Charter Hall Group
Annual Report 2008

Plain-text annual report

Charter Hall Group 2008 Annual Report Our Performance 4 Highlights 6 Sustained Performance 8 Chairman’s Letter 10 Joint Managing Directors’ Report 12 Charter Hall’s New Brand Identity 13 Achieving Balance® Our Business 16 Charter Hall Group 17 Corporate Structure Our Funds 26 Charter Hall Property Trust 31 Core Plus Office Fund 34 Core Plus Industrial Fund 39 Core Plus Retail Fund 42 Diversified Property Fund 47 Charter Hall Umbrella Fund 49 Charter Hall Investment Fund No. 2, 4-6 51 Charter Hall Opportunity Fund No. 4 52 Charter Hall Opportunity Fund No. 5 54 Property Development Portfolio No. 3 Our Leadership 58 Board of Directors 62 Corporate Governance Financial Report Front Cover: Sydney Wharf, Pyrmont NSW (PDP3 asset) Charter Hall Group Active Approach... Continued Performance. Through an active approach Charter Hall continues to enhance its performance platform with its vertically integrated business model. A full year distribution of 12.60 cents per security has delivered Charter Hall securityholders a 21% increase on last year. 1 Annual Report 2008 Maintaining a sharp focus on sustainable performance is key to delivering superior return on equity. 2 Charter Hall Group Our Performance Charter Hall’s performance objective is to outperform its peers through a fundamentally based, active approach to property investment achieving strong, sustainable returns for both wholesale and retail investors. 3 Annual Report 2008 Our Performance Highlights 56% 39% increase in net profi t after tax of $67.5m over FY07 increase in FUM to $3.9 billion 34% increase in growth of underlying earnings per security of 12.74cps on PCP 4 Charter Hall Group 21% 8.7 YEARS 8 increase in distribution of 12.60cps CHPT’s WALE is above industry average unlisted funds including the establishment of two new funds 5 Annual Report 2008 Our Performance Sustained Performance Revenue growth of 72%1 $100m $80m $60m $40m $20m 68% $51.5 $30.6 $88.5 72% FY06 FY07 FY08 1 Revenue in this analysis excludes interest income, is net of property expenses and includes the $7.2 million NPAT contribution from CIP. Strong EBITDA growth $100m $80m $60m $40m $20m $21.8 FY06 Group Underlying EPS and DPS 12cps 9cps 6cps 3cps 7.10 6.47 $66.8 76% $38.0 FY07 FY08 9.51 10.44 12.74 12.60 EPS DPS FY06 FY07 FY08 FY08 $67.5cps 16.31cps $52.7m 12.74cps 12.60cps At 30 June 08 $3.9bn $802m $1.19 31% FY07 $43.2m 12.00cps $34.2m 9.51cps 10.44cps At 30 June 07 $2.8bn $650m $1.12 21% Change 56% 36% 54% 34% 21% Change 39% 23% 6% 10% 2 Excluding fair value adjustments, gains on sale and unrealised foreign exchange gains. 3 Calculated as Borrowings net of Cash over Total Assets net of Cash. NPAT (AIFRS) Basic EPS (AIFRS) Underlying NPAT 2 Underlying EPS DPS FUM Total Group Assets NTA Gearing3 6 Charter Hall Group 11 Exhibition Street, Melbourne Vic 7 Annual Report 2008 Our Performance Chairman’s Letter “One of our most important tasks is not just to ensure strong performance, but to also create the conditions for long term success” 8 Charter Hall Group Dear Investor, On behalf of the Charter Hall Group Board, it is my pleasure to present the 2008 Annual Report for our third year as a listed Group. Highlighting continued performance Our fi nancial performance was strong, despite challenging conditions. The operating result of $67.5 million represented an increase of 56% on last year. A highlight was the 39% rise in the Group’s funds under management from $2.8 billion to $3.9 billion, providing the Group with solid annuity earning streams going forward. The Group’s EPS grew to 12.74cps, an increase of 34% on last year. The full year distribution to Charter Hall securityholders of 12.60 cents is up 21% up on last year. Our managed funds continue to outperform their respective internal rate of return (IRR) targets, underpinning current and future performance fees for the Group. Enhancing our business platform One of our most important tasks is not just to ensure strong performance, but to also build a foundation for long term success. Charter Hall has expanded its business platform with the introduction of two new funds; the Charter Hall Umbrella Fund (CHUF) and the Core Plus Retail Fund (CPRF). The Group now manages eight unlisted funds across the risk and return spectrum. The successful closing of CHUF last year was a milestone. The Fund closed almost 100% oversubscribed, raising a total of $187 million in capital from retail investors. CPRF, with funds under management of approximately $500 million on a fully completed basis, was established as the third Fund in a series of sector specifi c core plus investment offerings. CPRF’s fi rst close occurred in August 2008 with $95 million of external equity raised, together with a $250 million non recourse debt facility at the fund level. Charter Hall will target further equity closes to bring the Charter Hall Property Trust’s (CHPT) co-investment in CPRF down to a long term target co-investment stake of 20%. Corporate responsibility and sustainability – it’s all about Balance®! Apart from achieving corporate success that is measured fi nancially, we at Charter Hall are mindful of our social responsibilities. As a leading property fund management group, our commitment to principles of sustainability is particularly important – for our investors, the environment, unitholders, staff and the community. A key initiative this year is our environmental, social and corporate governance (ESG) policy, ‘Balance®’, which is helping to strengthen the sustainability culture throughout the Charter Hall Group. ‘Balance®’ will deliver Charter Hall’s ESG philosophy to the market place, and set the future direction for sustainability across the entire Group’s activities, ensuring optimum environmental outcomes. Our head offi ce in Sydney demonstrated this commitment as the fi rst commercial offi ce project to be awarded a 4 Star Green Star – Offi ce Interiors v1.1 certifi ed rating. In addition to our ESG initiatives, Charter Hall is a signatory to the United Nations Principles for Responsible Investment (UNPRI). Capitalising on emerging markets Charter Hall’s most valuable assets are its human resources. Our experienced and motivated executive and management team is led by Joint Managing Directors, David Harrison and David Southon. This year Charter Hall announced a number of new executive appointments around Australia, and opened offi ces in Melbourne and Adelaide. These initiatives have improved the Group’s ability to capitalise on investment opportunities in these key markets. Consolidating our position with a new brand identity I am pleased to announce the Group recently launched a fresh and refi ned new brand identity. This is a symbol of our strategic competitive brand position, visually reinforcing our drive to remain a market leader and better representing our key brand values for the long term. As one of Australia’s leading property fund managers and developers, the new identity refl ects our ability to deliver continued performance to our investors through expert agile thinking, and a fl exible team that is best able to adapt to market changes and capitalise on investment opportunities. New challenges provide new opportunities With the dislocation this past fi nancial year in the global fi nancial markets, it is clear that volatility in the debt markets promises a challenging year, worldwide. That said, the economic fundamentals in Australia remain strong. With $3.9 billion of funds under active management, a positive fi nancial performance last year and a strong balance sheet at year end, Charter Hall Group has planned its position consciously in order for it to meet the challenges ahead and where appropriate, to capitalise on opportunities to provide strong risk adjusted returns for all our stakeholders. In a year marked by challenges, opportunities and growth, Charter Hall is looking forward with confi dence to the year ahead. On behalf of all securityholders and investors in Charter Hall’s suite of unlisted funds, once again it is my pleasure to express the Board’s appreciation for the outstanding contribution made by the entire Charter Hall team. I look forward to what promises to be a challenging year, one that will present many opportunities my Board colleagues and our leadership team will be keen to capitalise on. I recognise and thank my fellow Board members for their invaluable contribution and support. Yours sincerely, Kerry Roxburgh Chairman 9 Annual Report 2008 Our Performance Joint Managing Directors’ Report 10 Charter Hall Group “Our focus is to outperform absolute return hurdles for each fund” Dear Investor, We are very pleased to report that the Charter Hall Group continues to outperform across all its managed funds and delivered strong earnings growth during FY08. The Charter Hall trademark of applying an active asset and development approach to all property assets owned and managed has contributed to a resilient performance of net tangible assets (NTA) in each fund despite challenging property markets. Our experienced and highly professional in-house development and investment teams have created signifi cant development margins and value, through the selection, management and delivery of key outcomes that respond favourably to the fundamentals of the property market. The Group’s low risk, diversifi ed business model has achieved solid growth in funds under management across the full risk and return spectrum, via the implementation of the investment mandates of its various managed funds, while retaining a strong focus on sustainable performance and superior return on equity. The off-balance sheet development and investment model reduces risk to Charter Hall securityholders and leverages the Charter Hall Group to higher return on equity (ROE) and earnings per security (EPS) growth prospects than that which would be possible with an ‘on-balance sheet’ 100% direct property ownership model. During FY08, assets under management increased by 39% compared to the previous corresponding period and Underlying EPS increased by 34%. The Group also deployed additional external equity of $350 million from a variety of unlisted investors. The Charter Hall Property Trust (CHPT) continues to generate stable property investment income through its co-investments in each of the unlisted funds managed by the corporation, Charter Hall Limited. Property income dominates the Group’s earnings before interest, taxation, depreciation and amortisation (EBITDA) and is generated from a diverse portfolio of assets leased predominantly to Government, national and multi-national tenants. The portfolio has a weighted average lease expiry (WALE) profi le of 8.7 years, which is substantially above industry averages. Additional annuity style income is generated by the Group from recurrent management fees paid to Charter Hall as the Manager of unlisted property funds, which combined with property income contributes 78% of Group earnings. The balance of the Group’s earnings was derived through performance fees, transaction fees and development dividends from its 50% ownership of commercial and industrial pre-lease development specialist, Commercial and Industrial Property Pty Limited (CIP). The CIP business is a low equity intensive model with the majority of development pre-leased and pre-sold early in the development phase, often prior to construction commencement. Charter Hall believes that there will be many compelling real estate opportunities over the next 12 to 18 months. The Group is well placed to take advantage of these opportunities with substantial acquisition capacity available in the opportunistic and core plus fund series. The Group is also developing a number of new fund initiatives to take advantage of opportunities in a ‘buyers market’. Success in funds management is tied to delivering long term performance. Our focus is to outperform absolute return hurdles for each fund on an IRR basis. The Group’s wholesale Core Plus Offi ce Fund (CPOF) and Core Plus Industrial Fund (CPIF) have achieved 19% and 16% IRRs versus return targets of 12% and 11% respectively. The retail equity fund, Diversifi ed Property Fund (DPF), achieved an IRR of 25% versus its return target of 10% since inception three years ago. This outperformance not only establishes the potential to generate performance fees, it also reinforces Charter Hall’s credentials to secure further commitments to existing and new unlisted funds. The Group’s resilient, high growth business model, whilst well established, has substantial capacity to grow. The business platform is anchored by the following features: (cid:88) (cid:88) (cid:88) (cid:88) (cid:88) (cid:88) (cid:88) (cid:88) highly skilled and experienced in-house property investment and development teams which create real value from property assets; product offering across the risk and return spectrum and diversifi ed access to investors; access to secure, growing property income as a property owner through its property fund co-investment stakes; annuity service fee income; additional income from performance fees, transactional revenue and development earnings from investments in CIP and the CHOF series of opportunistic funds; strong relationships with a diverse range of equity and debt providers; conservative gearing; and potential new wholesale and retail equity raisings for existing and new fund initiatives driving further funds under management and hence earnings growth. These features reinforce Charter Hall’s robust position to further increase market share within the Australasian property markets during what will continue to be a very challenging business environment over FY09. We are encouraged by the range of exciting opportunities that are emerging, allowing our team to harness its full potential to secure investment properties and projects that will drive the performance of the Group well beyond FY09. We take this opportunity to thank the Charter Hall team, our valued tenants and investor partners for their respective roles in assisting the Group to navigate a challenging environment during FY08. Naturally, we are disappointed with the reduction in the Charter Hall security price, which we believe is primarily due to wider market issues, however we remain confi dent that securityholder value will be restored in time through the recognition of the continued performance of the Group. Yours sincerely, David Harrison David Harrison Joint Managing Director David Southon Joint Managing Director 11 Annual Report 2008 Our Performance Charter Hall’s New Brand Identity Charter Hall Group has recently undergone a strategic brand review, the outcome of which is a refi ned competitive brand position that will build greater value and brand equity for Charter Hall long term. The new brand logo, look and personality better refl ects our position as one of Australia’s leading property investors, fund managers and developers, and is a visual expression of how we have evolved into a dynamic and active three-dimensional business. The new brand represents our ability to deliver continued performance to our investors through expert agile thinking, and a fl exible team that is best able to adapt to market changes and capitalise on appropriate investment opportunities. 12 Charter Hall Group Our Performance Achieving Balance® As a leading property investment management group, Charter Hall Group is mindful of our responsibilities to the environment, our customers, unitholders, staff and the community. In line with our Balance® policy, Charter Hall is a member of the Green Building Council and is a signatory to the United Nations Principles for Responsible Investment (UNPRI). UNPRI embodies the aspirations contained in Balance®. As a signatory to this global policy on environmental and socially responsible investment principles, Charter Hall will ensure that it measures the impact of its activities on the environment and society. Sustainability, in particular, will only grow in importance as an essential element in developing, maintaining and managing all forms of property investment. As a result, Charter Hall is committed to putting our guiding principles into action across all our properties and Group activities. ‘Balance®’ is a key initiative for our environmental, social and corporate governance (ESG), which is helping to strengthen the culture of responsibility throughout the Charter Hall Group. It formalises Charter Hall’s genuine corporate commitment in these areas. As the name suggests, Balance® requires us to consider the often competing objectives of the environment, our customers, unitholders, staff and the community to ensure an optimal outcome is achieved. An active approach to environmental and social issues is crucial to the health of all aspects of our business. It enhances our ability to secure higher quality tenant covenants, net rental value and ultimately capital value. From an economic perspective, a more environmentally responsible end product should also prove to be a more sustainable long term investment. This should enhance the exit strategy of the opportunity funds in their delivery of high quality, attractive and environmentally effi cient offi ce, retail, industrial and residential projects. The ability to manage the risks and opportunities with the potential to affect current and future business is crucial. Putting this balanced philosophy into action will only enhance the social, environmental and economic benefi ts for Charter Hall’s stakeholders and the community at large. Furthermore, Charter Hall fi rmly believes that the demand for environmentally effi cient buildings will increase over the next decade, from prospective tenants, institutional owners and Local, State and Federal Government bodies. An active approach to environmental and social issues is crucial to the health of all aspects of our business. 13 Annual Report 2008 Focusing on the fundamentals is critical in these challenging times. 14 Charter Hall Group Our Business The Charter Hall Group believes it is essential to focus on property fundamentals when sourcing, managing, developing, repositioning and divesting property assets. Our active management strategy aims to enhance capital security and optimise returns to investors, both unlisted and listed. 15 Annual Report 2008 Our Business Charter Hall Group Charter Hall Group is a property investment, development and funds management group that operates across the full risk and return spectrum. The Group manages core, core plus and opportunistic property funds. The following chart outlines the Group’s products across the risk and return spectrum. Return 20%+ 15-17% 11-14% 9-17% OPPORTUNISTIC CHOF 4 & 5 ENHANCED CORE PLUS CPOF, CPIF, CPRF CORE PLUS CPOF, CPIF, CPRF CORE PLUS CPOF, CPIF, CPRF CORE CHUF, DPF, CHPT, CHIF 2,4-6 Low Risk CORE INVESTMENTS 70% CORE / 30% ENHANCED INSTITUTIONAL AND RETAIL INVESTORS WHOLESALE INVESTORS High Risk DEVELOPMENT OPPORTUNITIES WHOLESALE INVESTORS During these challenging times, the Charter Hall Group believes it is essential to focus on property fundamentals when sourcing, managing, developing, repositioning and divesting property assets across the entire portfolio. Our active management strategy aims to preserve capital and optimise returns to investors, both unlisted and listed. Charter Hall has a strong corporate governance structure, a healthy corporate culture and a stable, experienced and professional team. These attributes are very important and ensure Charter Hall is well placed to take advantage of opportunities in the current environment. Established in 1991 and listed on the ASX in 2005 as a stapled security, the Group comprises Charter Hall Limited stapled to the Charter Hall Property Trust. Over the past 17 years, and particularly over the last three years since listing, the Group has established an impressive, off-balance sheet investment platform with funds under management of $3.9 billion. Charter Hall’s success continues to be underpinned by its innovative and highly experienced development and investment management team, which has enabled the Group to actively manage its funds and development projects. Charter Hall has earned a strong reputation for innovation and agility to achieve outperformance in property investment and development projects undertaken within its diverse suite of off-balance sheet direct property funds. 16 Charter Hall Group Our Business Corporate Structure CHARTER HALL LIMITED Stapled & Managed via Responsible Entity Charter Hall Funds Management Limited CHARTER HALL PROPERTY TRUST FUNDS MANAGEMENT PROPERTY INVESTMENT PROPERTY DEVELOPMENT CORPORATE SERVICES AND PROPERTY MANAGEMENT 17 Annual Report 2008 Our Business Corporate Structure (continued) Co-Investment Philosophy The Charter Hall Group strongly believes in aligning its interests with those of its investors. This is achieved by targeting an initial 20% co-investment in each of its unlisted property funds. Given the current co-investments held, the Group has the ability to sell down these co-investments over time to raise capital for co-investing in future fund initiatives being implemented by the Group. CHARTER HALL GROUP (CHC) MANAGED FUNDS CHOF4 (Diversifi ed) CHOF5 (Diversifi ed) CPOF (Offi ce) CPIF (Industrial) CPRF (Retail) DPF (Diversifi ed) CHUF (Diversifi ed) CHIF 2, 4-6 (Diversifi ed) FUNDS MANAGEMENT Charter Hall Limited currently manages eight unlisted property funds with discrete mandates across the risk and return spectrum from core through to opportunistic. Charter Hall has developed a strong reputation for an active approach and continued performance in managing external equity. The Group’s balance sheet strength continues to underpin its funds management activities. In addition to listed capital, Charter Hall has access to wholesale, high-net worth and retail investors through its unlisted funds. Approximately 85% of the $3.9 billion of funds under management is supported by capital sourced from wholesale investors. The Group’s funds continue to outperform their respective targets, delivering strong returns to investors. Funds Under Management (FUM) CHARTER HALL FUM $3,895 billion1 Wholesale Investor Funds $3,281m Retail Investor Funds $596m Property $17m Opportunistic $847m Core Plus $2,434m CHOF4 $490m CHOF5 $357m CPOF $1,600m CPIF $339m CPRF $495m DPF $249m CHUF $223m CHIFs $124m Chullora $17m 18 Charter Hall Group 1 Post CPRF’s fi rst close. Our Business Corporate Structure (continued) Actual and forecast gross equity IRRs (since inception) – outperformed target returns DPF CPOF CPIF CHOF 4 & 5 25.5% 19.2% 16.1% FUND HURDLE RETURN1 DPF CPOF CPIF 10% 11% 10% CHOF 4 & 5 13% Hurdle return 42.0% 1 CHC performance fee is a share of outperformance over hurdle return. PROPERTY INVESTMENT Charter Hall is a property investor with a strong focus on property fundamentals, quality and long term expected return. The property portfolios of each of the funds managed by Charter Hall refl ect these investment fundamentals and have long WALEs, strong minimum rent increases and exposure to high quality tenants. The Group enjoys stable, secure property income streams from its co-investments in each of the unlisted funds it manages. In addition to generating annuity income for CHPT, these co-investments create a strong alignment of interest with the wholesale and retail investors in our various unlisted, off-balance sheet funds. Charter Hall has achieved signifi cant diversity over its approximately $500 million of property investments through its co-investments in well leased, geographically and sectorial diverse portfolios with a combined WALE of 8.7 years. This relatively long WALE is enhanced by average minimum rent increases of 3.55% per annum, together with the benefi ts of 7% under market rentals across the portfolios. PROPERTY DEVELOPMENT On behalf of its managed funds, the development division has developed or is in the process of developing more than 28 projects with an estimated completion value in excess of $2.6 billion. Charter Hall Limited has achieved strong outperformance over the past 11 years in managing opportunistic property funds, having achieved a gross IRR on equity of 30% on realised projects. Given the Group’s solid track history and strong corporate governance, Charter Hall has been the leader in the market for wholesale opportunistic funds. This provides the Group with the best prospect of raising further wholesale capital for a new opportunistic fund to take advantage of compelling opportunities that will emerge over the next 12 to 18 months. In addition to its co-investment in its suite of opportunistic funds, Charter Hall also accesses development returns through its 50% ownership in CIP which undertakes predominately pre-committed commercial and industrial development projects, often in joint ventures with land owners. During FY08, CIP undertook projects comprising a total area of 175,000m². The Group’s strong in-house development teams will continue to create value and generate development margins, greatly assisting with countering the impact of potential expansion in capitalisation rates in Charter Hall’s core plus suite of funds. Property Management The property management division provides a range of property management services across the commercial, retail and industrial sectors, for properties owned by Charter Hall managed funds as well as selected external clients nationally. Services include market analysis, risk management, occupancy maximisation, environmental and engineering management, fi nancial and information management. 19 Annual Report 2008 Our Business Geographical Diversity of Assets Charter Hall offi ces Charter Hall properties 24% Western Australia 12 properties 20 Charter Hall Group 2% South Australia 4 properties 18% Victoria 18 properties 22% Queensland 15 properties 31% New South Wales 14 properties 1% Australian Capital Territory 1 property Top tenants include: (cid:88) (cid:88) (cid:88) (cid:88) (cid:88) (cid:88) (cid:88) (cid:88) (cid:88) Wesfarmers Telstra Harvey Norman St George Bank Coles American Express Australian Government Woolworths Mercer Human Resourcing Consultants 3% New Zealand 4 properties 21 Annual Report 2008 Our Business Growth In Assets Under Management Through the continued implementation of its mandates in its various unlisted funds, Charter Hall Group has achieved an impressive 39% growth in funds under management from $2.8 billion in FY07 to $3.9 billion in FY08. 39% growth in funds under management $1.06bn 0.14 0.65 0.28 0.00.0.00.0.0.0 2828228282828282828282282 0.28 2005 $1.35bn 0.19 0.83 0.33 2006 $2.81bn 0.25 1.97 0.60 2007 22 Charter Hall Group $3.90bn 0.60 3.28 0.02 2008 Retail Wholesale CHPT 275 George Street, Brisbane Qld 23 Annual Report 2008 Delivering long term performance is key to success in funds management. 24 Charter Hall Group Our Funds With the establishment of two new funds, the Charter Hall Umbrella Fund (CHUF) and the Core Plus Retail Fund (CPRF), Charter Hall’s fund portfolio comprises eight unlisted funds across the risk and return spectrum. 25 Annual Report 2008 Our Funds Charter Hall Property Trust The Charter Hall Property Trust’s (CHPT) strategy is to invest in a diversifi ed portfolio of properties through Charter Hall’s various managed funds. Assets and investments are selected for the Trust that are forecast to provide stable and growing investment income and capital growth. The opportunity to add value through active asset management increases potential returns. Charter Hall also benefi ts from generating fees from the management of the property funds in which it invests, enhancing its return on equity signifi cantly above that available from the underlying property assets. CHPT has successfully implemented its strategy of down- weighting its allocation to direct holdings, replaced by investments across Charter Hall’s stable of unlisted property funds. The majority of CHPT’s property holdings are diversifi ed across the Manager’s Core Plus Offi ce Fund (CPOF), Core Plus Industrial Fund (CPIF) and Core Plus Retail Fund (CPRF) with smaller holdings in the Diversifi ed Property Fund (DPF) and the Charter Hall Umbrella Fund (CHUF). The Group’s investments in Charter Hall Opportunity Fund No.4 (CHOF4) and Charter Hall Opportunity Fund No.5 (CHOF5), are held through Charter Hall Limited. The establishment of CPRF in July 2008 resulted in the CHPT’s balance sheet debt position reducing to a gearing ratio of approximately 10%. Portfolio Highlights As a consequence of challenging market conditions globally, risk premiums have been rising across all asset classes including property. The required equity return from property assets in Australia, refl ected in the discount and capitalisation rate a valuer ascribes to an asset’s valuation, has increased over FY08. As at 30 June 2008, 90% of the CHPT’s portfolio was re-valued independently. The outcome of these re-valuations has seen the weighted average market capitalisation rate soften by 28bps and a softening discount rate/IRR of 34bps. Whilst this dampened CHPT’s capital growth over the six months since 31 December 2007, the value of the portfolio continued to rise. This increase, despite a softening capitalisation and discount rate environment, was the result of strong growth in market rents for the majority of property assets owned, in addition to the delivery of active development margin on assets under development within CHPT’s investments in the opportunity and core plus funds. The majority of the portfolio is invested across Charter Hall’s core plus funds CPOF, CPIF and CPRF. These funds, particularly the offi ce and industrial portfolios, have a strong weighting to Brisbane and Perth, both being markets which have experienced exceptionally strong growth in market rents over the last year. The portfolio also benefi ts from holding positions in several under-rented assets and portfolios, which provide a further buffer against softening capitalisation rates. As at 30 June 2008, it is estimated that CPOF was over 13% under-rented, with both CPIF and CPRF portfolios being approximately 3% under-rented and the DPF 11% under-rented. The combination of strong market rental growth, owning assets that are under-rented and the active delivery of development margin sourced from assets under development, has continued to benefi t both CHPT and Charter Hall’s wholesale and retail clients. The NTA of the portfolio consequently increased from $1.18 to $1.19 over the six months to 30 June 2008, in a period which saw signifi cant volatility and negative sentiment towards Australian property markets. The portfolio’s cash fl ows remain robust, with greater than 99% occupancy, diversifi ed exposure across over 63 assets in Australia, two assets in New Zealand and a WALE of 8.7 years. The portfolio’s tenancy profi le is highly exposed to major Australian and global companies, with the top 10 tenants including high quality covenants such as Wesfarmers, Telstra, Harvey Norman, Coles, American Express, the Commonwealth Government of Australia, Woolworths, Mercer and Monash University. 