Redcape Hotel Group
Annual Report 2019

Plain-text annual report

Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Appendix 4E Preliminary final report 1. Company details Name of entity: ASRN: Reporting period: Previous period: Redcape Hotel Group Redcape Hotel Trust I (ASRN 629 354 614) and Redcape Hotel Trust II (ASRN 629 354 696) For the year ended 30 June 2019 For the year ended 30 June 2018 Redcape Hotel Trust I and Redcape Hotel Trust II were stapled on 2 July 2018. On guidance from the ASX, previous period numbers in this Appendix 4E reflect aggregated financials and the assumption that the trusts were stapled during the period. 2. Results for announcement to the market Revenues from ordinary activities Loss for the year attributable to the stapled security holders up down 17.4% 343.1% 285,215 (4,930) 242,885 2,028 Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 % Basic earnings per share Diluted earnings per share Stapled Consolidated 2019 Cents (0.93) (0.93) Comments Commentary and analysis of the result can be found in the ASX released results announcement and presentation. 3. Net assets and Net tangible assets Net assets per stapled security Net tangible assets per stapled security Reporting Period Cents Previous Period Cents 114.09 6.96 118.92 10.57 No. of stapled securities on issue at 30 June 2019 are 551,445,932 and 30 June 2018 470,312,074. 4. Control gained over entities Name of entities (or group of entities) In accordance to the stapling deed, securities in Redcape Hotel Trust I (RHT I) and Redcape Hotel II (RHT II) were stapled to one another on 2 July 2018. They were subsequently listed as a single security on the ASX on 30 November 2018. For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Appendix 4E Preliminary final report 5. Loss of control over entities Not applicable. 6. Distributions Current period Distribution for the quarter ended 30 September 2018 (paid 31 October 2018) Distribution for the quarter ended 31 December 2018 (paid 31 January 2019) Distribution for the quarter ended 31 March 2019 (paid 31 May 2019) Distribution for the quarter ended 30 June 2019 (to be paid 30 August 2019) Previous period Distribution for the quarter ended 30 September 2017 (paid 31 October 2017) (a) Distribution for the quarter ended 31 December 2017 (paid 31 January 2018) Distribution for the quarter ended 31 March 2018 (paid 31 May 2018) Distribution for the quarter ended 30 June 2018 (paid 31 August 2018) Amount per security Cents Franked amount per security Cents 2.205 2.205 2.158 2.182 - - - - Amount per security Cents Franked amount per security Cents 2.205 2.205 2.158 2.182 - - - - Distributions prior to the listing on the ASX as at 30 November 2018 were calculated on a pro rata basis for days held. (a) Calculated on a pro rata basis notwithstanding that distribution applied from 10 July 2017. Actual amount payable was 1.990 cents per security. There is no foreign sourced distribution for the current and previous period. 7. Distribution reinvestment plans The following dividend or distribution plans are in operation: The Distribution Reinvestment Plan (“DRP”) applied to the June quarter distributions. The key terms of the DRP are as follows: ● ● ● Securities acquired under the DRP rank equally with existing securities on issue. The price at which securities are allocated under the DRP is the average of the daily volume weighted average price of all sales of stapled securities of Redcape Hotel Group (ASX code: RDC) recorded on ASX for each of the first ten ASX trading days following the ASX trading day from and including the 3rd ASX trading day after the record date in respect of the distribution. Election for the DRP generally must be received by 5pm AEST on the final business day of each calendar quarter. In line with the DRP rules, the Responsible Entity resolved to extend the election cut-off date to 12 July 2019 for the June 19 quarter distribution. 8. Details of associates and joint venture entities Not applicable. For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Appendix 4E Preliminary final report 9. Foreign entities Details of origin of accounting standards used in compiling the report: Not applicable. 10. Audit qualification or review Details of audit/review dispute or qualification (if any): The financial statements have been audited and an unqualified opinion has been issued. 11. Attachments Details of attachments (if any): Stapling of the entities occurred on 2 July 2018. Due to this, Redcape’s General Purpose consolidated financial statement comparatives are for the RHT II group and do not include RHT I. In the interest of providing users with more relevant financial information, the Responsible Entity has supplemented the Annual Report with Special Purpose financial statements, which cover the activities of Redcape's 2019 financial year and provides aggregated comparative financial information for the 2018 financial year. 12. Signed Signed ___________________________ Date: 28 August 2019 Nicholas Roland Collishaw Chairman Sydney For personal use only A N N UA L R E P ORT – 30 J U N E 20 1 9 Redcape Hotel Group (ASX:RDC) is a leading hospitality group of 800+ dedicated people, who passionately serve 30 different communities across Australia’s east coast. Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II ASRN Redcape Hotel Trust I (ASRN 629 354 614) and Redcape Hotel Trust II (ASRN 629 354 696) FY19 For personal use onlyA N N UA L R E P ORT – 30 J U N E 20 1 9 CONTE NTS Key Highlights Cover Note Corporate directory Chairman's report CEO report Directors' report Auditor's independence declaration Statement of profit or loss and other comprehensive income Statement of financial position Statement of changes in equity Statement of cash flows Notes to the financial statements Directors' declaration Independent auditor's report to the members of Redcape Hotel Group Stapled Security Holders information Appendix - Special Purpose Financial Statements ("SPFS") SPFS - Statement of profit or loss and other comprehensive income SPFS - Statement of financial position SPFS - Statement of changes in equity SPFS - Statement of cash flows SPFS - Notes to the financial statements SPFS - Directors' declaration SPFS - Independent auditor's report to the members of Redcape Hotel Group Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II 1 2 3 4 6 10 20 21 22 23 24 25 61 62 67 69 70 71 72 73 74 107 108 For personal use onlyOur Promise is ‘People First’. A B OUT R E D CAPE A leading hospitality group with scalable systems and capable people, led by an experienced and proven management team driving growth through active management of a high quality real estate backed portfolio. . ’ t s r i F e l p o e P ‘ s i e s i m o r P r u O OU R VI S I ON Our vision is to enrich communities through our hospitality. Our promise is ‘People First’ – our staff, our customers, our securityholders. Our Assets Our Communities Our People ASX:RDC Annual Report 2019 For personal use only Central Hotel ANZAC Day Key Highlights. Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II For personal use onlyK E Y H I G H LI G HTS 30 June 2019 Financial Performance $46.5m1 Distributable earnings in line with PDS Statutory net loss after tax of $4.9m 8.8cps 8.75cps FY19 Distributable Earnings 8.8-9.0 cps guidance at IPO FY Distributions2 8.75 cps guidance at IPO Equates to 7.85% yield3 Portfolio $1.08b Portfolio value 32 venues includes 6 acquisitions and 1 divestment Capital Management $1.14 NAV per stapled security +$14.6m revaluation post IPO5 Progressed alternate use opportunities $21.6m Growth Capex4 Spend. Includes major refurbishment projects 38.0% 3.95x Gearing6 Lower end of 35%-45% target range Interest Coverage Ratio7 Cash generative business 1 Distributable Earnings defined as pro forma NPAT adjusted for non-cash items such as fair value adjustments, depreciation and amortisation and other unrealised and non-recurring items less maintenance capex. Refer to P13 in the Director’s Report for reconciliation. 2 Cumulative distributions over FY19 including pre-IPO distributions. 3 Based on RDC share price as at 28 June 2019. 4 Growth Capex includes major refurbishments, one off acquisition and tactical capital expenditure. 5 Uplift measured against previous valuations plus growth capital expenditure over the financial year. Statutory valuation uplift of $20.5m (excluding Belrose divestment reversal) over the financial year is higher due to treatment of depreciation expense and maintenance capital expenditure. 6 Gearing defined as total borrowings less cash as a percentage of total assets less cash. 7 Interest Cover Ratio (“ICR”) calculated as Operating EBITDA / Net finance costs less amortisation of borrowing costs (on a 12 month rolling basis). . ’ t s r i F e l p o e P ‘ s i e s i m o r P r u O 1 Key Highlights. ASX:RDCAnnual Report 2019For personal use only COVE R N OTE 30 June 2019 Redcape Hotel Trust I (ARSN 629 354 614) and Redcape Hotel Trust II (ARSN 629 354 696) were established on 13 June 2017, stapled together on 2 July 2018 and registered as managed investment schemes on 26 October 2018. ASIC granted relief to Redcape to exempt it from the requirement to prepare half-year accounts for the six- month period from their registration as managed investment schemes. In accordance with ASX’s requirements, Redcape released an Appendix 4D and Special Purpose interim financial report for the 6-month period ended 31 December 2018 with aggregated comparatives. Redcape has consulted with ASIC in relation to the period for its financial year ended 30 June 2019. In accordance with ASIC’s guidance and with reference to the Corporations Act, Redcape’s financial year ended 30 June 2019 is to be the 12-month period commencing on 1 July 2018. Redcape’s General Purpose Financial Statements (as required by Chapter 2M of the Corporations Act) set out Redcape’s financial information for its financial year being the 12 months to 30 June 2019. The comparative numbers in the financial statements for the 12 months to 30 June 2018 are the numbers for Redcape Hotel Trust II only because the trusts were not stapled during this period, hence only the comparatives of the parent entity can be used. The comparative period also commences on 10 July 2017, being the date Redcape was acquired by entities associated with Moelis Australia Ltd. In accordance with ASX’s requirements, Redcape has also provided a Special Purpose full year financial report, as an appendix to the Annual Report, for the 12-month period ending 30 June 2019 with full year aggregated comparatives. In contrast to the General Purpose financial report, the comparative period commences on 1 July 2017 using the scenario that Redcape was acquired by entities associated with Moelis Australia Ltd on this date. This comparative period is also the reference for both the Appendix 4E and the Directors’ Report. 2 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only COR P ORATE D I R E CTO RY 30 June 2019 Directors Mr Nicholas Collishaw Mr Daniel Brady Mr Andrew Ireland Mr David Groves Mr Hugh Thomson Responsible Entity Redcape Hotel Group Management Ltd ACN: 610 990 004 ("The Responsible Entity") Company secretary Ms Rebecca Ong Entity Information Registered office Principal place of business Share register Auditor Redcape Hotel Trust II ARSN: 629 354 696 ("RHT II" or the "Parent Entity") Redcape Hotel Trust I ARSN: 629 354 614 ("RHT I") together form the stapled entity; Redcape Hotel Group ("Redcape") Level 27 Governor Phillip Tower 1 Farrer Place Sydney NSW 2000 (02) 8288 5555 Level 1 Minskys Hotel 287 Military Road Cremorne NSW 2090 (02) 9719 4000 Boardroom Pty Ltd Level 12 Grosvenor Place 225 George Street Sydney NSW 2000 1300 737 760 KPMG Level 38 International Towers Sydney 300 Barangaroo Avenue Sydney NSW 200 Stock exchange listing Redcape Hotel Group stapled securities are listed on the Australian Securities Exchange (ASX code: RDC) Website www.redcape.com.au 3 ASX:RDCAnnual Report 2019For personal use only CHAI R MA N S’ R E P ORT 30 June 2019 Dear Securityholders, This has been an exciting year for Redcape Hotel Group (“Redcape” or “the Group”) including the successful listing on the Australian Securities Exchange on 30 November 2018. Delivering on our strategy Future growth opportunities We entered the public realm with a strong management platform and a clear strategy to deliver consistent earnings from our portfolio while pursuing growth through acquisition and capital investment. I am pleased to report that Redcape has executed well on this strategy delivering a strong pro forma operating EBITDA result up +21.3%1 year on year underpinned by the acquisition of six venues and solid like for like revenue growth of +3.3%. This sound performance delivered distributions of 8.75cps2 for the year consistent with the Group’s PDS guidance. Distributable earnings for the year came in at 8.80cps in line with the PDS forecast. This is a commendable result given the overall weaker market conditions resulting from consumer uncertainty in the lead up to both State and Federal elections. A general reduction in consumer spending impacted many businesses, however our result is a clear demonstration of the resilient nature of our business and our clear focus on delivering shareholder returns. Our robust operating business is underpinned by owning the majority of the real estate in which we operate. This freehold ownership structure sets us apart from many of our industry peers and provides us with the flexibility to respond quickly to customer preferences or regulatory changes through facility improvements. It also provides us with a valuable land bank for alternate use development opportunities. Having completed several venue upgrades this year, we already have a well-advanced pipeline of refurbishment opportunities in place for FY20 and beyond. These are designed to continue to deliver incremental earnings growth and underpin a potential uplift in valuations as we continue to improve the quality of our facilities within their local communities. Management has a strong track record of investing this type of growth capital and with FY19 refurbishments now complete, we continue to be optimistic about these growth opportunities that exist across the portfolio. Our growth proposition is further strengthened by the opportunity to unlock latent land value through alternate use across our freehold assets. Within our greater Sydney portfolio (22 freehold assets), approximately 73% of the site area is underutilised. With access to a depth of experience in asset optimisation, we are enthusiastic about the considerable opportunity to optimise land use and extract additional value for the Group. 1 Refer to reconciliation provided on P12 of the Directors report 2 Cumulative distributions over FY19 including pre-IPO distributions. 4 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only CHAI R MA N S’ R E P ORT 30 June 2019 Experienced management platform An optimistic outlook The business’ strong fundamentals have been enhanced by our industry leading management platform. This operating platform has enabled our local venues to benefit from the expertise of a management team with deep operational experience that is focused on strong risk management and governance whilst utilising the latest technology and data to pinpoint growth opportunities. Over recent years significant investment has been made in this management platform that has positioned Redcape well for future growth. A focus of this investment has been on talent development, and this is proving rewarding. The development of our people and creating programs that enable young, driven, hospitality professionals to gain a depth of experience across a number of disciplines, as well as gain exposure to broader organisational projects, is something that we believe will allow us to continue to attract high quality business leaders to both Redcape and its venues. Similarly, our investment in programs that improve social outcomes for the communities in which we operate continues to be a focus of Management. Our venues are the cornerstone of their local communities and we continue to look for opportunities to enhance our contribution through direct financial support and improved harm minimisation initiatives to enhance community life in these areas. As we move into FY20, we will continue our focus on the investment of growth capital through refurbishment and will continue our disciplined approach to capital management and portfolio optimisation. Our long-term growth is intrinsically linked to the relationship our venues have with the communities in which they operate. We remain committed to delivering excellent and responsible service, maintaining high quality facilities, and contributing positively to our communities. Redcape continues to offer a unique investment proposition as a growth company with a strong capital structure, industry leading systems and processes, capable people, and a stable earnings base that is underpinned by owning its real estate. On behalf of the Board of Directors I would like to thank our existing securityholders, our employees and the communities in which we operate for their continued support throughout the year. We are well placed for growth in FY20. Our business fundamentals remain strong and the sector remains attractive for investors. I am confident that Redcape, led by Dan Brady and his management team, has the right assets and capability, and is well placed to continue delivering value and positive returns to Securityholders. Nicholas Collishaw, Chairman 5 ASX:RDCAnnual Report 2019For personal use only CH I E F E X E CU TIV E OFFI CE R’ S R E P ORT 30 June 2019 FY19 Highlights $46.5m FY19 pro forma distributable earnings3 of $46.5m or 8.80cps in line with PDS guidance. Statutory net loss after tax of $4.9m 8.75cps Distributions of 8.75cps4 equating to a 7.85%5 yield +21.3% Pro forma operating EBITDA6 up +21.3% on FY18, driven by venue acquisitions and like-for-like7 (“LFL”) revenue growth +3.3% $1.08b $1.14 38.0% LFL Revenue grew +3.3% on FY18 Portfolio value of $1.08b Net Asset Value at $1.14 per stapled security underpinned by Valuations uplift of $14.6m8 over the full year Gearing9 of 38.0% at the lower end of target range of 35% - 45% 3 Distributable Earnings defined as pro forma NPAT adjusted for non-cash items such as fair value adjustments, depreciation and amortisation and other unrealised and non-recurring items less maintenance capex. Refer to P13 in the Directors’ Report for reconciliation. 4 Cumulative distributions over FY19 includes pre-IPO distributions. 5 Based on RDC share price as at 28 June 2019 6 Pro forma operating EBITDA defined as Earnings Before Interest, Tax, Depreciation and Amortisation, impairment charges and fair value adjustments. Refer to P12 of Directors’ Report for a reconciliation of pro forma to Statutory results. 7 Like for Like (“LFL”) revenue growth is based on venues that traded for the full year F18 and F19 and thus excludes any part year acquisitions. 8 Uplift measured against previous valuations plus growth capital expenditure over the financial year. Statutory valuation uplift of $20.5m (excluding Belrose divestment reversal) over the financial year is higher due to treatment of depreciation expense and maintenance capital expenditure. 9 Gearing defined as total borrowings less cash as a percentage of total assets less cash. 6 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only CH I E F E X E CU TIV E OFFI CE R’ S R E P ORT 30 June 2019 This year has been focused on the balance of delivering enhanced experiences for our customers across many of our venues, improving the learning and development of our people, investing accretive growth capital, and further strategic crafting of the portfolio whilst delivering Redcape’s financial objectives. There is a high level of pride in the team’s achievements as we successfully listed the group on the ASX during the period while remaining focused on delivering positive contributions to the communities in which we operate. Operating Performance The business is a highly cash generative business with operating cash flows in FY19 of $36.0m. Portfolio enhancement through acquisitions and capital investment drove a 21.3% increase in Redcape’s FY19 Pro forma Operating EBITDA for the period. Downward pressure on gaming margin as a result of increased player win rates across the market and some acquisitions taking longer to integrate than expected was offset by a reduction of costs resulting in a $2.3m overall improvement versus PDS forecast. Reflecting Moelis Australia Hotel Management Pty Ltd (“MAHM’s”) continued support of Redcape post listing, the Trust Manager waived $1.5m from its Hotel Operating fee, demonstrating its long-term alignment to Redcape Securityholders. Our existing portfolio performed well on a LFL basis, achieving +3.3% LFL revenue growth demonstrating the strength and defensive characteristics of the Redcape business. This pleasing operating result was attained against the backdrop of a soft consumer market causing variable trading conditions across the FY19 period, predominately due to macro factors leading to this weaker consumer sentiment. Redcape paid distributions of 8.75cps for the year consistent with the PDS guidance. Pro forma distributable earnings for the year came in at 8.80cps in line with the PDS forecast range of 8.80-9.00cps. Property Portfolio Portfolio Management FY19 was an active year acquiring and integrating six venues into our portfolio and investing $21.6m in growth capex. Both measures have enhanced the quality of the portfolio, diversified earnings and lay a strong platform to drive future earnings growth. The acquisition of three hotels south of Sydney comprising the Central Hotel, the Unanderra Hotel and the Figtree Hotel, as well as Sydney hotels, the Vauxhall Inn, the Australian Hotel and Brewery, and the Sun Hotel in Northern Queensland, were undertaken in the period. The Belrose Hotel in Sydney’s Northern Beaches was divested during the period, allowing for the recycling of capital into higher-growth opportunities. This disposal is consistent with the Groups strategy of portfolio optimisation. Redcape now has a portfolio of 3210 quality venues in strategic locations across New South Wales and Queensland. Refurbishment Program Redcape has a 5-year pipeline of refurbishment opportunities within the existing portfolio that will modernise the Group’s venues and make them more appealing to customers. Recent refurbishment activity has delivered IRR’s in excess of 20%11. 10 Excludes post reporting period exchange of contracts to acquire the Eden Brewhouse, Redbank Plains. 11 Based on Internal Rate of Return (“IRR”) achieved on a select group of venues (control group of 9 venue refurbishments) where sufficient data exists both pre and post capex investment to reliably establish returns. IRR’s are typically determined over a 5-year period. Assumptions used by Management included base line estimate of growth without any capital spend. 7 ASX:RDCAnnual Report 2019For personal use only CH I E F E X E CU TIV E OFFI CE R’ S R E P ORT 30 June 2019 $21.6m of growth capex was invested in FY19 which included the major refurbishments of the Leumeah Hotel, the Eastwood Hotel and the Cabramatta Hotel. All three have provided enhanced facilities commensurate with the local communities in which they operate and all three are performing well in these early stages of relaunch. Valuation A combination of independent and Directors valuations was completed during the period which saw a net uplift of $14.6m12. While uplifts outweighed downward revaluations, the Trust adjusted valuations for a small number of venues that had weaker earnings performance over the course of the year. Management executed a plan to improve the profitability of these venues and are pleased with the trajectory these venues are on. Alternative Uses Of the 32 venues, 31 are Freehold Going Concern assets which provide a valuable land bank and the flexibility to consider alternative uses for those sites to augment the hotels’ underlying profitability and unlock this latent land value. Importantly, freehold ownership enables Redcape Securityholders to retain the benefits associated with both property and hotel operator growth. Management has completed feasibility studies on four of its sites identified for potential alternate use development. Two developments were marked for alternate use development within the existing Local Environmental Plan. The Revesby Hotel, Revesby which sits approximately 100 metres from the Revesby train station on a site are of 2,150 sqm has been earmarked for a 144-bed scheme aged care/retirement site. The Cabramatta Hotel which sits within approximately 150 metres from the Cabramatta train station on a 4,308 sqm site has been earmarked for a 234 mixed use unit development. With the independent feasibility studies indicating material potential value uplift if the Group were to undertake the developments, management are continuing to progress preliminary planning and approvals whilst assessing options for extracting this latent land value and de-risking projects. Capital Management Redcape has a strong capital structure and a disciplined approach to the deployment of capital. Our balance sheet has been strengthened by the increase in property asset values, which are a result of an uplift in valuations. As at 30 June 2019, gearing13 of 38.0% was at the lower end of our target range of 35%-45% - and interest coverage ratio was calculated at 3.95times14. Post the reporting period, the Group successfully refinanced a $503m15 debt facility with enhanced terms, an extension of tenor to a weighted average of four years, and an expanded lender group with four financiers now in place versus three previously. As a result of closing out the existing hedge program and the refinance, we expect the all-in interest costs to improve ~100 bps from September 2019. Leumeah Hotel post refurbishment 12 Uplift measured against previous valuations plus growth capital expenditure over the financial year. Statutory valuation uplift of $20.5m (excluding Belrose divestment reversal) over the financial year is higher due to treatment of depreciation expense and maintenance capital expenditure. 13 Gearing defined as total borrowings less cash as a percentage of total assets less cash. 14 Interest Cover Ratio calculated as Operating EBITDA/Net finance costs, less amortisation of borrowing costs (on a 12-month rolling basis). 15 Includes $3.0m ancillary facility. 