Abacus Property Group
Annual Report 2017

Plain-text annual report

A b a c u s P r o p e r t y G r o u p ANNUAL FINANCIAL REPORT 2017 ABACUS PROPERTY GROUP ANNUAL FINANCIAL REPORT 30 June 2017 Directory Abacus Group Holdings Limited ABN: 31 080 604 619 Abacus Group Projects Limited ABN: 11 104 066 104 Abacus Storage Operations Limited ABN: 37 112 457 075 Directors of Responsible Entities and Abacus Group Holdings Limited: John Thame, Chairman Frank Wolf, Managing Director William Bartlett Malcolm Irving Myra Salkinder Peter Spira Abacus Funds Management Limited ABN: 66 007 415 590 Company Secretary: Rob Baulderstone Abacus Storage Funds Management Limited Auditor (Financial and Compliance Plan): ABN: 41 109 324 834 Ernst & Young 200 George Street SYDNEY NSW 2000 Share Registry: Boardroom Pty Ltd Level 12, 225 George St SYDNEY NSW 2000 Tel: 1300 737 760 Fax: 1300 653 459 Registered Office Level 34, Australia Square 264-278 George Street SYDNEY NSW 2000 Tel: (02) 9253 8600 Fax: (02) 9253 8616 Website: www.abacusproperty.com.au Custodian: Perpetual Trustee Company Limited Level 12 Angel Place 123 Pitt Street SYDNEY NSW 2000 CONTENTS DIRECTORS’ REPORT AUDITORS INDEPENDENCE DECLARATION CONSOLIDATED INCOME STATEMENT CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF CASH FLOW CONSOLIDATED STATEMENT OF CHANGES IN EQUITY NOTES TO THE FINANCIAL STATEMENTS DIRECTORS’ DECLARATION INDEPENDENT AUDIT REPORT 2 33 34 35 36 37 39 40 97 98 It is recommended that this Annual Financial Report should be read in conjunction with the Annual Financial Report of Abacus Trust, Abacus Group Projects Limited, Abacus Income Trust, Abacus Storage Property Trust and Abacus Storage Operations Limited as at 30 June 2017. It is also recommended that the report be considered together with any public announcements made by the Abacus Property Group in accordance with its continuous disclosure obligations arising under the Corporations Act 2001. 1 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 The Directors of Abacus Group Holdings Limited (“AGHL”), Abacus Funds Management Limited (“AFML”) – the Responsible entity of Abacus Trust (“AT”) and Abacus Income Trust (“AIT”), Abacus Group Projects Limited (“AGPL”), Abacus Storage Funds Management Limited (“ASFML”) – the Responsible Entity of Abacus Storage Property Trust (“ASPT”) and Abacus Storage Operations Limited (“ASOL”) present their report for the year ended 30 June 2017. PRINCIPAL ACTIVITIES The principal activities of Abacus Property Group were investment in office, retail and industrial properties, investment in self-storage facilities, participation in property and residential developments and property funds management. The retail funds management activities were substantially reduced during the year with the sale of hotels held by Abacus Hospitality Fund and the winding up of Abacus Diversified Income Fund II. OPERATING AND FINANCIAL REVIEW The operating and financial review is intended to convey the Directors’ perspective of Abacus Property Group and its operational and financial performance. It sets out information to assist securityholders to understand and interpret the financial statements prepared in accordance with Australian International Financial Reporting Standards (“AIFRS”) included in this report. It should be read in conjunction with the financial statements and accompanying notes. Listed Structure / Entities The listed Abacus Property Group is a diversified property group that operates predominantly in Australia. It comprises AGHL, AT, AGPL, AIT, ASPT and ASOL (collectively “Abacus”) and its securities trade on the Australian Securities Exchange (“ASX”) as ABP. Abacus was listed on the ASX in November 2002 and its market capitalisation was over $1.86 billion at 30 June 2017. Shares in AGHL, AGPL and ASOL and units in AT, AIT and ASPT have been stapled together so that none can be dealt with without the others and are traded together on the ASX as Abacus securities. An Abacus security consists of one share in AGHL, one unit in AT, one share in AGPL, one unit in AIT, one share in ASOL and one unit in ASPT. A transfer, issue or reorganisation of a share or unit in any of the component parts requires, while they continue to be stapled, a corresponding transfer, issue or reorganisation of a share or unit in each of the other component parts. AGHL, AGPL and ASOL are companies that are incorporated and domiciled in Australia. AT, AIT and ASPT are Australian registered managed investment schemes. AFML is the Responsible Entity of AT and AIT and ASFML is the Responsible Entity of ASPT. Both AFML and ASFML are incorporated and domiciled in Australia and are wholly-owned subsidiaries of AGHL. Abacus Property Group Consolidation The application of AASB10 by Abacus results in the consolidation of Abacus Hospitality Fund, Abacus Diversified Income Fund II and Abacus Wodonga Land Fund (the “Group”). This is due to the combination of Abacus’ role as responsible entity, variable returns arising from its collective equity and loan investments in these funds, and certain guarantees. AGHL has been identified as the parent entity of the Group. The financial reports of the Group for the year ended 30 June 2017 comprise the consolidated financial reports of AGHL and its controlled entities, AT and its controlled entities, AGPL and its controlled entities, AIT and its controlled entities, ASOL and its controlled entities, ASPT and its controlled entities, Abacus Hospitality Fund and its controlled entities, Abacus Diversified Income Fund II and its controlled entities and Abacus Wodonga Land Fund. The principal activities of Abacus that contributed to its earnings during the course of the year ended 30 June 2017 included: investment in self-storage, office, retail and industrial properties to derive rental and fee income; • • participation in property and residential developments to derive interest income and development profits. 2 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 OPERATING AND FINANCIAL REVIEW (continued) These activities are reported in the segment information note. Abacus is included in the S&P/ASX 200 A-REIT index (ASX:XPJ), a sub-index of the S&P/ASX 200 index that contains the listed vehicles classified as A-REITs. Abacus is the only dedicated core plus investor in the XPJ index and offers some differentiation to the market providing a more active management model to the other members of the XPJ index that are focused on rent collection or funds management. OUR STRATEGY Abacus’ overarching strategy is to invest our capital in core plus property assets. Abacus takes advantage of value adding opportunities to drive long term total returns and maximise securityholder value. Our investment objective is to provide our investors with reliable and increasing returns. We look for property assets that are capable of providing strong and stable cash-backed distributions from a diversified portfolio that provides genuine potential for enhanced capital and income growth as a result of our diligent active management. Abacus does this through the acquisition, development and active management of property assets. In particular: • We take advantage of our specialised knowledge and market position as the only listed core plus investor in the XPJ. • We invest in core plus property investments that are expected to yield c.12% per annum equity total returns over time. • We drive value through active management of the asset portfolio and through the reinvestment of sales proceeds. We have a successful track record of acquiring property based assets and actively managing those assets to enhance income and capital growth. Our core plus presence and track record has facilitated joint ventures with a number of sophisticated global third party capital providers. We look for assets and projects in major centres, typically on the Eastern seaboard of Australia, that are, in our opinion, mispriced by the market and which we believe have the potential for income and capital growth. Our experience has shown that strict adherence to our fundamental investment criteria enables us to buy assets well and provide opportunities for outperformance while minimising downside risk to equity. 3 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 GROUP RESULTS SUMMARY The Board monitors a range of financial information and operating performance indicators to measure performance over time. We use several measures to monitor the financial success of our overall strategy. The key measure is underlying profit. Revenue ($ million) Total income ($ million) Statutory net profit excluding non-controlling interests ($ million) Underlying profit^ ($ million) Underlying profit per security^ (c) Cashflow from operating activities ($ million) Cashflow from operating activities per security (c) Distributions per security^ (c) Interest cover ratio Weighted securities on issue^ (million) ^ Abacus 2017 251.6 463.4 285.1 186.8 32.71 116.2 20.35 17.50 7.4x 571.2 2016 263.7 394.6 185.9 124.0 22.36 91.5 16.50 17.00 4.2x 554.7 The Group earned a statutory net profit excluding non-controlling interests of $285.1 million for the year ended 30 June 2017 (2016: $185.9 million). This profit has been calculated in accordance with Australian Accounting Standards. It includes certain significant items that need adjustment to enable securityholders to obtain an understanding of Abacus’ underlying profit of $186.8 million, a 51% increase on the 2016 underlying profit of $124.0 million. The underlying profit reflects the statutory profit as adjusted in order to present a figure which reflects the Directors’ assessment of the result for the ongoing business activities of Abacus, in accordance with the AICD / Finsia principles for reporting underlying profit. The consolidated profits / (losses) which belong to the securityholders of Abacus Hospitality Fund, Abacus Diversified Income Fund II and Abacus Wodonga Land Fund are excluded as these profits cannot and do not form part of the distributable income of Abacus. The calculation of underlying profit excludes items such as unrealised fair value gains / losses on investment properties, unrealised provision gains / losses, adjustments arising from the effect of revaluing assets / liabilities carried at fair value (such as derivatives, financial instruments and investments), the consolidated profits / (losses) of managed funds which do not form part of the assessable or distributable profits of Abacus and other adjustments in the determination of underlying profit including transactions that occur infrequently and those that are outside the scope of Abacus’ core ongoing business activities. Underlying profit is the basis on which distributions are determined. The reconciliation between the Group’s statutory profit excluding non-controlling interests and Abacus’ underlying profit is below. This reconciliation and the underlying profit has not been reviewed or audited by the Group’s auditor. 4 DIRECTORS’ REPORT 30 June 2017 OPERATING AND FINANCIAL REVIEW (continued) GROUP RESULTS SUMMARY (continued) ABACUS PROPERTY GROUP Consolidated statutory net profit after tax attributable to members of the Group add back: Consolidated profits relating to the managed funds (these profits are excluded as the profits of the managed funds cannot and do not form part of the assessable and distributable income of Abacus) Net profit attributable to Abacus securityholders Certain significant items: Net change in fair value of investment properties held at balance date Net change in fair value of investments and financial instruments held at balance date Net change in fair value of derivatives Net change in fair value of property, plant and equipment and investment properties included in equity accounted investments Impairment of land development Net tax expense / (benefit) on significant items Underlying profit attributable to Abacus securityholders Basic earnings per security (cents) Basic underlying earnings per security^ (cents) Distribution per security^ (cents - including proposed distribution) Weighted average securities on issue (million) ^Abacus 2017 2016 $'000 285,097 $'000 185,886 (27,165) (16,154) 169,732 257,932 (74,773) (74,029) 10,677 (14) 8,258 (4,317) (718) (11,575) - 40,622 (1,999) (8,983) 186,802 124,011 2017 49.91 2016 33.51 32.71 22.36 17.50 17.00 571.2 554.7 During the 12 months to 30 June 2017 the real estate markets across Australia continued to see similar market conditions to those of the prior year. Historically low interest rates and an expectation for this low interest rate environment to continue for the foreseeable future combined with an unabated weight of global capital seeking yield in a low yield global environment. These conditions saw further cap rate compression across all sectors of the market from traditional asset classes of office, retail and industrial through to alternative asset classes of self- storage, healthcare facilities, manufactured homes and hotels and pubs. A general improvement in the outlook of the leasing market during the year also contributed to the attractiveness of real estate assets to domestic and global investors. The strength of the market continues despite a backdrop of economic uncertainty and disparate economic activity throughout Australian States. The office markets across the Eastern Seaboard, in particular Sydney and Melbourne have continued to strengthen with office demand in each market exceeding forecasts from 12 months prior. The markets have worked through respective supply cycles and now have limited supply for the next few years. With demand forecast to remain positive during this period, vacancy rates are expected to contract and rental growth to strengthen in the short to medium term. Australian retail sales have continued to grow, led by the Eastern states with employment growth being stimulated by government and infrastructure investment across these states. This should see a continued growth environment for retail sales, notwithstanding the future concern of a structural shift occurring with the expansion of online retailing and the introduction of Amazon which has stated intent to commence operations in Australia. The investment market for institutional grade industrial product has been strong over the past few years, with landmark assets and portfolios transacting at yields firmer than at previous market peaks. Despite a modest growth outlook and increasing supply side issues, assets with strong covenants and long weighted lease expiries have been well sought after. The medium term outlook is for a stabilisation of yields as this investment activity tapers off, while rents are likely to remain stable. 5 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 OPERATING AND FINANCIAL REVIEW (continued) GROUP RESULTS SUMMARY (continued) The self-storage market over the last 12 months has seen strong transaction activity as the sector becomes more institutionalised. The sector has become more attractive to institutional and high net worth investors which have resulted in continued capitalisation rate compression. It is difficult to get a sense of the rates of rental rate growth achieved across geographic regions as rates depend upon a number of local market factors, in addition to specific occupancy levels such that the more mature the store the greater the potential to optimise rental rates and revenue per available metre (i.e. RevPAM). Abacus has held a cautious investment approach for a number of years while we intensified our investment analysis to ensure assets represented strong value propositions. As a result, during FY17 we focused our investment capital on acquisitions across the self-storage and office sectors as we believed they represented the best risk adjusted returns. This was in line with the investment strategy presented at the Group’s Annual General Meeting in November 2016 which also indicated that we would look to fund future investments across these sectors via the realisation of our residential developments over the coming years. This strategy is focussed on growing the contribution to earnings from recurring revenue sources to fund the Group’s targeted distribution growth of 2-3% pa. During the year Abacus added two office assets in Brisbane CBD, 324 Queen Street and 444 Queen Street, for $90 million for Abacus’ ownership stake. Both assets illustrate strong core plus characteristics that met our investment criteria at this point in the cycle to drive capital value while providing a strong income yield. Abacus continues to utilise our third party capital platform with the introduction of a new investment partner, Investec Australia on the 324 Queen Street acquisition (50/50 respective ownership percentages). Abacus also acquired a number of self-storage and industrial assets for $22 million which we intend to convert into self-storage. The low interest rate environment continued to support the residential market throughout the year, particularly in the Eastern states, despite pockets of oversupply in Brisbane and Melbourne. Concern over the ability of purchasers to settle on off the plan sales remains strong following lending restrictions introduced by the major banks and exchange controls introduced by the Chinese government. Despite this concern most major residential developers have not encountered a strong increase in defaults, although some delays in the timeframe for settlement to occur have been reported. During the 12 months to 30 June, Abacus’ experiences have matched those of the general market while continuing to deliver a number of strong results across its residential developments business. The increase in the Group’s statutory net profit excluding non-controlling interests was principally due to the net change in fair value of investment properties, stronger transactional profits across both the commercial property investment portfolio and residential developments and strong performance fee income across assets held via our third party capital platform. The impact of both year-end fair value adjustments and the Group’s performance on its financial position were as follows: Total assets ($ million) Gearing^ (%) Net assets* ($ million) Net tangible assets*^ ($ million) NTA per security^ ($) NTA per security post distribution^ ($) ^ Abacus - gearing calculated as debt minus cash divided by total assets minus cash * Excluding external non-controlling interests of $48.5 million (2016: $43.3 million) 2017 2,436.7 2016 2,450.3 20.5 25.8 1,766.1 1,516.0 1,737.1 1,480.0 3.02 2.66 2.93 2.59 The increase in net assets of the Group by 16% reflects the improved performance compared to the previous year and a substantial reduction in liabilities. 6 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 OPERATING AND FINANCIAL REVIEW (continued) GROUP RESULTS SUMMARY (continued) Capital management The Abacus balance sheet continues to be strong with gearing remaining conservative at 20.5%, well within our target gearing limit of 35%. At 30 June 2017, Abacus had $295 million of available liquidity that provides capacity for use for up to $519 million of accretive acquisitions. We continue to improve and reweight the balance sheet to larger, higher quality assets with a focus on disciplined capital management strategies. We anticipate Abacus’ weighted average interest rate will remain relatively stable as current capacity is utilised and anticipate it should be no greater than 5.50% over the next year. CORE SEGMENT RESULTS SUMMARY Business activities that specifically contributed to the Abacus’ operating performance and financial condition for the financial year were: Property Investment Commercial Portfolio Abacus’ commercial portfolio delivered a segment result of $180.0 million for the year ended 30 June 2017 which was substantially higher than the previous period by 55.6% (2016: $115.7 million) largely as a result of strong transactional earnings. The commercial portfolio consists of 34 assets (2016: 32 assets) and had a total value of $1.2 billion at year end (2016: $1.1 billion). Pursuant to the 2017 portfolio valuation process, 16 out of 26 of the commercial properties (excluding equity accounted properties) or 57% by value were independently valued during the year to 30 June 2017. The remaining properties were subject to internal review and, where appropriate, their values were adjusted. The valuation process resulted in a net full year revaluation gain of $47.5 million (2016: $37.4 million gain) or 5.3% of commercial portfolio. Commercial portfolio (office, retail, industrial and other) 1. WACR: Weighted Average Capitalisation Rate 2. Like for like rental growth. Excluding movement in occupancy, rental growth for Office and Retail portfolio reflects 4.1% and 6.0% increase, respectively period on period. * See segment note on page 44 7 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 OPERATING AND FINANCIAL REVIEW (continued) CORE SEGMENT RESULTS SUMMARY (continued) During the year Abacus was able to secure two commercial properties that met our investment criteria: • 324 Queen Street, Brisbane QLD for $66 million (ABP interest 50%) • 444 Queen Street, Brisbane QLD for $23.5 million (ABP interest 67%) Abacus and its partners sold a number of properties during the year. These properties delivered some strong returns to the group and included: • 50% interest in Westpac House, Adelaide SA for $88.5 million • 31-49 Brown Road, Clayton VIC for $51.5 million • World Trade Centre, Melbourne VIC for $267.5 million As a result of changes in the portfolio from acquisitions and sales and a mixed leasing environment across regions the portfolio occupancy decreased from 91.2% at 30 June 2016 to 90.5% at 30 June 2017. Pleasingly, like for like rental growth remained strong across our existing and stabilised portfolio to deliver growth of 2.7%. This was largely as a result of the performance of the Group’s property management team and in-built annual rental increases. We believe Abacus’ portfolio is well suited to the current conditions. The office portfolio has limited exposure to full floor or multi-floor tenants, and is configured more for multi-tenanted floors. We have found the potential cost (financial and time) of relocating to another property in the same location often outweighs the benefit of a cheaper rent. Our tenants are also strongly connected to the property’s location, which is traditionally the reason they initially leased the property and results in a positive predisposition to remain. Due to the multi-tenanted floor structure we also have the ability to work proactively with our tenants to contract or expand and adjust their space requirements. Alongside the market, Abacus has also been a beneficiary of the stronger leasing environment with the strong re-leasing spreads across new and renewing leases, particularly in the Sydney CBD. Abacus’ retail portfolio is largely based around properties that are the dominant trader in their respective trade areas. They are heavily focused on non-discretionary and convenience based shopping and trade well in their respective markets. The Group typically targets assets that have been classified as non-core from institutional and high net worth owners and require some levels of refurbishment and upgrade. These assets tend to illustrate strong turnaround prospects and Abacus looks to take advantage of the capital and income improvements achievable through clever cost effective regeneration projects. Abacus remains focused on maintaining revenue and cashflows to support securityholder distributions but nevertheless being conscious of the market’s leasing requirements and competitive offerings. Contribution from Third Party Capital Abacus’ third party capital joint ventures remain an integral strategic investment platform for the Group. As previously mentioned we expanded the platform with a new joint venture with Investec Australia to acquire 324 Queen Street in Brisbane for $132 million (100% asset value). Abacus and its joint venture partner KKR sold their interests in World Trade Centre in Melbourne for $187.25 million, which valued 100% of the asset at $267.5 million. This delivered an equity IRR of over 30% to the joint venture. Abacus typically invests 25% to 50% of the required equity with our capital partners investing the balance. Management of the property remains with Abacus and as a result we are able to leverage our capital to gain greater exposure to a higher number of core plus assets. This leads to greater earnings from fees and rental income. We will focus on driving our third party strategy to expand our capital base. 8 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 OPERATING AND FINANCIAL REVIEW (continued) CORE SEGMENT RESULTS SUMMARY (continued) Self-storage Abacus’ self-storage portfolio delivered a segment result of $70.7 million for the year ended 30 June 2017. This represents a 5.2% decrease on the FY16’s result of $74.6 million and can be attributed to a lower level of fair value increases from the self-storage portfolio offsetting a 14% increase in self-storage EBITDA. Portfolio assets totalled $629 million across a total portfolio of 65 facilities, an overall increase of four facilities during the period, although two existing facilities operating adjacent to each other were merged into one facility during the period. Pursuant to the 2017 valuation process 24 self-storage facilities out of 65 or 36.3% by value were independently valued during the year to 30 June 2017. The remaining facilities were subject to internal review and, where appropriate, their values were adjusted. The valuation process resulted in a net full year revaluation gain of $27.3 million (2016: $36.7 million gain) or 4.6% of investment properties. The self-storage portfolio is well diversified in Australia and New Zealand. 1. Stabilised portfolio 2. WACR: Weighted Average Capitalisation Rate 3. Revenue per available square metre 4. Average over last 12 months (by area) As stated at the Group’s Annual General Meeting in November, we continue to consider investment into our self- storage portfolio as one of our sectors of choice to deliver the Group’s returns and help fund our targeted distribution growth into the future. The last 12 months saw additional asset acquisitions, and we continue to target assets that will contribute to improving the portfolio’s metrics, particularly focusing on conversion opportunities in metropolitan areas in Australia’s Eastern Seaboard. The storage portfolio’s stabilised assets are the key contributor to underlying growth across the portfolio. They continue to deliver improved operating performances across Australian and New Zealand markets. The stabilised portfolio occupancy grew to 89.2% from 87.4% and average rental rate increased to $262m2 from $259m2. The increased rental and occupancy improved portfolio RevPAM to $234m2 from $227m2 in 2016, a 3.1% increase assuming a stabilised New Zealand exchange rate. RevPAM measures the profitability and efficiency of your portfolio. The Group made $22 million of acquisitions during the year including two stabilised facilities for $12.2 million and $9.8 million of assets for conversion into self-storage facilities. These facilities to be converted were acquired in metropolitan areas in NSW and ACT. We remain focused on investment opportunities in metropolitan locations that will deliver higher average rental rates than the current portfolio average to drive portfolio returns. The self-storage sector has seen further interest from investors and capital partners highlighting the sector’s continued attractiveness and further evidence that it sits alongside traditional asset class of office, retail and industrial. The increased institutional recognition has driven strong pricing of assets as new and existing entrants to the sector seek assets and market share. This continues to drive strong capitalisation rate compression across the asset class. * See segment note on page 44 9 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 OPERATING AND FINANCIAL REVIEW (continued) CORE SEGMENT RESULTS SUMMARY (continued) Developments The developments business delivered an increased segment result of $55.0 million (2016: $16.4 million). The business invests in projects and provides finance solutions that focus on select residential and commercial development opportunities in core locations directly and with experienced local joint venture partners. Abacus has total assets of $448 million invested across a number of residential developments in capital city markets across the eastern seaboard of Australia. Abacus controls c.9,500 apartment units or land lots which equates to c.