Lifestyle Communities Limited
Annual Report 2019

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2022 Report
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Peers and competitors of Lifestyle Communities Limited:

Newmark Group
CBRE Group
Marcus & Millichap
Green Brick Partners
Inland Homes Plc

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For personal use only 2019 Highlights 551 Lifestylers walked for Mother’s Day Classic 18 Communities and growing 3,346 Homeowners and growing 2,284 Homes occupied 3 Electric Town Cars Option of Smart Homes introduced 2 New sites acquired 744 Cats, dogs and other pets For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Contents Consolidated Financial Statements Corporate Information Chairman and Managing Director's Review Directors' Report Auditors Independence Declaration Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Financial Statements Directors' Declaration Independent Auditor's Report ASX Additional Information Page 2 3 6 25 27 28 29 30 31 63 64 69 The accompanying notes form part of these financial statements. For personal use only Corporate Information Lifestyle Communities Limited ABN 11 078 675 153 Registered Office Directors Company Secretaries Principal Place of Business Share Registry Solicitors Auditors Level 1, 9-17 Raglan Street South Melbourne VIC 3205 Australia Telephone 61 3 9682 2249 Tim Poole – Non-executive Chairman 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 1, 9-17 Raglan Street South Melbourne VIC 3205 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 Pitcher Partners Accountants Auditors & Advisors Level 13, 664 Collins Street Docklands VIC 3008 Australia The accompanying notes form part of these financial statements. 2 For personal use only Chairman and Managing Director’s Review For the 2019 Financial Year Dear fellow shareholders, We are pleased to present to you the Lifestyle Communities Annual Report for the year ended 30 June 2019 and to set out the progress we have made towards meeting our objective of being the leading provider of good quality affordable accommodation for active retirees in Victoria. The 2019 financial year has seen the addition of 337 new home settlements now providing 2,284 settled homes within our communities. We are delighted with the acquisition of two additional sites located at Plumpton and Tyabb as well as acquiring additional land to expand our development at Wollert. We were also very pleased to execute new funding agreements with The Commonwealth Bank of Australia, National Australia Bank and HSBC Bank Australia to secure $225 million of senior debt facilities under a common terms deed. Our land acquisition plan remains focused in Victoria where we continue to build on our brand and referral network. We have the capacity to secure two new sites per year and we continue to investigate opportunities in Melbourne's key growth corridors. Our development activity is currently focused on closing out final settlements at Shepparton, Geelong, Berwick Waters and Bittern, maintaining the pace at Ocean Grove and Mount Duneed, and commencing construction at Kaduna Park, Wollert, Plumpton and Tyabb. We also remain focused on continuing to differentiate Lifestyle Communities by delivering a high level of customer experience through the many customer touchpoints. This has resulted in 54% of our new sales during FY19 coming from referrals. The key highlights for the 2019 financial year include: • • • • • • • Achieved 337 new home settlements. We commence FY20 with 239 new homes sold but not settled; Acquired additional sites in Plumpton and Tyabb; Acquired an additional parcel of land at Wollert extending the size of the community to 246 homes; Achieved 152 settlements at Bittern during the year; Increased the total number of home sites settled and under management to 2,284; Increased the total portfolio to 3,563 home sites either under planning, development or management; Underlying net profit after tax attributable to shareholders increased by $7.3 million (or 21.6%) to $41.1 million (statutory net profit after tax was $55.1 million); • Home site annuity rentals increased by $3.6 million to $20.5 million; and • Deferred management fees realised (inclusive of selling and administration fees) remained steady at $4.2 million due to strong resale prices despite settlements attracting a DMF reducing to 53 (2018: 59). The Company has delivered fourteen 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 annuity flow for future dividends. The accompanying notes form part of these financial statements. 3 For personal use only Growing annuity income streams $26,000,000 $24,000,000 $22,000,000 $20,000,000 $18,000,000 $16,000,000 $14,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Site Rental Fees Deferred Management Fees During FY19 we have continued to build the Company’s capability and resources and improve systems and processes while maintaining the unique organisational culture that Lifestyle Communities has enjoyed as an organic growth business. This, coupled with an increase in the Company’s senior debt facilities and a property market that is providing more opportunities, should allow new home settlements to increase materially in FY21 and beyond. The Company’s Board has remained stable during FY19. However, long serving Director and Chair, Tim Poole, will retire at the conclusion of the August 2019 Board meeting. Tim has overseen and made a significant contribution towards the growth of the company during his twelve years on the Board. As part of the board's succession plan, the Chair will pass to Philippa Kelly who has been a Non- Executive Director since September 2013. Philippa has a deep understanding of our business and was Chair of the Audit and Risk Committee. We are pleased to announce the Lifestyle Communities foundation donated over $100,000 this year to cancer-based charities as well as winning an award for the largest team participating in the Mother's Day Classic with over 500 homeowners, employees and their families supporting this great cause. 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. Finally, on behalf of the Board, we would like to thank all our homeowners, our talented team and our shareholders for great support during the 2019 financial year. Yours sincerely, James Kelly Managing Director 14 August 2019 Tim Poole Chair 14 August 2019 The accompanying notes form part of these financial statements. 4 For personal use only Engaging our Communities For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Directors' Report For the year ended 30 June 2019 The directors present their report together with the financial report of the consolidated entity consisting of Lifestyle Communities Limited and the entities it controlled (the Group), for the year ended 30 June 2019 and the auditor's report thereon. Principal activities and significant changes in nature of 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 were no significant changes in the nature of the Group's principal activities during the financial year. Results The consolidated profit of the Group for the financial year after providing for income tax amounted to $ 55,063,201 (2018: $52,681,734). Information on directors The names, qualifications, experience and special responsibilities of each person who has been a director during the year and to the date of this report are: Tim Poole, Non-Executive Chair (BCom) James Kelly, Managing Director (BBldg) 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 is the Chair of the HR & Remuneration Committee and is a member of the Audit Committee. He holds a Bachelor of Commerce from the University of Melbourne and is formerly a Chartered Accountant. Tim is an experienced Director of ASX listed and unlisted companies across the financial services, infrastructure, property 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 was appointed Managing Director in September 2007 and is one of the founders of Lifestyle Communities Limited. With over 40 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. Philippa Kelly, Non-Executive Director (LLB, F Fin, FAICD) 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 is also 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. 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 Non-executive Director of ASX listed, private and not-for-profit organisations. Philippa is a Deputy Chancellor of Deakin University, Chair of its Finance and Business Committee and a member of the Remuneration Committee. Philippa was previously a Non-executive Director of the Alcohol and Drug Foundation. Philippa held senior executive operational roles within ASX listed and unlisted businesses for the past 20 years and most recently was Chief Operating Officer of the Juilliard Group, one of Melbourne’s largest private property owners. She has specific expertise in property, listed investment and managed funds, finance and in repositioning and developing the strategic direction of businesses in a range of sectors. Philippa has a background in law, investment banking and mergers and acquisitions. Lifestyle Communities Annual Report 6 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Directors' Report For the year ended 30 June 2019 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 is also 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 Independent Chair of HESTA and Non-Executive Director of Dexus Funds Management Limited. She was previously Chair of Bupa, Cancer Council Australia, the Accounting Professional and Ethical Standards Board and an 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 15 years in politics she held many relevant positions including Federal Attorney General and Federal Minister for Health and Ageing. She worked previously as an Industrial lawyer and advocate at Maurice Blackburn and the National Union of Workers. Company Secretaries 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. Mark Licciardo, (B Bus(Acc), GradDip CSP, FGIA, GAICD) Kate Goland, (CPA, GIA (Cert)) Mark is the founder and 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. As a former company secretary of ASX 50 companies, Transurban Group and Australian Foundation Investment Company Limited, his expertise includes working with boards of directors in the areas of corporate governance, administration and company secretarial matters. 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. He is also the former Chairman of the Governance Institute of Australia Victoria division, Academy of Design (LCI Melbourne) and Melbourne Fringe Festival and is a current non-executive director of a number of public and private companies. Mr Licciardo is currently a director of Frontier Digital Ventures Limited and Mobilicom Limited, ASX listed entities. He was recently a Director of iCar Asia Limited. Darren Rowland (B Bus (Acc), CA), Company Secretary Darren was appointed as Company Secretary on 9 July 2018. Darren joined the Lifestyle Communities team as Chief Financial Officer in May 2018 and has previously held a number of senior finance and commercial roles with Toll Holdings Limited predominantly in the resources and marine logistics industries. 