26 Charter Hall Group 56 Anzac Street, Chullora NSW 27 Annual Report 2008 28 Charter Hall Group Foster’s Portfolio, Abbotsford Vic Our Funds Charter Hall Property Trust (continued) The portfolio’s cash fl ows remain robust, with greater than 99% occupancy Portfolio Metrics Asset Diversification (By value) Geographical Diversification (By value) CHUF 10% Direct Properties 3% WA 17% CPRF 31% DPF 5% CPIF 12% SA & ACT 3% CPOF 39% Vic 26% Weighted average lease expiry (By income) Sector Diversification (By income) 12.6 Retail 35% CPIF CHUF CPRF CPOF DPF Direct Properties WALE 2.4 9.5 9.0 8.0 7.6 8.7 NZ 3% Qld 25% NSW 26% Industrial 19% Office 46% 29 Annual Report 2008 30 Charter Hall Group BHP House, 225 St George Terrace, Perth WA Our Funds Core Plus Offi ce Fund Charter Hall’s Core Plus Offi ce Fund (CPOF) is the largest of the core plus series of wholesale funds. Launched in December 2005, the Fund achieved its target equity commitment of $500 million and was offi cially closed in July 2006. In line with the Group’s co-investment strategy, CHPT currently holds a 23% stake and intends to maintain a minimum of 20% commitment to the fund. Portfolio Highlights (cid:88) (cid:88) (cid:88) (cid:88) (cid:88) (cid:88) CPOF continues to deliver strong returns for its wholesale investors, delivering a gross equity IRR of 19.2% p.a. Revaluation of the Fund’s assets at 30 June 2008 resulted in a net uplift for the year of $48.8 million. This resulted in a 12.57 cent increase to the unit price from 30 June 2007 to 30 June 2008, which closed at $1.2223. Charter Hall committed 90% of the $735 million CPOF equity commitment, investing in 18 high quality assets diversifi ed throughout the Sydney, Brisbane, Melbourne, Adelaide and Perth offi ce markets. Management provided an opportunity for unitholders to increase their respective commitments to the Fund in April 2008. As a result the committed equity in CPOF rose from $625 million to $735 million providing $1.47 billion in gross asset value capacity. (cid:88) In a joint venture with the CHOF4, CPOF has successfully completed the redevelopment of Northbank Plaza in Brisbane’s CBD. Comprising 26,000m2 of net lettable area over 26 levels, the property was fully leased at completion in June 2008 with key tenants Telstra and Parsons Brinkerhoff. In line with the Fund’s strategy to deliver enhanced returns through development of surplus land, the CPOF investment committee approved the development of a new A-grade offi ce facility to be constructed on the underutilised car park site contained within the Fund’s 144 Stirling Street property in Perth. The development, known as ONE30 Stirling Street, will provide 12,000m2 of high quality offi ce space over four levels with secure undercover parking for 250 cars. Designed to achieve 4 Star Green Star Rating and 4.5 Star NABERS Energy rating the commercial offi ce building is due to be completed in mid 2009. Leasing pre-commitments totalling approximately 78% of the building have been achieved, with leases to the Police & Nurses Credit Society and the Australian Commonwealth Government. With a strong base established in New South Wales, Queensland and Western Australia, CPOF moved its focus to the Victorian market in 2008 completing the acquisition of four new assets with a combined value of $366 million. The Victorian portfolio now represents 23% of the fund consisting of three CBD assets located at 11 Exhibition Street, 150 Queen Street and 570 Bourke Street and the Monash University anchored 399 Royal Parade in Parkville. Investment Strategy CPOF targets the offi ce property sector in the major capital city and fringe markets by incorporating a mix of core and enhanced investment grade assets, and holding those assets in the medium to long term. On a fully invested basis, the Fund is expected to hold approximately 70% in stabilised core assets and 30% in enhanced, value-add property assets. In doing so CPOF aims to achieve total returns in excess of 12% p.a., with the Charter Hall Group being entitled to earn performance fees above an 11% return hurdle. Fund management fees are calculated on the gross assets of CPOF. 31 Annual Report 2008 Committed equity in CPOF rose from $625 million to $735 million which together with asset value creation, provides $1.6 billion in gross asset value capacity Our Funds Core Plus Offi ce Fund (continued) Portfolio Metrics Weighted Average Annual Lease Expiry (By net income) Monash University, Melbourne Vic St George Bank, 4-16 Montgomery St, Kogarah NSW St George Bank, 97 King William St, Adelaide SA Atrium, 60 Union St, Sydney NSW 275 George St, Brisbane Qld ONE30 Stirling St, Perth WA Northbank Plaza, 69 Ann St, Brisbane Qld 16.0 13.3 13.3 10.9 10.7* 10.7* 8.3 7.4 11 Exhibition St, Melbourne Vic 225 St Georges Tce, Perth WA 167 Macquarie St, Sydney NSW 570 Bourke St, Melbourne Vic 331 George St, Sydney NSW 109 St Georges Tce, Perth WA 51 Pirie St, Adelaide SA Hatch, 144 Stirling St, Perth WA 333 George St, Sydney NSW 34 Hunter St, Sydney NSW 150 Queen St, Melbourne Vic WALE * Assumes 10 year WALE on completion 4.5 4.3 4.1 4.1 3.8 3.6 3.3 2.8 1.7 1.0 8.1 Annual Lease Expiry (By net income) Tenant Type (By net income) 15% 10% 5% 4.7 0% 9.7 8.4 6.5 5.6 5.6 2.0 2.3 14.3 12.3 11.6 10.7 Government 12.8% Others 17.0% 4.0 0 0 FY 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23+ National/International 70.2% Asset Diversification (By current value) Geographical Diversification (By net income) 150 Queen St, Melb 2.1% Hatch, 144 Stirling St, Perth 2.9% 34 Hunter St, Syd 3.0% 109 St Georges Tce, Perth 3.9% Monash University, Melb 4.3% 570 Bourke St, Melb 5.0% 333 George St, Syd 5.4% 225 St Georges Tce, Perth 5.5% ONE30 Stirling St, Perth 5.7% WA 18.1% Bank SA, Adl 1.3% 151 Pirie St, Adl 0.9% Northbank Plaza, Bris 12.4% 11 Exhibition St, Melb 11.8% 275 George St, Bris 11.6% Vic 23.1% Atrium, Pyrmont 10.0% 167 Macquarie St, Syd 5.9% St George Bank, Kogarah 8.3% 32 Charter Hall Group SA 2.2% NSW 32.5% Qld 24.1% Northbank Plaza, Brisbane Qld 33 Annual Report 2008 Our Funds Core Plus Industrial Fund Charter Hall’s Core Plus Industrial Fund (CPIF) is the second of the core plus series of wholesale funds. Launched in December 2006, the Fund achieved its target equity commitment of $350 million and was offi cially closed in April 2007. In line with the Group’s co-investment strategy, CHPT currently holds a 25% stake and intends to maintain a minimum of 20% commitment to the fund. The Fund as at 30 June 2008, has called 61.4% of committed equity for the acquisition of eight high quality core investment assets and three enhanced asset opportunities in the Sydney, Melbourne, Brisbane and Perth industrial markets. This represents a 20/80 split between enhanced and core assets. The Fund is well placed with a 34.7% gearing level and $135 million of undrawn equity, which combined caters for future acquisition capacity totaling in excess of $300 million. These conservative debt and equity fundamentals position CPIF as one of the few funds in the industrial market with acquisition capacity to take advantage of accretive opportunities. Portfolio Highlights (cid:88) (cid:88) (cid:88) CPIF continues to deliver strong returns for its wholesale investors, delivering a gross equity IRR of 16.1% p.a. since inception. Revaluation of the Fund’s assets at 30 June 2008 delivered a net uplift resulting in a 7.14% cent increase to the unit price from 30 June 2007 to 30 June 2008, which closed at $1.095. For the 12 months to 30 June 2008, CPIF refl ected an annualised weighted distribution yield of 6.97% p.a. being approximately in line with the forecast of 7% p.a. post fees. CPIF is one of the few funds in the industrial market with acquisition capacity to take advantage of accretive opportunities 34 Charter Hall Group (cid:88) (cid:88) (cid:88) (cid:88) Coles Distribution Centre at Perth Airport successfully reached Practical Completion on 30 May 2008. The 87,241m2 industrial site is leased to Coles Group for 20 years and is one of the largest distribution centres in the country. After a lengthy review, management is beginning to see value emerge in New South Wales after focusing on the growth states of Queensland and Western Australia. The Fund has since settled its fi rst New South Wales acquisition, with Chatswood Business Park in Sydney for $29 million, at a material discount to an independent valuation of $31 million. The acquisition provides a forecast 10 year equity IRR in excess of 12% p.a. CPIF either exchanged contracts or entered into Development Agreements to acquire fi ve new assets during the year. Following these transactions, the CPIF portfolio will retain a WALE in excess of 12 years, with diversifi ed exposure to a variety of modern industrial properties with gross assets on completion in excess of $400 million. The portfolio is 100% leased as at 30 June 2008, with management continuing to focus on tenant retention and relationships. Approximately 7,888m2 of industrial space has been leased or renewed, together with well negotiated market reviews, increasing market income for the subject tenancies above forecast. Investment Strategy Charter Hall’s Core Plus Industrial Fund’s (CPIF) strategy is to focus predominantly on industrial and logistics sectors in major capital city markets of Australia and to source a mix of core and enhanced investment grade property assets. On a fully invested basis, the Fund is targeting a WALE of between 7-10 years and a target 10 year equity IRR of 11% net of fund management fees. CPIF’s Management Team will work diligently to enhance the Fund’s portfolio through the introduction of newly developed product and accretive acquisitions. Furthermore, the Fund is focused on effi cient structures to minimise transaction costs and hence NTA dilution, while maximising tax deferred distributions to investors. Charter Hall continues to assess opportunities that present compelling fi nancial metrics and is witnessing consistent deal fl ow across the board, as some owners manage a more challenging fi nancial environment and look to reposition their portfolios. Coles Distribution Centre, Perth Airport WA 123-135 Kewdale Road, Kewdale WA 35 Annual Report 2008 140-160 Robinson Road, Geebung Qld 36 Charter Hall Group Coles Distribution Centre, Perth Airport WA Our Funds Core Plus Industrial Fund (continued) Portfolio Metrics Weighted Average Lease Expiry (By net income) Coles Distribution Centre, Perth Airport WA 309 Fitzgerald Rd, Derrimut Melbourne Vic 7 Viola Pl, Brisbane Airport Qld 160 Robinson Road, Geebung Brisbane Qld 772-776 Boundary Rd, Richlands Brisbane Qld 200 Holt St, Pinkenba Brisbane Qld 123-135 Kewdale Rd, Kewdale Perth WA 140-150 Robinson Rd, Geebung Brisbane Qld Melbourne Airport Business Park, Tullamarine Vic 8.7 8.5 7.5 6.9 5.2 5.2 4.9 372 Eastern Valley Way, Chatswood NSW 3.9 17 Sugarmill Rd, Meeandah Qld 1.8 WALE 11.9 Annual Lease Expiry (By net income) Area Expiry Income Expiry 19.8 19.3 48.0 46.0 40% 30% 20% 10% 0% FY 8.1 6.5 3.6 5.0 8.3 5.7 3.4 3.8 2.2 2.5 3.3 3.3 4.5 5.2 8.3 8.5 9.2 6.3 2.9 3.6 09 10 11 12 13 0 0 14 15 16 17 18 19 23+ Geographical Diversification (By acquisition price on a fully invested basis) Asset Diversification (By acquisition price on a fully invested basis) NSW 4% Vic 7.6% Qld 14.3% WA 23.5% 372 Eastern Valley Way, Chatswood 4.0% 309 Fitzgerald Rd, Derrimut Melbourne 4.2% 123-135 Kewdale Rd, Kewdale Perth 4.5% Coles Distribution Centre, Perth Airport 19.0% Future 50.5% Future 50.5% Melbourne Airport Business Park, Tullamarine 3.5% 200 Holt Rd, Pinkenba Brisbane 3.3% 17 Sugarmill Rd, Meeandah Brisbane 3.0% 772-776 Boundary Rd, Richlands Brisbane 2.9% 140-150 Robinson Rd, Geebung Brisbane 2.6% 7 Viola Pl, Brisbane Airport 1.4% 160 Robinson Rd, Geebung Brisbane 1.1% 37 Annual Report 2008 38 Charter Hall Group Home HQ Nunawading, Nunawading Vic Our Funds Core Plus Retail Fund In July of this year, Charter Hall announced the establishment of the Core Plus Retail Fund (CPRF), the third in a series of sector specifi c core plus investment vehicles managed by the Group. CPRF’s fi rst close occurred in August 2008 with $95 million of external equity raised. A $250 million non-recourse debt facility at the Fund level was also secured at the same time. The Fund comprises 17 geographically diverse assets throughout Australia and New Zealand including two forward funded acquisitions and the development of a well anchored bulky goods centre known as Home HQ Ipswich. Portfolio Highlights (cid:88) (cid:88) (cid:88) (cid:88) (cid:88) CPRF has an above average industry WALE of nine years. 48.5% of income is derived from the blue chip tenants such as; Bunnings, Harvey Norman, Woolworths and Coles. Home HQ Rothwell located in Queensland was completed in April 2008 with Harvey Norman and Petwise opening at that time. At Menai Central, Dan Murphy’s leased additional space and entered into a further 10 year term. New leases were also signed with Dick Smith Electronics and Goodlife Gym. At Home HQ Nunawading, Fitness First leased approximately 1,700m2 taking the total occupancy to 93.2%. Dick Smith Electronics also leased premises during the fi nancial year for a term of six years. (cid:88) (cid:88) (cid:88) (cid:88) Harvey Norman’s OFIS was secured for Mentone Showrooms. Foodtown Auckland was awarded the ‘2007 Top Shop Retail Excellence Award’ by the New Zealand Retailers Association. A large number of specialty tenants were secured for Bluewater Square, Redcliffe in Queensland including Terry White Pharmacy, BWS, Brumbies, Australia Post, Suncorp, Donut King and the Department of Housing. National retailers are taking advantage of the Ipswich’s growth corridor with Fantastic Furniture, Spotlight, Elite Fitness, Pet Café and Sleepy’s all signing Agreement for Lease at Home HQ Ipswich. This development, being undertaken by Charter Hall on behalf of CPRF, is scheduled to open in December 2008. (cid:88) The CPRF portfolio comprises 36.5% speciality tenants and 63.5% anchor tenants. Investment Strategy On a fully invested basis, the Fund is targeting a WALE of between 7-10 years and a 10 year equity IRR of 11% net of fees. As with the Group’s other core plus funds, we expect to achieve this target by expanding on the existing portfolio to achieve a 70%/30% blend of ‘core/stabilised’ assets and ‘enhanced’ assets. CPRF is well placed to become one of Australasia’s largest retail funds that focuses on the bulky goods sector 39 Annual Report 2008 Our Funds Core Plus Retail Fund (continued) Portfolio Metrics Weighted Average Lease Expiry (By net income) Bluewater Square, Redcliffe Qld Bunnings Australia Portfolio Foodtown Centre, Auckland NZ Mentone Centre, Mentone Vic Home HQ Ipswich, Ipswich Qld Home HQ Rothwell, Rothwell Qld Bunnings, Bendigo Vic Bunnings, Kalgoorlie WA Home HQ Nunawading, Nunawading Vic 7.7 Mentone Showrooms, Mentone Vic Harvey Norman, Dunedin NZ Menai Central, Menai NSW WALE 5.4 5.3 4.6 11.4 11.3 11.3 9.9 9.4 8.9 8.8 8.8 9.3 Annual Lease Expiry (By net income) Geographical Diversification (By value) 31.1 ACT 5% NZ 8% NSW 16% 5.6 3.8 0 0 Qld 31% 14.9 14.9 8.9 7.3 6.0 6.6 0.7 0.8 0.4 2.0 1.0 0 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 30% 25% 20% 15% 10% 5% 0% FY Asset Diversification (By completion value) Tenant diversification (By net income) Foodtown Centre, Auckland 4% Mentone Showrooms 5% Harvey Norman, Dunedin 3% Home HQ Rothwell 3% Bunnings Portfolio 29% (8 assets) Home HQ Nunawading 14% Speciality 36.5% Home HQ Ipswich 7% Menai Central 8% Mentone Centre 14% Bluewater Square, Redcliffe 13% 40 Charter Hall Group WA 1% Vic 39% Anchor 63.5% Foodtown Centre, Auckland NZ 41 Annual Report 2008 Our Funds Diversifi ed Property Fund The Diversifi ed Property Fund (DPF) is an unlisted, open-ended fund. The Fund’s mandate is to acquire and actively manage quality investment properties across the offi ce, retail and industrial sectors generally in the range of $5 million to $30 million across Australia. The fund remains open to equity fl ows from new and existing investors. Since its launch in September 2005, DPF has acquired 23 properties (or 14 including the 10 assets within the Fosters portfolio) across four states with an aggregate acquisition value of approximately $219 million. Since inception, the upward re-valuations within the portfolio, have increased the gross asset value of DPF to approximately $249 million. From a valuation perspective, DPF performed exceptionally well throughout the year despite negative market sentiment and softening of applied market capitalisation rates by valuers. This followed as a consequence of the credit crisis, higher local interest rates and the availability of credit. Twelve of the 14 properties underwent revaluations throughout the year with these properties either maintaining or increasing in value. DPF has acquired several signifi cantly under rented assets in growth markets which has provided a natural “buffer” and has assisted in offsetting the effects of softening capitalisation rates. As a result of the various re-valuations throughout the year, the unit price for DPF increased from $1.04 at 30 June 2007 to $1.217 as 30 June 2008. Portfolio Highlights (cid:88) (cid:88) (cid:88) DPF acquired 53 Berry Street, North Sydney in September 2007 for $23.9 million. In December 2007, DPF increased its stake in 400 Kent Street, Sydney by acquiring a 50% interest for $30.5 million. DPF now owns a 75% interest in this quality asset that has a long term lease to major tenant Central Queensland University. DPF acquired the Fosters Portfolio located in the inner city Melbourne suburb of Abbotsford in December 2007, in a joint venture with the Perth based Wyllie Group for $41 million. DPF owns a 50% interest in this portfolio of 10 commercial properties. (cid:88) (cid:88) (cid:88) The third asset acquired in December 2007 was 46-50 Kings Park Road, situated in West Perth for $25 million. The property is leased to quality tenants including Moly Mines Limited, Equinox Resources, Icon Engineering, Oilex Limited and lawyers Pullinger Redhead Lucas. 94% of DPF’s tenants are either Government, national or international companies and the portfolio is 100% leased. The Fund has one of the highest WALE profi les in the industry above seven years. DPF also maintained its Upper Recommended product rating by the independent managed fund research group Lonsec and has achieved a 3.75 star rating from Adviser Edge. Investment Strategy The DPF Management Team continues to focus on adding value to the portfolio via actively managing rental reviews and mitigating lease expiry risks. The team constantly reviews the DPF portfolio and actively invites tenants to renew their leases years prior to expiry. By being pro-active, the DPF Management Team endeavours to secure under renting reversions earlier and provide an extended WALE. DPF has achieved a very strong net IRR of approximately 19% p.a. since inception and remains on track to deliver on its long term objective to outperform a 10 year equity IRR target of 10%. The Morning Star property survey ranked DPF as the highest ranking diversifi ed unlisted property fund in FY08 42 Charter Hall Group 181 St Georges Terrace, Perth WA 43 Annual Report 2008 46-50 Kings Park Road, West Perth WA 44 Charter Hall Group 53 Berry Street, North Sydney NSW Our Funds Diversifi ed Property Fund (continued) Portfolio Metrics Weighted Average Annual Lease Expiry (By net income) Coles Distribution Centre, Perth Airport WA Fosters’ Portfolio, Abbotsford Vic 400 Kent St, Sydney NSW 615-619 Maroondah Hwy, Mitcham Vic Melbourne Airport Business Park, Tullamarine Vic 22-28 Compark Circuit, Mulgrave Vic 385 St Pauls Tce, Fortitude Valley Qld 181 St Georges Tce, Perth WA 98-100 Glover St, Cremone NSW 4.2 3.3 2.8 2.7 19.8 9.0 8.2 6.0 4.4 46-50 Kings Park Rd, West Perth WA 2.5 420 Princes Hwy, Corio Vic 53 Berry St, North Sydney NSW 2.2 2.0 WALE 7.6 Annual Lease Expiry (By net income) Tenant Type (By net income) 24.4 15.3 7.6 7.5 6.3 9.7 4.4 3.1 2.7 25% 20% 15% 10% 5% 0% 19.0 Government 17.1% Others 5.6% National/International 77.3% FY 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Asset Diversification (By current value) Geographical Diversification (By current value) 22-28 Compark Circuit, Mulgrave 2.6% 385 St Pauls Terrace, Brisbane 3.6% 615-619 Maroondah Hwy, Mitcham 2.1% 98-100 Glover Street, Cremone 4.2% Melb Airport Business Park,Tullamarine 4.3% 420 Princes Hwy, Corio 4.9% Foster’s Portfolio, Abbotsford 8.2% 53 Berry Street, North Sydney 9.6% Coles Distribution Centre, Perth Airport 18.6% Vic 22.1% 400 Kent Street, Sydney 18.4% 46-50 Kings Park Road, West Perth 12.0% NSW 32.1% 181 St Georges Terrace, Perth 11.6% Qld 3.6% WA 42.2% 45 Annual Report 2008 46 Charter Hall Group Atrium, 60 Union Street, Pyrmont NSW Our Funds Charter Hall Umbrella Fund The Charter Hall Umbrella Fund (CHUF) provides retail investors (with a minimum of $5,000) with a unique opportunity to invest across a suite of Charter Hall property funds, the assets of which include commercial properties in the offi ce, industrial and retail markets. CHUF provides retail investors with an unprecedented opportunity to invest across Charter Hall’s range of property funds, which own a variety of quality offi ce buildings, warehouses, logistics distribution centres, bulky goods showrooms and neighbourhood shopping centres. The Fund retains several competitive advantages in its product category, including asset diversifi cation, long lease duration and high quality tenant covenants. As at July 2008, CHUF was awarded a ‘Highly Recommended’ rating by the independent managed fund research group, Lonsec. The Fund has also performed well since inception, relative to its peer group, providing foundation investors with a positive return of 2.6% over the Fund’s initial six months. Many competing funds have recorded negative returns of between -5% and -25% over the same period. Portfolio Metrics The Fund’s portfolio includes investments in the Charter Hall Core Plus Offi ce, Industrial and Retail Funds; Opportunity Fund No.5 and DPF. CHUF also has an investment in Australand Wholesale Property Fund No.6 and a portfolio of listed property trusts (LPTs), through a mandate which will be actively managed by UBS Global Asset Management. Quarterly distributions targeted to be highly tax deferred. A diversifi ed exposure to over 70 property assets, with a long WALE duration of approximately nine years. Investment Allocation (By value) Sector Allocation (Unlisted portfolio)1 CPOF 29% CPIF 28% Industrial 28% Cash Portfolio 15.5% LPT Portfolio 8.9% CHOF5 0.2% DPF 13.5% Australand Wholesale Fund No.6 4.9% Retail 31.2% 1 Includes CPRF investments implemented July 2008. Office 40.8% Geographical Diversification (By asset value) Lease Expiry Profile (By income) NZ 2.4% WA 22.6% NSW 21.7% Qld 25% SA 0.8% 20% 20.5 Vic 26% 15% 10% 5% 0% FY 6.1 4.7 4.7 4.6 4.7 4.5 3.2 3.0 13.2 8.3 7.2 8.1 4.3 0 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23+ 47 Annual Report 2008 48 Charter Hall Group 400 Kent Street, Sydney NSW Our Funds Charter Hall Investment Fund No. 2, 4-6 The Charter Hall Investment Funds No. 2, 4-6 are unlisted closed-end funds anchored by investment properties that provide stable investment income and the potential for capital growth. To date, the life of each investment fund that has come up for review has been extended, while their performance has exceeded the forecasts contained in the offer documents of each fund. A high proportion of investors have invested in more than one Charter Hall offering, demonstrating the repeat business and customer focus of Charter Hall. Charter Hall Investment Fund No. 2 Charter Hall Investment Fund No. 5 The Charter Hall Investment Fund No. 2 (CHIF2) comprises 220 Collins Street located in Melbourne, which has three retail shops located on the ground fl oor of the historic Manchester Unity Building. This high profi le building is located on the corner of Collins Street and Swanston Street, in the heart of the Melbourne CBD. The portion of Collins Street where the property sits is considered the most prestigious and is the location of high end retail boutiques as well as premium grade offi ce buildings. The property is leased to Travel Money (a wholly owned subsidiary of Flight Centre), Hutchinson 3G and Swatch Group Australia. The Charter Hall Investment Fund No. 5 (CHIF5) comprises a 50% interest in an offi ce building of 4,466m2 located at Wharf 10, Pyrmont Bay, Sydney leased to Hapag Lloyd, Initiative Media Australia and AEI Music Australia. An additional commercial property consists of a suburban Melbourne offi ce building of approximately 1,950m2 which is leased to Sportscover Australia Pty Limited and located at 271 Wellington Road, Mulgrave. A third asset comprises an industrial facility of approximately 10,225m2 located at 137 McCredie Road, Guildford leased to Tyco International. Portfolio Highlights: Portfolio Highlights: (cid:88) (cid:88) New fi ve year lease extension to Travel Money to June 2013. New fi ve year lease extension to Swatch Group to June 2013. Charter Hall Investment Fund No. 4 The Charter Hall Investment Fund No. 4 (CHIF4) comprises 121 Harrington Street located in The Rocks, Sydney, a seven level heritage building incorporating a ground fl oor restaurant and car park together with six upper levels of refurbished offi ce accommodation. The property is leased to Dimension Data Australia Pty Limited, Brew Restaurant and Secure Parking (NSW) Pty Limited. (cid:88) (cid:88) New four year lease extension to Initiative Media to September 2012 of over 770m2 (approximately 17% of the building NLA). Valuation increase of approximately 40% from June 2005 to February 2008. Charter Hall Investment Fund No. 6 The Charter Hall Investment Fund No. 6 (CHIF6) comprises a 25% interest in an offi ce building located at 400 Kent Street in Sydney. The 10,461m2 offi ce building is leased to Central Queensland University, Meinhardt Engineering and Page Kirkland. Portfolio Highlights: (cid:88) (cid:88) New fi ve year lease extension to Secure Parking to February 2013. Valuation increase of approximately 33% from May 2006 to December 2007. Portfolio Highlights: (cid:88) 400 Kent Street valuation increased approximately 15% from September 2006 to June 2008. 49 Annual Report 2008 50 Charter Hall Group Alluvion, 54-58 Mounts Bay Road, Perth WA Our Funds Charter Hall Opportunity Fund No. 4 The Charter Hall Opportunity Fund No. 4 (CHOF4) equity is now fully allocated to eight projects across fi ve states. CHOF4 is currently on track to deliver a gross IRR on equity of 40%, which is the highest return to date in the series of opportunity funds. Over an 11 year period the gross realised IRR on equity of the Charter Hall opportunity funds has been 30%. This is an outstanding result for investors in the opportunity funds which have produced in excess of $1.2 billion worth of property assets around Australia. Portfolio Highlights (cid:88) (cid:88) In a 50/50 joint venture between CHOF4 and CPOF, Northbank Plaza in Brisbane’s CBD underwent an extensive transformation to become a modern A-grade commercial offi ce building. Northbank Plaza was 100% leased prior to completion in May 2008 and delivered an equity IRR of 97.6%. Located in the heart of Perth’s CBD, Alluvion comprises commercial offi ce development is a 50/50 joint venture with Cape Bouvard Investments. The building is under construction with Practical Completion scheduled in April 2010. Agreements for Lease have been executed over 70% of the commercial offi ce area with the balance of the building currently under offer. (cid:88) 275 George Street is a 41,600m² A-grade offi ce development located in Brisbane’s CBD. The development was recently awarded a 5 Star Green Star – Offi ce Design v2 rating by Portfolio Metrics Asset Diversification (By asset value) Mentone Residential, Mentone 13% Trade HQ Gepps Cross, Adelaide 2% Gepps Cross Centre, Adelaide 9% Home HQ North Shore, Artarmon 23% 275 George St, Brisbane 34% Alluvion, 54-58 Mounts Bay Rd, Perth 20% the Green Building Council of Australia (GBCA). Practical Completion is scheduled for June 2009 and the project is 80% pre-leased to Telstra. (cid:88) (cid:88) (cid:88) (cid:88) Home HQ North Shore located in Artarmon NSW, is CHOF4’s fi fth investment. The development involves the adaptive reuse of a heritage warehouse as a bulky goods retail complex of approximately 22,500m² plus parking for 503 cars. Construction commenced in June 2008 and completion is scheduled for September 2009. To date, Heads of Agreement have been signed with two major tenants with further commitments expected over the next few months. Gepps Cross Centre located in South Australia, is a bulky goods project comprising a 32,460m² bulky goods complex with parking for 901 cars. Construction has commenced with completion scheduled for June 2009. Agreements for Lease have been executed on 14% of the project with Heads of Agreement on a further 42% of the centre. Trade HQ in South Australia is a light industrial/showroom project of 28,200m². The development is a joint venture with Axiom and Harvey Norman. Plans are being progressed to allow for lodgement of a Development Application. Mentone Residential Centre is located in Mentone Victoria. The Base Case Development Scheme for this project comprises 129 townhouses. The project and consultant team are being appointed to progress the scheme for lodgement of a Development Application. Investment Strategy The investment strategy for CHOF4 remains consistent and unchanged from Fund inception and the Information Memorandum issued in June 2005. The Fund’s mandate is to identify, acquire and deliver property development and value add opportunities across various sectors within the Manager’s existing skill base, including commercial, industrial, retail, bulky goods retail and infi ll residential sectors located primarily in the major cities on the eastern seaboard of Australia. CHOF4 aims to deliver an IRR on equity above 20%. Sector Diversification (By asset value) Geographic Diversification (By asset value) Residential 12.9% Bulky Goods 33.8% Office 53.2% WA 20% SA 10% Vic 13% Qld 34% NSW 23% 51 Annual Report 2008 Our Funds Charter Hall Opportunity Fund No. 5 The Charter Hall Opportunity Fund No. 5 (CHOF5) was established in June 2007 raising $300 million of equity commitments. To date 65% of the equity has been allocated to fi ve projects across four states (including New Zealand). This fund currently has a forecast gross equity IRR of 33%. Portfolio Highlights (cid:88) Home HQ Hastings is a bulky goods development located in Hasting, New Zealand and comprises 21,500m² NLA with associated car parking for 773 cars. Planning approvals have been secured for the development and construction is scheduled to commence early 2009 following execution of Agreements for Lease with the anchor tenants. (cid:88) The Whakatu site is located next to the Home HQ Hastings site and providing further scope to expand the development. The site is currently leased by Whakatu Cold Storage for a further two years. Portfolio Metrics Asset Diversification (By asset value) Whakatu, Hastings 2% Home HQ Hastings, Hastings 5% 40 Creek St, Brisbane 13% 202 Pier St, Perth 33% 1406 Anzac Pde, Little Bay 47% (cid:88) (cid:88) (cid:88) 202 Pier Street is situated on the northern edge of the Perth CBD and has a site area of 10,129m². The site can accommodate a commercial offi ce building of approximately 24,000m². A Development Application is being prepared and discussions have been held with several major tenants who have expressed interest. The 11.42 hectare site at Little Bay was acquired in January 2008. The site is situated approximately 14 kilometres from the Sydney CBD and enjoys sweeping views of the Pacifi c Ocean, Botany Bay and prestigious golf courses. Development plans are being prepared incorporating a mix of products across the site. 40 Creek Street was acquired in June 2008 and is an existing 12,437m² commercial offi ce building located in the heart of Brisbane’s fi nancial precinct, known as the “Golden Triangle”. The building will be refurbished, repositioned and released to a range of quality tenants. Investment Strategy The investment strategy for CHOF5 remains consistent and unchanged from Fund inception. The Fund’s mandate is to identify, acquire and deliver property development and trading opportunities across various sectors including offi ce, industrial, bulky goods retail and residential sectors located primarily in capital city and metropolitan markets of Australia as well as New Zealand for up to 20% of the Fund, focusing on growth markets due to a positive demand and supply dynamic. CHOF5 aims to deliver an IRR on equity above 20%. Sector Diversification (By asset value) Geographic Diversification (By asset value) Bulky Goods 7% WA 33% Office 46% Residential 47% Qld 13% NSW 47% NZ 7% 52 Charter Hall Group 1406 Anzac Parade, Little Bay NSW 53 Annual Report 2008 Our Funds Property Development Portfolio No. 3 During the last fi nancial year, the fi nal two projects in Property Development Portfolio No.3 (PDP3) reached completion: Zone at Sydney Olympic Park and the Sydney Wharf project in Pyrmont. These successful projects have now returned all equity and profi ts to investors and the Fund will be closed. PDP3 achieved a gross equity IRR of 25.3%, outperforming its 20% IRR target. 54 Charter Hall Group Sydney Wharf, Pyrmont NSW 55 Annual Report 2008 A motivated and agile team is vital in navigating a challenging environment. 56 Charter Hall Group Our Leadership The Charter Hall Board of Directors is committed to fostering a dynamic, agile and successful business, with a dedicated and motivated team, focused on driving continued performance in 2009 and beyond. 57 Annual Report 2008 Our Leadership Board of Directors Kerry Roxburgh Roy Woodhouse Cedric Fuchs Glenn Fraser 58 Charter Hall Group David Harrison David Southon Patrice Derrington Colin McGowan 59 Annual Report 2008 Our Leadership Board of Directors Kerry Roxburgh Chairman – Independent Non-Executive Cedric Fuchs Executive Director Kerry is an SDIA Practitioner Member and holds positions on the boards of several listed and unlisted companies. He is the Chairman of Babcock & Brown Capital and of Asian Express Airlines. He is also a director of Ramsay Health Care, Everest Babcock & Brown, Money Switch Ltd., the LawCover Group, the Medical Indemnity Protection Society Group and Professional Insurance Australia. Until it was acquired by the ANZ in June this year, he was Chairman of E*TRADE Australia where he had previously served as CEO until July 2000. In the past 10 years, Kerry’s prior public company directorships were at J.Boag & Son and Climax Mining. Before joining E*TRADE he spent 10 years as an Executive Director of the Hong Kong Bank of Australia Group, including roles as Executive Chairman at James Capel Australia and fi ve years as Managing Director of the bank’s corporate fi nance subsidiary. Roy Woodhouse Deputy Chairman – Independent Non-Executive Director Roy has been the Deputy Chairman of Charter Hall since July 2004 and is a member of Transfi eld Holdings Advisory Board. Roy worked for the Baillieu family for 30 years in various senior executive capacities including Director of L.J. Hooker, Managing Director of Knight Frank Australia and Chairman of Knight Frank Australia. Roy co-founded KFPW, a joint venture with PricewaterhouseCoopers specialising in outsourcing. Roy is Chairman of Stephenson Mansell, an executive development and leadership company and Chairman of National Recycling Company, a waste recycling company. Roy was a Fellow of the Australian Institute of Valuers and a Fellow of the Institute of Company Directors. Cedric is a co-founder of Charter Hall with over 40 years of experience in the fi elds of property investment and fi nancial services. He is a member of the Investment Committee for all of Charter Hall’s wholesale and retail property funds. Prior to co-founding Charter Hall in 1991, he worked with the Heine Group’s property arm (now part of ING) and Leighton Properties where he was involved in the development and investment activities of those companies. Cedric holds a degree in Business Management. Glenn Fraser Independent Non-Executive Director A member of Transfi eld Holdings Advisory Board, Glenn was instrumental in Transfi eld Holdings’ acquisition of its interest in Charter Hall and has substantial experience in the project fi nance industry. He specialises in infrastructure and property projects and joined Transfi eld Holdings in 1996. Glenn has previously held positions of Chief Financial Offi cer and was General Manager – Finance Project Development, where he was responsible for the fi nancial elements of Transfi eld Holdings’ infrastructure and property projects. Preceding his time with Transfi eld Holdings, Glenn was a principal of a project fi nance advisory business, Perry Development Finance Pty Limited, which was sold to Hambros Corporate Finance Limited in 1995. Glenn holds a Bachelor of Commerce, is a member of the Institute of Chartered Accountants and the Australian Institute of Company Directors. 60 Charter Hall Group David Harrison Joint Managing Director Patrice Derrington Independent Non-Executive Director David heads the Funds Management and Property Management Divisions of Charter Hall. His role entails responsibility for the strategic growth of the funds management business with particular focus on investment sourcing, capital raisings and structuring of transactions. David has more than 20 years of experience in the Australian commercial property markets and prior to joining Charter Hall in 2004, David was Managing Director of Savills in Australia, an international commercial real estate agency business. David has transacted approximately $6 billion of commercial, retail and industrial property assets across all capital cities of Australia over the past 10 years. David holds a Land Economics degree from the University of Western Sydney, a graduate Diploma in Applied Finance from SIA and is a Fellow of the Australian Property Institute. David Southon Joint Managing Director David is a co-founder of Charter Hall. As Joint Managing Director, David heads the Development Division and is on the Investment Committees of the Group’s series of opportunity funds. He has over 20 years of property industry experience and is responsible for overseeing project origination, project strategy, development management and resourcing of projects. He is also involved in the procurement and divestment of investment properties. Prior to co-founding Charter Hall in 1991, David was a Development Manager with the Heine Group’s property arm (now part of ING) and Leighton Properties. David holds a Bachelor of Business Degree (Land Economy) from the University of Western Sydney and is a Fellow Member of the Australian Property Institute (FAPI). Patrice is a senior property executive with recent roles including CEO of Penrith Lakes Development Corporation Limited and CEO of Campus Living; and she has also been nominated to the Board of ABC Learning. She was previously the executive responsible for the economics and funding of the revitalisation effort led by the Lower Manhattan Development Corporation following the September 11, 2001 terrorist attacks on New York City. Prior positions have included Managing Director at the New York fund management and advisory fi rm, Spears, Benzak, Salomon and Farrell, Vice President in the Real Estate Finance Group at Chemical Bank (now JP Morgan Chase) and in 1997 founded the Victory Real Estate Investment Fund, a portfolio of traded property securities. Patrice has a Bachelor of Architecture from University of Queensland; was a recipient of the prestigious Harkness Fellowship, studying at the University of California, Berkeley for her Ph.D. in architecture/ civil engineering; and she holds a MBA from Harvard University. Colin McGowan Independent Non-Executive Director Colin was formerly CEO of the listed AMP Diversifi ed Property Trust, Executive Vice President of Bankers Trust (Australia), founding Fund Manager of the BT Property Trust and founding Fund Manager of Advance Property Fund. He is a qualifi ed valuer, a Fellow of the Australian Property Institute and a Senior Fellow of the Financial Services Institute of Australasia (formally SIA). Colin was the honorary SIA National Principal Lecturer and Task Force Chairman for the Graduate Diploma’s Property Investment Analysis course – a position held for 10 years until 2003. Colin is a member of the Remuneration and Nomination Committee and is chairman and member of a number of Charter Hall Group Investment Committees. 61 Annual Report 2008 Our Leadership Corporate Governance The Group reviews its corporate governance framework on an ongoing basis. This review takes into account best practice recommendations of the Australian Securities Exchange (ASX) Corporate Governance Council. The appropriate practice recommendations have been adopted so as to refl ect the Group’s commitment to the highest standards of corporate governance practice. On 2 August 2007 the ASX released the revised Corporate Governance Principles and Recommendations (the “Revised Principles”). The effective date for the Revised Principles is for fi nancial years beginning on or after 1 January 2008. This means that the Group will be obliged to report on whether it has complied with the Revised Principles in its annual report for the year ending 30 June 2009. This Corporate Governance Statement has been prepared in a manner consistent with the reporting recommendations of the ASX. Additional corporate governance information may be found on the Group’s website charterhall.com.au or by contacting the Company Secretary. Principle 1: Lay Solid Foundations for Management and Oversight Recommendation 1.1: Formalise and disclose the functions reserved to the Board and those delegated to management The Board operates in accordance with a formal charter which establishes its duties and responsibilities and the scope of the authority delegated to senior management. In summary, the Board’s charter states that the Board has primary responsibility, among other duties, to provide strategic guidance to the Group; monitor the operational and fi nancial position of the Group; identify risk and ensure appropriate risk management systems are in place. The full Charter can be found on the Corporate Governance section of the Group’s website charterhall.com.au Principle 2: Structure the board to add value Board of Directors The Board is comprised of eight members appointed with a view to providing appropriate skills and experience likely to add value to the Group’s activities. Name & Position Independent (Y/N) First Appointed Kerry Roxburgh Chairman Roy Woodhouse Deputy Chairman Cedric Fuchs Executive Director Patrice Derrington Non-Executive Director Glenn Fraser Non-Executive Director Colin McGowan Non-Executive Director David Harrison Joint Managing Director David Southon Joint Managing Director Yes Yes No Yes Yes Yes No No 12 April 2005 6 April 2005 6 April 2005 6 April 2005 6 April 2005 6 April 2005 30 August 2006 30 August 2006 Independent Advice The terms of each Director’s letter of appointment permits him or her to seek independent professional advice, including, but not limited to, legal, accounting and fi nancial advice, at the Group’s expense or any matter connected with the discharge of his or her responsibilities. The cost, nature and details of such advice must fi rst be approved by the Chairman. Recommendation 2.1: A majority of the Board should be independent directors. As shown in the table above, the Board comprises a majority of independent directors. Five out of the eight members of the Board are considered to be independent directors in accordance with the criteria set by Board in relation to determining directors’ independence. These principles are guided principally by the criteria set by the ASX and are subject to specifi c materiality tests which are determined on both quantitative and qualitative bases. An amount exceeding 5% of annual turnover of the Group or 5% of a director’s net worth, is considered material for this purpose. Furthermore, any transaction and all relationships are deemed material if they impact a securityholder’s understanding of a director’s performance. Details of the Directors’ qualifi cations, experience, other responsibilities, number of meetings attended and holdings of Securities in the Group can be found in the Directors Report on page 10. Following Transfi eld’s sell down of its Charter Hall Group holding to 3% in October 2007 (below the 5% threshold defi nition of substantial shareholder), Mr Roy Woodhouse and Mr Glenn Fraser were re-classifi ed by Charter Hall Group’s Board as Independent Directors. Recommendation 2.2: The chairperson should be an independent director. 62 Charter Hall Group Recommendation 2.3: The roles of chairperson and chief executive offi cer should not be exercised by the same individual. Mr Kerry Roxburgh is the Chair of the Board. Mr Roxburgh is a non-executive, independent member of the Board (in accordance with the criteria described above). The role of CEO – or Managing Director – is carried out jointly by Mr David Harrison and Mr David Southon, two executive directors of the Group. Recommendation 2.4: The board should establish a nomination committee. The Board has established a Nomination Committee which consists of the Group Chairman Mr Roxburgh (Committee Chairman), Mr Woodhouse and Mr Colin McGowan, who are all independent, non executive directors. Details of the committee members experience and the number of meetings held and attended can be found in the Directors Report. A copy of the Nomination Committee Charter which sets out the competencies of the Committee is available on the Group’s website. Principle 3: Promote Ethical and Responsible Decision Making Recommendation 3.1: Establish a code of conduct to guide the directors, the chief executive offi cer (or equivalent), the chief fi nancial offi cer (or equivalent) and any other key executives as to: 3.1.1 the practices necessary to maintain confi dence in the company’s integrity 3.1.2 the responsibility and accountability of individuals for reporting and investigating reports of unethical practices The Group has established a formal Code of Conduct for its Directors as well as a separate Code of Conduct for all its employees, including key executives, which form the basis for ethical behaviour by Directors, key executives and employees in general, and are the framework that provides the foundation for maintaining and enhancing the Group’s reputation. The objective of the Codes is to ensure that directors can be confi dent that the Group conducts its affairs honestly in accordance with ethical values and practices. A full copy of the Directors’ Code of Conduct can be obtained from the Corporate Governance section of the Group’s website. Recommendation 3.2: Disclose the policy concerning trading in company securities by directors, offi cers and employees. The Group has in place a formal Security Trading Policy which regulates the manner in which Directors and employees can deal with Securities in the Group. It requires that they conduct their personal investment activities in a manner that is lawful and avoids confl icts between their own interests and those of the Group. The policy specifi es trading blackouts as the periods during which trading Securities cannot occur. Trading is always prohibited if the relevant person is in procession of non-public price sensitive information regarding the Group. The policy has been formally reviewed and up-dated by the Board in December 2007. A copy of the current Security Trading Policy is available on the Group’s website. Principle 4: Safeguard integrity in fi nancial reporting Recommendation 4.1: Require the chief executive offi cer (or equivalent) and the chief fi nancial offi cer (or equivalent) to state in writing to the board that the company’s fi nancial reports present a true and fair view, in all material respects, of the company’s fi nancial condition and operational results and are in accordance with relevant accounting standards. The Joint Managing Directors and Chief Financial Offi cer provide a certifi cation with the specifi cations contained in this Recommendation 4.1 to the Board prior to the Board’s review and approval of the accounts. Recommendation 4.2: The board should establish an audit committee. Recommendation 4.3: Structure the audit committee so that it consists of: – Only non-executive directors – A majority of independent directors – An independent chairperson, who is not chairperson of the board – At least three members. The Audit, Risk and Compliance Committee assists the Board in fulfi lling its corporate governance and oversight responsibilities relating to fi nancial accounting practices, risk management and internal control systems, external reporting, compliance and the external audit function. The Committee is comprised of Ms Patrice Derrington (Chair), Mr Roxburgh and Mr Fraser, who are all non executive Directors and, from October 2007, all independent members (previously Mr Fraser was considered non-independent). The members have comprehensive fi nancial and property industry expertise. The Committee met on six occasions during the year to 30 June 2008. Please refer to the Directors Report for more information on members, including attendance at committee meetings. Recommendation 4.4: The audit committee should have a formal charter The Audit, Risk and Compliance Committee reports to the Board has adopted a formal Charter which sets out the Committee’s role and responsibilities, composition, structure and membership requirements. Responsibilities include the assessment of the internal control and compliance systems, monitoring the integrity of the fi nancial statements, reviewing the fi nancial reporting processes and continuous disclosure, selection and appointment of external auditors, and the rotation of external audit engagement partners, as well as monitoring their performance. A copy of the Charter is available on the Corporate Governance section on the Group’s website. 63 Annual Report 2008 Our Leadership Corporate Governance (continued) Principle 5: Make timely and balanced disclosure Recommendation 5.1: Establish written policies and procedures designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior management level for that compliance. The Group has a Continuous Disclosure Policy consistent with the continuous disclosure obligations of the ASX and Corporations Act. The policy has been formally reviewed and up-dated by the Board in June 2008. The policy is designed to ensure that all investors have equal and timely access to information concerning the Group, and to ensure that price-sensitive information from any part of the Group is immediately notifi ed to the ASX in a complete, balanced and timely manner. A copy of the current Continuous Disclosure Policy is available on the Group’s website. Principle 6: Respect the rights of shareholders Recommendation 6.1: Design and disclose a communications strategy to promote effective communication with shareholders and encourage effective participation at general meetings. The Group is committed to communicating with its investors in an effective and timely manner so as to provide them with ready access to information relating to the Group. The Group’s communication’s strategy is outlined and disclosed in the Continuous Disclosure Policy, mentioned above. In addition to this, the Group maintains a website (charterhall.com.au) providing access to information likely to be of interest to securityholders, including an Corporate Governance Section, Investor Centre, and News Centre. The Group encourages securityholders to utilise its website, which is regularly updated, as their primary tool to access information and disclosures. Recommendation 6.2: Request the external auditor to attend the annual general meeting and be available to answer shareholders’ questions about the conduct of the audit and the preparation and content of the auditor’s report. The Group’s auditor, Mr Brian Hunter of PricewaterhouseCoopers, has attended all Annual General Meeting’s of the Group held to date and has been requested to attend the up-coming Meeting to answer any securityholders’ questions about the conduct of the audit and the preparation and content of the auditor’s report. Principle 7: Recognise and manage risk Recommendation 7.1: The board or appropriate board committee should establish policies on risk oversight and management. The Board, through the Audit, Risk and Compliance Committee, ensures that strategic, operational, legal, reputation and fi nancial risks are identifi ed, effectively assessed, and effi ciently managed and monitored so as to achieve the Group’s objectives. Specifi cally, as per the Audit, Risk and Compliance Committee’s charter, the Committee has responsibility, amongst other things, for internal control and compliance systems, assessment at regular intervals of compliance plans and risk management policies and plans. The Board Charter, also available on the Group’s website, includes the role of the Board in identifying and monitoring risks. However the Board has delegated identifying and managing operational risks and, where those risks could have a material impact on the Group, formulating strategies for managing these risks for consideration by the Board. The fi nancial accounts section of the Annual Report also contains a detailed description of the Group’s fi nancial risk management. The Audit, Risk and Compliance Committee’s charter is posted on the Corporate Governance Section of the Group’s website. Considerable importance is placed on maintaining a strong control environment through an organisation structure with clearly drawn lines of accountability and authority. Charter Hall has a Risk Management Statement in place which describes the main material risks facing the group, the system for identifying, assessing, monitoring and managing material risk, which is available upon request. At this point in time the Directors are of the opinion that the size of the Group does not warrant an internal audit function. This policy is subject to ongoing review. Recommendation 7.2: The chief executive offi cer (or equivalent) and the chief fi nancial offi cer (or equivalent) should state to the board in writing that: 7.2.1 the statement given in accordance with best practice recommendation 4.1 (the integrity of fi nancial statements) is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the board 7.2.2 the company’s risk management and internal compliance and control system is operating effi ciently and effectively in all material respects. The Joint Managing Directors and the Chief Financial Offi cer confi rm in writing to the Board that the fi nancial statements present a true and fair view and that the fi nancial statements are based on a sound system of fi nancial risk management and internal compliance and controls and that these are operating effi ciently and effectively in all material respects. Principle 8: Encourage enhanced performance Recommendation 8.1: Disclose the process for performance evaluation of the board, its committees and individual directors, and key executives. Board members are subject to an annual self-assessment of their performance. The performance of all levels of management is conducted annually in conjunction with remuneration reviews undertaken by the Remuneration and Nominations Committees and Joint Managing Directors. During this fi nancial year, the Directors carried out a self- assessment via completion of a questionnaire prepared by the Chair who further reviewed each response to assess any areas requiring attention. 64 Charter Hall Group Principle 10: Recognise the legitimate interests of stakeholders Recommendation 10.1: Establish and disclose a code of conduct to guide compliance with legal and other obligations to legitimate stakeholders. The Group recognises the need to observe the highest standards of corporate practice and business conduct. In order to ensure that these standards are met, the Group has established a formal Code of Conduct which forms the basis for ethical behaviour by all Group personnel and is the framework that provides the foundation for maintaining and enhancing the Group’s reputation. The objective of the Code is to ensure that employees, suppliers, clients, competitors and the community in general can be confi dent that the Group conducts its affairs honestly in accordance with ethical values and practices. All employees of the Group are provided with the code of conduct at induction and are required to comply with both the spirit as well as the letter of the relevant laws which govern the operations of the Group. Principle 9: Remunerate fairly and responsibly Recommendation 9.1: Provide disclosure in relation to the company’s remuneration policies to enable investors to understand (i) the costs and benefi ts of those policies and (ii) the link between remuneration paid to directors and key executives and corporate performance. The Board has established a Remuneration Committee to assist it in achieving fairness and transparency in relation to remuneration issues and overseeing the remuneration and human resource policies and practices of the Group. The Remuneration Committee endeavours to ensure that the Group’s remuneration policies and outcomes strike an appropriate balance between the interests of investors and rewarding and motivating the Group’s management. The Remuneration Committee obtain the advice of independent experts to ensure the Group’s remuneration policies are appropriate and follow best practice and address the requirements of the Group’s stakeholders. For further information in regards to the Group’s Remuneration policies and framework please refer to the Remuneration Report. A copy of the Remuneration Committee Charter is available on the Group’s website. Recommendation 9.2: The Board should establish a remuneration committee. The Remuneration Committee comprises three non-executive, independent directors being Mr Woodhouse (Chairman), Mr McGowan and Mr Roxburgh (please refer to the Directors Report for information in regards to the members and the number of meetings held and attended). Recommendation 9.3: Clearly distinguish the structure of non- executive directors’ remuneration from that of executives. Fees paid to Non-Executive Directors are set by the Board in consultation with remuneration experts, within an aggregate limit approved by securityholders. The total remuneration paid to Non- Executive Directors to 30 June 2008 is set out in the Remuneration Report. Directors’ fees are reviewed annually and are benchmarked against fees paid to Directors of similar organisations. Non-Executive Directors are not provided with retirement benefi ts other than statutory superannuation and do not participate in staff security plans, receive options or bonus payments. Executive Directors remuneration packages comprise salary, short term incentives (i.e. bonus) and long term incentives. Further details on Executive Directors’ packages are set out in the Remuneration Report. Recommendation 9.4: Ensure that payment of equity-based executive remuneration is made in accordance with thresholds set in plans approved by shareholders. Payments of equity-based executive remuneration is made in accordance with thresholds set in plans approved by shareholders. Details of these payments are set out in the Remuneration Report. 65 Annual Report 2008 Financial Report Contents Contents 67 Directors’ Report 81 Auditors’ Independence Declaration 82 Income Statements 83 Balance Sheets 84 Statements of Changes in Equity 85 Cash Flow Statements 86 Notes to the Financial Statements 128 Directors’ Declaration 129 Independent Audit Report 131 Securityholder Information IBC Corporate Directory 66 Charter Hall Group Directors’ Report 30 June 2008 Your directors present their report on the consolidated entity (referred to hereafter as the Group or Charter Hall Group) consisting of Charter Hall Limited (the Company) and the entities it controlled at the end of, or during, the year ended 30 June 2008. The Group includes Charter Hall Funds Management Limited as the Responsible Entity of Charter Hall Property Trust (the Trust). Charter Hall Limited and Charter Hall Funds Management Limited have identical Boards of Directors. The term Board hereafter should be read as references to both these Boards. DIRECTORS The following persons were directors of the Group during the whole of the year and up to the date of this report, unless noted otherwise: – – – – – – – – – K Roxburgh – Chairman R Woodhouse – Deputy Chairman P Derrington G Fraser C Fuchs – Executive Director D Harrison – Joint Managing Director C McGowan D Southon – Joint Managing Director A Biet (Resigned 25/10/2007) PRINCIPAL ACTIVITIES During the year the principal continuing activities of the Group consisted of: (a) Property investment (b) Funds management (c) Development management (d) Property management No signifi cant changes in the nature of the activities of the Group occurred during the year. DISTRIBUTIONS – CHARTER HALL GROUP Distributions paid / declared to members during the year were as follows: Interim ordinary distribution for the 6 months ended 31 December 2007 of 6.30 cents per security paid on 29 February 2008 Final ordinary distribution for the 6 months ended 30 June 2008 of 6.30 cents per security expected to be paid on 29 August 2008 Interim ordinary distribution for the 6 months ended 31 December 2006 of 4.77 cents per security paid on 28 February 2007 Final ordinary distribution for the 6 months ended 30 June 2007 of 5.67 cents per security paid on 31 August 2007 2008 $’000 26,448 25,669 2007 $’000 – – – 17,440 – 52,117 20,632 38,072 RESULTS The Group has reported a strong fi nancial result for the year to 30 June 2008. The underlying earnings per security of 12.74 cents for the year ended 30 June 2008 represents an increase of 34% compared to the 9.51 cents for the year ended 30 June 2007. The profi t after tax attributable to securityholders increased 56% to $67.5m. The fi nancial report includes separate fi nancial statements for Charter Hall Limited (CHL) as an individual entity and the consolidated entity consisting of CHL and its subsidiaries and controlled entities including Charter Hall Funds Management Limited as Responsible Entity for Charter Hall Property Trust (CHPT). FINANCIAL PERFORMANCE – 1 JULY 2007 TO 30 JUNE 2008 The Group revenue increased from $60.8m to $91.1m, a 50% increase, refl ecting increased rental income of $9.8m, increased distributions from investments of $5.5m and increased management fees of $14.6m. The net profi t after tax including fair value adjustments, totalling a net gain of $15.3m (2007: $11.5m), for the year is $67.5m (2007: $43.2m). The Group recorded solid gains in its directly owned properties and its investments in Charter Hall managed funds (Charter Hall Core Plus Offi ce Fund (CPOF), Charter Hall Core Plus Industrial Fund (CPIF), Charter Hall Diversifi ed Property Fund (DPF) and Charter Hall Umbrella Fund (CHUF). 