Lifestyle Communities Limited Annual Report 2018

Plain-text annual report

20 18 Annual Report For personal use onlyFor personal use onlyContents Chair’s Report ................................................................................................................................. 1 Managing Director’s Report ......................................................................................................... 2 Directors’ Report ............................................................................................................................ 4 Operating and Financial Review .................................................................................................. 9 Remuneration Report................................................................................................................... 16 Auditors Independence Declaration ......................................................................................... 28 Corporate Governance Statement ............................................................................................ 29 Financial Statements ................................................................................................................... 38 Directors' Declaration.................................................................................................................. 77 Independent Auditors Report .................................................................................................... 78 ASX additional information ........................................................................................................ 83 Corporate information ................................................................................................................ 85 For personal use onlyChair’s Report For the 2018 Financial Year Dear fellow shareholders, There have been many changes at Lifestyle Communities during a busy 2018 financial year. This included a transformation in the Company’s Board as we welcomed three new Directors, The Hon. Nicola Roxon, Georgina Williams and, more recently, David Blight. Nicola, Georgie and David have broadened the skills and experience of the Board and have made an immediate and positive impact on Board discussions. As part of the Board renewal, Bruce Carter and Jim Craig resigned from the Board during the year. As one of the three founders of the Company and a long-term Executive Director, Bruce’s contribution to Lifestyle Communities has been significant. Jim joined the Board in 2012 and was a key architect in the Company’s transformative capital raising in that year. Bruce and Jim were outstanding Directors of the Company and, on behalf of the Board, I thank them for their service and wish them well for the future. The Company’s senior management team also experienced some change during the 2018 financial year. This change is necessary as the Company prepares for further growth in the number of communities being developed and managed. I would like to make a special mention of Geoff Hollis, our former Chief Financial Officer and Company Secretary, who worked closely with the Board during his eight years with the Company. On behalf of the Board, I would like to thank Geoff for his contribution and wish him well for the next steps in his career. The highlight of the 2018 financial year was the outstanding results delivered by our team. New home settlements of 321, underlying net profit after tax of $33.8 million and underlying return on capital employed of 19.5% are very good numbers. They reflect a clear and increasing need for our communities at the quality but affordable part of the market and a team that is executing our plans extremely well. We often get asked about our ability to access new land. We are not a ‘land banker’ and the Victorian property market has been highly competitive in recent years, so shareholders are right to question whether we can continue to access land at a fair price. Notwithstanding the competitive market, Lifestyle Communities has been able to make three new land acquisitions during the last two financial years and buy additional land to extend the size of our Ocean Grove community. Given the quality of our communities, developers are increasingly prepared to sell us land from their development projects. And given we are playing a role in developing affordable housing, councils have been providing strong planning support. We monitor our land access risk intently and remain of the view that, in the medium to long term, we will be able to get access to good quality land opportunities at fair prices in Victoria. The Board believes the 2019 financial year will be another successful year for Lifestyle Communities. We are planning on increasing the number of settlements over the record number achieved in 2018, three new communities are expected to be launched for sale and a range of new initiatives for our homeowners are planned at our communities. Finally, on behalf of the Board, I would like to thank all our homeowners, our talented team and our shareholders for great support during the 2018 financial year as we continue our mission to dominate our niche of providing good quality affordable accommodation for active retirees in Victoria. Yours sincerely, Tim Poole Chair 15 August 2018 1 For personal use onlyManaging Director’s Report For the 2018 Financial Year Dear fellow shareholders, I am pleased to present to you the Lifestyle Communities Annual Report for the year ended 30 June 2018. The 2018 financial year has seen the addition of 321 new home settlements now providing 1,947 settled homes within our communities providing annuity income streams. We are delighted with the acquisition of an additional site during the year located at Wollert North as well as acquiring additional land to expand our development at Ocean Grove. We also undertook an additional and final stage at Shepparton which will complete that project at 301 homes when sold out. Our ongoing acquisition plan remains focused in Victoria where we can continue to build on our brand equity and we continue to investigate further sites in Melbourne’s key growth corridors. As our brand has become established and visible, we are getting more approaches from developers who are interested in having Lifestyle Communities as part of their development mix. The development focus of the business is on finalising the developments at Shepparton and Geelong, maintaining the pace at Berwick Waters, Bittern and Ocean Grove, and launching new communities at Mount Duneed, Kaduna Park and Wollert North. We also remain focused on continuing to differentiate Lifestyle Communities against our competitors through delivering a high level of customer experience through all the various customer touchpoints. This has resulted in 54% of our new sales during FY2018 coming from referrals. The key highlights for the 2018 financial year include: • Achieving 321 new home settlements; we commence FY2019 with 369 new homes sold but not settled; • Acquiring additional sites in Kaduna Park and Wollert North; • Achieving 125 settlements at Berwick Waters during the year and being almost sold out within two and a half years; • Achieving 116 sales at Bittern and welcoming our first homeowners in May 2018; • • Increasing the total number of home sites settled and under management to 1,947; Increasing the total portfolio to 2,995 home sites either under planning, development or management; • Achieving 48 settlements at Lifestyle Shepparton leaving 54 homes to completely sell out our largest community (301 homes); • Underlying net profit after tax attributable to shareholders increased by $8.8 million to $33.8 million (statutory net profit after tax was $52.7 million); • Home site annuity rentals increased by $3.3 million to $17.0 million; and • Deferred management fees realised (inclusive of selling and administration fees) remained steady at $4.3 million due to strong resale prices despite settlements reducing to 59 (2017: 73). 2 For personal use onlyThe Company now has thirteen years of increasing annuities flowing from site rentals and deferred management fees. The rental fees increase annually by the greater of CPI or 3.5% creating a strong inflation linked annuity flow for future dividends. During the last year we have undertaken a complete assessment of the company’s systems, processes and human resources with a strategy to build organisational ability while also maintaining the unique organisational culture that Lifestyle Communities has enjoyed as an organic growth business. This has involved the implementation of new systems and processes and also a restructure of a number of positions and roles to enable our ongoing growth and service delivery. Finally I am pleased to announce the Lifestyle Communities foundation donated over $100,000 this year to cancer based charities. The foundation is funded through allocating $50 for every home that we have under management and is directed towards matching what communities raise in supporting cancer based charities. Yours sincerely, James Kelly Managing Director 15 August 2018 3 For personal use onlyDirectors’ Report The Directors present their report together with the financial report of the consolidated entity consisting of Lifestyle Communities Limited and the entities it controlled for the financial year ended 30 June 2018 and auditor’s report thereon. Principal activities The principal activities of the consolidated entity during the financial year were developing and managing affordable communities which offer homeowners an improved lifestyle. There have been no significant changes in the nature of these activities during the financial year. Results The consolidated profit after income tax attributable to shareholders of Lifestyle Communities Limited for the year ended 30 June 2018 was $52,681,734 (2017: $27,695,112). Directors The Directors of the Company during the financial year and until the date of this report are set out below. Tim Poole, Non-Executive Chair (BCom) Tim was appointed as a Non-Executive Director of Lifestyle Communities Limited on 22 November 2007 and was appointed Chair on 31 December 2012. Tim was recently appointed as Chair of the HR & Remuneration Committee and is also a member of the Audit Committee. He holds a Bachelor of Commerce from the University of Melbourne and is formerly a Chartered Accountant. Tim has more than 17 years’ experience as a Director of ASX listed and unlisted companies across the financial services, infrastructure, aged care and resources industries. He is currently Non-Executive Chair of Aurizon Holdings Limited and McMillan Shakespeare Limited and is a Non- Executive Director of Reece Limited. He was formerly Managing Director of Hastings Funds Management, and a Non-Executive Director of Japara Healthcare Limited and Newcrest Mining Limited. James Kelly, Managing Director (BBldg) James was appointed Managing Director in September 2007 and is one of the founders of Lifestyle Communities Limited. With over 30 years’ experience in property development and construction, James brings to Lifestyle Communities a wealth of knowledge and experience in the property industry. Prior to establishing Lifestyle Communities, James held several senior management roles in property and related sectors, including CEO of Dennis Family Corporation and roles at Coles Myer and Lend Lease Corporation. James is the founding Chair of the Residential Land Lease Alliance, the peak body for the land lease industry. He is also on the Board of the Caravan Industry Association of Australia and is Vice President of the Victorian Caravan Parks Association. James has not held any directorships in any other listed entities during the past three years. 4 For personal use onlyPhilippa Kelly, Non-Executive Director (LLB, F Fin, FAICD) Philippa was appointed to the Board of Lifestyle Communities Limited as a Non-Executive Director on 18 September 2013. Philippa is also Chair of the Audit Committee and a member of the HR & Remuneration Committee. Philippa is an experienced property and finance executive with over 25 years’ experience in the corporate sector and a background in law and investment banking at Goldman Sachs. Specialising in property for the past 20 years, she is currently Chief Operating Officer of the Juilliard Group of Companies, one of Melbourne’s largest private property owners, managing an extensive portfolio of commercial and retail assets. Previous experience included seven years with Federation Centres (formerly Centro Properties Group), working on the refinancing of the Group and with responsibility for its institutional and wholesale funds management business. Philippa is a member of the Deakin University Council, Chair of its Finance and Business Committee and a member of the Remuneration Committee. Philippa is also a Non-Executive Director of the Alcohol and Drug Foundation, including Chair of the Audit and Risk Committee. The Honourable Nicola Roxon, Non- Executive Director (BA/LLB (Hons), GAICD) The Honourable Nicola Roxon was appointed to the Board of Lifestyle Communities Limited as a Non-Executive Director on 1 September 2017. Ms Roxon was also recently appointed as a member of the HR & Remuneration Committee. Ms Roxon holds a Bachelor of Arts and Bachelor of Laws with Honours from the University of Melbourne. Her current roles are Non-Executive Chair of Bupa Australia and New Zealand, Non- Executive Director of Dexus Funds Management Limited, and Chair of the Cancer Council Australia, the Accounting Professional and Ethical Standards Board and Chair and Adjunct Professor at the Sir Zelman Cowen Centre at Victoria University. Ms Roxon has more than 20 years’ experience with a background in the public sector and significant expertise in highly regulated consumer industries and the not-for-profit sector. Ms Roxon has deep industry knowledge of the health, government and professional services sector in positions including Federal Attorney General, Federal Minister for Health and Ageing, Member for Gellibrand and Industrial lawyer and advocate at Maurice Blackburn and the National Union of Workers. Georgina Williams, Non-Executive Director (BCom, BA) Georgina Williams was appointed to the Board of Lifestyle Communities Limited as a Non- Executive on 1 September 2017. Georgina was also recently appointed as a member of the Audit Committee. Georgina holds a Bachelor of Commerce and Bachelor of Arts from the University of Melbourne. She has previously held the roles of Group Executive at AustralianSuper and Head of Brand and Marketing at Bank of Melbourne. Georgina is a Non-Executive Director of Reece Limited and Sunsuper. David Blight, Non-Executive Director (BAppSc) David Blight was appointed to the Board of Lifestyle Communities Limited as a Non- Executive Director on 15 June 2018. David has more than 30 years of experience in property investment, development and management. He is currently the Chief Executive Officer of ARA Australia, the Australian business of Singapore-based ARA Asset Management Limited. David’s previous roles include Vice Chairman of ING Real Estate and Global Chairman and CEO of ING Real Estate Investment Management based in The Netherlands. He has also held senior executive positions with Armstrong Jones, Mirvac Group and APN Property Group. David is currently a Non-Executive Director of the ASX listed Japara Healthcare Limited and Cromwell Property Group. Bruce Carter, Non-Executive Director (BCom) – Resigned 21 August 2017 Bruce is one of the founders of Lifestyle Communities Limited and was appointed as an executive Director in September 2007, transitioning to a non-executive Director on 1 July 2015. Bruce resigned as a Director of the Company with effect from 21 August 2017. 5 For personal use onlyDarren Rowland (B Bus (Acc), CA), Company Secretary Darren was appointed as Company Secretary on 9 July 2018. Darren joined the Lifestyle Communities team in May 2018 and has held a number of senior finance and commercial roles; most recently as the Head of Finance and Commercial for the Toll Group’s Operating Services division. Prior to joining Toll, Darren gained valuable experience in commercial and finance roles based in Dublin and London. In addition to being a Chartered Accountant, Darren also holds a Bachelor of Business (Majoring in Accountancy) from Queensland University of Technology. Geoff Hollis, Company Secretary (BCom, CA, AGIA) – Resigned 14 February 2018 Geoff was appointed as Company Secretary on 24 November 2011 and resigned with effect from 14 February 2018. Lisa Pipito Lisa was appointed as Company Secretary on 16 March 2018 and resigned with effect from 9 July 2018. Jim Craig, Non-Executive Director (BEc, LLB (Hons) Adel, LLM Melb) – Resigned 14 February 2018 Jim was appointed a Director of Lifestyle Communities Limited on 31 December 2012 and resigned as a Director of the Company with effect from 14 February 2018. Company Secretaries Mark Licciardo, (B Bus(Acc), GradDip CSP, FGIA, GAICD) Mark was appointed as Company Secretary on 26 March 2018. Mark is Managing Director of Mertons Corporate Services Pty Ltd (Mertons) which provides company secretarial and corporate governance consulting services to ASX listed and unlisted public and private companies. Prior to establishing Mertons, Mark was Company Secretary of the Transurban Group and Australian Foundation Investment Company Limited. He has also had an extensive commercial banking career with the Commonwealth Bank and State Bank Victoria. Mark is a former Chairman of the Governance Institute Australia (GIA) in Victoria and the Melbourne Fringe Festival, a fellow of GIA, the Institute of Chartered Secretaries (CIS) and the Australian Institute of Company Directors (AICD) and a Director of ASX listed Frontier Digital Ventures Limited, iCar Asia Limited and Mobilicom Limited as well as several other public and private companies. Kate Goland, (CPA, GIA (Cert)) Kate was appointed as Company Secretary on 26 March 2018. Kate works with Mertons Corporate Services and is an experienced accounting and company secretarial professional. She has demonstrated expertise in supporting clients in meeting their corporate obligations and ASIC compliance requirements. She joined Mertons from BDO where she assisted clients within the company secretarial division. Kate is a current Company Secretary of various public and private companies. She has a strong understanding of corporate compliance matters. 6 For personal use onlyDirectors’ interests At the date of this report, the interests of each Director in the shares and options of Lifestyle Communities Limited were: Director Tim Poole James Kelly Philippa Kelly The Honourable Nicola Roxon (appointed 1 September 2017) Georgina Williams (appointed 1 September 2017) David Blight (appointed 15 June 2018) Fully Paid Ordinary Shares Options over Ordinary Shares 1,224,607 12,045,566 65,000 - 2,000 - - - - - - - Dividends A fully franked dividend of 2.0 cents per share was paid on 6 October 2017 (representing the 2017 final dividend). A fully franked dividend of 2.0 cents per share was paid on 6 April 2018 (representing the 2018 interim dividend). Since the end of the financial year the Directors have resolved to pay a fully franked dividend of 2.5 cents per ordinary share (representing the 2018 final dividend). Share options There are no unissued ordinary shares of the Company under share option arrangements as at the date of this report. Significant changes in the state of affairs Refer to the Operating and Financial Review for the significant changes in the state of the affairs of the Company. Significant events after the balance date There are no matters or affairs that have arisen since balance date which significantly affect or may significantly affect the operations of the consolidated entity. Future developments Refer to the Operating and Financial Review for information on likely developments and the future prospects of the Company. Environmental regulation The consolidated entity’s operations are not subject to any significant Commonwealth or State environmental regulations or laws. Indemnification and insurance of directors and officers During the financial year the Company paid premiums in respect of a Directors’ and Officers’ insurance policy. The nature of the liabilities insured and premium payable under this contract of insurance has not been disclosed in accordance with confidentiality provisions within the policy. 7 For personal use onlyProceedings against the Company The Directors are not aware of any current or threatened Court proceedings of a material nature in which the Company is directly or indirectly concerned which are likely to have a material adverse effect on the business or financial position of the Company. Directors’ meetings The number of meetings of Directors (including meetings of committees of Directors) held during the time the Director held office or was a member of the committee during the financial year and the number of meetings attended by each of the Directors are: Director Tim Poole James Kelly Philippa Kelly The Honourable Nicola Roxon (appointed 1 September 2017) Georgina Williams (appointed 1 September 2017) David Blight (appointed 15 June 2018) Bruce Carter (resigned 21 August 2017) Jim Craig (resigned 14 February 2018) Directors’ meetings Attended 11 11 10 9 Held 11 11 11 9 Meetings of committees of directors’ Audit Held 1 - 5 - Attended 1 - 5 - HR & Remuneration Attended 3 - 4 2 Held 3 - 4 2 9 1 2 7 9 1 2 6 4 - 1 4 4 - 1 2 - - - 3 - - - 3 Corporate governance In recognising the need for the highest standards of corporate behaviour and accountability, the Directors of Lifestyle Communities Limited support and have adhered to the principles of corporate governance. The Company’s Corporate Governance Statement is contained later in this report. Auditor independence declaration A copy of the auditors independence declaration from the auditor of Lifestyle Communities Limited as required under section 307C of the Corporations Act 2001 in relation to the audit for the financial year is provided with this report. Non-audit services The Company’s auditor, Pitcher Partners, provided tax compliance ($15,000), general tax advice ($45,675) and other agreed upon procedures ($41,360) at a total cost of $102,035 (2017: $114,345). The Directors are satisfied that the provision of these non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of these non-audit services means that auditor independence was not compromised. Rounding of amounts In accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, selected amounts in the directors’ report have been rounded to the nearest one million dollars, or in certain cases, to the nearest dollar (where indicated). 