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. Directors have been in office since the start of the financial year to the date of this report unless otherwise stated. Lifestyle Communities Annual Report 7 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Directors' Report For the year ended 30 June 2019 Directors’ Interests Director Tim Poole James Kelly Philippa Kelly The Honourable Nicola Roxon Georgina Williams David Blight Dividends Fully Paid Ordinary Shares Options over Ordinary Shares 1,224,607 12,077,001 65,000 - 2,000 - - - - - - - A fully franked dividend of 2.5 cents per share was paid on 5 October 2018 (representing the 2018 final dividend). A fully franked dividend of 2.5 cents per share was paid on 5 April 2019 (representing the 2019 interim dividend). Since the end of the financial year the Directors have resolved to pay a fully franked dividend of 3.0 cents per ordinary share (representing the 2019 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 state of affairs Refer to the Operating and Financial Review for the significant changes in the state of the affairs of the Company. Events after the reporting date No matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in future financial years. Future developments Refer to the Operating and Financial Review for information on likely developments and the future prospects of the Company. Environmental issues The Group's operations are not regulated by any significant environmental regulations under a law of the Commonwealth or of a state or territory of Australia. 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 directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the directors’ and officers’ liability and legal expenses insurance contracts as such disclosure is prohibited under the terms of the contract. Proceedings 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. Lifestyle Communities Annual Report 8 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Directors' Report For the year ended 30 June 2019 Meetings of Directors 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: Directors' Meetings Audit Committee HR & Remuneration Committee Number eligible to attend Number attended Number eligible to attend Number attended Number eligible to attend Number attended 12 12 12 12 12 12 12 12 12 12 12 11 5 - 5 - 5 - 5 - 5 - 5 - 1 - 1 1 - - 1 - 1 1 - - Tim Poole James Kelly Philippa Kelly The Honourable Nicola Roxon Georgina Williams David Blight 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 published on its website at LifestyleCommunities.com.au. Auditor's independence declaration The auditor's independence declaration in accordance with section 307C of the Corporations Act 2001 for the year ended 30 June 2019 has been received and can be found on page 25 of the consolidated financial report. Non-audit services The Company’s auditor, Pitcher Partners, provided tax compliance ($24,615) and general tax advice ($225,190) at a total cost of $249,805 (2018: $102,035). 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. Lifestyle Communities Annual Report 9 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Directors' Report For the year ended 30 June 2019 Operating and Financial Review The Company continued to develop and manage its portfolio of affordable lifestyle communities during the 2019 financial year. Profit after tax attributable to shareholders was $55.1 million (2018: $52.7 million). Underlying profit after tax attributable to shareholders was $41.1 million (2018: $33.8 million). Revenue Earnings before interest and tax Net profit before tax Net profit after tax Underlying net profit after tax1 Operating cash flow Community cash flow2 Gearing3 Underlying return on average capital employed4 Earnings per share Underlying earnings per share Total dividend per share Measure FY19 FY18 Change Change % A$ millions 146.8 123.6 23.2 A$ millions A$ millions A$ millions A$ millions A$ millions A$ millions % % A$ cents A$ cents A$ cents 81.1 79.7 55.1 41.1 5.8 12.5 27.1 19.1 52.7 39.3 5.5 75.8 75.5 52.9 33.8 20.6 11.7 13.3 19.8 50.4 32.3 4.5 5.3 4.2 2.2 7.3 (14.8) 0.8 13.8 (0.7) 2.3 7.0 1.0 18.8 7.0 5.6 4.2 21.6 (71.8) 6.8 103.8 (3.5) 4.6 21.7 22.2 Measure FY19 FY18 Change Change % Homes settled (gross) Homes sold (gross) No. of homes No. of homes Average realised sales price new homes (GST incl) A$’000 Total number of homes (gross) Total number of homes (after NCI)5 Total number of homeowners Average age of homeowners Number of resales settled6 Average realised sales price resales (GST incl)7 No. of homes No. of homes No. of people Years No. of homes A$’000 337 209 401 2,284 2,083 3,346 73 53 395 321 293 343 1,947 1,746 2,859 72 59 356 16 (84) 58 337 337 487 1 (6) 39 5 (29) 17 17 19 17 1.4 (10) 11 1. 2. 3. 4. 5. 6. 7. Underlying net profit FY19 $41.1 million (FY18 $33.8 million) excludes non-cash fair value increases driven by changes to the valuation assumptions used by independent valuers FY19 $14.0 million (FY18 $19.1 million) Community cash flow comprises cash flows received from homeowner rentals and deferred management fees less community operating costs and the net surplus/deficit from providing utilities Calculated as a ratio of net debt to net debt plus equity Calculated as a ratio of underlying EBIT divided by a three year rolling average of total assets less current liabilities Gross number of homes adjusted for share of communities owned by non-controlling interests Includes resales attracting a deferred management fee. There were a further 18 resales settled in FY19 (FY18: 28 resales) that did not attract a deferred management fee as the outgoing homeowners sold their home within 12 months of initial settlement in accordance with the Company’s Smart Buy Guarantee 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 2019 financial year. Lifestyle Communities Annual Report 10 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Directors' Report For the year ended 30 June 2019 Update on communities Community New homes Resales Settled FY19 Settled FY18 Net sales FY19 Net sales FY18 Settled FY19 Settled FY18 Net sales FY19 Net sales FY18 Homes sold not settled Total homes settled Total homes in portfolio Brookfield Seasons Warragul Casey Fields Shepparton Chelsea Heights Hastings Lyndarum Geelong Officer Berwick Waters Bittern Ocean Grove Mount Duneed Kaduna Park Wollert Plumpton Tyabb - - - - 25 - - - 20 - 72 152 68 - - - - - - - - - 48 - - 40 57 26 125 25 - - - - - - - - - - - - - - 20 41 - - - 4 - 3 17 59 41 47 18 - - - - 1 37 5 74 116 70 - - - - - 11 3 9 11 2 9 5 7 5 7 2 - - - - - - - 15 4 14 11 12 9 9 1 - 12 - - - - - - - - 10 1 10 9 6 10 6 2 5 5 1 1 - - - - - - 14 4 10 9 4 6 7 1 - 4 - - - - - - - - - - - - 16 - - - 1 - 3 26 87 41 47 18 - - 228 136 182 217 272 186 141 154 163 151 209 177 68 - - - - - 228 136 182 217 300 186 141 154 164 151 216 209 220 191 172 246 265 185 Total 337 An update on each of the communities as at 30 June 2019 is as follows: 321 344 209 71 87 66 59 239 2,284 3,563 • • • • • • • • • • • 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 completed construction during FY19. There are 11 homes remaining for sale and 28 homes remaining to settle. Lifestyle Geelong is now fully sold and has one home left to settle. Lifestyle Berwick Waters has seven homes remaining for settlement. Of these, four homes have been retained as display homes to assist with marketing at Kaduna Park. Lifestyle Bittern is fully sold and achieved 152 settlements in FY19. There are 32 homes remaining to settle and six of these have been retained to assist with marketing for Tyabb. Lifestyle Ocean Grove has achieved 155 sales and 68 settlements to date. The clubhouse at Ocean Grove was officially opened during May 2019. The land for the Lifestyle Community in Mount Duneed (Armstrong Creek) settled in September 2018. This community was launched for sale in August 2018 and first settlements are expected to commence in December 2019. The land for the Lifestyle Community in Kaduna Park was settled in May 2019. Whilst some preliminary site works have started, commencement of construction at Kaduna Park remains subject to receipt of a planning permit which is expected to be received in the first quarter of FY20. The initial parcel of land for the Lifestyle Community in Wollert was acquired in April 2018 with an additional adjacent site acquired in October 2018 which extended the size of the community to 246 homes. The second parcel of land settled in June 2019 with the first parcel due to settle in August 2019. Commencement of construction remains subject to receiving a planning permit which is expected to be received during FY20. The land for the Lifestyle Community in Plumpton was acquired in December 2018 and is due to settle in September 2019. Commencement of construction remains subject to receiving a planning permit which is expected to be received in the second half of FY20. The contracts for the acquisition of land for the Lifestyle Community in Tyabb were executed in March 2019. The contracts are conditional on obtaining a planning permit. Settlement is expected to occur at the end of 2020 with construction anticipated to commence soon after. Lifestyle Communities Annual Report 11 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Directors' Report For the year ended 30 June 2019 Outlook The Company has a focused strategy to service the niche of providing good quality affordable housing to the over 50’s market and is currently funded and resourced to acquire up to two new sites per year 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. Due to a highly competitive property market in Victoria during the last 12 to 18 months, the Company enters FY20 with one less project than planned. The Company has also experienced some delays in receiving planning permits for new communities at Kaduna Park and Wollert. New home settlements for FY20 are forecast to be in the range of 270 to 310 and established home settlements attracting a deferred management fee are forecast to be 60 to 80. The expected increase in established home sales and site rental annuities means the Company is confident that total dividends will increase in FY20 compared to the 2019 financial year. Key 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 18 sites and developing most of these during the past 16 years. Sales and settlements – the Company is exposed to the rate of sales of new and existing homes, the sales price of new homes (and to a lesser extent the sales price 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 is a critical determiner in the site selection process and the acquisition case. Community Development – the Company is exposed to various risks inherent in developing greenfield projects. Effective management of the construction programme is important to ensure; high quality product is delivered; cash flow is managed efficiently and returns are maximised. The Company mitigates this risk by implementing a robust project governance framework, using a panel of trusted suppliers, and 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 