is of foreign currencies held by entities whose functional currency is the Australian dollar. It excludes assets and liabilities of entities, including the Trusts’ United States subsidiaries and equity accounted investments, whose functional currency is not the Australian dollar. Net foreign currency exposure: United States dollars NET FOREIGN CURRENCY ASSET/(LIABILITY) INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 2014 $’000 2013 $’000 157 1,282 – – 128 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 25. FINANCIAL INSTRUMENTS (CONTINUED) f. Foreign Exchange Sensitivity Analysis The impact of an increase or decrease in average foreign exchange rates of 10% at reporting date, with all other variables held constant, is illustrated in the tables below. This analysis is based on the foreign exchange risk exposures in existence at balance sheet date. In these tables, the effect on unitholders’ interest excludes the effect on proﬁt after tax. i. Effect of appreciation in Australian dollar of 10%: EFFECT ON PROFIT AFTER TAX INGENIA COMMUNITIES FUND HIGHER/(LOWER) INGENIA COMMUNITIES MANAGEMENT TRUST HIGHER/(LOWER) 2014 $’000 2013 $’000 2014 $’000 2013 $’000 Foreign exchange risk exposures denominated in: United States dollars (16) (128) – – ii. Effect of depreciation in Australian dollar of 10%: EFFECT ON PROFIT AFTER TAX INGENIA COMMUNITIES FUND HIGHER/(LOWER) INGENIA COMMUNITIES MANAGEMENT TRUST HIGHER/(LOWER) 2014 $’000 2013 $’000 2014 $’000 2013 $’000 Foreign exchange risk exposures denominated in: United States dollars 16 128 – – g. Foreign Exchange Derivatives Held Forward exchange contracts, options and foreign exchange swaps are taken out to mitigate the effect of foreign exchange movements on the ﬁnancial statements. At balance sheet date, the Trusts did not hold any foreign exchange derivatives. There was no impact to the consolidated result for the year for the change in fair value for foreign exchange derivatives ended 30 June 2014 (2013: loss $9,000). h. Credit Risk Credit risk refers to the risk that a counterparty defaults on its contractual obligations resulting in a ﬁnancial loss to the Trusts. The major credit risk for the Trusts is default by tenants, resulting in a loss of rental income while a replacement tenant is secured and further loss if the rent level agreed with the replacement tenant is below that previously paid by the defaulting tenant. The Trusts assess the credit risk of prospective tenants, the credit risk of in-place tenants when acquiring properties and the credit risk of existing tenants renewing upon expiry of their leases. Factors taken into account when assessing credit risk include the ﬁnancial strength of the prospective tenant and any form of security, for example a rental bond, to be provided. The decision to accept the credit risk associated with leasing space to a particular tenant is balanced against the risk of the potential ﬁnancial loss of not leasing up vacant space. Rent receivable balances are monitored on an ongoing basis and arrears actively followed up in order to reduce, where possible, the extent of any losses should the tenant subsequently default. The Responsible Entity believes that the Trust’s receivables that are neither past due nor impaired do not give rise to any signiﬁcant credit risk. Credit risk also arises from deposits placed with ﬁnancial institutions and derivatives contracts that may have a positive value to the Trusts. The Trust’s Treasury Policy sets target limits for credit risk exposure with ﬁnancial institutions and minimum counterparty credit ratings. Counterparty exposure is measured as the aggregate of all obligations of any single legal entity or economic entity to the Trusts, after allowing for appropriate set offs which are legally enforceable. The Trust’s maximum exposure to credit risk at reporting date in relation to each class of ﬁnancial instrument is the carrying amount as reported in the balance sheet. Annual Report 2014 129 i. Liquidity Risk The main objective of liquidity risk management is to reduce the risk that the Trusts do not have