8 For personal use onlyOperating and Financial Review Overview The Company continued to develop and manage its portfolio of affordable lifestyle communities during the 2018 financial year. Profit after tax attributable to shareholders was $52.7 million (2017: $27.7 million). Underlying profit after tax attributable to shareholders was $33.8 million (2017: $25.0 million). Financial and operating highlights Key financial data Revenue Earnings before interest and tax Net profit before tax Net profit after tax Net profit attributable to shareholders Underlying net profit attributable to shareholders Operating cash flow Community cash flow(1) Gearing(2) Underlying return on average capital employed(3) Earnings per share Underlying earnings per share Dividend per share(4) Key operational data Homes settled (gross) Homes sold (gross) Average realised sales price of new homes (GST incl) Total number of homes (gross) Total number of homes (after NCI)(5) Total number of homeowners Average age of homeowners Number of resales settled(6) Average realised sales price of resales (GST incl) (7) Measure FY2018 FY2017 Change Change % A$ millions A$ millions A$ millions A$ millions A$ millions A$ millions A$ millions A$ millions % % A$ cents A$ cents A$ cents No. of homes No. of homes A$’000 No. of homes No. of homes No. of people Years No. of homes A$’000 123.6 75.8 75.5 52.9 52.7 33.8 20.6 11.7 13.3 19.5 50.4 32.3 4.5 321 293 343 1,947 1,746 2,859 72 59 356 100.4 41.5 40.3 27.7 27.7 25.0 18.4 10.4 21.8 18.7 26.6 24.0 3.5 278 406 315 1,626 1,425 2,418 72 73 340 23.2 34.3 35.2 25.2 25.0 8.8 2.2 1.3 (8.5) 0.8 23.8 8.3 1.0 43 (113) 28 321 321 441 - (14) 16 23 83 87 91 90 35 12 13 (39) 4 90 35 29 15 (28) 9 20 23 18 - (19) 5 (1) Community cash flow comprises cash flows received from homeowner rentals and deferred management fees less community operating costs and the net surplus/deficit provided from utilities (2) Calculated as a ratio of net debt to net debt plus equity (3) Calculated as a ratio of underlying EBIT divided by average total assets less current liabilities (4) (5) Gross number of homes adjusted for share of communities owned by non-controlling interests (6) For FY2018 includes interim dividend of 2.0 cents per share and final dividend of 2.5 cents per share Includes resales attracting a deferred management fee, there were a further 28 resales settled in FY2018 (FY2017: 8 resales) that did not attract a deferred management fee as the outgoing homeowners moved out within 12 months of initial settlement in accordance with the Company’s Smart Buy Guarantee (7) Average realised sales price of resales attracting a deferred management fee Included in the table above are several non IFRS measures including earnings before interest and tax, underlying net profit attributable to shareholders, community cash flow, gearing, return on average capital employed and key operational data. These figures have not been subject to audit but have been provided to give a better understanding of the performance of the Company during the 2018 financial year. 9 For personal use onlyThe increase in net profit after tax attributable to shareholders to $52.7 million (2017: $27.7 million) can be mainly attributed to: increased new home settlements; increased contributions from net rental income and deferred management fees received; increased fair value adjustments from investment property revaluations; being partly offset by increased development expenses and corporate overheads. Underlying profit of $33.8 million (2017: $25.0 million) excludes an $18.9 million (2017: $2.7 million) after tax impact of independent investment property revaluations across the portfolio. Refer to the analysis of income statement section on page 11 for further details. New home settlements for the year were 321, up from 278 in the prior year; higher than the original guidance of 260-290 settlements and slightly higher than the updated forecast of 310-320 settlements. This was due to achieving the higher end of the expected new home settlement range at Shepparton, Lyndarum and Bittern and exceeding the top end of the range at Berwick Waters and Geelong. The Company continued to develop its communities at Shepparton, Geelong and Berwick Waters. During the year construction was completed at Lyndarum and construction commenced at Bittern and Ocean Grove. The Company made good progress operationally with improvements in several key metrics. The total number of homes settled increased to 1,947 homes due to 321 settlements during the year. Net community cash flows were $11.7 million (2017: $10.4 million). This was driven by increases in rental revenue, partly offset by increases in management expenses for new communities. The Company had 2,859 people living in its communities as at the end of the 2018 financial year with an average age of 72 years (2017: 72). Resales (sales of previously settled and occupied homes) during the year were 59 (2017: 73). Deferred management fee income received (inclusive of selling and administration fees) was $4.3 million (2017: $4.1 million). As at 30 June 2018 there were 17 resale homes available for sale across the communities. Update on communities Community New homes Net sales FY2018 Settled FY2017 Net sales FY2017 Settled FY2018 Resales Settled FY2018 Settled FY2017 Net sales FY2018 Net sales FY2017 Brookfield Seasons Warragul Casey Fields Shepparton Chelsea Heights Hastings Lyndarum Geelong Officer Berwick Waters Bittern Ocean Grove Mount Duneed Kaduna Park Wollert North Total - - - - 48 - - 40 57 26 125 25 - - - - 321 - - - - 50 - - 68 50 98 12 - - - - - 278 - - - - 41 - - 1 37 5 74 116 70 - - - 344 - - - - 37 - - 69 44 53 105 74 24 - - - 406 12 3 16 12 5 12 13 - - - - - - - - - 73 14 4 10 9 4 6 7 1 - 4 - - - - - - 59 14 1 15 14 4 11 14 - - - - - - - - - 73 15 4 14 11 12 9 9 1 - 12 - - - - - - 87 10 Homes sold not settled - - - - 21 - - - 17 - 72 163 96 - - - 369 Total homes settled Total homes in portfolio 228 136 182 217 247 186 141 154 143 151 137 25 - - - - 1,947 228 136 182 217 301 186 141 154 164 151 216 209 221 191 165 133 2,995 For personal use only• • • • • • • • • Lifestyle Brookfield in Melton, Lifestyle Seasons in Tarneit, Lifestyle Warragul, Lifestyle Casey Fields in Cranbourne, Lifestyle Chelsea Heights, Lifestyle Hastings, Lifestyle Lyndarum and Lifestyle Officer are fully sold and settled. Lifestyle Shepparton had a solid year and achieved 41 net sales and 48 settlements. Lifestyle Geelong performed well during the year achieving 57 settlements. The community is now fully sold and has only 21 homes remaining to settle. Lifestyle Berwick Waters outperformed expectations and achieved 125 settlements during the year, which brings total settlements to 137 since the project was launched in April 2016. Lifestyle Bittern achieved 25 settlements in May and June. Demand for this community is strong with 116 net sales achieved during the year. The land at Bittern is expected to settle in the first quarter of the 2019 financial year. Lifestyle Ocean Grove has achieved 96 net sales since the project was launched in March 2017. Construction has commenced, and the Company currently expects first settlements in December this year. The land at Ocean Grove is expected to settle in the second quarter of the 2019 financial year. The land for the Lifestyle Community in Mount Duneed (Armstrong Creek) was acquired in March 2017 and is expected to settle in the first quarter of FY2019. Construction is planned to commence soon after, with planning approval having been received. This community was launched for sale in August 2018 and first settlements are expected in the first-half of FY2020. The land for the Lifestyle Community in Kaduna Park was acquired in August 2017 and, subject to receipt of planning approval, is due to settle in the third quarter of FY2019. The land for the Lifestyle Community in Wollert North was acquired in April 2018 and is due to settle in the fourth quarter of FY2019. Analysis of income statement Net profit after tax attributable to shareholders increased to $52.7 million (2017: $27.7 million). The table below shows the changes to net profit attributable to shareholders from 30 June 2017 to 30 June 2018. A$ millions A$ millions Net profit after tax attributable to shareholders for the year ended 30 June 2017 Changes in revenues Home settlement revenue Rental revenue Utilities revenue Deferred management fees Sub-division revenue Finance revenue Total changes in revenues Changes in cost of sales Changes in gains from fair value adjustments Changes in expenses Development expenses (sales and marketing) Management rental expenses Management deferred management fee expenses Utilities expenses Corporate overheads Sub-division expenses Finance costs Loss on disposal of assets Increase in income tax expense Increase in profit after tax attributable to non-controlling interests Net profit after tax attributable to shareholders for the year ended 30 June 2018 20.2 3.2 0.5 0.2 (0.9) - (0.8) (1.5) (0.4) (0.6) (2.0) 1.1 - - 27.7 23.2 (15.5) 30.7 (3.3) (9.9) (0.2) 52.7 11 For personal use onlyThe key drivers of changes in profitability were: Home settlement revenue and margin - - Revenue from home settlements increased to $100.1 million (2017: $79.9 million) due to an increase in settlements to 321 (2017: 278). This was higher than the original forecast range of 260-290 settlements and was due to achieving strong results at Shepparton, Lyndarum, Officer, Geelong, Berwick Waters and Bittern. Home settlement gross margin increased to 20.3% (2017: 19.5%). An increase in the average realised sales price to $343k (GST inclusive) in the 2018 financial year (2017: $315k) was offset by an increase in the average cost per home settled to $249k (2017: $232k). Changes in margin are mainly due to changes in product mix. The gross home margin represents home settlement revenue less a pro- rata share of project infrastructure, housing and capitalised finance costs expensed as each home settles. Annuity income and expenses - Revenue from homeowner rentals increased to $17.0 million (2017: $13.8 million) due to an increase in homes under management and a rental increase of 3.5%. - - Community management rental expenses increased to $7.8 million (2016: $6.3 million) due to: an increase in operations at Shepparton, Lyndarum, Geelong, Officer and Berwick Waters, and commencement of management at Bittern. Deferred management fees received (inclusive of selling and administration fees) increased to $4.3 million (2017: $4.1 million). There were 59 resale settlements during the year compared to 73 in the prior year. The average realised sales price of resales increased to $356k (GST inclusive) (2017: $340k). The 59 resale settlements achieved an average price growth of 8.9% per annum from the acquisition date. Deferred management fee expenses increased to $1.7 million (2017: $1.2 million) due to an increase in sales and marketing resources to provide organisational capability for medium term growth. - Other expenses - Development expenses (new home sales and marketing) increased to $5.8 million (2017: $5.0 million) due to: increased employee costs due to the increased sales and settlement activity; increased marketing support required to achieve sales and settlements; and launching Bittern and Ocean Grove. - Corporate overheads increased to $7.7 million (2017: $5.8 million). The increase was mainly due to: $1.3 million of head office wages growth due to additional resources to provide organisational capability for medium term growth and $0.2 million of expenses associated with the Company’s new employee incentive scheme. Finance costs decreased to $0.3 million (2017: $1.2 million). This is mainly due to lower debt levels during the year and the majority of interest costs being expensed to developments through cost of sales. The Company capitalises a proportion of finance costs to investment properties and inventories where appropriate and the balance of finance costs are expensed. - Fair value adjustments - Total fair value adjustments have increased to $57.4 million (2017: $26.7 million). The increase of $30.7 million includes a $27 million uplift ($18.9 million on an after-tax basis) as a result of changes to investment property valuation assumptions by the independent valuers. The key drivers were: rental capitalisation rates reduced to 7.5% for all communities, down from 7.75% in prior valuations; and the valuers have updated their view in relation to the long-term resale prices and therefore the carrying value of deferred management fees. Fair value adjustments comprise changes to the fair value of investment properties. Changes relating to investment properties represent incremental adjustments to their fair value upon settlement of homes and reflects the discounted value of future rental and deferred management fee revenues net of expenses as well as the fair value of undeveloped land. Refer to Note 4 in the Company’s 2018 Financial Statements for further details. 12 For personal use onlyAnalysis of cash flow A$ millions Cash flows related to operations add Project capital expenditure (1) Adjusted cash flows related to operations Cash flows related to investing activities Cash flows related to financing activities Net movement in cash Cash at the beginning of the period Cash at the end of the period FY2018 FY2017 Change 2.3 11.6 13.9 8.8 (8.9) 20.6 26.8 47.4 (4.0) (11.6) 5.0 3.6 8.6 18.3 15.2 33.5 (12.8) (2.7) 2.8 0.8 3.6 (1) Due to the Company’s legal structure, cash flows related to operations includes all gross costs of project capital infrastructure expenditure (i.e. civil works, clubhouse and other facilities). Under some other legal structures, project capital expenditure may be classified within investing cash flows rather than operating cash flows. Cash flows related to operations increased to a surplus of $20.6 million (2017: surplus of $18.3 million). The increase is mainly attributable to a $27.0 million increase in receipts from customers. Payments to suppliers and employees increased by $23.9 million due to increased home construction activity. In relation to home construction 291 homes were constructed in the 2018 financial year compared to 269 in the prior year. Cash flows related to investing activities included: $1.3 million relating to the deposit on land at Kaduna Park; $0.5 million for the deposit paid in respect of the land acquisition in Wollert North; and $1.5 million relating to purchases of property, plant and equipment. Cash flows related to financing activities included: $7.0 million net repayment of bank borrowings; $1.1 million for the purchase of treasury shares related to the employee incentive scheme; $0.6 million proceeds from the repayment of employee loans for CRES; and $4.2 million for the payment of dividends. Analysis of balance sheet Net assets and total equity A$ millions Assets Cash and cash equivalents Trade and other receivables Inventories Property, plant and equipment Investment properties Other assets Total Assets Liabilities Trade and other payables Interest-bearing loans and borrowings Provisions Current tax payable Deferred tax liabilities Total Liabilities Net Assets Equity Lifestyle Communities interest Contributed equity and reserves Retained earnings Total Equity FY2018 FY2017 Change Change % 3.7 1.3 44.9 4.6 211.3 0.3 266.1 (26.8) (47.0) (0.7) (0.6) (35.5) (110.6) 155.5 65.0 90.5 155.5 4.9 (1.1) (5.5) 1.0 92.3 0.5 92.1 (33.0) 7.0 (0.1) (0.5) (16.4) (43.0) 49.1 0.6 48.5 49.1 132 (85) (12) 22 44 167 35 123 (15) 14 83 46 39 32 1 54 32 8.6 0.2 39.4 5.6 303.6 0.8 358.2 (59.8) (40.0) (0.8) (1.1) (51.9) (153.6) 204.6 65.6 139.0 204.6 13 For personal use onlyDuring the year the Company’s net assets and total equity increased to $204.5 million (2017: $155.5 million) as a result of: profit during the period of $52.7 million; $0.6 million provided due to the repayment of CRES loans; partly offset by dividends paid of $4.2 million. Inventories have decreased to $39.4 million (2017: $44.9 million). This reflects that home construction and inventory levels are adjusted to match home settlements. Civil and infrastructure activity has reduced as projects at Lyndarum, Geelong and Officer have completed their intensive civil and infrastructure phase. Included within trade and other payables is a liability of $48.9 million. This reflects that new home settlements were higher during the year than new homes constructed. Deferred tax liabilities have increased to $51.9 million (2017: $35.5 million) representing the tax on fair value adjustments being deferred. This liability will only be realised should an investment property be disposed of on an individual basis which the Company views as unlikely. The Company has surplus franking credits (after allowing for the final dividend) of $13.3 million (2017: $7.9 million). Debt, gearing and liquidity As at 30 June 2018 the Company had net debt of $31.4 million (2017: $43.4 million). A$ millions Net debt at 30 June 2017 Net decrease in bank borrowings Increase in cash balances / overdraft Net movement in 2018 Net debt at 30 June 2018 43.4 (7.0) (5.0) (12.0) 31.4 The gearing ratio (net debt to net debt plus equity) has decreased to 13.3% (2017: 21.8%) due to the timing of the settlements for land at Ocean Grove and Bittern. As at 30 June 2018 the Company has a committed facility with Westpac of $120.0 million of which $40.0 million was drawn. Outlook and risks Outlook The Company has been very satisfied with the rate of construction, sales and settlements across the communities currently under development during the 2018 financial year. The Company was particularly pleased with the level of sales achieved at Berwick Waters, Bittern and Ocean Grove. The Company enters the 2019 financial year with 369 sales waiting for settlement. The Company has a focused strategy to dominate the niche of affordable housing to the over 50’s market and is currently funded and resourced to roll out a new community at least every 12 months subject to identification of appropriate sites. The Company continues to focus on Melbourne’s growth corridors as well as key Victorian regional centres and is currently considering a range of opportunities but will remain disciplined in its assessment of these opportunities. The Company advises that settlements for the 2019 financial year are forecast to be in the range of 310 to 350. The Company also advises that underlying net profit after tax attributable to shareholders and total dividends are both expected to increase in the 2019 financial year compared to the 2018 financial year. 14 For personal use onlyKey risks The Company’s key risk categories include: Site selection – if the Company makes a poor site acquisition it may not generate adequate financial returns on the investment and the objective of recovering 100% of the development costs may not be met. The Company attempts to mitigate this risk by maintaining a comprehensive land acquisition strategy and by carrying out detailed due diligence on potential new sites. The Company also uses the significant experience it has gained from acquiring 16 sites and developing most of these during the past 15 years. Sales and settlements – the Company is exposed to the rate of sales of new and existing homes, the price of sales of new homes (and to a lesser extent the price of sales of existing homes) and to the timing of settlements of new homes (revenue is only recorded when a sale of a home is settled). The Company’s experience to date is that sales rates and realisations are closely related to the difference between the median house price in the area and the home price in the Lifestyle Community. This factor attracts a great deal of attention during the site selection process and also during the development of the community. Community roll out – management of the construction programme is important to ensure cash flow is managed efficiently and returns are maximised. The Company mitigates this risk by taking a stage by stage approach to construction based on a required level of pre-sales. Financing risk – there is a risk the Company will not achieve its growth strategy due to insufficient capital or the inability to obtain new debt facilities. The Company may also experience re-financing risk if it’s debt facility was cancelled in a short period of time. The Company mitigates these risks by: maintaining a balance sheet with a reasonably low level of gearing; ensuring it complies with all debt covenants and reporting obligations; ensuring sufficient remaining term for debt facilities; and tightly managing the commencement and rate of development of new communities. Community management – it is important communities are well managed and homeowners have a high level of satisfaction. A well managed community will: generate new sales from homeowner referrals; add to the Lifestyle Communities brand; assist in facilitating resales of existing homes; and improve the profitability of the community management business. The Company mitigates community management risk by maintaining a transparent sales and contract process, undertaking careful selection of community management teams, maintaining community facilities to a high standard, ensuring regular community activities and events, and maintaining the common areas and gardens to a high standard. Regulatory risk – the Company’s operations and business and financial model are impacted by the Residential Tenancies Act and the Social Securities Act. Changes to this legislation could have an adverse impact on the operating and financial performance of the Company. 15 For personal use onlyRemuneration Report (audited) Dear Shareholders, On behalf of the Board, we are pleased to present Lifestyle Communities’ Remuneration Report for the 2018 financial year. We introduced an employee incentive scheme for the 2017 financial year to align the interests of staff and senior management with the objectives of the business. In our judgement, the target that best unifies employees and benefits shareholders is an annual new home settlement target. For the 2018 financial year the target range was set at 260 to 290 new home settlements and our team achieved 321 new home settlements, resulting in a 35% increase in underlying net profit after tax and a 29% increase in dividends. Importantly, these financial results were achieved alongside an increase in our customer referral rate for new sales to 55%. For the 2019 financial year the target range has been set at 310 to 350 new home settlements and we expect to announce the 2020 financial year employee share plan targets during the 2019 financial year. The HR & Remuneration Committee reviews the operation of this scheme annually to ensure that shareholder value is being driven from the single new home settlement target and the quantum of shares issued to employees. For the 2019 financial year, the same level of shares will be available to senior executives and employees. The Board believes that the business should continue to be scaled to continue the growth in annual new home settlements over time. To this end, we are continuing to invest in senior management, head office resources and various management systems to meet this objective for the benefit of all shareholders. The following report sets out further detail on the Company’s approach to remuneration. Yours sincerely Tim Poole Chair 15 August 2018 16 For personal use onlyIntroduction 1. 