its debt facility was cancelled in a short period of time. The Company mitigates these risks by: maintaining a Statement of Financial Position with a reasonably low level of gearing; ensuring it complies with all debt covenants and reporting obligations; ensuring sufficient remaining term for debt facilities; in the most recent debt refinancing introducing different maturity dates 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 and safety. A well-managed community will: provide a safe living environment for homeowners; 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 Compliance and Governance – the Company seeks to avoid reputational and compliance incidents by implementing a strong operating and control environment and seeking professional advice in relation to the management of its legal compliance and tax affairs. The Company’s operations, business, and financial model are specifically impacted by how the provisions of the Residential Tenancies Act 1997 (Vic), the Social Security Act 1991 (Commonwealth) and a number of other legislative schemes are currently interpreted and administered by the relevant regulatory authorities. Changes to the current administrative practice or specific legislative amendments, could have an adverse impact on the operating and financial performance of the Company. Further, some aspects of the taxation treatment of our relatively new asset class are being formally considered by the tax authorities for the first time. It is possible that any view formed by the tax authorities or the Courts that is inconsistent with the Company’s current treatment may adversely impact the Company’s operating and financial performance. The Company takes an active role in engaging with, and providing submissions to, the relevant regulatory bodies through its membership and participation in the Victorian Caravan Parks Association and the Residential Land Lease Alliance. Lifestyle Communities Annual Report 12 For personal use only Putting the extra in the ordinary For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Remuneration Report (audited) For the year ended 30 June 2019 1. Introduction 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 Contents 1 2 3 4 5 6 7 8 9 10 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 2. HR & Remuneration Committee 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. Lifestyle Communities Annual Report 14 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Remuneration Report (audited) For the year ended 30 June 2019 3. Details of Key Management Personnel Non-Executive Directors Position Commencement date Tim Poole Philippa Kelly Chair of the Board Non-Executive Director Chair – HR & Remuneration Committee Member – Audit Committee 22 November 2007 Non-Executive Director Chair – Audit Committee Member - HR & Remuneration Committee 18 September 2013 Non-Executive Director The Honourable Nicola Roxon Member - HR & Remuneration Committee 1 September 2017 Georgina Williams David Blight Executive Director James Kelly Other executives Darren Rowland Chris Paranthoiene Sam Cohen Yvonne Slater Richard Parker Non-Executive Director Member – Audit Committee 1 September 2017 Non-Executive Director 15 June 2018 Position Managing Director Position Commencement date Founder Commencement date Chief Financial Officer and Company Secretary 21 May 2018 Head of Acquisitions and Development 13 March 2007 Head of Operations Head of Development Delivery Head of Sales 3 October 2011 8 January 2018 11 January 2016 Lifestyle Communities Annual Report 15 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Remuneration Report (audited) For the year ended 30 June 2019 4. Non-Executive Directors’ remuneration 4.1 Fixed fees All Non-Executive Directors are paid fixed fees for their services to the Company. The level of fees is 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 to Non-Executive Directors 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 2019 financial year are set out in section 8. 4.2 Review of Non-Executive Director's 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 (including superannuation). Fees paid to the other Non-Executive Directors are $80,000 per annum plus an additional $5,000 per annum for each committee Chair. 5. Executive Directors and senior management remuneration 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. 5.2 Determining fixed remuneration Managing Director The total remuneration for the Managing Director (inclusive of superannuation) is $579,592 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. Lifestyle Communities Annual Report 16 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Remuneration Report (audited) For the year ended 30 June 2019 5.3 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 Low Medium High FY20 270 290 310 FY19 310 330 350 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. Senior management personnel will receive: 2,000 shares if the low point of the target is reached; 3,000 shares if the mid-point is reached; and 4,000 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 2019 financial year, 337 new home settlements were achieved meaning the mid-point of the target was achieved. 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 and remain employed up until the shares are allocated. Shares are allocated in September following the end of the target year and after the completion of the independent audit. 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 will be issued in September following completion of the audit; 25% have a one-year service and ongoing performance requirements; and 50% have two-year service and ongoing performance requirements. Shares allocated to senior management personnel have the following service (or escrow) conditions: • • 50% of shares will be issued in September following completion of the audit; and 50% have a one-year service and ongoing performance requirements. 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, the fair value has been determined at the grant date for employees employed prior to 1 July and at commencement date of employees that joined the Company during the year. The expense will be recognised over the vesting periods noted above. 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 and are awarded within three months after the end of the financial year. 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. Lifestyle Communities Annual Report 17 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Remuneration Report (audited) For the year ended 30 June 2019 Relationship 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 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, the new home settlements metric was chosen as the only performance condition as new home settlements are 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 HR & Remuneration Committee has discussed whether a second performance condition should be introduced in the future. The decision was made to retain one condition for FY20, however, this matter will be further considered during the year. The role each group of the Company’s employees plays in delivering new home settlements is described in the following table: Department Total staff Impact on settlements Acquisitions Marketing 1 Supported by the Managing Director, the acquisitions executive is incentivised by the ability to influence the future settlement pipeline. 8 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. Development and delivery 11 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. Sales Operations Customer Contact 23 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. 35 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. 3 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. Finance 6 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 2019 financial year. Prior to the commencement of the financial year, the Company had provided guidance that the expected new home settlement range for the 2019 financial year was 310 to 350. 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. Lifestyle Communities Annual Report 18 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Remuneration Report (audited) For the year ended 30 June 2019 The following table shows the gross revenue, profits and dividends for the last five years for the Company, as well as the share prices at the end of the respective financial years. Performance measure FY19 FY18 FY17 FY16 FY15 Underlying net profit after tax attributable to members ($million) Underlying Net profit (change from prior year) (%) 41.10 21.6% 33.80 35.2% 25.00 29.5% 19.30 15.6% 16.70 35.8% Performance measure FY19 FY18 FY17 FY16 FY15 Dividends declared & paid (fully franked) (cents) Underlying diluted earnings per share (cents) Closing share price (30 June) Share price increase / (decrease) New home settlements 5.5 52.7 6.63 13.3% 337 4.5 32.30 5.85 44.4% 321 3.5 26.50 4.05 39.2% 278 2.5 18.50 2.91 19.3% 202 1.5 16.10 2.44 52.5% 240 7. Executive service agreements 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. The agreement is an ongoing contract which is reviewed annually. 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 2019 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. Lifestyle Communities Annual Report 19 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Remuneration Report (audited) For the year ended 30 June 2019 Remuneration details 8. The following table of benefits and payment details, in respect to the financial year, the components of remuneration for each member of the key management personnel of the Group. 2019 Directors Tim Poole James Kelly Philippa Kelly David Blight Nicola Roxon Georgina Williams Key management personnel Darren Rowland Chris Paranthoiene Sam Cohen Yvonne Slater Richard Parker Total Lifestyle Communities Annual Report Short term Post-employment Share based payment Total performance related % Salary & fees $ Bonus $ Non- monetary Other Super Retirement benefits $ $ $ $ EIS $ Cash bonus % Total Shares $ % 114,155 575,000 77,626 73,059 73,059 73,059 985,958 325,000 325,000 194,550 220,913 203,082 1,268,545 2,254,503 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 10,845 4,592 7,374 6,941 6,941 6,941 - 43,634 - - - - - 25,490 25,371 16,107 19,087 16,858 - - - - - - - - - - - - - - - - - - - 53,761 69,180 69,180 53,761 69,180 - 102,913 - 315,062 - 146,547 - 315,062 - - - - - - - - - - - - - - - - - - - - 125,000 579,592 85,000 80,000 80,000 80,000 - 1,029,592 13.3 404,251 16.5 419,551 24.7 279,837 18.3 293,761 23.9 289,120 18.7 1,686,520 11.6 2,716,112 20 For personal use only Remuneration Report (audited) For the year ended 30 June 2019 2018 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 25 August 2017) Geoff Hollis (resigned 16 March 2018) Total Lifestyle Communities Annual Report Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Short term Post-employment Share based payment Total performance related % Salary $ fees Cash bonus Non- monetary Other Super Retirement benefits $ $ $ $ $ $ EIS $ Cash bonus % Shares Total % $ 112,325 530,464 76,153 - 60,929 60,929 9,337 48,125 898,262 29,094 - - - - - - - - - - 292,191 9,050 196,434 101,777 44,818 170,380 - - - - 834,694 9,050 1,732,956 9,050 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 31,212 10,670 - 7,234 - 5,788 5,788 887 - 30,367 2,764 27,133 16,185 8,760 5,791 30,447 19,079 61,659 79,712 61,659 110,079 - - - - - - - - - - - - - - - - - - - - - - - - - - 12,866 43,167 43,167 12,866 - 9,189 121,255 121,255 - - - - - - - - - - 2.6 - - - - 0.9 0.5 - - - - - - - - 122,995 530,464 83,387 - 66,717 66,717 10,224 48,125 - 928,629 28.7 44,724 11.6 371,541 16.9 255,786 10.4 123,403 - 81,821 0.0 229,095 0.1 1,106,370 0.1 2,034,999 21 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Remuneration Report (audited) For the year ended 30 June 2019 Shares held by Key Management Personnel 9. 