Investor Update 2020 SUMMARY Revenue $244.2m 7% EBIT $71.9m Statutory Profit $31.5m Underlying Profit $59.1m Underlying Profit EPS 22.1c Operating Cash Flow $67.2m 17% 7% 25% 5% 13% Net Asset Value per Security $2.90 Distribution per Security 10.0c 9% 11% Development Sites Secured 3,000+ Strong balance sheet, with capacity for growth Stable returns from growing resident rent base We create community Chairman’s Letter Growing our rental platform is fundamental to our strategy. Over the last year this platform has proven resilient, and the foundation for delivering stable cash flows in challenging conditions. Dear Security holders The 2020 financial year began well for the Group and at our half year results announced in February we expected to deliver another record year of growth, with strong settlements across our development business and increased forward bookings at our holiday parks. However, this momentum was disrupted by the COVID-19 pandemic and growth moderated as areas of our operations were impacted. Nevertheless, we were pleased with the Group’s results which were underpinned by recurring rents from a resident rental base which has been built over the past eight years and is largely supported by Commonwealth Government pension payments. We were fortunate to enter this crisis in a strong position and responded quickly and decisively to manage the impact on the business. Our priority was, and remains, the health and safety of our residents, guests and staff and it is pleasing to note that to date we have had no recorded cases of COVID-19 in our communities or offices. We also sought to actively manage our cost base, with the Board, head office and support staff taking temporary pay reductions and close monitoring of capital expenditure. In addition, casual staff were stood down for a period to reduce costs as holiday parks were subject to mandatory closures. Where possible, we used this period to undertake park maintenance. In May we successfully raised $178 million in equity through a Security Purchase Plan and Placement. I thank security holders for their support of this raising, which allowed us to further strengthen the balance sheet and, importantly, to position for future growth as we deploy the equity raised into acquisitions and our development pipeline. With restrictions in response to COVID-19 resulting in the loss of holiday park revenue and reduced home settlements as residents sought additional time to sell their current home, the FY20 result was supported by stable rents from the lifestyle and gardens communities, growth in rental sites via development and acquisition and cost management. The Group delivered increases in revenue (up 7%), EBIT (up 17% to $71.9 million) and underlying profit per security (up 5%). The full year distribution of 10.0 cents per stapled security represented a decrease of 11% on FY19, following six years of consecutive growth. Underlying profit and distribution on a per security basis were impacted by the significant increase in securities on issue over the period. Chairman’s Letter continued Ingenia Lifestyle Plantations, NSW The security price grew over the year, from $3.25 on 1 July 2019 to close the year at $4.49 and has performed well since the 2020 financial year results were released, closing at $4.71 at the end of August. The Group was included in the S&P/ASX 200 Index in December 2019 and substantially outperformed both the S&P/ASX 200 Accumulation Index and the S&P/ASX 200 Property Accumulation Index over the one, three and ten-year period to 30 June 2020. Over the year a focus on strong capital management was maintained, with the sale of non-core assets, the active Distribution Reinvestment Plan and equity raisings providing capital to position the Group for growth. At year end, the Group had $370 million in cash and available undrawn debt to fund further investment. Funds management business Eighth Gate Capital Management (acquired in August 2019) and the development Joint Venture with US based Sun Communities (NYSE: SUI) provided additional revenue streams as Ingenia generated fees for management and development services. These businesses leverage our established platform, diversify the Group’s capital partnerships, and extend Ingenia’s footprint in key markets. Both are expected to make a greater contribution to revenue in FY21. Importantly, we have maintained a focus on the future as we navigate the current environment – with recently announced acquisitions, a strong balance sheet, new projects underway and an ongoing commitment to the health and safety of our residents, guests and staff we are well positioned to continue to grow. As your Chairman I would like to thank all security holders for your continued support, and I look forward to providing an update on the business at our Annual General Meeting which will be held via a virtual format on 10 November 2020. Jim Hazel Chairman We released our first sustainability disclosures in July 2020, an important step in communicating with our security holders our progress and aspirations. The report focusses on the important role social, governance and environment (ESG) issues play in delivering sustainable value for our stakeholders. While we remain cautious about the outlook given the unprecedented conditions we are operating in, uncertainty around future restrictions and the longer-term impacts of the pandemic, the business is well placed. The resilience of the Group’s resident rental streams and the attractiveness of Ingenia’s communities to a growing number of seniors is clear. The long- term fundamental drivers of an ageing population that is increasingly viewing community living as an affordable and attractive housing choice remains unchanged. Whilst our Holidays business continues to be impacted by border closures, forward bookings have increased as restrictions eased, and we are well positioned to benefit as Australians seek domestic holidays. For further information, visit the website http://www.ingeniacommunities.com.au/investor-centre/ CEO Update Ingenia Lifestyle Freshwater, QLD Ingenia’s performance in FY20 highlighted the resilience of a business model that has strong underlying rental cash flows, combined with a focus on continual improvement and growth. The FY20 result demonstrated the strength of a business model and operating platform which continued to deliver performance despite the impact of COVID-19. A focus on the health and safety of residents and guests, growing rents, increasing occupancy, building and selling quality homes, integrating acquisitions and being vigilant on costs were key to delivering growth in FY20. Financial performance Like many businesses in Australia, Ingenia was adversely impacted by COVID-19. Despite operating restrictions impacting the Lifestyle Development and Holidays segments, an increase in the Group’s rental base, growth in above ground margin per new home settlement, cost management and access to JobKeeper mitigated the impact of mandated closures of the Group’s holiday parks and lower settlements on the result. In challenging conditions, revenue grew 7% to $244.2 million and operating cash flow of $67.2 million was up 13% as an increase in rental sites through development and acquisition contributed. Statutory Profit of $31.5 million was up 7% on the 2019 result. Underlying Profit of $59.1 million increased 25% on the prior year and Net Asset Value per security (NAV) increased to $2.90 (from $2.65 at 30 June 2019). Capital management Over the year, $328.3 million in equity was raised to fund growth through acceleration of the development program and the acquisition of established communities and future development sites. The May 2020 equity raising of $178 million positions the Group to capitalise on opportunities for growth arising due to potential market dislocation caused by COVID-19. At 30 June 2020, Ingenia’s loan to value ratio (LVR) was 8.4%, below the Group’s target range of 30-40%, providing significant capacity to grow the Group’s asset base as existing and new acquisition opportunities progress. The Group’s capital position has been further enhanced through the development Joint Venture with Sun Communities and the funds management platform. Building the rental base A core focus over the past eight years has been growing exposure to the lifestyle and holidays market via acquisitions and increased development. This focus continued over FY20, with settlement of 325 new homes and acquisitions including: — Colonial Village (now Taigum), located in Brisbane CBD — Lake Munmorah lifestyle community on the NSW Central Coast — Bevington Shores lifestyle community on the NSW Central Coast — Land adjacent to Avina (NSW), Hervey Bay (QLD) and Rivershore Resort (QLD). Since year end this growth has continued with the acquisition of Sunnylake Shores (an established lifestyle community on the NSW Central Coast) and a greenfield development site at Ballarat in Victoria complete in July 2020. Operating platform delivering growing returns Over the year, the 26-village Ingenia Gardens portfolio reached an all-time high occupancy, with strong rent collections and no increase in defaults. The Ingenia lifestyle and holidays portfolio continued to expand and grow returns. Lifestyle rental revenue increased by 27%, with tourism revenue down only 6% despite holiday park closures due to bushfires and COVID-19. The addition of tourism cabins and rental homes to existing communities, new acquisitions and development continue to be a focus to drive enhanced returns and leverage the Group’s established platform. CEO Update continued Ingenia Holidays Lake Macquarie, NSW In closing, I would like to thank the Board for their support and guidance and the management team and all employees for their unwavering commitment particularly in these unprecedented times – it is testament to their efforts that we have managed to maintain momentum across the business despite continuing headwinds and are well placed for the future. Finally, I would like to thank our residents, guests, and security holders for their ongoing trust and support of Ingenia’s business. Simon Owen Chief Executive Officer and Managing Director Moving into FY21, forward holiday bookings have responded positively to the easing of restrictions and home settlements have been strong compared to prior year. The funds management business (Eighth Gate Capital Management), was successfully integrated following acquisition in August 2019 and delivered initial management fees and returns from the Group’s co-investment in the nine established communities owned by the funds in FY20. Growth in this business is anticipated over the 2021 calendar year. Development Development was progressed at ten communities over FY20 with new communities expected to be launched in FY21. New home sales achieved a near record result with 325 homes settled, despite disruption due to COVID-19. An increase in above ground margin per home offset lower volumes, to generate an increase in EBIT of 19%. The new rental contracts created will contribute $3 million in rental revenue annually. Home prices and rents for new homes also continued to increase. Greenfield communities, Latitude One (Anna Bay, NSW) and Plantations (Coffs Harbour, NSW), again displayed strong demand, contributing 149 new settlements. The development Joint Venture with Sun Communities completed its first home settlements, at Ingenia Lifestyle Freshwater (QLD), with further projects expected to commence in FY21. Ingenia provides only half of the required funding, while receiving fees for services and preserving the right to fully own the completed community. Ingenia is now capitalising on the significant investment made in the development business, as margins grow with increasing scale. Outlook The Group’s acquisition pipeline remains strong. Ingenia is well capitalised and ideally positioned to utilise any market dislocation to become a clear sector leader. With two acquisitions settled in July 2020, a dedicated acquisitions team and due diligence underway on several established and development projects, growth in the asset base remains a priority. Continuing to build market scale and sector leadership, while managing near term pandemic related challenges remains the Group’s strategic focus. In light of current market uncertainties, guidance for FY21 has not been provided, however the underlying demand fundamentals for the business remain strong – an ageing population, housing affordability and the appeal of community living are expected to drive ongoing demand for Ingenia’s communities. With a growing focus on acquisitions and ongoing development, Ingenia is expanding this portfolio and delivering growth. Ingenia Lifestyle 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 $72.2 million in FY20 (up 6% on the prior year). The strong growth (27%) in permanent rental income was partially offset by the temporary closure of holiday parks which reduced tourism income (down 6% on the prior year). The EBIT contribution of $29.8 million was up 9% on the prior year, driven by a growing rental base as $76 million in acquisitions contributed and new home settlements and additional rental cabins were added to existing communities. New home at Ingenia Lifestyle Plantations, NSW The core of this portfolio is rental revenue generated from residents who generally fund their rental payments via government pension and rental assistance. Through COVID-19, this revenue has remained consistent with no loss of rent or increase in bad debts. Future growth will be generated as the portfolio benefits from the addition of 850 income producing sites in FY20, acquisitions are completed, and new homes are added to existing communities. Key data 30 June 2020 30 June 2019 Properties (Lifestyle and Holidays)1 Permanent sites Annual sites Holiday sites Potential development sites2 37 4,034 739 2,465 3,015 35 3,252 764 2,383 3,713 Portfolio value3 $672.8m $565.3m 1. Includes assets held for sale. Excludes Joint Venture and fund assets. 2. Includes all potential sites (on balance sheet or via Joint Venture – under option or secured). 3. Excludes value attributed to development (30 Jun 20: $131.3m: 30 Jun 19: $149.4 million). Development Ingenia’s development program supports further rental growth as new home settlements add to the Group’s rental base. The development business achieved a near record for new home settlements, with 325 homes settled, despite restrictions which slowed sales inspections and settlements in the fourth quarter. An increase in the average home sales price grew gross new home development profit to $59.0 million (up 15%). In addition to four established greenfield projects, including the first development for the Joint Venture with Sun Communities, expansion has continued at several communities. New home product was also developed to expand the appeal of the Group’s communities, with homes now for sale from $199,000 to over $900,000. Additional scale is generating efficiencies, with the EBIT margin for the development business growing to 31.5% (from 28.1% in FY19). New projects to commence in FY21 include the expansion of Lara and a greenfield development at Ballarat in Victoria (Ingenia) and a 427- home greenfield development at Morisset on the NSW Central Coast via the Group’s Joint Venture. Additional sites are actively being assessed and further opportunities have been identified via the Group’s dedicated acquisitions team. The 205 deposits and contracts already in place at 16 August 2020, combined with the ability to leverage the Group’s scale and generate fees through delivery of development projects for the Joint Venture is expected to support development returns and the creation of new rental contracts in FY21. Construction of new homes at Ingenia Lifestyle Hervey Bay, QLD Key data New home settlements Gross above ground new home development profit Average new home price ($’000)1 Deposited/contracted (at 30 June) FY20 325 FY19 336 $59.0m $51.4m $430 187 $384 223 Investment value (30 June) $131.3m $149.4m 1 Inclusive of GST. Tourism is a complementary strong cash flow business which caters to Australian seniors and families. Ingenia Holidays provides tourism accommodation including villas, cabins, caravan and camping sites which are attractive to ‘grey nomads’ and families alike and is heavily leveraged to domestic travel. Over the 2020 financial year, performance was impacted by the closure of some parks on the NSW South Coast over December/January and of all parks from late March to June because of COVID-19. Despite closures during the traditional peak Christmas and Easter trading periods, revenue was down only 6% on the prior year. Cost management, access to JobKeeper and the transition of some sites to short-term rental partially offset lower earnings, and the cost of re-employing park staff. While operating conditions remain uncertain, forward bookings have increased in Ingenia Holidays Rivershore, QLD FY21 and the business should benefit as demand for domestic travel is anticipated to grow. Ingenia Holidays is well positioned for intrastate travel and a desire for ‘low rise’ drive holidays as people seek domestic travel alternatives. Key data 30 June 2020 30 June 2019 Total self-contained units Caravan and camping sites Annual sites 830 1,568 739 804 1,579 764 Average resident tenure for care clients in Ingenia Gardens communities (at 4 years) is well above the portfolio average. The Group’s popular Activate program, which provides activities and outings for residents, also supports community engagement and resident wellbeing. The program was adjusted through COVID-19 restrictions to maintain resident health, engagement, and well- being while socially distancing. Ingenia is currently assessing options for expansion through repurposing of vacant premises into new Ingenia Gardens communities. The Ingenia Gardens portfolio provides stable recurring cash flows underpinned by Government payments (pension and rent assistance). Over the year the Ingenia Gardens portfolio reached a new record high occupancy, of 94.4% and maintained average weekly rents of $342, with no increase in defaults. Residents were attracted to the supported environment Ingenia Gardens offers, with a reduction in move-outs contributing to occupancy growth. ‘Ingenia Care’, a ‘concierge’ style service offered to residents for no charge, has continued to grow, assisting residents to age in place and supporting their health and wellbeing. Internal view of an Ingenia Gardens home Key data Total properties Total units Occupancy Portfolio value 30 June 2020 30 June 2019 26 1,376 94.4% 26 1,376 90.8% $139.9m $132.1m Funds Management The Funds Management platform provides an opportunity to co-invest alongside fund investors while enhancing returns through additional fee streams. Ingenia acquired Eighth Gate Capital Management in August 2019, in conjunction with the acquisition of a stake in each of the six managed funds. Following Ingenia’s acquisition of an approved development site in Ballarat, Victoria in July 2020 the funds are now focussed on stabilised yield. The nine established communities operate under the Allswell Communities brand and are located on the east coast of Australia, expanding Ingenia’s presence in the key markets of Victoria, NSW, and QLD. In FY20 Ingenia derived $1.8 million in income from the funds business. The funds have a defined term and in addition to earning fees for services to the funds, Ingenia retains the right to acquire the fund assets on wind-up. Sustainability As one of the largest owners, operators and developers of quality land lease communities and holiday parks, thousands of people every day are impacted by Ingenia’s business. The Group’s first sustainability report, which can be found on the Group’s website, is an important step in Ingenia’s sustainability journey and is focussed on the importance social, governance and environment (ESG) issues play in delivering sustainable value for the Group’s stakeholders. It contains more detail on the Group’s progress, objectives, and current initiatives. Over FY20, key initiatives included: — Proactively engaging with key stakeholders as the COVID-19 pandemic evolved, to ensure that community operations were adapted to deal with health advice, staff were appropriately supported to work from home and residents remained engaged and supported — Investing in our communities through local volunteering and support and through our Group-wide initiative, Ingenia Aspire — Introducing additional platforms to support our people to deliver performance and advance their careers with the Group — Consolidating our waste, energy and water suppliers and working with suppliers to access consistent data — Evolving the building methodology for new homes within our communities to provide more sustainable homes for incoming residents — Engaging with the Green Building Council of Australia (GBCA) to consider potential industry standards and ratings tools applicable to lifestyle communities. Over the next twelve months we plan to work with our suppliers, industry bodies and relevant subject experts to understand our environmental impacts and extend our initiatives and report more fully. Key initiatives in FY21 include: — Participating in the Green Building Council of Australia (GBCA) Green Star for Homes Early Access Program — Identifying appropriate measurements and goals for reductions in energy use, water use and waste recycling — Continuing to invest in solar across 50 communities to reduce non-renewable energy consumption — Installing LED lighting across the Group’s holiday parks — Further refining our objectives to foster the creation of more resilient and sustainable communities through future development and reduce the environmental impact of the Group’s operations. Federation Sunshine Village, VIC Key data Total properties Permanent sites Annual sites Holiday sites Portfolio value 30 June 2020 9 801 521 264 $136m We are in the early stages of this journey and are committed to evolving our approach as the business grows and with it our sustainability initiatives. For the latest news and further information on the Group’s sustainability journey visit https://www.ingeniacommunities.com.au/sustainability/ NT NT WA WA SA SA 74 communities* Key Lifestyle and Holidays (37) Gardens (26) Allswell Communities (9) Joint Venture (2) QLD NSW VIC TAS TAS * Property portfolio includes balance sheet assets, post 30 June acquisitions, communities owned by managed funds and the Group’s Joint Venture with Sun Communities. Excludes assets held for sale. 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 Note: This Newsletter provides a summary of the Group’s 2020 financial year results. Further information can be found on the Group’s website (www.ingeniacommunties.com.au) in the Full Year Results Presentation, Financial Statements and Property Portfolio. Ingenia Communities Annual Report 2020 b Ingenia Communities Holdings Limited Annual Reports For the year ended 30 June 2020 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 benefit 8. Trade and other receivables 9. Inventories 10. Assets and liabilities held for sale 11. Investment properties 12. Plant and equipment 13. Intangibles 14. Right-of-use assets 15. Investment in a joint venture 16. Other financial assets 17. Business combinations 18. Deferred tax assets and liabilities 19. Trade and other payables 20. Borrowings 21. Other financial liabilities 22. Issued securities 23. Reserves 24. Accumulated losses 25. Commitments 26. Contingent liabilities 27. Share based payment transactions 28. Capital management 29. Financial instruments 30. Fair value measurement 31. Auditor’s remuneration 32. Related parties 33. Company financial information 34. Subsidiaries 35. Notes to cashflow statement 36. Subsequent events Directors’ Declaration Independent Auditor’s Report Security Holder Information Investor Relations Corporate Directory www.ingeniacommunities.com.au 1 24 25 26 27 28 29 29 37 38 40 40 41 41 42 42 42 43 49 49 50 50 51 51 52 52 53 54 55 55 56 56 56 56 58 58 63 64 64 65 66 69 69 70 71 138 140 141 Ingenia Communities Holdings Limited Annual Report 2020 Directors’ Report For the year ended 30 June 2020 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 2020 (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 was 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 Robert Morrison Amanda Heyworth Andrew McEvoy Pippa Downes (Chairman) (Deputy Chairman) (appointed, effective 4 December 2019) Gary Shiffman John McLaren Valerie Lyons Executive Director Simon Owen (Alternate Director to Gary Shiffman) (resigned, effective 30 November 2019) (Managing Director and Chief Executive Officer (MD and CEO)) Company Secretaries Natalie Kwok Nhu Nguyen Vanessa Chidrawi (appointed, effective 5 February 2020) (resigned, effective 5 February 2020) 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). He is also a director of Bendigo and Adelaide Bank Ltd. 1 Mr Hazel serves on the Boards of Coopers Brewery Limited, the University of South Australia and COTA Australia, the peak policy development, advocacy and representation organisation for older Australians. He is also Chairman of the Adelaide Festival Centre Trust. 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. Robert Morrison – Non-Executive Deputy Chairman Mr Morrison was appointed to the Board in February 2013. He brings to the Board extensive experience in property investments, property development, portfolio management and capital raisings as well as institutional funds management. Mr Morrison is a Founding Partner and Executive Director of alternative investments firm, Barwon Investment Partners, which invests in healthcare real estate, property finance and private equity on behalf of institutional and wholesale investors. Mr Morrison’s investment experience includes senior portfolio management roles where he managed both listed and unlisted property funds on behalf of institutional investors. Prior executive positions include Head of Property for Asia Pacific and Director of Asian Investments at AMP Limited. 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. 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 Remuneration and Nomination 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 several 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 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 extensive experience in capital raisings and M&A transactions and holds a BA (Accounting) with a major in finance, post graduate qualifications in accounting and finance and an MBA from the Australian Graduate School of Management. Ms Heyworth is Chair of the Remuneration and Nomination Committee and a member of the Audit and Risk Committee. Ingenia Communities Holdings Limited Annual Report 2020 2 Directors’ Report For the year ended 30 June 2020 | continued Andrew McEvoy – Non-Executive Director Gary Shiffman – 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, the media, digital marketing and e-commerce. Mr McEvoy’s prior roles include Managing Director, Tourism Australia, CEO, South Australian Tourism Commission, CEO, Life Media and Events for Fairfax Media and Chairman of advocacy group, the Tourism Transport Forum (TTF). Mr McEvoy is currently a Director of Lux Group and Voyages Indigenous Tourism Australia and was Chairman of SeaLink Travel Group (ASX: SLK) until 30 June 2020. Mr McEvoy holds a Master of Arts, International Communications and a Bachelor of Arts degree. Mr McEvoy is a member of the Remuneration and Nomination Committee. Mr McEvoy has announced his intention to resign from the Board to take up a major new destination development role in the Middle East and will formally resign once a replacement Director is appointed. Pippa Downes – Non-Executive Director Ms Downes was appointed to the Board in December 2019. Ms Downes is a professional company director who has held executive and non- executive roles across listed, not-for- profit and government enterprises. Ms Downes brings to the Board significant experience in international banking and capital markets as well as broad industry knowledge across financial services, technology, infrastructure and property. Prior executive roles include Managing Director and Equity Partner at Goldman Sachs JB Were. Ms Downes currently serves on the boards of ALE Property Group and Australian Technology Innovators and is a Commissioner of Sport Australia. Ms Downes was previously a Panel Member of the ASX Appeals Tribunal and a Director of ASX Clearing and Settlement Companies, Sydney Olympic Park Authority and Windlab. She has also served as a Director of The Pinnacle Foundation, Swimming Australia Foundation and Swimming Australia Limited. Ms Downes holds a Masters in Applied Finance and a Bachelor of Science (Business Administration) and is a member of the Australian Institute of Company Directors and Women Corporate Directors. Ms Downes is Chair of the Audit and Risk Committee and a member of the Investment Committee. Mr Shiffman is the appointed Nominee Director of Sun Communities, Inc (NYSE: SUI). He was appointed to the Board in December 2018, in accordance with the Subscription Agreement between Ingenia Communities and Sun Communities entered into in November 2018. Mr Shiffman has over 25 years’ experience in executive and non-executive roles in financial and real estate public companies listed on the NYSE and NASDAQ. Mr Shiffman is currently Chairman and Chief Executive Officer of Sun Communities, Inc. Mr Shiffman has been actively involved in the management, acquisition, construction and development of manufactured housing communities and recreational vehicle resorts over the past thirty years. Mr Shiffman attended undergraduate studies at Michigan State University and Northwestern University. John McLaren – Alternate Director to Gary Shiffman Mr McLaren was appointed an Alternate Director by Gary Shiffman in February 2019. Mr McLaren has over 25 years of experience in executive and non-executive roles in financial and real estate public companies listed on the NYSE. Mr McLaren is currently President and Chief Operating Officer of Sun Communities, Inc. (NYSE: SUI) and has been actively involved in the management, acquisition, construction and development of manufactured housing communities and recreational vehicle resorts as well as home sales and leasing operations within communities and resorts over the past twenty years. Mr McLaren holds a Bachelor of Arts degree in Geology from the University of Colorado, Boulder and a Master of Business Administration degree from Regis University, Denver. Simon Owen – MD and CEO Mr Owen joined the Group in November 2009 as the Chief Executive Officer. He initiated the strategy to focus on developing and acquiring a leading portfolio of lifestyle and holiday communities which has seen the Group’s market capitalisation grow from $30 million to over $1.3 billion today. Mr Owen brings to the Group in-depth sector experience. He is currently a Director of BIG4 Holiday Parks, Australia’s leading holiday parks group representing 175 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. Ingenia Communities Holdings Limited Annual Report 2020 Directors’ Report For the year ended 30 June 2020 | continued 3 Mr Owen 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 seniors housing and aged care company. Mr Owen is a qualified accountant (CPA) with a Bachelor of Business (Accounting) and post graduate 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 Robert Morrison Amanda Heyworth Andrew McEvoy Pippa Downes Valerie Lyons Gary Shiffman John McLaren (Alternate Director) Simon Owen Board Audit & Risk Committee Remuneration & Nomination Committee Investment Committee A 21 21 21 21 14 7 15 4 21 B 20 21 20 15 14 5 10 4 19 A 3 3 6 – 3 3 – – – B 3 3 6 – 3 3 – – – A 1 3 6 5 – 3 – – – B 1 3 6 3 – 3 – – – A 6 6 – 3 3 – – – – B 5 6 – 3 3 – – – – 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 2020 were: Jim Hazel Robert Morrison Amanda Heyworth Andrew McEvoy Pippa Downes Gary Shiffman(1) John McLaren(1) Simon Owen Issued stapled securities Rights 418,541 202,837 178,641 39,916 32,148 32,572,582 32,572,582 1,445,658 – – – – – – – 820,992 (1) The securities held by Mr Shiffman and Mr McLaren are beneficially owned by Sun Communities and represent the same securities. Mr Shiffman is the appointed Nominee Director of Sun Communities which is entitled to appoint a Director to the Board of ICH, in accordance with the Subscription Agreement between ICH and Sun Communities which was entered into on 7 November 2018. Mr Shiffman appointed Mr McLaren as his Alternate Director effective 18 February 2019. Company Secretaries Natalie Kwok Ms Kwok is responsible for the Group’s capital transactions and legal functions. Ms Kwok joined Ingenia in May 2012 as the Group Tax Manager and moved into the role of General Manager Acquisitions, Legal and 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. Nhu Nguyen (appointed, effective 5 February 2020) Ms Nguyen has over 10 years’ company secretarial experience in both ASX and private entity environments and has worked in the property and financial services industries. Ms Nguyen holds a Bachelor of Business (Accounting)/Bachelor of Law and Graduate Diploma in Legal Practice. Ms Nguyen is also an Associate Member of the Governance Institute of Australia. Ingenia Communities Holdings Limited Annual Report 2020 4 Directors’ Report For the year