1.1 About this report The Remuneration Report forms part of the Directors’ Report. It outlines the overall remuneration strategy, framework and practices adopted by Lifestyle Communities Limited (the Company) and has been prepared in accordance with Section 300A of the Corporations Act 2001 and its regulations. This entire remuneration report is designated as audited. 1.2 Overview of contents Section 1 2 3 4 5 6 7 8 9 10 Contents Introduction HR & Remuneration Committee Details of key management personnel Non-executive directors’ remuneration Executive directors and senior management remuneration Relationship between remuneration and performance Executive service agreements Remuneration details Options held by key management personnel Remuneration report voting at Annual General Meetings HR & Remuneration Committee 2. 2.1 Role of the HR & Remuneration Committee As a minimum, the HR & Remuneration Committee’s role is to make recommendations to the Board on: • • • • the Company’s remuneration framework; formulation and operation of employee incentive plans; remuneration levels of executive Directors and other key management personnel; and the level of non-executive Director fees. The objective is to ensure that remuneration policies and structures are fair and competitive and aligned with the long-term interests of the Company. 17 For personal use only3. Details of Key Management Personnel Position Non-Executive Directors Tim Poole Philippa Kelly The Honourable Nicola Roxon Georgina Williams David Blight Bruce Carter (resigned 21 August 2017) Jim Craig (resigned 14 February 2017) Executive director James Kelly Other executives Darren Rowland Chris Paranthoiene Sam Cohen Yvonne Slater Michael Imbesi (resigned 25 August 2017) Geoff Hollis (resigned 16 March 2018) Chair of the Board Non-Executive Director Chair – HR & Remuneration Committee Member – Audit Committee Non-Executive Director Chair – Audit Committee Member - HR & Remuneration Committee Non-Executive Director Member – HR & Remuneration Committee Non-Executive Director Member – Audit Committee Non-Executive Director Non-Executive Director Member – Audit Committee Non-Executive Director Commencement date 22 November 2007 18 September 2013 1 September 2017 1 September 2017 15 June 2018 Founder 31 December 2012 Member – Audit Committee Chair – HR & Remuneration Committee Managing Director Founder Chief Financial Officer and Company Secretary Head of Acquisitions and Development Head of Operations Head of Development Delivery Construction Manager 21 May 2018 13 March 2007 3 October 2011 8 January 2018 21 March 2005 Chief Financial Officer and Company Secretary 15 February 2010 18 For personal use onlyNon-Executive Directors’ remuneration 4. 4.1 Fixed fees All Non-Executive Directors are paid fixed fees for their services to the Company. The level of fees are set to enable the Company to attract and retain Directors of high calibre, whilst incurring a cost that is reasonable having regard to the size and complexity of the Company. The aggregate amount of fees paid is within the overall amount approved by shareholders in a general meeting. The last determination was made at the Annual General Meeting held in November 2007 at which shareholders approved an aggregate amount of $1,000,000 per annum. Fixed fees paid to Directors during the 2018 financial year are set out in section 8. 4.2 Review of non-executive Directors’ fees The HR & Remuneration Committee annually reviews the level of fees paid to Non-Executive Directors. Fees payable to the Chair are currently set at $125,000 per annum. Fees paid to the other Non-Executive Directors are $80,000 per annum plus an additional $5,000 per annum for each committee Chair. Executive Directors and senior management remuneration 5. 5.1 Framework The Company’s executive remuneration framework consists of the following elements: • • fixed remuneration; and performance linked remuneration (using equity incentives). In determining executive remuneration the Board aims to ensure that remuneration practices are: • Competitive and reasonable, enabling the Company to attract and retain key talent; • Aligned to the Company’s strategic and business objectives and the creation of shareholder value; and Transparent and acceptable to shareholders. • Determining fixed remuneration 5.2 Managing Director The total remuneration for the Managing Director (inclusive of superannuation) is $530,000 and includes a $20,000 car allowance as compensation for the high level of travel required between the Company’s communities. The Managing Director does not participate in any short term or long term incentive plans. Senior management Fixed remuneration for senior management is reviewed annually or on promotion. Fixed remuneration is benchmarked against market data for comparable roles. 19 For personal use only5.3 Equity incentive scheme Pursuant to the equity incentive scheme (EIS), fully paid ordinary shares in the Company, acquired on- market, will be issued to eligible employees on reaching new home settlement targets as follows: Settlement targets 310 to 350 FY2019 FY2018 260 to 290 Should settlement targets be achieved, ordinary shares will be issued as follows: • Key management personnel and other senior management (on a pro-rata basis based on standard hours) will receive: 10,000 shares if the low point of the target is reached; 15,000 shares if the mid- point is reached; and 20,000 shares if the high point is reached or exceeded. • All other eligible employees (on a pro-rata basis based on standard hours) will receive: 500 shares if the low point of the target is reached; 1,000 shares if the mid-point is reached; and 1,500 shares if the high point is reached or exceeded. In relation to the 2018 financial year, 321 new home settlements were achieved meaning the high point of the target was exceeded. To be eligible to fully participate in the incentive scheme, employees will need to have been employed by the Company on 1 July of the target year with shares to be allocated in September following the end of the target year. Employees commencing employment with the Company after 1 July of the target year are entitled to a pro-rata incentive. Shares allocated to key management personnel and other senior management have the following service (or escrow) conditions: 25% of shares have no service requirements; 25% have a one-year service requirement; and the remaining 50% have a two-year service requirement. The allocation relating to all other employees will not have a service requirement and will be allocated provided they are employed by the Company at the date of allocation. For accounting purposes, shares will be measured based on the valuation (share price) at grant date and then expensed recognising any service period. For the shares allocated to key management personnel and other senior management, 25% of the expense will be recognised in the target year, 25% in the year following the target year and the remaining 50% in the second year following the target year. All other shares will be recognised and expensed over a period incorporating the target year and any further time to allotment following the target year. The operation of the equity incentive scheme is conducted through an Employee Share Trust administered by an independent third party, Smartequity Pty Ltd. 5.4 Short-term incentives The equity incentive scheme provides an element of short-term incentive to key management personnel and other senior management as 25% of shares allocated have no service requirements. 5.5 Long-term incentives The equity incentive scheme provides a long-term incentive to key management personnel and other senior management as 25% of shares allocated have a one-year service requirement and 50% of shares allocated have a two-year service requirement. The use of ordinary shares also provides strong long term alignment between employees and shareholders. Refer to section 9 for details of shares issued pursuant to the EIS held by key management personnel. 20 For personal use onlyRelationship between remuneration and performance 6. The Company’s current remuneration framework, outlined in sections 4 and 5, was historically based primarily on providing fixed remuneration. The new equity incentive scheme provides a basis for additional performance linked remuneration in addition to fixed remuneration. When the EIS was introduced, there was significant debate and consideration by the Board and HR & Remuneration Committee as to the appropriate performance conditions for the scheme. Ultimately, new home settlements was chosen as the only performance condition as new home settlements is the main driver of earnings growth and the creation of shareholder value. It is also a simple measure, it is easy to measure and it is one that all employees can play a role in achieving. The role each group of the Company’s employees plays in delivering new home settlements is described in the following table: Department Acquisitions Total staff 1 Marketing Development and delivery 3 10 Sales 22 Operations 36 Customer Contact Finance 3 5 Impact on settlements Supported by the Managing Director, the acquisitions executive is incentivised by the ability to influence the future settlement pipeline. Although the marketing team have long-term strategies for growing enquiries they have a short-term ability to directly impact enquiries leading to sales and settlements. The development team is responsible for ensuring efficiency within the construction programme to meet settlements based on sales demand. Whilst also having a direct impact on short-term settlements they are increasingly responsible for driving customer referral as they are highly customer focused. The sales team directly influence conversion of enquiries to sales and then move those sales though to settlement. The sales team is also a key part of increasing customer referral. The operations team is responsible for the seamless experience of our homeowners at move-in date and work closely with the sales and construction teams. By providing a high level of customer service the operations team promote referral and therefore future sales and settlements. The customer contact team was established in January 2017 and had an immediate and ongoing impact. The conversion of new enquiries to appointment with sales consultants as well as conversion of older leads has improved greatly leading to higher sales and settlements. The finance team ensure sufficient funding is in place for future acquisitions and for delivering the construction programme. The Board and HR & Remuneration Committee considered a range of factors in setting the target settlement range for the 2018 financial year. Prior to the commencement of the financial year, the Company had provided guidance that the expected new home settlement range for the 2018 financial year was 260 to 290 so this was a logical starting point. The Company’s budget for new home settlements was also within this range, with the top end of the range higher than budget. Analyst forecasts for new home settlements were also within this range with the analyst average approximately equivalent to the midpoint of the range. 21 For personal use onlyThe following table shows key performance indicators for the Company over the last five years: Performance measure Underlying net profit after tax attributable to members ($million) Net profit (change from prior year) (%) Dividends declared & paid (fully franked) (cents) Underlying diluted earnings per share (cents) Closing share price (30 June) Share price increase / (decrease) STI paid to KMP FY2018 FY2017 FY2016 FY2015 FY2014 $33.8 35.2% 4.5 32.3 $5.85 44.4% $25.0 29.5% 3.5 26.5 $4.05 39.2% $19.3 15.6% 2.5 18.5 $2.91 19.3% $10,000 $10,000 $10,000 $16.7 35.8% 1.5 16.1 $2.44 52.5% $ - $12.3 76.4% - 12.0 $1.60 105.1% $ - New home settlements 321 278 202 240 210 Executive service agreements 7. 7.1 Executive Directors The HR & Remuneration Committee refreshed the Managing Director’s executive service agreement during the 2014 financial year. This was executed on 8 December 2013 with an effective date of 1 September 2013. Significant conditions Under the terms of the agreement, the contract may be terminated by either party giving three months written notice. The Company may terminate the contract at any time without notice if serious misconduct has occurred. The Managing Director has a three month restrictive period post termination. 7.2 Senior management The employment agreements for the senior management team were refreshed during the 2018 financial year. All senior management have consistent key terms of employment. Significant conditions Under the terms of all agreements, the contracts may be terminated by either party giving three months written notice. The Company may terminate the contracts at any time without notice if serious misconduct has occurred. 22 For personal use onlyRemuneration details 8. 8.1 30 June 2018 Compensation of directors and key management personnel for the year ended 30 June 2018 Short term Post-employment Salary & fees $ Cash bonus $ Non- monetary $ Other Super $ $ Retirement benefits $ Directors Tim Poole James Kelly Philippa Kelly David Blight (appointed 15 June 2018) Nicola Roxon (appointed 1 September 2017) Georgina Williams (appointed 1 September 2017) Bruce Carter (resigned 21 August 2017) Jim Craig (resigned 14 February 2018)(1) 112,325 530,464 76,153 - 60,929 60,929 9,337 48,125 898,262 Key management personnel Darren Rowland (appointed 21 May 2018) 29,094 - - - - - - - - Chris Paranthoiene Sam Cohen Yvonne Slater (appointed 8 January 2018) Michael Imbesi (resigned 25 August 2017) (2) Geoff Hollis (resigned 16 March 2018) (2) Total 292,191 9,050 196,434 101,777 44,818 170,380 - - - - 834,694 9,050 1,732,956 9,050 - - - - - - - - - - - - - - - - - - - - - - - - - - 31,212 30,447 61,659 10,670 - 7,234 - 5,788 5,788 887 - 30,367 2,764 27,133 16,185 8,760 5,791 19,079 79,712 61,659 110,079 Fees were paid to Bellwether Holdings Pty Ltd, an entity controlled by Jim Craig. (1) (2) Other payments made to Michael Imbesi and Geoff Hollis relate to leave payouts upon resignation. 23 Share based payment EIS $ Total performance related % Total Cash bonus % Shares % $ - - - - - - - - - - - - - - - - - - - - - 3,256 - - - - - - - - - - 25,900 2.6 25,900 3,256 - 9,189 67,501 67,501 - - - - 0.9 0.5 - - - - - - - - - 9.3 7.3 10.9 2.9 - 4.0 6.4 3.4 122,995 530,464 83,387 - 66,717 66,717 10,224 48,125 928,629 35,114 354,274 238,519 113,793 81,821 229,095 1,052,616 1,981,245 For personal use only8.2 Compensation of directors and key management personnel for the year ended 30 June 2017 30 June 2017 Short term Post-employment Salary & fees $ Cash bonus $ Non- monetary $ Other Super $ $ Retirement benefits $ Share based payment EIS Share based payment ESLP $ $ Total performance related % Total Cash bonus % Shares % $ Directors Tim Poole James Kelly Bruce Carter Jim Craig(1) Philippa Kelly 91,324 408,958 47,945 57,500 52,511 658,238 Key management personnel Michael Imbesi(2) 175,114 - - - - - - - Chris Paranthoiene 198,326 9,132 Geoff Hollis Sam Cohen 222,356 180,822 - - 776,618 9,132 Total 1,434,856 9,132 - - - - - - - - - - - - - - - - - - - - - - - - 8,676 35,000 4,555 - 4,989 53,219 14,261 18,284 21,124 14,803 68,471 121,690 - - - - - - - - - - - - - - - - - - - 12,950 12,950 12,950 38,850 38,850 - - - - - - 4,434 4,434 6,651 2,217 17,736 17,736 - - - - - - - 3.8 - - 1.0 0.5 - - - - - - 2.3 7.2 7.5 7.2 6.2 100,000 443,958 52,500 57,500 57,500 711,458 193,809 243,126 263,081 210,792 910,808 3.4 1,622,266 Fees were paid to Bellwether Holdings Pty Ltd, an entity controlled by Jim Craig. (1) (2) Michael Imbesi did not receive share based payments pursuant to the equity incentive scheme (EIS) as he tendered a letter of resignation on 3 August 2017. 24 For personal use onlyOptions held by Key Management Personnel 9. 9.1 Share based payments issued to key management personnel as remuneration Shares (pursuant to the equity incentive scheme) expensed to key management personnel as remuneration Plan Number Value at grant date Total vested Vested % Name Darren Rowland Chris Paranthoiene Sam Cohen Yvonne Slater Geoff Hollis Financial Year of grant 2018 Financial year of vesting 2019 2018 2018 2017 2017 2017 2018 2018 2018 2017 2017 2017 2018 2018 2018 2018 2018 2018 2017 2019 2020 2018 2018 2019 2019 2019 2020 2018 2018 2019 2019 2019 2020 2019 2019 2020 2018 EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS 625 $3,256 625 1,250 5,000 5,000 10,000 5,000 5,000 10,000 5,000 5,000 10,000 5,000 5,000 10,000 625 625 1,250 5,000 $3,256 $6,513 $12,950 $12,950 $25,900 $12,950 $12,950 $25,900 $12,950 $12,950 $25,900 $12,950 $12,950 $25,900 $3,256 $3,256 $6,513 $12,950 2018 Note: all shares that vest in 2019 will be issued on 28 September 2018. 5,000 2017 EIS $12,950 - - - - - - 5,000 100% 5,000 100% - - - - - - - - 5,000 5,000 100% 100% - - - - - - - - - - - - - - 5,000 5,000 100% 100% For further details relating to the EIS, please refer to Note 24 of the Company’s 2018 Financial Statements. 25 For personal use only- - - - - - - - - - - - - - - - - - - 1,224,607 12,045,566 65,000 - - 2,000 5,079,433(1) 3,000,000(1) - 197,341 85,000 195 204,000(1) 140,000(1) Balance at 30-Jun-17 1,224,607 12,045,566 65,000 5,079,433 3,000,000 Shareholdings of Directors and key management personnel 9.2 2018 Name Balance at 1-Jul-17 Off-market transfer On-market transactions Exercise of options Balance at 30-Jun-18 Directors Tim Poole James Kelly Philippa Kelly David Blight (appointed 15 June 2018) Nicola Roxon (appointed 1 September 2017) Georgina Williams (appointed 1 September 2017) Bruce Carter (resigned 21 August 2017) Jim Craig (resigned 14 February 2018) Key Management Personnel Darren Rowland (appointed 21 May 2018) Chris Paranthoiene Sam Cohen Yvonne Slater (appointed 8 January 2018) Michael Imbesi (resigned 27 August 2017) Geoff Hollis (resigned 16 March 2018) 1,224,607 12,045,566 65,000 - - - 5,079,433 3,000,000 - 225,000 100,000 - 204,000 190,000 (1) Balance correct as at resignation date - - - - - - - - - - - - - - - - - - - 2,000 - - - (27,659) (15,000) 195 - (50,000) 2017 Name Directors Tim Poole James Kelly Philippa Kelly Bruce Carter Jim Craig Key Management Personnel Geoff Hollis Michael Imbesi Chris Paranthoiene Sam Cohen Balance at 1-Jul-16 Off-market transfer On-market transactions Exercise of options - (1,000,000) - (2,000,000) (1,000,000) 1,224,607 13,045,566 65,000 7,079,433 4,000,000 200,000 237,334 116,667 66,668 - - - - - - - - - (110,000) (100,000) (25,000) - 100,000 66,666 133,333 33,332 190,000 204,000 225,000 100,000 Remuneration report voting at Annual General Meetings 10. Lifestyle Communities Limited received more than 99% of votes in support of its remuneration report at the 2017 Annual General Meeting. 26 For personal use onlyDirectors’ Report Signed in accordance with a resolution of the directors. On behalf of the Board Tim Poole Chair James Kelly Managing Director Melbourne, 15 August 2018 27 For personal use onlyLIFESTYLE COMMUNITIES LIMITED AUDITOR’S INDEPENDENCE DECLARATION TO THE DIRECTORS OF LIFESTYLE COMMUNITIES LIMITED In relation to the independent audit for the year ended 30 June 2018, to the best of my knowledge and belief there have been: (i) (ii) no contraventions of the auditor independence requirements of the Corporations Act 2001; and no contraventions of APES 110 Code of Ethics for Professional Accountants. P A JOSE Partner Date 15 August 2018 PITCHER PARTNERS Melbourne An independent Victorian Partnership ABN 27 975 255 196 Level 19, 15 William Street, Melbourne VIC 3000 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane | Newcastle An independent member of Baker Tilly International 28 For personal use onlyCorporate Governance Statement The Company is committed to implementing and maintaining good corporate governance practices. This Statement outlines the main features of the Company’s corporate governance framework and governance practices, and the extent to which the Company has followed the recommendations of the ASX Corporate Governance Council (the ASX Principles and Recommendations) during the 2018 financial year. This Statement is current as at 15 August 2018 and has been approved by the Board of the Company. All charters and other policies referred to in this Statement are available on the Company’s website at www.lifestylecommunities.com.au. Lay solid foundations for management and oversight 1. Board functions The Board is responsible for the overall corporate governance of the Company. The Company has a Board Charter which describes the roles and responsibilities of the Board. The primary role of the Board is to create shareholder value by setting the strategic direction of the Company. Matters reserved for the Board include: • • • • • • • • • setting the strategic direction of the Company; approving and monitoring operating budgets and major capital expenditure; overseeing the integrity of the Company's financial reporting; overseeing the management of the Company’s debt facilities; overseeing the Company’s risk management strategy and approval of the risk management framework; selecting, appointing, and where necessary removing, the Managing Director; delegating responsibility to the Managing Director, and setting the limits of delegation from the Managing Director to other management; appointing committees to assist in the oversight of the Company; and reviewing Board performance. The Board has delegated other matters and the day to day management of the Company to the Managing Director, James Kelly, and established cascading delegated authority levels for senior management and employees. The Managing Director is also responsible for implementing the Company's strategic plan within the Company's risk management framework and ensuring accurate information is provided to the Board. The Chair, Tim Poole, is primarily responsible for facilitating effective Board meetings by encouraging contribution from all Directors and by promoting constructive and respectful relations between management and the Board. 