9.1 Share based payments issued to key management personnel as remuneration The number of ordinary shares in Lifestyle Communities Limited awarded or vested person (pursuant to the equity incentive scheme) to each key management of the Group during the financial year is as follows: Name Darren Rowland Chris Paranthoiene Sam Cohen Yvonne Slater Richard Parker Financial Year of grant Financial year of vesting Plan Number Value at grant date $ Total vested Vested % 2018 2018 2018 2019 2019 2019 2017 2018 2018 2018 2019 2019 2019 2017 2018 2018 2019 2019 2019 2019 2018 2018 2018 2019 2019 2019 2017 2018 2018 2018 2019 2019 2019 2019 2019 2020 2020 2020 2021 2019 2019 2019 2020 2020 2020 2021 2019 2019 2020 2020 2020 2020 2021 2019 2019 2020 2020 2020 2021 2019 2019 2019 2020 2020 2020 2021 EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS EIS 625 625 3,256 3,256 625 625 1,250 6,513 3,750 21,787 3,750 21,787 7,500 43,575 - - - - 10,000 25,900 10,000 5,000 12,950 5,000 5,000 12,950 5,000 10,000 25,900 3,750 21,787 3,750 21,787 3,750 43,575 - - - - 10,000 25,900 10,000 5,000 12,950 5,000 10,000 12,950 5,000 5,000 25,900 5,000 21,787 10,000 21,787 625 43,575 625 625 3,256 3,256 1,250 6,513 3,750 21,787 3,750 21,787 7,500 43,575 - - - - 625 625 - - - - 10,000 25,900 10,000 5,000 12,950 5,000 5,000 12,950 5,000 10,000 25,900 3,750 21,787 3,750 21,787 7,500 43,575 - - - - 100 100 - - - - 100 100 100 - - - - 100 100 100 - - - - 100 100 - - - - 100 100 100 - - - - For further details relating to the EIS, please refer to Note 5.3 of the Company’s 2019 Financial Statements. Lifestyle Communities Annual Report 22 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Remuneration Report (audited) For the year ended 30 June 2019 9.2 Shareholdings of Directors and key management personnel 30 June 2019 Directors Tim Poole James Kelly Philippa Kelly David Blight Nicola Roxon Georgina Williams Key management personnel Darren Rowland Chris Paranthoiene Sam Cohen Yvonne Slater Richard Parker 30 June 2018 Directors Tim Poole James Kelly Philippa Kelly David Blight (appointed 15 June 2018) Nicola Roxon (appointed 1 September 2018) Georgina Williams (appointed 1 September 2018) 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) Balance at beginning of year On-market transactions Balance at end of year 1,224,607 - 1,224,607 12,045,566 - 12,045,566 65,000 - - 2,000 - - - - 65,000 - - 2,000 - 1,250 1,250 197,341 (16,000) 181,341 85,000 20,000 105,000 195 1,250 1,445 10,000 16,500 26,500 Balance at beginning of year On-Market transactions Balance at end of year 1,224,607 12,045,566 65,000 - - - - 1,224,607 - 12,045,566 - - - 65,000 - - 2,000 2,000 5,079,433 - 5,079,433 3,000,000 - 3,000,000 - - - 225,000 (27,659) 197,341 100,000 (15,000) 85,000 - 195 195 204,000 - 204,000 190,000 (50,000) 140,000 10. Remuneration report voting at Annual General Meetings Lifestyle Communities Limited received more than 95.78% of votes in support of its remuneration report at the 2018 Annual General Meeting. Remuneration report ends. Lifestyle Communities Annual Report 23 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Directors' Report For the year ended 30 June 2019 Signed in accordance with a resolution of the Board of Directors: Tim Poole Chair Dated 14 August 2019 James Kelly Managing Director Lifestyle Communities Annual Report 24 For personal use only LIFESTYLE 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 2019, 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. This declaration is in respect of Lifestyle Communities Limited and the entities it controlled during the year N R BULL Partner Date 14 August 2019 PITCHER PARTNERS Melbourne An independent Victorian Partnership ABN 27 975 255 196 Level 13, 664 Collins Street, Docklands VIC 3008 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 only For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2019 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 Other expenses Finance costs Profit before income tax Income tax expense Profit from continuing operations Profit attributable to: Members of the parent entity Non-controlling interests Total comprehensive income for the half year Total comprehensive income attributable to: Members of the parent entity Non-controlling interests Note 2019 $ 2018 $ 119,270,205 100,114,866 (89,716,228) (79,815,755) 29,553,977 20,299,111 20,539,317 16,963,810 2.1(a) 4,192,677 4,346,907 2,818,577 2,121,865 - 20,273 50,087 11,544 27,570,844 23,494,213 2.2 55,732,362 57,396,731 (6,212,127) (5,835,906) 2.1(d) 2.1(e) (9,169,649) (7,752,814) (2,614,718) (1,677,119) (3,270,966) (2,266,073) (9,843,826) (7,771,760) (673,238) (99,126) 2.1(b) (1,421,634) (307,315) 79,651,025 75,479,942 2.4 (24,587,824) (22,577,027) 55,063,201 52,902,915 55,063,201 52,681,734 - 221,181 55,063,201 52,902,915 55,063,201 52,681,734 - 221,181 55,063,201 52,902,915 52.7 52.7 50.4 50.4 Earnings per share for profit attributable to the ordinary equity holders of the parent entity: Basic earnings per share (cents) Diluted earnings per share (cents) The above statement should be read in conjunction with the accompanying notes. Lifestyle Communities Annual Report 27 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Consolidated Statement of Financial Position As at 30 June 2019 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 Trade and other payables Current tax liabilities 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 Total equity attributable to equity holders of the Company Non-controlling interest TOTAL EQUITY Note 2019 $ 2018 $ 4.3 2.6 3.3 2.7 3.3 3.4 3.1 2.8 2.4 5.2 4.4 5.2 2.4 4.5 4.6 4.6 4,981,887 8,585,136 605,316 227,152 34,776,702 33,232,275 1,824,549 815,510 42,188,454 42,860,073 13,881,826 6,206,662 7,642,027 5,576,406 399,750,455 303,572,686 421,274,308 315,355,754 463,462,762 358,215,827 37,405,769 59,808,214 973,934 1,132,103 888,517 667,254 39,268,220 61,607,571 100,000,000 40,000,000 132,100 165,774 69,370,783 51,888,520 169,502,883 92,054,294 208,771,103 153,661,865 254,691,659 204,553,962 63,641,422 63,808,144 2,196,251 1,727,770 188,853,986 139,018,048 254,691,659 204,553,962 - - 254,691,659 204,553,962 The above statement should be read in conjunction with the accompanying notes. Lifestyle Communities Annual Report 28 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Consolidated Statement of Changes in Equity For the year ended 30 June 2019 2019 Contributed equity Reserves Note $ $ Retained earnings $ Non-controlling interest Total equity $ $ Balance at 1 July 2018 Profit for the year Total comprehensive income for the year 63,808,144 1,727,770 139,018,048 - 204,553,962 - - - 55,063,201 - 55,063,201 - 55,063,201 - 55,063,201 Transactions with owners in their capacity as owners Treasury shares purchased Vesting of treasury shares Employee share scheme expense Dividends paid or provided for 4.5 4.5 5.3 4.7 (547,889) - 381,167 (419,799) 888,280 - - - (5,227,263) - - - - (547,889) (38,632) 888,280 (5,227,263) Balance at 30 June 2019 63,641,422 2,196,251 188,853,986 - 254,691,659 2018 Balance at 1 July 2017 Profit for the year Contributed equity Reserves Retained earnings Non-controlling interest Total equity Note $ $ $ $ $ 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 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 6.2 4.5 4.5 4.5 5.3 4.7 - - - (534,091) - - - - 533,725 (533,725) 604,440 - 459,679 - - - (4,181,805) (221,181) - - - - - (221,181) (534,091) - 604,440 459,679 (4,181,805) Balance 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. Lifestyle Communities Annual Report 29 - - - - - - - - For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Consolidated Statement of Cash Flows For the year ended 30 June 2019 Cash flow from operating activities Receipts from customers Payments to suppliers and employees Income tax paid Interest received Interest paid Note 2019 $ 2018 $ 146,374,079 134,791,374 (130,279,294) (107,247,348) (7,029,004) (5,067,510) 123,044 11,544 (3,405,465) (1,936,684) Net cash provided by operating activities 2.5 5,783,360 20,551,376 Cash flow from investing activities Purchase of property, plant and equipment Purchase of investment properties Net cash used in investing activities Cash flow from financing activities Proceeds from CRES shares Purchase of treasury shares Proceeds from external borrowings Repayment of external borrowings Dividends paid Net cash provided by/ (used in) financing activities Net increase/(decrease) in cash and cash equivalents held Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at end of financial year (2,760,947) (1,530,213) (60,615,700) (2,430,000) (63,376,647) (3,960,213) - 604,440 (782,699) (1,069,416) 60,000,000 2,000,000 - (9,000,000) (5,227,263) (4,181,805) 53,990,038 (11,646,781) (3,603,249) 4,944,382 8,585,136 3,640,754 4.3 4,981,887 8,585,136 The above statement should be read in conjunction with the accompanying notes. Lifestyle Communities Annual Report 30 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 1 How we have prepared this report 1.1 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. 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. 1.2 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. Where necessary, comparative information has been reclassified and repositioned for consistency with current year disclosures. 1.3 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. (a) Significant accounting judgments Income tax (i) 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. Lifestyle Communities Annual Report 31 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 (ii) 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. (b) Significant accounting estimates and assumptions (i) 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. (ii) 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. Refer to Note 5.3 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. 2 How we have performed this year 2.1 Profit from continuing operations Profit from continuing operations before income tax has been determined after the following specific revenues and expenses: Revenues 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: (i) Home settlement revenue 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. (ii) Interest revenue 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 homeowners 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 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 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. The Company offers a Smart Buy Guarantee whereby no deferred management fee is payable by homeowners that moveout for whatever reason in the first 12 months. 4.4% of homeowners that settled in FY19 used the Smart Buy Guarantee (and therefore didn’t pay a deferred management fee) compared with 6.9% in FY18. (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. Lifestyle Communities Annual Report 32 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 All revenue is stated net of the amount of goods and services tax (GST). (a) Deferred management fee Deferred management fees received Selling and administration fees Total Expenses (b) Finance costs expensed 2019 $ 2018 $ 3,431,238 3,522,666 761,439 824,241 4,192,677 4,346,907 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. Interest on secured loans Other interest expense Amortisation of loan facility fees Total (c) Finance costs capitalised Finance costs expensed excludes interest capitalised as part of inventory: Interest on secured loans 2019 $ 2018 $ 1,168,068 200,396 650 252,916 24,313 82,606 1,421,634 307,315 2019 $ 2018 $ 2,237,397 1,781,199 Interest on development debt has been capitalised at the prevailing facility interest rate and is expensed through cost of sales as a pro-rata amount per home settled. (d) Management rental expenses Management expenses attributable to communities Surplus application to joint venture partners Total 2019 $ 2018 $ 8,449,073 6,713,934 720,576 1,038,880 9,169,649 7,752,814 Lifestyle Communities Annual Report 33 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 (e) Management deferred management fee expenses Deferred management fee sales and marketing expenses Surplus application to joint venture partners Total 2019 $ 2018 $ 1,894,209 1,094,589 720,509 582,530 2,614,718 1,677,119 (f) Depreciation, amortisation and impairment The Company reviews the estimated useful lives of property, plant and equipment at the end of each annual reporting period. At the end of this reporting period, the Directors have determined that there was no adjustment required to the Group’s property, plant and equipment useful lives. Full details of the Company’s depreciation accounting policy can be found at note 3.4. 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. Depreciation 2.2 Fair Value Adjustments Fair value adjustments - Investment Properties Other fair value adjustments Total Note 3.4 2019 $ 2018 $ 703,698 544,696 2019 $ 2018 $ 55,732,362 60,226,305 - (2,829,574) 55,732,362 57,396,731 (a) Fair value adjustments - investment properties 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 Other fair value adjustments relate to transactions incurred that are not directly relating to investment properties but are fair value in nature. Lifestyle Communities Annual Report 34 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 2.3 Earning per share 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 Net profit (b) Weighted average number of shares 2019 $ 2018 $ 55,063,201 52,681,734 2019 $ 2018 $ Weighted average number of ordinary shares for basic earnings per share 104,545,131 104,545,131 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. 2.4 Income Tax Expense 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. (a) The major components of tax expense (income) comprise: Current tax Deferred income tax Under/(over) provision in respect of prior years 2019 $ 2018 $ 6,870,836 5,552,614 17,482,263 16,951,880 - 72,533 Deferred tax movement- booked through equity (contribution to the employee share trust) 234,725 - Total 24,587,824 22,577,027 Lifestyle Communities Annual Report 35 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 (b) Deferred income tax expense included in income tax expense comprises Decrease / (increase) in deferred tax assets Increase in deferred tax liabilities Total (c) Reconciliation of income tax to accounting profit: Accounting profit before tax Tax Add / (less): Tax effect of: - Share options expensed during year - Non-controlling interests - Tax loss adjustments - Under provision for income tax in prior year - Other Income tax expense (d) Current tax Current tax relates to the following: Opening balance Income tax payable Tax payments Under provision in prior year Current tax liabilities 2019 $ 2018 $ 423,741 (332,676) 17,058,522 17,284,556 17,482,263 16,951,880 2019 $ 2018 $ 79,651,025 75,479,942 30.00% 30.00% 23,895,308 22,643,983 266,484 - - - 426,032 139,027 (133,263) (160,257) 72,533 15,004 24,587,824 22,577,027 2019 $ 2018 $ 1,132,103 574,467 6,870,836 5,552,614 (7,029,005) (5,067,511) - 72,533 973,934 1,132,103 Lifestyle Communities Annual Report 36 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 (e) Deferred tax Deferred tax assets Capital raising costs Tax losses Provision for employee entitlements Accruals and business expenses Credited to equity - purchase of treasury shares Deferred tax assets Deferred tax liabilities Interest capitalised Investment property fair value adjustments Deferred tax liabilities Net deferred tax liability (f) Deferred tax assets not brought to account Capital tax losses 2.5 Cash Flow Information (a) Reconciliation of result for the year to cashflows from operating activities Operating profit after income tax Cash flows excluded from profit attributable to operating activities Non-cash flows in profit: -Depreciation -Amortisation -Share based payments -Fair value adjustment Changes in assets and liabilities: - (Increase)/decrease in trade and other receivables - (Increase) in other assets - (Increase)/decrease in inventories - Increase/(decrease) in trade and other payables - Increase in provisions - Increase/(decrease) in current tax - Increase in deferred tax Net cash flow from operating activities 2019 $ 2018 $ 12,236 274,344 306,185 18,354 921,103 249,908 1,455,141 1,247,328 340,253 375,207 2,388,159 2,811,900 836,394 497,581 70,922,548 54,202,839 71,758,942 54,700,420 69,370,783 51,888,520 324,241 240,000 2019 $ 2018 $ 55,063,201 52,902,915 703,698 252,916 888,280 544,696 82,606 459,679 (55,732,362) (57,396,731) (378,164) 520,425 (1,009,039) - (9,219,592) 5,494,366 (2,297,261) 187,589 (158,169) 290,985 142,918 557,636 17,482,263 16,951,881 5,783,360 20,551,376 Lifestyle Communities Annual Report 37 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 2.6 Trade and other receivables Other receivables 2019 $ 2018 $ 605,316 227,152 (a) 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. 2.7 Other current assets Security deposits Other assets Prepayments Total 2019 $ 2018 $ 787,271 958,750 78,528 401,836 343,634 70,040 1,824,549 815,510 (a) 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. 2.8 Trade and other payables Trade payables Customer deposits GST payable Other payables and accruals Contracted land Deferred revenue Total Note (a) (b) (c) (c) (e) (f) 2019 $ 2018 $ 1,486,479 1,839,570 637,900 2,177,715 402,911 481,421 5,428,500 6,277,594 29,323,325 48,877,906 126,654 154,008 37,405,769 59,808,214 (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) 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, Lifestyle Communities Annual Report 38 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 activities, which are disclosed as operating cash flows. (d) 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 and professional fees related to the GST audit currently being conducted by the Australian Taxation Office. For further details see Note 7.3. (e) Contracted land Includes amounts payable on two parcels of land for contracts entered prior to the reporting date (including stamp duty). All contracts are expected to settle in the 2020 financial year. (f) 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. 2.9 Segment Information 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. 3 Our business assets 3.1 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. Investment properties at fair value (a) Reconciliation of carrying amounts at the beginning and end of the period Opening balance Additions (contracted land and capitalised costs) Net unrealised gain from fair value adjustments Closing balance 2019 $ 2018 $ 399,750,455 303,572,686 2019 $ 2018 $ 303,572,686 211,294,274 40,445,407 32,052,107 55,732,362 60,226,305 399,750,455 303,572,686 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 independent valuations. Rates were taken directly from independent valuations for the six 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 six 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. Lifestyle Communities Annual Report 39 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 Investment properties (continued) 3.1 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 an independently assessed discount rate. 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 4.4. 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 Investment properties at cost 3.2 Fair value measurements (a) Fair value hierarchy 2019 $ 2018 $ 158,084,175 117,836,765 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 Level 3: Inputs for the asset or liability that are not based on observable market data 30 June 2019 Recurring Fair Value Measurements Investment properties Total assets measured at fair value 30 June 2018 Recurring Fair Value Measurements Investment properties Total assets measured at fair value Level 1 Level 2 Level 3 $ $ $ Total $ - - - - - - - - 399,750,445 399,750,445 399,750,445 399,750,445 303,572,686 303,572,686 303,572,686 303,572,686 (b) Valuation techniques and inputs used in level 3 fair value measurements Investment properties (i) 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. Lifestyle Communities Annual Report 40 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 (c) Significant unobservable inputs used in level 3 fair value measurements Investment properties (i) Rental capitalisation rates - rates were taken directly from the valuations for the six 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 - for all communities the Directors have adjusted the weekly rental rates adopted in prior year valuations 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 ($) Adopted Per valuations 196.44 - 202.92 196.44 - 202.92 Anticipated % expenses (as a percentage of rental income) 28.0% - 42.2% 28.0% - 42.2% Rental capitalisation rate (%) Rental values per unit ($) Deferred management fee discount rates (%) Deferred management fee values per unit ($) Valuation of undeveloped land (per hectare) ($'million) 7.0% 7.0% 84,730 - 108,341 84,730 - 108,341 13.00% - 13.25% 13.00% - 13.25% 31,229 - 89,247 31,229 - 89,247 0.19 - 2.20 0.19 - 2.20 (d) Valuation processes used for level 3 fair value measurements Investment properties (i) 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 independent valuations to assess whether rental capitalisation rates and weekly rental income should be adjusted. These adjustments are assessed 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. Lifestyle Communities Annual Report 41 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 (e) 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. Rental expense rate +2% -2% Rental capitalisation rate +0.50% -0.50% Deferred management fee per unit +5% -5% Land prices (undeveloped land) +10% -10% Post Tax Profit Higher/(Lower) Equity Higher/(Lower) 2019 $ 2018 $ 2019 $ 2018 $ (4,465,964) (3,415,472) (4,465,964) (3,415,472) 4,465,964 3,336,621 4,465,964 3,336,621 (9,937,497) (7,008,103) (9,937,497) (7,008,103) 11,466,343 7,924,779 11,466,343 7,924,779 4,106,731 3,464,013 4,106,731 3,464,013 (4,106,731) (3,464,013) (4,106,731) (3,464,013) 5,786,125 4,059,691 5,786,125 4,059,691 (5,786,125) (4,059,691) (5,786,125) (4,059,691) Lifestyle Communities Annual Report 42 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 Inventories 3.3 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. Current Housing Civils and infrastructure Total current Non-current Housing Civils and Infrastructure Total non-current Total 2019 $ 2018 $ 21,470,409 19,421,030 13,306,293 13,811,245 34,776,702 33,232,275 4,650,453 41,926 9,231,373 6,164,736 13,881,826 6,206,662 48,658,528 39,438,937 (a) Inventory expense Inventories recognised as an expense for the year ended 30 June 2019 totalled $89,716,228 for the Group (2018: $79,815,755). The expense has been included in the cost of sales line item. Inventory expense includes $27,953,534 for a share of the community infrastructure sold with each home (FY18 $26,810,436). 3.4 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 2019 40 years 4 to 25 years 2 to 3 years 4 to 7 years 2018 40 years 4 to 25 years 2 to 3 years 4 to 7 years Lifestyle Communities Annual Report 43 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 The assets' residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at each financial year end. (a) Movements in carrying amounts of property, plant and equipment Movement in the carrying amounts for each class of property, plant and equipment between the beginning and the end of the current financial year: Buildings $ Plant and Equipment Motor Vehicles Computer Equipment $ $ $ Total $ Year ended 30 June 2019 Balance at the beginning of the year 2,420,926 2,085,307 728,713 341,460 5,576,406 Additions Disposals Depreciation 735,411 1,568,269 232,975 455,505 2,992,160 - (222,841) - - (222,841) (78,665) (354,152) (97,348) (173,533) (703,698) Balance at the end of the year 3,077,672 3,076,583 864,340 623,432 7,642,027 At 30 June 2019 Cost Accumulated depreciation Net Carrying Amount 3,473,773 4,250,415 1,339,396 1,055,521 10,119,105 (396,101) (1,173,832) (475,056) (432,089) (2,477,078) 3,077,672 3,076,583 864,340 623,432 7,642,027 Buildings $ Plant and Equipment Motor Vehicles Computer Equipment $ $ $ Total $ Year ended 30 June 2018 Balance at the beginning of year 1,971,628 1,739,388 569,505 310,368 4,590,889 Additions Depreciation expense 505,213 652,313 235,226 137,461 1,530,213 (55,915) (306,394) (76,018) (106,369) (544,696) 2,420,926 2,085,307 728,713 341,460 5,576,406 At 30 June 2018 Cost Accumulated depreciation Net Carrying Amount 2,738,362 3,114,495 1,106,417 600,010 7,559,284 (317,436) (1,029,188) (377,704) (258,550) (1,982,878) 2,420,926 2,085,307 728,713 341,460 5,576,406 Lifestyle Communities Annual Report 44 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 4 How we fund the business and manage risks 4.1 Capital Management When managing capital, the Company’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. The Company 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. 4.2 Financial Risk Management Objectives and 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. 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. 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. Lifestyle Communities Annual Report 45 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 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 4.4. 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 Secured loans - bank finance Net exposure 2019 $ 2018 $ 4,981,887 8,585,136 100,000,000 40,000,000 95,018,113 31,414,864 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) Equity Higher/(Lower) 2019 $ 2018 $ 2019 $ 2018 $ (574,583) (219,904) (574,583) (219,904) 574,583 219,904 574,583 219,904 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. 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. Lifestyle Communities Annual Report 46 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 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 4.4. 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 less1 6-12 months 1-2 years 2-5 years2 Total 2019 $ 2018 $ 37,405,769 42,519,214 - - 17,289,000 - 100,000,000 40,000,000 137,405,769 99,808,214 (1) This amount is represented by the following financial liabilities: - $637,900 relates to customer deposits which typically convert to settlement within six months or less (2018: $2,177,715). - $126,654 relates to deferred revenue which will be bought to account within six month or less (2018: $154,008). - $7,322,591 relates to trade and other payables, refer to Note 2.8 for further detail (2018: $8,598,585). - $29,323,325 relates to amounts payable on two 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) 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. 4.3 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. Cash and cash equivalents 4.4 Interest-bearing loans and borrowings Secured loans - bank finance 2019 $ 2018 $ 4,981,887 8,585,136 2019 $ 2018 $ 100,000,000 40,000,000 Lifestyle Communities Annual Report 47 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 (a) Secured loans - bank finance maturity On 28 March 2019, the Company executed contracts with The Commonwealth Bank of Australia, National Australia Bank and HSBC Bank Australia to secure $225,000,000 of senior debt facilities under a common terms deed. The new facilities comprise a $60,000,000 tranche with a maturity of three years and a $165,000,000 tranche with a maturity of five years and replaces the previous $120,000,000 facility with Westpac Banking Corporation. As at reporting date the company has drawn $100,000,000 of the $225,000,000 facility. See note (c) 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 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 $225,000,000 facility is secured by the following: General Security Deeds between The Commonwealth Bank of Australia, National Australia Bank, HSBC Bank Australia and: - Lifestyle Communities Limited - Lifestyle Investments 1 Pty Ltd - Lifestyle Management 1 Pty Ltd - Lifestyle Developments 1 Pty Ltd - Lifestyle Investments 2 Pty Ltd - Lifestyle Management 2 Pty Ltd - Lifestyle Developments 2 Pty Ltd - Lifestyle Communities Investments Cranbourne Pty Ltd - Brookfield Village Management Pty Ltd; and - Brookfield Village Development Pty Ltd. Mortgage granted by Lifestyle Investments 1 Pty Ltd over the properties at Melton, Tarneit and Warragul. Mortgage granted by Lifestyle Investments 2 Pty Ltd over the properties at Shepparton, Hastings, Wollert, Geelong, Officer, Berwick Waters, Bittern, Ocean Grove, Mount Duneed, Kaduna Park and Wollert North. (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 The Commonwealth Bank of Australia, National Australia Bank and HSBC Bank Australia. Lifestyle Communities Annual Report 48 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 4.5 Contributed equity 104,545,131 Ordinary shares (30 June 2018: 104,545,131) 230,401 Treasury shares (30 June 2018: 237,231) Total (i) Reconciliation of ordinary shares Opening balance Repayment of CRES loan Closing balance (ii) Reconciliation of treasury shares Opening balance Purchase of treasury shares Vesting of employee shares Closing balance 2019 $ 2018 $ 64,523,267 64,523,510 (881,845) (715,366) 63,641,422 63,808,144 2019 2018 Number $ Number $ 104,545,131 64,523,510 104,545,131 63,919,070 - - - 604,440 104,545,131 64,523,510 104,545,131 64,523,510 2019 2018 Number $ Number $ 237,231 (715,366) 150,000 (547,889) (156,830) 381,410 230,401 (881,845) 174,086 180,325 (117,180) 237,231 (715,000) (534,091) 533,725 (715,366) (a) Ordinary shares Fully paid ordinary shares carry one vote per share and carry the right to dividends. 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. Lifestyle Communities Annual Report 49 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 4.6 Retained earnings and reserves (a) Movements in retained earnings were as follows Opening balance Profit for the year Dividends paid Closing balance (b) Reserves Opening balance Share based payments expense Vesting of employee shares Closing balance 4.7 Dividends (a) Dividends 2019 $ 2018 $ 139,018,048 90,518,119 55,063,201 52,681,734 (5,227,263) (4,181,805) 188,853,986 139,018,048 2019 $ 2018 $ 1,727,770 1,801,816 888,280 459,679 (419,799) (533,725) 2,196,251 1,727,770 2019 $ 2018 $ Dividends paid 5.0 cents per share (2018: 4.0 cents per share) fully franked 5,227,263 4,181,805 Dividends declared after balance date and not recognised Since balance date the directors have approved a dividend of 3.0 cents per share (2018: 2.5 cents per share) fully franked at 30% 3,136,354 2,613,628 (b) Franking account balance Franking account balance 2019 $ 2018 $ 17,542,713 13,301,326 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. Franked dividends declared or paid during the year were franked at the tax rate of 30%. Lifestyle Communities Annual Report 50 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 (c) Dividend considerations 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 FY19 community management cash flows delivered a sufficient surplus to declare and pay an interim fully franked dividend of 2.5 cent per share ($2,613,628) and declare a final fully franked dividend of 3.0 cents per share ($3,136,354). 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. 5 How we remunerate our employees and auditors 5.1 Employee benefits expense (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. (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 5.3 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. Wages and salaries Defined contribution superannuation expense Share based payments expense Movement in employee provisions Total 2019 $ 2018 $ 8,594,288 7,901,690 618,074 888,280 187,589 545,159 459,679 142,918 10,288,231 9,049,446 Lifestyle Communities Annual Report 51 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 5.2 Employee provisions Current Employee provisions Non-current Employee provisions 5.3 Share-based payments (a) Recognised share-based payment expenses Expenses arising pursuant to the EIS 2019 $ 2018 $ 888,517 667,254 132,100 165,774 2019 $ 2018 $ 888,280 459,679 (b) 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. 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 and remain employed up until the shares are allocated. Shares are allocated in September following the end of the target year and after the completion of the independent audit. Employees commencing employment with the Company after 1 July of the target year and entitles 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 will be issued in September following completion of the audit; 25% have a one-year service and ongoing performance requirements; and 50% have two-year service and ongoing performance requirements. Shares allocated to senior management personnel have the following service (or escrow) conditionals: • • 50% of shares will be issued in September following completion of the audit; and 50% have a one-year service and ongoing performance requirements. 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. 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 shares on-market. The Employee Share Trust has an independent share plan trustee and is not considered to be controlled by the Company. Lifestyle Communities Annual Report 52 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 (c) Shares granted pursuant to the EIS The following tables outlines shares granted pursuant to the EIS: Senior management Other staff Total Number of shares 2019 Number of shares 2018 Number of shares 2019 Number of shares 2018 '000 '000 '000 '000 Number of shares 2019 Number of shares 2018 Outstanding at the beginning of the year Granted during the year Vested during the year 130,000 101,250 60,000 90,000 89,575 72,045 15,436 89,575 219,575 173,295 75,436 179,575 (80,000) (20,000) (89,575) (15,436) (169,575) (35,436) Cancelled during the year (15,000) - - - (15,000) - Outstanding at the reporting date 136,250 130,000 72,045 89,575 208,295 219,575 (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 Cancelled during the year Outstanding at the reporting date Number of shares 2019 $ 2019 $ Number of shares 2018 $ 2018 $ 219,575 173,295 (169,575) (15,000) 208,295 3.13 5.78 3.13 4.06 5.09 75,436 179,575 (35,436) - 219,575 2.87 3.36 2.87 - 3.13 5.4 Key Management Personnel Remuneration Key Management Personnel remuneration included within employee expenses for the year is shown below: Short-term employee benefits Post-employment benefits Share-based payments Total 2019 $ 2018 $ 2,254,503 1,803,665 146,549 315,062 110,079 121,255 2,716,114 2,034,999 Richard Parker (Head of Sales) has been included in the Key Management Personnel for the 2019 financial year. Lifestyle Communities Annual Report 53 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 5.5 Auditors remuneration 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. 122,804 111,500 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. Total 249,805 102,035 372,609 213,535 2019 $ 2018 $ The auditor of Lifestyle Communities Limited is Pitcher Partners. Lifestyle Communities Annual Report 54 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 6 How we structure the business 6.1 Related party disclosures (a) Ultimate parent Lifestyle Communities Limited is the ultimate Australian parent entity. (b) Subsidiaries *The percentage of ownership interest held is equivalent to the percentage voting rights for all subsidiaries. Country of incorporation % Equity Interest Carrying value of parent entity's interest 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) 2019 2018 2019 % % $ 2018 $ 100 100 8,751,551 8,751,551 Australia Australia Australia 100 100 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Brookfield Development Trust (Trustee: Brookfield Village Development Pty Ltd) Australia 100 100 Lifestyle Communities Investments Cranbourne Pty Ltd Cameron Street Developments Pty Ltd Cameron Street Developments Unit Trust Australia 100 100 Australia 50 50 (Trustee: Cameron Street Developments Pty Ltd) Australia 50 50 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 (c) Loans from related parties There are no loans from related parties. Australia 100 100 Australia 100 100 Australia 100 100 Australia 50 50 Australia 50 50 Australia 100 100 Australia 100 100 Australia Australia 100 100 100 100 (d) Transactions with related parties There were no transactions with related parties in the current or prior years. - - 3 3 - - - - - 2 2 2 - - 120 120 3 3 - - 3 3 - - - - - 2 2 2 - - 120 120 3 3 8,751,809 8,751,809 Lifestyle Communities Annual Report 55 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 6.2 Non-controlling interests Details of subsidiaries with non-controlling interests (a) Cameron Street Developments Unit Trust The Group has a 50% interest (2018: 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 Current assets Total assets Current liabilities Current liabilities Net assets 2019 $ 2018 $ - - - - 444,709 444,709 444,709 - 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 Profit allocated to non-controlling interest (ii) Summarised financial information for subsidiaries' trust distributions: Trust distributions 2019 $ 2018 $ - - - 36 444,673 444,709 2019 $ 2018 $ - 222,355 2019 $ 2018 $ - 444,709 Lifestyle Communities Annual Report 56 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 (b) Lifestyle Chelsea Heights Unit Trust 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 on 22 December 2011. (i) Summarised financial information for subsidiary: Current assets Current assets Total assets Current liabilities Current liabilities Total liabilities Net assets 2019 $ 2018 $ - - - - - 8,330 8,330 8,330 8,330 - 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 loss after tax from continuing operations Loss allocated to non-controlling interest (ii) Summarised financial information for subsidiaries' trust distributions: Trust distributions 2019 $ 2018 $ - - - 9 (2,357) (2,348) 2019 $ 2018 $ - (1,174) 2019 $ 2018 $ - (2,348) Lifestyle Communities Annual Report 57 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 6.3 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 as they are part of a Closed Group as defined by the Corporations Act 2001: - Lifestyle Communities Limited - Lifestyle Investments 2 Pty Ltd - Lifestyle Developments 2 Pty Ltd - Lifestyle Management 2 Pty Ltd - Lifestyle Communities Investments Cranbourne Pty Ltd - Lifestyle Investments 1 Pty Ltd - Lifestyle Management 1 Pty Ltd - Lifestyle Developments 1 Pty Ltd - Brookfield Village Management Pty Ltd - Brookfield Village Development Pty Ltd Pursuant to the abovementioned legislative instrument, the Company and each of the subsidiaries entered into a Deed of Cross Guarantee on the 19th of June 2015 or have been added as parties to the Deed of Cross Guarantee by way of an Assumption Deed dated the 4th of June 2019. 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 Consolidated Statement of Profit and Loss and Other Comprehensive Income and Consolidated Statement of Financial Position for the Closed Group are the same as the financial statements for Lifestyle Communities Limited and its controlled entities. Lifestyle Communities Annual Report 58 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 6.4 Parent entity Required disclosures relating to Lifestyle Communities Limited as a parent entity: Consolidated Statement of Financial Position Assets Current assets Total Assets Liabilities Current liabilities Total Liabilities Equity Issued capital Reserves Retained earnings Total Equity Consolidated Statement of Profit or Loss and Other Comprehensive Income Net profit Total comprehensive income 2019 $ 2018 $ 138,478,903 97,487,482 140,142,974 107,144,764 2,503,505 220,056 69,221,402 39,850,505 62,514,600 63,451,129 2,196,251 6,210,721 1,727,770 2,115,360 70,921,572 67,294,259 8,037,672 1,263,774 8,037,672 1,263,774 Information not recognised in the financial statements 7 7.1 Lessor Commitments Operating lease commitments receivable The Group has entered 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: - no later than 1 year - between 1 year and 5 years - greater than 5 years Total minimum lease payments 2019 $ 2018 $ 23,691,790 19,640,361 94,767,161 78,561,444 1,919,880,982 1,597,919,783 2,038,339,933 1,696,121,588 Minimum lease payments were determined by measuring the current year's rentals and measuring this over the standard 90-year lease agreement. Lifestyle Communities Annual Report 59 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 7.2 Leasing Commitments 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 lease commitments payable Lease payments for operating leases are recognised as expenses on a straight-line basis over the term of the lease. The Group has entered a commercial property lease with its landlord for office premises. The lease has an initial term of five years from the commencement date being 1 February 2019. Future minimum rentals payable under non-cancellable operating leases as at balance date were as follows: - not later than one year - between one year and five years Total Contracted construction commitments Payable not later than one year 2019 $ 2018 $ 167,265 636,321 166,441 305,142 803,586 471,583 7,036,855 14,975,592 7.3 Contingencies The GST audit being conducted by the Australian Taxation Office ( ATO) continued throughout the period. The ATO issued a position paper during the period and notified the Company that, in its view: 1. 2. The Company is not entitled to input tax credits on land acquisitions; and The Company is not entitled to input tax credits on its community infrastructure expenditure. The Company’s position remains that it is entitled to an input tax credit for a part of the GST incurred on its land acquisitions and an input tax credit for the full amount of GST incurred on its community infrastructure expenditure. The Company has come to this view after taking independent advice from relevant subject matter experts, including senior counsel. During FY19 the ATO issued a notice of assessment for $670,000 which related to the input tax credit claimed on the purchase of the land for Lifestyle Lyndarum in June 2014. The Company immediately paid and lodged an objection to that assessment. By mutual agreement, the ATO and the Company have agreed to pause the objection process whilst the GST audit is completed. At the ATO's request, the Company agreed to extend the audit period. The Company will continue to engage with the ATO and has not increased the size of its provision since 30 June 2018. 7.4 Events Occurring After the Reporting Date The consolidated financial report was authorised for issue on 14 August 2019 by the board of directors. No matters or circumstances have arisen since the end of the financial year which significantly affected or could significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. 7.5 Change in Accounting Policy (a) Financial Instruments - Adoption of AASB 9 AASB 9 replaces AASB 139: Financial Instruments: Recognition and Measurement. The key changes introduced by AASB 9 in relation to the accounting treatment for financial instruments include: • • • • • simplifying the general classifications of financial assets into those measured at amortised cost and those measured at fair value; permitting entities to irrevocably elect, on initial recognition, for gains and losses on equity instruments not held for trading to be presented in other comprehensive income (OCI); simplifying the requirements for embedded derivatives, including removing the requirement to separate and measure embedded derivatives at fair value, in relation to embedded derivatives associated with financial assets measured at amortised cost; requiring entities that elect to measure financial liabilities at fair value, to present the portion of the change in fair value arising from changes in the entity’s own credit risk in OCI, except when it would create an ‘accounting mismatch’; introducing a new model for hedge accounting that permits greater flexibility in the ability to hedge risk, particularly with respect to Lifestyle Communities Annual Report 60 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 non-financial items; and • Introducing a new ‘expected credit loss’ impairment model (replacing the ‘incurred loss’ impairment model of previous accounting standard). The application of AASB 9 has not materially impacted the classification and measurement of the group’s financial assets and financial liabilities. (b) Revenue from Contracts with Customers - Adoption of AASB 15 AASB 15 provides (other than in relation to some specific exceptions, such as lease contracts and insurance contracts) a single source of accounting requirements for all contracts with customers, thereby replacing all current accounting pronouncements on revenue. The core principle of AASB 15 is that an entity recognises revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under the previous accounting standard, AASB 118 Revenue, revenue from the sale of goods was recognised when the significant risks and rewards of ownership of the goods transferred to the buyer, and revenue from the rendering of services was recognised by reference to the stage of completion of the transaction at the end of the reporting period. The Group’s recognition and measurement of revenue from contracts with customers has not changed as a result of the introduction of the new standard. Further details of the group’s accounting policies in relation to accounting for revenue from contracts with customers under AASB 15 are contained in note 2. Change in accounting policy in future periods 7.6 The Australian Accounting Standards Board (AASB) has issued a number of new and amended Accounting Standards and Interpretations that have mandatory application dates for future reporting periods, some of which are relevant to the Group. The Group has decided not to early adopt any of these new and amended pronouncements. The Group’s assessment of the new and amended pronouncements that are relevant to the Group but applicable in future reporting periods is set out below. Lifestyle Communities Annual Report 61 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Notes to the Financial Statements For the year ended 30 June 2019 AASB 16: Leases 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: (a) 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: i. ii. 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 (b) 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. AASB 16 mandatorily applies to annual reporting periods commencing on or after 1 January 2019 and will be first applied by the Group in the financial year commencing 1 July 2019. 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. The Company expects to record a right of use asset of approximately $1.2 million and a corresponding lease liability of approximately $1.1 million in relation to the lease on its support office space in South Melbourne. Lifestyle Communities Annual Report 62 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 Directors' Declaration The directors of the Company declare that: 1. the consolidated financial statements and notes for the year ended 30 June 2019 are in accordance with the Corporations Act 2001 and: comply with Accounting Standards, which, as stated in basis of preparation Note 1.1 to the consolidated financial statements, a. constitutes explicit and unreserved compliance with International Financial Reporting Standards (IFRS); and b. 2. give a true and fair view of the financial position and performance of the consolidated group; the Chief Executive Officer and Chief Finance Officer have given the declarations required by Section 295A that: the financial records of the Company for the financial year have been properly maintained in accordance with section 286 of the a. Corporations Act 2001; b. the consolidated financial statements and notes for the financial year comply with the Accounting Standards; and c. 3. the consolidated financial statements and notes for the financial year give a true and fair view. in the directors' opinion, there are reasonable grounds to believe that the Company 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 companies which are party to the deed of cross guarantee identified in Note 6.3 will be able to meet any obligations or liabilities to which they are, or may become subject to, by virtue of the deed. This declaration is made in accordance with a resolution of the Board of Directors. Tim Poole Chair James Kelly Managing Director Melbourne, 14 August 2019 Lifestyle Communities Annual Report 63 For personal use only LIFESTYLE 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 2019, 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) giving a true and fair view of the Company’s financial position as at 30 June 2019 and of its financial performance for the year then ended; and (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Company in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants “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 13, 664 Collins Street, Docklands VIC 3008 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 only LIFESTYLE 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 Valuation of investment properties - $399.7m How our audit addressed the key audit matter Refer to Note 3.1 This is the largest asset on the balance sheet, representing 86% of total assets. Our audit effort is largely focused on this balance due to the size and subjectivity of inputs. The valuation of the investment properties held at fair value is based on key inputs and assumptions employed by the valuers and where applicable may be supported by data provided by management. The Group engages external independent valuers to undertake valuations of each investment property at least every 2 years, with desktop valuations being obtained for the properties off-cycle. Our procedures included: • • • • valuation the key Evaluating the external property valuations obtained by management and identifying and assessing inputs and assumptions used in the valuation; Comparing and inputs assumptions to observable historic data where available; Ensuring that there in assumptions applied to valuations across communities; Conducting interviews with the valuation expert to evaluate their competence, capabilities and document their approach and methodology applied to the valuation. is consistency An independent Victorian Partnership ABN 27 975 255 196 Level 13, 664 Collins Street, Docklands VIC 3008 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 only LIFESTYLE 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 2019, 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 have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. An independent Victorian Partnership ABN 27 975 255 196 Level 13, 664 Collins Street, Docklands VIC 3008 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 only LIFESTYLE 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. 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 An independent Victorian Partnership ABN 27 975 255 196 Level 13, 664 Collins Street, Docklands VIC 3008 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 only LIFESTYLE COMMUNITIES LIMITED AND CONTROLLED ENTITIES ABN 11 078 675 153 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF LIFESTYLE COMMUNITIES LIMITED 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 14 to 23 of the directors’ report for the year ended 30 June 2019. In our opinion, the Remuneration Report of Lifestyle Communities Limited, for the year ended 30 June 2019 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. N R BULL Partner 14 August 2019 PITCHER PARTNERS Melbourne An independent Victorian Partnership ABN 27 975 255 196 Level 13, 664 Collins Street, Docklands VIC 3008 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 only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 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 5 August 2019. (a) Distribution of equity securities (i) Ordinary share capital 104,545,131 fully paid ordinary shares are held by 2,567 individual shareholders (b) Substantial shareholders The number of substantial shareholders and their associates are set out below: Fully paid ordinary shareholders James Kelly Cooper Investors Pty Ltd Washington H. Soul Pattinson and Company Limited (WHSP) Pengana Capital Group Limited Number Percentage Current at (last notification date) 12,077,001 11.55 17 July 2019 7,896,352 7.55 9 February 2017 7,465,093 7,465,093 7.14 7.14 5 February 2019 5 February 2019 AustralianSuper 5,727,700 5.48 28 September 2016 Australian Foundation Investment Company Limited 5,470,436 5.22 27 April 2016 Perlov family 5,386,637 5.15 16 September 2016 BT Investment Management Limited 5,299,706 5.07 14 March 2018 Voting rights All ordinary shares carry one vote per share without restriction. (c) The number of shareholders by range of shares and unmarketable parcel holders Holding 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,000 and over Unmarketable Parcels Minimum $ 500.00 parcel at $6.63 per share Lifestyle Communities Annual Report Total holders Units % of issued capital 1,071 928 266 247 55 Minimum Parcel Size 75 440,279 2,436,312 2,023,451 7,427,477 92,217,612 Holders 195 0.42 2.33 1.94 7.10 88.21 Units 3,216 69 For personal use only Lifestyle Communities Limited and Controlled Entities ABN: 11 078 675 153 (d) Twenty largest holders of quoted equity securities Number held % of issued shares 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 J P MORGAN NOMINEES AUSTRALIA LIMITED NATIONAL NOMINEES LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED MASONKELLY PTY LTD BNP PARIBAS NOMS PTY LTD CITICORP NOMINEES PTY LIMITED AUSTRALIAN FOUNDATION INVESTMENT COMPANY LIMITED DAKEN INVESTMENTS PTY LTD KELLY SUPERANNUATION FUND PTY LTD TRACEY RYAN INVESTMENTS PTY LTD ABN AMRO CLEARING SYDNEY NOMINEES PTY LTD SANDHURST TRUSTEES LTD ARMADA INVESTMENTS PTY LTD MIRRABOOKA INVESTMENTS LIMITED AUST EXECUTOR TRUSTEES LTD NETWEALTH INVESTMENTS LIMITED BELLWETHER INVESTMENTS PTY LTD B S CARTER INVESTMENTS PTY LTD CITICORP NOMINEES PTY LIMITED AUSTRALIAN SHAREHOLDER NOMINEES PTY LTD 11,501,656 10,262,063 9,573,730 9,116,265 8,650,955 5,398,609 5,228,014 5,149,539 2,116,801 1,977,650 1,816,101 1,676,885 1,608,229 1,421,101 1,369,398 1,317,363 1,204,619 1,161,439 920,000 768,435 11.00 9.82 9.16 8.72 8.27 5.16 5.00 4.93 2.02 1.89 1.74 1.60 1.54 1.36 1.31 1.26 1.15 1.11 0.88 0.74 Totals: Top 20 holders of ORDINARY FULLY PAID SHARES 82,238,852 78.66 Securities exchange The Company is listed on the Australian Securities Exchange. Lifestyle Communities Annual Report 70 For personal use only LIFESTYLE COMMUNITIES LIMITED Level 1, 1-17 Raglan Street South Melbourne VIC 3205 Ph: (03) 9682 2249 www.lifestylecommunities.com.au For personal use only

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