$47,000 cost base per unit/land lot. This low average price provides evidence that the developments business has prospects for strong returns. Abacus completed two residential joint venture development projects during the last 12 months: • Spice Apartments, South Brisbane QLD was a development to build 274 apartments. All apartments have now settled. • The Prince, Canberra ACT was a 152 residential apartments project in the Kingston Foreshore precinct, overlooking Lake Burley Griffin. All apartments have settled. The pipeline of projects that are due for completion over the 12 months to 30 June 2018 includes: • The Eminence, Melbourne VIC (current investment $14.2 million) – Development to build 193 apartments in the inner city suburb of Carlton. The project is a 50/25/25 joint venture with the Crema and Lechte Groups. All apartments have been sold with the project completing in June 2017. The settlement process commenced in late June 2017 and we anticipate finalisation by October 2017. • • Ashfield Central, Sydney NSW (current investment $24.1 million) – Development to build 101 apartments in the inner city suburb of Ashfield. The project is 100% owned by Abacus. All apartments have been sold and we are anticipating completion by June 2018. Ivy and Eve, Brisbane QLD (current investment $27.5 million) – Development to build 476 apartments across two buildings in the inner city suburb of South Brisbane, 500m from the CBD overlooking the Brisbane River. The project is a joint venture with CDL, a Singaporean developer and Kilcor Properties. 464 apartments have been sold with the expected completion on Ivy and Eve by December 2017 and June 2018 respectively. • One A, Erskineville Sydney NSW (current investment $31.2 million) – Development to build 175 apartments in the inner city suburb of Sydney. The project is a joint venture with the Linear Group. 164 apartments have been sold with the expected completion by June 2018. Abacus also has a number of ventures that own land sites, across the Metropolitan Sydney area, undergoing residential rezoning. It is anticipated that a number of these sites will receive their approvals in 2018 and will either be sold to developers or built with our joint venture partners. FY17 saw the realisation of a number of projects including: • Campsie, Sydney VIC was a collection of unzoned parcels of land that was combined and approved for a proposed 439 residential apartment project in the local suburb of Sydney. Abacus was a lender to the project and receives a 50% profit share upon sale. The two sites were sold in late 2016 and early 2017 with settlement occurring in 2017. The timeframe to work through the rezoning of non-residential zoned land is uncertain and complex. This is the reason it is possible to derive higher risk adjusted returns through projects of this type. Timeframes can be disrupted through unpredictable changes in local council and state governments. This includes the ongoing NSW council amalgamation program and subsequent court actions which continue to created headwinds for developers seeking development approvals. Administrators placed into councils affected by amalgamations have caused a back log of approvals while mergers are implemented. This has caused delays to a number of rezoning applications and has created increased uncertainty to delivery and realisation timings. * See segment note on page 44 10 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 OPERATING AND FINANCIAL REVIEW (continued) NON-CORE SEGMENT RESULTS SUMMARY As a result of AASB10, the managed funds are consolidated into the Group financial statements and the Group’s statutory profit includes the financial performance of these funds. These funds are treated as non-core segments as the assets of the funds are not directly owned by Abacus securityholders and do not contribute directly to Abacus’ underlying profit and distributable income. An overview of the financial performance of each of the funds for the year ended 30 June 2017 is as follows: Abacus Hospitality Fund (AHF) AHF owns one hotel: A sales programme for the last remaining asset, the Twin Waters hotel, was undertaken throughout 2016 and 2017. Despite extensive due diligence by one party, no sale contract was exchanged. Abacus will use its best endeavours to source a suitable buyer for the property when market conditions for this hotel improve. When the property is sold capital will be distributed and the Fund will be wound up. Abacus Diversified Income Fund II (ADIF II) On 31 March 2017 retail investors were repaid their original investment. Abacus Wodonga Land Fund (AWLF) AWLF owns the residential estate known as White Box Rise located in Wodonga, Victoria. During the year 117 residential lots were settled for combined gross proceeds of $16.2 million. This takes the total number of lots settled to 833 since the start of the project. There are approximately 239 lots left to sell in the estate, and these are expected to be sold over the next 2-3 years. FUTURE PROSPECTS AND RISKS Abacus has committed to growing its investments across its commercial and self-storage property segments as a means to growing its contribution to the Group’s recurring earnings. This follows the investment strategy presented at the Group’s Annual General Meeting in November 2016 which focussed on growing recurring revenue sources to fund the Group’s targeted distribution growth of 2-3% pa. This investment strategy would be funded via the realisation of our residential developments over the coming years. Abacus has had a successful start to this strategy through the realisations and acquisitions that have delivered its record results through FY17. Abacus acquisition strategy remains focused on core plus investment properties either through joint venture or directly on balance sheet. We will continue to actively manage our portfolio and where appropriate recycle the mature, lower growth assets realising its improved capital position. At 30 June 2017 Abacus held sufficient acquisition capacity to acquire a further $519 million of properties directly on the balance sheet. This capacity can be further leveraged to invest in a larger number of projects through joint venture arrangements. Recurring underlying earnings should increase over the coming year as the Group sources additional acquisitions and an increased level of rental income as assets currently under development come back on line. Growth in revenue through further acquisitions will be driven or limited by our ability to access new opportunities that deliver our required equity returns in current markets that are showing signs of strong pricing. The different characteristics of each leasing market across office, retail and industrial sectors in each state has the potential to increase volatility in rental revenue. Any sales of investment properties or the completion and repayment of any development project loans will also have a negative influence of recurring revenue growth. Abacus will continue to be invested across the residential development sector. In FY17 its projects have delivered strong returns to the Group. Its pipeline for project completions remains robust for the next few years. The outlook for the residential sector remains strong in Sydney, where over 77% of the Group’s invested capital is located. The contribution to earnings from finance income is directly correlated to the levels of loans extended to borrowers. This has potential to fall as the current pipeline is realised and the Group returns to more normalised levels of investments of approximately 10% of balance sheet total assets. 11 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 OPERATING AND FINANCIAL REVIEW (continued) FUTURE PROSPECTS AND RISKS (continued) Abacus remains committed to delivering transactional returns to securityholders in addition to returns from recurring income. The Abacus balance sheet is exposed to transactional returns from both investment properties and also development projects. The timing and nature of transactional returns are unpredictable and uncertain therefore making it difficult to forecast. There are a number of risk factors associated with property-related businesses that may have an impact on the financial prospects of Abacus. Some of the key risks are outlined below. This outline is not exhaustive, and performance may be affected adversely by any of these risk and other factors. • Returns from investment – Returns from investment in real property and other related property exposures depend largely on the amount of rental income that can be generated from the property, the expenses incurred in operations, including the management and maintenance of the property, as well as changes in the market value of the property. Factors which may adversely impact these returns include: • • • the overall conditions in the national and local economy, such as changes in gross domestic product, employment trends, inflation and interest rates; local real estate conditions, such as the level of demand for and supply of retail, commercial and industrial space; the perception of prospective tenants of the attractiveness, practicality and convenience of the rental space; changes in tenancy laws and planning approval requirements; • • external factors including major world events such as war, terrorist attacks or force majeure events; • unforeseen capital expenditures; • • • cost of property outgoings and recoverability from tenants; and supply of new property and other investment assets; investor demand/liquidity in investment markets. • Development – Abacus is involved in the development of real estate. Generally, property development projects have a number of risks including: • The risk that planning consents and regulatory approvals are not obtained or, if obtained, are received later than expected, or are adverse to Abacus’ interests, or are not properly adhered to; • The escalation of development costs beyond those originally expected; • Project delays; • Anticipated sales prices or timing on sales not being achieved; • Defaults on pre-sales contracts; • Non-performance/breach of contract by a contractor, sub-contractor or joint venture partner; and • Competing development projects adversely affecting the overall return achieved by Abacus developments. A sustained downturn in property markets caused by any deterioration in the economic climate could result in reduced development profits through reduced selling prices or delays in achieving sales. Increases in supply or falls in demand in any of the sectors of the property market in which Abacus operates or invests could influence the acquisition of sites, the timing and value of sales and carrying value of projects. The residential property market in particular may be adversely affected by declining consumer sentiment and increasing interest rates. In the short term this may affect, for example, project enquiry levels or rates of sale. In the medium-term factors such as the oversupply or undersupply of various markets may materially impact Abacus’ development operations. A number of factors affect the earnings, cashflows and valuations of Abacus’ commercial property development, including construction costs, scheduled completion dates, estimated rental income and occupancy levels and the ability of tenants to meet rental and other contractual obligations. 12 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 OPERATING AND FINANCIAL REVIEW (continued) FUTURE PROSPECTS AND RISKS (continued) • Leasing terms and tenant defaults – The future financial performance of Abacus will depend, in part, on its ability to continue to lease existing retail, office, industrial, self-storage and hotel space that is vacant or becomes vacant on economically favourable terms. In addition, its ability to lease new asset space in line with expected terms will impact on the financial performance of Abacus. The ability of major tenants to meet their rental and other contractual commitments to Abacus (such as in situations of insolvency or closure of their businesses) may have an adverse impact on the income from properties, which may result in an adverse impact on the financial performance of Abacus. This risk is managed through active asset management including ongoing liaison with tenants, regular maintenance and refurbishment of properties to attract tenants, timely marketing programs for vacant space and due diligence on the financial strength of prospective tenants prior to entering into leases. • Funding – The property investment and development sector is highly capital intensive. The ability of Abacus to raise funds (equity and debt) on acceptable terms will depend on a number of factors including capital market conditions, general economic and political conditions, Abacus’ performance, and credit availability. Changes in the cost of current and future borrowings and equity raisings may impact the earnings of Abacus, and impact the availability of funding for new acquisitions and projects, or increase refinancing risk as debt facilities mature. Abacus uses debt funding provided by major banks. Any downgrade of Abacus’ bank credit assessment may increase overall debt funding costs and adversely affect Abacus’ access to debt funding and the terms on which that funding is offered. Abacus staggers the debt maturity profile to reduce the concentration of refinancing risks at any point in time and obtains funding through different banks to reduce credit and counterparty risks. • Insurance – While Abacus carries property insurance, there are types of losses (such as against floods and earthquakes) that are generally not insured at full replacement cost or that are insured subject to larger deductibles or insurance may not be able to be obtained. Additionally, Abacus will face risks associated with the financial strength of its insurers to meet their indemnity obligations when called upon which could lead to an adverse effect on earnings. Abacus mitigates this risk through the use of insurance brokers to seek to place cover with well rated insurers and ensure that this insurance risk is diversified across various insurers. The diversification of the property portfolio across geographical regions reduces the impact of any potential losses to Abacus. • Environmental – Abacus may from time to time be exposed to a range of environmental risks including those resulting from soil and water contamination, construction, cultural heritage and flora and fauna (e.g. native vegetation). In addition, there is a risk that property owned by or projects undertaken by Abacus from time to time may be contaminated by materials harmful to human health (such as asbestos or other hazardous materials). Also, returns may be adversely impacted by changes to sustainability and environmental requirements and potentially costs associated with the carbon pricing or the introduction of new regulations referable to the property industry. In these circumstances, Abacus may be required to undertake remedial works on contaminated sites. Additional expenses may result from changes in environmental regulations across the industry. Abacus as part of the property acquisition due diligence engages experts to advise on any potential environmental risks and factors these into the acquisition price of the property. Abacus also constantly monitors for any potential exposure in changes in environmental regulations to manage any costs and impacts associated with these risks. • Treasury risk – Abacus manages its exposure to financial market risks by way of a formal treasury policy encompassing among other things interest rate, funding, liquidity and credit risk management. Risk management is undertaken over multiple timeframes with risk management activity reviewed on a regular basis by our Treasury Management Committee, a formally documented senior management committee. The overarching treasury policy parameters for interest rate and funding risk management reflect the objective of balancing a desired level of certainty for interest expense against retaining an appropriate level of 13 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 OPERATING AND FINANCIAL REVIEW (continued) FUTURE PROSPECTS AND RISKS (continued) flexibility to respond to external developments within not only domestic and global financial markets but also the wider domestic and global economies. The Treasury Policy is reviewed on a regular basis by senior management and the Board. This is enhanced by utilising the in-depth market knowledge of Abacus’ external independent treasury adviser. With high levels of uncertainty not only in domestic financial markets but also in the Australasian residential and commercial property sectors and the wider global economy, Abacus has focused its interest rate risk management activity over the last financial year on the near-term, albeit within the overall interest rate risk management hedging requirements of our Treasury Policy. Funding risk management has focused on the timely renegotiation of maturing facilities and where possible seeks to increase the overall maturity profile. • Workplace Health and Safety (WH&S) – Abacus manages its exposure to WH&S by way of a documented WH&S program including policies and procedures for managing safety. The management system ensures compliance by stakeholders including site contractors and employees through training and education. The management system protects from the risk of incidents, causing financial or physical impact arising from an accident or event at an asset owned or managed by Abacus. • Talent retention – The inability to attract, retain and develop talented people can frustrate the execution of the strategy, limiting the ability to deliver the business’ objectives. 14 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 OPERATING AND FINANCIAL REVIEW (continued) DIRECTORS AND SECRETARY The qualifications, experience and special responsibilities of the Directors and Company Secretary are as follows: John Thame AIBF, FCPA Chairman (non-executive) Mr Thame has over 30 years’ experience in the retail financial services industry in senior management positions. His 26-year career with Advance Bank included 10 years as Managing Director until the Bank’s merger with St George Bank Limited in 1997. Mr Thame was Chairman (2004 to 2008) and a director (1997 to 2008) of St George Bank Limited and St George Life Limited. Mr Thame is Chairman of the Due Diligence Committee and a member of the Audit & Risk and Remuneration & Nomination Committees. Tenure: 14 years (All as Chairman) Frank Wolf OAM, PhD, BA (Hons) Managing Director Dr Wolf has over 30 years’ experience in the property and financial services industries, including involvement in retail, commercial, industrial and hospitality-related assets in Australia, New Zealand and the United States. Dr Wolf has been instrumental in over $5 billion worth of property related transactions, corporate acquisitions and divestments and has financed specialist property-based assets in retirement and hospitality sectors. He is also a director of HGL Limited, a diversified publicly listed investment company. Tenure: 14 years (10 years as Managing Director) Malcolm Irving AM, FCPA, SF Fin, BCom, Hon DLitt Mr Irving is a Non-Executive Director and has over 40 years’ experience in company management, including 12 years as Managing Director of CIBC Australia Limited. He is also a director of O’Connell Street Associates Pty Ltd. Mr Irving is Chairman of the Audit & Risk and Compliance Committees and a member of the Due Diligence Committee. Tenure: 13 years William J Bartlett FCA, FCPA, FCMA, CA(SA), FAICD Mr Bartlett is a Non-Executive Director. As a partner at Ernst & Young for 23 years, he held the roles of Chairman of Worldwide Insurance Practice, National Director of Australian Financial Services Practice and Chairman of the Client Service Board. Mr Bartlett is a director of Suncorp Group Limited, GWA Limited, Reinsurance Group of America Inc. and RGA Reinsurance Company of Australia Limited. He is Chairman of the Cerebral Palsy Foundation of Australia. Mr Bartlett is Chairman of the Remuneration & Nomination Committee and a member of the Due Diligence and Audit & Risk Committees. Tenure: 10 years Myra Salkinder MBA, BA Mrs Salkinder is a Non-Executive Director and is a senior executive of the Kirsh Group. She has been integrally involved over many years with the continued expansion of the Kirsh Group’s property and other investments, both in South Africa, Australia and internationally. Mrs Salkinder is a director of various companies associated with the Kirsh Group worldwide. Mrs Salkinder is a member of the Due Diligence and Remuneration & Nomination Committees. Tenure: 6 years 15 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 OPERATING AND FINANCIAL REVIEW (continued) DIRECTORS AND SECRETARY (continued) Peter Spira AM, B Arch Mr Spira is a Non-Executive Director. He has over 36 years’ experience in the Australian real estate sector with Meriton Group, Australia’s largest residential apartment developer. He was responsible for Meriton Group’s development projects while also leading the Meriton team in researching and developing new construction and remediation systems. Mr Spira was a director of Meriton Group from 1995 until 2015. In 2006 he received the Order of Australia (AM) for services to the development industry. He is a director of Retire Australia. Mr Spira is a member of the Due Diligence Committee. Tenure: 2 years Robert Baulderstone BA, CA, FCIS Company Secretary and Chief Financial Officer Mr Baulderstone has been the Company Secretary since February 2017. He has been a chartered accountant for over 25 years. As at the date of this report, the relevant interests of the directors in the stapled securities of ABP Group were as follows: Directors J Thame F Wolf W Bartlett M Irving Directors’ Meetings ABP securities held 84,590 3,606,382 33,125 52,343 The number of meetings of directors (including meetings of committees of directors) of AGHL, AFML (the Responsible Entity of AT and AIT), AGPL, ASFML (the Responsible Entity of ASPT) and ASOL, held during the year and the number of meetings attended by each director were as follows: Board Audit & Risk Committee Remuneration & Nomination Committee Compliance Committee Held Attended Held Attended Held Attended Held Attended J Thame F Wolf W Bartlett M Irving M Salkinder P Spira 11 11 11 11 11 11 11 11 11 11 11 11 4 4 4 4 3 4 1 1 1 1 1 1 4 4 4 4 Indemnification and Insurance of Directors and Officers The Group has paid an insurance premium in respect of a contract insuring all directors, full time executive officers and the secretary. The terms of this policy prohibit disclosure of the nature of the risks insured or the premium paid. Indemnification of Auditors To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount) – except for any loss in respect of any matters which are finally determined to have resulted from Ernst & Young’s negligent, wrongful or wilful acts or omissions. No payment has been made to indemnify Ernst & Young during or since the financial year. 16 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 ENVIRONMENTAL REGULATION AND PERFORMANCE The Group is subject to significant environmental regulation in respect of its property activities. Adequate systems are in place for the management of the Group’s environmental responsibilities and compliance with the various licence requirements and regulations. No material breaches of requirements or any environmental issues have been identified during the year. The Group is a core plus investor, not a builder of new buildings. The Group endeavours to choose sustainable options whenever that is a cost-effective outcome. AUDITORS INDEPENDENCE DECLARATION We have obtained an independence declaration from our auditor, Ernst & Young, and such declaration is shown on page 33. ROUNDING The amounts contained in this report and in the half-year financial report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the group under ASIC Corporations Instrument 2016/191. The group is an entity to which the instrument applies. 17 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 REMUNERATION REPORT (audited) This Remuneration Report describes Abacus’ remuneration arrangements for directors and executives in accordance with the requirements of the Corporations Act and Regulations. Key terms used in this report are defined in the glossary at Table 15. This report contains details of the remuneration of the following key management personnel (KMPs) (i) Non-executive Directors J. Thame W. Bartlett M. Irving M. Salkinder P. Spira Chairman Director Director Director Director (ii) Executive Director F. Wolf Managing Director (iii) Executives R. Baulderstone C. Laird P. Strain Chief Financial Officer Director Property Development Director Property Investments Board oversight of remuneration Remuneration & Nomination Committee The Remuneration & Nomination Committee is responsible for making recommendations to the Board on the remuneration arrangements for the non-executive directors and executives. Further details about the Committee’s membership and functions are contained in the Corporate Governance Report. 18 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 REMUNERATION REPORT (audited) (continued) Executive remuneration Snapshot Abacus is a core plus investor in the Australian real estate sector. We seek to acquire properties that are mispriced in the market through flaws in their capital structure, leasing or use. Our risk profile differs from traditional A-REITS that primarily manage rental income streams. We have structured our remuneration policies so that our executives are not encouraged to take undue risks. With core plus property, opportunistic investing can only be assessed over time. Variable remuneration is short and long dated. Variable remuneration recognises different contributions. For executives focused on transaction, initiation and value delivery outcomes, it recognises the realisation of value from historic transactions that have crystallised in the current period and other non-financial contributions. For other executives it recognises contributions through provision of infrastructure, management and specialist services to enable the effective functioning of the Group. Long dated variable remuneration is linked to Abacus’ security price that reflects the market assessment of the business’s longer term ability to deliver sustainable distributions and growth. Long dated variable remuneration is subject to clawback. Objective The remuneration policy for executives supports the Group’s overall objective of producing sustainable earnings and continuing growth in security value. Total remuneration levels are positioned at market median, with higher rewards possible if justified by performance. The policy framework is designed to align the interests of executives and securityholders through the use of variable remuneration linked to an underlying profit gateway range and to the Abacus security price over the vesting period for deferred remuneration. The variable remuneration strategy is designed to drive sustainable and growing underlying profit that covers the distribution level implicit in the Abacus security price. Abacus’ performance over the last 5 years is illustrated below. Table 1: 5 year performance Underlying earnings per security (cents)* Distributions paid and proposed (cents) Closing security price (30 June) Net tangible assets per security** Weighted average securities on issue * Underlying earnings are unaudited. 2013 18.76 16.50 $2.27 $2.32 446.4m 2014 20.83 16.75 $2.50 $2.38 486.1m 2015 24.53 17.00 $2.92 $2.49 524.4m 2016 22.36 17.00 $3.15 $2.66 554.7m 2017 32.71 17.50 $3.24 $3.02 571.2m ** Net tangible assets per security include the impact of the fair value movements. 