FOLKESTONE REAL ESTATE INCOME FUND AT OXLEY ANNUAL REPORT 2016

Transcription

1 FOLKESTONE REAL ESTATE INCOME FUND AT OXLEY ANNUAL REPORT Folkestone Real Estate Income Fund at Oxley Annual Report 2016

2 CONTENTS KEY HIGHLIGHTS AND FINANCIAL SUMMARY 2 CHAIRMAN AND HEAD OF FUNDS MANAGEMENT REPORT 3 DIRECTORS' REPORT 5 AUDITOR S INDEPENDENCE DECLARATION 11 FINANCIAL REPORT STATEMENT OF COMPREHENSIVE INCOME 12 BALANCE SHEET 13 STATEMENT OF CHANGES IN EQUITY 14 STATEMENT OF CASH FLOWS 15 NOTES TO THE FINANCIAL STATEMENTS 16 DIRECTORS DECLARATION 31 INDEPENDENT AUDITOR S REPORT 32 Folkestone Funds Management Limited ABN Folkestone Real Estate Income Fund at Oxley Annual Report 2016

3 KEY HIGHLIGHTS 17.4% TOTAL ANNUAL RETURN $38.5m PROPERTY VALUATION 4.8 % 41.8% GEARING 2.1 % 8.1cpu DISTRIBUTION 1.3 % $1.06 NTA 8.2 % 98.6% OCCUPANCY FINANCIAL SUMMARY Jun 2016 Jun 2015 Jun 2014 Total Assets ($m) Investment Property ($m) Gross Debt ($m) Net Assets ($m) Gearing (%) Units on Issue (m) NTA per Unit ($) (With mark to market of interest rate hedges) NTA per Unit ($) (Without mark to market of interest rate hedges) Folkestone Real Estate Income Fund at Oxley Annual Report

4 CHAIRMAN AND HEAD OF FUNDS MANAGEMENT REPORT We are pleased to provide the results of the Folkestone Real Estate Income Fund at Oxley ( the Fund ) for the year ended 30 June The Fund is a single asset, closed end unlisted real estate fund with a term of six years. The Fund owns a neighbourhood shopping centre located at 157 Oxley Station Road, Oxley, QLD which comprises 4,698 sqm of ground floor retail space (incorporating a 3,200 sqm Woolworths) together with 2,400 sqm of commercial office space on level one (leased to the Queensland Government Department of Communities, Child Safety and Disability Services). There are two levels of basement car parking with 126 car spaces dedicated to retail customers and a further 38 occupied under licence by the Queensland Government. KEY FINANCIAL ACHIEVEMENTS The key achievements during FY16 include: the Fund's total annual return of 17.4 per cent 1 ; an annualised distribution of 8.1 per cent per Unit, in line with the forecast distribution; the valuation increased to $38.5 million up 4.8 per cent from 30 June 2015 and 11.2 per cent on the acquisition price in April 2014; NTA per Unit of $1.06 (with mark to market of the interest rate hedges) and $1.09 (without mark to market of the interest rate hedges) 2 compared to $0.98 and $0.99 respectively at 30 June 2015; and Fund gearing reduced from 43.9 per cent at 30 June 2015 to 41.8 per cent as at 30 June PROPERTY SUMMARY As at 30 June 2016, 98.6 per cent of the Centre was occupied with one vacant shop, a kiosk and an ATM. The weighted average lease term by income was 9.0 years and 11.0 years by area. The Centre's total moving annual turnover (MAT) to 30 June 2016 was $34.3 million compared to $32.1 million for the year to June 2015, an increase of 6.9 per cent. Despite the slower sales in the broader Woolworths group, the Woolworths supermarket at Oxley continues trading toward its market share potential, with sales in the month of June 2016 up 2.5 per cent on sales in June 2015 and MAT at June 2016 up 2.9 per cent on the MAT at June The positive sales growth continues to confirm that customers are shifting their grocery shopping behaviour and with the area currently going through gentrification, we expect further growth in sales turnover for both Woolworths and the speciality stores. The Centre was independently revalued at $38.5 million on 30 June 2016, an increase of $1.75 million or 4.8 per cent on the June 2015 valuation. The Centre was valued on a capitalisation rate of 7.0 per cent, a 50 basis point firming over the year and 75 basis points lower than the acquisition capitalisation rate of 7.75 per cent. The key factors driving the increase in value in FY16 were: 1. the additional Centre income derived from upcoming fixed rent reviews, particularly the 4.0 per cent increase on the Queensland Government space on level 1; 2. the improving MAT of the Centre; and 3. the strong investor demand for neighbourhood retail centres with a number of recent transactions confirming yields (capitalisation rates) continued to firm in the past year (Table 1). MARKET OVERVIEW The retail industry remains a very competitive environment. A number of cyclical and structural trends are at work contributing to a complicated outlook for the retail sector. As a result, there continues to be a wide variance in performance across both retailers and individual retail centres. The latest retail trade figures from the ABS for the month of June 2016 show an annual rate of MAT growth of 3.8 per cent (seasonally adjusted). Household goods have been the stand-out performer, growing 5.6 per cent in the year to June Rising house prices and the uplift in housing supply are flowing through to stronger demand for household goods such as furniture and white goods. Food retailing continues to weaken, growing 2.8 per cent in the year to June 2016, down from 4.5 per cent for the year to June 2015 and the 4.8 per cent annual growth recorded at June The weakening headline food sales reflects the price deflation underway in the supermarket sector as increased competition between Coles, Woolworths and Aldi is putting pressure on grocery prices, which is flowing through to topline sales growth. While supply growth is modest in most major markets, net absorption of space is 1. Calculated in accordance with the MSCI IPD Methodology. 2. Net tangible assets ("NTA") is a measure of the value of the Fund s assets less the value of the Fund s liabilities. Under Accounting Standards, any interest rate hedges that the Fund has in place are required to be measured at the current market value i.e. "fair value" of the hedge. This value is recorded on the Fund s Balance Sheet as an asset or liability. The Fund fixed (hedged) the interest rate at 5.39 percent including margin from April 2017 to March 2019 in order to provide greater certainty to investors of the Fund's net income. Subsequently, interest rates globally have fallen significantly. As a result, if the Fund entered into the same interest rate hedges now, the interest rate would be lower than the interest rates the Fund has entered into. As at 30 June 2016, this results in an out of the money position of $604,000 which is recorded on the Balance Sheet as a liability. This has the impact of reducing the Fund s NTA by $0.03 per Unit. The fair value of the hedges will continue to fluctuate in line with movements in interest rates but will eventually reduce to nil as the hedges unwind through to March The Fund would only be impacted in the event that the interest rate hedges were cancelled (only likely in the early wind-up of the Fund), which would then crystallise the liability to the bank. 3 Folkestone Real Estate Income Fund at Oxley Annual Report 2016