29 For personal use onlyDirector appointment, election and re-election The Board is responsible for ensuring it is comprised of individuals who are best able to discharge the responsibilities of Directors having regard to the law and the best standards of governance. Vetting is undertaken before new Directors are appointed, elected or re-elected to the Board to ensure they are appropriate candidates. This includes background checks, such as for bankruptcy. Information included in respect of recommendation 2.4 (below) further describes the process undertaken by the Board and the information considered in relation to appointing a person as a Director. For the election or re-election of Directors at Annual General Meetings, the notice of meeting sets out for shareholders information on candidates, including details of any other directorships and whether they are considered to be independent. Director and Senior Executive agreements The Company has a written agreement with each Director and senior executive clearly outlining the terms of their appointment. For non-executive Directors the agreement includes the Company's expectations concerning involvement with individual committees, remuneration, circumstances under the Company's Constitution in which a Director’s office becomes vacant, indemnity and insurance arrangements, access to corporate information, confidentiality and a requirement to comply with Company policies. For the Managing Director and senior executives, the agreement includes similar material (where relevant) as well as a description of the position, roles and responsibilities, the term of appointment, resignation and termination processes, and entitlements on resignation or termination. Further details of the key terms for the employment agreements for the Managing Director and senior executives are set out in the Remuneration Report. Company Secretary Each Company Secretary has a direct reporting line to the Chair of the Board to ensure that the Board and its committees function efficiently and effectively. The responsibilities of the Company Secretary include advising on governance matters such as Board and committee policies, supporting meetings by preparing agendas and minutes, and communicating with ASIC and the ASX. Diversity The Company values diversity and recognises the benefits it brings to the organisation. The Company has developed a Diversity Policy to take advantage of a workforce comprised of people with a diverse range of skills, backgrounds and experience. The Company supports diversity in its workforce by: • Treating all employees fairly and with respect and dignity as detailed in the Code of Conduct; • Actively and promoting a working environment that values diversity and tolerance of differences; • Ensuring that applicants and employees of all backgrounds are encouraged to apply for, and have fair opportunity to be considered for all available roles; • Ensuring that the Company’s policies encourage diversity and address specific barriers to groups of employees, such as those with domestic responsibilities, by making reasonable provision for the special needs of these employees, by means such as the Flexible Working Arrangements, Parental innovative strategies to Leave and Other Leave Standards, and recognising and rewarding accommodate diverse groups within the workforce; • Setting, reviewing and reporting annually, measurable objectives; and • Complying with all anti-discrimination and equal opportunity legislation. 30 For personal use onlyThe Company has the following objectives in relation to gender diversity which are assessed by the HR & Remuneration Committee annually: • Objective 1: female representation on the Board at all times; • Objective 2: female representation within the senior management team; and • Objective 3: 50% or more female employees across its workforce. This seeks to ensure adequate female representation across all of the Company's business practices. There is a particular emphasis on gender diversity in the sales and community management functions of the Company. Measuring performance The Company has an informal evaluation process for Board and committee performance which focuses on the role of the Board, its size and composition, the procedures and practices of the Board and meeting arrangements. The evaluation also includes an assessment of the future requirements of the Board in relation to the skills and experience required to ensure that Board composition is appropriate for the needs of the Company. Individual non-executive Director performance is assessed by the Chair informally to ensure that the Director continues to operate effectively within the Board. This may involve discussions with the Director and with other members of the Board, and considering the Director's: • • • skills, experience, performance and contributions to the Board, committees and other aspects of the Company; degree of independence; and availability to attend and prepare for Board and committee meetings. The Company has an on-going evaluation process for senior management. The HR & Remuneration Committee and Managing Director set performance objectives for senior executives necessary to achieve the strategic objectives of the Company. Performance of senior executives is assessed annually by the Managing Director. Structure the Board to add value 2. Board selection process and induction The Board believes that the composition, including selection, appointment, renewal and retirement of members, is of such importance that it is the role of the Board as a whole to manage. In considering the nomination and appointment of new Directors, the Board assesses candidates with regard to their experience in the industry, as well as more generally, and their skills, qualifications, personal qualities and background. In addition, in selecting new Directors, the Board looks for candidates with skills that complement and balance those of the existing Directors. The Company supports the appointment of Directors who bring a wide range of business and professional skills and experience. While the Company does not have or disclose a formal skills matrix it does consider Directors attributes prior to any appointment. The qualifications, skills, experience and expertise relevant to the position of Director held by each Director in office at the date of the Annual Report and their attendance at Board and Committee meetings is included in the Directors’ Report. The Board has an extensive range of knowledge and skills with relevant experience as detailed in the Annual Report. 31 For personal use onlyThe mix of skills and diversity that the Company seeks to achieve on the Board includes: • • • • • • • accounting, finance and capital markets; property development, construction and management; asset management; information technology; financial and business management; sales and marketing; and legal, tax and regulatory. The Board has an induction program for newly-appointed non-executive Directors. This provides orientation including written materials, briefings, training on accounting principles (where appropriate), site visits and educational opportunities designed to make them familiar with the Company and better equipped to perform their duties. This seeks to build an understanding of the Company's business, the markets in which it operates, customers, suppliers, employees and community residents. Directors are also encouraged to attend external director education programs to develop and maintain their skills and knowledge. Independence The Board assesses independence at least annually. The Board considers Tim Poole, Philippa Kelly, The Honourable Nicola Roxon, Georgina Williams and David Blight as Independent Non-Executive Directors, being the majority of members of the Board. Details of their qualifications, experience and length of service are set out in the Directors’ Report. None of the aforementioned Non-Executive Directors have an interest, position, association or relationship of the type described in item 2.3 of the ASX Principles and Recommendations. Act ethically and responsibly 3. The Company recognises that its reputation is one of its most valuable assets to build long-term value for its shareholders. The Company has a Code of Conduct which applies to its Directors, senior executives and employees. The Company is committed to promoting and maintaining a high standard of corporate ethics and business integrity. As stated in the Company's Code of Conduct, all Directors, senior executives and employees must act with integrity and professionalism and be scrupulous in the proper use of Company information, funds, equipment and facilities. Directors, senior executives and employees are to exercise fairness, equity, proper courtesy, consideration and sensitivity in dealing with customers, employees and other stakeholders. See also the information in respect of recommendation 7.4 below. The Code of Conduct is a detailed statement concerning: • responsibilities of all Directors, senior executives and employees; • practices to promote the best interests and reputation of the Company; • confidentiality; • Company property; • • • conflicts of interests; public statements; policies for preventing the acceptance or offering of bribes or other forms of unlawful or unethical payments or inducements; • measures to encourage the reporting of unlawful or unethical behaviour; • • compliance; and breaches of the Code. 32 For personal use only• The Company has a Securities Trading Policy. Under the Company’s Securities Trading Policy, Directors, senior executives and employees must not trade in any securities of the Company at any time when they are in possession of unpublished, price sensitive information in relation to those securities. Provided dealing would not otherwise contravene the insider trading provisions of the Corporations Act, Directors, senior executives and employees can deal in securities of the Company outside of the following prohibited periods: from 1 January to the opening of trading on the second Business Day after the Company’s half-yearly results are announced to the ASX; from 1 July to the opening of trading on the second Business Day after the Company’s annual results for that year are announced to the ASX; from the opening of trading on the date that is two weeks prior to the AGM to the opening of trading on the first Business Day after the close of the AGM; and any additional period, as specified by the Board. • • • Trading within a prohibited period can only occur with the prior approval from the Chair. The Code of Conduct encourages the reporting of unlawful and unethical behaviour and protects whistle- blowers. Any employee who makes a complaint and complies with the reporting process will not be disadvantaged or prejudiced in any way. All complaints are treated as confidential. Directors, senior executives and employees can report straight to the Managing Director, Company Secretary or the Chair of the Audit Committee if they believe their immediate supervisor may be implicated. Directors, senior executives and employees must avoid any personal, financial or other interest that may conflict with their duties and responsibilities to the Company. Any interest that may constitute a conflict of interest must be promptly disclosed to the Managing Director, Company Secretary or the Chair of the Audit Committee. Safeguard integrity in corporate reporting 4. Audit Committee The Company has an Audit Committee that currently consists of the following members; Philippa Kelly, Tim Poole and Georgina Williams, who are considered Independent, Non-Executive Directors. All three Committee members have and maintain very good financial literacy. Further information on their skills, qualifications and experience are set out in the Directors’ Report. The Chair of the Audit Committee is Philippa Kelly who is not the Chair of the Board. Details of the number of Audit Committee meetings and attendance at those meetings are also set out in the Directors' Report. The Audit Committee has adopted a formal Charter, which is available on the Company's website. The Charter sets out the Audit Committee’s composition, responsibilities and powers to ensure the adequacy of the Company’s financial reporting. The Audit Committee oversees the Company’s internal financial controls and the appointment of the external auditor. The Audit Committee will consider matters relevant to the preparation of the Company's Financial Statements for approval by the Board. It also monitors the external auditor’s ongoing independence, effectiveness and scope of work, as well as the rotation of the audit engagement partner. The Audit Committee may seek advice from external consultants or specialists where it considers necessary. 33 For personal use onlyExternal auditor The external auditor, Pitcher Partners, was appointed in November 2008 and was selected based on having the necessary skills, objectivity and independence. This appointment is reviewed by the Board annually. The Company's policy on audit rotation requires the partner managing the audit for the external auditor be changed within a period of five years. The Company's external auditor is invited to attend meetings of the Audit Committee when appropriate, including meetings without management being present. Approval of Financial Statements As part of the Company's financial assurance processes, the Directors receive a declaration from the Managing Director and the Chief Financial Officer before approving Financial Statements for a full year or half year period. The declaration confirms to the Directors that, in the opinion of the Managing Director and the Chief Financial Officer: • the Company’s financial records have been properly maintained in accordance with the Corporations Act; the Financial Statements and the notes for the financial period or year comply with the accounting standards and give a true and fair view of the financial position and performance of the Company; and the declaration is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. • • Annual General Meeting The Company holds a general meeting each year and copies of presentations are lodged with the ASX and made available on the Company's website. Shareholders have the opportunity to ask questions at the meeting and meet informally with Directors after the meeting. The Company's external auditor attends the general meeting each year and is available to answer questions from shareholders regarding the conduct of the audit, the preparation and content of the auditor’s report, the accounting policies adopted by the Company in the preparation of its Financial Statements and the independence of the auditor in relation to the conduct of the audit. The Company considers this is an important safeguard for the integrity of the Company’s financial reporting process. Make timely and balanced disclosure 5. Continuous disclosure ASX Listing Rule 3.1 requires the Company to inform the ASX immediately once the Company is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the Company’s shares. Procedures are in place to ensure that items which potentially require announcement to the ASX are promptly notified to relevant parties for approval. The Company takes the spirit of its continuous disclosure obligations seriously and issues market releases during the year to satisfy these obligations. All ASX announcements are available on the Company’s website. 34 For personal use onlyRespect the rights of security holders 6. Company’s website The Company's website is one of the Company’s key communication tools. The Company uses its website, annual report, market disclosures and media announcements to communicate with its shareholders, as well as encourages participation at general meetings. The Company endeavours to keep the website up-to-date and accurate to provide information about the Company’s performance and governance to investors. The Company values transparency in all areas of operations and understands that quality disclosure can foster the trust and confidence of shareholders and investors. The Company encourages shareholders to take an active interest in the Company, and publishes information about the Company’s history, current projects and corporate structure. Communication with shareholders The Company recognises the timeliness, convenience and environmental advantages of electronic communication. Shareholders have the option of communicating with the Company electronically. Shareholders who wish to update their communication preferences should contact the Company's share registry. The Annual General Meeting allows the Company to provide shareholders with a greater understanding of the Company’s operations, governance, performance and prospects, and gives shareholders the opportunity to raise questions or concerns. Communications with analysts, investors, media and others The Managing Director, James Kelly and the Chief Financial Officer and Joint Company Secretary, Darren Rowland, generally deal with analysts, investors, media and others, taking account of regulatory guidelines including those issued by the ASX on continuous disclosure. The presentations on the 30 June and 31 December results and other presentations are sent to the ASX and are available promptly on the Company’s website. A teleconference held in respect of the 30 June and 31 December presentations is conducted on the afternoon of the release. The Company’s Communications Policy is available on the Company’s website. Recognise and manage risk 7. The Company considers risk management as a core principle of sound corporate governance. The Company recognises the importance of managing risk and controlling its business activities in a manner which enables it to protect established value, identify and capitalise on opportunities to create value, enhance resilience to external events and avoid or reduce risks which may cause injury or loss. Risk management In view of its size and operational structure, the Board considers that it is able to oversee the Company's risk management framework efficiently and effectively without establishing a risk committee. The Company shall review this position periodically. A formal risk register has been developed and approved by the Board. The register identifies specific risks at an operational and strategic level and provides the framework for the reporting and monitoring of material risks across the Company. The full Board is responsible for oversight of the Company’s risk management and control framework. The Board receives periodic reports from management on risk management matters. The Company has disclosed its current material business risks within the Operating and Financial Review in the Annual Report. 35 For personal use only• • The Company’s risk management processes and systems that were in place over the reporting period include: robust planning and budgeting process providing a long-term financial model that enables the Board to review timely financial forecasts as well as analyse future opportunities and sensitivities. The Board also receives regular forecasts in relation to the liquidity of the business; comprehensive site selection process that requires Board approval of any acquisition case prior to any land acquisition. The Board is then notified and approves any changes (positive or negative) to the acquisition case prior to the commencement of construction; a system of delegated authorities that cascades authority levels for expenditure and commitments from the Board, the delegation to the Managing Director and further cascading of authorities from the Managing Director to the rest of the organisation; • • maintaining insurance cover appropriate to the size and nature of the Company’s operations to • • reduce the financial impact of any significant insurable losses; establishing a risk register which identifies the material risks facing the Company and which is regularly reviewed and updated. This includes providing a risk rating, assessment of the key controls in place to manage the risk and the person(s) responsible for implementing and reviewing controls; and all members of the senior management team report to the Board on financial and non-financial matters and meet with the Board at least quarterly. Internal audit The Company does not have a formal internal audit function. In view of the size of the Company, such a function is not considered necessary or appropriate at this time. During the 2018 financial year the Company continued process improvements in relation to the following areas: accounts payable and purchase order systemisation; new payroll and HR management systems; fixed assets reporting; and monthly reporting processes. These improvements are anticipated to be continuously reviewed and improved during the 2019 financial year. Environmental risk management The Company's risk register (described above), identifies specific risks for the Company at an operational and strategic level. The sustainability of the Company's business could also be adversely impacted by the way in which the Company conducts its business and the effects on the Company's residents, employees, suppliers as well as the Company's shareholders. The Board has regard to economic, environmental and social sustainability risks. It does so by considering: • what issues are important to the sustainability of the Company's business; • • whether it is in the interests of the Company to adopt particular measures having regard to the how those issues could be addressed; and materiality of the risk addressed and the likely costs of doing so or failing to do so. This process is applied by the Board as part of its annual planning and budget approval process, when setting the Company's strategy and when considering significant transactions for the Company. By having regard to economic, environmental and social sustainability risks in the manner described above, the Board seeks to ensure that it acts in the best interests of the Company. 