19 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 REMUNERATION REPORT (audited) (continued) The table below sets out the structure of Abacus’ executive remuneration arrangements. Each element is discussed in further detail in the sections that follow. Table 2: Summary of ABP’s remuneration structure Remuneration component Fixed remuneration Current variable component (capped at 75% of fixed remuneration for the Managing Director and at 60% for other executives) Deferred variable component (capped at 75% of fixed remuneration for the Managing Director and at 60% for other executives) Method Purpose Link to performance Paid mainly as cash salary - comprises base salary, superannuation contributions and other non-monetary benefits (car parking and associated fringe benefits tax). Paid in cash in September. Awards are made in the form of security acquisition rights. Set with reference to role, market, experience and skill- set. Indirect link to performance. Periodic increases are linked to market movements, changes in roles and responsibilities, and incumbent experience. To drive achievement of the underlying profit target range as set by the Board. To reward executives for achieving sustainable underlying profit growth over the short to medium term and to reduce excessive risk taking associated with short term performance assessment models. Underlying profit is a key financial gateway for a current variable award. Individual performance is then tested against KPIs, key effectiveness indicators and other internal financial and performance measures. Directly linked to the increase in the Abacus security price over the vesting period, and the maintenance of distributions. Claw back of prior grants is considered if performance is not sustained. Abacus aims to ensure that the split of fixed and variable remuneration for executives is appropriate for the type of business it operates, namely, a cyclical, established business that seeks to provide stable distributions to securityholders. Volatile outcomes are not valued by long-term investors, and therefore remuneration is not highly incentive leveraged. The result is a higher proportion of fixed remuneration for executives compared to other A- REITs and a lower proportion of variable remuneration, with the variable remuneration designed to reward consistency of sustainable distributions and steady improvement to the underlying financial strength of the business. This strategy aligns with the Board’s desired positioning of the group within the A-REIT industry. Accordingly, the Board considers it appropriate that for the key management personnel the proportion of fixed to the potential maximum variable pay (the remuneration ratio) is 40:60 for the Managing Director and 45:55 for the other executives, with half of the variable component generally allocated to current variable remuneration and the other half to deferred variable remuneration. There may be variations from the ratio based on personal performance, but each executive’s total current and deferred variable remuneration is generally capped at 150% for the Managing Director and 120% for the other executives of their fixed remuneration. To assist the Committee in determining remuneration, Abacus subscribes to an independent property salary and remuneration survey recommended to it by EY. Abacus also reviews the published remuneration of the members of the S&P ASX 200 Index and the S&P/ASX 300 A-REIT Index. This information is used by the Committee for benchmarking purposes Fixed Remuneration Abacus aims to set a fair base salary. Base salary is set by reference to each executive’s position, performance and experience, and the Committee has regard to independent benchmarking information. The Committee has authority to engage independent advisers to assist it in its role. No external adviser provided any remuneration recommendations in relation to any member of the KMP during the year. Fixed remuneration is benchmarked against data for the property industry as well as data from the stock market to determine an appropriate market-competitive level of pay. Stock market data covers listed industry companies of comparable size and, within that, A-REITs of comparable size. Base salaries paid to executives increased by an average of 1.8% in the year ended 30 June 2017. 20 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 REMUNERATION REPORT (audited) (continued) Current variable remuneration Table 3: Summary of the current variable remuneration plan What is current variable remuneration? A cash incentive plan linked to specific annual targets. What were the outcomes for executives this year and last year? For the 2017 financial year current variable remuneration awards of $1,710,000 have been accrued and will be paid in September 2017. The awards made to each executive and their achievements against the maximum potential payment are set out in table 6. What is the purpose of current variable remuneration? To link the achievement of Abacus’ operational targets to the remuneration received by all the executives charged with meeting those targets. This is designed to encourage the executives to work as a team to achieve the underlying profit target range. What are the performance conditions? For each financial year, the Board specifies an underlying profit target range. The lower end of the target range operates as a gateway that must be passed if current variable remuneration awards are to be generally payable. The profit target range for the 2017 financial year was $119m to $125m. If the gateway is passed, the value of the award for each executive is determined having regard to achievement against pre-determined key performance indicators or KPIs. The target levels of performance set by the Board are challenging, and 100% payments require a high level of consistent performance. The KPIs for the year ended 30 June 2017 are set out below: KPI Proportion of current variable remuneration award measure applies to Managing Director Other executives 20-80% (dependent on role) Financial measure: 60% - - - Contribution to Abacus underlying profit Contribution to sustainability of distribution Contributions to projects expected to grow security value Non-financial measures: 40% 20-80% - - - - - Quality of analysis and recommendations Transaction and project management Key growth activities Risk management Other performance measures focused on achieving business imperatives Account is also taken of qualitative indicators of effectiveness, performance and behaviour. 21 DIRECTORS’ REPORT 30 June 2017 REMUNERATION REPORT (audited) (continued) ABACUS PROPERTY GROUP Why were these measures chosen? An underlying profit target range was chosen because, of several financial performance measures considered by the Board, underlying profit demonstrated the closest correlation to security-holder value creation (measured by total security-holder return). Underlying profit reflects the statutory profit as adjusted in order to present a figure that reflects the Directors’ assessment of the result for the ongoing business activities of Abacus, in accordance with the AICD/Finsia principles for reporting underlying profit. The other financial and non-financial KPIs were chosen as they represent the key drivers for the short-term success of the business and provide a framework for long term securityholder value. How is the total current variable remuneration pool determined? The current variable remuneration pool is linked directly to, and contingent on, the achievement of the underlying profit gateway for the assessment year. How is performance assessed? The Remuneration and Nomination Committee considers the performance of the executives against their KPIs and other applicable measures and has regard to independent benchmarking information. The Committee then recommends current variable remuneration payments, if any, to the Board for its approval. What discretions does the Board have? If the underlying profit gateway is missed, the Board retains the discretion to make the current variable remuneration pool, or a reduced pool, generally available if it determines the circumstances warrant such action. If performance has been exceptionally strong the Board may increase the total pool size to provide additional current variable remuneration awards reflective of the above target performance. If the underlying profit gateway is missed, the Board also retains the discretion to pay current variable remuneration awards to selected individuals to reward them for their personal above target performance. When approving awards for individual executives, the Board has the discretion to consider each executive’s total contribution to the group in addition to the specific KPIs selected for the relevant year. The board will disclose the exercise of any of these discretions. No discretions have been exercised in respect of the reporting year. What happens on cessation of employment? An executive will generally not be entitled to be paid a current variable remuneration award if they resign or if their employment is terminated with cause. Table 4: Summary of the pooling and assessment process The process for determining an individual’s current variable remuneration award is as follows: Beginning of the year Set the plan parameters - Underlying profit target range for coming year KPIs for each participant - - Maximum current variable remuneration payable for each participant based on remuneration ratio Year-end Measure Abacus’ financial performance - - - Is underlying profit gateway met or exceeded? If no, a payment will generally not be made If yes, gateway is passed After year-end Distribute current variable remuneration - - Assess individual performance against KPIs and other measures Pay current variable remuneration entitlements 22 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 REMUNERATION REPORT (audited) (continued) Current variable remuneration outcome for the Managing Director The following table sets out the performance of the Managing Director against his KPI targets for the year ended 30 June 2017 (scorecard) which are reviewed by the Remuneration and Nomination Committee and the Board. These KPIs are intended to provide a link between remuneration outcomes and the key drivers of long term securityholder value: Table 5: Managing Director’s performance against KPIs Category Weighting Result Performance Detail Financial performance – measured by underlying profit Sustainable distribution – measured by payment of the target amount 40% 20% Above target Above target Abacus delivered an underlying profit of $186.8m which is 57% higher than the variable remuneration gateway. Abacus has paid a distribution of 17.5c per security which is 3% higher than the target distribution of 17.0c per security. Growth – measured by revenue growth, funds under management, acquisitions, capital partners and expanded activities Business management – measured by debt management, rent and leasing management, operating costs and delivery of business plans People – measured by leadership performance, employee engagement, retention and development 15% Above target 15% Above target 10% At target Abacus achieved a 21% increase in revenue and continued to grow the property portfolio. Abacus also entered into joint ventures with new capital partners which led to an increase in funds and properties under management Abacus has a strong capital position and sound controls that have supported its performance in maintaining occupancy levels above 90%, comparable WALE and the delivery of operational improvements and efficiencies An independent survey undertaken with senior staff during the year concluded that Abacus has positive and focused leadership. The average tenure of all employees in Abacus is greater than 5 years. The scorecards for other executives are similar to that of the Managing Director, but with different weightings and with KPIs applicable to their individual roles. Current variable remuneration awards Application of the KPIs against the scorecards resulted in no executive achieving the maximum possible variable remuneration. The following table sets out the awards made to each executive based on their performance during the year ended 30 June 2017. Table 6: Current variable awards Maximum STI as per the plan 1,050,000 300,000 300,000 300,000 Fixed salary 1,400,000 500,000 500,000 500,000 Current variable remuneration award 900,000 270,000 270,000 270,000 % of maximum possible current award earned 86% 90% 90% 90% F Wolf R Baulderstone C Laird P Strain 23 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 REMUNERATION REPORT (audited) (continued) Deferred variable remuneration Table 7: Summary of the deferred variable remuneration plan What is deferred variable remuneration? Deferred variable remuneration is delivered in the form of an annual grant of security acquisition right (SARs) under the deferred security acquisition rights plan (SARs Plan). SARs allocated to an executive as their deferred variable remuneration for a financial year will vest in four equal annual tranches on the first, second, third and fourth anniversaries of the allocation date. Executives are entitled before any tranche of SARs vests, to extend the vesting date for that tranche by 12 months. What is the purpose of deferred variable remuneration? The objective of the deferred variable remuneration plan is to reward executives for sustaining underlying profit that covers the distribution level implicit in the Abacus security price and for the sustainability of distributions over a four year period. The structure of the plan recognises that long-term value is the product of a string of sustained short-term outcomes and seeks to discourage volatile earnings and distributions. Reward is accordingly contingent on both current performance and the maintenance of that performance in succeeding years. The two are not considered independent, and the reward structure intentionally does not allow for separate short term and long term measures. How is the value of the deferred variable remuneration determined? A deferred variable remuneration award is available to an executive who satisfies the KPIs outlined in the current variable remuneration section. As a starting point, the deferred variable remuneration award for a financial year will match the value of the current variable remuneration award paid for that year. The matching allocations may then be adjusted to take into account other factors that the Board considers specifically relevant to the purpose of providing deferred variable remuneration awards. Adjustments may be needed, for example, to take into account exceptional individual performance, the potential of an executive, or their future employment plans and aspirations. Once the grant value is determined by the Board, the number of SARs to be awarded is calculated based on the face value of Abacus’ securities. The face value is calculated using a 10 day volume weighted average price (VWAP) for the period commencing on the second trading day after the full year results announcement. Can deferred variable remuneration be forfeited? Deferred variable remuneration will usually be forfeited if an executive resigns or is summarily dismissed prior to the vesting date (see the ‘Cessation of employment section’ below for more detail). The Board has the discretion to forfeit unvested SARs tranches of an allocation of SARs if ABP distributions fall by more than the annualised distribution rate per ABP security set at the time of the relevant allocation. The rate set for the reporting year was $0.17. No forfeitures of SARs for unsustainable performance occurred in the reporting period. Further, if the Board determines that an executive is responsible for misconduct resulting in material non-compliance with financial reporting requirements or for excessive risk taking, the executive will forfeit all unvested SARs entitlements. Do executives receive distributions on their unvested deferred variable remuneration? No. However, to achieve a closer alignment of the interests of securityholders and senior executives, when a tranche of SARs vests, the holder will receive an additional number of ABP securities equivalent in value to the distributions the executive would have received over the vesting period if their SARs had been ABP securities. 24 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 REMUNERATION REPORT (audited) (continued) What discretions does the Board have? The Board has the discretion to award SARs in excess of the deferred remuneration cap in the case of exceptional performance. The board will disclose the exercise of any of these discretions. No discretions have been exercised in respect of the reporting year. What happens on cessation of employment? To receive the deferred remuneration award the executive must remain employed by Abacus, unless they are considered a good leaver (that is, through disability, termination without cause, genuine retirement, death or some other circumstance considered acceptable by the board in its discretion). Further details about deferred variable remuneration grants are set out in tables 10 to 13 and the terms of prior year grants are set out in earlier remuneration reports. Employment contracts and termination entitlements The Managing Director, Dr Wolf, is employed under a rolling contract. The current employment contract commenced on 10 October 2002. Under the terms of the contract: - Dr Wolf may resign from his position by giving 6 months written notice; and - Abacus may terminate the employment agreement by providing 12 months written notice or providing payment in lieu of notice. The other executives are employed on an ongoing basis under letter agreements until one month’s notice is given by either party. Abacus may terminate an executive’s service at any time without notice if serious misconduct has occurred. Where termination with cause occurs the executive is only entitled to remuneration up to the date of termination. Deferred variable remuneration allocations vest according to the SARs Plan rules. 25 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 REMUNERATION REPORT (audited) (continued) Non-executive director remuneration Objective The Committee assesses the appropriateness of the nature and amount of remuneration of non-executive directors on a periodic basis by reference to market rates with the overall objective of attracting and retaining Board members with an appropriate combination of industry and specialist functional knowledge and experience. Structure Abacus’ constituent documents and the ASX Listing Rules specify that the maximum aggregate remuneration of non-executive directors must be approved by securityholders. The last determination was at the annual general meeting held on 12 November 2010 when securityholders approved an aggregate remuneration limit of $800,000 per year. (This is a limit on non-executive directors’ total fees. The actual fees paid to non-executive directors are in Table 8.) The aggregate remuneration limit and the fee structure are reviewed annually and fees were last increased in August 2015. Fees payable, inclusive of superannuation, to non-executive directors are as follows: Table 8: Non-Executive Director fee levels Board/Committee Board Board Audit & Risk Committee Audit & Risk Committee Compliance Committee Compliance Committee Due Diligence Committee Due Diligence Committee Remuneration & Nomination Committee Remuneration & Nomination Committee Role Fee Chairman* $221,000 Member Chairman Member Chairman Member Chairman Member Chairman Member $95,000 $26,000 $10,000 $14,000 $10,000 $15,000 $5,000 $15,000 $10,000 * The Chairman is an ex-officio member of all Board committees but does not receive any committee membership fees. The non-executive directors do not receive retirement benefits. Nor do they participate in any incentive programs. 26 DIRECTORS’ REPORT 30 June 2017 REMUNERATION REPORT (audited) (continued) Table 9: Remuneration of Key Management Personnel ABACUS PROPERTY GROUP 2017 Short-term benefits Post Long-term Security- based Total Perform ance em ploym ent benefits paym ent related Current variable incentive Non- m onetary benefits Total cash paym ents and short term benefits Superannuation $ $ $ $ Long service leave* $ Security acquisition rights (SARs)* $ $ - - - - - - - - - - - - 201,828 114,155 140,028 109,589 91,324 656,924 19,172 10,845 9,828 10,411 8,676 58,932 - - - - - - - - - - - - 221,000 125,000 149,856 120,000 100,000 715,856 Salary & fees $ 201,828 114,155 140,028 109,589 91,324 656,924 % - - - - 1,375,411 900,000 6,673 2,282,084 24,589 27,621 569,887 2,904,181 51% 252,333 465,000 465,000 465,000 - 270,000 270,000 270,000 3,022,744 1,710,000 3,679,668 1,710,000 3,336 - 6,673 6,673 23,355 23,355 255,669 735,000 741,673 741,673 4,756,099 5,413,023 15,167 35,000 35,000 35,000 144,756 203,688 4,273 10,122 9,362 10,284 61,662 61,662 64,470 138,910 165,435 151,579 339,579 919,032 951,470 938,536 1,090,281 6,052,798 1,090,281 6,768,654 Non-executive directors J Thame - Chairman W Bartlett M Irving M Salkinder P Spira Sub-total non-executive directors Executive Directors F Wolf - Managing Director Other key m anagem ent personnel E Varejes - Chief Operating Officer # R Baulderstone - Chief Financial Officer C Laird - Director Property Developments P Strain - Director Property Investments Sub-total executive KMP Total * Accrued no presently entitled # Mr Varejes ceased to meet the definition of a key management person in December 2016 19% 44% 46% 45% 27 DIRECTORS’ REPORT 30 June 2017 REMUNERATION REPORT (audited) (continued) Table 9: Remuneration of Key Management Personnel 2016 Short-term benefits Post em ploym ent Long-term benefits Current variable incentive Non- m onetary benefits Total cash paym ents and short term benefits Superannuation $ $ $ $ - - - - - - - - - - - - 201,828 114,155 136,991 109,589 91,324 653,887 19,172 10,845 12,363 10,411 8,676 61,467 Long service leave* $ - - - - - - Salary & fees $ 201,828 114,155 136,991 109,589 91,324 653,887 ABACUS PROPERTY GROUP Total Perform ance related Security- based paym ent Security acquisition rights (SARs)* $ $ - - - - - - 221,000 125,000 149,354 120,000 100,000 715,354 % - - - - 1,351,069 750,000 6,673 2,107,742 28,931 31,345 552,974 2,720,992 48% 504,000 455,000 455,000 455,000 160,000 200,000 200,000 200,000 3,220,069 1,510,000 3,873,956 1,510,000 6,673 - 6,673 6,673 26,692 26,692 670,673 655,000 661,673 661,673 4,756,761 5,410,648 31,000 35,000 35,000 35,000 164,931 226,398 8,530 9,777 9,036 9,937 68,625 68,625 143,673 137,473 164,265 150,373 853,876 837,250 869,974 856,983 1,148,758 6,139,075 1,148,758 6,854,429 36% 40% 42% 41% 28 Non-executive directors J Thame - Chairman W Bartlett M Irving M Salkinder P Spira Sub-total non-executive directors Executive Directors F Wolf - Managing Director Other key m anagem ent personnel E Varejes - Chief Operating Officer R Baulderstone - Chief Financial Officer C Laird - Director Property Ventures P Strain - Director Property Sub-total executive KMP Total *Accrued but not presently entitled DIRECTORS’ REPORT 30 June 2017 REMUNERATION REPORT (audited) (continued) ABACUS PROPERTY GROUP Table 10: Grants under the Deferred Security Acquisition Rights Plan The table below discloses unvested SARs held by key management personnel as well as the number of SARs that vested or lapsed during the year. Year Grant date SARs granted Fair value per right at grant date Vesting date No. vested during the year No. lapsed during the year Director F Wolf Executives R Baulderstone C Laird P Strain E Varejes 2017 2016 2015 2014 2013 2017 2016 2015 2014 2013 2017 2016 2015 2014 2013 2017 2016 2015 2014 2013 2017 2016 2015 2014 2013 230,260 57,564 65,788 57,564 46,052 14/11/2016 21/11/2015 21/11/2014 29/11/2013 15/05/2013 14/11/2016 21/11/2015 21/11/2014 29/11/2013 15/05/2013 14/11/2016 21/11/2015 21/11/2014 29/11/2013 15/05/2013 14/11/2016 21/11/2015 21/11/2014 29/11/2013 15/05/2013 14/11/2016 21/11/2015 21/11/2014 29/11/2013 15/05/2013 $2.379 over 4 years 13/09/2016 13/09/2016 13/09/2016 13/09/2016 $2.379 over 4 years 13/09/2016 13/09/2016 13/09/2016 13/09/2016 $2.379 over 4 years 13/09/2016 13/09/2016 13/09/2016 13/09/2016 $2.379 over 4 years 13/09/2016 13/09/2016 13/09/2016 13/09/2016 $2.379 over 4 years 13/09/2016 13/09/2015 13/09/2015 13/09/2015 - 58,294 54,565 69,352 53,105 - 13,324 14,550 16,644 16,340 - 16,655 18,188 16,644 17,913 - 16,655 14,550 16,644 16,340 - 12,491 16,369 16,644 21,242 - - - - - - - - - - - - - - - - - - - - - - - - Table 11: The value of SARs granted, exercised and lapsed during the year Value of SARs granted during the year Value of SARs exercised during the year Value of SARs lapsed during the year $ $ $ F Wolf R Baulderstone C Laird P Strain E Varejes 547,841 136,958 156,525 136,958 109,568 770,065 200,207 227,390 210,248 220,902 - - - - - Refer to Note 20 for details on the valuation the SARs, including models and assumptions used. There were no alterations to the terms and conditions of the SARs since their grant date. 29 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 REMUNERATION REPORT (audited) (continued) Table 12: Securities acquired on exercise of options Securities acquired No. 269,845 70,158 79,682 73,675 77,411 Paid per security $ 2.84 2.84 2.84 2.84 2.84 F Wolf R Baulderstone C Laird P Strain E Varejes The number of securities acquired is based on the SARs that vested in the year and the distributions that would have been paid on that number of securities from the grant date to the allocation date. Table 13: Movements in SARs holdings of key management personnel during the year Balance 1 July 2016 Granted as remuneration SARs Vested Balance exercised 30 June 2017 30 June 2017 - - - - - Director F Wolf Executives R Baulderstone C Laird P Strain E Varejes 588,680 230,260 (235,316) 583,624 146,574 172,385 159,898 153,601 57,564 65,788 57,564 46,052 (60,858) (69,400) (64,189) (66,746) 143,280 168,773 153,273 132,907 Total 1,221,138 457,228 (496,509) 1,181,857 Table 14: Securityholdings of key management personnel Balance 1 July 2016 Vesting of SARs Purchases/ (sales) Balance 30 June 2017 Directors J Thame F Wolf W Bartlett a Irving Executives R Baulderstone C Laird P Strain Total 84,590 - 3,336,537 269,845 33,125 49,370 121,044 119,832 165,831 - - 70,158 79,682 73,675 - - - 2,973 - (34,000) 15,498 84,590 3,606,382 33,125 52,343 191,202 165,514 255,004 3,910,329 493,360 (15,529) 4,388,160 All equity transactions with key management personnel other than those arising from the vesting of the security acquisition rights have been entered into under terms and conditions no more favourable than those the Group would have adopted if dealing at arm’s length. Loans to key management personnel There were no loans to key management personnel and their related parties at any time in 2017 or in the prior year. 30 ABACUS PROPERTY GROUP DIRECTORS’ REPORT 30 June 2017 REMUNERATION REPORT (audited) (continued) Other transactions with key management personnel During the year, transactions occurred between the Group and key management personnel which are within normal employee and investor relationships. Table 15: Glossary of terms used in the Remuneration Report Term Definition allocation date for an award of SARS the first business day after a period of 10 trading days on ASX starting from the second trading day after the full year results announcement for the Group for the previous financial year has elapsed Executives the Managing Director and the other senior executives of Abacus who are members of the KMP Key Management Personnel or KMP Security acquisition rights or SARs those executives who for the purposes of the accounting standards are considered to have authority and responsibility for planning, directing and controlling the major activities of Abacus, and includes the directors SARs are awarded under the deferred security acquisition rights plan. If a SAR vests, it will convert into ABP security on a one for one basis or (exceptionally, subject to the discretion of the Board where an executive already has a significant holding of ABP securities) a cash amount equal to the face value of an ABP security at around the time of vesting 31 DIRECTORS’ REPORT 30 June 2017 ABACUS PROPERTY GROUP Signed in accordance with a resolution of the directors. Abacus Group Holdings Limited (ABN 31 080 604 619) John Thame Chairman Sydney, 18 August 2017 Frank Wolf Managing Director 32 33 CONSOLIDATED INCOME STATEMENT YEAR ENDED 30 JUNE 2017 REVENUE Rental income Hotel income Finance income Fee Income Sale of inventory Total Revenue OTHER INCOME Net change in fair value of investment properties derecognised Net change in fair value of investments and financial instruments derecognised Net profit on sale of property, plant and equipment Net change in fair value of investment properties and property, plant & equipment held at balance date Net change in fair value of derivatives Share of profit from equity accounted investments Other income Total Revenue and Other Income Property expenses and outgoings Hotel expenses Depreciation, amortisation and impairment expense Cost of inventory sales Net change in fair value of investments held at balance date Impairment charges Finance costs Administrative and other expenses PROFIT BEFORE TAX Income tax (expense) / benefit NET PROFIT AFTER TAX PROFIT ATTRIBUTABLE TO: Equity holders of the parent entity (AGHL) Equity holders of other stapled entities AT members AGPL members AIT members ASPT members ASOL members Stapled security holders Net profit attributable to external non-controlling interests