CONTENTS. Folkestone Funds Management Limited ABN Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15

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2 CONTENTS CHAIRMAN AND HEAD OF FUNDS MANAGEMENT REPORT 3 DIRECTORS' REPORT 5 AUDITOR S INDEPENDENCE DECLARATION 11 FINANCIAL REPORT - STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME 12 - STATEMENT OF FINANCIAL POSITION 13 - STATEMENT OF CHANGES IN EQUITY 14 - STATEMENT OF CASH FLOWS 15 - NOTES TO THE FINANCIAL STATEMENTS 16 DIRECTORS DECLARATION 32 INDEPENDENT AUDITOR S REPORT 33 Folkestone Funds Management Limited ABN Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15

3 KEY FY15 HIGHLIGHTS FUND S TOTAL RETURN OF 28.5% DISTRIBUTION OF 8.5 CPU VALUATION 15.1% ABOVE ACQUISITION PRICE CENTRE OFFICIALLY OPENED SEPTEMBER 2014 SETTLED ACQUISITION OF CENTRE IN NOVEMBER % OCCUPANCY FINANCIAL SUMMARY 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 Altona North Annual Report 2014/15 2

4 CHAIRMAN AND HEAD OF FUNDS MANAGEMENT REPORT We are pleased to provide the results of the Folkestone Real Estate Income Fund at Altona North ( 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 until November The Fund acquired, on a fund through basis, a large format retail centre ( Centre ) which opened in September The Centre, now known as Millers Junction Home, is located at 330 Millers Road Altona North and has a gross lettable area of 22,016 sqm with key tenants including Bunnings, Officeworks, JB Hi-Fi Home, Repco, PETstock, petvet and a café. KEY FINANCIAL HIGHLIGHTS The key financial highlights during FY15 include: the Fund's total return of 28.5 per cent - the third best performing fund in the PCA/IPD Unlisted Core Retail Property Fund Index; the Fund settled the acquisition of the Centre in November 2014 for a total cost $30.4 million excluding transaction costs which was 5.2 per cent below the $32.0 million upon completion valuation and 15.1 per cent below the 30 June 2015 valuation of $35.0 million; an annualised distribution of 8.5 per cent per Unit, in line with the forecast FY15 annualised distribution yield in the PDS; a tax deferred component in FY15 of 39.0 per cent; gearing was 43.2 per cent at the Fund level and 44.3 per cent at the property level at 30 June 2015; in July 2014, the Fund hedged its debt position for an additional two years from November 2017 at a rate of 3.95 per cent p.a. (excluding margin) to further improve the risk profile of the Fund; and NTA per Unit of $1.14 (with mark to market of the interest rate hedges), and $1.20 per Unit (without mark to market of the interest rate hedges) 1 compared to $0.97 and $0.99 respectively at 30 June KEY PROPERTY HIGHLIGHTS The key property highlights during FY15 include: the building containing Officeworks, JB Hi-Fi Home, Repco, PETstock and petvet opened for trade on 30 July 2014; the Bunnings building opened for trade on 30 September 2014; the Centre is 100 per cent leased; and the Centre was revalued at 30 June 2015 at $35 million 15.1 per cent above the purchase price (excluding transaction costs). PROPERTY SUMMARY The Fund made the final payment and settled the acquisition of Millers Junction Home on 14 November The holdup in settlement post completion of the Centre was driven by a delay in the registration of the Plan of Subdivision for the site with the relevant authority. The developer, Folkestone, continued to pay interest on the loan to the Fund, so the Fund was no worse off in terms of income up to the date of settlement. As foreshadowed in the PDS, the acquisition of the Centre was forecast to be $30.1 million (excluding transaction costs) although the final price would be adjusted higher or lower depending on certain items (area change and tenant variations that are rentalised) which would alter the final income of the Centre. The additional income was to be capitalised as per the Development Management Agreement at 8.23 per cent. The lettable area of the Centre (based on a survey following completion) increased from 21,553 square metres to 22,016 square metres and some tenant variations occurred. As a result of the additional income being capitalised the total purchase price payable by the Fund was $30.4 million excluding acquisition costs. This compares to the 30 September 2014 'upon completion' valuation of $32.0 million. The Centre was independently revalued by JLL at $35.0 million as at 30 June 2015, 15.1 per cent higher than the acquisition price and 9.4 per cent higher than the September 2014 'upon completion' valuation. The most recent valuation is based on a cap rate of 7.25 per cent compared to the September 2014 cap rate of 7.75 per cent. As at 30 June 2015, 100 per cent of Centre was leased to seven tenants with a weighted average lease term by income of 9.9 years and 10.2 years by area. The Centre is performing well based on the positive feedback from tenants. ADJOINING PROPERTY The Centre is part of a broader precinct 1. 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 Statement of Financial Position as an asset or liability. The Fund has fixed (hedged) the interest rate via two hedges through to October 2019 in order to provide greater certainty to investors of the Fund's net income. Subsequently, interest rates globally have fallen significantly and in recent months the Australian bond yields have fallen to 80 year lows. As a result, if the Fund entered into the same interest rate hedges now, the interest rates would be lower than the interest rates the Fund has entered into. As at 30 June 2015, this results in an out of the money position of $914,000 which is recorded on the Statement of Financial Position as a liability but does not impact on the Fund's distribution. This has the impact of reducing the Fund s NTA by $0.06 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 October 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 Altona North Annual Report 2014/15