36 For personal use onlyRemunerate fairly and responsibly 8. Remuneration Committee The Company has an HR & Remuneration Committee that currently consist of the following members, Tim Poole, Philippa Kelly and The Honourable Nicola Roxon, who are considered Independent, Non-Executive Directors. The Chair of the HR & Remuneration Committee is Tim Poole who is also the Chair of the Board. Details of the number of HR & Remuneration Committee meetings and attendance at those meetings are set out in the Directors' Report. The HR & Remuneration Committee has adopted a formal Charter which is available on the Company's website. The Charter sets out the HR & Remuneration Committee’s responsibilities including oversight and approval of the human resources and remuneration policies and practices of the Company. The HR & Remuneration Committee may seek advice from external consultants or specialists where it considers necessary. Details of remuneration Details of remuneration of Directors, the Managing Director and senior management are included in the Remuneration Report section of the Annual Report. 37 For personal use onlyFinancial Statements Consolidated Statement of Profit or loss and other Comprehensive income For the year ended 30 June 2018 Note 2018 $ 2017 $ Development revenue Home settlement revenue Cost of sales Gross profit from home settlements Management and other revenue Rental revenue Deferred management fees Utilities revenue Sub-division revenue Finance revenue Total management and other revenue Fair value adjustments less expenses Development expenses (sales and marketing) Management rental expenses Management deferred management fee expenses Utilities expenses Corporate overheads Sub-division expenses Loss on disposal of assets Finance costs Profit before income tax Income tax expense Net profit from continuing operations Profit is attributable to: Members of the parent Non-controlling interests Total comprehensive income for the year Total comprehensive income is attributable to: Members of the parent Non-controlling interests 6 5 6 6 6 7 100,114,866 79,941,727 (79,815,755) (64,360,083) 20,299,111 15,581,644 16,963,810 4,346,907 2,121,865 50,087 11,544 23,494,213 13,751,895 4,112,152 1,662,257 925,000 17,122 20,468,426 57,396,731 26,664,208 (5,835,906) (7,752,814) (1,677,119) (2,266,073) (7,771,760) (99,126) - (307,315) (5,039,082) (6,263,887) (1,231,412) (1,663,379) (5,774,937) (1,194,475) (31,898) (1,181,811) 75,479,942 40,333,397 (22,577,027) (12,636,296) 52,902,915 27,697,101 52,681,734 221,181 27,695,112 1,989 52,902,915 27,697,101 52,902,915 27,697,101 52,681,734 221,181 27,695,112 1,989 52,902,915 27,697,101 Earnings per share for profit attributable to the ordinary equity holders of the parent entity: Basic earnings per share Diluted earnings per share 22 22 cents 50.391 50.391 cents 26.555 26.505 The above statement should be read in conjunction with the accompanying notes. 38 For personal use onlyConsolidated Statement of Financial Position For the year ended 30 June 2018 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Total current assets Non-current assets Inventories Property, plant and equipment Investment properties Total non-current assets TOTAL ASSETS LIABILITIES Current liabilities Bank overdraft Trade and other payables Current tax payable Provisions Total current liabilities Non-current liabilities Interest-bearing loans and borrowings Provisions Deferred tax liabilities Total non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Retained earnings Members' interest in equity Non-controlling interest TOTAL EQUITY Note 2018 $ 2017 $ 9 10 11 12 11 13 14 9 15 7 16 17 16 7 18 19 19 20 8,585,136 227,152 33,232,275 815,510 42,860,073 3,653,118 1,324,805 34,368,842 320,888 39,667,653 6,206,662 5,576,406 303,572,686 10,564,461 4,590,889 211,294,274 315,355,754 226,449,624 358,215,827 266,117,277 - 59,808,214 1,132,103 667,254 61,607,571 40,000,000 165,774 51,888,520 92,054,294 12,364 26,844,367 574,467 316,016 27,747,214 47,000,000 374,094 35,471,964 82,846,058 153,661,865 110,593,272 204,553,962 155,524,005 63,808,144 1,727,770 139,018,048 204,553,962 - 204,553,962 63,204,070 1,801,816 90,518,119 155,524,005 - 155,524,005 The above statement should be read in conjunction with the accompanying notes. 39 For personal use onlyConsolidated Statement of Changes in Equity For the year ended 30 June 2018 Contributed equity $ Reserves $ Retained earnings $ Non- controlling interest Total equity $ $ Balance at 1 July 2016 63,822,710 1,561,850 65,920,305 - 131,304,865 Profit for the year Total comprehensive income for the year Transactions with owners in their capacity as owners: Net distributions to non-controlling interests Treasury shares purchased Employee share scheme expense Repayment of employee share scheme loans Dividends paid - - - - - - 27,695,112 1,989 27,697,101 27,695,112 1,989 27,697,101 - (1,989) (1,989) (715,000) - 96,360 - - 239,966 - - - 30,058 - (3,127,356) - - - - (715,000) 270,024 96,360 (3,127,356) (618,640) 239,966 (3,097,298) (1,989) (3,477,961) Balance as at 30 June 2017 63,204,070 1,801,816 90,518,119 - 155,524,005 52,681,734 221,181 52,902,915 52,681,734 221,181 52,902,915 Profit for the year Total comprehensive income for the year Transactions with owners in their capacity as owners: Net distributions to non-controlling interests Treasury shares purchased Issue of shares - exercise of options Repayment of employee share scheme loans Employee share scheme expense Dividends paid - - - - - - (534,091) 533,725 604,440 - (533,725) - - - - - (221,181) (221,181) - - - - - (534,091) - 604,440 459,679 (4,181,805) - - 459,679 - - (4,181,805) 604,074 (74,046) (4,181,805) (221,181) (3,872,958) Balance as at 30 June 2018 63,808,144 1,727,770 139,018,048 - 204,553,962 The above statement should be read in conjunction with the accompanying notes. 40 For personal use onlyConsolidated Cash Flow Statement For the year ended 30 June 2018 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Income tax paid Interest received Interest paid Note 2018 $ 2017 $ 134,791,374 (107,247,348) (5,067,510) 11,544 (1,936,684) 107,772,898 (83,352,078) (4,271,195) 17,122 (1,807,002) Net cash flows provided by operating activities 21 20,551,376 18,359,745 Cash flows from investing activities Purchase of property, plant and equipment Purchase of investment properties 13(a) (1,530,213) (2,430,000) (768,823) (11,997,725) Net cash flows used in investing activities (3,960,213) (12,766,548) Cash flows from financing activities Proceeds from exercise of options / CRES shares Purchase of treasury shares Proceeds from external borrowings Repayment of external borrowings Dividends paid 604,440 (1,069,416) 2,000,000 (9,000,000) (4,181,805) 96,360 (715,000) 19,500,000 (18,500,000) (3,127,356) 8(a) Net cash flows used in financing activities (11,646,781) (2,745,996) Net increase in cash held 4,944,382 2,847,201 Cash at the beginning of the financial year 3,640,754 793,553 Cash at the end of the financial year 9 8,585,136 3,640,754 The above statement should be read in conjunction with the accompanying notes. 41 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES The following are the significant accounting policies adopted by the consolidated entity in the preparation and presentation of the financial report. The accounting policies have been consistently applied, unless otherwise stated. (a) Basis of preparation This financial report is a general purpose financial report, that has been prepared in accordance with Australian Accounting Standards, Interpretations and other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. The financial report covers Lifestyle Communities Limited and controlled entities as a consolidated entity. Lifestyle Communities Limited is a company limited by shares, incorporated and domiciled in Australia. Lifestyle Communities Limited is a for-profit entity for the purpose of preparing the Financial Statements. The financial report was authorised for issue by the directors as at the date of the director's report. Compliance with IFRS The financial report complies with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Historical Cost Convention The financial report has been prepared under the historical cost convention, as modified by revaluation to fair value for certain classes of assets as described in the accounting policies. Significant accounting estimates The preparation of the financial report requires the use of certain estimates and judgements in applying the entity's accounting policies. Those estimates and judgements significant to the financial report are disclosed in Note 2. (b) Principles of consolidation The consolidated Financial Statements are those of the consolidated entity, comprising the Financial Statements of the parent entity and of all entities which the parent entity controls. The group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The Financial Statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies, which may exist. All inter-company balances and transactions, including any unrealised profits and losses have been eliminated on consolidation. Subsidiaries are consolidated from the date on which control is established and are de-recognised from the date that control ceases. Equity interests in a subsidiary not attributable, directly or indirectly, to the group are presented as non- controlling interests. Non-controlling interests in the results of subsidiaries are shown separately in the Consolidated Statement of Profit or loss and other Comprehensive Income and Consolidated Statement of Financial Position respectively. 42 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (c) Cash and cash equivalents Cash and cash equivalents include cash on hand and at banks, bank overdrafts and short-term deposits with an original maturity of three months or less held at call with financial institutions. (d) Inventories Inventories are measured at the lower of cost and net realisable value. Inventories include housing units built but not sold as well as capitalised civils and infrastructure, wages and holding costs. Inventories are classified as either current or non-current assets pursuant to the timing of their anticipated sale. (e) Revenue recognition Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent it is probable that the economic benefits will flow to the consolidated entity and the revenue can be reliably measured. The following specific recognition criteria must also be met: Home settlement revenue (i) Revenue from home settlements is recognised when there is persuasive evidence, usually in the form of settlement of the home, indicating that there has been a transfer of risks and rewards to the customer, no further work or processing is required, the quantity and quality of the goods has been determined, the price is fixed and generally ownership has passed. The consolidated entity considers all risks and rewards as transferred to the customer upon receipt of final settlement. Interest revenue (ii) Interest revenue is recognised when it becomes receivable on a proportional basis taking into account the interest rates applicable to the financial assets. (iii) Rental revenue Rental revenue from investment properties is derived from home owners and is recorded as revenue in the respective month. (iv) Utilities revenue Utilities revenue is billed to homeowners monthly and recorded as revenue in the respective month. (v) Deferred management fee The deferred management fee is receivable upon a resident selling their home. Revenue is recorded upon the resale settlement of the home. For all contracts entered into prior to 1 January 2009, the fee payable is 15% on the resale value of the unit and after a period of occupation of a year and one day. For all contracts entered into post 1 January 2009, the fee payable is up to 20% (the fee accumulates by 4% per year over 5 years up to 20%) on the resale value of the unit. Due to the Company’s Smart Buy Guarantee, no deferred management fee is payable if the home is sold within the first 12 months. (vi) Sub-division revenue Sub-division revenue is derived from land sold that is surplus to requirements for the residential communities. Sub-division revenue is recognised upon the exchange of an unconditional contract or if the contract is conditional once those conditions have been satisfied. All revenue is stated net of the amount of goods and services tax (GST). 43 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (f) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets as follows: Buildings Plant and equipment Computer equipment Motor vehicles 2018 40 years 4 to 25 years 2 to 3 years 4 to 7 years 2017 40 years 4 to 25 years 2 to 3 years 4 to 7 years The assets' residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at each financial year end. (g) Investment properties Investment properties are measured initially at cost, including transaction costs. Investment properties include undeveloped land and land subject to residential site lease agreements. Subsequent to initial recognition, investment properties are re-measured at fair value, which reflects market conditions. Gains or losses arising from changes in the fair values of investment properties are recognised in profit or loss in the year in which they arise. (h) Leases Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership. Operating leases Lease payments for operating leases are recognised as expenses on a straight-line basis over the term of the lease. (i) Impairment Assets with an indefinite useful life are not amortised but are tested annually for impairment in accordance with AASB 136 Impairment of Assets. Assets subject to annual depreciation or amortisation are reviewed for impairment whenever events or circumstances arise that indicate that the carrying amount of the asset may be impaired. An impairment loss is recognised where the carrying amount of the asset or cash generating unit exceeds its recoverable amount. The recoverable amount of an asset cash generating unit is defined as the higher of its fair value less costs of disposal and value in use. 44 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (j) Borrowing costs Borrowing costs can include interest, amortisation of discounts or premiums relating to borrowings, and ancillary costs incurred in connection with arrangement of borrowings. Borrowing costs are expensed as incurred, except for borrowing costs incurred as part of the cost of the construction of a qualifying asset which are capitalised until the asset is ready for its intended use or sale. Acceptance fees are amortised over the life of the facility. (k) Income tax Current income tax expense or revenue is the tax payable on the current period's taxable income based on the applicable income tax rate adjusted by changes in deferred tax assets and liabilities. Deferred tax balances Deferred tax assets and liabilities are recognised for temporary differences at the applicable tax rates when the assets are expected to be recovered or liabilities are settled. No deferred tax asset or liability is recognised in relation to temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only when it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. Tax consolidation The parent entity and its wholly owned subsidiaries have implemented tax consolidation and have formed an income tax-consolidated group from 18 March 2011. This means that: each entity recognises their own current and deferred tax amounts in respect of the transactions, events and balances of the entity; and the parent entity assumes the current tax liabilities and deferred tax assets arising in respect of tax losses, arising in the subsidiary, and recognises a contribution to (or distribution from) the subsidiaries. The tax consolidated group also has a tax sharing agreement in place to limit the liability of subsidiaries in the tax- consolidated group, arising under the joint and several liability provisions of the tax consolidation system, in the event of default by the parent entity to meet its payment obligations. (l) Employee benefits (i) Short-term employee benefit obligations Liabilities arising in respect of wages and salaries, annual leave and any other employee benefits expected to be settled wholly within twelve months of the reporting date are measured at their nominal amounts based on remuneration rates which are expected to be paid when the liability is settled. The expected cost of short-term employee benefits in the form of compensated absences such as annual leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables. 45 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (ii) Long-term employee benefit obligations The provision for employee benefits in respect of long service leave and annual leave which are not expected to be settled wholly within twelve months of reporting date, are measured at the present value of the estimated future cash outflow to be made in respect of services provided by employees up to the reporting date. Employee benefit obligations are presented as current liabilities in the Statement of Financial Position if the entity does not have an unconditional right to defer settlement for at least twelve months after the reporting date, regardless of when the actual settlement is expected to occur. (iii) Retirement benefit obligations Defined contribution superannuation plan The consolidated entity makes contributions to defined contribution superannuation plans in respect of employee services rendered during the year. These superannuation contributions are recognised as an expense in the same period when the employee services are received. (iv) Share based payments The consolidated entity operates an equity incentive scheme (EIS). Refer to Note 24 for further information. For the EIS, the Company provides a contribution to an Employee Share Trust for the estimated number of shares relating to the relevant financial year. The Employee Share Trust purchases shares on-market and issues the relevant shares to participating employees within three months of the end of the financial year. As the shares have not vested the contribution is recognised as treasury shares within contributed equity. The fair value of the equity to which employees become entitled is measured at grant date and recognised as an expense over the vesting period, with a corresponding increase to an equity account. The Company previously operated an employee share loan scheme (ESLP). For the ESLP, convertible repurchase-able employee shares (CRES) were issued to employees. For accounting purposes CRES were treated like options until the time of vesting. At the time of vesting an interest-free limited recourse loan was made to the participant with the value reflected as equity. The CRES were then convertible to ordinary shares at the discretion of the participant prior to their expiry with the loan being due and payable on or before expiry of the CRES. The fair value of the equity to which employees become entitled was measured at grant date and recognised as an expense over the vesting period, with a corresponding increase to an equity account. The number of employee share loans expected to vest was reviewed and adjusted at each reporting date such that the amount recognised for services received as consideration for the equity instruments granted shall be based on the number of equity instruments that eventually vest. There are no further plans to issue CRES pursuant to the ESLP. (m) Goods and services tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Where applicable receivables and payables in the Statement of Financial Position are shown inclusive of GST. Cash flows are presented in the Statement of Cash Flows on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. 46 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (n) Financial instruments Classification The consolidated entity classifies its financial instruments in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the instruments were acquired. Management determines the classification of its financial instruments at initial recognition. Non-derivative financial instruments Non-derivative financial instruments consist of trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Non-derivative financial instruments are initially recognised at fair value, plus directly attributable transactions costs (if any). After initial recognition, non-derivative financial instruments are measured as described below. Loans and receivables Loans and receivables are measured at fair value at inception and subsequently at amortised cost using the effective interest rate method. Interest bearing loans and borrowings Interest bearing loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Fees paid on the establishment of loan facilities that are yield related are included as part of the carrying amount of the loans and borrowings. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Financial liabilities Financial liabilities include trade payables, other creditors and loans from third parties. Non-derivative financial liabilities are recognised at amortised cost, comprising original debt less principal payments and amortisation. (o) Comparatives Where necessary, comparative information has been reclassified and repositioned for consistency with current year disclosures. (p) Rounding of amounts The parent entity and the consolidated entity have applied the relief available under ASIC Corporations (Rounding in Financial / Directors' Reports) Instrument 2016/191 and accordingly, the amounts in the Consolidated Financial Statements and in the Directors' Report have been rounded to the nearest dollar. 47 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (q) Accounting standards issued but not yet effective at 30 June 2018 The following standards and interpretations have been issued at the reporting date but are not yet effective. The directors' assessment of the impact of these standards and interpretations is set out below. (i) AASB 15: Revenue from Contracts with Customers (applicable for annual reporting periods commencing on or after 1 January 2018) AASB 15 introduces a five step process for revenue recognition with the core principle of the new Standard being for entities to recognise revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the entity expects to be entitled in exchange for those goods or services. The five step approach is as follows: step 1 - identify the contracts with the customer; step 2 - identify the separate performance obligations; step 3 - determine the transaction price; step 4 - allocate the transaction price; and step 5 - recognise revenue when a performance obligation is satisfied. AASB 15 will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. The Company has assessed the revenue recognition requirements in AASB 15 and has determined there will be no material impact to the timing and amount of revenue recorded in the Financial Statements. (ii) AASB 9: Financial Instruments (applicable for annual reporting periods commencing on or after 1 January 2018) Significant revisions to the classification and measurement of financial assets, reducing the number of categories and simplifying the measurement choices, including the removal of impairment testing of assets measured at fair value. The amortised cost model is available for debt assets meeting both business model and cash flow characteristics tests. All investments in equity instruments using AASB 9 are to be measured at fair value. AASB 9 amends measurement rules for financial liabilities that the entity elects to measure at fair value through profit and loss. Changes in fair value attributable to changes in the entity’s own credit risk are presented in other comprehensive income. Revised disclosures about an entity’s hedge accounting have also been added to AASB 7 Financial Instruments: Disclosures. Impairment of assets is now based on expected losses in AASB 9 which requires entities to measure: the 12- month expected credit losses (expected credit losses that result from those default events on the financial instrument that are possible within 12 months after the reporting date); or full lifetime expected credit losses (expected credit losses that result from all possible default events over the life of the financial instrument. The Company has assessed the changes to AASB 9 and has determined that they will not materially impact the measurement of financial instruments recorded in the Financial Statements. 