5 CHAIRMAN AND HEAD OF FUNDS MANAGEMENT REPORT CONT. Table 1: Key Neighbourhood Centre Sales in Queensland - FY16 Centre Suburb Price ($m) Date Yield (%) Vendor Buyer Woolworths Marketplace Albany Creek 26.1 July Private Private Coolum Park Coolum Nov Private Private Marian Town Centre Mackay 32.0 Nov Tipalea Funds Management SCA Property Group Woolworths Everton Park Everton Park 33.5 Dec Woolworths Rockworth Capital Partners Greenbank Shopping Centre Greenbank 33.0 Dec Private SCA Property Group Woolworths Moorooka Moorooka 27.3 Dec Private Private Pimpama Junction Pimpama 38.7 April Tipalea Funds Management Private Treetops Plaza Burleigh Heads 44.0 June Private Private picking up, although vacancies remain elevated in selected parts of the retail market, especially older tired centres or centres in secondary locations. This has contributed to subdued rental growth across most retail centre formats including neighbourhood retail centres which focus on convenience shopping (i.e. food). Landlords have become more flexible in their negotiations with tenants than they have been in years, as incentives continue to be a feature of the market, although there are signs that incentives may not be as high as the previous year. Retailers continue to be more selective about their store locations and are closing underperforming or poorly located stores. Woolworths recently announced that they were looking to close a number of supermarkets that were "either loss making or in the bottom quartile of the portfolio, measured on a sales per square metre basis." Oxley is not one of these stores. Woolworths also said they were slowing their net new store openings from approximately 90 to 45 over the next 3 years. Neighbourhood retail centres, have performed well, generating a total return, according to the PCA/IPD Property Index, of 15.5 per cent in the year to March 2016 and 14.0 per cent per annum over three years. This segment of the retail sector has been popular with investors because of its focus on nondiscretionary spending and the smaller lot size, which makes them attractive to private investors, syndicators and institutional investors. Recent neighbourhood centre sales in Queensland reflect continued strong interest from both institutional and private investors. Table 1 shows the key neighbourhood retail sales in the past year, with yields ranging from 5.5 per cent to 7.0 per cent. As noted earlier, the Oxley Station Centre was re-valued on a yield (capitalisation rate) of 7.0 per cent. Going forward, the increased competition amongst the supermarket operators means that investors will need to focus more on the individual performance of the supermarket anchoring each centre. We expect the variation in performance to widen depending on the supermarket operator, the size of the store, the demographics of the area and surrounding competition. 12 MONTH OUTLOOK The forecast distribution yield for FY17 is 8.1 per cent of which 70.1 per cent is forecast to be tax deferred. During FY17, we will be working very closely with the Centre Manager to lease the remaining vacant store, kiosk and ATM and secure tenants that will enhance the retail mix whilst improving the appeal of the Centre to customers. The Fund's 3 year term facility is due to expire in April We have commenced discussions with the existing bank to refinance the debt. Given the competitive environment for lending to quality assets with long leases, we will also be seeking offers from other alternate debt providers to ensure we obtain the best financial package for the Fund. We will seek to have a new facility agreed before the end of Grant Hodgetts Chairman Adrian Harrington Head of Funds Management Folkestone Real Estate Income Fund at Oxley Annual Report

6 DIRECTORS' REPORT The Directors of Folkestone Funds Management Limited ( the Responsible Entity ), being the Responsible Entity of the Folkestone Real Estate Income Fund at Oxley ( the Fund ) present their report on the Fund for the year ended 30 June THE RESPONSIBLE ENTITY The registered office of the Responsible Entity and the Fund is Level 14, 357 Collins Street, Melbourne, Victoria Directors of the Responsible Entity The directors of the Responsible Entity during the financial year and to the date of this report comprise: Mr Grant Bartley Hodgetts - Appointed 25 May 2012 Mr Adrian John Harrington - Appointed 6 July 2009 Mr Greg James Paramor, AO - Appointed 6 July 2009 Mr K Ross Strang - Appointed 25 May 2012 Company Secretary Qualifications and Experience Scott Nicholas Martin, BCom, CA - appointed 31 March Scott joined Folkestone Limited in December Scott has over 20 years experience in finance, specialising in the property and construction industries having previously held positions at R.Corporation and Higgins Coatings. Scott is a Chartered Accountant who began his career at Deloitte providing specialist accounting and taxation advice to a variety of clients in a broad range of sectors. Scott is a member of the Institute of Chartered Accountants and holds a Bachelor of Commerce from the University of Melbourne. Remuneration of the Responsible Entity During the financial year the Responsible Entity received fees totalling $262,000 from the Fund. Fees paid by the Fund to the Responsible Entity and its associates during the year are set out in Note 10. PRINCIPAL ACTIVITIES The Fund is a single asset, closed end unlisted real estate fund. The Fund owns 157 Oxley Station Road, Oxley, Queensland, a neighbourhood shopping centre comprising 7,098 square metres together with parking for 164 vehicles. The Centre commenced trading in July 2013 and comprises a strong tenancy mix anchored by Woolworths and the Queensland State Government occupying the office space on Level 1. The Fund aims to provide investors with sustainable, tax effective income and the potential for capital growth through active management of the asset. The Fund s term is six years from 31 March 2014 unless unitholders agree to a variation of the Fund term. The Fund was established on 28 January 2014 and the first units allotted on 31 March REVIEW AND RESULTS OF OPERATIONS The Fund delivered a statutory profit for the year ending 30 June 2016 of $3.3 million (2015: $3.1 million). The Fund's investment property was independently valued at 30 June 2016 which resulted in an increase of $1.75 million or 4.8 per cent in FY16 to $38.5 million. The Fund's NTA value per unit as at 30 June 2016 was $1.06 (2015: $0.98). Excluding the negative impact of accounting for the hedging the Fund has in place, the Fund's NTA value per unit increases to $1.09 (2015: $0.99). 5 Folkestone Real Estate Income Fund at Oxley Annual Report 2016

7 DIRECTORS' REPORT CONT. DISTRIBUTIONS The distribution for the year ended 30 June 2016 totalled 8.1 cents per unit (2015: 8.0 cents per unit). Distributions declared by the Fund since 30 June 2015 were: Period Paid/Payable Cents per unit Amount $000 Quarter ending 30 September October Quarter ending 31 December January Quarter ending 31 March April Quarter ending 30 June July Total 8.1 1,665 FUNDING Capital Management and Financial Position As at 30 June 2016 the Fund had total assets of $39.8 million, gross debt of $16.62 million and net assets of $21.7 million. The Fund has a debt facility with the Bank of Melbourne ( BOM ) with a maturity date of 2 April Management are currently in discussions with BOM to extend the maturity date of the Fund's borrowings beyond April The Fund s gearing level (borrowings before unamortised transaction costs to total asset value) is 41.8 per cent and the loan to value ratio (borrowings before unamortised transaction costs to investment property value) is 43.2 per cent. As at 30 June 2016 the Fund complied with all of its debt covenant ratios and obligations. The Fund has the following fixed rate bills and interest rate swaps in place: Period Amount $million Rate (Inclusive of Margin) % January April 2017 (fixed rate bill) April March 2019 (interest rate swap) The Fund has 20,550,000 units on issue as at 30 June STATE OF AFFAIRS In the opinion of the Directors, there were no other significant changes in the state of affairs of the Fund that occurred during the financial year under review. ENVIRONMENTAL REGULATION The Fund is not subject to any significant environmental regulations under Commonwealth, State or Territory legislation other than those relevant to the specific asset held by the Fund. The Directors believe that the Fund has adequate systems in place for the management of its environmental requirements and is not aware of any breach of those environmental requirements as they apply to the Fund. EVENTS SUBSEQUENT TO BALANCE DATE There has not been any other matter or circumstances occurring subsequent to the end of the financial year that has significantly affected, or may significantly affect, the operations of the Fund, the results of those operations, or the state of affairs of the Fund in future financial years. INTERESTS OF THE RESPONSIBLE ENTITY Interests of both the Responsible Entity and its Directors in the Fund are disclosed in Note 10 to the financial statements. LIKELY DEVELOPMENTS The Fund will continue to provide secure distributions to its Unitholders. Distributions will continue on a quarterly basis. Folkestone Real Estate Income Fund at Oxley Annual Report