5 CHAIRMAN AND HEAD OF FUNDS MANAGEMENT REPORT CONT. that Folkestone is developing called Millers Junction. In the PDS, we flagged that the Fund may have an opportunity to acquire, Stage 2 which comprises 2.57 hectares of land to the rear for an extension of the Centre. Folkestone has decided that the adjoining land is better suited to the development of approximately 60 strata style office/warehouse mews with an anticipated end value of circa $30.0 million. This scheme is a logical inclusion to the Millers Junction precinct which will now include a mix of retail and business uses in an urban renewal precinct. Construction is expected to commence in September In April 2015, Folkestone (not the Fund) entered into an agreement to secure the former Bunnings site which is on the northern side of the Centre, which combined with Folkestone s existing Stage 3 land on the northern side, will enable Folkestone to undertake further complementary development. Folkestone is working with the Hobson s Bay Council to have the site approved for a mix of traditional retail, large format retail and community uses. Aldi s new supermarket which opened in April 2015 is located adjacent to the Centre fronting Millers Road. Although not owned by the Fund, Aldi has a made a major enhancement to the precinct and is already drawing significant customer traffic to our Centre. MARKET OVERVIEW The latest ABS retail trade figures for the month of June 2015 show an increase of 0.7 per cent, taking the annual rate of growth to 4.8 per cent (seasonally adjusted). Household goods have been the stand-out performer, growing 2.2 per cent in June and 8.9 per cent in the year to June Rising house prices in Sydney and Melbourne, and the uplift in housing supply are flowing through to stronger demand for household goods such as furniture, white goods and electronics. Leasing conditions in large format retail centres are improving with tenants wanting to expand their footprint on the back of strong growth in household goods retailing. The range of tenants being attracted to the large format centres is also expanding to include pet retailers, gyms, sporting goods retailers and in some cases, where the planning has been relaxed, supermarkets. Investor activity, both private and institutional, has also been strong with competition for quality large format retail centres intensifying. The standout segment has been free-standing hardware stores anchored by Bunnings or Masters which are now consistently trading on yields below 7.0 per cent. The Masters at Williams Landing in Melbourne was sold in April 2015 on a record yield of 6.0 per cent. We remain positive on the large format retail sector, although as is the case with all forms of retail, the individual characteristics of the centre are critical. 12 MONTH OUTLOOK The forecast distribution yield for FY16 is 8.75 per cent, up from 8.5 per cent in FY15. The FY16 distribution is forecast to be 74.3 per cent tax deferred. Key to the ongoing success of the Centre will be for Folkestone to drive the development of the land adjoining the Centre. This will ensure the Millers Junction precinct becomes a destination comprising Millers Junction Home, Millers Junction Business, Millers Junction Retail and Millers Junction Family. This will enhance the draw of the overall precinct and increase traffic flow to the Fund's Millers Junction Home. Grant Hodgetts Chairman Adrian Harrington Head of Funds Management Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15 4