48 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (iii) AASB 16: Leases (applicable for annual reporting periods commencing on or after 1 January 2019) AASB 16 will replace AASB 117: Leases and introduces a single lessee accounting model that will require a lessee to recognise right-of-use assets and lease liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. Right-of-use assets are initially measured at their cost and lease liabilities are initially measured on a present value basis. Subsequent to initial recognition: - - - - right-of-use assets are accounted for on a similar basis to non-financial assets, whereby the right-of- use asset is accounted for in accordance with a cost model unless the underlying asset is accounted for on a revaluation basis, in which case if the underlying asset is: investment property, the lessee applies the fair value model in AASB 140: Investment Property to the right-of-use asset; or property, plant or equipment, the lessee can elect to apply the revaluation model in AASB 116: Property, Plant and Equipment to all of the right-of-use assets that relate to that class of property, plant and equipment; and lease liabilities are accounted for on a similar basis as other financial liabilities, whereby interest expense is recognised in respect of the liability and the carrying amount of the liability is reduced to reflect lease payments made. AASB 16 substantially carries forward the lessor accounting requirements in AASB 117. Accordingly, under AASB 16 a lessor would continue to classify its leases as operating leases or finance leases subject to whether the lease transfers to the lessee substantially all of the risks and rewards incidental to ownership of the underlying asset, and would account for each type of lease in a manner consistent with the current approach under AASB 117. The Company has assessed the recognition requirements in AASB 16 and has determined there will be no material impact to the timing and amount of expenses recorded in the Financial Statements. 49 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 2: SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of the Financial Statements requires management to make estimates and assumptions that affect the reported amounts in the Financial Statements. Management continually evaluates its estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its estimates on historical experience and on other various factors it believes to be reasonable under the circumstances. The estimates and assumptions based on future events have a significant inherent risk, and where future events are not anticipated there could be a material impact on the carrying amounts of the assets and liabilities in future periods, as discussed below. (i) Significant accounting judgments Income tax Deferred tax assets and liabilities are based on the assumption that no adverse change will occur in the income tax legislation and the anticipation that the group will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law. Deferred tax assets are recognised for deductible temporary differences as management considers that it is probable that future taxable profits will be available to utilise those temporary differences. Consolidation of subsidiaries The Company consolidates its interests in joint venture entities Cameron Street Developments Pty Ltd and Lifestyle Chelsea Heights Pty Ltd in accordance with AASB 10 Consolidated Financial Statements requirements. The Company is exposed to variable returns and is able to influence these returns via the power over the investee due to the structure of the arrangements with its joint venture entities. (ii) Significant accounting estimates and assumptions Valuation of investment properties The Group values investment properties at fair value. Fair value is determined by a combination of the discounted annuity streams associated with the completed and settled home units and the fair value of the undeveloped land. Inputs for the fair value of investment properties are derived from independent and Directors' valuations and are adjusted to reflect actual rental income. Share based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value of the EIS is measured based on the share price at grant date and the fair value of the ESLP is determined using the Black-Scholes model. Refer to Note 24 for further detail. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact expenses and equity. 50 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 3: FINANCIAL RISK MANAGEMENT OBJECTIVES & POLICIES The Group’s principal financial instruments comprise loan notes, bank loans, finance leases, cash and term deposits, trade and other receivables and trade payables. The Group manages its exposure to key financial risk, including interest rate risk in accordance with the Group's financial risk management policy. The objective of the policy is to support the delivery of the Group’s financial targets whilst protecting future financial security. The main risks arising from the Group’s financial instruments are interest rate risk, market risk, credit risk and liquidity risk. The Group uses different methods to measure and manage different types of risks to which it is exposed. These include market forecasts for interest rates. Liquidity risk is monitored through the development of future rolling cash flow forecasts. These procedures are sufficient to identify when mitigating action might be required. The Board reviews and agrees policies for managing each of these risks as summarised as follows: Interest rate risk The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long- term debt obligations. The level of debt is disclosed in Note 17. Long-term debt obligations As at balance date, the Group had the following mix of financial assets and liabilities exposed to Australian variable interest rate risk (being the bank bill business rate): Financial assets Cash and cash equivalents Financial liabilities Bank overdraft Secured loans - bank finance Net exposure 2018 $ 2017 $ 8,585,136 3,653,118 - 40,000,000 12,364 47,000,000 40,000,000 47,012,364 (31,414,864) (43,359,246) If interest rates had moved and been effective for the period, as illustrated in the table below, with all other variables held constant, post tax profit and equity would have been affected as follows: Consolidated +1% (100 basis points) -1% (100 basis points) Post Tax Profit Higher/(Lower) 2018 $ 2017 $ Equity Higher/(Lower) 2018 $ 2017 $ (219,904) 219,904 (303,515) 303,515 (219,904) 219,904 (303,515) 303,515 When determining the parameters for a possible change in interest rate risk, management has taken into consideration the current economic environment at balance sheet date and historical movements. 51 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 3: FINANCIAL RISK MANAGEMENT OBJECTIVES & POLICIES (continued) A proportion of the impact on post tax profit is deferred due to the capitalisation of interest to inventory which is recognised when units are sold. Market risk At balance date, the Group has no financial instruments exposed to material market risks other than interest rate risk. Credit risk There are no significant concentrations of credit risk within the Group. Credit risk arises from the financial assets for the Group, which comprise cash and cash equivalents, and trade and other receivables. The Group’s exposure to credit risk arises from potential default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. Exposure at balance date has been assessed as minimal as the financial assets have been assessed as having a high likelihood of being received. Liquidity risk The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of a bank facility. The Group ensures that there is sufficient liquidity within the bank facility by maintaining internal credit requirements that are more conservative than the financier. The Group's debt as at balance date is outlined at Note 17. The table below represents the undiscounted contractual settlement terms for financial instruments and management expectation for settlement of undiscounted maturities. The remaining contractual maturities of the Group's financial liabilities are: 6 months or less (1) 6-12 months (2) 1-2 years 2-3 years (3) 3-4 years 4-5 years 2018 $ 42,519,214 17,289,000 - 40,000,000 - - 99,808,214 2017 $ 7,588,567 19,255,800 - - 47,000,000 - 73,844,367 (1) This amount is represented by the following financial liabilities: - $2,177,715 relates to customer deposits which typically convert to settlement within six months or less (2017: $1,022,250). - $154,008 relates to deferred revenue which will be bought to account within six month or less (2017: $1,265,795). - $8,598,585 relates to trade and other payables, refer to Note 15 for further detail (2017: $5,300,522). - $31,588,906 relates to amounts payable on three parcels of land for contracts entered into prior to the reporting date (including stamp duty) expected to settle within six months of the reporting date. (2) This amount relates to amounts payable on two parcels of land for contracts entered into prior to the reporting date (including stamp duty), expected to settle between six to twelve months after the reporting date. 52 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 3: FINANCIAL RISK MANAGEMENT OBJECTIVES & POLICIES (continued) (3) On 29 November 2017 the company executed an agreement with Westpac to add a $40,000,000 tranche to the existing $80,000,000 facility. This facility is subject to internal credit management procedures whereby funds drawn are allocated between development debt (capitalised to inventory) and pre- development debt (expensed). Development debt includes funding for inventory and pre-development debt includes funding for undeveloped land. As at 30 June 2018 total debt was $40,000,000 with $35,506,181 allocated to development debt and $4,493,819 allocated to pre-development debt (as at 30 June 2017 total debt was $47,000,000 with $18,717,722 allocated to development debt and $28,282,278 allocated to pre- development debt). The Group has met all required covenants since the arrangements commenced and therefore expects that all current arrangements will continue until the sooner of repayment or expiry. NOTE 4: FAIR VALUE MEASUREMENTS (a) Fair value hierarchy Assets and liabilities measured and recognised at fair value have been determined by the following fair value measurement hierarchy: Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities; Level 2: Input other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3: Inputs for the asset or liability that are not based on observable market data. 30-Jun-18 Recurring Fair Value Measurements Investment properties Total assets measured at fair value 30-Jun-17 Recurring Fair Value Measurements Investment properties Total assets measured at fair value Level 1 $ Level 2 $ Level 3 $ Total $ - - - - Level 1 $ Level 2 $ - - - - 303,572,686 303,572,686 303,572,686 303,572,686 Level 3 $ Total $ 211,294,274 211,294,274 211,294,274 211,294,274 (b) Valuation techniques and inputs used in level 3 fair value measurements (i) Investment properties The fair value of investment properties is determined by a combination of inputs from independent valuations and Directors' valuations. Fair value is determined by a combination of the discounted annuity streams associated with the completed home units and the fair value of the undeveloped land. Inputs, including discount rates, deferred management fee annuity value, and management expense rates are derived from independent valuations. Rental capitalisation rates are derived from a combination of independent and Directors' valuations. Some inputs relating to the rental annuity streams are adjusted to reflect appropriate data relating to the rental at those communities that weren't valued in the current year. The fair value of undeveloped land is based on inputs from independent valuations. Inputs from independent valuations are provided by property valuers who are industry specialists in valuing these types of investment properties. Investment properties have been classified as level 3 as it is an internally generated calculation that contains some non-observable market inputs. The company does not adjust some of the major inputs obtained from the independent valuations such as discount rates, the deferred management fee annuity values, and the management expense rates. 53 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 (c) Significant unobservable inputs used in level 3 fair value measurements Rental capitalisation rates - rates were taken directly from the valuations for the eleven communities independently valued in the current year. In relation to the remaining communities (independently valued in the prior year) the Directors have adjusted the rental capitalisation rates to reflect those adopted by the independent valuers. Deferred management fee annuity - the valuation for this component is taken directly from independent valuations. Rental annuity - weekly rental rates were taken directly from the valuations for the eleven communities independently valued in the current year. In relation to the remaining communities (independently valued in the prior year) the Directors have adjusted the rate adopted in the prior year by inflation to reflect annual rent increases. Undeveloped land - the valuation for this component is taken from inputs within the independent valuations. Below is a summary of the significant unobservable inputs utilised across the portfolio, including the inputs obtained from the independent valuations: Weekly rentals ($) Anticipated % expenses (as a percentage of rental income) Rental capitalisation rates (%) Rental values per unit ($) Deferred management fee discount rates (%) Deferred management fee values per unit ($) Adopted 190.02 - 195.57 27.7% - 45.0% 7.50% 72,647 - 98,333 13.00% - 14.00% 31,224 - 88,172 Per valuations 190.02 - 195.57 27.7% - 45.0% 7.50% 72,647 - 98,333 13.00% - 14.00% 31,224 - 88,172 Valuation of undeveloped land (per hectare) ($'million) 0.19 - 2.20 0.19 - 2.20 (d) Reconciliation of recurring level 3 fair value movements (i) Investment properties Opening balance Additions (contracted land and capitalised costs) Net unrealised gain from fair value adjustments Closing balance 2018 $ 2017 $ 211,294,274 163,676,707 32,052,107 60,226,305 303,572,686 19,818,775 27,798,792 211,294,274 Gains and losses are recognised in the Statement of Comprehensive Income within fair value adjustments. (e) Valuation processes used for level 3 fair value measurements (i) Investment properties The Company obtains independent valuations of each community at least every two years. The Company uses the independent valuers' inputs in relation to the rental and deferred management fee annuity streams for communities valued in the current year. For those communities valued in the prior year the Directors utilise inputs from current independent valuations to assess whether rental capitalisation rates and weekly rental income should be adjusted. These adjustments are assessed at each period end. The directors assess the value attributed to undeveloped land annually. Land contracted in any period is recognised at cost until the first valuation is obtained. 54 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 (f) Sensitivity analysis for recurring level 3 fair value measurements (i) Investment properties The impact of changes to the inputs that affect the valuation of investment properties is assessed below: Rental income Rental is contractually fixed to increase by the greater of CPI or 3.5% annually. Therefore it is unlikely that there will be any material sensitivities in relation to rental income. Post Tax Profit Higher/(Lower) 2018 $ 2017 $ Equity Higher/(Lower) 2018 $ 2017 $ Management expense as a percentage of rental income +2% -2% Rental capitalisation rate +0.50% -0.50% Deferred management fee per unit +5% -5% Land prices (undeveloped land) +10% -10% (3,415,472) 3,336,621 (2,582,472) 2,582,472 (3,415,472) 3,336,621 (2,582,472) 2,582,472 (7,008,103) (5,147,094) (7,008,103) (5,147,094) 7,924,779 5,857,038 7,924,779 5,857,038 3,464,013 (3,464,013) 2,031,444 (2,031,444) 3,464,013 (3,464,013) 2,031,444 (2,031,444) 4,059,691 (4,059,691) 2,782,406 (2,782,406) 4,059,691 (4,059,691) 2,782,406 (2,782,406) NOTE 5: FAIR VALUE ADJUSTMENTS Net unrealised gain from fair value adjustments - investment properties (Note 14) (a) Other fair value adjustments (b) 2018 $ 2017 $ 60,226,305 (2,829,574) 27,798,792 (1,134,584) 57,396,731 26,664,208 (a) Fair value adjustment results from restating communities to their fair value at balance date. This income represents incremental adjustments to the fair value of investment properties upon settlement of units and reflects the discounted value of future rental and deferred management fee revenues net of expenses as well as the fair value of undeveloped land. (b) Other fair value adjustments relate to transactions incurred that are not directly relating to investment properties but are fair value in nature. 55 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 6: PROFIT FROM CONTINUING OPERATIONS Profit from continuing operations before income tax has been determined after the following specific revenues and expenses: Revenues (i) Deferred management fee Deferred management fees received Selling and administration fees Expenses Finance costs expensed (i) Bank loans Other Amortisation of loan facility fees (ii) Finance costs capitalised Finance costs expensed excludes the following interest capitalised as part of inventory: Bank loans 2018 $ 2017 $ 3,522,666 824,241 4,346,907 3,471,230 640,922 4,112,152 200,396 24,313 82,606 307,315 893,213 213,543 75,055 1,181,811 1,781,199 1,107,820 Interest has been capitalised at the prevailing facility interest rate and is expensed through costs of sales as a pro-rata amount per home settled. (iii) Management rental expenses Management expenses attributable to communities Surplus applicable to joint venture partners (iv) Management deferred management fee expenses Deferred management fee sales and marketing expenses Surplus applicable to joint venture partners (v) Plant and equipment Depreciation (Note 13) Write-off of plant and equipment (Note 13) (vi) Employee benefits expense Wages and salaries Defined contribution superannuation expense Share based payments expense Movement in employee provisions 6,713,934 5,209,778 1,038,880 7,752,814 1,054,109 6,263,887 1,094,589 577,429 582,530 1,677,119 653,983 1,231,412 544,696 - 544,696 438,473 31,899 470,372 7,901,690 545,159 459,679 142,918 9,049,446 5,072,679 428,504 270,024 127,244 5,898,451 56 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 7: INCOME TAX (a) Components of tax expense Current tax Deferred income tax Under provision in prior years (b) Deferred income tax expense included in income tax expense comprises Decrease / (increase) in deferred tax assets Increase in deferred tax liabilities 2018 $ 2017 $ 5,552,614 16,951,880 72,533 22,577,027 4,484,861 8,151,436 - 12,636,296 (332,676) 17,284,556 16,951,880 (69,772) 8,221,207 8,151,436 (c) Reconciliation between tax expense recognised in the Statement of Profit or Loss and tax expense calculated per the statutory income tax expense Accounting profit before tax 75,479,942 40,333,397 At the statutory income tax rate of 30% (2017:30%) 22,643,983 12,100,019 Add / (less): Share based payments Non-controlling interests Tax loss adjustments Under provision in prior years Other Income tax expense (d) Current tax Current tax relates to the following: Opening balance Income tax payable Tax payments Under provision in prior years Current tax liabilities (e) Deferred tax Deferred tax relates to the following: Deferred tax assets The balance comprises: Capital raising costs Inventory Tax losses Provision for employee entitlements Accruals & business expenses Credited to equity - purchase of treasury shares Deferred tax liabilities The balance comprises: Interest capitalised Receivables Investment property fair value adjustments Net deferred tax liability (e) Deferred tax assets not brought to account Capital tax losses 57 139,027 (133,263) (160,257) 72,533 15,004 22,577,027 81,007 (6,943) 240,000 - 222,213 12,636,296 574,467 5,552,614 (5,067,511) 72,533 1,132,103 360,801 4,484,861 (4,271,195) - 574,467 18,354 - 921,103 249,908 1,247,328 375,207 2,811,900 35,702 41,794 961,849 207,033 697,522 - 1,943,900 497,581 - 54,202,839 54,700,420 1,003,416 277,500 36,134,948 37,415,864 51,888,520 35,471,964 240,000 240,000 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 8: DIVIDENDS (a) Dividends Dividends paid $0.04 per share (2017: $0.030 per share) fully franked 4,181,805 3,127,356 2018 $ 2017 $ (b) Dividends declared after balance date and not recognised Since balance date the directors have approved a dividend of 2.5 cents per share fully franked at 30% (2017: 2.0 cents per share) 2,613,628 2,090,903 Balance of franking account on a tax paid basis at balance date adjusted for franking credits arising from payment of current tax payable and franking debits arising from the payment of dividends declared at balance date: 13,301,326 7,927,602 NOTE 9: CASH & CASH EQUIVALENTS CURRENT ASSETS Cash at bank and on hand CURRENT LIABILITIES Bank overdraft NET CASH NOTE 10: TRADE AND OTHER RECEIVABLES CURRENT Other receivables Land proceeds receivable (a) 8,585,136 8,585,136 3,653,118 3,653,118 - 12,364 8,585,136 3,640,754 227,152 - 227,152 399,805 925,000 1,324,805 (a) Land proceeds receivable relates to an unconditional contract that was signed prior to balance date and was expected to settle within six months or less. The land being sold was surplus land at Casey Fields that was unable to be incorporated within the current community. Fair value and credit risk Due to the short term nature of other receivables, their carrying amount is assumed to approximate their fair value. The maximum exposure to credit risk is the fair value of receivables. 