8 DIRECTORS' REPORT CONT. INFORMATION ON DIRECTORS OF THE RESPONSIBLE ENTITY The Directors of the Responsible Entity at the time of this report are: Name and qualifications Mr Grant Bartley Hodgetts Independent Director and Chairman Bachelor of Arts Associate Diploma in Valuations Associate of the Australian Property Institute Member of the Australian Institute of Company Directors Licensed Estate Agent (VIC) Mr Adrian John Harrington Head of Funds Management Bachelor of Science (Hons) Graduate Diploma in Applied Finance and Investment Fellow of the Financial Services Institute of Australasia Mr Greg James Paramor, AO Managing Director Fellow of the Australian Property Institute Fellow of the Institute of Company Directors Fellow of the Royal Institute of Chartered Surveyors Mr K Ross Strang Non Executive Director LLB (Hons) Member of the Australian Institute of Company Directors Experience and special responsibilities Grant was appointed 25 May Grant has been involved in real estate and funds management since He is currently Non Executive Director and Chairman of Folkestone Investment Management Limited, Non Executive Director of Knights Capital Group Limited and all of its subsidiaries, Director of Bethley Group Pty Ltd, Director of Cedar Woods Wellard Pty Ltd and Principal of Hodgetts and Partners. Between early 2006 and 2010 he held various positions within the Investment and Funds Management Division of Mirvac Limited including that of CEO Australia for Mirvac Investment Management. Prior to joining Mirvac, he was Head of Property in the Specialised Capital Group of Westpac Institutional Bank; a Division Director of Property Investment Banking at Macquarie Bank; a Director of Richard Ellis (Vic) Pty Ltd; and an executive of the AMP Society s Property Division. Holding a Bachelor of Arts (Legal Studies and Economics) from La Trobe University, an Associate Diploma in Valuations from RMIT and an Advanced Certificate in Business Studies (Real Estate), also from RMIT, he is an Associate of the Australian Property Institute, a licensed real estate agent in Victoria and a member of the Australian Institute of Company Directors. He was a founding Director of the Property Industry Foundation in Victoria. Adrian was appointed 6 July Adrian joined Folkestone in April 2011 following the acquisition of Equity Real Estate Partners. Adrian was a founding partner of Equity Real Estate Partners. Adrian has more than 20 years of experience in the funds management and real estate industries. He is currently Chairman of the Australian Construction Industry Forum's Construction Forecasting Council. He was formerly CEO Funds Management, UK and USA for Mirvac Group. He previously held senior positions at James Fielding Group, Deutsche Asset Management, Paladin Australia and the Property Council of Australia. Adrian is a Fellow of the Financial Services Institute of Australasia. Adrian has a Bachelor of Science (Hons) from the University of New South Wales and a Graduate Diploma in Applied Finance and Investment from the Financial Services Institute of Australasia. Greg became Managing Director of Folkestone in April Greg has been involved in the real estate and funds management industry for more than 40 years, and was the cofounder of Equity Real Estate Partners, Growth Equities Mutual, Paladin Australia and the James Fielding Group. Greg was the CEO of Mirvac Group between 2004 and Greg is a past president of the Property Council of Australia and past president of Investment Funds Association, a Fellow of the Australian Property Institute and The Royal Institute of Chartered Surveyors. Greg is a board member of the Sydney Swans and the immediate past Chair of LJ Hooker. Greg was awarded an Officer in the General Division (AO) of the Order of Australia in January 2015 for his distinguished service to the community through executive roles in a range of fields, including breast cancer research, the not-for-profit sector and real estate and property investment industries. Ross was appointed to the Board of the Responsible Entity on 25 May Ross is also a Non-Executive Director of Folkestone. Ross is a consultant to Kemp Strang, a Sydney commercial law firm. Ross is one of Kemp Strang's founders and was a partner in the practice for over 30 years. Ross has extensive experience in commercial real estate, construction and securities matters on a broad front and is well known in legal, commercial and community circles. He is a former non-executive Director of Mirvac Funds Management Limited and Mirvac Wholesale Funds Management Limited, and is a member of the Australian Institute of Company Directors. The Fund s Constitution does not require Directors to retire and seek re-election. 7 Folkestone Real Estate Income Fund at Oxley Annual Report 2016

9 DIRECTORS' REPORT CONT. DIRECTORS' MEETINGS A Board Meetings Mr Grant Hodgetts 5 5 Mr Adrian Harrington 5 5 Mr Greg Paramor, AO 5 5 Mr Ross Strang 5 5 A - Number of meetings held during the time the Director held office during the year. B - Number of meetings attended. AUDIT AND RISK MANAGEMENT COMMITTEE The members of the Audit and Risk Management Committee during the financial year and to the date of this financial report comprise: Mr Ross Strang Mr Garry Sladden (Independent Member) Mr Mark Baillie (Independent Member) Mr Mark Baillie and Mr Garry Sladden are not Directors of the Responsible Entity. Details of meetings held during the period and member s attendance are as follows: B Audit and Risk Management Committee Meetings A B Mr Ross Strang 4 4 Mr Garry Sladden 4 4 Mr Mark Baillie 4 4 A - Number of meetings held during the year the member was eligible to attend. B - Number of meetings attended. AUDIT AND RISK MANAGEMENT COMMITTEE CONT. The experience of the Audit and Risk Management Committee is set out below: Name and qualification Mr K Ross Strang Mr Garry Sladden Bachelor of Business Certified Practicing Accountant FINSA Mr Mark Baillie Bachelor of Commerce Chartered Accountant Experience See information on Directors Garry was appointed as Non-Executive Chairman of Folkestone in March Garry is a business and strategic adviser who has a diversified business background in the areas of real estate, private equity, business operations, banking and finance, and equity raising, having held the position of General Manager Operations at Consolidated Press Holdings for six years. Garry is Chairman of Ashton Manufacturing Pty Limited, a non executive Director of Melanoma Institute Australia and non-executive Chairman of Clarius Limited (ASX: CND). Mark was appointed as Non-Executive Deputy Chairman of Folkestone in February Prior to this Mark was Macquarie Group Limited s Head of Real Estate Europe and North America. During his 14 years at Macquarie, Mark was responsible for the creation and listing of three AREITs on the ASX and was an AREIT CEO for five years. Mark was located in Chicago, USA (2001 to 2006) and London UK (2006 to 2009) in order to establish and manage the growth of Macquarie Real Estate s business in both regions. Mark was a director on the boards of all Macquarie s listed AREITs. In addition, Mark has been a director of the following real estate industry bodies, the Property Council of Australia, the Shopping Centre Council of Australia, the Association of Foreign Investors in Real Estate (past Chairman) and the European Public Real Estate Association. Mark is currently a director of the American Australian Association Limited and United States Studies Centre Limited. Folkestone Real Estate Income Fund at Oxley Annual Report

10 DIRECTORS' REPORT CONT. REMUNERATION REPORT The Responsible Entity does not have a Remuneration Committee as the Fund s Constitution prescribes the Fund s remuneration arrangement with the Responsible Entity. In relation to remuneration of the Directors of the Responsible Entity this is a matter for the Board and the ultimate parent entity of the Responsibility Entity. It is the objective of the Fund that the Board comprises Directors with an appropriate mix of skills, experience and personal attributes that allow the Directors individually and the Board collectively to supervise the operations of the Fund with excellence. All fees and expenses of the Responsible Entity are approved by the Board and remuneration of the Responsible Entity is dealt with comprehensively in the Fund s Constitution. Remuneration of the Directors is paid either directly by the Responsible Entity or by entities associated with the shareholders of the Responsible Entity. The Directors are not provided with any remuneration by the Fund itself. Directors are not entitled to any equity interests in the Fund, or any rights to or options for equity interests in the Fund, as a result of the remuneration provided by the Responsible Entity. The Responsible Entity determines remuneration levels and ensures they are competitively set to attract and retain appropriately qualified and experienced Directors and senior executives. Loans to Directors of the Responsible Entity The Fund has not made, guaranteed or secured, directly or indirectly, any loans to the Directors of their personally-related entities at any time during the reporting year. DETAILS OF UNITHOLDING IN THE FUND The interests of the Directors of the Responsible Entity in units of the Fund during the year are set out below: Balance at the start of the year No. of units Acquisitions during the year No. of units Redemptions during the year No. of units Balance at the end of the year No. of units Ordinary units Adrian Harrington 14, ,300 Greg Paramor, AO 200, ,000 Refer to Note 10 of the financial statements for further details. INDEMNITIES AND INSURANCE PREMIUMS FOR OFFICERS AND AUDITORS Indemnification Under the Fund Constitution, the Responsible Entity, including its officers and employees, is indemnified out of the Fund s assets for any loss, damage, expense or other liability incurred by it in properly performing or exercising any of its powers, duties or rights in relation to the Fund. The Fund has not indemnified any Auditor of the Fund. 9 Folkestone Real Estate Income Fund at Oxley Annual Report 2016