67 Annual Report 2008 Directors’ Report 30 June 2008 The Group generated additional management fee income as a result of funds under management growth. The Group also generated strong profi ts from 50% owned Commercial and Industrial Property Pty Ltd whose results were in line with expectations. The majority of properties held directly by CHPT and also in the 100% owned Charter Hall Core Plus Retail Fund (CPRF) have been independently valued as at 30 June 2008. In addition, the majority of properties held within CPOF, CPIF and DPF have been independently valued as at 30 June 2008. During the year, the Group sold down its interest in CPOF from 23% to 20%, its interest in CPIF from 32% to 25% and its interest in CHUF from 47% to less than 1%. The following movements, including additional equity contributed were recorded on the Group’s investments in Charter Hall managed unlisted funds and in its investment in Axiom Properties Limited (Axiom): – – – – – the value of the group’s 20% investment in CPOF increased by $63m (11% unit price growth) to $143m the value of the group’s 25% investment in CPIF increased by $12m (7% unit price growth) to $58m the value of the group’s 5% investment in Axiom decreased $6m (75% share price decline) to $2m the value of the group’s 17% investment in DPF increased $10m (17% unit price growth) to $24m the value of the group’s <1% investment in CHUF decreased $11m with the sell down to retail investors The 30 June 2008 fi nancial results with comparatives are summarised as follows: Gross revenue ($m) Net profi t after tax ($m) Distribution ($m) AIFRS earnings per stapled security (EPS) (cents) Underlying EPS (cents) 1,2 Distribution per stapled security (cents) 2 Total assets ($m) Total liabilities ($m) Net assets ($m) NTA per security ($) 2 Gearing – borrowings to total assets 3 Assets under management ($bn) 2008 91 67 52 16.31 12.74 12.60 802 310 492 1.19 31.2% 3.9 2007 61 43 38 12.00 9.51 10.44 650 189 461 1.12 21.2% 2.8 1 Excludes AASB 140 fair value adjustments on investment property and fi nancial assets, gains on sale of investments and non cash AIFRS charges such as share based payments expense, amortisation and tax benefi t on unrealised fair value losses. 2 Calculation excludes stapled securities issued under the Executive Loan Security Plan in accordance with AASB2 Share Based Payments. The fi nancial year ended 2007 DPS included a 0.44 cents distribution from unrealised gains on investments. 3 Calculation is net of cash. DISTRIBUTION RE-INVESTMENT PLAN (DRP) The DRP has been reactivated for the fi nal distribution for the 6 month period ended 30 June 2008. REVIEW OF OPERATIONS During the year the Group successfully completed additional equity raisings for Charter Hall Core Plus Offi ce Fund (CPOF) ($235m) and the initial equity raising for Charter Hall Umbrella Fund (CHUF) ($237m). The Group has expanded its diverse sources of equity, providing institutional, wholesale, retail and high net worth clients with these new products. The Group issued 5,599,098 securities in July 2007 to complete the purchase of 50% of Commercial and Industrial Property Pty Ltd. CPOF, in which CHPT now holds a 20% interest, recently acquired its 18th asset bringing the total asset value to $1.4bn (on a fully developed basis) having increased from nearly $1bn at 30 June 2007. CPIF, in which CHPT now holds a 25% interest, recently acquired its 12th asset bringing the total fund size to over $400m (on a fully developed basis) up from $270m at 30 June 2007. CPRF was owned 100% by CHPT as at 30 June 2008, however its benefi cial ownership interest was reduced in July 2008 to 62% with the fi rst close raising $95m in equity. CPRF acquired its 14th asset bringing the total fund size to $309m with Group assets worth $117m purchased by CPRF in July 2008 bringing the seed portfolio to $426m. DPF, in which CHPT holds a 17% interest, acquired its 10th property which are in total valued at approximately $183m an increase on $123m at 30 June 2007. 68 Charter Hall Group Directors’ Report 30 June 2008 CHOF4 has 8 projects with 2 completed and 3 commenced during the year. Equity of $124m representing 75% of the total has been called to date. CHOF5 has commenced 5 projects including projects in New Zealand. Equity of $24m representing 8% of the total has been called to date. Total assets under management as at 30 June 2008 have grown to $3.9bn (2007: $2.8bn). ENVIRONMENTAL REGULATION The principal activities of the group are property investment, funds management and development management. Funds management involves minimal environmental impact. The group ensures compliance with applicable environmental standards and regulations in its property investment and development management activities. Recent announcements by the Federal Government as to the introduction of a carbon trading scheme will be monitored to ensure that any potential impacts are understood and addressed. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Signifi cant changes in the state of affairs of the Group during the year, in addition to the review of operations above, were as follows: – – – – CHPT sold down 3% of its holding in CPOF and 7% of CPIF to CHUF during the year. On 24 December 2007 CHPT sold 400 Kent Street, Sydney NSW to DPF for $30.5m. On 22 February 2008 CHPT granted a leasehold interest in Carter Rd, Menai, NSW to CPRF for $39m. On 30 June 2008 CHPT sold a 50% freehold interest in 570 Bourke St, Melbourne, Vic to CPOF for $72.5m. MATTERS SUBSEQUENT TO THE END OF THE PERIOD Since 30 June 2008 CHPT has completed the following transactions: – – – – The sale of 372 Whitehorse Rd, Nunawading, Vic, 61 Nepean Hwy, Mentone, Vic and 25 Nepean Hwy, Mentone, Vic to CPRF in July 2008. The Group announced the fi rst close of CPRF with CHPT’s benefi cial ownership reduced from 100% at 30 June 2008 to 62%. With the proceeds from the fi rst close CHPT repaid debt and reduced its debt facility limit to $100m with an expiry of July 2011. CHPT invested $50m in CHUF in August 2008 equating to an interest of 22%. Except for the matters discussed above, no other matter or circumstance has arisen since 30 June 2008 that has signifi cantly affected, or may signifi cantly affect: (a) the Group’s operations in future fi nancial years, or (b) the results of those operations in future fi nancial years, or (c) the Group’s state of affairs in future fi nancial years. LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS Further information on likely developments in the operations of the Group and the expected results of operations have not been included in this annual fi nancial report because the directors believe it would be likely to result in unreasonable prejudice to the Group. 69 Annual Report 2008  R Woodhouse Deputy Chairman – Independent Non-Executive Director Experience and expertise Appointed non-executive director and deputy Chairman of the Group on 6 April 2005. Worked for the Ballieu family for 30 years in senior executive capacities from 1975 including Director L.J. Hooker, Managing Director Knight Frank Australia and Chairman Knight Frank Australia. Fellow of the Institute of Company Directors. Other current listed company directorships Nil Former listed company directorships in last 3 years Nil Special responsibilities – – – Deputy Chairman of the Board Member of Nomination Committee Chairman of Remuneration Committee Interests in securities 66,666 securities in Charter Hall Group. C Fuchs Executive Director Experience and expertise Co-founder of Charter Hall in 1991. Executive director of the Group since 6 April 2005. Has over 40 years experience in property investment and fi nancial services. Is involved in the Group’s funds management business and is a member of the Investment Committee for the Charter Hall opportunity funds. Previously worked at the Heine Group’s property arm and Leighton Properties. Other current listed company directorships Nil Former listed company directorships in last 3 years Nil Special responsibilities Nil Interests in securities 6,862,615 securities in Charter Hall Group via direct and indirect interests including 1,806,020 securities in the Charter Hall Executive Loan Security Plan. Securities in the Plan which will vest upon the satisfaction of performance and service criteria. Directors’ Report 30 June 2008 INFORMATION ON DIRECTORS K Roxburgh Chairman – Independent Non-Executive Director Experience and expertise Independent non-executive director and Chairman appointed 12 April 2005. One of the founders of E*TRADE in Australia, Board Member for 11 years to 2007, Chief Executive Offi cer from 1998 to 2000 then Chairman until its takeover by the ANZ Bank in 2007. For 10 years from 1986 to 1995, he was an Executive Director at the Hong Kong Bank of Australia Group, Chairman of their stockbroker, James Capel Australia and Managing Director of their corporate fi nance subsidiary. Between 1964 to 1986 practiced as a Chartered Accountant for 4 years at Arthur Andersen followed by 18 years as a partner at Mann Judd in Sydney. Experienced in the fi nancial markets and the fi nancial management of the insurance, healthcare, technology, property and resource sectors. Bachelor of Commerce, MBA and Practitioner Member of the Securities & Derivatives Institute of Australia. Other current listed company directorships Non-executive Chairman of Babcock – and Brown Capital Limited (since 2006) Non-executive director of Ramsay Health Care Ltd (since 1997) Non-executive director of Everest Babcock and Brown Ltd (since 2005) – – Former listed company directorships in last 3 years – E*TRADE Australia (Retired in June 2007) Everest Babcock and Brown Alternative Investment Trust (Resigned December 2006) – Special responsibilities – – – – Chairman of the Board Chairman of Nomination Committee Member of Remuneration Committee Member of Audit, Risk and Compliance Committee Interests in securities 50,000 securities in Charter Hall Group. 70 Charter Hall Group Directors’ Report 30 June 2008 G Fraser Independent Non-Executive Director Experience and expertise Non-executive director of the Group since 6 April 2005. Joined Transfi eld Holdings in 1996 where he was formerly the CFO and General Manager – Finance, Project Development and is currently a member of its Advisory Board. Previously was the principal of a fi nance advisory business Perry Development Finance Pty Limited. Member of the Institute of Chartered Accountants in Australia and the Institute of Company Directors. Other current listed company directorships Nil Former listed company directorships in last 3 years Nil Special responsibilities Member of Audit, Risk and Compliance Committee. Interests in securities 350,000 securities in Charter Hall Group via direct and indirect interests. D Harrison Joint Managing Director Experience and expertise Joint Managing Director and heads up the Funds Management Division & Property Management Division. Has more than 19 years of experience in the Australian commercial property markets. Prior to joining Charter Hall in 2004, was the Managing Director of Savills in Australia. Holds a Land Economics degree from the University of Western Sydney, a graduate Diploma in Applied Finance and is a Fellow of the Australian Property Institute. Other current listed company directorships Nil Former listed company directorships in last 3 years Nil Special responsibilities Nil Interests in securities 11,855,755 securities in Charter Hall Group via direct and indirect interests including 5,328,808 securities in the Charter Hall Executive Loan Securities Plan. Securities in the Plan will vest upon the satisfaction of performance and service criteria. D Southon Joint Managing Director Experience and expertise David is a founding member of Charter Hall. As a Joint Managing Director David heads up the Development Division and has over 19 years of property industry experience. Prior to co-founding Charter Hall in 1991 worked at the Heine Group’s property arm (now part of ING) and Leighton Properties. Holds a Land Economics degree from the University of Western Sydney. Other current listed company directorships Nil Former listed company directorships in last 3 years Nil Special responsibilities Nil Interests in securities 12,083,704 securities in Charter Hall Group via direct and indirect interests including 5,310,501 securities in the Charter Hall Executive Loan Security Plan. Securities in the Plan will vest upon the satisfaction of performance and service criteria. 71 Annual Report 2008 Directors’ Report 30 June 2008 P Derrington Independent Non-Executive Director C McGowan Independent Non-Executive Director Experience and expertise Independent non-executive director since 6 April 2005. Formerly CEO of the listed AMP Diversifi ed Property Trust, Executive Vice President of Bankers Trust (Australia), founding Fund Manager of the BT Property Trust and founding Fund Manager of the Advance Property Fund. Fellow of the Australian Property Institute and Senior Fellow of the Financial Services Institute of Australasia. Other current listed company directorships Nil Former listed company directorships in last 3 years Nil Special responsibilities – – Member of Remuneration Committee Member of Nomination Committee Interests in securities Nil securities in Charter Hall Group. Experience and expertise Independent non-executive director since 6 April 2005. Appointed as Non-executive Director of A.B.C. Learning Centres Limited from September 2008. Formerly the CEO of Penrith Lakes Development Corporation Limited and Managing Director of the US asset management fi rm Spears, Benzak, Salomon and Farrell, Patrice was also formerly the Vice President in the Real Estate Finance Group at Chemical Bank (now J.P. Morgan Chase) and in 1997 founded the Victory Real Estate Investment Fund. Holds an MBA from Harvard University and a Ph. D from U.C. Berkeley. Other current listed company directorships Non-executive Director of A.B.C. Learning Centres Limited. Commenced 7 August 2008. Former listed company directorships in last 3 years Nil Special responsibilities Chair of Audit, Risk and Compliance Committee Interests in securities Nil securities in Charter Hall Group. A Biet Non-Executive Director (Resigned 25 October 2007) Experience and expertise Co-founder of Charter Hall and Managing Director of the Group from 1991 to 2005. Has over 25 years of property experience and was previously the Managing Director of the Heine Group’s property arm (now part of ING) and previously Director of Operations for Leighton Properties. He is a Fellow of the Australian Institute of Company Directors, a Fellow of the Australian Property Institute and holds a Bachelors degree in Economics and an MBA. Resigned as non-executive director of the Group in October 2007. Other current listed company directorships Nil Former listed company directorships in last 3 years Nil Special responsibilities Nil Interests in securities As at the date of his resignation, Mr Biet held 5,209,724 securities in Charter Hall Group via direct and indirect interests. Company secretary The company secretary is Mr N Francis, a member of the Institute of Chartered Accountants in Australia and Chartered Secretaries Australia who was appointed to the position of Company Secretary of the Group on 6 April 2005. Before joining Charter Hall Group he was the Finance and Asset Manager at Quantum Property Group and prior to that gained seven years experience with PricewaterhouseCoopers in audit and transactions services. He also holds a Bachelor of Business degree from the University of Technology, Sydney. 72 Charter Hall Group Directors’ Report 30 June 2008 MEETINGS OF DIRECTORS The numbers of meetings of the Group’s board of directors and of each board committee held during the year ended 30 June 2008, and the numbers of meetings attended by each director were: Full meetings of the Board of Directors Audit, Risk and Compliance Committee Nomination Committee Remuneration Committee K Roxburgh R Woodhouse A Biet (Resigned 25/10/2007) P Derrington G Fraser C Fuchs C McGowan D Harrison D Southon A 12 11 4 12 12 10 12 12 12 B 12 12 4 12 12 12 12 12 12 A 6 * * 6 6 * * * * B 6 * * 6 6 * * * * A 3 3 * * * * 3 * * B 3 3 * * * * 3 * * A 3 3 * * * * 3 * * B 3 3 * * * * 3 * * A = Number of meetings attended B = Number of meetings held during the time the director held offi ce or was a member of the committee during the year * = Not a member of the relevant committee REMUNERATION REPORT The remuneration report is set out under the following main headings: A Principles used to determine the nature and amount of remuneration B Details of remuneration C Service agreements D Security based compensation E Additional information. The information provided in this remuneration report has been audited as required by section 308(3C) of the Corporations Act 2001. A. PRINCIPLES USED TO DETERMINE THE NATURE AND AMOUNT OF REMUNERATION The objective of the Group’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with achievement of strategic objectives and the creation of value for securityholders, and conforms with market best practice for delivery of reward. The Board ensures that executive reward satisfi es the following key criteria for good reward governance practices: – – – – – competitiveness and reasonableness acceptability to securityholders performance linkage / alignment of executive compensation transparency capital management. In consultation with external remuneration consultants, the Group has structured an executive remuneration framework that is market competitive and complimentary to the reward strategy of the organisation. Alignment to securityholders’ interests: – – – has economic profi t as a core component of plan design focuses on sustained growth in securityholder wealth, consisting of distributions and dividends and growth in security price, and delivering constant return on assets as well as focusing the executive on key non-fi nancial drivers of value attracts and retains high calibre executives. Alignment to program participants’ interests: – – – – rewards capability and experience refl ects competitive reward for contribution to growth in securityholder wealth provides a clear structure for earning rewards provides recognition for contribution. The framework provides a mix of fi xed and variable pay, and a blend of short and long-term incentives. As executives gain seniority with the Group, the balance of this mix shifts to a higher proportion of “at risk” rewards. The Board has established a Remuneration Committee which provides advice on remuneration and incentive policies and practices and specifi c recommendations on remuneration packages and other terms of employment. The Corporate Governance Statement provides further information on the role of this committee. 73 Annual Report 2008 Directors’ Report 30 June 2008 Non-executive directors Fees and payments to non-executive directors refl ect the demands which are made on, and the responsibilities of, the directors. Non-executive directors’ fees and payments are reviewed annually by the Board. The Board has also reviewed independent remuneration research to ensure non-executive directors’ fees and payments are appropriate and in line with the market. The Chairman’s fees are determined independently to the fees of non-executive directors based on comparative roles in the external market. The Chairman is not present at any discussions relating to determination of his own remuneration. Non-executive directors are not a part of the Charter Hall Limited Executive Loan Security Plan. Directors’ fees The current base remuneration was last reviewed with effect from 1 July 2007. Non-executive directors who are part of a committee receive additional yearly fees. The base remuneration will be reviewed early in the year ending 30 June 2009 to determine its appropriateness. Retirement allowances for directors There are no retirement allowances for non-executive directors. Executive pay The executive pay and reward framework has four components: – – – – base pay and other benefi ts short term performance incentives (STI) long term incentives (LTI) through participation in the Charter Hall Limited Executive Loan Security Plan, and other remuneration such as superannuation. The combination of these comprises the executive’s total remuneration. Base pay Executives are offered a competitive base pay where reference is made to latest salary trends and salary surveys to ensure base pay is set to refl ect the market for a comparable role. Other benefi ts include provision of car parking spaces at the offi ce location. There are no guaranteed base pay increases included in any senior executives’ contracts. Short term incentives (STI) Cash incentives (bonuses) are payable in July depending on Group and individual performance for the year to 30 June. Executives have a target STI opportunity depending on the accountabilities of the role and impact on the organisation. Each year, the remuneration committee and Joint Managing Directors will consider the appropriate targets and key performance indicators (KPIs) to link the STI plan and the level of payout if targets are met. This includes setting any maximum payout under the STI plan, and minimum levels of performance to trigger payment of STI. For the year ended 30 June 2008, the KPIs linked to STI plans were based on group and personal objectives. The KPIs required performance in achieving specifi c targets. The Joint Managing Directors and Remuneration Committee are responsible for assessing whether the KPIs are met. To help make this assessment, the committee receives reports on performance from management. The short-term bonus payments may be adjusted up or down in line with under or over achievement against the target performance levels. This is at the discretion of the remuneration committee. The STI target annual payment is reviewed annually. STI – Executive Directors The Executive Directors (Cedric Fuchs, David Harrison and David Southon) short-term incentive is linked to a percentage of distribution growth above the Board approved budget distribution. The Remuneration Committee has approved a year ending 30 June 2008 bonus for the Executive Directors of 15% in the aggregate (6% David Harrison, 6% David Southon, 3% Cedric Fuchs) of the amount that the distribution for the 12 months to 30 June 2008 exceeds the distribution forecast in the Board approved budget. In order to bring the Joint Managing Directors in line with market levels and to acknowledge the earnings outperformance of the Group the Remuneration Committee approved an additional payment of $275,000 each for David Harrison and David Southon. The fi nancial year ended 30 June 2008 bonus has been approved by the Board subject to the completion of the audit and release of accounts. From 1 July 2008 the Joint Managing Directors bonus will be in the range of 50 —100% of salary, subject to individual KPIs and Group performance. The Remuneration Committee approved an FY07 bonus for the Executive Directors of 15% in the aggregate (6% David Harrison, 6% David Southon, 3% Cedric Fuchs) of the amount that the distribution for the 12 months to 30 June 2007 exceeded the distribution forecast in the Board approved budget. The total bonus of $254,000 was split $51,000 for Cedric Fuchs, $102,000 for David Harrison and $102,000 for David Southon and was paid in the fi nancial year ended 2008. Charter Hall Limited Executive Loan Security Plan Information on the Charter Hall Limited Executive Loan Security Plan is set out in note 40 to the fi nancial statements. 74 Charter Hall Group Directors’ Report 30 June 2008 B. DETAILS OF REMUNERATION Amounts of remuneration Details of the remuneration of the directors and the key management personnel (as defi ned in AASB 124 Related Party Disclosures) of Charter Hall Group are set out in the following tables. The key management personnel of Charter Hall Group includes the directors as per pages 70-72 and the following executive offi cers, who with the executive directors include the 5 highest paid executives of the Group: – – – J Bakker – Corporate Development Director R Champion – Fund Manager and Retail Director M Winnem – Fund Manager and Development Director The cash bonuses are dependent on the satisfaction of performance conditions as set out in the section headed Short-term incentives above. Key management personnel of the Group 2008 Name Non-Executive Directors K Roxburgh, Chairman R Woodhouse, Deputy Chairman P Derrington G Fraser C McGowan A Biet (to 25/10/07) Sub-total non-executive directors Executive Directors C Fuchs D Harrison D Southon Other key management personnel J Bakker R Champion M Winnem Totals Short-term benefi ts Post- employment benefi ts Security- based payment Cash salary and fees $ Cash bonus $ Super- annuation $ 125,344 75,102 78,784 73,624 24,861 23,867 401,582 181,420 484,684 486,871 334,962 386,871 295,332 2,571,722 – – – – – – — 101,000 477,000 477,000 100,000 60,000 80,000 1,295,000 11,281 6,759 7,091 6,626 60,000 2,148 93,905 98,580 13,129 13,129 13,129 13,129 12,886 257,887 Securities Total $ – – – – – – – 136,208 700,811 697,997 59,324 89,222 62,814 1,746,376 $ 136,625 81,861 85,875 80,250 84,861 26,015 495,487 517,208 1,675,624 1,674,997 507,415 549,222 451,032 5,870,985 The bonus for the year ended 30 June 2007 paid to the executive directors was not accrued in 2007 and has consequently been included in this year together with the 30 June 2008 bonus. The amount of the 2007 bonus is discussed above. 75 Annual Report 2008 Directors’ Report 30 June 2008 Key management personnel of the Group 2007* Name Non-executive directors K Roxburgh, Chairman **R Woodhouse, Deputy Chairman P Derrington **G Fraser C McGowan P McMahon *A Biet (from 1/1/07) Sub total non-executive directors Executive directors *A Biet (until 31/12/06) C Fuchs D Harrison D Southon Other key management personnel R Champion M Winnem Totals Short term benefi ts Post- employment benefi ts Security- based payment Cash salary and fees $ Cash bonus $ Super- annuation $ 106,422 13,761 59,174 13,761 22,019 14,220 22,892 252,249 335,742 183,813 437,314 437,314 – – – – – – – – – – – – 343,702 237,314 2,227,448 60,000 60,000 120,000 9,376 826 5,326 826 48,981 1,280 4,579 71,194 40,000 103,500 12,686 12,686 12,686 12,686 265,438 Securities Total $ – – – – – – – – 33,904 70,813 156,509 152,448 51,673 22,146 487,493 $ 115,798 14,587 64,500 14,587 71,000 15,500 27,471 323,443 409,646 358,126 606,509 602,448 468,061 332,146 3,100,379 * Short-term benefi ts to Non-executive Directors include Director and committee fees. A Biet transitioned from Executive to Non-executive Director on 1 January 2007 and was paid an eligible termination payment of $300,000 upon termination of his contract. The table above divides the remuneration received by A Biet into that received as an Executive Director and as a Non-executive Director. ** Roy Woodhouse and Glenn Fraser agreed to waive Director and Committee Fees for a period of 2 years from the date they were appointed as Directors of the Board on 6 April 2005. Charter Hall Limited does not have any employees in its own right as employees are paid by a subsidiary. C. SERVICE AGREEMENTS The Joint Managing Directors, David Harrison and David Southon signed 3 year agreements which expired on 18 October 2007 and 1 July 2007, respectively which related to the purchase of 50% of Charter Hall Holdings Pty Limited by Transfi eld (CHG) Limited on 1 July 2004. Updated agreements have not been pursued because the un-vested component of the Charter Hall Limited Executive Loan Security Plan provides a strong incentive for continuity of employment. D. EMPLOYEE SECURITY SCHEME The Charter Hall Limited Loan Security Plan (LSP) is designed to develop a clear line of sight between business objectives and reward. It is an incentive plan aimed at creating a strong link between executive performance and reward and increasing securityholder value by enabling plan participants to have a greater involvement with, and share in the future growth and profi tability of the Group. Participants are offered non recourse loans to acquire securities under the plan with interest charged at the distribution yield. If the performance and service conditions are satisfi ed, the securities become available to the plan participants after repayment of any loan obligations outstanding. Non-executive directors do not participate in the LSP. 2006 Offers: issued 5,900,000 securities on 6 June 2005 at $1.00 per security and issued 300,000 securities on 11 November at $1.0731 per security. Service conditions: the plan participants must be an employee at 30 September each year which is the time of vesting. Performance conditions: for the period ended 30 June 2006 at least meet the forecast distribution per security per the PDS/Prospectus dated 11 May 2005 and at least 5% growth in like for like distributions per security for each of the years ended 30 June 2007 and 30 June 2008. Vesting conditions: securities may vest in three tranches. Subject to the satisfaction of the performance and service conditions above, one-third of the securities provided under the plan may vest after the end of the forecast period and one-third will vest after 30 June 2007 and one-third after 30 June 2008. Loans totalling $6,200,000 under the 2005 offer were provided by Charter Hall Limited to participants. 76 Charter Hall Group Directors’ Report 30 June 2008 2007 Offers: issued 6,299,212 securities on 3 July 2006 at $1.27 per security, 352,564 securities on 5 October at $1.56, 807,453 securities on 16 October 2006 at $1.61, 50,000 securities on 15 December 2006 at $2.00 and 202,428 securities on 7 March 2006 at $2.47. Performance conditions: for the year ended 30 June 2007 at least meet the forecast distribution per security per the PDS/Prospectus dated 19 May 2006 and at least 5% growth in like for like distributions per security for each of the years ended 30 June 2008 and 30 June 2009. Vesting conditions: securities will vest in three tranches. Subject to the satisfaction of the performance and service conditions above, one-third of the securities provided under the plan will vest after the end of the forecast year and one-third will vest after 30 June 2008 and one-third after 30 June 2009. Loans totalling $10,449,997 under the offer were provided by Charter Hall Limited to participants. 2008 Offer: issued 10,041,015 securities on 2 July 2007 at $2.76 per security (includes directors and KMPs). In addition the Group purchased, on market, 70,534 securities on 6 July 2007 at $2.8355, 35,714 securities on 30 August 2007 at $2.80, 17,008 securities on 21 November 2007 at $2.9397 and 73,366 securities on 7 December 2007 at $2.7260. Performance conditions: for the year ended 30 June 2008 at least meet the Board approved budgeted DPS and at least 5% growth in like for like distributions per security for each of the years ended 30 June 2009 and 30 June 2010. Vesting conditions: securities will vest in three tranches. Subject to the satisfaction of the performance and service conditions above, one-third of the securities provided under the plan will vest after the end of the 30 June 2008, one-third will vest after 30 June 2009 and one-third after 30 June 2010. The loan is repayable after 5 years. Loans totalling $27,713,201 under the offer were provided by Charter Hall Limited to participants. The executive directors of Charter Hall Group and other key management personnel of the Group received the following vested securities during the year from the company’s employee security scheme: LSP Securities Issued in 2006 LSP Securities Issued in 2007 LSP Securities Issued in 2008 LSP Securities Forfeited in 2008 $1.00 Issue price Executive Directors A Biet1 C Fuchs D Harrison D Southon Key management personnel J Bakker2 R Champion M Winnem 1,050,000 1,050,000 1,475,000 1,475,000 – – – $1.27 $2.76 – 393,700 1,161,417 1,118,110 621,118 551,181 236,220 – 362,319 2,717,391 2,717,391 362,319 326,087 289,855 (700,000) – – – – – – LSP Securities Vested in 20073 LSP Securities Vested in 20083 LSP unvested securities 30/6/08 (350,000) (350,000) (491,667) (491,667) – – – – (481,233) (878,806) (864,370) (207,039) (183,727) (52,493) – 974,786 3,983,335 3,954,464 776,398 693,541 473,582 Total securities 350,000 1,806,019 5,353,808 5,310,501 983,437 877,268 526,075 1 A Biet’s securities were forfeited as the service criteria could not be met as a non-executive director. 2 J Bakker’s 2007 securities were issued at a price of $1.61. 3 Securities that have vested but have not been exercised by repayment of the loan and removal from the LTI plan. The model inputs for the Black-Scholes method for assessing the fair value at loan date for the LSP securities issued during the year ended 30 June 2008 include the following: (a) security share price at grant date was $2.76 (b) loan value per security was $2.76 (c) grant date 2 July 2007 and expiry of loan 30 September 2012 (d) expected price volatility 32.62% (e) expected distribution yield 4.244% (f) risk-free interest rate 6.465%. 77 Annual Report 2008 Directors’ Report 30 June 2008 E. ADDITIONAL INFORMATION Details of the short term incentives and the vesting of the securities are shown above. The table below shows the percentage of securities forfeited for not satisfying the service and performance criteria that make up the vesting conditions. No options will vest if the conditions are not satisfi ed. The maximum value of the options yet to vest has been determined as the amount of the grant date fair value of the options that is yet to be expensed. Year granted Vested % Forfeited % Minimum total value of grant yet to vest $ Maximum total value of grant yet to vest $ Name A Biet C Fuchs D Harrison D Southon J Bakker R Champion M Winnem 2006 2008 2007 2006 2008 2007 2006 2008 2007 2006 2008 2007 2008 2007 2008 2007 33% – 33% 66% – 33% 66% – 33% 66% – 33% – 33% – 33% 67% – – – – – – – – – – – – – – – nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil Further details relating to the LSP are set out below: Name A Biet C Fuchs D Harrison D Southon J Bakker R Champion M Winnem Remuneration consisting of LSP Value at grant date $ Value at vesting date (30 September 2007) $ Value at 30 June 2008 $ – 26.3% 41.7% 41.8% 16.2% 11.7% 13.9% – 176,291 1,322,164 1,322,164 111,215 100,094 88,972 – 854,848 1,526,123 1,498,454 256,728 290,289 82,939 17,500 24,583 24,583 – – – The value of securities at grant date is nil as the grant value is equivalent to the loan provided. The value at the vesting date of 30 September 2007 refl ects a security price of $2.85 however these securities have remained in the plan. The value at the security price at 30 June 2008 is shown above. The value at forfeit date is based on a security price of $2.85 with a loan of $1.00. Loans to directors and executives Information on loans to directors and executives, including amounts, interest rates and repayment terms are set out in note 30 to the fi nancial statements. Insurance of offi cers During the year, Charter Hall Group paid a premium of $72,300 (2007: $56,561) to insure the director and secretaries of the company and its Australian based controlled entities. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the offi cers in their capacity as offi cers of entities in the Group, and any other payments arising from liabilities incurred by the offi cers in connection with such proceedings. This does not include such liabilities that arise from conduct involving a wilful breach of duty by the offi cers or the improper use by the offi cers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the company. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities. 78 Charter Hall Group – 99,193 11,309 2,302 743,936 33,360 3,234 743,936 32,116 3,234 51,891 20,568 46,702 15,832 41,513 6,785 Value at forfeit date $ 1,225,000 – – – – – – Directors’ Report 30 June 2008 Proceedings on behalf of the company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the company, or to intervene in any proceedings to which the company is a party, for the purpose of taking responsibility on behalf of the company for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the company with leave of the Court under section 237 of the Corporations Act 2001. Non-audit services The company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the company and/or the Group are important. Details of the amounts paid or payable to the auditor (PricewaterhouseCoopers) for audit and non audit services provided during the year are set out below. The board of directors has considered the position and, in accordance with the advice received from the Audit, Risk and Compliance Committee, is satisfi ed that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfi ed that the provision of non audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: – – all non-audit services have been reviewed by the Audit, Risk and Compliance Committee to ensure they do not impact the impartiality and objectivity of the auditor. none of the services undermine the general principles relating to auditor independence as set out in Professional Accountants. APES 110 Code of Ethics for During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit fi rms: Consolidated Parent entity 2008 $ 2007 $ 2008 $ 2007 $ (a) Assurance services Audit services PricewaterhouseCoopers Australian fi rm Audit and review of fi nancial reports and other audit work under the Corporations Act 2001 Non-PricewaterhouseCoopers audit fi rms for the audit or review of fi nancial reports of any entity in the Group Total remuneration for audit services Other assurance services PricewaterhouseCoopers Australian fi rm Investigating Accountants Reports – equity raising Total remuneration for other assurance services 206,901 207,887 56,417 263,318 33,290 241,177 219,000 219,000 – – Total remuneration for assurance services 452,318 241,177 (b) Taxation services PricewaterhouseCoopers Australian fi rm Tax compliance services, including review of company income tax returns Tax advice on equity raising Total remuneration for taxation services 21,090 – 21,090 37,610 97,123 134,733 (c) Advisory services PricewaterhouseCoopers Australian fi rm Long term incentive plan structure Total remuneration for advisory services – – 38,500 38,500 – – – – – – – – – – – – – – – – – – – – – – 79 Annual Report 2008 Directors’ Report 30 June 2008 Auditors’ independence declaration A copy of the auditors’ independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 81. Rounding of amounts The company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the directors’ report. Amounts in the directors’ report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. Auditor PricewaterhouseCoopers continues in offi ce in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors. K Roxburgh Chairman Sydney 25 August 2008 80 Charter Hall Group Auditors’ Independence Declaration 81 Annual Report 2008 Charter Hall Group Income Statements For the year ended 30 June 2008 Revenue Gain on sale of investments Other income Investment property expenses Employee benefi ts expense Depreciation Other expenses Finance costs Foreign exchange gain Share of net profi t of associates accounted for using the equity method Net gain from fair value adjustments Profi t/(loss) before income tax Income tax benefi t/(expense) Net profi t/(loss) after income tax attributable to stapled security holders of Charter Hall Group Attributable to: Equity holders of Charter Hall Limited Equity holders of Charter Hall Property Trust (minority interest) Profi t/(loss) attributable to stapled securityholders of Charter Hall Group Notes 6 8 8 7 9 Consolidated Parent entity 2008 $’000 91,060 838 – (8,275) (17,412) (252) (5,052) (20,111) 922 7,534 49,252 15,287 2007 $’000 60,829 – 35 (7,120) (9,893) (197) (4,084) (6,496) – 287 33,361 11,493 2008 $’000 16,398 – – – (66) – (2) (27,548) – – (11,218) – 2007 $’000 4,376 – – – – – (82) (14,163) – – (9,869) – 64,539 44,854 (11,218) (9,869) 2,959 (1,686) 7,834 3,540 67,498 43,168 (3,384) (6,329) (3,888) 71,386 1,239 41,929 (3,384) – (6,329) – 67,498 43,168 (3,384) (6,329) Group earnings per stapled security Basic earnings per security Diluted earnings per security Cents Cents 39 39 16.31 16.14 12.00 11.94 The above income statements should be read in conjunction with the accompanying notes. 82 Charter Hall Group Charter Hall Group Balance Sheets As at 30 June 2008 ASSETS Current assets Cash and cash equivalents Trade and other receivables Financial assets available for sale Total current assets Non-current assets Trade and other receivables Investments accounted for using the equity method Financial assets at fair value through the profi t and loss Other fi nancial assets Property, plant and equipment Investment properties Derivative fi nancial instruments Deferred tax assets Other assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Provisions Total current liabilities Non-current liabilities Borrowings Deferred tax liabilities Financial liabilities Provisions Total non-current liabilities Total liabilities Net assets/(liabilities) EQUITY Equity holders of Charter Hall Limited Contributed equity Reserves Retained profi ts / (accumulated losses) Parent entity interest Consolidated Parent entity Notes 2008 $’000 2007 $’000 2008 $’000 2007 $’000 10 11 12 15 16 13 17 18 19 14 20 21 22 23 24 19 25 16,183 32,344 – 48,527 5,082 50,340 227,283 18,182 1,577 439,645 5,880 5,110 295 753,394 26,507 26,564 218 53,289 7,405 760 149,945 – 1,355 430,701 5,345 1,283 295 597,089 328 64 – 392 13,763 – – 48,693 – – – 10,105 295 72,856 168 – – 168 12,424 – – 2,360 – – – 5,687 295 20,766 801,921 650,378 73,248 20,934 42,491 109 42,600 260,981 3,408 2,462 150 267,001 28,043 149 28,192 158,572 2,562 – 41 161,175 58 – 58 129,008 555 – – 129,563 5 – 5 75,351 368 – – 75,719 309,601 189,367 129,621 75,724 492,320 461,011 (56,373) (54,790) 26 27(a) 27(b) 5,272 (46,679) (3,683) (45,090) 5,131 (50,952) 207 (45,614) 5,272 (50,340) (11,305) (56,373) 5,131 (52,000) (7,921) (54,790) Equity holders of Charter Hall Property Trust (minority interest) 28 537,410 506,625 – – Total equity 492,320 461,011 (56,373) (54,790) The above balance sheets should be read in conjunction with the accompanying notes. 83 Annual Report 2008 Charter Hall Group Statements of Changes in Equity For the year ended 30 June 2008 Total equity at the beginning of the year Changes in the fair value of cash fl ow hedges, net of tax Foreign currency reserve movement Net loss recognised directly in equity Profi t / (loss) for the year Notes 14,27 27 Consolidated Parent entity 2008 $’000 2007 $’000 2008 $’000 2007 $’000 461,011 279,470 (54,790) (50,221) (379) (1,257) (1,636) 67,498 (1,340) 22 (1,318) 43,168 – (57) (57) (3,384) – – – (6,329) Total recognised income and expense for the year 65,862 41,850 (3,441) (6,329) Transactions with equity holders in their capacity as equity holders: Contributions of equity, net of transaction costs * Distributions provided for or paid * Other Security based payments reserve 26 29 27 13,225 (52,117) (47) 4,386 (34,553) 177,138 (38,072) (258) 883 139,691 141 – – 1,717 1,858 1,760 – – – 1,760 Total equity at the end of the year 492,320 461,011 (56,373) (54,790) Total recognised income and expense for the year Equity holders of Charter Hall Limited Equity holders of Charter Hall Property Trust (minority interest) (4,001) 69,863 65,862 1,238 40,612 41,850 (3,441) – (3,441) (6,329) – (6,329) * The equity and distributions for Charter Hall Limited and Charter Hall Property Trust are combined as the two entities are stapled together and have the same investors. As outlined in note 1, for accounting purposes, equity attributable to Charter Hall Property Trust is considered attributable to minority interest. Refer to note 28 for a breakdown of the minority interest in equity. The above statement of changes in equity should be read in conjunction with the accompanying notes. 84 Charter Hall Group Charter Hall Group Cash Flow Statements For the year ended 30 June 2008 Cash fl ows from operating activities Receipts from customers (inclusive of goods and services tax) Payments to suppliers and employees (inclusive of goods and services tax) Interest paid Distributions and dividends from investments Interest received Net cash infl ow / (outfl ow) from operating activities Cash fl ows from investing activities Payment for purchase of subsidiary, net of cash acquired Payments for property, plant and equipment Payments for investment property Proceeds on disposal of investment property Payments for other fi nancial assets Loans to / (repaid by) employees Investment in associates Proceeds on disposal of investments in associates Investment in joint venture Repayments from / (loans to) associates Loans to subsidiaries Net cash (outfl ow) from investing activities Cash fl ows from fi nancing activities Proceeds from issues of securities and other equity securities Proceeds from forfeited LTI securities Proceeds from CPOF investors for units to be issued Proceeds from borrowings Repayment of borrowings Security issue and transaction costs Distributions paid to securityholders Net cash infl ow from fi nancing activities Consolidated Parent entity Notes 2008 $’000 2007 $’000 2008 $’000 2007 $’000 80,456 78,099 53 5,050 38 (37,933) 42,523 (17,323) 13,990 6,092 45,282 – (377) (102,829) 98,943 (18,182) (3,894) (113,715) 41,700 (25,510) 9,115 – (114,749) 4,337 – – 209,187 (106,921) (380) (47,080) 59,143 (10,324) 26,507 16,183 (43,380) 34,719 (6,506) 2,931 5,043 36,187 (9,691) (1,244) (248,173) – – (2,936) (134,091) – – (9,081) – (405,216) 201,584 – (58,318) 116,357 – (4,621) (27,836) 227,166 (141,863) 168,370 26,507 (16) 37 (27,498) 15,642 1,166 (10,653) – – – – – (3,945) (5,944) – (25,510) – – (35,399) 189 1,717 – 44,306 – – – 46,212 160 168 328 (77) 4,973 (14,163) 4,222 450 (4,518) (9,691) – – – – (2,936) (875) – – – (5,019) (18,521) 1,755 – – 20,301 – – – 22,056 (983) 1,151 168 Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 10 The above cash fl ow statements should be read in conjunction with the accompanying notes. 85 Annual Report 2008 Notes to the Financial Statements 1 Summary of signifi cant accounting policies 2 Financial risk management 3 Critical accounting estimates and judgements 4 Underlying earnings per security 5 Segment information 6 Revenue 7 Fair value adjustments 8 Expenses 9 Income tax expense 10 Current assets – Cash and cash equivalents 11 Current assets – Trade and other receivables 12 Current assets – Financial assets 13 Non-current assets – Other fi nancial assets at fair value through profi t and loss 14 Derivative fi nancial instruments 15 Non-current assets – Trade and other receivables 16 Non-current assets – Investments accounted for using the equity method 17 Non-current assets – Other fi nancial assets 18 Non-current assets – Property, plant and equipment 19 Non-current assets – Investment properties 20 Non-current assets – Deferred tax assets 21 Current liabilities – Trade and other payables 22 Current liabilities – Provisions 23 Non-current liabilities – Borrowings 24 Non-current liabilities – Deferred tax liabilities 25 Non-current liabilities – Provisions 26 Contributed equity 27 Reserves and retained profi ts 28 Minority interest 29 Distributions 30 Key management personnel disclosures 31 Remuneration of auditors 32 Commitments 33 Related parties 34 Subsidiaries 35 Investments in associates 36 Investment in joint venture 37 Events occurring after the balance sheet date 38 Reconciliation of profi t after income tax to net cash infl ow from operating activities 39 Earnings per security 40 Security-based payments Page 87 94 96 96 97 98 98 99 99 100 100 101 101 102 103 105 105 106 106 108 108 108 108 111 111 112 114 115 115 115 118 119 119 121 122 124 125 125 126 127 86 Charter Hall Group Notes to the Financial Statements 30 June 2008 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of the fi nancial report are set out below. The fi nancial report includes separate fi nancial statements for Charter Hall Limited (CHL) as an individual entity and the consolidated entity consisting of CHL and its subsidiaries and controlled entities including Charter Hall Funds Management Limited as Responsible Entity for Charter Hall Property Trust (CHPT). For the purposes of AASB Interpretation 1002 Post date of transition stapling arrangements (AASB I – 1002), CHL has been identifi ed as the parent entity in relation to the stapling that occurred on 6 June 2005 which is the date of the initial public offering (IPO). In accordance with AASB Interpretation 1002 the results and equity, not directly owned by CHL, of CHPT have been treated and disclosed as a minority interest. Whilst the results and equity of CHPT are disclosed as minority interest, the stapled securityholders of CHL are the same as the stapled securityholders of CHPT. On 6 June 2005 CHL acquired Charter Hall Holdings Pty Ltd (CHH). Under the terms of AASB 3 Business Combinations CHH was deemed to be the accounting acquirer in this business combination. This transaction has therefore been accounted for as a reverse acquisition under AASB 3. Accordingly the consolidated fi nancial statements of CHG have been prepared as a continuation of the consolidated fi nancial statements of CHH. CHH as the deemed acquirer, has acquisition accounted for CHL as at 6 June 2005. (a) Basis of preparation This general purpose fi nancial report has been prepared in accordance with Australian equivalents to International Financial Reporting Standards (AIFRSs), other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. Compliance with IFRSs Australian Accounting Standards include AIFRSs. Compliance with AIFRSs ensures that the fi nancial report complies with International Financial Reporting Standards (IFRSs) in accordance with AASB 101 Presentation of fi nancial statements. Historical cost convention These fi nancial statements have been prepared under the historical cost convention, as modifi ed by the revaluation of investment property, fi nancial assets and liabilities (derivative fi nancial instruments) at fair value through the profi t and loss. Critical accounting estimates The preparation of fi nancial statements in conformity with AIFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are signifi cant to the fi nancial statements, are disclosed in note 3. (b) Principles of consolidation (i) Subsidiaries The consolidated fi nancial statements incorporate the assets and liabilities of all subsidiaries of Charter Hall Limited (“company” or “parent entity”) including CHPT, as at 30 June 2008 and the results of all subsidiaries for the year then ended. Charter Hall Limited and its subsidiaries together are referred to in this fi nancial report as the Group or the consolidated entity. Subsidiaries are all those entities over which the Group has the power to govern the fi nancial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group (refer to note 1(g)). Disposals to minority interests result in gains and losses for the Group that are recorded in the income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of identifi able net assets of the subsidiary. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction involves impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Minority interests in the results and equity of subsidiaries are shown separately in the consolidated income statement and balance sheet respectively. Investments in subsidiaries are accounted for at cost in the individual fi nancial statements of Charter Hall Limited. 87 Annual Report 2008 Notes to the Financial Statements 30 June 2008 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b) Principles of consolidation (continued) (ii) Associates Associates are all entities over which the Group has signifi cant infl uence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for in the parent entity fi nancial statements as fi nancial assets at fair value through the profi t and loss and in the consolidated fi nancial statements using the equity method of accounting except as noted below, after initially being recognised at cost. The Group’s share of its associates’ post-acquisition profi ts or losses is recognised in the income statement, and its share of post acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends receivable from associates are recognised in the parent entity’s income statement, while in the consolidated fi nancial statements they reduce the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. Investments in associates held by CHPT are accounted for as fi nancial assets at fair value through the profi t and loss. Investments are initially and in subsequent periods carried at fair value. Gain or losses arising from changes in the fair value of the “fi nancial assets at fair value through the profi t or loss” category are presented in the income statement within fair value gains / (losses) in the period in which they arise. Distribution income from fi nancial assets accounted at fair value through the profi t and loss is recognised in the income statement as part of revenue. (c) Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment and is subject to risks and returns that are different from those of segments operating in other economic environments. (d) Foreign currency translation (i) Functional and presentation currency The fi nancial statements are presented in Australian Dollars which is Charter Hall Limited’s functional and presentation currency. (ii) Group companies The results and fi nancial position of all the Group entities (none of which has the currency of a hyperinfl ationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: – – – assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet (NZ$1.2641 for A$1.00 for 30 June 2008) income and expenses for each income statement are translated at average exchange rates (NZ$1.16742 for A$1.00); and all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings are taken to a separate component of equity. (e) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances and amounts collected on behalf of third parties. Revenue is recognised for the major business activities as follows: (i) Rental income Rental income from operating leases is recognised on a straight-line basis over the lease term. Rental income relating to straight lining is included as a component of the net gain from fair value adjustments on investment property. An asset is recognised to represent the portion of operating lease income in a reporting period relating to fi xed increases in operating lease rentals in future periods. Such assets are recognised as a component of the carrying amount of investment properties in the balance sheet. (ii) Management fees Management fees are brought to account on an accruals basis and, if not received at the balance sheet date are refl ected in the Balance sheet as a receivable. In the case of performance fees receivable a judgement on the likelihood of receipt is made under a percentage of completion basis method based on the actual service provided as a percentage of the services to be provided. Where management fees are derived in respect of an acquisition or disposal of property the fees are recognised where it is probable that criteria for entitlement will be met. (iii) Interest income Interest income is recognised on a time proportion basis using the effective interest method, see note 1(k). When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash fl ow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate. 88 Charter Hall Group Notes to the Financial Statements 30 June 2008 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (e) Revenue recognition (continued) (iv) Dividends Dividends are recognised as revenue when the right to receive payment is established. (f) Income tax The period’s income tax expense or revenue is the tax payable on the current period’s taxable income based on the national income tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the fi nancial statements, and to unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profi t or taxable profi t or loss. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. Tax consolidation legislation On 22 August 2005 Charter Hall Limited and its wholly owned Australian controlled entities implemented the tax consolidation legislation. The head entity, Charter Hall Limited, and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand alone taxpayer in its own right. In addition to its own current and deferred tax amounts, Charter Hall Limited 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. Details about the tax funding agreement are disclosed in note 9. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. (g) Business combinations The purchase method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, securities issued or liabilities incurred or assumed at the date of exchange plus costs directly attributable to the acquisition. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Identifi able assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifi able net assets acquired is recorded as goodwill. If the cost of acquisition is less than the Group’s share of the fair value of the identifi able net assets of the subsidiary acquired, the difference is recognised directly in the income statement, but only after a reassessment of the identifi cation and measurement of the net assets acquired. (h) Impairment of assets Assets are reviewed for impairment when 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. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. In assessing impairment, assets are grouped at the lowest levels for which there are separately identifi able cash infl ows which are largely independent of the cash infl ows from other assets or groups of assets (cash generating units). Non-fi nancial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. (i) Cash and cash equivalents For cash fl ow statement presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with fi nancial institutions, other short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignifi cant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. 89 Annual Report 2008 Notes to the Financial Statements 30 June 2008 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for doubtful debts. Trade receivables are due for settlement no more than 30 days from the date of recognition. Collectibility of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for doubtful receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash fl ows, discounted at the original effective interest rate. Cash fl ows relating to short term receivables are not discounted if the effect of discounting is immaterial. The amount of the provision is recognised in the income statement. (k) Investments and other fi nancial assets The Group classifi es its investments in the following categories: fi nancial assets at fair value through profi t or loss, loans and receivables, held-to-maturity investments, and available for sale fi nancial assets. The classifi cation depends on the purpose for which the investments were acquired. Management determines the classifi cation of its investments at initial recognition and, in the case of assets classifi ed as held-to-maturity, re-evaluates this designation at each reporting date. (i) Financial assets at fair value through profi t or loss Financial assets at fair value through profi t or loss are fi nancial assets held for long term investment. Their treatment is discussed at Note 1b(ii). Derivatives are also categorised as held for trading unless they are designated as hedges. (ii) Loans and receivables Loans and receivables are non-derivative fi nancial assets with fi xed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of selling the receivable. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date which are classifi ed as non-current assets. Loans and receivables are included in receivables in the balance sheet (notes 11 and 15). (iii) Held-to-maturity investments Held-to-maturity investments are non-derivative fi nancial assets with fi xed or determinable payments and fi xed maturities that the Group’s management has the positive intention and ability to hold to maturity. (iv) Available-for-sale fi nancial assets Available-for-sale fi nancial assets, comprising principally marketable equity securities, are non-derivatives that are either designated in this category or not classifi ed in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Regular purchases and sales of investments are recognised on trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all fi nancial assets not carried at fair value through profi t or loss. Financial assets carried at fair value through profi t or loss are initially recognised at fair value and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash fl ows from the fi nancial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Available-for-sale fi nancial assets and fi nancial assets at fair value through profi t and loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Gains or losses arising from changes in the fair value of the ‘fi nancial assets at fair value through profi t or loss’ category, excluding interest and dividend income, are presented in the income statement within other income or other expenses in the period in which they arise. When securities classifi ed as available-for-sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statement as gains and losses from investment securities. The fair values of quoted investments are based on current bid prices. If the market for a fi nancial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash fl ow analysis, and option pricing models making maximum use of market inputs and relying as little as possible on entity-specifi c inputs. The Group assesses at each balance date whether there is objective evidence that a fi nancial asset or group of fi nancial assets is impaired. In the case of equity securities classifi ed as available-for-sale, a signifi cant or prolonged decline in the fair value of a security below its cost is considered in determining whether the security is impaired. If any such evidence exists for available-for-sale fi nancial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that fi nancial asset previously recognised in profi t and loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments classifi ed as available-for-sale are not reversed through the income statement. 