INVESTOR UPDATE 2018 Chairman’s Letter SUMMARY Revenue $189.5m 26% This year represented a step change for the Group, with EBIT and operating cash flow up more than 50%. EBIT $48.8m Statutory Profit $34.2m Underlying Profit $36.8m Underlying Profit EPS 17.7c Distribution per Security 10.75c Operating Cash Flow $47.2m 52% 30% 56% 36% +5% 56% Net Asset Value per Security $2.57 Ingenia Gardens Occupancy +92.4% Development Sites Secured 3,240+ (92% in metro and coastal locations) Record New Home Settlements 287 36% Dear Security holders The past financial year has seen Ingenia capitalise on the Group’s platform and capability in a growing market segment to deliver significant growth, exceeding the guidance we set at the beginning of this year. The growing acceptance of lifestyle communities as an affordable and valued seniors housing choice, and increasing interest by some of the world’s largest real estate businesses, supports the Group’s decision to focus capital and management efforts on expanding in this sector and has underpinned the strong growth in returns over the past year. Ingenia now owns 35 communities located largely in eastern seaboard coastal and metropolitan locations and a rapidly expanding development business. With margins in our operating business improving as the addition of new assets to the portfolio and increased revenue from the development and sale of new homes contributed, the 2018 financial year saw Ingenia deliver record profit growth. Underlying profit increased by 56% and revenue grew by 26% (to $189.5 million). The full year distribution, of 10.75 cents per security, represented an increase of 5.4% on the prior year, and was the fifth year of growth. Both Earnings Before Interest and Tax (EBIT) and new home settlements were above market guidance, which we prudently increased over the course of the year. The security price increased from $2.60 on 30 June 2017 to close the year at $3.08, reflecting corporate activity in the sector, growing offshore interest and the Group’s strong performance. Ingenia’s returns outperformed those of the S&P/ASX 300 Accumulation Index over a one, three and five year period to 30 June 2018 and were in line with (over three years) or exceeded (over one and five years) the S&P/ASX Property 300 Accumulation Index to 30 June 2018. Over the year we maintained a focus on strong capital management, selling a number of non-core assets and increasing our funding capacity to ensure the Group’s new developments could be funded without reliance on the equity capital markets. This capacity, combined with the active Distribution Reinvestment Plan and growing cash flows, will provide funding for future growth as we continue to accelerate development. In addition to successfully launching our first greenfield development we continued to improve operating performance of our existing assets, adding new rental cabins and tourism cabins to existing communities. The year represented a step change for the Group with our EBIT growing by over 50% to $48.8 million and operating cash flow also up more than 50%. We saw the benefit of the investment in people and systems made over the last few years as we integrated over $100 million of assets in 18 months and increased new home settlements by more than 30%. From this significantly higher base we are forecasting EBIT growth of 10-15%, underlying earnings per security growth of 5-10% and settlement of over 350 new homes in the 2019 financial year. As the development business further matures and we continue to grow our rental contracts, we are again forecasting EBIT growth in the 2020 financial year. I would like to thank Ingenia’s dedicated directors and management team for their hard work and ongoing commitment to Ingenia’s performance and strategic goals. As your Chairman I would like to thank all security holders for your continued support and I look forward to meeting with you and providing a further update on the business at our upcoming Annual General Meeting to be held in Sydney on 13 November 2018. We create community Jim Hazel Chairman CEO Update Ingenia’s growth has continued in FY18, with increasing rents, a full year contribution from recent acquisitions and expanding development margins and volumes resulting in a break out year for the Group. Ingenia Lifestyle Latitude One, NSW September 2018 Over the 2018 financial year Ingenia’s strategy continued to deliver improving performance, with strong increases across key metrics. Margin expansion was achieved as scale efficiencies were delivered from an operating platform that has been put in place over the past few years to facilitate growth. Recycling non-core assets and portfolio remixing Ingenia made significant progress on the planned divestment of approximately $100 million in non-core assets. To date, $60 million of this target has been completed or contracted. Guidance was exceeded, with EBIT, new home settlements and underlying profit earnings per security demonstrating strong increases and record returns. Substantial increases in revenue and cash flows supported a 5.4% increase in distributions. Financial Performance Revenue grew 26% to $189.5 million and operating cash flow of $47.2 million was up 56% as a larger rental base and significant increase in home settlements contributed. Statutory Profit of $34.2 million was up 30% on the 2017 result. Underlying Profit of $36.8 million increased 56% on the prior year. Net Asset Value per security (NAV) increased to $2.57 (from $2.50 at 30 June 2017). Capital management Over the year, capital recycling provided proceeds to accelerate development activity and further acquisitions were completed, growing the lifestyle and holidays portfolio and securing future development sites. The Group successfully increased total debt facilities to $350 million with extended terms. The Group had more than $100 million in unutilised debt facilities available at 30 June 2018. At 30 June 2018, Ingenia’s LVR of 32.6% was within the Group’s policy range of 30-40% and well below the banking covenant of 50%. The Group has an active Distribution Reinvestment Plan, growing cash inflows and is exploring capital partnerships to fund future investment and accelerate development. These divestments not only provided funding for increased development activity but improved the quality and efficiency of the portfolio. Ingenia continued to grow exposure to the lifestyle and holidays market with increasing development activity a key avenue for growth. Ingenia also continued to identify new opportunities for investment, with recent acquisitions including: — The Durack Gardens rental community located in close proximity to Brisbane — Land adjacent to Latitude One (NSW) and Chambers Pines (QLD) — Development land with approvals in place at Woolgoolga (NSW) and Hervey Bay (QLD) — A significant land parcel at Upper Coomera (QLD) which provides an opportunity to develop a new lifestyle community (subject to approvals). Portfolio performance Over the year Ingenia’s 26-village Ingenia Gardens portfolio maintained high occupancy and rent increases were also achieved across the portfolio. Income was relatively flat, reflecting the sale of five communities in April 2018. Ingenia Gardens communities generate a high quality recurrent stream of cash earnings, which underpin the Group’s balance sheet and cash flows. The Ingenia lifestyle and holidays portfolio continued to expand with acquisitions in Queensland and NSW extending our presence in key markets. Tourism revenue increased, reflecting operating improvements and the benefit of new acquisitions which increased the number of nights available across the portfolio. Development Ingenia welcomed the very first residents to new developments, Latitude One and Lake Conjola over the year, with both projects attracting strong interest and meeting key milestones. Development approval for further homes was received and there are now nine communities being expanded or created. As acquisitions have become more competitive, development has become an important contributor to growth. New home sales of 287 were up 36% on the prior year and demonstrated the strong demand across communities in Victoria, NSW and Queensland. Ingenia is now demonstrating the benefit of the investment made in this business, as margins grow with increasing scale. Outlook We continue to seek growth in the Group’s lifestyle and holidays business as the market for seniors housing matures. With the sale of non-core assets continuing as a key focus and development providing growth, our portfolio will continue to evolve over the coming year. We are forecasting 350+ new home settlements for the 2019 financial year, EBIT growth of 10-15% and underlying EPS growth of 5-10% as we see the benefit of multi-year, large scale projects and growing margins across the Group. In closing, I would like to thank the Board for their support and guidance, the management team and all employees for their continuing commitment and engagement and our residents and guests for supporting our business. Simon Owen Chief Executive Officer and Managing Director Portfolio Location (by value)* Coastal Metropolitan Regional * Includes Rouse Hill 52% 42% 6% With a growing focus on development and the contribution from recent acquisitions, Ingenia is expanding this portfolio and delivering margin growth. The Ingenia Lifestyle portfolio provides exposure to a growing demand from Australia’s ageing population for affordable age- appropriate housing. Reflecting ongoing growth in the portfolio, which is dominated by communities in coastal and metropolitan locations, rental revenue increased to $61.8 million in the 2018 financial year (up 37% on the prior year). The EBIT contribution of $25.3 million was up over 50% on the prior year, driven by a growing rental base as acquisitions contributed. The core of this portfolio is permanent site revenue generated from residents who generally fund their rental payments via government pension and rental assistance. Residents own their home, and pay a land lease rent to locate it on Ingenia’s land. This stable cash flow is now generated from over 2,700 homes. In addition to growing rental cash flows from permanent homes, revenue from tourism increased over the period. Development Ingenia’s development activity has expanded over the year, providing improved returns through the sale of new homes, and importantly delivering new rent contracts. Assisted by proceeds from non- core asset sales, development expenditure increased over the 2018 financial year, as three major projects began contributing new home settlements in the last quarter. A record 287 new home settlements increased gross new home development profit to $34.8 million (up over 75%). With a focus on continuing to maintain a future pipeline for development, new sites were secured in key metropolitan and coastal markets, and development approvals were progressed across a number of potential projects. Significant progress has been made on major expansion and greenfield projects, with Latitude One (270 home greenfield project on the NSW Central Coast) and Ingenia Holidays Conjola (114 site new home precinct on the NSW South Coast) welcoming their first residents and generating pleasing demand. Latitude One is utilising new designs and building methods to create unique, quality homes which set a new benchmark for Ingenia. As settlements increase, additional scale is generating efficiencies with the EBIT margin for the development business growing to 24.4% (from 17.1% in the 2017 financial year). While the residential market is slowing, the diversity, quality and scale of Ingenia’s developments and the 166 deposits and contracts already in place at 30 June 2018 are expected to support an increase in settlements to the targeted 350+ in financial year 2019. Ingenia Lifestyle Chambers Pines, QLD Key data Total properties Total permanent sites Total annual sites Total tourism sites Portfolio value1 30 June 2018 30 June 2017 35 2,702 908 2,186 33 2,323 909 2,139 $472.2m $407.8m 1 Excludes value attributed to development (30 Jun 18: $142.9m; 30 June 17: $107.1m). Ingenia Lifestyle Plantations, NSW Key data New home settlements Gross above ground new home development profit Average new home price ($’000)1 Deposited/contracted (at 30 June) Investment value (at 30 June) Potential development sites2 FY18 287 $34.8m $324 166 $142.9m 3,244 FY17 211 $19.7m $309 135 $107.1m 2,473 Inclusive of GST. 1 2 Includes new and recycled permanent and tourism sites. Portfolio Location (by site numbers) Coastal Metropolitan Regional 38% 55% 7% Tourism is a complementary strong cash flow business which caters to the key markets of seniors and families. Ingenia Holidays assets provide tourism accommodation including villas, cabins and caravan and camping sites which target the affordable tourism market and are attractive to ‘grey nomads’ and families alike. The $50 million acquisition of one of Australia’s most awarded tourist parks (Cairns Coconut) in March 2017 extended Ingenia’s footprint and brand, increasing ‘room nights’ across the holidays business to 785,000 per annum. Over the 2018 financial year new cabins were added to a number of tourism communities, generating incremental returns. Across the portfolio there is the potential to build an additional 150 tourist cabins as demand grows, providing further potential to enhance returns from existing parks. Occupancy increased across cabins and sites and active marketing to Ingenia’s 160,000 customer database assisted in increasing the average length of stay across the holidays business in the 2018 financial year. Key data Total properties Total units Occupancy1 Portfolio value 1 Like for like basis. The Ingenia Gardens portfolio provides stable recurring cash flows underpinned by Government payments (pension and rent assistance). Over the year the Ingenia Gardens portfolio maintained high occupancy and average weekly rent across the portfolio increased to $338 (from $333 in the prior year). 30 June 2018 30 June 2017 26 1,374 92.4% 31 1,628 92.6% $127.3m $141.3m With the sale of five Ingenia Gardens communities in Tasmania in April 2018, total revenue of $28.0 million and EBIT of $11.4 million were both down slightly on the prior year. This portfolio remains core to Ingenia’s strategy and Ingenia is currently reviewing the opportunity to develop a new modular two-storey rental community as a way to meet demand for affordable rental homes. This innovative concept capitalises on the skills and experience developed in the lifestyle and holidays business and if viable will create the opportunity to expand this portfolio. Ingenia Holidays Cairns Coconut, QLD Key data Total properties Self-contained units Caravan and camping sites Annual sites 30 June 2018 30 June 2017 22 784 1,402 908 22 763 1,367 909 Residents of Ingenia Gardens Hertford, VIC ‘Ingenia Care’, a free service that acts as a ‘care concierge’ to assist residents find appropriate care, has continued to grow, assisting residents to age in place and supporting their health and wellbeing. Resident tenure (which averages 3.1 years) and resident satisfaction are supported by this important program which works in conjunction with Ingenia’s Activate program to support community engagement and resident wellbeing. The portfolio is positioned well to continue to improve occupancy and grow earnings in the 2019 financial year. Community Highlights It has been a big year for Ingenia and our communities. We accelerated into the year by breaking ground at our first Ingenia Lifestyle greenfield site in Port Stephens and were also busy in the Holidays business where a new dual waterslide at Cairns Coconut resort added to the joy of many guests. Caption to go here Ingenia’s first greenfield development, Ingenia Lifestyle Latitude One, NSW Ingenia Lifestyle Latitude One, Port Stephens NSW Nestled in the heart of Port Stephens just two and a half hours north of Sydney sits Ingenia Lifestyle’s first Star Collection community, Latitude One. This master-planned community combines the best of a sea and tree change with outstanding onsite facilities and luxury architect-designed relocatable homes in a gold class resort setting and sets an exciting new benchmark for lifestyle communities. With state of the art facilities seamlessly integrated into beautifully landscaped subtropical gardens, facilities are designed to be welcoming spaces to chat with friends, host visitors or enjoy in solitude. The gold class clubhouse, framed by a stunning Porte Cochere, will soon take pride of place as the social centrepiece and hub of vibrant community life. Home to unspoiled waterways and bushland, resident dolphins and some of the best fishing spots and surf breaks on the east coast, Port Stephens offers a myriad of ways to get in touch with nature. Ingenia Holidays Cairns Coconut In the first full year of ownership by Ingenia, Ingenia Holidays Cairns Coconut has unveiled two new water slides and added six new cabins ahead of what is expected to be another great tourism season for Tropical North Queensland. Ingenia Holidays Cairns Coconut, QLD A favourite for family holidays in far North Queensland, Ingenia Holidays Cairns Coconut is the only holiday park in Cairns with a splash park and waterslides and offers families a range of activities from kids’ clubs to outdoor cinemas, breakfasts, snorkeling lessons, pools and water entertainment. It is easy to see why the park received a 2018 Trip Advisors Travellers Choice Award! Ingenia investors are entitled to discounts (subject to certain terms and conditions) at Ingenia’s holiday parks, including Cairns Coconut. NT NT CAIRNS WA WA PERTH SA SA Lifestyle & Holidays Ingenia Gardens QLD QLD NSW NSW ACT VIC MELBOURNE BRISBANE NEWCASTLE SYDNEY NEW SOUTH WALES Ingenia Kingscliff, NSW Ingenia Lifestyle Plantations, Woolgoolga, NSW Ingenia Holidays White Albatross, Nambucca Heads, NSW Ingenia South West Rocks, NSW Ingenia Holidays Bonny Hills, NSW Ingenia Holidays Blueys Beach, NSW Ingenia Mudgee, NSW Ingenia Mudgee Valley, NSW Ingenia Holidays Soldiers Point, Port Stephens, NSW Ingenia Holidays One Mile Beach, Anna Bay, NSW Ingenia Lifestyle Latitude One, Anna Bay, NSW Ingenia Hunter Valley, Cessnock, NSW Ingenia Holidays Lake Macquarie, Mannering Park, NSW Ingenia Lifestyle The Grange, Morisset, NSW Ingenia Lifestyle Ettalong, NSW Ingenia Holidays Avina, Vineyard, NSW Ingenia Sydney Hills, Dural, NSW Ingenia Nepean River, Emu Plains, NSW Ingenia Lifestyle Rouse Hill, NSW Ingenia Lifestyle Stoney Creek, Marsden Park, NSW Ingenia Holidays Lake Conjola, NSW Ingenia Holidays Broulee, NSW Ingenia Holidays Ocean Lake, Wallaga Lake, NSW Ingenia Albury, NSW Ingenia Holidays Sun Country, Mulwala, NSW QUEENSLAND Ingenia Holidays Hervey Bay, Torquay, QLD Ingenia Holidays Cairns Coconut, Woree, QLD Ingenia Holidays Noosa, Tewantin, QLD Ingenia Lifestyle Chambers Pines, Chambers Flat, QLD Ingenia Lifestyle Bethania, QLD Ingenia Rental Durack Gardens, QLD Ingenia Rental, Eight Mile Plains, QLD Ingenia Lifestyle Hervey Bay, Torquay, QLD* Ingenia Lifestyle Upper Coomera, QLD* *to be developed VICTORIA Ingenia Lifestyle Lara, VIC Note: TAS TAS QUEENSLAND Ingenia Gardens Jefferis, Bundaberg, QLD Ingenia Gardens Marsden, QLD NEW SOUTH WALES Ingenia Gardens Wagga Wagga, NSW Ingenia Gardens Wheelers, Dubbo, NSW Ingenia Gardens Taloumbi, Coffs Harbour, NSW Ingenia Gardens Chatsbury, Goulburn, NSW Ingenia Gardens Oxley, Port Macquarie, NSW Ingenia Gardens Dubbo, NSW Ingenia Gardens Taree, NSW Ingenia Gardens Peel River, Tamworth, NSW Ingenia Gardens Bathurst, NSW VICTORIA Ingenia Gardens Grovedale, VIC Ingenia Gardens St Albans Park, VIC Ingenia Gardens Townsend, St Albans Park, VIC Ingenia Gardens Sovereign, Ballarat, VIC Ingenia Gardens Hertford, Sebastopol, VIC Ingenia Gardens Coburns, Brookfield, VIC Ingenia Gardens Horsham, VIC Ingenia Gardens Brooklyn, Brookfield, VIC Ingenia Gardens Warrnambool, VIC WESTERN AUSTRALIA Ingenia Gardens Carey Park, WA Ingenia Gardens Ocean Grove, WA Ingenia Gardens Seascape, WA Ingenia Gardens Seville Grove, WA Ingenia Gardens Swan View, WA Ingenia Gardens Yakamia, WA Ingenia Communities Group Level 9, 115 Pitt Street, Sydney, NSW 2000 T. E. W. www.ingeniacommunities.com.au 1300 132 946 investor@ingeniacommunities.com.au This Newsletter provides a summary of the Group’s 2018 financial year results. Further information can be found on the Group’s website in the Full Year Results Presentation, Financial Statements and Property Portfolio. ANNUAL REPORT 2018 b Ingenia Communities Holdings Limited Annual Reports For the year ended 30 June 2018 Contents Directors’ Report Auditor’s Independence Declaration Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Cash Flow Statement Consolidated 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. Net finance expense 7. Income tax expense 8. Trade and other receivables 9. Inventories 10. Assets and liabilities held for sale 11. Investment properties 12. Plant and equipment 13. Intangibles 14. Deferred tax assets and liabilities 15. Trade and other payables 16. Borrowings 17. Retirement village resident loans 18. Issued securities 19. Reserves 20. Accumulated losses 21. Commitments 22. Contingent liabilities 23. Share based payment transactions 24. Capital management 25. Financial instruments 26. Fair value measurement 27. Auditor’s remuneration 28. Related parties 29. Company financial information 30. Subsidiaries 31. Notes to cash flow statement 32. Subsequent events Directors’ Declaration Independent Auditor’s Report Security Holder Information Investor Relations Corporate Directory www.ingeniacommunities.com.au 1 21 22 24 25 26 27 27 34 35 37 38 38 39 39 40 40 41 46 46 47 47 47 49 50 51 51 52 52 52 54 54 60 60 61 61 62 63 63 64 65 123 125 126 Ingenia Communities Holdings Limited Annual Report 2018 Directors’ Report For the year ended 30 June 2018 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 2018 (the “current period”) 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”) as one security (ASX Code: INA). 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. Directors The Directors of the Company at any time during or since the end of the current period were: Non-Executive Directors (NEDs) Jim Hazel (Chairman) Robert Morrison (Deputy Chairman) Amanda Heyworth Valerie Lyons Andrew McEvoy (appointed 1 December 2017) Philip Clark AM (resigned 4 December 2017) Executive Director Simon Owen (Managing Director and Chief Executive Officer (MD and CEO)) Qualifications, Experience and Special Responsibilities Jim Hazel – Non-Executive Chairman Mr Hazel was appointed to the Board in March 2012. Mr Hazel has had 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 current listed company directorships include Bendigo and Adelaide Bank Limited and Centrex Metals Limited. He also serves on the Boards of Coopers Brewery Limited and the University of South Australia. Mr Hazel was previously on the board of ImpediMed Limited. Mr Hazel holds a Bachelor of Economics and is a Senior Fellow of the Financial Services Institute of Australasia and a Fellow of the Australian Institute of Company Directors. Mr Hazel is a member of the Investment Committee. 1 Robert Morrison – Non-Executive Deputy Chairman Mr Morrison was appointed to the Board in February 2013. Mr Morrison brings to the board extensive experience in property investments, property development, portfolio management and capital raising as well as institutional funds management. During his 21 years at AMP Limited, 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 a Non-Executive Director of Mirvac Funds Management Limited, an Executive Director of AMP Capital Limited 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. Mr Morrison holds a Bachelor of Town and Regional Planning (Hons) and a Master of Commerce. Mr Morrison is Chair of the Investment Committee and a member of the Audit and Risk Committee. Amanda Heyworth – Non-Executive Director Ms Heyworth was appointed to the Board in April 2012. Ms Heyworth is a professional company director and currently serves on the boards of a number of private, university and Government bodies. She previously served as Executive Director of a venture capital fund which specialised in technology investments. Early in her career, she worked as a Federal Treasury economist and held management roles in the finance and technology sectors. Ms Heyworth has particular strengths in strategy, managing growth and marketing having worked as a venture capital investor for over a decade. Ms Heyworth has strong finance and accounting credentials. She has been involved in over 40 capital raisings and M&A transactions and holds a BA (Accounting) with a major in finance, post graduate qualifications in accounting and finance and a MBA from the Australian Graduate School of Management. Ms Heyworth is Chair of the Audit and Risk Committee and the Remuneration and Nomination Committee. Valerie Lyons – Non-Executive Director Ms Lyons was appointed to the Board in March 2017. Ms Lyons has over 30 years’ experience in executive, non-executive and advisory roles across the health, aged care and retirement, and finance and superannuation sectors. Ms Lyons has held CEO and CFO roles in well regarded seniors and disability service organisations including Uniting AgeWell, Villa Maria and Southern Cross Care (Vic) with prior directorships including Health Employees Superannuation Trust Australia (HESTA), Leading Age Services Australia (LASA), Catholic Health Australia (CHA) and Aged and Community Services Australia (ACSA). Ingenia Communities Holdings Limited Annual Report 2018 2 Directors’ Report For the year ended 30 June 2018 | continued Ms Lyons serves as a non-executive member of the Audit & Risk Board committee for the Australian Digital Health Agency (ADHA), a government agency with responsibility for all national digital health services and systems. Ms Lyons holds a Bachelor of Business Studies Accounting, is a Fellow of the Australian Institute of Company Directors, CPA Australia and the Governance Institute of Australia and a member of the Australian Institute of Superannuation Trustees. Ms Lyons is a member of the Audit and Risk Committee, and Remuneration and Nomination Committee. Andrew McEvoy – Non-Executive Director Mr McEvoy was appointed to the Board in December 2017. Mr McEvoy has over 20 years’ experience in executive and non-executive roles in tourism, digital marketing and e-commerce. Mr McEvoy’s prior roles include Managing Director, Tourism Australia, CEO, South Australian Tourism Commission, and CEO, Life Media and Events for Fairfax Media. Mr McEvoy is currently Chairman of SeaLink Travel Group (ASX: SLK). He is also a Director of Lux Group and Founder and Executive Chairman of We Connect China. Mr McEvoy holds a Master of Arts, International Communications and a Bachelor of Arts. Mr McEvoy is a member of the Remuneration and Nomination Committee and the Investment Committee. Simon Owen – MD and CEO Simon joined the Group in November 2009 as the Chief Executive Officer. He led the turnaround of the business and Ingenia’s focus on developing and acquiring a leading portfolio of lifestyle and holiday communities which has seen the Groups’ market capitalisation grow from $30 million to over $600 million today. Simon brings to the Group in-depth sector experience. Simon is currently a Director of BIG4 Holiday Parks, Australia’s leading holiday parks group representing 180 parks across Australia and is a past member of the Retirement Living Division Council (part of the Property Council of Australia). He is also a 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, a role he held for four years. Simon has over 20 years’ experience working in ASX listed groups with roles across finance, funds management, mergers and acquisitions, business development and sales and marketing. Prior to joining Ingenia Communities, he was the CEO of Aevum, a formerly listed retirement company. Mr Owen is a qualified accountant (CPA) with a Bachelor of Business (Accounting) and postgraduate diplomas in finance and investment and advanced accounting. 