NET PROFIT ABACUS PROPERTY GROUP Notes 2017 $'000 2016 $'000 154,334 148,846 30,968 46,749 1 44,637 46,913 5,470 4,070 16,192 17,148 251,601 263,726 45,267 5,101 7,167 14,512 11,762 (92) 84,948 88,896 4,458 (8,057) 8(a) 54,273 30,543 3,956 - 463,432 394,629 (43,477) (40,864) (23,415) (36,874) 3(a) (2,481) (5,579) (10,968) (16,573) 3(b) (15,554) 95 - (38,922) 3(c) 3(d) (35,826) (40,056) (29,483) (27,448) 302,228 188,408 4(a) (10,140) 1,684 292,088 190,092 66,005 23,396 157,181 95,098 5,189 7,462 3,391 4,047 13,395 16,420 39,936 39,463 285,097 185,886 6,991 4,206 292,088 190,092 Basic and diluted earnings per stapled security (cents) 2 49.91 33.51 34 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME YEAR ENDED 30 JUNE 2017 ABACUS PROPERTY GROUP NET PROFIT AFTER TAX 292,088 190,092 OTHER COMPREHENSIVE INCOME Items that will not be reclassified subsequently to the income statement Revaluation of assets, nil tax effect 10,565 8,813 2017 $'000 2016 $'000 Items that may be reclassified subsequently to the income statement Foreign exchange translation adjustments, net of tax TOTAL COMPREHENSIVE INCOME FOR THE YEAR Total comprehensive income attributable to: Members of the APG Group External non-controlling interests TOTAL COMPREHENSIVE INCOME FOR THE YEAR Total comprehensive income attributable to members of the Group analysed by amounts attributable to: AGHL members AT members AGPL members AIT members ASPT members ASOL members TOTAL COMPREHENSIVE INCOME AFTER TAX ATTRIBUTABLE TO MEMBERS OF THE GROUP (42) 2,662 302,611 201,567 291,414 193,858 11,197 7,709 302,611 201,567 72,364 28,706 157,181 95,098 5,189 7,462 3,391 4,047 13,353 18,942 39,936 39,603 291,414 193,858 35 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2017 ABACUS PROPERTY GROUP CURRENT ASSETS Investment properties held for sale Inventory Property loans Cash and cash equivalents Property, plant and equipment held for sale Trade and other receivables Derivatives at fair value Other TOTAL CURRENT ASSETS NON-CURRENT ASSETS Investment properties Inventory Property loans Equity accounted investments Deferred tax assets Property, plant and equipment Other financial assets Intangible assets and goodwill TOTAL NON-CURRENT ASSETS Notes 5 6(a) 7(a) 9 16 2017 $'000 2016 $'000 8,000 186,550 8,474 9,845 72,597 93,685 56,288 43,792 - 130,000 18,457 8,851 1,667 - 3,242 5,138 168,725 477,861 5 6(b) 7(b) 8 4(c) 16 7(c) 21 1,563,523 1,335,069 96,479 68,633 274,070 291,577 167,248 179,935 6,954 10,876 84,734 4,676 42,543 49,269 32,394 32,394 2,267,945 1,972,429 TOTAL ASSETS 2,436,670 2,450,290 CURRENT LIABILITIES Trade and other payables Interest-bearing loans and borrowings Derivatives at fair value Income tax payable Other financial liabilities Other TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing loans and borrowings Derivatives at fair value Deferred tax liabilities Other TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS TOTAL EQUITY 27,865 26,167 11(a) - 124,745 5,469 2,650 740 507 - 45,934 6,910 8,476 40,984 208,479 11(b) 549,184 631,323 16,814 37,591 4(c) 10,358 9,535 4,709 4,085 581,065 682,534 622,049 891,013 1,814,621 1,559,277 1,814,621 1,559,277 36 CONSOLIDATED STATEMENT OF FINANCIAL POSITION (continued) AS AT 30 JUNE 2017 ABACUS PROPERTY GROUP Equity attributable to members of AGHL: Contributed equity Reserves Retained earnings Total equity attributable to members of AGHL: Equity attributable to unitholders of AT: Contributed equity Accumulated losses Total equity attributable to unitholders of AT: Equity attributable to members of AGPL: Contributed equity Retained earnings Total equity attributable to members of AGPL: Equity attributable to unitholders of AIT: Contributed equity Accumulated losses Total equity attributable to unitholders of AIT: Equity attributable to members of ASPT: Contributed equity Reserves Accumulated losses Total equity attributable to members of ASPT: Equity attributable to members of ASOL: Contributed equity Reserves Retained earnings Total equity attributable to members of ASOL: Equity attributable to external non-controlling interest: Contributed equity Reserves Accumulated losses Total equity attributable to external non-controlling interest: TOTAL EQUITY Contributed equity Reserves Retained earnings / (accumulated losses) Total stapled security holders' interest in equity Total external non-controlling interest TOTAL EQUITY Notes 2017 $'000 2016 $'000 344,284 332,074 18,373 12,793 72,899 6,894 435,556 351,761 935,977 905,159 (23,340) (104,318) 912,637 800,841 27,150 25,867 16,630 11,441 43,780 37,308 130,556 126,451 (80,300) (69,309) 50,256 57,142 122,535 115,441 2,148 2,230 (2,100) (8,285) 122,583 109,386 20,654 18,886 174 135 180,459 140,523 201,287 159,544 68,809 72,822 7,847 3,642 (28,134) (33,169) 48,522 43,295 1,814,621 1,559,277 13 1,581,156 1,523,878 20,695 15,158 164,248 (23,054) 1,766,099 1,515,982 48,522 43,295 1,814,621 1,559,277 37 CONSOLIDATED STATEMENT OF CASH FLOW YEAR ENDED 30 JUNE 2017 CASH FLOWS FROM OPERATING ACTIVITIES Income receipts Interest received Distributions received Income tax paid Finance costs paid Operating payments Payments for land acquisitions ABACUS PROPERTY GROUP Notes 2017 $'000 2016 $'000 289,437 282,404 1,329 642 347 432 (2,944) (8,524) (35,409) (38,694) (102,757) (133,709) (33,772) (11,016) NET CASH FLOWS FROM OPERATING ACTIVITIES 9 116,231 91,535 CASH FLOWS FROM INVESTING ACTIVITIES Payments for investments and funds advanced Proceeds from sale and settlement of investments and funds repaid Purchase of property, plant and equipment Disposal of property, plant and equipment Purchase of investment properties Disposal of investment properties Payment for other investments (92,770) (186,867) 153,354 70,419 (1,100) (3,555) 72,698 3,768 (141,049) (158,637) 182,070 84,645 (2,124) (1,753) NET CASH FLOWS FROM / (USED IN) INVESTING ACTIVITIES 171,079 (191,980) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of stapled securities Return of capital Payment of issue / finance costs Repayment of borrowings Proceeds from borrowings Distributions paid 17,550 7,498 (4,213) (234) (1,436) (4,236) (260,130) (43,107) 37,152 238,023 (63,767) (92,228) NET CASH FLOWS (USED IN) / FROM FINANCING ACTIVITIES (274,844) 105,716 NET INCREASE IN CASH AND CASH EQUIVALENTS Net foreign exchange differences Cash and cash equivalents at beginning of year 12,466 5,271 30 133 43,792 38,388 CASH AND CASH EQUIVALENTS AT END OF YEAR 9 56,288 43,792 38 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY YEAR ENDED 30 JUNE 2017 ABACUS PROPERTY GROUP CONSOLIDATED Attributable to the stapled security holder Asset Foreign Employee External Non- Issued revaluation currency equity Retained controlling capital $'000 reserve translation benefits earnings interest $'000 $'000 $'000 $'000 $'000 Total Equity $'000 At 1 July 2016 Other comprehensive income 1,523,878 5,521 2,364 7,273 (23,054) 43,295 1,559,277 - 6,359 (42) - - 4,206 10,523 Net income for the year - - - - 285,097 6,991 292,088 Total comprehensive income for the year Equity raisings Return of capital Issue costs - 6,359 (42) - 285,097 11,197 302,611 17,347 - - - - 203 17,550 - - - - - (4,213) (4,213) (104) - - - - - (104) Distribution reinvestment plan 40,035 - - - - - 40,035 Security acquisition rights - - - (780) - - (780) Distribution to security holders - - - - (97,795) (1,960) (99,755) At 30 June 2017 1,581,156 11,880 2,322 6,493 164,248 48,522 1,814,621 CONSOLIDATED Attributable to the stapled security holder Asset Foreign Employee External Non- Issued revaluation currency equity Accumulated controlling capital $'000 reserve translation benefits $'000 $'000 $'000 Losses $'000 interest $'000 Total Equity $'000 At 1 July 2015 Other comprehensive income 1,514,015 211 (298) 7,659 (114,438) 30,979 1,438,128 - 5,310 2,662 - - 3,503 11,475 Net income for the year - - - - 185,886 4,206 190,092 Total comprehensive income for the year Equity raisings Return of capital Issue costs - 5,310 2,662 - 185,886 7,709 201,567 - - - - - 7,504 7,504 - - - - - (234) (234) (89) - - - - - (89) Distribution reinvestment plan 9,952 - - - - - 9,952 Security acquisition rights - - - (386) - - (386) Distribution to security holders - - - - (94,502) (2,663) (97,165) At 30 June 2016 1,523,878 5,521 2,364 7,273 (23,054) 43,295 1,559,277 39 CONTENTS 30 JUNE 2017 ABACUS PROPERTY GROUP Notes to the financial statements About this report Segment information Page 41 Page 43 Results for the year Operating assets and liabilities Capital structure and financing costs Group Structure Other Items 1. Revenue 5. Investment properties 9. Cash and cash equivalents 15. Parent entity information 16. Property, plant and equipment 2. Earnings per 6. Inventory 10. Capital stapled security management 3. Expenses 7. Property loans and other financial assets 11. Interest bearing loans and borrowings 4. Income tax 8. Investments 12. Financial accounted for using the equity method instruments 13. Contributed equity 14. Distributions paid and proposed Signed reports Directors’ declaration Independent auditor’s report 17. Commitments and contingencies 18. Related party disclosures 19. Key management personnel 20. Security based payments 21. Intangible assets and goodwill 22. Summary of significant accounting policies 23. Auditors remuneration 24. Events after balance date Page 97 Page 98 40 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS – About this Report 30 JUNE 2017 Abacus Property Group (“APG” or the “Group”) is comprised of Abacus Group Holdings Limited (“AGHL”) (the nominated parent entity), Abacus Trust (“AT”), Abacus Group Projects Limited (“AGPL”), Abacus Income Trust (“AIT”), Abacus Storage Property Trust (“ASPT”) and Abacus Storage Operations Limited (“ASOL”). Shares in AGHL, AGPL and ASOL and units in AT, AIT and ASPT have been stapled together so that neither can be dealt with without the other. The securities trade as one security on the Australian Securities Exchange (the “ASX”) under the code ABP. The financial report of the Group for the year ended 30 June 2017 was authorised for issue in accordance with a resolution of the directors on 18 August 2017. The nature of the operations and principal activities of the Group are described in the Directors’ Report. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS In applying the Group’s accounting policies management continually evaluates judgements, estimates and assumptions based on experience and other factors, including expectations of future events that may have an impact on the Group. All judgements, estimates and assumptions made are believed to be reasonable, based on the most current set of circumstances available to management. Actual results may differ from these judgements, estimates and assumptions. Significant judgements, estimates and assumptions made by management in the preparation of these financial statements are outlined below: (a) Significant accounting judgements Accounting policy – financial assets and liabilities at fair value through profit and loss A financial asset or financial liability is designated by the entity as being at fair value through profit or loss upon initial recognition. The Group uses this designation where doing so results in more relevant information, because it is a group of financial assets and liabilities which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management and investment strategy, and information about the instruments is provided internally on that basis to the entity’s key management personnel and the Board. Control and significant influence In determining whether the Group has control over an entity, the Group assesses its exposure or rights to variable returns from its involvement with the entity and whether it has the ability to affect those returns through its power over the investee. The Group may have significant influence over an entity when it has the power to participate in the financial and operating policy decisions of the entity but is not in control or joint control of those policies. (b) Significant accounting estimates and assumptions Impairment of goodwill and intangibles with indefinite useful lives The Group determines whether goodwill and intangibles with indefinite useful lives are impaired at least on an annual basis. This requires an estimation of the recoverable amount of the cash-generating units to which the goodwill and intangibles with indefinite useful lives are allocated. For goodwill this involves value in use calculations which incorporate a number of key estimates and assumptions around cash flows and fair value of investment properties upon which these determine the revenue / cash flows. The assumptions used in the estimations of the recoverable amount and the carrying amount of goodwill and intangibles with indefinite useful lives are discussed in Note 21. Impairment of property loans and financial assets The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. If an impairment trigger exists the recoverable amount of the asset is determined. For property loans and interim funding to related funds this involves value in use calculations, which incorporate a number of key estimates and assumptions around cashflows and fair value of underlying investment properties held by the borrower and expected timing of cashflows from equity raisings of related funds. 41 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS – About this Report (continued) 30 JUNE 2017 Fair value of derivatives The fair value of derivatives is determined using closing quoted market prices (where there is an active market) or a suitable pricing model based on discounted cash flow analysis using assumptions supported by observable market rates. Where derivatives are not quoted in an active market their fair value has been determined using (where available) quoted market inputs and other data relevant to assessing the value of the financial instrument, including financial guarantees granted by the Group, estimates of the probability of exercise. Valuation of investment properties and property, plant and equipment held at fair value The Group makes judgements in respect of the fair value of investment properties and property, plant and equipment (Note 22(n)). The fair value of these properties are reviewed regularly by management with reference to external independent property valuations and market conditions existing at reporting date, using generally accepted market practices. The assumptions underlying estimated fair values are those relating to the receipt of contractual rents, expected future market rentals, maintenance requirements, capitalisation rates and discount rates that reflect current market conditions and current or recent property investment prices. If there is any material change in these assumptions or regional, national or international economic conditions, the fair value of investment properties and property, plant and equipment may differ and may need to be re-estimated. Net realisable value of inventory Inventories are carried at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and selling expenses. The estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period. The key assumptions that require the use of management judgment are reviewed half-yearly and these assumptions include the number of lots sold per year and the average selling price per lot. If the net realisable value is less than the carrying value of inventory, an impairment loss is recognised in the income statement. Fair value of financial assets The Group holds investments in unlisted securities and enters into loans and receivables with associated options that provide for a variety of outcomes including repayment of principal and interest, satisfaction through obtaining interests in equity or property or combinations thereof. 42 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS – Segment Information 30 JUNE 2017 The Group predominately operates in Australia. Following are the Group’s operating segments, which are regularly reviewed by the Chief Operating Decision Maker (“CODM”) to make decisions about resources allocation and to assess performance: (a) Property Investments: the segment is responsible for the investment in and ownership of commercial, retail, industrial properties and self-storage facilities. This segment also includes the equity accounting of co- investments in property entities not engaged in development and construction projects; and (b) Property Development: provides secured lending and related property financing solutions and is also responsible for the Group’s investment in joint venture developments and construction projects, which includes revenue from debt and equity investments in joint ventures. Segment result includes transactions between operating segments which are then eliminated. The Group has consolidated the Abacus Hospitality Fund, Abacus Diversified Income Fund II and Abacus Wodonga Land Fund. The performances of these entities are operated as externally managed investment schemes and are reviewed separately to that of the performance of the Group’s business segments. The performances of the Abacus Hospitality Fund and Abacus Diversified Income Fund II are included in the non-core segment. * The operating segments reported by the Group have changed from the prior year. Accordingly, prior year comparatives have been restated to reflect the change. 43 NOTES TO THE FINANCIAL STATEMENTS – Segment Information (continued) 30 JUNE 2017 ABACUS PROPERTY GROUP Share of profit from equity accounted investments ^ 33,557 - 20,716 Year ended 30 June 2017 Revenue Rental income Hotel income Finance income Fee income Sale of inventory Net change in fair value of investment properties derecognised Net change in fair value of investments and financial instruments derecognised Net gain on sale of property, plant & equipment Net change in investment properties and property, plant & equipment held at balance date Net change in fair value of derivatives Other income Other unallocated revenue Total consolidated revenue Property expenses and outgoings Hotel expenses Depreciation and amortisation expense Cost of inventory sales Impairment charges Segment result Net change in fair value of investments held at balance date Finance costs Profit before tax Income tax expense Net profit for the year less non-controlling interest Net profit for the year attributable to members of the Group ^ includes fair value gain of $0.7 million Property Investments Commercial $'000 Storage $'000 Core Segments Property Developments Unallocated $'000 $'000 Total Core Segments $'000 Non Core Segments Other $'000 Eliminations Consolidated $'000 $'000 75,334 69,687 9,298 - - - - - 30,968 - - 43,891 4 - 15 145,036 12,620 - - - 16,192 - 43,891 - - - 12,620 16,192 - - - 36,775 36,775 - 154,334 - 30,968 - 43,895 - (7,150) 5,470 - - 16,192 8,492 - 45,267 6,674 - - - 6,674 493 - 7,167 - - - - - 11,077 685 11,762 47,440 27,333 - - 74,773 10,175 - 84,948 - - - 4,317 2,402 - 1,051 - - - 375 4,317 - 54,273 - 3,453 375 214,802 97,020 65,658 (15,174) (25,939) 20,899 398,379 - (286) (41,399) (2,379) - - - - - (23,415) - (3) (2,281) (200) (1,872) (406) 367 141 - 4,458 - - 54,273 825 (322) 3,956 - 742 71,840 (6,787) 463,432 301 (43,477) - (23,415) - (2,481) - 2,516 (10,968) - - - (13,484) (13,484) - - (3,000) 3,000 - - - - 10,029 315,755 - (7,609) (97) (25,460) (1,452) (2,571) (29,483) 44,394 (6,541) 353,608 27,998 (15,554) 4,255 (35,826) 25,712 302,228 - (10,140) 25,712 292,088 - (6,991) 25,712 285,097 (15,537) (28,015) (32,898) (7,183) 267,320 9,196 (7,863) (2,277) 259,457 6,919 (1,044) (5,947) 972 258,413 Administrative and other expenses (17,754) 180,002 70,675 55,049 44 NOTES TO THE FINANCIAL STATEMENTS – Segment Information (continued) 30 JUNE 2017 ABACUS PROPERTY GROUP Year ended 30 June 2016 Revenue Rental income Hotel income Finance income Fee income Sale of inventory Net change in fair value of investment properties derecognised Net change in fair value of investments and financial instruments derecognised Net change in fair value of investments held at balance date Net change in investment properties and property, plant & equipment held at balance date Share of profit from equity accounted investments ^ Other income Other unallocated revenue Total consolidated revenue Property expenses and outgoings Hotel expenses Depreciation and amortisation expense Cost of inventory sales Net loss on sale of property, plant & equipment Impairment charges Administrative and other expenses Segment result Net change in fair value of derivatives Finance costs Profit before tax Income tax benefit / (expense) Net profit for the year less non-controlling interest Net profit for the year attributable to members of the Group ^ includes fair value loss of $11.6 million Property Investments Commercial $'000 Storage $'000 Core Segments Property Developments Unallocated $'000 $'000 Total Core Segments $'000 Non Core Segments Other $'000 Eliminations Consolidated $'000 $'000 69,602 61,343 - - 46,276 321 12,487 347 3,813 - 18 130,963 - - - 321 - 46,276 - - - 12,487 - 2,624 17,148 - - - 3,813 14,177 6 17,883 46,428 - 148,846 - 46,749 - 46,282 - (8,417) 4,070 - - 17,148 - 5,101 1,288 3,103 - 9,149 - 12,252 2,260 - 14,512 14 - - - 14 8,651 (8,570) 95 37,370 36,659 - - 74,029 14,867 - 88,896 25,312 - - - - - - - - - - - 472 - 5,651 (420) - - 30,543 30,543 152,369 98,002 63,700 (14,027) (23,050) (1,483) (357) (483) (2,840) (92) (17,755) - - (40,622) 115,689 74,595 16,355 472 159 - (2,284) (11,449) (16,573) - - - (92) 1,700 (38,922) 14,247 328,318 - (368) (37,445) (3,910) - - - (483) (36,391) - (2) (1,842) (3,737) - 631 91,542 (16,987) 402,873 491 (40,864) - (36,874) - (5,579) - - (16,573) - - (92) - - (38,922) - (4,439) (57) (22,251) (1,707) (3,490) (27,448) 45,797 (19,986) 236,521 - (8,057) 201 (8,258) 5,419 (40,056) (31,340) (14,135) 31,863 (14,567) 188,408 171,112 - 1,684 2,232 (548) 31,315 (14,567) 190,092 173,344 - (4,206) (1) (4,205) 27,110 (14,567) 185,886 173,343 4,071 210,710 45 NOTES TO THE FINANCIAL STATEMENTS – Segment Information (continued) 30 JUNE 2017 ABACUS PROPERTY GROUP As at 30 June 2017 Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Core Segments Non Core Segments Property Property Investment Development Unallocated $'000 $'000 $'000 Total $'000 Other $'000 Eliminations Consolidated $'000 $'000 8,000 72,596 59,338 139,934 28,791 - 168,725 1,823,107 375,686 47,160 2,245,953 80,422 (58,430) 2,267,945 1,831,107 448,282 106,498 2,385,887 109,213 (58,430) 2,436,670 19,354 8,486 7,445 35,285 5,699 - 40,984 1,423 481 546,349 548,253 96,848 (64,036) 581,065 20,777 8,967 553,794 583,538 102,547 (64,036) 622,049 1,810,330 439,315 (447,296) 1,802,349 6,666 5,606 1,814,621 Total facilities - bank loans Facilities used at reporting date - bank loans Facilities unused at reporting date - bank loans 873,000 - (513,691) - 359,309 - 873,000 (513,691) 359,309 As at 30 June 2016 Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets $'000 $'000 $'000 $'000 $'000 $'000 $'000 172,792 78,676 59,401 310,869 280,113 (113,121) 477,861 1,541,655 420,914 48,894 2,011,463 - (39,034) 1,972,429 1,714,447 499,590 108,295 2,322,332 280,113 (152,155) 2,450,290 62,825 4,580 1,476 68,881 248,119 (108,521) 208,479 1,263 316 701,034 702,613 - (20,079) 682,534 64,088 4,896 702,510 771,494 248,119 (128,600) 891,013 1,650,359 494,694 (594,215) 1,550,838 31,994 (23,555) 1,559,277 Total facilities - bank loans Facilities used at reporting date - bank loans Facilities unused at reporting date - bank loans 873,629 110,000 (629,406) (99,953) 244,223 10,047 983,629 (729,359) 254,270 46 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 1. REVENUE Finance income Interest and fee income on secured loans Bank interest Total finance income 2. EARNINGS PER STAPLED SECURITY ABACUS PROPERTY GROUP 2017 $'000 2016 $'000 43,895 46,283 742 630 44,637 46,913 2017 2016 Basic and diluted earnings per stapled security (cents) 49.91 33.51 Reconciliation of earnings used in calculating earnings per stapled security Basic and diluted earnings per stapled security Net profit ($'000) Weighted average number of shares: Weighted average number of stapled securities for basic earning per security ('000) 285,097 185,886 571,204 554,703 3. EXPENSES (a) Depreciation, amortisation and impairment expense Depreciation and amortisation of property, plant and equipment and software Amortisation - leasing costs Total depreciation, amortisation and impairment expense (b) Net change in fair value of investments held at balance date Net change in fair value of property securities held at balance date Net change in fair value of options held at balance date Net change in fair value of other investments held at balance date Total change in fair value of investments held at balance date (c) Finance costs Interest on loans Amortisation of finance costs Total finance costs (d) Administrative and other expenses Wages and salaries Contributions to defined contribution plans Other expenses Total administrative and other expenses 2017 $'000 670 1,811 2,481 708 22,774 (7,928) 15,554 33,951 1,875 35,826 16,818 1,059 11,606 29,483 2016 $'000 4,256 1,323 5,579 - 2,966 (3,061) (95) 38,045 2,011 40,056 13,477 1,011 12,960 27,448 47 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 4. INCOME TAX (a) Income tax expense The major components of income tax expense are: Income Statement Current income tax Current income tax charge / (benefit) Adjustments in respect of current income tax of previous years Deferred income tax Relating to origination and reversal of temporary differences Income tax expense / (benefit) reported in the income statement ABACUS PROPERTY GROUP 2017 $'000 2016 $'000 10,851 1,209 (1,920) 10,140 (1,119) (79) (486) (1,684) (b) Numerical reconciliation between aggregate tax expense recognised in the income statement and tax expense calculated per the statutory income tax rate A reconciliation between tax expense and the product of the accounting profit before income tax multiplied by the Group's applicable income tax rate is as follows: Profit before income tax expense 302,228 188,408 Prima facie income tax expense calculated at 30% (AU) Prima facie income tax expense calculated at 28% (NZ) Less prima facie income tax expense on profit from Trusts Prima Facie income tax of entities subject to income tax Adjustment of prior year tax applied Unrecognised tax losses brought to account Restructuring transactions Other items (net) Income tax expense / (benefit) reported in the income statement 89,176 833 (80,187) 9,822 1,209 (400) - (491) 10,140 55,917 565 (54,963) 1,519 (79) - (3,125) 1 (1,684) 48 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 4. INCOME TAX (continued) ABACUS PROPERTY GROUP (c) Recognised deferred tax assets and liabilities Deferred income tax at 30 June 2017 relates to the following: Deferred tax liabilities Revaluation of investment properties at fair value Revaluation of investments and financial instruments at fair value Capital allowances Other Gross deferred income tax liabilities Set off against deferred tax assets Net deferred income tax liabilities Deferred tax assets Revaluation of investments and financial instruments at fair value Provisions - other Provisions - employee entitlements Derecognition of deferred tax asset (losses - AHF) Losses available for offset against future taxable income Other Gross deferred income tax assets Set off of deferred tax liabilities Net deferred income tax assets Tax consolidation 2017 $'000 2016 $'000 8,540 - 1,080 4,948 14,568 (4,210) 10,358 6,451 1,500 2,929 (600) 682 202 11,164 (4,210) 6,954 8,097 832 1,016 1,668 11,613 (2,078) 9,535 1,418 1,500 1,951 - 7,308 777 12,954 (2,078) 10,876 AGHL and its 100% owned Australian resident subsidiaries, ASOL and its 100% owned Australian resident subsidiaries and AHL and its 100% owned Australian resident subsidiaries have formed separate tax consolidated groups. AGHL, ASOL and AHL are the head entity of their respective tax consolidated groups. The head entity and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. These amounts are measured in a manner that is consistent with the broad principles in AASB 112 Income Taxes. The nature of the tax funding agreements are discussed further below. Nature of the tax funding agreement Members of the respective tax consolidated groups have entered into tax funding agreements. The tax funding agreements require payments to/from the head entity to be recognised via an inter-entity receivable (payable) which is at call. To the extent that there is a difference between the amount allocated under the tax funding agreement and the allocation under UIG 1052, the head entity accounts for these as equity transactions. The amounts receivable or payable under the tax funding agreements are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. 