ended 30 June 2020 | continued Operating and Financial Review ICH overview The Group is an active owner, manager and developer of a diversified portfolio of lifestyle, seniors rental and holiday communities across Australia. The Group’s real estate assets at 30 June 2020 were valued at $944.0 million, comprising 35 lifestyle and holiday communities (Ingenia Lifestyle and Holidays) and 26 rental communities (Ingenia Gardens). The Group manages a further 11 communities through its development JV and funds management platform. The Group was included in the S&P/ASX 200 in December 2019 and had a market capitalisation of approximately $1.5 billion at 30 June 2020. The Group’s vision is to create Australia’s best lifestyle and holiday communities, offering affordable permanent and tourism accommodation with a focus on the seniors demographic. The Board is committed to delivering sustainable long-term underlying earnings per security (EPS) growth to security holders while providing a supportive community environment for residents and guests. Our Values At Ingenia we build community on 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 an amazing experience every day. Whether it’s time to live, play, stay or renew, we deliver freedom of choice with a range of industry award winning lifestyle and holiday options. Creating Australia’s best lifestyle communities Strategy The Group is positioning for scale and long-term sector leadership whilst delivering growth in net operating income and enhancing the operational performance of its investment properties. Using a disciplined investment framework, the Group will: continue to grow its lifestyle and holiday communities business in metropolitan and coastal locations; build out its existing development pipeline; expand development and revenue streams through the Joint Venture with Sun Communities, Inc (NYSE: SUI) and funds management platform; deploy equity raised through the May equity raising to acquire existing communities and additional development sites; and, recycle capital through non-core asset sales. The immediate business priorities of the Group are: – Capitalise on opportunities to expand the development pipeline to deliver new rental contracts; – – Improve performance of existing assets to drive growth in rental returns; Improve resident and guest satisfaction; – Focus on sales and marketing effectiveness to successfully launch new projects and grow rental base; – Continue rollout of new rental and tourism cabins; – Expand the funds management platform and deliver performance for investors; – Execute the development joint venture business plan, delivering opportunities for capital light growth and additional revenue streams; – Enhance sustainable competitive advantage through recruiting, retaining and developing industry leading talent; – Continue to respond to operating environment, maintain focus on employee, resident and guest health and safety; – Continue to advance focus on sustainable home design and construction; and – Build on the Group’s sustainability program and enhance disclosures as initiatives are progressed. Ingenia Communities Holdings Limited Annual Report 2020 Directors’ Report For the year ended 30 June 2020 | continued 5 FY20 financial results The year to 30 June 2020 delivered total revenue of $244.2 million, up 7% on the prior year. The Group built and sold 3251 turnkey homes (30 Jun 2019: 336 homes) and grew Lifestyle and Holidays rental income from permanent, annual and tourism clients to $72.5 million (30 Jun 2019: $67.7 million). Statutory profit of $31.5 million was up 7% on the prior year. The statutory result reflects the combination of growth in underlying earnings and fair value movements on investment property arising from: improved capitalisation rates, offset by transaction costs on new acquisitions and; a reduction of fair value associated with the realisation of development profits on settlement. Underlying profit from continuing operations was $59.1 million, which represents an increase of $11.9 million (25%) on the prior year. The underlying result is underpinned by a significantly higher EBIT contribution from the Lifestyle Development segment which was up 19% on prior corresponding period, and from the Ingenia Lifestyle and Holidays segment which was up 9% on the prior corresponding period. Ingenia Gardens EBIT was $10.2 million, up 2% from the prior corresponding period. The Lifestyle Development and Holidays segments were impacted by COVID-19 and the early 2020 bushfires, which had an adverse effect on the 2020 financial results. Operating cash flow for the period was $67.2 million, up 13% from the prior year, reflecting growth in lifestyle home profits, growth in recurring rental income and the impact of new operational parks acquired in the period. During the year, the Group successfully raised $328.3 million through the following: – November 19: $131.1 million accelerated non-renounceable entitlement offer (ANREO) to existing security holders and a placement to institutional investors; – May 20: $150.0 million placement to institutional investors; – June 20: $27.9 million via a share purchase plan (SPP) to existing security holders; and – $19.3 million under the Distribution Reinvestment Plan. The proceeds from these equity raises have been and will continue to be invested into acquisitions to expand the Group’s portfolio of lifestyle communities and to provide additional equity for the Group’s joint venture with Sun Communities. The Group grew its investment in lifestyle communities during the period, 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. The Group invested part of the equity raised to acquire Bevington Shores, Taigum (Colonial Village) and land adjacent to Ingenia Holidays Rivershore. The Group continued to divest non-core assets to support the Group’s capital recycling strategy, with the divestment of Ingenia Lifestyle Mudgee Valley in 1H20. COVID-19 had an adverse impact on the FY20 result. The Group’s holidays business was materially impacted with the mandated closure of tourist parks from late March until June 2020 and the closure of domestic and international borders. Home settlement figures were also negatively impacted by social distancing restrictions which prevented auctions and the viewing of open homes as well as consumer sentiment. In response to COVID-19, Ingenia took decisive action, immediately reducing variable costs, standing down a number of casual staff and implementing companywide cost saving initiatives, including a voluntary 20% temporary pay reduction for salaried staff and NEDs. The Group was subsequently eligible to receive the JobKeeper subsidy, allowing the Group to re-employ eligible employees and limit further staff reductions. Key metrics – Income generating sites across the Group increased by 11% to 8,614 sites as at 30 June 2020. – Statutory profit of $31.5 million, up 7% on the prior year. – Underlying profit of $59.1 million, up 25% on the prior year. – Basic earnings per security (Statutory) of 11.8 cps, down 9% on the prior year (30 Jun 2019: 13.0 cps). – Basic earnings per security (Underlying) of 22.1 cps, up 5% on the prior year (30 Jun 2019: 21.0 cps). – Operating cash flows of $67.2 million, up 13% on the prior year. – Full year distribution of 10.0cps, down 11% on the prior year. Net asset value is $2.90 per security, up 9% compared with $2.65 at 30 June 2019. 1 Including seven settlements at Ingenia Lifestyle Freshwater, the Group’s first joint venture project with Sun Communities. Ingenia Communities Holdings Limited Annual Report 2020 6 Directors’ Report For the year ended 30 June 2020 | continued Group results summary Underlying profit for the financial year has been calculated as follows, with a reconciliation to statutory profit: EBIT Share of joint venture profit/(loss) Net finance expense Tax expense associated with underlying profit Underlying profit(1) Net (loss)/gain on change in fair value of: Investment properties Acquisition costs Financial liabilities Other financial instruments Other Tax benefit associated with items below underlying profit Statutory profit 30 Jun 2020 $’000 30 Jun 2019 $’000 71,892 134 (6,649) (6,268) 59,109 61,490 (1,157) (7,582) (5,530) 47,221 (28,292) (12,468) (5,515) (2,195) 32 (1,567) 9,880 31,452 (6,494) (5,400) (2,288) (2,290) 11,032 29,313 (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. Segment performance and priorities Ingenia Lifestyle and Holidays Operations At 30 June 2020, Ingenia Lifestyle and Holidays comprised 35 communities that offer an affordable community experience for seniors and tourism guests. Ingenia Lifestyle and Holidays EBIT grew 9% on FY19 to $29.8 million. During FY20, the Group continued to expand its rental assets by delivering 318 new settlements from its development business and completing the acquisition of established communities (Taigum and Bevington Shores). The Group also undertook the divestment of one non-core asset, Ingenia Lifestyle Mudgee Valley, to support the Group’s capital recycling strategy. Permanent rental income grew by 27% on the prior corresponding period, as a result of acquisitions completed in FY19 and the acquisitions of Taigum, Bevington Shores and Lake Munmorah in FY20, the settlement of new homes, investment in new rental cabins and rental growth across the portfolio. Tourism rental income decreased by 6% largely driven by the impact of January bushfires on the NSW South Coast and COVID-19 restrictions requiring park closures and limiting travel for holiday makers. The Group’s ability to manage its cost base during the closures reduced the impact on EBIT. Lifestyle and Holidays EBIT stabilised margin improved marginally from the prior year driven by the increase in rental sites from development and acquisitions, offset by lower tourism revenue which was adversely impacted by NSW South Coast bushfires and COVID-19. The carrying value of the Lifestyle and Holidays investment property at 30 June 2020 is $672.8 million (30 Jun 2019: $565.3 million). Performance Permanent rental income ($m) Annuals rental income ($m) Tourism rental income ($m) Other ($m) EBIT contribution ($m) Stabilised EBIT margin (%) 30 Jun 2020 30 Jun 2019 Change % 31.8 4.5 35.9 4.5 29.8 39.7 25.0 4.7 38.0 4.0 27.4 39.3 27% (4%) (6%) 13% 9% 1% Ingenia Communities Holdings Limited Annual Report 2020 Directors’ Report For the year ended 30 June 2020 | continued 7 Strategic priorities The strategic priorities for Ingenia Lifestyle and Holidays are: growing rental returns; integrating recent acquisitions and completed development sites; leveraging scale efficiencies, growing holiday bookings; and investing in new rental and tourism cabins. The fuel, food and beverage offering continues to complement tourism revenue, with the Group focusing on improving the offering and returns from venues that have recently been acquired and internalised. Ingenia Lifestyle Development The earnings contribution from development has continued to grow with development now underway at 9 communities and new turnkey settlement volumes down 5% from the prior year driven by a softer fourth quarter due to the impact of COVID-19. Ingenia delivered 318 new turnkey settlements in FY20 (30 Jun 2019: 336). This result reflects increased awareness and interest in the market, the launch of a new community at Hervey Bay in QLD and Ingenia’s quality sales and development platform. The Group currently has a strong development pipeline of 3,015 potential new home sites (30 Jun 2019: 3,713 sites). The carrying value of the Ingenia Lifestyle Development investment property at 30 June 2020 is $131.3 million (30 Jun 2019: $149.4 million). Performance New home settlements (#) Gross new home development profit ($m) Other home settlements (#) Gross refurbished home development profit ($m) EBIT contribution ($m) EBIT margin (%) 30 Jun 2020 30 Jun 2019 Change % 318 59.0 11 1.0 39.9 31.5 336 51.4 12 0.5 33.4 28.1 (5%) 15% (8%) 100% 19% 3% Strategic priorities The key strategic priorities for Ingenia Lifestyle Development include: completing the current development pipeline on time and within budget; building the sales and settlement momentum within a new selling environment; securing further development approvals for new homes within the current pipeline and on new properties under offer; securing land adjacent to existing Group communities and; delivering an outstanding move in experience for new residents. The Group will continue to identify future development opportunities and continuously seek to improve margins in a sustainable manner. Development Joint Venture The development Joint Venture with Sun Communities was established in November 2018. The Joint Venture commenced development on its first greenfield acquisition located at Burpengary, QLD and settled on its first homes during the year. The Joint Venture is in the final stages of development planning on its second acquisition at Fullerton Cove, NSW and has other acquisition opportunities under exclusive due diligence or option. During FY20, fees generated by Ingenia from the Joint Venture primarily relate to asset and development management. Performance Greenfield properties (#) Investment carrying value ($m) New home settlements (#) Fee income ($m) Share of profit/(loss) from joint venture ($m) 30 Jun 2020 30 Jun 2019 Change % 2 15.9 7 0.6 0.1 2 11.6 – 0.8 (1.2) – 37% NM (25%) NM Strategic priorities The Joint Venture’s objective is to acquire greenfield sites in key metro and coastal markets to develop a significant portfolio of new lifestyle communities. The Joint Venture leverages the expertise and local market knowledge of Ingenia to identify, acquire and develop sites. Once homes are sold, Ingenia will also provide operational services to the lifestyle communities. At completion of development, Ingenia has the right to acquire the communities at market value. Ingenia generates origination, development and management fees for these services plus a performance fee for above hurdle rate returns. Ingenia Communities Holdings Limited Annual Report 2020 8 Directors’ Report For the year ended 30 June 2020 | continued Ingenia Gardens Ingenia Gardens comprises 26 rental communities located across the eastern seaboard and Western Australia. Collectively, these communities have 1,376 sites for rent. The portfolio performed ahead of prior year, with record high occupancy of 94.4% at 30 June 2020. The carrying value of these assets at 30 June 2020 is $139.9 million (30 Jun 2019: $132.1 million). Performance Rental communities (#) Occupancy (%) Rental income ($m) Catering income ($m) EBIT contribution ($m) EBIT margin (%) 30 Jun 2020 30 Jun 2019 Change % 26 94.4 22.3 2.5 10.2 40.7 26 90.8 21.7 2.6 10.0 40.7 – 4% 3% (2%) 2% – Strategic priorities The strategic priorities of Ingenia Gardens are: increasing occupancy rates and rental income; improving resident retention; increasing referrals and; ensuring residents are actively engaged. Funds Management In November 2019, the Group acquired the share capital of Eighth Gate Capital Management Pty Limited and its wholly owned subsidiaries (collectively, “EGCM”) a funds and asset management business which manages six funds, that invest in lifestyle and holiday communities situated in NSW, QLD and VIC. The Group receives fees for the management and development of the assets and management of the funds. At acquisition, the Group also co-invested into each of the six funds, to ensure alignment with the funds’ investors. The investment in the funds generates asset ownership and development revenue streams. Strategic priorities The strategic priorities of the funds management business is to leverage the Group’s platform to provide additional growth and deliver fund performance to investors. Capital management of the Group During the year, the Group raised $328.3 million in new equity through the issue of 89.2 million new securities in FY20. The Group has three debt facilities with a combined facility limit of $450.0 million. The weighted average term to maturity of Ingenia’s debt at 30 June 2020 is 3.3 years with the first debt expiry in February 2022. As at 30 June 2020, the debt facilities were drawn to $73.0 million. The Group’s Loan to Value Ratio (“LVR”) was 8.4% and gearing was 5.7% at 30 June 2020, which are below FY19 due to the completion of the equity raise in June 2020. The funds raised are anticipated to be deployed across FY21 and FY22. The Group intends to fund near term growth through deployment of the equity raise proceeds into new acquisitions, operating cash flows, divestment of non-core assets and drawing on committed debt facilities. Ingenia Communities Holdings Limited Annual Report 2020 Directors’ Report For the year ended 30 June 2020 | continued Financial position The following table provides a summary of the Group’s financial position as at 30 June 2020: 9 $'000 Cash and cash equivalents Inventories Assets held for sale Investment properties Deferred tax asset Other assets Total assets Borrowings Liabilities held for sale Other liabilities Total liabilities Net assets /equity 30 Jun 2020 30 Jun 2019 Change 10,751 36,201 32,623 20,185 35,987 12,835 943,958 846,835 13,129 56,192 8,026 29,019 (9,434) 214 19,788 97,123 5,103 27,173 1,092,854 952,887 139,967 85,398 5,175 59,260 149,833 943,021 251,695 (166,297) 5,694 69,751 (519) (10,491) 327,140 (177,307) 625,747 317,274 Assets held for sale represent the carrying value of the Group’s investment in the regional lifestyle and holiday assets Albury and Sun Country, development land at Upper Coomera and a deferred management fee village at Gladstone, QLD. Investment property book value increased by $97.1 million from 30 June 2019. This was primarily due to the acquisition of new communities, investment in community development and changes in fair value. Borrowings decreased by $166.3 million due to proceeds received from the Group’s equity raisings, offset by the acquisition of three lifestyle communities, investment in development and investment in fund management activities. Cash flow $’000 Operating cash flow Investing cash flow Financing cash flow Net change in cash and cash equivalents 30 Jun 2020 30 Jun 2019 Change 67,188 59,307 7,881 (187,113) (126,393) (60,720) 110,491 (9,434) 72,821 5,735 37,670 (15,169) Operating cash flow for the Group was up 13.3% to $67.2 million, reflecting the contribution from new acquisitions in FY19 and FY20, the growth in recurring net rental income from lifestyle and rental communities, and the cash inflow associated with the sale of new lifestyle homes at an improved margin. Distributions The following distributions were made during or in respect of the year: – On 18 February 2020, the Directors declared an interim distribution of 5.6 cps, amounting to $15.2 million which was paid on 26 March 2020. – On 18 August 2020, the Directors declared a final distribution of 4.4 cps amounting to $14.3 million, to be paid on 24 September 2020. FY21 outlook The Group’s strong balance sheet and low level of gearing places Ingenia in a strong position to manage the risks associated with COVID-19. Ingenia expects to be a major beneficiary from the rebound in domestic tourism as international borders remain closed and is well positioned to meet the anticipated increase in demand for affordable housing from downsizers. The Group will continue to grow its lifestyle communities business in FY21 with a significant development pipeline, an innovative and adaptable sales approach, increasing consumer awareness and demand and a broader range of capital partnerships. The Group will acquire mature lifestyle and holiday communities where on strategy opportunities can be identified. The priority for existing lifestyle and holiday communities is to improve performance of existing assets by delivering rental growth and investing in new rental homes and tourism cabins within existing communities. The creation of new rent contracts via existing and new development projects will contribute development profits and growth in the rental base. Ingenia Communities Holdings Limited Annual Report 2020 10 Directors’ Report For the year ended 30 June 2020 | continued The Joint Venture with Sun Communities and the funds management business provide additional opportunities for growth, whilst diversifying the Group’s revenue streams. Management continues to explore expansion, development and acquisition opportunities within the seniors rental market as Ingenia Gardens continues to provide high-yield stable recurring cash flows. The Group will continue to regularly assess market opportunities and the performance of existing assets, divesting and acquiring assets where superior longer-term returns are available. 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 20 for details of debt facility, and Note 22 for issued securities. Events Subsequent to Reporting Date Final FY20 distribution On 18 August 2020, the Directors declared a final distribution of 4.4 cps amounting to $14.3 million, to be paid on 24 September 2020. Acquisition of Sunnylake Shores On 24 July 2020, the Group completed the acquisition of the Sunnylake Shores lifestyle community, located on the Central Coast of NSW, for a purchase price of $16.3 million. Acquisition of Ballarat On 28 July 2020, the Group completed the acquisition of a DA approved greenfield development site for a lifestyle community in Ballarat, VIC for a purchase price of $7.0 million. Operating restrictions due to COVID-19 Post 30 June 2020, governments have announced further restrictions in response to the COVID-19 pandemic, including the closure of State borders. The Group continues to monitor the impact of these closures on our Holidays assets. Likely Developments The Group will continue to pursue strategies aimed at growing its cash earnings, profitability and market share within the lifestyle and seniors rental and tourism sectors during the next financial year, through: – Developing greenfield sites and expanding existing lifestyle communities; – Acquiring new communities; – Growing the funds management platform; and – Divesting non-core assets. Detailed information about operations of the Group is included in the various reports in this financial report. 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. 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. Indemnification of Auditor To the extent permitted by law, the Company has agreed to indemnify its auditor, Ernst & Young, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the reporting period. 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 24. Ingenia Communities Holdings Limited Annual Report 2020 11 Directors’ Report For the year ended 30 June 2020 | continued Non-Audit Services During the year, non-audit services were provided by the Group’s auditor, Ernst & Young. 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 Ernst & Young 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 Ernst & Young, as auditor of ICH. Refer to Note 31 of the financial statements for details on the audit and non-audit fees. Rounding Amounts ICH 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. Jim Hazel Chairman Adelaide, 18 August 2020 Ingenia Communities Holdings Limited Annual Report 2020 12 Directors’ Report For the year ended 30 June 2020 | continued Message from the Remuneration and Nomination Committee Dear Security holders, The Board of ICH (Ingenia) is pleased to present the Remuneration Report for FY20. The Board is committed to clear and transparent communication of Ingenia’s remuneration arrangements and ongoing review of the Group’s remuneration philosophy and practices. Consistent with this commitment, the Remuneration and Nomination Committee (RNC) undertakes regular reviews of the remuneration framework to ensure it is “fit for purpose” and aligns executive remuneration with performance outcomes and security holder returns. There was no change to the basic structure of Executive Key Management Personnel (KMP) remuneration in FY20. We continue to be mindful of feedback from investors and over the past year reviewed a number of areas of remuneration, including our transparency in relation to achievement of short-term incentive KPIs and the grossing up of distributions on vested rights during the accrual period. Disclosure has been enhanced to address these concerns. We are appreciative of the support received for remuneration resolutions at our AGM in November 2019 and remain committed to ongoing engagement with investors. Remuneration outcomes for FY20 Management achieved strong financial and operating performance in a year of extraordinary challenge posed by devastating bushfires in January and the COVID-19 pandemic in the final quarter which included mandated closure of a number of Holiday Parks. The Group’s return on equity and earnings per security outcomes were adversely impacted by equity raisings completed during the year which strengthened our balance sheet but were dilutive as the proceeds take time to deploy. During FY20, there was a moderate increase to KMP base salary which was offset by a 20% temporary reduction to salaries in April and May in response to the COVID-19 pandemic and the mandated closure of Ingenia’s holiday parks. Executive Short Term Incentive (STI) awards ranged from 65 to 67 percent of maximum opportunity in FY20, well below the prior year as a result of COVID-19. These outcomes were based on actual results achieved. The Board did not exercise any discretion to adjust for the impacts of the COVID-19 pandemic. The principal financial impacts of COVID-19 were reduced tourism revenues and slowed home settlements. These impacts were offset by the introduction of cost saving measures and the JobKeeper subsidy of $4.4M which allowed the Group to re-engage the majority of employees stood down at the start of the pandemic. Mr Owen was awarded an STI of 67% based on his performance. Due to the adverse impact of COVID-19 on the business, staff and residents, it was agreed to award all of this STI in the form of deferred rights with no cash component. The Board determined that the profit sustainability threshold had been met to allow FY19 deferred STIs to vest in full. Security holders approved the FY20 Long Term Incentive (LTI) performance hurdles for the CEO/MD at the 2019 AGM, with these hurdles also applicable to the CFO and COO. These hurdles link LTI outcomes to security holder returns and the achievement of Return on Equity and underlying earnings growth targets. Looking ahead With the impact of the COVID-19 pandemic extending into FY21 the RNC will continue to monitor business performance and remuneration practices to ensure they remain fit for purpose. In particular: – Review of base salaries has been deferred from the start of the financial year until later in 2020. – We are considering the impact of a lower growth environment on the performance hurdles for future LTI issues. 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 10 November 2020. Amanda Heyworth Chair – Remuneration and Nomination Committee Adelaide, 18 August 2020 Ingenia Communities Holdings Limited Annual Report 2020 13 Directors’ Report For the year ended 30 June 2020 | continued Remuneration Report (Audited) Introduction The Board is pleased to present the Remuneration Report for the Group for the year ended 30 June 2020, 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. 1. Remuneration Governance 1.1. 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 high calibre people. 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; – The Group’s culture; – Remuneration levels being paid by peers for similar positions; and – The need to ensure executive continuity and succession. 1.2. Link between remuneration and performance The Board aims to ensure alignment between 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 and the achievement of strategic objectives. The components of remuneration and their link to Group performance is outlined in the table below: Principles Remuneration Component Measure Fixed remuneration should be fair, competitive and benchmarked to comparable market roles. Total Fixed Remuneration (TFR) 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. External benchmarking undertaken by Guerdon Associates. The RNC reviews and makes recommendations to the Board in relation to TFR levels for executive KMP at least annually. A significant portion of remuneration should be ‘at risk’ and awarded to executives based on the achievement of agreed objectives and hurdles. Remuneration should be aligned to the interests of all security holders and build ownership and alignment. The Board maintains sole discretion over the granting of equity rights as remuneration to employees. Short Term Incentive (STIs) For achievement of STIs in relation to executive KMP, the payment is: – CEO: 33% cash and 67% deferred equity rights – CFO and COO: 50% cash and 50% deferred equity rights STIs are awarded to executive KMP whose achievements, behaviour and focus meet the Group’s business plan and individual Key Performance Indicators (KPI’s) measured over the financial year. KPIs comprise: – Financial outcomes – Operational targets – Health and safety – Capital management – People, Culture, Systems & Process STI equity rights are deferred for 12 months. 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. STI equity rights vest subject to a Board assessment and a malus provision during the deferral period where Rights may be forfeited if underlying earnings growth is not sustainable or circumstances set out in the Rights Plan Rules occur (such as fraud, dishonesty, a breach of obligations or material misstatement of Ingenia’s financial position). Ingenia Communities Holdings Limited Annual Report 2020 14 Directors’ Report For the year ended 30 June 2020 | continued Remuneration Report (Audited) (continued) Principles Remuneration Component Measure Long-Term Incentive (LTIs) LTI equity rights are granted to executive KMP to align their focus with the Group’s strategy and overall financial outcomes. LTI grants are made in equity rights to ensure alignment with security holders’ interests. 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. 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. – Average Underlying Earnings per Security (Underlying EPS) growth over the three financial years. 1.3. 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 FY20 and the maximum remuneration for executive KMP is detailed below. Maximum Total Remuneration Simon Owen (CEO) Nicole Fisher (COO) Scott Noble (CFO) 2. Remuneration Outcomes TFR STI Total Remuneration LTI $700,000 $614,000 $573,000 $1,887,000 $410,000 $240,000 $150,000 $800,000 $410,000 $240,000 $150,000 $800,000 2.1. Financial performance over the past five years Despite challenges posed by the COVID-19 pandemic, the Group delivered stable returns, with EBIT, underlying EPS and NAV per security exceeding the record FY19 result. This continued a period of sustained growth over the past five years. EBIT ($M) Underlying EPS (cents) NAV ($) $80M $70M $60M $50M $40M $30M $20M $10M $0M 25c 20c 15c 10c 5c 0c $3.00 $2.90 $2.80 $2.70 $2.60 $2.50 $2.40 $2.30 $2.20 FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20 Ingenia Communities Holdings Limited Annual Report 2020 Directors’ Report For the year ended 30 June 2020 | continued 15 Remuneration Report (Audited) (continued) The table below sets out further information about the Group’s earnings and movement in security holder wealth for the five years to 30 June 2020: Income generating sites at 30 June (#) EBIT ($’000) Total Underlying profit ($'000) Statutory profit ($'000) Underlying (Basic) EPS(1) (cents) Statutory (Basic) EPS(1) (cents) Underlying ROE Statutory ROE Underlying EPS growth (3-year CAGR) EBIT Growth (3-year CAGR) Net asset value per security ($) Security price at 30 June ($) Distributions (cents) FY16 FY17 5,337 24,200 20,161 24,280 13.4 16.1 5.6% 6.7% 25.4% 39.4% 2.45 2.87 9.30 6,999 32,093 23,521 26,408 13.0 14.6 5.4% 6.1% 6.4% 38.3% 2.50 2.60 10.20 FY18 7,170 48,759 36,771 34,243 17.7 16.5 7.0% 6.5% 11.4% 39.3% 2.57 3.08 10.75 FY19 7,775 61,490 47,221 29,313 21.0 13.0 8.1% 5.0% 16.2% 36.5% 2.65 3.24 11.20 FY20 8,614 71,892 59,109 31,452 22.1 11.8 7.9% 4.2% 19.4% 30.8% 2.90 4.49 10.0 (1) Basic earnings per security is based on the weighted average number of securities on issue during the period. 2.2. 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 fringe benefits tax (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 at least annually. In reviewing fixed remuneration, the RNC reviews remuneration for comparable roles across a range of active Real Estate Investment Trusts (REITs) as well as property, health and specialised services companies. For the 2020 financial year TFR increased modestly for the CEO and executive KMP, as shown in the table below. This was subsequently reduced by 20% for 6 weeks as a response to COVID-19. KMP Simon Owen (CEO) Nicole Fisher (COO) Scott Noble (CFO) FY20 TFR FY19 TFR Movement $700,000 $682,500 $410,000 $400,000 $410,000 $400,000 2.6% 2.5% 2.5% Data ranges for the CEO, CFO and COO FY20 TFR were provided by Guerdon Associates. The RNC determined the appropriate TFR of individual KMP with reference to these data ranges and the individual role, experience and responsibilities. Those recommendations were approved by the Board. 2.3. Short-Term Incentive Plan (STIP) The current Rights Plan was approved by security holders at the AGM held on 12 November 2019. 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. Under the FY20 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 FY20 STI Equity Rights are subject to the following terms and conditions: – A one-year deferral period and are eligible to vest on the date that is 12 months following the grant date, which is expected to be 1 October 2020; – A ‘malus’ provision during the deferral period; – From the vesting date the executive may exercise their rights and have the relevant number of Ingenia securities issued 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. Ingenia Communities Holdings Limited Annual Report 2020 16 Directors’ Report For the year ended 30 June 2020 | continued Remuneration Report (Audited) (continued) The STI award is subject to performance conditions that are summarised in the following table. The KPIs are set with ‘threshold’, ‘target’ and ‘stretch’ performance levels, with entitlements calculated on a pro-rata basis between these levels. 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 key considerations in assessing performance against the KPIs are: KPI Financial Key considerations in achievement Rating – EBIT to exceed threshold level. At mid-point of target range – Underlying profit per security to exceed threshold level. – Deliver cost management outcomes. Health & Safety – Champion and demonstrate safe systems of work. Upper end of target range Operational – Identify hazards and reinforce commitment to safe and efficient work practices. – Achievement of rental growth and operations and sales metrics that deliver on business strategy (established for each executive KMP specific to their area of responsibility). At mid-point of target range Capital management – Capital available on competitive pricing and Upper end of target range People, Culture, Systems & Process flexible terms to fund high quality deal flow and development pipeline. – Cultivate and contribute to a mutually supportive, Upper end of target range aligned and highly effective executive team. – Succession planning in place for key roles. – Drive process and system efficiencies resulting in improvements/innovations to further commercial prosperity. The weighting to each of the above KPIs is as follows: KMP Simon Owen (CEO) Nicole Fisher (COO) Scott Noble (CFO) Financial Health & Safety Operational Capital Management 40% 40% 40% – 10% – 20% 25% 15% 20% – 20% People, Culture, Systems & Process 20% 25% 25% Total 100% 100% 100% FY20 STI outcomes – Executive KMP The RNC recommended and the Board approved STIP awards as follows: KMP Simon Owen (CEO) Nicole Fisher (COO) Scott Noble (CFO) Maximum STIP (% of TFR) STI Awarded STIP Awarded as % of maximum STI 87.7% 58.5% 58.5% $411,380 $159,360 $157,440 67.0% 66.4% 65.6% The CEO’s maximum potential FY20 STIP deferred equity component was approved by security holders at the AGM held on 12 November 2019. For FY20, Mr Owen was awarded an STI of 67% based on his performance. Due to the adverse impact of COVID-19 on the business, staff and residents, it was agreed to award all of this STI in the form of deferred rights with no cash component. Ingenia Communities Holdings Limited Annual Report 2020 Directors’ Report For the year ended 30 June 2020 | continued 17 Remuneration Report (Audited) (continued) 2.4. 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. Details of the FY19 LTIP Performance Conditions can be found in the 30 June 2019 Remuneration Report, available on the Group’s website. Relative TSR Performance Condition (40%) The Relative TSR hurdle is growth in Ingenia’s TSR relative to growth in the ASX 200 A-REIT index (Index), measured over a three-year period ending on 30 September 2022. 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 of the performance period and the 30 days up to and including the end-trading day of the performance period. FY20 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 total return + 1% Nil Between Threshold and Maximum Between Index total return + 1% and Index total return + 5% 10% plus an additional amount progressively vesting on a straight-line basis between Threshold and Maximum Maximum Equal to or greater than Index total return + 5% 100% ROE Performance Condition (30%) 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 FY20, the relevant metric is ROE achieved for FY22 on the following basis: At or below Threshold Less than 8% Nil ROE % of Rights that vest Between Threshold and Maximum Between 8% and 10% 30% plus an additional amount progressively vesting on a straight-line basis between Threshold and Maximum Maximum Equal to or greater than 10% 100% Average Underlying Earning Per Security (EPS) Performance Condition (30%) The Average Underlying EPS Performance Condition is intended to focus executive KMP on improving medium to long-term underlying earnings. Underlying EPS defined as underlying profit divided by the weighted average number of securities outstanding. The relevant metric is Average Underlying EPS Growth for the period FY20 to FY22, with the FY19 base year Underlying EPS being 21.0 cps. At or below Threshold Equal to or less than 5% Nil Average underlying EPS growth % of Rights that vest Between Threshold and Maximum Between 5% and 10% 10% plus an additional amount progressively vesting on a straight-line basis between Threshold and Maximum Maximum Equal to or greater than 10% 100% The FY20 LTIP methodology determines security value as the VWAP of Ingenia securities in the 30-day trading period ending on 1 October 2019. The number of LTIP Rights granted in FY20 was calculated by dividing the LTIP award by the security value (as defined above). FY20 LTIP Rights grants will be entitled 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. Executives do not receive distributions (cash or accrued) on securities underlying any Rights that do not vest or remain unexercised. Ingenia Communities Holdings Limited Annual Report 2020 18 Directors’ Report For the year ended 30 June 2020 | continued Remuneration Report (Audited) (continued) LTI Awarded in FY20 FY17 LTIP rights were tested on 1 October 2019 resulting in the combined vesting of 132,282 rights for Mr Owen and Ms Fisher. This represented 79.8% of FY17 rights on issue based on the full achievement of the TSR condition and partial achievement of the ROE condition. Unvested LTIP Rights held by KMP during the year were: Directors Simon Owen Executives Nicole Fisher Scott Noble Total Balance 1 July 2019 Granted Vested Lapsed Balance 30 June 2020 511,680 157,490 (110,855) (25,181) 533,134 107,328 40,445 (21,427) (4,867) 86,762 38,234 – – 121,479 124,996 705,770 236,169 (132,282) (30,048) 779,609 Granted rights issued include both new issues and distribution entitlement factor on vested rights. Refer to Note 32 for a summary of all vested and unvested rights. Summary of LTIPs on issue to KMP The following table sets out all LTIPs granted to-date and not vested at 30 June 2020. KMP Scheme year Simon Owen Nicole Fisher Scott Noble Total FY20 FY19 FY18 FY20 FY19 FY18 FY20 FY19 FY18 Fair value of rights per award at award date $1.61 $1.22 $1.22 $1.61 $1.22 $1.17 $1.61 $1.22 $1.17 Number of rights granted 146,052 181,417 205,665 38,234 39,872 43,373 38,234 39,872 46,890 779,609 Grant date Fair value of rights Vesting date Maximum to expense in future years 12-Nov-19(1) $234,945 01-Oct-22 $176,208 13-Nov-18(2) $221,641 01-Oct-21 $92,350 $14,667 $46,128 14-Nov-17 $251,431 01-Oct-20 01-Oct-19 01-Oct-18 $61,505 01-Oct-22 $48,712 01-Oct-21 $20,297 01-Oct-17 $50,932 01-Oct-20 $2,971 01-Oct-19 01-Oct-18 $61,505 01-Oct-22 $46,128 $48,712 01-Oct-21 $20,297 01-Oct-17 $55,062 01-Oct-20 $3,212 $1,034,445 $422,258 (1) Grant date following the 2019 AGM with price based on 30-day VWAP at 1 October 2019 to align with other executives. (2) Grant date following the 2018 AGM with price based on 30-day VWAP at 1 October 2018 to align with other executives. Mr Owen holds 204,360 vested security rights and Ms Fisher holds 34,300 vested security rights that they have not exercised. Vested rights expire 15 years from the grant date of the LTI Rights and STI Rights. Ingenia Communities Holdings Limited Annual Report 2020 Directors’ Report For the year ended 30 June 2020 | continued 19 Remuneration Report (Audited) (continued) 2.5. Executive Remuneration for FY20 The following tables outline the remuneration provided to Executive KMP for FY19 and FY20. Separate to the numbers outlined below, the Group accrues annual leave and long service leave in accordance with statutory requirements. Statutory presentation FY20 Executive KMP Financial Year Salary ($) STI(1) Cash ($) Total ($) Short-Term Post- employment Super- annuation Benefits ($) Share-based payments STI(1) Deferred Rights ($) LTI expense ($) Performance related Total ($) STI+LTI (%) Simon Owen Chief Executive Officer Nicole Fisher Chief Operating Officer Scott Noble Chief Financial Officer Total Total 2020 2019 2020 2019 2020 2019 2020 2019 663,328 – 663,328 21,003 411,380 203,242 1,298,953 661,980 163,800 825,780 20,520 327,600 218,847 1,392,747 380,020 79,680 459,700 21,003 79,680 45,895 606,278 379,480 96,000 475,480 20,520 96,000 44,002 636,002 380,020 78,720 458,740 21,003 78,720 44,462 602,925 379,480 96,000 475,480 20,520 96,000 30,532 622,532 1,423,368 158,400 1,581,768 63,009 569,780 293,599 2,508,156 1,420,940 355,800 1,776,740 61,560 519,600 293,381 2,651,281 47 51 34 37 33 36 41 44 (1) Cash STIs were accrued in the year ended 30 June 2020. Deferred STI rights are expensed evenly over the performance and deferral periods. LTI (%) 16 16 8 7 7 5 12 11 Actual remuneration received or realised FY20 Executive KMP Financial Year Simon Owen Chief Executive Officer Nicole Fisher Chief Operating Officer Scott Noble Chief Financial Officer Total Total 2020 2019 2020 2019 2020 2019 2020 2019 STI awarded and received as cash(1) ($) TFR ($) Total cash payments in relation to the financial year ($) Previous years’ STI that were realised(2) ($) Previous years’ LTI that were realised(2) ($) Total remuneration (received and/or realised) ($) Awards which lapsed or were forfeited(3) ($) 684,331 – 684,331 509,812 434,552 1,628,695 682,500 163,800 846,300 307,762 273,605 1,427,667 401,023 79,680 480,703 145,361 83,994 710,058 400,000 96,000 496,000 96,534 56,215 648,749 401,023 78,720 479,743 145,361 400,000 96,000 496,000 – – – 625,104 496,000 98,710 124,316 19,079 25,540 – – 1,486,377 158,400 1,644,777 800,534 518,546 2,963,857 117,789 1,482,500 355,800 1,838,300 404,296 329,820 2,572,416 149,856 (1) Represents 33% of Mr Owen’s STI award and 50% of Ms Fisher’s and Mr Noble’s STI award. The remaining share of their respective STI was deferred in Rights which vest over 12 months following the performance year. (2) This represents the value of all prior years’ deferred STI and LTI rights that vested during FY20 based on the 30 day VWAP up to the 1 October 2019 vesting date of $3.92 (1 October 2018: $3.00). (3) The value shown represents the value of any prior year equity awards that lapsed or were forfeited during the financial year. The FY20 values are based on the 30 day VWAP up to the 1 October 2019 vesting date of $3.92 (1 October 2018: $3.00). During FY20 KMP salaries were reduced by 20% for a period of 6 weeks, as part of the Group’s response to the COVID-19 pandemic and mandated closure of the Groups’ holiday parks. A short-term loan facility of $500,000 was made available to the CEO for a period of 15 days on commercial terms. Interest paid on the facility was $1,060. No balance is outstanding. Ingenia Communities Holdings Limited Annual Report 2020 20 Directors’ Report For the year ended 30 June 2020 | continued Remuneration Report (Audited) (continued) 3. Non-executive Directors’ Remuneration Ingenia Communities Group’s remuneration policy for Non-Executive Directors aims to ensure that the Group attracts and retains suitably skilled and experienced individuals to serve on the Board and to remunerate them appropriate for their time, expertise and responsibilities and liabilities as public company directors. The Nomination and Remuneration Committees is responsible for reviewing and recommending to the Board any changes to Board and Committee remuneration, considering the size and scope of the Group’s activities and the responsibilities and liabilities of directors. In developing its recommendations, the Committee may take advice from external consultants. NEDs are remunerated by way of cash and mandated superannuation. They do not participate in performance-based remuneration plans unless approved by security holders. The Group currently has no intention to remunerate NEDs by any way other than cash benefits. 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. All independent NEDs have self-funded the purchase of Ingenia securities on market as shown below in section 3.2. 3.1. Non-Executive Directors’ Fees The NED fee is reviewed annually with any changes effective 1 December. Annual NED fees, inclusive of superannuation, are detailed below: Chairman Non-Executive Director Deputy Chairman Committee Chair Committee Member 1 Dec 2019 1 Dec 2018 $196,500 $191,500 $101,500 $99,000 $20,500 $20,000 $15,350 $15,000 $2,600 $2,600 During FY20 Directors fees were reduced by 20% for a period of 2 months, as part of the Group’s response to the COVID-19 pandemic. 3.2. Non-Executive Directors’ Remuneration The maximum aggregate fee pool available to NEDs is $1,000,000 as stipulated in the Constitution that was adopted prior to the Group’s internalisation in 2012. Total remuneration paid to Directors in FY20 was $651,213, well below the total remuneration available to Directors. The following table outlines the remuneration provided to NEDs for FY20 and FY19, inclusive of superannuation, and their compliance with the policy outlined above in relation to self-funding a security holding in excess of one year’s gross Director fees. NEDs – Directors’ fees Jim Hazel Robert Morrison Amanda Heyworth Andrew McEvoy Pippa Downes Gary Shiffman(1) John McLaren (Alternate)(1) Former Non-Executive Directors Valerie Lyons Total FY20 ($) 188,509 133,848 125,398 101,238 58,887 – – FY19 ($) 187,542 127,833 125,250 101,917 – – – 43,333 651,213 101,917 644,459 Compliance with security holding policy Yes Yes Yes Yes Yes NA NA NA (1) Mr Shiffman is the appointed Nominee Director of Sun Communities which is entitled to appoint a Director to the Board of ICH, in accordance with the Subscription Agreement between ICH and Sun Communities which was entered into on 7 November 2018. Mr Shiffman appointed Mr McLaren as his Alternate Director effective 18 February 2019. As nominees of Sun Communities neither Mr Shiffman nor Mr McLaren are remunerated by ICH. In addition to the above fees, all NEDs receive reimbursement for reasonable travel, accommodation and other expenses incurred while undertaking Ingenia business. Ingenia Communities Holdings Limited Annual Report 2020 21 Directors’ Report For the year ended 30 June 2020 | continued Remuneration Report (Audited) (continued) 4. Other Remuneration Information 4.1. Remuneration governance 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); – Robert Morrison; and – Andrew McEvoy. The RNC provides oversight for KMP and other executives, 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. 4.2. External remuneration advisers Guerdon Associates, initially engaged in March 2014, provided independent remuneration advice during FY20 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. 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. Ingenia Communities Holdings Limited Annual Report 2020 22 Directors’ Report For the year ended 30 June 2020 | continued Remuneration Report (Audited) (continued) 4.3. Ingenia Communities Group equity held by key management personnel The table below shows securities held indirectly or beneficially by each KMP, including their related parties (excluding unvested equity holdings where applicable – refer to section 2.4 and Note 32). This table highlights the direct exposure that each Director and executive KMP has to the Ingenia Communities Group security price. Non-Executive KMP Jim Hazel Robert Morrison Amanda Heyworth Andrew McEvoy Pippa Downes Gary Shiffman(1) John McLaren(1) Executive KMP Simon Owen(2)(3) Nicole Fisher(3) Scott Noble(3) Balance 1 July 2019 Acquisitions Disposals Balance 30 June 2020 357,755 143,822 129,507 14,815 – 60,786 59,015 49,134 25,101 32,148 23,560,866 9,011,716 23,560,866 9,011,716 – – – – – – – 418,541 202,837 178,641 39,916 32,148 32,572,582 32,572,582 1,180,528 275,416 (10,286) 1,445,658 291,638 21,427 (68,000) 245,065 6,000 66,277 (37,082) 35,195 (1) The securities held by Mr Shiffman and Mr McLaren are beneficially owned by Sun Communities and represent the same securities. (2) Mr Owen disposed of his securities in FY20 to meet personal tax obligations. (3) A portion of securities acquired by Mr Owen, Ms Fisher and Mr Noble result from the exercise of FY17 LTIP and FY18 STIP rights which vested in FY20. Ms Lyons opening security holding at 1 July 2019 was 35,655 and at the date of her resignation (30 November 2019) was 38,390 reflecting acquisitions of 2,735 in the period up until her resignation. As she is no longer a KMP she has not been included in the above table. 4.4. Executive KMP Employment Contracts and Termination Arrangements Contract terms The Managing Director and other Executive KMP are on rolling contracts until notice of termination is given by either Ingenia Communities Group or the relevant Executive KMP. The notice period for the Managing Director and other Executive KMP is twelve and six months respectively. In appropriate circumstances, payment may be made in lieu of notice, which would include pro rata fixed remuneration and statutory entitlements. Other contract terms are noted below: Fixed remuneration Variable remuneration(1) Managing Director Other Non-Executive KMP Total fixed remuneration includes cash salary, superannuation and other non-cash benefits. – Eligible for STI of up to 87.7% for any one year of the fixed annual remuneration, of which 66.6% is in the form of deferred equity. – Eligible for STI of up to 58.5% for any one year of fixed annual remuneration, of which 50% is in the form of deferred equity. – Eligible for LTI of up to 81.9% for any one – Eligible for LTI of up to 36.6% year of fixed annual remuneration. for any one year of fixed annual remuneration. Non-compete period Non-solicitation period 12 months 12 months (1) 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. Ingenia Communities Holdings Limited Annual Report 2020 Directors’ Report For the year ended 30 June 2020 | continued 23 Treatment of 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. 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 consider: – 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. 4.5. Details of KMP KMP for the year ended 30 June 2020 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 2020 have been determined by the Board as follows: KMP Non-Executive KMP Jim Hazel Robert Morrison Amanda Heyworth Andrew McEvoy Pippa Downes Gary Shiffman John McLaren Valerie Lyons Executive KMP Simon Owen Nicole Fisher Scott Noble Position Term Chairman Deputy Chairman Director Director Director Director Alternate Director Full year Full year Full year Full year Appointed 4 December 2019 Full year Full year Director Resigned, effective 30 November 2019 CEO & Managing Director Full year Chief Operating Officer Full year Chief Financial Officer Full year Signed in accordance with resolution of the Directors. Amanda Heyworth Chair – Remuneration and Nomination Committee Adelaide, 18 August 2020 Ingenia Communities Holdings Limited Annual Report 2020 24 Auditor’s Independence Declaration For the year ended 30 June 2020 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 the financial report of Ingenia Communities Holdings Limited for the financial year ended 30 June 2020, 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 Yvonne Barnikel Partner 18 August 2020 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 27 Ingenia Communities Holdings Limited Annual Report 2020 Consolidated Statement of Comprehensive Income For the year ended 30 June 2020 25 Rental income Ancillary guest and resident income Lifestyle home sales Service station sales Food and beverage sales Fee income Other revenue Revenue Property expenses Cost of lifestyle 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 Share of joint venture income/(loss) Net (loss)/gain on change in fair value of: Investment properties Financial liabilities Other financial instruments Other Profit before income tax Income tax benefit Net profit for the year Total comprehensive income for the year net of income tax Distributions per security paid(1) Earnings/(loss) per security: Basic earnings/(loss) Per security Per security attributable to parent Diluted earnings/(loss) per security Per security Per security attributable to parent Note 5 30 Jun 2020 $’000 30 Jun 2019 $’000 94,523 7,337 89,758 6,626 126,840 119,060 7,299 5,394 2,435 381 7,016 4,932 814 502 244,209 228,708 (27,425) (26,869) (66,994) (67,109) (49,929) (48,038) (8,014) (10,432) (6,279) (3,244) 71,892 (7,637) (9,801) (6,153) (1,611) 61,490 (6,649) (7,582) 65,243 53,908 134 (1,157) 12,13,14 6 15 11(b) (33,807) (18,962) (2,195) (5,400) 32 (1,567) 27,840 3,612 31,452 31,452 (2,288) (2,290) 23,811 5,502 29,313 29,313 7 Note 30 Jun 2020 Cents 30 Jun 2019 Cents 11.4 11.1 4(a) 4(b),33 4(a) 4(b),33 11.8 (1.0) 11.7 (1.0) 13.0 2.0 12.9 1.9 (1) Distributions relate to the amount paid during the financial year. A final FY20 distribution of 4.4 cps was declared on 18 August 2020 (payment due on 24 September 2020) resulting in a total FY20 distribution of 10.0 cps. Ingenia Communities Holdings Limited Annual Report 2020 26 Consolidated Balance Sheet As at 30 June 2020 Current assets Cash and cash equivalents Trade and other receivables Inventories Assets held for sale Total current assets Non-current assets Trade and other receivables Investment properties Investment in a joint venture Other financial assets Plant and equipment Intangibles Right-of-use assets Deferred tax asset Total non-current assets Total assets Current liabilities Trade and other payables Borrowings Employee liabilities Other financial liabilities Liabilities held for sale Provision for income tax Derivatives and other financial instruments Total current liabilities Non-current liabilities Borrowings Other financial liabilities Employee liabilities Derivatives and other financial instruments Total non-current liabilities Total liabilities Net assets Equity Issued securities Reserves Accumulated losses Total equity Net asset value per security ($) Note 30 Jun 2020 $’000 30 Jun 2019 $’000 8 9 10(a) 8 11 15 16 12 13 14 18 19 20 21 10(b) 29(i) 20 21 29(i) 10,751 8,794 36,201 32,623 88,369 20,185 6,232 35,987 12,835 75,239 1,892 1,917 943,958 846,835 15,926 13,862 5,158 8,339 2,221 13,129 1,004,485 1,092,854 11,593 2,263 5,018 1,996 – 8,026 877,648 952,887 41,488 52,940 1,849 2,481 3,577 5,175 1,486 – 765 1,961 1,100 5,694 – 70 56,056 62,530 83,549 9,588 640 – 93,777 149,833 943,021 250,930 10,800 445 2,435 264,610 327,140 625,747 22(a) 1,218,908 900,417 23 24 (1,933) 1,933 (273,954) (276,603) 943,021 $2.90 625,747 $2.65 Ingenia Communities Holdings Limited Annual Report 2020 Consolidated Cash Flow Statement For the year ended 30 June 2020 Cash flows from operating activities Rental and other property income Property and other expenses Government subsidy Proceeds from sale of lifestyle homes Purchase of lifestyle homes Proceeds from sale of service station inventory Purchase of service station inventory Net movement in resident loans Interest received Borrowing costs paid Cash flows from investing activities Payments for acquisition of investment properties Additions to investment properties Purchase and additions of plant and equipment Purchase and additions of intangible asset Proceeds from sale of investment properties Payments for acquisition of financial assets Net payments for acquisition of subsidiaries Investment in joint venture Other Cash flows from financing activities Proceeds from issue of stapled securities Payments for security issue costs Distributions to security holders Proceeds from borrowings Repayment of borrowings Payments for debt issue costs Termination of derivatives Payment for securities under security plan Other Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 27 Note 30 Jun 2020 $’000 30 Jun 2019 $’000 116,115 107,444 (102,656) (93,300) 2,906 – 140,372 131,629 (80,887) (75,909) 8,082 (6,966) (465) 85 7,810 (7,086) (2,410) 121 (9,398) (8,992) 35 67,188 59,307 17 (85,600) (78,836) (77,390) (65,988) (2,088) (656) 2,591 (13,847) (5,923) (4,200) – (2,180) (390) 32,172 – – (12,750) 1,579 (187,113) (126,393) 328,337 (9,846) 89,391 (3,217) (28,877) (24,295) 201,000 136,706 (369,000) (124,705) (698) (2,496) (4,980) (2,949) 110,491 (9,434) 20,185 10,751 (360) – – (699) 72,821 5,735 14,450 20,185 Ingenia Communities Holdings Limited Annual Report 2020 28 Consolidated Statement of Changes in Equity For the year ended 30 June 2020 Attributable to security holders Ingenia Communities Holdings Limited Issued Capital $’000 Reserves $’000 Note Carrying value 1 Jul 2019 12,985 1,933 Net profit Total comprehensive income for the year Transactions with security holders in their capacity as security holders: – – Issue of securities 22(a) 23,202 – – – Share based payment transactions Payment of distributions to security holders Payments to employee share trust 23 24 23 – – – 884 – (4,750) Retained Earnings $’000 20,194 18,085 Total $’000 ICF & ICMT $’000 Total Equity $’000 35,112 590,635 625,747 18,085 13,367 31,452 18,085 18,085 13,367 31,452 – 74 – – 23,202 295,289 318,491 958 – 958 – (28,877) (28,877) (4,750) – (4,750) Carrying value 30 Jun 2020 36,187 (1,933) 38,353 72,607 870,414 943,021 Carrying value 1 Jul 2018 11,216 1,393 (1,782) 10,827 523,046 533,873 Net profit Total comprehensive income for the year Transactions with security holders in their capacity as security holders: – – Issue of securities 22(a) 1,769 Share based payment transactions Payment of distributions to security holders Transfers from reserves 23 24 23 Other – – – – – – – 800 – (260) 9,686 9,686 19,627 29,313 9,686 9,686 19,627 29,313 – 142 – – 1,769 84,405 86,174 942 – 942 – (24,295) (24,295) (260) – (260) – – 12,148 12,148 (12,148) Carrying value 30 Jun 2019 12,985 1,933 20,194 35,112 590,635 625,747 Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 29 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 2020 was authorised for issue by the Directors on 18 August 2020. (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, residents’ 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 The Group has adopted, for the first time, AASB 16 Leases for reporting periods beginning on 1 July 2019. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for most leases under a single on-balance sheet model. Upon adoption of AASB 16, the Group recognised lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets, using the modified retrospective method. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognised at the date of initial application. Consequently, as permitted under the specific transitional provisions in the standard, the Group has not restated prior period comparatives. The Group also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a short-term lease of 12 months or less and do not contain a purchase option, and lease contracts for which the underlying asset is of low-value. The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets which are recognised as an expense on a straight-line basis over the lease term. The Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. Right-of-use assets The Group recognises right-of-use assets at the commencement date of the lease. Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets. Lease liabilities At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating the lease, if the lease term reflects the Group exercising the option to terminate. Ingenia Communities Holdings Limited Annual Report 2020 30 Notes to the Financial Statements For the year ended 30 June 2020 | continued 1. Summary of significant accounting policies (continued) Variable lease payments that do not depend on an index or a rate are recognised as expenses in the period in which the event or condition that triggers the payment occurs. In calculating the present value of lease payments, the Group uses the interest rate implicit in the lease. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying value of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset. The Group’s lease liabilities are included in Borrowings (Note 20). Leases for investment property which apply the fair value model are classified as investment property per AASB 140 Investment Properties. The Group has adopted for the first time AASB Interpretation 23 Uncertainty over income tax treatment for reporting periods beginning on 1 July 2020. It does not apply to taxes or levies outside the scope of AASB 112, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The Group applies significant judgement in identifying uncertainties over income tax treatments. Since the Group operates in a complex environment, the Group assessed whether the Interpretation had an impact on its consolidated financial statements and determined that the Interpretation did not have an impact. (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. 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. Goodwill is tested annually for impairment, or more frequently if changes in circumstances indicate that it might impaired. An impairment loss is recognised when the carrying amount of the asset exceeds its recoverable amount, calculated as the higher of fair value less costs of disposal and the value in use. Impairment losses are recognised in the Consolidated Statement of Comprehensive Income. For the purposes of assessing impairment, assets are grouped at the lowest levels for which goodwill is monitored for management purposes and allocated to cash generating units (“CGU”). The assumptions used for determining the recoverable amount of the CGU are based on the expectation for the future, utilising both internal and external sources of data and relevant market trends. (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 value 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. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 31 1. Summary of significant accounting policies (continued) (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. (i) Leases The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets which are recognised as an expense on a straight-line basis over the lease term. The Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. Right-of-use assets The Group recognises right-of-use assets at the commencement date of the lease. Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets. Lease liabilities At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating the lease, if the lease term reflects the Group exercising the option to terminate. Variable lease payments that do not depend on an index or a rate are recognised as expenses in the period in which the event or condition that triggers the payment occurs. In calculating the present value of lease payments, the Group uses the interest rate implicit in the lease. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset. The Group’s lease liabilities are included in Borrowings (Note 20). Leases for investment property which apply the fair value model are classified as investment property per AASB 140 Investment Properties. Prior year leases policy 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 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. (j) Plant and equipment 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 value of the plant and equipment as a replacement, if the recognition criteria are satisfied. Ingenia Communities Holdings Limited Annual Report 2020 32 Notes to the Financial Statements For the year ended 30 June 2020 | continued 1. Summary of significant accounting policies (continued) 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 9 Financial Instruments are classified as; fair value through profit or loss; fair value through other comprehensive income; or amortised cost. 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. 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 instruments; discounted cash flow analysis; option pricing models; making use of available and supportable market data and keeping judgemental inputs to a minimum. 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 value may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying value 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 original invoice amount, and subsequently adjusted for ECL. An allowance is recognised by analysing the age of outstanding balances and applying historical default percentages. Historical loss rates are adjusted to reflect current and forward-looking observable data affecting the ability of customers to settle their debts. Inventories (o) The Group holds inventory in relation to the acquisition and development of lifestyle homes, as well as service station fuel and supplies. 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 lifestyle 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. (q) Investment property Land and buildings have the function of an investment and are regarded as composite assets. In accordance with applicable accounting standards, the buildings, including plant and equipment, are not depreciated. Investment property includes property under construction, 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. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 33 1. Summary of significant accounting policies (continued) 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. 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 value 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) 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 Note 1(cc) and Note 29(k) for information regarding the valuation of resident loans. Ingenia Communities Holdings Limited Annual Report 2020 34 Notes to the Financial Statements For the year ended 30 June 2020 | continued 1. Summary of significant accounting policies (continued) (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 value of the borrowing, and amortised over its expected life. Borrowings are classified as current liabilities, unless the Group has an unconditional right to defer settlement to more than twelve months after reporting date. Borrowing costs are expensed as incurred, except where they are directly attributable to the acquisition, construction or production of a qualifying asset. When this is the case, they are capitalised as part of the acquisition cost of that asset. (w) Issued equity Issued and paid up securities are recognised at the fair value of the consideration received by the Group. Any transaction costs arising on issue of ordinary securities are recognised directly in equity as a reduction of the security proceeds received. (x) Revenue Revenue from rent, management fees, 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 investment properties 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 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 lifestyle homes is recognised at the point in time when control of the lifestyle home is transferred to the customer, on settlement of the home. 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 at the point in time when control of the assets is transferred to the customer. (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. 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. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 35 1. Summary of significant accounting policies (continued) 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. ICF has entered 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 value 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. 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) 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. (bb) Investment in a joint venture A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries. The Group’s investment in its joint venture with Sun Communities is accounted for using the equity method. Under the equity method, the investment in a joint venture is initially recognised at cost. The carrying value of the investment is adjusted to recognise changes in the Group’s share of net assets of the joint venture since the acquisition date. Goodwill relating to the joint venture is included in the carrying value of the investment and is not tested for impairment separately. The statement of profit or loss reflects the Group’s share of the results of operations of the joint venture. Any change in other comprehensive income (“OCI”) of those investees is presented as part of the Group’s OCI. In addition, when there has been a change recognised directly in the equity of the joint venture, the Group recognises its share of any changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the joint venture are eliminated to the extent of the interest in the joint venture. The aggregate of the Group’s share of profit or loss of a joint venture is shown on the face of the statement of profit or loss outside operating profit and represents profit or loss after tax and non-controlling interests in the subsidiaries of the joint venture. The financial statements of the joint venture are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its joint venture. At each reporting date, the Group determines whether there is objective evidence that the investment in the joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the joint venture and its carrying value, and then recognises the loss within the statement of comprehensive income. Upon loss of joint control, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying value of the joint venture upon loss of significant influence or joint control and the fair value of the retained investment and proceeds from disposal is recognised in profit or loss. Ingenia Communities Holdings Limited Annual Report 2020 36 Notes to the Financial Statements For the year ended 30 June 2020 | continued 1. Summary of significant accounting policies (continued) (cc) 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 29. 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 major assumptions used in the valuations. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities based on nature, characteristics and risks of the asset or liability, and the level of the fair value hierarchy (see Note 29). (dd) 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. (ee) Pending accounting standards In the current period, the Group has adopted all the new and revised accounting standards, amendments to accounting standards, and interpretations that are relevant to its operations and effective for the current annual reporting period. (ff) 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. (gg) Government grants Government grants are recognised where there is reasonable assurance that the grant will be received, and all attached conditions will be complied with. When the grant relates to an expense, it is recognised net of the related expense for which it is intended to compensate. There are no unfilled conditions or other contingencies attached to the grants. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 37 ii. Valuation of inventories The Group has inventory in the form of lifestyle 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 resident loans The fair value of the 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 fees (“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 the departure 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. (a) Critical accounting estimates and assumptions 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 value of assets and liabilities within the next financial year are discussed below. i. Valuation of investment property, other financial assets and other financial liabilities The Group has investment properties and assets held for sale which together represent the estimated fair value of the Group’s investment property. Other financial assets represent the Groups investment in a number of unlisted property funds. Other financial liabilities relate to a profit share arrangement with a third-party which is carried at fair value. The carrying value of these assets 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. Refer to Note 11 for the impact of COVID-19 on valuation assumptions. 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 2020 38 Notes to the Financial Statements For the year ended 30 June 2020 | continued 3. Segment information (a) Description of segments The Group invests predominantly in rental properties located in Australia with five reportable segments: – – – Ingenia Lifestyle and Holidays – comprising long-term and tourism accommodation within lifestyle communities; Ingenia Lifestyle Development – comprising the development and sale of lifestyle 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 and Holiday communities; – Corporate & Other – comprises the Group’s remaining assets and operating activities including, funds management, development joint venture 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. Lifestyle & Holidays Operations $’000 Lifestyle Development $’000 Ingenia Gardens $’000 Fuel, Food & Beverage Services $’000 Corporate & Other $’000 Total $’000 76,710 76,710 126,840 126,840 25,039 25,039 12,690 12,690 2,930 2,930 244,209 244,209 76,710 (18,168) – (22,307) (3,207) 126,840 (1,005) (66,994) (12,578) (1,293) (2,583) (4,186) – – 25,039 (6,740) – (5,996) (965) (902) – (599) (880) (233) Earnings before interest and tax 29,846 39,904 10,203 12,690 (659) – (2,918) (67) (2,126) (6,279) 2,930 (853) – (6,130) (2,482) 244,209 (27,425) (66,994) (49,929) (8,014) (635) – (10,432) (6,279) (52) 589 (1,480) (8,650) (3,244) 71,892 134 (6,649) (6,268) 59,109 (33,807) (2,195) 32 (1,567) 9,880 31,452 (b) 2020 Segment revenue External segment revenue Total revenue Segment underlying profit External segment revenue Property expenses Cost of lifestyle homes sold Employee expenses Administrative expenses Operational, marketing and selling expenses Service station expenses Depreciation and amortisation expense Share of profit of a joint venture Net finance expense Income tax expense Underlying profit Net (loss)/gain on change in fair value of: Investment properties Financial liabilities Other financial instruments Other Income tax benefit Profit after tax Segment assets Segment assets Assets held for sale Total assets 679,990 23,948 703,938 167,980 142,703 – – 167,980 142,703 316 – 316 69,242 8,675 77,917 1,060,231 32,623 1,092,854 Ingenia Communities Holdings Limited Annual Report 2020 39 Notes to the Financial Statements For the year ended 30 June 2020 | continued 3. Segment information (continued) (c) 2019 Lifestyle & Holidays Operations $’000 Lifestyle Development $’000 Ingenia Gardens $’000 Fuel, Food & Beverage Services $’000 Corporate & Other $’000 Total $’000 71,722 71,722 119,063 119,063 24,639 24,639 11,950 11,950 1,334 1,334 228,708 228,708 71,722 (17,772) – (20,821) (3,105) 119,063 (989) (67,109) (11,959) (661) (2,001) (4,428) – – (625) (508) Earnings before interest and tax 27,398 33,409 Segment revenue External segment revenue Total revenue Segment underlying profit External segment revenue Property expenses Cost of lifestyle homes sold Employee expenses Administrative expenses Operational, marketing and selling expenses Service station expenses Depreciation and amortisation expense Share of loss of a joint venture Net finance expense Income tax expense Underlying profit Net loss on change in fair value of: Investment properties Financial liabilities Other financial instruments Other Income tax benefit Profit after tax Segment assets Segment assets Assets held for sale Total assets 24,639 (6,788) – (6,474) (378) (828) – (140) 10,031 11,950 (686) – (2,631) (51) (1,755) (6,153) (49) 625 1,334 (634) – (6,153) (3,442) (789) – (289) (9,973) 228,708 (26,869) (67,109) (48,038) (7,637) (9,801) (6,153) (1,611) 61,490 (1,157) (7,582) (5,530) 47,221 (18,962) (5,400) (2,288) (2,290) 11,032 29,313 571,131 2,662 573,793 186,740 – 186,740 134,616 – 134,616 348 – 348 47,217 10,173 57,390 940,052 12,835 952,887 Ingenia Communities Holdings Limited Annual Report 2020 40 Notes to the Financial Statements For the year ended 30 June 2020 | continued 4. Earnings per security (a) Per security 30 Jun 2020 30 Jun 2019 Profit attributable to security holders ($’000) 31,452 29,313 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 267,272 224,872 1,542 264 1,237 265 269,078 226,374 11.8 11.7 13.0 12.9 (Loss)/profit attributable to security holders ($’000) (2,722) 4,402 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) 5. Revenue (a) Rental income Residential rental income – Ingenia Gardens Residential rental income – Lifestyle and Holidays Annuals rental income – Lifestyle and Holidays Tourism rental income – Lifestyle and Holidays Commercial rental income – Lifestyle and Holidays Total rental income 267,272 224,872 1,542 264 1,237 265 269,078 226,374 (1.0) (1.0) 2.0 1.9 30 Jun 2020 $’000 30 Jun 2019 $’000 22,326 31,829 4,462 35,508 398 21,717 25,008 4,680 38,023 330 94,523 89,758 Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 6. Net finance expense Interest income Debt facility interest expense Lease interest expense (1) Net finance expense 41 30 Jun 2020 $’000 30 Jun 2019 $’000 (85) (121) 6,167 567 6,649 7,307 396 7,582 (1) Lease interest expense relates to lease of right-of-use assets and certain ground leases for investment properties that are long term in nature. Interest costs of $3,136,000 have been capitalised into investment properties associated with development assets (30 Jun 2019: $3,004,000). 7. Income tax benefit (a) Income tax benefit Current tax expense Increase in deferred tax asset Income tax benefit (b) Reconciliation between tax expense and pre-tax profit Profit before income tax Less amounts not subject to Australian income tax Income tax expense at the Australian tax rate of 30% (30 Jun 2019: 30%) Tax effect of amounts which impact tax expense: Prior period income tax return true-ups Recognition of previously unrecognised tax losses Other Income tax benefit 30 Jun 2020 $’000 30 Jun 2019 $’000 (898) (3,556) 4,510 3,612 9,058 5,502 27,840 23,811 (20,380) (25,662) 7,460 (2,238) (1,851) 555 1,314 – 4,536 3,612 859 1,839 2,249 5,502 (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. Ingenia Communities Holdings Limited Annual Report 2020 42 Notes to the Financial Statements For the year ended 30 June 2020 | continued 8. Trade and other receivables Current Trade receivables Prepayments Deposits Other receivables Total current trade and other receivables Non-current Other receivables 9. Inventories Lifestyle homes: Completed Display homes Under construction Fuel, food and beverage supplies Total inventories The lifestyle home balance includes: 30 Jun 2020 $’000 30 Jun 2019 $’000 1,775 3,036 260 3,723 8,794 636 2,993 812 1,791 6,232 1,892 1,917 30 Jun 2020 $’000 30 Jun 2019 $’000 27,150 2,514 6,222 315 19,320 1,895 14,455 317 36,201 35,987 – – – – 132 new completed homes (30 Jun 2019: 99) 12 refurbished/renovated/annuals completed homes (30 Jun 2019: 18) 20 display homes (30 Jun 2019: 9) Lifestyle homes under construction includes 52 partially completed homes at different stages of development (30 Jun 2019: 84). 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: Gladstone, South Gladstone, QLD Albury, Lavington, NSW Sun Country, Mulwala, NSW Upper Coomera, Upper Coomera, QLD Mudgee Valley, Mudgee, NSW Total assets held for sale 30 Jun 2020 $’000 30 Jun 2019 $’000 8,675 4,475 8,973 10,500 – 32,623 10,173 – – – 2,662 12,835 Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 10. Assets and liabilities held for sale (continued) (b) Summary of carrying value – Liabilities The following are the carrying values of loans associated with assets held for sale: Net resident loans – Gladstone Total liabilities held for sale 11. Investment properties (a) Summary of carrying value Completed properties Properties under development Total carrying value (b) Movements in carrying value Carrying value at the beginning of the year Acquisitions Expenditure capitalised Net loss on change in fair value Transfer to assets held for sale Disposals Carrying value at the end of the year 43 30 Jun 2020 $’000 30 Jun 2019 $’000 5,175 5,175 5,694 5,694 30 Jun 2020 $’000 30 Jun 2019 $’000 812,667 131,291 697,447 149,388 943,958 846,835 Note 30 Jun 2020 $’000 30 Jun 2019 $’000 846,835 730,437 84,227 69,153 85,543 69,611 (32,309) (18,962) 10(a) (23,948) (12,835) – (6,959) 943,958 846,835 Fair value hierarchy disclosures for investment properties have been provided in Note 30(a). (c) Reconciliation of fair value Carrying value at the beginning of the year 132,140 714,695 846,835 Ingenia Gardens $’000 Lifestyle and Holidays $’000 Total $’000 Acquisitions Expenditure capitalised Net gain/(loss) on change in fair value Transfer to assets held for sale Carrying value at the end of the year – 2,638 5,092 84,227 66,515 84,227 69,153 (37,401) (32,309) – (23,948) (23,948) 139,870 804,088 943,958 Ingenia Communities Holdings Limited Annual Report 2020 44 Notes to the Financial Statements For the year ended 30 June 2020 | continued 11. Investment properties (continued) (d) Individual property carrying value Completed properties Ingenia Gardens: Brooklyn, Brookfield, VIC Carey Park, Bunbury, WA Horsham, Horsham, VIC Jefferis, Bundaberg North, QLD Oxley, Port Macquarie, NSW Townsend, St Albans Park, VIC Yakamia, Yakamia, WA Goulburn, Goulburn, NSW Coburns, Brookfield, VIC 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 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 Warrnambool, Warrnambool, VIC Carrying value 30 Jun 2020 $’000 30 Jun 2019 $’000 5,420 5,200 5,180 4,350 5,380 5,170 4,660 5,400 5,190 4,290 4,850 3,770 5,930 6,480 6,230 4,920 5,580 11,670 8,700 6,350 3,920 4,790 4,040 3,960 4,300 4,140 5,170 4,900 4,700 4,300 5,150 5,100 4,600 4,940 5,070 4,500 4,410 4,070 5,750 5,630 5,760 4,900 5,250 11,130 7,980 5,560 3,790 4,640 3,050 3,580 4,380 3,830 139,870 132,140 Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 11. Investment properties (continued) Completed properties Ingenia Lifestyle and Holidays: The Grange, Morisset, NSW Ettalong Beach, Ettalong Beach, NSW(2) Albury, Lavington, NSW(1) Nepean River, Emu Plains, NSW Kingscliff, Kingscliff, NSW One Mile Beach, One Mile, NSW(2) Hunter Valley, Cessnock, NSW Sun Country, Mulwala, NSW(1) Stoney Creek, Marsden Park, NSW 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(2) Broulee, Broulee, NSW(2) Ocean Lake, Ocean Lake, NSW Avina, Vineyard, NSW Hervey Bay (Holidays), Hervey Bay, QLD Latitude One, Port Stephens, NSW(3) Blueys Beach, Blueys Beach, NSW Cairns Coconut, Woree, QLD Bonny Hills, Bonny Hills, NSW Durack Gardens, Durack, QLD Eight Mile Plains, Eight Mile Plains, QLD Plantations, Woolgoolga, NSW Hervey Bay (Lifestyle), Hervey Bay, QLD Rivershore, Diddillibah, QLD Brisbane North, Aspley, QLD Byron Bay, Byron Bay, NSW(2) Taigum, Taigum, QLD Bevington Shores, Halekulani, NSW Lake Munmorah, Lake Munmorah, NSW Total completed properties (1) Classified as held for sale at 30 June 2020. 45 Carrying value 30 Jun 2020 $’000 30 Jun 2019 $’000 22,534 6,953 – 13,263 15,349 20,260 8,525 – 22,319 26,575 18,832 35,135 9,114 15,848 14,621 39,534 16,331 28,883 12,673 6,510 9,783 22,485 9,652 21,744 1,148 55,920 13,900 27,709 27,063 10,381 1,124 24,300 30,000 18,079 17,250 25,000 24,000 672,797 812,667 18,922 7,129 3,993 13,235 15,138 19,662 8,019 8,006 20,469 29,586 18,500 30,393 8,559 15,800 9,586 33,766 15,750 20,994 12,282 6,544 9,450 23,599 9,800 8,161 2,949 57,002 13,900 25,954 26,646 864 – 23,250 29,500 17,899 – – – 565,307 697,447 (2) Includes a land component that is leased from the Crown, local municipalities or private lessors and are recognised as investment property with an associated ground lease. The value of the capitalised lease carried within investment property is $11,515,000 (30 June 2019: $11,850,000). (3) The carrying value of Latitude One represents 100% of the property value. A profit share arrangement is in place with a third-party, the liability for which is carried at fair value and classified as a non-current financial liability. Ingenia Communities Holdings Limited Annual Report 2020 46 Notes to the Financial Statements For the year ended 30 June 2020 | continued Investment properties (continued) 11. 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. Properties under development Ingenia Lifestyle and Holidays: The Grange, Morisset, NSW Albury, Lavington, NSW(1) Hunter Valley, Cessnock, NSW Sun Country, Mulwala, NSW(1) Stoney Creek, Marsden Park, NSW Chambers Pines, Chambers Flat, QLD Bethania, Bethania, QLD Conjola, Lake Conjola, NSW Lara, Lara, VIC South West Rocks, South West Rocks NSW(2) Avina, Vineyard, NSW Latitude One, Port Stephens, NSW(3) Blueys Beach, Blueys Beach, NSW Durack Gardens, Durack, QLD Eight Mile Plains, Eight Mile Plains, QLD Plantations, Woolgoolga, NSW Hervey Bay (Lifestyle), Hervey Bay, QLD Upper Coomera, Upper Coomera, QLD(1) Rivershore, Diddillibah, QLD Properties under development Total investment properties (1) Classified as held for sale at 30 June 2020. Carrying value 30 Jun 2020 $’000 30 Jun 2019 $’000 – – – – 2,029 16,600 16,140 3,992 7,060 – 13,020 23,062 6,452 2,066 2,096 24,068 11,956 3,656 3,166 935 1,030 2,699 11,926 15,060 10,370 7,090 553 10,400 32,944 3,410 3,218 3,468 21,913 7,550 – 10,000 2,750 131,291 943,958 – 149,388 846,835 (2) Includes a land component that is leased from the Crown, local municipalities or private lessors and are recognised as investment property with an associated ground lease. The value of the capitalised lease carried within investment property is $11,515,000 (30 June 2019: $11,850,000). (3) The carrying value of Latitude One represents 100% of the property value. A profit share arrangement is in place with a third-party, the liability for 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)). 13 Lifestyles villages and 2 Ingenia Garden villages were externally valued across May and June 2020. 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 2020 47 Notes to the Financial Statements For the year ended 30 June 2020 | continued 11. Investment properties (continued) (e) Description of valuations techniques used and key inputs to valuation on investment properties Valuation technique Significant unobservable inputs 30 Jun 2020 30 Jun 2019 Range (weighted average) Ingenia Gardens Capitalisation method Stabilised occupancy 78% – 97% (92.0%) 76% – 98% (92.0%) Capitalisation rate 9.4% – 10.3% (9.7%) 8.8% – 10.5% (10.0%) 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; 30% – 80% for tourism and short-term rental 20% – 80% for powered and camp sites; 30% – 80% for tourism and short-term rental 100% 100% Relationship of unobservable input to fair value 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. The higher the occupancy, the greater the value. 30% – 80% dependent upon short-term and residential accommodation mix 20% – 76% dependent upon short-term and residential accommodation mix A COVID-19 net profit shortfall adjustment has also been incorporated for some assets in line with external valuation methodology. Capitalisation rate 5.90% – 12.25% 6.3% – 12.3% Discount rate 8.0% – 16.5% 8.3% – 17.9% Discounted cash flow (for investment properties under development) Gladstone DMF Village Discounted cash flow Current market value per unit $125,000 – $185,000 $125,000 – $230,000 Long-term property growth rate Average length of stay – future residents 2.0% 0.0% 7.2 years 8.9 years Discount rate 11.5% 14.5% Capitalisation has an inverse relationship to valuation. Discount rate 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 has an inverse relationship with valuations. The longer the length of stay, later the company is able to recognise the deferred management fee accrued. Ingenia Communities Holdings Limited Annual Report 2020 48 Notes to the Financial Statements For the year ended 30 June 2020 | 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. COVID-19 Valuation impact In response to the uncertainty surrounding the COVID-19 pandemic, a COVID-19 net profit shortfall adjustment has also been incorporated for some assets in line with external valuation methodology. In assessing the fair value of investment properties, the Group has considered the following: Segment COVID-19 Considerations Ingenia Gardens – Limited increase in operational costs. Ingenia Lifestyle and Rentals – Limited increase in operational costs. – Recent occupancy rates are at historical highs, indicating strong segment resilience. – Strong debtor collection with no increase in defaults. – Strong debtor collection with no increase in defaults. – Continued market transactions in comparable lifestyle assets supporting capitalisation rates. Ingenia Holidays – Limited increase in operational costs. – Strong forward bookings for majority of assets. – Impact of travel restrictions on revenue. Lifestyle Development – Short term slow down in the residential housing market and the impact on settlements. – Limited impact on development progress. Given the constantly changing nature of the situation, the fair value at reporting date involves uncertainties around the underlying assumptions. The external valuations undertaken during the period, contained material valuation uncertainty clauses given the impacts of COVID-19 and reduced levels of transactional evidence during the period. The valuation can be relied upon at the date of valuation however, a higher level of valuation uncertainty than normal is assumed. In the event that COVID-19 impacts are more severe or prolonged than anticipated, this may have a further adverse impact on the fair value of Ingenia’s investment properties. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 49 11. Investment properties (continued) (f) Sensitivity analysis The Group performed a sensitivity analysis to assess the impact on the fair value of investment properties given the uncertainty associated with COVID-19. The below tables summarise the fair value movements associated with changes in capitalisation rates and discount rates: Investment Properties $’000 Ingenia Gardens Ingenia Lifestyle & Holidays Investment Properties $’000 Ingenia Gardens Ingenia Lifestyle & Holidays 12. Plant and equipment (a) Summary of carrying value Plant and equipment Less: accumulated depreciation Total plant and equipment (b) Movements in carrying value Carrying value at the beginning of year Additions Disposals Depreciation expense Carrying value at the end of year 13. Intangibles (a) Summary of carrying value Software & development Less: accumulated amortisation Goodwill Total Intangibles (b) Movements in carrying value Carrying value at the beginning of year Additions Disposals Amortisation expense Carrying value at the end of year Fair value at 30 June 2020 Capitalisation rate impact -0.5% +0.5% 139,870 804,088 943,958 7,100 52,147 59,247 (6,430) (45,423) (51,853) Fair value at 30 June 2020 Discount rate -0.5% +0.5% 139,870 804,088 943,958 – 1,730 1,730 – (1,693) (1,693) 30 Jun 2020 $’000 30 Jun 2019 $’000 7,412 (2,254) 5,158 5,018 1,904 (283) (1,481) 5,158 8,372 (3,354) 5,018 4,279 2,064 (197) (1,128) 5,018 30 Jun 2020 $’000 30 Jun 2019 $’000 4,338 (2,107) 6,108 8,339 1,996 6,884 (10) (531) 8,339 3,582 (1,586) – 1,996 1,956 523 – (483) 1,996 Ingenia Communities Holdings Limited Annual Report 2020 50 Notes to the Financial Statements For the year ended 30 June 2020 | continued 14. Right-of-use assets (a) Summary of carrying value Plant and equipment Buildings Less: accumulated amortisation Total right-of-use asset (b) Movements in carrying value Carrying value at the beginning of year Recognised on adoption of AASB 16 Additions Disposals Depreciation expense Carrying value at the end of year 30 Jun 2020 $’000 30 Jun 2019 $’000 1,035 2,418 (1,232) 2,221 – 3,453 – – (1,232) 2,221 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 15. Investment in a joint venture The Group holds a 50% interest in a joint venture with Sun Communities for the development of greenfield communities. The Group’s interest in the joint venture is accounted for using the equity method in the consolidated financial statements. The valuation methodology of the Joint Venture’s assets and liabilities are consistent with that of the Group. The following table illustrates the summarised financial information of the Group’s investment in the joint venture entities: Balance Sheet Current assets Non-current assets(1) Current liabilities Equity Group’s share in equity – 50% Group’s carrying value in investment 30 Jun 2020 $’000 30 Jun 2019 $’000 11,126 22,880 (2,154) 31,852 15,926 15,926 5,859 17,623 (296) 23,186 11,593 11,593 (1) Non-current assets represent the fair value of investment property. Refer to Note 2(a) for valuation methodology. Statement of Comprehensive Income Revenue Interest income Cost of sales Expenses Depreciation Net gain/(loss) on change in fair value of investment property Profit/(loss) before income tax Income tax benefit Total comprehensive profit/(loss) for the year Group’s share of profit/(loss) for the year 30 Jun 2020 $’000 30 Jun 2019 $’000 2,592 33 (1,106) (1,600) (43) 242 118 149 267 134 – 12 – (436) – (1,941) (2,365) 51 (2,314) (1,157) Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 16. Other financial assets Unlisted property funds Total non-current 51 30 Jun 2020 $’000 30 Jun 2019 $’000 13,862 13,862 2,263 2,263 Other financial assets represent the Groups investment in a number of unlisted property funds. Refer to Note 2 for valuation assumptions. 17. Business combinations Acquisition of Eighth Gate Capital Management Pty Limited On 22 August 2019, the Group acquired the share capital of EGCM, a funds and asset management business which manages six funds, that invest in lifestyle and holiday communities situated in NSW, QLD and VIC. The Group receives fees for the management and development of the assets and management of the funds. From the date of acquisition, EGCM contributed $1,832,000 of revenue and $606,000 of to profit before tax from continuing operations of the Group. If the combination had taken place at the beginning of FY20, the Group’s revenue would have been $2,200,000 and the profit before tax would have been $730,000. The fair values of the identifiable assets and liabilities of EGCM as at the date of acquisition were: Assets Cash Trade and other receivables Total Assets Liabilities Trade and other payables Total Liabilities Total identifiable net assets at fair value Goodwill arising on acquisition Purchase consideration paid and accrued on acquisition Analysis of cash flows on acquisition: Net cash acquired with the subsidiary Cash paid Net cash flow on acquisition Fair value recognised on acquisition $’000 199 1,000 1,199 1,134 1,134 65 6,108 6,173 199 (6,122) (5,923) Reconciliation of the carrying value of goodwill at the beginning and end of the reporting period is presented below: Carrying value at the beginning of the period Acquisition of subsidiary Impairment losses recognised during the reporting period Carrying value at the end of the period 30 Jun 2020 $’000 – 6,108 – 6,108 Ingenia Communities Holdings Limited Annual Report 2020 52 Notes to the Financial Statements For the year ended 30 June 2020 | continued Business combinations (continued) 17. 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. Goodwill is tested annually for impairment, or more frequently if changes in circumstances indicate that it might be impaired. An impairment loss is recognised when the carrying amount of the asset exceeds its recoverable amount, calculated as the higher of fair value less costs of disposal and the value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which goodwill is monitored for management purposes and allocated to cash generating units (CGU). The assumptions used for determining the recoverable amount of the CGU are based on the expectation for the future, utilising both internal and external sources of data and relevant market trends. Discounted cash flow method This method involves the projection of a series of cash flows of the funds management business. To this projected cash flow series, a pre-tax market-derived discount rate of 19% and a terminal growth rate of 2% was applied to establish the present value of the income streams associated with the CGU. The discounted cash flow was then tested against appropriate business EBIT multiples and a sensitivity analysis was conducted. 18. Deferred tax assets and liabilities Deferred tax assets Tax losses Other Deferred tax liabilities DMF receivable Investment properties Net deferred tax assets Tax effected carried forward tax losses for which no deferred tax asset has been recognised 30 Jun 2020 $’000 30 Jun 2019 $’000 19,124 1,984 (460) (7,519) 13,129 5,552 12,540 8 (447) (4,075) 8,026 6,052 The availability of carried forward tax losses of $5.6 million to the ICMT tax consolidated group is subject to recoupment rules at the time of recoupment. Further, the rate at which these losses can be utilised is determined by reference to market values at the time of tax consolidation and subsequent events. Accordingly, a portion of these carried forward tax losses may not be available in the future. The Group offsets tax assets and liabilities, if and only if, it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority. 19. Trade and other payables Current Trade payables and accruals Deposits Other Total current 30 Jun 2020 $’000 30 Jun 2019 $’000 31,204 9,215 1,069 45,212 6,418 1,310 41,488 52,940 Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 20. Borrowings Current Lease liabilities – Right-of-use assets Lease liabilities – Ground leases Total current Non-current Bank debt Prepaid borrowing costs Lease liabilities – Right-of-use assets Lease liabilities – Ground leases Total non-current 53 30 Jun 2020 $’000 30 Jun 2019 $’000 1,072 777 1,849 – 765 765 73,000 241,000 (1,400) (1,155) 1,209 10,740 83,549 – 11,085 250,930 (a) Bank debt Ingenia has $450.0 million in available debt facilities at 30 Jun 2020 (30 Jun 2019: $350.0 million). The total $450.0 million in debt facilities is provided by three Australian banks. The facility tranche dates are: – – – 17 February 2022 ($175.4 million); 13 July 2023 ($174.6 million); and 21 February 2027 ($100.0 million). As at 30 Jun 2020, the facilities have been drawn to $73.0 million (30 Jun 2019: $241.0 million). The carrying value of investment property net of resident liabilities at reporting date for the Group’s Australian properties pledged as security is $909.0 million (30 Jun 2019: $797.2 million). (b) Bank guarantees The Group has the ability to utilise its bank facilities to provide bank guarantees, which at 30 June 2020 were $14.3 million (30 Jun 2019: $11.5 million). (c) Right-of-use asset leases Lease payments Lease payments: Within one year Later than one year but not later than five years Later than five years Total lease payments Future finance charges Present value of lease payments Present value of lease payments: Within one year Later than one year but not later than five years Later than five years Total lease payments 30 Jun 2020 $’000 30 Jun 2019 $’000 1,072 1,289 – 2,361 (80) 2,281 1,072 1,209 – 2,281 – – – – – – – – – – Ingenia Communities Holdings Limited Annual Report 2020 54 Notes to the Financial Statements For the year ended 30 June 2020 | continued 20. Borrowings (continued) (d) Ground leases The Group has entered into ground leases in relation to certain Lifestyle and Holidays investment properties. The leases are long-term in nature and range between 6 years to perpetuity. Lease payments – excluding perpetual lease Lease payments: Within one year Later than one year but not later than five years Later than five years Total lease payments Future finance charges Present value of lease payments Present value of lease payments: Within one year Later than one year but not later than five years Later than five years Total lease payments 30 Jun 2020 $’000 30 Jun 2019 $’000 802 3,374 12,086 16,262 (5,880) 10,382 777 2,944 6,661 10,382 786 3,306 12,955 17,047 (6,330) 10,717 765 2,895 7,057 10,717 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. 21. Other financial liabilities Current Financial liabilities Total current Non-current Financial liabilities Total non-current 30 Jun 2020 $’000 30 Jun 2019 $’000 3,577 3,577 9,588 9,588 1,100 1,100 10,800 10,800 Other financial liabilities relate to a profit share arrangement with a third-party which is carried at fair value. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 22. Issued securities (a) Carrying values Balance at beginning of the year Issued during the year: Distribution Reinvestment Plan (“DRP”) Institutional Placement, Rights Issue and Share Purchase Plan Executive Incentive Plan Equity raising costs Balance at end of the 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 Balance at beginning of the year Issued during the year: Distribution Reinvestment Plan (“DRP”) Institutional Placement, Rights Issue and Share Purchase Plan Executive Incentive Plan Balance at end of the year 55 30 Jun 2020 $’000 30 Jun 2019 $’000 900,417 814,243 19,273 309,064 – 14,462 74,564 365 (9,846) (3,217) 1,218,908 900,417 36,187 1,093,696 89,025 12,985 831,792 55,640 1,218,908 900,417 30 Jun 2020 ’000 30 Jun 2019 ’000 236,375 208,092 4,237 84,941 – 4,931 23,177 175 325,553 236,375 (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. 23. Reserves Share-based payment reserve Balance at the beginning of year Payments to employee share trust Granting of securities Lapsed rights Share-based payment expense Balance at the end of year 30 Jun 2020 $’000 30 Jun 2019 $’000 1,933 (4,750) – (74) 958 (1,933) 1,393 – (260) (142) 942 1,933 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. Ingenia Communities Holdings Limited Annual Report 2020 56 Notes to the Financial Statements For the year ended 30 June 2020 | continued 24. Accumulated losses Balance at beginning of the year Net profit for the year Distributions Lapsed rights Balance at end of the year The closing balance is attributable to the security holders of: Ingenia Communities Holding Limited Ingenia Communities Fund Ingenia Communities Management Trust 30 Jun 2020 $’000 30 Jun 2019 $’000 (276,603) (281,763) 31,452 29,313 (28,877) (24,295) 74 142 (273,954) (276,603) 38,353 20,194 (316,668) (308,171) 4,361 11,374 (273,954) (276,603) 25. Commitments There were commitments for capital expenditure on investment properties and inventories contracted but not provided for at reporting date of $28,407,358 (30 Jun 2019: $38,374,980). During the period, a lease for office space was signed with a commencement date in FY21. The expected minimum lease payments over the term of the lease are $5,000,000. 26. Contingent liabilities The Group has the following contingent liabilities: – Bank guarantees totalling $14.3 million provided for under the $450.0 million bank facility. Bank guarantees primarily relate to the Responsible Entity’s AFSL capital requirements ($10.0 million). 27. 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 FY20 Rights Plan, 33.3% of the maximum STI for the CEO and 50.0% 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 $527,017 (30 Jun 2019: $452,487) 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 2020. (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 FY20 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 average underlying Earnings Per Security growth (Underlying EPS). TSR is benchmarked against the ASX 200 A-REIT Index, whilst ROE and Underlying EPS is benchmarked against internal targets. The number of LTIP rights that will vest depends on the TSR, ROE and Underlying EPS 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 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 27. Share based payment transactions (continued) One right equates to one security in the Group. Movements in rights during the year were as follows: 57 STIPs Outstanding at the beginning of year Exercised during the year Granted during the year Outstanding at the end of year Weighted average remaining life of outstanding rights (years) LTIPs Outstanding at beginning of the year Lapsed during the year Exercised during the year Granted during the year Outstanding at end of the year Weighted average remaining life of outstanding rights (years) 30 Jun 2020 Thousands 30 Jun 2019 Thousands 297 (267) 139 169 0.3 1,329 (50) (92) 473 1,660 1.3 151 (49) 195 297 0.3 989 (83) (92) 515 1,329 1.3 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: STIPs 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 (years) Risk-free interest rate at grant date Share price volatility LTIPs 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 01 Oct 2019 $4.01 $4.18 1 0.66% 18.79% 01 Oct 2019 $4.01 $4.18 3 0.66% 3.50% $1.61 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 $560,820 (30 Jun 2019: $489,755). Ingenia Communities Holdings Limited Annual Report 2020 58 Notes to the Financial Statements For the year ended 30 June 2020 | continued 28. 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 $450.0 million common terms debt facilities. LVR is calculated as the sum of bank debt, bank guarantees, ground 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 2020, the LVR of 8.4% (30 June 2019: 29.8%) is below target due to the completion of the equity raising in June 2020. In addition, the Group monitors Interest Cover Ratio as defined under the common terms of the debt facilities. At 30 June 2020, the Total Interest Cover Ratio was 8.35x (30 Jun 2019: 6.38x) and the Core Interest Cover Ratio was 6.15x (30 Jun 2019: 3.09x). 29. Financial instruments (a) Introduction The Group’s principal financial instruments comprise cash and short-term deposits, receivables, payables, interest bearing liabilities, other financial liabilities, and derivative financial instruments. The main risks arising from the Group’s financial instruments are interest rate risk, foreign exchange risk, credit risk and liquidity risk. The Group manages its exposure to these risks primarily through its 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. (b) Interest rate risk The Group’s exposure to the risk of changes in market interest rates arises primarily from its use of borrowings. The main consequence of adverse changes in market interest rates is higher interest costs, reducing the Group’s profit. In addition, one or more of the Group’s loan agreements may include minimum interest cover covenants. Higher interest costs resulting from increases in market interest rates may result in these covenants being breached, providing the lender the right to call in the loan or to increase the interest rate applied to the loan. The Group manages the risk of changes in market interest rates by maintaining an appropriate mix of fixed and floating rate borrowings. Fixed rate debt is achieved either through fixed rate debt funding or through derivative financial instruments permitted under the Investment, Derivatives, and Borrowing policy. At 30 June 2020, the Group had no derivative financial instruments or fixed debt in place (30 Jun 2019: 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 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 59 29. 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: Fixed interest maturing in: Floating interest rate Less than 1 year 1 to 5 years More than 5 years 10,751 73,000 – – – – – – 1,072 777 1,209 2,944 – – – 6,661 Total 10,751 73,000 2,281 10,382 30 Jun 2020 $’000 Financial assets Cash at bank Financial liabilities Bank debt Lease Liabilities – Right-of-use-asset Lease Liabilities – Ground leases 30 Jun 2019 $’000 Financial assets Cash at bank Financial liabilities Bank debt Lease liabilities – Ground leases Interest rate swaps; Group pays fixed rate 20,185 241,000 – (70,000) – – 765 – – – 2,895 70,000 – – 20,185 241,000 7,057 10,717 – – – – Interest rate collars; Group pays fixed rate on floor (125,000) 45,000 80,000 Other financial instruments of the Group not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk. (d) Interest rate sensitivity analysis The impact of an increase or decrease in average interest rates of 1% (100 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 and collars (AUD denominated) Decrease in average interest rates of 100 bps: Variable interest rate bank debt (AUD denominated) Interest rate swaps and collars (AUD denominated) Effect on profit after tax higher/(lower) 30 Jun 2020 $’000 30 Jun 2019 $’000 (730) (2,410) – 695 730 – 2,410 (4,507) (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. Ingenia Communities Holdings Limited Annual Report 2020 60 Notes to the Financial Statements For the year ended 30 June 2020 | continued 29. Financial instruments (continued) (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 not 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 30 Jun 2020 $’000 30 Jun 2019 $’000 1,014 264 1,089 266 (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) 30 Jun 2020 $’000 30 Jun 2019 $’000 (92) (24) (99) (24) Effect on profit after tax higher/(lower) 30 Jun 2020 $’000 30 Jun 2019 $’000 113 29 121 30 The Group believes that the reporting date risk exposures are representative of the risk exposure inherent in its financial instruments. (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. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 61 29. Financial instruments (continued) 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 value as reported in the balance sheet. (i) Liquidity risk The main objective of liquidity risk management is to reduce the risk that the Group does not have the resources available to meet its financial obligations and working capital and committed capital expenditure requirements. The Group’s 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. Although the expected average residency term is more than ten years, 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. 30 Jun 2020 Trade and other payables Borrowings(1) Right-of-use asset leases Ground leases (excluding perpetual lease) Ground leases (perpetual lease)(2) 30 Jun 2019 Trade and other payables Borrowings(1) Ground leases (excluding perpetual lease) Ground leases (perpetual lease)(2) Less than 1 year $’000 41,488 2,182 1,072 802 121 1 to 5 years $’000 More than 5 years $’000 – 77,546 1,289 3,374 483 – – – 12,086 – Total $’000 41,488 79,728 2,361 16,262 604 45,665 82,692 12,086 140,443 52,940 – 7,884 270,941 786 121 3,306 483 – – 12,955 – 52,940 278,825 17,047 604 61,731 274,730 12,955 349,416 (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 20(c). Ingenia Communities Holdings Limited Annual Report 2020 62 Notes to the Financial Statements For the year ended 30 June 2020 | continued 29. Financial instruments (continued) 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. 30 Jun 2020 Liabilities Other financial liabilities Derivative liabilities - net settled 30 Jun 2019 Liabilities Other financial liabilities Derivative liabilities - net settled Less than 1 year $’000 1 to 5 years $’000 More than 5 years $’000 3,741 – 3,741 1,036 70 1,106 9,424 – 9,424 10,864 2,435 13,299 – – – – – – Total $’000 13,165 – 13,165 11,900 2,505 14,405 (j) Other Financial Instrument Risk The Group carries 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 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) 30 Jun 2020 $’000 30 Jun 2019 $’000 (149) 149 (147) 147 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. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 63 29. Financial instruments (continued) The following table presents the Group’s financial instruments that were measured and recognised at fair value at reporting date: Financial assets/ financial liabilities Valuation technique(s) and key inputs Significant unobservable inputs Relationship of unobservable inputs to fair value Residents’ loans and liabilities held for sale Deferred management fee accrued Loans measured as the ingoing resident's contribution plus the resident's share of capital appreciation to reporting date, less DMF accrued to reporting date. DMF measured using the initial property price, estimated length of stay, various contract terms and projected property price at time of re-leasing. Estimated current market value of residential property. Estimated length of stay of residents based on life tables. The higher the appreciation, the higher the value of resident loans. The longer the length of stay, the lower the value of resident loans. Estimated length of stay of residents based on life tables. The longer the length of stay, the higher the DMF accrued, capped at a predetermined period of time. Derivative interest rate swaps and collars Net present value of future cash flows discounted at market rates adjusted for the Group's credit risk. N/A Other financial assets Capitalisation method for existing N/A Other financial liabilities rental streams. Refer to Note 11. Discounted cash flow N/A N/A N/A N/A Other financial assets relate to investments in unlisted property funds and the valuation is linked to the underlying investment property value. Other financial liabilities relate 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. The carrying value of the Group’s other financial instruments approximate their fair values. 30. Fair value measurement The following table provides the fair value measurement hierarchy of the Group’s assets and liabilities: (a) Assets measured at fair value 30 Jun 2020 Date of valuation Investment properties 30-Jun-20 Note 11(a) Assets held for sale - investment property 30-Jun-20 Other financial assets 30 Jun 2019 Investment properties Note 10(a) 30-Jun-20 Note 16 30-Jun-19 Note 11(a) Assets held for sale - investment property 30-Jun-19 Note 10(a) Other financial assets 30-Jun-19 Note 16 Fair value measurement using: Quoted prices in active markets (Level 1) $’000 Significant observable inputs (Level 2) $’000 Significant unobservable inputs (Level 3) $’000 Total $’000 – – – – – – – – – – – – 943,958 943,958 32,623 32,623 13,862 13,862 846,835 846,835 12,835 12,835 2,263 2,263 Ingenia Communities Holdings Limited Annual Report 2020 64 Notes to the Financial Statements For the year ended 30 June 2020 | continued 30. Fair value measurement (continued) (b) Liabilities measured at fair value 30 Jun 2020 Resident loans Liabilities held for sale Other financial liabilities Derivatives 30 Jun 2019 Resident loans Liabilities held for sale Other financial liabilities Derivatives Date of valuation 30-Jun-20 30-Jun-20 Note 10(b) 30-Jun-20 Note 21 30-Jun-20 30-Jun-19 30-Jun-19 Note 10(b) 30-Jun-19 Note 21 30-Jun-19 – – – – – – – – There have been no transfers between Level 1 and Level 2 during the year. 31. Auditor’s remuneration Fees for auditing the statutory financial report Fees for assurance services that are required by legislation: AFSL Fees for other services: Technical advice System review Total fees to Ernst & Young 32. Related parties Fair value measurement using: Quoted prices in active markets (Level 1) $’000 Significant observable inputs (Level 2) $’000 Significant unobservable inputs (Level 3) $’000 Total $’000 308 5,175 308 5,175 13,165 13,165 – – 308 308 5,694 5,694 11,900 11,900 – – – – – – – 2,505 – 2,505 30 Jun 2020 $ 30 Jun 2019 $ 497,500 458,096 38,500 37,750 – – 10,750 12,500 536,000 519,096 (a) Key management personnel The aggregate compensation paid to Key Management Personnel (“KMP”) of the Group is as follows: Directors fees Salaries and other short-term benefits Short-term incentives (payable in cash) Superannuation benefits Share-based payments 30 Jun 2020 $ 30 Jun 2019 $ 651,213 644,458 1,423,368 1,420,940 158,400 355,800 63,009 863,379 61,560 812,981 3,159,369 3,295,739 The amounts disclosed in the table are the amounts recognised as an expense during the reporting period related to KMP. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 65 32. Related parties (continued) For FY20, Mr Owen was awarded an STI of 67% based on his performance. Due to the adverse impact of COVID-19 on the business, staff and residents, it was agreed to award all of this STI in the form of deferred rights with no cash component. The aggregate rights outstanding of the Group held directly by KMP are as follows: Issue date Right Type Vesting date 30 Jun 2020 30 Jun 2019 Number outstanding FY16(1) FY17(1) FY17(1) FY18 FY18(1) FY19 FY19 FY20 LTIP LTIP STIP LTIP STIP LTIP STIP LTIP FY19 FY20 FY19 FY21 FY20 FY22 FY21 FY23 91,068 91,068 128,819 248,432 2,437 102,437 493,568 493,568 34,300 496,917 132,436 450,234 194,935 496,917 – – 1,829,779 1,627,357 (1) Rights are fully vested but not exercised. All other rights are still subject to vesting conditions. A short-term loan facility of $500,000 was made available to the CEO for a period of 15 days on commercial terms. Interest paid on the facility was $1,060. No balance is outstanding. (b) Joint venture During the year, the Group generated fee income from the joint venture with Sun Communities. Fee income from associate 33. 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)/profit from continuing operations Net (loss)/profit attributable to security holders Total comprehensive (loss)/income 30 Jun 2020 $ 30 Jun 2019 $ 602,691 602,691 813,590 813,590 30 Jun 2020 $’000 30 Jun 2019 $’000 10,853 26,121 1,235 1,233 24,888 36,187 (1,933) (9,366) 24,888 (2,722) (2,722) (2,722) 41 9,581 1,068 1,307 8,274 12,985 1,933 (6,644) 8,274 4,402 4,402 4,402 Ingenia Communities Holdings Limited Annual Report 2020 66 Notes to the Financial Statements For the year ended 30 June 2020 | continued 33. Company financial information (continued) Closed Group disclosures The Company, INA Development Pty Ltd and INA Latitude One Development Pty Limited (collectively the “Closed Group”), entered into a deed of cross guarantee on 18 June 2020. Pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785, relief has been granted to INA Development Pty Ltd and INA Latitude One Development Pty Limited from the Corporations Act 2001 requirements for the preparation, audit and lodgement of their financial report. The effect of the deed is that the Company has guaranteed to pay any deficiency in the event of winding up of an entity subject to the deed of cross guarantee if they do not meet their obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The controlled entities have also given a similar guarantee in the event that the Company is wound up or if it does not meet its obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The consolidated results of the entities that are members of the Closed Group are as follows: Current assets Total assets Current liabilities Total liabilities Net assets Security holders’ equity: Issued securities Reserves Accumulated losses Total security holders’ equity Revenue Operating expenses Profit from continuing operations Total comprehensive income 30 Jun 2020 $’000 30 Jun 2019 $’000 38,301 51,818 5,798 10,345 41,473 36,187 (1,933) 7,219 41,473 52,376 24,173 29,792 8,105 8,105 21,687 12,987 1,933 6,767 21,687 20,941 (51,997) (18,308) 379 379 2,633 2,633 34. 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): 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 Ownership interest Country of residence 30 Jun 2020 % 30 Jun 2019 % Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 34. Subsidiaries (continued) 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 INA DMF Management Pty Ltd (formerly 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 NZ Subsidiary Unit Trust No 2 INA Community Living LLC INA Community Living Subsidiary Trust No. 2 INA Development Pty Limited INA Development Management Pty Limited INA Plantations Development Pty Limited INA Hervey Bay Development Pty Limited INA Bethania Development Pty Limited INA Chambers Pines Development Pty Limited INA Development No.1 Pty Limited INA Development No.2 Pty Limited INA Development No.3 Pty Limited INA Lifestyle Operations Pty Limited 67 Ownership interest Country of residence 30 Jun 2020 % 30 Jun 2019 % 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 New Zealand USA Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Ingenia Communities Holdings Limited Annual Report 2020 68 Notes to the Financial Statements For the year ended 30 June 2020 | continued 34. Subsidiaries (continued) INA Lifestyle Landowner Pty Limited INA Subsidiary Trust No.4 INA Lifestyle Landowner Trust INA Lifestyle Operations Trust INA Operations Management Trust Emmetlow Pty Ltd Park Trust Eighth Gate Capital Management Pty Ltd Eighth Gate Pty Ltd Eighth Gate Capital Management No.3 Eighth Gate Capital Management No.4 Eighth Gate Capital Management No.5 Eighth Gate Capital Management No.6 Eighth Gate Capital Management No.7 Eighth Gate Capital Management No.8 Allswell Communities Pty Ltd Ownership interest Country of residence 30 Jun 2020 % 30 Jun 2019 % Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – – – – – – – – – – – Financial information of ICF and ICMT and their controlled entities are provided below: Current assets Non-current assets Total Assets Current liabilities Non-current liabilities Total Liabilities Net Assets/Equity Revenue Expenses Profit/(loss) after tax Total comprehensive income/(loss) ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 2,287 849,161 851,448 2,820 71,600 74,420 777,028 24,688 (4,308) 20,380 20,380 7,006 761,612 768,618 2,717 242,280 244,997 523,621 33,403 63,980 719,005 782,985 47,792 642,507 690,299 92,686 169,518 53,664 637,667 691,331 46,643 578,374 625,017 66,314 203,782 (7,741) (176,531) (209,817) 25,662 25,662 (7,013) (7,013) (6,035) (6,035) Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 35. Notes to cashflow statement Reconciliation of profit to net cash flow from operating activities: Net profit for the year Adjustments for: Share of joint venture (income)/loss Net loss/(gain) on change in fair value of: Investment properties Financial liabilities Other financial instruments Income tax benefit Net loss on disposal of investment properties Other Operating profit before tax Depreciation and amortisation Share-based payments expense GST recoverable on investing activities Finance costs Operating cash flow before changes in working capital Changes in working capital: Increase in receivables Increase in inventory Increase in other payables and provisions Net cash provided by operating activities 36. Subsequent events 69 30 Jun 2020 $’000 30 Jun 2019 $’000 31,452 29,313 (134) 1,157 33,807 2,195 (32) (3,612) 1,567 – 18,962 5,400 2,288 (5,502) 1,527 763 65,243 53,908 3,244 958 7,315 (2,664) 74,096 (610) (214) (6,084) 67,188 1,611 942 6,505 (1,289) 61,677 (612) (5,759) 4,001 59,307 Final FY20 distribution On 18 August 2020, the Directors declared a final distribution of 4.4 cps amounting to $14.3 million, to be paid on 24 September 2020. Acquisition of Sunnylake Shores On 24 July 2020, the Group completed the acquisition of the Sunnylake Shores lifestyle community, located on the Central Coast of NSW, for a purchase price of $16.3 million. Acquisition of Ballarat On 28 July 2020, the Group completed the acquisition of a DA approved greenfield development site for a lifestyle community in Ballarat, VIC for a purchase price of $7.0 million. Operating restrictions due to COVID-19 Post 30 June 2020, governments have announced further restrictions in response to the COVID-19 pandemic, including the closure of State borders. The Group continues to monitor the impact of these closures on our Holidays assets. Ingenia Communities Holdings Limited Annual Report 2020 70 Directors’ Declaration For the year ended 30 June 2020 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 2020 are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of its financial position as at 30 June 2020 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) c) 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. at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed Group identified in Note 33 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in Note 33. 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 Adelaide, 18 August 2020 Ingenia Communities Holdings Limited Annual Report 2020 Independent Auditor’s Report For the year ended 30 June 2020 71 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 balance sheet as at 30 June 2020, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated cash flow statement 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 2020 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 Company 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 (including Independence Standards) (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 | 77 Ingenia Communities Holdings Limited Annual Report 2020 72 Independent Auditor’s Report For the year ended 30 June 2020 | continued 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 Approximately 87% of the Group’s total assets comprise investment properties (both those disclosed as investment properties and equity accounted investments). 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 is considered a key audit matter as valuations contain several 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, a 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. The valuation of investment properties is inherently subjective given that there are alternative assumptions and valuation methods that may result in a range of values. The impact of COVID-19 at 30 June 2020 has resulted in a wider range of possible values than at past valuation points. Our audit procedures included the following: • We reviewed the controls in place relevant to the valuation process; • We evaluated the suitability of the valuation methodology used across the portfolio and tested the valuation reports for mathematical accuracy on a sample basis; • We assessed the qualification, competence and objectivity of the independent valuation experts used by the Group; • We assessed the Group’s internal valuation methodology and tested the mathematical accuracy of the valuation models. We also assessed the competence, qualifications and objectivity of the internal valuer; • On a sample basis, we compared the property related data used as input for both the external and internal valuations against actual and budgeted property performance; A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 78 Ingenia Communities Holdings Limited Annual Report 2020 Independent Auditor’s Report For the year ended 30 June 2020 | continued 73 • • The key judgements for the longer term and short-term rental include capitalisation rates, discount 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. Specific assumptions and judgements of the impact of COVID-19 are contained within Note 11 to the financial report. These include impact on property sale settlements, revenue and operational costs. As at 30 June 2020 there is increased valuation uncertainty arising from the COVID-19 pandemic and the response of Governments to it. This means that the property values may change significantly and unexpectedly over a relatively short period of time. Given the market conditions at balance date, the independent valuers have reported on the basis of the existence of “material valuation uncertainty”, noting that less certainty and a higher degree of caution should be attached to the valuations than would normally be the case. In this situation the disclosures in the financial report provide particularly important information about the assumptions made in the property valuations and the market conditions at 30 June 2020. • On a sample basis, 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 independent valuations to determine whether the key judgements and methodology used were appropriate, including the impact of COVID-19; • We assessed the appropriateness of the allocation of capital expenditure between investment property and inventory assets; • We have also considered the ‘material valuation uncertainty’ disclosure included in the valuation reports and any other restrictions imposed on the valuation process (if any) and the market conditions at balance date. • On a sample basis, we have considered the specific assumptions and judgements used by the Group in the valuations following the impact of COVID-19. We have validated the additional disclosure describing the specific judgements used by the Group in relation to the pandemic included in Note 11 of the financial report; and • We have considered whether there have been any indicators of material changes in property valuations from 30 June 2020 up to the date of our opinion. We involved our real estate valuation specialists to assist us in making this assessment. Any material matters identified have been reflected in the fair values of investment properties at the reporting date, where appropriate, or disclosed as a subsequent event in Note 36. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 79 Ingenia Communities Holdings Limited Annual Report 2020 74 Independent Auditor’s Report For the year ended 30 June 2020 | continued Information Other than the Financial Report and Auditor’s Report Thereon The directors are responsible for the other information. The other information comprises the information included in the Group’s 2020 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, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the financial report, our responsibility is to read the other information 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. 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 judgement and maintain professional scepticism throughout the audit. We also: A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 80 Ingenia Communities Holdings Limited Annual Report 2020 Independent Auditor’s Report For the year ended 30 June 2020 | continued 75 • • • • • • 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. 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 81 Ingenia Communities Holdings Limited Annual Report 2020 76 Independent Auditor’s Report For the year ended 30 June 2020 | continued Report on the Audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 13 to 23 of the directors' report for the year ended 30 June 2020. In our opinion, the Remuneration Report of Ingenia Communities Holdings Limited for the year ended 30 June 2020, 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 Yvonne Barnikel Partner Sydney 18 August 2020 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 82 Ingenia Communities Holdings Limited Annual Report 2020 Ingenia Communities Fund & Ingenia Communities Management Trust Annual Reports For the year ended 30 June 2020 77 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 benefit 6. Trade and other receivables 7. Inventories 8. Assets and liabilities held for sale 9. Investment properties 10. Plant and equipment 11. Intangibles 12. Right-of-use assets 13. Investment in a joint venture 14. Other financial assets 15. Deferred tax assets and liabilities 16. Trade and other payables 17. Borrowings 18. Other financial liabilities 19. Issued units 20. Accumulated losses and retained earnings 21. Commitments 22. Contingent liabilities 23. Capital management 24. Financial instruments 25. Fair value measurement 26. Auditor’s remuneration 27. Related parties 28. Parent entity financial information 29. Subsidiaries 30. Notes to the cash flow statements 31. Subsequent events 78 83 84 85 87 88 89 89 97 98 102 102 103 104 104 104 106 106 107 107 108 108 109 109 111 111 112 112 112 112 113 117 119 119 122 122 123 124 Ingenia Communities Holdings Limited Annual Report 2020 78 Directors’ Report For the year ended 30 June 2020 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 (“ICH” or 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 2020 (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) Jim Hazel (Chairman) Robert Morrison (Deputy Chairman) Amanda Heyworth Andrew McEvoy Pippa Downes Gary Shiffman John McLaren Valerie Lyons (appointed, effective 4 December 2019) (Alternate Director to Gary Shiffman) (resigned, effective 30 November 2019) Executive Directors Simon Owen (Managing Director and Chief Executive Officer (MD and CEO)) Company Secretaries Natalie Kwok Nhu Nguyen (appointed, effective 5 February 2020) Vanessa Chidrawi (resigned, effective 5 February 2020) Operating and Financial Review ICF and ICMT Overview ICF and ICMT are two of the entities forming part of ICH, which is a triple staple structure traded on the ASX. The Group is an active owner, manager and developer of a diversified portfolio of lifestyle, seniors rental and holiday communities across Australia. The Group’s real estate assets at 30 June 2020 were valued at $944.0 million, comprising 35 lifestyle and holiday communities (Ingenia Lifestyle and Holidays) and 26 rental communities (Ingenia Gardens). The Group manages a further 11 communities through its development JV and funds management platform. The Group was included in the S&P/ASX 200 in December 2019 and had a market capitalisation of approximately $1.5 billion at 30 June 2020. The Group’s vision is to create Australia’s best lifestyle and holiday communities, offering affordable permanent and tourism accommodation with a focus on the seniors demographic. The Board is committed to delivering sustainable long-term underlying earnings per security (EPS) growth to security holders while providing a supportive community environment for residents and guests. Our Values At Ingenia we build community on 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 an amazing experience every day. Whether it’s time to live, play, stay or renew, we deliver freedom of choice with a range of industry award winning lifestyle and holiday options. Creating Australia’s best lifestyle communities Ingenia Communities Holdings Limited Annual Report 2020 Directors’ Report For the year ended 30 June 2020 | continued Strategy The Group is positioning for scale and long-term sector leadership whilst delivering growth in net operating income and enhancing the operational performance of its investment properties. Using a disciplined investment framework, the Group will: continue to grow its lifestyle and holiday communities business in metropolitan and coastal locations; build out its existing development pipeline; expand development and revenue streams through the Joint Venture with Sun Communities, Inc (NYSE: SUI) and funds management platform; deploy equity raised through the May equity raising to acquire existing communities and additional development sites; and, recycle capital through non-core asset sales. The immediate business priorities of the Group are: – Capitalise on opportunities to expand the development pipeline to deliver new rental contracts; – Improve performance of existing assets to drive growth in rental returns; – Improve resident and guest satisfaction; – Focus on sales and marketing effectiveness to successfully launch new projects and grow rental base; – Continue rollout of new rental and tourism cabins; – Expand the funds management platform and deliver performance for investors; – Execute the development joint venture business plan, delivering opportunities for capital light growth and additional revenue streams; – Enhance sustainable competitive advantage through recruiting, retaining and developing industry leading talent; – Continue to respond to operating environment, maintain focus on employee, resident and guest health and safety; – Continue to advance focus on sustainable home design and construction; and – Build on the Group’s sustainability program and enhance disclosures as initiatives are progressed. FY20 Financial Results The year to 30 June 2020 delivered total revenue of $244.2 million, up 7% on the prior year. The Group built and sold 3251 turnkey homes (30 Jun 2019: 336 homes) and grew Lifestyle and Holidays rental income from permanent, annual and tourism clients to $72.5 million (30 Jun 2019: $67.7 million). Statutory profit of $31.5 million was up 7% on the prior year. The statutory result reflects the combination of growth in underlying earnings and fair value movements on investment property arising from: improved capitalisation rates, offset by transaction costs on new acquisitions and; a reduction of fair value associated with the realisation of development profits on settlement. Underlying profit from continuing operations was $59.1 million, which represents an increase of $11.9 million (25%) on the prior year. The underlying result is underpinned by a significantly higher EBIT contribution from the Lifestyle Development segment which was up 19% on prior corresponding period, and from the Ingenia Lifestyle and Holidays segment which was up 9% on the 79 prior corresponding period. Ingenia Gardens EBIT was $10.2 million, up 2% from the prior corresponding period. The Lifestyle Development and Holidays segments were impacted by COVID-19 and the early 2020 bushfires, which had an adverse effect on the 2020 financial results. Operating cash flow for the period was $67.2 million, up 13% from the prior year, reflecting growth in lifestyle home profits, growth in recurring rental income and the impact of new operational parks acquired in the period. During the year, the Group successfully raised $328.3 million through the following: – November 19: $131.1 million accelerated non-renounceable entitlement offer (ANREO) to existing security holders and a placement to institutional investors; – May 20: $150.0 million placement to institutional investors; – June 20: $27.9 million via a share purchase plan (SPP) to existing security holders; and – $19.3 million under the Distribution Reinvestment Plan. The proceeds from these equity raises have been and will continue to be invested into acquisitions to expand the Group’s portfolio of lifestyle communities and to provide additional equity for the Group’s joint venture with Sun Communities. The Group grew its investment in lifestyle communities during the period, 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. The Group invested part of the equity raised to acquire Bevington Shores, Taigum (Colonial Village) and land adjacent to Ingenia Holidays Rivershore. The Group continued to divest non-core assets to support the Group’s capital recycling strategy, with the divestment of Ingenia Lifestyle Mudgee Valley in 1H20. COVID-19 had an adverse impact on the FY20 result. The Group’s holidays business was materially impacted with the mandated closure of tourist parks from late March until June 2020 and the closure of domestic and international borders. Home settlement figures were also negatively impacted by social distancing restrictions which prevented auctions and the viewing of open homes as well as consumer sentiment. In response to COVID-19, Ingenia took decisive action, immediately reducing variable costs, standing down a number of casual staff and implementing companywide cost saving initiatives, including a voluntary 20% temporary pay reduction for salaried staff and NEDs. The Group was subsequently eligible to receive the JobKeeper subsidy, allowing the Group to re-employ eligible employees and limit further staff reductions. Key Metrics – Net profit for the year for ICF $20.4 million (30 Jun 2019: $25.7 million profit). – Net loss for the year for ICMT of $7.0 million (30 Jun 2019: $6.0 million loss). – Full year distributions of 10.0 cents per unit by ICF, nil from ICMT. 1 Including seven settlements at Ingenia Lifestyle Freshwater, the Group’s first joint venture project with Sun Communities. Ingenia Communities Holdings Limited Annual Report 2020 80 Directors’ Report For the year ended 30 June 2020 | continued Development Joint Venture The development Joint Venture with Sun Communities was established in November 2018. The Joint Venture commenced development on its first greenfield acquisition located at Burpengary, QLD and settled on its first homes during the year. The Joint Venture is in the final stages of development planning on its second acquisition at Fullerton Cove, NSW and has other acquisition opportunities under exclusive due diligence or option. During FY20, fees generated by Ingenia from the Joint Venture primarily relate to asset and development management. Performance Greenfield properties (#) Investment carrying value ($m) New home settlements (#) Fee income ($m) Share of profit/(loss) from joint venture ($m) 30 Jun 2020 30 Jun 2019 Change % 2 15.9 7 0.6 0.1 2 11.6 – 0.8 (1.2) – 37% NM (25%) NM Strategic Priorities The Joint Venture’s objective is to acquire greenfield sites in key metro and coastal markets to develop a significant portfolio of new lifestyle communities. The Joint Venture leverages the expertise and local market knowledge of Ingenia to identify, acquire and develop sites. Once homes are sold, Ingenia will also provide operational services to the lifestyle communities. At completion of development, Ingenia has the right to acquire the communities at market value. Ingenia generates origination, development and management fees for these services plus a performance fee for above hurdle rate returns. Capital Management During the year, the Group raised $328.3 million in new equity through the issue of 89.2 million new securities in FY20. The Group has three debt facilities with a combined facility limit of $450.0 million. The weighted average term to maturity of Ingenia’s debt at 30 June 2020 is 3.3 years with the first debt expiry in February 2022. As at 30 June 2020, the debt facilities were drawn to $73.0 million. The Group’s Loan to Value Ratio (“LVR”) was 8.4% and gearing was 5.7% at 30 June 2020, which are below FY19 due to the completion of the equity raise in June 2020. The funds raised are anticipated to be deployed across FY21 and FY22. The Group intends to fund near term growth through deployment of the equity raise proceeds into new acquisitions, operating cash flows, divestment of non-core assets and drawing on committed debt facilities. Distributions The following distributions were made during or in respect of the year: – On 18 February 2020, the Directors declared an interim distribution of 5.6 cps, amounting to $15.2 million which was paid on 26 March 2020. – On 18 August 2020, the Directors declared a final distribution of 4.4 cps amounting to $14.3 million, to be paid on 24 September 2020. FY21 Outlook The Group’s strong balance sheet and low level of gearing places Ingenia in a strong position to manage the risks associated with COVID-19. Ingenia expects to be a major beneficiary from the rebound in domestic tourism as international borders remain closed and is well positioned to meet the anticipated increase in demand for affordable housing from downsizers. The Group will continue to grow its lifestyle communities business in FY21 with a significant development pipeline, an innovative and adaptable sales approach, increasing consumer awareness and demand and a broader range of capital partnerships. The Group will acquire mature lifestyle and holiday communities where on strategy opportunities can be identified. The priority for existing lifestyle and holiday communities is to improve performance of existing assets by delivering rental growth and investing in new rental homes and tourism cabins within existing communities. The creation of new rent contracts via existing and new development projects will contribute development profits and growth in the rental base. The Joint Venture with Sun Communities and the funds management business provide additional opportunities for growth, whilst diversifying the Group’s revenue streams. Management continues to explore expansion, development and acquisition opportunities within the seniors rental market as Ingenia Gardens continues to provide high-yield stable recurring cash flows. The Group will continue to regularly assess market opportunities and the performance of existing assets, divesting and acquiring assets where superior longer-term returns are available. Ingenia Communities Holdings Limited Annual Report 2020 Directors’ Report For the year ended 30 June 2020 | continued 81 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 19 for issued units. Events Subsequent to Reporting Date Final FY20 Distribution On 18 August 2020, the Directors declared a final distribution of 4.4 cps amounting to $14.3 million, to be paid on 24 September 2020. Acquisition of Sunnylake Shores On 24 July 2020, the Group completed the acquisition of the Sunnylake Shores lifestyle community, located on the Central Coast of NSW, for a purchase price of $16.3 million. Acquisition of Ballarat On 28 July 2020, the Group completed the acquisition of a DA approved greenfield development site for a lifestyle community in Ballarat, VIC for a purchase price of $7.0 million. Operating restrictions due to COVID-19 Post 30 June 2020, governments have announced further restrictions in response to the COVID-19 pandemic, including the closure of State borders. The Group continues to monitor the impact of these closures on our Holidays assets. Likely Developments The Group will continue to pursue strategies aimed at growing its cash earnings, profitability and market share within the lifestyle and seniors rental and tourism sectors during the next financial year, through: – Developing greenfield sites and expanding existing lifestyle communities; – Acquiring new communities; – Growing the funds management platform; and – Divesting non-core assets. Detailed information about operations of the Group 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. Indemnification of Auditors To the extent permitted by law, the Company has agreed to indemnify its auditor, Ernst & Young, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit. No payment has been made to indemnify Ernst & Young during or since the reporting period. Ingenia Communities Holdings Limited Annual Report 2020 82 Directors’ Report For the year ended 30 June 2020 | continued Interests of Directors of the Responsible Entity Securities of the Group held by directors of the Responsible Entity or associates of the directors as at 30 June 2020 were: Jim Hazel Robert Morrison Amanda Heyworth Andrew McEvoy Pippa Downes Gary Shiffman(1) John McLaren(1) Simon Owen Issued stapled securities 418,541 202,837 178,641 39,916 32,148 32,572,582 32,572,582 Rights – – – – – – – 1,445,658 820,992 (1) The securities held by Mr Shiffman and Mr McLaren are beneficially owned by Sun Communities and represent the same securities. Mr Shiffman is the appointed Nominee Director of Sun Communities which is entitled to appoint a Director to the Board of ICH, in accordance with the Subscription Agreement between ICH and Sun Communities which was entered into on 7 November 2018. Mr Shiffman appointed Mr McLaren as his Alternate Director effective 18 February 2019. Other Information Fees paid to the Responsible Entity and its associates, and the number of securities in each Trust held by the Responsible Entity and its associates as at the end of the financial year are set out in Note 27 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 83. Non-Audit Services During the year, non-audit services were provided by the Group’s auditor, Ernst & Young. 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 Ernst & Young 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 Ernst & Young, as auditor of ICH. Refer to Note 26 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 Adelaide, 18 August 2020 Ingenia Communities Holdings Limited Annual Report 2020 Auditor’s Independence Declaration For the year ended 30 June 2020 83 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 the financial reports of Ingenia Communities Fund and its controlled entities and Ingenia Communities Management Trust and its controlled entities for the financial year ended 30 June 2020, 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 Yvonne Barnikel Partner 18 August 2020 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 8 Ingenia Communities Holdings Limited Annual Report 2020 84 Consolidated Statement of Comprehensive Income For the year ended 30 June 2020 Rental Income Ancillary guest and resident income Lifestyle home sales Service station revenue Food and beverage sales Other revenue Fee income Revenue Property expenses Cost of lifestyle homes sold Employee expenses Administrative expenses Operational, marketing and selling expenses Service station expenses Responsible entity fee and expenses Depreciation and amortisation expense Operating profit before interest and tax Net finance income/(expense) Operating profit before tax ICF ICMT Note 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 10,664 10,046 – – – – – – – – – – – – 94,523 7,337 47,467 7,299 5,394 381 7,117 89,758 8,302 92,458 7,016 4,932 502 814 10,664 10,046 169,518 203,782 (514) (655) (27,788) (36,872) – – – – (27,495) (53,332) (43,044) (42,075) 27(b) 10, 11, 12 (690) (524) – – – – (5,651) (9,735) (6,279) (4,166) (3,654) (3,646) (26) (12,435) (5,035) (9,438) (6,153) (3,582) (1,308) 5,187 33,445 45,987 23,357 28,544 (18,894) (31,061) 14,551 14,926 (26) 5,268 14,024 19,292 Share of joint venture loss 13 (42) (1,098) (26) – Net gain/(loss) on change in fair value of: Investment properties Financial liabilities Other financial instruments Other Profit/(loss) before tax Income tax benefit Net profit/(loss) for the year 9(b) 1,865 – 38 (773) 514 – (2,298) – 20,380 25,662 5 – – 20,380 25,662 (24,507) (417) (6) (794) (11,199) 4,186 (7,013) (19,476) (5,400) 10 (2,290) (12,230) 6,195 (6,035) Total comprehensive income/(loss) for the year net of income tax 20,380 25,662 (7,013) (6,035) 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 20,380 25,662 – – 20,380 25,662 20,380 25,662 – – 20,380 25,662 – (7,013) (7,013) – (7,013) (7,013) – (6,035) (6,035) – (6,035) (6,035) Earnings per unit: Basic earnings per unit Diluted earnings per unit Cents Cents Cents Cents 4 4 7.6 7.6 11.4 11.3 (2.6) (2.6) (2.7) (2.7) Ingenia Communities Holdings Limited Annual Report 2020 Consolidated Balance Sheet As at 30 June 2020 85 ICF ICMT Note 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 Current assets Cash and cash equivalents Trade and other receivables Inventories Assets held for sale Total current assets Non-current assets Trade and other receivables Receivable from related party Investment properties Plant and equipment Investments in a joint venture Other financial assets Intangibles Right-of-use-asset Deferred tax asset Total non-current assets Total assets Current liabilities Trade and other payables Borrowings Employee liabilities Other financial liabilities Derivatives and other financial instruments Liabilities held for sale Total current liabilities Non-current liabilities 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) 6 27(e) 9 10 13 14 11 12 15 16 17 18 8(b) 27(e) 17 18 13,478 5,495 21,856 12,835 53,664 34 – 1,687 600 – – 6,629 377 – – 2,287 7,006 8,065 5,746 17,546 32,623 63,980 5,493 614,299 217,404 5 11,960 – – – – 5,461 559,878 – – 184,217 669,818 623,542 31 11,252 773 – – – 4,323 – 13,847 1,772 18,251 10,994 4,081 – 1,490 1,717 – 6,803 849,161 761,612 719,005 637,667 851,448 768,618 782,985 691,331 2,820 2,647 – – – – – – – – 70 – 2,820 2,717 – – 71,600 239,845 – – 2,435 – – – 71,600 74,420 27,722 12,414 2,481 – – 5,175 47,792 611,236 22,015 8,616 640 – 36,765 1,123 1,961 1,100 – 5,694 46,643 551,993 15,136 10,800 445 – 242,280 642,507 578,374 244,997 690,299 777,028 523,621 92,686 625,017 66,314 Ingenia Communities Holdings Limited Annual Report 2020 86 Consolidated Balance Sheet As at 30 June 2020 | continued Equity Issued units (Accumulated losses)/Retained earnings Security holders interest Non-controlling interest Total equity Attributable to unit holders of: Ingenia Communities Fund Ingenia Communities Management Trust ICF ICMT Note 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 19(a) 20 1,093,696 831,792 (316,668) (308,171) 777,028 523,621 89,025 4,361 93,386 55,640 11,374 67,014 – – (700) (700) 777,028 523,621 92,686 66,314 777,028 523,621 (700) (700) – – 777,028 523,621 93,386 92,686 67,014 66,314 Ingenia Communities Holdings Limited Annual Report 2020 Consolidated Cash Flow Statement For the year ended 30 June 2020 87 Cash flows from operating activities Rental and other property income Property and other expenses Government subsidy Proceeds from sale of lifestyle homes Purchase of lifestyle homes Proceeds from sale of service station inventory Purchase of service station inventory Net movement in resident loans Interest received Borrowing costs paid Cash flows from investing activities Payments for investment properties Additions to investment properties Purchase and additions of plant and equipment Purchase and additions of intangible assets Proceeds from sale of investment properties Payments for acquisition of financial assets Investment in joint venture Other Cash flows from financing activities Proceeds from issue of stapled securities Payments for security issue costs Distributions to unit holders ICF ICMT Note 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 – – 114,879 107,444 (128) (1,497) (89,114) (97,999) – – – – – – 44 (9,271) (9,355) 30 – – – – – – 57 (8,992) 2,906 52,274 – 102,065 (32,843) (60,706) 8,082 (6,966) (465) 38 (16) 7,810 (7,086) (2,410) 64 – (10,432) 48,775 49,182 (26,296) (34,816) (59,304) (44,020) (4,517) (4,535) (43,728) (50,413) – – – – – – – – (750) (12,350) – 1,579 (1,600) (492) 2,591 (13,847) – – (1,616) (390) 32,172 – – – (31,563) (50,122) (116,380) (64,267) 270,012 74,848 (8,108) (3,217) 34,414 (1,029) (28,877) (24,295) – 12,345 – – (Repayment of)/proceeds from related party borrowings (25,857) 4,584 29,079 6,166 Proceeds from borrowings Repayment of borrowings Payments for debt issue costs Termination for derivatives Other Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at end of the year 201,000 136,706 (369,000) (124,705) (698) (2,496) – (360) – – – – – – (272) 35,976 63,561 62,192 (4,942) 6,629 1,687 3,007 3,622 6,629 (5,412) 13,478 8,066 – – – – (699) 17,812 2,727 10,751 13,478 Ingenia Communities Holdings Limited Annual Report 2020 88 Consolidated Statement of Changes in Equity For the year ended 30 June 2020 Attributable to security holders Issued capital $’000 Retained earnings $’000 Note ICF Total $’000 Non- controlling interest $’000 Carrying value 1 Jul 2019 831,792 (308,171) 523,621 Net profit Total comprehensive income Transactions with security holders in their capacity as security holders: – – 20,380 20,380 20,380 20,380 Issue of securities 19(a) 261,904 – 261,904 Payment of distributions to security holders 20 – (28,877) (28,877) Carrying value 30 Jun 2020 1,093,696 (316,668) 777,028 Carrying value 1 Jul 2018 759,337 (309,538) 449,799 Net profit Total comprehensive income Transactions with security holders in their capacity as security holders: – – 25,662 25,662 25,662 25,662 Issue of securities 19(a) 72,455 – 72,455 Payment of distributions to security holders Carrying value 30 Jun 2019 20 – (24,295) (24,295) 831,792 (308,171) 523,621 – – – – – – – – – – – – Total equity $’000 523,621 20,380 20,380 261,904 (28,877) 777,028 449,799 25,662 25,662 72,455 (24,295) 523,621 Attributable to security holders ICMT Note Issued capital $’000 55,640 – – Retained earnings $’000 11,374 (7,013) (7,013) Total $’000 67,014 (7,013) (7,013) Carrying value 1 Jul 2019 Net loss Total comprehensive income Transactions with security holders in their capacity as security holders: Issue of securities 19(a) 33,385 Other – – – 33,385 – Non- controlling interest $’000 Total equity $’000 (700) 66,314 – – – – (7,013) (7,013) 33,385 – Carrying value 30 Jun 2020 89,025 4,361 93,386 (700) 92,686 Carrying value 1 Jul 2018 43,690 29,557 73,247 (700) 72,547 Net profit Total comprehensive income Transactions with security holders in their capacity as security holders: – – (6,035) (6,035) (6,035) (6,035) Issue of securities 19(a) 11,950 – 11,950 Other – (12,148) (12,148) – – – – (6,035) (6,035) 11,950 (12,148) Carrying value 30 Jun 2019 55,640 11,374 67,014 (700) 66,314 Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 89 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 2020 was authorised for issue by the Directors on 18 August 2020. (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, 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 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, residents’ 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 The Trusts has adopted, for the first time, AASB 16 Leases for reporting periods beginning on 1 July 2019. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for most leases under a single on-balance sheet model. Upon adoption of AASB 16, the Trusts have recognised lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets, using the modified retrospective method. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognised at the date of initial application. Consequently, as permitted under the specific transitional provisions in the standard, the Trusts have not restated prior period comparatives. The Trusts also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a short-term lease of 12 months or less and do not contain a purchase option, and lease contracts for which the underlying asset is of low-value. The Trusts assess at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Trusts apply a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets which are recognised as an expense on a straight-line basis over the lease term. The Trusts recognise lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. Right-of-use assets The Trusts recognise right-of-use assets at the commencement date of the lease. Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets. Lease liabilities At the commencement date of the lease, the Trusts recognise lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Trusts and payments of penalties for terminating the lease, if the lease term reflects the Trusts exercising the option to terminate. Ingenia Communities Holdings Limited Annual Report 2020 90 Notes to the Financial Statements For the year ended 30 June 2020 | continued 1. Summary of significant accounting policies (continued) Variable lease payments that do not depend on an index or a rate are recognised as expenses in the period in which the event or condition that triggers the payment occurs. In calculating the present value of lease payments, the Trusts use the interest rate implicit in the lease. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying value of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset. The Trusts’ lease liabilities are included in Borrowings (refer to Note 17). Leases for investment property which apply the fair value model are classified as investment property per AASB 140 Investment Properties. The Trusts have adopted for the first time AASB Interpretation 23 Uncertainty over income tax treatment for reporting periods beginning on 1 July 2020. It does not apply to taxes or levies outside the scope of AASB 112, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The Trusts apply significant judgement in identifying uncertainties over income tax treatments. Since the Trusts operates in a complex environment, the Trusts have assessed whether the Interpretation had an impact on its consolidated financial statements and determined that the Interpretation did not have an impact. (d) Principles of consolidation ICF’s consolidated financial statements comprise ICF 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. 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. 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 the amount recognised for non-controlling interest over the fair value of net identifiable assets acquired and liabilities assumed. Goodwill is tested annually for impairment, or more frequently if changes in circumstances indicate that it might impaired. An impairment loss is recognised when the carrying amount of the asset exceeds its recoverable amount, calculated as the higher of fair value less costs of disposal and the value in use. Impairment losses are recognised in the Consolidated Statement of Comprehensive Income. For the purposes of assessing impairment, assets are grouped at the lowest levels for which goodwill is monitored for management purposes and allocated to cash generating units (“CGU”). The assumptions used for determining the recoverable amount of the CGU are based on the expectation for the future, utilising both internal and external sources of data and relevant market trends. (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 value 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 in Note 8. (g) Dividends and 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. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 91 1. Summary of significant accounting policies (continued) (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. (i) Leases The Trusts assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Trusts applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets which are recognised as an expense on a straight-line basis over the lease term. The Trusts recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. Right-of-use assets The Trusts recognises right-of-use assets at the commencement date of the lease. Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets. Lease liabilities At the commencement date of the lease, the Trusts recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Trusts and payments of penalties for terminating the lease, if the lease term reflects the Trusts exercising the option to terminate. Variable lease payments that do not depend on an index or a rate are recognised as expenses in the period in which the event or condition that triggers the payment occurs. In calculating the present value of lease payments, the Trusts uses the interest rate implicit in the lease. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset. The Trusts’ lease liabilities are included in Borrowings (Note 17). Leases for investment property which apply the fair value model are classified as investment property per AASB 140 Investment Properties. Prior year leases policy 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 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. (j) Plant and equipment 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 Trusts 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 value 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. Ingenia Communities Holdings Limited Annual Report 2020 92 Notes to the Financial Statements For the year ended 30 June 2020 | continued 1. Summary of significant accounting policies (continued) (k) Financial assets and liabilities Current and non-current financial assets and liabilities within the scope of AASB 9 Financial Instruments are classified as; fair value through profit or loss; fair value through other comprehensive income; or amortised cost. The Trusts determine 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. 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 instruments; discounted cash flow analysis; option pricing models; making use of available and supportable market data and keeping judgemental inputs to a minimum. 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 value may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying value 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 original invoice amount, and subsequently adjusted for ECL. An allowance is recognised by analysing the age of outstanding balances and applying historical default percentages. Historical loss rates are adjusted to reflect current and forward-looking observable data affecting the ability of customers to settle their debts. Inventories (o) The Trusts hold inventory in relation to the acquisition and development of lifestyle homes, as well as and service station fuel and supplies. 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 lifestyle 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. (q) Investment property Land and buildings have the function of an investment and are regarded as composite assets. In accordance with applicable accounting standards, the buildings, including plant and equipment, are not depreciated. Investment property includes property under construction, 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 Trusts 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 Trusts 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. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 93 1. Summary of significant accounting policies (continued) Intangible assets (r) An intangible asset arising from software development expenditure is recognised only when the Trusts 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 Trusts 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. 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 value 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 which 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) Provisions, including for employee 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. 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. (u) 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 Trusts 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(bb) information regarding the valuation of resident loans. Ingenia Communities Holdings Limited Annual Report 2020 94 Notes to the Financial Statements For the year ended 30 June 2020 | continued 1. Summary of significant accounting policies (continued) Borrowings (v) 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 value 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. (w) Issued equity Issued and paid up securities are recognised at the fair value of the consideration received by the Trusts. Any transaction costs arising on issue of ordinary securities are recognised directly in security holders’ interest as a reduction of the security proceeds received. (x) Revenue Revenue from rent, management fees, interest and distributions is recognised to the extent it is probable that the economic benefits will flow to the Trusts, 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 investment properties 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 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 lifestyle homes is recognised at the point in time when control of the lifestyle home is transferred to the customer, on settlement of the home. 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 at the point in time when control of the assets is transferred to the customer. (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 security holders each year. Tax allowances for building and fixtures depreciation are distributed to security 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, security holders may be entitled to receive a foreign tax credit for this withholding tax. ICF has entered 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 value 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. 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. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 95 1. Summary of significant accounting policies (continued) 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. (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) Investment in a joint venture A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries. The Trusts’ investment in its joint venture with Sun Communities is accounted for using the equity method. Under the equity method, the investment in a joint venture is initially recognised at cost. The carrying value of the investment is adjusted to recognise changes in the Trusts’ share of net assets of the joint venture since the acquisition date. Goodwill relating to the joint venture is included in the carrying value of the investment and is not tested for impairment separately. The statement of profit or loss reflects the Trusts’ share of the results of operations of the joint venture. Any change in other comprehensive income (“OCI”) of those investees is presented as part of the Trusts’ OCI. In addition, when there has been a change recognised directly in the equity of the joint venture, the Group recognises its share of any changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the joint venture are eliminated to the extent of the interest in the joint venture. The aggregate of the Trusts’ share of profit or loss of a joint venture is shown on the face of the statement of profit or loss outside operating profit and represents profit or loss after tax and non-controlling interests in the subsidiaries of the joint venture. The financial statements of the joint venture are prepared for the same reporting period as the Trusts. When necessary, adjustments are made to bring the accounting policies in line with those of the Trusts. After application of the equity method, the Trusts determine whether it is necessary to recognise an impairment loss on its investment in its joint venture. At each reporting date, the Trusts determines whether there is objective evidence that the investment in the joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the joint venture and its carrying value, and then recognises the loss within the statement of comprehensive income. Upon loss of joint control, the Trusts measure and recognise any retained investment at its fair value. Any difference between the carrying value of the joint venture upon loss of significant influence or joint control and the fair value of the retained investment and proceeds from disposal is recognised in profit or loss. (bb) 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 25. 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 2020 96 Notes to the Financial Statements For the year ended 30 June 2020 | continued (dd) Pending accounting standards In the current period, the Trusts have adopted all the new and revised accounting standards, amendments to accounting standards, and interpretations that are relevant to its operations and effective for the current annual reporting period. (ee) 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. 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. (ff) Government grants Government grants are recognised where there is reasonable assurance that the grant will be received, and all attached conditions will be complied with. When the grant relates to an expense, it is recognised net of the related expense for which it is intended to compensate. There are no unfilled conditions or other contingencies attached to the grants. 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 25). (cc) Earnings per share (“EPS”) Basic EPS is calculated as net profit attributable to members of the Trusts’, divided by the weighted average number of ordinary securities, adjusted for any bonus element. Diluted EPS is calculated as net profit attributable to the Trusts, divided by the weighted average number of ordinary securities and dilutive potential ordinary securities, adjusted for any bonus element. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 97 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 resident loans The fair value of the 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 fees (“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 the departure 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 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 value of assets and liabilities within the next financial year are discussed below. i. Valuation of investment property, other financial assets and other financial liabilities The Trusts have investment properties and assets held for sale which together represent the estimated fair value of investment property. Other financial assets represent ICMT’s investment in a number of unlisted property funds. Other financial liabilities relates to a profit share arrangement between ICMT and a third-party which is carried at fair value. These carrying value 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. Refer to Note 9 for the impact of COVID-19 on valuation assumptions. 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 lifestyle 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. Ingenia Communities Holdings Limited Annual Report 2020 98 Notes to the Financial Statements For the year ended 30 June 2020 | continued 3. Segment information (a) Description of Segments The Trusts invest predominantly in rental properties located in Australia with five reportable segments: – – – Ingenia Lifestyle and Holidays – comprising long-term and tourism accommodation within lifestyle communities; Ingenia Lifestyle Development – comprising the development and sale of lifestyle homes; Ingenia Gardens – rental villages; – Fuel, Food & Beverage Services – consists of the Trusts’ investment in service station operations and food & beverage activities attached to Ingenia Lifestyle and Holiday communities; – Corporate & Other – comprises the Trusts’ remaining assets and operating activities including, development joint venture 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 included in Corporate & Other. (b) ICF – 2020 Segment revenue External segment revenue Total revenue Segment underlying profit External segment revenue Property expenses Administrative expenses Depreciation expense L&H Operations $’000 Ingenia Gardens $’000 Corporate & Other $’000 1,675 1,675 8,989 8,989 1,675 8,989 – – (2) – – – – – – (514) (690) (24) Total $’000 10,664 10,664 10,664 (514) (690) (26) Earnings before interest and tax 1,673 8,989 (1,228) 9,434 Share of loss of a joint venture Net finance income Underlying profit Net gain/(loss) on change in fair value of: Investment properties Other financial instruments Other Responsible entity fees Profit after tax Segment assets Total assets (42) 14,024 23,416 1,865 38 (773) (4,166) 20,380 851,448 58,829 161,665 630,954 58,829 161,665 630,954 851,448 Ingenia Communities Holdings Limited Annual Report 2020 99 Notes to the Financial Statements For the year ended 30 June 2020 | continued 3. Segment information (continued) (c) ICF – 2019 Segment revenue External segment revenue Total revenue Segment underlying profit External segment revenue Property expenses Administrative expenses Depreciation expenses L&H Operations $’000 Ingenia Gardens $’000 Corporate & Other $’000 Total $’000 770 770 8,989 8,989 287 287 10,046 10,046 770 8,989 (2) – (2) – – – 287 (653) (524) (24) (914) 10,046 (655) (524) (26) 8,841 (1,098) 23,357 31,100 514 (2,298) (3,654) 25,662 768,618 768,618 Earnings before interest and tax 766 8,989 Share of loss of a joint venture Net finance income Underlying profit Net gain/(loss) on change in fair value of: Investment properties Other financial instruments Responsible entity fees Profit after tax Segment assets Total assets 1,100 1,100 152,653 614,865 152,653 614,865 Ingenia Communities Holdings Limited Annual Report 2020 100 Notes to the Financial Statements For the year ended 30 June 2020 | continued 3. Segment information (continued) (d) ICMT – 2020 L&H Operations $’000 L&H Development $’000 Ingenia Gardens $’000 Fuel, Food & Beverage Services $’000 Corporate & Other $’000 Total $’000 76,710 76,710 47,467 47,467 25,039 25,039 12,690 12,690 7,612 7,612 169,518 169,518 Segment revenue External segment revenue Total revenue Segment underlying profit External segment revenue 76,710 47,467 25,039 12,690 7,612 169,518 Property expenses (18,168) (900) (6,739) (659) (1,322) (27,788) Cost of lifestyle homes sold – (27,495) – – – (27,495) Employee expenses (22,307) (11,704) (5,996) (2,918) Administrative expenses (3,207) (1,278) (966) (67) Operational, marketing and selling expenses (2,583) (3,579) (902) Service station expenses – – – (2,126) (6,279) (119) (133) (545) – (43,044) (5,651) (9,735) (6,279) Depreciation and amortisation expense (599) (721) (233) (52) (10,830) (12,435) Earnings before interest and tax 29,846 1,790 10,203 589 (5,337) 37,091 Share of loss of a joint venture Net finance expense Income tax expense Underlying profit/(loss) Net (loss)/gain on change in fair value of: Investment properties Financial liabilities Other financial instruments Other Income tax benefit Responsible entity fees Loss after tax Segment assets Segment assets Assets held for sale Total assets (26) (18,894) (5,344) 12,827 (24,507) (417) (6) (794) 9,530 (3,646) (7,013) 608,698 92,473 23,948 – 632,646 92,473 3,313 – 3,313 339 – 339 45,539 750,362 8,675 32,623 54,214 782,985 Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 101 3. Segment information (continued) (e) ICMT – 2019 L&H Operations $’000 L&H Development $’000 Ingenia Gardens $’000 Fuel, Food & Beverage Services $’000 Corporate & Other $’000 Total $’000 71,722 71,722 92,461 92,461 24,639 24,639 11,950 11,950 3,010 3,010 203,782 203,782 Segment revenue External segment revenue Total revenue Segment underlying profit External segment revenue 71,722 92,461 24,639 11,950 3,010 203,782 Property expenses (17,772) (966) (6,788) (686) (10,660) (36,872) Cost of lifestyle homes sold – (53,332) – – – (53,332) Employee expenses (20,821) (11,595) (6,474) (2,631) Administrative expenses (3,105) (651) (378) (51) Operational, marketing and selling expenses (2,001) (4,311) (828) Service station expenses – – – Depreciation and amortisation expense (625) (468) (140) Earnings before interest and tax 27,398 21,138 10,031 (1,755) (6,153) (49) 625 (554) (850) (543) – (42,075) (5,035) (9,438) (6,153) (26) (1,308) (9,623) 49,569 Net finance expense Income tax expense Underlying profit/(loss) Net (loss)/gain on change in fair value of: Investment properties Financial liabilities Other financial instruments Other Income tax benefit Responsible entity fees Loss after tax Segment assets Segment assets Assets held for sale Total assets (31,061) (4,837) 13,671 (19,476) (5,400) 10 (2,290) 11,032 (3,582) (6,035) 533,746 129,577 3,563 2,662 – – 536,408 129,577 3,563 860 – 860 10,750 10,173 678,496 12,835 20,923 691,331 Ingenia Communities Holdings Limited Annual Report 2020 102 Notes to the Financial Statements For the year ended 30 June 2020 | continued 4. Earnings per unit Profit/(loss) attributable to security holders ($’000) 20,380 25,662 (7,013) (6,035) Weighted average number of securities outstanding (thousands) ICF ICMT 30 Jun 2020 30 Jun 2019 30 Jun 2020 30 Jun 2019 Issued securities (thousands) Dilutive securities (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 benefit (a) Income tax benefit Current tax benefit/(expense) Increase in deferred tax asset Income tax benefit 267,272 224,872 267,272 224,872 1,542 264 1,237 265 1,542 264 1,237 265 269,078 226,374 269,078 226,374 7.6 7.6 11.4 11.3 (2.6) (2.6) (2.7) (2.7) ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 – – – – – – 1,301 2,885 4,186 (2,319) 8,514 6,195 (b) Reconciliation between tax expense and pre-tax net profit Profit/(loss) before income tax 20,380 25,662 (11,199) (12,230) Less amounts not subject to Australian income tax (20,380) (25,662) – – Income tax at the Australian tax rate of 30% (30 June 2019: 30%) Tax effect of amounts which impact tax expense: Prior period income tax return true-ups Other Income tax benefit – – – – – – – – – – (11,199) (12,230) 3,360 3,669 1,314 (488) 4,186 859 1,667 6,195 (c) Tax consolidation 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. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 103 6. Trade and other receivables Current Trade receivables Prepayments Deposits Other receivables Finance lease receivable from stapled entity Total current trade and other receivables Non-current Finance lease receivable from stapled entity Other receivables Total non-current and other receivables ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 10 – – 232 358 600 4,051 1,442 5,493 – – – 19 358 377 4,051 1,410 5,461 494 1,449 260 3,543 – 5,746 – – – 607 2,158 812 1,918 – 5,495 – 34 34 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 ground lease. The remaining term of the agreement is 90 years. There are no purchase options. Minimum payments under the agreements and their present values are: ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’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 31,651 33,509 358 1,500 32,026 33,884 (29,100) (29,475) 4,409 4,409 358 1,165 2,886 4,409 358 1,165 2,886 4,409 Finance income recognised and included in interest income in the statement of comprehensive income 358 358 Information about the related ground lease payable by ICMT is given in Note 27. – – – – – – – – – – – – – – – – – – – – – – Ingenia Communities Holdings Limited Annual Report 2020 104 Notes to the Financial Statements For the year ended 30 June 2020 | continued 7. Inventories Lifestyle homes Completed Display homes Under construction Fuel, food and beverage Total inventories ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 – – – – – – – – – – 12,056 2,232 2,943 315 17,546 14,913 1,134 5,492 317 21,856 The lifestyle home balance includes: – 64 new completed homes (30 Jun 2019: 78) – – – 12 refurbished/renovated/annuals completed homes (30 Jun 2019: 18) 12 display homes (30 Jun 2019: 6) Lifestyle homes under construction includes 29 partially completed homes at different stages of development (30 Jun 2019: 20). It also includes demolition, site preparation costs and buybacks on future development sites. 8. 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: Gladstone, South Gladstone, QLD Albury, Lavington, NSW Sun Country, Mulwala, NSW Upper Coomera, Upper Coomera, QLD Mudgee Valley, Mudgee, NSW Total assets held for sale ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 – – – – – – – – – – – – 8,675 4,475 8,973 10,500 – 32,623 10,173 – – – 2,662 12,835 (b) Summary of carrying value – Liabilities The following is a summary of the carrying value of the loans associated with investment properties held for sale: Net resident loans – Gladstone Total liabilities held for sale 9. Investment properties (a) Summary of carrying value Completed properties Properties under development Total carrying value ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 – – – – 5,175 5,175 5,694 5,694 ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 217,404 180,562 595,080 515,990 – 3,655 74,738 107,552 217,404 184,217 669,818 623,542 Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 105 9. Investment properties (continued) (b) Movements in carrying value ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 Carrying value at beginning of the year 184,217 143,561 623,542 586,876 Acquisitions Expenditure capitalised Net gain/(loss) on change in fair value Transfer to assets held for sale Disposals 18,697 12,625 1,865 – – 31,874 8,268 65,530 29,201 53,669 22,267 514 (24,507) (19,476) – – (23,948) (12,835) – (6,959) Carrying value at the end of the year 217,404 184,217 669,818 623,542 (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. COVID-19 Valuation impact In response to the uncertainty surrounding the COVID-19 pandemic, a COVID-19 net profit shortfall adjustment has also been incorporated for some assets in line with external valuation methodology. In assessing the fair value of investment properties, the Trusts have considered the following: Segment Ingenia Gardens COVID-19 Considerations – – Limited increase in operational costs. Recent occupancy rates are at historical highs, indicating strong segment resilience. – Strong debtor collection with no increase in defaults. Ingenia Lifestyle and Rentals – Limited increase in operational costs. – Strong debtor collection with no increase in defaults. – Continued market transactions in comparable lifestyle assets supporting capitalisation rates. Ingenia Holidays – Limited increase in operational costs. – Strong forward bookings for majority of assets. – Impact of travel restrictions on revenue. Lifestyle Development – Short term slow down in the residential housing market and the impact on settlements. – Limited impact on development progress. Ingenia Communities Holdings Limited Annual Report 2020 106 Notes to the Financial Statements For the year ended 30 June 2020 | continued Investment properties (continued) 9. Given the constantly changing nature of the situation, the fair value at reporting date involves uncertainties around the underlying assumptions. The external valuations undertaken during the period, contained material valuation uncertainty clauses given the impacts of COVID-19 and reduced levels of transactional evidence during the period. The valuation can be relied upon at the date of valuation however, a higher level of valuation uncertainty than normal is assumed. In the event that COVID- 19 impacts are more severe or prolonged than anticipated, this may have a further adverse impact on the fair value of Ingenia’s investment properties. 10. Plant and equipment (a) Summary of carrying value Plant and equipment Less: accumulated depreciation Total plant and equipment (b) Movements in carrying value Carrying value at beginning of the year Additions Disposals Depreciation expense Carrying value at end of the year 11. Intangibles (a) Summary of carrying value Software and development Less: accumulated amortisation Total intangibles (b) Movements in carrying value Carrying value at beginning of the year Additions Disposals Amortisation expense Carrying value at end of the year ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 10 (5) 5 31 – – (26) 5 205 (174) 31 57 – – (26) 31 6,276 (1,953) 4,323 4,081 1,500 (282) (976) 4,323 6,438 (2,357) 4,081 3,699 1,293 (75) (836) 4,081 ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 – – – – – – – – – – – – – – – – 3,838 (2,066) 1,772 1,717 568 (10) (503) 1,772 3,288 (1,571) 1,717 1,919 270 – (472) 1,717 Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 107 12. Right-of-use assets (a) Summary of carrying amounts Plant and equipment Land and buildings Less: accumulated depreciation Carrying amount at end of the year (b) Movements in carrying amount Carrying value at beginning of the year Recognised on adoption of AASB 16 Additions Disposals Depreciation expense Carrying amount at end of the year ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 – – – – – – – – – – – – – – – – – – – 1,035 28,172 (10,956) 18,251 – 29,207 – – (10,956) 18,251 – – – – – – – – – – ICF has leased investment properties to ICMT, which it has been classified as operating leases. All leases include a clause to enable upward revision of the rental charge on an annual basis according to prevailing market conditions. Future minimum rentals receivable under non-cancellable operating leases as at 30 June 2020 are as follows: Within one year Later than one year but not later than five years Later than five years Carrying amount at end of the year ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 11,651 4,188 3,938 19,777 – – – – – – – – – – – – 13. Investment in a joint venture Together, ICF and ICMT hold a 50% interest in a joint venture with Sun Communities for the development of greenfield communities. The Trusts’ interest in the Joint Venture is accounted for using the equity method in the consolidated financial statements. The following table illustrates the summarised financial information of the Trusts investment in the joint venture entities: Balance Sheet Current assets Non-current assets(1) Current liabilities Non-current liabilities Equity Trusts’ share in equity – 50% Goodwill Group’s carrying value in investment ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 4,564 19,451 (95) – 23,920 11,960 – 11,960 5,203 17,500 (199) – 22,504 11,252 – 11,252 6 177 (183) – – – – – – – – – – – – – (1) Non-current assets represent the fair value of investment property. Refer to Note 2(a) for valuation methodology. Ingenia Communities Holdings Limited Annual Report 2020 108 Notes to the Financial Statements For the year ended 30 June 2020 | continued 13. Investment in a joint venture (continued) Statement of Comprehensive Income Revenue Cost of sales Expenses Interest income Depreciation Net gain/(loss) on change in fair value of: Investment properties Loss before income tax Income tax expense Total comprehensive loss for the year Group’s share of loss for the year 14. Other financial assets Unlisted property funds Total non-current ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 – – – – (353) (266) 27 – 242 (84) – (84) (42) 12 – (1,941) (2,195) – (2,195) (1,098) 8 – (75) – (8) – (75) 23 (52) (26) – – – – – – – – – – ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 – – 773 773 13,847 13,847 1,490 1,490 Other financial assets represent the Groups investment in a number of unlisted property funds. Refer to Note 2 for valuation assumptions. 15. Deferred tax assets and liabilities Deferred tax assets Tax losses Other Deferred tax liabilities DMF receivable Investment properties Net deferred tax assets Tax effected carried forward tax losses for which no deferred tax asset has been recognised ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 – – – – – – – – – – – – 18,973 11,704 – – (460) (7,519) 10,994 (447) (4,454) 6,803 5,552 6,052 The availability of carried forward tax losses of $5.6 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. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 109 16. Trade and other payables Current Trade payables and accruals Deposits Other unearned income Non-current Other 17. Borrowings Current Lease liabilities – Right-of-use assets Lease liabilities – Ground leases Non-current Bank debt Prepaid borrowing costs Lease liabilities – Right-of-use assets Lease liabilities – Ground leases ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 2,820 2,647 – – – – 18,675 7,978 1,069 29,312 6,143 1,310 2,820 2,647 27,722 36,765 – – – – ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 – – – – – – 73,000 241,000 (1,400) (1,155) – – – – 71,600 239,845 11,278 1,136 12,414 – – 7,227 14,788 22,015 – 1,123 1,123 – – – 15,136 15,136 (a) Bank debt Ingenia has $450.0 million in available debt facilities at 30 June 2020 (30 Jun 2019: $350.0 million). The total $450.0 million in debt facilities is provided by three Australian banks. The facility tranche dates are: – – – 17 February 2022 ($175.4 million); 13 July 2023 ($174.6 million); and 21 February 2027 ($100.0 million). As at 30 June 2020, the facilities have been drawn to $73.0 million (30 Jun 2019: $241.0 million). The carrying value of investment property net of resident liabilities at reporting date for the Group’s Australian properties pledged as security is $909.0 million (30 Jun 2019: $797.2 million). (b) Bank guarantees The Group has the ability to utilise its bank facilities to provide bank guarantees, which at 30 June 2020 were $14.3 million (30 Jun 2019: $11.5 million). Ingenia Communities Holdings Limited Annual Report 2020 110 Notes to the Financial Statements For the year ended 30 June 2020 | continued 17. Borrowings (continued) (c) Right-of-use asset 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 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 – – – – – – – – – – – – – – – – – – – – 11,297 4,542 3,938 19,777 (1,273) 18,504 11,297 3,568 3,639 18,504 – – – – – – – – – – (d) Ground leases The Group has entered into ground leases in relation to certain Lifestyle and Holidays investment properties. The leases are long-term in nature and range between 6 years to perpetuity. Minimum lease payments – excluding perpetual lease ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 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 – – – – – – – – – – – – – – – – – – – – 1,177 4,874 43,924 49,975 1,161 4,806 44,981 50,948 (35,184) (35,822) 14,791 15,126 1,135 4,109 9,547 14,791 1,123 4,060 9,943 15,126 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 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 18. Other financial liabilities Other financial liabilities relate to a profit share arrangement with a third-party which is carried at fair value. 111 Current Financial liabilities Total current Non-current Financial liabilities Total non-current 19. Issued units (a) Carrying values Balance at beginning of the year Issued during the year: Dividend Reinvestment Plan (“DRP”) Institutional Placement, Rights Issue and Share Purchase Plan Executive Incentive plan Equity raising costs Balance at end of the year The closing balance is attributable to the security holders of: Ingenia Communities Fund Ingenia Communities Management Trust (b) Number of issued securities Balance at beginning of the year Issued during the year: Dividend Reinvestment Plan (“DRP”) Institutional Placement, Rights Issue and Share Purchase Plan Executive Incentive Plan Balance at end of the year ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 – – – – – – – – – – 1,100 1,100 8,616 8,616 10,800 10,800 ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 831,792 759,337 55,640 43,690 15,854 254,158 – (8,108) 1,093,696 12,178 62,671 310 (2,704) 831,792 – 831,792 1,093,696 1,093,696 – 831,792 2,095 32,319 – (1,029) 89,025 – 89,025 89,025 1,983 10,363 51 (447) 55,640 – 55,640 55,640 ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 236,375 208,092 236,375 208,092 4,237 84,941 – 4,931 23,177 175 4,237 84,941 – 4,931 23,177 175 325,553 236,375 325,553 236,375 (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 2020 112 Notes to the Financial Statements For the year ended 30 June 2020 | continued 20. Accumulated losses and retained earnings ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 Balance at beginning of the year Net profit/(loss) for the year Distributions Other (308,171) (309,538) 20,380 25,662 (28,877) (24,295) – – 11,374 (7,013) – – Balance at end of the year (316,668) (308,171) 4,361 The closing balance is attributable to the security holders of: Ingenia Communities Fund Ingenia Communities Management Trust (316,668) (308,171) – – (316,668) (308,171) – 4,361 4,361 29,557 (6,035) – (12,148) 11,374 – 11,374 11,374 21. Commitments ICMT has commitments for capital expenditure on investment properties and inventories contracted but not provided for at reporting date of $10,072.103 (30 Jun 2019: $11,938,070). 22. Contingent liabilities The Trusts have the following contingent liabilities: – Bank guarantees totalling $14.3 million provided for under the $450.0 million bank facility. Bank guarantees primarily relate to the Responsible Entity’s AFSL capital requirements ($10.0 million). 23. 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 the Loan to Value Ratio (LVR) which is a key covenant under the Group’s $450.0 million common terms debt facilities. LVR is calculated as the sum of bank debt, bank guarantees, ground 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 2020, the LVR of 8.4% (30 June 2019: 29.8%) is below target due to the completion of the equity raising in June 2020. In addition, the Group monitors Interest Cover Ratio as defined under the common terms of the debt facilities. At 30 June 2020, the Total Interest Cover Ratio was 8.35x (30 Jun 2019: 6.38x) and the Core Interest Cover Ratio was 6.15x (30 Jun 2019: 3.09x). Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 113 24. Financial instruments (a) Introduction The Trusts’ principal financial instruments comprise receivables, payables, interest bearing liabilities, other financial liabilities, cash and short-term deposits and derivative financial instruments. The main risks arising from the Trusts’ financial instruments are interest rate risk, foreign exchange risk, credit risk and liquidity risk. The Trusts manage the exposure to these risks primarily through the 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. (b) Interest rate risk The Trusts’ exposure to the risk of changes in market interest rates arises primarily from its use of borrowings. The main consequence of adverse changes in market interest rates is higher interest costs, reducing the Trust’s profit. In addition, one or more of the Trust’s loan agreements may include minimum interest cover covenants. Higher interest costs resulting from increases in market interest rates may result in these covenants being breached, providing the lender the right to call in the loan or to increase the interest rate applied to the loan. The Trusts manage the risk of changes in market interest rates by maintaining an appropriate mix of fixed and floating rate borrowings. Fixed rate debt is achieved either through fixed rate debt funding or through derivative financial instruments permitted under the Investments, Derivatives, and Borrowing Policy. At 30 June 2020, the Trusts’ had no derivative financial instruments or fixed debt in place (30 Jun 2019: 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. (c) Interest rate risk exposure 30 Jun 2020 $’000 Financial assets Cash at bank Ground leases (excluding perpetual lease) Financial liabilities Bank debt Interest rate swaps: Fund pays fixed rate Interest rate collar; Group pays fixed rate on floor 30 Jun 2019 $’000 Financial assets Cash at bank Ground leases (excluding perpetual lease) Financial liabilities Bank debt Interest rate swaps: Fund pays fixed rate ICF Fixed interest maturing in: Floating interest rate Less than 1 year 1 to 5 Years More than 5 years 1,687 – 73,000 – – 6,629 – 241,000 (70,000) – 358 – – – – 358 – – – 1,165 – 2,886 – – – – 1,165 – 70,000 – – – – 2,886 – – – Total 1,687 4,409 73,000 – – 6,629 4,409 241,000 – – Interest rate collar; Group pays fixed rate on floor (125,000) 45,000 80,000 Ingenia Communities Holdings Limited Annual Report 2020 114 Notes to the Financial Statements For the year ended 30 June 2020 | continued 24. Financial instruments (continued) ICMT’s exposure to interest rate risk and the effective interest rates on financial instruments at reporting date were: 30 Jun 2020 $’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 8,065 – – – 8,065 Lease liabilities – Right-of-use-asset Lease liabilities – Ground leases (excluding perpetual lease) – – 11,297 3,568 3,639 18,504 1,135 4,109 9,547 14,791 30 Jun 2019 $’000 Financial assets Cash at bank Financial liabilities 13,478 – – – 13,478 Lease liabilities – Ground leases (excluding perpetual lease) – 1,123 4,060 9,943 15,126 Other financial instruments of the Trusts not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk. (d) Interest rate sensitivity analysis The impact of an increase or decrease in average interest rates of 1% (100 basis points) at reporting date, with all other variables held constant, is illustrated in the tables below. This analysis is based on the interest rate risk exposures in existence at balance sheet date. As the Trusts have no derivatives that meet the documentation requirements to qualify for hedge accounting, there would be no impact on 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 and collars (AUD denominated) Decrease in average interest rates of 100 bps: Variable interest rate bank debt (AUD denominated) Interest rate swaps and collars (AUD denominated) Effect on profit after tax higher/(lower) ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 (730) – (2,410) 695 730 – 2,410 (4,507) – – – – – – – – (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. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 115 24. Financial instruments (continued) (f) Net foreign currency exposure Net foreign currency exposure: United States dollars New Zealand dollars Total net foreign currency assets Net foreign currency asset ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 1,014 264 1,278 1,089 266 1,355 – – – – – – (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 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 (92) (24) 113 29 (99) (24) 121 30 – – – – – – – – (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 Trusts’ maximum exposure to credit risk at reporting date in relation to each class of financial instrument is the carrying value as reported in the balance sheet. Ingenia Communities Holdings Limited Annual Report 2020 116 Notes to the Financial Statements For the year ended 30 June 2020 | continued 24. Financial instruments (continued) (i) Liquidity risk The main objective of liquidity risk management is to reduce the risk that the Trusts do not have the resources available to meet their financial obligations and working capital and committed capital expenditure requirements. The Trusts’ 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, 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. 30 Jun 2020 Trade and other payables Borrowings(1) 30 Jun 2019 Trade and other payables Borrowings(1) 30 Jun 2020 Trade and other payables Right-of-use asset leases Ground leases (excluding perpetual lease) Ground leases (perpetual lease)(2) 30 Jun 2019 Trade and other payables Ground leases (excluding perpetual lease) Ground leases (perpetual lease)(2) ICF Less than 1 year $’000 1 to 5 years $’000 More than 5 years $’000 2,820 – 2,182 77,546 5,002 77,546 2,647 7,884 – 270,941 10,531 270,941 – – – – – – Total $’000 2,820 79,728 82,548 2,647 278,825 281,472 ICMT Less than 1 year $’000 1 to 5 years $’000 More than 5 years $’000 Total(2) $’000 27,722 11,297 1,177 121 – 4,542 4,874 483 – 3,938 27,722 19,777 43,924 49,975 – 604 40,317 9,899 47,862 98,078 36,765 - - 36,765 1,161 121 4,806 44,981 50,948 483 - 604 38,047 5,289 44,981 88,317 (1) The balances above will not agree to the balance sheet as it includes the implied interest component. (2) For purpose of the table above, the lease payments are included for five years for the perpetual lease. Refer to Note 17(d). Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 117 24. Financial instruments (continued) 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. 30 Jun 2020 Liabilities Other financial liabilities Derivative liabilities – net settled 30 Jun 2019 Liabilities Other financial liabilities Derivative liabilities – net settled ICF Less than 1 year $’000 1 to 5 years $’000 More than 5 years $’000 Total $’000 163 – 163 1,036 70 1,106 8,453 – 8,453 10,864 2,435 13,299 – – – – – – 8,616 – 8,616 11,900 2,505 14,405 (j) Other financial instrument risk The Trusts carry 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 residents’ loans in existence at reporting date. Effect on profit after tax ICF ICMT Higher/(lower) Higher/(lower) 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 Increase in market prices of investment properties of 10% Decrease in market prices of investment properties of 10% – – – – (149) 149 (147) 147 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. 25. Fair value measurement (a) Ingenia Communities Fund The following table provides the fair value measurement hierarchy of Ingenia Communities Fund assets and liabilities: i. Assets measured at fair value 30 Jun 2020 Investment properties Other financial assets Date of valuation 30-Jun-20 Note 9(a) 30-Jun-20 Note 14 Fair value measurement using: Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3) Total – – – – 217,404 217,404 – – Ingenia Communities Holdings Limited Annual Report 2020 118 Notes to the Financial Statements For the year ended 30 June 2020 | continued 25. Fair value measurement (continued) 30 Jun 2019 Investment properties Other financial assets ii. Liabilities measured at fair value 30 Jun 2020 Derivatives 30 Jun 2019 Derivatives Fair value measurement using: Quoted prices in active markets (Level 1) Date of valuation Significant observable inputs (Level 2) Significant unobservable inputs (Level 3) Total 30-Jun-19 Note 9(a) 30-Jun-19 Note 14 30-Jun-20 30-Jun-19 – – – – – – – 2,505 184,217 184,217 773 773 – – – 2,505 There have been no transfers between Level 1 and Level 2 during the year. (b) Ingenia Communities Management Trust The following table provides the fair value measurement hierarchy of Ingenia Communities Management Trust assets and liabilities: i. Assets measured at fair value 30 Jun 2020 Investment properties Assets held for sale – investment property Other financial assets 30 Jun 2019 Investment properties Assets held for sale – investment property Other financial assets Fair value measurement using: Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3) Total – – – – – – – – – – – – 669,818 669,818 32,623 32,623 13,847 13,847 623,542 623,542 12,835 12,835 1,490 1,490 Date of valuation 30-Jun-20 Note 9(a) 30-Jun-20 Note 8(a) 30-Jun-20 Note 14 30-Jun-19 Note 9(a) 30-Jun-19 Note 8(a) 30-Jun-19 Note 14 Ingenia Communities Holdings Limited Annual Report 2020 119 Total 308 Notes to the Financial Statements For the year ended 30 June 2020 | continued 25. Fair value measurement (continued) ii. Liabilities measured at fair value 30 Jun 2020 Resident loans Liabilities held for sale Other financial liabilities 30 Jun 2019 Resident loans Liabilities held for sale Other financial liabilities Date of valuation 30-Jun-20 30-Jun-20 Note 8(b) 30-Jun-20 Note 18 30-Jun-19 30-Jun-19 Note 8(b) 30-Jun-19 Note 18 Fair value measurement using: Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3) – – – – – – – – – – – – 308 5,175 5,175 8,616 8,616 308 308 5,694 5,694 11,900 11,900 There have been no transfers between Level 1 and Level 2 during the year. 26. Auditor’s remuneration Fees for auditing the statutory financial report 198,000 200,518 198,000 200,518 Fees for assurance services that are required by legislation: ICF ICMT 30 Jun 2020 $ 30 Jun 2019 $ 30 Jun 2020 $ 30 Jun 2019 $ AFSL Fees for other services: Technical advice System review 10,000 9,875 10,000 9,875 – – 4,838 5,625 – – 4,838 5,625 Total fees to Ernst & Young 208,000 220,856 208,000 220,856 27. 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 ICMT 30 Jun 2020 $ 30 Jun 2019 $ 30 Jun 2020 $ 30 Jun 2019 $ 4,165,601 3,654,049 3,645,980 3,582,448 The Responsible Entity is entitled to a fee of 0.5% of total assets. In addition, it is entitled to recover certain expenses. Ingenia Communities Holdings Limited Annual Report 2020 120 Notes to the Financial Statements For the year ended 30 June 2020 | continued 27. Related parties (continued) The gross amount accrued and recognised but unpaid at reporting date was: ICF ICMT 30 Jun 2020 $ 30 Jun 2019 $ 30 Jun 2020 $ 30 Jun 2019 $ Current trade payables 1,100,918 988,035 947,130 939,191 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 2020 and 30 June 2019. (d) Joint venture During the year ICMT generated fee income from the joint venture with Sun Communities. ICF ICMT 30 Jun 2020 $ 30 Jun 2019 $ 30 Jun 2020 $ 30 Jun 2019 $ Fee income from associate – – 406,000 813,590 (e) Other related party transactions ICF has leased its investment property to ICMT. Rental villages have been classified as operating leases and the DMF village has been classified as a ground 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). ICMT has entered into development agreements with subsidiaries of ICH to develop land into lifestyle communities. These agreements are on arms-length terms and eliminate on consolidation in the Group results. Pursuant to the terms of the agreements, subsidiaries of ICH received a development fee of $4,470,000 (30 June 2019: $1,520,000). There are a number of other transactions and balances that occur between the Trusts, which are detailed below: ICF ICMT 30 Jun 2020 $ 30 Jun 2019 $ 30 Jun 2020 $ 30 Jun 2019 $ 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 374,936 374,936 (374,936) (374,936) 4,408,747 4,408,931 (4,408,747) (4,408,931) Finance lease commitments 33,525,542 33,900,478 (33,525,542) (33,900,478) 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 10,664,106 9,758,622 (10,664,106) (9,758,622) 23,155,347 33,703,896 (17,972,592) (30,325,076) Intercompany loan balances between stapled entities 614,299,043 559,877,745 (611,235,769) (551,992,587) (f) 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. Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 121 27. Related parties (continued) The names of the directors and KMP of ICRE, and their dates of appointment or resignation if they were not directors for all of the financial year, are: Directors Jim Hazel (Chairman) Robert Morrison (Deputy Chairman) Amanda Heyworth Andrew McEvoy Pippa Downes (appointed, effective 4 December 2019) Gary Shiffman John McLaren Valerie Lyons Simon Owen Other KMP Nicole Fisher Scott Noble (Alternate Director to Gary Shiffman) (resigned, effective 30 November 2019) (Managing Director and Chief Executive Officer (MD and CEO)) (Chief Operating Officer) (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 30 Jun 2020 $ 30 Jun 2019 $ 651,213 644,458 1,423,368 1,420,940 158,400 355,800 63,009 863,379 61,560 812,981 3,159,369 3,295,739 The amounts disclosed in the table are the amounts recognised as an expense during the reporting period related to key management personnel. For FY20, Mr Owen was awarded an STI of 67% based on his performance. Due to the adverse impact of COVID-19 on the business, staff and residents, it was agreed to award all of this STI in the form of deferred rights with no cash component. The aggregate Rights of the Group held directly, by KMP, are as follows: Issue date Right Type Vesting date FY16(1) FY17(1) FY17(1) FY18 FY18(1) FY19 FY19 FY20 LTIP LTIP STIP LTIP STIP LTIP STIP LTIP FY19 FY20 FY19 FY21 FY20 FY22 FY21 FY23 Number outstanding 30 Jun 2020 30 Jun 2019 91,068 91,068 128,819 248,432 2,437 102,437 493,568 493,568 34,300 194,935 496,917 496,917 132,436 450,234 – – 1,829,779 1,627,357 (1) Rights are fully vested but not exercised. All other rights are still subject to vesting conditions. A short-term loan facility of $500,000 was made available to the CEO for a period of 15 days on commercial terms. Interest paid on the facility was $1,060. No balance is outstanding. Ingenia Communities Holdings Limited Annual Report 2020 122 Notes to the Financial Statements For the year ended 30 June 2020 | continued 28. Parent entity financial information Summary financial information about the parent of each Trust is: Current assets Total assets Current liabilities Total liabilities Net assets/(liabilities) Security holders’ equity: Issued securities Accumulated losses Total security holders’ equity ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 1,713 6,629 816,066 734,495 2,681 5,126 1,300 31,498 1,578 150 25,546 282 74,283 244,973 50,358 63,863 741,783 489,522 (18,860) (38,317) 1,093,696 831,792 89,025 55,640 (351,913) (342,270) (107,885) (93,957) 741,783 489,522 (18,860) (38,317) Profit/(loss) from continuing operations 19,233 24,955 (16,252) (12,912) Net profit/(loss) attributable to security holders Total comprehensive income/(loss) 19,233 19,233 24,955 24,955 (16,252) (16,252) (12,912) (12,912) 29. 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): 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 INA Subsidiary Trust No.4 INA Lifestyle Landowner Trust INA Community Living Subsidiary Trust No. 2 Country of residence 30 Jun 2020 % 30 Jun 2019 % Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia USA Australia Australia Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Ingenia Communities Holdings Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 | continued 29. Subsidiaries (continued) Subsidiaries of ICMT Garden Villages Management Trust INA Community Living Lynbrook Trust Settlers Operations Trust INA DMF Management Pty Ltd (formerly 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 Soldiers Point Pty Ltd INA NZ Subsidiary Unit Trust No. 1 INA NZ Subsidiary Unit Trust No. 2 INA Lifestyle Operations Trust INA Operations Management Trust Emmetlow Pty Ltd Park Trust 123 Country of residence 30 Jun 2020 % 30 Jun 2019 % Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand New Zealand Australia Australia Australia Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - - The Trusts’ voting interest in all other subsidiaries is the same as the ownership interest. 30. Notes to the cash flow statements Reconciliation of profit to net cash flows from operations: Net profit/(loss) for the year Adjustments for: Share of joint venture loss Net loss on disposal of investment properties Net loss/(gain) on change in fair value of: Investment properties – continuing Financial liabilities Other Income tax (benefit)/expense Operating profit before tax Depreciation and amortisation expense Finance (cost)/income ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 20,380 25,662 (7,013) (6,035) 42 773 1,098 – 26 794 (1,865) (514) 24,507 – (38) – – 2,298 – 19,292 28,544 26 (51) 26 1,469 417 6 (4,186) 14,551 12,435 (16) – 2,290 19,476 5,400 (10) (6,195) 14,926 1,308 – Operating cash flow before changes in working capital 19,267 30,039 26,970 16,234 Ingenia Communities Holdings Limited Annual Report 2020 124 Notes to the Financial Statements For the year ended 30 June 2020 | continued 30. Notes to the cash flow statements (continued) Changes in working capital: (Increase)/decrease in receivables Decrease in inventory Increase/(decrease) in other payables and provisions (Decrease)/increase in loans to related parties Net cash provided by operating activities 31. Subsequent events ICF ICMT 30 Jun 2020 $’000 30 Jun 2019 $’000 30 Jun 2020 $’000 30 Jun 2019 $’000 (255) – 173 1,230 – (217) 4,310 (1,739) (9,043) (28,540) (39,962) (9,355) (10,432) 26,755 48,775 1,617 8,372 (506) 23,465 49,182 Final FY20 distribution On 18 August 2020, the Directors declared a final distribution of 4.4 cps amounting to $14.3 million, to be paid on 24 September 2020. Acquisition of Sunnylake Shores On 24 July 2020, the Group completed the acquisition of the Sunnylake Shores lifestyle community, located on the Central Coast of NSW, for a purchase price of $16.3 million. Acquisition of Ballarat On 28 July 2020, the Group completed the acquisition of a DA approved greenfield development site for a lifestyle community in Ballarat, VIC for a purchase price of $7.0 million. Operating restrictions due to COVID-19 Post 30 June 2020, governments have announced further restrictions in response to the COVID-19 pandemic, including the closure of State borders. The Group continues to monitor the impact of these closures on our Holidays assets. Ingenia Communities Holdings Limited Annual Report 2020 Directors’ Declaration For the year ended 30 June 2020 125 In accordance with a resolution of the directors of Ingenia Communities Fund and 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 2020 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. The notes to the financial statements include an explicit and unreserved statement of compliance with international financial reporting standards at Note 1(b). This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2020. 2. 3. On behalf of the Board Jim Hazel Chairman Adelaide, 18 August 2020 Ingenia Communities Holdings Limited Annual Report 2020 126 Independent Auditor’s Report For the year ended 30 June 2020 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 balance sheet as at 30 June 2020, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated cash flow statement 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 2020 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 Company 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 (including Independence Standards) (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. 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 2020 Independent Auditor’s Report For the year ended 30 June 2020 | continued 127 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. 1. Valuation of Investment Properties Why significant How our audit addressed the key audit matter Approximately 27% of the Group’s total assets comprise investment properties (both those disclosed as investment properties and equity accounted investments). 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 is 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. As at 30 June 2020 there is increased valuation uncertainty arising from the COVID-19 pandemic and the response of Governments to this. This means that the property values may change significantly and unexpectedly over a relatively short period of time. The valuation of investment properties is inherently subjective given that there are alternative assumptions and valuation methods that may result in a range of values. The impact of COVID-19 at 30 June 2020 has resulted in a wider range of possible values than at past valuation points. Our audit procedures included the following: • We reviewed the controls in place relevant to the valuation process; • We evaluated the suitability of the valuation methodology used across the portfolio and tested the valuation reports for mathematical accuracy on a sample basis; • We assessed the qualification, competence and objectivity of the independent valuation experts used by the Group; • We assessed the Group’s internal valuation methodology and tested the mathematical accuracy of the valuation models. We also assessed the competence, qualifications and objectivity of the internal valuer; • On a sample basis, we compared the property related data used as input for both the external and internal valuations against actual and budgeted property performance; • On a sample basis, we considered the key inputs and assumptions used in the valuations by comparing this information to external market data; 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 2020 128 Independent Auditor’s Report For the year ended 30 June 2020 | continued Given the market conditions at balance date, the independent valuers have reported on the basis of the existence of “material valuation uncertainty”, noting that less certainty and a higher degree of caution should be attached to the valuations than would normally be the case. In this situation the disclosures in the financial report provide particularly important information about the assumptions made in the property valuations and the market conditions at 30 June 2020. • Our real estate valuation specialists reviewed a sample of internal and independent valuations to determine whether the key judgements and methodology used were appropriate, including the impact of COVID- 19; • We assessed the appropriateness of the allocation of capital expenditure between investment property and inventory assets; • We have also considered the ‘material valuation uncertainty’ disclosure included in the valuation reports and any other restrictions imposed on the valuation process (if any) and the market conditions at balance date. • On a sample basis, we have considered the specific assumptions and judgements used by the Group in the valuations following the impact of COVID-19. We have validated the additional disclosure describing the specific judgements used by the Group in relation to the pandemic included in Note 9 of the financial report; and • We have considered whether there have been any indicators of material changes in property valuations from 30 June 2020 up to the date of our opinion. We involved our real estate valuation specialists to assist us in making this assessment. Any material matters identified have been reflected in the fair values of investment properties at the reporting date, where appropriate, or disclosed as a subsequent event in Note 31. 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 2020 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. 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 2020 Independent Auditor’s Report For the year ended 30 June 2020 | continued 129 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. 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. 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 2020 130 Independent Auditor’s Report For the year ended 30 June 2020 | continued 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 | 57 Ingenia Communities Holdings Limited Annual Report 2020 Independent Auditor’s Report For the year ended 30 June 2020 | continued 131 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 Yvonne Barnikel Partner Sydney 18 August 2020 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 58 Ingenia Communities Holdings Limited Annual Report 2020 132 Independent Auditor’s Report For the year ended 30 June 2020 | 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 balance sheet as at 30 June 2020, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated cash flow statement 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 2020 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 Company 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 (including Independence Standards) (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 | 59 Ingenia Communities Holdings Limited Annual Report 2020 Independent Auditor’s Report For the year ended 30 June 2020 | continued 133 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 Approximately 86% 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 is considered a key audit matter as valuations contain several 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 of the financial report. One of these categories is considered material and involve significant judgement. • 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. The valuation of investment properties is inherently subjective given that there are alternative assumptions and valuation methods that may result in a range of values. The impact of COVID-19 at 30 June 2020 has resulted in a wider range of possible values than at past valuation points. Our audit procedures included the following: • We reviewed the controls in place relevant to the valuation process; • We evaluated the suitability of the valuation methodology used across the portfolio and tested the valuation reports for mathematical accuracy on a sample basis; • We assessed the qualification, competence and objectivity of the independent valuation experts used by the Group; • We assessed the Group’s internal valuation methodology and tested the mathematical accuracy of the valuation models. We also assessed the competence, qualifications and objectivity of the internal valuer; • On a sample basis, we compared the property related data used as input for both the external and internal valuations against actual and budgeted property performance; • On a sample basis, we considered the key inputs and assumptions used in the valuations by comparing this information to external market data; A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 60 Ingenia Communities Holdings Limited Annual Report 2020 134 Independent Auditor’s Report For the year ended 30 June 2020 | continued • • The key judgements for the longer term and short-term rental include capitalisation rates, discount 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. Specific assumptions and judgements of the impact of COVID-19 are contained within Note 9 to the financial report. These include impact on property sale settlements, revenue and operational costs. As at 30 June 2020 there is increased valuation uncertainty arising from the COVID-19 pandemic and the response of Governments to this. This means that the property values may change significantly and unexpectedly over a relatively short period of time. Given the market conditions at balance date, the independent valuers have reported on the basis of the existence of “material valuation uncertainty”, noting that less certainty and a higher degree of caution should be attached to the valuations than would normally be the case. In this situation the disclosures in the financial report provide particularly important information about the assumptions made in the property valuations and the market conditions at 30 June 2020. • Our real estate valuation specialists reviewed a sample of internal and independent valuations to determine whether the key judgements and methodology used were appropriate, including the impact of COVID- 19; • We assessed the appropriateness of the allocation of capital expenditure between investment property and inventory assets; • We have also considered the ‘material valuation uncertainty’ disclosure included in the valuation reports and any other restrictions imposed on the valuation process (if any) and the market conditions at balance date. • On a sample basis, we have considered the specific assumptions and judgements used by the Group in the valuations following the impact of COVID-19. We have validated the additional disclosure describing the specific judgements used by the Group in relation to the pandemic included in Note 9 of the financial report; and • We have considered whether there have been any indicators of material changes in property valuations from 30 June 2020 up to the date of our opinion. We involved our real estate valuation specialists to assist us in making this assessment. Any material matters identified have been reflected in the fair values of investment properties at the reporting date, where appropriate, or disclosed as a subsequent event in Note 31. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 61 Ingenia Communities Holdings Limited Annual Report 2020 Independent Auditor’s Report For the year ended 30 June 2020 | continued 135 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 2020 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. 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: A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 62 Ingenia Communities Holdings Limited Annual Report 2020 136 Independent Auditor’s Report For the year ended 30 June 2020 | continued • • • • • • 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 63 Ingenia Communities Holdings Limited Annual Report 2020 Independent Auditor’s Report For the year ended 30 June 2020 | continued 137 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 Yvonne Barnikel Partner Sydney 18 August 2020 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Page | 64 Ingenia Communities Holdings Limited Annual Report 2020 138 Security Holder Information For the year ended 30 June 2020 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 1 September 2020. 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 PTY LIMITED CITICORP NOMINEES PTY LIMITED SUN INA EQUITY LLC BNP PARIBAS NOMINEES PTY LTD NATIONAL NOMINEES LIMITED BNP PARIBAS NOMS PTY LTD BNP PARIBAS NOMS(NZ) LTD CITICORP NOMINEES PTY LIMITED BRAHMAN PURE ALPHA PTE LTD CUSTODIAL SERVICES LIMITED BOND STREET CUSTODIANS LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED-GSCO ECA GWYNVILL TRADING PTY LTD THE TRUST COMPANY (AUSTRALIA) LIMITED PACIFIC CUSTODIANS PTY LIMITED BODIAM PROPERTIES PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2 ONE MANAGED INVT FUNDS LTD PACIFIC CUSTODIANS PTY LIMITED Total Total Quoted Equity Securities Number of securities held Percentage of issued capital 113,217,711 54,179,647 36,353,657 32,572,582 16,448,424 12,202,202 10,846,724 6,197,816 3,999,139 3,100,478 1,254,575 798,786 752,709 688,961 654,750 603,770 590,431 581,517 545,599 545,343 34.78 16.64 11.17 10.01 5.05 3.75 3.33 1.90 1.23 0.95 0.39 0.25 0.23 0.21 0.20 0.19 0.18 0.18 0.17 0.17 296,134,821 90.96 325,552,633 100.00 Less than marketable parcels of ordinary securities There are 348 security holders with unmarketable parcels totalling 5,229 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 holders Number of securities Percentage of securities 53 627 477 1,392 1,427 303,660,384 14,286,630 3,467,717 3,598,140 539,762 3,976 325,552,633 93.28 4.39 1.07 1.11 0.17 100 Ingenia Communities Holdings Limited Annual Report 2020 Security Holder Information For the year ended 30 June 2020 | 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 139 Number of holders Number of securities Percentage of securities 4 14 5 1 – 1,116,742 508,215 31,462 4,187 – 67.25 30.60 1.89 0.25 – 24 1,660,606 100.00 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 – – – 3 – 169,173 – – – 0.00 100.00 0.00 0.00 0.00 169,173 100.00 The Short Term Incentive Plan Rights on issue are unquoted and issued under the Ingenia Rights Plan. Unquoted Equity Securities The Company had the following unquoted securities on issue as at 1 September 2020. 24 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 1,660,606 169,173 Substantial Security Holders The names of the Substantial Security Holders pursuant to notices released to the ASX as at 1 September 2020: Security holder Sun INA Equity LLC The Vanguard Group Inc AMP Limited and its related bodies corporate Perennial Value Management Limited (PVM) Number of securities Percentage of issued capital 31,873,650 10.040 25,007,362 17,419,487 13,290,772 9.233 5.560 5.560 Restricted Securities There are no restricted securities on issue as at 1 September 2020. 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 2020 140 Investor Relations For the year ended 30 June 2020 Enquiries relating to Ingenia Communities Group (ASX code: INA) can be directed to the Link Market Services Investor Information line on 1300 554 474 (or from outside Australia +61 1300 554 474). This service is available from 8:30am to 5:30pm (Sydney time) on all business days. Link Market Services can assist with: – Change of address details – Requests to receive communications online – Provision of tax file numbers – Changes to payment instructions – General enquiries about your security holding. www.ingeniacommunities.com.au Ingenia Communities’ 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; sustainability; and corporate governance information. Security holders can access their investment details, including holding balance and payment history, from the link to the Registry which is contained on 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 2019/2020 financial year. A history of distribution payments made since 2005 is available from the Group’s website www.ingeniacommunities.com.au. Period Ended June 2020 December 2019 Date Paid Total Amount 24 Sept 2020 26 March 2020 $0.044 $0.056 * Information on the tax components of distributions can be found on the Ingenia Communities Group website or the Attribution Managed Investment Trust Member Annual Statement (AMMA 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 securities. The rules of the Plan and how to apply can be found on the website or obtained from the Registry, Link Market Services. AMMA Statements AMMA Statements, which summarise payments made during the year and include information required to complete an Australian tax return, are dispatched each September. Details of past distributions and relevant tax information are available on the Group’s website. Annual General Meeting The Annual General Meeting will be held on 10 November 2020. The Group will hold a virtual meeting and information on how to attend and vote at the meeting will be provided to all investors in advance of the meeting. 2020/2021 Security Holder Calendar* 24 September 2020 24 September 2020 10 November 2020 February 2021 March 2021 Final FY20 distribution paid AMMA Statement dispatched Annual General Meeting 1H21 Result announced Interim FY21 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. If you have any questions or concerns as to how Ingenia deals with your personal information please contact the Privacy Officer at privacy@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 Australian Financial Complaints Authority (AFCA). If a security holder feels that a complaint remains unresolved or wishes it to be investigated further, AFCA can be contacted as detailed below: By telephone: 1800 931 678 Website: www.afca.org.au Corporate Governance Statement The Corporate Governance Statement was approved by the Board of Directors on 17 August 2020 and can be found at: http://www.ingeniacommunities.com.au/wp-content/uploads/2020/08/Corporate-Governance-Statement.pdf Ingenia Communities Holdings Limited Annual Report 2020 141 Corporate Directory For the year ended 30 June 2020 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: 1300 132 946 Facsimile: +61 2 8263 0500 Email: investor@ingeniacommunities.com.au Website: www.ingeniacommunities.com.au Directors of Ingenia Communities Group (as at 31 August 2020) J Hazel (Chairman) R Morrison (Deputy Chairman) A Heyworth S Owen P Downes A McEvoy G Shiffman J McLaren (Alternate Director) Secretary N Nguyen 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 Facsimile: +61 2 9287 0303 Email: registrars@linkmarketservices.com.au Auditors Ernst & Young 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 2020 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 2020. 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 Holdings Limited Ingenia Communities Group Level 9, 115 Pitt Street, Sydney, NSW 2000 T. 1300 132 946 E. investor@ingeniacommunities.com.au www.ingeniacommunities.com.au