90 Charter Hall Group Notes to the Financial Statements 30 June 2008 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (l) Derivatives Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either; (1) hedges of the fair value of recognised assets or liabilities or a fi rm commitment (fair value hedge); or (2) hedges of the cash fl ows of recognised assets and liabilities and highly probable forecast transactions (cash fl ow hedges). The Group documents at the inception of the hedging transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash fl ows of hedged items. The fair values of various derivative fi nancial instruments used for hedging purposes are disclosed in note 14. Movements in the hedging reserve in securityholders’ equity are shown in note 27. (i) Cash fl ow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash fl ow hedges is recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement within other income or other expense. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profi t or loss. The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in the income statement within ‘fi nance costs’. However, when the forecast transaction that is hedged results in the recognition of a non-fi nancial asset (for example, inventory) or a non-fi nancial liability, the gains and losses previously deferred in equity are transferred from equity and included in the measurement of the initial cost or carrying amount of the asset or liability. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. (ii) Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement and are included in fair value adjustment gains / (losses). The fair value previously recognised for hedges which are no longer effective is amortised over the remaining period of the hedge. (m) Fair value estimation The fair value of fi nancial assets and fi nancial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of fi nancial instruments traded in active markets is based on quoted market prices at the balance sheet date. The quoted market price used for fi nancial assets held by the Group is the current bid price; the appropriate quoted market price for fi nancial liabilities is the current ask price. The fair value of fi nancial instruments that are not traded in an active market is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt instruments held. Other techniques, such as estimated discounted cash fl ows, are used to determine fair value for the remaining fi nancial instruments. The fair value of interest-rate swaps is calculated as the present value of the estimated future cash fl ows. The fair value of forward exchange contracts is determined using forward exchange market rates at the balance sheet date. The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. The fair value of fi nancial liabilities for disclosure purposes is estimated by discounting the future contractual cash fl ows at the current market interest rate that is available to the Group for similar fi nancial instruments. (n) Plant and equipment Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefi ts associated with the item will fl ow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the fi nancial period in which they are incurred. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives, as follows: – Furniture, fi ttings and equipment 3-8 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (note 1(h)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. 91 Annual Report 2008 Notes to the Financial Statements 30 June 2008 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (o) Investment property Investment properties comprise investment interests in land and buildings held for long-term rental yields and not occupied by the Group. Investment property is carried at fair value, which is based on active market prices, adjusted, if necessary, for any differences in the nature, location and condition of the specifi c asset. The group aims to have properties valued externally on a regular basis. The carrying amount of investment properties recorded in the balance sheet includes components relating to lease incentives and assets relating to fi xed increases in operating lease rentals in future periods. Changes in fair values are recorded in the income statement as part of fair value adjustments. (p) Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of period which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. (q) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities, which are not incremental cost relating to the actual draw-down of the facility, are recognised as prepayments and amortised on a straight-line basis over the term of the facility. Borrowings are classifi ed as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. (r) Borrowing costs Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed. (s) Provisions Provisions for legal claims are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is probable that an outfl ow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses. (t) Employee benefi ts (i) Wages and salaries and annual leave Liabilities for wages and salaries, including non-monetary benefi ts and annual leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. (ii) Long service leave Liabilities for other employee entitlements which are not expected to be paid or settled within 12 months of balance date are accrued in respect of all employees at present values of future amounts expected to be paid, based on a projected weighted average increase in wage and salary rates. Expected future payments are discounted using interest rates on national government securities with terms to maturity that match, as closely as possible, the estimated future cash outfl ows. (iii) Retirement benefi t obligations Contributions to employee defi ned contribution superannuation funds are recognised as an expense as they become payable. (iv) Security-based payments Security-based compensation benefi ts are provided to employees via the Charter Hall Limited Executive Loan Security Plan. Information relating to these schemes is set out in note 40. The fair value at grant date is independently determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the security price at grant date and expected price volatility of the underlying security, the expected dividend yield and the risk free interest rate for the term of the option. The fair value of the securities granted is adjusted to refl ect market vesting conditions, but excludes the impact of any non market vesting conditions (for example, profi tability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of securities that are expected to vest. At each balance sheet date, the entity revises its estimate of the number of securities that are expected to vest. The employee benefi t expense recognised each period takes into account the most recent estimate. Upon the vesting of securities and repayment of the loan, the balance of the security based payments reserve relating to those securities is transferred to equity and the proceeds received, net of any directly attributable transaction costs, are credited to equity. (v) Bonus plans The Group recognises a liability and an expense. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. 92 Charter Hall Group Notes to the Financial Statements 30 June 2008 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (u) Contributed equity Ordinary stapled securities are classifi ed as equity. Incremental costs directly attributable to the issue of new securities or options are shown in equity as a deduction, net of tax, from the proceeds. (v) Distributions Provision is made for the amount of any distribution or dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the period but not distributed at balance date. (w) Earnings per security (i) Basic earnings per security Basic earnings per security is calculated by dividing the profi t attributable to equity holders of CHG, excluding any costs of servicing equity other than ordinary stapled securities, by the weighted average number of ordinary securities outstanding during the period, adjusted for bonus elements in ordinary stapled securities issued during the year. (ii) Diluted earnings per security Diluted earnings per security adjusts the fi gures used in the determination of basic earnings per stapled security to take into account the after income tax effect of interest and other fi nancing costs associated with dilutive potential ordinary securities and the weighted average number of stapled securities assumed to have been issued in relation to dilutive potential stapled securities. (x) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Cash fl ows are presented on a gross basis. The GST components of cash fl ows arising from investing or fi nancing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash fl ow. (y) Rounding of amounts The company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the fi nancial report. Amounts in the fi nancial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. (z) New accounting standards and UIG interpretations Certain new accounting standards and UIG interpretations have been published that are not mandatory for 30 June 2008 reporting periods. The Group’s assessment of the impact of these new standards and interpretations is set out below. (i) AASB 8 Operating Segments and AASB 2007-3 Amendments to Australian Accounting Standards arising from AASB 8 AASB 8 and AASB 2007-3 are effective for annual reporting periods commencing on or after 1 January 2009. AASB 8 will result in a signifi cant change in the approach to segment reporting, as it requires adoption of a “management approach” to reporting on the fi nancial performance. The information being reported will be based on what the key decision —makers use internally for evaluating segment performance and deciding how to allocate resources to operating segments. The Group has not yet decided when to adopt AASB 8. Application of AASB 8 may result in different segments, segment results and different type of information being reported in the segment note of the fi nancial report. However, it will not affect any of the amounts recognised in the fi nancial statements. (ii) Revised AASB 123 Borrowing Costs and AASB 2007-6 Amendments to Australian Accounting Standards arising from AASB 123 [AASB 1, AASB 101, AASB 107, AASB 111, AASB 116 & AASB 138 and interpretations 1 & 12] The revised AASB 123 is applicable to annual reporting periods commencing on or after 1 January 2009. It has removed the option to expense all borrowing costs and when adopted – will require the capitalisation of all borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset. This is consistent with the Group’s current accounting policy. (iii) Revised AASB 101 Presentation of Financial Statements and AASB 2007-8 Amendments to Australian Accounting Standards arising from AASB 101 A revised AASB 101 was issued in September 2007 and is applicable to annual reporting periods beginning on or after 1 January 2009. It ensures the presentation of a statement of comprehensive income and make changes to the statement of changes in equity, but will not affect any of the amounts recognised in the fi nancial statements. If an entity has made a prior period adjustment or has reclassifi ed items in the fi nancial statements, it will need to disclose a third balance sheet (statement of fi nancial position), this one being as at the beginning of the comparative period. The Group intends to apply the revised standard from 1 July 2009. (aa) Leases Leases in which a signifi cant portion of the risks and rewards of ownership are retained by the lessor are classifi ed as operating leases (note 32). Payments made under operating leases are charged to the income statement on a straight-line basis. Lease income from operating leases is recognised in income on a straight-line basis over the lease term. (ab) Going concern Although the parent entity shows net liabilities there is no reason to believe that it will not be able to pay its liabilities as and when they fall due. The defi ciency relates to a $52m debit to a business combination reserve as a result of $52m paid by CHL to acquire Charter Hall Holdings Pty Ltd. 93 Annual Report 2008 Notes to the Financial Statements 30 June 2008 ) 2. FINANCIAL RISK MANAGEMENT The Group’s activities expose it to a variety of fi nancial risks; market risk (fair value interest rate risk and price risk), credit risk, liquidity risk and cash fl ow interest rate risk. The Group’s overall risk management program focuses on the unpredictability of fi nancial markets and seeks to minimise potential adverse effects on the fi nancial performance of the Group. The Group uses derivative fi nancial instruments such as interest rate swaps to hedge certain risk exposures. Risk management is carried out by the Joint Managing Directors in discussion with the Board of Directors. The Managing Directors identify, evaluate and hedge fi nancial risks in close co-operation with the fi nance department. The Board provides guidance for overall risk management, as well as covering specifi c areas, such as mitigating interest rate, price and credit risks, use of derivative fi nancial instruments and investing excess liquidity. (a) Market risk (i) Price risk (a) Listed equity securities price risk The Group is exposed to equity securities price risk. This arises from an investment in a publicly listed entity held by the Group and classifi ed on the balance sheet as at fair value through the profi t or loss. Price rate sensitivity analysis The table below illustrates the potential impact a change in listed share prices by +/-20% would have on the Group’s profi t and equity. The movement in the price variable has been determined based on management’s best estimate, having regard to a number of factors, including historical levels of price movement, historical correlation of the Group’s investments with the relevant benchmark and market volatility. However, actual movements in the price may be greater or less than anticipated due to a number of factors. As a result, historic price variations are not a defi nitive indicator of future price variations. 2008 Assets Listed shares Total increase/(decrease) Carrying amount $’000 2,004 -20% +20% Profi t $’000 (281) (281) Equity $’000 (281) (281) Profi t $’000 281 281 Equity $’000 281 281 (b) Unlisted units price risk The Group is exposed to unlisted units price risk. This arises from an investment in unlisted property funds managed by the Group. These funds invest in direct property. Price rate sensitivity analysis The table below illustrates the potential impact a change in unlisted unit prices by +/-10% would have on the Group’s profi t and equity. The movement in the price variable has been determined based on management’s best estimate, having regard to a number of factors, including historical levels of price movement, historical correlation of the Group’s investments with the relevant benchmark and market volatility. However, actual movements in the price may be greater or less than anticipated due to a number of factors. As a result, historic price variations are not a defi nitive indicator of future price variations. 2008 Assets Unlisted units Total increase/(decrease) Carrying amount $’000 225,279 -10% +10% Profi t $’000 (22,528) (22,528) Equity $’000 (22,528) (22,528) Profi t $’000 22,528 22,528 Equity $’000 22,528 22,528 (ii) Cash fl ow and fair value interest rate risk As the Group has no signifi cant long term interest-bearing assets, the Group’s income and operating cash receipts are not materially exposed to changes in market interest rates. The Group’s interest rate risk arises from long term borrowings of $260,982,000 (2007: $158,572,000). Borrowings issued at variable rates expose the Group to cash fl ow interest rate risk. Borrowings issued at fi xed rates expose the Group to fair value interest-rate risk. Group policy is to fi x the rates for up to 100% of its long term borrowings (when appropriate). At year end 75% (2007: 70%) of debt had fi xed interest rates through the use of derivatives. The Group manages its cash fl ow interest rate risk by using fl oating-to-fi xed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from fl oating rates to fi xed rates. Generally, the Group raises long-term borrowings at fl oating rates and swaps them into fi xed rates that are lower than those available if the Group borrowed at fi xed rates directly. Under the interest-rate swaps, the Group agrees with other parties to exchange, at specifi ed intervals (mainly quarterly), the difference between fi xed contract rates and fl oating-rate interest amounts calculated by reference to the agreed notional principal amounts. Refer to note 15(c) for interest rate sensitivity analysis on assets and note 23(d) for sensitivity analysis for liabilities. 94 Charter Hall Group Notes to the Financial Statements 30 June 2008 2. FINANCIAL RISK MANAGEMENT (CONTINUED) (b) Credit risk The Group has policies in place to ensure that sales of services are made to customers with an appropriate credit history. Derivative counterparties and cash transactions are limited to high credit quality fi nancial institutions. The Group has policies that limit the amount of credit exposure to any one fi nancial institution. (c) Liquidity risk Prudent liquidity risk management implies maintaining suffi cient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close-out market positions. Due to the dynamic nature of the underlying businesses, Group Finance aims at maintaining fl exibility in funding by keeping committed credit lines available. The table below analyses the Group’s fi nancial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash fl ows, except for interest rate swaps. Maturities of fi nancial liabilities 2008 Consolidated Non-interest bearing Bank and other loans Interest rate swaps 2007 Consolidated Non-interest bearing Bank and other loans Interest rate swaps 2008 Parent Non-interest bearing Bank and other loans 2007 Parent Non-interest bearing Bank and other loans Carrying Amount $’000 1,002 260,981 (5,880) 256,103 Carrying Amount $’000 1,252 158,572 (5,345) 154,479 Carrying Amount $’000 53 129,008 129,061 Carrying Amount $’000 5 75,351 75,356 Less than 1 year $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Total cash fl ows $’000 1,002 22,430 (2,901) 20,531 – 283,411 (2,868) 280,543 – – – – – – – – 1,002 305,841 (5,769) 301,074 Less than 1 year $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Total cash fl ows $’000 1,252 11,372 (727) 11,897 – 169,944 (694) 169,250 – – (661) (661) Less than 1 year $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 53 30,014 30,067 – 30,014 30,014 – 90,042 90,042 Less than 1 year $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 5 14,104 14,109 – 14,104 14,104 – 42,311 42,311 – – – – Over 5 years $’000 – 228,299 228,299 Over 5 years $’000 – 128,264 128,264 1,252 181,316 (2,082) 180,486 Total cash fl ows $’000 53 378,369 378,422 Total cash fl ows $’000 5 161,903 161,908 95 Annual Report 2008 Notes to the Financial Statements 30 June 2008 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Estimates and judgements are continually evaluated and are based on experience and other factors, including expectations of future events that may have a fi nancial impact on the entity and that are believed to be reasonable under the circumstances. (a) Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by defi nition, seldom equal the related actual results. The estimates or assumptions that have a signifi cant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next fi nancial year are discussed below: (i) Estimated value of investments Critical judgements are made by the Group in respect of the fair value of investments in associates (note 35) and investment properties (note 19). These investments are reviewed regularly for impairment by reference to external independent property valuations and market conditions, using generally accepted market practices. (ii) Estimated performance fees Critical judgements are made by the Group in respect of recognising performance fee revenue. Performance fees are only recognised if it is probable a fee will be received. Detailed calculations are completed and the risks associated with the fee are assessed when deciding when it is appropriate to recognise revenue. 4. UNDERLYING EARNINGS PER SECURITY The Responsible Entity does not consider it appropriate to use profi t under certain Australian Accounting Standards to determine distributions to securityholders. The table below outlines the Responsible Entity’s adjustments to profi t under Australian Accounting Standards to determine the amount the Responsible Entity believes should be available for distribution for the current year. The Responsible Entity uses this amount as guidance for determination. Underlying earnings is a fi nancial measure which is not prescribed by Australian Accounting Standards and represents the profi t under Australian Accounting Standards adjusted for certain unrealised and non-cash items. Per the Trust Constitution, the adjustments, and therefore the amount distributed to securityholders are at the discretion of the Responsible Entity. The Responsible Entity will use the underlying earnings calculated as a guide to assessing an appropriate distribution to declare. The adjustments made to profi t under Australian Accounting Standards in order to solely determine underlying earnings may change from time to time depending on future changes to accounting standards and the Responsible Entity’s assessment as to whether non-recurring or infrequent items (such as realised gains on the sale of properties) will be distributed to securityholders. Earning per security per note 39 (cents) Underlying earning per security (cents) Earnings used in the calculation of underlying earnings per security (‘000s) Weighted average number of ordinary securities used in the calculation of underlying earnings per security (‘000s) (note 39) Net profi t attributable to stapled securityholders of the Group Net gain from fair value adjustments Foreign exchange gain Gains on sale of investments Tax expense / (benefi t) on unrealised gains or losses Non cash long term incentive plan Amortisation of fees paid for raising of wholesale equity Amortisation of lease incentives Underlying earnings Distribution paid/payable Distribution paid/payable per security (cents) 96 Charter Hall Group Consolidated 2008 2007 16.31 12.74 52,742 12.00 9.51 34,223 413,905 359,384 $’000 $’000 67,498 (15,287) (922) (838) (1,552) 2,669 755 419 52,742 52,117 12.60 43,168 (11,493) – – 852 882 480 344 34,233 3 8,072 10.44 Notes to the Financial Statements 30 June 2008 5. SEGMENT INFORMATION (a) Description of segments Business segments The consolidated entity is organised into the following divisions: Property investment Has interests in investment properties and unlisted property funds. Funds management and corporate Property funds management, development management and property management. 2008 Revenue Inter-segment sales (note (ii)) Total sales revenue Gain on sale of Investments Share of net profi t of associates (note (iii)) Total segment revenue/income Segment result before interest expense Interest expense Segment result after interest expense Fair value adjustments Profi t before income tax Income tax benefi t Profi t for the period Segment assets Segment liabilities (note (ii)) Investments in associates (note (iii)) Acquisitions of plant and equipment and other non-current segment assets Depreciation and amortisation expense Long term incentive expenses 2007 Revenue Inter-segment sales (note (ii)) Total sales revenue Share of net profi t of associates (note (iii)) Total segment revenue/income Segment result before interest expense Interest expense Segment result after interest expense Fair value adjustments Profi t before income tax Income tax expense Profi t for the period Segment assets Segment liabilities (note (ii)) Investments in associates (note (iii)) Acquisitions of plant and equipment and other non-current segment assets Depreciation and amortisation expense Long term incentive expenses Property Investment $’000 78,394 – 78,394 838 – 79,232 70,566 (20,109) 50,457 21,132 71,589 (203) 71,386 842,817 299,758 225,279 8,944 – – Property Investment $’000 49,379 – 49,379 – 49,379 41,005 (6,496) 34,509 7,363 41,872 57 41,929 690,301 184,170 142,096 145,913 – – Funds management and corporate $’000 40,214 745 40,959 – 7,534 48,493 26,345 (27,550) (1,205) (5,845) (7,050) 3,162 (3,888) 93,762 144,501 52,344 474 (252) (2,669) Funds management and corporate $’000 25,648 1,997 27,645 287 27,932 14,307 (14,163) 144 2,838 2,982 (1,743) 1,239 36,740 81,860 8,609 1,245 (197) (882) Inter-segment eliminations/ unallocated $’000 (27,548) (745) (28,293) – – (28,293) (27,548) 27,548 – – – – – (134,658) (134,658) – – – – Inter-segment eliminations/ unallocated $’000 (14,163) (1,997) (16,160) – (16,160) (15,455) 14,163 (1,292) 1,292 – – – (76,663) (76,663) – – – – Consolidated $’000 91,060 – 91,060 838 7,534 99,432 69,363 (20,111) 49,252 15,287 64,539 2,959 67,498 801,921 309,601 277,623 9,418 (252) (2,669) Consolidated $’000 60,864 – 60,864 287 61,151 39,857 (6,496) 33,361 11,493 44,854 (1,686) 43,168 650,378 189,367 142,856 147,158 (197) (882) 97 Annual Report 2008 Notes to the Financial Statements 30 June 2008 5. SEGMENT INFORMATION (CONTINUED) (b) Notes to and forming part of the segment information (i) Accounting policies Segment information is prepared in conformity with the accounting policies of the entity as disclosed in note 1 and accounting standard AASB 114 Segment Reporting. Segment revenues, expenses, assets and liabilities are those that are directly attributable to a segment and the relevant portion that can be allocated to the segment on a reasonable basis. Segment assets include all assets used by a segment and consist primarily of operating cash, receivables, investment properties, property, plant and equipment net of related provisions. While most of these assets can be directly attributable to individual segments, the carrying amounts of certain assets used jointly by segments are allocated based on reasonable estimates of usage. Segment liabilities consist primarily of trade and other creditors, employee benefi ts and provisions. Segment assets and liabilities include income taxes. (ii) Inter-segment transfers Segment revenues, expenses and results include transfers between segments. Such transfers are priced on an “arm’s-length” basis and are eliminated on consolidation. (iii) Investments in associates The Group owns approximately 17% of Charter Hall Diversifi ed Property Fund, 20% of Charter Hall Core Plus Offi ce Fund, 25% of Charter Hall Core Plus Industrial Fund and <1% of Charter Hall Umbrella Fund which are all accounted for at fair value and are allocated to the property investment segment. Investments of 3% in Charter Hall Opportunity Fund 4, 15% in Charter Hall Opportunity Fund 5 and 50% of Commercial and Industrial Property Pty Ltd are equity accounted and allocated to the funds management and corporate segment. Consolidated Parent entity 2008 $’000 36,548 39,570 76,118 5,401 9,541 91,060 2007 $’000 26,726 24,977 51,703 5,043 4,083 60,829 2008 $’000 2007 $’000 – 49 49 707 15,642 16,398 – – – 766 3,610 4,376 Consolidated Parent entity 2008 $’000 4,156 10,218 913 15,287 2007 $’000 (3,791) 11,080 4,204 11,493 2008 $’000 2007 $’000 – – – – – – – – 6. REVENUE Sales revenue Gross rental income Management and performance fees Other revenue Interest Distributions / dividends 7. FAIR VALUE ADJUSTMENTS Investment properties Investments in fi nancial assets Derivative fi nancial instruments 98 Charter Hall Group Notes to the Financial Statements 30 June 2008 8. EXPENSES Profi t before income tax includes the following specifi c expenses: Depreciation Plant and equipment Finance costs Interest and fi nance charges paid/payable Consolidated Parent entity 2008 $’000 2007 $’000 2008 $’000 2007 $’000 252 197 – – 20,111 6,496 27,548 14,163 Defi ned contribution superannuation expense 1,046 654 Rent expense relating to operating leases Minimum lease payments Doubtful Debts Impairment losses – Financial assets Trade receivabless 9. INCOME TAX EXPENSE (a) Income tax expense / (gain) Current tax Deferred tax Under provided in prior years Deferred income tax (revenue) expense included in income tax expense comprises: Increase in deferred tax assets (note 20) Increase in deferred tax liabilities (note 24) 444 349 300 190 – – – – – – Consolidated Parent entity 2008 $’000 (165) (2,981) 187 (2,959) (3,827) 846 (2,981) 2007 $’000 (180) 1,674 192 1,686 (4) 1,678 1,674 2008 $’000 (3,623) (4,231) 20 (7,834) (4,418) 187 (4,231) 2007 $’000 – (3,545) 5 (3,540) (3,758) 213 (3,545) (b) Numerical reconciliation of income tax expense to prima facie tax payable Profi t before income tax expense 64,539 44,854 (11,218) (9,869) Tax at the Australian tax rate of 30% Tax effect of amounts which are not deductible (taxable) in calculating taxable income: 19,362 13,456 (3,365) (2,961) Charter Hall Property Trust income Entertainment Share based payments expense Reversal of tax losses previously recognised Non-taxable dividends Adjustments to current tax of prior periods Sundry items (21,321) 16 801 – (2,167) 187 163 (2,959) (12,562) 7 341 131 – 192 121 1,686 – – – – (4,599) 20 110 (7,834) – – 341 131 (997) 5 (59) (3,540) (c) Amount recognised directly in equity Net deferred tax debited directly to equity (note 26) – 5 – – 99 Annual Report 2008 Notes to the Financial Statements 30 June 2008 9. INCOME TAX EXPENSE (CONTINUED) (d) Tax consolidation legislation Charter Hall Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation of 1 July 2003. The accounting policy in relation to this legislation is set out in note 1(f). On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharing agreement which, in the opinion of the directors, limits the joint and several liability of the wholly-owned entities in the case of a default by the head entity, Charter Hall Limited. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate Charter Hall Limited for any current tax payable assumed and are compensated by Charter Hall Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Charter Hall Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ fi nancial statements. The amounts receivable/payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each fi nancial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. The funding amounts are recognised as current intercompany receivables or payables (see note 33). 