the resources available to meet their ﬁnancial obligations and working capital and committed capital expenditure requirements. The Trust’s Treasury Policy sets a target for the level of cash and available undrawn debt facilities to cover future committed expenditure in the next year, loan maturities within the next year and an allowance for unforeseen events such as tenant default. The Trusts may also be exposed to contingent liquidity risk under term loan facilities, where term loan facilities include covenants which if breached give the lender the right to call in the loan, thereby accelerating a cash ﬂow which otherwise was scheduled for the loan maturity. The Trusts monitor adherence to loan covenants on a regular basis, and the Treasury Policy sets targets based on the ability to withstand adverse market movements and remain within loan covenant limits. The Trusts monitor the debt expiry proﬁle and aims to achieve debt maturities below a target level of total committed debt facilities, where possible, to reduce reﬁnance risk in any one year. The contractual maturities of the Trust’s non-derivative ﬁnancial liabilities at reporting date are reﬂected in the following table. It shows the undiscounted contractual cash ﬂows required to discharge the liabilities including interest at market rates. Foreign currencies have been converted at rates of exchange ruling at reporting date. Although the expected average residency term is more than ten years, retirement village residents’ loans are classiﬁed as current liabilities, as required by Accounting Standards, because the Trusts do not have an unconditional right to defer settlement to more than twelve months after reporting date. 2014 Trade and other payables Borrowings 2013 Trade and other payables Borrowings 2014 Trade and other payables Retirement village resident loans Borrowings (excluding perpetual lease) Finance lease (perpetual lease) Provisions 2013 Trade and other payables Retirement village resident loans Borrowings Provisions INGENIA COMMUNITIES FUND Less than 1 year $’000 1 to 5 years $’000 More than 5 years $’000 1,210 4,521 5,731 1,569 3,271 4,840 – 99,653 99,653 – 72,089 72,089 – – – – – – Total $’000 1,210 104,174 105,384 1,569 75,360 76,929 INGENIA COMMUNITIES MANAGEMENT TRUST Less than 1 year $’000 8,480 190,122 3,613 121 590 1 to 5 years $’000 4,000 – More than 5 years $’000 – – Total $’000 12,480 190,122 14,530 305,301 323,444 483 249 – – 604 839 202,926 19,262 305,301 527,489 6,305 175,703 3,589 507 – – – – 6,305 175,703 14,422 308,628 326,639 140 – 647 186,104 14,562 308,628 509,294 The contractual maturities of ICF’s derivative ﬁnancial liabilities at reporting date are reﬂected in the following table. It shows the undiscounted contractual cash ﬂows required to discharge the instruments including interest at market rates. Foreign currencies have been converted at rates of exchange ruling at reporting date. 130 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 25. FINANCIAL INSTRUMENTS (CONTINUED) 2014 Liabilities INGENIA COMMUNITIES FUND Less than 1 year $’000 1 to 5 years $’000 More than 5 years $’000 Total $’000 Derivative liabilities – net settled 84 84 2013 Liabilities Derivative liabilities – net settled – 209 ICMT did not have any derivative ﬁnancial liabilities at either 30 June 2014 or 30 June 2013. – – 168 209 j. Other Financial Instrument Risk The Trusts carry retirement village residents’ loans at fair value with resulting fair value adjustments recognised in the income statement. The fair value of these loans is dependent on market prices for the related retirement village units. The impact of an increase or decrease in these market prices of 10% at reporting date, with all other variables held constant, is shown in the table below. This analysis is based on the retirement village residents’ loans in existence at reporting date. EFFECT ON PROFIT AFTER TAX INGENIA COMMUNITIES FUND HIGHER/(LOWER) INGENIA COMMUNITIES MANAGEMENT TRUST HIGHER/(LOWER) 2014 $’000 2013 $’000 2014 $’000 2013 $’000 Increase in market prices of investment properties of 10% Decrease