11 DIRECTORS' REPORT CONT. INSURANCE PREMIUMS The Responsible Entity has paid insurance premiums in respect of its officers for liability and legal expenses for the period ended 30 June Such insurance contracts insure against certain liability (subject to specified exclusions) for persons who are or have been officers of the Responsible Entity. Details of the nature of the liabilities covered or the amount of the premium paid has not been included as such disclosure is prohibited under the terms of the contracts. PROCEEDINGS ON BEHALF OF RESPONSIBLE ENTITY No person has applied for leave of Court to bring proceedings on behalf of the Responsible Entity or intervene in any proceedings to which the Responsible Entity is a party for the purpose of taking responsibility on behalf of the Responsible Entity for all or any part of those proceedings. The Responsible Entity was not a party to any such proceedings during the year. NON-AUDIT SERVICES Details of the amounts paid and payable to the auditor (PricewaterhouseCoopers Australian firm) for audit and non-audit services provided during the year are contained in Note 16 to the financial statements. ROUNDING OF AMOUNTS The Fund is of a kind referred to in Legislative instrument 2016/91 issued by the Australian Securities and Investments Commission, relating to the rounding off of amounts in the directors report and financial report. Amounts in the financial report and the directors report have been rounded off to the nearest thousand dollars in accordance with the Legislative instrument, unless otherwise stated. AUDITOR'S INDEPENDENCE DECLARATION A copy of the auditor s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 11. Signed in accordance with a resolution of the Board of Directors of the Responsible Entity. Grant Hodgetts Chairman Folkestone Funds Management Limited Sydney, 25 August 2016 Folkestone Real Estate Income Fund at Oxley Annual Report

12 AUDITOR'S INDEPENDENCE DECLARATION Auditor s Independence Declaration As lead auditor for the audit of Folkestone Real Estate Income Fund at Oxley for the year ended 30 June 2016, I declare that to the best of my knowledge and belief, there have been: 1. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and 2. no contraventions of any applicable code of professional conduct in relation to the audit. Charles Christie Partner PricewaterhouseCoopers 25 August 2016 Melbourne PricewaterhouseCoopers, ABN Freshwater Place, 2 Southbank Boulevard, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: , F: , Liability limited by a scheme approved under Professional Standards Legislation. 11 Folkestone Real Estate Income Fund at Oxley Annual Report 2016

13 STATEMENT OF COMPREHENSIVE INCOME FOLKESTONE REAL ESTATE INCOME FUND AT OXLEY For the year ended 30 June Note $000 $000 Revenue Lease income 3,470 3,482 Property outgoings recoveries Net property revaluation increment 1,709 1,488 Interest income 8 4 Total revenue 5,464 5,247 Expenses Finance costs Property outgoings Other expenses Responsible entity's remuneration Change in fair value of derivative instruments Total expenses 2,148 2,186 Net profit attributable to unitholders 3,316 3,061 Other comprehensive income - - Total comprehensive profit attributable to unitholders 3,316 3,061 Earnings per unit Cents Cents Basic earnings per unit (cents per share) Diluted earnings per unit (cents per share) The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes. Folkestone Real Estate Income Fund at Oxley Annual Report

14 BALANCE SHEET FOLKESTONE REAL ESTATE INCOME FUND AT OXLEY As at 30 June Notes $000 $000 ASSETS Current Assets Cash and cash equivalents 4 1, Trade and other receivables Prepayments Total Current Assets 1,254 1,086 Non-Current Assets Investment property 6 37,970 36,407 Investment property - Straight line rental asset Total Non-Current Assets 38,500 36,750 Total Assets 39,754 37,836 LIABILITIES Current Liabilities Trade and other payables Distribution payable Derivative financial instruments 76 - Rent received in advance Borrowings 8(a) 16,607 - Total Current Liabilities 17, Non-Current Liabilities Borrowings 8(b) - 16,589 Derivative financial instruments Total Non-Current Liabilities ,900 Total Liabilities 18,057 17,790 Net Assets 21,697 20,046 EQUITY Issued capital 9 20,436 20,436 Undistributed profit/(losses) 1,261 (390) Total Equity 21,697 20,046 The above Balance Sheet should be read in conjunction with the accompanying notes. 13 Folkestone Real Estate Income Fund at Oxley Annual Report 2016

15 STATEMENT OF CHANGES IN EQUITY FOLKESTONE REAL ESTATE INCOME FUND AT OXLEY For the year ended 30 June 2016 Issued Capital Undistributed Profit/(losses) Total Notes $000 $000 $000 Balance at 1 July ,436 (1,807) 18,629 Issue of ordinary units 9 3,222-3,222 Redemption of underwrite units* 9 (3,222) - (3,222) Net profit attributable to the unitholders - 3,061 3,061 Other comprehensive income Distribution paid or provided for - (1,644) (1,644) Balance at 30 June ,436 (390) 20,046 Balance at 1 July ,436 (390) 20,046 Net profit attributable to the unitholders - 3,316 3,316 Other comprehensive income Distribution paid or provided for - (1,665) (1,665) Balance at 30 June ,436 1,261 21,697 *Underwrite units were issued pursuant to an Underwriting Agreement dated 21 March The above Statement of Changes in Equity should be read in conjunction with the accompanying notes. Folkestone Real Estate Income Fund at Oxley Annual Report

16 STATEMENT OF CASH FLOWS FOLKESTONE REAL ESTATE INCOME FUND AT OXLEY For the year ended 30 June Notes $000 $000 Cash flows from operating activities Cash receipts in the course of operations (inclusive of GST) 4,108 3,783 Cash payments in the course of operations (inclusive of GST) (1,580) (1,434) Interest received 8 4 Finance costs paid (813) (789) Net cash inflow from operating activities 4(b) 1,723 1,564 Cash flows from investing activities Payments of capital expenditure (41) - Proceeds from deferred settlement adjustments in property acquisition Net cash inflow from investing activities Cash flows from financing activities Proceeds from issue of ordinary units - 3,222 Redemption of underwrite units - (3,518) Distributions paid (1,658) (1,649) Net cash outflow from financing activities (1,658) (1,945) Net increase/(decrease) in cash held 210 (381) Cash at beginning of the year 989 1,370 Cash at end of the year 4(a) 1, The above Statement of Cash Flows should be read in conjunction with the accompanying notes. 15 Folkestone Real Estate Income Fund at Oxley Annual Report 2016

17 NOTES TO THE FINANCIAL STATEMENTS NOTE 1: SIGNIFICANT ACCOUNTING POLICIES a) Basis of Preparation These general purpose financial statements have been prepared in accordance with the Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board, the Corporations Act 2001 and the requirements of the Fund Constitution dated 13 January The financial statements are prepared on the basis of fair value measurement of assets and liabilities except where otherwise stated. The Fund is a for profit entity. Compliance with International Financial Reporting Standards The financial statements of the Fund also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. New and Amended Standards Adopted by the Fund The Fund has applied the following standards and amendments for the first time for their annual reporting period commencing 1 July 2015: AASB Amendments to Australian Accounting Standards (including Part A: Annual Improvements and Cycles and part B: Defined Benefit Plans: Employee Contributions Amendments to AASB 119) The adoption of these amendments did not have any impact on the current period or any prior period and is not likely to affect future periods. The Fund also elected to adopt the following amendments early: AASB Amendments to Australian Accounting Standards Annual Improvements to Australian Accounting Standards Cycle, and AASB Amendments to Australian Accounting Standards Disclosure Initiative: Amendments to AASB 101. As these amendments merely clarify the existing requirements, they do not affect the Fund's accounting policies or any of the disclosures. New standards and interpretatives not yet adopted by the Fund Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2016 reporting periods and have not been early adopted by the Fund. The new standards and interpretations are set out below: AASB 9 Financial Instruments AASB 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. AASB 9 must be applied for financial years commencing on or after 1 January The Fund does not expect significant impact of these new rules on the Fund s financial statements. AASB 15 Revenue from Contracts with Customers The AASB has issued a new standard for the recognition of revenue. This will replace AASB 118 which covers revenue arising from the sale of goods and the rendering of services and AASB 111 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer. The standard permits either a full retrospective or a modified retrospective approach for the adoption. AASB 15 is mandatory for financial years commencing on or after 1 January The Fund has not yet assessed the impact of the new rules on the Fund s financial statements. AASB 16 Leases On 13 January the IASB issued IFRS 16 Leases. The changes under IFRS 16 are significant and will predominately affect lessees, with almost all leases going on their balance sheet. This is because the balance sheet distinction between operating and finance leases is removed for lessees. Instead, under the new standard an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exemptions are short-term and low-value leases. The new standard will be effective from 1 January Early adoption is allowed if the new revenue standard has also been applied. Given pre-existing leases are not grandfathered under the new standard, all leases will need to be reassessed when IFRS 16 is adopted. The Fund has not yet assessed the impact of the new rules on the Fund s financial statements. There are no other standards that are not yet effective and would be expected to have a material impact on the Fund in the current or future reporting periods and on foreseeable future transactions. Critical Accounting Estimates The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Fund s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 1(o). b) Revenue and Expenditure Recognition Revenue is measured at the fair value of consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances, rebates and amounts collected on behalf of third parties. The Fund recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the entity s activities as described below. Expenses including rates, taxes and other outgoings are brought to account on an accruals basis and any related payables are carried at cost. Folkestone Real Estate Income Fund at Oxley Annual Report

18 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 1: SIGNIFICANT ACCOUNTING POLICIES CONT. Revenue is recognised for the major business activities as follows: Lease Income Rent income due but not received at balance date is reflected in the Balance Sheet as a receivable. For leases where the revenue is determined with reference to market reviews, inflationary measures or other variables, revenue is recognised in accordance with the lease terms applicable for the year. Fixed Rent Reviews For leases with rent reviews based on a fixed rate, lease income arising on investment properties is recognised on a straight line basis over the lease term. Adjustments to lease income are also reflected in the Balance Sheet as a Straight Line Rental asset. Interest Income Interest is brought to account on a time proportion basis using the effective interest when earned and if not received at balance date, is reflected in the Balance Sheet as a receivable. Responsible Entity Fees Fees payable to the responsible entity are recognised in the Statement of Comprehensive Income on an accruals basis. Fees relating to specific events or transactions are charged upon completion or occurrence of the relevant service or event. Under the Fund s Constitution, the Responsible Entity is entitled to a management fee of 1.3 per cent of the value of net assets of the Fund. c) Income Tax Under current legislation, the Fund is not liable for income tax, provided that the taxable income and taxable realised gains are fully distributed to Unitholders each year. Tax allowances for building and plant and equipment depreciation are distributed to Unitholders in the form of a tax deferred component of the distribution. d) Cash and Cash Equivalents For the purpose of presentation in the statement of cash flows, 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 from the date of acquisition that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. e) Investment Property The investment property comprises interests in land and buildings (including integral plant and equipment) held for the purpose of letting to produce rental income. Investment properties acquired are initially recorded at the date of acquisition, being the fair value of the consideration provided plus incidental costs directly attributable to the acquisition. Valuations After initial recognition, investment properties are measured at fair value at each reporting date. The Fund s Constitution requires the Responsible Entity to have the Fund s property investments independently valued at regular intervals. An independent valuation of a property is carried out at least once every year. The valuation is considered by the Directors of the Responsible Entity when determining fair value. When assessing fair value, the Directors will also consider the discounted cash flow of the property, the highest and best use of the property and sales of similar properties. Fair value is based on the price, at which a property might reasonably be expected to be sold at the date of valuation, assuming: a willing, but not anxious, buyer and seller on an arm s length basis; a reasonable period in which to negotiate the sale, having regard to the nature and situation of the property and the state of the market for property of the same kind; that no account is taken of the value or other advantage or benefit, additional to market value, to the buyer incidental to ownership of the property being valued; and it only takes into account instructions given by the Responsible Entity and is based on all the information that the valuer needs for the purposes of the valuation being made available by or on behalf of the Responsible Entity. Under AASB 140: Investment Property, adjustments to fair value are to be recognised in the Statement of Comprehensive Income. f) Trade and Other Receivables Trade receivables are recognised at fair value, less provision for impairment. Trade receivables are due as specified within the individual property s lease. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the Fund will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. g) Trade and Other Payables These amounts represent liabilities for goods or services provided to the Fund prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. 17 Folkestone Real Estate Income Fund at Oxley Annual Report 2016

19 NOTES TO THE FINANCIAL STATEMENTS CONT. h) Financial Liabilities Non-derivative financial liabilities are recognised at amortised cost, comprising original debt less principal payments and amortisation. Bank Loans Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interestbearing debt is stated at amortised cost with any difference between proceeds and redemption value being recognised in the Statement of Comprehensive Income over the period of the debt on an effective interest basis. i) Derivatives Derivatives are initially measured at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The Fund's derivatives do not qualify for hedge accounting and therefore changes in the fair value of any derivative instrument are recognised immediately in the Statement of Comprehensive Income. j) Distributions Payable Distributions payable are recognised as a liability when they have been declared and are due and payable at reporting date. k) Impairment of Assets At each reporting date, the Fund reviews the carrying values of its tangible assets to determine whether there is any indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the assets fair value less costs to sell and value in use, is compared to the assets carrying value. Any excess of the assets carrying value over its recoverable amount is expensed to the Statement of Comprehensive Income. Where it is not possible to estimate the recoverable amount of an individual asset, the Fund estimates the recoverable amount of the cashgenerating unit to which the asset belongs. l) Contributed Equity Ordinary units are classified as equity in accordance with Australian Accounting Standards. Incremental costs directly attributable to the issue of new units are shown in equity as a deduction, net of tax, from the proceeds. m) Goods and Services Tax Revenues, expenses and assets are recognised net of the amount of goods and services tax ("GST"), unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of 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 taxation authority is included with other receivables or payables to the Balance Sheet. 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 taxation authority, are presented as operating cash flows. n) Rounding of Amounts The Fund is a registered scheme of a kind referred to in Legislative instrument 2016/91, issued by the Australian Securities and Investments Commission, relating to the "rounding off" of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that Legislative instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. o) Critical Accounting Estimates and Judgements The Directors evaluate estimates and judgements incorporated into the financial report based upon historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based upon current trends and economic data, obtained both externally and within the Fund. Key estimates Valuation of Investment Properties Independent valuations are prepared using both the capitalisation of net income and discounted cashflow analysis method which are consistent with the requirements of the relevant Accounting Standards. p) Earnings Per Unit ("EPU") Basic Earnings per Unit Basic earnings per unit is calculated by dividing: the profit attributable to the Unitholders, excluding any costs of servicing equity other than ordinary units and underwrite units; by the weighted average number of ordinary units and underwrite units outstanding during the financial year. Diluted Earnings per Unit Diluted earnings per unit adjusts the figures used in the determination of basic earnings per unit to take into account: the interest and other financing costs associated with dilutive potential ordinary units and underwrite units, and the weighted average number of additional ordinary units and underwrite units that would have been outstanding assuming the conversion of all dilutive potential ordinary units and underwrite units. q) Going Concern The financial statements have been prepared on a going concern basis. The directors of the Responsible Entity believe that the Fund will be able to continue as a going concern on the basis that the Fund is expected to complete new funding arrangements with its lender to extend the maturity date of the Fund's borrowings beyond April Folkestone Real Estate Income Fund at Oxley Annual Report