10. CURRENT ASSETS – CASH AND CASH EQUIVALENTS Cash at bank and in hand Deposits at call Consolidated Parent entity 2008 $’000 16,153 30 16,183 2007 $’000 3,808 22,699 26,507 2008 $’000 328 – 328 2007 $’000 168 – 168 (a) Cash at bank and on hand These amounts earn between 6.8% and 7.2% (2007: 5.5% and 5.8%). (b) Deposits at call The deposits are bearing fl oating interest rates between 7.3% and 7.4% (2007: 6.0% and 6.3%). These deposits have an average maturity of 28 days (2007: 25 days). 11. CURRENT ASSETS – TRADE AND OTHER RECEIVABLES Trade receivables Provision for doubtful debts Loans to associates GST receivable Other receivables Prepayments Further information relating to loans to associates is set out in note 33. Consolidated Parent entity 2008 $’000 19,529 (300) 19,229 – – 9,936 3,179 32,344 2007 $’000 9,715 (290) 9,425 9,283 33 4,173 3,650 26,564 2008 $’000 2007 $’000 – – – – – 64 – 64 – – – – – – – – 100 Charter Hall Group Notes to the Financial Statements 30 June 2008 11. CURRENT ASSETS – TRADE AND OTHER RECEIVABLES (CONTINUED) (a) Bad and doubtful trade receivables The Group has recognised a loss of $300,000 (2007: $190,000) in respect of bad and doubtful trade receivables during the period ended 30 June 2008. The loss has been included in ‘other expenses’ in the income statement. Movements in the provision for impairments of receivables are as follows: Opening balance Provision for impairment recognised during the year Receivables written off during the year Consolidated Parent entity 2008 $’000 (290) (300) 290 (300) 2007 $’000 – (290) – (290) 2008 $’000 2007 $’000 – – – – – – – – (b) Effective interest rates and credit risk Information concerning the effective interest rate and credit risk of both current and non-current receivables is set out in the non-current receivables note (note 15). 12. CURRENT ASSETS – FINANCIAL ASSETS AVAILABLE FOR SALE Other assets Consolidated Parent entity 2008 $’000 – – 2007 $’000 218 218 2008 $’000 – – 2007 $’000 – – 13. NON-CURRENT ASSETS – FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS Consolidated Parent entity Opening balance Additions Reallocation Revaluation Disposals Closing balance Share and units in associates (note 35) Shares in listed securities 2008 $’000 149,945 102,862 – 12,120 (37,644) 227,283 225,279 2,004 227,283 2007 $’000 3,988 134,990 (100) 11,067 – 149,945 142,096 7,849 149,945 2008 $’000 2007 $’000 – – – – – – – – – – – – – – – – – – Changes in fair values of other fi nancial assets at fair value through profi t or loss are recorded in fair value gains / (losses) in the income statement. These investments have been designated at fair value through the profi t and loss. Information about the Group’s and parent entity’s material exposure to security price risk is provided in note 2(a)(i). 101 Annual Report 2008 Notes to the Financial Statements 30 June 2008 14. DERIVATIVE FINANCIAL INSTRUMENTS Non-current assets Interest rate swap contracts Total non-current derivative fi nancial instrument assets Consolidated Parent entity 2008 $’000 5,880 5,880 2007 $’000 5,345 5,345 2008 $’000 – – 2007 $’000 – – (a) Instruments used by the Group The Group is party to derivative fi nancial instruments in the normal course of business in order to hedge exposure to fl uctuations in interest rates in accordance with the Group’s fi nancial risk management policies (refer to note 2). Interest rate swap contracts It is policy to protect up to 100% of bank loans from exposure to increasing interest rates. Accordingly, the Group has entered into interest rate swap contracts under which it is obliged to receive interest at variable rates and to pay interest at fi xed rates. Swaps currently in place cover 75% (2007: 70%) of the loan principal outstanding and are timed to expire as each loan repayment falls due. The fi xed interest rates range between 6.55% and 7.74% for $AUD swaps (including margin and line fees) (2007: 6.02% and 6.70%). There is one $NZ swap which has a rate of 8.56%. Hedging is at 75% to allow for the raising of external equity in the Charter Hall Core Plus Retail Fund which was a wholly owned subsidiary as at 30 June 2008. At 30 June 2008, the notional principal amounts and periods of expiry of the interest rate swap contracts are as follows: 1 – 2 years 3 – 4 years 4 – 5 years 5 – 6 years 6 – 7 years 8 – 9 years 9 – 10 years 10 – 11 years 11 – 12 years 2008 $’000 47,000 33,000 – – 40,000 – 40,000 – 35,598 195,598 2007 $’000 – 47,000 – 63,450 – – – – – 110,450 The contracts require settlement of net interest receivable or payable each 90 days. The settlement dates coincide with the dates on which interest is payable on the underlying debt. The contracts are settled on a net basis. The gain or loss from remeasuring the hedging instruments at fair value was previously deferred in equity in the hedging reserve. With the hedge no longer tested for effectiveness $1,331,000 was recorded in equity at 31 December 2006 and is currently being amortised to fair value adjustments over the period of the hedge remaining. The amount amortised in the year ended 30 June 2008 was $378,865 (2007: $189,432). The amount of the hedge recorded directly in fair value adjustments in the profi t and loss statement was $534,424 (2007: $4,014,000). (b) Credit risk exposures Credit risk arises from the potential failure of counterparties to meet their obligations under the respective contracts at maturity. This arises with amounts receivable from unrealised gains on derivative fi nancial instruments. The Group undertakes 100% of its transactions in interest rate contracts with fi nancial institutions. (c) Interest rate risk exposures Refer to note 23(c) for the Group’s exposure to interest rate risk on interest rate swaps. 102 Charter Hall Group Notes to the Financial Statements 30 June 2008 15. NON-CURRENT ASSETS – TRADE AND OTHER RECEIVABLES Consolidated Parent entity Loans to key management personnel Loans to subsidiaries Other receivables Further information relating to loans to key management personnel is set out in note 30. (a) Fair values The fair values and carrying values of non-current receivables of the Group are as follows: 2008 $’000 5,082 – – 5,082 2007 $’000 7,062 – 343 7,405 2008 $’000 5,082 8,681 – 13,763 Loans to key management personnel Other receivables 2008 2007 Carrying amount $’000 5,082 – 5,082 Fair value $’000 5,082 – 5,082 Carrying amount $’000 7,062 343 7,405 2007 $’000 7,062 5,019 343 12,424 Fair value $’000 7,062 343 7,405 (b) Interest rate risk The Group’s exposure to interest rate risk and the effective weighted average interest rate by maturity periods is set out in the following tables. Floating interest rate $’000 1 year or less $’000 Over 1 to 2 years $’000 2008 Trade receivables Loans to key management personnel Other receivables Weighted average interest rate – – – – – Floating interest rate $’000 2007 Trade receivables Loans to associates Loans to others Loans to key management personnel Other receivables Weighted average interest rate – – – – – – – – – – – – 1 year or less $’000 – 7,901 – – – 7,901 8.75% Fixed interest maturing in: Over 2 to 3 years $’000 – 5,082 – 5,082 12.60% Over 3 to 4 years $’000 Over 4 to 5 years $’000 Over 5 years $’000 – – – – – – – – – – – – – – – Fixed interest maturing in: – – – – – Over 1 to 2 years $’000 Over 2 to 3 years $’000 – – – – – – – – – – – – – – Over 3 to 4 years $’000 – – 343 7,062 – 7,405 10.44% Over 4 to 5 years $’000 Over 5 years $’000 – – – – – – – – – – – – – – Non interest bearing $’000 19,229 – 13,115 32,344 – Non interest bearing $’000 9,425 1,382 – – 7,856 18,663 – Total $’000 19,229 5,082 13,115 37,426 Total $’000 9,425 9,283 343 7,062 7,856 33,969 103 Annual Report 2008 Notes to the Financial Statements 30 June 2008 15. NON-CURRENT ASSETS – TRADE AND OTHER RECEIVABLES (CONTINUED) (c) Interest rate sensitivity analysis The following table illustrates the potential impact a change in interest rates by +/-1% would have on the Group’s profi t and equity. -1% +1% Carrying amount $’000 16,183 5,880 Carrying amount $’000 26,507 5,345 Carrying amount $’000 328 Carrying amount $’000 168 Profi t $’000 (162) (9,579) (9,741) Profi t $’000 (265) (2,794) (3,059) -1% Equity $’000 (162) (9,579) (9,741) Equity $’000 (265) (2,794) (3,059) Profi t $’000 162 9,006 9,168 Profi t $’000 265 2,693 2,958 +1% Equity $’000 162 9,006 9,168 Equity $’000 265 2,693 2,958 -1% +1% Profi t $’000 Equity $’000 Profi t $’000 Equity $’000 (3) (3) (3) (3) 3 3 3 3 -1% +1% Profi t $’000 Equity $’000 Profi t $’000 Equity $’000 (2) (2) (2) (2) 2 2 2 2 Consolidated 2008 Assets Cash and cash equivalents Derivative fi nancial instruments Total increase/(decrease) Consolidated 2007 Assets Cash and cash equivalents Derivative fi nancial instruments Total increase/(decrease) Parent 2008 Assets Cash and cash equivalents Total increase/(decrease) Parent 2007 Assets Cash and cash equivalents Total increase/(decrease) 104 Charter Hall Group Notes to the Financial Statements 30 June 2008 15. NON-CURRENT ASSETS – TRADE AND OTHER RECEIVABLES (CONTINUED) (d) Credit risk There is a limited concentration of credit risk with respect to current and non-current receivables, as the Group has a large number of customers. Refer to note 2 for more information on the risk management policy of the Group. The ageing of trade receivables at the reporting date was as follows: 1 to 3 months 3 to 6 months Consolidated Parent entity 2008 $’000 139 96 235 2007 $’000 – 201 201 2008 $’000 – – – 2007 $’000 – – – The receivables that are aged 1 to 3 months are considered past due but not impaired while the receivables aged 3 to 6 months are considered to be impaired and have been provided for in addition to other provisions required. 16. NON-CURRENT ASSETS – INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD Units in associates (note 35) Shares in joint venture entity (note 36) Consolidated 2008 $’000 6,502 43,838 50,340 2007 $’000 760 – 760 (a) Units in associates Investments in associates are accounted for in the consolidated fi nancial statements using the equity method of accounting and are carried at cost by the parent entity. (b) Shares in joint venture entity The interest in CIP is accounted for in the consolidated fi nancial statements using the equity method of accounting and is carried at cost by the parent entity. 17. NON-CURRENT ASSETS – OTHER FINANCIAL ASSETS Consolidated Parent entity Shares and units in subsidiaries (note 35) Shares and units in associates (note 35) Shares in joint venture (note 36) Units to be issued for equity contributed 2008 $’000 – – – 18,182 18,182 These fi nancial assets are carried at cost. $18,182,000 was invested by CHPT into CPOF on 27 June 2008 with units not being issued until 1 July 2008 Movements in other fi nancial assets Opening balance Additions Revaluation Closing balance – 18,182 – 18,182 2007 $’000 – – – – – – – – – 2008 $’000 1,600 6,584 40,509 – 48,693 2,360 46,333 – 48,693 2007 $’000 1,600 760 – – 2,360 2,097 – 263 2,360 105 Annual Report 2008 Notes to the Financial Statements 30 June 2008 18. NON-CURRENT ASSETS – PROPERTY, PLANT AND EQUIPMENT Consolidated Year ended 30 June 2007 Opening net book amount Additions Depreciation charge Closing net book amount At 30 June 2007 Cost Accumulated depreciation Net book amount Year ended 30 June 2008 Opening net book amount Additions Depreciation charge Closing net book amount At 30 June 2008 Cost Accumulated depreciation Net book amount 19. NON-CURRENT ASSETS – INVESTMENT PROPERTIES At Fair value Opening balance Acquisitions and additions Lease incentives paid Lease incentives amortised Asset removed on deconsolidation Disposals Net gain / (loss) from fair value adjustment Closing balance at 30 June (a) Amounts recognised in profi t and loss for investment property Rental income Direct operating expenses from property that generated rental income 106 Charter Hall Group Furniture, fi ttings and equipment $’000 Fixtures $’000 307 211 (111) 407 870 (463) 407 407 472 (217) 662 1,207 (545) 662 – 1,034 (86) 948 1,034 (86) 948 948 2 (35) 915 1,073 (158) 915 Total $’000 307 1,245 (197) 1,355 1,904 (549) 1,355 1,355 474 (252) 1,577 2,280 (703) 1,577 Consolidated Parent entity 2008 $’000 2007 $’000 2008 $’000 2007 $’000 430,701 103,563 761 (419) – (99,117) 4,156 439,645 36,548 (8,275) 28,273 284,788 253,738 2,957 (211) (106,780) – (3,791) 430,701 26,726 (7,120) 19,606 – – – – – – – – – – – – – – – – – – – – – – Notes to the Financial Statements 30 June 2008 19. NON-CURRENT ASSETS – INVESTMENT PROPERTIES (CONTINUED) Property % Owned Date acquired Type Cost incl additions $’000 Independent valuation date Independent valuation amount $’000 61 Nepean Hwy, Mentone1 Bulky retail 570 Bourke St, Melbourne3 Offi ce 56 Anzac St, Chullora5 Industrial 400 Kent St, Sydney3 Offi ce 372 Whitehorse Rd, Nunawading2 Bulky retail 25 Nepean Hwy, Mentone Bulky retail CPRF properties4 Bunnings, Kalgoorlie Bunnings, Bendigo Harvey Norman, Dunedin, NZ Bunnings, Box Hill Bunnings, Nerang Bunnings, Nowra Bunnings, Penrith Bunnings, Stafford Bunnings, Belconnen Foodtown, Auckland, NZ(c) Bulky retail Bulky retail Bulky retail Bulky retail Bulky retail Bulky retail Bulky retail Bulky retail Bulky retail Retail Home HQ, Ipswich1 Home HQ, Rothwell1 Menai Central, Menai4 Bluewater Square, Redcliffe1 Retail Bulky retail Retail Retail 50 0 100 0 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 15/6/05 20/6/05 21/6/05 28/7/05 31/10/06 21/7/06 20/12/06 20/12/06 2/2/07 20/6/07 20/6/07 20/6/07 20/6/07 20/6/07 27/6/07 N/A 14/8/07 28/9/07 4/7/05 N/A 27,399 – 18,589 – 72,922 23,059 6,571 9,213 14,253 27,722 20,058 14,588 28,020 21,669 25,475 24,643 12,547 17,923 224 53,217 418,092 31/12/07 30/6/07 30/6/07 30/9/07 30/6/08 30/6/08 30/6/08 30/6/08 30/6/08 30/6/08 30/6/08 30/6/08 30/6/08 30/6/08 30/6/08 30/6/08 30/6/08 30/6/08 30/6/08 30/6/08 27,595 72,000 19,250 26,650 69,000 24,600 6,600 9,100 14,239 25,400 18,750 13,800 25,600 21,250 23,500 22,150 12,547 17,300 39,000 53,217 Book value 2008 $’000 27,595 – 17,150 – 69,000 24,600 6,600 9,100 14,239 25,400 18,750 13,800 25,600 21,250 23,500 24,613 Book value 2007 $’000 23,615 72,000 19,250 26,650 67,931 21,900 6,200 8,700 16,343 26,220 19,100 13,720 26,520 20,640 23,800 1,271 11,047 17,300 39,000 51,101 439,645 – – 36,746 95 430,701 Valuer Savills CBRE Savills Savills Savills Savills CBRE CBRE CBRE Colliers Colliers Colliers Colliers Colliers Colliers Colliers Knight Frank Savills CBRE CBRE 1 Development assets which have been valued by directors from CPRF’s perspective. The valuation includes capitalised interest paid to CHPT which is eliminated on consolidation. 2 Valuation is based on a capitalised value of $72.3m less an allowance for incentives required to be paid for the property to be fully leased. 3 400 Kent St, Sydney was sold on 24 December 2007. 570 Bourke St, Melbourne was sold on 27 June 2008. CPRF properties are properties held in a wholly owned sub trust of CHPT. Menai Central was purchased by CHPT on 4 July 2005. A lease transferred ownership to Charter Hall MMN Trust a subsidiary of CPRF on 22 February 2008. 4 5 This property is shown at directors valuation. (b) Valuation basis The basis of the valuation of investment properties is fair value being based on a discounted cash fl ow calculation or capitalisation approach. The 2008 revaluations were based on a combination of directors’ valuations and independent valuations. (c) Foodtown fi nancial liability The independent valuation refl ects the net property value after deducting the Foodtown ground rent lease value $2,462,000 from the valuation of total income to be received. Foodtown fi nancial liability Consolidated Parent entity 2008 $’000 2,462 2007 $’000 – 2008 $’000 – 2007 $’000 – 107 Annual Report 2008 Notes to the Financial Statements 30 June 2008 20. NON-CURRENT ASSETS – DEFERRED TAX ASSETS Consolidated Parent entity The balance comprises temporary differences attributable to: Prepayments Employee benefi ts Other provisions Financial assets at fair value through profi t and loss Fund establishment costs Tax losses Movements: Opening balance Credited to the income statement (note 9) Amounts recognised in equity Closing balance at 30 June Deferred tax assets to be recovered after more than 12 months Deferred tax assets to be recovered within 12 months 21. CURRENT LIABILITIES – TRADE AND OTHER PAYABLES Trade payables Deposits Accruals Distribution payable GST payables Other payables 22. CURRENT LIABILITIES – PROVISIONS Employee benefi ts – long service leave 2008 $’000 – 256 26 902 – 3,926 5,110 1,283 3,827 – 5,110 5,110 – 5,110 2007 $’000 15 247 256 – 214 551 1,283 1,284 4 (5) 1,283 1,283 – 1,283 2008 $’000 – – – – – 10,105 10,105 5,687 4,418 – 10,105 10,105 – 10,105 2007 $’000 210 – – – – 5,477 5,687 1,929 3,758 – 5,687 5,687 – 5,687 Consolidated Parent entity 2008 $’000 1,002 – 11,705 25,670 2,083 2,031 42,491 2007 $’000 2,991 86 4,268 20,677 – 21 28,043 2008 $’000 2007 $’000 53 – – – 5 – 58 5 – – – – – 5 Consolidated Parent entity 2008 $’000 109 109 2007 $’000 149 149 2008 $’000 – – 2007 $’000 – – (a) Movements in provisions Refer to note 25 for the movement in provisions and split between current and non-current. 23. NON-CURRENT LIABILITIES – BORROWINGS Unsecured Bank loans Loan – Charter Hall Property Trust Total unsecured non-current borrowings 108 Charter Hall Group Consolidated Parent entity 2008 $’000 260,981 – 260,981 2007 $’000 158,572 – 158,572 2008 $’000 – 129,008 129,008 2007 $’000 – 75,351 75,351 Notes to the Financial Statements 30 June 2008 23. NON-CURRENT LIABILITIES – BORROWINGS (CONTINUED) (a) Total unsecured liabilities The total unsecured liabilities (current and non-current) are as follows: Bank loans Loan – Charter Hall Property Trust Total unsecured liabilities (b) Financing arrangements Unrestricted access was available at balance date to the following lines of credit: Total facilities Used at balance date Unused at balance date Consolidated Parent entity 2008 $’000 260,981 – 260,981 2007 $’000 158,572 – 158,572 2008 $’000 – 129,008 129,008 2007 $’000 – 75,351 75,351 Consolidated Parent entity 2008 $’000 304,079 260,981 43,098 2007 $’000 160,000 158,572 1,428 2008 $’000 150,000 129,008 20,992 2007 $’000 150,000 75,351 74,649 The consolidated entity has access to a National Australia Bank $270m 3 year evergreen facility and a $34m year facility. Subject to the continuance of satisfactory loan covenants and credit ratings, the bank loan facilities may be drawn at any time. In August 2008 CPRF secured a 3 year debt facility of $250m from National Australia Bank and St George Bank and used the facility to repay loans from CHPT. CHPT used the proceeds to repay the $34m year facility and the $270m facility. In August 2008 CHPT obtained a new $100m debt facility that expires in July 2011. The Parent entity has a facility provided by CHPT. (c) Interest rate risk exposures The following table sets out the Group’s exposure to interest rate risk, including the contractual repricing dates and the effective weighted average interest rate by maturity periods. Exposures arise predominantly from liabilities bearing variable interest rates as the Group intends to hold fi xed rate liabilities to maturity. Fixed interest rate 2008 Consolidated Bank and other loans Interest rate swaps Floating interest rate $’000 260,981 (195,598) 65,383 Weighted average interest rate 8.46% 1 year or less $’000 Over 1 to 2 years $’000 Over 2 to 3 years $’000 – 33,000 33,000 – 47,000 47,000 6.55% 7.44% – – – – Over 3 to 4 years $’000 Over 4 to 5 years $’000 – – – – – – – – 2007 Consolidated Bank and other loans Interest rate swaps Floating interest rate $’000 158,572 (110,450) 48,122 Weighted average interest rate 7.02% Fixed interest rate 1 year or less $’000 Over 1 to 2 years $’000 Over 2 to 3 years $’000 Over 3 to 4 years $’000 Over 4 to 5 years $’000 – – – – – – – – – – – – – 47,000 47,000 6.02% – – – – Over 5 years $’000 – 115,598 115,598 7.99% Over 5 years $’000 – 63,450 63,450 6.52% Total $’000 260,981 – 260,981 Total $’000 158,572 – 158,572 109 Annual Report 2008 Notes to the Financial Statements 30 June 2008 23. NON-CURRENT LIABILITIES – BORROWINGS (CONTINUED) (d) Interest rate sensitivity analysis The following table illustrates the potential impact a change in interest rates by + / -1% would have on the Group’s profi t and equity. Consolidated 2008 Liabilities Trade and other payables Financial liabilities Borrowings Total increase/(decrease) Consolidated 2007 Liabilities Trade and other payables Financial liabilities Borrowings Total increase/(decrease) Parent 2008 Liabilities Trade and other payables Borrowings Total increase/(decrease) Parent 2007 Liabilities Trade and other payables Borrowings Total increase/(decrease) Carrying amount $’000 42,491 2,462 260,981 Carrying amount $’000 28,043 – 158,572 Carrying amount $’000 58 129,008 Carrying amount $’000 5 75,351 –1% +1% Profi t $’000 Equity $’000 – – 654 654 – – 654 654 Profi t $’000 – – (654) (654) –1% +1% Profi t $’000 Equity $’000 Profi t $’000 – – (481) (481) – – 481 481 –1% +1% Equity $’000 – 1,178 1,178 Profi t $’000 – (1,178) (1,178) –1% +1% Equity $’000 – 601 601 Profi t $’000 – (601) (601) – – 481 481 Profi t $’000 – 1,178 1,178 Profi t $’000 – 601 601 Equity $’000 – – (654) (654) Equity $’000 – – (481) (481) Equity $’000 – (1,178) (1,178) Equity $’000 – (601) (601) (e) Fair value The carrying amounts and fair values of borrowings at balance date are: On-balance sheet Non-traded fi nancial liabilities Bank loans Other loans 110 Charter Hall Group 2008 2008 Parent Carrying amount $’000 Fair value $’000 Carrying amount $’000 Fair value $’000 260,981 – 261,270 – – 129,008 – 129,008 Notes to the Financial Statements 30 June 2008 23. NON-CURRENT LIABILITIES – BORROWINGS (CONTINUED) (e) Fair value (continued) Fair value is inclusive of costs which would be incurred on settlement of a liability. (i) On-balance sheet The fair value of borrowings is based upon market prices where a market exists or by discounting the expected future cash fl ows by the current interest rates for liabilities with similar risk profi les. (ii) Off-balance sheet There are no off-balance sheet liabilities. Capital risk management Gearing is a measure used to monitor levels of debt capital used by the business to fund its operations. This ratio is calculated as interest bearing debt divided by tangible assets, net of cash and cash equivalents. The gearing ratios at 30 June 2008 and 30 June 2007 were 31.0% and 21.2% respectively. 24. NON-CURRENT LIABILITIES – DEFERRED TAX LIABILITIES Consolidated Parent entity The balance comprises temporary differences attributable to: Financial assets at fair value through profi t and loss Prepayments Fund establishment costs Accrued revenue Depreciation on New Zealand assets Other Movements: Opening balance Charged/(credited) to the income statement (note 9) Closing balance at 30 June Deferred tax liabilities to be settled after more than 12 months Deferred tax liabilities to be settled within 12 months 25. NON-CURRENT LIABILITIES – PROVISIONS Employee benefi ts – long service leave (a) Movements in provisions Movements in employee benefi ts provisions are set out below: Long service leave Opening balance Additional provisions recognised Carrying amount at end of period Current Non-current Total 2008 $’000 – 11 739 2,370 288 – 3,408 2,562 846 3,408 3,408 – 3,408 2007 $’000 832 16 946 367 – 401 2,562 884 1,678 2,562 2,562 – 2,562 2008 $’000 2007 $’000 – – – 555 – – 555 368 187 555 555 – 555 – – – 367 – 1 368 155 213 368 368 – 368 Consolidated Parent entity 2008 $’000 150 2007 $’000 41 2008 $’000 – 2007 $’000 – Consolidated 2008 $’000 2007 $’000 190 69 259 109 150 259 131 59 190 149 41 190 111 Annual Report 2008 Notes to the Financial Statements 30 June 2008 26. CONTRIBUTED EQUITY (a) Security capital* Ordinary securities Fully paid (b) Movements in ordinary security capital: Details Opening balance Addback LTI securities reversed last year Entitlement issue Employee security scheme issue Employee security scheme issue Employee security scheme issue Employee security scheme issue Employee security scheme issue Securities issued to Wyllie as part of asset purchase Placement Balance at 30 June 2007 Less: Transaction costs on security issues Less: LTI securities reversed Balance per accounts at 30 June 2007 Addback LTI securities reversed last year Employee security scheme issue Issue for purchase of CIP Gift to employee issue Security purchase plan Employee security scheme issue Balance at 30 June 2008 Less: Transaction costs on security issues Less: LTI securities reversed Balance per accounts at 30 June 2008 Charter Hall Limited Charter Hall Property Trust Notes (b),(c) Parent Parent 2008 Securities 2007 Securities 2008 $’000 2007 $’000 413,983,609 413,983,609 409,120,620 409,120,620 526,822 526,822 513,597 513,597 Notes Number of securities Issue price $1.27 $1.27 $1.56 $1.61 $2.00 $2.47 $1.48 $3.00 $2.76 $2.68 $2.83 $3.00 $1.51 (f) (e) (e) (e) (e) (e) (g) (h) (e) (i) (j) (k) (e) 329,186,141 6,200,000 15,423,367 6,299,213 352,564 807,453 50,000 202,428 18,000,000 44,444,445 420,965,611 – (11,844,991) 409,120,620 11,844,991 10,041,015 5,599,098 23,320 68,976 793,701 437,491,721 – (23,508,112) 413,983,609 $’000 336,459 6,222 19,588 8,000 550 1,300 100 500 26,764 133,333 532,816 (4,621) (14,598) 513,597 14,598 27,713 15,000 66 207 1,198 572,379 (246) (45,311) 526,822 5,272 521,550 * This includes security capital of Charter Hall Limited and Charter Hall Property Trust which are stapled. Refer to note 1 for details of the accounting for this stapling arrangement. In 2007 the issued capital of $513,597,000 was divided between Charter Hall Limited $5,131,000 and Charter Hall Property Trust $508,466,000. 112 Charter Hall Group Notes to the Financial Statements 30 June 2008 26. CONTRIBUTED EQUITY (CONTINUED) (c) Ordinary securities Ordinary securities entitle the holder to participate in distributions/dividends and the proceeds on winding up of the trust/company in proportion to the number of and amounts paid on the securities held. The securities issued under the placement are fully paid with no entitlement to the distribution for 30 June 2008. On a show of hands every holder of ordinary securities present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each security is entitled to one vote. (d) Distribution reinvestment plan The company has established a distribution reinvestment plan (DRP) under which holders of ordinary securities may elect to have all or part of their distribution satisfi ed by the issue of new ordinary securities rather than by being paid in cash. Securities are issued under the plan at a discount to the market price. The DRP was activated for the 30 June 2008 distribution. (e) Employee security scheme Information on the employee security scheme, including details of securities issued under the scheme, is set out in note 40. (f) Entitlement, placement and public offer On 19 May 2006 the company invited its securityholders to subscribe to a entitlement, placement and public offer of 61.8m ordinary securities at an issue price of $1.27 per security on the basis of 2 securities for every 9 fully or partly paid ordinary securities held, such securities to be issued on 15 June 2006 or 3 July 2006 and rank for distributions/dividends after 30 June 2006. Securities not taken up under the entitlement offer were subscribed for under a placement and public offer. (g) Wyllie issue On 11 December 2006, 18,000,000 securities were issued to Wyllie Group and $26,764,000 was received as proceeds. This was part of the purchase of 225 St Georges Terrace, Perth by Charter Hall Core Plus Offi ce Fund. (h) Placement On 6 June 2007 44,444,445 securities were issued at $3.00 partially used to fund the acquisition of the Bunnings Portfolio and a 50% interest in Commercial and Industrial Property Pty Limited. The securities were not entitled to the distribution for the six months ended 30 June 2007. (i) Issue for purchase of CIP On 20 July 2007 5,599,098 securities were issued at $2.68 as part payment for the purchase of a 50% interest in Commercial and Industrial Property Pty Limited. (j) Gift to employees On 23 July 2007 23,320 securities were issued at $2.83 to employees of the Group to mark the market capitalisation of CHG reaching $1bn. 530 securities per employee were granted to 44 employees and are subject to escrow conditions governing the sale of the securities. (k) Security purchase plan In line with the placement all securityholders were given the opportunity to purchase securities in the Group at $3.00. As a result on 23 July 2007 68,976 securities were issued at $3.00 per security. 113 Annual Report 2008 Notes to the Financial Statements 30 June 2008 27. RESERVES AND RETAINED PROFITS (a) Reserves Hedging reserve – cash fl ow hedges Business combination reserve Security-based payments reserve Foreign currency reserve Charter Hall Limited and controlled entities Charter Hall Property Trust Movements: Hedging reserve – cash fl ow hedges Opening balance Hedge novated to Charter Hall Core Plus Fund Revaluation Amortisation Closing balance Security-based payments reserve Opening balance Expense relating to LTI scheme Closing balance Business combination reserve Opening and closing balance Foreign currency reserve Opening balance Translation Closing balance Consolidated Parent entity 2008 $’000 763 (52,000) 5,434 (1,235) (47,038) (46,679) (359) (47,038) 1,142 – – (379) 763 1,048 4,386 5,434 2007 $’000 1,142 (52,000) 1,048 22 (49,788) (50,952) 1,164 (49,788) 2,482 (1,512) 361 (189) 1,142 165 883 1,048 2008 $’000 – (52,000) 1,717 (57) (50,340) 2007 $’000 – (52,000) – – (52,000) – – – – – – 1,717 1,717 – – – – – – – – (52,000) (52,000) (52,000) (52,000) 22 (1,257) (1,235) – 22 22 – (57) (57) – – – (i) Hedging reserve – cash fl ow hedges The hedging reserve is used to record gains or losses on a hedging instrument in a cash fl ow hedge that are recognised directly in equity, as described in note 1(l). (ii) Security-based payments reserve The security-based payments reserve is used to recognise the fair value of securities issued to the Charter Hall Limited Executive Loan Security Plan but not issued to employees. (iii) Business combination reserve This reserve relates to the reverse acquisition at IPO. This is the amount that relates to the investment in CHH that is not eliminated by paid in capital. No goodwill is recognised as this transaction is the result of a reverse acquisition. (b) Retained profi ts / (accumulated losses) Movements in retained profi ts were as follows: Opening balance Net profi t / (loss) for the year Distributions / dividends Other Balance 30 June Charter Hall Limited and controlled entities Charter Hall Property Trust 114 Charter Hall Group Consolidated Parent entity 2008 $’000 (2,798) 67,498 (52,117) (47) 12,536 (3,683) 16,219 12,536 2007 $’000 (7,636) 43,168 (38,074) (256) (2,798) 207 (3,005) (2,798) 2008 $’000 (7,921) (3,384) – – (11,305) 2007 $’000 (1,592) (6,329) – – (7,921) Notes to the Financial Statements 30 June 2008 28. MINORITY INTEREST The fi nancial report includes separate fi nancial statements for Charter Hall Limited (CHL) as an individual entity and the consolidated entity consisting of Charter Hall Limited and its subsidiaries and controlled entities including Charter Hall Property Trust (CHPT). For the purposes of AASB Interpretation 1002 Post date of transition stapling arrangements (AASB 1 – 1002), Charter Hall Limited has been identifi ed as the Parent Entity in relation to the stapling. In accordance with AASB 1 – 1002 the results and equity, not directly owned by CHL, of CHPT have been treated and disclosed as minority interest. Whilst the results and equity of CHPT are disclosed as minority interest, the stapled securityholders of CHL are the same as the stapled securityholders of CHPT. Interest in: Contributed equity Reserves Retained profi ts 29. DISTRIBUTIONS (a) Ordinary securities Notes 26(b) 27(a) 27(a) Consolidated Parent entity 2008 $’000 2007 $’000 2008 $’000 2007 $’000 521,550 (359) 16,219 537,410 508,466 1,164 (3,005) 506,625 – – – – – – – – – Interim ordinary distribution for the 6 months ended 31 December 2007 of 6.30 cents per security paid on 29 February 2008 – Final ordinary distribution for the 6 months ended 30 June 2008 of cents per security expected to be paid on 29 August 2008 – Interim ordinary distribution for the 6 months ended 31 December 2007 of 4.77 cents per security paid on 28 February 2007 – Final ordinary distribution for the 6 months ended 30 June 2007 of 5.67 cents per security paid on 31 August 2007 Total distributions provided for or paid Less: distributions paid to holders of LTI securities Distributions paid in cash or satisfi ed by the issue of securities under the distribution reinvestment plan during the period ended 30 June were as follows: Paid in cash Satisfi ed by issue of securities 30. KEY MANAGEMENT PERSONNEL DISCLOSURES (a) Directors The following persons were directors of Charter Hall Limited during the year: (i) Chairman – non-executive K Roxburgh (ii) Executive directors C Fuchs D Harrison (Joint Managing Director) D Southon (Joint Managing Director) (iii) Non-executive directors R Woodhouse (Deputy Chairman) A Biet (resigned 24/10/07) P Derrington G Fraser C McGowan Consolidated entity 2008 $’000 27,512 27,562 – – 55,074 (2,957) 52,117 2007 $’000 – – 17,950 21,349 39,299 (1,227) 38,072 27,512 27,562 55,074 39,299 – 39,299 115 Annual Report 2008 Notes to the Financial Statements 30 June 2008 30. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) (b) Other key management personnel The following persons also had authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, during the year: Name J Bakker R Champion M Winnem Position Employer Corporate Development Director Fund Manager and Retail Director Fund Manager and Development Director Charter Hall Holdings Pty Ltd Charter Hall Holdings Pty Ltd Charter Hall Holdings Pty Ltd (c) Key management personnel compensation Short term employee benefi ts Post-employment benefi ts Security-based payment Consolidated Parent entity 2008 $ 3,866,722 257,887 1,746,376 5,870,985 2007 $ 2,347,448 265,438 487,493 3,100,379 2008 $ – – – – 2007 $ – – – – Detailed remuneration disclosures are provided in sections A-C of the remuneration report on pages 73 to 76. (d) Equity instrument disclosures relating to key management personnel (i) Security holdings The numbers of securities in the company held during the period by each director of Charter Hall Limited and other key management personnel of the Group, including their personally related parties, are set out below. There were no securities granted during the reporting period as compensation. 2008 Name Directors of Charter Hall Limited Ordinary securities A Biet (resigned 24/10/07) 2 P Derrington G Fraser C Fuchs D Harrison C McGowan K Roxburgh D Southon R Woodhouse Other key management personnel of the Group Ordinary securities J Bakker R Champion M Winnem Purchased/ (sold) during the period LTI securities vesting during the period Balance at the end of the period 1 Opening balance 5,559,724 – 225,000 5,486,595 8,666,809 – 50,000 8,754,870 366,666 (350,000) – 125,000 (80,000) (1,648,195) – – (1,490,000) (300,000) 14,666 – 1,654,548 530 530 (1,349,109) – – – 481,233 878,806 – – 864,370 – 207,039 183,727 52,493 5,209,724 – 350,000 5,887,828 7,897,420 – 50,000 8,129,240 66,666 222,235 184,257 357,932 1 This total includes securities that have vested but have not been exercised by repayment of the loan and removal from the LTI plan. 2 The balance for Andre Biet when he resigned as a director was $5,209,724. After this time his holding was not monitored. 116 Charter Hall Group Notes to the Financial Statements 30 June 2008 30. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) (d) Equity instrument disclosures relating to key management personnel (Continued) 2007 Name Directors of Charter Hall Limited Ordinary securities A Biet P Derrington G Fraser C Fuchs D Harrison C McGowan K Roxburgh D Southon R Woodhouse Other key management personnel of the Group Ordinary securities M Winnem R Champion Opening balance Purchased/ (sold) during the period LTI securities vesting during the period Balance at the end of the period 5,729,724 – 156,262 5,656,595 5,899,117 – 50,000 4,608,795 366,666 (520,000) – 68,738 (520,000) 2,276,025 – – 3,654,408 – 350,000 – – 350,000 491,667 – – 491,667 – 5,559,724 – 225,000 5,486,595 8,666,809 – 50,000 8,754,870 366,666 1,482,982 – 171,566 – – – 1,654,548 – (e) Loans to key management personnel Details of loans made to directors of Charter Hall Limited and other key management personnel of the Group, including their personally related parties, are set out below. (i) Aggregates for key management personnel Group 2008 2007 (ii) Individuals with loans above $100,000 during the period 2008 Name D Harrison D Southon C Fuchs A Biet (resigned 25/10/07) 2007 Name D Harrison D Southon C Fuchs A Biet Balance at the start of the period $ 7,062,280 3,964,504 Interest paid and payable for the period $ 1,134,126 378,946 Balance at the end of the period $ 9,928,333 7,062,280 Number in Group at the end of the period 6 4 Balance at the start of the period $ 3,161,295 3,161,295 369,845 369,845 Balance at the start of the period $ 1,970,720 1,970,720 – – Interest paid and payable for the period $ 315,000 315,000 – – Interest paid and payable for the period $ 312,330 312,330 36,540 36,540 Balance at the end of the period $ 2,541,064 2,541,064 – – Balance at the end of the period $ 3,161,295 3,161,295 369,845 369,845 Highest indebtedness during the period $ 2,657,500 2,657,500 – – Highest indebtedness during the period $ 3,161,295 3,161,295 369,845 369,845 117 Annual Report 2008 Notes to the Financial Statements 30 June 2008 30. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) (e) Loans to key management personnel (continued) (ii) Individuals with loans above $100,000 during the period (continued) Loans to key management personnel are for periods of 5 years at interest rates equivalent to the distribution, and are secured by mortgages over the securities that have been purchased with the loan. As predicated in the Product Disclosure Statement dated 11 May 2005, on 6 June 2005 the Joint Managing Directors, David Harrison and David Southon entered into loan agreements, which are full recourse, with CHL. Loans of $2.5m each were provided to acquire Charter Hall Group securities. The interest on the loans is equivalent to the Charter Hall Group distribution paid in respect of the securities purchased using the loan proceeds. The provision of the loans further aligns the Joint Managing Directors interests with those of the Group and Securityholders. The loans, which were for a period of 3 years, have been extended for a further 3 years until 6 June 2011, under the same terms and conditions, by resolution of the Board. 31. REMUNERATION OF AUDITORS During the period the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non related audit fi rms: Consolidated Parent entity 2008 $ 2007 $ 2008 $ 2007 $ (a) Assurance services Audit services PricewaterhouseCoopers Australian fi rm Audit and review of fi nancial reports and other audit work under the Corporations Act 2001 Non-PricewaterhouseCoopers audit fi rms for the audit or review of fi nancial reports of any entity in the Group Total remuneration for audit services Other assurance services PricewaterhouseCoopers Australian fi rm Investigating Accountants Reports Total remuneration for other assurance services 206,901 207,887 56,417 263,318 33,290 241,177 219,000 219,000 – – Total remuneration for assurance services 452,318 241,177 (b) Taxation services PricewaterhouseCoopers Australian fi rm Tax compliance services, including review of company income tax returns Tax advice on equity raising Total remuneration for taxation services 21,090 – 21,090 37,610 97,123 134,733 (c) Advisory services PricewaterhouseCoopers Australian fi rm Long term incentive plan Total remuneration for advisory services – – 38,500 38,500 – – – – – – – – – – – – – – – – – – – – – The Group’s policy to employ PricewaterhouseCoopers (PwC) on assignments additional to their statutory audit duties where PwC’s expertise and experience with the Group are important. These assignments are principally tax advice and Investigating Accountants Reports reporting on acquisitions, or where PwC is awarded assignments on a competitive basis. It is the Group’s policy to seek competitive tenders for all major consulting projects. 118 Charter Hall Group Notes to the Financial Statements 30 June 2008 32. COMMITMENTS (a) Capital Commitments Expenditure contracted for at the reporting date but not recognised as liabilities is as follows: Investment property Payable: Within one year Later than one year but not later than fi ve years Later than fi ve years Consolidated Parent entity 2008 $’000 6,054 – – 6,054 2007 $’000 2008 $’000 2007 $’000 – – – – – – – – – – – – (b) Lease commitments: Group as lessee Commitments in relation to leases contracted for at the reporting date but not recognised as liabilities, payable: Within one year Later than one year but not later than fi ve years Later than fi ve years 33. RELATED PARTIES (a) Parent Entity The parent entity within the Group is Charter Hall Limited. (b) Subsidiaries Interests in subsidiaries are set out in note 34. (c) Key management personnel Disclosures relating to key management personnel are set out in note 30. (d) Transactions with related parties The following transactions occurred with related parties: Sales of services Management and performance fees from associates Acquisition fees from associates Commitment fees from associates Tax consolidation legislation Current tax payable assumed from wholly owned tax consolidated entities Dividend revenue Subsidiaries Consolidated Parent entity 2008 $’000 124 2,210 153 2,487 2007 $’000 – 1,506 1,173 2,679 2008 $’000 2007 $’000 – – – – – – – – Consolidated Parent entity 2008 $ 2007 $ 29,135,241 6,513,024 180,225 15,296,464 2,008,273 173,218 2008 $ – – – 2007 $ – – – – – – 3,612,254 4,901,957 – 11,354,988 3,322,674 Transactions with associates and joint ventures are disclosed in note 35 and note 36 respectively. 119 Annual Report 2008 Notes to the Financial Statements 30 June 2008 33. RELATED PARTIES (CONTINUED) (e) Loans to/from related parties Loans to associates Beginning of the period Loans advanced Loan repayments received Interest charged Interest received End of period Loans to subsidiaries Beginning of the period Loans advanced Interest charged Loans from subsidiaries Beginning of the period Loans received Loan repayments paid Interest charged Interest paid End of period Consolidated Parent entity 2008 $ 2007 $ 2008 $ 2007 $ 9,283,306 – (9,283,306) 144,670 (144,670) – 536,197 57,492,387 (49,051,395) 1,152,920 (846,803) 9,283,306 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 5,018,510 3,612,254 50,725 8,681,489 – 5,010,000 8,510 5,018,510 75,350,694 42,297,921 – 27,548,475 (16,190,052) 129,007,038 55,049,981 20,027,776 (2,939,812) 14,162,749 (10,950,000) 75,350,694 No provisions for doubtful debts have been raised in relation to any outstanding balances, and no expense has been recognised in respect of bad or doubtful debts due from related parties. 120 Charter Hall Group Notes to the Financial Statements 30 June 2008 34. SUBSIDARIES The consolidated fi nancial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1(b): Name of entity Controlled entities of Charter Hall Limited Charter Hall Holdings Pty Limited Charter Hall CUB Pty Ltd Controlled entities of Charter Hall Holdings Pty Ltd Charter Hall (NZ) Pty Limited CH Management Australia Pty Limited Charter Hall Funds Management Limited Bowvilla Pty Limited Charter Hall Holdings Real Estate Pty Limited Frolish Pty Limited Stelridge Pty Limited Visokoi Pty Limited Bieson Pty Limited Sandkilt (No 2) Pty Limited Country of incorporation Class of securities 2008 % 2007 % Equity holding Australia Australia Ordinary Ordinary Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 100 100 100 100 100 100 100 100 100 100 N/A 100 100 100 100 100 100 100 100 100 100 Controlled entities of Charter Hall Holdings Real Estate Pty Ltd Charter Hall Holdings Real Estate (Vic) Pty Limited Australia Ordinary 100 100 Controlled Entities of Charter Hall Property Trust Charter Hall Investment Fund 15 Charter Hall Core Plus Retail Fund Controlled entities of Charter Hall Core Plus Retail Fund Core Plus Retail Fund New Zealand Redcliffe Retail Property Trust Belconnen Retail Warehouse Trust Box Hill Retail Warehouse Trust Nerang Retail Warehouse Trust Nowra Retail Warehouse Trust Penrith Retail Warehouse Trust Stafford Retail Warehouse Trust Ipswich Retail Property Trust Rothwell Retail Property Trust Mentone Property Trust Charter Hall MMN Property Trust CPRF Gepps X Trust CPRF Gepps 109 Trust CPRF MSN Property Trust Australia Australia Ordinary Ordinary Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 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 N/A N/A N/A N/A N/A N/A N/A 121 Annual Report 2008 Notes to the Financial Statements 30 June 2008 35. INVESTMENT IN ASSOCIATES (a) Carrying amounts Information relating to associates is set out below. – – – – 662 98 760 Principal activity Ownership Interest 2007 2008 % % Consolidated Parent entity 2008 $’000 2007 $’000 2008 $’000 2007 $’000 Name of company Unlisted Charter Hall Diversifi ed Property Fund Charter Hall Core Plus Offi ce Fund Charter Hall Core Plus Industrial Fund Charter Hall Umbrella Fund Property Investment 17.0% 11.7% 24,332 5,179 Property Investment 20.0% 23.0% 143,178 80,058 Property Investment 25.0% 32.1% 57,698 45,986 Property Investment <1.0% 47.3% 71 225,279 10,873 142,096 – – – – Charter Hall Opportunity Fund No. 4 Charter Hall Opportunity Fund No. 5 Property Development 3.0% 3.0% Property Development 15.0% 20.0% 3,214 3,288 6,502 662 98 760 3,115 3,469 6,584 The above associates are incorporated in Australia. The investments in Charter Hall Opportunity Fund No 4 & 5 held by Charter Hall Limited are equity accounted in the consolidated fi nancial statements and are other fi nancial assets in the parent fi nancial statements (note 17). The investments in Charter Hall Diversifi ed Property Fund, Charter Hall Core Plus Offi ce Fund, Charter Hall Core Plus Industrial Fund and Charter Hall Umbrella Fund are held by Charter Hall Property Trust and as such are accounted for at fair value through the profi t and loss (note 13). The investment in Charter Hall Diversifi ed Property Fund consists of units which consist of a 17% interest but also an additional investment in the form of a bridging equity loan provided. 122 Charter Hall Group Notes to the Financial Statements 30 June 2008 35. INVESTMENT IN ASSOCIATES (CONTINUED) (b) Movements in carrying amounts Consolidated Charter Hall Diversifi ed Property Fund Opening balance Investment Fair value increase Closing balance Charter Hall Core Plus Offi ce Fund Opening balance Investment Fair value increase Disposal of units Closing Balance Charter Hall Core Plus Industrial Fund Opening balance Investment Fair value increase Disposal of units Closing Balance Charter Hall Umbrella Fund Opening balance Investment Disposal of units Fair value decrease Closing Balance Charter Hall Opportunity Fund No. 4 Opening balance Investment Share of profi t/(loss) after income tax Distributions received/receivable Carrying amount at the end of the period Charter Hall Opportunity Fund No. 5 Opening balance Investment Share of loss after income tax Distributions received/receivable Reserves Fair value increase Closing Balance (c) Fair value of unlisted investments in associates Charter Hall Diversifi ed Property Fund Charter Hall Core Plus Offi ce Fund Charter Hall Core Plus Industrial Fund Charter Hall Umbrella Fund Charter Hall Opportunity Fund No. 4 Charter Hall Opportunity Fund No. 5 2008 $’000 5,179 18,184 969 24,332 80,058 67,002 12,516 (16,398) 143,178 45,986 18,754 3,404 (10,446) 57,698 10,873 11,030 (21,828) (4) 71 662 2,458 454 (360) 3,214 98 3,486 (142) (38) (116) – 3,288 2007 $’000 3,888 1,096 195 5,179 10,000 63,011 7,047 – 80,058 – 45,000 986 – 45,986 10,873 – – – 10,873 497 777 287 (899) 662 – 98 – – – – 98 Consolidated 2008 $’000 24,332 143,177 57,696 74 3,214 3,289 2007 $’000 5,179 80,058 45,986 10,873 662 98 123 Annual Report 2008 Notes to the Financial Statements 30 June 2008 35. INVESTMENT IN ASSOCIATES (CONTINUED) (d) Share of associates’ profi ts or losses Profi t before income tax Income tax expense Profi t after income tax (e) Summarised fi nancial information of associates 2008 Charter Hall Diversifi ed Property Fund Charter Hall Core Plus Offi ce Fund Charter Hall Core Plus Industrial Fund Charter Hall Umbrella Fund Charter Hall Opportunity Fund No. 4 Charter Hall Opportunity Fund No. 5 36. INTEREST IN JOINT VENTURE (a) Carrying amounts Information relating to joint ventures is set out below. Consolidated 2008 $’000 312 – 312 2007 $’000 287 – 287 Group’s share of: Assets $’000 Liabilities $’000 Revenues $’000 Profi t/(Loss) $’000 49,922 286,119 102,472 63 5,974 9,376 25,569 139,342 40,669 1 2,749 5,436 2,899 12,833 5,559 3 1,104 47 4,242 15,957 7,690 – 466 139 Name of company Principal activity Ownership Interest Consolidated Parent entity 2008 % 2007 % 2008 $’000 2007 $’000 2008 $’000 2007 $’000 Unlisted Commercial and Industrial Property Pty Ltd Property Development 50% N/A 43,838 N/A 40,510 N/A (b) Movements in carrying amounts Commercial and Investment Properties Pty Limited Opening balance Investment Share of profi t after income tax Dividends received/receivable Closing balance (c) Fair value of joint venture entity Commercial and Investment Property Pty Ltd (d) Share of joint venture’s revenue, expenses and results Revenues Expenses Profi t before income tax 124 Charter Hall Group Consolidated 2008 $’000 2007 $’000 – 40,510 7,222 (3,894) 43,838 43,838 19,129 (8,829) 10,300 – – – – – – – – – Notes to the Financial Statements 30 June 2008 36. INTEREST IN JOINT VENTURE (CONTINUED) (e) Share of joint venture’s assets and liabilities Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Consolidated 2008 $’000 6,017 4,166 10,183 1,862 2,492 4,354 5,829 2007 $’000 – – – – – – – 37. EVENTS OCCURRING AFTER THE BALANCE SHEET DATE Since 30 June 2008 CHPT has completed the following transactions: – – – – The sale of 372 Whitehorse Rd, Nunawading, Vic, 61 Nepean Hwy, Mentone, Vic and 25 Nepean Hwy, Mentone, Vic to CPRF in July 2008. The Group announced the fi rst close of CPRF with CHPT’s benefi cial ownership reduced from 100% at 30 June 2008 to 62% with further equity raising expected. With the proceeds from the fi rst close CHPT repaid debt and reduced its debt facility to $100m with an expiry of July 2011. CHPT invested $50m in CHUF in August 2008. 38. RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET CASH FLOW INFLOW FROM OPERATING ACTIVITIES Consolidated Parent entity Profi t / (loss) for the year Depreciation and amortisation Non-cash employee benefi ts expense – security-based payments Gain on sale of investments Fair value adjustments Change in operating assets and liabilities, net of effects from purchase of controlled entity Decrease / (increase) in trade debtors Decrease / (increase) in accrued revenue Decrease / (increase) in other operating assets Increase / (decrease) in trade creditors Increase / (decrease) in accrued expenses Increase / (decrease) in other operating liabilities Increase / (decrease) in provision for income taxes payable Increase / (decrease) in provision for deferred income tax Increase in other provisions Net cash infl ow / (outfl ow) from operating activities 2008 $’000 67,498 252 2,669 (838) (15,287) (11,683) (5,548) (142) 1,988 9,167 165 – (2,959) – 45,282 2007 $’000 43,168 197 883 – (11,493) 3,282 602 124 (2,347) (184) 327 – 1,686 (58) 36,187 2008 $’000 (3,384) – – – – 515 – – – – 50 – (7,834) – (10,653) 2007 $’000 (6,329) – – – – 5,050 – 296 – – 5 – (3,540) – (4,518) Dividend and interest income received on investments has been reclassifi ed from cash fl ow from investing activities in the year ended 30 June 2007 to cash fl ow from operating activities in the year ended 30 June 2008. 125 Annual Report 2008 Notes to the Financial Statements 30 June 2008 39. EARNINGS PER SECURITY (a) Basic earnings per security Profi t before fair value adjustments Fair value adjustments Profi t attributable to the ordinary equity holders of the Group (b) Diluted earnings per security Profi t before fair value adjustments Fair value adjustments Profi t attributable to the ordinary equity holders of the Group (c) Underlying earnings per security Refer to note 4 for further details. (d) Reconciliations of earnings used in calculating earnings per security Basic earnings per security Profi t before fair value adjustments Fair value gains Profi t attributable to the ordinary equity holders of the consolidated entity used in calculating basic earnings per security Diluted earnings per security Profi t Interest received from LTI securities Profi t attributable to the ordinary equity holders of the consolidated entity used in calculating diluted earnings per security Fair value gains Profi t attributable to the ordinary equity holders of the consolidated entity used in calculating diluted earnings per security before fair value adjustments (e) Weighted average number of securities used as the denominator Weighted average number of ordinary securities used as the denominator in calculating basic earnings per security Adjustments for calculation of diluted earnings per security: Consolidated 2008 Cents 12.61 3.70 16.31 12.64 3.50 16.14 2007 Cents 8.80 3.20 12.00 8.84 3.10 11.94 Consolidated 2008 $’000 52,211 15,287 2007 $’000 31,675 11,493 67,498 43,168 67,498 2,957 70,455 (15,287) 43,168 1,136 44,304 (11,493) 55,168 32,811 Consolidated 2008 Number 2007 Number 413,905,265 359,384,110 Securities issued to the Charter Hall Limited Executive Loan Security Plan 22,711,623 11,298,942 Weighted average number of ordinary securities and potential ordinary securities used as the denominator in calculating diluted earnings per security 436,616,888 370,683,052 (f) Information concerning the classifi cation of securities (i) Securities issued under the Charter Hall Limited Executive Loan Security Plan Securities issued under the Charter Hall Limited Executive Loan Security Plan have been issued in trust and have a corresponding loan given to the employee. Under AIFRS the loan, securities, interest received on the loan and the distribution paid and payable are derecognised for the preparation of the fi nancial report but recognised for the calculation of diluted earnings per security. 126 Charter Hall Group Notes to the Financial Statements 30 June 2008 40. SECURITY-BASED PAYMENTS (a) Employee Security Plan The establishment of the Charter Hall Limited Executive Loan Security Plan was approved by the Board in the process of the initial public offering. Staff who are eligible to participate in the plan are determined by the Joint Managing Directors in discussion with the Board. Please refer to the Remuneration Report for details relating to vesting conditions. Securities are granted under the plan at market value and are purchased with a loan to the employee. Recourse on the loan is limited to the value of the securities. The securities are intended to vest over a three year period in equal portions. The amount of interest due on the loan is equivalent to the amount of the distribution receivable on the underlying securities. Set out below are summaries of securities granted under the plan: Opening balance (number of securities) Number of securities issued on 03/07/06 at $1.27 Number of securities issued on 05/10/06 at $1.56 Number of securities issued on 16/10/06 at $1.61 Number of securities issued on 15/12/06 at $2.00 Number of securities issued on 07/03/07 at $2.47 Number of securities issued on 02/07/07 at $2.76 Number of securities purchased on market on 06/08/07 at $2.84 Number of securities purchased on market on 30/08/07 at $2.80 Number of securities purchased on market on 05/02/08 at $1.67 Number of securities purchased on market on 11/02/08 at $1.49 Number of securities purchased on market on 19/02/08 at $1.53 Number of securities issued on 19/02/08 at $1.51 Number of securities forfeited or transferred out during the year Consolidated Parent entity 2008 2007 2008 2007 13,931,343 – – – – – 10,041,016 70,534 35,714 54,970 100,376 197,180 793,701 (1,716,722) 23,508,112 6,200,000 6,318,898 352,564 807,453 50,000 202,428 – – – – – – – – 13,931,343 13,931,343 – – – – – 10,041,016 70,534 35,714 54,970 100,376 197,180 793,701 (1,716,722) 23,508,112 6,200,000 6,318,898 352,564 807,453 50,000 202,428 – – – – – – – – 13,931,343 (b) Expenses arising from security-based payment transactions Total expenses arising from security-based payment transactions recognised during the period as part of employee benefi t expense were as follows: Securities issued under employee security plan Consolidated Parent entity 2008 $’000 2,669 2007 $’000 883 2008 $’000 – 2007 $’000 – 127 Annual Report 2008 Directors’ Declaration 30 June 2008 In the directors’ opinion: (a) the fi nancial statements and notes set out on pages 82 to 127 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the company’s and consolidated entity’s fi nancial position as at 30 June 2008 and of their performance for the fi nancial year ended on that date; and (b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and (c) the remuneration disclosures set out on pages 75 to 79 of the directors’ report comply with Accounting Standard AASB 124 Related Party Disclosures and the Corporations Regulations 2001. The directors have been given the declarations by the joint managing directors and chief fi nancial offi cer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the directors. K Roxburgh Chairman Sydney 25 August 2008 128 Charter Hall Group Independent Auditor’s Report to the Stapled Securityholders of Charter Hall Group 129 Annual Report 2008 Independent Auditor’s Report to the Stapled Securityholders of Charter Hall Group (continued) 130 Charter Hall Group Charter Hall Group Securityholder Information 30 June 2008 The shareholder information set out below was applicable as at 30 June 2008. A. DISTRIBUTION OF EQUITY SECURITIES Analysis of numbers of equity securityholders by size of holding: 1 – 1000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over B. EQUITY SECURITYHOLDERS Twenty largest quoted equity securityholders The names of the twenty largest holders of quoted equity securities are listed below: Name Commonwealth Bank (Institutional Group) UBS (Institutional Group) Deutsche (Institutional Group) AMP Capital Investors (Institutional Group) CHL Executive Loan Security (Various Private Investors) Wyllie Group Quest Asset Partners Pty. Ltd. BT Funds Mgt (Institutional Group) Vanguard Investments Australia Ltd. Macquarie (Institutional Group) ING (Institutional Group) Transfi eld (CHG) Pty Ltd Fidelity (Institutional Group) Credit Suisse (Institutional Group) Barclays (Institutional Group) Natixis (Institutional Group) Perpetual Investments Ltd. Resolution Capital David John Southon David William Harrison C. SUBSTANTIAL HOLDERS Substantial holders in the group are set out below: Ordinary securities Commonwealth Bank (Institutional Group) UBS (Institutional Group) Deutsche (Institutional Group) AMP Capital Investors (Institutional Group) Wyllie Group Ordinary Securities 86,353 982,376 2,262,924 17,645,813 416,514,255 Ordinary securities Number held Percentage of issued securities 42,356,388 38,900,284 29,378,309 24,543,601 23,508,112 23,172,000 20,702,336 18,141,569 15,898,881 15,097,084 13,015,440 13,000,000 11,152,774 10,347,066 10,075,755 9,164,512 7,887,878 7,227,881 6,773,203 6,526,947 9.68% 8.89% 6.72% 5.61% 5.37% 5.30% 4.73% 4.15% 3.63% 3.45% 2.98% 2.97% 2.55% 2.37% 2.30% 2.09% 1.80% 1.65% 1.54% 1.49% Number held Percentage 42,356,388 38,900,284 29,378,309 24,543,601 23,172,000 9.68% 8.89% 6.72% 5.61% 5.30% D. VOTING RIGHTS The voting rights attaching to each class of equity securities are set out below: (a) Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. 131 Annual Report 2008 132 Charter Hall Group Corporate Directory Charter Hall Group, Charter Hall Limited and Charter Hall Funds Management Limited as Responsible Entity for the Charter Hall Property Trust Directors Kerry Roxburgh Chairman – Independent Non-Executive Director Roy Woodhouse Deputy Chairman – Independent Non-Executive Director ASX Listing Details Charter Hall Group is listed on the Australian Securities Exchange (ASX) as a stapled entity with the code ‘CHC’. Stapled securities are traded weekdays on the ASX between the hours of 10.00am and 4:00pm (AEST). Registry Charter Hall Group’s stapled security registration and distribution communication is managed by Link Market Services. Any queries regarding change of details, mailing address, distribution and communication instructions should be forwarded to: Cedric Fuchs Executive Director Glenn Fraser Independent Non-Executive Director David Harrison Joint Managing Director David Southon Joint Managing Director Patrice Derrington Independent Non-Executive Director Colin McGowan Independent Non-Executive Director Peter Roberts Chief Financial Officer Nathan Francis Deputy Chief Financial Officer and Company Secretary Principal Registered Office Level 11, 333 George Street Sydney NSW 2000 PO Box 2704 Sydney NSW 2001 Telephone: +61 2 8908 4000 Fax: +61 2 8908 4040 Website www.charterhall.com.au Link Market Services Level 8, 580 George Street Sydney NSW 2000 Telephone: 1300 664 498 Fax: +61 2 9287 0303 Fax: +61 2 9287 0309 (for proxy voting) Email: registrars@linkmarketservices.com.au Website: www.linkmarketservices.com.au Auditor PricewaterhouseCoopers Darling Park Tower 2 201 Sussex Street Sydney NSW 2000 Legal Advisers Allens Arthur Robinson Level 28, Deutsche Bank Place Corner of Hunter & Phillip Streets Sydney NSW 2000 Bankers National Australia Bank Level 24, NAB House 255 George Street Sydney NSW 2000 The Annual General Meeting of Charter Hall Group will be held at: The Westin Hotel No.1 Martin Place Sydney NSW 2000 Date: 10 November 2008 Time: 2.00pm Annual Report 2008 Sydney Melbourne Brisbane Perth Adelaide Auckland charterhall.com.au 

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