in market prices of investment properties of 10% – – – – (21,864) (20,700) 21,864 20,700 However, these effects are largely offset by corresponding changes in the fair value of the Trusts’ investment properties. The effect on unitholders’ interest would have been the same as the effect on proﬁt. k. Fair Value The Trusts use the following fair value measurement hierarchy: Level 1: Level 2: fair value is calculated using quoted prices in active markets for identical assets or liabilities; fair value is calculated using inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and Level 3: fair value is calculated using inputs for the asset or liability that are not based on observable market data. Quoted market price represents the fair value determined based on quoted prices on active markets as at the reporting date without any deduction for transaction costs. The following table presents the Trusts’ ﬁnancial instruments that were measured and recognised at fair value at reporting date: Financial assets/ financial liabilities Valuation technique(s) and key inputs Significant Unobservable Inputs Relationship of unobservable inputs to fair value Sensitivity to the input to fair value Retirement village resident loans Loans measured as Derivative interest rate swaps the ingoing resident's contribution plus the resident's share of capital appreciation to reporting date, less DMF accrued to reporting date. Net present value of future cash flows discounted at market rates adjusted for the Group's credit risk. Long-term capital appreciation rates for residential property between 0-4%. Estimated length of stay of residents based on life tables. The higher the appreciation, the higher the value of resident loans. The longer the length of stay, the lower the value of resident loans. The higher the appreciation, the higher the value of resident loans. The longer the length of stay, the lower the value of resident loans. N/A N/A The longer the length of stay, the higher the DMF accrued, capped at a predetermined period of time. There has been no movement from Level 3 to Level 2 during the current period. Changes in ICMT’s retirement village resident loans which are level 3 instruments are presented in Note 26. The carrying amounts of the Trusts’ other ﬁnancial instruments approximate their fair values. Annual Report 2014 131 26. FAIR VALUE MEASUREMENT a. Ingenia Communities Fund The following table provides the fair value measurement hierarchy of Ingenia Communities Fund assets and liabilities: i. Assets measured at fair value 30 June 2014 Date of valuation Total FAIR VALUE MEASUREMENT USING Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3) Investment properties 30 June 2014 Refer to Note 11 134,488 – – 134,488 ii. Liabilities measured at fair value 30 June 2014 Derivatives Date of valuation Total 168 30 June 2014 There have been no transfers between Level 1 and Level 2 during the year. FAIR VALUE MEASUREMENT USING Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3) – 168 – b. Ingenia Communities Management Trust The following table provides the fair value measurement hierarchy of Ingenia Communities Management Trust assets and liabilities: i. Assets measured at fair value 30 June 2014 Date of valuation Total FAIR VALUE MEASUREMENT USING Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3) Investment properties Discontinued operations – investment property Assets held for sale – investment property 30 June 2014 Refer to Note 11 30 June 2014 Refer to Note 7(b) 30 June 2014 Refer to Note 7(a) Assets held for sale – deferred management fee receivable 30 June 2014 Refer to Notes 7(a) and 15 364,375 45,902 – 5,439 – – – – – – – 5,439 364,375 45,902 – – ii. Liabilities measured at fair value 30 June 2014 Date of valuation Total FAIR VALUE MEASUREMENT USING Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3) Retirement village resident loans 30 June 2014 Refer to Note 15 190,122 – – 190,122 There have been no transfers between Level 1 and Level 2 during the year. 132 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 26. FAIR VALUE MEASUREMENT (CONTINUED) c. Fair Value Hierarchy for Financial Instruments Measured at Fair Value as at 30 June 2013: 30 June 2013 Financial liabilities – derivatives 30 June 2013 Financial liabilities – retirement village resident loans 27. AUDITOR’S REMUNERATION INGENIA COMMUNITIES FUND Total $’000 209 Level 1 $’000 Level 2 $’000 Level 3 $’000 – 209 – INGENIA COMMUNITIES MANAGEMENT TRUST Total $’000 175,703 Level 1 $’000 Level 2 $’000 Level 3 $’000 – – 175,703 INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $ 2013 $ 2014 $ 2013 $ Amounts received or receivable by Ernst & Young for: Audit or review of financial reports 146,025 120,339 146,025 122,364 Other audit related services 28. RELATED PARTIES 9,350 9,183 9,350 – 155,375 129,522 155,375 122,364 a. Responsible Entity The Responsible Entity for both trusts from 4 June 2012 is Ingenia Communities RE Limited (“ICRE”). ICRE is an Australian domiciled company and is a wholly owned subsidiary of ICH. b. Fees of the Responsible Entity and its Related Parties Ingenia Communities RE Limited: Asset management fees INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $ 2013 $ 2014 $ 2013 $ 1,170,374 1,101,265 1,625,516 1,456,230 The Responsible Entity is entitled to a fee of 0.5% of total assets. In addition, it is entitled to recover certain expenses. The amount accrued and recognised but unpaid at reporting date was: Current trade payables 2,340,175 1,169,801 3,167,572 1,542,056 These are included in current trade payables in the balance sheet. INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $ 2013 $ 2014 $ 2013 $ Annual Report 2014 133 c. Holdings of the Responsible Entity and its Related Parties There were no holdings of the Responsible Entity and its related parties (including managed investment schemes for which a related party is the Responsible Entity) as at 30 June 2014 and 30 June 2013. d. Other Related Party Transactions Subsidiaries of ICMT have entered into agreements with subsidiaries of ICF for the leases of land that retirement villages are operated on. The remaining term of each agreement varies between 92 and 115 years. There are no purchase options. Rental villages have been classiﬁed as operating leases and DMF villages have been classiﬁed as ﬁnance leases. Intercompany loans are subject to a loan deed dated 29 June 2012 encompassing ICH, ICF and ICMT and their respective subsidiaries. The deed stipulates that on the last business day of each month intercompany balances are set off within each of the ICH, ICF and ICMT sub-groups and the balances between ICH, ICF and ICMT incur interest at 8.5%pa. Intercompany loan balances are payable on demand, however ICF has undertaken not to call its loan receivable from ICMT within twelve months of the date of this report, if calling the loan would result in ICMT being unable to pay its debts as and when they are due and payable. There are a number of other transactions and balances that occur between the Trusts, which are detailed below: INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST Note 2014 $ 2013 $ 2014 $ 2013 $ Finance lease fees received or accrued/(paid or payable) for the year between ICF and ICMT Finance lease balance receivable/(payable) between ICF and ICMT 3,319,833 3,321,780 (3,319,833) (3,321,780) 9 40,677,551 40,679,518 (40,677,551) (40,679,518) Finance lease commitments 318,149,045 321,470,845 (318,149,045) (321,470,845) Operating lease fees received or accrued/(paid or payable) for the year between ICF and ICMT Interest on intercompany loans received or accrued/(paid or payable) between stapled entities 9,354,036 8,467,260 (9,354,036) (8,467,260) 6,807,133 2,039,631 6,335,522 1,820,680 Intercompany loan balances between stapled entities 135,805,451 31,870,000 (133,249,024) (30,769,000) 134 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 28. RELATED PARTIES (CONTINUED) e. Key Management Personnel Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director of the Responsible Entity. The names of the directors of ICRE, and their dates of appointment or resignation if they were not directors for