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 Amanda Heyworth Robert Morrison Valerie Lyons Andrew McEvoy Philip Clark AM Simon Owen Board Audit & Risk Committee Remuneration & Nomination Committee Investment Committee A 13 13 13 13 7 6 13 B 13 13 13 13 7 6 11 A – 6 6 6 – – – B – 6 6 6 – – – A – 3 – 3 2 1 – B – 3 – 3 2 1 – A 8 – 8 3 5 – – B 8 – 8 3 5 – – A: Meetings eligible to attend B: Meetings attended Interests of Directors Securities in the Group held by directors or their associates as at 30 June 2018 were: Jim Hazel Amanda Heyworth Robert Morrison Valerie Lyons Andrew McEvoy Simon Owen Issued stapled securities Rights 344,710 122,485 125,638 27,957 14,815 – – – – – 1,280,528 551,874 Ingenia Communities Holdings Limited Annual Report 2018 3 Directors’ Report For the year ended 30 June 2018 | continued Company Secretaries 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. Natalie Kwok Ms Kwok is responsible for the Group’s transactional, legal and tax functions. Ms Kwok joined Ingenia in May 2012 as the Group Tax Manager and moved into the role of General Manager Acquisitions, Legal & Tax. Ms Kwok has over 15 years’ experience in corporate and commercial matters, having worked at PwC, Challenger Financial Services and a commercial law firm. Ms Kwok holds a Bachelor of Law (Honours) and a Bachelor of Commerce, and is a Chartered Accountant and a Solicitor. Operating and Financial Review Ingenia Communities Overview The Group is an active owner, manager and developer of a diversified portfolio of retirement and holiday communities across Australia. Its real estate assets at 30 June 2018 were valued at $730.4 million (net of finance leases and resident loans), comprising 31 lifestyle and holiday communities (Ingenia Lifestyle and Holidays), 26 rental communities (Ingenia Gardens) and one deferred management fee retirement village asset (Ingenia Settlers). The Group is in the ASX 300 with a market capitalisation of approximately $640.9 million at 30 June 2018. The Group’s vision is to create Australia’s best lifestyle communities offering affordable permanent and tourism rental accommodation with a focus on the seniors demographic. The Board is committed to delivering sustainable long term earnings per share (EPS) growth to security holders while providing a supportive community environment to permanent residents and holidaymakers. Our Values At Ingenia we build community using a foundation of integrity and respect, creating a place where people have a sense of connection and belonging. We strive for continuous improvement in our resident, guest and visitor service, to ensure that they receive the best possible support, attention and experience every day. Whether it’s time to play, stay, rest or renew, we deliver freedom of choice with a range of lifestyle and holiday options. Strategy The Group’s strategy is to grow recurring revenue streams, develop lifestyle communities and enhance the operational performance of its investment properties. Using a disciplined investment framework, the Group plans to continue growing its lifestyle communities business in metropolitan and coastal locations, through the build out of its development pipeline, targeted acquisitions, reinvestment and divestment of non-core assets. The key immediate business priorities of the Group are: – Grow permanent and tourism rental sites through development and investment in new cabins at existing properties; – Grow rental income at a rate above CPI; – Deliver development projects on time and within budget; – Achieve at least 350 new home settlements in the 2019 financial year; – Continue to focus on metropolitan and coastal locations through portfolio remixing, development and acquisitions; – Improve performance of existing assets through repositioning, driving revenue growth and leveraging the Group’s operating and sales platform; – Expand development margins through innovative home designs and building efficiencies; and – Continue the divestment of non-core assets to support the Group’s capital recycling strategy. Ingenia Communities Holdings Limited Annual Report 2018 4 Directors’ Report For the year ended 30 June 2018 | continued FY18 Financial Results The year to 30 June 2018 has delivered a statutory profit of $34.2 million, which is up 30% on the prior year. Underlying Profit from continuing operations was $36.8 million which represents an increase of $13.3 million (56%) on the prior year. The Group developed and sold 287 turnkey homes (FY17: 211 homes) and grew rental income from permanent, annual and tourism clients to $61.5 million (FY17: $44.5 million). The underlying result is underpinned by a significantly higher EBIT contribution from the Ingenia Lifestyle and Holidays segment up 51% from the prior year. The statutory result reflects the reduction in fair value of investment property due to the increasing number of home settlements. Operating cash flow for the year was $47.2 million, up 56% from the prior year, reflecting growth in recurring rental income and new lifestyle home settlements growing by 36% to 287. Ingenia grew its investment in lifestyle communities during the year, with a continued focus on progressing the Group’s development pipeline to enable further growth in its recurring rental base through the expansion and creation of high quality communities. During June, the Group delivered 16 settlements at its first greenfield development at Latitude One, Anna Bay, NSW. The Group successfully undertook the divestment of eight non-core assets to support the Group’s capital recycling strategy. During 2018 Ingenia divested the Tasmanian Ingenia Gardens portfolio of five properties, two Lifestyle Communities and one Settlers village. At 30 June 2018 the Group had also contracted the sale of a further Settlers Village which settled in July 2018 and contracted (subject to conditions) the sale of the Rouse Hill lifestyle community. Key Metrics – Statutory profit of $34.2 million, up 30% on the prior year. – Underlying profit of $36.8 million, up 56% on the prior year. – Basic earnings per share (Statutory) of 16.5 cps, up 13% on the prior year (FY17: 14.6 cps). – Basic earnings per share (Underlying) of 17.7 cps, up 36% on the prior year (FY17: 13.0 cps). – Operating cash flows of $47.2 million compared with $30.3 million in the prior year. – Full year distribution of 10.75 cps, up 5.4% on the prior year. – Net asset value $2.57 per security compared with $2.50 at 30 June 2017. Group Results Summary Underlying profit for the financial year has been calculated as follows, with a reconciliation to statutory profit: EBIT Net finance expense Tax expense associated with underlying profit Underlying profit(1) Net loss on disposal of investment properties Net (loss)/gain on change in fair value of: - Investment properties - Other Loss on revaluation of newly constructed retirement villages Tax benefit/(expense) on items below underlying profit Statutory profit 2018 $’000 2017 $’000 48,759 32,093 (6,114) (5,874) 36,771 (1,016) (6,936) (1,636) 23,521 (8,438) (2,644) 12,372 198 – 934 (120) (633) (294) 34,243 26,408 (1) Underlying Profit is a non-IFRS measure designed to present, in the opinion of the Directors, the results from the ongoing 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. Ingenia Communities Holdings Limited Annual Report 2018 Directors’ Report For the year ended 30 June 2018 | continued 5 Segment Performance and Priorities Ingenia Lifestyle and Holidays Operations At 30 June 2018, Ingenia Lifestyle and Holidays comprised 31 communities that offer an affordable community experience for seniors and tourism guests. Ingenia Lifestyle and Holidays EBIT grew 51% on FY17 to $25.3 million. During FY18 the Group continued to expand its rental assets by delivering 287 new settlements from its development business, and completing the acquisition of Eight Mile Plains for $25.0 million. The Group also undertook the divestment of two subscale and non-core assets at Lake Macquarie and Chain Valley Bay to support the Group’s capital recycling strategy. Permanent rental income grew by 46% in FY18, as a result of new acquisitions completed in FY17 and FY18, the settlement of new homes, the investment in new rental cabins and rental growth across the portfolio. Tourism rental income growth of 38% has been driven largely through the FY17 acquisition of Ingenia Holidays Avina, Ingenia Holidays Cairns Coconut and Ingenia Holidays Bonny Hills and additional investment in new tourism cabins across the portfolio. The Groups continued focus on leveraging its database and brand position within the tourism market also contributed to the improved performance. The carrying value of the Lifestyle and Holidays investment property at 30 June 2018 is $449.9 million (2017: $407.8 million). Performance Permanent rental income ($m) Annuals rental income ($m) Tourism rental income ($m) EBIT contribution ($m) Margin (%) 2018 21.7 4.8 34.9 25.3 39.0 2017 Change % 14.9 4.3 25.3 16.8 35.3 46% 12% 38% 51% 4% Strategic Priorities: The strategic priorities for Ingenia Lifestyle and Holidays are: investing in new rental and tourism cabins; integrating and optimising newly settled development sites; growing rental returns; leveraging scale efficiencies and, driving holiday bookings in non-peak periods. Ingenia Lifestyle Development The earnings contribution from development has continued to grow with development now underway at 9 communities and new turnkey settlement volumes up 36% from the prior year, with Ingenia delivering 287 new turnkey settlements in 2018 (2017: 211). This result reflects increased awareness and interest in the market and Ingenia’s investment in the Group’s sales and development platform. During FY18 the Group added to its development pipeline with the acquisition of land at Woolgoolga (Ingenia Plantations), Hervey Bay, Upper Coomera and land adjacent to Latitude One. The Group currently has a strong development pipeline of 3,244 sites (2017: 2,370 sites). The carrying value of the Ingenia Lifestyle Development investment property at 30 June 2018 is $142.9 million (2017: $107.1 million). Performance New home settlements (#) Gross new home development profit ($m) Other home settlements (#) Gross refurbished home development profit ($m) EBIT contribution ($m) Margin (%) 2018 287 34.8 12 0.7 21.0 24.4 2017 Change % 211 19.8 20 1.3 10.9 17.1 36% 76% (40%) (46%) 93% 7% Ingenia Communities Holdings Limited Annual Report 2018 6 Directors’ Report For the year ended 30 June 2018 | continued Strategic Priorities: The key strategic priorities for Ingenia Lifestyle Development include: delivering the current development projects on time and within budget; continuing the sales and settlement momentum achieved during 2018 and, securing further development approvals for new homes within our existing communities. The Group will continue to identify future development opportunities and seek to continue to improve margins through building efficiencies and innovation. Ingenia Gardens Ingenia Gardens comprises 26 rental communities located across the eastern seaboard and Western Australia. These communities accommodate more than 1,400 residents. During FY18 Ingenia divested the Tasmanian Ingenia Gardens portfolio consisting of five properties. This divestment impacted FY18 results when compared to FY17, however the portfolio continues to perform well with net growth and occupancy closing at 92.4%. The carrying value of these assets at 30 June 2018 is $127.3 million (2017: $141.3 million). Performance Ingenia Gardens Rental communities (#) Occupancy (%) Rental income ($m) Catering income ($m) EBIT ($m) Margin (%) 2018 26 92.4 24.6 3.1 11.4 40.8 2017 Change % 31 92.8 24.8 3.2 11.6 40.9 (16%) – (1%) (3%) (2%) – Strategic Priorities: The strategic priorities of Ingenia Gardens are to: increase occupancy rates; grow rents by at least CPI; improve resident retention and referrals; manage our cost base and leverage scale opportunities; increase the take up of our Ingenia Care offering and, ensure that our residents are actively engaged. Capital Management of the Group During the year, the Group refinanced a tranche of its common terms debt facilities, increasing the total Group facility capacity by $50.0 million. The refinance provided increased tenor at a lower average margin. The weighted average term to maturity of Ingenia’s debt at 30 June 2018 is 4.3 years. The Group’s Loan to Value Ratio (“LVR”) is at the low end of Ingenia’s target range of 30-40% at 30 June 2018. As at 30 June 2018, the debt facilities are drawn to $229.0 million, which represents LVR of 32.6% (inclusive of bank guarantee liabilities). The Group has interest rate derivatives in place covering 41% of drawn debt at 30 June 2018. The Group intends to fund near term growth through internal cash flows, divestment of non-core assets and drawing on committed debt facilities. Ingenia continues to explore the concept of capital partnerships to accelerate the development of new lifestyle communities. Financial Position The following table provides a summary of the Group’s financial position as at 30 June 2018: $'000 Cash and cash equivalents Inventories Assets held for sale Investment properties Deferred tax asset Other assets Total assets Borrowings Retirement village resident loans Liabilities held for sale Other liabilities Total liabilities Net assets/equity 2018 14,450 30,228 28,675 2017 9,645 21,597 – 730,437 693,473 Change 4,805 8,631 28,675 36,964 (4,940) 3,550 77,685 62,491 7,464 15,977 748,156 170,830 27,201 (18,995) – 34,393 232,424 515,732 3,875 12,173 59,544 18,141 2,524 19,527 825,841 233,321 8,206 3,875 46,566 291,968 533,873 Ingenia Communities Holdings Limited Annual Report 2018 Directors’ Report For the year ended 30 June 2018 | continued 7 Inventories, up $8.6 million, include 93 newly completed homes, reflecting the Group’s rapidly growing lifestyle community development business and increased investment in display homes as new projects are launched. Investment property book value increased by $37.0 million from the prior year. This was due to: – Acquisition of new communities and development sites $50.4 million; – Capitalised expenditure of $66.6 million; – Divestments of investment properties and the transfer of investment properties to assets held for sale of ($77.4 million); and – Fair value decrement of ($2.6 million), driven by the settlements of development sites, partly offset by valuation increases associated with capitalisation rate improvements and improved operations. Assets held for sale represent the carrying value of the Group’s investment in Rouse Hill which is subject of a conditional sale contract and Ingenia Settlers Cessnock, which settled in July 2018. Borrowings increased by $62.5 million, partly funding the acquisition and development of lifestyle community assets. Cash Flow $’000 Operating cash flow Investing cash flow Financing cash flow Net change in cash and cash equivalents 2018 2017 Change 47,230 30,257 (87,431) (168,324) 16,973 80,893 45,006 4,805 132,599 (87,593) (5,468) 10,273 Operating cash flow for the Group was up 56% to $47.2 million, reflecting the contribution from new acquisitions in FY17 and FY18, the growth in recurring net rental income from lifestyle and rental communities, and the cash inflow associated with the increased sale of new lifestyle homes. Distributions The following distributions were made during or in respect of the year: – On 20 February 2018, the Directors declared an interim distribution for 2018 of 5.1cps, amounting to $10.6 million which was paid on 14 March 2018. The distribution was 21.3% tax deferred and the distribution reinvestment plan was in place. – On 21 August 2018, the Directors declared a final distribution of 5.65 cps amounting to $11.8 million, to be paid on 14 September 2018. The final distribution is estimated to be fully taxable and the distribution reinvestment plan will apply to the distribution. During FY18 ICF elected to enter the Attribution Managed Investment Trust (“AMIT”) regime. Security holders will receive their first Attribution Managed Investment Trust Member Annual (“AMMA”) statement in September 2018. FY19 Outlook The Group is well positioned to continue growing its lifestyle communities business in FY19 with a sector leading development pipeline and debt capacity in place to facilitate the accelerated growth in settlement volumes expected as further projects are launched. Priorities in existing lifestyle and holiday communities are to make appropriate investment in key communities to grow revenue through investing in new cabins and facilities across the rental and tourism business. Ingenia Gardens remains a key contributor to the Group’s rental cash flow. Ingenia’s priority is to continue to grow occupancy and rents while delivering the best possible support to our residents. The divestments made in the second half of FY18 and the divestments contracted at 30 June 2018 will temporarily impact the FY19 result due to lost earnings, while the capital proceeds are reinvested into development to grow long term recurring revenue streams in key locations. The Group will continue to regularly assess the performance of its existing assets and market opportunities, and make divestments and acquisitions where superior longer term returns are available. Ingenia Communities Holdings Limited Annual Report 2018 8 Directors’ Report For the year ended 30 June 2018 | continued 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 11 for Australian investment properties acquired during the year, Note 16 for details of increased debt facility, and Note 18 for issued securities. Indemnification of Auditor To the extent permitted by law, the Company has agreed to indemnify its auditor, Ernst & Young Australia, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the financial year. Events Subsequent to Reporting Date Final FY18 Distribution On 21 August 2018, the Directors of the Group resolved to declare a final distribution of 5.65cps (2017: 5.1 cps) amounting to $11.8 million to be paid at 14 September 2018. The distribution reinvestment plan will apply to the final distribution. Acquisition of Adjacent Land On 2 July 2018, the Group completed the acquisition of land adjacent to Ingenia Lifestyle Chambers Pines (Chambers Flat, QLD) for a purchase price of $4.5 million. Sale of Settlers Cessnock On 6 July 2018, the Group completed the sale of Settlers Cessnock (Cessnock, NSW) for $2.5 million (net of resident loans). Likely Developments The Group will continue to pursue strategies aimed at growing its cash earnings, profitability and market share within the seniors rental property and tourism industry during the next financial year, with a continuing focus on the development of lifestyle communities. The Group will continue to pursue the divestment of non-core assets to support the Group’s capital recycling strategy. Other information about likely developments in the operations of the Group and the expected results of those operations in future financial years is included in the various reports in this 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 21. Non-Audit Services During the year, non-audit services were provided by the Group’s auditor, Ernst & Young Australia. The directors are satisfied that the provision of the non-audit services is compatible with, and did not compromise, the independence for auditors imposed by the Corporations Act 2001 for the following reasons: – – – the non-audit services were for taxation, regulatory and assurance related work, and none of this work created any conflicts with the auditor’s statutory responsibilities; the Audit and Risk Committee resolved that the provision of non-audit services during the financial year by EY as auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001; the Board’s own review conducted in conjunction with the Audit and Risk Committee, having regard to the Board policy set out in this Report, concluded that it is satisfied the non-audit services did not impact the integrity and objectivity of the auditors; and – the declaration of independence provided by EY, as auditor of Ingenia. Refer to Note 27 of the financial statements for details on the audit and non-audit fees. Environmental Regulations The Group has policies and procedures in place to ensure that, where operations are subject to any particular and significant environmental regulation under the laws of Australia, those obligations are identified and appropriately addressed. The Directors have determined that there has not been any material breach of those obligations during the financial year. Rounding Amounts Ingenia Communities Group is an entity of the kind referred to in ASIC Instrument 2016/191, and in accordance with that Class Order, amounts in the financial report and Directors’ Report have been rounded to the nearest thousand dollars, unless otherwise stated. Signed in accordance with a resolution of the Directors of the Responsible Entity. Group 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. Jim Hazel Chairman Sydney, 21 August 2018 Ingenia Communities Holdings Limited Annual Report 2018 9 In relation to the FY18 executive remuneration structure a new metric relating to underlying earnings growth was included in the long-term incentive vesting rules. The other key metrics of Total Shareholder Return relative to that of the ASX 300 Industrials Index and Return on Equity targets remain consistent with prior years. We recommend Ingenia’s Remuneration Report to investors and seek your support for the resolution to adopt the Remuneration Report at Ingenia’s AGM on Tuesday 13 November 2018. Amanda Heyworth Chair - Remuneration and Nomination Committee Sydney, 21 August 2018 Directors’ Report For the year ended 30 June 2018 | continued Message from the Remuneration and Nomination Committee Dear Security holders, The Board of Ingenia Communities Group (Ingenia) is pleased to present the Remuneration Report for FY18. The Group’s strategy is outlined in the FY18 results presentation and Operational and Financial Review section of the Directors’ report. The Board has linked remuneration outcomes to the corporate strategy for medium to long- term return on investment. Ingenia’s remuneration framework continues to be “fit for purpose”, remuneration levels are sufficient to attract and retain key executives, the performance measures focus management on Board priorities for creating incremental value, and reward outcomes have varied in line with the Group’s performance. Ingenia undertakes regular reviews of its executive remuneration framework to ensure it is in line with Group strategy, group and individual performance and market relativities. The Board has established a strong nexus between executive remuneration and Ingenia’s performance and its security holder return. FY18 short-term incentive (STI) outcomes for key management personnel (KMP) were in line with Ingenia’s strong performance. The Group’s FY18 result, as measured by underlying profit, showed good growth on the prior year supported by the sales result achieved in the development business and the full year impact of accretive acquisitions made in FY17 and FY18 that have been successfully integrated into the business. Ingenia Communities Holdings Limited Annual Report 2018 10 Directors’ Report For the year ended 30 June 2018 | continued Remuneration Report (Audited) Introduction The Board presents the Remuneration Report for the Group for the year ended 30 June 2018, which forms part of the Directors’ Report and has been prepared in accordance with section 300A of the Corporations Act 2001 (Cth) (Corporations Act). The data provided in the Remuneration Report was audited as required under section 308(3C) of the Corporations Act. Remuneration Governance Remuneration and Nomination Committee (RNC) The Board has an established RNC, which is directly responsible for reviewing and recommending remuneration arrangements for non-executive directors (NEDs), the Managing Director (MD) and Chief Executive Officer (CEO) and senior executives who report directly to the CEO. The RNC comprises the following NEDs: – Amanda Heyworth (Chair); – Valerie Lyons; – Andrew McEvoy (appointed, 1 December 2017); and – Philip Clark AM (resigned, 4 December 2017). 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 (a minimum of twice per year), and considers recommendations from internal management and external advisors. The Board is ultimately responsible for decisions made on recommendations from the RNC. No Director votes on remuneration resolutions that directly impact their remuneration. External Remunerations Advisers Guerdon Associates, initially engaged in March 2014, provided independent remuneration advice during FY18 in respect of KMP and reviewed the rules of the Group’s incentive plan. Guerdon Associates have been commissioned by, engaged with, and addressed reports directly to the Chair of the RNC. The Board is satisfied that the remuneration advice from Guerdon Associates was made free from undue influence of the KMP in respect of whom the advice related, due to there being no engagement with the remuneration advisors outside of the RNC. A declaration of independence from Guerdon Associates was provided to the Board in respect of their engagement and their reports to the RNC. While remuneration services were received, no remuneration recommendations as defined under Division 1, Part 1.2.98 (1) of the Corporations Act, were made by Guerdon Associates. Details of KMP KMP for the year ended 30 June 2018 are those persons identified as having direct or indirect authority and responsibility for planning, directing and controlling the activities of the Group, and include any Executive Director or NED of the Group. KMP of the Group for the year ended 30 June 2018 have been determined by the Board as follows: KMP Non-Executive Directors Jim Hazel Robert Morrison Amanda Heyworth Position Chairman of the Board Member – Investment Committee Deputy Chairman of the Board Chair – Investment Committee Member - Audit and Risk Committee Chair - Audit and Risk Committee Chair - Remuneration and Nomination Committee (Appointed Chair 4 December 2017, upon the retirement of Mr Clark. Ms Heyworth was a member of this committee prior to this date) Ingenia Communities Holdings Limited Annual Report 2018 Directors’ Report For the year ended 30 June 2018 | continued 11 KMP Valerie Lyons Position Member – Audit and Risk Committee Member – Remuneration and Nomination Committee Andrew McEvoy Member – Investment Committee (appointed, effective 1 December 2017) Member – Remuneration and Nomination Committee Philip Clark AM Chair - Remuneration and Nomination Committee (resigned, effective 4 December 2017) Executive Director Simon Owen Other Executive KMP Scott Noble Nicole Fisher Remuneration of Executive KMP MD and CEO CFO COO Remuneration Policy The Group’s Remuneration Policy aims 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 security holders. The remuneration structures take into account a range of factors, including the following: – Capability, skills and experience; – Ability to impact achievement of the strategic objectives of the Group; – Performance of each individual executive KMP; – The Group’s overall performance; – Remuneration levels being paid by competitors for similar positions; and – The need to ensure executive continuity and succession. Link between Remuneration and Performance The Board understands the importance of the relationship between the executive KMP remuneration policy and the Group’s performance. Executive KMP remuneration packages are structured to align remuneration outcomes with the interests of security holders. Remuneration component Link to Group performance Total Fixed Remuneration (TFR) Short-Term Incentive (STI) TFR is set with reference to the executive KMP’s role, responsibilities and performance and remuneration levels for similar positions in the market. STIs are awarded to executive KMP whose achievements, behaviour and focus meet the Group’s business plan and individual Key Performance Indicators (KPIs) measured over the financial year. Details of the KPIs are explained separately below. The Board maintains sole discretion over the granting of STIs to employees. For achievement of STIs in relation to executive KMP, the payment is: – CEO: 33% cash and a 67% deferred equity – CFO & COO: 50% cash and a 50% deferred equity Deferred STIs are linked to underlying earnings growth sustainability and subject to a malus provision. Ingenia Communities Holdings Limited Annual Report 2018 12 Directors’ Report For the year ended 30 June 2018 | continued Remuneration component Link to Group performance Long-Term Incentive (LTI) LTIs are granted to executive KMP to align their focus with the Group’s strategy. The LTI performance conditions are as follows: – Total Shareholder Return (TSR), measured over three financial years; – Return on Equity (ROE) performance measured in the third year following the LTI grant; – Earnings before Interest and Tax (EBIT) cumulative annual growth rate over the grant period. The Board maintains sole discretion over the granting of LTIs. LTI grants are made in equity to ensure alignment with security holders’ interests. LTIs are subject to a malus provision. The table below sets out summary information about the Group’s earnings and movement in security holder wealth for the five years to 30 June 2018, noting that where applicable, certain amounts have been restated for the security consolidation that occurred in November 2015: EBIT ($’000) Total Underlying Profit ($'000) Statutory profit ($'000) Underlying (Basic) EPS(1) (cents) Statutory (Basic) EPS(1) (cents) Net asset value per security ($) Security price at 30 June ($) Distributions (cents) FY18 FY17 FY16 FY15 48,759 36,771 32,093 23,521 34,243 26,408 17.7 16.5 2.57 3.08 10.75 13.0 14.6 2.50 2.60 10.20 24,200 20,161 24,280 13.4 16.1 2.45 2.87 9.30 18,050 17,507 25,722 12.8 18.8 2.34 2.58 8.10 FY14 12,144 11,568 11,518 10.8 10.8 2.13 3.03 6.90 (1) Basic earnings per security is based on the weighted average number of securities on issue during the period. Mix of Remuneration Components Executive remuneration packages include a mix of TFR, STIs and LTIs. 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 position remuneration of executive KMP by reference to a 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. The remuneration mix the RNC is aiming to achieve for executives for FY18, expressed as a percentage of total remuneration, is detailed below: Maximum Total Remuneration Available Simon Owen (CEO) ($) Percentage (%) Scott Noble (CFO) ($) Percentage (%) Nicole Fisher (COO) ($) Percentage (%) TFR 682,500 37 Max STI 614,250 33 Max LTI Max Total REM 546,000 1,842,750 30 400,000 240,000 120,000 52 32 370,000 222,000 52 32 16 111,000 16 100 760,000 100 703,000 100 Ingenia Communities Holdings Limited Annual Report 2018 Directors’ Report For the year ended 30 June 2018 | continued 13 Total Fixed Remuneration of Executive KMP TFR is an annual salary, calculated on a total cost basis to include salary-packaged benefits grossed up for FBT, employer superannuation contributions 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 TFR levels for executive KMP on an annual basis. The TFR for each of the executives for FY18 and FY17 is: KMP Simon Owen (CEO) Scott Noble (CFO) Nicole Fisher (COO) FY18 TFR (p.a.) FY17 TFR (p.a.) Movement $682,500 $400,000 $370,000 $682,500 N/A $340,673 – N/A $29,327 Data ranges for the CEO, CFO and COO FY18 TFR were provided by Guerdon Associates. The RNC used an element of judgement to determine the appropriate positioning within this range. Those recommendations were approved by the Board. Rights Plan The current Rights Plan was approved by security holders at the Annual General Meeting (AGM) held on 15 November 2016. The Rights Plan provides for the grant of Rights, which upon a determination by the Board that the performance conditions have been met, will result in the issue of stapled securities in the Group for each Right. The Rights Plan provides for the grant of STI and LTI Rights to both executive KMP and other eligible employees. Short-Term Incentive Plan (STIP) Under the FY18 Rights Plan, 33% of the maximum STI for the CEO and 50% for the CFO and COO will be paid in cash, with the balance being a deferred equity element. The deferred equity component is for a period of 12 months and subject to forfeiture where earnings growth is not sustained. The deferral element is rights to INA stapled securities, plus additional stapled securities equal to the value of distributions during the deferral period on a reinvestment basis. KMP Simon Owen (CEO)(1) Scott Noble (CFO) Nicole Fisher (COO) Maximum STIP (Cash) 30% of TFR $204,750 30% of TFR $120,000 30% of TFR $111,000 Maximum STIP Deferred (Rights) Total Maximum STIP Available 60% of TFR $409,500 30% of TFR $120,000 30% of TFR $111,000 90% of TFR $614,250 60% of TFR $240,000 60% of TFR $222,000 (1) Approved by the security holders at the Annual General Meeting held on 14 November 2017. The FY18 STI Rights are subject to the following terms and conditions: – A ‘malus’ provision during the deferral period, which means that some or all of the STIP Rights may be forfeited if: • the Board determines Ingenia’s underlying earnings growth is not sustainable; or • any of the circumstances set out in the rules of the Rights Plan occur, such as fraud or dishonesty, a breach of obligations or material misstatement of Ingenia’s financial statements; – A one-year deferral period and are eligible to vest on, or following, 1 October 2019; – On the vesting date Ingenia will cause the relevant number of Ingenia securities to be issued to the executive in accordance with a prescribed formula; – No amount is payable by the executive KMP for the issue or transfer of Ingenia securities to the executive KMP. The STI award is subject to performance conditions that are summarised in the following table. These KPIs have been chosen as they aim to focus individuals on meeting the Group’s business plan. The KPIs specific to the executive are outlined below, together with what the Board will consider in determining the achievement of the KPI. Each assessment area is weighted. The KPIs are set with ‘threshold’, ‘target’ and ‘stretch’ performance levels, with entitlements calculated on a pro-rata basis between these levels. Ingenia Communities Holdings Limited Annual Report 2018 14 Directors’ Report For the year ended 30 June 2018 | continued The weighting of KPIs for each executive KMP is as follows: KMP Financial Health and Safety Capital Management Operational Systems Culture and Reporting Total Simon Owen (CEO) Scott Noble (CFO) Nicole Fisher (COO) 40% 40% 30% – – 5% 25% 15% – 20% 10% 50% – 10% – 15% 25% 15% 100% 100% 100% The key considerations in assessing performance against the KPIs are: KPI Financial Executive Key Considerations in achievement CEO, CFO, COO EBIT and underlying profit per security to exceed threshold level. Health and Safety COO Capital management CEO, CFO Safe work environment culture established across the Group, and lost time injury frequency below benchmark. Non-core asset divestment, capital and debt available on competitive pricing and flexible terms. Systems Operational CEO, CFO, COO CFO Improvement to the finance systems. Achievement of operational and sales metrics that deliver on business strategy, established for each executive KMP specific to their area of responsibility. Recruit and retain leading industry talent. High calibre leadership team offering clear succession opportunities. High quality Board and statutory reporting, analysis and forecasting. High quality management budgeting, reporting, analysis and forecasting. Culture and reporting CEO, CFO, COO For FY18 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 STIP awards. The Board approved the FY18 STIP awards as follows: KMP Simon Owen (CEO) Scott Noble (CFO) Nicole Fisher (COO) Actual STI awarded Actual STI awarded as a % of maximum STI $568,181 $216,000 $199,800 92.5% 90.0% 90.0% The CEO’s maximum potential FY18 STIP deferred equity component was approved by security holders at the AGM held on 14 November 2017. Any FY19 CEO deferred equity component will be subject to security holder approval at the 2018 AGM to be held on 13 November 2018. Long-Term Incentives Long Term Incentive Plan (LTIP) The objective of the Group’s LTIP is to align the ‘at risk’ compensation of executives with long-term security holder returns whilst also acting as a mechanism to retain key talent. The FY18 LTIP Rights are subject to the following LTIP Performance Conditions: – 40% based on Relative Total Shareholder Return (Relative TSR); – 30% based on Return on Equity (ROE); and 30% based on Earnings Before Interest and Tax (EBIT) Compound Annual Growth Rate (CAGR). – Refer to page 12 for details of maximum LTIP. Ingenia Communities Holdings Limited Annual Report 2018 Directors’ Report For the year ended 30 June 2018 | continued 15 Relative TSR Performance Condition The Relative TSR hurdle is growth in Ingenia’s TSR relative to growth in the ASX 300 Industrials Index (Index), measured over a three-year period ending on 30 September 2020. Total TSR is the growth in the INA security price plus distributions, assuming distributions are reinvested. To minimise the impact of any