8 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only CH I E F E X E CU TIV E OFFI CE R’ S R E P ORT 30 June 2019 Our People Summary and Outlook To help ensure each of our venues reflects the needs of our local communities and to provide local employment opportunities, our venues employ approximately 800 staff mostly from the communities in which we operate. We strive to offer work environments that provide opportunities for growth and empowerment enabling our staff to thrive, excel and find fulfillment in their career. Staff in our venues are supported by a strong board and senior leadership team, all with extensive experience in hospitality business management. Our Community Focus We continue our focus on providing venues where local communities can come together in sociable environments. Our goal is to continue to provide the best possible customer experiences by focusing on the development of our staff, our appeal to customers and the enhancement of the communities in which we operate. Throughout the year we continued to provide direct financial support to 106 community groups, local schools, charities and sporting clubs across the 30 communities we serve. We spent over $1.0m in entertainment for local communities, appointed 192 local jobs, 74 through the development of internal staff and contributed $80.8m in state government taxes. We continue to remain focused on harm minimisation, taking a community centric approach to our entertainment offering and the responsible service of alcohol and gaming. We also continue to make advances in providing our customers with tools that promote greater awareness and management of gambling activity. Having now completed FY19 and our first year as a listed entity we have a strong opportunity set for growth and believe Redcape is well positioned for the future. Operating in a consumer facing sector with high regulatory and capital investment barriers to entry, the business has stable earnings base, strong cashflows and revenue growth prospects. The portfolio is difficult to replicate, comprising of strategically located, high-quality assets, most of which are on sites we own and are largely underutilised, providing an opportunity to unlock value through alternate use development. An optimized program of refurbishment opportunities has been marked for FY20 and an extensive pipeline beyond this perpetuates the growth opportunity set. These facility improvements generate earnings growth coupled with enhanced customer experiences for a total venue offering that is modern and appealing to local communities. Looking to FY20, we are forecasting distributable earnings to be greater than 9.0cps16. Distributions are expected to be maintained at 8.75cps, equating to a 7.85% yield. The pay-out ratio is to be consistent at 90-100% of distributable earnings. Like for like revenue growth is expected to track above CPI. Dan Brady, Chief Executive Officer Australian Hotel & Brewery 16 Subject to no change in economic conditions, no change to management fee construct and/or portfolio numbers. 9 ASX:RDCAnnual Report 2019For personal use onlyRedcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Directors' report 30 June 2019 The directors of the Responsible Entity present their report, together with the financial statements, of the consolidated entity (referred to hereafter as 'Redcape') consisting of RHT II, RHT I and the entities they controlled at the end of, or during, the year ended 30 June 2019. Directors The following persons were directors of the Responsible Entity of Redcape from their appointment this financial year and up to the date of this report, unless otherwise stated: Mr Nicholas Collishaw - appointed 27 September 2018 Mr Daniel Brady - appointed 29 October 2018 Mr Andrew Ireland - appointed 29 October 2018 Mr David Groves - appointed 27 September 2018 Mr Hugh Thomson - appointed 26 February 2016 Non-IFRS Disclosures The Group also utilises non-IFRS “Pro Forma” and other financial metrics such as Distributable earnings in its assessment and presentation of Group performance. In particular the Group references Pro forma Earnings Before Interest, Tax, Depreciation and Amortisation (“EBITDA”), Distributable Earnings per Security and Pro Forma Net Profit After Tax (“NPAT”). The directors believe the pro forma financial and distributable earnings information is useful to users as it: • reveals the underlying run rate business economics of the Group which enhances the reader’s understanding of past performance; • provides insight into Management’s decision making as Management uses these measures to run the business, • • allocate resources and make financial, strategic and operating decisions; forms the basis of the Group’s annual budgeting and internal forecasting processes; and forms the basis of the financial metrics relevant to the determination of variable components of executive and employee remuneration. The Pro forma and other financial metrics, such as Distributable earnings, are not prepared in accordance with International Financial Reporting Standards and are not audited. Differences in measurement can have both a positive and negative impact on the Pro Forma financial information presented. Specifically, some adjustments give rise to material reductions in underlying measures but align with the principles by which the Company views and manages itself internally. Principal activities Redcape is an ASX listed, leading Australian hotel business operating a portfolio of 32 hotels across NSW and QLD. Redcape owns 31 of the 32 hotels it operates as Freehold Going Concerns. The Hotels offer patrons: ● ● ● ● Gaming On-Premise Food and Beverage Off-Premise packaged liquor through retail bottle shops Corporate and Other Revenue Freehold Going Concern ownership gives Redcape the ability to invest in refurbishment opportunities as well as provide potential future capital gains from the real estate on which the hotels are situated. 10 10 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Directors' report 30 June 2019 Distributions Distributions paid/payable during the financial year were as follows: Final distribution for the quarter ended 30 September 2018 of 2.205 cents (FY18: 2.205 cents (a)) per unit Final distribution for the quarter ended 31 December 2018 of 2.205 cents (FY18: 2.205 cents) per unit Final distribution for the quarter ended 31 March 2019 of 2.158 cents (FY18: 2.158 cents) per unit Final distribution for the quarter ended 30 June 2019(b) of 2.182 cents (FY18: 2.182 cents) per unit Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 10,795 7,839 11,548 9,032 11,898 9,912 12,030 10,243 46,271 37,026 (a) Calculated on a pro rata basis notwithstanding that distribution applied from 10 July 2017. Actual payable was 1.990 cents per security. (b) On 24 June 2019 the directors declared a final dividend for the quarter ended 30 June 2019 of 2.182 cents per unit to be paid on 30 August 2019. Distributions prior to the listing on the ASX as at 30 November 2018 were calculated on a pro rata basis for days held. Review of operations The statutory loss for Redcape after providing for income tax amounted to $4.9 million (30 June 2018: profit of $2.0 million). ● ● ● ● ● ● ● Distributable earnings of $46.5 million or 8.80 cents per stapled security Distributions of $46.3 million or 8.75 cents per stapled security Pro forma operating EBITDA increased 21.3% to $67.1 million Operating cash flows of $36.0 million Portfolio value increased to $1,077.4 million from $906.2 million in FY18 Net Asset Value of $1.14 per stapled security Total capex of $25.2m of which $21.6 million related to growth capex and $3.7m for maintenance capex 11 11 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Directors' report 30 June 2019 Gaming Revenue On-Premise Revenue Off-Premise Revenue Corporate and Other Revenue Total Revenue (a) Cost of Sales (a) Gross profit Employment Costs Other Operating Costs Management Fees Pro Forma Operating EBITDA Listing costs and Performance fee Loss on Asset Revaluation Venue Acquisition costs (b) Gain on sale of venues Loss on sale of other non-current assets Restatement of management fees pre-IPO One-off Employee share grants Employment costs Other operating costs Statutory EBITDA Depreciation Statutory EBIT Net Financing costs Profit / (Loss) before tax Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 Change $'000 Change % 179,099 56,877 48,022 1,217 285,215 153,846 39,999 48,126 915 242,885 25,253 16,878 (104) 302 42,330 16.4% 42.2% (0.2%) 33.0% 17.4% (133,021) 152,194 (117,110) 125,775 (15,911) 26,419 (13.6%) 21.0% (38,522) (32,162) (14,421) 67,089 (20,562) (17,998) (7,631) 1,026 (523) 254 (199) - - 21,456 (11,360) 10,097 (29,487) (27,462) (13,511) 55,316 - - (31,509) 1,952 (605) 372 - (121) 340 25,745 (9,035) (4,700) (910) 11,773 (30.6%) (17.1%) (6.7%) 21.3% (20,562) (17,998) 23,878 (926) 82 (118) (199) 121 (340) (4,289) (100.0%) (100.0%) 75.8% (47.4%) 13.6% (31.7%) (100.0%) 100.0% (100.0%) (16.7%) (9,036) 16,709 (2,324) (6,612) (25.7%) (39.6%) (17,324) (7,227) (14,911) 1,798 (2,413) (9,025) (16.2%) (501.9%) Tax benefit Statutory Net Profit / (Loss) after tax 2,297 (4,930) 230 2,028 2,067 (6,958) 898.7% (343.1%) (a) Revised statutory mapping since 2018 resulting in Revenue, Cost of Sales and Expenses differing marginally from metrics listed in the PDS. (b) FY18 includes acquisition costs of $26.3 million for Redcape by the entities associated with Moelis Australia Ltd. 12 12 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Directors' report 30 June 2019 Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 Change $'000 Change % Statutory Net Profit / (Loss) after tax (4,930) 2,028 (6,958) (343.1%) Pro Forma adjustments Listing Costs and Performance Fee Venue Acquisition costs (a) Restatement of management fees pre-IPO One-off Employee share grants Employment costs Other operating costs Tax benefit / (expense) Pro Forma Net Profit after tax Add / (Deduct) non-cash & non-operating items Loss on Asset Revaluation Depreciation Venue Acquisition costs Gain on sale of venues Loss on sale of other non-current assets Amortisation of borrowing costs Maintenance capital expenditure Other non-cash items Tax expense Distributable Earnings Distributable Earnings per stapled security (Cents) 20,562 - (254) 199 - - (3,625) 11,951 17,998 11,360 7,631 (1,026) 523 486 (3,686) (43) 1,328 46,522 8.80 - 26,316 (568) - 121 (144) (999) 26,753 - 9,036 5,193 (1,952) 605 681 (4,648) 376 770 36,814 8.50 20,562 (26,316) 314 199 (121) 144 (2,626) (14,802) 100.0% (100.0%) 55.3% 100.0% (100.0%) 100.0% (262.9%) (55.3%) 17,998 2,324 2,438 926 (82) (195) 962 (419) 558 9,708 0.30 (100.0%) 25.7% 46.9% 47.4% (13.6%) (28.7%) 20.7% (111.4%) 72.5% 26.4% 3.5% (a) FY18 includes acquisition costs of $26.3 million for Redcape by the entities associated with Moelis Australia Ltd. Significant changes in the state of affairs Securities in RHT II and RHT I were stapled on 2 July 2018 in accordance with the stapling deed and are dealt with as a stapled security. For further details refer to Note 1 of the consolidated financial statements. RHT II and RHT I are domiciled in Australia and were registered as managed investment schemes on 26 October 2018 under the Corporations Act 2001. On 30 November 2018 Redcape Hotel Group listed on the Australian Securities Exchange (“ASX”). Redcape has acquired 6 venues and disposed of 1 venue during the year. They were all Freehold Going Concern venues. There were no other significant changes in the state of affairs of Redcape during the financial year. Matters subsequent to the end of the financial year Subsequent to 30 June 2019, Redcape refinanced its debt facilities resulting in an increased facility of $503.0 million (including $3.0 million ancillary facility) with a weighted average term of 4 years. As a result of the refinancing, in FY20 the hedge position of the existing finance facility will be closed out at a cost of approximately $4.0 million. Capitalised loan establishment costs of $0.5 million will be written off upon activation of the new facility in FY20. Post the end of the financial year, Redcape exchanged contracts to acquire the Eden Brewhouse Redbank Plains Queensland as part of the ongoing portfolio optimisation program. No other material matter or circumstance has arisen since 30 June 2019 that has significantly affected, or may significantly affect Redcape's operations, the results of those operations, or Redcape's state of affairs in future financial years. 13 13 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Directors' report 30 June 2019 Likely developments and expected results of operations Having now completed FY19 and our first year as a listed entity we have a strong opportunity set for growth and believe Redcape is well positioned for the future. Operating in a consumer facing sector with high regulatory and capital investment barriers to entry, the business has stable earnings base, strong cashflows and revenue growth prospects. The portfolio is difficult to replicate, comprising of strategically located, high-quality assets, most of which are on sites we own and are largely underutilised, providing an opportunity to unlock value through alternate use development. An optimized program of refurbishment opportunities has been marked for FY20 and an extensive pipeline beyond this perpetuates the growth opportunity set. These facility improvements generate earnings growth coupled with enhanced customer experiences for a total venue offering that is modern and appealing to local communities. Looking to FY20, we expect like-for-like revenue growth to track above CPI. We are forecasting distributions to be maintained in line with FY19 and distributable earnings to be greater than 9.0cps subject to no material change in economic conditions, standard management fee construct and/or portfolio numbers. Environmental regulation Redcape is not subject to any significant environmental regulation under Australian Commonwealth or State law. Information on directors Name: Title: Experience and expertise: Nicholas Collishaw Independent Non-Executive Director and Chairman Nicholas was appointed to the Board on 27 September 2018. Nicholas has over 35 years’ experience in Australian and Global real estate and funds management markets. He has considerable experience in the development and management of residential, hotel, commercial, retail, industrial and retirement assets. Nicholas is a Fellow of Australian Institute of Valuers, a Fellow of Royal Institute of Chartered Surveyors, a Graduate Member of FINSIA and the Institute of Company Directors. Nicholas is currently a Non-Executive Director of Centuria Capital Group ("Centuria") and was previously CEO – Listed Property Funds at Centuria. Other current directorships: Former directorships (last 3 years): None Special responsibilities: Interests in stapled securities: Prior to his time at Centuria, Nicholas held the position of CEO and Managing Director of Mirvac Group and successfully guided the business through the GFC and implemented a strategy of sustained growth for the Real Estate and Investment Company. Centuria Capital Group (ASX: CNI) Chairman of the Board and Member of the Audit, Risk & Compliance Committee Ordinary stapled securities – 100,000 14 14 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Directors' report 30 June 2019 Name: Title: Experience and expertise: Daniel Brady Executive Director Daniel was appointed to the Board on 29 October 2018. Daniel is currently Chief Executive Officer of Moelis Australia Hotel Management Pty Ltd (MAHM), the manager and hotel operator of Redcape. Prior to this, he was Chief Operating Officer at Redcape, a role which he assumed in October 2012. He has extensive operational experience and has held senior positions within listed, privately owned pub organisations and was the owner operator of a pub. Prior to joining Redcape, Daniel was National Operations Manager at National Leisure and Gaming Limited ("NLG"), a position he held for five years before being made Chief Executive Officer at NLG in January 2011. Daniel has previously held key industry positions as well as currently being a Director of the Liquor Stax Retail Group. Daniel completed an Advanced Management Program at Harvard Business School in 2016. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Interests in stapled securities: Chief Executive Officer (MAHM) Ordinary stapled securities – 1,480,000 Name: Title: Experience and expertise: Andrew Ireland Independent Non-Executive Director Andrew was appointed to the Board on 29 October 2018. Andrew is currently Chair of Clemenger Brisbane, Director of Sports Australia and Director of the Sydney Swans. Prior to this, Andrew was Managing Director and Chief Executive Officer (CEO) of Sydney Swans having been appointed as CEO in September 2009 after joining the club in 2002 as General Manager of Football. Since 1990, Andrew has been involved in the management of leading Australian sporting teams including a successful tenure as CEO of Brisbane Bears and Brisbane Lions (1990 – 2001). He led the Brisbane Lions to their first premiership in 2001 as CEO and has overseen a strong and successful football program and growth in commercial areas during his time at Sydney Swans. During both tenures as CEO, Andrew had ultimate responsibility for the AFL clubs’ substantial social clubs, which included bars, restaurants and EGMs. During his tenure at the Brisbane Lions, Andrew was appointed by the QLD Treasurer as a Director of The Golden Casket Corporation, overseeing a gaming entity in a highly regulated market. Andrew holds a Bachelor of Science from La Trobe University, is a Fellow of the Australian Institute of Company Directors and is a Life Member of the Australian Football League. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Interests in stapled securities: Member of the Audit, Risk & Compliance Committee Ordinary stapled securities – 50,000 15 15 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Directors' report 30 June 2019 Name: Title: Experience and expertise: David Groves Independent Non-Executive Director David was appointed to the Board on 27 September 2018. David has over 25 years’ experience as a company director. David is a non-executive director of Pengana Capital Group Limited, Pengana International Equities Limited and Pipers Brook Vineyard Pty Ltd. He is a former director of EQT Holdings Limited, Tassal Group Limited and GrainCorp Limited and a former executive with Macquarie Bank Limited and its antecedent, Hill Samuel Australia. David is a member of the Council of Wollongong University. David is a member of the Australian Institute of Chartered Accountants and a fellow of the Australian Institute of Company Directors and holds a Bachelor of Commerce from the University of Wollongong and a Master of Commerce at the University of NSW. Pengana Capital Group Limited (ASX: PCG), Pengana International Equities Limited (ASX: PIA) Other current directorships: Former directorships (last 3 years): Pyrolyx AG (ASX: PLX) Special responsibilities: Interests in stapled securities: Chairman of the Audit, Risk & Compliance Committee Ordinary stapled securities – 200,000 Name: Title: Experience and expertise: Hugh Thomson Hugh was appointed to the Board on 26 February 2016. Hugh is a Managing Director at Moelis Australia Limited (Moelis Australia) within its Advisory businesses. Prior to this, he was Chief Operating Officer of Moelis Australia. Hugh has over 24 years’ experience in Investment Management, with a particular emphasis on the acquisition of alternative assets, finance and operations in Australia across a range of industry sectors. Hugh’s previous roles include CFO and CEO of ING Real Estate Investment Management, COO of HiLife Health & Beauty and CFO of Industrie Clothing. Hugh has considerable expertise in managing ASX listed funds, including as an executive Board member and Chairman of investment committees and operational risk management committees. Hugh is a qualified chartered accountant and member of the Institute of Chartered Accountants in England and Wales and holds a Bachelor of Arts (Honours) from the University of East Anglia. Other current directorships: None Former directorships (last 3 years): None None Special responsibilities: Ordinary stapled securities – 50,000 Interests in stapled securities: 'Other current directorships' quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. 'Former directorships (last 3 years)' quoted above are directorships held in the last 3 years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. 16 16 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Directors' report 30 June 2019 Company secretary Ms Rebecca Ong was appointed to the position of Company Secretary in October 2018. Rebecca joined Moelis Australia as a Senior Legal Counsel in February 2018. She has over 13 years of experience in areas of corporate, regulatory and funds management. Prior to joining Moelis Australia, Rebecca was Regional Counsel with UBS, with primary responsibilities for advising its Asset Management businesses across Asia Pacific both from Sydney and Hong Kong. Rebecca holds a Bachelor of Commerce (Finance Major) / Bachelor of Laws from the University of New South Wales and is a Fellow with the Governance Institute of Australia. Meetings of directors The number of meetings of the Responsible Entity's Board of Directors ('the Board') held during the year ended 30 June 2019, and the number of meetings attended by each director were Mr Nicholas Collishaw Mr Daniel Brady Mr Andrew Ireland Mr David Groves Mr Hugh Thomson Full Board Audit and Risk Committee Attended Held Attended Held 8 8 8 8 7 8 8 8 8 8 3 * 3 3 * 3 * 3 3 * Held: represents the number of meetings held during the time the director held office. * Not a member of the committee Remuneration report Remuneration of the Responsible Entity is as per the Constitution of RHT I and RHT II. As the Responsible Entity is wholly owned by Moelis Australia Limited (Moelis Australia), Moelis Australia oversees the appointment of Directors to the Board of the Responsible Entity and in this connection sets Director remuneration. Remuneration of the Directors is paid either directly by the Responsible Entity or by entities associated with Moelis Australia. The Directors are not provided with any remuneration by the Trusts. Directors are not entitled to any equity interests in the Trusts or any rights to or options for equity interests in the Trusts as a result of their remuneration provided by the Responsible Entity. Corporate Governance Statement 'Redcape' is a stapled entity comprising of Redcape Hotel Trust I ARSN: 629 354 614 and Redcape Hotel Trust II ARSN: 629 354 696. Redcape Hotel Group Management Ltd (ACN 610 990 004) ('Responsible Entity') is the responsible entity of Redcape and the Board of the Responsible Entity in this capacity ('the Board') is responsible for the overall corporate governance of Redcape and its controlled entities. The Board has created a framework for managing Redcape, including adopting relevant internal controls, risk management processes and corporate governance policies and practices which it believes are appropriate for Redcape’s business and which are designed to promote the responsible management and conduct of Redcape. The Corporate Governance Statement sets out the key features of Redcape's governance framework and reports against the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations (3rd edition) ('ASX Principles and Recommendations'). The 4th edition ASX Principles and Recommendations apply to the financial years beginning on or after January 2020. Redcape is in the process of reviewing its corporate governance policies and practices against the 4th edition ASX Principles and Recommendations and has incorporated many of the new recommendations into its Corporate Governance Statement already. The policies and charters referred to in the Corporate Governance Statement are available via the 'Corporate Governance' section of Redcape's website which is available at WWW.REDCAPE.COM.AU 17 17 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Directors' report 30 June 2019 Indemnity and insurance of officers In accordance with the Constitution of RHT I and RHT II, the Responsible Entity is indemnified on a full indemnity basis in respect of all taxes, costs and losses which it may pay or incur, in exercising any of its powers, rights, or obligations in properly performing its duties in connection with RHT I and RHT II. All Directors of the Responsible Entity are appointed by Moelis Australia. Moelis Australia has agreed to indemnify all current and former Directors and company secretaries of the Responsible Entity against all liabilities to persons which arise out of the performance of their normal duties as a Director or Company Secretary to the extent permitted by law unless the liability relates to conduct involving willful misconduct, bad faith or conduct known to be in breach of law. During the financial year, RHT I and RHT II paid an insurance premium in respect of customary Directors' and Officers’ insurance coverage for the Responsible Entity. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnity and insurance of auditor The trusts have not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the trusts or any related entity against a liability incurred by the auditor. During the financial year, the trusts have not paid a premium in respect of a contract to insure the auditor of the trust or any related entity. Proceedings on behalf of the trust No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the trusts, or to intervene in any proceedings to which the trust is a party for the purpose of taking responsibility on behalf of the trusts for all or part of those proceedings. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in note 30 to the financial statements. The directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor's behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services as disclosed in note 30 to the financial statements do not compromise the external auditor's independence requirements of the Corporations Act 2001 for the following reasons: ● all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor's own work, acting in a management or decision-making capacity for the trust, acting as advocate for the trust or jointly sharing economic risks and rewards. ● Officers of the trust who are former partners of KPMG There are no officers of the trusts who are former partners of KPMG. Rounding of amounts Amounts have been rounded to the nearest thousand dollars unless otherwise stated, in accordance with ASIC Corporations (Rounding in Financial/Directors' Reports) Instrument 2016/191. Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out immediately after this directors' report. 18 18 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Directors' report 30 June 2019 Auditor KPMG continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the directors ___________________________ Nicholas Roland Collishaw Chairman 28 August 2019 Sydney ___________________________ Daniel John Brady Executive Director 19 19 ASX:RDCAnnual Report 2019For personal use only Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Redcape Hotel Group Management Ltd, as Responsible Entity of Redcape Hotel Group I declare that, to the best of my knowledge and belief, in relation to the audit of Redcape Hotel Group for the financial year ended 30 June 2019 there have been: i. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPM_INI_01 KPMG Cameron Roan Partner Sydney 28 August 2019 PAR_SIG_01 PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 20For personal use onlyRedcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Statement of profit or loss and other comprehensive income For the year ended 30 June 2019 Revenue Cost of sales Expenses Operating costs Management fees Net finance costs Employment costs Depreciation and amortisation expense Gain/(loss) on disposal of non-current assets Loss on asset revaluation Business acquisition costs Operating profit/(loss) Listing costs and performance fee Loss before income tax benefit Income tax benefit Loss after income tax benefit for the year Other comprehensive income Items that will not be reclassified subsequently to profit or loss Gain on the revaluation of land Items that may be reclassified subsequently to profit or loss Net change in the fair value of cash flow hedges taken to equity Other comprehensive income for the year, net of tax Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 Note 6 285,215 238,200 (133,021) (115,005) 7 8 9 15 15 35 (32,162) (14,166) (17,324) (38,720) (11,360) 502 (17,998) (7,631) (61,917) (12,217) (9,016) (28,938) (8,080) 511 - (4,879) 13,335 (1,341) 10 (20,562) - (7,227) (1,341) 11 2,297 185 (4,930) (1,156) 37,573 (3,216) 34,357 - - - Total comprehensive income for the year 29,427 (1,156) Profit/(loss) for the year is attributable to: Unitholders of Redcape Hotel Trust I Unitholders of Redcape Hotel Trust II Total comprehensive income for the year is attributable to: Unitholders of Redcape Hotel Trust I Unitholders of Redcape Hotel Trust II 10,691 (15,621) - (1,156) (4,930) (1,156) 45,048 (15,621) - (1,156) 29,427 (1,156) Basic earnings per share (cents) Diluted earnings per share (cents) 39 39 (0.93) (0.93) The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes 21 21 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II 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 Property, plant and equipment Intangible assets Deferred tax Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Employee benefits Distribution payable Total current liabilities Non-current liabilities Other payables Borrowings Derivative financial instruments Employee benefits Total non-current liabilities Total liabilities Net assets Equity Contributed equity Accumulated losses Equity attributable to the stapled security holders of RHT II Non-controlling interest Total equity Equity attributable to RHT I (non-controlling interest) Contributed equity Reserves Accumulated losses Total equity attributable to unitholders of RHT I (non-controlling interest) (a) Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 Note 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 16,981 3,936 5,130 3,319 29,366 20,537 1,415 5,104 2,849 29,905 486,601 590,757 15,645 1,093,003 57,502 278,461 12,674 348,637 1,122,369 378,542 38,749 1,708 12,030 52,487 430 436,561 3,489 255 440,735 28,641 1,432 - 30,073 13,302 136,534 - 240 150,076 493,222 180,149 629,147 198,393 235,545 (43,293) 192,252 436,895 199,549 (1,156) 198,393 - 629,147 198,393 318,469 161,923 (43,497) 436,895 - - - - a) RHT II stand-alone is the comparative therefore the RHT I (non-controlling interest) balance reflected is zero The above statement of financial position should be read in conjunction with the accompanying notes 22 22 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Statement of changes in equity For the year ended 30 June 2019 Contributed Accumulated equity $'000 losses $'000 Non- controlling interest $'000 Total equity $'000 RHT II Consolidated Balance at 1 July 2017 Loss after income tax benefit for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year - - - - - (1,156) - (1,156) Transactions with security holders in their capacity as security holders: Contributions of equity, net of transaction costs (note 25) Balance at 30 June 2018 199,549 - 199,549 (1,156) - - - - - - - (1,156) - (1,156) 199,549 198,393 Stapled Consolidated Balance at 1 July 2018 Arising due to stapling arrangement Profit/(loss) after income tax benefit for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with stapled security holders in their capacity as stapled security holders: Contributions of equity, net of transaction costs (note 25) Distributions paid (note 27) Issued capital $'000 Accumulated losses $'000 Non- controlling interest $'000 Total equity $'000 199,549 (1,156) - 198,393 - - - - (26,516) 387,410 360,894 (15,621) - 10,691 34,357 (4,930) 34,357 (15,621) 45,048 29,427 35,996 - - - 50,708 (46,271) 86,704 (46,271) Balance at 30 June 2019 235,545 (43,293) 436,895 629,147 The above statement of changes in equity should be read in conjunction with the accompanying notes 23 23 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Statement of cash flows For the year ended 30 June 2019 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Interest received Interest and other finance costs paid Income taxes paid Net cash from operating activities Cash flows from investing activities Payment for purchase of business, net of cash acquired Business acquisition transaction costs Payments for property, plant and equipment Proceeds from disposal of business Proceeds from disposal of property, plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of stapled securities Proceeds from borrowings Repayment of borrowings Stapled Securities issue transaction costs Distributions paid Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 Note 311,559 (257,638) 53,921 262,414 (245,186) 17,228 259 (18,183) - 135 (9,317) (1,632) 38 35,997 6,414 35 15 25 27 (153,349) (7,631) (25,182) 20,430 112 (306,863) (4,879) (14,739) 5,848 425 (165,620) (320,208) 89,757 119,000 (49,000) (3,724) (44,484) 203,849 283,275 (146,650) (6,143) - 111,549 334,331 (18,074) 35,055 20,537 - Cash and cash equivalents at the end of the financial year 12 16,981 20,537 The above statement of cash flows should be read in conjunction with the accompanying notes 24 24 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 1. General Information (a) Reporting Entity The Redcape Hotel Trust II ("RHT II") and Redcape Hotel Trust I ("RHT I") were stapled on 2 July 2018 such that the securities are effectively dealt with as a stapled security. The stapled securities of RHT I and RHT II (collectively “Redcape Hotel Group” or "Redcape") commenced trading as a single stapled security on the ASX on 30 November 2018 under the ticker code “RDC”. In accordance with AASB 3 Business Combinations one of the entities in the stapled structure is required to be identified as the parent for the purpose of preparing consolidated financial reports. In accordance with this requirement, RHT II was identified as the parent entity. Redcape is a for-profit entity and its principal activity is the ownership and operation of Hotels. There has been no significant change in the nature of the principal activity during the year. (b) Responsible Entity Redcape Hotel Group Management Ltd (“RHGM”) is the Responsible Entity of RHT I and RHT II effective 24 October 2018 (replacing Moelis Australia Asset Management Ltd). (c) Scheme Registration RHT I (ARSN 629 354 614) and RHT II (ARSN 629 354 696) are domiciled in Australia and were registered as managed investment schemes on 26 October 2018 under the Corporations Act 2001. (d) First-year report Redcape has consulted with ASIC in relation to the period for its financial year ended 30 June 2019. In accordance with ASIC’s guidance and with reference to the Corporations Act, Redcape’s financial year ended 30 June 2019 is to be the 12- month period commencing on 1 July 2018. Redcape’s General Purpose Financial Statements (as required by Chapter 2M of the Corporations Act) set out Redcape’s financial information for its financial year being the 12 months to 30 June 2019. The comparative numbers for the 12 months to 30 June 2018 are the numbers for Redcape Hotel Trust II consolidated only. The trusts were not stapled during this period; hence the comparatives exclude Redcape Hotel Trust I. Redcape has also provided a Special Purpose full year financial report for the 12-month period ending 30 June 2019 with full year aggregated comparatives. This can be seen in the appendix of the Annual Report. Note 2. Basis of preparation The Responsible Entity has prepared General Purpose consolidated financial statements for the year ended 30 June 2019 for the purpose of meeting the listing requirements of the Australian Securities Exchange ("ASX"). (a) Compliance Statement The General Purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board ('IASB'). The financial report has been prepared on a going concern basis. The consolidated financial report as at and for the year ended 30 June 2019 was approved by the directors of the Responsible Entity on 28 August 2019 25 25 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 2. Basis of preparation (continued) (b) Basis of measurement The financial statements have been prepared on the historical cost basis, except for the following that are measured at fair value: - land; and - derivative financial instruments. The methods used to measure fair values are discussed in the relevant notes (c) Functional and presentation currency The consolidated financial statements are presented in Australian dollars, which is Redcape's functional currency and amounts have been rounded to the nearest thousand dollars unless otherwise stated, in accordance with ASIC Corporations (Rounding in Financial/Directors' Reports) Instrument 2016/191. (d) Use of estimates and judgements The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying accounting policies. Estimates and judgements affect the application of policies and reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. (e) Going Concern The consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. At 30 June 2019, Redcape had current assets of $29.4 million and current liabilities of $52.5 million leaving a net deficit of working capital of $23.1 million. The directors of the Responsible Entity believe Redcape will continue to generate operating cash flows sufficient to meet current liability obligations. Note 3. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. New or amended Accounting Standards and Interpretations adopted Redcape has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') that are mandatory for the current reporting period. Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. The adoption of these Accounting Standards and Interpretations did not have any material impact on the financial performance or position of Redcape. The following Accounting Standards and Interpretations are most relevant to Redcape: AASB 9 Financial Instruments From 1 July 2018, Redcape has applied AASB 9 prospectively. The resulting accounting policies for Redcape's financial instruments are explained in further detail in Note 3. AASB 15 Revenue from Contracts with Customers From 1 July 2018, Redcape has applied AASB 15 prospectively. The resulting accounting policies for Redcape's revenue are explained in further detail in Note 3 Revenue Recognition. 26 26 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 3. Significant accounting policies (continued) Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of RHT II as at 30 June 2019 and the results of all subsidiaries for the year then ended. RHT II and its subsidiaries together are referred to in these financial statements as 'Redcape'. Subsidiaries are all those entities over which Redcape has control. Redcape controls an entity when Redcape is exposed to, or has rights to, variable returns from its involvement with the entity. Subsidiaries are fully consolidated from the date on which control is transferred to Redcape. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in Redcape are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries align with the policies adopted by Redcape. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Where Redcape loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. Redcape recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Operating segments Operating segments are presented using the 'management approach', where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers ("CODM"). Redcape operates wholly within one business segment being the ownership and operation of hotels in Australia. Revenue recognition Redcape recognises revenue as follows: Revenue from contracts with customers Revenue is recognised at an amount that reflects the consideration to which Redcape is expected to be entitled in exchange for transferring goods or services to a customer. For each contract with a customer, Redcape identifies the contract with a customer, identifies the performance obligations in the contract, determines the transaction price which takes into account estimates of variable consideration and the time value of money, allocates the transaction price to the separate performance obligations on the basis of the relative stand-alone selling price of each distinct good or service to be delivered, and recognises revenue when or as each performance obligation is satisfied in a manner that depicts the transfer to the customer of the goods or services promised. Variable consideration is not material in the context of Redcape's 'total revenue'. Gaming Revenue Gaming revenue is the net difference between gaming wins and losses and is recognised upon the outcome of the game at the close of business. Food and beverage revenue (On-Premise and Off-Premise) Food and beverage revenue is recognised at the point in time the goods are provided and payment is collected. Accommodation and other revenues Accommodation and other revenues are recognised at the point in time services are performed. Interest Interest income is recognised using the effective interest method. 27 27 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 3. Significant accounting policies (continued) Income tax RHT I Under current income tax legislation, RHT I is not liable for income tax provided unit holders are presently entitled to all of RHT I’s income at 30 June each year. RHT II The income tax expense or benefit for the period is the tax payable on that period's taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: ● When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or ● When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled, and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. RHT II and its wholly owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidation regime, effective July 2017 and are taxed as a single entity from that date. The head entity and each subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the 'separate taxpayer within group' approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group. These are recognised as amounts payable to or receivable from other entities in the tax consolidated group in conjunction with any tax funding arrangement amount. The members of the tax consolidated group have entered into a tax funding arrangement which sets out the funding obligations of members of the tax consolidated group in respect of tax amounts. The tax funding arrangement requires payments to or from the head entity equal to the current tax liability or asset assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity. The members of the tax consolidated group have also entered into a tax sharing agreement. The tax sharing agreement provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote. 28 28 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 3. Significant accounting policies (continued) In determining the amount of current and deferred tax RHT II takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. RHT II believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgements about future events. New information may become available that causes RHT II to change its judgement regarding the adequacy of existing tax assets and liabilities; such changes to tax assets and liabilities will impact tax expense in the period such a determination is made. Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses. Redcape has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue. Other receivables are recognised at amortised cost, less any allowance for expected credit losses. Inventories Inventories include food and beverages, these are costed on a weighted average basis and stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. Derivatives are classified as current or non-current depending on the expected period of realisation. Cash flow hedges Cash flow hedges are used to hedge Redcape's interest rate risk exposures. The effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income through the cash flow hedges reserve in equity, whilst the ineffective portion is recognised in profit or loss. Amounts taken to equity are transferred out of equity and included in the measurement of the hedged transaction when the forecast transaction occurs. Cash flow hedges are tested for effectiveness on a regular basis prospectively to ensure that each hedge is highly effective and continues to be designated as a cash flow hedge. If the forecast transaction is no longer expected to occur, the amounts recognised in equity are transferred to profit or loss. If the hedging instrument is sold, terminated, expires, exercised without replacement or rollover, or if the hedge becomes ineffective and is no longer a designated hedge, the amounts previously recognised in equity remain in equity until the forecast transaction occurs. 29 29 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 3. Significant accounting policies (continued) Property, plant and equipment Recognition and measurement With the exception of land, all other items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and capitalised borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised net within other income in profit or loss. Subsequent costs The cost of replacing a part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to Redcape, and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. Depreciation Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that Redcape will obtain ownership by the end of the lease term. The estimated useful lives are as follow: Freehold buildings Property improvements Furniture, fittings and equipment Software 40-150 years 7-40 years 7-15 years 4-7 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to Redcape. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. Any revaluation surplus reserve relating to the item disposed of is transferred directly to retained profits. Revaluation Land is recognised at fair value based on periodic valuations by external independent valuers and/or 6-month director valuations. A revaluation surplus is credited to other reserves in securityholders’ equity. Increases in the carrying amounts arising on revaluation of land are recognised in other comprehensive income and accumulated in other reserves in securityholders’ equity. To the extent that the increase reverses a decrease previously recognised in profit or loss, the increase is first recognised in profit or loss. Decreases that reverse previous increases of the same asset are first recognised in other comprehensive income to the extent of the remaining surplus attributable to the asset. All other decreases are charged to profit or loss. 30 30 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 3. Significant accounting policies (continued) Intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Gaming licences Separately acquired Gaming licences are shown at historical cost. Gaming licences acquired in a business combination are recognised at fair value at the acquisition date. They have an indefinite useful life and are subsequently carried at cost less accumulated impairment losses. Gaming licenses are not amortised but tested for impairment annually, or more frequently if events or changes in circumstances indicate that they might be impaired, and are carried at cost less accumulated impairment losses. Liquor licences Separately acquired Liquor licences are shown at historical cost. Liquor licences acquired in a business combination are recognised at fair value at the acquisition date. They have an indefinite useful life and are subsequently carried at cost less accumulated impairment losses. Liquor licenses are not amortised but tested for impairment annually, or more frequently if events or changes in circumstances indicate that they might be impaired, and are carried at cost less accumulated impairment losses. Impairment Non-financial assets Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset's fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. Financial assets Redcape recognises a loss allowance for expected credit losses on financial assets which are either measured at amortised cost. Redcape has adopted a lifetime expected loss allowance in estimating expected credit losses to trade receivables. These provisions are considered representative across all customers of Redcape based on recent sales experience, historical collection rates and forward-looking information that is available. Trade and other payables These amounts represent liabilities for goods and services provided to Redcape prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost, are unsecured and are not discounted. 31 31 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 3. Significant accounting policies (continued) Loans and borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Where there is an unconditional right to defer settlement of the liability for at least 12 months after the reporting date, the loans or borrowings are classified as non-current. Finance costs Finance costs are expensed in the period in which they are incurred. Finance costs comprise interest expense on borrowings, using the effective interest rate method, and unwinding of the discount on provisions. Provisions Provisions are recognised when Redcape has a present (legal or constructive) obligation as a result of a past event, it is probable Redcape will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, considering the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. Employee benefits Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. Other long-term employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement. For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data. Issued capital Ordinary stapled securities are classified as equity. 32 32 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 3. Significant accounting policies (continued) Incremental costs directly attributable to the issue of new stapled securities or options are shown in equity as a deduction, net of tax, from the proceeds. Distributions Distributions are recognised when declared during the financial year and no longer at the discretion of the trust. Provision is made for the amount of any distribution declared, being appropriately authorised and no longer at the discretion of the trust, on or before the end of the financial year but not distributed at the reporting date. Business combinations The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued, or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at the proportionate share of identifiable net assets of the acquiree. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, Redcape assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, Redcape's operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Where the business combination is achieved in stages, Redcape remeasures its previously held equity interest in the acquiree at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition-date, but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquiree, if any, the consideration transferred and the acquirer's previously held equity interest in the acquirer. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition-date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. Goods and Services Tax ('GST') and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. 33 33 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 3. Significant accounting policies (continued) Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by Redcape for the annual reporting period ended 30 June 2019. Redcape's assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to Redcape, are set out below. AASB 16 Leases This standard is applicable to annual reporting periods beginning on or after 1 January 2019. The standard replaces AASB 117 'Leases' and for lessees will eliminate the classifications of operating leases and finance leases. Subject to exceptions, a 'right-of-use' asset will be capitalised in the statement of financial position, measured at the present value of the unavoidable future lease payments to be made over the lease term. The exceptions relate to short-term leases of 12 months or less and leases of low-value assets (such as personal computers and small office furniture) where an accounting policy choice exists whereby either a 'right-of-use' asset is recognised or lease payments are expensed to profit or loss as incurred. A liability corresponding to the capitalised lease will also be recognised, adjusted for lease prepayments, lease incentives received, initial direct costs incurred and an estimate of any future restoration, removal or dismantling costs. Straight-line operating lease expense recognition will be replaced with a depreciation charge for the leased asset (included in operating costs) and an interest expense on the recognised lease liability (included in finance costs). In the earlier periods of the lease, the expenses associated with the lease under AASB 16 will be higher when compared to lease expenses under AASB 117. However, EBITDA results will be improved as the operating expense is replaced by interest expense and depreciation in profit or loss under AASB 16. For classification within the statement of cash flows, the lease payments will be separated into principal (financing activities) and interest (either operating or financing activities) component. For lessor accounting, the standard does not substantially change how a lessor accounts for leases. The consolidated entity will adopt this standard from 1 July 2019 and its impact on adoption is expected to result in total lease assets increasing by approximately $23.8 million and total lease liabilities increasing approximately $25.6 million. Deferred tax asset that arises as a result of both the internal and external leases that will not be eliminated on consolidation is by approximately $9.5 million. Note 4. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, which management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. Judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Valuation of land The fair value of land is reviewed regularly by management with reference to external independent valuations, recent offers and market conditions existing at reporting date, using generally accepted market practices. Then critical assumptions underlying management’s estimates of fair value are those relating to the capitalisation rate and adopted earnings. If there is any change in these assumptions or economic conditions, the fair value of the land may differ. Fair value measurement hierarchy Redcape is required to classify all assets and liabilities, measured at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3: Unobservable inputs for the asset or liability. Considerable judgement is required to determine what is significant to fair value and therefore which category the asset or liability is placed in can be subjective. 34 34 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 4. Critical accounting judgements, estimates and assumptions (continued) Goodwill and other indefinite life intangible assets Redcape tests annually, or more frequently if events or changes in circumstances indicate impairment, whether goodwill and other indefinite life intangible assets have suffered any impairment, in accordance with the accounting policy stated in Note 3. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions, including estimated discount rates based on the current cost of capital and growth rates of the estimated future cash flows. Impairment of non-financial assets other than goodwill and other indefinite life intangible assets Redcape assesses impairment of non-financial assets other than goodwill and other indefinite life intangible assets at each reporting date by evaluating conditions specific to Redcape and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves fair value less costs of disposal or value-in-use calculations, which incorporate a number of key estimates and assumptions. Note 5. Operating segments Identification of reportable operating segments Redcape operates as one business segment being the owner and/or operator of Hotels, and in one geographic segment being Australia. These operating segments are based on the internal reports that are reviewed and used by the Board of Directors (who are identified as the Chief Operating Decision Makers ('CODM')) in assessing performance and in determining the allocation of resources. There is no aggregation of operating segments. The CODM reviews EBITDA (earnings before interest, tax, depreciation and amortisation). The accounting policies adopted for internal reporting to the CODM are consistent with those adopted in the financial statements. The information is reported to the CODM at the end of each period. Note 6. Revenue Disaggregation of revenue The disaggregation of revenue from contracts with customers is as follows: Major revenue streams Gaming revenue On-premise revenue Off-premise revenue Corporate and other revenue Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 179,099 56,877 48,022 1,217 150,918 39,268 47,308 706 285,215 238,200 All major revenue streams are within Australia and timing of revenue recognition is when goods or services transferred. 35 35 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 7. Operating costs Administrative expenses Advertising and marketing expenses Operating expenses Repairs and maintenance expenses Property outgoing expenses Rental expenses Note 8. Management fees Hotel operating fee Asset management fee Note 9. Net finance costs Finance income Finance costs 36 36 Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 3,287 5,082 11,771 2,161 8,613 1,248 2,161 3,758 9,541 1,826 6,991 37,640 32,162 61,917 Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 9,138 5,028 9,389 2,828 14,166 12,217 Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 (259) 17,583 (136) 9,152 17,324 9,016 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 10. Listing costs and performance fee Listing costs (a) Performance fee (b) Total listing costs and performance fee Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 6,762 13,800 20,562 - - - (a) Expensed costs associated with listing Redcape on the ASX. (b) Fee payable to the Responsible Entity, in its personal capacity, on the overall performance of Redcape and realised upon IPO event. Comprises fee of $13.5 million plus non-claimable GST of $0.3 million. Note 11. Income tax benefit Income tax benefit Deferred tax - origination and reversal of temporary differences Aggregate income tax benefit Deferred tax included in income tax benefit comprises: Increase in deferred tax assets (note 17) Numerical reconciliation of income tax benefit and tax at the statutory rate Loss before income tax benefit Tax at the statutory tax rate of 30% Trust loss not subject to tax Non-deductible expenses Income tax benefit Amounts credited directly to equity Deferred tax assets (note 17) Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 (2,297) (2,297) (185) (185) (2,297) (185) (7,227) (1,341) (2,168) (402) (787) 658 - 217 (2,297) (185) Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 (674) (1,843) 37 37 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 12. Current assets - cash and cash equivalents Cash and cash equivalents Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 16,981 20,537 Cash and cash equivalents include cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less. Note 13. Current assets - trade and other receivables Trade receivables Other receivables (a) (a) Includes receivables from supplier rebates. Allowance for expected credit losses There was no expense for expected credit losses for the year ended 30 June 2019. Note 14. Current assets - other current assets Prepayments Acquisition costs Capitalised loan establishment costs Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 514 3,422 81 1,334 3,936 1,415 Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 2,760 - 559 1,388 1,388 73 3,319 2,849 38 38 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 15. Non-current assets - property, plant and equipment Land - at valuation Buildings - at cost Less: Accumulated depreciation Property improvements - at cost Less: Accumulated depreciation Furniture, fittings & equipment - at cost Less: Accumulated depreciation Work in progress - at cost Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 351,648 351,648 59,505 (2,033) 57,472 37,189 (2,615) 34,574 41,869 (9,691) 32,178 - - - - - 24,957 (1,420) 23,537 29,946 (4,530) 25,416 10,729 8,549 486,601 57,502 39 39 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 15. Non-current assets - property, plant and equipment (continued) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Land Building Property improvement Furniture, fittings & equipment Work in progress RHT II Consolidated $'000 $'000 $'000 $'000 $'000 Balance at 1 July 2017 Disposals Disposal - business Additions Additions - business acquisitions Transfers in/(out) Depreciation expense Stapled Consolidated Balance at 30 June 2018 Disposals Disposal - business (a) Additions Additions - business acquisitions (a) Revaluation increments (b) Adjustment arising from stapling arrangement Transfers in/(out) Depreciation expense - - - - - - - - - (1,821) - 40,756 20,453 292,260 - - - - - - - - - - - (4,841) 86 16,751 - 46,804 - (1,328) - (250) (199) 689 22,529 2,305 (1,537) 23,537 (839) (264) 3,518 - - - 10,634 (2,012) - (756) (573) 5,091 26,704 1,493 (6,543) 25,416 (133) (710) 6,513 6,975 - - 2,137 (8,020) Total $'000 - (1,028) (802) 14,739 52,673 - (8,080) 57,502 (972) (7,750) 25,182 64,482 20,453 - (22) (30) 8,959 3,440 (3,798) - 8,549 - (114) 15,065 - - - (12,771) - 339,064 - (11,360) Balance at 30 June 2019 351,648 57,472 34,574 32,178 10,729 486,601 (a) Note 35 details treatment of business combination and disposal. (b) Net revaluation uplift of $20.5 million includes gain of $38.5 million recognised in the asset revaluation reserve offset by a loss of $18.0 million recognised in the income statement. Gain on revaluation of land of $37.6 million in other comprehensive income includes the reserve released on the sale of Belrose Hotel. Valuations of land The basis of the valuations of land is fair value. A portion of the land was last revalued on 31 May 2019 based on independent external assessments by a professionally qualified valuer, having recent experience in the location and category of land being valued. Land is also revalued by the directors each half year where an independent valuation has not been sought. The directors do not believe that there has been a material movement in fair value since the revaluation date. Valuations are based on current prices for similar properties in the same location and condition. Land stated under the historical cost convention If land and buildings were stated under the historical cost convention, the amounts would be as follows: Land - at cost 40 40 Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 204,233 204,233 - - Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 16. Non-current assets - intangible assets Goodwill - at cost Gaming and liquor licences - at cost Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 327,714 278,461 263,043 - 590,757 278,461 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: RHT II Consolidated Balance at 1 July 2017 Additions - business acquisitions Disposals Stapled Consolidated Balance at 30 June 2018 Additions - business acquisitions (note 35) Disposals (a) Adjustment arising from stapling arrangement Gaming and liquor licences Goodwill $'000 $'000 Total $'000 - 283,403 (4,942) 278,461 56,275 (7,022) - - - - - 283,403 (4,942) - 37,423 (5,509) 231,129 278,461 93,698 (12,531) 231,129 Balance at 30 June 2019 327,714 263,043 590,757 (a) Relates to disposal of Belrose hotel. Refer disposal commentary in note 35. Impairment testing Goodwill is allocated to the group of cash-generating units which in total reflect Redcape’s operating segment. The recoverable amount of Redcape's goodwill has been determined by a value-in-use calculation using a discounted cash flow model, based on a 1 year projection period approved by management and extrapolated for a further 4 years using a steady rate, together with a terminal value applied to the forecast fifth year after tax cashflows. Management has based the value-in-use calculations on the historical performance and future prospects of the business as reported to the CODM, taking into consideration the like-for-like historical growth. As a result of the value-in-use calculation, no impairment of goodwill has been recorded in the Financial Statements. Key assumptions are those to which the recoverable amount of an asset or cash-generating units is most sensitive. The following key assumptions were used in the value-in-use calculations: 41 41 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 16. Non-current assets - intangible assets (continued) Discount rate (pre-tax) EBITDAR growth rate Terminal value growth rate 2019 % 2018 % 8.1% 3.0% 3.0% 8.7% 3.0% 3.0% The pre-tax discount rate of 8.1% reflects management’s estimate of the time value of money and Redcape’s weighted average cost of capital adjusted for, the risk-free rate and the volatility of the share price relative to market movements. Management believes the projected 3% growth rate is prudent and justified, based on the like-for-like historical growth. Sensitivity Management believes that any reasonably possible change in the key assumptions used would not cause the cash- generating unit’s carrying amount to exceed its recoverable amount and result in a material impairment based on current economic conditions and CGU performance The below table shows the key assumptions used in the value in use calculation and the amount by which each key assumption must change in isolation in order for the estimated recoverable amount to be equal to its carrying value. Assumptions used in value in use calculation Rate required for recoverable amount to equal carrying value (a) (a) Each rate is determined in isolation. Terminal value % Pre-tax discount rate % 3.0% 1.7% 8.1% 9.2% 42 42 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 17. Non-current assets - deferred tax Deferred tax asset comprises temporary differences attributable to: Amounts recognised in profit or loss: Tax losses Property, plant and equipment Employee benefits Accrued expenses Straight-line lease liability Over market rent (Onerous rent) liability Transaction costs Other items Deferred tax asset Movements: Opening balance Credited to profit or loss (note 11) Credited to equity (note 11) Additions through business combinations Closing balance Note 18. Current liabilities - trade and other payables Trade payables Accrued interest Performance fee Other payables State Government taxes Over market rent (Onerous rent) (a) Straight-line lease liability (a) Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 4,975 1,249 589 163 1,659 2,360 4,636 14 1,770 1,002 501 584 1,763 2,928 4,092 34 15,645 12,674 12,674 2,297 674 - - 185 1,843 10,646 15,645 12,674 Stapled Consolidated 2019 $'000 Stapled Consolidated 2019 RHT II Consolidated 2018 $'000 RHT II Consolidated 2018 3,972 1,944 6,400 8,125 18,308 - - 3,056 - - 6,930 16,321 1,894 440 38,749 28,641 (a) Leases in which a significant portion of the risks and rewards of ownership are not transferred to Redcape as lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. 43 43 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 19. Current liabilities - employee benefits Annual leave Long service leave Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 1,453 255 1,208 224 1,708 1,432 Amounts not expected to be settled within the next 12 months The current provision for employee benefits includes all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount is presented as current, since Redcape does not have an unconditional right to defer settlement. However, based on past experience, Redcape does not expect all employees to take the full amount of accrued leave or require payment within the next 12 months. The following amounts reflect leave that is not expected to be taken within the next 12 months: Employee benefits obligation expected to be settled after 12 months 255 240 Note 20. Current liabilities - distribution payable Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 Distributions Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 12,030 - Distributions The provision represents distributions declared, being appropriately authorised and no longer at the discretion of the trust, on or before the end of the financial year but not distributed at the reporting date. Carrying amount at the start of the year Additional provisions recognised Payments relating to prior period Payments relating to current period Carrying amount at the end of the year 44 44 Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 10,243 46,271 (10,243) (34,241) 12,030 - - - - - Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 21. Non-current liabilities - other payables Straight line lease liability Over market rent (onerous rent) provision Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 430 - 5,436 7,866 430 13,302 Leases in which a significant portion of the risks and rewards of ownership are not transferred to Redcape as lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. Note 22. Non-current liabilities - borrowings Bank loans Redcape Hotel Property Trust (a) Capitalised loan establishment costs Total secured liabilities The total secured liabilities (current and non-current) are as follows: Bank loans Redcape Hotel Property Trust (a) Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 436,700 - (139) - 136,625 (91) 436,561 136,534 Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 436,700 - - 136,625 436,700 136,625 Syndicated Bank Facility The total facility amount is $477.0 million (excluding $3.0 million ancillary facility) and expires on 23 September 2020. Assets pledged as security The financiers in respect of the bank loans have first ranking security over all of the assets of each entity in Redcape, a registered mortgage over each property and a fixed charge over each liquor and gaming licence. Defaults and breaches There have been no breaches of bank covenants in the year ended 30 June 2019. Restrictions on distributions There have been no breaches of the restrictions on distributions in the year ended 30 June 2019. 45 45 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 22. Non-current liabilities - borrowings (continued) (a) This entity is a related party (subsidiary of RHT I). In FY19 the borrowing is eliminated on consolidation. Financing arrangements Unrestricted access was available at the reporting date to the following lines of credit: Total facilities Bank loans Used at the reporting date Bank loans Unused at the reporting date Bank loans Note 23. Non-current liabilities - derivative financial instruments Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 477,000 436,700 40,300 - - - Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 Interest rate swap contracts - cash flow hedges 3,489 - Refer to note 28 for further information on financial instruments. Note 24. Non-current liabilities - employee benefits Long service leave Note 25. Equity - contributed equity Stapled Consolidated 2019 Stapled Securities Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 255 240 Consolidated RHT II 2018 Stapled Consolidated 2019 Securities $'000 RHT II Consolidated 2018 $'000 Contributed equity 551,445,932 470,312,074 235,545 199,549 46 46 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 25. Equity - contributed equity (continued) Details RHT II Consolidated Balance at beginning of the period Unit issuances Equity raising costs Deferred tax asset June 2019 June 2019 June 2018 June 2018 No of securities '000 $'000 No of securities '000 $'000 470,312 81,134 - - 199,549 37,569 (2,247) 674 - 470,312 - - - 203,849 (6,143) 1,843 Balance at end of the period 551,446 235,545 470,312 199,549 Details RHT I Consolidated (non-controlling interest) Balance at beginning of the period Unit issuances Equity raising costs Balance at end of the period June 2019 June 2019 June 2018 June 2018 No of securities '000 $'000 No of securities '000 $'000 470,312 81,134 - 267,758 52,188 (1,477) 551,446 318,469 - - - - - - - - Ordinary stapled securities The Ordinary securities of RHT II are stapled to the securities of RHT I. Each stapled security entitles the holder to participate in distributions and the proceeds on the winding up of the trust in proportion to the number of and amounts paid on the securities held. The fully paid stapled ordinary securities have no par value and the trust does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each stapled security shall have one vote. Stapled Securities buy-back As disclosed in the PDS, the Responsible Entity may in its sole discretion proceed with an on-market buy-back of up to 5% of Redcape stapled securities. The timing of and conduct of the buy-back will be in accordance with the Listing Rules and all applicable laws. No buy-back of Redcape stapled securities has been undertaken by the Responsible Entity. Voluntary Escrow There are currently 51.5 million shares subject to a voluntary escrow arrangement. The escrow period ends in February 2020 in line with Redcape's FY20 HY results release. Capital risk management Redcape's objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for stapled security holders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity, as recognised in the statement of financial position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. In order to maintain or adjust the capital structure, Redcape may adjust the amount of distributions paid to stapled security holders, return capital to stapled security holders, issue new stapled securities or sell assets to reduce debt. Redcape would look to raise capital when an opportunity to invest in a business or company is seen as value adding relative to the current trust's stapled securities price at the time of the investment. 47 47 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 25. Equity - contributed equity (continued) Redcape is subject to certain financing arrangements covenants and meeting these is given priority in all capital risk management decisions. There have been no events of default on the financing arrangements during the financial year. The capital risk management policy remains unchanged from the previous reporting period. Note 26. Equity - non-controlling interest Contributed equity Reserves Accumulated losses Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 318,469 161,923 (43,497) 436,895 - - - - RHT II only comparative therefore the RHT I (non-controlling interest) balance reflected is zero. Contributed Hedging Revaluation equity $'000 reserve $'000 reserve $'000 Retained earnings/ (Accumulate d losses) $'000 RHT I Consolidated Profit for the year Total other comprehensive income Arising on stapling Issue of securities Equity raising costs Interim distributions paid to unitholders Provisions for distribution to unitholders - - 267,758 52,188 (1,477) - - - (3,216) (272) - - - - - 37,573 127,838 - - - - 10,691 - (7,917) - - (34,241) (12,030) Total $'000 10,691 34,357 387,407 52,188 (1,477) (34,241) (12,030) Balance at 30 June 2019 318,469 (3,488) 165,411 (43,497) 436,895 48 48 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 27. Equity - distributions Distributions paid/payable during the financial year were as follows: Final distribution for the quarter ended 30 September 2018 of 2.205 cents (FY18: 2.205 cents (a)) per unit Final distribution for the quarter ended 31 December 2018 of 2.205 cents (FY18: 2.205 cents) per unit Final distribution for the quarter ended 31 March 2019 of 2.158 cents (FY18: 2.158 cents) per unit Final distribution for the quarter ended 30 June 2019(b) of 2.182 cents (FY18: 2.182 cents) per unit Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 10,795 11,548 11,898 12,030 46,271 - - - - - (a) Calculated on a pro rata basis notwithstanding that distribution applied from 10 July 2017. Actual payable was 1.990 cents per security. (b) On 24 June 2019 the directors declared a final dividend for the quarter ended 30 June 2019 of 2.182 cents per unit to be paid on 30 August 2019. Distributions prior to the listing on the ASX as at 30 November 2018 were calculated on a pro rata basis for days held. Distributions of $44.5 million (2018: $26.8 million) were paid during the current period from RHT I. This represents the last quarter of FY18 and the first three quarters of FY19 (2018: First three quarters of FY18). Note 28. Financial instruments Financial risk management objectives Redcape's activities expose it to interest rate risk, credit risk and liquidity risk. Redcape's overall risk management program seeks to minimise potential adverse effects on the financial performance of Redcape. Redcape uses derivative financial instruments such as interest rate swaps to hedge its interest rate risk exposure. Derivatives are exclusively used for hedging purposes, i.e. not as trading or other speculative instruments. Redcape uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate and ageing analysis for credit risk. Risk management is carried out by senior finance executives ('Finance') under policies approved by the directors of the Responsible Entity. These policies include identification and analysis of the risk exposure of Redcape and appropriate procedures, controls and risk limits. Finance identifies, evaluates and hedges financial risks within Redcape's operations. Finance reports to the directors on a monthly basis. Market risk Foreign currency risk Redcape is not exposed to any foreign currency risk. Price risk Redcape is not exposed to any significant price risk. Interest rate risk Redcape's main interest rate risk arises from long-term borrowings. Borrowings obtained at variable rates expose Redcape to interest rate risk. Borrowings obtained at fixed rates expose Redcape to fair value interest rate risk. The policy is to maintain approximately 50% of current borrowings at fixed rates using interest rate swaps to achieve this when necessary. 49 49 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 28. Financial instruments (continued) As at the reporting date, Redcape had the following variable rate borrowings and interest rate swap contracts outstanding: Bank loans Redcape Hotel Property Trust Interest rate swaps (notional principal amount) Net exposure to interest rate risk Stapled Consolidated RHT II Consolidated 2019 2018 Weighted average interest rate % Weighted average interest rate % Balance $'000 2.98% - - 436,700 - (238,500) 198,200 - 6.50% - Balance $'000 - 136,625 - 136,625 The bank loans outstanding, totalling $436.7 million, are interest payment loans. Monthly cash outlays of approximately $1.1 million per month are required to service the interest payments. An official increase/decrease in interest rates of 100 basis points would have an adverse/favourable effect on profit before tax of $4.4 million per annum. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to Redcape. Redcape has a strict code of credit, including obtaining agency credit information, confirming references and setting appropriate credit limits. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount. Redcape does not hold any collateral. Redcape does not hold any collateral or have any expected credit losses. Liquidity risk Redcape manages liquidity risk by maintaining adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Redcape has a voluntary working capital deficiency based on its capital management strategy of paying down debt with excess cash. Financing arrangements Unused borrowing facilities at the reporting date: Bank loans Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 40,300 - 50 50 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 28. Financial instruments (continued) Remaining contractual maturities The following tables detail Redcape's remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. Stapled Consolidated 2019 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - variable Bank loans Total non-derivatives Weighted average interest rate % 1 year or less $'000 Between 1 and 2 years $'000 Between 2 and 5 years $'000 Remaining contractual maturities $'000 Over 5 years $'000 - - 3,972 34,777 - - 2.98% 17,386 56,135 468,102 468,102 - - - - - - - - 3,972 34,777 485,488 524,237 RHT II Consolidated 2018 Weighted average interest rate % 1 year or less $'000 Between 1 and 2 years $'000 Between 2 and 5 years $'000 Remaining contractual maturities $'000 Over 5 years $'000 Non-derivatives Non-interest bearing Trade payables Other payables - - 3,056 25,585 - - Interest-bearing - variable Redcape Hotel Property Trust Total non-derivatives 6.50% 1,094 29,735 183,389 183,389 - - - - - - - - 3,056 25,585 184,483 213,124 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. Subsequent to 30 June 2019, Redcape has refinanced its debt facilities which will extend the repayments by another four years. The extension of the bank loans is not reflected in the above contractual maturities. Fair value of financial instruments Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value. 