49 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 5. INVESTMENT PROPERTIES Leasehold investment properties 1 Freehold investment properties Total investment properties ABACUS PROPERTY GROUP 2017 2016 $'000 13,592 11,092 $'000 1,557,931 1,510,527 1,571,523 1,521,619 1. The carrying amount of the leasehold property is presented gross of the finance liability of $2.3 million (2016: $1.8 million). Investment properties held for sale Retail Office Industrial Total investment properties held for sale Investment properties Retail Office Industrial Storage Other Total investment properties 2017 $'000 2016 $'000 - 14,300 8,000 145,250 - 27,000 8,000 186,550 377,500 339,500 487,200 341,418 55,100 63,950 625,232 570,351 18,491 19,850 1,563,523 1,335,069 Total investment properties including held for sale 1,571,523 1,521,619 Reconciliation A reconciliation of the carrying amount of investment properties at the beginning and end of the year is as follows. All investment properties are classified as Level 3 in accordance with the fair value hierarchy outlined in Note 12(d): Leasehold investment properties Carrying amount at beginning of the financial year Additions and capital expenditure Net change in fair value as at balance date Carrying amount at end of the year Freehold investment properties Carrying amount at beginning of the financial year Additions and capital expenditure Net change in fair value as at balance date Net change in fair value derecognised Disposals Non-current 2017 2016 $'000 11,092 11,119 $'000 - 14 2,500 (41) 13,592 11,092 Held for sale Non-current 2017 2016 2017 2016 $'000 186,550 51,047 $'000 $'000 1,323,977 $'000 1,305,982 890 21 141,896 175,504 224 777 82,223 77,927 41,929 1,901 3,337 3,200 (206,672) (52,446) (5,603) (60,968) Effect of movements in foreign exchange - - (164) 7,582 Transfer to inventory Properties transferred to / from held for sale Carrying amount at end of the year - - (10,656) - (14,921) 185,250 14,921 (185,250) 8,000 186,550 1,549,931 1,323,977 50 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 5. INVESTMENT PROPERTIES (continued) Investment properties are carried at the Directors’ determination of fair value. The determination of fair value includes reference to the original acquisition cost together with capital expenditure since acquisition and either the latest full independent valuation, latest independent update or directors’ valuation. Total acquisition costs include incidental costs of acquisition such as property taxes on acquisition, legal and professional fees and other acquisition related costs. Sensitivity Information Significant input Adopted capitalisation rate Optimal occupancy Adopted discount rate Fair value measurement sensitivity to significant increase in input Fair value measurement sensitivity to significant decrease in input Decrease Increase Decrease Increase Decrease Increase The adopted capitalisation rate forms part of the income capitalisation approach. When calculating the income capitalisation approach, the net market rent has a strong interrelationship with the adopted capitalisation rate given the methodology involves assessing the total net market income receivable from the property and capitalising this in perpetuity to derive a capital value. In theory, an increase in the net market rent and an increase (softening) in the adopted capitalisation rate could potentially offset the impact to the fair value. The same can be said for a decrease in the net market rent and a decrease (tightening) in the adopted capitalisation rate. A directionally opposite change in the net market rent and the adopted capitalisation rate could potentially magnify the impact to the fair value. The adopted discount rate of a discounted cashflow has a strong interrelationship in deriving at a fair value given the discount rate will determine the rate in which the terminal value is discounted to the present value. External valuations are conducted by qualified independent valuers who are appointed by the Director of Property who is also responsible for the Group’s internal valuation process. He is assisted by two employees both of whom hold relevant recognised professional qualifications and are experienced in valuing the types of properties in the applicable locations. Investment properties are independently valued on a staggered basis every two years unless the underlying financing requires a different valuation cycle. The majority of the investment properties are used as security for secured bank debt outlined in Note 11. Abacus* The weighted average capitalisation rate for Abacus is 7.13% (2016: 7.47%) and for each significant category above is as follows; - Retail – 6.22% (2016: 6.69%) - Office – 6.99% (2016: 7.21%) - Industrial – 8.42% (2016: 8.39%) - Storage – 7.72% (2016: 7.98%) The current occupancy rate for the principal portfolio excluding development and self-storage assets is 90.5% (2016: 91.2%). The current occupancy rate for self-storage assets is 89.2% (2016: 85.9%). During the year ended 30 June 2017, 44% (2016: 57%) of the number of investment properties in the portfolio were subject to external valuations, the remaining 56% (2016: 43%) were subject to internal valuation. * Excludes Abacus Hospitality Fund and Abacus Diversified Income Fund II 51 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 6. INVENTORY ABACUS PROPERTY GROUP (a) Current Hotel supplies Projects1 - purchase consideration - development costs (b) Non-current Projects1 - purchase consideration - development costs - provision Total inventory 1. Inventories are held at the lower of cost and net realisable value. 2017 $'000 2016 $'000 214 352 876 1,477 7,384 8,016 8,474 9,845 117,418 103,308 22,783 11,747 (43,722) (46,422) 96,479 68,633 104,953 78,478 52 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 7. PROPERTY LOANS AND OTHER FINANCIAL ASSETS ABACUS PROPERTY GROUP (a) Current property loans Secured loans - amortised cost1 Interest receivable on secured loans - amortised cost (b) Non-current property loans Secured loans - amortised cost1 Interest receivable on secured loans - amortised cost (c) Non-current other financial assets Investment in securities and options - unlisted - fair value Investments in debt instruments - unlisted - amortised cost2 Derivatives - projects - fair value 2017 $'000 2016 $'000 65,034 86,081 7,563 7,604 72,597 93,685 219,379 245,918 54,691 45,659 274,070 291,577 6,792 22,774 22,488 22,488 13,263 4,007 42,543 49,269 1. Mortgages are secured by real property assets. The current facilities are scheduled to mature and are expected to be realised on or before 30 June 2018 and the non-current facilities will mature between 1 July 2018 and 22 December 2020. 2. Abacus has a 50% investment in a joint venture St Leonards JV Unit Trust held via preference shares. 53 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 8. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD (a) Extract from joint ventures’ profit and loss statements Fordtrans Pty Ltd* Other Joint Ventures Total Revenue Expenses 2017 $'000 2016 $'000 9,646 20,516 478,590 140,896 488,236 161,412 2017 $'000 2016 $'000 2017 $'000 2016 $'000 (14,152) (6,854) (351,811) (89,026) (365,963) (95,880) Net profit / (loss) (4,506) 13,662 126,779 51,870 122,273 65,532 Share of net profit / (loss) (2,253) 6,934 56,526 23,609 54,273 30,543 * Included in the net profit of Fordtrans Pty Ltd for the year ended 30 June 2017: interest income $1.9 million (2016: $1.6 million) and interest expense $2.8 million (2016: $2.8 million). (b) Extract from joint ventures’ balance sheets Fordtrans Pty Ltd* Other Joint Ventures Total 2017 $'000 15,436 2016 $'000 2,971 2017 $'000 101,401 2016 $'000 26,728 2017 $'000 116,837 2016 $'000 29,699 Current assets Non-current assets 183,031 204,798 666,721 752,004 849,752 956,802 198,467 207,769 768,122 778,732 966,589 986,501 Current liabilities (3,265) (786) (83,167) (16,283) (86,432) (17,069) Non-current liabilities (64,800) (68,374) (406,812) (447,630) (471,612) (516,004) Net assets 130,402 138,609 278,143 314,819 408,545 453,428 Share of net assets 65,201 74,511 102,047 105,424 167,248 179,935 * Included in the net assets of Fordtrans Pty Ltd as at 30 June 2017: cash and cash equivalents $0.7 million (2016: $2.4 million), current interest bearing loans and borrowings $Nil (2016: $Nil) and non-current interest bearing loans and borrowings $64.8 million (2016: $68.4 million). There were no impairment losses or contingent liabilities relating to the investment in the joint ventures. 1. Fordtrans Pty Ltd (Virginia Park) (“VP”) Abacus has a 50% interest in the ownership and voting rights of Fordtrans Pty Ltd. VP’s principal place of business is in Bentleigh East, Victoria. VP owns a sizeable Business Park providing a mixture of industrial and office buildings as well as supporting facilities including gymnasium, swim centre, child care centre, children’s play centre and cafe. Abacus jointly controls the venture with the other partner under the terms of Unitholders Agreement and requires unanimous consent for all major decisions over the relevant activities. Abacus has received distributions for the year ended 30 June 2017 of $2.0 million (2016: $1.0 million). 54 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 9. CASH AND CASH EQUIVALENTS ABACUS PROPERTY GROUP Reconciliation to Statement of Cash Flow For the purposes of the Statement of Cash Flow, cash and cash equivalents comprise the following at 30 June 2017 Cash at bank and in hand1 56,288 43,792 1. Cash at bank earns interest at floating rates. The carrying amounts of cash and cash equivalents represent fair value. 2017 $'000 2016 $'000 Net profit Adjustments for: Depreciation and amortisation of non-current assets Impairment charges Net change in fair value of derivatives Net change in fair value of investment properties held at balance date Net change in fair value of investments held at balance date Net change in fair value of investment properties derecognised Net change in fair value of investment and financial instruments derecognised Net (gain) / loss on disposal of property, plant and equipment Share of profit from equity accounted investments Increase / (decrease) in payables (Increase) / decrease in inventories (Increase) / decrease in receivables and other assets Net cash from operating activities 292,088 190,092 2,481 - (4,458) (84,948) 15,554 (45,267) (7,167) (11,762) (54,273) 15,617 (22,043) 20,409 116,231 5,579 38,922 8,057 (88,896) (95) (5,101) (14,512) 92 (30,543) (7,320) 2,433 (7,173) 91,535 (a) Disclosure of financing facilities Refer to Note 11. (b) Disclosure of non-cash financing facilities Non-cash financing activities include capital raised pursuant to the Abacus distribution reinvestment plan. During the year 13.35 million (2016: 3.4 million) stapled securities were issued with a cash equivalent of $40.0 million (2016: $9.95 million). 55 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 10. CAPITAL MANAGEMENT Abacus Abacus seeks to manage its capital requirements through a mix of debt and equity funding. It also ensures that Group entities comply with capital and distribution requirements of their constitutions and/or trust deeds, the capital requirements of relevant regulatory authorities and continue to operate as a going concern. Abacus also protects its equity in assets by taking out insurance. Abacus assesses the adequacy of its capital requirements, cost of capital and gearing (i.e. debt/equity mix) as part of its broader strategic plan. In addition to tracking actual against budgeted performance, Abacus reviews its capital structure to ensure sufficient funds and financing facilities (on a cost effective basis) are available to implement its strategy, that adequate financing facilities are maintained and distributions to members are made within the stated distribution guidance (i.e. paid out of underlying profits). The following strategies are available to the Group to manage its capital: issuing new stapled securities, its distribution reinvestment plan, electing to have the distribution reinvestment plan underwritten, adjusting the amount of distributions paid to members, activating a security buyback program, divesting assets, active management of its fixed rate swaps, directly purchasing assets in managed funds and joint ventures, or (where practical) recalibrating the timing of transactions and capital expenditure so as to avoid a concentration of net cash outflows. Abacus has a total gearing covenant as a condition of the current $480m Syndicated facility and the $54m Bilateral facility. The total gearing covenant requires Abacus to have total liabilities (net of cash) to be less than or equal to 50% of total tangible assets (net of cash). As at date of reporting period, Abacus was compliant in meeting all its debt covenants. Consolidated Funds The Capital Management approach and strategies employed by the Group are also deployed for the funds ABP manages and which are consolidated in these accounts – AHF and AWLF (or the Consolidated Funds). Points unique to the capital management of these respective funds are: - The Consolidated Funds via their responsible entities comply with capital and distribution requirements of their constitutions and/or deeds, the capital requirements of relevant regulatory authorities and continue to operate as going concerns; and - There is currently no Distribution Reinvestment Plan for any of the Funds. 56 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 11. INTEREST BEARING LOANS AND BORROWINGS ABACUS PROPERTY GROUP Other Current Bank loans - A$ Other loans - A$ Less: Unamortised borrowing costs (a) Total current Abacus* Non-current Bank loans - A$ Bank loans - A$ value of NZ$ denominated loan Other loans - A$ Less: Unamortised borrowing costs (b) Total non-current 2017 $'000 2016 $'000 - 99,953 - 25,138 - (346) - 124,745 2017 $'000 2016 $'000 440,657 556,296 73,033 73,110 37,426 4,292 (1,932) (2,375) 549,184 631,323 * Excludes Abacus Hospitality Fund, Abacus Diversified Income Fund II, Abacus Wodonga Land Fund (c) Maturity profile of current and non-current interest bearing loans Due within one year Due between one and five years Due after five years 2017 $'000 2016 $'000 - 124,745 419,184 501,323 130,000 130,000 549,184 756,068 57 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 11. INTEREST BEARING LOANS AND BORROWINGS (continued) Abacus* Abacus maintains a range of interest-bearing loans and borrowings. The sources of funding are spread over a number of counterparties and the terms of the instruments are negotiated to achieve a balance between capital availability and cost of debt. Bank loans are $A and $NZ denominated and are provided by several banks at interest rates which are set periodically on a floating basis. The loans term to maturity varies from July 2018 to July 2022. The bank loans are secured by charges over the investment properties, certain inventory and certain property, plant and equipment. Approximately 48.6% (2016: 53.2%) of bank debt drawn was subject to fixed rate hedges with a weighted average term to maturity of 3.4 years (2016: 3.5 years). Hedge cover as a percentage of available facilities at 30 June 2017 is 28.6% (2016: 38.3%). Abacus’ weighted average interest rate as at 30 June 2017 was 5.23% (2016: 5.39%). Line fees on undrawn facilities contributed to 0.36% of the weighted average interest rate at 30 June 2017 (2016: 0.34%). Abacus’ weighted average interest rate excluding the undrawn facilities line fees as at 30 June 2017 was 4.87% (2016: 5.05%). * Excludes Abacus Hospitality Fund and Abacus Diversified Income Fund II (d) Assets pledged as security The carrying amounts of assets pledged as security for current and non-current interest bearing liabilities are: Current First mortgage Property, plant and equipment Investment properties held for sale Total current assets pledged as security Non-current First mortgage Inventory Investment properties Total non-current assets pledged as security 2017 $'000 2016 $'000 - 130,000 8,000 172,250 8,000 302,250 36,231 - 1,524,431 1,319,619 1,560,662 1,319,619 Total assets pledged as security 1,568,662 1,621,869 58 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 12. FINANCIAL INSTRUMENTS Financial Risk Management The risks arising from the use of the Group’s financial instruments are credit risk, liquidity risk and market risk (interest rate risk, price risk and foreign currency risk). The Group’s financial risk management focuses on mitigating the unpredictability of the financial markets and its impact on the financial performance of the Group. The Board reviews and agrees policies for managing each of these risks, which are summarised below. Primary responsibility for identification and control of financial risks rests with the Treasury Management Committee under the authority of the Board. The Board reviews and agrees policies for managing each of the risks identified below, including the setting of limits for trading in derivatives, hedging cover of interest rate risks and cash flow forecast projections. The main purpose of the financial instruments used by the Group is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The Group also enters into derivative transactions principally interest rate swaps. The purpose is to manage the interest rate exposure arising from the Group’s operations and its sources of finance. Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instruments are disclosed in the section about this report and Note 22 to the financial statements. (a) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers, investment in securities and options, secured property loans and interest bearing loans and derivatives with banks. The Group manages its exposure to risk by: - - - - - - derivative counterparties and cash transactions are limited to high credit quality financial institutions; policy which limits the amount of credit exposure to any one financial institution; providing loans as an investment into joint ventures, associates, related parties and third parties where it is satisfied with the underlying property exposure within that entity; regularly monitoring loans and receivables balances on an ongoing basis; regularly monitoring the performance of its associates, joint ventures, related parties and third parties on an ongoing basis; and obtaining collateral as security (where required or appropriate). The Group’s credit risk is predominately driven by its Property Developments business which provides loans to third parties, those using the funds for property development and / or investment. The Group mitigates the exposure to this risk by evaluation of the application before acceptance. The analysis will specifically focus on: the Loan Valuation Ratio (LVR) at drawdown; - - mortgage ranking; - - - - - market analysis of the completed development being used to service drawdown. background of the developer (borrower) including previous developments; background of the owner (borrower) including previous investment track record; that the terms and conditions of higher ranking mortgages are acceptable to the Group; appropriate property insurances are in place with a copy provided to the Group; and The Group also mitigates this risk by ensuring adequate security is obtained and timely monitoring of the financial instrument to identify any potential adverse changes in the credit quality. 59 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 12. FINANCIAL INSTRUMENTS (continued) (a) Credit risk (continued) Credit risk exposures The Group’s maximum exposure to credit risk at the reporting date was: Receivables Secured property loans Other financial assets Cash and cash equivalents ABACUS PROPERTY GROUP Carrying Amount 2017 2016 $'000 18,457 8,851 $'000 346,667 385,262 42,543 49,269 56,288 43,792 463,955 487,174 As at 30 June 2017, the Group had the following concentrations of credit risk: - Secured property loans: a loan which represents 29% (2016: 23%) of the portfolio covers two large projects at Riverlands and Camellia. Secured property loans The Group has a total investment of $346.7 million in secured property loans as at 30 June 2017 (2016: $385.3 million). Of these loans $64.5 million has been renewed / extended beyond the original term on commercial terms (2016 $52.9 million). In considering the impairment of loans, the Group undertakes a market analysis of the secured property development which is used to service the loan and identify if a deficiency of security exists and the extent of that deficiency, if any. If there is an indicator of impairment, fair value calculations of expected future cashflows are determined and if there are any differences to the carrying value of the loan, an impairment is recognised. There was no movement in the allowance for impairment in respect of secured property loans and receivables during the year where no loans are past due and not impaired. 60 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 12. FINANCIAL INSTRUMENTS (continued) (b) Liquidity Risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate and diverse amount of committed credit facilities, the ability to close out market positions and the flexibility to raise funds through the issue of new stapled securities or the distribution reinvestment plan. The Group’s policy is to maintain an available loan facility with banks sufficient to meet expected operational expenses and to finance investment acquisitions for a period of 90 days, including the servicing of financial obligations. Current loan facilities are assessed and extended for a maximum period based on the Group’s expectations of future interest and market conditions. The table below shows an analysis of the contractual maturities of key liabilities which forms part of the Group’s assessment of liquidity risk. 30 June 2017 Liabilities Trade and other payables Carrying Amount Contractual cash flows 1 Year or less Over 1 year to 5 years Over 5 years $'000 $'000 $'000 $'000 $'000 27,865 27,865 27,865 - - Interest bearing loans and borrowings incl derivatives# 571,467 655,906 32,704 493,132 130,070 Total liabilities 599,332 683,771 60,569 493,132 130,070 30 June 2016 Liabilities Trade and other payables Carrying Amount Contractual cash flows 1 Year or less Over 1 year to 5 years Over 5 years $'000 $'000 $'000 $'000 $'000 26,167 26,167 26,167 - - Interest bearing loans and borrowings incl derivatives# 796,309 904,182 172,512 598,421 133,249 Other financial liabilities Total liabilities 45,934 45,934 45,934 - - 868,410 976,283 244,613 598,421 133,249 # Carrying amount includes fair value of derivative liabilities. Contractual cash flows includes contracted debt and net swap payments using prevailing forward rates 61 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 12. FINANCIAL INSTRUMENTS (continued) (c) Market Risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. Interest rate risk / Fair value interest rate risk The Group’s exposure to the risk of changes in market interest rates relates primarily to its long-term bank debt obligations which are based on floating interest rates. The Group has a policy to maintain a mix of floating exposure and fixed interest rate hedging with fixed rate cover highest in years 1 to 5. The Group hedges to minimise interest rate risk by entering variable to fixed interest rate swaps which also helps deliver interest covenant compliance and positive carry (net rental income in excess of interest expense) on the property portfolio. Interest rate swaps have the economic effect of converting borrowings from variable rates to fixed rates. Under the interest rate swaps, the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to the agreed notional principal amounts. At 30 June 2017, after taking into account the effect of interest rate swaps, approximately 48.6% of the Group’s drawn debt is subject to fixed rate hedges (2016: 53.2%). Hedge cover as a percentage of available facilities at 30 June 2017 is 28.6% (2016: 38.3%). As the Group holds interest rate swaps against its variable rate debt there is a risk that the economic value of a financial instrument will fluctuate because of changes in market interest rates. 62 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 12. FINANCIAL INSTRUMENTS (continued) (c) Market Risk (continued) Interest rate risk / Fair value interest rate risk (continued) The Group’s exposure to interest rate risk and the effective weighted average interest rates for each class of financial asset and financial liability are: Abacus^ 30 June 2017 Financial Assets Cash and cash equivalents Receivables Secured loans Derivatives Floating interest rate Fixed interest less than 1 year Fixed interest 1 to 5 years Fixed interest over 5 years Non interest bearing $'000 $'000 $'000 $'000 $'000 Total $'000 27,638 - - - - 27,638 - - - - 17,531 17,531 - 93,148 253,518 - - 346,666 - - - - 1,667 1,667 Total financial assets 27,638 93,148 253,518 - 19,198 393,502 Weighted average interest rate* 1.60% 8.41% 11.27% Financial liabilities Interest bearing liabilities - bank Interest bearing liabilities - other Derivatives Payables 513,691 - - - - 513,691 - - 11,525 - - 11,525 - - - - 22,283 22,283 - - - - 21,653 21,653 Total financial liabilities 513,691 - 11,525 - 43,936 569,152 Notional principal swap balance maturities* - 130,000 119,500 - - 249,500 Weighted average interest rate on drawn bank debt* 5.23% 30 June 2016 Financial Assets Cash and cash equivalents Receivables Secured loans Floating interest rate Fixed interest less than 1 year Fixed interest 1 to 5 years Fixed interest over 5 years Non interest bearing $'000 $'000 $'000 $'000 $'000 Total $'000 36,284 - - - - 36,284 - - - - 5,657 5,657 - 166,723 218,539 - - 385,262 Total financial assets 36,284 166,723 218,539 - 5,657 427,203 Weighted average interest rate* 1.85% 7.64% 13.15% Financial liabilities Interest bearing liabilities - bank Interest bearing liabilities - other Derivatives Payables 629,406 - - - - 629,406 - - 4,292 - - 4,292 - - - - 37,591 37,591 - - - - 16,546 16,546 Total financial liabilities 629,406 - 4,292 - 54,137 687,835 Notional principal swap balance maturities* - - 284,500 50,000 - 334,500 Weighted average interest rate on drawn bank debt* 5.39% calculated at 30 June * ^ excludes Abacus Hospitality Fund, Abacus Diversified Income Fund II, Abacus Wodonga Land Fund 63 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 12. FINANCIAL INSTRUMENTS (continued) (c) Market Risk (continued) Interest rate risk / Fair value interest rate risk (continued) Other^ 30 June 2017 Financial Assets Cash and cash equivalents Receivables Total financial assets Floating interest rate Fixed interest less than 1 year Fixed interest 1 to 5 years Fixed interest over 5 years Non interest bearing $'000 $'000 $'000 $'000 $'000 Total $'000 28,650 - - - - 28,650 - - - - 926 926 28,650 - - - 926 29,576 Weighted average interest rate* 1.60% Financial liabilities Payables - - - - 6,212 6,212 Total financial liabilities - - - - 6,212 6,212 30 June 2016 Financial Assets Cash and cash equivalents Receivables Total financial assets Floating interest rate $'000 Fixed interest less than 1 year $'000 Fixed interest 1 to 5 years $'000 Fixed interest over 5 years $'000 Non interest bearing $'000 Total $'000 7,505 - - - - 7,505 - - - - 3,197 3,197 7,505 - - - 3,197 10,702 Weighted average interest rate* 1.85% Financial liabilities Interest bearing liabilities - bank Derivatives Payables 99,767 - - - - 99,767 - - - - 2,650 2,650 - - - - 9,622 9,622 Total financial liabilities 99,767 - - - 12,272 112,039 Notional principal swap balance maturities* - 51,750 - - - 51,750 Weighted average interest rate on drawn bank debt* 6.97% * calculated at 30 June ^ Includes Abacus Hospitality Fund, Abacus Diversified Income Fund II, Abacus Wodonga Land Fund 64 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 12. FINANCIAL INSTRUMENTS (continued) (c) Market Risk (continued) Interest rate risk / Fair value interest rate risk (continued) The following table is a summary of the interest rate sensitivity analysis: 30 June 2017 Financial assets Financial liabilities 30 June 2016 Financial assets Financial liabilities AUD Carrying amount -1% Floating $'000 Profit $'000 Equity $'000 +1% Profit $'000 Equity $'000 56,288 (562) - 562 - 535,973 (3,828) - 3,558 - AUD Carrying amount -1% Floating $'000 Profit $'000 Equity $'000 +1% Profit $'000 Equity $'000 43,792 (438) - 438 - 796,308 (7,809) - 7,361 - The analysis for the interest rate sensitivity of financial liabilities includes derivatives. 