short-term volatility, Ingenia’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 performance period. Ingenia must outperform the Index for the LTIP rights to vest for the Executive KMP. The FY18 LTIP Rights will vest on the following basis: Growth rate in INA’s Relative TSR % of Rights that vest At or Below Threshold Equal to or less than Index + 1% CAGR Nil Between Threshold and Maximum Between Index + 1% and Index +6% CAGR 10% plus an additional amount progressively vesting on a straight line basis between Threshold and Maximum Maximum Equal to or greater than Index + 6% CAGR 100% CAGR: Compound Annual Growth Rate ROE Performance Condition The ROE Performance Condition is intended to focus executive KMP on improving medium to long-term return on investment. ROE is defined as underlying profit divided by weighted average net assets (excluding the impact of asset revaluations on Net Assets between LTI issue date and the LTI vesting date). For FY18, the relevant metric is ROE achieved for FY20 on the following basis: At or Below Threshold Less than 9.0% Nil ROE % of Rights that vest Between Threshold and Maximum Equal to or greater than 9.0% 30% plus an additional amount progressively vesting on a straight line basis between Threshold and Maximum Maximum Equal to or greater than 10.0% 100% EBIT CAGR Performance Condition The EBIT CAGR Performance Condition is intended to focus executive KMP on improving medium to long-term return on investment. EBIT CAGR is the compound annual growth rate of underlying earnings before interest and tax. The relevant metric is EBIT CAGR achieved for the period FY18 to FY20, with the base year EBIT on which CAGR will be calculated as the disclosed FY17 EBIT of $32.1 million. At or Below Threshold Equal to or less than 10.0% Nil EBIT CAGR % of Rights that vest Between Threshold and Maximum Between 10% and 20% 10% plus an additional amount progressively vesting on a straight line basis between Threshold and Maximum Maximum Equal to or greater than 20% 100% Ingenia Communities Holdings Limited Annual Report 2018 16 Directors’ Report For the year ended 30 June 2018 | continued The FY18 LTIP methodology determines security value as the VWAP of Ingenia securities in the 30 day trading period ending on the grant date of 1 October 2017 (for the CFO and COO) and 14 November 2017 (for the CEO). The number of LTIP Rights granted in FY18 was calculated by dividing the LTIP value by the 30 day VWAP of the Ingenia security price as above. Each LTI Right vested equals one Ingenia security plus an additional number of Ingenia securities calculated based on the distributions that would have been paid during the relevant period being reinvested. FY18 LTIP Rights grants will be entitlements to Rights to stapled securities plus additional stapled securities equal to distributions paid during the vesting period. The Board aims to have executive KMP incentivised to grow distributions to security holders. However, executives do not receive distributions on securities underlying any Rights that do not vest or remain unexercised. LTIP Rights held by KMP during the year were: KMP Directors Simon Owen Executives Scott Noble Nicole Fisher Total Balance 1 July 2017 Granted Vested Lapsed Balance 30 June 2018 365,772 205,665 – 71,677 46,890 43,373 437,449 295,928 – – – – (118,236) 453,201 – (22,336) 46,890 92,714 (140,572) 592,805 During the year the LTIP rights issued in 2015 lapsed as they did not meet the vesting conditions. No LTIP rights vested during the year. Summary of LTIPs on Issue to KMP The following table sets out all LTIPs granted to-date and not vested at 30 June 2018. KMP Scheme year Simon Owen Nicole Fisher Scott Noble Total FY18 FY17 FY16 FY18 FY17 FY16 FY18 Fair value of rights per award at award date $1.22 $1.44 $1.91 $1.17 $1.20 $1.91 $1.17 Number of rights granted 205,665 124,598 122,938 43,373 24,083 25,258 46,890 592,805 Grant date Fair value of rights Vesting date Maximum to expense in future years 14-Nov-17 $251,431 1-Oct-20 $188,803 15-Nov-16 $179,843 17-Nov-15 $234,444 1-Oct-19 1-Oct-18 $71,084 $19,679 1-Oct-17 1-Oct-16 1-Oct-15 1-Oct-17 $50,932 1-Oct-20 $38,246 $28,842 $48,167 1-Oct-19 1-Oct-18 $55,062 1-Oct-20 $848,721 $11,405 $4,043 $41,347 $374,607 LTIP – Termination of Employment The following outlines the treatment of unvested LTIP Rights at the time of termination of employment. This treatment also applies to unvested STIP Rights. – Where a Participant holding unvested Rights ceases to be an employee of the Group, those Rights immediately lapse. – Notwithstanding the above, where a Participant holding unvested Rights ceases to be an employee of the Group due to a Qualifying Reason, the Board may determine in its discretion, the treatment of those unvested Rights. – Qualifying Reason means: • the death, total and permanent disablement, retirement or redundancy of the Participant as determined by the Board in its absolute discretion; or • any other reason with the approval of the Board. Ingenia Communities Holdings Limited Annual Report 2018 Directors’ Report For the year ended 30 June 2018 | continued 17 LTIP – Change in Control In the event of a change in control, the Board has absolute discretion as to the treatment of unvested LTIP rights. In exercising discretion, the Board will take into account: – The employee’s length of service in relation to each unvested grant; – Performance to the date of the change in control on any performance measures specified for each grant; and – Any other factors that the Board considers relevant. KMP Employment Contracts MD and CEO Contract duration Commenced 1 October 2016, open-ended. Fixed remuneration Total fixed remuneration includes cash salary, superannuation and other non-cash benefits. Variable remuneration Eligible for STI of up to 90% for any one year of the fixed annual remuneration, of which 67% is in the form of deferred equity. Eligible for LTI of up to 80% for any one year of the fixed annual remuneration. The Board may withdraw or vary the STI and LTI schemes at any time by written notice to the Executive, provided 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 CFO 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. Contract duration Commenced 1 January 2018, open-ended. Fixed remuneration Total fixed remuneration includes cash salary, superannuation and other non-cash benefits. Variable remuneration eligibility Eligible for STI of up to 60% for any one year of fixed annual remuneration, of which 50% is in the form of deferred equity. Eligible for LTI of up to 30% for any one year 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 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. Ingenia Communities Holdings Limited Annual Report 2018 18 Directors’ Report For the year ended 30 June 2018 | continued COO Contract duration Commenced 4 June 2012, open-ended. Fixed remuneration Total fixed remuneration includes cash salary, superannuation and other non-cash benefits. Variable remuneration eligibility Eligible for STI of up to 60% for any one year of fixed annual remuneration, of which 50% is in the form of deferred equity. Eligible for LTI of up to 30% for any one year 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 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. Remuneration Tables The following tables outline the remuneration provided to Executive KMP for FY17 and FY18. FY18 Executive KMP Financial Year Simon Owen Scott Noble(3) Nicole Fisher Total 2018 2018 2018 Short-Term Super- annuation Benefits ($) 20,049 20,049 20,049 60,147 STI(1) Cash ($) STI(1) Deferred Rights ($) Total Short-Term ($) 189,394 378,788 1,245,639 108,000 108,000 616,429 99,900 99,900 544,859 397,294 586,688 2,406,927 Salary ($) 657,408 380,380 325,010 1,362,798 FY18 Executive KMP Financial Year Simon Owen Scott Noble(3) Nicole Fisher Total 2018 2018 2018 Fair Value of LTI Rights Granted (subject to vesting conditions)(2) ($) Performance Related Total ($) STI & LTI Percent (%) LTI Percent (%) 251,431 1,497,070 55,062 50,932 671,491 595,791 357,425 2,764,352 55% 40% 42% 49% 17% 8% 9% 13% (1) Cash STIs were accrued in the year ended 30 June 2018. Deferred STI rights are expensed evenly over the year of service and vesting period. (2) The fair value of the LTIP rights is calculated at the date of grant using the Black Scholes option-pricing model and expensed to each reporting period evenly over the three year period from grant date to vesting date. The value disclosed is the fair value of rights granted at the date of issue. (3) Mr Scott Noble was deemed to be a KMP from 1 January 2018, prior to this he was acting CFO. The salary and superannuation disclosed in the above table is for the full year FY18. Ingenia Communities Holdings Limited Annual Report 2018 19 Directors’ Report For the year ended 30 June 2018 | continued FY17 Executive KMP Financial Year Simon Owen Tania Betts(3) Nicole Fisher(4) Total 2017 2017 2017 FY17 Executive KMP Financial Year Simon Owen Tania Betts(3) Nicole Fisher(4) Total 2017 2017 2017 Short-Term Salary ($) 662,885 235,358 252,923 Super- annuation Benefits ($) 19,615 14,712 19,615 STI(1) Cash ($) STI(1) Deferred Rights ($) Total Short-Term ($) 252,525 252,525 1,187,550 42,088 79,206 42,088 79,206 334,246 430,950 1,151,166 53,942 373,819 373,819 1,952,746 Fair Value of LTI Rights Granted (subject to vesting conditions)(2) ($) Performance Related Total ($) STI & LTI Percent (%) LTI Percent (%) 179,843 1,367,393 36,647 28,842 370,893 459,792 245,332 2,198,078 50% 33% 41% 45% 13% 10% 6% 11% (1) Cash STIs were accrued in the year ended 30 June 2017. Deferred STI rights are expensed evenly over the year of service and vesting period. (2) The fair value of the LTIP rights is calculated at the date of grant using the Black Scholes option-pricing model and expensed to each reporting period evenly over the three year period from grant date to vesting date. The value disclosed is the fair value of rights granted at the date of issue. (3) Ms Tania Betts commenced maternity leave on 1 January 2017 and did not return as a KMP in FY18. (4) Ms Nicole Fisher’s remuneration noted above is based on a four day week. Non-Executive Directors’ Remuneration NED Fees The maximum aggregate fee pool available to NEDs is $1,000,000 as stipulated in the Constitution that was adopted pre- internalisation. Performance-Based Remuneration NEDs are remunerated by way of cash and mandated superannuation. They do not participate in performance based remuneration practices unless approved by security holders. The Group currently has no intention to remunerate NEDs by any way other than cash benefits. Equity-Based Remuneration Directors are eligible to participate in the existing Rights Plan, however there is no current intention to grant any Rights to NEDs under this plan. To this end, all NEDs have self-funded the purchase of Ingenia securities on market thereby aligning their interests with security holders. Details are shown below. The Board has introduced a policy guideline for NEDs to hold the equivalent of one year’s gross fees in Ingenia securities within a period of three years from the date of appointment. Once this hurdle has been met, NEDs are considered compliant with this guideline. Ingenia Communities Holdings Limited Annual Report 2018 20 Directors’ Report For the year ended 30 June 2018 | continued NED Remuneration Table The following table outlines the remuneration provided to NEDs for FY17 and FY18: NEDs – Directors’ Fees Jim Hazel Amanda Heyworth Robert Morrison Valerie Lyons Andrew McEvoy Philip Clark Norah Barlow Total 2018 $ 2017 $ 180,592 176,250 114,167 104,000 114,158 97,750 57,750 35,333 – 107,000 32,000 – 101,500 34,000 599,750 554,750 The FY18 NED annual fees were increased effective 1 December 2017 as follows: – Chairman of the Board: from $177,500 to $182,800; – Non-Executive Directors: from $96,000 to $99,000; – Committee Chairs (ARC, IC and RNC): from an additional $10,000 to an additional $10,500; and – Deputy Chair of the Board: from an additional $6,000 to an additional $6,200. In addition to the above fees, all NEDs receive reimbursement for reasonable travel, accommodation and other expenses incurred while undertaking Ingenia business. KMP Interests Securities held directly, indirectly or beneficially by each KMP, including their related parties, were: Directors Jim Hazel Amanda Heyworth Robert Morrison Valerie Lyons Andrew McEvoy Simon Owen(2) Scott Noble Nicole Fisher Total Balance 1 July 2017 Acquisitions Disposals On vesting of rights(1) Balance 30 June 2018 331,483 122,485 107,146 13,969 – 13,227 – 18,492 13,988 14,815 – – – – – – – – – – 344,710 122,485 125,638 27,957 14,815 1,352,772 – (148,676) 76,432 1,280,528 – 6,000 288,573 – – – – 6,000 25,523 314,096 2,216,428 66,522 (148,676) 101,955 2,236,229 (1) Includes STIP rights vested during the period. (2) Mr Owen disposed of his shares in FY18 to meet personal tax obligations. Philip Clark AM opening shareholding at 1 July 2017 was 52,674 and at the date of his resignation (4 December 2017) remained at 52,674. As he is no longer a KMP he has not been included in the above table. Signed in accordance with resolution of the Directors. Amanda Heyworth Chair - Remuneration and Nomination Committee Sydney, 21 August 2018 Ingenia Communities Holdings Limited Annual Report 2018 Auditor’s Independence Declaration For the year ended 30 June 2018 21 Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Auditor’s Independence Declaration to the Directors of Ingenia Communities Holdings Limited As lead auditor for the audit of Ingenia Communities Holdings Limited for the financial year ended 30 June 2018, I declare to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Ingenia Communities Holdings Limited and the entities it controlled during the financial year. Ernst & Young Megan Wilson Partner 21 August 2018 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 28 Ingenia Communities Holdings Limited Annual Report 2018 22 Consolidated Statement of Comprehensive Income For the year ended 30 June 2018 Rental income Manufactured home sales Service station sales Other revenue Revenue Property expenses Cost of manufactured homes sold Employee expenses Administrative expenses Operational, marketing and selling expenses Service station expenses Depreciation and amortisation expense Operating profit before interest and tax Net finance expense Operating profit before tax Net (loss)/gain on change in fair value of: - Investment properties - Other Net loss on disposal of investment properties Profit before tax Income tax expense Net profit Total comprehensive income Profit/(loss) attributable to security holders of: Ingenia Communities Holdings Limited Ingenia Communities Fund Ingenia Communities Management Trust Total comprehensive income attributable to security holders of: Ingenia Communities Holdings Limited Ingenia Communities Fund Ingenia Communities Management Trust Note 5(a) 5(b) 12(b), 13(b) 2018 $’000 86,520 85,875 7,356 9,725 2017 $’000 69,976 63,752 7,284 8,872 189,476 149,884 (25,498) (22,470) (50,347) (42,699) (43,871) (35,380) (6,513) (6,983) (6,338) (1,167) 48,759 (5,784) (5,032) (6,229) (830) 31,460 6 (6,114) (6,936) 42,645 24,524 11(c) (2,644) 12,372 198 (120) (1,016) (8,438) 39,183 28,338 7 (4,940) (1,930) 34,243 34,243 26,408 26,408 29 (341) 25,458 9,126 34,243 29 (341) 25,458 9,126 34,243 (446) (2,738) 29,592 26,408 (446) (2,738) 29,592 26,408 Ingenia Communities Holdings Limited Annual Report 2018 Consolidated Statement of Comprehensive Income For the year ended 30 June 2018 | continued 23 Distributions per security paid(1) Earnings per security: Basic earnings - Per security - Per security attributable to parent Diluted earnings per security - Per security - Per security attributable to parent Note 4(a) 4(b) 4(a) 4(b) 2018 Cents 10.2 2017 Cents 10.2 16.5 (0.2) 16.5 (0.2) 14.6 (0.2) 14.6 (0.2) (1) Distributions relate to the amount paid during the financial year. A final FY18 distribution of 5.65cps was declared on 21 August 2018 (payment due on 14 September 2018) resulting in a total FY18 distribution of 10.75cps. Ingenia Communities Holdings Limited Annual Report 2018 24 Consolidated Balance Sheet As at 30 June 2018 Current assets Cash and cash equivalents Trade and other receivables Inventories Other Assets held for sale Total current assets Non-current assets Trade and other receivables Investment properties Plant and equipment Other financial assets Intangibles Deferred tax asset Total non-current assets Total assets Current liabilities Trade and other payables Borrowings Retirement village resident loans Employee liabilities Derivatives and other financial instruments Liabilities held for sale Total current liabilities Non-current liabilities Borrowings Other financial liabilities Employee liabilities Other payables Derivatives and other financial instruments Total non-current liabilities Total liabilities Net assets Equity Issued securities Reserves Accumulated losses Total equity Attributable to security holders of: Ingenia Communities Holdings Limited Ingenia Communities Fund Ingenia Communities Management Trust Net asset value per security ($) Note 2018 $’000 2017 $’000 8 9 10(a) 8 11 12 13 14 15 16 17 25(i) 10(b) 14,450 7,293 30,228 38 28,675 80,684 3,698 730,437 4,279 2,263 1,956 2,524 745,157 825,841 37,546 501 8,206 1,770 73 3,875 51,971 16 232,820 15 25(i) 6,500 529 83 65 239,997 291,968 533,873 9,645 5,901 21,597 38 – 37,181 3,002 693,473 2,752 2,263 2,021 7,464 710,975 748,156 25,983 493 27,201 1,480 221 – 55,378 170,337 6,136 344 168 61 177,046 232,424 515,732 18(a) 814,243 809,836 19 20 29 1,393 1,074 (281,763) (295,178) 533,873 515,732 10,827 449,799 73,247 533,873 10,494 441,671 63,567 515,732 $2.57 $2.50 Ingenia Communities Holdings Limited Annual Report 2018 Consolidated Cash Flow Statement For the year ended 30 June 2018 Cash flows from operating activities Rental and other income Property and other expenses Proceeds from sale of manufactured homes Purchase of manufactured homes Proceeds from sale of service station inventory Purchase of service station inventory Proceeds from resident loans Repayment of resident loans Interest received Borrowing costs paid Cash flows from investing activities Purchase and additions of plant and equipment Purchase and additions of intangible assets Payments for investment properties Additions to investment properties Proceeds on sale of investment properties Cash flows from financing activities Proceeds from issue of stapled securities Payments for security issue costs Finance lease payments Distributions to security holders Proceeds from borrowings Repayment of borrowings Payments for debt issue costs 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 Cash and cash equivalents at the end of the year 25 Note 2018 $’000 2017 $’000 102,118 82,699 (81,425) (63,851) 94,439 63,376 (59,806) (47,575) 8,091 (7,134) 594 (767) 95 7,014 (6,615) 3,411 (2,191) 27 17(b) 17(b) (8,975) (6,038) 31 47,230 30,257 (2,506) (372) (1,301) (364) (51,214) (180,311) (66,081) (27,190) 32,742 40,842 (87,431) (168,324) 4,414 88,044 – (639) (21,104) (3,013) (643) (17,951) 120,223 181,364 (57,688) (114,000) (200) (1,202) 45,006 132,599 4,805 9,645 – 14,450 (5,468) 15,057 56 9,645 Ingenia Communities Holdings Limited Annual Report 2018 26 Consolidated Statement of Changes in Equity For the year ended 30 June 2018 Attributable to Security Holders Ingenia Communities Holdings Limited Issued Capital $’000 Reserves $’000 Retained Earnings $’000 Note Total $’000 ICF & ICMT $’000 Total Equity $’000 Carrying amount 1 July 2017 11,131 1,074 Net (loss)/profit Total comprehensive income for the year Transactions with security holders in their capacity as security holders: – – - Issue of securities 18(a) 85 - Share based payment transactions 19,20 - Payment of distributions to security holders - Transfers from reserves 20 19 – – – Carrying amount 30 June 2018 11,216 (1,711) (341) 10,494 505,238 515,732 (341) 34,584 34,243 (341) (341) 34,584 34,243 – 85 4,322 4,407 – – – 660 270 930 – 930 – (341) 1,393 – – – (21,098) (21,098) (341) – (341) (1,782) 10,827 523,046 533,873 Carrying amount 1 July 2016 10,205 1,810 (1,265) 10,750 410,851 421,601 Net (loss)/profit Total comprehensive income for the year Transactions with security holders in their capacity as security holders: – – - Issue of securities 18(a) 915 - Share based payment transactions - Payment of distributions to security holders 19 20 - Transfer from reserves to issued securities 18,19 – – 11 Carrying amount 30 June 2017 11,131 – – – 631 – (1,367) 1,074 (446) (446) 26,854 26,408 (446) (446) 26,854 26,408 – – – – 915 631 84,171 85,086 – 631 – (17,994) (17,994) (1,356) 1,356 – (1,711) 10,494 505,238 515,732 Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 27 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 security holders 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 2018 was authorised for issue by the Directors on 21 August 2018. 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 (“AASB”) and the Corporations Act 2001. The financial report complies with Australian Accounting Standards as issued by the AASB and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. As permitted by Instrument 2015/838, 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 as permitted by Instrument 2016/191. The financial report is prepared on a historical cost basis, except for investment properties, retirement village resident loans, derivative financial instruments, other financial assets and other financial liabilities, which are measured at fair value. Where appropriate, comparative amounts have been restated to ensure consistency of disclosure throughout the financial report. c. Adoption of New and Revised Accounting Standards No new or revised standards and interpretations were issued by the AASB that are relevant to the Group during the period. 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. Intercompany balances and transactions including dividends and unrealised gains and losses from intragroup transactions have been eliminated. Subsidiaries are consolidated from the date on which the parent obtains control. They are deconsolidated 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. e. Business Combinations and Goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the fair value aggregate of the consideration transferred, at acquisition date and the amount of any non-controlling interest in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interest in the acquiree at fair value or the proportionate share of the acquiree’s identifiable net assets. Acquisition costs are expensed and included in other expenses. When the Group acquires a business, it assesses 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 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 consideration transferred and the amount recognised for non-controlling interest over the fair value of net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the acquired subsidiary’s net assets, the difference is recognised in profit or loss. Ingenia Communities Holdings Limited Annual Report 2018 28 Notes to the Financial Statements For the year ended 30 June 2018 | continued 1. Summary of significant accounting policies (continued) f. Assets Held for Sale Components of the entity are classified as held for sale if their carrying value 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. The liabilities of an asset classified as held for sale are presented separately from other liabilities on the face of the balance sheet. Details of assets and liabilities held for sale are given at Note 10. 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 Functional and presentation currencies: The presentation currency of the Group, and functional currency of the Company, is the Australian dollar. 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 statement of comprehensive income, 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 statement of comprehensive income. 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. Leases i. Finance leases where the Group is lessee, 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, so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised as an expense in the statement of comprehensive income. Finance leases where the Group is lessor, 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, so as to achieve a constant rate of interest on the remaining balance of the receivable. Interest is recognised as income in the statement of comprehensive income. Leases of 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 statement of comprehensive income on a straight-line basis over the term of the lease. Plant and Equipment j. Plant and equipment is stated at cost, net of accumulated depreciation and any accumulated impairment losses. 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 require replacing 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, the 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 statement of comprehensive income. The fair value of financial instruments actively traded in organised financial markets are determined by reference to quoted market bid prices at close of business on 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 substantially similar instrument; discounted cash flow analysis; option pricing models; making use of available and supportable market data and keeping judgemental inputs to a minimum. Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 29 1. Summary of significant accounting policies (continued) Impairment of Non-Financial Assets l. Assets other than investment property and financial assets carried at fair value are tested for impairment whenever events or circumstance changes 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, cash in hand, and short term deposits that are readily convertible to known amounts of cash, and 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. Inventories o. The Group holds inventory in relation to the acquisition and development of manufactured homes, as well as service station fuel and supplies within the Ingenia Lifestyle and Holidays 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 based on 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 and Financial Instruments The Group uses derivative financial instruments such as interest rate swaps to hedge its risks associated with interest rate fluctuations. Such derivative financial instruments are initially recognised at fair value on the date the contract is entered, and are subsequently remeasured to fair value. Investment Property q. 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, tourism cabins and associated amenities. Investment properties are measured initially at cost, including transaction costs. Subsequently, investment properties are stated at fair value, reflecting market conditions at reporting date. Gains or losses arising from changes in the fair values of investment properties are included in the statement of comprehensive income in the period they arise, including the 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 measurement date, in the principal market for the asset or liability, or the most advantageous market in its absence. In determining the fair value of certain assets, recent market offers have been taken into consideration. It is the Group’s policy to have all investment properties independently valued at intervals of not more than two years. It is the policy of the Group to review the fair value of each investment property every six months and revalue investment properties to fair value when their carrying value materially differs to their fair values. In determining fair values, the Group considers relevant information including the capitalisation of rental streams using market assessed capitalisation rates, expected net cash flows discounted to their present value using market determined risk adjusted discount rates, and other available market data such as recent comparable transactions. The assessment of fair value of investment properties does not take into account potential capital gains tax assessable. Intangible Assets r. An intangible asset arising from software development expenditure is recognised only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use; how the asset will generate future economic benefits; the availability of resources to complete the asset; and the ability to measure reliably the expenditure during its development. Costs capitalised include external direct costs of materials and service, direct payroll, and payroll related costs of employee time spent on projects. Following the initial recognition of expenditure, the asset is carried at cost less any accumulated amortisation and accumulated impairment losses. Amortisation of the asset begins when the development is complete and the asset is available for use. Amortisation is over the period of expected future benefit. The Group’s policy applied to capitalised development costs is as follows: Software and associated development to capitalised development costs (assets in use) – Useful life: Finite amortisation method using seven years on a straight line basis; and – Impairment test: Amortisation method reviewed at each financial year-end; closing carrying value reviewed annually for indicators of impairment. Ingenia Communities Holdings Limited Annual Report 2018 30 Notes to the Financial Statements For the year ended 30 June 2018 | continued 1. Summary of significant accounting policies (continued) Subsequent expenditure on intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed, as incurred. Gains or losses arising from the derecognition of an intangible asset are measured as the difference between the net disposal proceeds, and the carrying amount of the asset. They are recognised in profit or loss when the asset is derecognised. Intangible assets acquired separately, are initially recognised 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, acquired intangible assets are carried at cost less any accumulated amortisation and impairment losses. s. Trade and Other 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 which are unpaid. They are recognised when the Group becomes obliged to make future payments in respect of the purchase of the goods and services. t. Provisions, Including Employee Benefits 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. 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 comprehensive income net of any reimbursement. 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. Long service leave: The liability for long service leave is recognised and measured as the present value of expected future payments 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 employees departing, and period of service. Expected future payments are discounted using market yields on high quality corporate bonds, at the reporting date with terms to maturity and currencies that match, as closely as possible, the estimated future cash outflows. u. Retirement Village Resident Loans The loans are repayable on the departure of the resident, and classified as financial liabilities at fair value through profit and loss with resulting fair value adjustments recognised in the statement of comprehensive income. 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. This is 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, as the Group’s contracts with residents require net settlement of those obligations. Refer to Notes 1(aa) and 25(k) 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. Issued Equity w. 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 rent, interest and distributions is recognised to the extent it is probable that the economic benefits will flow to the Group, and can be reliably measured. Revenue brought to account but not received at balance date is recognised as a receivable. Interest income is recognised as the interest accrues, using the effective interest rate method. Rental income from operating leases is recognised on a straight-line basis over the lease term. 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. Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 31 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 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. The dilutive effect of outstanding rights is reflected as additional share dilution in the computation of diluted earnings per share. z. Income Tax Current income tax: The Company, ICMT and their subsidiaries are subject to Australian income tax. Under the current tax legislation, ICF and its subsidiaries are not liable to pay Australian income tax if their taxable income (including any assessable capital gains) is fully distributed to security holders each year. Tax allowances for building and fixtures depreciation are distributed to security holders via the tax-deferred component of distributions. Current tax assets and liabilities 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 laws used to compute the amount are those that are enacted, or substantively enacted at the reporting date. The subsidiaries that previously held the Group’s foreign properties may be subject to corporate income tax and withholding tax in the countries they operate. Under current Australian income tax legislation, security holders may be entitled to receive a foreign tax credit for this withholding tax. During FY18 ICF elected to enter the Attribution Managed Investment Trust (AMIT) regime. Deferred income tax: Deferred income tax represents tax (including withholding tax) expected to be payable or recoverable by taxable entities on differences between 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 not recognised against income. 1. Summary of significant accounting policies (continued) Deferred management fee income is calculated as the expected fee 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 Lifestyle and Holidays segment is recognised when the significant risks and rewards of ownership, as well as effective control has been transferred to the buyer. Service station sales, food and beverage revenue represents the revenue earned from the provision of products and services to external parties. Sales revenue is only recognised when the significant risks and rewards of ownership of the products or service has been passed to the buyer. Government incentives are recognised where there is reasonable assurance the incentive will be received, and attached conditions 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. y. Share-Based Payment Transactions Certain Group senior executives 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 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 statement of comprehensive income 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 where 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 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. Any expense not yet recognised for the award is recognised immediately. Ingenia Communities Holdings Limited Annual Report 2018 32 Notes to the Financial Statements For the year ended 30 June 2018 | continued 1. Summary of significant accounting policies (continued) Tax consolidation: The Company, ICMT, and their respective subsidiaries have formed a tax consolidation group with the Company or ICMT being the head entity. The head and 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, the head entity of 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 or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from, or payable to, other entities in the Group. aa. Fair Value Measurement The Group measures financial instruments, such as derivatives, investment properties, resident loans, certain non-financial assets and non-financial liabilities, at fair value at each balance sheet date. Refer to 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 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 market participants 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 best use, or by selling it to another market participant that would use the asset in its best use. The Group uses valuation techniques that are appropriate in the circumstances, and for which sufficient data are available to measure fair value - maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described below, based on the lowest level of 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 of 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 Group determines whether transfers have occurred between Levels in the hierarchy by reassessing categorisation at the end of the reporting period. This is based on the lowest level input that is significant to the fair value measurement as a whole. 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 month basis, management presents valuation results to the Investment Committee as well as the Audit and Risk Committee once approved. This includes a review of the major assumptions used in the valuations. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities based on the nature, characteristics and risks of the asset or liability, and the level of the fair value hierarchy (see Note 25). 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. Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 33 The measurement includes non-cancellable lease payments (including inflation-linked payments) and payments made in optional periods, if the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. The Group is currently the lessee of two non-cancellable operating leases, which will be included under this new standard. These leases relate to the Group’s Sydney and Brisbane offices, which have a future minimum lease payments total of $2,402,000 at 30 June 2018. The Group is also the lessee of four finance leases (relating to the land component of investment properties), which are not expected to be materially impacted by the new standard as they are already substantially treated in the manner prescribed by the new standard. Other new accounting standards, amendments to accounting standards, and interpretations have been published that are not mandatory for the current reporting period and are not expected to have a material impact on the Group’s future financial reporting. 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. A liability is current when it is: – Expected to be settled in the normal operating cycle; – Held primarily for the purpose of trading; – Due to be settled within twelve months after the reporting period; or – There is no unconditional right to defer settlement of the liability for at least twelve months after the reporting period. All other assets and liabilities are classified as non-current. Deferred tax assets and liabilities are classified as non- current assets and liabilities. 1. Summary of significant accounting policies (continued) 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 securities, adjusted for any bonus element. Diluted EPS is calculated as net profit attributable to the Group, divided by the weighted average number of ordinary securities and dilutive potential ordinary securities, 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, measurement and derecognition of financial assets and financial liabilities. Changes in the Group’s credit risk, which affect the value of liabilities designated at fair value through profit and loss, must be presented in other comprehensive income. The impact of the application of the standard is continuously being monitored by the Group, and the Group expects to conclude on the impact in due course. AASB 15 Revenue from Contracts with Customers is applicable to reporting periods beginning on or after 1 January 2018. The Group has not early adopted this standard. The standard is based on the principle that revenue is recognised when control of a good or service is transferred to a customer. It contains a single model that applies to contracts with customers and two approaches to recognising revenue - at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine if, how much, and when revenue is recognised. It applies to all contracts with customers except leases, financial instruments and insurance contracts. It requires reporting entities to provide users of financial statement with more informative and relevant disclosures. The application of the standard is not expected to have any material impact on the Group’s financial reporting in future periods. AASB 16 Leases is applicable to reporting periods beginning on or after 1 January 2019. The Group has not early adopted this standard. This standard provides requirements for classification, measurement, and disclosure of all leases with a term of more than twelve months, unless the underlying asset is of low value. A lessee must now measure right-of-use assets similarly to other non-financial assets and lease liabilities similarly to other financial liabilities. Assets and liabilities arising from a lease are initially measured on a present value basis. Ingenia Communities Holdings Limited Annual Report 2018 34 Notes to the Financial Statements For the year ended 30 June 2018 | continued ii. Valuation of inventories The Group has inventory in the form of manufactured homes and service station fuel and supplies, 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 of estimation, the amount the inventories are expected to realise and the estimated costs of completion. Key assumptions require the use of management judgement, and are continually reviewed. iii. 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 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. iv. 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 accrued DMF is realised upon exit of the resident. 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. Accounting estimates and judgements 2. 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 its 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. Critical Accounting Estimates and Assumptions a. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates, by definition, may not 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. Valuation of investment property i. The Group has investment properties and assets held for sale with a combined carrying amount of $759,112,000 (30 June 2017: $693,473,000) (refer Note 10 and Note 11), and combined retirement village resident loans of $12,081,000 (30 June 2017: $27,201,000) (refer Note 10 and Note 17) which together represent the estimated fair value of the Group’s property business. These carrying amounts reflect certain assumptions about expected future rentals, rent-free periods, operating costs and appropriate discount and capitalisation rates. The valuation assumption for properties to be developed reflect sales prices for new homes, sales rates, new rental tariffs, estimates of capital expenditure, discount rates and projected property growth rates. The valuation assumptions for deferred management fee villages reflect 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 Group considered information about recent sales activity, current market rents, discount rates, capitalisation rates for properties similar to those owned by the Group, as well as independent valuations of the Group’s property. Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 35 3. Segment information a. Description of Segments The Group invests predominantly in rental properties located in Australia with four reportable segments: – – – Ingenia Lifestyle & Holidays – comprising long-term and tourism accommodation within lifestyle parks; Ingenia Lifestyle Development – comprising the development and sale of manufactured homes; Ingenia Gardens – rental villages; – Fuel, Food & Beverage Services – Consists of the Group’s investment in service station operations and food & beverage activities attached to Ingenia Lifestyle & Holiday communities; – Corporate & Other – comprises deferred management fee villages and corporate overheads. 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 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”. Lifestyle & Holidays Operations $’000 Lifestyle Development $’000 Ingenia Gardens $’000 Fuel, Food & Beverage Services $’000 Corporate & Other $’000 Total $’000 65,072 65,072 85,879 85,879 27,984 27,984 8,986 8,986 1,555 1,555 189,476 189,476 b. 2018 Segment revenue External segment revenue Total revenue Segment underlying profit External segment revenue Property expenses 65,072 (15,321) 85,879 (601) Cost of manufactured homes sold – (50,347) Employee expenses Administrative expenses Operational, marketing and selling expenses Service station expenses Depreciation and amortisation expense (19,628) (2,576) (9,162) (793) (1,838) (3,606) – – (362) (403) Earnings before interest and tax 25,347 20,967 Net finance expense Income tax expense – – – – 27,984 (7,850) – (7,090) (609) (915) – (109) 11,411 – – Underlying profit/(loss) 25,347 20,967 11,411 Net (loss)/gain on change in fair value of: - Investment properties - Other Net (loss)/gain on disposal of investment properties Income tax benefit Profit/(loss) after tax Segment assets Segment assets Assets held for sale Total assets (2,832) – (152) – – – – – 2,260 – (886) – 22,363 20,967 12,785 405 (22,277) 34,243 459,742 170,155 129,283 22,325 – – 356 – 37,630 797,166 6,350 28,675 482,067 170,155 129,283 356 43,980 825,841 8,986 (496) – (1,270) (27) (431) (6,338) (19) 405 – – 405 – – – – 1,555 (1,230) – (6,721) (2,508) (193) – (274) (9,371) (6,114) (5,874) (21,359) (2,072) 198 22 934 189,476 (25,498) (50,347) (43,871) (6,513) (6,983) (6,338) (1,167) 48,759 (6,114) (5,874) 36,771 (2,644) 198 (1,016) 934 Ingenia Communities Holdings Limited Annual Report 2018 36 Notes to the Financial Statements For the year ended 30 June 2018 | continued 3. Segment information (continued) c. 2017 Lifestyle & Holidays Operations $’000 Lifestyle Development $’000 Ingenia Gardens $’000 Fuel, Food & Beverage Services $’000 Corporate & Other $’000 Total $’000 Segment revenue External segment revenue Reclassification of gain on newly constructed villages 47,686 63,752 28,389 7,285 3,405 150,517 - - - - (633) (633) Total revenue 47,686 63,752 28,389 7,285 2,772 149,884 Segment underlying profit External segment revenue Property expenses Cost of manufactured homes sold Employee expenses Administrative expenses Operational, marketing and selling expenses Service station expenses Depreciation and amortisation expense 47,686 (12,462) – (15,315) (2,114) (713) – 63,752 (493) (42,699) (6,453) (532) (2,440) – (245) (254) Earnings before interest and tax 16,837 10,881 Net finance expense Income tax expense - - - - 28,389 (8,023) – (7,046) (606) (982) – (118) 11,614 - - Underlying profit/(loss) 16,837 10,881 11,614 7,285 (106) – (359) (16) – (6,229) (5) 570 - - 570 3,405 (1,386) – (6,207) (2,516) (897) – 150,517 (22,470) (42,699) (35,380) (5,784) (5,032) (6,229) (208) (830) (7,809) 32,093 (6,936) (1,636) (16,381) (6,936) (1,636) 23,521 Net gain/(loss) on change in fair value of: - Investment properties 7,838 - Other Reclassification of gain on newly constructed villages Net loss on disposal of investment properties Income tax expense – – (870) – – – – – – 4,820 – – – – – – – – – (286) (120) 12,372 (120) (633) (633) (7,568) (294) (8,438) (294) Profit/(loss) after tax 23,805 10,881 16,434 570 (25,282) 26,408 Segment assets Segment assets Total assets 412,453 128,541 38,205 412,453 128,541 38,205 183 183 168,774 748,156 168,774 748,156 Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 4. Earnings per security a. Per security 37 2018 2017 Profit attributable to security holders ($’000) 34,243 26,408 Weighted average number of securities outstanding (thousands): Issued securities (thousands) Dilutive securities (thousands): Long-term incentives Short-term incentives Weighted average number of issued and dilutive potential securities outstanding (thousands) Basic earnings per security (cents) Dilutive earnings per security (cents) b. Per security attributable to parent Loss attributable to security holders ($’000) Weighted average number of securities outstanding (thousands) Issued securities (thousands) Dilutive securities (thousands): Long-term incentives Short-term incentive rights Weighted average number of issued and dilutive potential securities outstanding (thousands) Basic earnings per security (cents) Dilutive earnings per security (cents) 207,329 180,383 690 119 486 111 208,138 180,980 16.5 16.5 14.6 14.6 (341) (446) 207,329 180,383 690 119 486 111 208,138 180,980 (0.2) (0.2) (0.2) (0.2) Ingenia Communities Holdings Limited Annual Report 2018 38 Notes to the Financial Statements For the year ended 30 June 2018 | continued 5. Revenue a. Rental income Residential rental income – Ingenia Gardens Residential rental income – Lifestyle and Holidays Residential rental income – Settlers Annuals rental income – Lifestyle and Holidays Tourism rental income – Lifestyle and Holidays Commercial rental income – Lifestyle and Holidays Total rental income b. Other revenue Catering income Accrued deferred management fee Utility recoveries Ancillary lifestyle park income Commissions and administrative fees Government incentives Sundry income Total other revenue 6. Net finance expense Interest income Debt facility interest paid or payable Deferred consideration interest on acquisitions Finance lease interest paid or payable (1) 2018 $’000 2017 $’000 24,569 21,748 123 4,792 34,922 366 24,770 14,911 232 4,348 25,251 464 86,520 69,976 3,084 636 1,747 2,674 351 188 1,045 9,725 2018 $’000 (95) 5,853 – 356 6,114 3,191 1,825 1,281 1,173 335 267 800 8,872 2017 $’000 (25) 6,377 169 415 6,936 (1) Finance leases relate to certain investment properties and are long term in nature. Interest costs of $3,836,000 have been capitalised into investment properties associated with development assets (30 June 2017: $620,000). Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 7. Income tax expense a. Income tax expense Current tax Decrease in deferred tax asset Income tax expense b. Reconciliation between tax expense and pre-tax profit Profit before income tax (Less)/add amounts not subject to Australian income tax Income tax expense at the Australian tax rate of 30% (2017: 30%) 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(1) Other Income tax expense 39 2018 $’000 2017 $’000 (18) (4,922) (4,940) 233 (2,163) (1,930) 39,183 (25,458) 13,725 28,338 2,738 31,076 (4,118) (9,323) (87) – (735) (325) 7,615 103 (4,940) (1,930) (1) FY17 movement in cost base of investment property impacted by valuation adjustments and resetting of historic cost bases. 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. 8. Trade and other receivables Current Trade and other receivables Prepayments Deposits Total current trade and other receivables Non-current Other receivables 2018 $’000 2017 $’000 2,161 2,609 2,523 7,293 2,814 1,912 1,175 5,901 3,698 3,002 Ingenia Communities Holdings Limited Annual Report 2018 40 Notes to the Financial Statements For the year ended 30 June 2018 | continued 9. Inventories Manufactured homes: Completed Display homes Under construction Service station fuel and supplies Total inventories 2018 $’000 2017 $’000 15,616 4,869 9,435 308 30,228 15,247 547 5,643 160 21,597 The manufactured home balance includes: – 93 new completed homes (2017: 86) – – 11 refurbished/renovated/annuals completed homes (2017: 9) 24 display homes (2017: 4) – Manufactured homes under construction includes 88 partially completed homes at different stages of development (2017: 56). It also includes demolition, site preparation costs and buybacks on future development sites. 10. Assets and liabilities held for sale a. Summary of Carrying Value - Assets The following are the carrying values of assets held for sale: Investment properties held for sale: Cessnock, Cessnock, NSW(1) Rouse Hill, Rouse Hill, NSW(2) Total assets held for sale 2018 $’000 2017 $’000 6,350 22,325 28,675 – – – (1) This relates to Settlers Cessnock which was sold in July 2018. (2) A conditional contract for the sale of Rouse Hill was signed in June 2018. As such, the property has been reclassified from investment property to asset held for to sale in view of management’s expectation that the property will be sold in the twelve months ended 30 June 2019. Summary of Carrying Amounts – Liabilities b. The following is a summary of the carrying amounts of the loans associated with investment properties held for sale: Net resident loans – Cessnock Total liabilities held for sale 2018 $’000 3,875 3,875 2017 $’000 – – Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 11. Investment properties a. Summary of Carrying Amounts Completed properties Properties under development Total carrying amount b. Movements in Carrying Amounts Carrying amount at 1 July 2017 Acquisitions Expenditure capitalised Net change in fair value: Investment property Resident loans Transfer to assets held for sale Disposals Carrying amount at 30 June 2018 41 2018 $’000 2017 $’000 587,524 586,392 142,913 107,081 730,437 693,473 Note 2018 $’000 693,473 50,386 66,636 (1,651) (993) 10(a) (28,675) 2017 $’000 710,746 174,883 28,562 12,372 – – (48,739) (233,090) 730,437 693,473 Fair value hierarchy disclosures for investment properties have been provided in Note 26(a). c. Reconciliation of Fair Value Carrying amount at 1 July 2017 141,290 514,843 37,340 693,473 Ingenia Gardens $’000 Lifestyle and Holidays $’000 Ingenia Settlers $’000 Total $’000 Acquisitions Expenditure capitalised Net change in fair value: Investment property Resident loans Transfer to assets held for sale Disposals – 1,898 2,260 – – 50,386 64,702 – 36 50,386 66,636 (2,689) (125) (1,222) (868) (1,651) (993) (22,325) (6,350) (28,675) (18,148) (11,959) (18,632) (48,739) Carrying amount at 30 June 2018 127,300 592,833 10,304 730,437 Ingenia Communities Holdings Limited Annual Report 2018 42 Notes to the Financial Statements For the year ended 30 June 2018 | continued 11. Investment properties (continued) d. Individual Property Carrying Amounts Completed properties Ingenia Settlers: Cessnock, Cessnock, NSW(1) Gladstone, South Gladstone, QLD Meadow Springs, Mandurah, WA(2) Completed properties Ingenia Gardens: Brooklyn, Brookfield, VIC Carey Park, Bunbury, WA Elphinwood, Launceston, TAS(2) Horsham, Horsham, VIC Jefferis, Bundaberg North, QLD Oxley, Port Macquarie, NSW Townsend, St Albans Park, VIC Yakamia, Yakamia, WA Goulburn, Goulburn, NSW Claremont, Claremont, TAS(2) Coburns, Brookfield, VIC Devonport, Devonport, TAS(2) Hertford, Sebastopol, VIC Seascape, Erskine, WA Seville Grove, Seville Grove, WA St Albans Park, St Albans Park, VIC Taloumbi, Coffs Harbour, NSW Wheelers, Dubbo, NSW Taree, Taree, NSW Grovedale, Grovedale, VIC Glenorchy, Glenorchy, TAS(2) Marsden, Marsden, QLD Swan View, Swan View, WA Dubbo, Dubbo, NSW Ocean Grove, Mandurah, WA Peel River, Tamworth, NSW Sovereign, Ballarat, VIC Wagga, Wagga Wagga, NSW Bathurst, Bathurst, NSW Launceston, Launceston, TAS(2) Warrnambool, Warrnambool, VIC Carrying amount 2018 $’000 2017 $’000 – 10,304 – 10,304 6,756 11,018 19,566 37,340 Carrying amount 2018 $’000 2017 $’000 4,950 4,660 – 3,940 4,500 5,020 5,040 4,550 4,590 – 4,800 – 4,230 4,360 4,010 5,730 5,450 5,330 4,220 5,560 – 10,050 7,790 5,670 3,910 5,120 2,640 3,460 4,470 – 3,250 127,300 4,690 4,400 4,100 3,700 4,550 4,760 4,850 4,500 4,420 4,260 4,500 2,160 3,840 4,980 3,660 5,680 5,150 5,050 3,940 5,400 4,280 9,560 7,610 5,170 3,870 5,270 2,540 3,950 4,100 3,350 3,000 141,290 Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 11. Investment properties (continued) Completed properties Ingenia Lifestyle and Holidays: The Grange, Morisset, NSW Ettalong Beach, Ettalong Beach, NSW(3) Albury, Lavington, NSW Nepean River, Emu Plains, NSW Mudgee Valley, Mudgee, NSW Mudgee, Mudgee, NSW Kingscliff, Kingscliff, NSW Lake Macquarie (Lifestyle), Morisset, NSW(2) Chain Valley Bay, Chain Valley Bay, NSW(2) One Mile Beach, One Mile, NSW(3) Hunter Valley, Cessnock, NSW Sun Country, Mulwala, NSW Stoney Creek, Marsden Park, NSW Rouse Hill, Rouse Hill, NSW(1) White Albatross, Nambucca Heads, NSW Noosa, Tewantin, QLD Chambers Pines, Chambers Flat, QLD Lake Macquarie (Holidays), Mannering Park, NSW Sydney Hills, Dural, NSW Bethania, Bethania, QLD Conjola Lakeside, Lake Conjola, NSW Soldiers Point, Port Stephens, NSW Lara, Lara, VIC South West Rocks, South West Rocks NSW(3) Broulee, Broulee, NSW(3) Ocean Lake, Ocean Lake, NSW Avina Van Village, Vineyard, NSW Hervey Bay (Holidays), Hervey Bay, QLD Latitude One, Port Stephens, NSW(4) Blueys Beach, Blueys Beach, NSW Cairns Coconut, Woree, QLD Bonny Hills, Bonny Hills, NSW Durack Gardens, Durack, QLD Eight Mile Plains, QLD Total completed properties 43 Carrying amount 2018 $’000 2017 $’000 16,262 7,096 3,690 13,259 3,000 5,110 13,814 – – 16,819 6,900 7,520 21,188 – 29,500 18,092 22,250 8,350 16,120 6,963 28,250 14,709 11,386 9,277 6,730 9,306 21,954 9,777 1,415 6,023 52,374 12,146 25,640 25,000 13,718 5,968 3,132 13,867 2,934 4,587 12,524 6,778 2,435 14,809 7,868 7,384 18,529 10,300 28,443 16,800 19,200 8,020 15,200 5,401 27,500 13,027 4,582 7,016 6,463 8,900 17,480 9,667 – 7,500 51,296 13,500 22,934 – 449,920 407,762 587,524 586,392 The figures shown above are the fair values of the operating rental streams associated with each property and exclude any valuation attributed to the development component of the Investment Property. The values attributed to development properties are separately disclosed in this note on the following page. Ingenia Communities Holdings Limited Annual Report 2018 44 Notes to the Financial Statements For the year ended 30 June 2018 | continued 11. Investment properties (continued) Properties under development Ingenia Lifestyle and Holidays: The Grange, Morisset, NSW Albury, Lavington, NSW Mudgee Valley, Mudgee, NSW Mudgee, Mudgee, NSW Chain Valley Bay, Chain Valley Bay, NSW(2) Hunter Valley, Cessnock, NSW Sun Country, Mulwala, NSW Stoney Creek, Marsden Park, NSW Rouse Hill, Rouse Hill, NSW(1) Chambers Pines, Chambers Flat, QLD Sydney Hills, Dural, NSW Bethania, Bethania, QLD Conjola Lakeside, Lake Conjola, NSW Lara, Lara, VIC South West Rocks, South West Rocks NSW(3) Avina Van Village, Vineyard, NSW Latitude One, Port Stephens, NSW(4) Cairns Coconut, Woree, QLD Bonny Hills, Bonny Hills, NSW Durack Gardens, Durack, QLD Eight Mile Plains, QLD Plantations, Woolgoolga, NSW Hervey Bay (Lifestyle), Hervey Bay, QLD Upper Coomera, Upper Coomera, QLD Total properties under development Total investment properties (1) Classified as held for sale at 30 June 2018. (2) Assets sold during the year ended 30 June 2018. Carrying amount 2018 $’000 2017 $’000 3,990 4,979 – 890 – 2,995 1,030 2,987 – 16,140 – 13,768 10,320 11,134 469 12,940 30,230 1,932 1,648 1,232 2,650 8,774 4,305 10,500 142,913 1,967 3,682 700 2,203 2,678 3,395 1,904 2,560 8,224 9,590 160 15,084 5,000 13,702 2,616 17,745 13,805 – – 2,066 – – – – 107,081 730,437 693,473 (3) Includes a land component that is leased from the Crown or local municipalities and are recognised as investment property with an associated finance lease. (4) The carrying value of Latitude One represents 100% of the property value. A profit share arrangement is in place with a third-party liability which is carried at fair value and classified as a non-current financial liability. Investment properties are carried at fair value in accordance with the Group’s accounting policy (Note 1 (q)). Fair value is the price that would be received to sell an asset 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. In determining fair values, the Group considers relevant information including the capitalisation of rental streams using market assessed capitalisation rates. For investment properties under development the Group assesses fair value based on expected net cash flows discounted to their present value using market determined risk adjusted discount rates and other available market data such as recent comparable transactions. As such the fair value of an investment property under development will differ depending on the number of settlements realised and the stage that each development is at. In determining the fair value of certain assets, recent market offers have been taken into consideration. Refer to Note 11(e) for inputs used in determining fair value. Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 45 11. Investment properties (continued) e. Description of Valuations Techniques Used and Key Inputs to Valuation on Investment Properties Valuation technique Significant unobservable inputs Range (weighted average) 2018 2017 Relationship of unobservable input to fair value Ingenia Gardens Capitalisation method Stabilised occupancy 75% - 98% (92.1%) 80% - 98% (92.8%) Capitalisation rate 8.8% - 10.9% (9.9%) 9.5% - 10.9% (9.9%) Settlers Discounted cash flow Current market value per unit $125,000 - $283,000 $100,000 - $390,000 Long-term property growth rate 0.0% 0.0% Average length of – stay future residents 11.4 years 12.6 years Discount rate 14.5% - 16.0% 13.5% - 17.0% Ingenia Lifestyle and Holidays Capitalisation method (for existing rental streams) Short-term occupancy Residential occupancy Operating profit margin 20% - 80% for powered and camp sites; 40% - 80% for tourism and short-term rental 20% - 80% for powered and camp sites; 15% - 75% for tourism and short-term rental 100% 100% As costs are fixed in nature, occupancy has a direct correlation to valuation (i.e. the higher the occupancy, the greater the value). Capitalisation has an inverse relationship to valuation. Market value and growth in property value have a direct correlation to valuation, while length of stay and discount rate have an inverse relationship to valuation. Average length of stay projection is based on life expectancy and other factors. The higher the occupancy, the greater the value. 42% - 77% dependent upon short-term and residential accommodation mix 35% - 70% dependent upon short-term and residential accommodation mix The higher the profit margin, the greater the value. Capitalisation rate 6.75% - 12.5% 7.4% - 14.0% Discount rate 12.0% - 24.9% 12.5% - 17.5% Capitalisation has an inverse relationship to valuation. Discount rate has an inverse relationship to valuation. Discounted cash flow (for investment properties under development) Ingenia Communities Holdings Limited Annual Report 2018 46 Notes to the Financial Statements For the year ended 30 June 2018 | continued 11. 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 and applying a capitalisation rate into perpetuity. 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 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. 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 Additions Disposals Depreciation expense Carrying amount at end of year 13. Intangibles a. Summary of carrying amounts Software & development Less: accumulated amortisation Total Intangibles b. Movements in carrying amount Carrying amount at beginning of year Additions Amortisation expense Carrying amount at end of year 2018 $’000 2017 $’000 6,752 (2,473) 4,279 2,752 2,392 (101) (764) 4,279 4,476 (1,724) 2,752 1,943 1,264 – (455) 2,752 2018 $’000 2017 $’000 3,164 (1,208) 1,956 2,021 338 (403) 1,956 2,818 (797) 2,021 1,999 397 (375) 2,021 Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 14. Deferred tax assets and liabilities Deferred tax assets Tax losses Other Deferred tax liabilities DMF receivable Investment properties Net deferred tax asset 47 2018 $’000 2017 $’000 14,833 17 (1,047) (11,279) 2,524 14,679 276 (1,011) (6,480) 7,464 Deductible temporary differences and carried forward losses tax effected for which no deferred tax asset has been recognised 7,500 7,500 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. 15. Trade and other payables Current Trade payables and accruals Deposits Other unearned income Total current Non-current Other Total non-current 16. Borrowings Current Finance leases Non-current Bank debt Prepaid borrowing costs Finance leases Total non-current 2018 $’000 2017 $’000 31,053 5,266 1,227 37,546 20,071 4,562 1,350 25,983 83 83 168 168 2018 $’000 2017 $’000 501 493 228,999 166,464 (1,497) 5,318 (1,735) 5,608 232,820 170,337 Ingenia Communities Holdings Limited Annual Report 2018 48 Notes to the Financial Statements For the year ended 30 June 2018 | continued 16. Borrowings (continued) a. Bank Debt Ingenia has $350.0 million in available debt facilities at 30 June 2018 (2017: $300.0 million). This increase of $50.0 million was a result of completing a refinance and extension of a tranche of the facilities during the year. The term of this tranche was extended from 12 February 2020 to 13 July 2023. The total $350.0 million in debt facilities is provided by three Australian banks. The facility tranche dates are: – – 12 February 2022 ($175.4 million); and 13 July 2023 ($174.6 million) As at 30 June 2018, the facilities have been drawn to $229.0 million (30 June 2017: $166.5 million). The carrying value of investment property net of resident liabilities at reporting date for the Group’s Australian properties pledged as security is $701.8 million (30 June 2017: $602.9 million). b. Bank Guarantees The Group has the ability to utilise its bank facilities to provide bank guarantees, which at 30 June 2018 were $11.4 million (30 June 2017: $10.8 million). c. Finance Leases The Group has entered into finance leases for the following Lifestyle and Holidays investment properties: – Gosford City Council for the land and facilities of Ettalong Beach – Crown leases for the land of One Mile Beach – Crown lease for the land of Big 4 Broulee Beach – Crown lease for the land of South West Rocks The leases are long-term in nature and range between 8 years to perpetuity. 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 2018 $’000 2017 $’000 526 2,185 3,456 6,167 (1,481) 4,686 501 1,865 2,320 4,686 518 2,152 4,014 6,684 (1,718) 4,966 493 1,837 2,636 4,966 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 applicable at the time of acquisition of 10.6% applied to the current lease payment. 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. Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 17. 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 Accrued deferred management fee income Deferred management fee cash collected Proceeds from resident loans Repayment of resident loans Transfer to liabilities held for sale Disposal of villages Other Carrying amount at end of year 49 2018 $’000 2017 $’000 9,880 (1,674) 8,206 30,155 (2,954) 27,201 27,201 207,483 (636) (1,825) 334 594 (767) (3,875) 465 3,411 (2,191) – (14,127) (180,283) (518) 8,206 141 27,201 Fair value hierarchy disclosures for retirement village resident loans have been provided in Note 26(b). Ingenia Communities Holdings Limited Annual Report 2018 50 Notes to the Financial Statements For the year ended 30 June 2018 | continued 18. Issued securities a. Carrying values Balance at beginning of year Issued during the year: Dividend Reinvestment Plan (DRP) Performance Quantum Rights (PQR) Institutional Placement and Rights issue Security Purchase Plan Short-Term Incentive Plan Institutional placement and rights issue costs Balance at end of year The closing balance is attributable to the security holders 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: Dividend Reinvestment Plan (DRP) Performance Quantum Rights Security Purchase Plan Short-Term Incentive Plan Institutional placement and rights issue At end of year 2018 $’000 2017 $’000 809,836 723,383 4,407 – – – – – 5,517 1,158 74,045 8,162 238 (2,667) 814,243 809,836 11,216 11,131 759,337 755,570 43,690 43,135 814,243 809,836 2018 Thousands 2017 Thousands 206,382 172,155 1,710 – – – – 2,049 599 3,023 77 28,479 208,092 206,382 c. Term 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 security holders. Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 19. Reserves Share-based payment reserve Balance at beginning of year Granting of securities Lapsed rights Share-based payment expense Balance at end of year 51 2018 $’000 2017 $’000 1,074 (341) (270) 930 1,393 1,810 (1,367) – 631 1,074 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. 20. Accumulated losses Balance at beginning of year Net profit for the year Distributions Lapsed rights Balance at end of year The closing balance is attributable to the security holders of: Ingenia Communities Holding Limited Ingenia Communities Fund Ingenia Communities Management Trust 2018 $’000 2017 $’000 (295,178) (303,592) 34,243 26,408 (21,098) (17,994) 270 – (281,763) (295,178) (1,782) (1,711) (309,538) (313,899) 29,557 20,432 (281,763) (295,178) Ingenia Communities Holdings Limited Annual Report 2018 52 Notes to the Financial Statements For the year ended 30 June 2018 | continued 21. Commitments a. Capital Commitments There were commitments for capital expenditure on investment properties and inventories contracted but not provided for at reporting date of $16,785,083 (30 June 2017: $805,725). b. Operating Lease Commitments A subsidiary of ICMT has two non-cancellable operating leases for its Sydney and Brisbane offices. These leases have remaining lives of two and five years respectively. 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 2018 $’000 607 1,795 2,402 2017 $’000 502 990 1,492 c. Finance Lease Commitments Refer to Note 16(c) for future minimum lease payments payable and the present value of minimum lease payments payable at reporting date for the finance leases relating to investment property. 22. Contingent liabilities There are no known contingent liabilities other than the bank guarantees totalling $11.4 million provided for under the $350.0 million bank facility. Bank guarantees primarily relate to the Responsible Entity’s AFSL capital requirements ($10.0 million). 23. Share based payment transactions The Group’s current Rights Plan provides for the issuance of rights to eligible employees, which upon a determination by the Board that the performance conditions attached to the rights have been met, result in the issue of stapled securities in the Group for each right. The Rights Plan was approved at the 12 November 2014 Annual General Meeting and contains the following: a. Short-Term Incentive Plan (STIP) STIP performance rights are awarded to eligible employees whose achievements, behaviour, and focus meet the Group’s business plan and individual Key Performance Indicators (KPIs) measured over the financial year. STIP rights are subject to a one year vesting deferral period from the issue date and allow for certain lapsing conditions within the deferral period, should certain conditions occur. Under the FY18 Rights Plan, 33% of the maximum STI for the CEO and 50% for the CFO and COO will be paid in cash, with the balance being a deferred equity element. The deferred expense for conditional STIP rights recognised for the period is $489,187 (2017: $321,004) and is based on an estimate of the Group’s and individual employee’s current period performance. The total value of STIP rights is subject to adjustment up until the final full-year audited result is known and KPIs reliably measured, being 1 October 2018. b. Long-Term Incentive Plan (LTIP) LTIP performance rights are granted to individuals to align their focus to increase alignment with security holder’s interests. The FY18 LTIP Rights are subject to the following LTIP Performance Conditions: – 40% based on Relative Total Shareholder Return (Relative TSR); – – 30% based on Return on Equity (ROE); and 30% based on Earnings Before Interest and Tax (EBIT) Compound Annual Growth Rate (CAGR). TSR is benchmarked against the ASX 300 Industrials Index, whilst ROE and EBIT CAGR is benchmarked against internal targets. The number of LTIP rights that will vest depends on the TSR, ROE and EBIT CAGR achieved and is also conditional on the eligible employee being employed by the Group at the relevant vesting date. Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 23. Share based payment transactions (continued) One right equates to one security in the Group. Movements in rights during the year were as follows: 53 STIPs Outstanding at beginning of year Vested during the year(1) Granted during the year Outstanding at end of year Weighted average remaining life of outstanding rights (years) LTIPs Outstanding at beginning of year Lapsed during the year(2) Granted during the year Outstanding at end of year Weighted average remaining life of outstanding rights (years) PQRs(3) Outstanding at beginning of year Converted to fully paid stapled securities Granted during the year Outstanding at end of year Weighted average remaining life of outstanding rights (years) 2018 Thousands 2017 Thousands 123 (123) 146 146 0.3 699 (204) 494 989 1.3 – – – – – 77 (77) 123 123 0.3 451 – 248 699 1.3 619 (619) – – – (1) The Group procured the transfer of stapled securities with respect to STIPs that vested during FY18. The STIPs that vested in FY17 were converted to fully paid securities. (2) 204,453 LTIPs lapsed during the year. (3) LTIP rights replaced the Performance Quantum Rights (PQRs) for the year ended 30 June 2015. The last remaining PQRs vested on 1 July 2016. The fair value of the LTIPs issued during the year was estimated using a Monte Carlo Simulation model. Assumptions made in determining the fair value, and the results of these assumptions, are: Grant Date Security price at grant date 30 day Volume Weighted Average Price (VWAP) at start of performance period Expected remaining life at grant date Risk-free interest rate at grant date Distribution yield LTIP fair value 1 October 2017 14 November 2017 $2.57 $2.56 3.0 2.12% $2.68 $2.65 2.9 1.98% 4.44% 4.44% $1.17 $1.22 The fair value of LTIPs 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 total LTIP expense recognised for the financial year was $433,430 (2017: $338,783). Ingenia Communities Holdings Limited Annual Report 2018 54 Notes to the Financial Statements For the year ended 30 June 2018 | continued 24. Capital management The Group aims to meet its strategic objectives, operational needs and maximise returns to security holders through the appropriate use of debt and equity, 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 refinance risk of maturing debt facilities and the potential for acceleration prior to maturity. In assessing this risk, the Group takes into account the relative stability of its income flows, the predictability of its expenses, its debt maturity 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, 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. One measure of the Group’s capital position is through the Loan to Value Ratio (LVR) which is a key covenant under the Group’s $350.0 million common terms debt facilities. LVR is calculated as the sum of bank debt, bank guarantees, finance leases, and interest rate swaps, less cash at bank, as a percentage of the value of properties pledged as security. The Group’s strategy is to maintain an LVR range of 30-40%. As at 30 June 2018, LVR is 32.6% compared to 27.7% at 30 June 2017. In addition the Group also monitors Interest Cover Ratio as defined under the common terms of the debt facilities. At 30 June 2018, the Total Interest Cover Ratio was 5.53x (2017: 5.36x) and the Core Interest Cover Ratio was 3.19x (2017: 3.52x). 25. Financial instruments Introduction a. 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 Investment, Derivatives, and Borrowing 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 the forecast is unlikely 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 Investment, Derivatives, and Borrowing 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 Investment, Derivatives, and Borrowing 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 Investment, Derivatives, and Borrowing 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. Interest Rate Risk b. 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 Investment, Derivatives, and Borrowing policy. At 30 June 2018, after taking into account the effect of interest rate swaps, approximately 21% of the Group’s borrowings are at a fixed rate of interest (2017: 29%). Further, the Group has entered into an interest rate collars to provide further interest rate protection. 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. Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 55 25. Financial instruments (continued) Interest Rate Risk Exposure c. The Group’s exposure to interest rate risk and the effective interest rates on financial instruments at reporting date was: 2018 $’000 Financial assets Cash at bank Financial liabilities Bank debt Fixed interest maturing in: Floating interest rate Less than 1 year 1 to 5 years More than 5 years Total 14,450 228,999 – – – – – – 14,450 228,999 Finance leases (excluding perpetual lease) – 501 1,865 2,320 4,686 Interest rate swaps; Group pays fixed rate (48,000) 28,000 20,000 2017 $’000 Financial assets Cash at bank Financial liabilities Bank debt 9,645 166,464 – – – – – – – – 9,645 166,464 Finance leases (excluding perpetual lease) – 493 1,837 2,636 4,966 Interest rate swaps; Group pays fixed rate (48,000) – 48,000 – – 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. Interest Rate Sensitivity Analysis d. The impact of an increase or decrease in average interest rates of 1% (100 bps) 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 security holder’s interest (apart from the effect on profit). Increase in average interest rates of 100 bps: Variable interest rate bank debt (AUD denominated) Interest rate swaps (AUD denominated) Decrease in average interest rates of 100 bps: Variable interest rate bank debt (AUD denominated) Interest rate swaps (AUD denominated) Effect on profit after tax higher/(lower) 2018 $’000 2017 $’000 (2,290) 857 (1,665) 1,084 2,290 (1,465) 1,665 (1,366) Ingenia Communities Holdings Limited Annual Report 2018 56 Notes to the Financial Statements For the year ended 30 June 2018 | continued 25. Financial instruments (continued) e. Foreign Exchange Risk The Group’s exposure to foreign exchange risk is limited to foreign denominated cash balances and receivables following the divestment of its final overseas operations in December 2014. These amounts are unhedged as cash will be used to cover final costs to wind up the companies and receivables relate to escrows. f. Net Foreign Currency Exposure The Group’s net foreign currency monetary exposure 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 New Zealand dollars Net foreign currency assets 2018 $’000 2017 $’000 2,054 269 2,054 254 g. Net Foreign Currency 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. i. Effect of appreciation in Australian dollar of 10%: Foreign exchange risk exposures denominated in: United States dollars New Zealand dollars ii. Effect of depreciation in Australian dollar of 10%: Foreign exchange risk exposures denominated in: United States dollars New Zealand dollars Effect on profit after tax higher/(lower) 2018 $’000 2017 $’000 (187) (24) (187) (23) Effect on profit after tax higher/(lower) 2018 $’000 2017 $’000 228 30 228 28 The Group believes that the reporting date risk exposures are representative of the risk exposure inherent in its financial instruments. Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 57 25. Financial instruments (continued) h. 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 Investment, Derivatives, and Borrowing 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. Liquidity Risk i. 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 Investment, Derivatives, and Borrowing 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 Investment, Derivatives, and Borrowing 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 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. Ingenia Communities Holdings Limited Annual Report 2018 58 Notes to the Financial Statements For the year ended 30 June 2018 | continued 25. Financial instruments (continued) 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. 2018 Trade and other payables Retirement village residents loans Borrowings(1) Provisions Finance leases (excluding perpetual lease) Finance lease (perpetual lease)(2) 2017 Trade and other payables Retirement village residents loans Borrowings(1) Provisions Finance leases (excluding perpetual lease) Finance lease (perpetual lease)(2) Less than 1 year $’000 1 to 5 years $’000 More than 5 years $’000 37,546 8,206 10,177 1,770 526 121 83 – 258,783 529 2,185 483 – – – – 3,456 – Total $’000 37,629 8,206 268,960 2,299 6,167 604 58,346 262,063 3,456 323,865 25,983 27,201 7,435 1,480 518 121 168 – 187,635 344 2,152 483 – – – – 4,014 – 26,151 27,201 195,070 1,824 6,684 604 62,738 190,782 4,014 257,534 (1) The balance above will not agree to the balance sheet as it includes the implied interest component. (2) For the purpose of the table above, lease payments are included for five years for the perpetual lease. Refer to Note 16(c). 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. 2018 Liabilities Less than 1 year $’000 1 to 5 years $’000 More than 5 years $’000 Derivative liabilities - net settled 73 65 2017 Liabilities Derivative liabilities - net settled 221 61 – – Total $’000 138 282 Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 59 25. Financial instruments (continued) j. Other Financial Instrument Risk The Group carries retirement village residents’ loans at fair value with resulting fair value adjustments recognised in the statement of comprehensive income. 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) 2018 $’000 (988) 988 2017 $’000 (3,016) 3,016 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. k. Fair Value The Group uses 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 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 Retirement village resident loans Deferred management fee accrued Derivative interest rate swaps 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. 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. Estimated length of stay of residents based on life tables. N/A N/A Relationship of unobservable inputs to fair value 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. Other financial liabilities relates to ongoing obligations for the Latitude One investment property and is linked to the underlying property value. The associated financial liability will move in line with the fair value of the property. There has been no movement from Level 3 to Level 2 during the year. Changes in the Group’s retirement village resident loans, which are Level 3 instruments are presented in Note 17(b). The carrying amounts of the Group’s other financial instruments approximate their fair values. Ingenia Communities Holdings Limited Annual Report 2018 60 Notes to the Financial Statements For the year ended 30 June 2018 | continued 26. 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 2018 Investment properties Date of valuation 30-June-18 Refer Note 11(a) Assets held for sale - investment property 30-June-18 Other financial assets 2017 Investment properties Other financial assets b. Liabilities Measured at Fair Value Refer Note 10(a) 30-June-18 30-June-17 Refer Note 11(a) 30-June-17 2018 Date of valuation Retirement village resident loans Liabilities held for sale Other financial liabilities Derivatives 2017 Retirement village resident loans Other financial liabilities Derivatives 30-June-18 Refer Note 17(a) 30-June-18 Refer Note 10(b) 30-June-18 30-June-18 30-June-17 Refer Note 17(a) 30-June-17 30-June-17 Fair value measurement using Quoted prices in active markets (Level 1) $’000 Significant observable inputs (Level 2) $’000 Significant unobservable inputs (Level 3) $’000 – – – – – – – – – – 730,437 28,675 2,263 693,473 2,263 Fair value measurement using Quoted prices in active markets (Level 1) $’000 Significant observable inputs (Level 2) $’000 Significant unobservable inputs (Level 3) $’000 – – – – – – – – – – 138 – – 282 8,206 3,875 6,500 – 27,201 6,136 – Total $’000 730,437 28,675 2,263 693,473 2,263 Total $’000 8,206 3,875 6,500 138 27,201 6,136 282 There have been no transfers between Level 1 and Level 2 during the year. 27. Auditor’s remuneration Amounts received or receivable by EY for: Audit or review of the financial reports Other audit and assurance related services Non audit related services 2018 $ 2017 $ 470,089 572,788 39,914 – 58,528 13,000 510,003 644,316 Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 28. Related parties The aggregate compensation paid to Key Management Personnel (“KMP”) of the Group is as follows: 61 Directors fees Salaries and other short-term benefits Short-term incentives (payable in cash) Superannuation benefits Share-based payments 2018 $ 2017 $ 599,750 554,750 1,362,798 1,151,166 397,294 60,147 373,819 53,942 664,769 593,773 3,084,758 2,727,450 The amounts disclosed in the table are the amounts recognised as an expense during the reporting period related to KMP. The aggregate rights outstanding of the Group held directly by KMP are as follows: Issue date Right type Expiry date FY15 FY16 FY16 FY17 FY17 FY18 LTIP LTIP STIP LTIP STIP LTIP FY18 FY19 FY18 FY20 FY19 FY21 29. Company financial information Summary financial information about the Company is: Current assets Total assets Current liabilities Total liabilities Net assets Security holders’ equity Issued securities Reserves Accumulated losses Total security holders’ equity Loss from continuing operations Net loss attributable to security holders Total comprehensive income Number outstanding 2018 2017 – 163,829 148,196 173,870 – 122,850 148,681 173,161 129,623 295,928 – – 722,428 633,710 2018 $’000 78 11,602 775 775 2017 $’000 106 11,184 690 690 10,827 10,494 11,216 1,393 (1,782) 10,827 (341) (341) (341) 11,131 1,074 (1,711) 10,494 (446) (446) (446) Ingenia Communities Holdings Limited Annual Report 2018 62 Notes to the Financial Statements For the year ended 30 June 2018 | continued 30. 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): Ownership interest Country of residence 2018 % 2017 % Bridge Street Trust Browns Plains Road Trust Casuarina Road Trust Edinburgh Drive Trust Garden Villages Management Trust INA Community Living Lynbrook Trust INA Community Living Subsidiary Trust INA Garden Villages Pty Ltd INA Kiwi Communities Pty Ltd INA Kiwi Communities Subsidiary Trust No. 1 INA Management 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 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.3 INA Operations Pty Ltd INA Operations Trust No.1 INA Operations Trust No.2 INA Operations Trust No.3 INA Operations Trust No.4 INA Operations Trust No.6 INA Operations Trust No.7 INA Operations Trust No.8 INA Operations Trust No.9 Settlers Management Pty Ltd INA Latitude One Pty Ltd INA Latitude One Development Pty Ltd INA Soldiers Point Pty Ltd INA Operations No.3 Pty Limited IGC NZ Student Holdings Ltd INA NZ Subsidiary Unit Trust No 1 INA Community Living LLC (formerly ING Community Living LLC) 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 USA 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 31. Notes to cash flow statement Reconciliation of profit to net cash flow from operating activities: Net profit for the year Adjustments for: Net loss on disposal of investment properties Net loss/(gain) on change in fair value of: Investment properties Other Income tax expense Depreciation and amortisation Share-based payments expense GST recoverable on investing activities Finance costs 63 2018 $’000 2017 $’000 34,243 26,408 1,016 8,438 2,644 (198) 4,940 1,167 930 6,510 (2,767) (12,372) 120 1,930 830 631 2,719 925 Operating profit for the year before changes in working capital 48,485 29,629 Changes in working capital: (Decrease)/increase in receivables Increase in inventory (Decrease)/increase in retirement village resident loans Increase in other payables and provisions Net cash provided by operating activities 32. Subsequent events (44) (8,631) (993) 8,413 1,089 (3,932) 1 3,470 47,230 30,257 Final FY18 Distribution On 21 August 2018, the directors of the Group resolved to declare a final distribution of 5.65cps (2017: 5.1 cps) amounting to $11.8 million to be paid at 14 September 2018. The distribution reinvestment plan will apply to the final distribution. Acquisition of Adjacent Land On 2 July 2018, the Group completed the acquisition of land adjacent to Ingenia Lifestyle Chambers Pines (Chambers Flat, QLD) for a purchase price of $4.5 million. Sale of Settlers Cessnock On 6 July 2018, the Group completed the sale of Settlers Cessnock (Cessnock, NSW) for $2.5 million (net of resident loans). Ingenia Communities Holdings Limited Annual Report 2018 64 Directors’ Declaration For the year ended 30 June 2018 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 2018 are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of its financial position as at 30 June 2018 and of its performance for the year ended on that date; and (ii) 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, 21 August 2018 Ingenia Communities Holdings Limited Annual Report 2018 Independent Auditor’s Report For the year ended 30 June 2018 65 Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Independent Auditor's Report to the Members of Ingenia Communities Holdings Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Ingenia Communities Holdings Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2018, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2018 and of its consolidated financial performance for the year ended on that date; and b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 72 Ingenia Communities Holdings Limited Annual Report 2018 66 Independent Auditor’s Report For the year ended 30 June 2018 | continued 1. Valuation of Investment Property Why significant How our audit addressed the key audit matter Approximately 88% of the Group’s total assets comprise investment properties. These assets are carried at fair value, which is assessed by the directors with reference to either external independent valuations or internal valuations, and is based on market conditions existing at reporting date. This was considered a key audit matter as valuations contain a number of assumptions which are based on direct market comparisons, or estimates. Minor changes in certain assumptions can lead to significant changes in the valuation. The Group has three categories of investment properties as disclosed in Note 11 to the financial report. Two of these categories are considered material and involve significant judgement. • • The Garden Villages portfolio consists of investment properties earning revenue predominantly from longer term rental agreements and the key judgements include capitalisation rates, discount rates, market and contractual rent and forecast occupancy levels. The Lifestyle & Holidays portfolio consists of investment properties earning revenue from a mix of longer term land rental agreements and short- term accommodation rental. In addition the group earns revenue from the sale of manufactured homes to residents of the properties. Our audit procedures included the following: • We considered the competence, qualifications and objectivity of the external valuers and evaluated the suitability of their valuation scope and methodology for the financial report; • We assessed the Group’s internal valuation methodology and checked the mathematical accuracy of their valuation models. We also assessed the competence and qualifications of the internal valuer; • We compared the property related data used as input for both the external and internal valuations against actual and budgeted property performance; • We considered the key inputs and assumptions used in the valuations by comparing this information to external market data; • Our real estate valuation specialists reviewed a sample of internal and external valuations to determine whether that the key judgements and methodology used were appropriate; and • We assessed the appropriateness of the allocation of capital expenditure between investment property and inventory assets. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 73 Ingenia Communities Holdings Limited Annual Report 2018 Independent Auditor’s Report For the year ended 30 June 2018 | continued 67 The key judgements for the longer term and short-term rental include capitalisation rates, market and contractual rents, forecast short-term and residential occupancy levels, historical transactions and remaining development potential for vacant land. In assessing the development potential, additional key judgments include future new homes sales prices, estimated capital expenditure and allocation between investment property and inventory, discount rates, projected property growth rates and operating profit margins. 2. Deferred tax assets Why significant How our audit addressed the key audit matter The Group has recorded net deferred tax assets of $14.8m resulting from temporary differences and tax losses carried forward as disclosed in note 14 of the financial report. The Group recognises these deferred tax assets to the extent that it is probable that future taxable profits will allow the deferred tax assets to be recovered. The probability of recovery is impacted by uncertainties regarding the likely timing and level of future taxable profits and the forecasting of this included assumptions and judgements made by the Group. Our audit procedures included the following: • We evaluated assumptions and judgements made by the Group to forecast future taxable profits to determine the likelihood that the losses will be recovered; and • We assessed whether that information used to forecast future taxable profits was derived from the Group’s business cash flow forecasts that have been subject to internal reviews and were approved by the Directors. Information Other than the Financial Report and Auditor’s Report The directors are responsible for the other information. The other information comprises the information included in the Group’s 2018 Annual Report other than the financial report and our auditor’s report thereon. We obtained the Directors’ Report that is to be included in the Annual Report, prior to the date of this auditor’s report, and we expect to obtain the remaining sections of the Annual Report after the date of this auditor’s report. Our opinion on the financial report does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 74 Ingenia Communities Holdings Limited Annual Report 2018 68 Independent Auditor’s Report For the year ended 30 June 2018 | continued Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor's Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • • • • • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 75 Ingenia Communities Holdings Limited Annual Report 2018 Independent Auditor’s Report For the year ended 30 June 2018 | continued 69 • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 10 to 20 of the directors' report for the year ended 30 June 2018. In our opinion, the Remuneration Report of Ingenia Communities Holdings Limited for the year ended 30 June 2018, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Megan Wilson Partner Sydney 21 August 2018 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 76 Ingenia Communities Holdings Limited Annual Report 2018 70 Ingenia Communities Fund & Ingenia Communities Management Trust Annual Reports For the year ended 30 June 2018 Contents Directors’ Report Auditor’s Independence Declaration Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Cash Flow Statement Consolidated 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 unit 5. Income tax expense 6. Trade and other receivables 7. 8. Assets and liabilities held for sale Inventories 9. Investment properties 10. Plant and equipment 11. Intangibles 12. Deferred tax assets and liabilities 13. Trade and other payables 14. Borrowings 15. Retirement village resident loans 16. Issued units 17. Accumulated losses and retained earnings 18. Commitments 19. Contingencies 20. Capital management 21. Financial instruments 22. Fair value measurement 23. Auditor’s remuneration 24. Related parties 25. Parental financial information 26. Subsidiaries 27. Notes to the cash flow statements 28. Subsequent events Directors’ Declaration Independent Auditor’s Report 71 75 76 77 79 80 81 81 87 88 92 92 93 94 94 95 95 96 96 96 97 98 99 99 100 100 100 101 106 107 108 110 111 112 112 113 114 Ingenia Communities Holdings Limited Annual Report 2018 Directors’ Report For the year ended 30 June 2018 71 Ingenia Communities Fund (ICF or the Fund) (ARSN 107 459 576) and 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 (ICRE or the Responsible Entity) is Ingenia Communities Holdings Limited (the Company).The shares of the Company are “stapled” with the units of the Trusts and trade on the Australian Securities Exchange (“ASX”) as one security (ASX Code: INA). 