51 51 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 29. Fair value measurement Fair value hierarchy The following tables detail Redcape's assets and liabilities, measured or disclosed at fair value, using a three-level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3: Unobservable inputs for the asset or liability Stapled Consolidated 2019 Assets Land Total assets Liabilities Interest rate swaps Total liabilities Level 1 $'000 Level 2 $'000 Level 3 $'000 Total $'000 - - - - - - - - 351,648 351,648 351,648 351,648 3,489 3,489 3,489 3,489 There were no transfers between levels during the financial year. The carrying amounts of trade and other receivables and trade and other payables are assumed to approximate their fair values due to their short-term nature. The fair value of financial liabilities is estimated by discounting the remaining contractual maturities at the current market interest rate that is available for similar financial liabilities. Valuation techniques for fair value measurements categorised within level 2 and level 3 The basis of the valuations of land is fair value. A portion of the land was last revalued on 31 May 2019 based on independent external assessments by a professionally qualified valuer, having recent experience in the location and category of land being valued. Land is revalued by the directors each half year where an independent valuation has not been sought. The remaining land values were based on internal valuations performed by Redcape's property team and approved by the Board to form Directors valuations. All internal valuations have been reviewed and approved by the Board. The directors do not believe that there has been a material movement in fair value since the revaluation date. Valuations are based on current prices for similar properties in the same location and condition. Derivative financial instruments have been valued using quoted market rates. This valuation technique maximises the use of observable market data where it is available. Note 30. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by KPMG, the auditor of the trust: Audit services - KPMG Audit or review of the financial statements Other services - KPMG IPO related services including due diligence 52 52 Stapled Consolidated 2019 $ RHT II Consolidated 2018 $ 349,075 299,534 799,914 20,000 1,148,989 319,534 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 31. Contingent liabilities Redcape has provided bank guarantees to a supplier and landlord as at 30 June 2019 of $1,800,000. Note 32. Commitments Capital commitments Committed at the reporting date but not recognised as liabilities, payable: Property, plant and equipment Lease commitments - operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years More than five years Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 - 1,296 1,322 5,803 25,993 34,279 108,348 94,686 33,118 237,313 Note 33. Related party transactions Parent entity Redcape Hotel Trust II is the parent entity. Transactions with related parties (a) Responsible entity Moelis Australia Asset Management Ltd (i) Fund establishment fee Asset management fee Debt arrangement fee Acquisition fee Disposal fee Redcape Hotel Group Management Ltd (ii) Asset management fee Acquisition fee Performance fee (iii) Transaction values for the year ended 30 June 2019 $ Balance outstanding as at 30 June 2019 $ Transaction values for the year ended 30 June 2018 $ Balance outstanding as at 30 June 2018 $ - 1,466,532 250,000 1,080,000 210,000 3,006,532 - - - - - - 2,850,000 2,828,190 - 275,500 60,000 - 268,992 - - - 6,013,690 268,992 3,561,614 500,000 14,400,000 435,667 - 6,400,000 18,461,614 6,835,667 - - - - - - - - 53 (i) Moelis Australia Asset Management Ltd ceased to be the Responsible Entity on 24th October 2018. 53 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 33. Related party transactions (continued) (ii) Redcape Hotel Group Management Ltd became the Responsible Entity of the Trust from 24th October 2018. (iii) Performance fee of $0.9 million has been capitalised to equity and $13.5 million has been expensed. (b) Other related party transactions The aggregate amounts recognised during the period relating to transactions between Redcape and related entities were as follows: Related Entity Transaction Transaction fee Underwriting fee Moelis Australia Advisory Pty Limited Moelis Australia Advisory Pty Limited Moelis Australia Hotel Management Pty Ltd Moelis Australia Hotel Management Pty Ltd Redcape Hotel Property Trust Related party loan Redcape Hotel Property Trust Interest expense Redcape Hotel Property Trust Rent Hotel operating fee (a) Project development fee Transaction values for the year ended 30 June 2019 $ Balance outstanding as at 30 June 2019 $ Transaction values for the year ended 30 June 2018 $ Balance outstanding as at 30 June 2018 $ 2,375,000 3,115,670 - - 6,137,854 - - - 9,137,915 (409,473) 9,389,155 655,924 743,851 - - - 73,822 329,205 53,715 - 136,625,095 136,625,095 - - 8,454,975 - - 37,285,984 15,372,436 (335,651) 198,222,268 137,334,734 (a) Includes the $1.45 million waiver of the Hotel Operator Fee by the Trust manager. Note 34. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Profit/(loss) after income tax Total comprehensive income Parent 2019 $'000 2018 $'000 (12,815) 6,154 (12,815) 6,154 54 54 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 34. Parent entity information (continued) Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Contributed equity Retained profits / (Accumulated losses) Total equity Parent 2019 $'000 2018 $'000 191,798 168,297 232,443 205,971 3,559 3,559 268 268 235,545 (6,661) 199,549 6,154 228,884 205,703 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The subsidiaries of RHT II are the initial guarantors of the syndicated bank facility of Redcape Hotel Property Trust, a subsidiary of RHT I. Redcape Hotel Fund Pty Ltd, a subsidiary of RHT II also has in placed a Deed of Cross Guarantees in relation to the debts of certain subsidiaries. Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2019 and 30 June 2018. Capital commitments - Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 30 June 2019 and 30 June 2018. The accounting policies of the parent entity are consistent with those of Redcape, as disclosed in note 3, except for the following: ● Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. Note 35. Business combinations and disposals Business combination to form Redcape Hotel Group Stapling In accordance to the stapling deed, securities in RHT I and RHT II were stapled to one another on 2 July 2018. They were listed as a single security on the ASX at 30 November 2018. RHT II is identified as the parent of Redcape and acquirer of RHT I with the acquisition accounted for as a change in ownership without a loss of control. The issued securities of RHT I are not owned by RHT II and are presented as non-controlling interests in Redcape even though securities in RHT I are held directly by the unitholders of the Trust. Additionally, no goodwill has been recognised on acquisition of RHT I because no direct ownership interest was acquired by Redcape in RHT I. The equity in the net assets of RHT I and the profit/(loss) arising from those net assets have been separately identified in the statements of comprehensive income and financial position. RHT I’s contributed equity and retained earnings/accumulated losses are shown as a non-controlling interest in the consolidated financial statements in accordance with accounting standards. Redcape was admitted to the official list of the ASX as a stapled group and consequently, ASX reserves the right (but without limiting its absolute discretion) to remove any or both of RHT I and RHT II from the official list of ASX if any of the securities in RHT I or RHT II comprising Redcape stapled securities cease to be stapled together or any equity securities are issued by either RHT I or RHT II which are not stapled to the equivalent securities in the other of RHT I or RHT II. 55 55 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 35. Business combinations and disposals (continued) Details of the acquisition arising from stapling are as follows: Cash and cash equivalents Related party loan Other current assets Investment property Trade and other payables Distribution payable Loans and borrowings Derivative financial instruments Net assets acquired Goodwill Acquisition-date fair value of the total consideration transferred Accumulated losses Accumulated losses are losses attributable to RHT II. Movement in accumulated losses were as follows: Balance at 1 July 2018 Net loss for the year attributable to RHT II Arising from stapling (a) Fair value $'000 14,519 136,625 5,184 611,873 (3,900) (10,243) (366,376) (272) 387,410 - 387,410 Stapled Consolidated 2019 $'000 (1,156) (15,621) (26,516) (43,293) (a) RHT I holds the Freehold assets which are recognised collectively as investment properties in the RHT I balance sheet. On consolidation, where Redcape holds the Freehold assets, the investment properties are disaggregated into their components (Land, Buildings, Licences). On disaggregation, depreciation and capitalised acquisition costs are also expensed to the income statement causing losses to the income statement as a result of stapling. 56 56 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 35. Business combinations and disposals (continued) Other business acquisitions Redcape has settled on the acquisition of 6 hotels during the year ended 30 June 2019. The following summarises the major classes of consideration transferred and recognises the amounts of assets acquired and liabilities assumed at the acquisition date: Details of the acquisition of Venues are as follows: Cash and cash equivalents Inventory Prepayments Property, plant and equipment (Note 15) Gaming and liquor licences (Note 16) Trade and other payables Employee benefits Net assets acquired Goodwill Acquisition-date fair value of the total consideration transferred Representing: Cash paid or payable to vendor Acquisition costs expensed to profit or loss Cash used to acquire businesses; net of cash acquired: Acquisition-date fair value of the total consideration transferred Add: payments made for future period acquisition Less: cash and cash equivalents Less: payments made in prior periods Net cash used Fair value $'000 229 263 105 64,482 37,423 (698) (149) 101,655 56,275 157,930 157,930 7,631 Stapled Consolidated 2019 $'000 157,930 - (229) (4,352) 153,349 Acquisition related costs Business acquisition costs of $7.6 million include stamp duty, legal fees and due diligence costs were included in Redcape's consolidated statement of profit or loss and other comprehensive income. Disposals Redcape has disposed 1 hotel during the year ended 30 June 2019 resulting in a gain on disposal of $1.0 million The carrying amount of property plant and equipment at the date of disposal amounted to $7.8 million. The value of intangibles at the date of disposal amounted to $12.5 million. 57 57 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 36. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiary in accordance with the accounting policy described in note 3: Subsidiaries of RHT II (All incorporated in Australia) Redcape Hotel Fund Pty Ltd MAHF Custodian Pty Ltd MAHPT TT Pty Ltd Redcape Group Limited Redcape Hotel Group Pty Ltd RHG Operations Pty Ltd Redcape Services Pty Ltd RGM TT Pty Ltd Stapled Consolidated 2019 % RHT II Consolidated 2018 % 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% - 100.00% 100.00% 100.00% 100.00% - 58 58 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 36. Interests in subsidiaries (continued) Subsidiaries of RHT I (All incorporated in Australia) Redcape Hotel Property Trust St George Hotel Trust Doonside Hotel Trust El Cortez Hotel Trust Keighery Hotel Trust Lakeview Hotel Motel Trust Prospect Hotel Trust Royal Hotel Trust St Marys Hotel Trust Belrose Hotel Trust Red Lantern Hotel Trust Campbelltown Hotel Trust Eastwood Hotel Trust Leumeah Hotel Trust Mount Annan Hotel Trust Revesby Pacific Hotel Trust Willoughby Hotel Trust Eastern Creek Tavern Hotel Trust Landmark Hotel Trust Crown Revesby Hotel Trust Minskys Hotel Trust Shamrock Hotel Trust Hermit Park Hotel Trust Wattle Hotel Trust Carrington Hotel Trust Andergrove Tavern Hotel Trust Cabramatta Hotel Trust Crescent Hotel Trust Wattle Grove Hotel Trust Sun Hotel Trust - Acquired on 2 July 2018 Vauxhall Hotel Trust - Acquired on 13 August 2018 Australian Hotel & Brewery Trust - Acquired on 20 August 2018 Central Hotel Trust - Acquired on 4 December 2018 Unanderra Hotel Trust - Acquired on 4 December 2018 Figtree Hotel Trust - Acquired on 4 December 2018 Note 37. Events after the reporting period Stapled Consolidated 2019 % RHT II Consolidated 2018 % 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Subsequent to 30 June 2019, Redcape refinanced its debt facilities resulting in an increased facility of $503.0 million (including $3.0 million ancillary facility) with a weighted average term of 4 years. As a result of the refinancing, in FY20 the hedge position of the existing finance facility will be closed out at a cost of approximately $4.0 million. Capitalised loan establishment costs of $0.5 million will be written off upon activation of the new facility in FY20. Post the end of the financial year, Redcape exchanged contracts to acquire the Eden Brewhouse Redbank Plains Queensland as part of the ongoing portfolio optimisation program. No other material matter or circumstance has arisen since 30 June 2019 that has significantly affected, or may significantly affect Redcape's operations, the results of those operations, or Redcape's state of affairs in future financial years. 59 59 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Notes to the financial statements 30 June 2019 Note 38. Reconciliation of loss after income tax to net cash from operating activities Loss after income tax benefit for the year Adjustments for: Depreciation and amortisation expense Loss on asset revaluation Net loss/(gain) on disposal of non-current assets Business acquisition costs Change in operating assets and liabilities: Decrease/(increase) in trade and other receivables Decrease/(increase) in inventories Increase in deferred tax assets Decrease/(increase) in prepayments Increase/(decrease) in trade and other payables Decrease in provision for income tax Increase/(decrease) in employee benefits Stapled Consolidated 2019 $'000 RHT II Consolidated 2018 $'000 (4,930) (1,156) 11,360 17,998 (502) 7,631 (2,520) 237 (2,297) (2) 8,880 - 142 8,080 - (511) 4,879 157 (175) (186) 295 (2,628) (1,632) (709) Net cash from operating activities 35,997 6,414 Note 39. Earnings per stapled securities Loss after income tax Weighted average number of ordinary securities used in calculating basic and diluted earnings per stapled securities Basic and diluted earnings per stapled unit (cents) Stapled Consolidated 2019 $'000 (4,930) 528,811,312 (0.93) RHT II Consolidated 2018 $'000 - - - 60 60 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Directors' declaration 30 June 2019 In the directors' opinion: ● ● ● ● the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 3 to the financial statements; the attached financial statements and notes give a true and fair view of Redcape's financial position as at 30 June 2019 and of its performance for the financial year ended on that date; there are reasonable grounds to believe that the trust will be able to pay its debts as and when they become due and payable. The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the directors ___________________________ Nicholas Roland Collishaw Chairman 28 August 2019 Sydney ___________________________ Daniel John Brady Executive Director 61 61 ASX:RDCAnnual Report 2019For personal use only Independent Auditor’s Report To the stapled security holders of Redcape Hotel Group Opinion We have audited the Financial Report of Redcape Hotel Group (the Stapled Group Financial Report). In our opinion, the accompanying Stapled Group Financial Report is in accordance with the Corporations Act 2001, including: • • giving a true and fair view of the Stapled Group’s financial position as at 30 June 2019 and of its financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. The Financial Report of the Stapled Group comprises: • Statement of financial position as at 30 June 2019 • Statement of profit or loss and other comprehensive income, Statement of changes in equity, and Statement of cash flows for the year then ended • Notes including a summary of significant accounting policies • Responsible Entity’s Directors’ Declaration. The Stapled Group consists of Redcape Hotel Trust II and the entities it controlled at the year-end or from time to time during the financial year and Redcape Hotel Trust I and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 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 Stapled Group and Redcape Hotel Group Management Ltd (the Responsible Entity) in accordance with 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 fulfilled our other ethical responsibilities in accordance with the Code. Key Audit Matters The Key Audit Matters we identified for the Stapled Group are: • Carrying value of goodwill and intangible 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. assets • Valuation of land These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, we do not provide a separate opinion on these matters. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 62For personal use onlyCarrying value of goodwill and intangible assets ($590.8m) Refer to Note 16 to the financial report The key audit matter How the matter was addressed in our audit Annual testing of goodwill and intangible assets for impairment is a key audit matter, given the size of the balance (being 53% of total assets). We focussed on the significant forward-looking assumptions the Stapled Group applied in their value in use model for the group of CGUs, including: • • forecast cash flows, growth rates (including terminal growth rate). discount rate. This is complex in nature and varies according to the conditions and environment in which the group of Cash Generating Unit’s (CGUs) operate. The Stapled Group uses a complex model to perform their annual testing of goodwill and intangible assets for impairment. The model is largely manually developed, uses adjusted historical performance, and a range of internal and external sources as inputs to the assumptions. Complex modelling, particularly those containing highly judgemental forward- looking assumptions tend to be prone to greater risk for potential bias, error and inconsistent application. These conditions necessitate additional scrutiny by us, in particular to address the objectivity of sources used for assumptions, and their consistent application. The Stapled Group has a large number of individual developed properties, necessitating our consideration of the Stapled Group’s determination of CGUs, based on the smallest group of assets to generate largely independent cash inflows. We considered the Stapled Group’s allocation of goodwill and intangible assets to the Group of CGUs to which they belong based on the management and monitoring of the business. In addition to the above, the carrying amount of net assets of the Stapled Group is above the Stapled Group’s market capitalisation at 30 June 2019. This increased our audit effort in this key audit area. We involved valuation specialists to supplement our audit team in assessing this key audit matter. Working with our valuation specialists, our procedures included: • we considered the appropriateness of the value in use method applied by the Stapled Group to perform the annual test of goodwill and intangible assets for impairment, for the group of CGUs, against the requirements of the accounting standards. • we assessed the integrity of the value in use model used, including the accuracy of the underlying calculation formulas. • we considered the sensitivity of the model by varying key assumptions, such as forecast growth rates, terminal growth rate and discount rate, within a reasonably possible range. We did this to identify those assumptions at higher risk of bias or inconsistency in application and to focus our further procedures. • we compared the forecast cash flows contained in the value in use model to Board approved forecasts. • we assessed the accuracy of previous Stapled Group forecasts to inform our evaluation of forecasts incorporated in the model. • we challenged the Stapled Group’s significant forecast cash flow and growth assumptions by comparing the forecast to historical results of the Stapled Group’s operations and applied increased scepticism to areas where previous forecasts were not achieved. We compared forecast growth rates, including terminal growth rate to published studies of industry trends and expectations. We used our knowledge of the Group, their past performance, business and customers, and our industry experience. • we independently developed a discount rate range considered comparable using publicly available market data for comparable entities, adjusted by risk factors specific to the Stapled Group and the industry it operates in. • we considered the Stapled Group’s determination of their CGUs based on our 63For personal use onlyunderstanding of the operations of the Stapled Group’s business, and how independent cash inflows were generated, against the requirements of the accounting standards. • we analysed the Stapled Group’s internal reporting to assess the Stapled Group’s monitoring and management of activities, and the consistency of the allocation of goodwill and intangible assets to the Group of CGUs. • we assessed the Stapled Group’s reconciliation of differences between the year-end market capitalisation and the carrying amount of the net assets by comparing the implicit earnings multiples from the Stapled Group’s model to market multiples of comparable entities. • we assessed the disclosures in the financial report using our understanding obtained from our testing and against the requirements of the accounting standards. Valuation of Land ($351.6m) Refer to Note 15 to the financial report The key audit matter How the matter was addressed in our audit It is the Stapled Group’s policy that land is recognised at fair value based on periodic valuations of individual developed properties. Valuations are conducted by either the Stapled Group’s Directors or external valuation experts engaged by the Stapled Group. We considered valuation of land as a key audit matter, given the: • • • relative size of land in the statement of financial position (being 31% of total assets); quantum of the revaluation gains/losses that directly impact the Statement of profit or loss and other comprehensive income through the fair value fluctuations; inherently subjective nature of property valuations due to the use of assumptions containing estimation uncertainty. These estimates lead to additional audit effort due to differing assumptions such as prevailing market conditions, the individual nature, Working with our real-estate valuation specialists, our procedures included: • we assessed the appropriateness of the accounting policies applied by the Stapled Group, against the requirements of the accounting standards. • we assessed the scope, competence and objectivity of Stapled Group’s Directors and its external valuation experts, to fair value the individual developed properties. • we assessed the valuation methodology used by the Directors of the Stapled Group and its external valuation experts for consistency with the Stapled Group’s valuation policy, and compliance with accounting standards and industry practice. • we assessed the specific valuation assumptions (including the capitalisation rate) for a sample of property valuations, through comparison to market data published by 64For personal use onlycondition and location of each property and the expected future income for each property. We focused on the following key assumptions contained in valuation methodology used by the Stapled Group and its external valuation experts: • • Capitalisation rate Stabilised net operating profit (EBITDA) We involved real-estate valuation specialists to supplement our audit team in assessing this key audit matter. commercial real estate agents, recent market transactions and our knowledge of historical performance of the properties held by the Stapled Group and their condition and location. • we compared the stabilised net operating profit (EBITDA) used in the valuations to historical results of the Stapled Group’s operations. We adjusted for expected changes such as the annualisation of results of properties acquired by the Stapled Group during the year. We used our knowledge of the Group, their past performance, business and customers, and our industry experience. • we visited a sample of properties to observe the condition and location of the land. • we checked amounts recorded in the statement of profit or loss and other comprehensive, to movements in the fair value of the land for the year from the Stapled Group’s Statement of financial position. • we assessed the disclosures in the financial report using our understanding obtained from our testing and against the requirements of the accounting standards. Other Matter The Consolidated Financial Report of Redcape Hotel Group for the year ended 30 June 2018 was not prepared, nor audited. Other Information Other Information is financial and non-financial information in Redcape Hotel Group’s annual reporting which is provided in addition to the Financial Report and the Auditor's Report. The Directors of Redcape Hotel Group Management Ltd (the Responsible Entity) are responsible for the Other Information. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Stapled Group Special Purpose Financial Statements and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we 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. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. 