all of the ﬁnancial year, are: Jim Hazel (Chairman) Philip Clark AM Amanda Heyworth Robert Morrison Norah Barlow Appointed 31 March 2014 Simon Owen (Managing Director and CEO) The names of other key management personnel, and their dates of appointment or resignation if they did not occupy their position for all of the ﬁnancial year, are: Simon Owen Nicole Fisher Tania Betts Managing Director and CEO Chief Operating Officer Chief Financial Officer Key management personnel do not receive any remuneration directly from the Trusts. They receive remuneration from ICH in their capacity as Directors or employees of ICH. Consequently, the Trusts do not pay any compensation as deﬁned in Accounting Standard AASB 124 Related Parties to its key management personnel. The aggregate compensation paid to Key Management Personnel (“KMP”) of the Group is as follows: Directors fees Salaries and other short-term benefits Short-term incentives Superannuation benefits Share-based payment 2014 $ 2013 $ 462,500 1,094,684 332,235 59,084 680,600 319,167 756,735 182,382 48,957 293,113 2,629,103 1,600,354 The amounts disclosed in the table are the amounts recognised as an expense during the reporting period related to key management personnel. The aggregate PQRs and RQRs of the Group held directly, by KMP, are as follows: NUMBER OUTSTANDING Issue date Rights Expiry date 2014 2013 2012 2012 2013 RQR PQR PQR 2014 2015 2016 1,818,000 1,818,000 3,842,000 3,842,000 3,716,000 – Annual Report 2014 135 29. PARENT FINANCIAL INFORMATION Summary ﬁnancial information about the parent of each Trust is: Current assets Total assets Current liabilities Total liabilities Net assets/(liabilities) Unitholders equity: Issued units Accumulated losses Total unitholders’ equity Profit/(loss) from continuing operations Net profit/(loss) attributable to unitholders of each Trust Total comprehensive income/(loss) INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 2013 $’000 134,675 253,843 1,379 95,067 158,776 57,833 183,749 1,779 69,202 114,547 2014 $’000 178 3,165 8,108 5,772 2013 $’000 3 2,991 9,332 9,332 (2,607) (6,341) 547,643 497,957 14,092 6,106 (388,867) (383,410) (16,699) (12,447) 158,776 460 460 460 114,547 (4,744) 19,704 19,703 (2,607) (4,252) (4,252) (4,252) (6,341) (3,511) (9,088) (9,055) 136 Ingenia Communities Holdings Limited Notes to the Financial Statements Notes to the Financial Statements for the year ended 30 June 2014(cid:13)|(cid:13)continued for the year ended 30 June 2014 30. SUBSIDIARIES a. Names of Subsidiaries The consolidated ﬁnancial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in Note 1(d): Name Country of residence Subsidiaries of Ingenia Communities Fund OWNERSHIP INTEREST 2014 % 2013 % Bridge Street Trust Browns Plains Road Trust Casuarina Road Trust Edinburgh Drive Trust INA CC Trust INA Community Living Subsidiary Trust No. 2 INA Community Living Subsidiary Trust INA Kiwi Communities Subsidiary Trust No. 1 INA Sunny Trust Jefferis Street Trust Lovett Street Trust ILF Regency Subsidiary Trust Settlers Subsidiary Trust SunnyCove Gladstone Unit Trust SunnyCove Rockhampton Unit Trust Taylor Street (2) Trust INA Subsidiary Trust No.1 INA Subsidiary Trust No.2 Noyea Pty Ltd INA Community Living LLC (formerly ING Community Living LLC) INA US Community Living Fund LLC (formerly ING US Community Living Fund LLC) Subsidiaries of Ingenia Communities Management Trust Garden Villages Management Trust INA Community Living Lynbrook Trust ILF Regency Operations Trust Settlers Operations Trust INA Operations Trust No.1 INA Operations Trust No.2 INA Operations Trust No.3 Noyea Operations Pty Ltd Ridge Estate Trust INA Subsidiary Trust No.3 INA NZ Subsidiary Trust No. 1 CSH Lynbrook GP LLC CSH Lynbrook LP Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia United States of America United States of America Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand United States of America United States of America INA Community Living II (formerly ING Community Living II) United States of America Lynbrook Freer Street Member LLC Lynbrook Management, LLC United States of America United States of America The Trusts voting interest in all other subsidiaries is the same as the ownership interest. 