65 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 12. FINANCIAL INSTRUMENTS (continued) (d) Fair values The fair value of the Group’s financial assets and liabilities are approximately equal to that of their carrying values. Class of assets / liabilities Investment properties Fair value hierarchy Level 3 Valuation technique Discounted Cash Flow ("DCF") and Income capitalisation method Inputs used to measure fair value Adopted capitalisation rate Optimal occupancy Adopted discount rate Property, plant and equipment Derivative - project entitlement Level 3 Income capitalisation method Level 3 Residual cash flow analysis Securities and options - unlisted Level 3 Pricing models Derivative - financial instruments Level 2 DCF (adjusted for counterparty credit worthiness) Net market EBITDA Optimal occupancy Adopted capitalisation rate Project cash flow forecast Project payment priorities Security price Underlying net asset Property valuations Interest rates Consumer Price Index ("CPI") Volatility Level 1 Level 2 Quoted prices (unadjusted) in active market for identical assets or liabilities; Inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3 Inputs for the asset or liability that are not based on observable market data. There were no transfers between Levels 1, 2 and 3 during the period. Income capitalisation method This method involves assessing the total net market income receivable from the property and capitalising this in perpetuity to derive a capital value, with allowances for capital expenditure reversions. Discounted cash flow method Under the DCF method, the fair value is estimated using explicit assumptions regarding the benefits and liabilities of ownership over the assets’ or liabilities’ life including an exit or terminal value. The DCF method involves the projection of a series of cash flows from the assets or liabilities. To this projected cash flow series, an appropriate, market-derived discount rate is applied to establish the present value of the cash flow stream associated with the assets or liabilities. Residual cash flow analysis The analysis takes into account the time value of money in a more detailed way than simply a developer’s profit margin as it considers the timing of all costs and income associated with the project. Pricing models – unlisted securities The fair value is determined by reference to the net assets which approximates fair value of the underlying entities. Pricing models – options The fair value is determined using generally accepted pricing models including Black-Scholes and adjusted for specific features of the options including share price, underlying net assets and property valuations and prevailing exchange rates. 66 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 12. FINANCIAL INSTRUMENTS (continued) (d) Fair values (continued) The following table is a reconciliation of the movements in derivatives (projects), unlisted securities and options classified as Level 3 for the year ended 30 June 2017. Opening balance as at 30 June 2016 Fair value movement through the income statement Additions Closing balance as at 30 June 2017 Opening balance as at 30 June 2015 Fair value movement through the income statement Redemptions / conversions / disposals Closing balance as at 30 June 2016 Derivatives - projects $'000 Unlisted securities/ options $'000 Total $'000 4,007 22,774 26,781 9,256 (23,482) (14,226) - 7,500 7,500 13,263 6,792 20,055 Derivatives - projects Unlisted securities/ options Total $'000 $'000 $'000 3,520 31,075 34,595 487 (3,013) (2,526) - (5,288) (5,288) 4,007 22,774 26,781 Sensitivity of Level 3 – unlisted securities and options The potential effect of using reasonable possible alternative assumptions based on a change in the property valuations by 5% would have the effect of reducing the fair value by up to $0.8 million (2016: $9.3 million) or increase the fair value by $0.8 million (2016: $9.3 million). 13. CONTRIBUTED EQUITY (a) Issued stapled securities Stapled securities Issue costs Total contributed equity (b) Movement in stapled securities on issue At 30 June 2016 - equity raisings - distribution reinvestment plan - less transaction costs Securities on issue at 30 June 2017 2017 2016 $'000 1,622,897 1,565,515 $'000 (41,741) (41,637) 1,581,156 1,523,878 Stapled securities Number Value $'000 556,577 1,523,878 '000 5,642 17,347 13,351 40,035 - (104) 575,570 1,581,156 67 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 14. DISTRIBUTIONS PAID AND PROPOSED ABACUS PROPERTY GROUP Abacus (a) Distributions paid during the year 2017 $'000 2016 $'000 June 2016 half: 8.50 cents per stapled security (2015: 8.50 cents) December 2016 half: 8.75 cents per stapled security (2015: 8.50 cents) 47,309 47,011 50,486 47,491 (b) Distributions proposed and not recognised as a liability^ June 2017 half: 8.75 cents per stapled security (2016: 8.50 cents) 50,362 47,309 Distributions were paid from Abacus Trust, Abacus Income Trust and Abacus Storage PropertyTrust (which do not pay tax provided they distribute all their taxable income) hence, there were no franking credits attached. ^ The final distribution of 8.75 cents per stapled security was declared on 3 July 2017. The distribution being paid on or around 31 August 2017 will be approximately $50.4 million. No provision for the distribution has been recognised in the balance sheet at 30 June 2017 as the distribution had not been declared by the end of the year. Non-core funds (a) Distributions paid during the year Abacus Hospitality Fund Abacus Diversified Income Fund II (b) Distributions proposed Abacus Hospitality Fund - not recognised Abacus Diversified Income Fund II - recognised Abacus Franking credit balance The amount of franking credits available for the subsequent financial year are: Franking account balance as at the beginning of the financial year at 30% (2016: 30%) Franking credits that will arise from the payment of income tax payable at the end of the financial year Franking account balance at the end of the financial year 30% (2016: 30%) 2017 $'000 2016 $'000 1,349 980 5,052 5,004 6,401 5,984 368 245 - 1,256 2017 $'000 2016 $'000 30,362 1,393 31,755 23,908 6,454 30,362 68 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 15. PARENT ENTITY FINANCIAL INFORMATION ABACUS PROPERTY GROUP Results of the parent entity Loss for the year Total comprehensive expense for the year Financial position of the parent entity at year end Current assets Total assets Current liabilities Total liabilities Net assets Total equity of the parent entity comprising of: Issued capital Accumulated losses Employee options reserve Total equity (a) Parent entity contingencies 2017 $'000 2016 $'000 (9,871) (4,028) (9,871) (4,028) 1,512 482 336,195 339,008 146 240 62,566 66,691 273,629 272,317 347,011 335,050 (79,875) (70,004) 6,493 7,271 273,629 272,317 As at 30 June 2017, the parent entity has entered into, or still bound by, the following agreements: - Act as guarantor for borrowings for certain joint venture arrangements to a guarantee limit of $18.5 million (30 June 2016: $27.5 million). No property security has been provided by the parent. (b) Parent entity capital commitments There are no capital commitments of the parent entity as at 30 June 2017 (2016: Nil). 69 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 16. PROPERTY, PLANT AND EQUIPMENT The following table is a reconciliation of the movements of property, plant and equipment for the year ended 30 June 2017. ABACUS PROPERTY GROUP Property, plant and equipment held for sale Current Hotel properties1 Total current property, plant and equipment held for sale Non-current Hotel property1 Storage properties Office equipment / furniture and fittings Total non-current property, plant and equipment 2017 $'000 2016 $'000 - 130,000 - 130,000 80,000 - 4,226 4,051 508 625 84,734 4,676 Total property, plant and equipment including held for sale 84,734 134,676 1. Abacus Hospitality Fund sold 2 of its hotel properties during the year. The remaining property has been withdrawn from sale and reclassified as non-current. Land and buildings At the beginning of the year net of accumulated depreciation Additions Fair value movement through the income statement Fair value movement through comprehensive income Disposal Depreciation charge for the year At the end of the year net of accumulated depreciation Gross value Accumulated depreciation Net carrying amount at end of the year Plant and equipment Gross value Accumulated depreciation Net carrying amount at end of the year 2017 $'000 2016 $'000 121,411 107,480 99 - 12,282 (61,964) - 71,828 81,139 (9,311) 71,828 31,546 (18,640) 12,906 630 8,513 8,812 (3,106) (918) 121,411 137,106 (15,695) 121,411 42,526 (29,261) 13,265 Total 84,734 134,676 If property, plant and equipment was carried under the cost model, the carrying amount would be $62.7 million (2016: $117.9 million). 70 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 16. PROPERTY, PLANT AND EQUIPMENT (continued) The property, plant and equipment1 has been disclosed as held for sale which are measured at the lower of their carrying amount and fair value less costs to sell. ABACUS PROPERTY GROUP Sensitivity Information Significant input Net market EBITDA Optimal occupancy Adopted capitalisation rate Fair value measurement sensitivity to significant increase in input Fair value measurement sensitivity to significant decrease in input Increase Increase Decrease Decrease Decrease Increase The adopted capitalisation rate forms part of the income capitalisation approach. When calculating the income capitalisation approach, the EBITDA has a strong interrelationship with the adopted capitalisation rate given the methodology involves assessing the total EBITDA generated from the property and capitalising this in perpetuity to derive a capital value. In theory, an increase in the EBITDA and an increase (softening) in the adopted capitalisation rate could potentially offset the impact to the fair value. The same can be said for a decrease in the EBITDA and a decrease (tightening) in the adopted capitalisation rate. A directionally opposite change in the EBITDA and the adopted capitalisation rate could potentially magnify the impact to the fair value. Hotel Properties - The weighted average capitalisation rate is 7.00% (2016: 7.83%) - The current weighted average occupancy rate is 79% (2016: 77%) Storage Properties - The weighted average capitalisation rate is 7.72% (2016: 7.98%) - The current weighted average occupancy rate is 88% (2016: 86%) External valuations are conducted by qualified independent valuers who are appointed by the Director of Property who is also responsible for the Group’s internal valuation process. He is assisted by two employees both of whom hold relevant recognised professional qualifications and are experienced in valuing the types of properties in the applicable locations. 1. Other than corporate property, plant and equipment 71 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 17. COMMITMENTS AND CONTINGENCIES Abacus (a) Operating lease commitments – Group as lessee The Group has entered into a commercial lease on its offices. The lease has a term of five years with an option to renew for another five years. Future minimum rentals payable under non-cancellable operating leases as at 30 June 2017 are as follows: Within one year After one year but not more than five years More than five years 2017 2016 $'000 1,030 1,026 $'000 3,227 523 1,163 - 5,420 1,549 (b) Operating lease commitments – Group as lessor Future minimum rentals receivable under non-cancellable operating leases as at 30 June 2017 are as follows: Within one year After one year but not more than five years More than five years 2017 2016 $'000 72,465 67,721 $'000 163,080 165,477 76,649 68,773 312,194 301,971 These amounts do not include contingent rentals which may become receivable under certain leases on the basis of retail sales in excess of stipulated minimums and, in addition, do not include recovery of outgoings. (c) Capital and other commitments At 30 June 2017 the Group had numerous commitments and contingent liabilities which principally related to property acquisition settlements, loan facility guarantees for the Group's interest in the jointly controlled projects and funds management vehicles, commitments relating to property refurbishing costs and unused mortgage loan facilities to third parties. Commitments planned and/or contracted at reporting date but not recognised as liabilities are as follows: Within one year - gross settlement of property acquisitions - property refurbishment costs - property development costs - unused portion of loan facilities to outside parties 2017 $'000 2016 $'000 - 13,350 15,136 9,020 11,176 8,420 28,087 25,821 54,399 56,611 72 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 17. COMMITMENTS AND CONTINGENCIES (c) Capital and other commitments (continued) Contingent liabilities: Within one year - corporate guarantee ABACUS PROPERTY GROUP 2017 $'000 18,712 18,712 2016 $'000 43,025 43,025 73 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 18. RELATED PARTY DISCLOSURES (a) Subsidiaries The consolidated financial statements include the financial statements of the following entities: Entity Abacus Group Holdings Limited and its subsidiaries Abacus Castle Hill Trust Abacus Cobar Trust Abacus Finance Pty Limited Abacus Funds Management Limited Abacus Griffith Avenue Trust Abacus HP Operating Co Pty Ltd Abacus HP Trust Abacus Investment Pty Ltd Abacus Wasjig Investments Pty Ltd Abacus Mariners Lodge Trust Abacus Mortgage Fund Abacus Mount Druitt Trust Abacus Musswellbrook Pty Ltd Abacus Nominee Services Pty Limited Abacus Nominees (No 5) Pty Limited Abacus Nominees (No 7) Pty Limited Abacus Nominees (No 9) Pty Limited Abacus Note Facilities Pty Ltd Abacus Property Services Pty Ltd Abacus SP Note Facility Pty Ltd Abacus Storage Funds Management Limited Abacus Summit Trust Abacus Wodonga Land Commercial Trust Amiga Pty Limited Bay Street Brighton Unit Trust Clarendon Property Investments Pty Ltd Corporate Helpers Pty Ltd Main Street Pakenham Unit Trust Oasis Staffing Pty Ltd Yarradale Developments Trust Abacus Hobart Growth Trust Abacus Group Projects Limited and its subsidiaries Abacus Property Pty Ltd Abacus Allara Street Trust* Abacus Wasjig Holdings Pty Limited* Abacus Repository Trust* Abacus Ventures Trust* * These entities are wholly owned by Abacus equity interest 2017 % 2016 % 100 100 100 100 100 - - 100 - - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - - - - 100 100 100 100 50 - 50 51 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 50 50 51 74 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 18. RELATED PARTY DISCLOSURES (continued) (a) Subsidiaries (continued) Entity Abacus Trust and its subsidiaries: Abacus 1769 Hume Highway Trust Abacus AGIT Trust Abacus Alderley Trust Abacus Ashfield Mall Property Trust Abacus Australian Aggregation Holding Trust Abacus Australis Drive Trust Abacus Bacchus Marsh Trust Abacus Birkenhead Point Trust Abacus Browns Road Trust Abacus Campbell Property Trust Abacus Jetstream Trust Abacus Liverpool Plaza Trust Abacus Lutwyche Trust Abacus Macquarie Street Trust Abacus Moore Street Trust Abacus Northshore Trust 1* Abacus Northshore Trust 2* Abacus North Sydney Car park Trust Abacus Oasis Trust Abacus Premier Parking Trust Abacus Sanctuary Holdings Pty Limited* Abacus Shopping Centre Trust Abacus Short Street Trust Abacus SP Fund Abacus St Leonards Trust Abacus Varsity Lakes Trust Abacus Virginia Trust Abacus Westpac House Trust Abacus Westpac House No2 Trust Abacus WTC Trust Abacus 14 Martin Place Trust Abacus 324 Queen Street Trust Abacus 33 Queen Street Trust Abacus 37 Epping Road Trust Abacus 710 Collins Street Trust 444 Queen Street Trust Lutwyche City Shopping Centre Unit Trust Abacus Income Trust and its subsidiaries: Abacus Eagle Farm Trust Abacus Grant Street Trust Abacus Independent Retail Property Trust Abacus Retail Property Trust Abacus Wollongong Property Trust * These entities are wholly owned by Abacus ABACUS PROPERTY GROUP equity interest 2017 % 2016 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 25 25 - 100 100 24 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 75 100 100 75 100 - 100 - 100 100 100 100 100 100 100 100 - 100 100 100 100 25 25 100 100 100 24 100 - 100 100 100 100 100 - 100 100 - 100 - 100 - 75 100 - 75 100 100 75 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 18. RELATED PARTY DISCLOSURES (continued) (a) Subsidiaries (continued) ABACUS PROPERTY GROUP Entity Abacus Storage Operations Limited and its subsidiaries: Abacus Storage NZ Operations Pty Limited Abacus Storage Solutions Pty Limited Abacus Storage Solutions NZ Pty Limited Abacus USI C Trust Abacus U Stow It A1 Trust Abacus U Stow It B1 Trust Abacus U Stow It A2 Trust Abacus U Stow It B2 Trust U Stow It Holdings Limited U Stow It Pty Limited Abacus Storage Property Trust and its subsidiary: Abacus Storage NZ Property Trust Abacus Diversified Income Fund II Abacus Hospitality Fund Abacus Wodonga Land Fund equity interest 2017 % 2016 % 100 100 100 100 100 100 100 100 100 100 100 17 10 15 100 100 100 100 100 100 100 100 100 100 100 17 10 15 Subsidiaries controlled by the Group with material non-controlling interest Abacus Hospitality Fund: The Group is deemed to have control of AHF based upon the aggregate impact of (a) the Group’s role as responsible entity of AHF and (b) the size and variable nature of returns arising from the Group’s loans to AHF (as the loans provided by the Group to AHF rank pari passu for downside but not on upside at fund wind up). 30 June 2017 Abacus Hospitality Fund 30 June 2016 Abacus Hospitality Fund Principal place of business Australia Australia % held by NCI 90 90 (Profit)/loss allocated to Accumulated NCI $'000 NCI $'000 (7,821) 40,840 (4,204) 32,037 (b) Ultimate parent AGHL has been designated as the parent entity of the Group (c) Key management personnel Details of payments are disclosed in Note 19. 76 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 18. RELATED PARTY DISCLOSURES (continued) (d) Transactions with related parties Transactions with related parties other than associates and joint ventures Revenues Property management fees received / receivable Transactions with associates and joint ventures Revenues Management fees received / receivable from joint ventures Revenue received / receivable from joint ventures Other transactions Loan advanced to joint ventures Loan repayments from joint ventures Loan advanced from joint ventures Terms and conditions of transactions ABACUS PROPERTY GROUP 2017 $'000 2016 $'000 196 189 4,316 3,569 61,186 41,512 (12,019) (27,716) 18,161 57,345 762 498 Sales and fees to and purchases and fees charged from related parties are made in arm’s length transactions both at normal market prices and on normal commercial terms. Outstanding balances at year-end are unsecured and settlement occurs in cash. No provision for doubtful debts has been recognised or bad debts incurred with respect to amounts payable or receivable from related parties during the year. Entity with significant influence Calculator Australia Pty Ltd (“Kirsh”) is a significant securityholder in the Group with a holding of approximately 49% of the ordinary securities of the Group (2016: 49%). During the year, Abacus Property Services Pty Ltd was engaged to manage the following properties: Property Relationship with Kirsh Charge per annum 14 Martin Place 4 Martin Place Tenants in common 100% owned by Kirsh 3% of gross rental 3% of gross rental 2017 $ 195,782 177,492 2016 $ 301,899 189,216 Mrs Myra Salkinder is a non-executive director of the Group and is a senior executive of Kirsh. 77 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 19. KEY MANAGEMENT PERSONNEL (a) Compensation for key management personnel Short-term employee benefits Post-employment benefits Other long-term benefits Security-based payments ABACUS PROPERTY GROUP 2017 $ 2016 $ 5,413,023 5,410,648 203,688 226,398 61,662 68,625 1,090,281 1,148,758 6,768,654 6,854,429 (b) Loans to key management personnel There were no loans to key management personnel and their related parties at any time in 2017 or in the prior year. (c) Other transactions and balances with key management personnel and their related parties During the financial year, transactions occurred between the Group and Key Management Personnel which are within normal employee and investor relationships. 78 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 20. SECURITY BASED PAYMENTS (a) Recognised security payment expenses The expense recognised for employee services received during the year is as follows: Expense arising from equity-settled payment transactions 2,062 1,983 2017 $'000 2016 $'000 (b) Type of security – based payment plan Security Acquisition Rights (SARs) The deferred variable incentive plan has been designed to align the interests of executives with those of securityholders by providing for a significant portion of the remuneration of participating executives to be linked to the delivery of sustainable underlying profit that covers the distribution level implicit in the Group’s security price. Key executives have been allocated SARs in the current financial year generally equal to the last current variable incentive paid. Allocations were based on the performance assessment completed in determining current variable incentive awards for the prior financial year, adjusted to take into account other factors that the Board considers specifically relevant to the purpose of providing deferred variable incentives. The SARs granted during the year vest as follows: Vesting date Amount Vested* Potential number to vest September 2017 September 2018 September 2019 September 2020 One quarter of the initial issue One quarter of the initial issue One quarter of the initial issue One quarter of the initial issue 216,273 216,273 216,273 216,273 * The Board is able to claw back unvested SARs if the distribution level fails by more than 10% below the sustainable annual distribution rate For valuation purposes the SARs are equivalent to European call options (in that they may be “exercised” only at their maturity (i.e. vesting date)). The fair value of the SARs granted is estimated at the date of the grant using a trinomial tree model (using 500 steps) cross checked by a modified Black-Scholes model. The trinomial tree model and the Black-Scholes model generally produce the same values for an option over a non-dividend paying share, or where the option is entitled to the same distributions as are paid on the underlying security, as is assumed in this case, and if the time to exercise is the same, (i.e. at the end of the term). When SARs vest they will convert into ABP securities on a one for one basis or at the Board’s discretion a cash equivalent amount will be paid. 79 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 20. SECURITY BASED PAYMENTS (continued) (c) Summary of SARs granted The following table illustrates movements in SARs during this year: Opening balance Granted during the year Forfeited during the year Vested during the year Outstanding at the end of the year Exercisable at the end of the year ABACUS PROPERTY GROUP 2017 No. 2016 No. 2,111,757 1,945,236 865,092 825,228 (13,519) - (865,014) (658,707) 2,098,316 2,111,757 - - The weighted average remaining life of the instrument at 30 June 2017 was 1.2 years (2016: 1.2 years) and the weighted average fair value of the SARs granted during the year was $2.38 (2016: $2.66). The following table lists the inputs to the model used for the SARs plan for the years ended 30 June 2017 and 30 June 2016: Expected volatility (%) Risk-free interest rate (%) Life of instrument (years) Model used 2017 2016 18 21 1.41 - 1.68 1.91 - 2.18 0.8 - 3.8 Trinomial 0.8 - 3.8 Trinomial The expected life of the SARs is based on historical data and current expectations and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the SARs is indicative of future trends, which may not necessarily be the actual outcome. 80 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 21. INTANGIBLE ASSETS AND GOODWILL Description of the Group’s intangible assets Goodwill Balance at 1 July Balance at 30 June Licences and entitlements At 1 July, net of accumulated amortisation Disposal At 30 June, net of accumulated amortisation ABACUS PROPERTY GROUP 2017 $'000 2016 $'000 32,394 32,394 32,394 32,394 - 800 - (800) - - Total goodwill and intangibles 32,394 32,394 Impairment tests for goodwill with indefinite useful lives (i) Description of the cash generating units and other relevant information Goodwill is allocated to a cash generating unit, where the Goodwill acquired through business combinations for the purposes of impairment testing is allocated to the Groups Property Investments segment relating to the property / asset management business. The recoverable amount of the unit has been determined based on a fair value less costs to sell calculation using cash flow projections as at 30 June 2017 covering a five-year period. (ii) Key assumptions used in valuation calculations Goodwill – the calculation of fair value less costs to sell is most sensitive to the following assumptions: a. Fee income: based on actual income in the year preceding the start of the budget period and actual funds under management b. Discount rates: reflects management’s estimate of the time value of money and the risks specific to each unit that are not reflected in the cash flows c. Property values of the funds/properties under management: based on the fair value of properties d. Selling costs: management’s estimate of costs to sell the funds/properties under management e. A pre-tax discount rate of 9.40% (2016: 9.40%) and a terminal growth rate of 2.7% (2016: 2.7%) have been applied to the cash flow projections (iii) Sensitivity to changes in assumptions Significant and prolonged property value falls and market influences which could increase discount rates could cause goodwill to be impaired in the future, however, the goodwill valuation as at 30 June 2017 has significant head room thus reasonable changes in the assumptions such as a 0.5% change in the discount rate or a 5% fall in revenue assumptions would not cause any impairment. 81 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 22. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Preparation The financial report is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards. The financial report has also been prepared on a historical cost basis, except for investment properties and derivative financial instruments which have been measured at fair value, interests in joint ventures and associates which are accounted for using the equity method, and certain investments and financial assets measured at fair value. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($'000) unless otherwise stated under the option available to the Group under ASIC Corporations Instrument 2016/191. The Group is an entity to which the class order applies. (b) Statement of Compliance The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (IFRS), as issued by the AASB and IASB respectively. (c) New accounting standards and interpretations (i) Changes in accounting policy and disclosures The accounting policies adopted are consistent with those of the previous financial year except for the adoption of new standards and interpretations effective as of 1 July 2016. The Group has adopted the following new or amended standards which became applicable on 1 July 2016: - AASB 2014-3 – Accounting for Acquisitions of Interests in Joint Ventures - AASB 2014-4 – Clarification of Acceptable Methods of Depreciation and Amortisation - AASB 1057 – Application of Accounting Standards - AASB 2014-9 – Equity Method in Separate Financial Statements - AASB 2015-1 – Annual Improvements to Australian Accounting Standards 2012-2014 Cycle - AASB 2015-2 – Disclosure Initiative: Amendments for AASB 101 Presentation of Financial Statements - AASB 2015-5 – Investments Entities: applying the consolidation exception - AASB 2015-9 – Scope and Application Paragraphs (AASB 8, AASB 133 and AASB 1057) The adoption of these amended standards has no material impact on the financial statements of the Group. (ii) Accounting Standards and Interpretation issued but not yet effective Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the Group for the annual reporting period ended 30 June 2017. The significant new standards or amendments are outlined below: - AASB 9 Financial Instruments (effective 1 January 2018 / applicable for Group 1 July 2018) This standard includes requirement to improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB 139 Financial Instruments: Recognition and Measurement. The Standard contains requirements in the areas of classification, measurement, hedge accounting and derecognition. The most significant change for the adoption of AASB 9 will be the introduction of the new impairment model relating to the Group’s property loans. It is likely that the Group will recognise an impairment loss upon initial application of the new credit loss model. As it is the first-time application of the Standard, the Group will adjust the retained earnings of the Group as at 1 July 2018 as opposed to restating the previous year amounts. 