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 Altona North ( 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 12, 15 William 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 Gregory James Paramor, AO - Appointed 6 July 2009 Mr Kenneth 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 18 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 $203,000 from the Fund. Fees paid by the Fund to the Responsible Entity and its associates during the year are set out in Note 14. PRINCIPAL ACTIVITIES The Fund is a single asset, closed end unlisted real estate fund. On 14 November 2014, the Fund acquired 330 Millers Road, Altona North, Victoria, a large format retail centre with gross lettable area of 22,016 sqm. The Centre's tenants include Bunnings Warehouse, Officeworks, JB Hi-Fi Home, Repco, PETstock and petvet and has carparking for approximately 916 vehicles. 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 until November 2020, unless unitholders agree to a variation of the Fund term. The Fund was established on 30 October 2013 and commenced operating on 11 December 2013 when the units were allotted to investors. REVIEW AND RESULTS OF OPERATIONS The Fund delivered a statutory profit for the year ending 30 June 2015 of $4.3 million (2014: $0.3 million). The Fund's NTA value per unit as at 30 June 2015 was $1.14 (30 June 2014: $0.97). Excluding the negative impact of accounting for the hedging the Fund has in place, the Fund's NTA value per unit increases to $1.20 (30 June 2014: $0.99). 5 Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15

7 DIRECTORS' REPORT CONT. DISTRIBUTIONS Distributions paid for the year ended 30 June 2015 totalled 8.5 cents per unit (11 December 2013 to 30 June 2014: cents per unit). Distributions declared by the Fund since 30 June 2014 were: Period Paid/Payable Cents per Unit 2015 Amount $000 Quarter ending 30 September October Quarter ending 31 December January Quarter ending 31 March April Quarter ending 30 June July Total 8.5 1,409 FUNDING As at 30 June 2015 the Fund had total assets of $35.9 million and net assets of $18.9 million. The Fund has a debt facility with the Bank of Melbourne ( BOM ) with a maturity date of 14 November The Fund s gearing level (borrowings before unamortised transaction costs to total asset value) is 43.2 per cent and the loan to value ratio (borrowings before unamortised transaction costs to investment property value) is 44.3 per cent. As at 30 June 2015 the Fund complied with all of its debt covenant ratios and obligations. The Fund entered into an interest rate swap for the period from November 2014 to October 2017 for the debt amount of $15.27 million at a rate of 5.65 per cent per annum (inclusive of margin). In addition, the Fund has entered into an interest rate swap for the period from November 2017 to October 2019 for the amount of $15.27 million at a rate of 5.75 per cent per annum (inclusive of margin). The Fund has 16,579,944 units on issue as at 30 June STATE OF AFFAIRS In the opinion of the Directors, there were no 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 matter or circumstance 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 14 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 Altona North Annual Report 2014/15 6

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 Age Experience and special responsibilities 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 Gregory 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 Kenneth Ross Strang Non Executive Director LLB (Hons) Member of the Australian Institute of Company Directors 58 Grant was appointed 25 May Grant has been involved in real estate and funds management since He is currently Non Executive Director of Folkestone Investment Management Limited and Knights Capital Group Limited, Director of Bethley Group 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. 47 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. 65 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. 70 Ross was appointed to the Board of the Responsible Entity on 25 May Ross is also a Non-Executive Director of Folkestone Ltd. 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 Altona North Annual Report 2014/15

9 DIRECTORS' REPORT CONT. DIRECTORS' MEETINGS A Board Meetings B Mr Grant Hodgetts 7 7 Mr Adrian Harrington 7 7 Mr Gregory Paramor 7 7 Mr Ross Strang 7 7 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: Audit and Risk Management Committee Meetings Mr Ross Strang 3 3 Mr Garry Sladden 3 3 Mr Mark Baillie 3 3 A - Number of meetings held during the period the member was eligible to attend. B - Number of meetings attended. A B Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15 8