58 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 11: INVENTORIES CURRENT Housing Civils & infrastructure NON-CURRENT Housing Civils & infrastructure TOTAL INVENTORIES 2018 $ 2017 $ 19,421,030 21,263,729 13,811,245 33,232,275 13,105,113 34,368,842 41,926 6,164,736 6,206,662 46,243 10,518,218 10,564,461 39,438,937 44,933,303 Inventory expense (a) Inventories recognised as an expense for the year ended 30 June 2018 totaled $79,815,755 for the Group (2017: $64,360,083). The expense has been included in the cost of sales line item. NOTE 12: OTHER CURRENT ASSETS Security deposits Other assets Prepayments 401,836 343,634 70,040 815,510 160,456 159,273 1,159 320,888 Fair value and credit risk Due to the short-term nature of other current assets, their carrying amount is assumed to approximate their fair value. The maximum exposure to credit risk is the fair value of other current assets. 59 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 13: PROPERTY, PLANT AND EQUIPMENT (a) Reconciliation of carrying amounts at the beginning and end of the period Year end 30 June 2018 Buildings Plant and equipment Computer equipment $ $ $ Motor vehicles $ Total $ At 1 July 2017 net of accumulated depreciation Additions Depreciation charge for the year At 30 June 2018 net of accumulated depreciation At 30 June 2018 Cost Accumulated depreciation Net carrying amount Year end 30 June 2017 At 1 July 2016 net of accumulated depreciation Additions Write-off Transfers / change in depreciation rate (i) Depreciation charge for the year At 30 June 2017 net of accumulated depreciation At 30 June 2017 Cost Accumulated depreciation Net carrying amount 1,971,628 1,739,388 310,368 569,505 4,590,889 505,213 652,313 137,461 235,226 1,530,213 (55,915) (306,394) (106,369) (76,018) (544,696) 2,420,926 2,085,307 341,460 728,713 5,576,406 2,738,362 3,114,495 600,010 1,106,417 7,559,284 (317,436) (1,029,188) (258,550) (377,704) (1,982,878) 2,420,926 2,085,307 341,460 728,713 5,576,406 1,985,542 1,697,329 164,280 380,467 4,227,618 49,126 - 366,308 (30,853) 208,083 (1,046) 145,306 - 768,823 (31,899) (8,198) (45,628) 9,125 109,521 64,820 (54,842) (247,768) (70,074) (65,789) (438,473) 1,971,628 1,739,388 310,368 569,505 4,590,889 2,233,149 (261,521) 1,971,628 2,462,180 (722,792) 1,739,388 462,549 (152,181) 310,368 871,191 (301,686) 6,029,069 (1,438,180) 569,505 4,590,889 (i) During the year ended 30 June 2017, the fixed asset register was streamlined for depreciation type / rate consistency across all asset sub-categories. 60 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 14: INVESTMENT PROPERTIES 2018 $ 2017 $ Investment properties at fair value 303,572,686 211,294,274 (a) Reconciliation of carrying amounts at the beginning and end of the period Opening balance as at 1 July Additions Net gain from fair value adjustments Closing balance as at 30 June 211,294,274 32,052,107 60,226,305 163,676,707 19,818,775 27,798,792 303,572,686 211,294,274 Investment properties are carried at fair value, which has been determined by a combination of inputs from independent valuations and Directors' valuations. Fair value is determined by a combination of the discounted annuity streams associated with the completed home units and the fair value of the undeveloped land. Inputs, including discount rates, deferred management fee annuity value, and management expense rates are derived from independent valuations. Rental capitalisation rates are derived from a combination of independent and Directors' valuations, rates were taken directly from independent valuations for the eleven communities independently valued in the current year. In the remaining communities (independently valued in the prior year) the directors have adjusted the rental capitalisation rates to reflect those adopted by the independent valuers. Weekly rental rates were taken directly from the valuations for the eleven communities independently valued in the current year. In relation to the remaining communities (independently valued in the prior year) the Directors have adjusted the rate adopted in the prior year by inflation to reflect annual rent increases. The fair value of the land is based on inputs from independent valuations. Inputs from independent valuations are provided by property valuers who are industry specialists in valuing these types of investment properties. The fair value represents the amount at which the assets could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm’s length transaction at the date of the valuation, in accordance with Australian Accounting Standards. In determining fair value, the expected net cash flows applicable to each property have been discounted to their present value using a market determined, risk- adjusted, discount rate applicable to the respective asset. All rental income and deferred management fee income disclosed in the Statement of Profit or Loss was generated from investment properties. All management expense relates to investment properties that generated rental income. Investment properties are subject to a first charge, forming in part the security of the Group’s loans as disclosed in Note 17. The investment properties are at various stages of development and are subject to further development until fully completed. (b) Carrying amount of investment properties if the cost method had been applied 117,836,765 86,546,962 61 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 15: TRADE AND OTHER PAYABLES CURRENT Trade payables (a) Customer deposits (b) GST payable Other payables and accruals (c) Contracted land (d) Deferred revenue (e) 2018 $ 2017 $ 1,839,570 2,177,715 481,421 6,277,594 48,877,906 154,008 59,808,214 1,459,544 1,022,250 885,932 2,955,046 19,255,800 1,265,795 26,844,367 (a) Trade payables Trade payables are non-interest bearing and are normally settled on 7 to 30 day terms. Due to the short term nature of trade payables, their carrying amount is assumed to approximate their fair value. (b) Customer deposits These represent deposits received from customers that are recognised as revenue upon home settlement. (c) Other payables Other payables are non-traded payables, are non-interest bearing and have an average term of 30 days. Also included in other payables is a provision for GST payable following the GST Business Systems Review performed during the period, by the Australian Taxation Office. For further details see Note 27 (b). (d) Contracted land Includes amounts payable on five parcels of land for contracts entered into prior to the reporting date (including stamp duty). All contracts are expected to settle in the 2019 financial year. (e) Deferred revenue These represent cash received upon the payment of rental and home settlement invoices that relates to a future financial period and will be recognised as income within the next financial year. NOTE 16: PROVISIONS CURRENT Employee provisions NON-CURRENT Employee provisions 667,254 316,016 165,774 374,094 62 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 17: INTEREST-BEARING LOANS AND BORROWINGS NON-CURRENT Secured loans - bank finance 2018 $ 2017 $ 40,000,000 47,000,000 For terms and conditions attached to each type of borrowing, refer to section (c). (a) Secured loans - bank finance maturity As at reporting date the company has drawn $40,000,000 of a $120,000,000 facility it has with Westpac Banking Corporation (2017: $47,000,000). See note (c)(ii) below for further details of the borrowing facility. (b) Fair values Unless disclosed below, the carrying amount of the Group's current and non-current borrowings approximate their fair value. (c) Terms and conditions (i) Bank overdraft As at reporting date the company has a bank overdraft of $Nil (2017: $12,364). The Company has a $5,000,000 overdraft sub-limit as part of the $120,000,000 facility with Westpac Banking Corporation. (ii) Non-current secured loans - bank finance On 29 November 2017 the company executed an agreement with Westpac Banking Corporation to add a $40,000,000 tranche to the existing $80,000,000. The $40,000,000 tranche has the same covenants and other requirements as the original $80,000,000 facility. The $120,000,000 facility has an expiry of greater than one year, with the original $80,000,000 expiring on 26 August 2020 and the $40,000,000 expiring on 29 November 2020. As at reporting date the company has drawn $40,000,000 of the $120,000,000 facility. The Group has met all required covenants since the arrangements commenced and therefore expects that all current arrangements will continue until the sooner of repayment or expiry. (d) Assets pledged as security The $120,000,000 facility held with Westpac Banking Corporation is secured by the following: - General Security Deeds between Westpac Banking Corporation and Lifestyle Communities Limited, Lifestyle Investments 1 Pty Ltd, Lifestyle Developments 1 Pty Ltd, Lifestyle Management 1 Pty Ltd, Brookfield Village Development Pty Ltd, Brookfield Village Management Pty Ltd, Lifestyle Investments 2 Pty Ltd, Lifestyle Developments 2 Pty Ltd, Lifestyle Management 2 Pty Ltd and Lifestyle Communities Investments Cranbourne Pty Ltd. - Mortgage by Lifestyle Investments 1 Pty Ltd over Melton, Tarneit and Warragul properties. - Mortgage by Lifestyle Investments 2 Pty Ltd over the Shepparton, Hastings, Wollert, Geelong, Officer, and Berwick Waters properties. (e) Defaults and breaches During the current or prior year there have been no defaults or breaches of any banking covenants as set out in the Business Finance Agreements with Westpac. 63 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 18: CONTRIBUTED EQUITY 104,545,131 Ordinary shares (2017: 104,545,131 Ordinary shares) 237,231 Treasury shares (2017: 174,086) (i) Reconciliation of Ordinary shares Opening balance Repayment of CRES loan Issue of shares - conversion of CRES to ordinary shares 2018 Number 104,545,131 - - 2018 $ 64,523,510 (715,366) 63,808,144 2017 $ 63,919,070 (715,000) 63,204,070 2017 $ 63,919,070 604,440 Number 104,211,800 - $ 63,822,710 96,360 Closing balance 104,545,131 64,523,510 (ii) Reconciliation of Treasury shares 2018 Opening balance Purchase of treasury shares Vesting of employee shares Closing balance Number 174,086 180,325 (117,180) 237,231 $ (715,000) (534,091) 533,725 (715,366) - 333,331 104,545,131 - 63,919,070 2017 Number $ - 174,086 - 174,086 - (715,000) - (715,000) (a) Ordinary shares Fully paid ordinary shares carry one vote per share and carry the right to dividends. (b) Treasury shares Treasury shares represent shares purchased by an Employee Share Trust that have not been issued to employees at balance date pursuant to the Equity Incentive Scheme. (c) Capital management When managing capital, management's objective is to ensure the entity continues as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders. Management also aims to maintain a capital structure that ensures the lowest cost of capital available to the entity by assessing the cost of equity (share issue), cost of debt (borrowings) or a combination of both. Dividends As a general principle, the Directors of Lifestyle Communities intend to declare dividends out of post tax, operating cash flow generated from community management. In FY2018 community management cash flows delivered a sufficient surplus to declare and pay an interim fully franked dividend of 2.0 cent per share ($2,090,903) and declare a final fully franked dividend of 2.5 cents per share ($2,613,628). Considerations in determining the level of free cash flow from which to pay dividends include: operating cash flow generated from community management; the projected tax liability of Lifestyle Communities Limited; the level of corporate overheads attributable to community roll out; the level of interest to be funded from free cash flow; and additional capital needs of the development business. The Group is not subject to externally imposed capital requirements. 64 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 19: RETAINED EARNINGS AND RESERVES (a) Movements in retained earnings were as follows: Balance 1 July Net profit Transfer from reserves Dividends paid (b) Reserves Opening balance Option expense (CRES) Other share based payments expense (EIS) Vesting of employee shares Reversal to retained earnings due to vested/cancelled options (CRES) Closing balance 2018 $ 2017 $ 90,518,119 52,681,734 - (4,181,805) 65,920,305 27,695,112 30,058 (3,127,356) 139,018,048 90,518,119 Share based payments reserve $ 2018 1,801,816 - 459,679 (533,725) - 1,727,770 $ 2017 1,561,850 23,010 247,014 - (30,058) 1,801,816 The option reserve is used to record the fair value of options / CRES issued to employees as part of their remuneration as well as expenses pursuant to the Equity Incentive Scheme. Refer Note 24 for further details. NOTE 20: NON-CONTROLLING INTERESTS Details of subsidiaries with non-controlling interests (a) The Group has a 50% interest (2017: 50%) in the subsidiary entity, Cameron Street Developments Unit Trust, whose principal activity is the development of a master planned residential village. The Group's voting power is equal to its ownership interest. The entity is registered and operates in Australia. Cameron Street Developments Unit Trust commenced its operations in November 2010. (i) Summarised financial information for subsidiary: Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets 2018 $ 2017 $ 444,709 - 444,709 444,709 - 444,709 446,051 - 446,051 446,051 - 446,051 - - 65 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 The joint venture arrangement provides significant restrictions on the use of assets and liabilities to protect the non-controlling interest. There are many key decisions that require agreement from non-controlling interests including: entering into unbudgeted capital commitments greater than $50,000; sales and purchases of assets that are greater than 10% of total assets; and substantial alteration to the strategic direction of the activities. Revenues Expenses Net profit after tax from continuing operations 2018 $ 36 444,673 444,709 2017 $ 4,455 (3,221) 1,234 Profit allocated to non-controlling interest 222,355 617 (ii) Summarised financial information for subsidiaries' cash flows: Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Net cash flows (iii) Summarised financial information for subsidiaries' trust distributions: - - - - (30,238) - (300,838) (331,076) Trust distributions 444,709 1,234 (iv) Summarised financial information for subsidiaries' contingent liabilities: Bank guarantees - - Bank guarantees are funded by the subsidiaries and are secured by term deposits. (b) The Group has a 50% interest in the subsidiary entity, Lifestyle Chelsea Heights Unit Trust, whose principal activity is the development of a master planned residential village. The Group's voting power is equal to its ownership interest. The entity is registered and operates in Australia. Lifestyle Chelsea Heights Unit Trust commenced its operations in 22 December 2011. (i) Summarised financial information for subsidiary: Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets 2018 $ 2017 $ 8,330 - 8,330 8,330 - 8,330 - 8,330 - 8,330 8,330 - 8,330 - 66 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 The joint venture arrangement provides significant restrictions on the use of assets and liabilities to protect the non-controlling interest. There are many key decisions that require agreement from non-controlling interests including: entering into unbudgeted capital commitments greater than $50,000; sales and purchases of assets that are greater than 10% of total assets; and substantial alteration to the strategic direction of the activities. Revenues Expenses Net profit after tax from continuing operations 2018 $ 2017 $ 9 (2,357) (2,348) 4,306 (1,562) 2,744 Profit/(loss) allocated to non-controlling interest (1,174) 1,372 (ii) Summarised financial information for subsidiaries' cash flows: Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Net cash flows - - - - (21,496) (85,232) - (106,728) (iii) Summarised financial information for subsidiaries' trust distributions: Trust distributions (2,348) 2,744 (v) Summarised financial information for subsidiaries' contingent liabilities: Bank guarantees - - Bank guarantees are funded by the subsidiaries and are secured by term deposits. 67 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 21: CASH FLOW STATEMENT RECONCILIATION a) Reconciliation of net cash flows from operating activities to operating profit Operating profit after income tax 52,902,915 27,697,101 2018 $ 2017 $ Adjustment for non-cash items: Depreciation Amortisation Write-off of plant and equipment Share option expense Fair value adjustment Add back/(subtract) changes in operating assets and liabilities: (Increase)/decrease in trade and other receivables (Increase)/decrease in inventories Increase/(decrease) in trade and other payables Increase/(decrease) in provisions Increase/(decrease) in current tax Increase in deferred tax Net cash flow from operating activities NOTE 22: EARNINGS PER SHARE 544,696 82,606 - 373,653 75,055 31,899 459,679 (57,396,731) 270,024 (26,664,208) 520,425 5,494,366 290,985 142,918 557,636 16,951,881 (914,098) 7,445,552 1,552,419 127,244 213,667 8,151,438 20,551,376 18,359,745 The following reflects the income and weighted average number of shares used in the basic and diluted earnings per share computations: (a) Earnings used in calculating earnings per share For basic and diluted earnings per share: Net profit (b) Weighted average number of shares 52,681,734 27,695,112 Weighted average number of ordinary shares for basic earnings per share 104,545,131 104,292,165 Effect of dilution: Share options - 198,250 Weighted average number of ordinary shares adjusted for dilution 104,545,131 104,490,415 There have been no transactions involving ordinary shares or potential ordinary shares that would significantly change the number of ordinary shares or potential ordinary shares outstanding between the reporting date and the date of completion of these Financial Statements. 68 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 23: RELATED PARTY DISCLOSURES (a) Subsidiaries The Consolidated Financial Statements include the Financial Statements of Lifestyle Communities Limited and the subsidiaries listed in the following table: Name Lifestyle Investments 1 Pty Ltd Lifestyle Developments 1 Pty Ltd Lifestyle Management 1 Pty Ltd Lifestyle Seasons Pty Ltd Lifestyle Cranbourne Pty Ltd Brookfield Management Trust (Trustee: Brookfield Village Management Pty Ltd) Brookfield Development Trust (Trustee: Brookfield Village Development Pty Ltd) Lifestyle Communities Investments Cranbourne Pty Ltd Cameron Street Developments Pty Ltd Cameron Street Developments Unit Trust (Trustee: Cameron Street Developments Pty Ltd) Lifestyle Investments 2 Pty Ltd Lifestyle Developments 2 Pty Ltd Lifestyle Management 2 Pty Ltd Lifestyle Chelsea Heights Pty Ltd Lifestyle Chelsea Heights Unit Trust (Trustee: Lifestyle Chelsea Heights Trust Pty Ltd) Lifestyle Warragul Pty Ltd Lifestyle Shepparton Pty Ltd Lifestyle Whirakee Pty Ltd Lifestyle Parks Australia Pty Ltd Country of incorporation Australia Australia Australia Australia Australia % Equity interest 2017 2018 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Australia 100% 100% Australia 100% 100% Australia 100% 100% Australia 50% 50% Australia 50% 50% Australia Australia Australia Australia 100% 100% 100% 50% 100% 100% 100% 50% Australia 50% 50% Australia Australia Australia Australia 100% 100% 100% 100% 100% 100% 100% 100% Carrying value of parent entity’s interest 2018 $ 2017 $ 8,751,551 8,751,551 - - - - 3 3 - - - - - 2 2 2 - - 3 3 - - - - - 2 2 2 - - 120 120 3 3 8,751,809 120 120 3 3 8,751,809 (b) Ultimate parent Lifestyle Communities Limited is the ultimate Australian parent entity. (c) Loans from related parties There are no loans from related parties. (d) Transactions with related parties There were no transactions with related parties in the current or prior years. 