65For personal use onlyResponsibilities of the Directors for the Financial Report The Directors of Redcape Hotel Group Management Ltd (the Responsible Entity) are responsible for: • • • preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error assessing the Stapled Group’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Stapled 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 objective is: • • 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 Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They 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 the Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our Auditor’s Report. KPMG Cameron Roan Partner Sydney 28 August 2019 66For personal use onlyRedcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Stapled Security Holders information 30 June 2019 The stapled security holder’s information set out below was applicable as at 13 August 2019. Distribution of equitable securities Analysis of number of equitable security holders by size of holding: Number of holders of options Number of holders of ordinary ordinary stapled securities stapled securities over 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel Equity security holders Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: THE TRUST COMPANY (AUSTRALIA) LIMITED WESTERN FUNDS MANAGEMENT PTY LTD MOELIS AUSTRALIA ASSET MANAGEMENT LTD J P MORGAN NOMINEES AUSTRALIA PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED CARPE DIEM ASSET MANAGEMENT PTY LTD CITICORP NOMINEES PTY LIMITED NATIONAL NOMINEES LIMITED BARANA CAPITAL PTY LTD RHINO TRADE PTY LTD TPIC PTY LTD PETERS MEATS (EXPORT) PTY LTD TOP 4 PTY LTD NETWEALTH INVESTMENTS LIMITED AUSTRALIAN BRANDS PTY LTD CHAO DUAN ONE MANAGED INVESTMENT FUNDS LIMITED BNP PARIBAS NOMINEES PTY LTD HUB24 CUSTODIAL SERV LTD DRP LIANGROVE MEDIA PTY LIMITED NDPM PTY LTD Unquoted equity securities There are no unquoted equity securities. 251 90 388 213,908 342,798 3,347,024 1,646 74,040,677 444 473,501,525 2,891 551,445,932 - - Ordinary stapled securities % of total stapled securities issued Number held 113,881,938 51,541,700 46,770,651 39,507,068 34,610,919 10,000,000 8,261,537 7,288,943 5,205,537 5,000,000 5,000,000 4,629,630 4,522,192 3,961,526 3,940,000 3,120,000 2,935,000 2,582,139 2,394,547 1,806,163 20.65 9.35 8.48 7.16 6.28 1.81 1.50 1.32 0.94 0.91 0.91 0.84 0.82 0.72 0.71 0.57 0.53 0.47 0.43 0.33 356,959,490 64.73 67 67 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Stapled Security Holders information 30 June 2019 Substantial holders Substantial holders in Redcape are set out below: Substantial Holders Percentage Securities held at date of notice of securities held at date of notice % Date of notice Moelis Australia Limited (including its related bodies corporate) 213,953,331 38.8 4 December 2018 Moelis & Company Group LP, Moelis & Company International Holdings LLC, Kenneth Moelis and each of their related bodies corporate Redcape Hotel Group Management Limited in its capacity as responsible entity of Redcape Hotel Trust I and Redcape Hotel Trust II 213,953,331 38.8 4 December 2018 51,500,000 9.34 4 December 2018 MAGIC TT Pty Ltd and Andrew Pridham 220,043,766 39.9 4 December 2018 Voting rights The voting rights attached to ordinary stapled securities are set out below: Ordinary stapled securities On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each stapled security shall have one vote. There are no other classes of equity securities. 68 68 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II Appendix - Special Purpose Financial Statements ("SPFS") 30 June 2019 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II ASRN Redcape Hotel Trust I (ASRN 629 354 614) and Redcape Hotel Trust II (ASRN 629 354 696) Special Purpose Annual Report - 30 June 2019 69 69 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Statement of profit or loss and other comprehensive income 30 June 2019 Revenue Cost of sales Expenses Operating costs Management fees Net finance costs Employment costs Depreciation and amortisation expense Gain/(loss) on disposal of non-current assets Loss on asset revaluation Business acquisition costs Operating profit Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 6 285,215 242,885 (133,021) (117,110) 7 8 9 15 15 35 (32,162) (14,166) (17,324) (38,720) (11,360) 502 (17,998) (7,631) (27,122) (13,139) (14,911) (29,608) (9,036) 1,348 - (31,509) 13,335 1,798 Listing costs and performance fee 10 (20,562) - Profit/(loss) before income tax benefit (7,227) 1,798 Income tax benefit 11 2,297 230 Profit/(loss) after income tax benefit for the year (4,930) 2,028 Other comprehensive income Items that will not be reclassified subsequently to profit or loss Gain on the revaluation of land Items that may be reclassified subsequently to profit or loss Net change in the fair value of cash flow hedges taken to equity Other comprehensive income for the year, net of tax Total comprehensive income for the year Profit/(loss) for the year is attributable to: Unitholders of Redcape Hotel Trust I Unitholders of Redcape Hotel Trust II Total comprehensive income for the year is attributable to: Unitholders of Redcape Hotel Trust I Unitholders of Redcape Hotel Trust II 37,573 127,840 (3,216) (272) 34,357 127,568 29,427 129,596 10,691 (15,621) - 2,028 (4,930) 2,028 45,048 (15,621) - 129,596 29,427 129,596 Basic earnings per share (cents) Diluted earnings per share (cents) 39 39 (0.93) (0.93) 70 70 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Statement of financial position 30 June 2019 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Total current assets Non-current assets Property, plant and equipment Intangible assets Deferred tax Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Employee benefits Distribution payable Total current liabilities Non-current liabilities Other payables Borrowings Derivative financial instruments Employee benefits Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses Equity attributable to the stapled security holders of RHT II Non-controlling interest Total equity Equity attributable to RHT I (non-controlling interest) Contributed equity Reserves Accumulated losses Total equity attributable to unitholders of RHT I (non-controlling interest) (a) Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 16,981 3,936 5,130 3,319 29,366 35,055 1,416 5,104 7,286 48,861 486,601 590,757 15,645 1,093,003 396,565 509,590 12,674 918,829 1,122,369 967,690 38,749 1,708 12,030 52,487 430 436,561 3,489 255 440,735 29,460 1,430 10,243 41,133 474 366,284 272 240 367,270 493,222 408,403 629,147 559,287 235,545 - (43,293) 192,252 436,895 467,307 127,568 (35,588) 559,287 - 629,147 559,287 318,469 161,923 (43,497) 436,895 - - - - (a) Aggregated comparative hence no parent entity or non-controlling interest, therefore the balance reflected is zero. 71 71 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Statement of changes in equity 30 June 2019 Contributed equity $'000 Asset revaluation reserve $'000 Cash flow hedge reserve $'000 Accumulated losses $'000 Non- controlling interest $'000 Aggregated Balance at 1 July 2017 Profit after income tax benefit for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with stapled security holders in their capacity as stapled security holders: Contributions of equity, net of transaction costs (note 25) Distributions paid (note 27) Adjustments - - - - - - - - 127,840 (272) - 2,028 - 127,840 (272) 2,028 467,307 - - - - - - - - - (37,026) (590) Total equity $'000 - 2,028 127,568 129,596 467,307 (37,026) (590) 559,287 - - - - - - - - Balance at 30 June 2018 467,307 127,840 (272) (35,588) Stapled Consolidated Issued capital $'000 Asset revaluation reserve $'000 Cash flow hedge reserve $'000 Accumulated losses $'000 Non- controlling interest $'000 Total equity $'000 Balance at 1 July 2018 467,307 127,840 (272) (35,588) - 559,287 (267,758) (127,840) 272 7,916 387,410 - Arising due to stapling arrangement Profit/(loss) after income tax benefit for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with stapled security holders in their capacity as stapled security holders: Contributions of equity, net of transaction costs (note 25) Distributions paid (note 27) - - - 35,996 - Balance at 30 June 2019 235,545 72 - - - - - - (15,621) 10,691 (4,930) - 34,357 34,357 (15,621) 45,048 29,427 - - 50,708 (46,271) 86,704 (46,271) (43,293) 436,895 629,147 - - - - - - 72 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Statement of cash flows 30 June 2019 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Interest received Interest and other finance costs paid Income taxes paid Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 311,559 (257,638) 53,921 267,530 (213,764) 53,766 259 (18,183) - 257 (13,126) (1,632) Net cash from operating activities 38 35,997 39,265 Cash flows from investing activities Payment for purchase of business, net of cash acquired Business acquisition transaction costs Payments for property, plant and equipment Payments for intangibles Proceeds from disposal of business Proceeds from disposal of investment property Proceeds from disposal of property, plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of stapled securities Proceeds from borrowings Repayment of borrowings Stapled Securities issue transaction costs Distributions paid Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year 35 15 16 25 27 (153,349) (7,631) (25,182) - 20,430 - 112 (794,378) (31,509) (14,761) (1,329) 20,412 2,646 724 (165,620) (818,195) 89,757 119,000 (49,000) (3,724) (44,484) 474,068 390,072 (23,372) - (26,783) 111,549 813,985 (18,074) 35,055 35,055 - Cash and cash equivalents at the end of the financial year 12 16,981 35,055 73 73 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Note 1. General Information (a) Reporting Entity The Redcape Hotel Trust II ("RHT II") and Redcape Hotel Trust I ("RHT I") were stapled on 2 July 2018 such that the securities are effectively dealt with as a stapled security. The stapled securities of RHT I and RHT II (collectively “Redcape Hotel Group” or "Redcape") commenced trading as a single stapled security on the ASX on 30 November 2018 under the ticker code “RDC”. In accordance with AASB 3 Business Combinations one of the entities in the stapled structure is required to be identified as the parent for the purpose of preparing consolidated financial reports. In accordance with this requirement, RHT II was identified as the parent entity. Redcape is a for-profit entity and its principal activity is the ownership and operation of Hotels. There has been no significant change in the nature of the principal activity during the year. (b) Responsible Entity Redcape Hotel Group Management Ltd (“RHGM”) is the Responsible Entity of RHT I and RHT II effective 24 October 2018 (replacing Moelis Australia Asset Management Ltd). (c) Scheme Registration RHT I (ARSN 629 354 614) and RHT II (ARSN 629 354 696) are domiciled in Australia and were registered as managed investment schemes on 26 October 2018 under the Corporations Act 2001. (d) First-year report Redcape has consulted with ASIC in relation to the period for its financial year ended 30 June 2019. In accordance with ASIC’s view, Redcape’s financial year ended 30 June 2019 was the 12-month period commencing on 1 July 2018. Redcape’s General Purpose Financial Statements (as required by Chapter 2M of the Corporations Act) set out Redcape’s financial information for its financial year being the 12 months to 30 June 2019. The comparative numbers for the 12 months to 30 June 2018 are the numbers for Redcape Hotel Trust II only. The trusts were not stapled in during this period, hence only the comparatives of the parent entity can be used. Redcape has provided this Special Purpose full year financial report for the 12-month period ending 30 June 2019 with full year aggregated comparatives. Note 2. Basis of preparation The Responsible Entity has prepared a Special Purpose consolidated financial statements for the year ended 30 June 2019 for the purpose of meeting the listing requirements of the Australian Securities Exchange ("ASX"). 74 74 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 (a) Compliance Statement The consolidated financial statements are Special Purpose financial statements which have been prepared in accordance with the recognition, measurement and classification aspects of the Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB). The Special Purpose consolidated financial statements include those disclosures considered necessary by the directors of the Responsible Entity to meet the needs of users. The Special Purpose consolidated financial statements comply with all disclosure requirements of the AASBs except for the comparatives not complying with: - AASB 10 Consolidated financial statements Stapling of the entities occurred on 2 July 2018 hence Redcape’s FY18 accounts were prepared on an aggregated basis as there was no single parent entity. Under AASB 10 aggregation of Redcape is not a consolidation. To comply with AASB 10, the comparative financials to be included in the 30 June 2019 consolidated financial statements are those of RHT II (the parent entity in the FY18 accounts). As RHT I and RHT II were not stapled during the twelve months to 30 June 2018, AASB 10 would require that the financials of RHT I would be wholly excluded from the comparative numbers in the 30 June 2019 consolidated financial statements. The Responsible Entity has deemed that aggregated financials of RHT II and RHT I are the most relevant financials to be used as comparatives for the year ended 30 June 2019 with the sole difference being the allocation of non-controlling interest to RHT I with RHT II as the parent. For this reason alone, the 30 June 2019 financial statements have been prepared as a Special Purpose accounts. The financial report has been prepared on a going concern basis. The Special Purpose consolidated financial report as at and for the year ended 30 June 2019 was approved by the directors of the Responsible Entity on 28 August 2019 (b) Basis of measurement The financial statements have been prepared on the historical cost basis, except for the following that are measured at fair value: - land; and - derivative financial instruments. The methods used to measure fair values are discussed in the relevant notes (c) Functional and presentation currency The consolidated financial statements are presented in Australian dollars, which is Redcape's functional currency and amounts have been rounded to the nearest thousand dollars unless otherwise stated, in accordance with ASIC Corporations (Rounding in Financial/Directors' Reports) Instrument 2016/191. (d) Use of estimates and judgements The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying accounting policies. Estimates and judgements affect the application of policies and reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. (e) Going Concern The Special Purpose consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. At 30 June 2019, Redcape had current assets of $29.4 million and current liabilities of $52.5 million leaving a net deficit of working capital of $23.1 million. The directors of the Responsible Entity believe Redcape will continue to generate operating cash flows sufficient to meet current liability obligations. 75 75 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Note 3. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. New or amended Accounting Standards and Interpretations adopted Redcape has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') that are mandatory for the current reporting period. Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. The adoption of these Accounting Standards and Interpretations did not have any material impact on the financial performance or position of Redcape. The following Accounting Standards and Interpretations are most relevant to Redcape: AASB 9 Financial Instruments From 1 July 2018, Redcape has applied AASB 9 prospectively. The resulting accounting policies for Redcape's financial instruments are explained in further detail in Note 3. AASB 15 Revenue from Contracts with Customers From 1 July 2018, Redcape has applied AASB 15 prospectively. The resulting accounting policies for Redcape's revenue are explained in further detail in Note 3 Revenue Recognition. Principles of consolidation The consolidated Special Purpose financial statements incorporate the assets and liabilities of all subsidiaries of RHT II as at 30 June 2019 and the results of all subsidiaries for the year then ended. RHT II and its subsidiaries together are referred to in these financial statements as the 'Redcape'. Subsidiaries are all those entities over which Redcape has control. Redcape controls an entity when Redcape is exposed to, or has rights to, variable returns from its involvement with the entity. Subsidiaries are fully consolidated from the date on which control is transferred to Redcape. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in Redcape are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries align with the policies adopted by Redcape. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Where Redcape loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. Redcape recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Operating segments Operating segments are presented using the 'management approach', where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers ("CODM"). Redcape operates wholly within one business segment being the ownership and operation of hotels in Australia. 76 76 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Revenue recognition Redcape recognises revenue as follows: Revenue from contracts with customers Revenue is recognised at an amount that reflects the consideration to which Redcape is expected to be entitled in exchange for transferring goods or services to a customer. For each contract with a customer, Redcape: identifies the contract with a customer, identifies the performance obligations in the contract, determines the transaction price which takes into account estimates of variable consideration and the time value of money, allocates the transaction price to the separate performance obligations on the basis of the relative stand-alone selling price of each distinct good or service to be delivered, and recognises revenue when or as each performance obligation is satisfied in a manner that depicts the transfer to the customer of the goods or services promised. Variable consideration is not material in the context of Redcape's 'total revenue'. Gaming Revenue Gaming revenue is the net difference between gaming wins and losses and is recognised upon the outcome of the game at the close of business. Food and beverage revenue (On-Premise and Off-Premise) Food and beverage revenue is recognised at the point in time the goods are provided and payment is collected. Accommodation and other revenues Accommodation and other revenues are recognised at the point in time services are performed. Interest Interest income is recognised using the effective interest method. Income tax RHT I Under current income tax legislation, RHT I is not liable for income tax provided unit holders are presently entitled to all of RHT I’s income at 30 June each year. RHT II The income tax expense or benefit for the period is the tax payable on that period's taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: ● When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled, and it is probable that the temporary difference will not reverse in the foreseeable future. ● Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. 77 77 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 RHT II and its wholly owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidation regime, effective July 2017 and are taxed as a single entity from that date. The head entity and each subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the 'separate taxpayer within group' approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group. These are recognised as amounts payable to or receivable from other entities in the tax consolidated group in conjunction with any tax funding arrangement amount. The members of the tax consolidated group have entered into a tax funding arrangement which sets out the funding obligations of members of the tax consolidated group in respect of tax amounts. The tax funding arrangement requires payments to or from the head entity equal to the current tax liability or asset assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity. The members of the tax consolidated group have also entered into a tax sharing agreement. The tax sharing agreement provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote. In determining the amount of current and deferred tax RHT II takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. RHT II believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgements about future events. New information may become available that causes RHT II to change its judgement regarding the adequacy of existing tax assets and liabilities; such changes to tax assets and liabilities will impact tax expense in the period such a determination is made. Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses. Redcape has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue. Other receivables are recognised at amortised cost, less any allowance for expected credit losses. Inventories Inventories include food and beverages, these are costed on a weighted average basis and stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. Derivatives are classified as current or non-current depending on the expected period of realisation. Cash flow hedges Cash flow hedges are used to hedge Redcape's interest rate risk exposures. The effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income through the cash flow hedges reserve in equity, whilst the ineffective portion is recognised in profit or loss. Amounts taken to equity are transferred out of equity and included in the measurement of the hedged transaction when the forecast transaction occurs. 78 78 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Cash flow hedges are tested for effectiveness on a regular basis prospectively to ensure that each hedge is highly effective and continues to be designated as a cash flow hedge. If the forecast transaction is no longer expected to occur, the amounts recognised in equity are transferred to profit or loss. If the hedging instrument is sold, terminated, expires, exercised without replacement or rollover, or if the hedge becomes ineffective and is no longer a designated hedge, the amounts previously recognised in equity remain in equity until the forecast transaction occurs. Property, plant and equipment Recognition and measurement With the exception of land, all other items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and capitalised borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised net within other income in profit or loss. Subsequent costs The cost of replacing a part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to Redcape, and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. Depreciation Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that Redcape will obtain ownership by the end of the lease term. The estimated useful lives are as follow: Freehold buildings Property improvements Furniture, fittings and equipment Software 40-150 years 7-40 years 7-15 years 4-7 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to Redcape. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. Any revaluation surplus reserve relating to the item disposed of is transferred directly to retained profits. 79 79 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Revaluation Land is recognised at fair value based on periodic valuations by external independent valuers and/or 6-month director valuations. A revaluation surplus is credited to other reserves in securityholders’ equity. Increases in the carrying amounts arising on revaluation of land are recognised in other comprehensive income and accumulated in other reserves in securityholders’ equity. To the extent that the increase reverses a decrease previously recognised in profit or loss, the increase is first recognised in profit or loss. Decreases that reverse previous increases of the same asset are first recognised in other comprehensive income to the extent of the remaining surplus attributable to the asset. All other decreases are charged to profit or loss. Intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Gaming licences Separately acquired Gaming licences are shown at historical cost. Gaming licences acquired in a business combination are recognised at fair value at the acquisition date. They have an indefinite useful life and are subsequently carried at cost less accumulated impairment losses. Gaming licenses are not amortised but tested for impairment annually, or more frequently if events or changes in circumstances indicate that they might be impaired, and are carried at cost less accumulated impairment losses. Liquor licences Separately acquired Liquor licences are shown at historical cost. Liquor licences acquired in a business combination are recognised at fair value at the acquisition date. They have an indefinite useful life and are subsequently carried at cost less accumulated impairment losses. Liquor licenses are not amortised but tested for impairment annually, or more frequently if events or changes in circumstances indicate that they might be impaired, and are carried at cost less accumulated impairment losses. Impairment Non-financial assets Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset's fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. Financial assets Redcape recognises a loss allowance for expected credit losses on financial assets which are either measured at amortised cost. Redcape has adopted a lifetime expected loss allowance in estimating expected credit losses to trade receivables. These provisions are considered representative across all customers of Redcape based on recent sales experience, historical collection rates and forward-looking information that is available. 80 80 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use onlyRedcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Trade and other payables These amounts represent liabilities for goods and services provided to Redcape prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost, are unsecured and are not discounted. Loans and borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Where there is an unconditional right to defer settlement of the liability for at least 12 months after the reporting date, the loans or borrowings are classified as non-current. Finance costs Finance costs are expensed in the period in which they are incurred. Finance costs comprise interest expense on borrowings and unwinding of the discount on provisions. Provisions Provisions are recognised when Redcape has a present (legal or constructive) obligation as a result of a past event, it is probable Redcape will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, considering the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. Employee benefits Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. Other long-term employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement. For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data. 81 81 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Issued capital Ordinary stapled securities are classified as equity. Incremental costs directly attributable to the issue of new stapled securities or options are shown in equity as a deduction, net of tax, from the proceeds. Distributions Distributions are recognised when declared during the financial year and no longer at the discretion of the trust. Provision is made for the amount of any distribution declared, being appropriately authorised and no longer at the discretion of the trust, on or before the end of the financial year but not distributed at the reporting date. Business combinations The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at the proportionate share of the identifiable net assets of the acquiree. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, Redcape assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, Redcape's operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Where the business combination is achieved in stages, Redcape remeasures its previously held equity interest in the acquiree at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition-date, but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquiree, if any, the consideration transferred and the acquirer's previously held equity interest in the acquirer. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition-date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. Goods and Services Tax ('GST') and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. 82 82 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by Redcape for the annual reporting period ended 30 June 2019. Redcape's assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to Redcape, are set out below. AASB 16 Leases This standard is applicable to annual reporting periods beginning on or after 1 January 2019. The standard replaces AASB 117 'Leases' and for lessees will eliminate the classifications of operating leases and finance leases. Subject to exceptions, a 'right-of-use' asset will be capitalised in the statement of financial position, measured at the present value of the unavoidable future lease payments to be made over the lease term. The exceptions relate to short-term leases of 12 months or less and leases of low-value assets (such as personal computers and small office furniture) where an accounting policy choice exists whereby either a 'right-of-use' asset is recognised or lease payments are expensed to profit or loss as incurred. A liability corresponding to the capitalised lease will also be recognised, adjusted for lease prepayments, lease incentives received, initial direct costs incurred and an estimate of any future restoration, removal or dismantling costs. Straight-line operating lease expense recognition will be replaced with a depreciation charge for the leased asset (included in operating costs) and an interest expense on the recognised lease liability (included in finance costs). In the earlier periods of the lease, the expenses associated with the lease under AASB 16 will be higher when compared to lease expenses under AASB 117. However, EBITDA results will be improved as the operating expense is replaced by interest expense and depreciation in profit or loss under AASB 16. For classification within the statement of cash flows, the lease payments will be separated into principal (financing activities) and interest (either operating or financing activities) component. For lessor accounting, the standard does not substantially change how a lessor accounts for leases. The consolidated entity will adopt this standard from 1 July 2019 and its impact on adoption is expected to result in total lease assets increasing by approximately $23.8 million and total lease liabilities increasing approximately $25.6 million. Deferred tax asset that arises as a result of both the internal and external leases that will not be eliminated on consolidation is by approximately $9.5 million. Note 4. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, which management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. Judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Valuation of land The fair value of land is reviewed regularly by management with reference to external independent valuations, recent offers and market conditions existing at reporting date, using generally accepted market practices. Then critical assumptions underlying management’s estimates of fair value are those relating to the capitalisation rate and adopted earnings. If there is any change in these assumptions or economic conditions, the fair value of the land may differ. Fair value measurement hierarchy Redcape is required to classify all assets and liabilities, measured at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3: Unobservable inputs for the asset or liability. Considerable judgement is required to determine what is significant to fair value and therefore which category the asset or liability is placed in can be subjective. Goodwill and other indefinite life intangible assets Redcape tests annually, or more frequently if events or changes in circumstances indicate impairment, whether goodwill and other indefinite life intangible assets have suffered any impairment, in accordance with the accounting policy stated in note 3. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions, including estimated discount rates based on the current cost of capital and growth rates of the estimated future cash flows. 83 83 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Impairment of non-financial assets other than goodwill and other indefinite life intangible assets Redcape assesses impairment of non-financial assets other than goodwill and other indefinite life intangible assets at each reporting date by evaluating conditions specific to Redcape and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves fair value less costs of disposal or value-in-use calculations, which incorporate a number of key estimates and assumptions. Note 5. Operating segments Identification of reportable operating segments Redcape operates as one business segment being the owner and/or operator of pubs, and in one geographic segment being Australia. These operating segments are based on the internal reports that are reviewed and used by the Board of Directors (who are identified as the Chief Operating Decision Makers ('CODM')) in assessing performance and in determining the allocation of resources. There is no aggregation of operating segments. The CODM reviews EBITDA (earnings before interest, tax, depreciation and amortisation). The accounting policies adopted for internal reporting to the CODM are consistent with those adopted in the financial statements. The information is reported to the CODM at each period end. Note 6. Revenue Disaggregation of revenue The disaggregation of revenue from contracts with customers is as follows: Major revenue streams Gaming revenue On-premise revenue Off-premise revenue Corporate and other revenue Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 179,099 56,877 48,022 1,217 153,846 39,998 48,126 915 285,215 242,885 All major revenue streams are within Australia and timing of revenue recognition is when goods or services are transferred. Note 7. Operating costs Administrative expenses Advertising and marketing expenses Operating expenses Repairs and maintenance expenses Property outgoing expenses Rental expenses 84 84 Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 3,287 5,082 11,771 2,161 8,613 1,248 2,348 3,825 9,668 1,858 7,209 2,214 32,162 27,122 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Note 8. Management fees Hotel operating fee Asset management fee Note 9. Net finance costs Finance income Finance costs Note 10. Listing costs and performance fee Listing costs (a) Performance fee (b) Total listing costs and performance fee Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 9,138 5,028 9,389 3,750 14,166 13,139 Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 (259) 17,583 (257) 15,168 17,324 14,911 Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 6,762 13,800 20,562 - - - (a) Expensed costs associated with listing Redcape on the ASX. (b) Fee payable to the Responsible Entity, in its personal capacity, on the overall performance of Redcape and realised upon IPO event. Comprises fee of $13.5 million plus non-claimable GST of $0.3 million. 85 85 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Note 11. Income tax benefit Income tax benefit Deferred tax - origination and reversal of temporary differences Aggregate income tax benefit Deferred tax included in income tax benefit comprises: Increase in deferred tax assets (note 17) Numerical reconciliation of income tax benefit and tax at the statutory rate Profit/(loss) before income tax benefit Tax at the statutory tax rate of 30% Trust loss not subject to tax Non-deductible expenses Income tax benefit Amounts credited directly to equity Deferred tax assets (note 17) Note 12. Current assets - cash and cash equivalents Cash and cash equivalents Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 (2,297) (2,297) (230) (230) (2,297) (230) (7,227) 1,798 (2,168) (787) 658 (2,297) 539 (941) 172 (230) Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 (674) (1,843) Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 16,981 35,055 Cash and cash equivalents include cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less. 86 86 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Note 13. Current assets - trade and other receivables Trade receivables Other receivables (a) (a) Includes receivables from supplier rebates. Note 14. Current assets - other current assets Prepayments Acquisition costs Capitalised loan establishment costs Note 15. Non-current assets - property, plant and equipment Land - at valuation Buildings - at cost Less: Accumulated depreciation Property improvements - at cost Less: Accumulated depreciation Furniture, fittings & equipment - at cost Less: Accumulated depreciation Work in progress - at cost Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 514 3,422 81 1,335 3,936 1,416 Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 2,760 - 559 2,321 4,632 333 3,319 7,286 Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 351,648 351,648 292,260 292,260 59,505 (2,033) 57,472 37,189 (2,615) 34,574 41,869 (9,691) 32,178 47,607 (803) 46,804 24,957 (1,420) 23,537 29,945 (4,530) 25,415 10,729 8,549 486,601 396,565 87 87 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: (a) Note 35 details treatment of business combination and disposal. (b) Net revaluation uplift of $20.5 million includes gain of $38.5 million recognised in the asset revaluation reserve offset by a loss of $18.0 million recognised in the income statement. Gain on revaluation of land of $37.6 million in other comprehensive income includes the reserve released on the sale of Belrose Hotel. Valuations of land The basis of the valuations of land is fair value. The land was last revalued on 31 May 2019 based on independent external assessments by a professionally qualified valuer, having recent experience in the location and category of land being valued. Land is revalued by the directors each half year where an independent valuation has not been sought. The directors do not believe that there has been a material movement in fair value since the revaluation date. Valuations are based on current prices for similar properties in the same location and condition. Land stated under the historical cost convention If land and buildings were stated under the historical cost convention, the amounts would be as follows: Land Building Property improvement Furniture, fittings & equipment Work in progress Stapled Consolidated $'000 $'000 $'000 $'000 $'000 Balance at 1 July 2017 Disposals Disposals - business Additions Additions - business acquisitions Revaluation increments Transfers in/(out) Depreciation expense Balance at 30 June 2018 Disposals Disposals - business (a) Additions Additions - business acquisitions (a) Revaluation increments (b) Transfers in/(out) Depreciation expense - - (6,293) - 170,713 127,840 - - 292,260 - (1,821) - 40,756 20,453 - - - - (1,038) 22 48,634 - - (814) 46,804 - (4,841) 86 16,751 - - (1,328) - (225) (199) 689 22,529 - 2,305 (1,562) 23,537 (839) (264) 3,518 - - 10,634 (2,012) - (640) (573) 5,091 26,704 - 1,493 (6,660) 25,415 (132) (710) 6,513 6,975 - 2,137 (8,020) - (22) (30) 8,959 3,440 - (3,798) - 8,549 - (114) 15,065 - - (12,771) - Total $'000 - (887) (8,133) 14,761 272,020 127,840 - (9,036) 396,565 (971) (7,750) 25,182 64,482 20,453 - (11,360) Balance at 30 June 2019 351,648 57,472 34,574 32,178 10,729 486,601 Land - at cost 88 88 Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 204,233 204,233 164,421 164,421 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Note 16. Non-current assets - intangible assets Goodwill - at cost Gaming and liquor licences - at cost Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 327,714 278,461 263,043 231,129 590,757 509,590 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Aggregated Balance at 1 July 2017 Additions Disposals Additions - business acquisitions Stapled Consolidated Balance at 30 June 2018 Disposals (a) Additions - business acquisitions (note 35) Balance at 30 June 2019 Gaming and liquor licences Goodwill $'000 $'000 Total $'000 - - (4,942) 283,403 - 1,329 (5,700) 235,500 - 1,329 (10,642) 518,903 278,461 (7,022) 56,275 231,129 (5,509) 37,423 509,590 (12,531) 93,698 327,714 263,043 590,757 (a) Relates to disposal of Belrose hotel. Refer to commentary in note 35. Impairment testing Goodwill is allocated to the group of cash-generating units which in total reflect Redcape’s operating segment. The recoverable amount of Redcape's goodwill has been determined by a value-in-use calculation using a discounted cash flow model, based on a 1 year projection period approved by management and extrapolated for a further 4 years using a steady rate, together with a terminal value applied to the forecast fifth year after tax cashflows. Management has based the value-in-use calculations on the historical performance and future prospects of the business as reported to the CODM, taking into consideration the like-for-like historical growth. As a result of the value-in-use calculation, no impairment of goodwill has been recorded in the Financial Statements. Key assumptions are those to which the recoverable amount of an asset or cash-generating units is most sensitive. The following key assumptions were used in the value-in-use calculations: Discount rate (pre-tax) EBITDAR growth rate Terminal value growth rate 89 2019 % 2018 % 8.1% 3.0% 3.0% 8.7% 3.0% 3.0% 89 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Sensitivity Management believes that any reasonably possible change in the key assumptions used would not cause the cash- generating unit’s carrying amount to exceed its recoverable amount and result in a material impairment based on current economic conditions and CGU performance The below table shows the key assumptions used in the value in use calculation and the amount by which each key assumption must change in isolation in order for the estimated recoverable amount to be equal to its carrying value. Terminal value % Pre-tax discount rate % 3.0% 1.7% 8.1% 9.2% Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 4,975 1,249 589 163 1,659 2,360 4,636 14 1,770 1,002 501 584 1,763 2,928 4,092 34 15,645 12,674 12,674 2,297 674 - - 230 1,843 10,601 15,645 12,674 Assumptions used in value in use calculation Rate required for recoverable amount to equal carrying value (a) (a) Each rate is determined in isolation. Note 17. Non-current assets - deferred tax Deferred tax asset comprises temporary differences attributable to: Amounts recognised in profit or loss: Tax losses Property, plant and equipment Employee benefits Accrued expenses Straight-line lease liability Over market rent liability Transaction costs Other items Deferred tax asset Movements: Opening balance Credited to profit or loss (note 11) Credited to equity (note 11) Additions through business combinations Closing balance 90 90 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Note 18. Current liabilities - trade and other payables Trade payables Accrued interest Performance fee Other payables State government taxes Note 19. Current liabilities - employee benefits Annual leave Long service leave Stapled Consolidated 2019 $'000 Stapled Consolidated 2019 Aggregated 2018 $'000 Aggregated 2018 3,972 1,944 6,400 8,125 18,308 3,055 2,595 - 7,489 16,321 38,749 29,460 Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 1,453 255 1,206 224 1,708 1,430 Amounts not expected to be settled within the next 12 months The current provision for employee benefits includes all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount is presented as current, since Redcape does not have an unconditional right to defer settlement. However, based on past experience, Redcape does not expect all employees to take the full amount of accrued leave or require payment within the next 12 months. The following amounts reflect leave that is not expected to be taken within the next 12 months: Employee benefits obligation expected to be settled after 12 months 255 240 Note 20. Current liabilities - distribution payable Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 Distributions Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 12,030 10,243 91 91 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Distributions The provision represents distributions declared, being appropriately authorised and no longer at the discretion of the trust, on or before the end of the financial year but not distributed at the reporting date. Carrying amount at the start of the year Additional provisions recognised Payments relating to prior period Payments relating to current period Carrying amount at the end of the year Note 21. Non-current liabilities - other payables Straight-line lease liability Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 10,243 46,271 (10,243) (34,241) - 37,026 - (26,783) 12,030 10,243 Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 430 474 Leases in which a significant portion of the risks and rewards of ownership are not transferred to Redcape as lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. Note 22. Non-current liabilities - borrowings Bank loans Capitalised loan establishment costs Total secured liabilities The total secured liabilities (current and non-current) are as follows: Bank loans Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 436,700 (139) 366,700 (416) 436,561 366,284 Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 436,700 366,700 Syndicated Bank Facility The total facility amount is $477.0 million (excluding $3.0 million ancillary facility) and expires on 23 September 2020. 92 92 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Assets pledged as security The financiers in respect of the bank loans have first ranking security over all of the assets of each entity in Redcape, a registered mortgage over each property and a fixed charge over each liquor and gaming licence. Defaults and breaches There have been no breaches of bank covenants in the year ended 30 June 2019. Restrictions on distributions There have been no breaches of the restrictions on distributions in the year ended 30 June 2019. Financing arrangements Unrestricted access was available at the reporting date to the following lines of credit: Total facilities Bank loans Used at the reporting date Bank loans Unused at the reporting date Bank loans Note 23. Non-current liabilities - derivative financial instruments Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 477,000 427,000 436,700 366,700 40,300 60,300 Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 Interest rate swap contracts - cash flow hedges 3,489 272 Refer to note 28 for further information on financial instruments. Refer to note 29 for further information on fair value measurement. Note 24. Non-current liabilities - employee benefits Long service leave Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 255 240 93 93 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Note 25. Equity - contributed equity Stapled Consolidated 2019 Stapled Securities Aggregated 2018 Stapled Securities Stapled Consolidated 2019 Aggregated 2018 $'000 $'000 Contributed equity 551,445,932 470,312,074 235,545 467,307 Details RHT II Consolidated Balance at beginning of the period Securities issued Equity raising costs Deferred tax asset June 2019 June 2019 June 2018 June 2018 No of securities '000 $'000 No of securities '000 $'000 470,312 81,134 - - 199,549 37,569 (2,247) 674 - 470,312 - - - 203,849 (6,143) 1,843 Balance at end of the period 551,446 235,545 470,312 199,549 Details RHT I Consolidated (non-controlling interest) Balance at beginning of the period Securities issued Equity raising costs June 2019 June 2019 June 2018 June 2018 No of securities '000 $'000 No of securities '000 $'000 470,312 81,134 - 267,758 52,188 (1,477) - 470,312 - - 270,219 (2,461) Balance at end of the period 551,446 318,469 470,312 267,758 Ordinary stapled securities The Ordinary securities of RHT II are stapled to the securities of RHT I. Each stapled security entitles the holder to participate in distributions and the proceeds on the winding up of the trust in proportion to the number of and amounts paid on the securities held. The fully paid stapled ordinary securities have no par value and the trust does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each stapled security shall have one vote. Stapled Securities buy-back As disclosed in the PDS, the Responsible Entity may in its sole discretion proceed with an on-market buy-back of up to 5% of Redcape stapled securities. The timing of and conduct of the buy-back will be in accordance with the Listing Rules and all applicable laws. No buy-back of Redcape stapled securities has been undertaken by the Responsible Entity. Voluntary Escrow There are currently 51.5 million shares subject to a voluntary escrow arrangement. The escrow period ends in February 2020 in line with Redcape's FY20 HY results release. Capital risk management Redcape's objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for stapled security holders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. 94 94 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Capital is regarded as total equity, as recognised in the statement of financial position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. In order to maintain or adjust the capital structure, Redcape may adjust the amount of distributions paid to stapled security holders, return capital to stapled security holders, issue new stapled securities or sell assets to reduce debt. Redcape would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current trust's stapled securities price at the time of the investment. Redcape is subject to certain financing arrangements covenants and meeting these is given priority in all capital risk management decisions. There have been no events of default on the financing arrangements during the financial year. The capital risk management policy remains unchanged from the previous reporting period. Note 26. Equity - non-controlling interest Contributed equity Reserves Accumulated losses Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 318,469 161,923 (43,497) 436,895 - - - - Aggregated comparative with no parent entity or non-controlling interest, therefore the balance reflected is zero. Contributed Hedging Revaluation equity $'000 reserve $'000 reserve $'000 Retained earnings/ (Accumulate d losses) $'000 RHT I Consolidated Profit for the year Total other comprehensive income Arising on stapling Issue of securities Equity raising costs Interim distributions paid to unitholders Provisions for distribution to unitholders - - 267,758 52,188 (1,477) - - - (3,216) (272) - - - - - 37,573 127,838 - - - - 10,691 - (7,917) - - (34,241) (12,030) Total $'000 10,691 34,357 387,407 52,188 (1,477) (34,241) (12,030) Balance at 30 June 2019 318,469 (3,488) 165,411 (43,497) 436,895 95 95 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Note 27. Equity - distributions Distributions paid/payable during the financial year were as follows: Final distribution for the quarter ended 30 September 2018 of 2.205 cents (FY18: 2.205 cents) per unit Final distribution for the quarter ended 31 December 2018 of 2.205 cents (FY18: 2.205 cents) per unit Final distribution for the quarter ended 31 March 2019 of 2.158 cents (FY18: 2.158 cents) per unit Final distribution for the quarter ended 30 June 2019(a) of 2.182 cents (FY18: 2.182 cents) per unit Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 10,795 7,839 11,548 9,032 11,898 9,912 12,030 10,243 46,271 37,026 (a) On 24 June 2019 the directors declared a final dividend for the quarter ended 30 June 2019 of 2.182 cents per unit to be paid on 30 August 2019. Distributions prior to the listing on the ASX as at 30 November 2018 were calculated on a pro rata basis for days held. Note 28. Financial instruments Financial risk management objectives Redcape's activities expose it to interest rate risks, credit risk and liquidity risk. Redcape's overall risk management program seeks to minimise potential adverse effects on the financial performance of Redcape. Redcape uses derivative financial instruments such as interest rate swaps to hedge its interest rate risk exposure. Derivatives are exclusively used for hedging purposes, i.e. not as trading or other speculative instruments. Redcape uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate and ageing analysis for credit risk. Risk management is carried out by senior finance executives ('Finance') under policies approved by the directors of the Responsible Entity. These policies include identification and analysis of the risk exposure of Redcape and appropriate procedures, controls and risk limits. Finance identifies, evaluates and hedges financial risks within Redcape's operations. Finance reports to the directors on a monthly basis. Market risk Foreign currency risk Redcape is not exposed to any foreign currency risk. Price risk Redcape is not exposed to any significant price risk. Interest rate risk Redcape's main interest rate risk arises from long-term borrowings. Borrowings obtained at variable rates expose Redcape to interest rate risk. Borrowings obtained at fixed rates expose Redcape to fair value interest rate risk. The policy is to maintain approximately 50% of current borrowings at fixed rates using interest rate swaps to achieve this when necessary. 