10 DIRECTORS' REPORT CONT. AUDIT AND RISK MANAGEMENT COMMITTEE CONT. The experience of the Audit and Risk Management Committee is set out below: Name and qualification Mr Kenneth 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. 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 No Directors of the Responsible Entity held units of the Fund during the year. Refer to Note 14 of the financial statements for further details. 9 Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15

11 DIRECTORS' REPORT CONT. 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. INSURANCE PREMIUMS The Responsible Entity has paid insurance premiums in respect of its officers for liability and legal expenses for the year 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 Australia) for audit and non-audit services provided during the year are contained in Note 20 to the financial statements. ROUNDING OF AMOUNTS The Fund is of a kind referred to in ASIC Class order 98/100 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 Class Order, 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, 24 August 2015 Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15 10

12 AUDITOR'S INDEPENDENCE DECLARATION 11 Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15

13 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOLKESTONE REAL ESTATE INCOME FUND AT ALTONA NORTH For the year ended 30 June 2015 Revenue Period from 30 October to 30 June 2014 Notes $000 $000 Lease income Property outgoings recovery Net investment property revaluation increment Interest income 1, , Total revenue 5, Expenses Finance costs Property outgoings Responsible entity's remuneration Other expenses Changes in fair value of derivative instruments Total expenses 1, Net profit attributable to unitholders 4, Other comprehensive income - - Total comprehensive income attributable to unitholders 4, Earnings per unit Cents Cents Basic earnings per unit (cents per unit) Diluted earnings per unit (cents per unit) The above Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes. Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15 12

14 STATEMENT OF FINANCIAL POSITION FOLKESTONE REAL ESTATE INCOME FUND AT ALTONA NORTH As at 30 June 2015 Notes $000 $000 ASSETS Current Assets Cash and cash equivalents ,200 Trade and other receivables 5-16 Other current assets Loan to related entity 7-13,210 Total Current Assets ,956 Non-Current Assets Investment property 8 34, Investment property straight line rental asset Total Non-Current Assets 35, Total Assets 35,916 16,813 LIABILITIES Current Liabilities Trade and other payables Distribution payable Derivative financial instruments 12(a) Rent received in advance Total Current Liabilities Non-Current Liabilities Borrowings 11 15,469 - Derivative financial instruments 12(b) Total Non-Current Liabilities 16, Total Liabilities 16, Net Assets 18,936 16,033 EQUITY Issued capital 13 16,469 16,469 Undistributed profit/(losses) 2,467 (436) Total Equity 18,936 16,033 The above Statement of Financial Position should be read in conjunction with the accompanying notes. 13 Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15

15 STATEMENT OF CHANGES IN EQUITY FOLKESTONE REAL ESTATE INCOME FUND AT ALTONA NORTH For the year ended 30 June 2015 Issue Capital Undistributed Profit/(Losses) Total Notes $000 $000 $000 Balance at 30 October Issue of ordinary units 13 16,580-16,580 Fund establishment costs 13 (111) - (111) Net profit attributable to the unitholders Other comprehensive income Distribution paid or provided for - (782) (782) Balance at 30 June ,469 (436) 16,033 Balance at 1 July ,469 (436) 16,033 Net profit attributable to the unitholders - 4,312 4,312 Other comprehensive income Distribution paid or provided for - (1,409) (1,409) Balance at 30 June ,469 2,467 18,936 The above Statement of Changes in Equity should be read in conjunction with the accompanying notes. Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15 14