69 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 24: SHARE-BASED PAYMENTS 2018 $ 2017 $ (a) Recognised share-based payment expenses The expense recognised for employee services received during the year is shown in the table below: Expenses arising pursuant to the EIS Expenses arising pursuant to the ESLP Total 459,679 247,014 - 23,010 459,679 270,024 (b) Types of share-based payment plans Equity Incentive Scheme, 'EIS' The purpose of the EIS is to offer all employees (excluding Directors) the ability to obtain shares in the Company and enable them to participate in any growth in the value of the Company, encouraging them to improve the longer-term performance of the Company and its returns to shareholders, and to motivate and retain them. Under this scheme, employees are offered ordinary shares in the Company by way of share units issued by the share plan trustee in the Employee Share Trust. There are two concurrent schemes, one for the senior management team and another for all other employees. Shares are offered in September each year based on the business successfully meeting pre- determined home settlement targets in the prior financial year. The first shares pursuant to this scheme were issued in September 2017. Senior management shares have service conditions whereby 100% of shares in respect of the 2017 financial year will be issued in September 2017 however 25% will be subject to a service condition until September 2018 and then a further 50% will be subject to a service condition until September 2019 when all shares will vest to the employees. The other scheme has no service requirements. An expense of $459,679 (2017: $247,014) has been recorded in the 2018 financial year to reflect the number of shares that vested during the 2018 financial year. The design of the scheme was approved by the board of directors in the 2016 financial year and was formally adopted by the board of directors in the 2017 financial year. The scheme will not result in new shares in the Company being issued. The Company will make a cash contribution to the share plan trustee who will arrange the purchase of the required amount of shares on-market. The Employee Share Trust has an independent share plan trustee and is not considered to be controlled by the Company. Employee Share Loan Plan, 'ESLP' The purpose of the ESLP was to provide eligible employees with an opportunity to acquire convertible repurchase-able employee shares ("CRES") in the Company and, by virtue of the fact that CRES are convertible into ordinary shares in the Company, thereby enable them to participate in any growth in the value of the Company, encouraging them to improve the longer term performance of the Company and its returns to shareholders, and to motivate and retain them. The issue of a CRES involves the granting of a financial assistance loan to each participant for each CRES issued. The last of the outstanding CRES were exercised in the year ended 30 June 2017 and loans amounting to $604,440 were settled in the year. As at the reporting date, no CRES were outstanding and all loans had been repaid. The Directors do not intend to issue any further CRES under the ESLP. 70 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 (c) Shares granted pursuant to the EIS The following table outlines shares granted pursuant to the EIS: Senior management Other staff Total Number of shares 2018 '000 Number of shares 2017 '000 Number of shares 2018 '000 Number of shares 2017 '000 Number of shares 2018 '000 Number of shares 2017 '000 60,000 - 15,436 - 75,436 - 90,000 (20,000) 130,000 80,000 (20,000) 60,000 89,575 (15,436) 89,575 77,180 (61,744) 15,436 179,575 (35,436) 219,575 157,180 (81,744) 75,436 Outstanding at the beginning of the year Granted during the year Vested during the year Outstanding at the reporting date (d) Average share price at measurement date under the EIS The following table illustrates the number (No.) and weighted average share price at measurement date (WASP) of, and movements in, EIS shares during the year: Outstanding at the beginning of the year Granted during the year Vested during the year Outstanding at the reporting date 2018 No. 75,436 179,575 (35,436) 219,575 2018 WASP A$ 2.87 3.36 2.87 3.13 2017 No. - 157,180 (81,744) 75,436 2017 WASP A$ - 2.87 2.87 2.87 (e) Summaries of options and CRES granted The following table illustrates the number (No.) and weighted average exercise price (WAEP) of, and movements in, share options issued during the year: 2018 No. 2018 WAEP A$ Outstanding at the beginning of the year CRES issued during the year Options exercised during the year CRES exercised during the year CRES cancelled during the year Outstanding at the end of the year Exercisable at the end of the year NOTE 25: SEGMENT INFORMATION - - - - - - - 2017 No. 453,331 - - (333,331) (120,000) - 2017 WAEP A$ 1.358 - - 0.876 2.696 - - - - - - - - - - Operating segments are reported based on internal reporting provided to the Managing Director who is the Group's chief operating decision maker. The consolidated entity operates within one operating segment, being the property development and management industry. As a result, disclosures in the Consolidated Financial Statements and notes are representative of this segment. 71 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 26: KEY MANAGEMENT PERSONNEL Compensation of Key Management Personnel Short-term employee benefits Post-employment benefits Share-based payments 2018 $ 2017 $ 1,803,665 110,079 67,501 1,981,245 1,443,988 121,690 56,586 1,622,264 There were no changes to roles defined as key management personnel during the 2018 financial year. NOTE 27: COMMITMENTS AND CONTINGENCIES (a) Commitments Operating lease commitments receivable – Group as lessor The Group has entered into commercial property leases with its residents in relation to its investment property portfolio, consisting of the Group's land. The residential site leases provide for future lease commitments receivable as disclosed below. These non-cancellable leases have remaining terms of between 81 and 90 years and are transferable. 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 balance date were as follows: Within one year After one year but not more than five years After more than five years Total minimum lease payments 19,640,361 78,561,444 1,597,919,783 1,696,121,588 15,665,465 62,661,862 1,278,233,029 1,356,560,356 Minimum lease payments were determined by measuring the current year's rentals and measuring this over the standard 90 year lease agreement. Operating lease commitments payable - Group as lessee The Group has entered into commercial property lease with its landlord for office premises. The contract provides for future lease commitments payable as disclosed below. The lease has an initial term of four years from the commencement date being 1 May 2014. The company has exercised an option to extend the original term by a further three years. Future minimum rentals payable under non-cancellable operating leases as at balance date were as follows: Within one year After one year but not more than five years Total minimum lease payments Contracted construction commitments Payable not later than one year 166,441 305,142 471,583 166,441 - 166,441 14,975,592 4,290,530 72 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 (b) Contingencies The Australian Taxation Office finalised the GST Business Systems Review during the period and notified the Company that it has identified risks which it would like to examine further under audit. The audit will cover the period from 1 June 2014 through 28 May 2018. The risks as advised by the ATO are: The Company is not entitled to input tax credits on land acquisitions; and The Company may not be entitled to all the input tax credits on its community infrastructure expenditure. 1. 2. The Company’s position remains that it is entitled to a proportion of the input tax credits associated with its land acquisitions and a full claim for input tax credits on its community infrastructure expenditure. The Company has come to this view after taking independent advice from relevant subject matter experts. Nevertheless, noting the ATO’s current view that the Company is not entitled to input tax credits on land acquisition, the Company has increased the size of its provision as at 30 June 2018 for GST claimed on Land Acquisitions in the relevant period; the provision is included in accruals and other payables (see Note 15(c)). NOTE 28: AUDITORS REMUNERATION The auditor of Lifestyle Communities Limited is Pitcher Partners. Amounts received or due and receivable for current auditors: An audit or review of the financial report of the entity and any other entity in the consolidated group. Other services in relation to the entity and any other entity in the consolidated group - tax compliance, general tax advice, GST advice and other agreed upon procedures. 2018 $ 2017 $ 111,500 113,000 102,035 114,345 213,535 227,345 73 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 29: PARENT ENTITY DISCLOSURES Required disclosures relating to Lifestyle Communities Limited as a parent entity: Current assets Total assets Current liabilities Total liabilities Net assets Equity: Contributed equity Reserves: Option reserve Accumulated profits / (losses) Total equity Net profit/(loss) Total comprehensive income 2018 $ 2017 $ 97,487,482 99,201,418 107,144,764 118,797,183 220,056 1,585,496 39,850,505 49,114,890 67,294,259 69,682,293 63,451,129 62,847,055 1,727,770 1,801,816 2,115,360 5,033,422 67,294,259 69,682,293 1,263,744 9,520,807 1,263,744 9,520,807 Subsequent to year end Lifestyle Investments 2 Pty Ltd, a subsidiary of Lifestyle Communities Limited, declared a dividend of $20,000,000. This ensures that there are sufficient retained earnings within Lifestyle Communities Limited to declare its dividend. NOTE 30: SIGNIFICANT EVENTS AFTER BALANCE SHEET DATE There are no matters or affairs that have arisen since balance date which significantly affect or may significantly affect the operations of the consolidated entity. NOTE 31: DEED OF CROSS GUARANTEE Pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 dated 17 December 2016, the wholly-owned subsidiaries listed below are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports, and Directors' reports. It is a condition of the Instrument that the Company and each of the subsidiaries enter into a Deed of Cross Guarantee. The effect of the Deed is that the Company guarantees to each creditor payment in full of any debt in the event of winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. If a winding up occurs under other provisions of the Act, the Company will only be liable in the event that after six months any creditor has not been paid in full. The subsidiaries have also given similar guarantees in the event that the Company is wound up. The parties subject to the Deed are: - Lifestyle Communities Limited - Lifestyle Investments 2 Pty Ltd - Lifestyle Developments 2 Pty Ltd 74 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 31: DEED OF CROSS GUARANTEE (continued) The Deed was executed on 19 June 2015. Lifestyle Developments 2 Pty Ltd obtained relief pursuant to the Instrument for the year ended 30 June 2018 (and prior year). Lifestyle Investments 2 Pty Ltd also obtained relief pursuant to the Instrument for the year ended 30 June 2018 (and was ineligible for relief in the prior year as it was a small proprietary company). A Consolidated Statement of Comprehensive Income and Consolidated Statement of Financial Position, comprising the Company and controlled entities which are a party to the Deed, after eliminating all transactions between parties to the Deed of Cross Guarantee, for the year ended 30 June 2018 (including prior year comparatives) is set out as follows: (a) Consolidated Statement of Comprehensive Income of the closed group 2018 $ 2017 $ Development revenue Home settlement revenue Cost of sales 100,113,741 79,726,920 (80,261,807) (64,160,895) Gross profit from home settlements 19,851,934 15,566,025 Management and other revenue Rental revenue Deferred management fees Trust distributions Finance revenue Total management and other revenue Fair value adjustments less Expenses Development expenses (sales and marketing) Management rental expenses Corporate overheads Finance costs Loss on disposal of assets Profit before income tax Income tax expense Net profit from continuing operations Profit is attributable to: Members of the parent Non-controlling interests 361,544 29,952 221,181 9,661 622,338 3,889,191 490,961 1,372 8,081 4,389,605 47,892,145 23,161,070 (5,832,117) (3,802) (7,797,042) (295,780) - (4,951,534) (3,889,191) (5,770,625) (1,154,756) (4,848) 54,437,676 27,345,746 (15,619,308) (6,868,673) 38,818,368 20,477,073 38,818,368 - 20,477,073 - 38,818,368 20,477,073 75 For personal use onlyNotes to the Financial Statements For the year ended 30 June 2018 NOTE 31: DEED OF CROSS GUARANTEE (continued) (b) Summary of movements in consolidated retained earnings of the closed group 2018 $ 2017 $ Balance 1 July Dividends paid Net profit (c) Consolidated Statement of Financial Position of the closed group ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Total current assets Non-current assets Inventories Property, plant and equipment Other financial assets Investment properties Total non-current assets TOTAL ASSETS LIABILITIES Current liabilities Bank overdraft Trade and other payables Current tax payable Provisions Total current liabilities Non-current liabilities Trade and other payables Interest-bearing loans and borrowings Provisions Deferred tax liabilities Total non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Retained earnings TOTAL EQUITY 76 34,644,062 (4,181,805) 38,818,368 69,280,625 17,294,345 (3,127,356) 20,477,073 34,644,062 8,524,642 61,382,554 33,240,605 921,381 104,069,182 3,617,285 115,841 34,817,532 441,679 38,992,337 6,206,662 2,343,970 8,893,334 211,833,386 10,564,461 1,736,532 8,893,334 129,070,031 229,277,352 150,264,358 333,346,534 189,256,695 - 119,657,266 1,132,103 667,254 121,456,623 - 40,000,000 165,774 36,907,599 77,073,373 12,364 25,110,022 574,467 316,016 26,012,869 155,300 47,000,000 374,094 16,064,484 63,593,878 198,529,996 89,606,747 134,816,539 99,649,948 63,808,144 1,727,770 69,280,625 134,816,539 63,204,070 1,801,816 34,644,062 99,649,948 For personal use onlyDirectors' Declaration The directors declare that the: 1. are in accordance with the Corporations Act 2001, including: In the directors' opinion, the Financial Statements and notes thereto, as set out on pages 38 to 76, complying with Australian Accounting Standards and the Corporations Regulations 2001, and other (a) mandatory professional reporting requirements; as stated in Note 1(a), the consolidated Financial Statements also comply with International Financial (b) Reporting Standards; and giving a true and fair view of the financial position of the consolidated entity as at 30 June 2018 and (c) its performance for the year ended on that date. In the directors' opinion there are reasonable grounds to believe that Lifestyle Communities Limited 2. 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 closed group identified in Note 31 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 31. This declaration has been made after receiving the declarations required to be made by the chief executive officer and the managing director to the directors in accordance with section 295A of the Corporations Act 2001 for the financial year ending 30 June 2018. This declaration is made in accordance with a resolution of the Directors. Tim Poole Chairman Melbourne, 15 August 2018 James Kelly Managing Director 77 For personal use onlyLIFESTYLE COMMUNITIES LIMITED AND CONTROLLED ENTITIES ABN 11 078 675 153 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF LIFESTYLE COMMUNITIES LIMITED Report on the Audit of the Financial Report Opinion We have audited the financial report of Lifestyle Communities Limited “the Company” and its controlled entities “the Group”, which comprises the consolidated statement of financial position as at 30 June 2018, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and 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) (b) giving a true and fair view of the Group’s financial position as at 30 June 2018 and of its financial performance for the year then ended; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants “the Code” that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. An independent Victorian Partnership ABN 27 975 255 196 Level 19, 15 William Street, Melbourne VIC 3000 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane| Newcastle An independent member of Baker Tilly International 78 For personal use onlyLIFESTYLE COMMUNITIES LIMITED AND CONTROLLED ENTITIES ABN 11 078 675 153 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF LIFESTYLE COMMUNITIES LIMITED Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter Valuation of investment properties ‐ $303.6m Refer to Note 14 This is the largest asset on the balance sheet, representing 84.7% of total assets. Our audit effort has increased in this area as the Group’s investment property portfolio has grown in recent years. In particular, there is significant focus in ensuring the underlying investments are valued appropriately. The valuation of the investment properties held at fair value is based on key inputs and assumptions noted in the valuation. Judgement is applied to a number of the key inputs including:  management fee expense percentages;   capitalisation rates; and the value of deferred management fees. The Group engages external independent valuers to undertake valuations of each investment property at least every 2 years. It is due to the size of the balance and use of key input and assumption judgements that this is a key area of audit focus. Our procedures included amongst others: the key Evaluating external property valuations obtained by management and performing an assessment as to the inputs and appropriateness of key assumptions used in the valuation; Challenging inputs and the assumptions provided by management to the external valuers; Comparing movements between key inputs and assumptions in valuations from prior periods to ensure they were line with our knowledge and in expectation of the specific property and the applicable market conditions; Reviewing the properties which were not subject to an external valuation, and comparing the inputs to those used in the prior period and indicators from current external valuations. overall     79 An independent Victorian Partnership ABN 27 975 255 196 Level 19, 15 William Street, Melbourne VIC 3000 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane| Newcastle An independent member of Baker Tilly International For personal use onlyLIFESTYLE COMMUNITIES LIMITED AND CONTROLLED ENTITIES ABN 11 078 675 153 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF LIFESTYLE COMMUNITIES LIMITED 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 annual report for the year ended 30 June 2018, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do 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, 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 ability of the Group to continue as a going concern, disclosing, as applicable, matters related 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 has 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. An independent Victorian Partnership ABN 27 975 255 196 Level 19, 15 William Street, Melbourne VIC 3000 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane| Newcastle An independent member of Baker Tilly International 80 For personal use onlyLIFESTYLE COMMUNITIES LIMITED AND CONTROLLED ENTITIES ABN 11 078 675 153 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF LIFESTYLE COMMUNITIES LIMITED 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:  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. An independent Victorian Partnership ABN 27 975 255 196 Level 19, 15 William Street, Melbourne VIC 3000 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane| Newcastle An independent member of Baker Tilly International 81 For personal use onlyLIFESTYLE COMMUNITIES LIMITED AND CONTROLLED ENTITIES ABN 11 078 675 153 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF LIFESTYLE COMMUNITIES LIMITED From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 16 to 26 of the directors’ report for the year ended 30 June 2018. In our opinion, the Remuneration Report of Lifestyle Communities Limited, for the year ended 30 June 2018, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. P A JOSE Partner 15 August 2018 PITCHER PARTNERS Melbourne An independent Victorian Partnership ABN 27 975 255 196 Level 19, 15 William Street, Melbourne VIC 3000 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane| Newcastle An independent member of Baker Tilly International 82 For personal use only ASX additional information Additional information required by the Australian Stock Exchange Limited and not shown elsewhere in this report is as follows. The information is current as at 6 August 2018. (a) Distribution of equity securities (i) Ordinary share capital 104,545,131 fully paid ordinary shares are held by 2,426 individual shareholders (b) Substantial shareholders Fully paid ordinary shareholders Number Percentage James Kelly 12,045,566 Cooper Investors Pty Ltd 7,896,352 Washington H. Soul Pattinson 6,363,178 and Company Limited (WHSP) Pengana Capital Group Limited 6,363,178 AustralianSuper Australian Foundation Investment Company Limited Perlov family Investment Management BT Limited 5,727,700 5,470,436 5,386,637 5,299,706 11.52% 7.55% 6.09% 6.09% 5.48% 5.22% 5.15% 5.07% Voting rights All ordinary shares carry one vote per share without restriction. Current at (last notification date) 15 August 2017 9 February 2017 5 June 2018 5 June 2018 28 September 2016 27 April 2016 16 September 2016 14 March 2018 83 For personal use only(c) Twenty largest holders of quoted equity securities Rank Name HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED MASONKELLY PTY LTD NATIONAL NOMINEES LIMITED BNP PARIBAS NOMS PTY LTD AUSTRALIAN FOUNDATION INVESTMENT COMPANY LIMITED DAKEN INVESTMENTS PTY LTD CITICORP NOMINEES PTY LIMITED MIRRABOOKA INVESTMENTS LIMITED TRACEY RYAN INVESTMENTS PTY LTD KELLY SUPERANNUATION FUND PTY LTD SANDHURST TRUSTEES LTD AMCIL LIMITED ARMADA INVESTMENTS PTY LTD B S CARTER INVESTMENTS PTY LTD EQUITAS NOMINEES PTY LIMITED Units % of Units 13,458,960 12.87 10,781,292 10.31 9,116,265 7,657,898 7,256,044 5,470,436 5,149,539 5,061,875 2,690,133 2,320,000 2,116,801 1,784,389 1,714,048 1,608,229 1,579,433 1,500,000 8.72 7.32 6.94 5.23 4.93 4.84 2.57 2.22 2.02 1.71 1.64 1.54 1.51 1.43 AUST EXECUTOR TRUSTEES LTD 1,244,355 1.19 CITICORP NOMINEES PTY LIMITED ABN AMRO CLEARING SYDNEY NOMINEES PTY LTD 926,000 0.89 825,585 0.79 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 AUSTRALIAN SHAREHOLDER NOMINEES PTY LTD 768,435 0.74 Totals: Top 20 holders of ORDINARY FULLY PAID SHARES 83,029,717 79.42 (d) The number of shareholders by range of units and unmarketable parcel holders Range of Units Snapshot Composition : ORD Range Total holders Units % of Issued Capital 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 Over Rounding 958 886 269 260 53 404,313 2,362,970 2,046,954 7,568,579 92,162,315 Unmarketable Parcels Minimum $ 500.00 parcel at $6.00 per unit Total 2,426 104,545,131 Minimum Parcel Size 84 Holders 192 Units 3,561 0.39 2.26 1.96 7.24 88.16 0.01 100.00 84 For personal use onlyCorporate information Lifestyle Communities Limited ABN 11 078 675 153 Registered office Directors Company secretary Level 2, 25 Ross Street South Melbourne Vic 3205 Australia Tim Poole – Non-Executive Chair James Kelly – Managing Director Philippa Kelly – Non-Executive Director The Honourable Nicola Roxon - Non-Executive Director Georgina Williams - Non-Executive Director David Blight – Non-Executive Director Mark Licciardo Kate Goland Darren Rowland Level 2, 25 Ross Street Principal place of business South Melbourne VIC 3205 Share registry Lawyers Bankers Auditors Australia Computershare Investor Services Pty Limited Yarra Falls 452 Johnston Street, Abbotsford VIC 3067 Telephone 61 3 9415 5000 Fax 61 3 9473 2500. Investor queries (within Australia) 1300 850 505 Thomson Geer Level 39, 525 Collins Street Melbourne VIC 3000 Australia Westpac Banking Corporation Limited Level 7, 150 Collins Street Melbourne VIC 3000 Australia Pitcher Partners Accountants Auditors & Advisors Level 13, 664 Collins Street Docklands VIC 3008 Australia 85 For personal use only

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