82 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 22. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (c) New accounting standards and interpretations (continued) - Revenue from Contracts with Customers (effective 1 January 2018 / applicable for Group 1 July 2018) AASB15 replaces the current revenue recognition standards AASB 111 Construction Contracts, AASB 118 Revenue and related Interpretations. AASB 15 specifies the accounting treatment for revenue arising from contracts with customers (except for contracts within the scope of other accounting standards such as leases or financial instruments). The core principle of IFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Early adoption of this Standard is permitted. The Group has undertaken an analysis to scope out its revenue streams to identify specific impacts of the Standard. The revenue streams identified are: - Rental / hotel income - Finance income - Fee income - Sale of inventory The majority of the Group’s revenue streams have application under other relevant standards and therefore, application of AASB 15 does not apply (rental income, finance income). Where the Standard does apply, the Group has assessed that there will be no change to the recognition or measurement of revenue upon application of the Standard or has considered that the impact to the Group’s results to be immaterial. - Leases (effective 1 January 2019 / applicable for Group 1 July 2019) AASB 16 supersedes: AASB 117 Leases and associated interpretations. The key features of AASB 16 are as follows: Lessee accounting - Lessees are required to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset of low value - A lessee measures right-of-use assets similarly to other non-financial assets and lease liabilities similarly to other financial liabilities - Assets and liabilities arising from a lease are initially measured on a present value basis. The measurement includes non-cancellable lease payments (including inflation-linked payments), and also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease - AASB 16 contains disclosure requirements for lessees Lessor accounting - AASB 16 substantially carries forward the lessor accounting requirements in AASB 117. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently - AABB 16 also requires enhanced disclosures to be provided by lessors that will improve information disclosed about a lessor’s risk exposure, particularly to residual value risk Early adoption is permitted, provided the new revenue standard, AASB15 Revenue from Contracts with Customers, has been applied, or is applied at the same date as AASB 16. The Group has entered into a Net Lease Proposal and upon execution of the Lease Agreement, the Group will review the terms and consider its impact. 83 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 22. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (c) New accounting standards and interpretations (continued) AASB 2016-1, AASB 2016-2, AASB 2014-10, AASB 2016-5 and IFRIC 23 are applicable to the Group, however will have no significant impact on the Group. AASB 2016-4, AASB 2017-2, AASB 2016-6 AASB 2017-1, AASB interpretation 22, AASB 2016-8 and AASB 17 will have no application to the Group. (d) Basis of consolidation The consolidated financial statements comprise the financial statements of AGHL and its subsidiaries, AT and its subsidiaries, AGPL and its subsidiaries, AIT and its subsidiaries, ASPT and its subsidiaries and ASOL and its subsidiaries collectively referred to as the Group. Subsidiaries are all those entities over which the Group has power over the investee such that the Group is able to direct the relevant activities, has exposure or rights to variable returns from its involvement with the investee and has the ability to use its power over the investee to affect the amount of the investor’s returns. The adoption of AASB 10 resulted in the consolidation of Abacus Hospitality Fund, Abacus Diversified Income Fund II and Abacus Wodonga Land Fund. This is due to the combination of the Group’s role as responsible entity and its exposure to variable returns arising from its collective equity and loan investments in these funds and certain guarantees. The financial statements of subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies with adjustments made to bring into line any dissimilar accounting policies that may exist. All intercompany balances and transactions, including unrealised profits from intra-group transactions, have been eliminated in full and subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Where there is a loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting period during which the Group has control. The acquisition of subsidiaries is accounted for using the purchase method of accounting. The purchase method of accounting involves allocating the cost of the business combination to the fair value of the assets acquired and the liabilities and contingent liabilities assumed at the date of acquisition. Non-controlling interests are allocated their share of net profit after tax in the consolidated income statement and are presented within equity in the consolidated statement of financial position, separately from the equity of the owners of the parent. Non-controlling interests represent those equity interests in Abacus Hospitality Fund, Abacus Wodonga Land Fund, Abacus Jigsaw Trust, Lutwyche City Shopping Centre Unit Trust and Abacus Independent Retail Property Trust that are not held by the Group and are presented separately in the income statement and within equity in the consolidated statement of financial position. 84 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 22. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (e) Foreign currency translation Functional and presentation currency Both the functional and presentation currency of the Group are in Australian dollars. Each entity in the Group determines its own functional currency and items are included in the financial statements of each entity are measured using that functional currency. Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All exchange differences in the consolidated financial report are taken to profit or loss with the exception of differences on foreign currency borrowings on translation of foreign operations that provide a hedge against a net investment in a foreign operation. These are taken directly to equity until the disposal of the net investment, at which time they are recognised in profit or loss. On disposal of a foreign operation, the cumulative amount recognised in equity relating to that particular foreign operation is recognised in profit or loss. Tax charges and credits attributable to exchange differences on those borrowings are also recognised in equity. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. At reporting date the assets and liabilities of foreign operations are translated into the presentation currency of the Group at the rate of exchange prevailing at balance date and the financial performance is translated at the average exchange rate prevailing during the reporting period. The exchange differences arising on translation are taken directly to the foreign currency translation reserve in equity. (f) Revenue recognition Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Rental income Rental income from investment properties is accounted for on a straight-line basis over the lease term. Contingent rental income is recognised as income in the periods in which it is earned. Lease incentives granted are recognised as an integral part of the total rental income. Hotel Income Revenue from rooms is recognised and accrued on the provision of rooms or on the date which rooms are to be provided in accordance with the terms and conditions of the bookings. Advance deposits from customers received are not recognised as revenue until such time when the rooms have been provided or when the customers forfeit the deposits due to failure of attendance. Finance Income Revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Income from the sale of joint venture profit share rights is recognised when the Group enters into arrangements with other parties which result in the Group receiving consideration for the sale of its right to receive a profit share from the joint venture. Fee Income Revenue from rendering of services is recognised in accordance with the terms and conditions of the service agreements and the accounting standards. 85 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 22. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (f) Revenue recognition (continued) Dividends and distributions Revenue is recognised when the Group’s right to receive the payment is established. Net change in fair value of investments and financial instruments derecognised during the year Revenue from sale of investments is recognised on settlement when the significant risks and rewards of the ownership of the investments have been transferred to the buyer. Risks and rewards are generally considered to have passed to the buyer at the time of settlement of the sale. Financial instruments are derecognised when the right to receive or pay cash flows from the financial derivative has expired or when the entity transfers substantially all the risks and rewards of the financial derivative through termination. Gains or losses due to derecognition are recognised in the statement of comprehensive income. Net change in fair value of investments held at balance date Changes in market value of investments are recognised as revenue or expense in determining the net profit for the period. Sale of inventory Revenue from property development sales is recognised when the significant risks, rewards of ownership and effective control has been transferred to the purchaser which has been determined to occur upon settlement and after contractual duties are completed. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, the costs incurred or to be incurred cannot be measured reliably, there is a risk of return or there is continuing management involvement to the degree usually associated with ownership. (g) Expenses Expenses including rates, taxes and other outgoings, are brought to account on an accrual basis and any related payables are carried at cost. (h) Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash which are subject to an insignificant risk of changes in value. For the purposes of the Statement of Cash Flow, cash and cash equivalents consist of cash and cash equivalents as defined above. (i) Trade and other receivables Trade receivables, which generally have 30 day terms, are recognised at amortised cost, which in the case of the Group, is the original invoice amount less an allowance for any uncollectible amounts. Collectability of trade receivables is reviewed on an ongoing basis. An allowance for doubtful debts is raised when there is objective evidence that collection of the full amount is no longer probable. Bad debts are written off when identified. (j) Derivative financial instruments and hedging The Group utilises derivative financial instruments, both foreign exchange and interest rate swaps to manage the risk associated with foreign currency and interest rate fluctuations. Such derivative financial instruments are recognised at fair value. The Group has set defined policies and implemented hedging policies to manage interest and exchange rate risks. Derivative instruments are transacted in line with these policies to achieve the economic outcomes in line with the Group’s treasury and hedging policy. They are not transacted for speculative purposes. The Group does not employ hedge accounting and as such derivatives are recorded at fair value with gains or losses arising from the movement in fair values recorded in the income statement. 86 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 22. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (k) Investments and other financial assets All investments are initially recognised at cost, being the fair value of the consideration given. Financial assets in the scope of AASB 139 Financial Instruments: Recognition and Measurement are classified as either financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, or available-for-sale financial assets. The Group determines the classification of its financial assets after initial recognition and, when allowed and appropriate, re-evaluates this designation at each financial year-end. At 30 June the Group’s investments in listed and unlisted securities have been classified as financial assets at fair value through profit or loss and property loans are classified as loans and receivables. Recognition and derecognition Purchases and sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place are recognised on the trade date i.e. the date that the Group commits to purchase the assets. Financial assets are derecognised when the right to receive cash flows from the financial assets have expired or been transferred. After initial recognition, investments, which are classified as held for trading, are measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term with the intention of making a profit. Gains or losses on investments held for trading are recognised in the income statement. For investments where there is no quoted market or unit price, fair value is determined by reference to the current market value of another instrument which is substantially the same or is calculated based on the expected cash flows of the underlying net asset base of the investment. Financial assets at fair value through profit or loss A financial asset or financial liability at fair value is designated by the entity at fair value through the profit and loss upon initial recognition. APG uses this designation where doing so results in more relevant information. This group of financial assets and liabilities are managed and their performance evaluated on a fair value basis, in accordance with APG’s documented risk management and investment strategy which outlines that these assets and liabilities are managed on a total rate of return basis, and information about the instruments is provided internally on that basis to the entity’s key management personnel and the Board. APG holds investments in unlisted securities and enters into loans and receivables with associated options that provide for a variety of outcomes including repayment of principal and interest, satisfaction through obtaining interests in equity or property or combinations thereof. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in profit or loss when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Subsidiaries Investment in subsidiaries are held at lower of cost or recoverable amount. 87 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 22. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (l) Interest in joint arrangements The Group’s interest in joint venture entities is accounted for under the equity method of accounting in the consolidated financial statements. The investment in the joint venture entities is carried in the consolidated balance sheet at cost plus post-acquisition changes in the Group’s share of net assets of the joint ventures, less any impairment in value. The consolidated income statement reflects the Group’s share of the results of operations of the joint ventures. Investments in joint ventures are held at the lower of cost or recoverable amount in the investing entities. The Group’s interest in joint operations that give the parties a right to the underlying assets and obligations themselves is accounted for by recognising the Group’s share of those assets and obligations. (m) Property, plant and equipment Hotel property, plant and equipment Property (including land and buildings), plant and equipment represent owner-occupied properties and are initially measured at cost including transaction costs and acquisition costs. Subsequent to initial recognition, properties are measured at fair value less accumulated depreciation and any impairment in value after the date of revaluation. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows: Buildings – 50 years Plant and equipment – 3 to 20 years Revaluations of land and buildings Any revaluation increment is credited to the asset revaluation reserve included in the equity section of the balance sheet except to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss, in which case the increase is recognised in profit or loss. Any revaluation decrease is recognised in profit or loss except to the extent that it offsets a previous revaluation increase for the same asset in which case the decrease is debited directly to the asset revaluation reserve to the extent of the credit balance existing in the revaluation reserve for that asset. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the income statement. Any accumulated depreciation as at the revaluation date is eliminated against the gross carrying amounts of the assets and the net amounts are restated to the revalued amounts of the assets. Hotel property, plant and equipment are independently valued on an annual basis unless the underlying financing requires a more frequent independent valuation cycle. Other property, plant and equipment Land and buildings are measured at fair value, based on periodic valuations by external independent valuers, less accumulated depreciation on buildings and less any impairment losses recognised after the date of the revaluation. Plant and equipment is stated at historical cost less accumulated depreciation and any impairment losses. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows: Buildings – 40 years Plant and equipment – over 5 to 15 years 88 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 22. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (m) Property, plant and equipment (continued) Impairment The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. The recoverable amount of property (including land and buildings), plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the assets. Impairment losses are recognised in the income statement. Independent valuations are performed with sufficient regularity to ensure that the carrying amount does not differ materially from the asset’s fair value at the balance sheet date. Disposal An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognised. Other property, plant and equipment are independently valued on a staggered basis every two years unless the underlying financing requires a more frequent independent valuation cycle. (n) Investment properties Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing parts of an existing investment property at the time that the cost is incurred if the recognition criteria are met, and excludes the costs of day-to-day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at fair value, which reflects market and property specific conditions at the balance sheet date. Gains or losses arising from changes in the fair values of investment properties are recognised in the income statement in the year in which they arise. Investment properties are derecognised either when they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised in the income statement in the year of retirement or disposal. Investment properties under construction are carried at fair value. Fair value is calculated based on estimated fair value on completion after allowing for the remaining expected costs of completion plus an appropriate risk adjusted development margin. Transfers are made to investment property when, and only when, there is a change in use, evidenced by commencement of an operating lease to another party or ending of construction or development. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of development with a view to sale. For a transfer from investment property to inventories, the deemed cost of property for subsequent accounting is its fair value at the date of change in use. For a transfer from inventories to investment property, any difference between the fair value of the property at that date and its previous carrying amount is recognised in profit or loss. Land and buildings that meet the definition of investment property are considered to have the function of an investment and are therefore regarded as a composite asset, the overall value of which is influenced by many factors, the most prominent being income yield, rather than diminution in value of the building content due to the passing of time. Accordingly, the buildings and all components thereof, including integral plant and equipment, are not depreciated. 89 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 22. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (n) Investment properties (continued) Investment properties are independently valued on a staggered basis every two years unless the underlying financing requires a more frequent independent valuation cycle. In determining fair value, the capitalisation of net income method and the discounting of future cashflows to their present value have been used. Lease incentives provided by the Group to lessees, and rental guarantees which may be received by the Group from third parties (arising from the acquisition of investment properties) are included in the measurement of fair value of investment property. Leasing costs and incentives are included in the carrying value of investment property and are amortised over the respective lease period, either using a straight-line basis, or a basis which is more representative of the pattern of benefits. Under AASB 140, investment properties, including any plant and equipment, are not subject to depreciation. However, depreciation allowances in respect of certain buildings, plant and equipment are currently available to investors for taxation purposes. (o) Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Group as lessee Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term. Lease incentives are recognised in the income statement as an integral part of the total lease expense. Group as a lessor Leases in which the Group retains substantially all the risks and benefits of ownership of the lease assets are classified as operating leases. (p) Goodwill and intangibles Goodwill Goodwill on acquisition is initially measured at cost being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses and is not amortised. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated: - Represents the lowest level within the Group at which the goodwill is monitored for internal management - purposes; and Is not larger than a segment based on either the Group’s primary or the Group’s secondary reporting format determined in accordance with AASB 8 Operating Segments. Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash- generating units), to which the goodwill relates. When the recoverable amount of the cash-generating unit (group of cash-generating units) is less that the carrying amount, an impairment loss is recognised. When goodwill forms part of a cash-generating unit (group of cash-generating units) and an operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this manner is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Impairment losses recognised for goodwill are not subsequently reversed. 90 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 22. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (q) Impairment of non-financial assets other than goodwill Intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other that goodwill that suffered an impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. (r) Trade and other payables Trade payables and other payables are carried at amortised cost. They represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition. (s) Provisions and employee leave benefits Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the time value of money and the risks specific to the liability. The increase in the provision resulting from the passage of time is recognised in finance costs. Employee leave benefits (i) Wages, salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Expenses for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. ii) Long service leave The liability for long service leave is recognised and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures, and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash outflows. (t) Distributions and dividends Trusts generally distribute their distributable assessable income to their unitholders. Such distributions are determined by reference to the taxable income of the respective trusts. Distributable income may include capital gains arising from the disposal of investments and tax-deferred income. Unrealised gains and losses on investments that are recognised as income are usually retained and are generally not assessable or distributable until realised. Capital losses are not distributed to security holders but are retained to be offset against any future realised capital gains. A liability for dividend or distribution is recognised in the Balance Sheet if the dividend or distribution has been declared, determined or publicly recommended prior to balance date. 91 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 22. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (u) Interest-bearing loans and borrowings All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of transaction costs associated with the borrowing. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Fees paid in the establishment of loan facilities are included as part of the carrying amount of loans and borrowings. Borrowings are classified as non-current liabilities where the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Borrowing Costs Borrowing costs are recognised as an expense when incurred unless they relate to a qualifying asset or to upfront borrowing establishment and arrangement costs, which are deferred and amortised as an expense over the life of the facility. A qualifying asset is an asset that generally takes more than 12 months to get ready for its intended use or sale. In these circumstances, the financing costs are capitalised into the cost of the asset. Where funds are borrowed by the Group for the acquisition or construction of a qualifying asset, the amount of the borrowing costs capitalised are those incurred in relation to the borrowing. (v) Contributed equity Issued and paid up capital is recognised at the fair value of the consideration received by the Group. Stapled securities are classified as equity. Incremental costs directly attributable to the issue of new securities are shown in equity as a deduction, net of tax, from the proceeds. (w) Non-current assets held for sale Before classification as held for sale the measurement of the assets is updated. Upon classification as held for sale, assets are recognised at the lower of carrying amount and fair value less costs to sell with the exception of investment properties which are valued in accordance with Note 22(n). Gains and losses from revaluations on initial classification and subsequent re-measurement are recognised in the income statement. (x) Inventories Property Development Inventories are stated at the lower of cost and net realisable value. Net realisable value is determined on the basis of sales in the ordinary course of business. Expenses of marketing, selling and distribution to customers are estimated and deducted to establish net realisable value. Where the net realisable value of inventory is less than cost, an impairment expense is recognised in the consolidated income statement. Reversals of previously recognised impairment charges are recognised in the consolidated income statement such that the inventory is always carried at the lower of cost and net realisable value. Cost includes the purchase consideration, development costs and holding costs such as borrowing costs, rates and taxes. Hotel Inventories are valued at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs necessary to make the sale. 92 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 22. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (y) Taxation The Group comprises taxable and non-taxable entities. A liability for current and deferred tax and tax expense is only recognised in respect of taxable entities that are subject to income tax and potential capital gains tax as detailed below. Trust income tax Under current Australian income tax legislation AT, AIT, ASPT, AHT and ADIFII are not liable to Australian income tax provided security holders are presently entitled to the taxable income of the trusts and the trusts generally distribute their taxable income. Company income tax AGHL and its Australian resident wholly-owned subsidiaries, ASOL and its Australian resident wholly-owned subsidiaries and AHL and its Australian resident wholly-owned subsidiaries have formed separate tax consolidation groups. AGHL, ASOL and AHL have entered into tax funding agreements with their Australian resident wholly-owned subsidiaries, so that each subsidiary agrees to pay or receive its share of the allocated tax at the current tax rate. The head tax entity and the controlled entities in each tax consolidated group continue to account for their own current and deferred tax amounts. In addition to its own current and deferred tax amounts, the head tax entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreements are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Deferred income tax assets are recognised for all deductible temporary differences, carry forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised, except: - when the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or - when the deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. 93 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 22. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (y) Taxation (continued) Deferred income tax liabilities are recognised for all taxable temporary differences, except: - when the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or - when the taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, and the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the income statement. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. New Zealand The trusts that operate in New Zealand (“NZ”) are treated as a company for NZ income tax purposes and are taxed at the corporate tax rate of 28% (2016: 28%). NZ income tax paid by the Trusts can be claimed as foreign tax credits to offset against foreign income and distributable to security holders. NZ tax losses are carried forward provided the continuity test of ownership is satisfied. Interest expense from the Trusts are fully deductible subject to thin capitalisation considerations. Property revaluation gains or losses are to be excluded from taxable income, with no deferred tax implications as capital gains are not taxed in NZ. Income derived by companies which are incorporated in Australia and registered in NZ as overseas companies is exempt from tax in Australia where the income has been taxed in NZ. This income is regarded as non- assessable non-exempt income. As such, income tax is calculated on the companies’ NZ taxable income and taxed at the NZ corporate rate of 28% (2016: 28%). Goods and services tax (GST) Revenues, expenses and assets are recognised net of the amount of GST except when the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet. Cash flows are included in the Cash Flow Statement on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. 94 ABACUS PROPERTY GROUP NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 22. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (z) Earnings per stapled security (EPSS) Basic EPSS is calculated as net profit attributable to stapled security holders, adjusted to exclude costs of servicing equity (other than distributions) divided by the weighted average number of stapled securities on issue during the period under review. Diluted EPSS is calculated as net profit attributable to stapled security holders, adjusted for: - - - costs of servicing equity (other than distributions); the after tax effect of dividends and interest associated with dilutive potential stapled securities that have been recognised as expenses; and other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential stapled securities; divided by the weighted average number of stapled securities and dilutive potential stapled securities, adjusted for any bonus element. (za) Security based payment plans Executives of the Group receive remuneration in the form of security based payments, whereby Executives render services as consideration for equity instruments (equity-settled transactions). The cost of equity-settled transactions is determined by the fair value at the date when the grant is made, using an appropriate valuation model and is recognised, together with a corresponding increase in other capital reserves in equity, over the period in which the performance and/or service conditions are fulfilled. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The income statement expense or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period and is recognised in employee benefits expense (Note 20). No expense is recognised for awards that do not ultimately vest, except for equity-settled transactions for which vesting is conditional upon a market or non-vesting condition. These are treated as vesting irrespective of whether or not the market or non-vesting conditions are satisfied, provided that all other performance and / or service conditions are satisfied. When the terms of an equity-settled award are modified, the minimum expense recognised is the expense had the terms not been modified, if the original terms of the award are met. An additional expense is recognised for any modification that increases the total fair value of the security based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification. When an equity-settled award is cancelled, it is treated as if it vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. This includes any award where non-vesting conditions within the control of either the entity or the employee are not met. 95 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2017 23. AUDITOR’S REMUNERATION ABACUS PROPERTY GROUP 2017 $ 2016 $ Amounts received or due and receivable by Ernst & Young Australia for: - An audit of the financial report of the entity and any other entity in the consolidated group 1,104,110 1,090,930 - Other services in relation to the entity and any other entity in the consolidated group - assurance services - compliance services 116,420 101,835 37,150 35,800 1,257,680 1,228,565 24. EVENTS AFTER BALANCE SHEET DATE Other than as disclosed in this report, there has been no other matter or circumstance that has arisen since the end of the financial year that has significantly affected, or may affect, the Group’s operations in future financial years, the results of those operations or the Group’s state of affairs in future financial years. 96 DIRECTORS’ DECLARATION ABACUS PROPERTY GROUP In accordance with a resolution of the Directors of Abacus Group Holdings Limited, we state that: In the opinion of the directors: a. the financial statements, notes and the additional disclosures included in the directors’ report designated as audited, of the company and of the consolidated entity are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the company’s and consolidated entity’s financial position as at 30 June 2017 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including Australian Accounting Interpretations) and the Corporations Regulations 2001; b. c. the financial report also complies with International Financial Reporting Standards as disclosed in Note 22(b); and there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. This declaration has been made after receiving the declarations required to be made to the directors in accordance with sections 295A of the Corporations Act 2001 for the financial year ended 30 June 2017. On behalf of the Board John Thame Chairman Sydney, 18 August 2017 Frank Wolf Managing Director 97 98 99 100 101 102 103 104 105 Abacus Property Group Corporate Governance Report This report sets out the Group’s position relating to each of the ASX Corporate Governance Council Principles of Good Corporate Governance during the year. Additional information, including charters and policies, is available through a dedicated corporate governance information section on the About us tab on the Abacus website at www.abacusproperty.com.au. This report is current as at 18 August 2017 and has been approved by the boards of AGHL, AFML (the Responsible Entity of AT and AIT), AGPL, ASFML (the Responsible Entity of ASPT) and ASOL (the Board). Principle 1: Lay solid foundations for management and oversight Recommendation 1.1 The Board has adopted a charter that sets out the functions and responsibilities reserved by the Board, those delegated to the Managing Director and those specific to the Chairman. The conduct of the Board is also governed by the Constitution. The primary responsibilities of the Board and the Managing Director are set out in the Board Charter. Senior executives reporting to the Managing Director have their roles and responsibilities defined in position descriptions and are given a letter of appointment on commencement. The Board Charter and Constitution are available on the Abacus website. Recommendation 1.2 The Selection and Appointment of Non-Executive Directors Policy sets out the procedures followed when considering the appointment of a new director and the disclosures made to securityholders. The Selection and Appointment of Non-Executive Directors Policy is available on the Abacus website. Recommendation 1.3 The Board Charter sets out the roles and responsibilities of the Board. Individual committee charters set out the roles and responsibilities for committee members. The Board Charter and the Constitutions (which are available on the Abacus website) set out: • • • • • • the term of appointment of directors; remuneration; Abacus’ policy on when directors may seek independent professional advice at Abacus’ expense; circumstances in which a director’s office becomes vacant; indemnity and insurance arrangements; and rights of access to corporate information. Prior to commencing employment, senior executives employment receive a letter of offer setting out their employment terms that they are required to accept prior to commencing employment with Abacus which covers these things (to the extent applicable) as well as a position description, whom they report to and circumstances in which they may be terminated. Directors and all staff (including senior executives) sign an annual Code of Conduct Declaration which includes (among other things) confirmation of any conflicts of interest, compliance obligations with the Abacus Trading Policy and ongoing confidentiality obligations. 106 1 Abacus Property Group Corporate Governance Report Recommendation 1.4 The Board Charter and the Constitutions (which are available on the Abacus website) set out the role and responsibilities of the company secretary. Recommendation 1.5 The Board is committed to workplace diversity, with a particular focus on supporting the representation of women at a senior level of the Group and on the Board. The Diversity Policy is available on the Abacus website and the Sustainability Report included in the Annual Report provides workplace metrics including gender composition and female salaries as a percentage of male salaries. The Board set as a target in 2011 having at least one female representative at Board level. the current period, Abacus has recruited from a diverse pool of candidates for all positions filled during the year and has a number of employees with flexible employment arrangements to take account of domestic responsibilities. In Abacus is a ‘relevant employer’ under the Workplace Gender Equality Act. Abacus continues to meet the reporting obligations under that legislation. Recommendation 1.6 The Board has a documented Performance Evaluation Policy which outlines the process for evaluating the performance of the Board, its committees and individual directors. An annual review has taken place in the reporting period in accordance with that policy. Recommendation 1.7 The Remuneration and Nomination Committee is responsible for making recommendations to the Board on the remuneration arrangements for non-executive directors and executives. The Remuneration Report at page 18 sets out the structure of the remuneration arrangements. In summary, executive total remuneration comprises fixed and variable components (with both current and deferred elements to the variable component). Fixed remuneration reflects market rates and variable pay reflects a combination of individual and Abacus performance. The Board has the discretion to consider each executive’s total contribution to the group in addition to specific key performance indicators which are established for each executive for the relevant year. An annual review has taken place in the reporting period in accordance with the Remuneration Report structure. Principle 2: Structure the board to add value Recommendation 2.1 The Board has established a Nomination and Remuneration Committee. The Committee’s charter sets its role, responsibilities and membership requirements. The members of the committee and their attendance at meetings are provided on page 16. The Chairman of the committee is independent. The Nomination and Remuneration Committee Charter is available on the Abacus website. 107 2 Abacus Property Group Corporate Governance Report Recommendation 2.2 Abacus has a board skills matrix which is reviewed and updated as part of the annual review process set out in response to Recommendation 1.6 above. The current skills matrix shows the current Board have skills in the following relevant areas: Financial reporting; Technological innovation; Storage markets; Property markets; Listed markets; International markets; Foreign investment; Joint ventures; Information security; Financial markets; • • • • • • • • • • • Hospitality markets; • Governance; • Regulatory compliance; and • Capital investment. The Board considers that the current mix of skills is appropriate for the Group. Given the nature of the Group’s business and current stage of development, the Board considers its current composition provides the necessary skills and experience to ensure a proper understanding of, and competence to deal with, the current and emerging issues of the business to optimise the financial performance of the Group and returns to securityholders. Details of the skills, experience and expertise of each director are set out on page 15. Recommendation 2.3 The Board comprises one executive director and five non-executive directors. The majority of the Board (Messrs Thame, Bartlett, Irving and Spira) are independent members. The Board has determined that an independent director is one who: • • • • • • • is not a substantial security holder or an officer of, or is not otherwise associated directly with, a substantial security holder of the Group; has not within the previous three years been employed in any executive capacity; has not within the last three years been a principal of a material professional adviser or a material consultant to the Group; or an employee materially associated with the service provided; does not have close family ties with any person who falls within any of the categories described; has not been a director of the entity for such a period that their independence may have been compromised; is not a material supplier or customer of the Group, or an officer of or otherwise associated directly or indirectly with a material supplier or customer; or does not have a material contractual relationship with the Group other than as a director. No independent non-executive director has a relationship significant enough to compromise their independence on the Board. Non-executive directors confer regularly without management present. Any change in the independence of a non-executive director would be disclosed and explained to the market in a timely manner. 108 3 Abacus Property Group Corporate Governance Report The independence of each non-executive director is assessed at least annually and in any case, as soon as practicable after any change in the non-executive director’s interests, positions, associations or relationships. Detail of the length of service of each director is set out on page 15. Recommendation 2.4 The majority of the Board (Messrs Thame, Bartlett, Irving and Spira) are independent members. Recommendation 2.5 The Chairman of the Board (Mr John Thame) is an independent non-executive director. The roles of Chairman and Managing Director are not exercised by the same individual. The division of responsibility between the Chairman and Managing Director has been agreed by the Board and is set out in the Board Charter. Recommendation 2.6 The Selection and Appointment of Non-Executive Directors Policy provides for induction training for new directors. Abacus has a board skills matrix which is reviewed and updated as part of the annual review process set out in response to Recommendation 1.6 above including a training needs analysis of individual directors. Given the nature of the Group’s business and current stage of development, the Board considers its current composition provides the necessary skills and experience to ensure a proper understanding of, and competence to deal with, the current and emerging issues of the business to optimise the financial performance of the Group and returns to securityholders. Details of the skills, experience and expertise of each director are set out on page 15. Principle 3: Act ethically and responsibly Recommendation 3.1 The Group’s Code of Conduct promotes ethical practices and responsible decision making by directors and employees. The Code deals with confidentiality of information, protection of company assets, disclosure of potential conflicts of interest and compliance with laws and regulations. The Code of Conduct is available on the Abacus website. Principle 4: Safeguard integrity in corporate reporting Recommendation 4.1 The Board has established an Audit and Risk Committee. The Audit and Risk Committee comprises three independent non-executive directors and the Chairman of the Committee is not the Chairman of the Board. The members of the committee and their attendance at meetings are provided on page 16. Details of the skills, experience and expertise of each member of the committee are set out on page 15. Other directors who are not members of the committee, the external auditor and other senior executives attend meetings by invitation. 109 4 Abacus Property Group Corporate Governance Report The Audit and Risk Committee has a formal charter that sets out its specific roles and responsibilities, and composition requirements. The procedures for the selection and appointment of the external auditor are set out in the Audit and Risk Committee Charter. The Audit and Risk Committee Charter is available on the Abacus website. Recommendation 4.2 Before approving the financial statements for a financial period, the Board receives from the Managing Director and Chief Financial Officer a declaration that, in their opinion, the financial records of the entity have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the entity and that the opinion has been formed on the basis of a sound system of risk management and internal control that is operating effectively Recommendation 4.3 The external auditor attends the Abacus annual general meeting and is available at the meeting to answer questions from securityholders relevant to the audit. Principle 5: Make timely and balanced disclosure Recommendation 5.1 The Group has a policy and procedures designed to ensure compliance with ASX Listing Rule disclosure requirements. The Managing Director is responsible for ensuring that the Group complies with its disclosure obligations. The Continuous Disclosure and Securityholder Communications Policy is available on the Abacus website. Principle 6: Respect the rights of securityholders Recommendation 6.1 The Group aims to keep securityholders informed of significant developments and activities of the Group. The Group’s website is updated regularly and includes annual and half-yearly reports, distribution history and all other announcements lodged with the ASX, as well as a corporate governance landing page from which all relevant corporate governance information can be accessed. The Abacus website also includes webcasts of the results briefings. The Group keeps a summary record for internal use of the issues discussed at group and one- on-one briefings with investors and analysts, including a record of those present where appropriate. The Continuous Disclosure and Securityholder Communications Policy is available on the Abacus website. Recommendation 6.2 The Continuous Disclosure and Securityholder Communications Policy, which is available on the Abacus website, sets out Abacus’ communication strategy with securityholders. Routine queries received by the Group’s registry are responded to by the registry. Non-routine queries are directed to the Group’s Head of Investor Relations for response. Securityholders, other financial market participants and the financial media also communicate directly with the Head of Investor Relations to seek information and provide feedback. Relevant feedback is 110 5 Abacus Property Group Corporate Governance Report communicated by the Head of Investor Relations to the Managing Director and the Board as required. Recommendation 6.3 Abacus’ annual general meeting is webcast to allow securityholders to hear proceedings online. There is also the functionality for investors to participate. Securityholders may vote online, by proxy or by attending meetings. The Continuous Disclosure and Securityholder Communications Policy is available on the Abacus website. Recommendation 6.4 Securityholders may elect to receive and send communications to Abacus and to the Group’s registry electronically. Email contact details for the registry are provided on the Abacus website. Principle 7: Recognise and manage risk Recommendation 7.1 and 7.2 The Audit and Risk Committee has responsibility for reviewing the Group’s risk management framework. The members of the committee and their attendance at meetings are provided on page 16. The risk management framework is formally reviewed annually. This review is initially carried out by the Compliance and Risk Manager and then reviewed by the Audit and Risk Committee and the Board to assess any necessary changes. This review has been completed in the reporting period. The Audit and Risk Committee Charter is available on the Abacus website. The Business Risk Management Policy dealing with oversight and management of material business risks is set out in the corporate governance information section on the Abacus website. The Group’s Risk Management Framework was developed in consultation with an external consultant. Under the compliance plan, the responsible managers report regularly on the risks they manage and any emerging risks. An independent consultant has been engaged to review business processes and undertake formal internal audit assessments throughout the year. These assessments are provided to the Audit and Risk Committee for review. Recommendation 7.3 An independent consultant has been engaged to review business processes and undertake formal internal audit assessments throughout the year. These assessments are provided to the Audit and Risk Committee for review. Recommendation 7.4 The Sustainability Report outlines the impact that Abacus’ business activities have on environmental, social and governance risks. Abacus’s Sustainability Protocol and Sustainability Reports, which are available on the Abacus website include a commitment to implementing sustainability practices in Abacus’ investments, property management, development activities and workplaces. Abacus uses these practices to manage risks, create opportunities and strengthen operations. 111 6 Abacus Property Group Corporate Governance Report Principle 8: Remunerate fairly and responsibly Recommendation 8.1 and 8.2 The Board has established a Nomination and Remuneration Committee. The Nomination and Remuneration Committee is responsible for assessing the processes for evaluating the performance of the Board and key executives. A copy of the committee charter is available on the Abacus website. The Chairman of the Nomination and Remuneration Committee is independent and the Committee has a majority of independent members. The Group’s remuneration policies including security-based payment plans and the remuneration of key management personnel are discussed in the Remuneration Report. The Nomination and Remuneration Committee may seek input from individuals on remuneration policies but no individual employee is directly involved in deciding their own remuneration. The members of the committee and their attendance at meetings are provided on page 16. Non-executive directors are paid fees for their service and do not participate in other benefits (with the exception of Group travel insurance cover) which may be offered other than those which are statutory requirements. Recommendation 8.3 Abacus’s Trading Policy is on the Abacus website. The Trading Policy sets out restrictions on trading by all directors, officers, and other staff, including restrictions on the use of derivatives and hedging transactions in relation to Abacus securities. 112 7 ASX Additional Information Abacus Property Group is made up of the Abacus Trust, Abacus Income Trust, Abacus Storage Property Trust, Abacus Group Holdings Limited, Abacus Group Projects Limited and Abacus Storage Operations Limited. The responsible entity of the Abacus Trust and Abacus Income Trust is Abacus Funds Management Limited. The responsible entity of the Abacus Storage Property Trust is Abacus Storage Funds Management Limited. Unless specified otherwise, the following information is current as at 4 August 2017. Number of holders of ordinary fully paid stapled securities 6,789 Voting rights attached to ordinary fully paid stapled securities one vote per stapled security Number of holders holding less than a marketable parcel of ordinary fully paid stapled securities Secretary, Abacus Funds Management Limited Secretary, Abacus Storage Funds Management Limited Secretary, Abacus Group Holdings Limited Secretary, Abacus Group Projects Limited Secretary, Abacus Storage Operations Limited Registered office Abacus Funds Management Limited Abacus Storage Funds Management Limited Abacus Group Holdings Limited Abacus Group Projects Limited Abacus Storage Operations Limited Registry 427 Rob Baulderstone Level 34, Australia Square 264-278 George Street Sydney NSW 2000 612 9253 8600 Boardroom Pty Limited Level 12, 225 George Street Sydney NSW 2000 (02) 9290 9600 Other stock exchanges on which Abacus Property Group securities are quoted none Number and class of restricted securities or securities subject to voluntary escrow that are on issue none There is no current on-market buy-back SUBSTANTIAL SECURITYHOLDER NOTIFICATIONS Securityholders Calculator Australia Pty Limited Investor Mutual Limited Number of Securities 252,981,605 29,523,171 113 SECURITIES REGISTER Number of Securities Number of Securityholders Total Securities 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001-over Totals 1,245 2,403 1,443 1,625 73 6,789 470,678 6,878,320 10,488,062 35,925,093 521,808,215 575,570,368 TOP 20 LARGEST SECURITYHOLDINGS Holder Name CITICORP NOMINEES PTY LIMITED HSBC CUSTODY NOMINEES J P MORGAN NOMINEES AUSTRALIA Number of Securities % Issued Securities 190,498,670 33.097% 96,089,134 16.695% 58,054,301 10.086% CALCULATOR AUSTRALIA PTY LIMITED 57,750,613 10.034% CALCULATOR AUSTRALIA PTY LIMITED NATIONAL NOMINEES LIMITED CALCULATOR AUSTRALIA PTY LIMITED CITIGROUP NOMINESS PTY LIMITED BNP PARIBAS NOMINEES PTY LIMITED RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED BAINPRO NOMINEES PTY LIMITED POWERWRAP LIMITED BNP PARIBAS NOMS (NZ) LTD AUSTRALIAN EXECUTOR TRUSTEES LIMITED AMP LIFE LIMITED MR FRANK MICHAEL WOLF 45,547,846 20,420,010 14,200,000 6,632,379 5,980,723 3,692,141 3,007,000 1,455,607 1,337,711 1,279,360 1,096,854 1,023,775 798,507 776,424 698,541 665,643 7.914% 3.548% 2.467% 1.152% 1.039% 0.641% 0.522% 0.253% 0.232% 0.222% 0.191% 0.178% 0.139% 0.135% 0.121% 0.116% 114 This page is intentionally blank 115 This page is intentionally blank 116 Abacus Property Group Level 34 Australia Square 264-278 George Street Sydney NSW 2000 T +61 2 9253 8600 F +61 2 9253 8616 E enquiries@abacusproperty.com.au www.abacusproperty.com.au 

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