96 96 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 As at the reporting date, Redcape had the following variable rate borrowings and interest rate swap contracts outstanding: Stapled Consolidated Stapled Consolidated 2019 Weighted average interest rate % Balance $'000 Weighted average interest rate % Aggregated 2018 Balance $'000 Bank loans Interest rate swaps (notional principal amount) 2.98% - 436,700 (238,500) 2.84% - 366,700 (215,000) Net exposure to interest rate risk 198,200 151,700 For Redcape the bank loans outstanding, totalling $436.7 million (2018: $366.7 million), are interest payment loans. Monthly cash outlays of approximately $1.1 million (2018: $0.8 million) per month are required to service the interest payments. An official increase/decrease in interest rates of 100 (2018: 100) basis points would have an adverse/favourable effect on profit before tax of $4.4 million (2018: $3.7 million) per annum. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to Redcape. Redcape has a strict code of credit, including obtaining agency credit information, confirming references and setting appropriate credit limits. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount. Redcape does not hold any collateral or have any expected credit losses. Liquidity risk Redcape manages liquidity risk by maintaining adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Redcape has a voluntary working capital deficiency based on its capital management strategy of paying down debt with excess cash. Financing arrangements Unused borrowing facilities at the reporting date: Bank loans Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 40,300 60,300 Remaining contractual maturities The following tables detail Redcape's remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. Stapled Consolidated 2019 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - variable Bank loans Total non-derivatives Weighted average interest rate % 1 year or less $'000 Between 1 and 2 years $'000 Between 2 and 5 years $'000 Remaining contractual maturities $'000 Over 5 years $'000 - - 3,972 34,777 - - 2.98% 17,386 56,135 468,102 468,102 - - - - 97 - - - - 3,972 34,777 485,488 524,237 97 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Aggregated 2018 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - variable Bank loans Total non-derivatives Weighted average interest rate % 1 year or less $'000 Between 1 and 2 years $'000 Between 2 and 5 years $'000 Remaining contractual maturities $'000 Over 5 years $'000 - - 3,055 26,405 - - - - 2.84% 16,345 45,805 17,970 17,970 380,691 380,691 - - - - 3,055 26,405 415,006 444,466 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. Redcape is in the process of refinancing its debt facilities which, when approved, will extend the repayments by another four years. The extension of the bank loans is not reflected in the above contractual maturities. Fair value of financial instruments Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value. Note 29. Fair value measurement Fair value hierarchy The following tables detail Redcape's assets and liabilities, measured or disclosed at fair value, using a three-level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3: Unobservable inputs for the asset or liability Stapled Consolidated 2019 Level 1 $'000 Level 2 $'000 Level 3 $'000 Total $'000 Assets Land Total assets Liabilities Interest rate swaps Total liabilities Aggregated 2018 Assets Land Total assets Liabilities Interest rate swaps Total liabilities Level 1 $'000 - - - - - - - - Level 2 $'000 - - - - - - - - 351,648 351,648 351,648 351,648 3,489 3,489 3,489 3,489 Level 3 $'000 Total $'000 292,260 292,260 292,260 292,260 272 272 272 272 There were no transfers between levels during the financial year. The carrying amounts of trade and other receivables and trade and other payables are assumed to approximate their fair values due to their short-term nature. 98 98 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 The fair value of financial liabilities is estimated by discounting the remaining contractual maturities at the current market interest rate that is available for similar financial liabilities. Valuation techniques for fair value measurements categorised within level 2 and level 3 The basis of the valuations of land is fair value. The land was last revalued on 31 May 2019 based on independent external assessments by a professionally qualified valuer, having recent experience in the location and category of land being valued, and internal valuations performed by Redcape's internal property team. All internal valuations have been reviewed and approved by the Board to form Directors valuation. All internal valuations have been reviewed and approved by the Board. The directors do not believe that there has been a material movement in fair value since the revaluation date. Valuations are based on current prices for similar properties in the same location and condition. Derivative financial instruments have been valued using quoted market rates. This valuation technique maximises the use of observable market data where it is available. Note 30. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by KPMG, the auditor of the trust: Audit services - KPMG Audit or review of the financial statements Other services - KPMG IPO related services including due diligence Stapled Consolidated 2019 $ Aggregated 2018 $ 349,075 299,534 799,914 20,000 1,148,989 319,534 Note 31. Contingent liabilities Redcape has provided bank guarantees to a supplier and landlord as at 30 June 2019 of $1,800,000 (2018: $1,800,000). Note 32. Commitments Capital commitments Committed at the reporting date but not recognised as liabilities, payable: Property, plant and equipment Lease commitments - operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years More than five years Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 - 1,296 1,322 5,803 25,993 1,274 4,117 - 33,118 5,391 99 99 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Note 33. Related party transactions Parent entity Redcape Hotel Trust II is the parent entity. Transactions with related parties (a) Responsible entity Moelis Australia Asset Management Ltd (i) Fund establishment fee Asset management fee Debt arrangement fee Acquisition fee Disposal fee Redcape Hotel Group Management Ltd (ii) Asset management fee Acquisition fee Performance fee (iii) Transaction values for the year ended 30 June 2019 $ Balance outstanding as at 30 June 2019 $ Transaction values for the year ended 30 June 2018 $ Balance outstanding as at 30 June 2018 $ - 1,466,532 250,000 1,080,000 210,000 3,006,532 - - - - - - 3,850,000 3,750,064 321,500 1,231,500 237,500 - 358,656 - - - 9,390,564 358,656 3,561,614 500,000 14,400,000 435,667 - 6,400,000 18,461,614 6,835,667 - - - - - - - - (i) Moelis Australia Asset Management Ltd ceased to be the Responsible Entity on 24th October 2018. (ii) Redcape Hotel Group Management Ltd became the Responsible Entity of the Trust from 24th October 2018. (iii) Performance fee of $0.9 million has been capitalised to equity and $13.5 million has been expensed. (b) Other related party transactions The aggregate amounts recognised during the period relating to transactions between Redcape and related entities were as follows: 100 100 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Related Entity Transaction Moelis Australia Advisory Pty Limited Moelis Australia Advisory Pty Limited Moelis Australia Hotel Management Pty Ltd Moelis Australia Hotel Management Pty Ltd Underwriting fee Transaction fee Hotel operating fee (a) Project development fee Transaction values for the year ended 30 June 2019 $ Balance outstanding as at 30 June 2019 $ Transaction values for the year ended 30 June 2018 $ Balance outstanding as at 30 June 2018 $ 2,375,000 3,115,670 - - 8,115,597 - - - 9,137,915 (409,473) 9,389,155 655,924 743,851 73,822 329,205 53,715 15,372,436 (335,651) 17,833,957 709,639 (a) Includes the $1.45 million waiver of the Hotel Operator Fee by the Trust manager. Note 34. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Profit/(loss) after income tax Total comprehensive income Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Contributed equity Retained profits/ (Accumulated losses) Total equity Parent 2019 $'000 2018 $'000 (12,815) 6,154 (12,815) 6,154 Parent 2019 $'000 2018 $'000 191,798 168,297 232,443 205,971 3,559 3,559 268 268 235,545 (6,661) 199,549 6,154 228,884 205,703 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The subsidiaries of RHT II are the initial guarantors of the syndicated bank facility of Redcape Hotel Property Trust, a subsidiary of RHT I. Redcape Hotel Fund Pty Ltd, a subsidiary of RHT II also has in placed a Deed of Cross Guarantees in relation to the debts of the trading subsidiaries. 101 101 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2019 and 30 June 2018. Capital commitments - Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 30 June 2019 and 30 June 2018. The accounting policies of the parent entity are consistent with those of Redcape, as disclosed in note 3, except for the following: ● Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. Note 35. Business combinations and disposals Business combination to form Redcape Hotel Group Stapling In accordance to the stapling deed, securities in RHT I and RHT II were stapled to one another on 2 July 2018. They were listed as a single security on the ASX at 30 November 2018. RHT II is identified as the parent of Redcape and acquirer of RHT I with the acquisition accounted for as a change in ownership without a loss of control. The issued securities of RHT I are not owned by RHT II and are presented as non-controlling interests in Redcape even though securities in RHT I are held directly by the unitholders of the Trust. Additionally, no goodwill has been recognised on acquisition of RHT I because no direct ownership interest was acquired by Redcape in RHT I. The equity in the net assets of RHT I and the profit/(loss) arising from those net assets have been separately identified in the statements of comprehensive income and financial position. RHT I’s contributed equity and retained earnings/accumulated losses are shown as a non-controlling interest in the consolidated financial statements in accordance with accounting standards. Redcape was admitted to the official list of the ASX as a stapled group and consequently, ASX reserves the right (but without limiting its absolute discretion) to remove any or both of RHT I and RHT II from the official list of ASX if any of the securities in RHT I or RHT II comprising Redcape stapled securities cease to be stapled together or any equity securities are issued by either RHT I or RHT II which are not stapled to the equivalent securities in the other of RHT I or RHT II. Details of the acquisition arising from stapling are as follows: Cash and cash equivalents Related party loan Other current assets Investment property Trade and other payables Distribution payable Loans and borrowings Derivative financial instruments Net assets acquired Goodwill Acquisition-date fair value of the total consideration transferred Accumulated losses Accumulated losses are losses attributable to RHT II. Movement in accumulated losses were as follows: 102 102 Fair value $'000 14,519 136,625 5,184 611,873 (3,900) (10,243) (366,376) (272) 387,410 - 387,410 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Balance at 1 July 2018 Net loss for the year attributable to RHT II Arising from stapling (a) Stapled Consolidated 2019 $'000 (1,156) (15,621) (26,516) (43,293) (a) RHT I holds the Freehold assets which are recognised collectively as investment properties in the RHT I balance sheet. On consolidation, where Redcape holds the Freehold of the assets, the investment properties are disaggregated into their components (Land, Buildings, Licences). On disaggregation, depreciation and capitalised acquisition costs are also expensed to the income statement causing losses to the income statement as a result of stapling. Other business acquisitions Redcape has settled on the acquisition of 6 hotels during the year ended 30 June 2019. The following summarises the major classes of consideration transferred and recognises the amounts of assets acquired and liabilities assumed at the acquisition date: Details of the acquisition are as follows: Cash and cash equivalents Inventories Prepayments Property, plant and equipment (Note 15) Gaming and liquor licences (Note 16) Trade and other payables Employee benefits Net assets acquired Goodwill Acquisition-date fair value of the total consideration transferred Representing: Cash paid or payable to vendor Acquisition costs expensed to profit or loss Cash used to acquire businesses; net of cash acquired: Acquisition-date fair value of the total consideration transferred Add: payments made for future period acquisition Less: cash and cash equivalents Less: payments made in prior periods Less: payments of equity raising fee as part of acquisition Net cash used 103 Fair value $'000 229 263 105 64,482 37,423 (698) (149) 101,655 56,275 157,930 157,930 7,631 Stapled Consolidated 2019 $'000 157,930 - (229) (4,352) - 153,349 103 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Acquisition related costs Business acquisition costs of $7.6 million include stamp duty, legal fees and due diligence costs were included in Redcape's consolidated statement of profit or loss and other comprehensive income. Disposals Redcape has disposed 1 hotel during the year ended 30 June 2019 resulting in a gain on disposal of $1.0 million. The carrying amount of property plant and equipment at the date of disposal amounted to $7.8 million and 2018 investment property $2.3 million. The value of intangibles at the date of disposal amounted to $12.5 million Note 36. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiary in accordance with the accounting policy described in note 3: Subsidiaries of RHT II (All incorporated in Australia) Redcape Hotel Fund Pty Ltd MAHF Custodian Pty Ltd MAHPT TT Pty Ltd Redcape Group Limited Redcape Hotel Group Pty Ltd RHG Operations Pty Ltd Redcape Services Pty Ltd RGM TT Pty Ltd 2019 % 2018 % 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% - 100.00% 100.00% 100.00% 100.00% - 104 104 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Subsidiaries of RHT I (All incorporated in Australia) Redcape Hotel Property Trust St George Hotel Trust Doonside Hotel Trust El Cortez Hotel Trust Keighery Hotel Trust Lakeview Hotel Motel Trust Prospect Hotel Trust Royal Hotel Trust St Marys Hotel Trust Belrose Hotel Trust Red Lantern Hotel Trust Campbelltown Hotel Trust Eastwood Hotel Trust Leumeah Hotel Trust Mount Annan Hotel Trust Revesby Pacific Hotel Trust Willoughby Hotel Trust Eastern Creek Tavern Hotel Trust Landmark Hotel Trust Crown Revesby Hotel Trust Minskys Hotel Trust Shamrock Hotel Trust Hermit Park Hotel Trust Wattle Hotel Trust Carrington Hotel Trust Andergrove Tavern Hotel Trust Cabramatta Hotel Trust Crescent Hotel Trust Wattle Grove Hotel Trust Sun Hotel Trust - Acquired on 2 July 2018 Vauxhall Hotel Trust - Acquired on 13 August 2018 Australian Hotel & Brewery Trust - Acquired on 20 August 2018 Central Hotel Trust - Acquired on 4 December 2018 Unanderra Hotel Trust - Acquired on 4 December 2018 Figtree Hotel Trust - Acquired on 4 December 2018 Note 37. Events after the reporting period 2019 % 2018 % 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% - - - - - - Subsequent to 30 June 2019, Redcape refinanced its debt facilities resulting in an increased facility of $503.0 million (including $3.0 million ancillary facility) with a weighted average term of 4 years. As a result of the refinancing, in FY20 the hedge position of the existing finance facility will be closed out at a cost of approximately $4.0 million. Capitalised loan establishment costs of $0.5 million will be written off upon activation of the new facility in FY20. Post the end of the financial year, Redcape exchanged contracts to acquire the Eden Brewhouse Redbank Plains Queensland as part of the ongoing portfolio optimisation program. No other material matter or circumstance has arisen since 30 June 2019 that has significantly affected, or may significantly affect Redcape's operations, the results of those operations, or Redcape's state of affairs in future financial years. 105 105 ASX:RDCAnnual Report 2019For personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Notes to the financial statements 30 June 2019 Note 38. Reconciliation of profit/(loss) after income tax to net cash from operating activities Profit/(loss) after income tax benefit for the year (4,930) 2,028 Stapled Consolidated 2019 $'000 Aggregated 2018 $'000 Adjustments for: Depreciation and amortisation expense Loss on asset revaluation Net loss/(gain) on disposal of non-current assets Business acquisition costs Change in operating assets and liabilities: Decrease/(increase) in trade and other receivables Decrease/(increase) in inventories Increase in deferred tax assets Increase in prepayments Increase in trade and other payables Decrease in provision for income tax Increase/(decrease) in employee benefits Decrease in other operating liabilities 11,360 17,998 (502) 7,631 (2,520) 237 (2,297) (2) 8,880 - 142 - 9,036 - (1,348) 31,509 119 (175) (185) (287) 1,501 (1,632) (709) (592) Net cash from operating activities 35,997 39,265 Note 39. Earnings per stapled securities Loss after income tax Weighted average number of ordinary stapled securities used in calculating basic and diluted earnings per stapled securities Basic and diluted earnings per stapled unit (cents) Stapled Consolidated 2019 $'000 (4,930) 528,811,312 (0.93) Aggregated 2018 $'000 - - - 106 106 Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust IIFor personal use only Redcape Hotel Group comprising Redcape Hotel Trust I and Redcape Hotel Trust II SPFS - Independent auditor's report to the members of Redcape Hotel Group 30 June 2019 Directors’ declaration In the opinion of the directors, acting in their capacity as Management for the Redcape Hotel Group (‘the Group’): • the financial statements and notes: (i) (ii) present fairly the financial position of the Group as at 30 June 2019 and its performance, as represented by the results of its operations and its cash flows, for the financial year ended on that date in accordance with the statement of compliance and basis of preparation described in Notes 1 and 2; and comply with Australian Accounting Standards (including the Australian Accounting Interpretations) to the extent described in Notes 1 and 2; and • there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable. In respect of the year ended 30 June 2019 the Group has: • • kept such accounting records as correctly record and explain its transactions and financial position; kept its accounting records that financial statements of the Group that are presented fairly can be prepared from time to time; and • kept its accounting records so that the financial statements of the Group can be conveniently and properly audited Signed in accordance with a resolution of the directors: On behalf of the directors ___________________________ Nicholas Roland Collishaw Chairman 28 August 2019 Sydney ___________________________ Daniel John Brady Executive Director 107 107 ASX:RDCAnnual Report 2019For personal use only Independent Auditor’s Report To the Directors of Redcape Hotel Group Management Ltd, as Responsible Entity of the Stapled Group (Directors of the Responsible Entity) Opinion We have audited the Special Purpose Financial Statements of Redcape Hotel Group (the Stapled Group Special Purpose Financial Statements). In our opinion, the accompanying Stapled Group Special Purpose Financial Statements present fairly, in all material respects, the financial position of the Stapled Group as at 30 June 2019, and of its financial performance and its cash flows for the year then ended, in accordance with the basis of preparation described in Notes 1, 2 and 3 to the financial statements. The Special Purpose Financial Statements of the Stapled Group comprise: • Statement of financial position as at 30 June 2019 • Statement of profit or loss and other comprehensive income, Statement of changes in equity, and Statement of cash flows for the year then ended • Notes including a summary of significant accounting policies The Stapled Group consists of Redcape Hotel Trust II and the entities it controlled at the year-end or from time to time during the financial year and Redcape Hotel Trust I and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Special Purpose Financial Statements section of our report. We are independent of the Stapled Group and Redcape Hotel Group Management Ltd (the Responsible Entity) in accordance with 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 Special Purpose Financial Statements in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. Emphasis of matter – basis of preparation and restriction on use We draw attention to Notes 1 and 2 to the Special Purpose Financial Statements, which describes the basis of preparation. The preparation of the comparative aggregation involved allocations of income, expenses, assets and liabilities. Consequently, the Stapled Group’s comparative aggregation may not necessarily be indicative of the financial position, performance and cash flows that would have been achieved if the Stapled Group had operated as an independent entity in that year, nor may they be indicative of the results of the position, operations and cash flows of the Stapled Group for any future period. The Special Purpose Financial Statements have been prepared to assist the Directors of Redcape Hotel Group Management Ltd, as Responsible Entity of the Stapled Group, for the purpose of meeting the listing requirements of the Australian Securities Exchange (“ASX”). As a result, the Special Purpose Financial Statements and this Auditor’s Report may not be suitable for another purpose. Our opinion is not modified in respect of this matter. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 108For personal use onlyOur report is intended solely for the Directors of Redcape Hotel Group Management Ltd, as Responsible Entity of the Stapled Group and should not be used by parties other than the Directors of Redcape Hotel Group Management Ltd, as Responsible Entity of the Stapled Group. We disclaim any assumption of responsibility for any reliance on this report, or on the Special Purpose Financial Statements to which it relates, to any person other than the Directors of Redcape Hotel Group Management Ltd, as Responsible Entity of the Stapled Group, or for any other purpose than that for which they were prepared. Other Matter The Stapled Group has prepared a Financial Report using a general purpose framework issued and approved by the Directors of the Responsible Entity on 28 August 2019. We issued an audit report thereon on 28 August 2019. The Special Purpose Financial Statements, subject of this audit opinion are separate and distinct from those prepared using a general purpose framework. Other Information Other Information is financial and non-financial information in Redcape Hotel Group’s annual reporting which is provided in addition to the Special Purpose Financial Statements and the Auditor’s Report. The Directors of Redcape Hotel Group Management Ltd (the Responsible Entity), acting in their capacity as Management for the Redcape Hotel Group (Management), are responsible for the Other Information. Our opinion on the Special Purpose Financial Statements does not cover the Other Information and, accordingly, we do not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Stapled Group Financial Report and our related assurance opinion. In connection with our audit of the Special Purpose Financial Statements, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Special Purpose Financial Statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of Management for the Special Purpose Financial Statements The Directors of Redcape Hotel Group Management Ltd (the Responsible Entity), acting in their capacity as Management for the Redcape Hotel Group (Management), are responsible for: • • • the preparation and fair presentation of the Special Purpose Financial Statements and have determined that the basis of preparation described in Notes 1 and 2 to the financial statements are appropriate to meet the needs of the Directors of the Responsible Entity. implementing necessary internal control to enable the preparation of Special Purpose Financial Statements that are free from material misstatement, whether due to fraud or error assessing the Stapled Group’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Stapled Group or to cease operations, or have no realistic alternative but to do so. The Directors of Redcape Hotel Group Management Ltd, as Responsible Entity of the Stapled Group are responsible for overseeing the Stapled Group’s Financial Reporting process. 109For personal use onlyAuditor’s responsibilities for the audit of the Special Purpose Financial Statements Our objective is: • • to obtain reasonable assurance about whether the Special Purpose Financial Statements as a whole are 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 Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They 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 the Special Purpose Financial Statements. 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 Special Purpose Financial Statements, 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 Stapled Group's internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management. • Conclude on the appropriateness of Management's 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 Stapled 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 report to the related disclosures in the Special Purpose Financial Statements 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 report. However, future events or conditions may cause the Stapled Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the Special Purpose Financial Statements, including the disclosures, and whether the Special Purpose Financial Statements represent the underlying transactions and events in a manner that achieves fair presentation. •Obtain sufficient appropriate audit evidence regarding the Special Purpose Financial Statements of the entities or business activities within the Stapled Group to express an opinion on the Stapled Group Financial Statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for the audit opinion. We communicate with Management and the Directors of the Responsible Entity 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 the audit. 110For personal use onlyWe also provide Management and the Directors of the Responsible Entity 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. KPMG Cameron Roan Partner Sydney 28 August 2019 111For personal use onlyFor personal use only

Continue reading text version or see original annual report in PDF format above