16 STATEMENT OF CASH FLOWS FOLKESTONE REAL ESTATE INCOME FUND AT ALTONA NORTH For the year ended 30 June 2015 Cash flows from operating activities 2015 Period from 30 October 2013 to 30 June 2014 Note NoteNotNitNo Notes $000 $000 Cash receipts in the course of operations (inclusive of GST) 2,210 - Cash payments in the course of operations (inclusive of GST) (806) (121) Interest received Finance costs paid (600) - Net cash inflow/(outflow) from operating activities 4(b) 838 (53) Cash flows from investing activities Purchase of investment property (30,826) (857) Loan to related entity - (12,400) Loan and accrued interest from related entity 13,975 - Net cash outflow from investing activities (16,851) (13,257) Cash flows from financing activities Proceeds from issue of ordinary units - 16,580 Payment of fund establishment costs - (111) Proceeds from borrowings 15,500 - Distributions paid (1,401) (429) Net cash inflow from financing activities 14,099 16,040 Net (decrease)/increase in cash held (1,914) 2,730 Cash at beginning of the year 2,730 - Cash at end of the year 816 2,730 Cash at end of the year comprising: Cash and cash equivalents 4(a) 816 2,200 Term deposit The above Statement of Cash Flows should be read in conjunction with the accompanying notes. 15 Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15

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 8 October 2013 (as amended). 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 2014: AASB Amendments to AASB 136 Recoverable Amount Disclosures for Non-Financial Assets AASB Amendments to Australian Accounting Standards Novation of Derivatives and Continuation of Hedge Accounting Interpretation 21 Accounting for Levies AASB Amendments to Australian Accounting Standards The adoption of these standards did not have any impact on the current period or any prior period and is not likely to affect future periods. New and Amended Standards not yet adopted by the Fund Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2015 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 and introduces new rules for hedge accounting. 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 contracts for goods and 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 so the notion of control replaces the existing notion of risks and rewards. The standard permits a modified retrospective approach for the adoption. Under this approach entities will recognise transitional adjustments in retained earnings on the date of initial application (e.g. 1 July 2017), i.e. without restating the comparative period. They will only need to apply the new rules to contracts that are not completed as of the date of the initial application. 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. 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. Early Adoption of Standards The Fund has not elected to apply any pronouncements before their operative date in the annual reporting period beginning 1 July 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. 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 Statement of Financial Position 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 period. 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 Statement of Financial Position as a receivable. Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15 16

18 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 1: SIGNIFICANT ACCOUNTING POLICIES CONT. Responsible Entity Fees Fees payable to the responsible entity are recognised in the Statement of Profit or Loss and Other 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 1.1 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. e) Investment Property The investment property comprises leasehold 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 Profit or Loss and Other 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. The amount of the impairment loss is recognised in the Statement of Profit or Loss and Other Comprehensive Income within other expenses. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other expenses in the Statement of Profit or Loss and Other Comprehensive Income. 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 Altona North Annual Report 2014/15

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 Profit or Loss and Other 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 Profit or Loss and Other 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 Profit or Loss and Other 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 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 taxation authority, are presented as operating cash flows. n) Rounding of Amounts The Fund is a registered scheme of a kind referred to in Class Order 98/0100, 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 Class Order 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; by the weighted average number of ordinary 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 the weighted average number of additional ordinary units that would have been outstanding assuming the conversion of all dilutive potential ordinary units. q) Going Concern The financial statements have been prepared on a going concern basis. Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15 18

20 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 2: DISTRIBUTIONS Distributions were paid/payable during the period as follows: Period Paid/Payable Cents per Unit Quarter ending 30 September 20 October 2014 Quarter ending 31 December* 20 January 2015 Quarter ending 31 March 20 April 2015 Quarter ending 30 June 20 July 2015 Total * In 2014, distributions were for the period from 11 December to 31 December 2013 NOTE 3: EARNINGS PER UNIT ("EPU") Amount Cents $000 per Unit ,409 Amount $ 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 ordinary units used in the calculating basic EPU 16,580 16,580 Adjusted weighted average number of ordinary units used in the calculating diluted EPU 16,580 16,580 $000 $000 Earnings used in calculating basic EPU 4, Earnings used in calculating diluted EPU 4, Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15