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 Annual Report 2014 137 31. NOTES TO THE CASH FLOW STATEMENTS a. Reconciliation of Proﬁt to Net Cash Flows from Operations Net profit for the year Adjustments for: Net foreign exchange (gain)/loss Release of FCTR on disposal of foreign operations Net (gain)/loss on disposal of equity accounted investment Net loss on disposal of investment properties Net (gain)/loss on change in fair value of: Investment properties – continuing Investment properties – discontinued Derivatives Retirement village resident loans Disposal costs associated with overseas investments Income tax expense/(benefit) Other non-cash items INGENIA COMMUNITIES FUND INGENIA COMMUNITIES MANAGEMENT TRUST 2014 $’000 15,422 2013 $’000 2,670 2014 $’000 (1,170) 42 – 320 – (1,530) – (41) – – 6 – – (1,453) 15,507 (7,584) 107 (1,618) 43 (752) – 150 748 35 – – – 1,871 1,630 – 616 290 (6,498) – 2013 $’000 (11,715) 718 2,444 – 994 (1,839) 2,740 – (327) 672 273 – Operating profit/(loss) for the year before changes in working capital 14,219 9,306 (4,714) (6,040) Changes in working capital: (Increase)/decrease in receivables (Increase)/decrease in other assets Increase in retirement village resident loans Increase/(decrease) in other payables and provisions (18,310) (12,676) 20,710 12,060 – – 292 – – 464 (1,923) 6,327 2,028 – 12,220 197 18,437 Net cash provided by operating activities (3,799) (2,906) 22,428 32. SUBSEQUENT EVENTS a. RQR Vesting On 1 July 2014, 1,818,000 Retention Quantum Rights (“RQRs”) granted to KMP in 2012 vested. As a result 1,818,000 fully paid stapled securities have been issued to the following KMP: Simon Owen 1,070,000 Tania Betts 374,000 Nicole Fisher 374,000 b. Sale of Noyea Settlement on the sale of Settlers Lifestyle Noyea was completed on 31 July 2014 at an adjusted sales price of $5.4 million resulting in $nil gain or loss recognised upon completion. c. Bank Guarantee On 1 July 2014, ICF obtained a bank guarantee of $10 million from the bank facility in relation to cash requirements under the Australian Financial Services Licence. d. Sale of New Zealand Students business On 5 September 2014, the Trusts announced they had contracted to divest the New Zealand Students business for consideration of NZ$49.4 million, representing the book value at 30 June 2014. Upon settlement, disposal costs and a FCTR gain will be released through proﬁt. At 30 June 2014, the FCTR balance was A$1.0 million. e. Reﬁnance of Australian Debt ICF’s current Australian banking facility expires in September 2015. ICF has recently undertaken a debt reﬁnance and obtained credit approval for a new $175 million Australian multilateral banking facility. This facility will be split between a three year and ﬁve year maturity proﬁle. 138 Ingenia Communities Holdings Limited Directors’ Declaration for the year ended 30 June 2014 In accordance with a resolution of the directors of Ingenia Communities RE Limited, I state that: 1. In the opinion of the directors: (a) the ﬁnancial statements and notes of Ingenia Communities Fund and of Ingenia Communities Management Trust are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of each Trust’s ﬁnancial position as at 30 June 2014 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards and Corporations Regulations 2001; and (b) there are reasonable grounds to believe that Ingenia Communities Fund and Ingenia Communities Management Trust will be able to pay their debts as and when they become due and payable. 2. 