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 the Trusts for the year ended 30 June 2018 (the “current period”). Directors The Directors of the Responsible Entity at any time during or since the end of the current period were: Non-Executive Directors (NEDs) (Chairman) Jim Hazel Robert Morrison (Deputy Chairman) Amanda Heyworth Valerie Lyons Andrew McEvoy (appointed 1 December 2017) Philip Clark AM (resigned 4 December 2017) Executive Directors Simon Owen (Managing Director and Chief Executive Officer (MD and CEO)) Operating and Financial Review ICF and ICMT Overview ICF and ICMT are two of the entities forming part of Ingenia Communities Group, which is a triple staple structure traded on the ASX. The Group is an active owner, manager and developer of a diversified portfolio of retirement and holiday communities across Australia. Its real estate assets at 30 June 2018 were valued at $730.4 million (net of finance leases and resident loans), comprising 31 lifestyle and holiday communities (Ingenia Lifestyle and Holidays), 26 rental communities (Ingenia Gardens) and one deferred management fee retirement village asset (Ingenia Settlers). The Group is in the ASX 300 with a market capitalisation of approximately $640.9 million at 30 June 2018. The Group’s vision is to create Australia’s best lifestyle communities offering affordable permanent and tourism rental accommodation with a focus on the seniors demographic. The Board is committed to delivering sustainable long term earnings per share (EPS) growth to security holders while providing a supportive community environment to permanent residents and holidaymakers. Our Values At Ingenia we build community using a foundation of integrity and respect, creating a place where people have a sense of connection and belonging. We strive for continuous improvement in our resident, guest and visitor service, to ensure that they receive the best possible support, attention and experience every day. Whether it’s time to play, stay, rest or renew, we deliver freedom of choice with a range of lifestyle and holiday options. Ingenia Communities Holdings Limited Annual Report 2018 72 Directors’ Report For the year ended 30 June 2018 | continued Strategy The strategies of ICF and ICMT are aligned with the Group’s strategy to grow recurring revenue streams, develop lifestyle communities and enhance the operational performance of its investment properties. Using a disciplined investment framework, the Group plans to continue growing its lifestyle communities business in metropolitan and coastal locations, through the build out of its development pipeline, targeted acquisitions, reinvestment and divestment of non-core assets. The key immediate business priorities of the Trusts are: – Grow permanent and tourism rental sites through development and investment in new cabins at existing properties; – Grow rental income at a rate above CPI; – Deliver development projects on time and within budget; – Achieve at least 350 new home settlements in the 2019 financial year; – Continue to focus on metropolitan and coastal locations through portfolio remixing, development and acquisitions; – Improve performance of existing assets through repositioning, driving revenue growth and leveraging the operating and sales platform; – Expand development margins through innovative home designs and building efficiencies; and – Continue the divestment of non-core assets to support the Group’s capital recycling strategy. FY18 Financial Results The financial results for Ingenia Communities Group are disclosed in the results of Ingenia Communities Holdings Limited (ICH), which does not form part of these accounts, but is relevant as ICH is stapled with ICF and ICMT. The year to 30 June 2018 has delivered a statutory profit of $34.2 million, which is up 30% on the prior year. Underlying Profit from continuing operations was $36.8 million which represents an increase of $13.3 million (56%) on the prior year. The Group developed and sold 287 turnkey homes (FY17: 211 homes) and grew rental income from permanent, annual and tourism clients to $61.5 million (FY17: $44.5 million). The underlying result is underpinned by a significantly higher EBIT contribution from the Ingenia Lifestyle and Holidays segment up 51% from the prior year. The statutory result reflects the reduction in fair value of investment property due to the increasing number of home settlements. Operating cash flow for the year was $47.2 million, up 56% from the prior year, reflecting growth in recurring rental income and new lifestyle home settlements growing by 36% to 287. Ingenia grew its investment in lifestyle communities during the year, with a continued focus on progressing the development pipeline to enable further growth in its recurring rental base through the expansion and creation of high quality communities. The Group successfully undertook the divestment of eight non-core assets to support the Group’s capital recycling strategy. During 2018 Ingenia divested the Tasmanian Ingenia Gardens portfolio of five properties, two Lifestyle Communities and one Settlers village. At 30 June 2018 the Group had also contracted the sale of a further Settlers Village which settled in July 2018 and contracted (subject to conditions) the sale of the Rouse Hill lifestyle community. Key Metrics – Net profit for the year for ICF $25.5 million (FY17: $2.7 million loss). – Net profit for the year for ICMT of $9.1 million (FY17: $29.6 million profit). – Full year distributions of 10.75 cents per unit by ICF, nil from ICMT. Capital Management The Trusts adopt a prudent and considered approach to capital management. During the year, the Group refinanced a tranche of its common terms facilities, increasing the total Group facility limit by $50.0 million. The refinance provided increased tenor at a lower average margin. The weighted average term to maturity of Ingenia’s debt at 30 June 2018 is 4.3 years. As at 30 June 2018, the common terms facilities are drawn to $229.0 million, which represents a loan to value ratio (“LVR”) of 32.6% (inclusive of bank guarantees). The LVR is at the lower end of our target range of 30-40%. The Group has interest rate derivatives in place covering 41% of drawn debt at 30 June 2018. In line with the Group’s strategy, the Trusts intend to fund near term growth through internal cash flows, divestment of non- core assets and drawing on committed debt facilities. Ingenia continues to explore the concept of capital partnerships to accelerate the development of new lifestyle communities. Ingenia Communities Holdings Limited Annual Report 2018 Directors’ Report For the year ended 30 June 2018 | continued 73 Distributions The following distributions were made during or in respect of the year: – On 20 February 2018, the Directors declared an interim distribution for 2018 of 5.1cps, amounting to $10.6 million which was paid on 14 March 2018. The distribution was 21.3% tax deferred and the distribution reinvestment plan was in place. – On 21 August 2018, the Directors declared a final distribution of 5.65 cps amounting to $11.8 million, to be paid on 14 September 2018. The final distribution is estimated to be fully taxable and the distribution reinvestment plan will apply to the distribution. During FY18 the ICF elected to enter the Attribution Managed Investment Trust (“AMIT”) regime. Security holders will receive their first Attribution Managed Investment Trust Member Annual (“AMMA”) statement in September 2018. FY19 Outlook The Group is well positioned to continue growing its lifestyle communities business in FY19 with a sector leading development pipeline and debt capacity in place to facilitate the accelerated growth in settlement volumes expected as further projects are launched. Priorities in existing lifestyle and holiday communities are to make appropriate investment in key communities to grow revenue through investing in new cabins and facilities across the rental and tourism business. Ingenia Gardens remains a key contributor to the Group’s rental cash flow. Ingenia’s priority is to continue to grow occupancy and rents while delivering the best possible support to our residents. The divestments made in the second half of FY18 and the divestments contracted at 30 June 2018 will temporarily impact the FY19 result due to lost earnings, while the capital proceeds are reinvested into development to grow long term recurring revenue streams in key locations. The Trusts will continue to regularly assess the performance of its existing assets and market opportunities, and make divestments and acquisitions where superior longer term returns are available. Significant changes in the state of affairs Changes in the state of affairs during the current period are set out in the various reports in the year-end financial report. Refer to Note 9 for investment properties acquired or disposed of during the year and Note 16 for issued units. Events subsequent to reporting date Final FY18 Distribution On 21 August 2018, the directors of the Group resolved to declare a final distribution of 5.65cps (2017: 5.1 cps) amounting to $11.8 million to be paid at 14 September 2018. The distribution reinvestment plan will apply to the final distribution. Acquisition of Adjacent Land On 2 July 2018, the Group completed the acquisition of land adjacent to Ingenia Lifestyle Chambers Pines (Chambers Flat, QLD) for a purchase price of $4.5 million. Sale of Settlers Cessnock On 6 July 2018, the Group completed the sale of Settlers Cessnock (Cessnock, NSW) for $2.5 million (net of resident loans). Likely developments The Trusts will continue to pursue strategies aimed at growing its cash earnings, profitability and market share within the seniors rental property and tourism industry during the next financial year, with a continuing focus on the development of lifestyle communities. The Trusts will continue to pursue the divestment of non-core assets to support the Group’s capital recycling strategy. Other information about 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 this Financial Report. Environmental regulation The Trusts have policies and procedures in place to ensure that, where operations are subject to any particular and significant environmental regulation under the laws of Australia, those obligations are identified and appropriately addressed. The Directors have determined that there has not been any material breach of those obligations during the financial year. Group indemnities The Trusts have purchased various insurance policies to cover a range or 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. Ingenia Communities Holdings Limited Annual Report 2018 74 Directors’ Report For the year ended 30 June 2018 | continued Indemnification of auditors To the extent permitted by law, the Trusts have agreed to indemnify its auditors, Ernst & Young Australia, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the period. Interests of directors of the responsible entity Units in each Trust held by directors of the Responsible Entity or associates of the directors as at 30 June 2018 were: Jim Hazel Amanda Heyworth Robert Morrison Valerie Lyons Andrew McEvoy Simon Owen Issued stapled securities 344,710 122,485 125,638 27,957 14,815 Rights – – – – – 1,280,528 551,874 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 24 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 75. Non-Audit Services During the year, non-audit services were provided by the Group’s auditor, Ernst & Young Australia. The directors are satisfied that the provision of the non-audit services is compatible with, and did not compromise, the independence for auditors imposed by the Corporations Act 2001 for the following reasons: – – – the non-audit services were for taxation, regulatory and assurance related work, and none of this work created any conflicts with the auditor’s statutory responsibilities; the Audit and Risk Committee resolved that the provision of non-audit services during the financial year by EY as auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001; the Board’s own review conducted in conjunction with the Audit and Risk Committee, having regard to the Board policy set out in this Report, concluded that it is satisfied the non-audit services did not impact the integrity and objectivity of the auditors; and – the declaration of independence provided by EY, as auditor of Ingenia. Refer to Note 23 of the financial statements for details on the audit and non-audit fees. Rounding of amounts The Trusts are of the kind referred to in ASIC Instrument 2016/191, 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. Signed in accordance with a resolution of the Directors of the Responsible Entity. Jim Hazel Chairman Sydney, 21 August 2018 Ingenia Communities Holdings Limited Annual Report 2018 Auditor’s Independence Declaration For the year ended 30 June 2018 75 Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Auditor’s Independence Declaration to the Directors of Ingenia Communities RE Limited as Responsible Entity for Ingenia Communities Fund and Ingenia Communities Management Trust As lead auditor for the audit of Ingenia Communities Fund and its controlled entities and Ingenia Communities Management Trust and its controlled entities for the financial year ended 30 June 2018, I declare to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Ingenia Communities Fund and the entities it controlled during the financial year and Ingenia Communities Management Trust and the entities it controlled during the financial year. Ernst & Young Megan Wilson Partner 21 August 2018 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 7 Ingenia Communities Holdings Limited Annual Report 2018 76 Consolidated Statement of Comprehensive Income For the year ended 30 June 2018 Responsible entity fee and expenses 24(b) (3,343) (2,677) Depreciation and amortisation expense 10(b), 11(b) (26) (24) Rental income Manufactured home sales Service station revenue Other revenue Revenue Property expenses Cost of manufactured homes sold Employee expenses Administrative expenses Operational, marketing and selling expenses Service station expenses 9(b) 5 Operating profit before interest and tax Net finance income/(expense) Operating profit before tax Net gain/(loss) on change in fair value of: Investment properties Other Net (loss)/gain on disposal of investment properties Profit/(loss) before tax Income tax expense Net profit/(loss) Total comprehensive income/(loss) Profit/(loss) attributable to unit holders of: Ingenia Communities Fund Ingenia Communities Management Trust Total comprehensive income/(loss) attributable to unit holders of: Ingenia Communities Fund Ingenia Communities Management Trust Note ICF ICMT 2018 $’000 10,628 – – – 2017 $’000 9,101 – – – 2018 $’000 86,520 85,875 7,356 9,709 2017 $’000 69,976 63,752 7,284 8,872 10,628 9,101 189,460 149,884 (785) (877) (36,640) (32,155) – – – – (50,347) (42,699) (37,807) (30,451) (347) (310) – – – – (4,582) (6,825) (6,338) (3,146) (912) (3,779) (4,849) (6,229) (2,769) (650) 5,213 13,821 19,034 42,863 26,303 (25,848) (20,407) 17,015 5,896 6,000 (4,826) (216) 6,127 19,670 25,797 2,182 181 (2,702) (27,556) 25,458 (2,738) – 25,458 25,458 – (2,738) (2,738) 25,458 (2,738) – – 25,458 (2,738) 25,458 (2,738) – – 25,458 (2,738) 436 1,267 13,892 (4,766) 9,126 9,126 – 9,126 9,126 – 9,126 9,126 6,373 96 19,117 31,482 (1,890) 29,592 29,592 – 29,592 29,592 – 29,592 29,592 Earnings per security: Basic earnings per unit Diluted earnings per unit Cents Cents Cents Cents 4 4 12.3 12.2 (1.5) (1.5) 4.4 4.4 16.4 16.4 Ingenia Communities Holdings Limited Annual Report 2018 Consolidated Balance Sheet As at 30 June 2018 77 ICF ICMT Note 2018 $’000 2017 $’000 2018 $’000 2017 $’000 Current assets Cash and cash equivalents Trade and other receivables Inventories Income tax receivable Assets held for sale Total current assets Non–current assets Trade and other receivables Receivable from related party Investment properties Plant and equipment Other financial assets Intangibles Deferred tax asset Total non–current assets Total assets Current liabilities Trade and other payables Borrowings Retirement village resident loans Employee liabilities Derivatives and other financial instruments Liabilities held for sale Total current liabilities Non–current liabilities Other payables Payable to related party Borrowings Other financial liabilities Employee liabilities Derivatives and other financial instruments Total non–current liabilities Total liabilities Net assets 6 7 8(a) 3,622 372 – 19 – 991 719 – 19 – 4,013 1,729 6 6,691 24(d) 524,363 10,129 441,244 154,556 73 773 – – 143,561 57 773 – – 10,751 7,271 30,228 19 28,675 76,944 1,651 – 8,547 5,708 21,597 19 – 35,871 458 – 586,876 538,918 3,699 1,490 1,919 455 1,991 1,490 2,021 5,233 675,445 606,775 596,090 550,111 679,458 608,504 673,034 585,982 2,019 1,822 34,759 23,474 – – – 73 – – – – 221 – 2,092 2,043 859 8,206 1,770 – 3,875 49,469 1,212 27,201 1,480 – – 53,367 – – – – 83 167 534,537 449,907 227,502 164,729 – – 65 – – 61 9,369 6,500 529 – 13,194 6,136 344 – 227,567 229,659 449,799 164,790 551,018 469,748 166,833 600,487 441,671 72,547 523,115 62,867 9 10 11 12 13 14 15 8(b) 13 24(d) 14 Ingenia Communities Holdings Limited Annual Report 2018 78 Consolidated Balance Sheet As at 30 June 2018 | continued Equity Issued units (Accumulated losses)/Retained earnings Unit holders interest Non-controlling interest Total equity Attributable to unit holders of: Ingenia Communities Fund Ingenia Communities Management Trust Note 16(a) 17 ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 759,337 755,571 (309,538) (313,900) 449,799 441,671 43,690 29,557 73,247 43,136 20,431 63,567 – – (700) (700) 449,799 441,671 72,547 62,867 449,799 441,671 (700) (700) – – 449,799 441,671 73,247 72,547 63,567 62,867 Ingenia Communities Holdings Limited Annual Report 2018 Consolidated Cash Flow Statement For the year ended 30 June 2018 79 Cash flows from operating activities Rental and other income Property and other expenses Proceeds from resident loans Repayment of resident loans Proceeds from sale of manufactured homes Purchase of manufactured homes Proceeds from sale of service station inventory Purchase of service station inventory Interest received Borrowing costs paid Cash flows from investing activities Purchase and additions of plant and equipment Purchase and additions of intangible assets Payments for investment properties Additions to investment properties Proceeds from sale of investment properties Cash flows from financing activities Proceeds from issue of stapled securities Payments for security issue costs Finance lease payments Distributions to unit holders Payments for debt issue costs ICF ICMT Note 2018 $’000 2017 $’000 2018 $’000 2017 $’000 – (502) – (77) 102,061 82,706 (84,121) (58,523) 15(b) 15(b) – – – – – – – – – – – – 40 (8,975) (9,437) 157 (5,803) (5,723) 27 594 (767) 3,411 (2,191) 94,439 63,376 (59,806) (47,575) 8,091 (7,134) 53 – 7,014 (6,615) 27 (353) 53,410 41,277 (9) – – – – – (2,436) (331) (1,259) (284) (51,214) (180,311) (6,805) (3,829) (59,276) (23,361) 17,854 11,040 – 14,888 41,297 (3,829) (98,369) (163,918) – – – 78,226 (4,472) – – – (639) (16,690) (17,952) (200) (1,126) – – 8,937 (299) (643) – – (Repayment of)/proceeds from related party borrowings (44,617) (119,879) 47,802 116,564 Proceeds from borrowings Repayment of borrowings Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Effects of exchange rate fluctuation on cash held Cash and cash equivalents at end of the period 120,223 181,364 (57,688) (114,000) – – – – 1,028 2,631 991 – 3,622 2,161 47,163 124,559 (7,391) 8,329 53 991 2,204 8,547 – 10,751 1,918 6,621 8 8,547 Ingenia Communities Holdings Limited Annual Report 2018 80 Consolidated Statement of Changes in Equity For the year ended 30 June 2018 Attributable to unit holders ICF Issued Capital $’000 Retained Earnings $’000 Note Non- Controlling Interest $’000 Total $’000 Carrying amount 1 July 2017 755,571 (313,900) 441,671 Net profit Total comprehensive income Transactions with unit holders in their capacity as unit holders: Issue of units Payment of distributions to unit holders – – 25,458 25,458 25,458 25,458 16 17 3,766 – 3,766 – (21,096) (21,096) Carrying amount 30 June 2018 759,337 (309,538) 449,799 Carrying amount 1 July 2016 679,161 (293,168) 385,993 Net loss Total comprehensive income Transactions with unit holders in their capacity as unit holders: Issue of units Payment of distributions to unit holders Transfer from reserves of ICH – – (2,738) (2,738) (2,738) (2,738) 16 17 16 75,122 – 75,122 – (17,994) (17,994) 1,288 – 1,288 Carrying amount 30 June 2017 755,571 (313,900) 441,671 – – – – – – – – – – – – – Total Equity $’000 441,671 25,458 25,458 3,766 (21,096) 449,799 385,993 (2,738) (2,738) 75,122 (17,994) 1,288 441,671 Attributable to unit holders ICMT Issued Capital $’000 Retained Earnings $’000 Note Non- Controlling Interest $’000 Total $’000 Total Equity $’000 Carrying amount 1 July 2017 43,136 20,431 63,567 (700) 62,867 Net profit Total comprehensive income Transactions with unit holders in their capacity as unit holders: – – 9,126 9,126 9,126 9,126 Issue of units 16 554 – 554 – – – 9,126 9,126 554 Carrying amount 30 June 2018 43,690 29,557 73,247 (700) 72,547 Carrying amount 1 July 2016 34,019 (9,161) 24,858 (700) 24,158 Net profit Total comprehensive income Transactions with unit holders in their capacity as unit holders: Issue of units Transfer from reserves of ICH Carrying amount 30 June 2017 – – 29,592 29,592 29,592 29,592 16 16 9,049 68 – – 9,049 68 – – – – 29,592 29,592 9,049 68 43,136 20,431 63,567 (700) 62,867 Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 81 1. Summary of significant accounting policies a. The Trusts Ingenia Communities Fund (ICF or the Fund) (ARSN 107 459 576) and 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 are stapled with the units of the Trusts and trade on the Australian Securities Exchange (ASX) effectively as one security. In this report, the Company and the Trusts are referred to collectively as the Group. 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 2018 was authorised for issue by the Directors on 21 August 2018. 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 (“AASB”) and the Corporations Act 2001. As permitted by Instrument 2015/838, 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 ICF and ICMT. The financial statements and accompanying notes of the Trusts have been presented within this financial report. The financial report complies with Australian Accounting Standards as issued by the AASB 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 as permitted by Instrument 2016/191. The financial report is prepared on a historical cost basis, except for investment properties, retirement village residents’ loans and derivative financial instruments, which are measured at fair value. Where appropriate, comparative amounts have been restated to ensure consistency of disclosure throughout the financial report. c. Adoption of New and Revised Accounting Standards No new or revised standards and interpretations were issued by the AASB that are relevant to the Trusts during the period. 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 are able to be governed by a trust, 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. Intercompany balances and transactions including unrealised profits have been eliminated. Subsidiaries are consolidated from the date on which the parent obtains control. They are deconsolidated from the date that control ceases. Investments in subsidiaries are carried at cost in the parent’s financial statements. e. Business Combinations and Goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the fair value aggregate of the consideration transferred, at acquisition date, and the amount of any non-controlling interest in the acquiree. For each business combination, the Trusts elect whether to measure the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition related costs are expensed and included in other expenses. When the Trusts acquire a business, they assess financial assets and liabilities 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 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 consideration transferred and amount recognised for non-controlling interests, as well as and any previous interest held over the fair value of net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the acquired subsidiary’s net assets, the difference is recognised in profit or loss. Ingenia Communities Holdings Limited Annual Report 2018 82 Notes to the Financial Statements For the year ended 30 June 2018 | continued 1. Summary of significant accounting policies (continued) f. Assets Held for Sale Components of the entity are classified as held for sale if their carrying value 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. The liabilities of an asset classified as held for sale are presented separately from other liabilities on the face of the balance sheet. Details of assets and liabilities held for sale are given at Note 8. 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 Functional and presentation currencies: The functional currency and presentation currency of the Trusts and their subsidiaries, other than foreign subsidiaries, is the Australian dollar. Translation 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 statement of comprehensive income. 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. Leases i. Finance leases, where the Trust is lessee, 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, so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised as an expense in the statement of comprehensive income. Finance leases, where the Trust is lessor, 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, so as to achieve a constant rate of interest on the remaining balance of the receivable. Interest is recognised as income in the statement of comprehensive income. 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 statement of comprehensive income on a straight-line basis over the term of the lease. Plant and Equipment j. Plant and equipment is stated at cost, net of accumulated depreciation and any accumulated impairment losses. Such cost includes the cost of replacing part of the plant and equipment, and borrowing costs for long-term construction projects if the recognition criteria are met. When significant parts of property, plant and equipment require replacing 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, the 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 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 statement of comprehensive income. The fair value of financial instruments actively traded in organised financial markets are determined by reference to quoted market bid prices at close of business on 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 substantially similar instrument; discounted cash flow analysis; option pricing models; making as much use of available and supportable market data; and keeping judgemental inputs to a minimum. Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 83 1. Summary of significant accounting policies (continued) Impairment of Non-Financial Assets l. Assets other than investment property and financial assets carried at fair value are tested for impairment whenever events or circumstance changes 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 statement comprise cash at bank, cash in hand, and short term deposits that are readily convertible to known amounts of cash, and 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. Inventories o. The Trusts hold inventory in relation to the acquisition and development of manufactured homes, as well as and service station fuel and supplies within the Lifestyle & Holidays 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 and Financial Instruments The Trusts use derivative financial instruments such as interest rate swaps to hedge its risks associated with interest rate fluctuations. Such derivative financial instruments are initially recognised at fair value on the date the contract is entered, and are subsequently remeasured to fair value. Investment Property q. 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, tourism cabins and associated amenities. Investment properties are measured initially at cost, including transaction costs. Subsequently, investment properties are stated at fair value, reflecting market conditions at reporting date. Gains or losses arising from changes in the fair values of investment properties are included in the statement of comprehensive income in the period they arise, including the 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 measurement date, in the principal market for the asset or liability or the most advantageous market in its absence. In determining the fair value of assets held for sale recent market offers have been taken into consideration. It is the Trusts’ policy to have all investment properties externally valued at intervals of not more than two years. It is the policy of the responsible trust to review the fair value of each investment property every six months, and revalued investment properties to fair value when their carrying value materially differs to their fair values. In determining fair values, the group considers relevant information including the capitalisation of rental streams using market assessed capitalisation rates, expected net cash flows discounted to their present value using market determined risk adjusted discount rates, and other available market data such as recent comparable transactions. The assessment of fair value of investment properties does not take into account potential capital gains tax assessable. Intangible Assets r. An intangible asset arising from software development expenditure is recognised only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use; how the asset will generate future economic benefits; the availability of resources to complete the asset; and the ability to reliably measure the expenditure during its development. Costs capitalised include external direct costs of materials and service, direct payroll, and payroll related costs of employee time spent on projects. Following the initial recognition of expenditure, the asset is carried at cost less any accumulated amortisation and accumulated impairment losses. Amortisation of the asset begins when the development is complete and the asset is available for use. Amortisation is over the period of expected future benefit. The Group’s policy applied to capitalised development costs is as follows: Software and associated development to capitalised development costs (assets in use) – Useful life: Finite amortisation method using seven years on a straight line basis; and – Impairment test: Amortisation method reviewed at each financial year end; closing carrying value reviewed annually for indicators of impairment. Ingenia Communities Holdings Limited Annual Report 2018 84 Notes to the Financial Statements For the year ended 30 June 2018 | continued 1. Summary of significant accounting policies (continued) Subsequent expenditure on intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Gains or losses arising from the derecognition of an intangible asset are measured as the difference between the net disposal proceeds, and the carrying amount of the asset. They are recognised in profit or loss when the asset is derecognised. 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, acquired intangible assets are carried at cost less any accumulated amortisation and impairment losses. s. Trade and Other 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, and are unpaid. They are recognised when the Trusts become obliged to make future payments in respect of the purchase of the goods and services. t. Retirement Village Resident Loans The non-interest bearing loans are repayable on the departure of the resident. They are classified as financial liabilities at fair value through profit and loss, with resulting fair value adjustments recognised in the statement of comprehensive income. 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. This is 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 1(aa) and Note 15 for information regarding the valuation of retirement village resident loans. u. 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. Issued units v. 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 unit holders’ interest as a reduction of the units proceeds received. w. Revenue Revenue from rent, interest and distributions is recognised to the extent it is probable that the economic benefits will flow to the Group, and can be reliably measured. Revenue brought to account but not received at balance date is recognised as a receivable. Interest income is recognised as the interest accrues, using the effective interest rate method. Rental income from operating leases is recognised on a straight-line basis over the lease term. 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 Lifestyle Development segment is recognised when the significant risks and rewards of ownership, as well as effective control has been transferred to the buyer. Service station sales, food and beverage revenue represents the revenue earned from the provision of products and services to external parties. Sales revenue is only recognised when the significant risks and rewards of ownership of the products or service has been passed 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. x. Provisions, Including for Employees Benefits 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. 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 comprehensive income net of any reimbursement. Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 85 1. Summary of significant accounting policies (continued) Wages, salaries, annual leave and sick leave: Liabilities for wages and salaries, including non-monetary benefits, and annual leave expected to be settled wholly 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. Long service leave: The liability for long service leave is recognised and measured as the present value of expected future payments 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 employees departing, and period of service. Expected future payments are discounted using market yields on high quality corporate bonds at the reporting date with terms to maturity and currencies that match, as closely as possible, the estimated future cash outflows. y. Income Tax Current income tax: Under the current tax legislation, ICF and its subsidiaries are not liable to pay Australian income tax provided that their taxable income (including any assessable capital gains) is fully distributed to unit holders each year. Tax allowances for building and fixtures depreciation are distributed to unit holders in the form of the tax-deferred component of distributions. ICMT and its subsidiaries are subject to Australian income tax. Current tax assets and liabilities 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 laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date. The subsidiaries that previously held 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, unit holders may be entitled to receive a foreign tax credit for this withholding tax. During FY18 ICF elected to enter the Attribution Managed Investment Trust (AMIT) regime. Deferred income tax: Deferred income tax represents tax (including withholding tax) expected to be payable or recoverable by taxable entities on differences between 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. Deferred tax assets are recognised for deductible temporary differences only if it is probable that future taxable amounts will be available to utilise those temporary differences. Income taxes related to items recognised directly in equity are not recognised against income. Critical accounting estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Trust and that are believed to be reasonable under the circumstances. z. 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. aa. Fair Value Measurement The Trusts measure financial instruments, such as derivatives, investment properties, resident loans, certain non-financial assets and non-financial liabilities, at fair value at each balance sheet date. Refer to Note 22. 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 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 Trusts. The fair value of an asset or a liability is measured using the assumptions market participants 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 best use or by selling it to another market participant that would use the asset in its best use. 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. Ingenia Communities Holdings Limited Annual Report 2018 86 Notes to the Financial Statements For the year ended 30 June 2018 | continued 1. Summary of significant accounting policies (continued) All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described below, 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 reassessing categorisation at the end of the reporting period. This is based on the lowest level input that is significant to the fair value measurement as a whole. 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 month basis management presents valuation results to the Audit and Risk Committee as well as the Trusts’ auditors. This includes a review 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 (see Note 22). bb. Pending Accounting Standards The Trusts have not early adopted the following standards, interpretations, or amendments that have been issued but are not yet effective: AASB 9 Financial Instruments is applicable to reporting periods beginning on or after 1 January 2018. The Trusts’ have not early adopted this standard. This standard provides requirements for the classification, measurement and derecognition of financial assets and financial liabilities. Changes in the Trusts’ credit risk, which affect the value of liabilities designated at fair value through profit and loss, must be presented in other comprehensive income. The impact of the application of the standard is continuously being monitored by the Trusts’, and the Trusts’ expect to conclude on the impact in due course. AASB 15 Revenue from Contracts with Customers is applicable to reporting periods beginning on or after 1 January 2018. The Trusts have not early adopted this standard. The standard is based on the principle that revenue is recognised when control of a good or service is transferred to a customer. It contains a single model that applies to contracts with customers and two approaches to recognising revenue - at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognised. It applies to all contracts with customers except leases, financial instruments and insurance contracts. It requires reporting entities to provide users of financial statement with more informative and relevant disclosures. The application of the standard is not expected to have any material impact on the Trusts’ financial reporting in future periods. AASB 16 Leases is applicable to reporting periods beginning on or after 1 January 2019. The Group has not early adopted this standard. This standard provides requirements for classification, measurement, and disclosure of all leases with a term of more than twelve months unless the underlying asset is of low value. A lessee must now measure right-of-use assets similarly to other non-financial assets and lease liabilities similarly to other financial liabilities. Assets and liabilities arising from a lease are initially measured on a present value basis. The measurement includes non-cancellable lease payments (including inflation-linked payments), and also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. The Group is currently the lessee of two non- cancellable operating leases which would be captured under this new standard. These leases relate to the Group’s Sydney and Brisbane offices, which have a future minimum lease payments total of $2,402,000 at 30 June 2018. The Group is also the lessee of four existing finance leases which relate to the land of certain investment properties. The application of the Standard is not expected to have any material impact on these finance leases. 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 Trusts’ financial reporting in future reporting periods. cc. 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. Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 87 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. All other assets are classified as non-current. The Trusts classify all other liabilities as non-current. Deferred tax assets and liabilities are classified as non-current assets and liabilities. 2. Accounting estimates and judgements The preparation of financial statements requires the use of certain critical accounting estimates. It also requires the Trusts to exercise judgement in the process of applying its 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 makes estimates and assumptions concerning the future. The resulting accounting estimates, by definition, may not 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 $759,112,000 (30 June 2017: $693,473,000) (refer Note 8 and Note 9), and combined retirement village resident loans of $12,081,000 (30 June 2017: $27,201,000) (refer Note 8 and 15) which together represent the estimated fair value of the Trust’s property business. These carrying amounts reflect certain assumptions about expected future rentals, rent-free periods, operating costs and appropriate discount and capitalisation rates. The valuation assumption for properties to be developed reflect sales prices for new homes, sales rates, new rental tariffs, estimates of capital expenditure, discount rates and projected property growth rates. The valuation assumptions for deferred management fee villages reflect 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 Trusts considered information about current and recent sales activity, current market rents, discount rates and capitalisation rates for properties similar to those owned by the Trusts, as well as independent valuations of the Trusts’ property. ii. Valuation of inventories The Trusts have inventory in the form of manufactured homes and service station fuel and supplies, 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 of estimation, the amount the inventories are expected to realise, and the estimated costs of completion. Key assumptions require the use of management judgement, and 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 Trusts rely on counterparty valuations for derivative values. The counterparty valuations are usually based on mid-market rates, and calculates using the main variables of the forward market curve, time and volatility. iv. Valuation of assets acquired in business combinations Upon recognising the acquisition, management uses estimations of the fair value of assets and liabilities assumed at the date of acquisition, involving judgements related to valuation of investment property as discussed above. v. 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 ICMT as operator. The key assumption for calculating 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. vi. 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. 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. Ingenia Communities Holdings Limited Annual Report 2018 88 Notes to the Financial Statements For the year ended 30 June 2018 | continued 3. Segment information a. Description of Segments The Trusts invests predominantly in rental properties located in Australia with four reportable segments: – – – Ingenia Lifestyle & Holidays – comprising long-term and tourism accommodation within lifestyle parks; Ingenia Lifestyle Development – comprising the development and sale of manufactured homes; Ingenia Gardens – rental villages; – Fuel, Food & Beverage Services – Consists of the Group’s investment in service station operations and food & beverage activities attached to Ingenia Lifestyle & Holiday communities; – Corporate & Other – comprises deferred management fee villages and corporate overheads. The Trusts have identified its operating segments based on the internal reports that are reviewed and used by the chief operating decision maker in assessing performance and determining the allocation of resources. Other parts of the Trusts 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. ICF – 30 June 2018 Segment revenue External segment revenue Total revenue Segment underlying profit External segment revenue Property expenses Administrative expenses Depreciation expense Earnings before interest and tax Net finance income Underlying profit Net (loss)/gain on change in fair value of: Investment properties Other Net loss on disposal of investment properties Responsible entity fees Profit after tax Segment assets Total assets L&H Operations $’000 Ingenia Gardens $’000 Corporate & Other $’000 16 16 16 (785) (347) (24) 464 464 10,148 10,148 464 10,148 – – – – – (2) 462 – 462 10,148 (1,140) – 10,148 19,670 18,530 (78) 2,260 – – – – – – – 181 (2,702) (3,343) Total $’000 10,628 10,628 10,628 (785) (347) (26) 9,470 19,670 29,140 2,182 181 (2,702) (3,343) 384 12,408 12,666 25,458 15,077 127,299 537,082 679,458 15,077 127,299 537,082 679,458 Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 3. Segment information (continued) c. ICF – 30 June 2017 Segment revenue External segment revenue Total revenue Segment underlying profit External segment revenue Property expenses Administrative expenses Depreciation expense Earnings before interest and tax Net finance income Underlying profit Net gain/(loss) on change in fair value of: Investment properties Other Net loss on disposal of investment properties Responsible entity fees Profit/(loss) after tax Segment assets Total assets 89 Total $’000 9,101 9,101 9,101 (877) (310) (24) 7,890 13,821 21,711 L&H Operations $’000 Ingenia Gardens $’000 Corporate & Other $’000 384 384 8,717 8,717 384 8,717 – – – (869) (310) (24) 8,709 (1,203) – 8,709 13,821 12,618 (8) – – – – – – – – 384 – 384 – – – 1,580 11,125 11,125 1,196 4,820 (16) (216) 6,000 (216) (27,556) (27,556) 13,529 (17,847) (2,677) (2,677) (2,738) 141,290 456,089 608,504 141,290 456,089 608,504 Ingenia Communities Holdings Limited Annual Report 2018 90 Notes to the Financial Statements For the year ended 30 June 2018 | continued 3. Segment information (continued) d. ICMT – 30 June 2018 L&H Operations $’000 L&H Development $’000 Ingenia Gardens $’000 Fuel, Food & Beverage Services $’000 Corporate & Other $’000 Total $’000 Segment revenue External segment revenue Total revenue Segment underlying profit 65,072 65,072 85,879 85,879 27,984 27,984 External segment revenue 65,072 85,879 27,984 Property expenses (15,785) (601) (17,998) Cost of manufactured homes sold – (50,347) – 8,986 8,986 8,986 (496) – Employee expenses (19,628) (9,162) (7,090) (1,270) Administrative expenses (2,576) (793) (605) (27) Operational, marketing and selling expenses (1,838) (3,606) (915) (431) Service station expenses – – – (6,338) Depreciation and amortisation expense (360) (404) Earnings before interest and tax 24,885 20,966 Net finance expense Income tax expense – – – – (109) 1,267 – – (19) 405 – – 1,539 1,539 189,460 189,460 1,539 189,460 (1,760) (36,640) – (50,347) (657) (581) (37,807) (4,582) (35) – (20) (6,825) (6,338) (912) (1,514) 46,009 (25,848) (25,848) (5,700) (5,700) Underlying profit/(loss) 24,885 20,966 1,267 405 (33,062) 14,461 Net (loss)/gain on change in fair value of: Investment properties Other Net (loss)/gain on disposal of investment properties Income tax benefit Responsible entity fees (2,754) – (151) – – – – – – – – – – – – – – – – – (2,072) (4,826) 436 1,418 934 436 1,267 934 (3,146) (3,146) Profit/(loss) after tax 21,980 20,966 1,267 405 (35,492) 9,126 Segment assets Segment assets 450,888 173,263 3,004 Assets held for sale 22,325 – – Total assets 473,213 173,263 3,004 356 – 356 16,848 6,350 644,359 28,675 23,198 673,034 Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 91 3. Segment information (continued) e. ICMT – 30 June 2017 L&H Operations $’000 L&H Development $’000 Ingenia Gardens $’000 Fuel, Food & Beverage Services $’000 Corporate & Other $’000 Total $’000 Segment revenue External segment revenue 47,686 63,752 28,389 7,285 3,405 150,517 Reclassification of gain on newly constructed villages – – – – (633) (633) Total revenue 47,686 63,752 28,389 7,285 2,772 149,884 Segment underlying profit External segment revenue 47,686 63,752 28,389 Property expenses (12,846) (493) (16,731) Cost of manufactured homes sold – (42,699) – Employee expenses (15,315) (6,453) (7,046) Administrative expenses (2,114) (531) (605) 7,285 (106) – (359) (17) Operational, marketing and selling expenses (713) (2,440) (982) – Service station expenses – – – (6,229) 3,405 (1,979) 150,517 (32,155) – (42,699) (1,278) (30,451) (512) (3,779) (714) – (4,849) (6,229) Depreciation and amortisation expense (244) (253) (120) Earnings before interest and tax 16,454 10,883 2,905 Net finance expense Income tax expense – – – – – – (5) 569 – – (28) (650) (1,106) 29,705 (20,407) (20,407) (1,595) (1,595) Underlying profit/(loss) 16,454 10,883 2,905 569 (23,108) 7,703 Net gain/(loss) on change in fair value of: Investment properties 6,642 Other Reclassification of gain on newly constructed villages Net (loss)/gain on disposal of investment properties Income tax expense Responsible entity fees – – (871) – – – – – – – – – – – – – – – – – – – – (269) 96 6,373 96 (633) (633) 19,988 (295) (2,769) 19,117 (295) (2,769) Profit/(loss) after tax 22,225 10,883 2,905 569 (6,990) 29,592 Segment assets Segment assets Total assets 371,081 166,223 371,081 166,223 3,012 3,012 183 183 45,483 585,982 45,483 585,982 Ingenia Communities Holdings Limited Annual Report 2018 92 Notes to the Financial Statements For the year ended 30 June 2018 | continued 4. Earnings per unit Profit/(loss) attributable to unit holders ($’000) 25,458 (2,738) Weighted average number of units outstanding (thousands) ICF 2018 2017 ICMT 2018 9,126 2017 29,592 Issued units (thousands) Dilutive units (thousands) Long-term incentives Short-term incentives Weighted average number of issued and dilutive potential units outstanding (thousands) Basic earnings per unit (cents) Dilutive earnings per unit (cents) 5. Income tax expense a. Income Tax Expense Current tax Decrease in deferred tax asset Income tax expense 207,329 180,383 207,329 180,383 690 119 486 111 690 119 486 111 208,138 180,980 208,138 180,980 12.3 12.2 (1.5) (1.5) 4.4 4.4 16.4 16.4 ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 – – – – – – 134 (4,900) (4,766) – (1,890) (1,890) b. Reconciliation Between Tax Expense and Pre-Tax Net Profit Profit/(loss) before income tax 25,458 (2,738) 13,892 31,482 (Less)/add amounts not subject to Australian income tax (25,458) 2,738 – – Income tax at the Australian tax rate of 30% Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: Prior period income tax return true-ups Movement in tax cost base of investment properties (1) Other Income tax expense – – – – – – – – – – – – 13,892 31,482 (4,168) (9,445) (99) – (499) – 7,615 (60) (4,766) (1,890) (1) FY17 movement in cost base of investment property impacted by valuation adjustments and resetting of historic cost bases. Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 93 6. Trade and other receivables Current Rental and other amounts due Finance lease receivable from stapled entity Other receivables Total current trade and other receivables Non-current Finance lease receivable from stapled entity Other receivables Total non-current and other receivables ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 – 358 14 372 4,051 2,640 6,691 – 719 – 719 7,585 2,544 10,129 5,832 – 1,439 7,271 – 1,651 1,651 4,906 – 802 5,708 – 458 458 Rental amounts due are typically paid in advance and other amounts due are receivable within 30 days. ICF has leased a property to ICMT which has been classified as a finance lease. The remaining term of the agreement is 91 years. There are no purchase options. Minimum payments under the agreements and their present values are: ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’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 358 1,500 32,401 34,259 719 3,019 71,843 75,581 (29,850) (67,277) 4,409 8,304 358 1,165 2,886 4,409 719 2,298 5,287 8,304 Finance income recognised and included in interest income in the statement of comprehensive income 358 719 Information about the related finance lease payable by ICMT is given in Note 24. – – – – – – – – – – – – – – – – – – – – – – Ingenia Communities Holdings Limited Annual Report 2018 94 Notes to the Financial Statements For the year ended 30 June 2018 | continued 7. Inventories Manufactured homes: Completed Display homes Under construction Service station fuel and supplies Total inventories ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 – – – – – – – – – – 15,616 4,869 9,435 308 30,228 15,247 547 5,643 160 21,597 The manufactured home balance includes: – 93 new completed homes (30 Jun 2017: 86) – – 11 refurbished/renovated/annuals completed homes (30 Jun 2017: 9) 24 display homes (2017: 4) – Manufactured homes under construction includes 88 partially completed homes at different stages of development (2017: 56). It also includes demolition, site preparation costs and buybacks on future development sites. 8. Assets and liabilities held for sale a. Summary of Carrying Values The following are the carrying values of assets held for sale: Investment properties held for sale: Cessnock, Cessnock, NSW(1) Rouse Hill, Rouse Hill, NSW(2) Total assets held for sale ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 – – – – – – 6,350 22,325 28,675 – – – (1) This relates to Settlers Cessnock which was sold in July 2018. (2) A conditional contract for the sale of Rouse Hill was signed in June 2018. As such, the property has been reclassified from investment property to asset held with to sale in view of management’s expectation that the property will be sold in the twelve months ended 30 June 2019. b. Summary of Carrying Amounts – Loans The following is a summary of the carrying amounts of the loans associated with investment properties held for sale: Net resident loans – Cessnock Total liabilities held for sale ICF ICMT 2018 $’000 2017 $’000 – – – – 2018 $’000 3,875 3,875 2017 $’000 – – Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 95 9. Investment properties a. Summary of Carrying Amounts Completed properties Properties under development Total carrying amount b. Movements in Carrying Amount Carrying amount at beginning of period Acquisitions Expenditure capitalised Net change in fair value: Investment property Resident loans Transfer to assets held for sale Disposals Carrying amount at the end of the period ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 143,561 154,556 – – 143,561 154,556 443,963 142,913 586,876 154,556 162,795 – 4,971 – 13,317 2,182 6,000 – – – – (18,148) 143,561 (27,556) 154,556 538,918 50,386 61,665 (3,833) (993) (28,675) (30,592) 586,876 431,836 107,082 538,918 547,951 174,883 15,245 6,373 – – (205,534) 538,918 c. Description of valuation techniques used and key inputs to valuation of investment properties 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 and applying a capitalisation rate into perpetuity. 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 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. 10. 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 Additions Disposals Depreciation expense Carrying amount at end of year ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 205 (148) 57 73 10 – (26) 57 195 (122) 73 103 – (6) (24) 73 5,296 (1,597) 3,699 1,991 2,319 (101) (510) 3,699 3,089 (1,098) 1,991 1,018 1,248 – (275) 1,991 Ingenia Communities Holdings Limited Annual Report 2018 96 Notes to the Financial Statements For the year ended 30 June 2018 | continued 11. Intangibles a. Summary of Carrying Amounts Software and development Less: accumulated amortisation Total intangibles b. Movements in Carrying Amount Carrying amount at beginning of year Additions Disposals Amortisation expense Carrying amount at end of year 12. Deferred tax assets and liabilities Deferred tax assets Tax losses Other Deferred tax liabilities DMF receivable Investment properties Net deferred tax asset Deductible temporary differences and carried forward losses tax effected for which no deferred tax asset has been recognised ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 – – – – – – – – – – – 2 – (2) – – 3,123 (1,204) 1,919 2,021 300 – (402) 1,919 2,818 (797) 2,021 1,962 434 – (375) 2,021 ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 – – – – – – – – – – – – 12,775 12,737 – – (1,047) (11,273) 455 (1,011) (6,493) 5,233 7,500 7,500 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. ICMT 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. 13. Trade and other payables Current Trade payables and accruals Deposits Other unearned income Non-current Other ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 2,019 1,822 - - - - 2,019 1,822 28,266 5,266 1,227 34,759 17,563 4,561 1,350 23,474 - - 83 167 Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 97 14. Borrowings Current Finance leases Non-current Bank debt Prepaid borrowing costs Finance leases ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 – – 859 1,212 228,999 166,464 (1,497) (1,735) – – 227,502 164,729 – – 9,369 9,369 – – 13,194 13,194 a. Bank Debt Ingenia has $350.0 million in available debt facilities at 30 June 2018 (2017: $300.0 million). This increase of $50.0 million was a result of completing a refinance and extension of a tranche of the facilities during the year. The term of this tranche was extended from 12 February 2020 to 13 July 2023. The total $350.0 million in debt facilities is provided by three Australian banks. The tranche maturity dates are: – – 12 February 2022 ($175.4 million); and 13 July 2023 ($174.6 million) As at 30 June 2018, the facilities have been drawn to $229.0 million (30 June 2017: $166.5 million). The carrying value of investment property net of resident liabilities at reporting date for the Group’s Australian properties pledged as security is $701.8 million (30 June 2017: $602.9 million). b. Bank Guarantees The Group has the ability to utilise its bank facilities to provide bank guarantees, which at 30 June 2018 were $11.4 million (30 June 2017: $10.8 million). c. Finance Leases The Group has entered into finance leases for the following Lifestyle and Holidays investment properties: – Gosford City Council for the land and facilities of Ettalong Beach – Crown leases for the land of One Mile Beach – Crown lease for the land of Big 4 Broulee Beach – Crown lease for the land of South West Rocks The leases are long-term in nature and range between 8 years to perpetuity. Subsidiaries of ICMT have entered into an agreement with subsidiaries of ICF. The subject of the agreement is to lease a retirement village. The remaining term of the agreement is 91 years. There are no purchase options. Ingenia Communities Holdings Limited Annual Report 2018 98 Notes to the Financial Statements For the year ended 30 June 2018 | continued 14. Borrowings (continued) 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 ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 – – – – – – – – – – – – – – – – – – – – 901 3,685 35,856 40,442 1,273 5,171 75,858 82,302 (31,347) (69,032) 9,095 13,270 859 3,030 5,206 9,095 1,212 4,135 7,923 13,270 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 applicable at the time of acquisition of 10.6% applied to the current lease payment. 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. 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 period Accrued deferred management fee income Deferred management fee cash collected Proceeds from resident loans Repayment of resident loans Transfer to liabilities held for sale Disposal of villages Other Carrying amount at end of period ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 – – – – – – – – – – – – – – – – – – – – – – – – 9,880 (1,674) 8,206 30,155 (2,954) 27,201 27,201 207,483 (636) (1,825) 334 594 (767) (3,875) 465 3,411 (2,191) – (14,127) (180,283) (518) 8,206 141 27,201 Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 99 16. Issued units a. Carrying values At beginning of period Issued during the year: ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 755,571 679,161 43,136 34,019 Dividend Reinvestment Plan (DRP) Performance Quantum Rights (PQR) Institutional placement and rights issue Security purchase plan Short-term incentive plan Institutional placement and rights issue costs 3,766 – – – – – 5,027 1,087 64,766 7,641 225 (2,336) 554 – – – – – At end of period 759,337 755,571 43,690 The closing balance is attributable to the unit holders of: Ingenia Communities Fund Ingenia Communities Management Trust 759,337 755,571 – – 759,337 755,571 – 43,690 43,690 429 58 8,492 430 10 (302) 43,136 – 43,136 43,136 b. Number of issued units At beginning of period Issued during the period: Performance Quantum Rights Distribution Reinvestment Plan Security purchase plan Institutional placement and rights issue Short-term incentive plan At end of period ICF ICMT 2018 Thousands 2017 Thousands 2018 Thousands 2017 Thousands 206,382 172,155 206,382 172,155 – 1,710 – – – 599 2,049 3,023 28,479 77 – 1,710 – – – 599 2,049 3,023 28,479 77 208,092 206,382 208,092 206,382 c. Term 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 unit holders. 17. Accumulated losses and retained earnings Balance at beginning of year Net profit/(loss) for the year Distributions Balance at end of year The closing balance is attributable to the unit holders of: Ingenia Communities Fund Ingenia Communities Management Trust ICF ICMT 2018 $’000 2017 $’000 (313,900) (293,168) 25,458 (21,096) (2,738) (17,994) 2018 $’000 20,431 9,126 – 2017 $’000 (9,161) 29,592 – (309,538) (313,900) 29,557 20,431 (309,538) (313,900) – – (309,538) (313,900) – 29,557 29,557 – 20,431 20,431 Ingenia Communities Holdings Limited Annual Report 2018 100 Notes to the Financial Statements For the year ended 30 June 2018 | continued 18. Commitments a. Capital Commitments ICF has commitments for capital expenditure on investment properties and inventories contracted but not provided for at reporting date of $16,785,083 (30 June 2017: $805,725). b. Operating Lease Commitments A subsidiary of ICMT has two non-cancellable operating leases for its Sydney and Brisbane offices. These leases have remaining lives of two and five years respectively. 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 ICF ICMT 2018 $’000 2017 $’000 – – – – – – 2018 $’000 607 1,795 2,402 2017 $’000 502 990 1,492 c. Finance Lease Commitments 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 relating to investment property. For commitments for inter-staple related party finance leases refer to Notes 6, 14 and 24. 19. Contingencies There are no known contingent liabilities other than the bank guarantees totalling $11.4 million provided for under the $350.0 million bank facility. Bank guarantees primarily relate to the Responsible Entity’s AFSL capital requirements ($10.0 million). 20. Capital management The capital management of ICF and ICMT is managed at a consolidated Group level (ICH and subsidiaries). At the Group level, the aim is to meet its strategic objectives, operational needs and maximise returns to security holders through the appropriate use of debt and equity, 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 refinance risk of maturing debt facilities and the potential for acceleration prior to maturity. In assessing this risk, the Group takes into account the relative stability of its income flows, the predictability of its expenses, its debt maturity 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, 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. One measure of the Group’s capital position is through Loan to Value Ratio (LVR) which is a key covenant under the Group’s $350.0 million common terms debt facilities. LVR is calculated as the sum of bank debt, bank guarantees, finance leases, and interest rate swaps, less cash at bank, as a percentage of the value of properties pledged as security. The Group’s strategy is to maintain an LVR range of 30-40%. As at 30 June 2018, LVR is 32.6% compared to 27.7% at 30 June 2017. In addition the Group also monitors Interest Cover Ratio as defined under the common terms of the debt facilities. At 30 June 2018, the Total Interest Cover Ratio was 5.53x (2017: 5.36x) and the Core Interest Cover Ratio was 3.19x (2017: 3.52x). Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 101 21. Financial instruments Instruments a. 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 Investments, Derivatives, and Borrowing 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 the forecast is unlikely 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 Investments, Derivatives, and Borrowing 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 Investments, Derivatives, and Borrowing 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 Investments, Derivatives, and Borrowing 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. Interest Rate Risk b. 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 Investments, Derivatives, and Borrowing Policy. At 30 June 2018 after taking into account the effect of interest rate swaps, approximately 21% of ICF’s borrowings are at a fixed rate of interest (2017: 29%). 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. Ingenia Communities Holdings Limited Annual Report 2018 102 Notes to the Financial Statements For the year ended 30 June 2018 | continued 21. Financial instruments (continued) c. Interest Rate Risk Exposure 2018 $’000 Financial assets Cash at bank Finance leases (excluding perpetual lease) Financial liabilities Bank debt ICF Fixed interest maturing in: Floating interest rate Less than 1 year 1 to 5 years More than 5 years Total 3,622 – – 358 – 1,165 – 2,886 3,622 4,409 Interest rate swaps: Fund pays fixed rate (48,000) 28,000 20,000 228,999 – – 2017 $’000 Financial assets Cash at bank Finance leases (excluding perpetual lease) Financial liabilities Bank debt Interest rate swaps: Fund pays fixed rate 991 – 166,464 (48,000) – 719 – – – – – 228,999 – 991 8,304 – 2,298 5,287 – 48,000 – – 166,464 – ICMT’s exposure to interest rate risk and the effective interest rates on financial instruments at reporting date were: 2018 $’000 Financial assets Cash at bank Financial liabilities ICMT Fixed interest maturing in: Floating interest rate Less than 1 year 1 to 5 years More than 5 years Total 10,751 – – – 10,751 Finance leases (excluding perpetual lease) – 859 3,030 5,206 9,095 2017 $’000 Financial assets Cash at bank Financial liabilities 8,547 – – – 8,547 Finance leases (excluding perpetual lease) – 1,212 4,135 7,923 13,270 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. Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 103 21. Financial instruments (continued) Interest Rate Sensitivity Analysis d. 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 unit holders’ interest (apart from the effect on profit). Increase in average interest rates of 100 bps: Variable interest rate bank debt (AUD denominated) Interest rate swaps (AUD denominated) Decrease in average interest rates of 100 bps: Variable interest rate bank debt (AUD denominated) Interest rate swaps (AUD denominated) Effect on profit after tax Higher/(lower) ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 (2,290) 857 (1,665) 1,084 2,290 (1,465) 1,665 (1,366) – – – – – – – – e. Foreign Exchange Risk The Trusts’ exposure to foreign exchange risk is limited to foreign denominated cash balances and receivables following the divestment of its final overseas operations in December 2014. These amounts are unhedged as cash will be used to cover final costs to wind up the companies and receivables relate to escrows. f. Net Foreign Currency Exposure Net foreign currency exposure: United States dollars New Zealand dollars Total net foreign currency assets Net foreign currency asset/(liability) ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 2,054 269 2,323 2,054 254 2,308 – – – – – – 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. i. Effect of appreciation in Australian dollar of 10%: Foreign exchange risk exposures denominated in: United States dollars New Zealand dollars ii. Effect of depreciation in Australian dollar of 10%: Foreign exchange risk exposures denominated in: United States dollars New Zealand dollars Effect on profit after tax Higher/(lower) ICF ICMT 2018 $’000 2017 $’000 2018 $’000 2017 $’000 (187) (24) (187) (23) 228 30 228 28 – – – – – – – – Ingenia Communities Holdings Limited Annual Report 2018 104 Notes to the Financial Statements For the year ended 30 June 2018 | continued 21. Financial instruments (continued) 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 Trusts’ 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 Trusts’ Investment, Derivatives, and Borrowing 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. Liquidity Risk i. 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 Investment, Derivatives, and Borrowing 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 Investment, Derivatives, and Borrowing 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 Trusts’ 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. 2018 Trade and other payables Borrowings(1) 2017 Trade and other payables Borrowings(1) ICF Less than 1 year $’000 1 to 5 years $’000 More than 5 years $’000 2,019 – 10,177 258,783 12,196 258,783 1,822 7,435 – 187,635 9,257 187,635 – – – – – – Total $’000 2,019 268,960 270,979 1,822 195,070 196,892 Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 21. Financial instruments (continued) 2018 Trade and other payables Retirement village resident loans Finance leases (excluding perpetual lease) Finance lease (perpetual lease)(3) Provisions 2017 Trade and other payables Retirement village resident loans Finance leases (excluding perpetual lease) Finance lease (perpetual lease)(3) Provisions 105 Total(2) $’000 34,842 8,206 ICMT Less than 1 year $’000 1 to 5 years $’000 More than 5 years $’000 34,759 8,206 901 121 1,770 83 – – – 3,685 35,856 40,442 483 529 – – 604 2,299 45,757 4,780 35,856 86,393 23,474 27,201 1,273 121 1,480 167 – 5,171 483 344 – – 23,641 27,201 75,858 82,302 – – 604 1,824 53,549 6,165 75,858 135,572 (1) The balances above will not agree to the balance sheet as it includes the implied interest component. (2) Excludes related party loans. (3) For purpose of the table above, the lease payments are included for five years for the perpetual lease. Refer to Note 14(c). 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 at market rates. 2018 Liabilities ICF Less than 1 year $’000 1 to 5 years $’000 More than 5 years $’000 Total $’000 Derivative liabilities – net settled 73 65 2017 Liabilities Derivative liabilities – net settled 221 61 ICMT did not have any derivative financial liabilities at either 30 June 2017 or 30 June 2018. – – 138 282 Ingenia Communities Holdings Limited Annual Report 2018 106 Notes to the Financial Statements For the year ended 30 June 2018 | continued 21. Financial instruments (continued) j. Other Financial Instrument Risk The Trusts carry retirement village residents’ loans at fair value with resulting fair value adjustments recognised in the statement of comprehensive income. 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 ICF ICMT Higher/(lower) Higher/(lower) 2018 $’000 2017 $’000 – – – – 2018 $’000 (988) 988 2017 $’000 (3,016) 3,016 These effects are largely offset by corresponding changes in the fair value of the Trusts’ investment properties. The effect on unit holders’ interest would have been the same as the effect on profit. 22. Fair value measurement Ingenia Communities Fund a. The following table provides the fair value measurement hierarchy of Ingenia Communities Fund assets and liabilities: i. Assets Measured at Fair Value 2018 Investment properties Other financial assets 2017 Investment properties Other financial assets ii. Liabilities Measured at Fair Value 2018 Derivatives 2017 Derivatives Fair value measurement using: Quoted prices in active markets (Level 1) $’000 Significant observable inputs (Level 2) $’000 Significant unobservable inputs (Level 3) $’000 – – – – – – – – – – 138 282 143,561 773 154,556 773 – – Date of valuation Total $’000 30 June 18 Refer Note 9(a) 30 June 18 143,561 773 30 June 17 Refer Note 9(a) 30 June 17 154,556 773 30 June 18 138 30 June 17 282 There have been no transfers between Level 1 and Level 2 during the year. Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 107 22. Fair value measurement (continued) Ingenia Communities Management Trust b. The following table provides the fair value measurement hierarchy of Ingenia Communities Management Trust assets and liabilities: i. Assets Measured at Fair Value 2018 Investment properties Assets held for sale - investment property Other financial assets 2017 Investment properties Other financial assets ii. Liabilities Measured at Fair Value 2018 Retirement village resident loans Liabilities held for sale Other financial liabilities 2017 Retirement village resident loans Other financial liabilities Date of valuation Total $’000 30 June 18 Refer Note 9(a) 30 June 18 Refer Note 8(a) 30 June 18 586,876 28,675 1,490 30 June 17 Refer Note 9(a) 30 June 17 538,918 1,490 30 June 18 Refer Note 15(a) 30 June 18 Refer Note 8(b) 30 June 18 30 June 17 Refer Note 15(a) 30 June 17 8,206 3,875 6,500 27,201 6,136 There have been no transfers between Level 1 and Level 2 during the year. 23. Auditor’s remuneration Fair value measurement using: Quoted prices in active markets (Level 1) $’000 Significant observable inputs (Level 2) $’000 Significant unobservable inputs (Level 3) $’000 – – – – – – – – – – – – – – – – – – – – 586,876 28,675 1,490 538,918 1,490 8,206 3,875 6,500 27,201 6,136 ICF 2018 $ 2017 $ ICMT 2018 $ 2017 $ Amounts received or receivable by EY for: Audit or review of financial reports 211,540 257,755 211,540 257,755 Other audit related services Non-audit related services 10,326 – 10,326 20,600 – 6,500 – 6,500 221,866 264,255 221,866 284,855 Ingenia Communities Holdings Limited Annual Report 2018 108 Notes to the Financial Statements For the year ended 30 June 2018 | continued 24. Related parties 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 ICF 2018 $ 2017 $ ICMT 2018 $ 2017 $ 3,343,146 2,676,519 3,146,351 2,768,738 The Responsible Entity is entitled to a fee of 0.5% of total assets. In addition, it is entitled to recover certain expenses. The gross amount accrued and recognised but unpaid at reporting date was: ICF 2018 $ 2017 $ ICMT 2018 $ 2017 $ Current trade payables 864,080 543,812 820,981 691,347 The above ICF balances are netted against the receivable from related party balance on the face of the balance sheet. The above ICMT balances are included in the payable to related party balance on the face of the balance sheet, which is shown net of related party receivables. 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 2018 and 30 June 2017. d. Other Related Party Transactions ICF has leased a property to ICMT which has been classified as a finance lease. The remaining term of the agreement is 91 years. There are no purchase options. Rental villages have been classified as operating leases and the DMF village has been classified as finance lease. Intercompany loans are subject to a loan deed, amended on and effective from 1 July 2015, encompassing ICH, ICF and ICMT and their respective subsidiaries. The revised deed stipulates that interest is calculated on the intercompany balances between ICH, ICF and ICMT for the preceding month. Interest is charged at a margin of 3.95% on the monthly Australian Bank Bill Swap Reference Rate. Intercompany loan balances are payable in the event of default or on termination date, being 30 June 2025 (or such other date as agreed by the parties in writing). Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 109 24. Related parties (continued) There are a number of other transactions and balances that occur between the Trusts, which are detailed below: ICF 2018 $ 2017 $ ICMT 2018 $ 2017 $ 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 374,936 1,366,037 (374,936) (1,366,037) 4,409,100 8,303,254 (4,409,100) (8,303,254) Finance lease commitments 34,259,414 75,581,536 (34,259,414) (75,581,536) 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 10,612,349 9,101,040 (10,612,349) (9,101,040) 29,212,090 20,619,500 (24,806,599) (19,000,335) Intercompany loan balances between stapled entities 524,363,233 441,244,097 (534,536,896) (449,906,552) 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) Robert Morrison (Deputy Chairman) Amanda Heyworth Valerie Lyons Andrew McEvoy (appointed 1 December 2017) Philip Clark AM (resigned 4 December 2017) 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: Nicole Fisher Chief Operating Officer Scott Noble Chief Financial Officer 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 (payable in cash) Superannuation benefits Share-based payments 2018 $ 2017 $ 599,750 554,750 1,362,798 1,151,166 397,294 373,819 60,147 53,942 664,769 593,773 3,084,758 2,727,450 The amounts disclosed in the table are the amounts recognised as an expense during the reporting period related to key management personnel. Ingenia Communities Holdings Limited Annual Report 2018 110 Notes to the Financial Statements For the year ended 30 June 2018 | continued 24. Related parties (continued) The aggregate Rights of the Group held directly, by KMP, are as follows: Issue date Right type Expiry date FY15 FY16 FY16 FY17 FY17 FY18 LTIP LTIP STIP LTIP STIP LTIP FY18 FY19 FY18 FY20 FY19 FY21 25. Parental financial information Summary financial information about the parent of each Trust is: Number outstanding 2018 2017 – 163,829 148,196 173,870 – 122,850 148,681 129,623 295,928 173,161 – – 722,428 633,710 Current assets Total assets Current liabilities Total liabilities Net assets/(liabilities) Unit holders’ equity: Issued units Accumulated losses Total unit holders’ equity ICF 2018 $’000 3,636 2017 $’000 1,293 646,033 577,736 2,125 1,823 ICMT 2018 $’000 37 6,532 528 2017 $’000 28 16,067 201 229,626 166,552 43,997 22,244 416,407 411,184 (37,465) (6,177) 759,337 755,573 43,690 43,130 (342,930) (344,389) (81,155) (49,307) 416,407 411,184 (37,465) (6,177) Profit/(loss) from continuing operations 22,555 13,190 (32,272) (14,632) Net profit/(loss) attributable to unit holders Total comprehensive income/(loss) 22,555 22,555 13,190 13,190 (32,272) (32,272) (14,632) (14,632) Ingenia Communities Holdings Limited Annual Report 2018 Notes to the Financial Statements For the year ended 30 June 2018 | continued 111 26. 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): Country of residence 2018 % 2017 % Subsidiaries of ICF Bridge Street Trust Browns Plains Road Trust Casuarina Road Trust Edinburgh Drive Trust INA Community Living Subsidiary Trust INA Kiwi Communities Subsidiary Trust No. 1 INA Sunny Trust Jefferis Street Trust Lovett Street Trust Settlers Subsidiary Trust SunnyCove Gladstone Unit Trust SunnyCove Rockhampton Unit Trust Taylor Street (2) Trust INA Subsidiary Trust No.1 INA Community Living LLC (formerly ING Community Living LLC) Subsidiaries of ICMT Garden Villages Management Trust INA Community Living Lynbrook Trust Settlers Operations Trust Settlers Management Pty Ltd INA Operations Trust No.1 INA Operations Trust No.2 INA Operations Trust No.3 INA Operations Trust No.4 INA Operations Trust No.6 INA Operations Trust No.7 INA Operations Trust No.8 INA Operations Trust No.9 Ridge Estate Trust INA Subsidiary Trust No.3 INA Latitude One Pty Ltd INA Latitude One Development Pty Ltd INA Soldiers Point Pty Ltd INA NZ Subsidiary Unit Trust No. 1 Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia USA Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 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 The Trusts’ voting interest in all other subsidiaries is the same as the ownership interest. Ingenia Communities Holdings Limited Annual Report 2018 112 Notes to the Financial Statements For the year ended 30 June 2018 | continued 27. Notes to the cash flow statements Reconciliation of profit to net cash flows from operations: ICF 2018 $’000 ICMT 2017 $’000 2018 $’000 2017 $’000 Net profit/(loss) profit for the year 25,458 (2,738) 9,126 29,592 Adjustments for: Net loss/(gain) on disposal of investment properties 2,702 27,556 (1,267) 19,117 Net (gain)/loss on change in fair value of: Investment properties - continuing (2,182) (6,000) Other Income tax (benefit)/ expense Depreciation and amortisation expense Share based payments expense Amortisation of borrowing costs (181) – 26 – 647 216 – 24 – 993 4,826 (436) 4,766 912 – – (6,373) (96) 1,890 650 174 – Operating profit for the year before changes in working capital 26,470 20,051 17,927 44,954 Changes in working capital: Decrease/(increase) in receivables Increase in inventory Increase in retirement village resident loans Increase in other payables and provisions (Decrease)/increase in loans to related parties Net cash provided by operating activities 28. Subsequent events 3,438 – – 197 315 – – 556 (39,542) (26,645) (9,437) (5,723) (1,193) (8,631) (993) 11,285 35,015 53,410 818 (3,932) (872) 9,661 (9,352) 41,277 Final FY18 Distribution On 21 August 2018, the directors of the Group resolved to declare a final distribution of 5.65cps (2017: 5.1 cps) amounting to $11.8 million to be paid at 14 September 2018. The distribution reinvestment plan will apply to the final distribution. Acquisition of Adjacent Land On 2 July 2018, the Group completed the acquisition of land adjacent to Ingenia Lifestyle Chambers Pines (Chambers Flat, QLD) for a purchase price of $4.5 million. Sale of Settlers Cessnock On 6 July 2018, the Group completed the sale of Settlers Cessnock (Cessnock, NSW) for $2.5 million (net of resident loans). Ingenia Communities Holdings Limited Annual Report 2018 Directors’ Declaration For the year ended 30 June 2018 113 In accordance with a resolution of the directors of Ingenia Communities Management Trust, 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 2018 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. The notes to the financial statements include an explicit and unreserved statement of compliance with international financial reporting standards at Note 1(b). 3. 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 2018. On behalf of the Board Jim Hazel Chairman Sydney, 21 August 2018 Ingenia Communities Holdings Limited Annual Report 2018 114 Independent Auditor’s Report For the year ended 30 June 2018 Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Independent Auditor's Report to the unitholders of Ingenia Communities Fund Report on the Audit of the Financial Report Opinion We have audited the financial report of Ingenia Communities Fund (the “Trust”) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2018, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2018 and of its consolidated financial performance for the year ended on that date; and b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For the matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matter below, provide the basis for our audit opinion on the accompanying financial report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 48 Ingenia Communities Holdings Limited Annual Report 2018 Independent Auditor’s Report For the year ended 30 June 2018 | continued 115 1. Valuation of Investment Properties Why significant How our audit addressed the key audit matter Approximately 21% of the Group’s total assets comprise investment properties. These assets are carried at fair value, which is assessed by the directors with reference to either external independent valuations or internal valuations, and is based on market conditions existing at reporting date. This was considered a key audit matter as valuations contain a number of assumptions which are based on direct market comparisons, or estimates. Minor changes in certain assumptions can lead to significant changes in the valuation. The investment properties, as disclosed in note 9 to the financial report, earn revenue predominantly from longer term rental agreements and the key judgments include capitalisation rates, discount rates, market and contractual rent and forecast occupancy levels. Our audit procedures included the following: • We considered the competence, qualifications and objectivity of the external valuers and evaluated the suitability of their valuation scope and methodology for the financial report; • We assessed the Group’s internal valuation methodology and checked the mathematical accuracy of their valuation models. We also assessed competence and qualifications of the internal valuer; • We compared the property related data used as input for both the external and internal valuations against actual property performance; • We considered the key inputs and assumptions used in the valuations by comparing this information to external market data; and • Our real estate valuation specialists reviewed a sample of internal and external valuations to determine whether the key judgements and methodology used were appropriate. Information Other than the Financial Report and Auditor’s Report The directors are responsible for the other information. The other information comprises the information included in the Group’s 2018 Annual Report other than the financial report and our auditor’s report thereon. We obtained the Directors’ Report that is to be included in the Annual Report, prior to the date of this auditor’s report, and we expect to obtain the remaining sections of the Annual Report after the date of this auditor’s report. Our opinion on the financial report does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 49 Ingenia Communities Holdings Limited Annual Report 2018 116 Independent Auditor’s Report For the year ended 30 June 2018 | continued Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor's Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • • • • • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 50 Ingenia Communities Holdings Limited Annual Report 2018 Independent Auditor’s Report For the year ended 30 June 2018 | continued 117 • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Ernst & Young Megan Wilson Partner Sydney 21 August 2018 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 51 Ingenia Communities Holdings Limited Annual Report 2018 118 Independent Auditor’s Report For the year ended 30 June 2018 | continued Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Independent Auditor's Report to the unitholders of Ingenia Communities Management Trust Report on the Audit of the Financial Report Opinion We have audited the financial report of Ingenia Communities Management Trust (the “Trust”) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2018, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2018 and of its consolidated financial performance for the year ended on that date; and b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 52 Ingenia Communities Holdings Limited Annual Report 2018 Independent Auditor’s Report For the year ended 30 June 2018 | continued 119 We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. 1. Valuation of Investment Property Why significant How our audit addressed the key audit matter Our audit procedures included the following: • We considered the competence, qualifications and objectivity of the external valuers and evaluated the suitability of their valuation scope and methodology for the financial statements; • We assessed the Group’s internal valuation methodology and checked the mathematical accuracy of their valuation models. We also assessed competence and qualifications of the internal valuer; • We compared the property related data used as input for both the external and internal valuations against actual and budgeted property performance; • We considered the key inputs and assumptions used in the valuations by comparing this information to external market data; • Our real estate valuation specialists reviewed a sample of internal and external valuations to determine whether the key judgements and methodology used were appropriate; and • We assessed the appropriateness of the allocation of capital expenditure between investment property and inventory assets. Approximately 87% of the Group’s total assets comprise investment properties. These assets are carried at fair value, which is assessed by the directors with reference to either external independent valuations or internal valuations, and is based on market conditions existing at reporting date. This was considered a key audit matter as valuations contain a number of assumptions which are based on direct market comparisons, or estimates. Minor changes in certain assumptions can lead to significant changes in the valuation. The Group has two categories of investment properties as disclosed in Note 9 to the financial report. One of these categories is considered material and involve significant judgement. • The Group holds a Lifestyle & Holidays portfolio consisting of investment properties earning revenue from a mix of longer term land rental agreements and short-term accommodation rental. In addition the group earns revenue from the sale of manufactured homes to residents of the properties. The key judgements for the longer term and short-term rental include capitalisation rates, market and contractual rents, forecast short- term and residential occupancy levels, historical transactions and remaining development potential for vacant land. In assessing the development potential additional key judgements include future new homes sales prices, estimated capital expenditure and allocation between investment property and inventory, discount rates, projected property growth rates and operating profit margins. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 53 Ingenia Communities Holdings Limited Annual Report 2018 120 Independent Auditor’s Report For the year ended 30 June 2018 | continued 2. Deferred tax assets Why significant How our audit addressed the key audit matter The Group has recorded net deferred tax assets of $12.8m resulting from temporary differences and tax losses carried forward as disclosed in note 12 of the financial statements. The Group recognises these deferred tax assets to the extent that it is probable that future taxable profits will allow the deferred tax assets to be recovered. The probability of recovery is impacted by uncertainties regarding the likely timing and level of future taxable profits and the forecasting of this included assumptions and judgements made by the Group. Our audit procedures included the following: • We evaluated assumptions and judgements made by the Group to forecast future taxable profits to determine the likelihood that the losses will be recovered; and • We considered whether information used was derived from the Group’s business cash flow forecasts that have been subject to internal reviews and were approved by the Directors. Information Other than the Financial Report and Auditor’s Report The directors are responsible for the other information. The other information comprises the information included in the Group’s 2018 Annual Report other than the financial report and our auditor’s report thereon. We obtained the Directors’ Report that is to be included in the Annual Report, prior to the date of this auditor’s report, and we expect to obtain the remaining sections of the Annual Report after the date of this auditor’s report. Our opinion on the financial report does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 54 Ingenia Communities Holdings Limited Annual Report 2018 Independent Auditor’s Report For the year ended 30 June 2018 | continued 121 Auditor's Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • • • • • • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 55 Ingenia Communities Holdings Limited Annual Report 2018 122 Independent Auditor’s Report For the year ended 30 June 2018 | continued From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Ernst & Young Megan Wilson Partner Sydney 21 August 2018 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 56 Ingenia Communities Holdings Limited Annual Report 2018 Security Holder Information For the year ended 30 June 2018 123 Additional information required under ASX Listing Rule 4.10 and not shown elsewhere in this Annual Report is as follows. This information is current as at 27 August 2018. The information set out below 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 Security Holders The twenty largest security holders of quoted equity securities are as follows: Security holder HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED CITICORP NOMINEES PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2 NATIONAL NOMINEES LIMITED BNP PARIBAS NOMINEES PTY LTD ONE MANAGED INVT FUNDS LTD BNP PARIBAS NOMS (NZ) LTD BNP PARIBAS NOMS PTY LTD PERSHING AUSTRALIA NOMINEES PTY LTD CITICORP NOMINEES PTY LIMITED MORGAN STANLEY AUSTRALIA SECURITIES (NOMINEE) PTY LIMITED CUSTODIAL SERVICES LIMITED BOND STREET CUSTODIANS LIMITED NEWECONOMY COM AU NOMINEES PTY LIMITED GWYNVILL TRADING PTY LTD BODIAM PROPERTIES PTY LTD MRS MONIKA BATKIN DAHARY PTY LTD FORSYTH BARR CUSTODIANS LTD Total Total Quoted Equity Securities Distribution of Stapled Security Holders The distribution of quoted stapled securities is as follows: Size of holding 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total Number of securities held Percentage of issued capital 56,334,266 42,063,649 19,326,017 13,743,356 13,413,251 10,681,431 6,966,819 4,523,662 3,414,923 1,889,932 1,702,782 1,656,234 1,183,810 783,731 748,894 608,659 520,500 516,667 477,566 475,510 27.07 20.21 9.29 6.60 6.45 5.13 3.35 2.17 1.64 0.91 0.82 0.80 0.57 0.38 0.36 0.29 0.25 0.25 0.23 0.23 181,031,659 87.00 208,091,633 Number of holders Number of securities Percentage of securities 54 526 530 1,502 1,136 187,492,019 90.10 12,292,417 3,940,765 3,881,856 484,576 5.91 1.89 1.87 0.23 3,748 208,091,633 100.00 Ingenia Communities Holdings Limited Annual Report 2018 124 Security Holder Information For the year ended 30 June 2018 | continued Distribution of Long Term Incentive Plan Rights Holders The distribution of unquoted Long Term Incentive Plan Rights is as follows: Size of holding 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total Number of holders Number of securities Percentage of securities 1 12 1 – – 14 453,201 525,819 9,841 – – 45.83 53.17 1.00 0.00 0.00 988,861 100.00 The Long Term Incentive Plan Rights on issue are unquoted and issued under the Ingenia Rights Plan. Distribution of Short Term Incentive Plan Rights Holders The distribution of unquoted Short Term Incentive Plan Rights is as follows: Size of holding 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total Number of holders Number of securities Percentage of securities – 3 – – – – 146,068 – – – 0.00 100.00 0.00 0.00 0.00 3 146,068 100.00 The Short Term Incentive Plan Rights on issue are unquoted and issued under the Ingenia Rights Plan. Less than marketable parcels of ordinary shares There are 312 security holders with unmarketable parcels totalling 8,589 securities. Unquoted Equity Securities The Company had the following unquoted securities on issue as at 27 August 2018: 14 holders of long term incentive rights issued as part of an incentive scheme 3 holders of short term incentive rights issued as part of an incentive scheme 988,861 146,068 Substantial Security Holders The names of the Substantial Shareholders pursuant to notices released to the ASX as at 27 August 2018: Security holder Ellerston Capital Limited and its associates Cohen & Steers and all bodies controlled by Cohen & Steers, Inc IOOF Holdings Limited The Vanguard Group Inc Restricted Securities There are no restricted securities on issue as at 27 August 2018. Number of securities Percentage of issued capital 13,548,827 22,483,324 11,602,400 14,628,509 6.51 10.81 5.58 8.22 Voting In accordance with the Constitution each member present at a meeting whether in person, or by proxy, or by power of attorney, or in a duly authorised representative in the case of a corporate member, shall have one vote on a show of hands, and one vote for each fully paid stapled security, on a poll. Holders of Long Term Incentive Plan Rights and Short Term Incentive Plan Rights have no voting rights. On-Market Buyback There is no current on-market buy-back in relation to the Company’s securities. Ingenia Communities Holdings Limited Annual Report 2018 Investor Relations For the year ended 30 June 2018 125 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; and – 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. Security holders 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 2017/2018 financial year. A history of distribution payments made since 2005 is available from the Group’s website www.ingeniacommunities.com.au. Period Ended June 2018 December 2017 Date Paid Total Amount 14 Sept 2018 14 March 2018 $0.0565 $0.0510 * Information on the tax components of distributions can be found on Ingenia’s website or the AMIT Member Annual Statement. Ingenia Communities Group operates a Distribution Reinvestment Plan through which security holders 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. AMIT Member Annual Statement Ingenia Communities Fund elected to be an Attribution Managed Investment Trust (AMIT) starting 1 July 2018. Annual Tax Statements constitute AMIT Member Annual (AMMA) Statement issued by Ingenia Communities Fund for distributions during the year ended 30 June 2018. Annual General Meeting The Annual General Meeting will be held on 13 November 2018 in Sydney. 2018/2018 Security Holder Calendar* 14 September 2018 14 September 2018 13 November 2018 February 2019 March 2019 Final FY18 distribution paid AMIT Member Annual Statement dispatched Annual General Meeting 1H19 Result announced Interim FY19 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 security holder 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 security holder 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 Corporate Governance Statement The Corporate Governance Statement was approved by the Board of Directors on 20 August 2018 and can be found at http://www.ingeniacommunities.com.au/wp-content/uploads/2018/09/Corporate-Governance-Statement.pdf Ingenia Communities Holdings Limited Annual Report 2018 126 Corporate Directory For the year ended 30 June 2018 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 415862) Registered Office Level 9, 115 Pitt Street Sydney NSW 2000 Telephone: Facsimile: 1300 132 946 +61 2 8263 0500 Email: investor@ingeniacommunities.com.au Website: www.ingeniacommunities.com.au Directors of Ingenia Communities Group (as at 31 August 2018) J Hazel (Chairman) R Morrison (Deputy Chairman) A Heyworth S Owen V Lyons A McEvoy Secretary L Ralph N Kwok 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 +61 2 9287 0303 Facsimile: Email: registrars@linkmarketservices.com.au Auditors EY 200 George Street Sydney NSW 2000 Stock Exchange Quotation Ingenia Communities Group is listed on the Australian Securities Exchange under ASX listing code: INA. Ingenia Communities Holdings Limited Annual Report 2018 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 2018. 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. Ingenia Communities Group Level 9, 115 Pitt Street, Sydney, NSW 2000 T. 1300 132 946 E. investor@ingeniacommunities.com.au W. www.ingeniacommunities.com.au