21 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 4: CASH AND CASH EQUIVALENTS (a) Components of cash and cash equivalents $000 $000 Cash 816 2,200 Total cash and cash equivalents 816 2,200 (b) Reconciliation of net profit attributable to unitholders to net cash inflows from operating activities Net profit for the year 4, Net revaluation (increment) of investment property (3,052) - Amortisation of straight line rental income (265) - (Increase) in other current assets (100) - Decrease/(increase) in receivables 16 (16) Accrued interest on loan to related entity (765) (810) Increase in trade and other payables Increase in rent received in advance (Increase) in unamortised transaction costs (31) - Change in fair value of derivative financial instruments Net cash inflow/(outflow) from operating activities 838 (53) (c) Financing facilities Committed financing facilities available to the Fund: Loan facility 15,500 - Amounts utilised (15,500) - Available financing facilities - - Cash 816 2,200 Financing resources available at the end of the year 816 2,200 NOTE 5: TRADE AND OTHER RECEIVABLES GST receivable Other receivables $000 $ Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15 20

22 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 6: OTHER CURRENT ASSETS $000 $000 Term deposit Prepayments 50 - Accrued income 50 - NOTE 7: LOAN TO RELATED ENTITY $000 $000 Loan advanced - Millers Road Altona Pty Ltd - 12,400 Interest accrued on loan ,210 The Fund had a Fund Loan Agreement with the Vendor/Developer, Millers Road Altona Pty Ltd, a wholly owned subsidiary of Folkestone Limited, the ultimate parent entity of the Responsible Entity. Under the Fund Loan Agreement, the Fund agreed to loan Millers Road Altona Pty Ltd up to $12.4 million to assist the funding of the construction of the early civil works and payment of costs relating to the development of the Centre. During the year, the full amount of principal and accrued interest was repaid. NOTE 8: INVESTMENT PROPERTY 2015 $ $000 Investment property - work in progress Transaction costs relating to acquisition of investment property Investment property - at valuation Investment property at fair value 35,000 - Less: straight line rental asset (265) - Carrying amount at the end of the year 34, Movement In investment property: Balance at the beginning of the year Acquisition of investment property including transaction costs 30, Net revaluation increment 3,052 - Carrying amount at the end of the year 34, a) 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. b) An independent valuation of the property is carried out at least annually. Independent valuations are prepared using both the capitalisation of net income method and the discounting of future net cash flows to their present value. c) The property was valued by JLL as at 30 June 2015 at $35.0 million. The independent valuation has been prepared using both the capitalisation of net income and discounted cashflow method. The key inputs by the valuer included passing rent of $3.1 million and a capitalisation rate of 7.25%. The property was acquired for $31.7 million, including costs. The net property revaluation increment after allowing for acquisition and transaction costs is $3.3 million. 21 Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15

23 NOTES TO THE FINANCIAL STATEMENTS CONT. d) Straight line adjustments of $0.3 million have decreased the value of investment property (shown as a reduction to the net property revaluation increment in the Statement of Profit or Loss and Other Comprehensive Income) with a corresponding increase in straight line rental asset. NOTE 9: TRADE AND OTHER PAYABLES $000 $000 Trade creditors 22 9 Accruals GST payable 16 - Rent incentives 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 17. NOTE 10: DISTRIBUTION PAYABLE $000 $000 Distribution payable NOTE 11: BORROWINGS 2015 $ $000 Borrowings - secured 15,500 - Less: unamortised up front transaction costs (31) - 15,469 - 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 $15.5 million as at 30 June 2015 (fully drawn) Facility Term November 2019 Loan to Value Ratio Less than 60% Interest Cover Ratio Not to be less than 2.0 times As at 30 June 2015, the Fund complied with all of its debt covenant ratios and obligations. Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15 22

24 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 11: BORROWINGS CONT. Hedging Arrangements The Fund entered into an interest rate swap for the period from November 2014 to October 2017 for the debt amount of $15.27 million at a rate of 5.65 per cent per annum (inclusive of margin). In addition, the Fund has entered into an interest rate swap for the period from November 2017 to October 2019 for the amount of $15.27 million at a rate of 5.75 per cent per annum (inclusive of margin). Interest rate and liquidity risk Refer to Note 17 for information on interest rate and liquidity risk. Fair values The carrying amount of the Fund s borrowings approximates their fair value. Assets pledged as security: Collateral that has been pledged for secured liabilities is as follows: i) Financial assets pledged $000 $000 Cash and cash equivalents ii) Other assets pledged Investment properties 35,000 - Total assets pledged 35,816 - 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 12: DERIVATIVE FINANCIAL INSTRUMENTS $000 $000 (a) Current Derivative financial instruments - interest rate swap contracts (b) Non - Current Derivative financial instruments - interest rate swap contracts The Fund uses derivative financial instruments (comprising of interest rate swaps) to swap its risk associated with interest rate fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which the derivative contract is entered into and are subsequently remeasured to fair value. Refer to note 11 for further Information on these contracts. 23 Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15