3. The notes to the ﬁnancial statements include an explicit and unreserved statement of compliance with international ﬁnancial reporting standards at Note 1(b). This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the ﬁnancial year ended 30 June 2014. On behalf of the Board Jim Hazel Chairman Sydney, 19 September 2014 Independent Auditors’ Report for the year ended 30 June 2014 Annual Report 2014 139 140 Ingenia Communities Holdings Limited Independent Auditors’ Report for the year ended 30 June 2014 Securityholder Information for the year ended 30 June 2014 Annual Report 2014 141 The information set out below was prepared as at 4 September 2014 and applies equally to units in the trusts and shares in the company under the terms of the joint quotation on the Australian Securities Exchange. Twenty Largest Securityholders as at 4 September 2014 Securityholder J P MORGAN NOMINEES AUSTRALIA LIMITED NATIONAL NOMINEES LIMITED CITICORP NOMINEES PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED BNP PARIBAS NOMS PTY LTD MERCANTILE INVESTMENT COMPANY LTD MCNEIL NOMINEES PTY LIMITED CITICORP NOMINEES PTY LIMITED MERCANTILE INVESTMENT COMPANY LTD MIRRABOOKA INVESTMENTS LIMITED BNP PARIBAS NOMS (NZ) LTD GWYNVILL TRADING PTY LTD UBS NOMINEES PTY LTD CUSTODIAL SERVICES LIMITED RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED BOND STREET CUSTODIANS LIMITED BODIAM PROPERTIES PTY LTD MRS MONIKA BATKIN FORSYTH BARR CUSTODIANS LTD RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED Number of Securities Held % of Issued Capital 151,820,670 107,560,963 74,958,077 54,600,979 31,278,400 19,514,519 16,400,531 14,109,792 13,103,817 8,500,000 6,444,114 6,166,667 4,941,940 4,207,549 3,413,091 3,249,667 3,123,000 3,100,000 2,442,900 2,374,473 22.39% 15.86% 11.05% 8.05% 4.61% 2.88% 2.42% 2.08% 1.93% 1.25% 0.95% 0.91% 0.73% 0.62% 0.50% 0.48% 0.46% 0.46% 0.36% 0.35% TOTAL 531,311,149 78.36% Distribution of securityholders as at 4 September 2014 Holding (securities) 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Total Number of Securityholders % of Issued Capital 252 814 785 1,906 282 4,039 6.24 20.15 19.44 47.19 6.98 100.00 The number of securityholders holding less than a marketable parcel on 4 September 2014 is 265 and they hold 92,420 securities. Substantial holders in INA as at 4 September 2014 Securityholder Mercantile Investment Company Limited Fisher Funds Management Limited Number of Securities 35,428,533 35,202,706 VOTING Securityholders in Ingenia Communities Group are entitled to 1 vote for each security they hold in the Group. 142 Ingenia Communities Holdings Limited Investor Relations for the year ended 30 June 2014 Enquiries relating to Ingenia Communities Group (ASX code: INA) can be directed to the Link Market Services Investor Information line on 1300 554 474 (or from outside Australia +61 1300 554 474). This service is available from 8:30am to 5:30pm (Sydney time) on all business days. Link Market Services can assist with: – Change of address details – Requests to receive communications online – Provision of tax ﬁle numbers – Changes to payment instructions – General enquiries about your securityholding. www.ingeniacommunities.com.au Ingenia’s corporate website provides investors with extensive information about the Group. You can visit the website to ﬁnd: information on Ingenia and its property portfolios; the latest ﬁnancial information; reports; announcements; and corporate governance information. Securityholders can access their investment details, including holding balance and payment history, from the site. Distribution Payments Distribution payments are made twice a year, for the six months ending 30 June and the six months ending 31 December. Distributions are declared and paid in Australian dollars. The table below details distribution payments for the 2013/2014 ﬁnancial year. A history of distribution payments made since 2005 is available from the Group’s website www.ingeniacommunities.com.au. Period Ended June 2014 December 2013 Date Paid Total Amount 17 Sept 2014 21 March 2014 $0.0065 $0.0050 * For resident securityholders the distribution is tax deferred. For non-resident securityholders, the total FY14 distributions comprised 0.496 cents of tax deferred amount and 0.654 cents of interest income. Ingenia Communities Group operates a Distribution Reinvestment Plan through which securityholders can elect to reinvest all or part of their distributions in additional Ingenia securities. The rules of the Plan and how to apply can be found on the website or obtained from the Registry, Link Market Services. Annual Taxation Statement Annual Taxation Statements, which summarise payments made during the year and include information required to complete an Australian tax return, are dispatched each September. Details of past distributions and relevant tax information are available on Ingenia’s website. Annual General Meeting The Annual General Meeting will be held on 12 November 2014 at the Grace Hotel in Sydney. 2014/2015 Securityholder Calendar* 17 September 2014 17 September 2014 12 November 2014 February 2015 March 2015 Final FY14 distribution paid Annual Tax Statement dispatched Annual General Meeting 1H15 Result announced Interim FY15 distribution paid *Dates are indicative. Privacy Policy Ingenia Communities Group is committed to ensuring the conﬁdentiality and security of your personal information. The Group’s Privacy Policy, detailing our handling of personal information, is available online at www.ingeniacommunities.com.au Complaints Any securityholder wishing to register a complaint should direct it to Investor Relations in the ﬁrst instance, at the Responsible Entity’s address listed in this Report. Ingenia Communities RE Limited is a member of an independent dispute resolution scheme, the Financial Ombudsman Service (FOS). If a securityholder feels that a complaint remains unresolved or wishes it to be investigated further, FOS can be contacted as detailed below: By telephone: 1300 780 808 In writing: Financial Ombudsman Service Limited GPO Box 3, Melbourne VIC 3001 Website: www.fos.org.au Annual Report 2014 143 Corporate Directory for the year ended 30 June 2014 Ingenia Communities Group Ingenia Communities Holdings Limited ACN 154 444 925 Ingenia Communities Management Trust ARSN 122 928 410 Ingenia Communities Fund ARSN 107 459 576 Responsible Entity Ingenia Communities RE Limited ACN 154 464 990 (AFSL 415 862) Registered Office Level 5, 151 Castlereagh Street Sydney NSW 2000 Telephone: 1300 132 946 Facsimile: +61 2 8263 0500 Email: investor@ingeniacommunities.com.au Website: www.ingeniacommunities.com.au Directors of INA (as at 4 September 2014) J Hazel (Chairman) A Heyworth N Barlow NZOM P Clark AM R Morrison S Owen Secretary L Ralph T Betts Security Registry Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Locked Bag A14 Sydney South NSW 1235 Telephone: 1300 554 474 (local call cost) or from outside Australia: +61 1300 554 474 Facsimile: +61 2 9287 0303 Email: registrars@linkmarketservices.com.au Auditors EY 680 George Street Sydney NSW 2000 Stock Exchange Quotation Ingenia Communities Group is listed on the Australian Securities Exchange under ASX listing code: INA. 144 Ingenia Communities Holdings Limited Disclaimer This report was prepared by Ingenia Communities Holdings Limited (ACN 154 444 925) and Ingenia Communities RE Limited (ACN 154 464 990) as responsible entity for Ingenia Communities Fund (ARSN 107 459 576) and Ingenia Communities Management Trust (ARSN 122 928 410) (together Ingenia Communities Group, INA or the Group). Information contained in this report is current as at 30 June 2014. This report is provided for information purposes only and has been prepared without taking account of any particular reader’s ﬁnancial situation, objectives or needs. Nothing contained in this report constitutes investment, legal, tax or other advice. Accordingly, readers should, before acting on any information in this report, consider its appropriateness, having regard to their objectives, ﬁnancial situation and needs, and seek the assistance of their ﬁnancial or other licensed professional adviser before making any investment decision. This report does not constitute an offer, invitation, solicitation or recommendation with respect to the subscription for, purchase or sale of any security, nor does it form the basis of any contract or commitment. www.ingeniacommunities.com.au Ingenia Communities Group Level 5, 151 Castlereagh Street Sydney NSW 2000 T. 1300 132 946 E. investor@ingeniacommunities.com.au W. www.ingeniacommunities.com.au

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