20 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 2: DISTRIBUTIONS Distributions were payable during the financial year as follows: Period Paid/Payable Cents per Unit Amount Cents $000 per Unit Amount $000 Quarter ending 30 September 20 October Quarter ending 31 December 20 January Quarter ending 31 March 20 April Quarter ending 30 June 20 July Total 8.1 1, ,644 NOTE 3: EARNINGS PER UNIT ("EPU") Cents Cents Basic EPU Diluted EPU The following information reflects the earnings and security numbers used in the calculations of basic and diluted EPU: Number of Units Number of Units '000 '000 Weighted average number of units used in the calculating basic EPU 20,550 20,550 Weighted average number of units used in the calculating diluted EPU 20,550 20,550 $000 $000 Earnings used in calculating basic EPU 3,316 3,061 Earnings used in calculating diluted EPU 3,316 3, Folkestone Real Estate Income Fund at Oxley Annual Report 2016

21 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 4: CASH AND CASH EQUIVALENTS (a) Components of cash and cash equivalents $000 $000 Cash 1, Total cash and cash equivalents 1, (b) Reconciliation of net profit attributable to unitholders to net cash inflows from operating activities Net profit for the year 3,316 3,061 Net revaluation (increment) of investment property (1,709) (1,488) Straight line rental income adjustments (186) (262) Decrease/(Increase) in trade and other receivables 47 (11) (Increase) in other current assets (4) (18) Decrease in unamortised transaction costs (Decrease)/increase in trade and other payables (154) 12 Increase/(decrease) in rent received in advance 102 (68) Change in fair value of derivative financial instruments Net cash inflow from operating activities 1,723 1,564 (c) Financing facilities Committed financing facilities available to the Fund: Loan facility 17,313 17,313 Amounts utilised (16,620) (16,620) Available financing facilities Cash 1, Financing resources available at the end of the year 1,892 1,682 Folkestone Real Estate Income Fund at Oxley Annual Report

22 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 5: TRADE AND OTHER RECEIVABLES $000 $000 Trade receivables Trade receivables are recognised at fair value less any provision for impairment. Trade receivables are due in accordance with the individual property s lease terms. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. Provision for impairment of trade receivables is used when there is objective evidence that the Fund will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of impairment allowance is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted of the original effective interest rate. Cash flows relating to short term receivables are not discounted if the effect of discounting is immaterial. The amount of any impairment loss is recognised in the Statement of Comprehensive Income. When a trade receivable for which a provision has been recognised becomes uncollectable in a subsequent period, it is written off against the provision account. Subsequent recoveries of amounts previously written off are credited against other expenses in the Statement of Comprehensive Income. Trade Receivables that are Past Due but not Impaired As at 30 June 2016, trade receivables of $17,859 were due but not impaired. The ageing of these receivables is as follows: days days days 90+ days $000 $000 $000 $000 Fund Fund NOTE 6: INVESTMENT PROPERTY Freehold property - at valuation $000 $000 Investment property at fair value 38,500 36,750 Less: Straight line rental asset (530) (343) Carrying amount at the end of the year 37,970 36,407 Movement in investment properties: Balance at the beginning of the year 36,407 34,919 Deferred settlement adjustments on property acquisition (186) - Capital expenditure 41 - Net revaluation increment 1,708 1,488 Carrying amount at the end of the year 37,970 36, Folkestone Real Estate Income Fund at Oxley Annual Report 2016

23 NOTES TO THE FINANCIAL STATEMENTS CONT. (a) (b) (c) (d) (e) (f) The investment property is carried at fair value. The determination of fair value is based on independent valuation where appropriate. Total acquisition costs include incidental costs of acquisition such as land registry and legal fees. An independent valuation of the property is carried out at least annually. The independent valuation has been prepared using both the capitalisation of net income and discounted cashflow method, which are consistent with the requirements of relevant Accounting Standards and valuation industry guidelines. The result of the valuation was an increase of $1.75 million in the carrying value of the property and was recognised in the Statement of Comprehensive Income for the year ending 30 June 2016 as a net property revaluation increment. The capitalisation rate applied by the independent valuer is 7.00 per cent (2015: 7.50 per cent). The adopted capitalisation rate is the rate at which net market rental revenue is capitalised to determine the value of a property. The rate is determined with regard to market evidence. The market rent (per sqm) is the estimated amount for which a property should lease between a lessor and a lessee on appropriate lease terms in an arm's length transaction Straight line rental adjustments of $0.2 million have decreased the value of investment property (resulting in a $0.2 million reduction in the net property revaluation increment) with a corresponding increase in straight line rental asset. Significant movement in any one of the inputs mentioned above may result in a change in the fair value of the Fund's investment properties as shown below: Fair value measurement sensitivity to significantly increase in input Fair value measurement sensitivity to significantly decrease in input Adopted capitalisation rate Decrease Increase Market rent Increase Decrease Generally, under the capitalisation approach, the net market rental has a strong interrelationship with the adopted capitalisation rate as the fair vale of the investment property is derived by capitalising, in perpetuity, the total net market rent receivable. An increase (softening) in the adopted capitalisation rate may offset the impact to fair value of an increase in the total net market rent. A decrease (tightening) in the adopted capitalisation rate may also offset the impact to fair value of a decrease in the total net market rent. (g) Investment properties have been classified as Level 3 in the fair value hierarchy. There have been no transfers between the levels in the fair value hierarchy during the year. (h) Refer to note 8 for information on investment properties pledged as security. (i) The major tenants of the investment property are Woolworths Limited (46 per cent of lettable area) and the Queensland Government Department of Communities, Child Safety and Disability Services (34 per cent of lettable area). NOTE 7: TRADE AND OTHER PAYABLES $000 $000 Trade creditors GST payable Accruals Folkestone Real Estate Income Fund at Oxley Annual Report

24 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 7: TRADE AND OTHER PAYABLES CONT. Fair Value and Credit Risk Due to the short term nature of these payables, their carrying value approximates their fair value. Financial Guarantees There are no financial guarantees in place. Interest Rate and Liquidity Risk Detail regarding interest rate and liquidity risk exposure is disclosed in Note 13. NOTE 8: BORROWINGS (a) Current $000 $000 Borrowings - secured 16,620 - Less: unamortised transaction costs (13) - 16,607 - (b) Non - current Borrowings - secured - 16,620 Less: unamortised transaction costs - (31) - 16,589 The Fund has a debt facility with the Bank of Melbourne ("BOM"). The key commercial terms of the debt facility are as follows: Facility Limit Drawn Amount $ million as at 30 June 2016 $ million as at 30 June 2016 Facility Term April 2017 Loan to Value Ratio Less than 60% Interest Cover Ratio Not to be less than 2.0 times Management are currently in discussions with BOM to extend the maturity date of the Fund's borrowings beyond April As at 30 June 2016, the Fund complied with all of its debt covenant ratios and obligations. Interest rate and liquidity risk Refer to Note 13 for information on interest rate and liquidity risk. Hedging Arrangements The Fund has the following fixed rate bills and interest rate swaps in place: Period Amount $million Rate (Inclusive of Margin) % January April 2017 (fixed rate bill) April March 2019 (interest rate swap) Folkestone Real Estate Income Fund at Oxley Annual Report 2016

25 NOTES TO THE FINANCIAL STATEMENTS CONT. Fair values The carrying amount of the Fund s borrowings approximates their fair value. Assets pledged as security: $000 $000 Collateral that has been pledged for secured liabilities is as follows: i) Financial assets pledged Cash and cash equivalents 1, ii) Other assets pledged Investment property 38,500 36,750 Total assets pledged 39,699 37,739 The principal terms and conditions with respect to the assets pledged are: to not change materially the business of the Fund; to provide limits on capital expenditure; and to not, without lender's consent borrow or raise further money. NOTE 9: CONTRIBUTED EQUITY Units on Issue Units on Issue No '000 $000 Balance at 1 July ,550 20,436 Issue of ordinary units 3,222 3,222 Redemption of underwrite units* (3,222) (3,222) Balance at 30 June ,550 20,436 Balance at 1 July ,550 20,436 Issue of ordinary units - - Balance at 30 June ,550 20,436 * underwrite units were issued pursuant to an underwriting agreement dated 21 March Each unit represents a right to an individual unit in the Fund per the Constitution. There are no separate classes of units and each unit has the same rights attaching to it as all other units in the Fund. Capital Management The Responsible Entity's objective when managing capital is to ensure the Fund continues as a going concern as well as to maintain optimal returns to Unitholders. The Responsible Entity also aims to maintain a capital structure that ensures the lowest cost of capital available to the Fund. NOTE 10: RELATED PARTY TRANSACTIONS Responsible Entity The Responsible Entity of the Fund is Folkestone Funds Management Limited. In accordance with the Fund s Constitution and other agreements the Responsible Entity is entitled to claim asset management fees, reimbursement for all expenses reasonably and properly incurred in relation with the Fund or in performing its obligations under the Constitution, and property acquisition due diligence fees. Under the Fund s Constitution, the Responsible Entity is entitled to a management fee of 1.3 per cent of the value of net assets of the Fund. Folkestone Real Estate Income Fund at Oxley Annual Report

26 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 10: RELATED PARTY TRANSACTIONS CONT. The following table provides the total amount of transactions that have been entered into with the Responsible Entity for the relevant financial year: Amounts paid or payable during the year $000 $000 Responsible Entity remuneration Cost recoveries Amounts included in accruals or payables at balance date No Director of the Responsible Entity received or became entitled to receive any benefit because of a contract made by the Fund with a Director or with a firm of which a Director is a member, or with an entity in which the Director has a substantial interest. The relevant interests of each Director of the Responsible Entity (including Director related entities) acquired in the unit capital of the Fund are set out under the section Key Management Personnel of the Responsible Entity. Custodian The Custodian of the Fund s assets is The Trust Company (Australia) Limited. The Custodian is entitled to fees for its services. Amounts paid or payable during the year $000 $000 Custodian fees Amounts included in accruals or payables at balance date 5 5 Terms and Conditions of Transactions with Related Parties All transactions between related parties were made on normal commercial terms and conditions. Outstanding balances at period end are unsecured and settlement occurs in cash. There have been no guarantees provided or received for any related party receivables. Key Management Personnel of the Responsible Entity The Directors of the Responsible Entity are considered to be Key Management Personnel ("KMP") Chairman Non-Executive Director Grant Hodgetts Appointed 25 May 2012 Executive Director Adrian Harrington Appointed 6 July 2009 Executive Director Greg Paramor, AO Appointed 6 July 2009 Non-Executive Director Ross Strang Appointed 25 May 2012 Other KMP - Chief Financial Officer and Company Secretary Folkestone Limited Scott Martin Appointed 31 March 2011 Other KMP - Chief Financial Officer Funds Travis Butcher Appointed 28 September 2012 Remuneration: No KMP were remunerated directly by the Fund. The KMP of the Responsible Entity receive remuneration in their capacity as Directors and senior management of the Responsible Entity and these amounts are paid from an entity related to the Responsible Entity. 25 Folkestone Real Estate Income Fund at Oxley Annual Report 2016

27 NOTES TO THE FINANCIAL STATEMENTS CONT. Units Held in the Fund by Directors of the Responsible Entity: The numbers of units in the Fund held during the financial year by each Director and other KMP of the Responsible Entity, including their personally related parties, are set out below. There were no units granted during the reporting year as compensation. Balance at the start of the year No. of Units Acquisitions during the year No. of Units Redemptions during the year No. of Units Balance at the end of the year No. of Units Ordinary units Adrian Harrington 14, ,300 Greg Paramor, AO 200, ,000 NOTE 11: SEGMENT INFORMATION The Fund operates wholly in Australia and operates in one business segment, being the ownership of a commercial investment property. NOTE 12: LEASE REVENUE COMMITMENTS The property is leased to a range of tenants under long-term operating leases with rentals generally payable monthly. Future minimum lease payments receivable on leases of investment properties are as follows: Receivable: $000 $000 Not later than 1 year 3,251 3,270 Between 1 years but no later than 5 years 13,039 13,138 Later than 5 years 16,305 19,565 32,594 35,973 NOTE 13: FINANCIAL RISK MANAGEMENT (a) Financial Risk Management Policies The Fund s financial instruments consist of deposits with banks, accounts receivable, accounts payable, borrowings and derivatives. The Responsible Entity manages the Fund's exposure to key financial risks in accordance with its Risk Management Plan. The objective of the plan is to support the delivery of the Fund's financial targets, whilst protecting future financial security. The Fund has a Risk Management Program which complies with the requirements of the Australian Standard on Risk Management (AS/NZ ISO 31000) and a Compliance Program which meets the Australian Standard for Compliance Programs (AS/NZ 3806). The Board is committed to identifying, monitoring and mitigating risks as well as capturing opportunities. Day to day responsibility for risk management has been delegated to executive management, with review at Board level. The Responsible Entity reviews and implements policies for managing each risk as summarised below. (b) Risk Exposures and Responses Market Risk The Fund is exposed to interest rate, liquidity and credit risks. There are no known exposures to other risks that are material to the financial statements. Folkestone Real Estate Income Fund at Oxley Annual Report

28 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 13: FINANCIAL RISK MANAGEMENT CONT. Interest Rate Risk The Fund has the following classes of financial assets and financial liabilities that are exposed to interest rate risk: Financial assets $000 $000 Cash and cash equivalents 1, Financial liabilities 1, Borrowings (Gross) 16,620 16,620 16,620 16,620 Net exposure (15,421) (15,631) The weighted average interest rates relating to the above financial assets and financial liabilities were as follows: 2016 % 2015 % Financial assets Cash and cash equivalents Financial liabilities Borrowings Financial assets are not hedged and are exposed to variable interest rate risk. The Responsible Entity believes that this exposure is relatively low and does not pose a material risk to the Fund. Refer to Note 8 for details of the derivative financial instruments used to mitigate the interest rate risk. Foreign Currency Risk The Fund has no exposure to foreign currency movements as it does not transact or hold assets in foreign currency. Liquidity Risk Liquidity risk is managed by adhering to restrictions under the Fund's investment strategy from entering into contractual arrangements that produce an exposure not covered by sufficient liquid assets or a total investment exposure in excess of total Unitholders' funds. Further, the Responsible Entity ensures that sufficient cash and cash equivalents are maintained to meet the needs of the Fund through cash flow monitoring and forecasting. 27 Folkestone Real Estate Income Fund at Oxley Annual Report 2016

29 NOTES TO THE FINANCIAL STATEMENTS CONT. Maturity analysis of financial assets and financial liability based on management expectations The following table below reflects a maturity analysis of financial assets and financial liabilities based on management's expectations. Apparent shortfalls in cash are due to the maturity of debt facilities at various points in time. Prior to the maturity of these facilities, the Fund will either negotiate to extend the term of these facilities or arrange new facilities on terms appropriate at that time months 6 to 12 1 to 5 Later than or less months years 5 years Total $000 $000 $000 $000 $000 Financial assets Cash and cash equivalents 1, ,199 Trade and other receivables , ,217 Financial liabilities Trade and other payables Derivative financial instruments Borrowings - 16, ,620 Interest payable on borrowings ,496-2, ,212 2,024-19,836 Net exposure 617 (17,212) (2,024) - (18,619) 2015 Financial assets Cash and cash equivalents Trade and other receivables , ,054 Financial liabilities Trade and other payables Derivative financial instruments Borrowings ,620-16,620 Interest payable on borrowings ,324-3, ,255-20,411 Net exposure 300 (402) (19,255) - (19,357) Folkestone Real Estate Income Fund at Oxley Annual Report

30 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 13: FINANCIAL RISK MANAGEMENT CONT. Credit Risk Credit risk arises from the financial assets of the Fund, which comprise cash and cash equivalents and trade and other receivables. The Fund's exposure to credit risk arises from potential default of the counter party, with a maximum exposure equal to the carrying amount of these instruments. Receivables are received within the terms of the individual property lease. Exposure at balance date is addressed in each applicable Note. Receivables are generally received within 30 days. The Fund does not hold any credit derivatives to offset its credit exposure. In addition, receivable balances are monitored on an ongoing basis with the result that the Fund's exposure to bad debts is not significant. Fair Value Measurements The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. AASB 7 Financial Instruments: Disclosures which requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: a) quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); b) inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (level 2); and c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). The following table presents the Fund s assets and liabilities measured and recognised at fair value at 30 June Level 1 Level 2 Level 3 Total $000 $000 $000 $000 Liabilities Derivative financial instruments - interest rate swap contracts Liabilities Derivative financial instruments - interest rate swap contracts The fair value of derivative financial Instruments are calculated as the present value of the estimated future cash flows. The Fund uses the latest information available in the market. These instruments are included in level 2. There were no transfers between the levels during the year. The carrying amounts of bank deposits, receivables, accounts payable, bank loans and distributions payable approximate net fair value. 29 Folkestone Real Estate Income Fund at Oxley Annual Report 2016

31 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 14: CONTINGENT LIABILITIES No contingent liabilities relating to the Fund exist of which the Responsible Entity is aware. NOTE 15: SUBSEQUENT EVENTS This financial report was authorised on 25 August 2016 by the Board of Directors of the Responsible Entity. There are no significant events since 30 June 2016 that have or may significantly affect the results and operations of the Fund. NOTE 16: AUDITORS REMUNERATION Audit and other assurance service $ $ Audit or review of financial report - PricewaterhouseCoopers, Australian firm 13,000 12,500 Audit of compliance plan - PricewaterhouseCoopers, Australian firm 3,000 2,750 Taxation services Taxation - PricewaterhouseCoopers, Australian firm 2,000 2,000 Total auditors remuneration 18,000 17,250 NOTE 17: FUND DETAILS The registered office of the Fund is Level 14, 357 Collins Street, Melbourne, Victoria 3000 and the principal activity being real estate investment. The domicile of the Fund is Australia. Folkestone Real Estate Income Fund at Oxley Annual Report

32 DIRECTORS' DECLARATION The directors of Folkestone Funds Management Limited, the Responsible Entity of Folkestone Real Estate Income Fund at Oxley ("the Fund"), declare that: 1. the financial statements and notes are in accordance with the Corporations Act 2001, including: giving a true and fair view of the financial position of the Fund as at 30 June 2016 and of its performance, as represented by the results of its operations and its cash flows, for the year ended on that date; and complying with Accounting Standards in Australia and the Corporations Regulations 2001 and other mandatory professional reporting requirements. 2. there are reasonable grounds to believe that the Fund will be able to pay its debts as and when they become due and payable. 3. the Fund has operated during the year ended 30 June 2016 in accordance with the provisions of the Fund Constitution (as amended). Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. This declaration is made in accordance with a resolution of the Directors of Folkestone Funds Management Limited. Grant Hodgetts Chairman Folkestone Funds Management Limited Sydney, 25 August Folkestone Real Estate Income Fund at Oxley Annual Report 2016

33 INDEPENDENT AUDITOR'S REPORT Independent auditor s report to the unitholders of Folkestone Real Estate Income Fund at Oxley Report on the financial report We have audited the accompanying financial report of Folkestone Real Estate Income Fund at Oxley (the Fund), which comprises the statement of financial position as at 30 June 2016, the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors declaration. Directors responsibility for the financial report The directors of the Fund are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial report 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 entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act PricewaterhouseCoopers, ABN Freshwater Place, 2 Southbank Boulevard, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: , F: , Liability limited by a scheme approved under Professional Standards Legislation. Folkestone Real Estate Income Fund at Oxley Annual Report

34 INDEPENDENT AUDITOR'S REPORT CONT. Auditor s opinion In our opinion: (a) the financial report of Folkestone Real Estate Income Fund at Oxley is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the Fund's financial position as at 30 June 2016 and of its performance for the year ended on that date; and complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations (b) the Fund's financial report also complies with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the remuneration report included on page 10 of the directors report for the year ended 30 June The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor s opinion In our opinion, the remuneration report of Folkestone Real Estate Income Fund at Oxley for the year ended 30 June 2016 complies with section 300A of the Corporations Act PricewaterhouseCoopers Charles Christie Partner 25 August 2016 Melbourne 33 Folkestone Real Estate Income Fund at Oxley Annual Report 2016

35 Folkestone Real Estate Income Fund at Oxley Annual Report

36 RESPONSIBLE ENTITY AND REGISTERED OFFICE Folkestone Funds Management Limited Level 14, 357 Collins Street Melbourne VIC 3000 DIRECTORS OF THE RESPONSIBLE ENTITY Grant Hodgetts (Chairman) Adrian Harrington Greg Paramor, AO Ross Strang LAWYERS Clayton Utz Level 15, 1 Bligh Street Sydney NSW 2000 UNIT REGISTRY Boardroom Pty Limited Level 12 Grosvenor Place 225 George Street Sydney NSW 2000 T: AUDITORS/TAXATION ADVISORS PricewaterhouseCoopers Freshwater Place 2 Southbank Boulevard Southbank VIC 3006 BANK Bank of Melbourne Level 8, 530 Collins Street Melbourne VIC 3000 CUSTODIAN The Trust Company (Australia) Limited Level 13, 123 Pitt Street Sydney NSW 2000 SECRETARY Scott Martin Level 14, 357 Collins Street Melbourne VIC 3000 INVESTOR RELATIONS Lula Liossi Level 14, 357 Collins Street Melbourne VIC 3000 T: Folkestone Real Estate Income Fund at Oxley Annual Report 2016