25 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 13: CONTRIBUTED EQUITY Balance at 30 October 2013 Units on Issue Units on Issue No '000 $ Issue of ordinary units 16,580 16,580 Write-off of fund establishment costs - (111) Balance at 30 June ,580 16,469 Balance at 1 July ,580 16,469 Issue of ordinary units - - Balance at 30 June ,580 16,469 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 14: 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 1.1 per cent of the value of net assets of the Fund. 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 property acquisition due diligence fees* Responsible Entity remuneration Acquisition costs - 87 Fund establishment costs - 56 Cost recoveries ,006 Amounts included in accruals or payables at balance date * These fees were capitalised into the carrying value of the investment property Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15 24

26 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 14: RELATED PARTY TRANSACTIONS CONT. 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 (Australia) Company 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 Gregory 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. Units Held in the Fund by Directors of the Responsible Entity: The number of units in the Fund held during the financial period by each Director and other KMP of the Responsible Entity, including their personally related parties were nil. There were no units granted during the reporting period as compensation. Transactions with other Related Parties The Fund had a Fund Loan Agreement with the Vendor/Developer, Millers Road Altona Pty Ltd, a wholly owned subsidiary of Folkestone Limited, the ultimate parent entity of the Responsible Entity. Under the Fund Loan Agreement, the Fund agreed to loan Millers Road Altona Pty Ltd up to $12.4 million to assist the funding of the construction of the early civil works and payment of costs relating to the development of the Centre. During the year, the full amount of $ million consisting of principal and accrued interest was repaid. On 14 November 2014 the Fund settled the acquisition of the Centre for $30.4 million, excluding acquisition costs. 25 Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15

27 NOTES TO THE FINANCIAL STATEMENTS CONT. During the year, the Fund reimbursed Millers Road Altona Pty Ltd for the following expenses: Amounts paid or payable during the year $000 $000 Acquisition costs During the year, the Fund paid the following expenses on behalf of Millers Road Altona Pty Ltd: Amounts paid or payable during the year Development costs $000 $ Amounts included in receivables at balance date - 8 NOTE 15: SEGMENT INFORMATION The Fund operates wholly in Australia and operates in one business segment, which will be the ownership of a commercial investment property. NOTE 16: LEASE REVENUE AND CAPITAL COMMITMENTS Capital expenditure commitments centre acquisition and development Estimated capital expenditure commitments contracted at balance date but not provided for: Not later than 1 year $000 $000-30,100-30,100 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: 2015 $ $000 Receivable: not later than 1 year 2,695 - later than 1 year but not later than 5 years 11,530 - later than 5 years 16,208-30,433 - Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15 26

28 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 17: 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 Fund uses derivative financial instruments such as interest rate swaps to hedge certain risk exposures. Derivatives are exclusively used for hedging purposes, not as trading or other speculative instruments. 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 (i) Market Risk The Fund is exposed to interest rate, liquidity and credit risks. Details are provided in the following paragraphs. There are no known exposures to other risks that are material to the financial statements. - Interest Rate Risk The Fund's main risk arises from long-term borrowings. Borrowings issued at variable rates expose the Fund to cash flow interest rate risk. Borrowings issued at fixed rates expose the Fund to fair value interest rate risk if the borrowings are carried at fair value. During the year, the Fund's borrowings at variable rate were denominated in Australian Dollars. 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 816 2,200 Term deposit ,730 Financial liabilities Borrowings (gross) 15,500-15,500 - Net exposure (14,684) 2, Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15

29 NOTES TO THE FINANCIAL STATEMENTS CONT. The weighted average interest rates relating to the above financial assets and financial liabilities were as follows: Financial assets Cash and cash equivalents 1.50% 2.78% Financial liabilities Borrowings 5.63% - 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 11 and 12 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. (ii) 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. The table below reflects all contractually fixed pay-offs and receivables for settlement, repayments and interest resulting from recognised financial assets and liabilities, including derivative financial instruments as at 30 June For derivative financial instruments, the market value is presented, whereas for the other obligations the respective undiscounted cash flows for the respective upcoming fiscal years are presented. Market value is not materially different from the break value. Cash flows for financial assets and liabilities without fixed amount or timing are based on the conditions existing as at 30 June Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15 28

30 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 17: FINANCIAL RISK MANAGEMENT CONT. Maturity analysis of financial assets and liability based on management expectations The table below is 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 Financial liabilities Trade and other payables Derivative financial instruments Borrowings ,500-15,500 Interest payable on borrowings ,907-3, ,069-20,277 Net exposure 164 (556) (19,069) - (19,461) 2014 Financial assets Cash and cash equivalents 2, ,200 Term deposit Loan to related entity 13, ,210 15, ,940 Financial liabilities Trade and other payables Derivative financial instruments Net exposure 15,904 - (391) - 15,513 (iii) Credit Risk Credit risk arises from the financial assets of the Fund, which comprise cash and cash equivalents and trade and other receivables and derivative instruments. 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. 29 Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15

31 NOTES TO THE FINANCIAL STATEMENTS CONT. The Fund does not hold any credit derivative to offset its credit exposure. The Fund trades only with recognised, credit worthy third parties, and as such is not requested nor Is it the Fund's policy to secure its trade and other receivables. The Fund's total credit risk for financial instruments contained in the Statement of Financial Position is limited to the carrying amount disclosed in the Statement of Financial Position, net of any provisions for doubtful debts. In addition, receivable balances are monitored on an ongoing basis with the result that the Fund's exposure to bad debts is not significant. (iv) 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 2015 and 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 interest rate swaps 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. NOTE 18: CONTINGENT LIABILITIES No contingent liabilities relating to the Fund exist of which the Responsible Entity is aware. Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15 30

32 NOTES TO THE FINANCIAL STATEMENTS CONT. NOTE 19: SUBSEQUENT EVENTS This financial report was authorised on 24 August 2015 by the Board of Directors of the Responsible Entity. There have been no significant events since 30 June 2015 that have or may significantly affect the results and operations of the Fund. NOTE 20: AUDITORS REMUNERATION Audit and other assurance services $ $ Audit or review of financial report - PricewaterhouseCoopers, Australian firm 12,500 12,500 Audit of compliance plan - PricewaterhouseCoopers, Australian firm 2,750 2,500 Taxation services Taxation - PricewaterhouseCoopers, Australian firm 5,000 5,000 Due diligence - PricewaterhouseCoopers, Australian firm - 15,000 Total auditors remuneration 20,250 35,000 NOTE 21: FUND DETAILS The registered office of the Fund is Level 12, 15 William Street, Melbourne, Victoria 3000 and the principal activity being real estate investment. The domicile of the Fund is Australia. 31 Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15

33 DIRECTORS' DECLARATION The directors of Folkestone Funds Management Limited, the Responsible Entity of Folkestone Real Estate Income Fund at Altona North ("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 2015 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 2015 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, 24 August 2015 Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15 32

34 INDEPENDENT AUDITOR'S REPORT 33 Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15

35 INDEPENDENT AUDITOR'S REPORT CONT. Folkestone Real Estate Income Fund at Altona North Annual Report 2014/15 34

36 RESPONSIBLE ENTITY AND REGISTERED OFFICE Folkestone Funds Management Limited Level 12, 15 William Street Melbourne VIC 3000 DIRECTORS OF THE RESPONSIBLE ENTITY Grant Hodgetts (Chairman) Adrian Harrington Greg Paramor, AO Ross Strang SOLICITORS 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 12, 15 William Street Melbourne VIC 3000 INVESTOR RELATIONS Lula Liossi Level 12, 15 William Street Melbourne VIC 3000 T: