Charter Hall Group Annual Report 2010

Plain-text annual report

Annual Report 2010 ARSN 113 339 147 Charter Hall is one of Australia’s leading specialist property fund managers with over $10 billion in funds under management across wholesale, listed and unlisted equity sources. Chairman’s Letter Joint Managing Directors’ Report About Charter Hall Group Corporate Structure Charter Hall Property Trust Our Funds — Wholesale Funds — Retail Funds — Listed Funds Sustainability Board of Directors Corporate Governance Financial Report Corporate Directory 02 04 06 07 09 10 12 15 16 18 20 24 33 IBC Weighted Average Lease Expiry (WALE) 6.6yrs Development pipeline $2.3b $10.2b in Funds Under Management (FUM) Operating earnings (1) $34.9m (1) Operating earnings was previously referred to as ‘underlying earnings’ and excludes fair value adjustments, gains/losses on sale, any non-cash gain or loss arising from the re-measurement of equity interests, non-cash tax beneﬁ ts, non cash LTI expenses and other non cash expenses. PDP3: SYDNEY WHARF, PYRMONT NSW 01 Annual Report 2010 Annual Report 2010 Chairman’s Letter Dear Investor, On behalf of the Board of Directors, it is our pleasure to present the 2010 Annual Report. In March this year, the Charter Hall Group achieved a signiﬁ cant milestone when it completed a transformational acquisition, increasing its funds under management to more than $10 billion. Charter Hall is now one of Australia’s largest specialist property fund managers with the Group managing property funds for wholesale, unlisted retail and listed investors. I am pleased to report that our balance sheet retained its strength during the year. This, along with a high quality portfolio, places Charter Hall Group in an excellent position to capitalise on opportunities as the world economies and the property and ﬁ nancial markets improve. Transformational acquisition The transformational acquisition of the majority of Macquarie Group Limited’s core real estate management platform was completed in March this year. This represented an important strategic move for Charter Hall Group, substantially expanding our funds management platform to include listed products and increasing the Group’s property funds management exposure to the unlisted sector. The Macquarie platform and the majority of their personnel have been integrated into the Group enhancing our capacity to grow funds under management and to proceed with the vertical integration of our property funds management, co-investment business model. The Charter Hall team, specialising in property management and development has grown to over 230 people. Strong capital position This year, the Group further strengthened its capital position. At 30 June 2010, Charter Hall reported a 56% increase in security holders’ equity to $772.5 million and a closing cash and deposits balance of $28.4 million. The Group also implemented a number of capital management initiatives across its managed funds, improving the balance sheet and liquidity position of each of these funds. These initiatives were designed to deliver future earnings and equity capital growth. Creating a sustainable company and portfolio Sustainability is a key focus for the Group. The Board believes investors will be rewarded by Charter Hall taking a balanced approach, as it is not only the right thing to do but it makes good business sense principally through reduced energy consumption. Understanding and managing the impact of our activities helps to reduce our consumption of scarce resources, while also decreasing both our own costs and those of our customers. This year we continued to make progress with this commitment by delivering Australia’s ﬁ rst 4 Star Green Star household retail centre, Home HQ North Shore, Sydney and by initiating NABERS (the National Australian Built Environment Rating System) Energy ratings across our managed ofﬁ ce portfolio. Developing our people The successful integration of the Macquarie platform within Charter Hall has signiﬁ cantly increased the depth of our talent pool and broadened our reach into all markets in which we invest. With ofﬁ ces in Sydney, Melbourne, Brisbane, Adelaide, Perth, Chicago and Warsaw, Charter Hall remains as committed as ever to developing our teams to drive our performance in each of these markets. As part of this commitment, the Board is currently ﬁ nalising its policy to formalise the Group’s focus on creating a diverse workforce. In particular our policy is to provide equality by encouraging the employment of and to offer career development for women at Charter Hall. The Community The development business established a local charity partnership program across our opportunistic fund portfolio in 2009. We are pleased to report that over $95,000 has been raised for Young Care Brisbane from our 40 Creek Street, Brisbane project to date. Our residential development in Mentone, Melbourne, known as Aqulio, is committed to raising $50,000 for Statewide Autistic Services. 02 Charter Hall Group Well positioned for a market recovery Charter Hall’s vertically integrated business model and diversiﬁ cation of its equity sources in fund products across the risk/return spectrum allowed the Group to successfully navigate its way through the Global Financial Crisis (GFC) and the difﬁ cult economic conditions the world has experienced since 2008. Charter Hall has performed solidly and it is currently well positioned with a strong balance sheet and a high quality portfolio with long leases to strong covenant tenants. Whilst we are seeing signs of recovery across most of the economies and markets in which we operate, Charter Hall is continuing to review and adopt strategies designed to best place our listed and unlisted funds to take advantage of conditions as they improve. The next year will see Charter Hall continue its focus on driving income and capital growth across the property funds management platform. We look forward to delivering solid results for all investors. On behalf of all securityholders and investors, it is my pleasure to again recognise and say thanks to my fellow Board members and to our much enlarged Charter Hall team for their continued support through what has been an exciting and challenging transformational year. In particular, I would like to give thanks to Patrice Derrington who retires from the Board at this year’s Annual General Meeting, following her move to New York. Until recently she served us with distinction as Chair of the Audit, Risk and Compliance Committee. Yours sincerely, Kerry Roxburgh Chairman CHOF4: ALLUVION, 54-58 MOUNTS BAY ROAD, PERTH WA 03 03 Annual Report 2010 Annual Report 2010 Joint Managing Directors’ Report The past 12 months has been a signiﬁ cant year for the growth of the Charter Hall business. We expanded our funds management platform to include listed products, substantially increased our exposure to the unlisted retail investor sector and successfully raised over $85 million of capital for these funds. Successful expansion of funds management platform In March this year, the Group acquired the majority of Macquarie Group Limited’s core real estate management platform, increasing our funds under management from $3.4 billion to over $10 billion. This transformational acquisition was in line with our strategy of further diversifying our equity sources to include listed funds while maintaining our focus on unlisted wholesale and retail funds management. The successful integration of the former Macquarie funds and resources has added substantial scale and growth potential to the Group, which in turn will deliver long term value for all our investors. David Southon Joint Managing Director David Harrison Joint Managing Director 04 Charter Hall Group Strong results Despite continuing difﬁ cult market conditions, the Group delivered a solid result at 30 June 2010 reporting operating earnings of $34.9 million and distributions of $27.2 million, in line with guidance provided in February 2010. This translates to operating earnings per share (EPS) of 4.11 cents and full year distributions per share (DPS) of 3.20 cents. Access to high quality assets Charter Hall continues to provide investors with access to portfolios of prime, investment grade assets in Australia. We successfully raised over $85 million of new equity for the 130 Stirling Street Trust and the Macquarie Martin Place Trust, which owns 50% of the $460 million No. 1 Martin Place ofﬁ ce complex in the Sydney CBD. At a property level, we continue to maintain strong alignment of interest with investors, co-investing in our managed funds. Our managed fund’s portfolio is well diversiﬁ ed across the mainstream property sectors of ofﬁ ce, retail and industrial. Our portfolio remains weighted to Australia, at 76%, which will increase over the coming years as our listed Ofﬁ ce REIT and Retail REIT’s repatriate equity from non-core offshore markets into Australia. Overall the portfolio’s occupancy was 94%, supported by our high quality tenants, with government, national and international tenants contributing 80% of net income. The portfolio maintains a weighted average lease expiry of 6.6 years. Our development business delivered three projects for a total value of $400 million during the year and maintains a $2.3 billion pipeline of committed future work. The Group’s strategic 50% investment in the industrial developer, CIP, also continues to provide our funds with access to a robust industrial pipeline of high quality, long lease investment opportunities. Post year end, we also launched a new unlisted fund for retail investors, Charter Hall Direct Industrial Fund (DIF). DIF is anchored by a new logistics property in Melbourne leased to Toll Holdings for 15 years, which is being developed by CIP. Enhancing the unlisted wholesale platform Charter Hall’s Core Plus Ofﬁ ce Fund (CPOF) and the Core Plus Industrial Fund (CPIF) are also seeking new equity commitments for future acquisitions and opportunities. To date, these Funds have collectively secured more than 50% of the targeted $300 million, with further commitments at an advanced stage. Positioned for a recovery in property markets The Group’s outlook improved over the year with economic indicators pointing to a gradual recovery in the global economy. Property fundamentals in Australia in particular have improved, highlighted by the increased transaction activity and available capital across this market. We are also starting to see increased investor and tenant interest the United States and Europe, however these markets are recovering more slowly. We expect equity ﬂ ows, in particular from Australian superannuation, to continue to improve into next year, underpinning the growth of our managed funds business. Signiﬁ cantly, according to research undertaken by APRA, Australia’s superannuation funds under management is currently $1.26 trillion and is forecast to grow to between $2.5 trillion and $3 trillion by 2020, with net positive inﬂ ows of approximately $60 billion per annum to be invested. We remain committed to becoming Australia’s leading specialist property fund manager and to provide investors with a combination of income and capital growth. We will continue to focus on growing earnings in all funds with an improvement in occupancy levels and growth in property income, together with recycling capital toward the highest total return opportunities in the marketplace. We are excited by the opportunities ahead and believe we are well positioned to take advantage of a continuing ﬂ ow of capital into property. We expect to capture a growing proportion of these ﬂ ows into the various property funds we manage across wholesale, retail and listed property sectors, driving performance at both a fund and Group level. Charter Hall currently expects FY11 EPS earnings growth in the region of 20%, which would allow for an increase in DPS in the region of 25%. Thank you to our investors and customers for your support during the year. We look forward to a strong year ahead. Yours sincerely, David Harrison Joint Managing Director David Southon Joint Managing Director 05 Annual Report 2010 About Charter Hall Group Charter Hall is a leading specialist property fund manager, with funds under management in excess of $10 billion across wholesale, listed and unlisted equity sources. Established in 1991, Charter Hall was listed on the Australian Securities Exchange (ASX) in 2005 as a stapled security and is part of the S&P/ASX 200 A-REIT Index. Through active funds management and superior property management, Charter Hall aims to outperform investment benchmarks, achieving high levels of tenant retention and rental growth across more than 300 assets. Charter Hall also invests in and provides management services across the full spectrum of real estate investment and development activities. Charter Hall acquired the majority of Macquarie Group Limited’s core real estate management platform in March 2010. The platform complements Charter Hall’s existing operations, enhancing the current vertically integrated business and increasing the Group to over 230 employees across Australia, Europe and the United States. The Group is committed to delivering performance for investors through its: ◆ focus on property fundamentals driving both income and capital growth; ◆ asset, advisory, property and development management activities across the risk/return spectrum; ◆ signiﬁ cant co-investments in its property funds; ◆ sourcing of investment opportunities, predominantly off-market; ◆ consistent track-record of strong relative performance through cycles; ◆ focus on securing long leased assets and portfolios; ◆ alignment with ‘best of breed’ joint venture partners; ◆ strong corporate governance principles; and ◆ highly regarded listed and unlisted property funds management and in-house development team. Charter Hall aims to outperform investment benchmarks, achieving high levels of tenant retention and rental growth across more than 300 assets. 06 Charter Hall Group Corporate Structure Charter Hall Group (ASX:CHC) Stapled Security Charter Hall Limited (CHL) Charter Hall Property Trust (CHPT) Charter Hall invests $582 million in its funds ◆ Funds Management ◆ Asset Management ◆ Development Services ◆ Property Management ◆ Transaction Services ◆ Leasing Services Fund Platform $10.2 billion FUM Wholesale Investor Funds $2.5 billion FUM Retail Investor Funds $1.5 billion FUM Listed Funds $6.2 billion FUM ◆ Opportunistic ◆ Core Plus ◆ Third party mandates ◆ Diversiﬁ ed ◆ Sector speciﬁ c ◆ Single asset funds ◆ Charter Hall Ofﬁ ce REIT (ASX:CQO) ◆ Charter Hall Retail REIT (ASX:CQR) CHIF7: 130 STIRLING STREET, PERTH WA 07 Annual Report 2010 CHARTER HALL OFFICE REIT: NO.1 MARTIN PLACE, SYDNEY NSW 08 Charter Hall Group Charter Hall Property Trust Alignment with investors is a key element of Charter Hall’s approach, with the Group co-investing in its managed funds. The Group provides specialist property services to the funds, driving income and capital growth for the funds while generating fees for the Group, collectively enhancing Charter Hall’s return on equity. Asset Diversiﬁ cation Geographical Diversiﬁ cation (by latest independent valuation) Charter Hall Property Trust (CHPT) has continued its strategy of investing across the Group’s managed funds with the majority of CHPT’s property holdings being diversiﬁ ed across the listed Charter Hall Ofﬁ ce REIT and Charter Hall Retail REIT and the unlisted wholesale Core Plus Ofﬁ ce Fund (CPOF), Core Plus Industrial Fund (CPIF) and Core Plus Retail Fund (CPRF). Co-investments are also held in the Charter Hall Direct Property Fund (CHDPF), 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. Portfolio highlights The portfolio is well diversiﬁ ed across the ofﬁ ce, retail and industrial sectors and has maintained strong occupancy at 94%. The Australian portfolio in particular beneﬁ ted from strong leasing activity with signiﬁ cant success in securing tenant renewals and rental growth via both ﬁ xed and market rental reviews. The portfolio has weighted average ﬁ xed rent reviews of 3.6% p.a, with 93% of the portfolio having ﬁ xed or Consumer Price Index (CPI) increased rent reviews. Tenant relationships remain a key focus with the portfolio’s tenancy quality remaining very high, with 80% of net income being derived from Australian government or leading national and international companies. The portfolio maintains a weighted average lease expiry (WALE) of 6.6 years. The Group’s funds continue to focus on active asset management to deliver strong performance across its portfolios. CQO 26.6% CQR 14.1% CHDPF 1.7% DPF 3.8% CPOF 19.3% CPIF 9.6% CPRF 17.7% CHUF 7.1% Sector Split (by latest independent valuation) WALE (by income) Retail 35.7% Industrial 13.8% Office 50.5% CHDPF CQR CQO CPOF CPIF CPRF DPF CHUF CHPT QLD 17.8% NZ 1.8% WA 12.8% ACT 0.8% SA 1.3% US 16.3% Europe 3.6% Asia 0.5% NSW 26.3% VIC 18.6% 4.8 4.7 6.0 6.1 7.8 7.4 8.0 6.6 9.9 8.9% Top 20 Tenants (by income) Wesfarmers Woolworths Ltd Telstra Corporation Australian Governments Westpac Group JPMorgan Chase Volkswagen Mercer BHP Billiton Harvey Norman Macquarie Group Ltd Wilson Parking Telstra Corporation Ltd Schnucks Queensland Gas Company REWE Group Wells Fargo Bank NA Central Queensland University Citigroup AT&T 1.7% 1.4% 1.2% 1.0% 1.0% 1.0% 1.0% 0.9% 0.9% 0.9% 0.8% 0.8% 0.8% 0.7% 0.7% 5.7% 5.0% 4.8% 3.4% 09 Annual Report 2010 Our Funds Charter Hall is one of Australia’s largest managers of listed and unlisted property funds with $10.2 billion in funds under management. The Group manages two listed funds, 12 retail unlisted funds and six wholesale unlisted funds across a diverse range of property sectors. Risk/return spectrum CORE PLUS $1.56bn FUM $168m Co-investments CORE $7.71bn FUM $414m Co-investments Lower Risk Core investments Core Plus investments OPPORTUNISTIC $0.72bn FUM $26m Co-investments Higher Risk Development opportunities Return 20%+ 15-17%+ 11-14%+ 9-11%+ 10 Charter Hall Group Charter Hall’s strong balance sheet underpins its funds management platform. DIRECT PROPERTY FUND: 200 QUEEN STREET, MELBOURNE VIC 11 Annual Report 2010 Our Funds Wholesale Funds As one of the largest managers of Core Plus and Opportunistic property funds in Australia, Charter Hall’s wholesale funds provide exposure to a diversiﬁ ed stable of quality assets and tenants with long lease durations. Charter Hall’s Core Plus funds include: Charter Hall Core Plus Ofﬁ ce Fund (CPOF) Total assets 16 Total property assets $1,148 million Fund gearing WALE Occupancy 44% 6.1 years 96% Launched in December 2005, the Fund’s investment strategy is to target property predominately focused on the ofﬁ ce sector in major capital city markets of Australia and to source a mix of core and enhanced investment grade properties. The investment mandate extends to mixed use assets that have, or have the potential to include, a signiﬁ cant ofﬁ ce component. Key assets include 275 George Street, Brisbane; 11 Exhibition Street, Melbourne; and 225 St Georges Terrace, Perth. Charter Hall Core Plus Industrial Fund (CPIF) Total assets 15 Total property assets $420 million Fund gearing WALE Occupancy 39% 9.9 years 98% Launched in April 2007, the Fund predominantly targets industrial and logistics sectors in major capital city markets of Australia. Key assets include, Coles Regional Distribution Centre, Perth Airport and the Volkswagen Distribution Centre, Chullora, Sydney. Wholesale investors, with an investment upwards of $5 million (average $30 million to $50 million), have the opportunity to invest in a diversiﬁ ed range of Core Plus and Opportunistic investment strategies. These funds have delivered strong outperformance since inception. Charter Hall’s Opportunistic funds include: Charter Hall Opportunity Fund No.4 (CHOF4) Total assets 8 Total equity raised Total project value $165 million $552 million Total project value realised $435 million Launched in 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, household retail and inﬁ ll residential sectors across Australia. Key development assets include 275 George Street, Brisbane; Alluvion, Perth; and Home HQ North Shore, Sydney. Charter Hall Opportunity Fund No.5 (CHOF5) Total assets 6 Total equity raised Total project value $300 million $916 million Launched in early 2007, 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. These include commercial, industrial, retail, household retail and inﬁ ll residential sectors located primarily in capital cities and metropolitan markets across Australia and New Zealand. Key development assets include Pier Street, Perth; Little Bay, Sydney; and Lacrosse, Docklands and Aquilo, Mentone in Melbourne. 12 Charter Hall Group Case Study Aquilo, Mentone, Melbourne – residential investment property Aquilo is Charter Hall’s new medium density townhouse development in Mentone, Melbourne. The $75 million project is being developed by the Charter Hall Opportunity Fund No.5 (CHOF5). The energy efﬁ cient development aims to set a new benchmark in contemporary living and will comprise 119 high quality two and three bedroom, two-storey townhouses. Off the plan sales have been strong with 80% of the development sold since the ofﬁ cial marketing launch in May 2010. Debt funding has been secured and construction is scheduled to commence in late 2010. The development is due to be completed by late 2012. CHOF5: AQUILO, MENTONE VIC 13 Annual Report 2010 Case Study Toll Fleet and Auto Logistics Centre Altona, Melbourne – industrial investment property Toll Fleet and Auto Logistics Centre is the seed asset for Charter Hall’s new Direct Industrial Fund (DIF). The 49,515 square metre site, located in Melbourne’s established western industrial area of Altona North, has convenient access to Melbourne Port, Tullamarine Airport and Melbourne’s CBD. The Group’s 50% owned industrial developer, CIP, is developing a purpose-built 6,318 square metre automotive logistics facility on the site for Toll Holdings. Toll will lease 100% of the premises for 15 years, with a ﬁ ve year option and ﬁ xed rental increases of 3.5% per annum. The facility will incorporate administration ofﬁ ces and a high clearance warehouse, together with motor vehicle storage. TOLL FLEET AND AUTO LOGISTICS CENTRE ALTONA, MELBOURNE, VIC 14 Charter Hall Group Our Funds Retail Funds Charter Hall Direct Property manages a diverse suite of unlisted property funds for retail investors and their ﬁ nancial advisers. Investors in the unlisted funds can access institutional grade property with a minimum investment of $10,000. Charter Hall Direct Property’s funds access a range of ofﬁ ce, retail and industrial property assets with quality tenants and long weighted average lease expiries located across Australia. Charter Hall’s retail funds include: Charter Hall Direct Industrial Fund (DIF) Asset 1 Gross asset value $24.4 million Fund gearing WALE Occupancy 45% 15 years 100% Established in 2010, DIF is a new unlisted property fund which seeks to invest in a selection of Australian industrial assets focusing on the eastern seaboard. DIF’s ﬁ rst investment, which is currently under construction, is located in Altona North, Melbourne and is underpinned by a 15 year lease pre-commitment by Toll Holdings Limited. The Fund aims to provide investors with sustainable and stable, tax-advantaged income quarterly. There is currently still an opportunity to invest in DIF. Charter Hall Direct Property Fund (CHDPF) Total Australian direct assets 9 Gross asset value $520 million Fund gearing WALE Occupancy 46% 4.8 years 90% Established in 2006, the Fund primarily invests in high quality direct ofﬁ ce property in Sydney, Melbourne and Brisbane; with additional smaller holdings in unlisted wholesale property funds and listed A-REITs. The Fund’s strategy is to provide regular, tax effective income payable quarterly. Key assets include 68 Pitt Street, Sydney and 200 Queen Street, Melbourne. Charter Hall Umbrella Fund (CHUF) Launched in 2007, the Fund provides retail investors with an opportunity to invest across a suite of Charter Hall’s wholesale property funds, including ofﬁ ce, industrial and retail sectors. The portfolio of Charter Hall funds that CHUF invests in comprises more than 60 assets with a secure WALE proﬁ le. Charter Hall’s nationwide tenant list includes BHP Billiton, Federal and State Governments, Bunnings, Coles, Westpac Group, Harvey Norman, Telstra, Toll Holdings, Myer, Wesfarmers and Woolworths, demonstrating the diversity of the Fund’s underlying cash ﬂ ow. Charter Hall Diversiﬁ ed Property Fund (DPF) Total assets 10 Gross asset value $176 million Fund gearing WALE Occupancy 55% 7.4 years 95% Launched in 2005, DPF invests in quality assets across ofﬁ ce, retail and industrial sectors throughout Australia. The Fund predominately invests in properties which range in acquisition value between $5 million to $30 million. The Fund’s investment objective is to provide stable distribution returns for investors with capital growth over the medium term from a well diversiﬁ ed portfolio of assets, with a high proportion of tax advantaged distributions. Key assets include 400 Kent Street, Sydney and 53 Berry Street, North Sydney. Macquarie Martin Place Trust (MMPT) Total asset 1 Gross asset value Fund gearing WALE Occupancy $230 million (50% interest) 33% 4.4 years 100% MMPT was established in 2002 to acquire a 50% interest in the ofﬁ ce tower and carpark located at No.1 Martin Place, Sydney. Set in the ﬁ nancial heart of Sydney, No.1 Martin Place is one of Australia’s most esteemed business addresses. In June 2010, the Trust successfully completed a capital raising offer to existing and new investors of more than $50 million, positioning MMPT to deliver capital and income returns for investors. 130 Stirling Street Trust (CHIF7) Total asset Gross asset value Fund gearing WALE Occupancy 1 $71.6 million 47.5% 9 years 100% Established in 2010, CHIF7 is a single asset unlisted property trust that invests in a brand new high quality A-grade ofﬁ ce building in the growth corridor of the Perth CBD fringe. The Fund aims to provide monthly distributions and a high tax advantage income. There is currently still an opportunity to invest in the 130 Stirling Street Trust. Charter Hall Core Plus Retail Fund (to be renamed and relaunched in late 2010 as Direct Retail Fund (DRF)) Total assets Gross asset value Fund gearing WALE Occupancy 9 $245 million 36% 7.8 years 96% In May 2010 the Group announced the restructure of its Core Plus Retail Fund (CPRF) into the Direct Retail Fund (DRF). This Fund will provide retail investors with an opportunity to invest in a portfolio of investment grade retail assets anchored by some of Australia’s leading household retailers, including Bunnings, Harvey Norman, JB Hi Fi, Spotlight, The Good Guys, Dick Smith; supermarkets leased to Woolworths, Coles, IGA and Franklins; together with BIG W and many other household names. Charter Hall Investment Funds (CHIF) CHIF’s 2 to 6 are unlisted closed-ended funds anchored by investment properties providing 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 each of the funds’ offer documents. A high proportion of the investors have invested in multiple Charter Hall funds, demonstrating the repeat business and customer focus of Charter Hall. 15 Annual Report 2010 Our Funds Listed Funds Charter Hall Ofﬁ ce REIT ASX code Charter Hall Retail REIT ASX code CQO Total assets Portfolio value Total value of assets (look through) NTA Balance sheet gearing (net of cash) Average cap rate 37 (1) Total assets $3,922 million Portfolio value $4,550 million NTA $2,068 million ($0.424/unit) (2) Balance sheet gearing (net of cash) Average cap rate 33.5% 7.81% CQR 136 $2,055 million $1,110 million ($0.74/unit) (3) 38.3% 8.07% Charter Hall Ofﬁ ce REIT is a listed real estate investment trust focused on investing in high grade ofﬁ ce buildings predominantly located in major business districts across Australia and the United States. A customer focused approach to asset management drives the leasing and refurbishment initiatives with a view to maximising returns of the underlying assets. The REIT’s strategy is focused on investing in high quality ofﬁ ce property with the aim to provide investors with stable and growing earnings and capital growth. Charter Hall Retail REIT is a listed investment trust that invests in high quality, predominately grocery anchored, shopping centres. Current investments exist in Australia, New Zealand, the United States and Europe, with Australia being the REIT’s core market going forward. Through an active management strategy focused on maximising total returns through attracting and retaining credit- worthy tenants, the REIT aims to deliver strong performance across its quality portfolio, with focus on investing in neighbourhood, sub regional and household retail assets in Australia. This, combined with a commitment to redevelopment and asset enhancement programs, is aimed at maximising the capital and income growth for investors by seeking to increase the return for each asset. Case Study Lake Macquarie Fair and Mount Hutton Shopping Centre, Lake Macquarie Charter Hall Retail REIT purchased 50% of Lake Macquarie Fair and Mount Hutton in July 2010, with the remaining 50% being owned by Charter Hall’s Direct Retail Fund (DRF). Lake Macquarie Fair, a fully refurbished centre, is anchored by a strongly performing Woolworths supermarket and a Big W discount department store and Mount Hutton Shopping Centre is anchored by a Coles supermarket. The centres are located in Lake Macquarie’s well established town centre in the Newcastle region of NSW, servicing a local area with average household income over 10% higher than the Regional NSW average (4). The properties were acquired on a year one yield of 8.75% before acquisition costs, approximately $3,200 per square metres of lettable area, and beneﬁ t from a combined anchor tenant WALE of 13 years and in excess of $100 million moving annual turnover generated by the anchor tenants alone. (1) Excluding Quintana. (2) Pre-unit consolidation of 1 for 10 effective 1 September, 2010. (3) Pre-unit consolidation of 1 for 5 effective 1 September, 2010. (4) Source: Deep End Services, Australian Bureau of Statistics (2006 Census). 16 Charter Hall Group Case Study 2 Market Street, Sydney A 24 level A-grade ofﬁ ce building, 2 Market Street is conveniently located in the heart of Sydney’s CBD. With a net lettable area of approximately 40,000 square metres, the building is 99% leased to a number of high quality tenants, with over 5,300 square metres of leases being signed during the 2010 ﬁ nancial year with new and existing leases. The ofﬁ ce building has achieved a 5 star NABERS Energy rating. Charter Hall Ofﬁ ce REIT owns 50% of the property in joint venture with Allianz. CHARTER HALL OFFICE REIT: 2 MARKET STREET, SYDNEY NSW 17 Annual Report 2010 Sustainability Key Achievements Resource efﬁ ciency We are committed to active asset management to improve the performance of our properties. This year, we have initiated NABERS Energy ratings across our managed ofﬁ ce portfolio. Our Australian Charter Hall Ofﬁ ce REIT properties are at the forefront of the industry with an average NABERS Energy rating of 4.4 stars. Regeneration and communities Charter Hall is committed to backing local initiatives and to giving back to the communities in which we operate. In 2009, Charter Hall established a program where each new development project adopted and supported a local charity. The ﬁ rst project in this program was the redevelopment of 40 Creek Street in Brisbane where over $95,000 was raised for Young Care, a Brisbane based charity that assists young Australians with full time care needs. This was achieved through the generosity of Charter Hall employees, the project consultants and contractors through a range of initiatives such as a celebrity abseiling event, golf days and barbecues to support this charity. This year, the team undertaking the Aquilo residential project in Mentone, Victoria has committed to raising $50,000 for Statewide Autistic Services. To date $20,000 has been raised. Charter Hall was also the ﬁ rst business to achieve a Green Star rating for a household retail centre in Australia. The adaptive re-use of the Home HQ North Shore, a household retail centre in Sydney, NSW resulted in a 4 Star Retail Design Rating under the Green Building Council of Australia’s Green Star scheme. Shareholders and Investors Sustainability contributes to the long term value of our shareholders and investors. We remain a signatory to United Nations Principles of Responsible Investment and will endeavour to apply these principles through our investment decisions. CHOF5: HOME HQ NORTH SHORE, ARTARMON NSW 18 Charter Hall Group Charter Hall Group is committed to implementing sustainable business practices. We believe that a balanced approach to managing environmental and social issues makes good business sense. Recognising this, Charter Hall Group seeks to adopt business practices that balance our economic, environmental and social responsibilities through the management of risks and the creation and enhancement of opportunities that strengthen our business. Our environmental and social governance policy, ‘Balance’, identiﬁ es core areas that relate to our current operations and that will continue to be a key consideration going forward. ◆ Resource efﬁ ciency — Improving the environmental performance of our assets, including all Charter Hall ofﬁ ces. — Reducing the environmental footprint of our development activities. ◆ Communities and regeneration — Protecting biodiversity and preserving cultural heritage. — Supporting and enhancing communities that are local to our business. ◆ Shareholders and Investors — Optimising returns for our shareholders and investors. — Aligning our business with the expectations of our shareholders and investors. — Implementing the principles of responsible investment (UN PRI). ◆ Customers — Strengthening our relationships with our customers and tenants through a dynamic proactive asset and development management approach. ◆ Our people — Educating, motivating and training our staff to adopt a balanced approach to sustainability. — Providing a supportive and ﬂ exible work environment. Charter Hall achieved the ﬁ rst Green Star rating for a household retail centre in Australia. 19 Annual Report 2010 Board of Directors The Board’s extensive experience and commitment to Charter Hall, underpins the Group’s performance. Colin McGowan Independent Non-Executive Director Cedric Fuchs Executive Director Peter Kahan Non-Executive Director Patrice Derrington Independent Non-Executive Director Glenn Fraser Independent Non-Executive Director 20 Charter Hall Group David Southon Joint Managing Director Roy Woodhouse Deputy Chairman and Independent Non-Executive Director Kerry Roxburgh Chairman and Independent Non-Executive Director David Harrison Joint Managing Director 21 Annual Report 2010 Board of Directors Colin McGowan Peter Kahan Patrice Derrington Non-Executive Director Peter Kahan joined the Charter Hall Board in October 2009, following an investment in the Charter Hall Group. Peter Kahan is the CEO of The Gandel Group and has over 15 years of property and funds management experience. He joined The Gandel Group in 1994 and became the Group’s Finance Director in 2001, prior to his appointment as the Group’s CEO in 2007. Prior to joining The Gandel Group, Peter worked as a Chartered Accountant and has held senior ﬁ nancial roles in various industry sectors. Between 2002 and 2006, Peter was a Director of Gandel Retail Management Pty Ltd and Colonial First State Property Retail Pty Ltd, a leading property and fund manager, managing a portfolio of approximately $8 billion of retail assets in Australia. Peter is a member of the Institute of Chartered Accountants in Australia and the Australian Institute of Company Directors and holds a Bachelor of Commerce and Bachelor of Accountancy degree from the University of The Witwatersrand Johannesburg, South Africa. 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. Colin 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 he held for 11 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. Cedric Fuchs Executive Director Cedric is a co-founder of Charter Hall with over 40 years of experience in the ﬁ elds of property investment, development and ﬁ nancial services. Cedric 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 diploma in Business Management. Independent Non-Executive Director Patrice is a senior property executive with recent roles including CEO of Penrith Lakes Development Corporation Limited and CEO of Campus Living. Patrice 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 attacks on New York City. Prior positions have included Managing Director at the New York funds management and advisory ﬁ rm, Spears, Benzak, Salomon and Farrell, where Patrice was responsible for David Rockefeller’s property portfolio, and in 1997 founded the Victory Real Estate Investment Fund, a portfolio of traded property securities. Patrice has a Bachelor of Architecture and University Medal 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. Glenn Fraser Independent Non-Executive Director Glenn Fraser is a professional non executive director. Hewas instrumental in Transﬁ eld Holdings’ acquisition of 50% of Charter Hall and its expansion and asx listing in 2005. Glen’s career has largely focused on infrastructure and property ﬁ nance. He joined Transﬁ eld Holdings in 1996 as General Manager – Finance Project Development, where he was responsible for the ﬁ nancial elements of infrastructure and property projects. He became Chief Financial Ofﬁ cer in 1998 and is currently a non executive member of its advisory board. 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 is the Chairman of the Charter Hall Group Audit and Risk Committee and holds a Bachelor of Commerce, is a member of the Institute of Chartered Accountants and the Australian Institute of Company Directors. 22 Charter Hall Group David Southon Roy Woodhouse David Harrison Joint Managing Director As Charter Hall Group’s Joint Managing Director, David Harrison is jointly responsible for all aspects of the Charter Hall business, with speciﬁ c focus on Funds, Asset and Property Management operations. David also substantially contributes to investment sourcing, capital raisings and structuring of transactions. In addition to his responsibilities on the various unlisted Fund Boards and Investment Committees, David is Chairman of the Charter Hall Ofﬁ ce REIT Board, Board Director of the Charter Hall Retail REIT and is Chairman of the Charter Hall Direct Responsible Entity Board. David has more than 24 years of experience in the Australian commercial property market and has jointly overseen the growth of the Charter Hall Group from $500 million to $10 billion of assets under management in six years. David has been principally responsible for transactions exceeding $13 billion of commercial, retail and industrial property assets across all property sectors. Prior to joining Charter Hall, David was Managing Director of Savills in Australia, an international commercial real estate agency business. Joint Managing Director David is a co-founder of Charter Hall. As Charter Hall Group’s Joint Managing Director, one of David’s key focuses is wholesale opportunistic funds and the operation of the Development Division. David is an Executive Director on the Boards of Charter Hall Retail REIT (CQR – Chairman) and Charter Hall Ofﬁ ce REIT (CQO) as well as the Responsible Entity Board of Charter Hall Direct Funds. He is also on the Investment Committees of the Group’s series of opportunity funds. David has over 22 years of property industry experience and is responsible for overseeing project origination, project strategy and the formulation and implementation of Group strategy together with the CHC Executive Committee and the Board. In addition, David is involved in the procurement and divestment of investment properties for the various Funds managed by the Group. Prior to co-founding Charter Hall in 1991, David was a Development Manager with Eurolynx Limited, the Heine Group’s property arm (now part of ING), and prior to that with 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). 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 is a past Fellow of the Australian Institute of Valuers and a Fellow of the Institute of Company Directors. Kerry Roxburgh Chairman and Independent Non-Executive Director Kerry is an SDIA Practitioner Member. He holds positions on the Boards of several listed and unlisted companies. Kerry is the non-executive Chairman of Tasman Cargo Airlines and of Money Switch Ltd. He is also a non-executive director of Ramsay Health Care, the LawCover Group and of the Medical Indemnity Protection Society Group. Until it was acquired by the ANZ in June 2007, 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 as Chairman of Eircom Holdings Ltd and as a non-executive director of the Everest Financial Group and of Climax Mining. Before joining E*TRADE Kerry 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. 23 Annual Report 2010 The pivotal elements of the Charter Hall framework are: ◆ conﬂ icts of interest arising between Charter Hall-managed vehicles and their related parties must be managed appropriately and, in particular: — related party transactions should be identiﬁ ed clearly and conducted on arm’s length terms; — related party transactions should be tested by reference to whether they meet market standards; — decisions about transactions between Charter Hall-managed vehicles and Charter Hall or its afﬁ liates should be made by parties independent of Charter Hall; ◆ the Board must have a majority of independent directors. Principle 1: Lay solid foundations for management and oversight Recommendation 1.1: Companies should establish the functions reserved to the board and those delegated to senior executives and disclose those functions. Responsibility for corporate governance and the internal working of the Group rests with the Board. The Board has adopted a formal charter of directors’ functions and matters that are delegated to management, having regard to the recommendations in the Principles. Corporate Governance This statement has been prepared by the Charter Hall Group (comprising Charter Hall Limited and the Charter Hall Property Trust, listed jointly on the ASX as a stapled security) (the Group or Charter Hall) in a manner consistent with the revised Corporate Governance Principles and Recommendations released by the Australian Securities Exchange (ASX) Corporate Governance Council on 2 August 2007 (Principles). The Principles can be viewed at asx.com.au. The Principles are not prescriptive; however, listed entities (including Charter Hall) are required to disclose the extent of their compliance with the Principles, and to explain why they have not adopted a Principle if they consider it inappropriate in their particular circumstances. As previously announced, the Charter Hall Group has acquired the majority of Macquarie Group Limited’s core real estate management platform and as a result a substantial review of its corporate governance arrangements has been conducted with the view to adjusting it to the new operating environment and strengthening corporate governance practices. The appropriate practice recommendations have been adopted so as to reﬂ ect the Group’s commitment to the highest standards of corporate governance practice. Additional corporate governance information may be found on the Group’s website charterhall.com.au or by contacting the Company Secretary. Charter Hall’s corporate governance statement is in the form of a report against each Recommendation. Below is a detailed outline of the arrangements currently in operation. Charter Hall’s approach to Corporate Governance Charter Hall is committed to the achievement of superior ﬁ nancial performance and long-term prosperity, while meeting stakeholders’ expectations of sound corporate governance practices. This statement outlines the Group’s main corporate governance practices as at 30 June 2010. Unless otherwise stated, they reﬂ ect the practices in place throughout the ﬁ nancial year ended on that date. The Charter Hall Board determines the corporate governance arrangements for the Group. As with all its business activities, Charter Hall is proactive in respect of corporate governance and puts in place those arrangements which it considers are in the best interests of the Group and securityholders, and consistent with its responsibilities to other stakeholders. Charter Hall has a strong governance framework to safeguard the interests of investors in the investment vehicles, which at times may conﬂ ict with those of Charter Hall as sponsor of related vehicles. 24 Charter Hall Group Charter Hall’s approach to Corporate Governance (continued) An outline of the Board’s responsibilities under the charter is set out below: Each independent director of Charter Hall has received a letter of appointment which details the key terms of their appointment. This letter has been enhanced for the more recent Board appointments to include all of the recommended matters in the Principles. ◆ providing strategic direction and deciding upon Charter Hall’s business strategies and objectives with a view to seeking to optimise the risk adjusted returns to investors; ◆ monitoring the operational and ﬁ nancial position and performance of Charter Hall; ◆ overseeing risk management for Charter Hall; ◆ ensuring that Charter Hall’s ﬁ nancial and other reporting mechanisms result in adequate, accurate and timely information being provided to the Board; ◆ ensuring that unitholders and the market are fully informed of all material developments; ◆ overseeing and evaluating the performance of the Joint Managing Directors and other senior executives in the context of Charter Hall’s strategies and objectives and, where appropriate, removing the Joint Managing Directors, approving other key executive appointments and planning for executive succession; and ◆ overall management of Charter Hall. In addition to the matters outlined above, there is a formal delegation structure in place. Under this structure, the Joint Managing Directors have delegated authority to make decisions in respect of the day to day management of the Group and its assets up to certain delegated levels, including appointment of advisers, approvals of asset business plans, budgets, capital expenditure and hedging (within approved Hedging Policy). Charter Hall’s senior executives, including the Joint Managing Directors and Chief Financial Ofﬁ cer, have formalised job descriptions and, as all Charter Hall employees, letters of appointment. Recommendation 1.2: Companies should disclose the process for evaluating the performance of senior executives. To ensure that Charter Hall’s senior executives properly perform their duties, the following procedures are in place: ◆ performance is assessed in June each year as part of Charter Hall’s formal employee performance evaluation process. ◆ employees are assessed against set behavioural and technical competencies. Assessment criteria used in determining remuneration are outlined in the Remuneration Report at page 44; ◆ a formal induction program to allow senior executives to participate fully and actively in management decision making; and ◆ access by executives to continuing education to update and enhance their skills and knowledge. The above process was followed for the year ended 30 June 2010. What you can ﬁ nd on our website: ◆ Charter Hall’s Board Charter. Principle 2: Structure the Board to add value a) Composition The Board is comprised of nine members appointed with a view to providing appropriate skills and experience likely to add value to the Group’s activities. Name Position Kerry Roxburgh Roy Woodhouse Cedric Fuchs Colin McGowan David Harrison David Southon Glenn Fraser Patrice Derrington Peter Kahan Chairman Deputy Chairman Executive Director Non-executive Director Joint Managing Director Joint Managing Director Non-executive Director Non-executive Director Non-executive Director Independent (Yes/No) Yes Yes No Yes No No Yes Yes No First appointed 12 April 2005 6 April 2005 6 April 2005 6 April 2005 30 August 2006 30 August 2006 6 April 2005 6 April 2005 1 October 2009 25 Annual Report 2010 Corporate Governance Charter Hall’s approach to Corporate Governance (continued) Recommendation 2.4: The Board should establish a nomination committee. Recommendation 2.1: A majority of the Board should be independent directors. The Board satisﬁ es the requirements that the Board have a majority of independent directors. Proﬁ les of these directors, including details of their skills, experience and expertise can be found later in the director’s report. Independence Independence of directors determined by objective criteria is acknowledged as being desirable to protect investor interests and optimise the ﬁ nancial performance of the managed vehicle and returns to investors. The Board regularly assesses independence of its directors. In determining the status of a director, Charter Hall considers that a director is independent when he or she is independent of management and free of any business or other relationship that could materially interfere with, or could reasonably be perceived to interfere with the exercise of unfettered and independent judgement. The standards set in the ASX Corporate Governance Principles are also adhered to by the Board when assessing independence of directors, in line with the Charter Hall policy. The relationships that affect the independent status of the directors classed as non-independent are as follows: ◆ Mr Harrison, Mr Southon and Mr Fuchs are employed in an executive capacity by the Group; ◆ Mr Kahan is the Chief Executive Ofﬁ cer and a director of The Gandel Group of Companies, which is a substantial securityholder in the Charter Hall Group. Recommendation 2.2: The chair should be an independent director. Recommendation 2.3: The roles of the chair 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 Chief Executive Ofﬁ cer – or Managing Director – is carried out jointly by Mr Harrison and Mr Southon, two executive directors of the group. The Board has established a Nomination Committee which consists of the Group Chairman Kerry Roxburgh (Committee Chairman), Roy Woodhouse and 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. The following Board composition and membership criteria have been adopted by the Committee and nominations to the Board are also approved by Charter Hall. Charter Hall also nominates executives to the Board. ◆ the Board is to comprise at least three directors. Additional directors may be appointed if the Board feels that additional expertise is required in speciﬁ c areas, or when an outstanding candidate is identiﬁ ed; ◆ directors nominated for election are approved by the Board; ◆ a majority of the directors must be independent as deﬁ ned by Charter Hall (refer above); and ◆ the Board is to be comprised of directors with an appropriate range of qualiﬁ cations and expertise. The following guidelines apply to director selection and nomination by the Board: ◆ integrity; ◆ particular expertise (sector and functional) and the degree to which they complement the skill set of the existing Board members; ◆ reputation and standing in the market; and ◆ in the case of prospective independent directors, actual (as prescribed by the Charter Hall deﬁ nition of independence above) and perceived independence from Charter Hall. 26 Charter Hall Group Charter Hall’s approach to Corporate Governance (continued) Recommendation 2.5: Companies should disclose the process for evaluating the performance of the Board, its committees and individual directors. To ensure that the directors of Charter Hall are properly performing their duties, the following procedures are in place: ◆ a formal annual performance self -assessment of the Board, the Audit, Risk and Compliance Committee, Nominations Committee and Remuneration Committee and individual directors; ◆ an induction program for directors; and ◆ access by directors to continuing education to update and enhance their skills and knowledge. The procedure for evaluation of the Board’s performance is: ◆ each independent director will complete an annual performance evaluation which will be submitted to an independent party (during this ﬁ nancial year, the lead corporate legal advisor of the Group was engaged for this process), who collates and provides summarised and anonymous results to the Chairman, who then distributes the results to the full Board; and ◆ the Board as a whole discusses and analyses Board and committee performance during the year, including suggestions for change or improvement, based on the results of the survey and Chairman’s feedback. Six or more full Board meetings are held each year. Other meetings are called as required. Directors are provided with Board reports in advance of Board meetings which contain sufﬁ cient information to enable informed discussion of all agenda items. Independent professional advice The directors are entitled to obtain independent professional advice at the cost of the Group, subject to the estimated costs being ﬁ rst approved by the Chairman as reasonable. Principle 3: Promote ethical and responsible decision-making Charter Hall is committed to being a good corporate citizen and has a robust framework of policies to achieve this. 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 Charter Hall Group has established a Code of Conduct for all its employees, including the Joint Managing Directors and key executives, which form the basis for ethical behaviour by staff 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 directors, other stakeholders and the broader community can be conﬁ dent that the Group conducts its affairs honestly in accordance with ethical values and practices. The Code sets the standards for dealing ethically with employees, investors, customers, regulatory bodies and the ﬁ nancial and wider community, and the responsibility and accountability of individuals for reporting and investigating reports of unethical behaviour. In addition to this, in order to deal speciﬁ cally with the responsibility and accountability of individuals for reporting and investigating reports of fraudulent and unethical practices, Charter Hall has adopted a Fraud Risk Management Policy which addresses these matters. A full copy of this policy is posted on the Corporate Governance section of the Group’s website. A full copy of the Directors’ Code of Conduct and a summary of the Charter Hall Code of Conduct can be obtained from the Corporate Governance section of the Group’s website. A full copy of the Charter Hall Code of Conduct is also available upon request from the Company Secretary. Managing conﬂ icts The Group has established protocols for identifying and managing conﬂ icts. In the case of the Board: ◆ Board members declare their interests as required under the Corporations Act, ASX Listing Rules and other general law requirements; ◆ Board members with a material personal interest in a matter are not present at a Board meeting during the consideration of the matter and subsequent vote unless the Board (excluding the relevant Board member) resolves otherwise; ◆ Board members with a conﬂ ict not involving a material personal interest may be required to absent themselves from the relevant deliberations of the Board. 27 Annual Report 2010 Corporate Governance Charter Hall’s approach to Corporate Governance (continued) The Group also has a policy for dealing with actual, apparent or potential conﬂ icts of interest which arise out of the fact that Charter Hall is also the manager of other listed and unlisted vehicles and the Group may transact with them from time to time or share staff or information with other Charter Hall companies or managed vehicles. In particular there is a comprehensive related party protocol. Personal conﬂ icts that might arise generally for directors and staff are covered by the Code of Conduct referred to above. Recommendation 3.2: Companies should establish a policy concerning trading in company securities by directors, senior executives and employees, and disclose the policy or a summary of that policy. The Group has in place a formal Security Trading Policy, in line with the Charter Hall Group Policy, which regulates the manner in which directors and staff involved in the management of the Group can deal in Group securities. 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 and contains all contents suggested in the ASX Corporate Governance. 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 possession of non-public price sensitive information regarding the Group. The policy has been formally reviewed and updated by the Board of Charter Hall in April 2010. A copy of the current Security Trading Policy is available on the Group’s website. Diversity The ASX Corporate Governance Council has released a new proposed Recommendation (Recommendation 3.2) regarding diversity. Under the proposed changes, listed entities (including Charter Hall) will need to establish a policy concerning diversity and disclose such policy (or a summary thereof). The policy should include requirements for the Board to establish measurable objectives for achieving gender diversity and to assess annually both the objectives and progress in achieving them. They will be also required to disclose the level of these achievements and the proportion of women on the board, in senior management and employed throughout the whole organisation. As at 30 June 2010, the proportion of women on the Board is 11%, in senior management 16% and across all staff 43%. 28 Charter Hall Group The Nomination Committee, the Audit, Risk and Compliance Committee and the Charter Hall Board have considered Recommendation 3.2 and commenced work towards the drafting of a suitable policy. For this purpose, the Nomination Committee has assessed the current gender mix at Board level, within senior management and in the business as a whole, also looking at it on a divisional basis. It has been proposed that a mentoring forum be established for women to have a direct dialogue with key executives within the business as a means to assist in their professional development. Further initiatives are being discussed and Charter Hall is committed not only to achieve compliance with the new proposed Recommendation but to further fostering a culture which embraces and recognises the value of diversity. What you can ﬁ nd on our website: ◆ a summary of the Charter Hall Code of Conduct; ◆ the Securities’ Trading Policy; and ◆ the Related Party Transactions Policy. Principle 4: Safeguard integrity in ﬁ nancial reporting The Board has the responsibility for the integrity of Charter Hall’s ﬁ nancial reporting. To assist the Board in fulﬁ lling its responsibility, the processes discussed below have been adopted with a view to ensuring that the Group’s ﬁ nancial reporting is a truthful and factual presentation of Charter Hall’s ﬁ nancial position. Recommendation 4.1: The Board should establish an audit committee. Recommendation 4.2: 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; and ◆ At least three members. To assist the Board in fulﬁ lling its responsibility for overseeing the quality and integrity of the accounting, audit, ﬁ nancial and risk management practices of Charter Hall, Charter Hall has appointed an Audit, Risk and Compliance Committee comprising only independent directors and which complies with the requirements of the Principles. The Committee is comprised of Glenn Fraser (Chair), Kerry Roxburgh and Patrice Derrington, who are all non-executive independent directors. The members have comprehensive ﬁ nancial and property industry expertise. The Committee met on seven (7) occasions during the year to 30 June 2010. Please refer to the Director’s report for more information on members, including attendance at committee meetings. The Audit, Risk and Compliance Committee also meet privately with the external auditors at least twice a year. Charter Hall’s approach to Corporate Governance (continued) Recommendation 4.3: The Audit Committee should have a formal Charter. In establishing the Audit, Risk and Compliance Committee, the Board has developed a charter which sets out the Committee’s role, responsibilities, composition, structure and membership requirements. This Charter has been last updated and reviewed in August 2010. The key responsibilities of the Audit, Risk and Compliance Committee under the Charter in relation to ﬁ nancial reporting are to: ◆ review the internal control and compliance systems of the Company and Charter Hall; ◆ monitor the integrity of the ﬁ nancial statements of the Company and Charter Hall; ◆ consider signiﬁ cant ﬁ nancial reporting issues and judgements made in connection with Charter Hall’s ﬁ nancial statements; ◆ monitor and review the performance of the external audit function and make recommendations to the Board; ◆ monitor compliance by the Company with legal and regulatory requirements; ◆ regularly monitor risk management reports provided by management; ◆ assess at regular intervals whether Charter Hall’s compliance plan, internal ﬁ nancial control systems, risk management policies and risk management systems are adequate; ◆ where appropriate, and at least twice a year, meet privately with the external auditor to discuss an matters that the Committee or the External Auditor believe should be discussed privately; and ◆ where appropriate, meet with the Group’s external legal counsel, any member of management or the internal audit team (if any) in separate session to discuss any matters that the Committee, the Group’s external legal counsel, the member of management or the internal audit team believe should be discussed privately. Details of the risk monitoring duties of the Audit, Risk and Compliance Committee are set out in the Principle 7 commentary below. Auditor independence The Audit, Risk and Compliance Committee has adopted a policy which includes the following to ensure the independence of the external auditor: ◆ the external auditor must remain independent from Charter Hall and Charter Hall at all times and must comply with APES 110: Code of Ethics for Professional Accountants pertaining to ﬁ nancial independence, and business and employment relationships; ◆ the external auditor must monitor its independence and report to the Board every six months that it has remained independent; ◆ signiﬁ cant permissible non-audit assignments awarded to the external auditor must be approved in advance by the Audit, Risk and Compliance Committee (or its chairman between meetings); ◆ all non-audit assignments are to be reported to the Audit, Risk and Compliance Committee every six months; and ◆ the Group’s audit engagement partner and review partner must be rotated every ﬁ ve years. Charter Hall’s audit engagement partner rotated at the conclusion of the 31 December 2009 half-year ﬁ nancial reporting period. The Board and the Audit, Risk and Compliance Committee are of the view that, at the present time, PricewaterhouseCoopers (PwC) is best placed to provide the Group’s audit services because PwC is a top tier professional services ﬁ rm. It has provided audit services to the Group since its establishment and is familiar with its structure and assets. The auditor is required to be independent from the Group and Charter Hall. PwC meets this requirement. The auditor attends Charter Hall’s annual meeting and is available to answer securityholder questions on the conduct of the audit, and the preparation and content of the auditor’s report. What you can ﬁ nd on our website: ◆ the Audit, Risk and Compliance Committee Charter; and ◆ Auditors’ Independence Policy. 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. It is Charter Hall’s policy to provide timely, open and accurate information to all stakeholders, including securityholders, regulators and the wider investment community. Charter Hall has a Continuous Disclosure and External Communications Policy which includes policies and procedures in relation to disclosure and compliance with the disclosure requirements in the ASX Listing Rules. These policies include procedures for dealing with potentially price- sensitive information which includes referral to the Joint Managing Directors and company secretary and sometimes the Board for a determination as to disclosure required. The ASX liaison person is the Company Secretary of Charter Hall. What you can ﬁ nd on our website: ◆ Continuous Disclosure and Communications Policy. 29 Annual Report 2010 Corporate Governance Charter Hall’s approach to Corporate Governance (continued) Principle 6: Respect the right of shareholders Recommendation 6.1: Design and disclose a communications strategy to promote effective communication with shareholders and encourage effective participation at general meetings. As mentioned above, Charter Hall has adopted a Continuous Disclosure and Communications Policy. The cornerstone of this policy is the delivery of timely and relevant information as described below. Investors receive an annual report and updates which keep them informed of Charter Hall’s performance and operations. After lodging market-sensitive information with ASX, Charter Hall’s policy is to place the information on its website, including annual and half year results announcements and analyst presentations as soon as practically possible. Charter Hall’s website (charterhall.com.au) contains recent announcements, presentations, past and current reports to securityholders, answers to frequently asked questions and a summary of key ﬁ nancial data since inception. Investors may also register here to receive email copies of the Group’s signiﬁ cant ASX announcements. Domestic investor roadshows are held periodically throughout Australia. International roadshows are also held for institutional securityholders. Where they contain new information, analyst and roadshow presentations are released to the ASX and included on the Group’s website. For formal meetings, an explanatory memorandum on the resolutions is included with the notice of meeting. Presentations by the chairman and Joint Managing Directors are webcast. Full copies of notices of meetings are placed on the Charter Hall website. Unless speciﬁ cally stated in the notice of meeting, all holders of fully paid securities are eligible to vote on all resolutions. In the event that securityholders cannot attend formal meetings, they are able to lodge a proxy on line in accordance with the Corporations Act. Proxy forms can be mailed or faxed. What you can ﬁ nd on our website: ◆ Continuous Disclosure and Communications Policy; ◆ the latest annual report and full ﬁ nancial statements; and ◆ Charter Hall’s latest ‘Investor Focus’ newsletter. Principle 7: Recognise and manage risk Recommendation 7.1: The Board or appropriate board committee should establish policies on risk oversight and management. Charter Hall has a formalised risk management framework. Compliance with risk management policies is monitored by the Audit, Risk and Compliance Committee. As part of its risk monitoring duties, the Audit, Risk and Compliance Committee is required to: ◆ review the internal control and compliance systems of the Company and Charter Hall; ◆ regularly monitor risk management reports provided by management; and ◆ assess at regular intervals whether Charter Hall’s compliance plan, internal ﬁ nancial control systems, risk management policies and risk management systems are adequate. The Audit, Risk and Compliance Committee members must satisfy the independence criteria set out in s601JB(2) of the Corporations Act and are required to certify their compliance with these requirements annually and otherwise notify Charter Hall if they cease to satisfy the criteria. Recommendation 7.2: The Board should require management to design and implement the risk management and internal control system to manage the Company’s material business risks and report to it on whether those risks are being managed effectively. The Board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks. The Audit, Risk and Compliance Committee and designated compliance staff also assist the Charter Hall Board in overseeing the risk management framework of the Group by monitoring the observance of the compliance plans and ensuring that there is an underlying compliance framework including detailed policies and procedures, staff training and supervision and appropriate compliance reporting. The compliance ofﬁ cer for the Group is responsible for reviewing and monitoring the efﬁ ciency of compliance systems on an ongoing basis so that appropriate compliance procedures, staff education and compliance committee reporting arrangements are in place to enable observance of the compliance plans. 30 Charter Hall Group Charter Hall’s approach to Corporate Governance (continued) During the year, management has reported to the Audit, Risk and Compliance Committee as to the effectiveness of Charter Hall’s management of its material risks. Charter Hall has a Risk Management framework in place for identifying, assessing, monitoring and managing its risks. Each ﬁ nancial year, an Operational Risk Assessment is conducted whereby management identiﬁ es key risks and controls in place and their effectiveness. Findings resulting from this assessment are reported to the Audit, Risk and Compliance Committee. Considerable importance is placed on maintaining a strong control environment through an organisation structure with clearly drawn lines of accountability and authority. At this point in time, the Board is of the opinion that the size of the Group does not warrant an internal audit function. This policy is subject to ongoing review. Recommendation 7.3: The Board should disclose whether it has received assurance from the Chief Executive Ofﬁ cer (or equivalent) and the chief ﬁ nancial ofﬁ cer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to ﬁ nancial reporting risks. The Board of Charter Hall has received assurance from the Joint Managing Directors and Chief Financial Ofﬁ cer that their conﬁ rmation given to the Board in respect of the integrity of ﬁ nancial statements is founded on a sound system of risk management and internal control which implements the policies adopted by the Board and that the system is operating in all material respects in relation to ﬁ nancial reporting risks. What you can ﬁ nd on our website: ◆ Group’s Risk Management framework. Principle 8: Remunerate fairly and responsibly Recommendation 8.1: The Board should establish a remuneration committee. 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 aims 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 comprises three non-executive, independent directors being Kerry Roxburgh (Chairman), Colin McGowan and Roy Woodhouse (please refer to the Directors Report for information in regard to the members and the number of meetings held and attended). The Remuneration Committee obtains 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 regard to the Group’s remuneration policies and framework, please refer to the Remuneration Report, including a detailed description of the structure of non-executive directors’ remuneration and executive directors’ and senior executives’ remuneration. A copy of the Remuneration Committee Charter is available on the Group’s website. The Security Trading Policy, also posted on the website, deals with the Group’s policy on entering into transactions in associated products which limit the economic risk of participating in unvested entitlements under any equity-based remuneration scheme. Recommendation 8.2: Companies should clearly distinguish the structure of non-executive directors’ remuneration from that of executive directors and senior 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 2010 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 or receive options or bonus payments. Executive directors’, as well as senior executives’, 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. 31 Annual Report 2010 CPOF: 225 ST GEORGES TERRACE, PERTH WA 32 Charter Hall Group Financial Report Income tax expense 34 57 58 59 60 61 62 Fair value adjustments Financial risk management Directors’ Report Auditor’s Independence Declaration Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Notes to the Financial Statements 63 1 Summary of signiﬁ cant accounting policies 71 2 74 3 Critical accounting estimates and judgements 74 4 Parent entity ﬁ nancial information 75 5 Segment information 77 6 Revenue 78 7 78 8 Expenses 79 9 80 10 Distributions 80 11 Current assets – Cash and cash equivalents 81 12 Current assets – Trade and other receivables 81 13 Current assets – Investment properties held for sale 82 14 Non-current assets – Financial assets at fair value through proﬁ t or loss 82 15 Derivative ﬁ nancial instruments 83 16 Non-current assets – Trade and other receivables 85 17 Non-current assets – Investments accounted for using the equity method 85 18 Non-current assets – Intangible assets 86 19 Non-current assets – Property, plant and equipment 86 20 Non-current assets – Investment properties 87 21 Non-current assets – Deferred tax assets 88 22 Trade and other payables 88 23 Current liabilities – Provisions 89 24 Non-current liabilities – Borrowings 92 25 Non-current liabilities – Deferred tax liabilities 92 26 Non-current liabilities – Provisions 93 27 Contributed equity 94 28 Reserves and retained proﬁ ts/(accumulated losses) 95 29 Non-controlling interest 96 30 Key management personnel disclosures 99 31 Remuneration of auditors 100 32 Commitments 100 33 Related parties 101 34 Subsidiaries 103 35 107 36 108 37 Business combination 38 Events occurring after the balance sheet date 110 39 Reconciliation of proﬁ t after income tax to net cash inﬂ ow from operating activities 111 111 40 Earnings per security 112 41 Security-based payments 114 42 Deed of cross guarantee 116 Directors’ Declaration to Unitholders 117 Independent Auditor’s Report 119 Securityholder information Investments in associates Investment in joint ventures 33 Annual Report 2010 Directors’ Report For the year ended 30 June 2010 Your directors present their report on the consolidated entity (referred to hereafter as the Group or Charter Hall Group) consisting of Charter Hall Limited (Company or CHL) and the entities it controlled at the end of, or during, the year ended 30 June 2010. Charter Hall Group is a stapled entity comprising CHL and its controlled entities and Charter Hall Property Trust (Trust or CHPT) and its controlled entities. The Group includes Charter Hall Funds Management Limited (CHFML) as the responsible entity of CHPT. CHL and CHFML 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: ◆ Kerry Roxburgh – Chairman ◆ Roy Woodhouse – Deputy Chairman ◆ Patrice Derrington – Non-executive Director ◆ Glenn Fraser – Non-executive Director ◆ Cedric Fuchs – Executive Director ◆ David Harrison – Joint Managing Director ◆ Peter Kahan – Non-executive Director (appointed 1 October 2009) ◆ Colin McGowan – Non-executive Director ◆ David Southon – Joint Managing Director Principal activities During the year the principal continuing activities of the Group consisted of: a) Property investment b) Funds management services c) Development management services d) Other property services No signiﬁ cant changes in the nature of the activities of the Group occurred during the year. 34 Charter Hall Group Distributions – Charter Hall Group Distributions paid/declared to members during the year were as follows: Interim ordinary distribution for the six months ended 31 December 2009 of 1.60 cents per security paid on 26 February 2010 Final ordinary distribution for the six months ended 30 June 2010 of 1.60 cents per security expected to be paid on 27 August 2010 Interim ordinary distribution for the six months ended 31 December 2008 of 3.96 cents per security paid on 27 February 2009 Final ordinary distribution for the six months ended 30 June 2009 of 1.00 cent per security paid on 28 August 2009 Earnings per security and operating earnings Earnings per security per note 40 (cents) Operating earnings per security per note 5 (cents) Earnings used in the calculation of operating earnings per security (‘000) Weighted average number of ordinary securities used in the calculation of operating earnings per security (‘000) (note 40) Net proﬁ t/(loss) attributable to stapled securityholders of the Group Fair value losses Net gain on remeasurement of equity interest Loss/(gain) on sale of investments, property and derivatives Impairment of goodwill on consolidation of CPRF and investments Business combination acquisition costs Non-operating movements in equity accounted investments ELSP and PROP expense Amortisation Tax beneﬁ t Foreign exchange loss Performance fee accrual reversal Operating earnings (excluding non-controlling interest) The adjustments above exclude the non-controlling interest in CPRF. 2010 $’000 11,204 18,598 – – 29,802 0.02 4.11 34,900 2009 $’000 – – 17,679 6,980 24,659 (17.98) 7.61 34,828 850,161 457,410 207 52,847 (59,725) 10,529 15,328 6,636 7,838 1,317 734 (950) 139 – 34,900 (82,222) 93,982 – (1,339) 17,644 – 3,625 616 744 (1,222) – 3,000 34,828 35 Annual Report 2010 Directors’ Report For the year ended 30 June 2010 Results The Group recorded a statutory gain attributable to stapled securityholders for the ﬁ nancial year of $0.2 million compared to a loss of $82.2 million in 2009. After adding back fair value adjustments, impairment, gains on sale and other non-cash items such as the mark to market of derivatives, the Group generated operating earnings (formerly called Underlying Earnings) of $34.9 million compared to $34.8 million in 2009. Operating Earnings per Security (OEPS) of 4.11 cents fell from 7.61 cents in 2009 due to the increase in the weighted average number of securities from 457,410,018 to 850,161,196. As a result, the Distribution per Security (DPS) fell from 4.96 cents to 3.20 cents. Net Tangible Assets per Security (NTA) has reduced from $0.71 at 30 June 2009 to $0.56, largely as a result of additional securities issued as part of capital raisings and due to devaluations of investments. Funds Under Management (FUM) has increased from $3.4 billion at 30 June 2009 to $10.2 billion as a result of the acquisition of the management rights of the majority of the Macquarie Group Limited’s (Macquarie) core real estate management platform and the co-investments in funds. Gearing has increased from 2.4% at 30 June 2009 to 6.5% at 30 June 2010 as a result of Charter Hall Core Plus Retail Fund (CPRF) being consolidated. The 30 June 2010 ﬁ nancial results with comparatives are summarised as follows: Revenue including non-controlled interests ($m) Proﬁ t/(loss) after tax attributable to stapled securityholders ($m) Operating earnings attributable to stapled securityholders ($m) Distributions to stapled securityholders ($m) Statutory earnings per stapled security (EPS) (cents) Operating EPS per stapled security (OEPS) (cents) Distribution per stapled security (cents) Total assets ($m) Total liabilities ($m) Net assets ($m) Net assets attributable to stapled securityholders ($m) Securities on issue (m) NTA per security ($) Gearing – borrowings to total assets Funds under management ($bn) Note 1, 2 2 2 2 3 2010 77 0.2 35 30 0.02 4.11 3.20 988 165 823 772 1,162 0.56 6.5% 10.2 2009 61 (82) 35 25 (17.98) 7.61 4.96 524 30 494 494 698 0.71 2.4% 3.4 1) Excludes AASB 140 fair value adjustments on investment properties and fair value adjustments on ﬁ nancial assets, impairment of assets, gains on sale of investments and non-cash charges such as share-based payments expense, amortisation, tax beneﬁ t and acquisition costs. 2) Calculation excludes stapled securities issued under the Executive Loan Security Plan in accordance with AASB 2 Share-based Payment. 3) Calculation is net of cash. Distribution Re-investment Plan (DRP) The DRP is currently activated. 36 Charter Hall Group Review of operations The Group has maintained its strategy to de-risk its managed funds and the listed balance sheet and ensured emergence from the Global Financial Crisis in a healthy position. In March 2010, the Group completed the transformational acquisition of the majority of the Macquarie real estate management platform. The acquisition involved the purchase of management rights for two listed and three unlisted real estate funds for $108 million and co-investment in Charter Hall Ofﬁ ce REIT, Charter Hall Retail REIT and Charter Hall Direct Property Fund for $189 million. The purchase has positioned Charter Hall as one of Australia’s largest specialist real estate fund managers with assets under management increased from $3.4 billion at 30 June 2009 to $10.2 billion. Charter Hall Retail REIT (CQR) – $2.1 billion FUM, CHPT interest 7.4% CQR’s investment strategy is to invest in retail properties, with the existing portfolio of 136 properties predominantly focusing on food and mainly anchored by market leading grocery retailers. The result of its asset revaluations at 30 June 2010 saw the value of its portfolio increase 1.1% over the June 2010 book value to $2.1 billion. The portfolio’s overall weighted average capitalisation rate decreased from 8.15% to 8.07%, resulting in a 0.9% increase in asset value, with the remaining 0.2% movement being driven by growth in the portfolio’s overall net income. Portfolio occupancy increased to 96.7% at 30 June 2010, from 96.6% at 31 March 2010. Same property income growth increased to 1.2% across the portfolio, indicating improving market conditions across the three regions in which the REIT is invested. Charter Hall has diversiﬁ ed its equity sources with access to listed equity and increased exposure to core funds. Core Plus Ofﬁ ce Fund (CPOF) – $1.1 billion FUM, CHPT interest 17% The funding for the transaction was provided by a $305 million equity raising with an underwritten placements and entitlement offer. Following is an update of the managed funds in which the Group has a co-investment. Charter Hall Ofﬁ ce REIT (CQO) – $4.1 billion FUM, CHPT interest 7.5% The CQO portfolio comprises 37 (excluding Quintana) high grade ofﬁ ce assets located in major business districts in Australia and the United States, with four ofﬁ ce assets in Europe and Japan. CQO announced its 30 June 2010 asset revaluations of A$3.9 billion with external valuations carried out on 12 assets, representing 53% of assets by value, and internal (directors) valuations were undertaken on the balance. The weighted average age of the external valuations is now ﬁ ve months. The 30 June 2010 valuations indicate a $97.3 million decrease against the 31 December 2009 book values, representing a decrease of 2.42%. The weighted average portfolio capitalisation rate remained unchanged with a 13 basis points movement in discount rates. Despite continued weakness and slow demand across the majority of ofﬁ ce markets, CQO’s high quality portfolio has remained resilient, with 140,505 square metres, or 13%, of the portfolio leased during the year. Other key results for the period to 30 June 2010 include portfolio occupancy of 91%, a stable like for like property income and a portfolio weighted average lease expiry of 4.5 years. CPOF has continued to focus on investment fundamentals and strengthen its balance sheet throughout ﬁ nancial year 2010. With occupancy of 96% and a long lease expiry proﬁ le of six years, CPOF is positioned to take advantage of an improving commercial real estate market. Continued tenant demand coupled with an upswing in demand from private, institutional and international investors for quality assets across the Australian market is a positive sign for a sustained recovery across the majority of ofﬁ ce markets. After a review of the entire CPOF portfolio in both the March and June quarters of this ﬁ nancial year CPOF has a current weighted average capitalisation rate of 7.76%. Including the 31 December 2009 valuations, 86% of this portfolio (by value) has now been revalued over the last six months. Core Plus Industrial Fund (CPIF) – $0.4 billion FUM, CHPT interest 25% CPIF has also undertaken June quarterly reviews of its entire portfolio, with valuations on 73% of the portfolio (by value). Including the 30 September 2009 valuations, 100% of the portfolio has now been revalued over the last nine months. The current weighted average capitalisation rate of the portfolio is 8.34%. Current CPIF occupancy is 98.9% with a WALE of 9.5 years, underpinned by strong tenant covenants with, for example, 17 and 14 year leases to Coles and Smorgon Steel respectively. CPIF has demonstrated a solid performance in what has been a challenging market environment. CPIF continues to secure lease renewals and extensions above forecast rental levels. On 4 August 2010, CPIF purchased a prominent seven hectare industrial site in Chullora which will be developed to provide a 27,000 square metre facility for Volkswagen Group Australia. 37 Annual Report 2010 Opportunity funds update The market remains challenging for development and repositioning projects due to the tight credit markets, reduction in asset values and a decline in demand for space due to the economic downturn. Charter Hall Opportunity Fund 4 (CHOF4) – $0.1 billion FUM, CHL interest 3% Charter Hall Opportunity Fund No.4 (CHOF4) announced in June 2010 that it has sold its 50% interest in half of the Gepps X Homemaker Centre in Gepps Cross, Adelaide for $34.8 million. Home HQ North Shore continues to trade well following the grand opening on 27 March 2010. Agreement for Lease documentation has been executed on approximately 96% of the centre’s area, which equates to 95% of the centre’s estimated income. The centre has achieved the ﬁ rst 4 star Green Star Rating for a household retail development in Australia. Construction of Alluvion, 58 Mounts Bay Road, Perth reached practical completion on 2 June 2010. The project is 100% leased and was pre-sold to Colonial’s Commonwealth Ofﬁ ce Property Fund (CPA) for $95 million with settlement occurring on 25 June 2010. Charter Hall Opportunity Fund 5 (CHOF5) – $0.6 billion FUM, CHL interest 15% At Home HQ Hastings, contracts have now been exchanged for the sale of a 22,350sqm lot to Mitre 10 Mega for the development of a timber and hardware trade store. In addition, commercial terms have also been agreed with The Warehouse Shop to lease a new 6,300 square metre facility on the site. The soft launch of Aquilo, a residential development in Mentone, Victoria has been well received by the market with 46 contracts exchanged and a further 30 townhouses reserved by potential purchasers with the payment of a holding deposit. The on-site sales and marketing suite has now been completed and the ﬁ nal 33 townhouses (Stage 3) are being marketed for sale. CHOF5 announced in April 2010 that it has acquired the development rights to develop stage one of the Lacrosse Apartments in the Docklands precinct. The project comprises 312 apartments and includes 1,300sqm of retail space. The average apartment price is approximately $500,000 and to date around 98% of apartments have been sold. Directors’ Report For the year ended 30 June 2010 Core Plus Retail Fund (CPRF) – $0.3 billion FUM, CHPT interest 66% The CPRF portfolio consists of eight properties with a current weighted average cap rate of 8.35%. June quarterly reviews of the CPRF portfolio showed that market capitalisation rates have stabilised across the retail market. A long dated WALE of 7.8 years backs the current occupancy of 96% and provides income stability into the future, with no signiﬁ cant lease expiries until 2014. CPRF is in the process of being restructured into the unlisted Direct Retail Fund, offering retail investors the chance to invest in an institutional quality portfolio of assets. Diversiﬁ ed Property Fund (DPF) – $0.2 billion FUM, CHPT interest 32% After a review of the entire DPF portfolio in both the March and June quarters of this ﬁ nancial year, 67% of the portfolio was independently revalued, resulting in a current weighted average cap rate of 8.17%. The WALE remains steady at 7.4 years due to new leases and extension of existing leases. The DPF portfolio currently has an occupancy rate of 95%. Charter Hall Umbrella Fund (CHUF) – $0.1 billion FUM, CHPT interest 25% CHUF is a fund with investments predominantly in Charter Hall Group managed funds. CHUF has effectively had 66% of its portfolio revalued over the March and June quarters of this ﬁ nancial year. CHUF provides exposure to high quality assets with a WALE of 7.8 years and a current occupancy of 96%. Charter Hall Direct Property Fund – $0.5 billion FUM, CHPT interest 4% Charter Hall Direct Property Fund (CHDPF) is an unlisted open-ended property fund that aims to provide regular, tax effective income payable quarterly from a portfolio of direct property (86% of the portfolio), unlisted wholesale funds (6% of the portfolio) and listed A-REITs (3% of the portfolio). As at 30 June 2010, 83% of the portfolio was invested in the ofﬁ ce sector and 94% of the portfolio was invested in Australia. In the year to 30 June 2010, in line with PDS requirements, all of the direct properties in CHDPF have been independently revalued. The weighted average cap rate was 8.7%, the weighted average lease expiry was 4.8 years and portfolio occupancy was 92% as at 30 June 2010. Since July 2008, in excess of A$270 million debt has been repaid to maintain gearing at the lower end of the 40-55% target range. CHDPF is currently closed for applications and redemptions. However, following the successful capital and portfolio management initiatives throughout the recent market downturn, CHDPF is targeted to reopen in the fourth quarter of 2010. 38 Charter Hall Group Environmental regulation The principal activities of the Group are property investment, funds management services, development management services and other property services. Funds management involves minimal environmental impact. The Group ensures compliance with applicable environmental standards and regulations in its property investment and development management activities. To the best of the directors’ knowledge, the operations of the Group have been undertaken in compliance with the applicable environmental regulations that apply to the Group’s activities. Matters subsequent to the end of the period Since 30 June 2010, the Group has completed the following transactions: ◆ The settlement of the purchase of 33 Windorah Street, Stafford by CPRF on 20 July 2010 for $11.2 million. ◆ The completion of the purchase by CPRF of 50% of Lake Macquarie Shopping Centre and Mount Hutton Shopping Centre on 30 July 2010 for $66 million. The purchase is a joint venture with Charter Hall Retail REIT. Signiﬁ cant 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: ◆ CPRF completed the sale of Bluewater Plaza, located at Redcliffe, to the Anthony John Group Pty Ltd on 10 August 2010 for $47.8 million. ◆ As previously mentioned, the Group raised $305 million via an entitlement offer and placement in March 2010 through the issue of 193.2 million securities at 65 cents per security and $108.7 million securities at 70 cents per security. ◆ Proceeds were used to purchase the majority of the Macquarie real estate platform for $108 million with purchases of co-investments in the underlying funds totalling $189 million. ◆ On 27 July 2010, the Group launched the Charter Hall Direct Industrial Fund for investment by retail and self managed superannuation fund investors. The seed asset is a development property at Altona North, Melbourne. The Group will be ﬁ nancing the development while equity is raised. Except for the matters discussed above, no other matter or circumstance has arisen since 30 June 2010 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. 39 Annual Report 2010 Directors’ Report For the year ended 30 June 2010 Information on directors Kerry Roxburgh Chairman – Independent non-executive director Roy Woodhouse Deputy Chairman – Independent non-executive director Patrice Derrington Independent non-executive director Experience and expertise Patrice is a senior property executive with recent roles including CEO of Penrith Lakes Development Corporation Limited and CEO of Campus Living. Patrice 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 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. Other current listed company directorships Nil Former listed company directorships in last three years Nil Special responsibilities Member of the Audit, Risk and Compliance Committee Interests in securities Nil securities in Charter Hall Group Experience and expertise Kerry is a Practitioner Member of the Stockbrokers Association of Australia. He holds positions on the boards of several listed and unlisted companies. He is the non-executive Chairman of Tasman Cargo Airlines and Money Switch Ltd. He is also a non-executive director of Ramsay Health Care, the Law Cover Group and the Medical Indemnity Protection Society Group. Until it was acquired by the ANZ in June 2007, 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 Everest Financial Group and Eircom Holdings Limited. 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. Kerry is also a Bachelor of Commerce and a Master of Business Administration. Experience and expertise 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 is a Fellow of the Institute of Company Directors and was a Fellow of the Australian Institute of Valuers. Other current listed company directorships Nil Former listed company directorships in last three years Nil Other current listed company directorships Non-executive director of Ramsay Health Care Ltd (since 1997) Special responsibilities Deputy Chairman of the Board Member of the Nomination Committee Member of the Remuneration Committee Interests in securities 85,713 securities in Charter Hall Group Former listed company directorships in last three years Everest Finance Group (from 2006 until May 2009) Non-executive Chairman and a director of Eircom Holdings Limited (from 2006 to January 2010) Special responsibilities Chairman of the Board Chairman of the Nomination Committee Chairman of the Remuneration Committee Member of Audit, Risk and Compliance Committee Interests in securities 125,000 securities in Charter Hall Group 40 Charter Hall Group Information on directors (continued) Glenn Fraser Independent non-executive director Experience and expertise Glenn Fraser is a professional non- executive director. He is currently a member of Transﬁ eld Holdings Advisory Board and was instrumental in the acquisition of its interest in Charter Hall and its expansion and listing in 2005. Glenn 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 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. Other current listed company directorships Nil Former listed company directorships in last three years Nil Special responsibilities Chair of Audit, Risk and Compliance Committee Interests in securities 627,733 securities in Charter Hall Group via indirect interests Cedric Fuchs Executive director David Harrison Joint Managing Director Experience and expertise Cedric is a co-founder of Charter Hall with over 40 years of experience in the ﬁ elds of property investment, development and ﬁ nancial services. Cedric 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 Diploma in Business Management. Other current listed company directorships Nil Former listed company directorships in last three years Nil Special responsibilities Member of the Valuation Committee Interests in securities 5,434,593 securities in Charter Hall Group via indirect interests. 1,621,403 securities in the Charter Hall Executive Loan Security Plan; securities in the Plan vest upon the satisfaction of performance and service criteria. 225,481 Performance Rights and 625,625 Options in the Charter Hall Performance Rights and Options Plan; options and performance rights also vest after performance and service conditions are met. Experience and expertise As Charter Hall Group’s Joint Managing Director, David Harrison is jointly responsible for all aspects of the Charter Hall business, with speciﬁ c focus on Funds, Asset and Property Management operations. David also substantially contributes to investment sourcing, capital raisings and structuring of transactions. In addition to his responsibilities on the various unlisted Fund Boards and Investment Committees, David is Chairman of the Charter Hall Ofﬁ ce REIT (CQO) Board, Director of the Charter Hall Retail REIT (CQR) and is Chairman of the Charter Hall Direct Responsible Entity Board. David has more than 24 years of experience in the Australian commercial property market and has jointly overseen the growth of the Charter Hall Group from $500 million to $10 billion of assets under management in six years. David has been principally responsible for transactions exceeding $13 billion of commercial, retail and industrial property assets across all property sectors. Prior to joining Charter Hall, David was Managing Director of Savills in Australia, an international commercial real estate agency business. David 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 Charter Hall Ofﬁ ce REIT (CQO) (Chairman) Charter Hall Retail REIT (CQR) Former listed company directorships in last three years Nil Special responsibilities Member of the Valuation Committee Interests in securities 8,038,080 securities in Charter Hall Group via direct and indirect interests. 10,801,884 securities in the Charter Hall Executive Loan Securities Plan; securities in the Plan will vest upon the satisfaction of performance and service criteria. 1,153,846 Performance Rights and 2,681,250 Options in the Charter Hall Performance Rights and Options Plan; performance rights and options also vest after performance and service criteria are met. 41 Annual Report 2010 Directors’ Report to Unitholders For the year ended 30 June 2010 Information on directors (continued) Peter Kahan Non-executive director Experience and expertise Peter Kahan joined the Charter Hall Board in October 2009, following an investment in the Charter Hall Group by the Gandel Group. Peter Kahan is the CEO of The Gandel Group and has over 15 years of property and funds management experience. He joined The Gandel Group in 1994 and became the Group’s Finance Director in 2001, prior to his appointment as the Group’s CEO in 2007. Prior to joining The Gandel Group, Peter worked as a Chartered Accountant and has held senior ﬁ nancial roles in various industry sectors. Between 2002 and 2006, Peter was a Director of Gandel Retail Management Pty Ltd and Colonial First State Property Retail Pty Ltd, a leading property and fund manager, managing a portfolio of approximately $8 billion of retail assets in Australia. Peter is a member of the Institute of Chartered Accountants in Australia and the Australian Institute of Company Directors and holds a Bachelor of Commerce and Bachelor of Accountancy degree from the University of The Witwatersrand Johannesburg, South Africa. Other current listed company directorships Nil Former listed company directorships in last three years Nil Special responsibilities Nil Interests in securities Nil securities in Charter Hall Group Colin McGowan Independent non-executive director Experience and expertise 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. Colin 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 he held for 11 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. Other current listed company directorships Nil Former listed company directorships in last three years Nil Special responsibilities Member of the Remuneration Committee Member of the Nomination Committee Chair of the Valuation Committee Interests in securities Nil securities in Charter Hall Group 42 Charter Hall Group David Southon Joint Managing Director Experience and expertise David is a co-founder of Charter Hall. As Charter Hall Group’s Joint Managing Director, David is jointly responsible for all aspects of the Charter Hall business with speciﬁ c focus on wholesale opportunistic funds and the operation of the Development Division. David is an Executive Director on the Boards of Charter Hall Retail REIT (CQR – Chairman) and Charter Hall Ofﬁ ce REIT (CQO) as well as the Responsible Entity Board of Charter Hall Direct Funds. He is also on the Investment Committees of the Group’s series of opportunity funds. David has over 22 years of property industry experience and is responsible for overseeing project origination, project strategy and the formulation and implementation of Group strategy together with the CHC Executive Committee and the Board. In addition, David is involved in the procurement and divestment of investment properties for the various Funds managed by the Group. Prior to co-founding Charter Hall in 1991, David was a Development Manager with Eurolynx Limited, the Heine Group’s property arm (now part of ING), and prior to that with 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). Other current listed company directorships Charter Hall Retail REIT (CQR – Chairman) Charter Hall Ofﬁ ce REIT (CQO) Former listed company directorships in last three years Nil Special responsibilities Member of the Valuation Committee Interests in securities 8,193,435 securities in Charter Hall Group via direct interests. 10,758,577 securities in the Charter Hall Executive Loan Security Plan; securities in the Plan will vest upon the satisfaction of performance and service criteria. 2,681,250 Options and 1,153,846 Performance Rights in the Charter Hall Performance Rights and Options Plan; options and performance rights also vest after performance and service conditions are met. Company Secretary The company secretary is Mr Nathan Francis, a member of the Institute of Chartered Accountants in Australia and Chartered Secretaries Australia. Before joining Charter Hall Group, Nathan 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. Nathan also holds a Bachelor of Business degree from the University of Technology, Sydney. 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 2010, 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 Valuation Committee A 13 13 11 13 12 12 12 11 12 B 13 13 13 13 13 13 12 13 13 A 7 * 7 7 * * * * * B 7 * 7 7 * * * * * A 2 1 * * * * * 2 * B 2 2 * * * * * 2 * A 7 7 * * * * * 7 * B 8 8 * * * * * 8 * A * * * * 3 4 * 4 3 B * * * * 4 4 * 4 4 K Roxburgh R Woodhouse P Derrington G Fraser C Fuchs D Harrison P Kahan C McGowan D Southon 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. 43 Annual Report 2010 Information presented in this report This Remuneration Report is presented under the following main headings: A Principles used to determine the nature and amount of remuneration – this section provides a summary of Group remuneration objectives, policies, framework and principles B Details of the remuneration in the past 2 years of the executive directors and the other key management personnel listed above and where applicable, their service agreements C Long term incentives (share-based component of remuneration) D Additional long term incentive information E Non-executive director remuneration for the past 2 years A Principles used to determine the nature and amount of remuneration The Board has responsibility for ensuring that the executive remuneration framework: 1. remains competitive so as to attract and retain the Group’s most talented personnel 2. has strong investor support 3. has the appropriate nexus with the Group’s overall performance 4. is strongly aligned with short term corporate goals and its long term strategies 5. is transparent and easily understood. To discharge its responsibilities, the Board is assisted by the Group’s Remuneration Committee which is comprised solely of independent non-executive directors who are completely independent of all executive personnel. The Chair of the committee (Mr K Roxburgh) is the independent Chairman of the Board. The Corporate Governance Statement provides more information about the role of the Remuneration Committee. The Group’s remuneration framework is designed to strike the right balance between the interests of its employees and those of its investors. To achieve this balance, the executive base pay, other beneﬁ ts and any short term incentive (STI) represent the major components of the remuneration framework designed to be competitive in the market place, so as to attract and retain talented personnel whilst offering additional rewards where Group results deliver value to investors. Directors’ Report For the year ended 30 June 2010 Remuneration Report Introduction This Remuneration Report is prepared in accordance with Section 300A of the Corporations Act 2001 (the Act) for the Company and its controlled entities (the Group) for the year ended 30 June 2010. The information provided in this report has been audited in accordance with the requirements of Section 308(3C) of the Act. This year, having regard to the recommendations made by the Productivity Commission in its ﬁ nal report on executive remuneration and in response to the acquisition in March 2010 of the majority of Macquarie’s real estate platform, the Group and the Remuneration Committee undertook a comprehensive review of the remuneration structure. The Remuneration Committee directly engaged and received expert advice from three remuneration consultants who provided reports to the committee under the following headings: ◆ Alternate long-term incentive approaches – July 2009 ◆ Executive remuneration benchmarking report – June 2010; ◆ Non-executive director benchmarking report – June 2010; and ◆ Recommendations on Top Executive Remuneration (Joint Managing Directors and Chief Financial Ofﬁ cer) The July 2009 report resulted in the suspension of the Executive Loan Security Plan (ELSP) and adoption of the Performance Rights and Options Plan (PROP) as the Long Term Incentive Plan (LTI) with effect from 1 July 2009. The 2010 remuneration report is presented in a revised format to provide investors with a clear understanding of the Group’s remuneration policies and structure. The key management personnel of the Group include the directors listed on pages 40 – 42 and the following executive ofﬁ cers, who with the executive directors include the ﬁ ve highest paid executives of the Group. ◆ J Bakker – Group Chief Financial Ofﬁ cer ◆ A Glass – Head of Wholesale Investment Funds Management ◆ N Kelly – Head of Investor Relations ◆ S Sewell – Chief Executive Ofﬁ cer – Charter Hall Retail REIT ◆ R Stacker – Chief Executive Ofﬁ cer – Charter Hall Direct Property ◆ A Taylor – Chief Executive Ofﬁ cer – Charter Hall Ofﬁ ce REIT ◆ M Winnem – Head of Wholesale Opportunistic Funds Management 44 Charter Hall Group A Principles used to determine the nature and amount of remuneration (continued) The long term incentive (LTI) is the third component of the framework. Its role is to encourage the executive to successfully implement the longer term strategic objectives of the Group that over time also deliver value to investors. This component of remuneration also engenders staff loyalty. With the beneﬁ t of expert professional advice obtained in July last year, the LTI was thoroughly re-designed to adopt the signiﬁ cant changes in market best practice. Overall, the remuneration framework comprises a mix of ﬁ xed and variable (“incentive or at risk”) pay representing a blend of ﬁ xed base pay, short term incentives and longer term non-cash incentives. As executives gain seniority with the Group, the balance of this mix shifts towards an increasing proportion of the “incentive or at risk” components. This framework is designed to provide: 1. Alignment to investors’ interests that: ◆ has economic proﬁ t as a core component of plan design; ◆ focuses on the effective implementation of strategies designed to deliver sustained growth in investor wealth, in the form of distributions and dividends, along with growth in asset values; and ◆ will attract and retain talented personnel. 2. Alignment to employee interests that: ◆ rewards experience, performance, commitment and loyalty; ◆ recognises their contribution to growth in investor wealth; and ◆ provides a clear and easily understood structure for earning rewards. The following table summarises the Group executive remuneration framework and component guidelines that were applicable in the year ended 30 June 2010: Joint Managing Directors Executive Director Other key management personnel (3) FY10 remuneration component guidelines Base and other STI LTI (1) 40% to 100% 60% to 100% 60% to 100% 0% to 40% 0% to 30% 0% to 30% 0% to 20% (2) 0% to 10% (2) 0% to 10% Key management personnel ranges 47.5% to 100% 0% to 40% 0% to 12.5% Strategic alignment with Group requirements and performance Operational performance to budget Outperformance of ﬁ nancial and non-ﬁ nancial KPIs Delivery of longer term investor returns 1) This is the accounting non-cash amount charged for the LTI in the Group’s consolidated income statement. 2) Subject to securityholder approval. 3) Excludes non-executive directors. 45 Annual Report 2010 Long-term incentives (LTI) The LTI is a non-cash Group expense. Its value in the remuneration framework is the amount recognised in the Group’s consolidated income statement. On this measure, the LTI is the smallest of the three components that make up the Group’s remuneration framework. The LTI is currently provided by participation in the Performance Rights and Options Plan (PROP). Some personnel also have an interest in the Executive Loan Security Plan (ELSP) that was suspended on 1 July 2009. The PROP and its predecessor, the ELSP are both designed to reward personnel for the effective implementation of strategies that deliver sustained growth in investor wealth and to attract and retain talented personnel. The number of offers that can be made under any employee incentive plan is limited to 10% of issued Stapled Securities from time to time. As approved at the 2008 AGM, securities issued under an employee incentive scheme to Directors, that have been approved by securityholders, are excluded from the 10% limit. It should be noted that this 10% limit is not imposed by any law, regulation or the Listing Rules. PROP participants are granted performance rights and options which may be exercised in two equal tranches in the 2nd and 3rd years following their grant, provided performance and service conditions have been satisﬁ ed. Participants in the now suspended ELSP were offered limited recourse loans to acquire securities within that plan. The interest charge on any such loan is equal to the Charter Hall Group distribution yield on the related securities held in that plan. If performance and service conditions are satisﬁ ed, securities will only become available for release to plan participants when any loan obligations outstanding have been repaid. Whilst 50.3 million ELSP securities remain in the plan no further issues are proposed. Non-executive directors do not participate in either the PROP or the ELSP. Further information about these plans is provided in note 41 to the ﬁ nancial statements Directors’ Report For the year ended 30 June 2010 A Principles used to determine the nature and amount of remuneration (continued) Base pay and other beneﬁ ts Executives are offered a market based pay where reference is made to latest salary trends and the benchmarking report and recommendations referred to above, 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 generally payable in July each year depending on Group and individual performance in the ﬁ nancial year to 30 June. Executives have an STI opportunity depending on the accountabilities of their role and their individual contribution. Each year the Remuneration Committee and Joint Managing Directors meet to determine what are the appropriate targets and key performance indicators (KPI’s). This includes a determination of the indicative overall maximum payout under the STI plan and the minimum levels for Group ﬁ nancial performance that would trigger payment of any STI. The Committee’s recommendations are made to the Board for their consideration and adoption. The Joint Managing Directors are responsible for determining the extent to which the KPI’s of individual personnel other than their own have been achieved. The Joint Managing Directors’ and the Executive Directors’ short term incentive are each subject to individual KPI’s set by the Board that apply provided Group performance targets are achieved. In the year ended 30 June 2009, Group operational performance was negatively impacted by unfavourable market conditions and the three executive directors were not awarded any STI bonus. In the year ended 30 June 2010, the Group ﬁ nancial targets were achieved, so the three executive directors were entitled to an STI. The Board did not consider that all of the executive director’s individual KPIs were fully achieved, however the Board did consider completion in March 2010 of the Macquarie real estate platform acquisition was exceptional. For exceptional performance such as this acquisition, at its discretion and based upon a recommendation from the Remuneration Committee, the Board may award additional payments. For the three executive directors, the Board resolved to make total STI payments out of the 30 June 2010 proﬁ ts of $2.15 million. 46 Charter Hall Group A Principles used to determine the nature and amount of remuneration (continued) Long-term incentives (LTI) (continued) The following table provides a breakdown of the proportion of the three remuneration components recorded in the Group’s consolidated income statement in the year ended 30 June 2010: Joint Managing Directors (4) Executive Director Other key management personnel (3) Key management personnel totals (3) Strategic alignment with Group requirements and performance FY 10 remuneration component guidelines Base and other 37.4% 64.0% 60.3% 48.1% STI 50.0% 27.4% 30.4% 40% LTI (1) 12.6% (2) 8.6% (2) 9.3% 11.9% Operational performance to budget Outperformance of ﬁ nancial and non-ﬁ nancial KPIs Delivery of longer term investor returns 1) This is the accounting non-cash amount charged for the LTI in the Group’s consolidated income statement. 2) Subject to securityholder approval. 3) Excludes non-executive directors. 4) Impacted by an additional STI allocated to the Joint managing Directors as noted above. Non-executive directors’ fees Fees and payments to non-executive directors reﬂ ect the demands which are made upon and the responsibilities of these directors. Non-executive directors’ fees and payments are reviewed annually by the Remuneration Committee. The Chairman’s fees are determined independent of the fees of non-executive directors. Fees have been based on comparative roles in similar enterprises. There are no retirement allowances for non-executive directors. The June 2010 benchmarking report revealed that for the industry peer group at the 25th percentile, base non-executive directors’ fees are $100,000. The report notes it is common for the Chairman’s fee to be 2 to 3 times the base fee. Committee fees are paid in addition. The report noted the peer group median base fee is $127,700. If Group non-executive director’s base and committee fees were set at the median, the fee pool would need to increase by 75% from the current $575,000 to approximately $1 million. In June this year, the Remuneration Committee commissioned an independent remuneration benchmarking report to determine whether the Group’s non-executive directors’ fees and payments are appropriate and remain comparable with similar enterprises. To provide the Group with an ability to remunerate its non- executive directors between the peer group 25th percentile and the median, at the 2010 Annual Meeting, investors will be invited to consider a 40% increase in the fee pool to $800,000. As the size and complexity of the Group has recently increased, the independent report concluded that: “Charter Hall’s Board Chairman and Member fees are generally at the 25th percentile against all peer groups”. 47 Annual Report 2010 Directors’ Report For the year ended 30 June 2010 B Details of key management personnel remuneration – the last 2 years Details of the remuneration of the executive directors and the key management personnel (as deﬁ ned in AASB 124 Related Party Disclosures) of Charter Hall Group are provided in the following tables. The key management personnel of Charter Hall Group include the directors and the executive ofﬁ cers listed above, comprising the ﬁ ve highest paid executives of the Group. Key management personnel of the Group and Company – statutory accounting 2010 Name Executive directors C Fuchs D Harrison D Southon Other key management personnel J Bakker A Glass N Kelly S Sewell R Stacker A Taylor M Winnem Short-term beneﬁ ts Post-employment Share-based payment beneﬁ ts Long-term beneﬁ ts Securities, options and Salary and fees $ Short-term incentive $ Super- performance Long service leave rights $ $ annuation $ Total $ 300,000 735,539 735,539 150,000 1,000,000 1,000,000 410,539 486,255 360,171 163,645 102,233 163,645 371,403 650,000 70,000 100,000 67,000 40,100 67,000 50,000 50,000 14,461 14,461 14,461 14,461 25,000 5,143 4,569 5,143 14,461 47,087 251,720 251,492 82,385 41,577 55,623 3,372 2,024 3,372 55,463 – – – 547,087 2,001,720 2,001,492 – – – – – – 14,136 1,157,385 612,293 540,794 239,160 148,926 239,160 505,463 Totals 3,828,969 3,194,100 162,160 794,115 14,136 7,993,480 S Sewell, R Stacker and A Taylor have been employees since 20 March 2010. Key management personnel of the Group and Company – statutory accounting 2009 Name Executive directors C Fuchs D Harrison D Southon Other key management personnel J Bakker R Champion N Kelly M Winnem Short-term beneﬁ ts Post-employment Share-based payment beneﬁ ts Long-term beneﬁ ts Salary and fees $ Short-term incentive $ Super- performance Long service leave rights $ $ annuation $ Securities and 249,847 699,651 735,557 408,774 346,140 366,679 386,255 – – – 100,000 50,000 13,745 40,000 – 35,000 30,000 13,745 5,727 25,745 13,745 22,301 49,904 48,046 (2,137) – 10,407 8,726 – – – – – – 1,860 Total $ 372,148 799,555 797,348 460,382 351,867 437,831 440,586 Totals 3,192,903 105,000 222,707 137,247 1,860 3,659,717 Service Agreements There are service agreements for S Sewell, R Stacker and A Taylor that do not specify a term of employment but do include details of their short and long term incentives arrangements. The current base remuneration prescribed in the service agreements are $600,000, $400,000 and $600,000 respectively. Other key management personnel participate in the long term incentive plan that requires their continuing employment. The base salary and incentive arrangements for all key management personnel are reviewed annually with the Remuneration Committee. 48 Charter Hall Group Key management personnel of the Group and Company – actual cash beneﬁ ts In line with Recommendation 8 of the Productivity Commission Report a table showing the actual cash received by executives is shown below. The value of the cash and other beneﬁ ts actually received by the executives during the year ended 30 June 2010 will be different to the statutory accounting numbers on page 48 due to accrued STI’s and an accounting expense for non-vested LTI being included in the statutory accounting numbers. Short-term beneﬁ ts Post-employment Share-based payment beneﬁ ts Long-term beneﬁ ts Cash salary and fees $ Short-term incentive $ Super- performance Long service leave rights $ $ annuation $ Securities and 300,000 735,539 735,539 410,539 486,255 360,171 163,645 102,233 163,645 371,403 – – – 40,000 85,000 35,000 – – – 30,000 50,000 14,461 14,461 14,461 14,461 25,000 5,143 4,569 5,143 14,461 Total $ 350,000 750,000 750,000 465,000 585,716 420,171 168,788 106,802 168,788 430,000 – – – – – – – – – 14,136 – – – – – – – – – – – 2010 Name Executive directors C Fuchs D Harrison D Southon Other key management personnel J Bakker A Glass N Kelly S Sewell R Stacker A Taylor M Winnem Totals 3,828,969 190,000 162,160 14,136 4,195,265 Service Agreements There are service agreements for S Sewell, R Stacker and A Taylor that do not specify a term of employment but do include details of their short and long term incentives arrangements. The current base remuneration prescribed in the service agreements are $600,000, $400,000 and $600,000 respectively. Other key management personnel participate in the long term incentive plan that requires their continuing employment. The base salary and incentive arrangements for all key management personnel are reviewed annually with the Remuneration Committee. C Long term incentives (share-based component) The share-based long term incentive is the third component of the remuneration framework and is at risk and non-cash. It represents an important and effective way of aligning the interests of key management personnel with the strategic objectives of the Group and it has proven effective at building loyalty and for retaining talent. Performance Rights and Options Plan – introduced from 1 July 2008 Securityholder approval is required for each executive director’s participation and entitlements in these plans. At their General Meeting held on 11 November 2009, securityholders voted strongly in favour of the three resolutions that approved the following issue of options and performance rights to the three executive directors, representing their LTI for the year ended 30 June 2010: ◆ 1,675,000 performance rights, being options over the ordinary stapled securities of the Group at nil exercise price that are subject to the vesting conditions described below ◆ 5,988,125 options over the ordinary stapled securities of the Group at a $0.485 exercise price (volume weighted average price, or VWAP, for the month of July 2009), that are also subject to the same set of vesting conditions described below So long as each of the executive directors continue in their current employment, the service and performance conditions applicable to both the performance rights and options provide for vesting in equal proportions on 1 July 2011 and 1 July 2012, provided that half of each proportion (25% tranche) is subject to achieving each of the following absolute and relative total securityholder return (TSR) measures calculated over the two vesting periods 3 August 2009 to each of 30 June 2011 and 2012, on the following basis: 1. The absolute TSR requires a total compound return over the vesting periods of: ◆ at least 10% pa TSR for the 1st 25% tranche of the options to vest; rising on a linear basis to ◆ 12.0% pa TSR for full vesting of the 2nd 25% tranche 2. The relative TSR requires the Charter Hall Group total compound return to be measured against the total compounded return of the S&P/ASX AREIT 200 Accumulation Index (A REIT Index) over the vesting period, so that: ◆ for performance that is at least equal to the AREIT Index , the 3rd 25% tranche of options will vest; rising on a linear basis to ◆ full vesting of the 4th and ﬁ nal 25% tranche for performance that is at least equal to 10% above the Index. 49 Annual Report 2010 Directors’ Report For the year ended 30 June 2010 C Long term incentives (share-based component) (continued) Inclusive of the options referred to above, the following performance rights and options have been or are proposed to be issued by the Board in respect of the years ended 30 June 2009 and 2010: Year of issue Securities Exercise price Vesting conditions FY09 FY10 1,628,789 nil OEPS (1) must increase by 5% in each year from FY08 or have achieved 5% compound annual growth on FY08 8,827,500 nil Absolute and relative performance criteria described above Total performance rights issued 10,456,289 Year of issue Securities Exercise price Vesting conditions FY10 FY10 Total options issued 1) Operating earnings per security (OEPS) 22,340,175 $0.485 Absolute and relative performance criteria described above 6,446,500 28,786,675 $0.70 Absolute and relative performance criteria described above For the FY10 options issued at $0.485, 16,352,050 were issued to staff other than directors and the total compounded return required to be achieved is 8%. On 18 June 2010 the Board approved the issue of 6,446,500 options with a strike price of $0.70, to a number of key personnel who joined the Group following the acquisition of the majority of the Macquarie real estate platform. These options have vesting conditions that require continuing employment and at least a 10% pa compounded absolute TSR from a base of $0.70 cps. The ﬁ rst vesting may occur on 1 July 2012. Performance Rights and Options Plan – introduced from 1 July 2008 (continued) The executive directors of Charter Hall Group and other key management personnel of the Group have been issued with the following performance rights and options: Executive directors C Fuchs D Harrison D Southon Key management personnel J Bakker A Glass N Kelly S Sewell R Stacker A Taylor M Winnem Performance rights 2009 Performance rights 2010 Total Performance rights 50,481 403,846 403,846 50,480 – 50,480 – – – 50,480 175,000 750,000 750,000 400,000 300,000 240,000 357,000 214,500 357,000 240,000 225,481 1,153,846 1,153,846 450,480 300,000 290,480 357,000 214,500 357,000 290,480 Options 2010 625,625 2,681,250 2,681,250 1,430,000 1,072,500 858,000 893,000 535,500 893,000 858,000 None of the above performance rights or options had vested at 30 June 2010. 50 Charter Hall Group C Long term incentives (share-based component) (continued) The Executive Loan Securities Plan – suspended from 1 July 2008 The following table records the securities issued and retained within the ELSP since its inception. The issue prices range from $1.00 to $2.94 compared to the security price at 30 June 2010 of $0.60: Year of issue Securities Transferred, sold or forfeited (1) Retained in plan On issue (2) Issue price Vesting conditions applicable on securities remaining within the plan FY06 6,200,000 (6,200,000) 4,500,000 4,500,000 $1.00 to $1.07 Meet the PDS forecast DPS of 6.56 in FY06 and 5% growth in FY07 and FY08. All vested. FY07 7,534,221 (1,476,374) – 6,057,847 $1.27 to $2.00 OEPS must increase by 5% in each year from FY06 or have achieved 5% compound annual growth on FY06. The ﬁ rst two tranches vested with the third not meeting the conditions. FY08 (3) 10,729,304 (988,896) 54,348 9,794,756 $2.47 to $2.94 OEPS must increase by 5% in each year from FY07 or have achieved 5% compound annual growth on FY07. First tranche vested with the second and third not meeting the conditions. FY09 31,777,041 (3,065,391) 1,279,344 29,990,994 $1.04 to $1.67 OEPS must increase by 5% in each year from FY08 or have achieved 5% compound annual growth on FY08. First tranche not vested with the compound annual return required unlikely to result in any vesting. Total 56,240,566 (11,730,661) 5,833,692 50,343,597 1) Securities can be sold direct from the plan or transferred to members once securities vest. Unvested securities are forfeited when an employee ceases employment. 2) Whilst the securities are legally issued and are quoted securities they are not recognised for accounting (OEPS/DPS/NTA) purposes until they are exercised (per AASB 2 Share-based Payment). The in substance options are exercised when executives pay the exercise price of the option (i.e. repay the loan that is recognised for tax and legal purposes). This is consistent with the fact that unvested and vested securities continue to be held by the employee share trust until the employee loan is repaid. 3) The performance condition under the ELSP was initially set at 5% growth per annum in Operating EPS. This performance condition was amended at the 2008 AGM. For the 2008 ELSP offer, the base year for the Operating EPS measure is 30 June 2008 resulting in a base Operating EPS of 12.74cps. Operating earnings per security (OEPS) since the inception of the Charter Hall Group are shown below: OEPS OEPS growth on previous year FY06 (cps) 6.47 FY07 (cps) 9.51 47% FY08 (cps) 12.74 34% FY09 (cps) 7.61 (40%) FY10 (cps) 4.11 (46%) Under AASB 2 there is a requirement to “true up” at each reporting date to determine the appropriate share-based payment expense based on the number of unvested securities which are estimated to vest. 51 Annual Report 2010 Directors’ Report For the year ended 30 June 2010 C Long term incentives (share-based component) (continued) The Executive Loan Securities Plan – suspended from 1 July 2008 (continued) Although it remains suspended, following is a summary of the interests of the executive directors of Charter Hall Group and other key management personnel in the ELSP: Securities issued in FY06 Securities issued in FY07 Securities issued in FY08 Securities forfeited in FY08 Securities issued in FY09 Securities Total securities that qualiﬁ ed for vesting forfeited in FY09 $1.00 $1.27 $2.76 $1.04 1,050,000 1,475,000 1,475,000 393,700 1,161,417 1,118,110 362,319 2,717,391 2,717,391 – – – – – – – – 621,118 551,181 – 186,335 – – – 236,220 362,319 326,087 – 289,855 – – – 289,855 – – – – – – – – – – – 865,385 6,923,076 6,923,076 – – – 2,671,404 12,276,884 12,233,577 865,384 721,153 – 865,384 – – – 865,384 – (1,122,271) – – – – – – 1,848,821 476,150 – 1,341,574 – – – 1,391,459 Total securities that qualiﬁ ed for vesting Securities vested in Securities vested in Securities vested in FY07 (2) FY08 (2) FY09 (2) Securities forfeited in FY10 Unvested securities 30/6/10 2,671,404 12,276,884 12,233,577 (350,000) (491,667) (491,667) (481,233) (878,806) (864,370) (602,007) (1,784,602) (1,770,167) (1,050,000) (1,475,000) (1,475,000) 188,164 7,646,809 7,632,373 1,848,821 476,150 – 1,341,574 – – – 1,391,459 – – – – – – – – (207,039) (183,727) – (62,112) – – – (78,740) (327,813) (292,423) – (158,730) – – – (175,358) – – – – – – – – 1,313,969 – – 1,120,732 – – – 1,137,361 Issue price Executive directors C Fuchs D Harrison D Southon Key management personnel J Bakker (1) R Champion A Glass N Kelly (1) S Sewell R Stacker A Taylor M Winnem Executive directors C Fuchs D Harrison D Southon Key management personnel J Bakker (1) R Champion A Glass N Kelly (1) S Sewell R Stacker A Taylor M Winnem None of the loans outstanding in respect of the above securities were repaid during FY09 or FY10. 1) J Bakker and N Kelly’s 2007 securities were issued at a price of $1.61. 2) Whilst these securities are qualiﬁ ed for vesting they have not been removed from the plan as the loans outstanding have not been repaid. 52 Charter Hall Group C Long term incentives (share-based component) (continued) The Executive Loan Securities Plan – suspended from 1 July 2008 (continued) The Black-Scholes method is utilised for valuation and accounting purposes. The model inputs for PROP performance rights and options issued during FY09 and FY10 and to assess the fair value at loan date for the ELSP securities issued during FY09 include the following: Grant date Security price at grant date Loan value per security Expiry of loan Expected price volatility Risk-free interest rate 7/8/08 $0.865 $1.04 6/8/13 23.68% 5.85% 10/10/08 $0.66 $1.04 9/8/13 22.75% 4.28% 19/11/08 $0.41 $1.04 18/11/13 58.06% 3.72% 22/12/08 $0.30 $1.04 21/12/13 59.49% 3.19% 13/11/09 $0.60 $0.485 1/7/14 40% 5.5% 18/6/10 $0.70 $0.70 18/6/15 40% 5.5% D Additional long term incentive information The table below lists the securities forfeited where the service and performance criteria have not been met: Name C Fuchs D Harrison D Southon J Bakker A Glass N Kelly M Winnem Financial year granted Vested % Forfeited % Minimum total value of grant yet to vest $ Maximum total value of grant yet to vest $ 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 2010 2009 2008 2007 2010 2010 2009 2008 2007 2010 2009 2008 2007 – – 33 67 100 – – 33 67 100 – – 33 67 100 – – 33 67 – – – 33 67 – – 33 67 – – – 33 100 – – – 33 100 – – – 33 100 – – – 33 – – – – 33 – – – 33 nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil 71,274 4,194 800 – – 305,454 33,544 6,000 – – 305,454 33,544 6,000 – – 162,909 4,099 480 – 122,182 97,746 4,099 869 – 97,746 2,152 2,181 1,246 The maximum value of the options yet to vest is reported in the ﬁ nancial statements as the amount at the grant date fair value of any option yet to be reﬂ ected in the Group’s consolidated income statement. 53 Annual Report 2010 Directors’ Report For the year ended 30 June 2010 D Additional long term incentive information (continued) The following table reports the LTI proportion of total remuneration for key management personnel in the past 2 ﬁ nancial years, measured by the expenses for the LTI recorded in the Group’s consolidated of income statement: Name C Fuchs D Harrison D Southon J Bakker A Glass N Kelly S Sewell R Stacker A Taylor M Winnem Remuneration consisting of LTI FY09 6.0% 6.2% 6.0% 0.0% 0.0% 2.4% – – – 2.0% Value at Value at Remuneration grant date 30 June 2009 consisting of LTI FY10 $ $ – – – – – – – – – – – – – – – – – – – – 8.6% 12.6% 12.6% 7.1% 6.8% 10.3% 1.4% 1.4% 1.4% 10.9% Value at Value at grant date 30 June 2010 – – – – – – – – – – – – – – – – – – – – The value of securities at grant date is nil as the grant value is equivalent to the loan provided. The 2009 securities were issued at grant date at $1.04 with the value at 30 June 2010 being $0.60 (2009: $0.52) with a corresponding loan amount of $1.04. E Non-executive director remuneration – the last two years The following tables provide details of each non-executive director’s base and committee fees in the last 2 ﬁ nancial years: Short-term beneﬁ ts Post-employment beneﬁ ts Salary and fees Short-term Superannuation $ incentive $ 167,270 84,209 78,097 100,379 91,548 521,503 – – – – – – $ 13,479 6,791 7,029 8,246 7,452 42,997 Short-term beneﬁ ts Post-employment beneﬁ ts Salary and fees Short-term Superannuation $ incentive $ 144,008 76,516 77,953 72,993 79,269 450,739 – – – – – – $ 12,862 6,886 7,016 6,569 7,134 40,467 Total $ 180,749 91,000 85,126 108,625 99,000 564,500 Total $ 156,870 83,402 84,969 79,562 86,403 491,206 2010 Name Non-executive directors K Roxburgh Chairman R Woodhouse Deputy Chairman P Derrington G Fraser C McGowan Total 2009 Name Non-executive directors K Roxburgh Chairman R Woodhouse Deputy Chairman P Derrington G Fraser C McGowan Sub-total non-executive directors 54 Charter Hall Group 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 $289,879 (2009: $103,953) to insure the directors and ofﬁ cers 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 Group. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities. 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 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 APES 110 Code of Ethics for Professional Accountants. During the year, the following fees were paid or payable for services provided by the auditor of the Group and other non-related audit ﬁ rms: a) Assurance services Audit services PricewaterhouseCoopers Australian ﬁ rm Audit and review of ﬁ nancial statements and other audit work under the Corporations Act 2001 Non-PricewaterhouseCoopers audit ﬁ rms for the audit or review of ﬁ nancial statements of any entity in the Group W F White & Co Ernst & Young Total remuneration for audit services Other assurance services PricewaterhouseCoopers Australian ﬁ rm Investigating Accountant’s Reports – equity raising Total remuneration for other assurance services Total remuneration for assurance services 2010 $ 2009 $ 257,849 236,092 5,510 59,035 322,394 4,770 – 240,862 – – 70,000 70,000 322,394 310,862 55 Annual Report 2010 Directors’ Report For the year ended 30 June 2010 Non-audit services (continued) b) Taxation services PricewaterhouseCoopers Australian ﬁ rm Tax compliance services, including review of company income tax returns Non-PricewaterhouseCoopers ﬁ rms for taxation services (Ernst & Young) Total remuneration for taxation services c) Advisory services PricewaterhouseCoopers Australian ﬁ rm Long-term incentive plan structure Due diligence for equity raising and acquisition Non-PricewaterhouseCoopers ﬁ rms for advisory services Ernst & Young Total remuneration for advisory services 2010 $ 2009 $ 25,920 130,920 156,840 9,000 380,000 33,269 422,269 13,920 141,075 154,995 21,538 – 69,806 91,344 Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 57. 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 the directors. K Roxburgh Chairman Sydney 24 September 2010 56 Charter Hall Group Auditor’s Independence Declaration PricewaterhouseCoopers ABN 52 780 433 757 Darling Park Tower 2 201 Sussex Street GPO BOX 2650 SYDNEY NSW 1171 DX 77 Sydney Australia pwc.com/au Telephone +61 2 8266 0000 Facsimile +61 2 8266 9999 Auditor’s Independence Declaration As lead auditor for the audit of Charter Hall Limited for the year ended 30 June 2010, I declare that to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Charter Hall Limited and the entities it controlled during the period. R Baker Partner PricewaterhouseCoopers Sydney 24 September 2010 Liability limited by a scheme approved under Professional Standards Legislation. 57 Annual Report 2010 Consolidated Income Statement For the year ended 30 June 2010 Revenue Investment property expenses Depreciation Employee beneﬁ ts expense Finance costs Other expenses Business combination transaction costs Foreign exchange loss Share of net loss of associates accounted for using the equity method Net gain on remeasurement of equity interests Loss on sale of investments, property and derivatives Impairment of investment accounted for using the equity method Impairment of goodwill Fair value adjustments Loss before income tax Income tax beneﬁ t Loss after income tax Proﬁ t/(loss) after tax attributable to: Proﬁ t/(loss) attributable to stapled securityholders of Charter Hall Group Net loss attributable to non-controlling interests of CPRF Proﬁ t/(loss) after tax attributable to stapled securityholders of Charter Hall Group Equity holders of Charter Hall Limited Equity holders of Charter Hall Property Trust (non-controlling interest) Proﬁ t/(loss) after tax attributable to stapled securityholders of Charter Hall Group Notes 6 8 8 37 35(b) 8 7 9 2010 $’000 77,333 (4,703) (672) (29,403) (6,471) (6,341) (6,636) (174) (1,426) 59,725 (10,880) – (15,328) (66,196) (11,172) 950 (10,222) 207 (10,429) (10,222) (25,169) 25,376 207 2009 $’000 61,249 (3,168) (285) (16,663) (7,403) (4,733) – – (2,154) – 1,339 (17,644) – (93,982) (83,444) 1,222 (82,222) (82,222) – (82,222) (32,848) (49,374) (82,222) Group earnings per stapled security Basic earnings per security Diluted earnings per security Cents Cents 40 40 0.02 0.20 (17.98) (15.85) The above consolidated income statement should be read in conjunction with the accompanying notes. 58 Charter Hall Group Consolidated Statement of Comprehensive Income For the year ended 30 June 2010 Loss after income tax for the year Other comprehensive income for the year: Changes in the fair value of derivatives, net of tax Foreign currency reserve movement Total comprehensive loss for the year Attributable to: Equity holders of Charter Hall Limited Equity holders of Charter Hall Property Trust (non-controlling interest) Comprehensive gain/(loss) attributable to stapled securityholders of Charter Hall Group Net comprehensive loss attributable to other non-controlling interests Total comprehensive loss for the year 2010 $’000 2009 $’000 (10,222) (82,222) – 4,650 (5,572) (25,146) 30,004 4,858 (10,430) (5,572) (763) 1,188 (81,797) (32,782) (49,015) (81,797) – (81,797) The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 59 Annual Report 2010 Consolidated Balance Sheet As at 30 June 2010 Assets Current assets Cash and cash equivalents Trade and other receivables Investment properties held 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 Property, plant and equipment Investment properties Intangible assets 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 Trade and other payables Borrowings Deferred tax liabilities Derivative ﬁ nancial instruments Provisions Total non-current liabilities Total liabilities Net assets Equity Equity holders of Charter Hall Limited Contributed equity Reserves Accumulated losses Equity holders of Charter Hall Property Trust (non-controlling interest) Stapled securityholders’ of Charter Hall Group interest Other non-controlling interest of CPRF Total equity Notes 2010 $’000 2009 $’000 11 12 13 16 17 14 19 20 18 21 22 23 22 24 25 15 26 27 28(a) 28(b) 28 29 29 28,380 48,361 45,000 121,741 3,750 297,366 242,157 3,592 202,118 111,831 5,721 – 866,535 988,276 55,018 749 55,767 11,270 91,228 1,273 4,754 879 109,404 165,171 823,105 9,427 (44,658) (61,698) (96,929) 869,405 772,476 50,629 823,105 1,923 17,082 – 19,005 5,307 43,258 433,621 2,304 15,770 – 3,946 295 504,501 523,506 14,221 222 14,443 – 14,220 852 – 25 15,097 29,540 493,966 6,383 (45,997) (36,530) (76,144) 570,110 493,966 – 493,966 The above consolidated balance sheet should be read in conjunction with the accompanying notes. 60 Charter Hall Group Consolidated Statement of Changes in Equity For the year ended 30 June 2010 Attributable to owners of CHG Contributed equity $’000 Reserves $’000 Accumulated losses $’000 Non-controlling interest $’000 Total $’000 Total equity $’000 Balance at 1 July 2008 526,822 (47,038) 12,536 492,320 Loss for the year Changes in the fair value of derivatives, net of tax Foreign currency reserve movement Total comprehensive income/(loss) for the year – – – – – (763) 1,188 (82,222) – – (82,222) (763) 1,188 425 (82,222) (81,797) Transactions with equity holders in their capacity as equity holders: Contributions of equity, net of transaction costs 107,486 – Distribution provided for or paid – Security-based payments reserve 107,486 – – 616 616 – (24,659) – 107,486 (24,659) 616 (24,659) 83,443 Balance at 1 July 2009 634,308 (45,997) (94,345) 493,966 – – – – – – – – – – Loss for the year Foreign currency reserve movement Total comprehensive income/(loss) for the year – – – Transactions with equity holders in their capacity as equity holders: Non-controlled interest in – Charter Hall Core Plus Retail Fund Contributions of equity, net of transaction costs 302,137 – Distribution provided for or paid – Security-based payments reserve 302,137 – 4,651 4,651 – – – 1,317 1,317 207 – 207 207 4,651 4,858 (10,429) (1) (10,430) – – (29,802) – – 302,137 (29,802) 1,317 (29,802) 273,652 64,825 – (3,766) – 61,059 50,629 Balance at 30 June 2010 936,445 (40,029) (123,940) 772,476 492,320 (82,222) (763) 1,188 (81,797) 107,486 (24,659) 616 83,443 493,966 (10,222) 4,650 (5,572) 64,825 302,137 (33,568) 1,317 334,711 823,105 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 61 Annual Report 2010 Notes 39 Consolidated Cash Flow Statement For the year ended 30 June 2010 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 from operating activities Cash ﬂ ows from investing activities Payments for property, plant and equipment Proceeds on disposal of investment properties Payment for business combination Investment in associates Proceeds on disposal of investments in associates Cash from CPRF reconsolidated Loans to associates Receipts from sale of subsidiary net of cash 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 borrowings Repayment of borrowings Payout of hedge derivatives Security issue and transaction costs Distributions paid to securityholders Net cash inﬂ ow/(outﬂ ow) from ﬁ nancing activities 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 11 2010 $’000 60,105 (34,714) 25,391 (6,135) 14,622 4,965 38,843 (1,999) 97,653 (100,193) (218,562) 29,700 5,983 (2,000) – (189,418) 304,982 – (91,549) (9,826) (7,250) (19,325) 177,032 26,457 1,923 28,380 2009 $’000 50,455 (30,025) 20,430 (12,746) 28,367 5,089 41,140 (1,016) 23,270 – (129,114) – – (1,985) 55,800 (53,045) 93,085 181,876 (246,999) (3,353) (2,219) (24,745) (2,355) (14,260) 16,183 1,923 The above consolidated cash ﬂ ow statement should be read in conjunction with the accompanying notes. 62 Charter Hall Group Notes to the Consolidated Financial Statements 30 June 2010 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of the consolidated ﬁ nancial statements are set out below. The ﬁ nancial statements are for the consolidated entity consisting of Charter Hall Limited (CHL) and its subsidiaries and controlled entities including Charter Hall Funds Management Limited as responsible entity for Charter Hall Property Trust (CHPT). 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). The results and equity, not directly owned by CHL, of CHPT have been treated and disclosed as a non-controlled interest. Whilst the results and equity of CHPT are disclosed as a non-controlled 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 Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. Compliance with IFRSs The ﬁ nancial statements of Charter Hall Group also comply with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). Historical cost convention These ﬁ nancial statements have been prepared under the historical cost convention, as modiﬁ ed by the revaluation of investment properties, ﬁ nancial assets and liabilities (including derivative ﬁ nancial instruments) at fair value through proﬁ t or loss. Critical accounting estimates The preparation of ﬁ nancial statements 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. Financial statement presentation The Group has applied the revised AASB 101 Presentation of Financial Statements which became effective on 1 January 2009. The revised standard requires the separate presentation of a statement of comprehensive income and a statement of changes in equity. All non-owner changes in equity must now be presented in the statement of comprehensive income. As a consequence, the Group had to change the presentation of its ﬁ nancial statements. Comparative information has been re-presented so that it is also in conformity with the revised standards. Change in accounting estimate Charter Hall announced on 8 December 2009 that based on discussions with ASIC the Group would consolidate its interest in from 1 July 2009 whilst ever CHC owns more than 50% of CPRF, provided all other circumstances remain unchanged. The Group’s consolidation of its investment in CPRF due to its 66% ownership interest will not impact the fund’s Investment Committee which will continue to make all investment and divestment, ﬁ nancing and capital expenditure decisions of CPRF. 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 2010 and the results of all subsidiaries for the year then ended. Charter Hall Limited and its subsidiaries together are referred to in the ﬁ nancial statements 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 deconsolidated 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)). 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. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated balance sheet respectively. 63 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 consolidated ﬁ nancial statements using the equity method of accounting after initially being recognised at cost, except as noted below in relation to certain CHPT investments. 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 consolidated ﬁ nancial statements as a reduction in 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 proﬁ t or loss, except for the investments in CQO and CQR which are accounted for using the equity method. 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 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 or loss is recognised in the income statement as part of revenue. iii) Joint ventures The interest in a joint venture is accounted for in the consolidated ﬁ nancial statements using the equity method after initially being recognised at cost. Under the equity method, the share of the proﬁ ts or losses is recognised in the income statement, and the share of movements in reserves is recognised in the reserves in the balance sheet. Details relating to the joint venture are set out in note 36. c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identiﬁ ed as the Board. The Group has adopted AASB 8 Operating Segments from 1 July 2009. AASB 8 replaces AASB 114 Segment Reporting. The new standard requires a ‘management approach’, under which segment information is presented on the same basis as that used for internal reporting purposes. There has been no impact on the measurement of the Group’s assets and liabilities. Comparatives for 2009 have been restated. The change to AASB 8 per AASB2009-5 was early adopted and as a result total assets for each reportable segment have not been disclosed. 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; ◆ income and expenses for each income statement are translated at average exchange rates; and ◆ all resulting exchange differences are recognised as a separate component of equity. 64 Charter Hall Group 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d) Foreign currency translation (continued) ii) Group companies (continued) Functional currencies and the relevant exchange rates are as follows: NZD $1 USD $1 GBP £1 EUR $1 2010 2009 Closing rate Average rate Closing rate Average rate A$0.8089 A$1.1721 A$1.7610 A$1.4403 A$0.7976 A$1.1241 A$1.6797 A$1.4555 A$0.8046 N/A N/A N/A A$0.816 N/A N/A N/A 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 properties. 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. 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) Performance fees Performance fees are only recognised when it is probable that 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. Further information is provided in the critical accounting estimates. iv) Interest income Interest income is recognised on a time proportion basis using the effective interest method. 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. v) Dividends/Distributions Dividends/distributions 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 applicable income tax rate for each jurisdiction 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. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the company’s subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provision where appropriate on the basis of amounts expected to be paid to the tax authorities. 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. 65 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) f) Income tax (continued) 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 is recognised in proﬁ t or loss, except to the extent that it related to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. g) Business combinations The acquisition method of accounting is used to account for all business combinations, including business combinations involving entities or businesses under common control, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred also includes the fair value of any contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition-related costs are expensed as incurred. Identiﬁ able assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identiﬁ able assets. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the net identiﬁ able assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identiﬁ able assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in proﬁ t or loss as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent ﬁ nancier under comparable terms and conditions. Contingent consideration is classiﬁ ed either as equity or a ﬁ nancial liability. Amounts classiﬁ ed as a ﬁ nancial liability are subsequently remeasured to fair value with changes in fair value recognised in proﬁ t or loss. Change in accounting policy A revised AASB 3 Business Combinations became operative on 1 July 2009. While the revised standard continues to apply the acquisition method to business combinations, there have been some signiﬁ cant changes. All purchase consideration is now recorded at fair value at the acquisition date. Contingent payments classiﬁ ed as debt are subsequently remeasured through proﬁ t or loss. Under the Group’s previous policy, contingent payments were only recognised when the payments were probable and could be measured reliably and were accounted for as an adjustment to the cost of acquisition. Acquisition-related costs are expensed as incurred. Previously, they were recognised as part of the cost of acquisition and therefore included in goodwill. Non-controlling interests in an acquiree are now recognised either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identiﬁ able assets. This decision is made on an acquisition-by-acquisition basis. Under the previous policy, the non-controlling interest was always recognised at its share of the acquiree’s net identiﬁ able assets. The changes were implemented prospectively from 1 July 2009 and affected the accounting for the acquisition of CPRF and the formerly Macquarie entities disclosed in note 37. Contingent consideration of $11,270,000 was recognised at fair value on 1 March 2010 on the Macquarie transaction. It would not previously have been recorded at the date of acquisition, as the payment to the former owners was not probable. Acquisition related costs of $6,636,000 were recognised in proﬁ t or loss. The Group has chosen to recognise the non-controlling interest relating to the CPRF purchase at the proportionate share of the net identiﬁ able assets. 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. 66 Charter Hall Group Recognition and derecognition 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. Subsequent measurement 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. 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. Further details on how the fair value of ﬁ nancial instruments is determined are disclosed in note 2 and note 1(m). Impairment 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 reclassiﬁ ed 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. 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. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable 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 Classiﬁ cation 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 12 and 16). 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. 67 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 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 fair values of various derivative ﬁ nancial instruments used for hedging purposes are disclosed in note 15. i) 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. o) Investment properties Investment properties comprise investment interests in land and buildings held for long-term rental yields and not occupied by the Group. Investment properties are 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) Intangibles i) Management rights Management rights are not amortised as they have an indeﬁ nite life. Management rights are tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Management rights are allocated to cash-generating units for the purpose of impairment testing. q) 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. 68 Charter Hall Group 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) r) 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. s) 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. t) 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. u) 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 and the Charter Hall Performance Rights and Options Plan. Information relating to these schemes is set out in note 41. 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. vi) Termination beneﬁ ts Termination beneﬁ ts are payable when employment is terminated before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these beneﬁ ts. The Group recognises termination beneﬁ ts when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or providing termination beneﬁ ts as a result of an offer made to encourage voluntary redundancy. Beneﬁ ts falling due more than 12 months after the reporting date are discounted to present value. v) 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. w) 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. x) 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. 69 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) y) Goods and Services Tax (GST) Revenues, expenses and assets (with the exception of receivables) 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. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. 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 ows. z) 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 statements. Amounts in the ﬁ nancial statements have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. aa) New accounting standards and UIG interpretations Certain new accounting standards and interpretations have been published that are not mandatory for year ended 30 June 2010 reporting periods. The Group’s assessment of the impact of these new standards and interpretations is set out below. i) AASB 2009-8 Amendments to Australian Accounting Standards – Group Cash-settled Share-based Payment Transactions [AASB 2] (effective from 1 January 2010) The amendments made by the AASB to AASB 2 conﬁ rm that an entity receiving goods or services in a group share-based payment arrangement must recognise an expense for those goods or services regardless of which entity in the company settles the transaction or whether the transaction is settled in shares or cash. They also clarify how the Group share-based payment arrangement should be measured, that is, whether it is measured as equity – or a cash-settled transaction. The Group will apply these amendments retrospectively for the ﬁ nancial reporting period commencing on 1 July 2010. ii) AASB 9 Financial Instruments and AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 (effective from 1 January 2013) AASB 9 Financial Instruments addresses the classiﬁ cation and measurement of ﬁ nancial assets and is likely to affect the Group’s accounting for its ﬁ nancial assets. The standard is not applicable until 1 January 2013 but is available for early adoption. The Group is yet to assess its full impact. The Group has not yet decided when to adopt AASB 9. iii) AASB 2010-3 Amendments to Australian Accounting Standards arising from the Annual Improvements Project and AASB 2010-4 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project (effective from 1 July 2010/1 January 2011) In June 2010, the AASB made a number of amendments to Australian Accounting Standards as a result of the IASB’s annual improvements project. The Group will apply the amendments from 1 July 2010. It does not expect that any adjustment will be necessary as a result of applying the revised rules. ab) 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. ac) Parent entity ﬁ nancial information The ﬁ nancial information for the parent entity, Charter Hall Limited, disclosed in note 4, has been prepared on the same basis as the consolidated ﬁ nancial statements, except as set out below. Investments in subsidiaries, associates and joint venture entities Investments in subsidiaries, associates and joint venture entities are accounted for at cost in the ﬁ nancial statements of Charter Hall Limited. Dividends received from associates are recognised in the parent entity’s proﬁ t or loss, rather than being deducted from the carrying amount of these investments. 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. 70 Charter Hall Group 2. FINANCIAL RISK MANAGEMENT The Group’s activities expose it to a variety of ﬁ nancial risks; market risk (interest rate risk, price risk and foreign exchange risk), credit risk and liquidity 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) 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. Charter Hall manages all the funds that the Group invests in and its staff have an excellent understanding of the underlying property values and trends that give rise to price risk. The carrying value of the ﬁ nancial assets at fair value through the proﬁ t and loss is determined with reference to the fund’s unit price which is determined in accordance with the fund’s constitution. The key determinant of the unit price is the underlying property values which are approved by the Board and the Valuation Committee of the Board. 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. 2010 Assets Unlisted units Total increase/(decrease) 2009 Assets Unlisted units Total increase/(decrease) Carrying amount $’000 242,157 Carrying amount $’000 433,621 -10% +10% Proﬁ t $’000 Equity $’000 (24,216) (24,216) (24,216) (24,216) -10% Proﬁ t $’000 Equity $’000 (43,362) (43,362) (43,362) (43,362) Proﬁ t $’000 24,216 24,216 Proﬁ t $’000 43,362 43,362 +10% Equity $’000 24,216 24,216 Equity $’000 43,362 43,362 71 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 2. FINANCIAL RISK MANAGEMENT (CONTINUED) 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 $91,228,056 (2009: $14,220,000). 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 44% (2009: 0%) 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 16(c) for interest rate sensitivity analysis on assets and note 24(d) for sensitivity analysis for liabilities. iii) Foreign exchange risk The foreign exchange risk that the Group is exposed to is not material. b) Credit risk The Group has policies in place to ensure that sales of services are made to customers with an appropriate credit history. Over half of the Group’s income is derived from management fees and performance fees from related parties. Approximately 25% of the Group’s income is derived from rental properties; all tenants are assessed for credit worthiness, taking into account their ﬁ nancial position, past experience and other factors. Refer to note 16(d) for more information on credit risk. 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, Treasury 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 Less than Between Between 1 year 1 and 2 years 2 and 5 years Over 5 years $’000 $’000 $’000 $’000 55,018 4,992 1,273 61,283 – 92,527 1,313 93,840 – – 3,801 3,801 – – 2,523 2,523 Less than Between Between 1 year 1 and 2 years 2 and 5 years Over 5 years $’000 $’000 $’000 $’000 14,221 558 14,779 – 558 558 – 14,547 14,547 – – – Total cash ﬂ ows $’000 55,018 97,519 8,910 161,447 Total cash ﬂ ows $’000 14,221 15,663 29,884 Carrying Amount $’000 55,018 91,228 4,754 151,000 Carrying Amount $’000 14,221 14,220 28,441 2010 Non-interest bearing Bank and other loans Interest rate swaps 2009 Non-interest bearing Bank and other loans 72 Charter Hall Group 2. FINANCIAL RISK MANAGEMENT (CONTINUED) d) Fair value measurements The fair value of ﬁ nancial assets and ﬁ nancial liabilities must be estimated for recognition and measurement or for disclosure purposes. As of 1 July 2009, Charter Hall Group has adopted the amendment to AASB 7 Financial Instruments: Disclosures which requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: i) quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); ii) inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (level 2); and iii) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). The following table present the group entity’s assets and liabilities measured and recognised at fair value at 30 June 2010. Comparative information has not been provided as permitted by the transitional provisions of the new rules. 2010 Assets Financial assets at fair value through proﬁ t or loss Total assets Liabilities Derivatives used for hedging Contingent consideration payable Total liabilities Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 – – – – – – – 242,157 242,157 4,754 – 4,754 – 11,270 11,270 242,157 242,157 4,754 11,270 16,024 The following table presents the changes in level 3 instruments for the year ended 30 June 2010: Group Opening balance CPRF consolidated (Note 35, 37) Sales Purchases Losses recognised in proﬁ t and loss Liability recognised during year Closing balance Financial assets at fair value through proﬁ t and loss $’000 Contingent consideration $’000 433,621 (139,888) (39,514) 14,825 (26,887) – 242,157 – – – – – 11,270 11,270 The carrying amounts of trade receivables and payables are assumed to approximate their fair values due to their short-term nature. 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. The fair value of current borrowings approximates the carrying amount, as the impact of discounting is not signiﬁ cant. 73 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 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 20). 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 when it is probable that 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. Performance fees recognised for the year ended 30 June 2010 have been received. iii) Tax losses The Group recognises tax losses from previous years which it believes are recoverable but has not recognised any additional tax losses in ﬁ nancial statements for the year ended 30 June 2010. iv) Impairment testing Critical judgements are made by the Group in assessing the value of management rights acquired. The management rights are considered to having an indeﬁ nite useful life if there is no foreseeable limit to the period over which the asset is expected to generate net cash inﬂ ows for the entity. 4. PARENT ENTITY FINANCIAL INFORMATION a) Summary ﬁ nancial information The individual ﬁ nancial statements for the parent entity show the following aggregate amounts: 2010 $’000 2009 $’000 5,932 256,790 – 2,492 134,044 – 282,709 144,598 9,427 6,383 1,717 18 (37,081) (25,919) (18,428) (18,410) 1,717 – (18,654) (10,554) (7,349) (7,349) Balance sheet Current assets Total assets Current liabilities Total liabilities Shareholders’ equity Issued capital Reserves Security-based payments Foreign currency translation reserve Accumulated losses Loss for the year Total comprehensive loss 74 Charter Hall Group 4. PARENT ENTITY FINANCIAL INFORMATION (CONTINUED) b) Contingent liabilities of the parent entity The parent entity did not have any contingent liabilities as at 30 June 2010 or 30 June 2009. c) Contractual commitments As at June 2010, the parent entity had no contractual commitments (2009: nil). d) 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. CHL has a loan facility provided by CHPT which has signiﬁ cant net assets. e) Deed of cross guarantee CHL and Charter Hall Holdings Pty Ltd are parties to a deed of cross guarantee under which each company guarantees the debts of the other. A consolidated income statement, statement of comprehensive income and balance sheet are disclosed in note 42. 5. SEGMENT INFORMATION a) Description of segments Management has determined the operating segments based on the reports reviewed by the Board that are used to make strategic decisions. The Board has identiﬁ ed two reportable segments, the performance of which it monitors separately. Property investment Has interests in investment properties and unlisted property funds. The property investment division has the proﬁ t result of the CPRF investment identiﬁ ed separately for management. Funds management and corporate Funds management services, development management services and other property services. b) Segment information provided to the Board The operating segments provided to the Board for the reportable segments for the year ended 30 June 2010 is as follows: 2010 Total net rental income Total investment income Total rental and property income Total corporate income Total income Operating expenses Other expenses EBITDA Depreciation EBIT Interest income Interest expense Operating earnings Non-controlling interest Operating earnings Number of securities (‘000) Operating EPS Number of securities for DPS (‘000) DPS Property investment $’000 Funds management and corporate $’000 CPRF (100%) $’000 Adjustments Combined Group $’000 $’000 422 25,385 25,807 120 25,927 (219) (3,474) 22,234 – 22,234 25,970 (731) 47,473 – 47,473 8 (402) (394) 47,360 46,966 (33,100) – 13,866 (672) 13,194 438 (25,343) (11,711) – (11,711) 13,420 – 13,420 – 13,420 (730) (1,223) 11,467 – 11,467 3,692 (5,414) 9,745 (3,306) 6,439 234 (7,301) (7,067) (5,037) (12,104) 106 4,697 (7,301) – (7,301) (25,343) 25,343 (7,301) – (7,301) 14,084 17,682 31,766 42,443 74,209 (33,943) – 40,266 (672) 39,594 4,757 (6,145) 38,206 (3,306) 34,900 850,161 4.11cps 1,162,380 3.20cps 75 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 5. SEGMENT INFORMATION (CONTINUED) b) Segment information provided to the Board (continued) Geographical segments are immaterial as the vast majority the Group’s income is from Australian sources. The group does not derive income of more than 10% from any one customer so no disclosure has been required. The operating segments provided to the Board for the reportable segments for the year ended 30 June 2009 is as follows: Property investment $’000 Funds management and corporate $’000 CPRF (100%) Combined Group $’000 $’000 2009 Total net rental income Total investment income Total rental and property income Total corporate income Total income Operating expenses Other expenses EBITDA Depreciation EBIT Interest income Interest expense Operating earnings Non-controlling interest Operating earnings Number of securities (‘000) Operating EPS Number of securities for DPS (‘000) DPS 2,019 24,477 26,496 – 26,496 (37) (3,525) 22,934 – 22,934 26,356 (7,335) 41,955 – 41,955 – 1,471 1,471 32,962 34,433 (19,999) – 14,434 (285) 14,149 623 (21,899) (7,127) (7,127) – – – (3,525) (3,525) – 3,525 – – – (21,890) 21,890 – – 2010 $’000 74,209 4,703 (1,130) 4,757 (5,280) – 74 77,333 2,019 25,948 27,967 29,437 57,404 (20,036) – 37,368 (285) 37,083 5,089 (7,344) 34,828 34,828 457,410 7.61cps 698,040 4.96cps 2009 $’000 57,404 3,168 (1,471) 5,089 – (3,000) 59 61,249 The reconciliation of income per the segment notes for 2010 and 2009 to the income statement is below: Total income per segment note Add: investment property expenses Less: equity accounted proﬁ t in funds management segment Add: interest income Less: equity accounted proﬁ t in property investment segment Less: performance fee accrual reversed Add: other Revenue per income statement Operating earnings is used by management to measure the proﬁ tability of the Group. It represents the proﬁ t under Australian Accounting Standards adjusted for fair value adjustments on investment properties and fair value adjustments on ﬁ nancial assets, impairment of assets, gains or losses on sale of investments, acquisition costs and non-cash charges such as share-based payments expense, amortisation, and tax beneﬁ t. 76 Charter Hall Group 5. SEGMENT INFORMATION (CONTINUED) b) Segment information provided to the Board (continued) The calculation of operating earnings by adjusting for amounts in the income statement excluding the non-controlled interest in CPRF is shown below: Statutory proﬁ t (excluding non-controlling interest) Fair value losses Net gain on re-measurement of equity interest Loss/(gain) on sale of investments, property and derivatives Impairment of goodwill on consolidation of CPRF and investments Business combination acquisition costs Non-operating movements in equity accounted investments LSP and PROP expense Amortisation Tax beneﬁ t Foreign exchange loss Performance fee accrual reversal Operating earnings (excluding non-controlling interest) Excluding non-controlled interest Including non-controlled interest 2010 ($’000) 207 52,847 (59,725) 10,529 15,328 6,636 7,838 1,317 734 (950) 139 – 34,900 2010 ($’000) (10,222) 66,196 (59,725) 10,880 15,328 6,636 7,838 1,317 734 (950) 174 – 38,206 2009 ($000) (82,222) 93,982 – (1,339) 17,644 – 3,625 616 744 (1,222) – 3,000 34,828 Basic weighted average number of securities per note 40 Operating earnings per security (excluding non-controlling interest) 850,161,196 4.11 cents 457,410,018 7.61 cents Assets and liabilities have not been reported on a separate basis as the chief operating decision maker is provided with consolidated information. 6. REVENUE Sales revenue Gross rental income Management and performance fees Other revenue Interest Distributions/dividends Total revenue 2010 $’000 18,768 40,951 59,719 4,804 12,810 17,614 77,333 2009 $’000 5,187 26,594 31,781 5,089 24,379 29,468 61,249 77 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 7. FAIR VALUE ADJUSTMENTS Investment properties Financial assets at fair value through proﬁ t and loss Derivative ﬁ nancial instruments 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 Deﬁ ned contribution superannuation expense Rent expense relating to operating leases Minimum lease payments Impairment losses – Financial assets (refer to note 36) Impairment of goodwill (refer to note 37) Doubtful debts Trade receivables Notes 20 14 2010 $’000 (38,592) (26,887) (717) (66,196) 2009 $’000 (2,085) (82,663) (9,234) (93,982) 2010 $’000 2009 $’000 672 285 6,471 1,218 771 – 15,328 7,403 1,223 630 17,644 – – (300) 78 Charter Hall Group 9. INCOME TAX EXPENSE a) Income tax expense/(beneﬁ t) Current tax Deferred tax Under provided in prior years Deferred income tax expense/(revenue) included in income tax beneﬁ t comprises: Decrease in deferred tax assets (note 21) Increase/(decrease) in deferred tax liabilities (note 25) b) Numerical reconciliation of income tax beneﬁ t to prima facie tax payable Loss before income tax expense Tax at the Australian tax rate of 30% Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Charter Hall Property Trust income/(loss) Entertainment Share-based payments expense Non-taxable dividends Tax on LTI interest Adjustments to current tax of prior periods Impairment loss Loss on sale of ﬁ nancial asset at fair value through proﬁ t or loss Losses not recognised Movement in deferred tax beneﬁ ts due to acquisition Sundry items 2010 $’000 442 (1,354) (38) (950) (1,775) 421 (1,354) (11,172) (3,352) (3,040) 42 395 172 483 (38) 89 – 4,082 212 5 (950) 2009 $’000 (591) (1,392) 761 (1,222) 1,164 (2,556) (1,392) (83,444) (25,034) 14,812 11 185 646 749 761 5,293 1,303 – – 52 (1,222) c) 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). d) Tax losses Unused tax losses for which no deferred tax asset has been recognised Potential tax beneﬁ t @ 30% 2010 $’000 13,607 4,082 2009 $’000 – – 79 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 10. DISTRIBUTIONS a) Ordinary securities Interim ordinary distribution for the six months ended 31 December 2009 of 1.60 cents per security paid on 26 February 2010 Final ordinary distribution for the six months ended 30 June 2010 of 1.60 cents per security expected to be paid on 27 August 2010 Interim ordinary distribution for the six months ended 31 December 2008 of 3.96 cents per security paid on 27 February 2009 Final ordinary distribution for the six months ended 30 June 2009 of 1.00 cent per security paid on 28 August 2009 Total distributions provided for or paid Less: distributions paid to holders of LTI securities 2010 $’000 2009 $’000 12,009 19,404 – – 31,413 (1,611) 29,802 – – 19,672 7,484 27,156 (2,497) 24,659 Distributions paid in cash or satisﬁ ed by the issue of securities under the distribution reinvestment plan for the year ended 30 June were as follows: Paid in cash Satisﬁ ed by issue of securities 20,552 10,861 31,413 19,858 7,298 27,156 Franking credits available in the parent entity for subsequent ﬁ nancial years based on a tax rate of 30% (2009: 30%) are $3,285,368 (2009: $2,765,000). 11. CURRENT ASSETS – CASH AND CASH EQUIVALENTS Cash at bank and on hand Deposits at call a) Cash at bank and on hand These amounts earn ﬂ oating interest rates of between 4.0% and 4.4% (2009: 2.5% and 2.9%). b) Deposits at call These amounts earn ﬂ oating interest rates of between 4.2% and 4.8% (2009: nil). 2010 $’000 23,896 4,484 28,380 2009 $’000 1,923 – 1,923 80 Charter Hall Group 12. CURRENT ASSETS – TRADE AND OTHER RECEIVABLES Trade receivables Provision for doubtful debts Loans to joint ventures Loans to associates Loans to key management personnel Distributions receivable Other receivables Prepayments 2010 $’000 19,970 – 19,970 – – 5,145 8,955 13,705 586 48,361 2009 $’000 6,381 – 6,381 1,750 24 – 5,252 939 2,736 17,082 Further information relating to loans to associates is set out in note 33. a) Bad and doubtful trade receivables In the prior year, the Group recognised a gain of $300,000 in respect of reversing a provision for bad and doubtful trade receivables. The gain was included in ‘other expenses’ in the income statement. There is no corresponding amount in the current year. Movements in the provision for impairments of receivables are as follows: Opening balance Provision for impairment recognised during the year 2010 $’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 16). 13. CURRENT ASSETS – INVESTMENT PROPERTIES HELD FOR SALE Bluewater Square, Redcliffe The sale of this property to the Anthony John Group Pty Ltd settled on 10 August 2010 for $47.8 million. 2010 $’000 45,000 2009 $’000 (300) 300 – 2009 $’000 – 81 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 14. NON-CURRENT ASSETS – FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Opening balance Additions Devaluations Disposals CPRF consolidated (note 1(a) change in accounting estimate and note 37) Closing balance Shares and units in associates (note 35) 2010 $’000 433,621 14,825 (26,887) (39,514) (139,888) 242,157 242,157 2009 $’000 227,283 289,686 (82,663) (685) – 433,621 433,621 Changes in fair values of ﬁ nancial assets at fair value through proﬁ t or loss are recorded in fair value adjustments in the income statement. These investments represent units in unlisted Charter Hall managed funds and have been designated at fair value through proﬁ t or loss. Information about the Group’s material exposure to share and unit price risk is provided in note 2(a)(i). The Group sold 39.5 million units in CPOF in July 2010. 15. DERIVATIVE FINANCIAL INSTRUMENTS Non-current liabilities Interest rate swap contracts Total non-current derivative ﬁ nancial instrument liabilities 2010 $’000 4,754 4,754 2009 $’000 – – a) Instruments used by the Group The Group was 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 previously 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. All swaps have been entered into by CPRF, which has been consolidated for 2010. Swaps currently in place cover 43.6% (2009: 0%) of the loan principal outstanding. The ﬁ xed interest rates in 2010 ranged between 6.46% and 7.5% for AUD swaps (including margin and line fees). There is one NZD swap in 2010 which had a rate of 7.5%. At 30 June 2010, the notional principal amounts and periods of expiry of the interest rate swap contracts are as follows: 4-5 years 7-8 years 2010 $’000 20,000 20,223 40,223 2009 $’000 – – – 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 was being amortised to fair value adjustments over the period of the hedge remaining. A ﬁ nal amount of $763,000 was amortised in 2009 at the time the hedge was repaid. The amount of fair value adjustments on hedges recorded directly in the proﬁ t and loss statement was a loss of $716,265 (2009: loss of $9,234,000). 82 Charter Hall Group 15. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) 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 24(c) for the Group’s exposure to interest rate risk on interest rate swaps. Interest rate swaps with a notional principal amount of $138.5 million were terminated during FY10, resulting in a realised gain of $391,064. 16. NON-CURRENT ASSETS – TRADE AND OTHER RECEIVABLES Loans to key management personnel Loans to joint ventures 2010 $’000 – 3,750 3,750 2009 $’000 5,307 – 5,307 Further information relating to loans to key management personnel is set out in note 30. These have moved to current in FY10. a) Fair values The fair values and carrying values of non-current receivables of the Group are as follows: Loans to key management personnel Loans to joint ventures 2010 2009 Carrying amount $’000 Fair value Carrying amount $’000 $’000 Fair value $’000 – 3,750 3,750 – 3,750 3,750 5,307 – 5,307 5,307 – 5,307 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. Fixed interest maturing in: 2010 Floating interest rate $’000 1 year or less $’000 Over 1 to 2 years $’000 Over 2 to 3 years $’000 Cash Trade receivables Loans to key management personnel Loans to joint ventures Other receivables 28,380 – – – – – – 5,145 – – 28,380 5,145 Weighted average interest rate 4.0% 3.2% – – – – – – – – – – – – – – Over 3 to 4 years $’000 – – – 3,750 – 3,750 12.0% Over 4 to 5 years $’000 – – – – – – – Over Non- interest 5 years bearing $’000 $’000 – – – – – – – Total $’000 28,380 12,831 5,145 3,750 29,799 – 12,831 – – 29,799 42,630 79,905 83 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 16. NON-CURRENT ASSETS – TRADE AND OTHER RECEIVABLES (CONTINUED) b) Interest rate risk (continued) Fixed interest maturing in: 2009 Floating interest rate $’000 1 year or less $’000 Cash Trade receivables Loans to key management personnel Loans to joint ventures Loans to associates Other receivables 1,923 – – – – – – – – 1,750 – – Over 1 to 2 years $’000 – – 5,307 – – – 1,923 1,750 5,307 Weighted average interest rate 2.5% 12.0% 5.0% Over 2 to 3 years $’000 Over 3 to 4 years $’000 Over 4 to 5 years $’000 Over Non- interest 5 years bearing $’000 $’000 Total $’000 1,923 6,381 5,307 1,750 24 6,191 – 6,381 – – 24 6,191 12,596 21,576 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 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 after tax and equity. Carrying amount $’000 Proﬁ t $’000 Equity $’000 Proﬁ t $’000 Equity $’000 -1% +1% 2010 Assets Cash and cash equivalents Total increase/(decrease) 2009 Assets Cash and cash equivalents Total increase/(decrease) 28,380 1,923 (284) (284) (19) (19) (284) (284) (19) (19) 284 284 19 19 284 284 19 19 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: 2010 $’000 9,719 1,237 1,875 12,831 2009 $’000 5,400 981 – 6,381 1 to 3 months 3 to 6 months More than 6 months The receivables are considered past due but not impaired. The carrying value approximates fair value. 84 Charter Hall Group 17. NON-CURRENT ASSETS – INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD Units in associates (note 35) Shares in joint venture entity (note 36) 2010 $’000 263,399 33,967 297,366 2009 $’000 18,279 24,979 43,258 a) Units in associates Investments in associates are accounted for in the consolidated ﬁ nancial statements using the equity method of accounting. b) Shares in joint venture entity The interest in Commercial and Industrial Property Pty Ltd and overseas joint ventures are accounted for in the consolidated ﬁ nancial statements using the equity method of accounting. 18. NON-CURRENT ASSETS – INTANGIBLE ASSETS As detailed in note 37, the Group completed a transaction to acquire the majority of Macquarie Group’s core real estate management platform in March 2010. This transaction was structured to secure the management rights (i.e. future management fee revenue) of Macquarie Ofﬁ ce Trust (renamed Charter Hall Ofﬁ ce REIT), Macquarie Country Wide Trust (renamed Charter Hall Retail REIT) and Macquarie Direct Property Fund (renamed Charter Hall Direct Property Fund). The excess of consideration paid over net tangible assets acquired represents the value of these management rights. Management considers that the management rights have an indeﬁ nite life as there are no ﬁ nite terms in the underlying agreements and the Group has no intention to cease managing these Funds. As a result the management rights are not being amortised. Management rights – at cost 2010 $’000 111,831 2009 $’000 – The carrying value of the management rights is supported by value-in-use calculations. These calculations use cash ﬂ ow projections based on ﬁ nancial budgets approved by management covering a ﬁ ve-year period. Cash ﬂ ows beyond the ﬁ ve-year period are extrapolated using estimated growth rates appropriate for the business. Impairment is tested at the cash generating unit (CGU) level for each CGU. Each individual CGU is considered to be a fund which generates management fee income. Key assumptions used for value-in-use calculations: ◆ Discount rate 12.5% is in excess of the Group’s WACC as a result of the management platform carrying more risk than the return on property investment cashﬂ ows. ◆ Growth over next ﬁ ve years of 5% pa which is conservative for this stage of the property cycle. ◆ Terminal growth rate of 3% which is in line with a long-term estimated inﬂ ation range. 85 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 19. NON-CURRENT ASSETS – PROPERTY, PLANT AND EQUIPMENT Furniture, ﬁ ttings and equipment $’000 Fixtures $’000 Software $’000 Year ended 30 June 2009 Opening net book amount Additions Depreciation charge Closing net book amount At 30 June 2009 Cost Accumulated depreciation Net book amount Year ended 30 June 2010 Opening net book amount Additions Depreciation charge Closing net book amount At 30 June 2010 Cost Accumulated depreciation Net book amount 662 246 (203) 705 1,458 (753) 705 705 907 (395) 1,217 2,365 (1,148) 1,217 915 – (82) 833 1,073 (240) 833 833 – (65) 768 1,073 (305) 768 – 766 – 766 766 – 766 766 1,058 (217) 1,607 1,824 (217) 1,607 Total $’000 1,577 1,012 (285) 2,304 3,297 (993) 2,304 2,304 1,965 (677) 3,592 5,262 (1,670) 3,592 20. NON-CURRENT ASSETS – INVESTMENT PROPERTIES At fair value Opening balance Assets reconsolidated/(deconsolidated) – CPRF Acquisitions and additions Lease incentives paid Lease incentives amortised Disposals Transferred to held for resale Net loss from fair value adjustment Foreign currency exchange Closing balance at 30 June a) Amounts recognised in proﬁ t and loss for investment properties Rental income Direct operating expenses from property that generated rental income 86 Charter Hall Group 2010 $’000 2009 $’000 15,770 277,516 4,597 3,020 (292) (15,000) (45,000) (38,592) 99 202,118 18,768 (4,703) 14,065 439,645 (301,404) 39 – – (120,425) – (2,085) – 15,770 5,187 (3,168) 2,019 20. NON-CURRENT ASSETS – INVESTMENT PROPERTIES (CONTINUED) a) Amounts recognised in proﬁ t and loss for investment properties (continued) Property % Type owned acquired Cost incl Independent valuation date Date additions $’000 Independent valuation amount $’000 61 Nepean Hwy, Mentone (1) 56 Anzac St, Chullora Residential Industrial 50 15/06/05 100 21/06/05 770 18,589 – 30/04/09 – 15,000 Book value 2010 $’000 Book value 2009 $’000 770 770 – 15,000 Valuer – Savills CPRF properties (2) Home HQ, Nunawading Bulky retail Mentone Showrooms, Mentone Bulky retail Bulky retail Bunnings, Stafford Retail Foodtown, Auckland, NZ Retail Home HQ, Ipswich 100 03/07/08 100 03/07/08 100 20/06/07 100 06/07/07 100 14/08/07 Menai Central, Menai Mentone Centre, Mentone 33 Windorah St, Stafford (3) Retail Bulky retail 100 22/02/08 50 06/05/09 70,481 24,600 21,669 24,643 31,309 37,753 26,678 21 30/06/10 30/09/09 30/06/10 31/12/09 30/06/10 30/06/10 31/12/07 62,000 M3 Property 62,000 Savills 18,300 18,300 Colliers 18,500 21,250 Savills 19,617 19,617 JLL 27,000 27,000 Cushman & 34,700 Wakeﬁ eld 34,700 Savills 21,210 68,300 21 – – – – – – – – 256,513 202,118 15,770 1) Property has not had an independent valuation, value determined by Directors valuation. 2) The Group did not consolidate CPRF at 30 June 2009, therefore no comparative book values have been given. Date acquired is the date CPRF acquired the property. 3) On 20 December 2009, contracts were exchanged for the purchase of 33 Windorah St, Stafford. This sale was settled on 20 July 2010 for $11.2 million. The above book value reﬂ ects costs relating to the purchase of this property which were incurred prior to 30 June 2010. 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 2009 valuations were based on directors’ valuations with the key assumptions for Chullora being a capitalisation rate of 9.25%, a vacancy rate of 0% and a weighted average rent review of 3.63%. The 2010 valuations had an average capitalisation rate of 8.35%, a vacancy rate of 4% and a weighted average rent review of 3.64%. 21. NON-CURRENT ASSETS – DEFERRED TAX ASSETS The balance comprises temporary differences attributable to: Employee beneﬁ ts Other provisions Tax losses Movements: Opening balance Charged to the income statement (note 9) Closing balance at 30 June Deferred tax assets to be recovered after more than 12 months 2010 $’000 1,022 – 4,699 5,721 3,946 1,775 5,721 5,721 5,721 2009 $’000 232 3 3,711 3,946 5,110 (1,164) 3,946 3,946 3,946 87 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 22. TRADE AND OTHER PAYABLES Current liabilities Trade payables Accruals Distribution payable GST payable Annual leave payable Payable for business combination (note 37) Bonus payable Other payables All current liabilities are expected to be settled within 12 months. Non-current liabilities Contingent consideration payable See note 37(i) for further details of the contingent consideration payable. 23. CURRENT LIABILITIES – PROVISIONS Employee beneﬁ ts – long service leave a) Movements in provisions Refer to note 26 for the movement in provisions and split between current and non-current. 2010 $’000 7,508 542 19,535 1,316 2,252 14,580 5,313 3,972 55,018 2010 $’000 2009 $’000 4,283 73 6,980 695 525 – – 1,665 14,221 2009 $’000 11,270 – 2010 $’000 749 749 2009 $’000 222 222 88 Charter Hall Group 24. NON-CURRENT LIABILITIES – BORROWINGS Secured Bank loans Unsecured Bank loans Total non-current borrowings 2010 $’000 91,228 – 91,228 2009 $’000 – 14,220 14,220 The bank loan is secured by a ﬂ oating charge over all the cash and receivables of CPRF and by a mortgage over the investment properties held by CPRF. The carrying amounts of assets pledged as security for current and non-current borrowings are: Current Floating charge Cash and cash equivalents Receivables First mortgage Investment properties held for sale Total current assets pledged as security Non-current First mortgage Investment properties Total non-current assets pledged as security Total assets pledged as security 2010 2009 $’000 1,456 4,692 45,000 51,148 201,348 201,348 252,496 $’000 – – – – – – – 89 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 24. NON-CURRENT LIABILITIES – BORROWINGS (CONTINUED) a) 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 2010 $’000 300,000 92,111 207,889 2009 $’000 100,000 14,220 85,780 In July 2008, following the selldown of its interest in CPRF from 100% to 62%, CHPT obtained a new $100 million NAB debt facility that expires in July 2011. This facility has subsequently been reduced to $50 million. CPRF has a facility of $250 million with NAB which expires in July 2011. b) Interest rate risk exposures The following table sets out the Group’s exposure to interest rate risk, including 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 Floating interest rate $’000 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 Over Non- interest 5 years bearing $’000 $’000 Total $’000 2010 Trade and other payables Contingent consideration payable Bank and other loans Interest rate swaps – – 91,228 (40,223) 51,005 Weighted average interest rate 3.99% 2009 Trade and other payables Bank and other loans – 14,220 14,220 Weighted average interest rate 6.04% – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 20,000 – – – 20,223 55,018 11,270 – – 55,018 11,270 91,228 – 20,000 20,223 66,288 157,516 7.04% 7.84% 14,221 – 14,221 14,220 14,221 28,441 – – – – – – – – 90 Charter Hall Group 24. NON-CURRENT LIABILITIES – BORROWINGS (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 after tax and equity. 2010 Liabilities Trade and other payables Contingent consideration payable Borrowings Derivative ﬁ nancial instruments Total increase/(decrease) 2009 Liabilities Trade and other payables Borrowings Total increase/(decrease) Carrying amount $’000 55,018 11,270 91,228 4,754 14,221 14,220 -1% +1% Proﬁ t $’000 Equity $’000 Proﬁ t $’000 Equity $’000 – – 912 (2,617) (1,705) – 142 142 – – 912 (2,617) (1,705) – 142 142 – – (912) 1,766 854 – (142) (142) – – (912) 1,766 854 – (142) (142) d) Fair value The carrying amounts and fair values of borrowings at balance date are: On-balance sheet Non-traded ﬁ nancial liabilities Bank loans 2010 Carrying amount $’000 Fair value $’000 91,228 92,111 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. e) 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 with both net of cash and cash equivalents. The gearing ratios at 30 June 2010 and 30 June 2009 were 6.5% and 2.4% respectively. Debt covenants are monitored regularly to ensure compliance and reported to the debt provider on a six monthly basis. The Group Treasurer is responsible for negotiating new debt facilities and compliance with covenants. 91 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 25. NON-CURRENT LIABILITIES – DEFERRED TAX LIABILITIES The balance comprises temporary differences attributable to: Prepayments Fund establishment costs Accrued revenue Depreciation on New Zealand investment properties 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 26. 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/(utilised) Carrying amount at end of year Current Non-current Total 92 Charter Hall Group 2010 $’000 296 – 316 661 – 1,273 852 421 1,273 1,273 – 1,273 2010 $’000 879 2010 $’000 247 1,381 1,628 749 879 1,628 2009 $’000 – 516 243 – 93 852 3,408 (2,556) 852 852 – 852 2009 $’000 25 2009 $’000 259 (12) 247 222 25 247 27. CONTRIBUTED EQUITY a) Security capital (1) Ordinary securities Fully paid Notes (b), (c) Group Group 2010 Securities 2009 Securities 2010 $’000 2009 $’000 1,162,380,235 698,040,044 1,162,380,235 698,040,044 936,445 936,445 634,308 634,308 b) Movements in ordinary security capital: Details Notes Number of securities Issue price $’000 Opening balance Add back LTI securities reversed last year Employee security scheme issue Distribution re-investment plan issue August 2008 Employee security scheme issue Distribution re-investment plan issue February 2009 Placement Entitlement offer Gandel underwriting Balance at 30 June 2009 Less: Transaction costs on security issues Less: LTI securities reversed (2) Balance per accounts at 30 June 2009 Add back LTI securities reversed last year Distribution re-investment plan issue August 2009 Distribution re-investment plan issue February 2010 Institutional placement Entitlement offer Macquarie placement (e) (d) (e) (d) (g) (f) (h) (d) (d) (i) (j) (k) 413,983,609 23,508,112 15,321,360 32,459,346 11,508,812 21,723,725 81,735,340 138,532,553 9,610,782 748,383,639 (50,343,595) 698,040,044 50,343,595 2,210,371 4,995,460 35,624,778 300,237,026 121,272,558 $1.04 $0.8489 $1.04 $0.2879 $0.33 $0.33 $0.33 $0.4722 $0.6689 $0.70 $0.65 $0.70 526,822 45,311 15,934 27,555 11,969 6,254 26,973 45,716 3,172 709,706 (2,219) (73,179) 634,308 73,179 1,044 3,342 24,937 195,154 84,891 Balance at 30 June 2010 1,212,723,832 1,016,855 Less: Transaction costs on security issues Less: LTI securities reversed (2) Balance per accounts at 30 June 2010 Charter Hall Limited Charter Hall Property Trust (50,343,597) 1,162,380,235 (7,231) (73,179) 936,445 9,427 927,018 1) 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. 2) 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 AASB 2: Share-based Payment, the loan, securities, interest received on the loan and the distribution paid and payable are derecognised for the preparation of the ﬁ nancial statements. In 2009, the issued capital of $634,308,000 was divided between Charter Hall Limited $6,383,000 and Charter Hall Property Trust $627,925,000. 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. 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. 93 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 27. CONTRIBUTED EQUITY (CONTINUED) d) Distribution re-investment plan The company has established a distribution re-investment 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 active for the 30 June 2009, 31 December 2009 and 30 June 2010 distributions. e) Employee security scheme Information on the employee security scheme, including details of securities issued under the scheme, is set out in note 41. f) Entitlement offer On 27 May 2009, the company invited securityholders to subscribe to a entitlement offer of 148.1 million ordinary securities at an issue price of $0.33 per security on the basis of 2 securities for every 7 fully paid ordinary securities held, such securities to be issued on 12 June 2009 or 29 June 2009 and be entitled to distributions/dividends from 30 June 2009. g) Placement On 11 June 2009, 72,847,275 securities were issued at $0.33 to Gandel Group. The securities are entitled to the distribution for the six months ended 30 June 2009. An additional 8,888,065 securities were issued to Gandel Group as part of a top up placement also at $0.33. h) Gandel underwriting The retail security offer was underwritten by Gandel Group with 9,610,782 securities not taken up by retail securityholders issued at $0.33. i) Institutional placement On 1 March 2010, 35,624,778 securities were issued at $0.70 as part of an institutional placement. j) Entitlement offer On 1 March 2010, 227,913,824 securities and on 16 March 2010, 72,323,202 securities were issued as part of a 2 for 5 entitlement offer. The price was $0.65 per security. k) Placement On 1 March 2010, 121,272,558 securities were issued at $0.70 as part of an institutional placement. 28. RESERVES AND RETAINED PROFITS/(ACCUMULATED LOSSES) a) Reserves Business combination reserve Security-based payments reserve Foreign currency reserve Charter Hall Limited and controlled entities Charter Hall Property Trust Movements: 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 94 Charter Hall Group 2010 $’000 (52,000) 7,367 4,604 (40,029) (44,658) 4,629 (40,029) 6,050 1,317 7,367 2009 $’000 (52,000) 6,050 (47) (45,997) (45,997) – (45,997) 5,434 616 6,050 (52,000) (52,000) (47) 4,651 4,604 (1,235) 1,188 (47) 28. RESERVES AND RETAINED PROFITS/(ACCUMULATED LOSSES) (CONTINUED) i) Security-based payments reserve The security-based payments reserve is used to recognise the fair value of securities issued to the LSP but not to employees and rights issued under the PROP. ii) Business combination reserve This reserve relates to the reverse acquisition at IPO in 2005. 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. iii) Foreign currency reserve Exchange differences arising on translation of the foreign controlled entity are recognised in other comprehensive income as described in note 1(d) and accumulated in a separate reserve within equity. The cumulative amount is reclassiﬁ ed to proﬁ t or loss when the net investment is disposed of. b) Retained proﬁ ts/(accumulated losses) Movements in retained proﬁ ts/(accumulated losses) were as follows: Opening balance Net proﬁ t/(loss) for the year Distributions/dividends Closing balance Charter Hall Limited and controlled entities Charter Hall Property Trust 2010 $’000 (94,345) 207 (29,802) (123,940) (61,698) (62,242) (123,940) 2009 $’000 12,536 (82,222) (24,659) (94,345) (36,530) (57,815) (94,345) 29. NON-CONTROLLING INTEREST The ﬁ nancial statements include the ﬁ nancial statements for the consolidated entity consisting of Charter Hall Limited and its subsidiaries and controlled entities including Charter Hall Property Trust (CHPT). Charter Hall Limited has been identiﬁ ed as the Parent Entity in relation to the stapling. The results and equity, not directly owned by CHL, of CHPT have been treated and disclosed as a non-controlling interest. Whilst the results and equity of CHPT are disclosed as non-controlling interest, the stapled securityholders of CHL are the same as the stapled securityholders of CHPT. Interest in: Contributed equity Reserves Accumulated losses Equity holders of CHPT (non-controlling interest) Notes 27(b) 28(a) 28(a) The Group has consolidated 100% of the net assets and results of CPRF. However, 33.96% of CPRF is owned by non-controlled unitholders. Their non-controlled interest in the total equity of CPRF is as follows: Contributed equity Reserves Accumulated losses Other non-controlling interest in CPRF 2010 $’000 2009 $’000 927,018 4,629 (62,242) 869,405 86,995 (371) (35,995) 50,629 627,925 – (57,815) 570,110 – – – – 95 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 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) P Derrington G Fraser C McGowan P Kahan 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. The number of other key management personnel in the year ended 30 June 2009 was three, compared to seven for the year ended 30 June 2010. Name J Bakker A Glass N Kelly S Sewell R Stacker A Taylor M Winnem Position Group Chief Financial Ofﬁ cer Head of Wholesale Investment Funds Management Head of Investor Relations Chief Executive Ofﬁ cer – Charter Hall Retail REIT Chief Executive Ofﬁ cer – Charter Hall Direct Property Chief Executive Ofﬁ cer – Charter Hall Ofﬁ ce REIT Head of Wholesale Opportunistic Funds Management c) Key management personnel compensation (including non-executive directors) Short-term employee beneﬁ ts Post-employment beneﬁ ts Security-based payment Long-term employee beneﬁ ts Employer Charter Hall Holdings Pty Ltd Charter Hall Holdings Pty Ltd Charter Hall Holdings Pty Ltd Charter Hall Holdings Pty Ltd Charter Hall Holdings Pty Ltd Charter Hall Holdings Pty Ltd Charter Hall Holdings Pty Ltd 2010 $ 7,544,572 205,157 794,115 14,136 8,557,980 2009 $ 3,748,642 263,174 137,247 1,860 4,150,923 Detailed remuneration disclosures are provided in sections A-E of the Remuneration Report on pages 44 to 54. 96 Charter Hall Group 30. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) d) Equity instrument disclosures relating to key management personnel i) Security holdings The numbers of securities in the company held during the year by each director of CHL and other key management personnel of the Group, including their personally related parties, are set out below. 2010 Name Directors of Charter Hall Limited Ordinary securities K Roxburgh R Woodhouse P Derrington G Fraser C Fuchs D Harrison P Kahan C McGowan D Southon Other key management personnel of the Group Ordinary securities J Bakker A Glass N Kelly S Sewell R Stacker A Taylor M Winnem Purchased/(sold) vesting/(forfeited) LTI securities Opening balance during the period during the period Closing balance (1) 64,285 85,713 – 823,792 6,867,833 10,973,394 – – 11,319,639 547,806 – 221,372 – – – 609,735 60,715 – – (196,059) – 219,761 – – – – – – – – – (54,020) – – – – (1,050,000) (1,475,000) – – (1,475,000) – – – – – – – 125,000 85,713 – 627,733 5,817,833 9,718,155 – – 9,844,639 547,806 – 221,372 – – – 555,715 1) This total includes securities that have vested but have not been exercised by repayment of the loan and removal from the LTI plan. Unvested securities are excluded from the balance. The vested securities were issued with loans varying from $1.00 to $2.76 per security which are signiﬁ cantly higher than the security price at 30 June 2010 of $0.60. 2009 Name Directors of Charter Hall Limited Ordinary securities K Roxburgh R Woodhouse P Derrington G Fraser C Fuchs D Harrison C McGowan D Southon Other key management personnel of the Group Ordinary securities J Bakker R Champion (1) N Kelly M Winnem LTI securities Purchased/(sold) vesting/(forfeited) Opening balance during the period during the period Closing balance 50,000 66,666 – 350,000 5,887,828 7,897,420 – 8,129,240 222,235 184,259 62,642 357,932 14,285 19,047 – 473,792 377,999 1,291,371 – 1,420,232 – – – – 602,006 1,784,603 – 1,770,167 64,285 85,713 – 823,792 6,867,833 10,973,394 – 11,319,639 (2,241) – – 76,445 327,812 (183,729) 158,730 175,358 547,806 530 221,372 609,735 1) The balance for Richard Champion when he ceased employment was 530 securities. After this time, his holding has not been monitored. 97 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 30. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) d) Equity instrument disclosures relating to key management personnel (continued) i) Security holdings (continued) The executive directors of Charter Hall Group and other key management personnel of the Group have received the following rights and options during the year from the company’s PROP: Executive Directors C Fuchs D Harrison D Southon Key management personnel J Bakker A Glass N Kelly S Sewell R Stacker A Taylor M Winnem Performance rights 2009 Performance rights 2010 Total Options 2010 50,481 403,846 403,846 50,480 – 50,480 – – – – 175,000 750,000 750,000 400,000 300,000 24,000 357,000 214,500 357,000 240,000 225,481 1,153,846 1,153,846 450,480 300,000 74,480 357,000 214,500 357,000 240,000 625,625 2,681,250 2,681,250 1,430,000 1,072,500 858,000 893,000 535,500 893,000 858,000 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 2010 2009 Balance at the start of the period $ Interest paid and payable for the period end of the period $ Balance at the Number in Group at the end of the period $ 5,306,500 9,928,333 160,000 248,000 5,145,000 5,306,500 2 2 ii) Individuals with loans above $100,000 during the period Name 2010 D Harrison D Southon 2009 D Harrison D Southon Balance at the start of the period $ Highest Interest paid indebtedness Balance at the and payable for the period end of the period during the period $ $ $ 2,781,500 2,525,000 80,000 80,000 2,605,000 2,540,000 2,781,500 2,540,000 2,657,500 2,657,500 124,000 124,000 2,781,500 2,525,000 2,781,500 2,756,500 Loans to key management personnel are for periods of ﬁ ve 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 $2.5 million 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 three years, were extended in 2008 for a further three years until 6 June 2011, under the same terms and conditions, by resolution of the Board. 98 Charter Hall Group 31. REMUNERATION OF AUDITORS During the period, the following fees were paid or payable for services provided by the auditor of the Group and non-related audit ﬁ rms: a) Assurance services Audit services PricewaterhouseCoopers Australian ﬁ rm Audit and review of ﬁ nancial statements and other audit work under the Corporations Act 2001 Non-PricewaterhouseCoopers audit ﬁ rms for the audit or review of ﬁ nancial statements of any entity in the Group W F White & Co Ernst & Young Total remuneration for audit services Other assurance services PricewaterhouseCoopers Australian ﬁ rm Investigating Accountant’s Reports – equity raising Total remuneration for other assurance services Total remuneration for assurance services b) Taxation services PricewaterhouseCoopers Australian ﬁ rm Tax compliance services, including review of company income tax returns Non-PricewaterhouseCoopers ﬁ rms for taxation services (Ernst & Young) Total remuneration for taxation services c) Advisory services PricewaterhouseCoopers Australian ﬁ rm Long-term incentive plan structure Due diligence for equity raising and acquisition Non-PricewaterhouseCoopers ﬁ rms for advisory services Ernst & Young Total remuneration for advisory services 2010 $ 2009 $ 257,849 236,092 5,510 59,035 322,394 – – 322,394 25,920 130,920 156,840 9,000 380,000 33,269 422,269 4,770 – 240,862 70,000 70,000 310,862 13,920 141,075 154,995 21,538 – 69,806 91,344 The Group’s policy is to employ PricewaterhouseCoopers (PwC) on assignments additional to statutory audit duties where PwC’s expertise and experience with the Group are important. These assignments are principally tax advice and Investigating Accountant’s 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. 99 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 32. COMMITMENTS a) 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 Commitment fees from associates 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 Transaction fees from associates Commitment fees from associates Property management fees from associates Transactions with associates and joint ventures are disclosed in note 34 and note 35 respectively. e) Loans to/from related parties Loans to joint ventures Opening balance Loans advanced Interest charged Interest received Closing balance 2010 $’000 1,311 8,966 10,277 2009 $’000 617 2,815 3,432 2010 $ 2009 $ 24,078,267 4,509,418 119,775 3,037,846 24,077,334 359,173 180,225 755,674 2010 $ 2009 $ 1,750,000 2,000,000 221,342 (221,342) – 1,750,000 177,205 (177,205) 3,750,000 1,750,000 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. 100 Charter Hall Group 34. SUBSIDIARIES 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): Country of incorporation Class of securities Equity holding 2010 % 2009 % 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 Charter Hall Real Estate Inc (1) Charter Hall Ofﬁ ce Management Limited (1) Charter Hall Asset Services Limited (1) Charter Hall Real Estate Europe Limited (1) Charter Hall Retail Management Limited (2) Charter Hall Direct Property Management Limited (2) Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia USA Australia Australia UK Australia Australia Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary – – Controlled entities of Charter Hall Holdings Real Estate Pty Ltd Charter Hall Holdings Real Estate (VIC) Pty Limited Controlled entities of Charter Hall Asset Services Limited Charter Hall Real Estate Management Services Pty Limited Charter Hall Real Estate Management Services (WA) Pty Limited Charter Hall Real Estate Management Services (VIC) Pty Limited Charter Hall Real Estate Management Services (TAS) Pty Limited Charter Hall Real Estate Management Services (SA) Pty Limited Charter Hall Real Estate Management Services (ACT) Pty Limited Charter Hall Real Estate Management Services (NSW) Pty Limited Charter Hall Real Estate Management Services (QLD) Pty Limited Controlled entities of Charter Hall Real Estate Inc. CHREI US Ofﬁ ce LLC CHREI US Retail LLC Australia Ordinary Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 1) Acquired 1/3/10. 2) The purchase of all shares of these is expected to complete during the quarter to 30 September 2010. Although Charter Hall does not own the shares of these entities, Charter Hall is deemed to control these entities and hence they are consolidated. 101 Annual Report 2010 100 100 100 – 100 100 100 100 100 100 100 100 100 100 100 100 – – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – – – – – – 100 – – – – – – – – – – Notes to the Consolidated Financial Statements 30 June 2010 34. SUBSIDIARIES (CONTINUED) Name of entity Country of incorporation Class of securities Controlled entities of Charter Hall Property Trust 130 Stirling Street Trust (formerly Charter Hall Investment Fund No. 15) Charter Hall Core Plus Retail Fund (1) Charter Hall Co-Investment Trust Australia Australia Australia Ordinary Ordinary Ordinary Equity holding 2010 % – 66 100 2009 % 100 N/A – 1) CHPT sold down its interest in CPRF in July 2008 from 100% to 62% (current interest is 66%). At that time it was considered that CHPT did not control the fund and therefore did not consolidate CPRF into its ﬁ nancial statements. However, as outlined in note 1, Charter Hall announced on 8 December 2009 that based on discussions with ASIC the Group would consolidate its interest in CPRF from 1 July 2009. Charter Hall Co-Investment Trust is a new entity set up by Charter Hall Property Trust to hold its investments in CQO, CQR and CHDPF. Name of entity 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 Country of incorporation Class of securities Equity holding 2010 % 2009 % 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 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 102 Charter Hall Group 35. INVESTMENTS IN ASSOCIATES a) Carrying amounts Information relating to associates is set out below. Name of company Principal activity Ownership interest 2010 % 2009 % 2010 $’000 2009 $’000 Unlisted Charter Hall Diversiﬁ ed Property Fund Charter Hall Core Plus Ofﬁ ce Fund Charter Hall Core Plus Industrial Fund Charter Hall Core Plus Retail Fund Charter Hall Umbrella Fund Charter Hall Direct Property Fund Macquarie Property Income Fund Unlisted Charter Hall Opportunity Fund 4 Charter Hall Opportunity Fund 5 Listed Charter Hall Ofﬁ ce REIT Charter Hall Retail REIT Property Investment Property Investment Property Investment Property Investment Property Investment Property Investment Property Investment Property Development Property Development Property Investment Property Investment 31.9% 16.8% 25.0% N/A 24.9% 3.5% 4.6% 3.0% 15.0% 7.5% 7.4% 25.7% 23.4% 25.0% 65.3% 24.9% – – 22,068 112,590 55,828 – 41,578 9,787 306 22,319 161,376 61,989 139,888 48,049 – – 242,157 433,621 3.0% 15.0% 1,254 24,670 2,951 15,328 – – 155,149 82,326 263,399 – – 18,279 The above associates are incorporated in Australia. The investments in Charter Hall Opportunity Fund 4 and 5 held by Charter Hall Limited are equity accounted in the consolidated 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, Charter Hall Umbrella Fund and Charter Hall Direct Property Fund are held by Charter Hall Property Trust and are accounted for at fair value through the proﬁ t or loss (note 14). The investments in Charter Hall Ofﬁ ce REIT and Charter Hall Retail REIT are held by Charter Hall Property Trust and are equity accounted (note 17). The carrying value of these investments is supported by value in use calculations. The investment in Charter Hall Diversiﬁ ed Property Fund consists of units which represent a 19.6% (2009: 19.7%) interest but also an additional investment in the form of bridging equity of $9 million, which is 12.3% (2009: 6.0%). The investment in Macquarie Property Income Fund is held by Charter Hall Limited via Charter Hall Direct Property Management Limited. 103 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 35. INVESTMENTS IN ASSOCIATES (CONTINUED) b) Movements in carrying amounts Charter Hall Diversiﬁ ed Property Fund Opening balance Investment Fair value adjustment Closing balance Charter Hall Core Plus Ofﬁ ce Fund Opening balance Investment Fair value adjustment Disposal of units Closing balance Charter Hall Core Plus Industrial Fund Opening balance Investment Fair value adjustment Closing balance Charter Hall Core Plus Retail Fund Opening balance Investment Fair value adjustment Eliminated on consolidation Closing balance Charter Hall Umbrella Fund Opening balance Investment Fair value adjustment Closing balance Charter Hall Direct Property Fund Investment Fair value adjustment Closing balance Macquarie Property Income Fund Investment Fair value adjustment Closing balance 104 Charter Hall Group 2010 $’000 22,319 5,989 (6,240) 22,068 161,376 – (9,273) (39,513) 112,590 61,989 – (6,161) 55,828 139,888 – – (139,888) 2009 $’000 24,332 2,835 (4,848) 22,319 143,178 50,000 (31,802) – 161,376 57,698 12,503 (8,212) 61,989 – 163,635 (23,747) – 139,888 48,049 76 (6,547) 41,578 8,454 1,333 9,787 307 (1) 306 71 58,563 (10,585) 48,049 – – – – – – 35. INVESTMENTS IN ASSOCIATES (CONTINUED) b) Movements in carrying amounts (continued) Charter Hall Opportunity Fund 4 Opening balance Investment Share of proﬁ t/(loss) after income tax Distributions received/receivable Reserves Closing balance Charter Hall Opportunity Fund 5 Opening balance Investment Share of loss after income tax Distributions received/receivable Reserves Closing balance Charter Hall Ofﬁ ce REIT Investment Increase to net tangible assets value – at acquisition date (1) Share of loss after income tax Distributions received/receivable Reserves Closing balance Charter Hall Retail REIT Investment Increase to net tangible assets value – at acquisition date (1) Share of proﬁ t after income tax Distributions received/receivable Reserves Closing balance 2010 $’000 2,951 714 150 (2,561) – 1,254 15,328 10,440 (1,116) – 18 24,670 111,459 48,353 (5,613) (3,106) 4,056 155,149 69,335 11,372 3,615 (2,568) 572 82,326 1) The total of these items of $59,725,000 has been recognised as income however is deducted for the calculation of operating earnings. c) Fair value of listed investments in associates Charter Hall Ofﬁ ce REIT Charter Hall Retail REIT Fair value represents market value of CQO and CQR units as at 30 June 2010. d) Share of associates’ proﬁ ts or losses Loss before income tax Income tax beneﬁ t Proﬁ t after income tax 2010 $’000 91,359 61,408 2010 $’000 13,607 (1,430) 12,177 2009 $’000 3,214 522 (538) (252) 5 2,951 3,288 16,558 (3,733) (837) 52 15,328 – – – – – – – – – – – – 2009 $’000 – – 2009 $’000 87,926 (1,540) 86,386 105 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 35. INVESTMENTS IN ASSOCIATES (CONTINUED) e) Summarised ﬁ nancial information of associates 2010 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 4 Charter Hall Opportunity Fund 5 Macquarie Property Income Fund Charter Hall Direct Property Fund Charter Hall Ofﬁ ce REIT Charter Hall Retail REIT 2009 Charter Hall Diversiﬁ ed Property Fund Charter Hall Core Plus Ofﬁ ce Fund Charter Hall Core Plus Industrial Fund Charter Hall Core Plus Retail Fund Charter Hall Umbrella Fund Charter Hall Opportunity Fund 4 Charter Hall Opportunity Fund 5 Group’s share of: Assets $’000 Liabilities $’000 Revenues $’000 Proﬁ t/(loss) $’000 49,506 197,601 101,729 37,896 3,942 45,402 644 15,850 272,535 145,068 35,362 329,296 106,106 248,963 44,143 9,884 41,535 28,909 93,287 45,668 617 2,653 20,769 284 7,279 117,420 62,721 21,194 182,585 44,674 124,308 841 6,898 26,240 5,171 19,238 10,932 2,257 3,982 211 15 578 7,082 4,812 3,504 24,591 9,415 20,151 3,345 60 573 (3,884) (1,252) (2,473) (3,880) 150 1,116 29 16 (5,613) 3,615 (4,788) (33,887) (9,550) (25,951) (7,941) (536) (3,733) f) Charter Hall Core Plus Retail Fund’s revenue, expenses and results The summary income statement and balance sheet of CPRF for FY09 are shown below. Whilst at 30 June 2009 CHPT still owned a 65% direct interest and a 5% indirect interest in CPRF (CHPT has a 25% investment in CHUF and CHUF holds a 21% investment in CPRF, the ﬁ nancial accounts of CPRF were not consolidated into CHPT’s ﬁ nancial accounts in 2009. Revenues Expenses Proﬁ t before fair value adjustments and tax Income tax expense Fair value adjustments/losses on sale Proﬁ t after income tax g) Charter Hall Core Plus Retail Fund’s assets and liabilities Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets 2009 $’000 30,845 (19,064) 11,781 (179) (51,249) (39,647) 103,645 277,654 381,299 7,614 182,800 190,414 190,885 From 1 July 2009, CPRF has been consolidated, the Group accounts so there is no need to show the 2010 numbers for CPRF above. Refer to note 37 for more information on the reconsolidation of CPRF. 106 Charter Hall Group 36. INVESTMENT IN JOINT VENTURES a) Carrying amounts Information relating to joint ventures is set out below and at note 17. Ownership Interest Consolidated Name of company Principal activity Unlisted Commercial and Industrial Property Pty Ltd MOUS 1 MOUS 2 MCW (US) 1 MCW (US) 2 Property development Asset management Asset management Asset management Asset management b) Movements in carrying amounts Commercial and Industrial Property Pty Limited Opening balance Investment Share of proﬁ t after income tax Dividends received/receivable Impairment of investment Closing balance MOUS 1 Investment MOUS 2 Investment MCW (US) 1 Investment MCW (US) 2 Investment c) Carrying value of joint venture entity 2010 % 50% 50% 50% 50% 50% 2009 % 50% – – – – 2010 $’000 2009 $’000 26,517 2,000 1,150 2,000 2,300 2010 $’000 24,979 – 1,538 – – 26,517 2,000 1,150 2,000 2,300 2010 $’000 24,979 – – – – 2009 $’000 43,838 – 2,116 (3,331) (17,644) 24,979 – – – – 2009 $’000 Commercial and Industrial Property Pty Ltd 26,517 24,979 KPMG were engaged to provide an indicative estimate of Charter Hall Limited’s 50% equity investment in Commercial and Industrial Property Pty Ltd as at 30 June 2009. The valuation methodology used was Value In Use (VIU) (in accordance with the requirements of AASB 136) and three different scenarios in relation to growth prospects were considered. Management adopted the base case scenario which had a value in use of $24,979,044. Consideration was given to the fair value less cost to sell (FVLCTS) method but management believe VIU gives the most accurate recoverable amount. In accordance with our accounting policy (note 1(h)) consideration was given to FVLCS, however VIU resulted in a higher recoverable amount which is required to be taken up in accordance with AASB 136. The base case scenario includes a decrease in gross proﬁ t of 47% in FY10 and then subsequently reﬂ ecting growth in gross proﬁ t to FY13 and maintaining real growth in gross proﬁ t of 4% beyond FY13 up to the end of the forecast period in FY19. A weighted average cost of capital of 11.6% was used to reﬂ ect the current market assessments of the time value of money and the risks speciﬁ c to the investment and the net debt position was calculated as $6,630,000 being the forecast debt of $8,490,000 and forecast cash of $1,960,000 as at 30 June 2009. There has been no impairment or reversal of impairment in FY10. 107 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 36. INVESTMENT IN JOINT VENTURES (CONTINUED) d) Share of joint venture’s revenue, expenses and results Revenues Expenses Proﬁ t before income tax 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 2010 $’000 43,079 (40,873) 2,206 2010 $’000 11,256 3,799 15,055 2,328 6,605 8,933 6,122 2009 $’000 28,871 (25,842) 3,029 2009 $’000 10,507 2,511 13,018 5,843 2,591 8,434 4,584 37. BUSINESS COMBINATION a) CPRF acquisition As announced on 8 December 2009, based on discussions with ASIC the Group decided to consolidate its 66% interest in the Core Plus Retail Fund (CPRF) from 1 July 2009 while CHC owns more than 50% of CPRF, and all other circumstances remain unchanged. The assets and liabilities arising from the consolidation at 1 July 2009 are as follows: Cash and cash equivalents Trade and other receivables Investment properties held for resale Investment properties Deferred tax asset Trade and other payables Interest bearing liabilities Deferred tax liabilities Derivative ﬁ nancial instruments Net identiﬁ able assets of CPRF Less: Non-controlling interest (34.55%) Add: Goodwill Value of CPRF units held at 30 June 2009 Fair value $’000 5,983 6,128 91,534 277,516 138 (7,614) (168,092) (453) (14,255) 190,885 (65,951) 14,954 139,888 The fair value of the assets and liabilities is equivalent to CPRF’s carrying value. All of the acquired receivables are expected to be collectable. The goodwill arises as the unit price of CPRF is higher than the net assets of CPRF due to adjustments for acquisition costs and fair value of derivative ﬁ nancial instruments in the calculation of the unit price. On consolidation of underlying investment property assets and derivative balances, the goodwill has been determined to be impaired and has been written off to the income statement. On a 100% basis, CPRF contributed revenues of $20.2 million, net loss of $30.7 million and operating earnings of $9.6 million for the year ended 30 June 2010. Information on the non-controlling interest is included at note 29. 108 Charter Hall Group 37. BUSINESS COMBINATION (CONTINUED) b) Summary of Macquarie acquisition On 1 March 2010, the consolidated entity completed a transaction to acquire the majority of Macquarie Group’s core real estate management platform comprising management of two listed and three unlisted real estate funds and co-investments in Macquarie Ofﬁ ce Trust (renamed Charter Hall Ofﬁ ce REIT), Macquarie Country Wide Trust (renamed Charter Hall Retail REIT) and Macquarie Direct Property Fund (renamed Charter Hall Direct Property Fund). As part of this transaction, the sale to Charter Hall Group by Macquarie of all of the shares in Macquarie Ofﬁ ce Management Limited (renamed Charter Hall Ofﬁ ce Management Limited), Macquarie Asset Services Limited (renamed Charter Hall Asset Services Limited) and Macquarie Real Estate Europe Limited (renamed Charter Hall Real Estate Europe Limited) under the terms of the Share Sale Agreement dated 12 February 2010 was completed on 1 March 2010. The sale to Charter Hall by Macquarie Group of all shares in Macquarie Countrywide Management Limited (renamed Charter Hall Retail Management Limited) and Macquarie Direct Property Management Limited (renamed Charter Hall Direct Property Management Limited) is expected to complete during the quarter to 30 September 2010 once all consents have been received. During the period in which the shares in these entities are not owned by Charter Hall, transitional arrangements have been put in place such that the management of Charter Hall Retail REIT and three unlisted funds is outsourced to Charter Hall. There is full ﬂ ow-through of management fees to Charter Hall. Despite not owning the shares in these companies, Charter Hall is deemed to control the entities and hence they are consolidated at 30 June 2010. Details of the purchase consideration and the net assets and management rights acquired are as follows: Purchase consideration (refer to (c) below): Cash paid Amounts payable (note 22) Contingent consideration (i) Total purchase consideration The assets and liabilities recognised as a result of the acquisition are as follows: Cash Prepayments Investment in Joint ventures Investments in associates Plant and equipment Deferred tax asset Trade payables Provision for income tax Provision for employee beneﬁ ts Deferred tax liability Net identiﬁ able assets acquired Add: Management Rights acquired Net assets acquired $’000 93,556 14,580 11,270 119,406 Fair value $’000 3,040 83 7,450 301 17 525 (1,233) (469) (2,136) (3) 7,575 111,831 119,406 Charter Hall Direct Property Management Limited owns 3.5% of an associate, Macquarie Property Income Fund, which it carries at fair value. There were no acquisitions in the year ending 30 June 2009. 109 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 37. BUSINESS COMBINATION (CONTINUED) b) Summary of Macquarie acquisition (continued) i) Contingent consideration In the event that certain cumulative revenue targets are achieved by the offshore platform (being the people, entities and businesses that generate revenue outside of Australia, New Zealand and Japan) between 1 March 2010 and 28 February 2013, additional consideration of up to $15,000,000 may be payable in cash. The potential undiscounted amount payable under the agreement is between $0 (for cumulative revenues below $21,425,000), and $15,000,000 (for cumulative revenues above $42,850,000). The fair value of the contingent consideration of $11,269,722 was estimated by applying a 10% discount rate to $15,000,000, as it is assumed that probability-adjusted revenues of the Offshore Platform will result in payments of $5,000,000 per year over three years. ii) Revenue and proﬁ t contribution The acquired platform contributed revenues of $16.9 million and net proﬁ t of $10.1 million to the Group for the period from 1 March 2010 to 30 June 2010. If the acquisition had occurred on 1 July 2009, consolidated revenue and consolidated proﬁ t for the year ended 30 June 2010 would have been $128.2 million and $19.9 million respectively. These amounts have been calculated using the Group’s accounting policies and by adjusting the results of the subsidiary to reﬂ ect the additional depreciation and amortisation that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from 1 July 2009, together with the consequential tax effects. c) Purchase consideration – cash outﬂ ow Outﬂ ow of cash to acquire subsidiary, net of cash acquired Cash consideration Direct costs relating to the acquisition Less: Balances acquired Cash Outﬂ ow of cash – investing activities 2010 $’000 2009 $’000 93,556,265 6,636,295 100,192,560 (3,039,686) 97,152,874 – – – – – Acquisition-related costs Acquisition-related costs of $6,636,295 are included in other expenses in proﬁ t or loss and in operating cash ﬂ ows in the statement of cash ﬂ ows. The acquisition was partly funded by the issue of 121,272,558 Charter Hall Group stapled securities to the Macquarie Group. These securities were issued at $0.70 thus raising $84,890,791 in equity. The issue price is consistent with securities traded on the ASX on the same day and so is considered fair value. 38. EVENTS OCCURRING AFTER THE BALANCE SHEET DATE Since 30 June 2010, CHG has completed the following transactions: ◆ The settlement of the purchase of 33 Windorah Street, Stafford by CPRF on 20 July 2010 for $11.2 million. ◆ The completion of the purchase by CPRF of 50% of Lake Macquarie Shopping Centre and Mount Hutton Shopping Centre on 30 July 2010 for $66 million. The purchase is a joint venture with Charter Hall Retail REIT. ◆ CPRF completed the sale of Bluewater Plaza, located at Redcliffe, to the Anthony John Group Pty Ltd on 10 August 2010 for $47.8 million. ◆ On 27 July 2010, the Group launched the Charter Hall Direct Industrial Fund for investment by retail and self managed superannuation fund investors. The seed asset is a development property at Altona North, Melbourne. The Group will be ﬁ nancing the development while equity is raised. 110 Charter Hall Group 39. RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET CASH INFLOW FROM OPERATING ACTIVITIES Loss for the year Depreciation and amortisation Non-cash employee beneﬁ ts expense – security-based payments Loss/(gain) on sale of investments, property and derivatives Net gain on remeasurement of equity interest Fair value adjustments Impairment of investment accounted for using the equity method Impairment of goodwill 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 Decrease in provision for deferred income tax Net cash inﬂ ow/(outﬂ ow) from operating activities 2010 $’000 (10,222) 1,406 1,317 10,880 (59,725) 66,196 – 15,328 1,390 (9,649) 10,948 8,693 45 3,186 (950) 38,843 Dividend and interest income received on investments has been classiﬁ ed as cash ﬂ ow from operating activities. 40. EARNINGS PER SECURITY a) Basic earnings per stapled security Basic earnings attributable to the stapled securityholders of Charter Hall Group b) Diluted earnings per security Diluted earnings attributable to the stapled securityholders of Charter Hall Group c) Operating earnings per security Refer to note 5 for further details. d) Reconciliations of earnings used in calculating earnings per security Proﬁ t attributable to the ordinary equity holders of the consolidated entity used in calculating basic earnings per security Interest received from LTI securities 2010 Cents 0.02 0.20 2010 $’000 207 1,611 2009 $’000 (82,222) 285 616 (1,339) – 93,982 17,644 – 10,569 627 6,460 (632) (3,656) 28 (1,222) 41,140 2009 Cents (17.98) (15.85) 2009 $’000 (82,222) 2,497 Proﬁ t attributable to the ordinary equity holders of the consolidated entity used in calculating diluted earnings per security 1,818 (79,725) 111 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 40. EARNINGS PER SECURITY (CONTINUED) 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: Performance rights Options Securities issued under the Charter Hall Limited Executive Loan Security Plan (LSP) 2010 Number 2009 Number 850,161,196 457,410,018 5,634,167 14,631,305 50,343,597 1,214,696 – 44,265,783 Weighted average number of ordinary securities and potential ordinary securities used as the denominator in calculating diluted earnings per security 920,770,265 502,890,497 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 AASB 2: Share-based Payment, the loan, securities, interest received on the loan and the distribution paid and payable are derecognised for the preparation of the ﬁ nancial statements but recognised for the calculation of diluted earnings per security. ii) Performance rights and options issued under the Charter Hall Performance Rights and Options Plan The performance rights and options are unquoted securities and conversion to stapled securities, and vesting to executives, is subject to service and performance conditions. 41. SECURITY-BASED PAYMENTS a) Employee Security Plan The establishment of the Charter Hall Limited Executive Loan Security Plan (ELSP) 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 subject to performance and service conditions. The amount of interest due on the loan is equivalent to the amount of the distribution receivable on the underlying securities. Distributions on the loan securities are paid to Charter Hall Limited as interest receivable on the loan provided to employees. As ELSP members do not hold securities in their own name the plan manager seeks instructions from plan members on their voting intentions. The plan manager distributed a voting instruction form to collate responses and completes the ELSP’s proxy form for lodgement with the share registry. Set out below are summaries of securities granted under the plan: Opening balance (number of securities) Number of securities issued on 07/08/08 at $1.04 Number of securities issued on 19/11/08 at $1.04 Other 2010 2009 50,343,595 – – 2 23,508,112 15,321,360 11,508,812 5,311 50,343,597 50,343,595 During the year 4,500,000 securities were forfeited by ELSP members but have been retained in the plan. 112 Charter Hall Group 41. SECURITY-BASED PAYMENTS (CONTINUED) b) Charter Hall Performance Rights and Options Plan (PROP) In 2008, the Board engaged external advisers to gain a market perspective on LTI arrangements. The Board, in consultation with the independent remuneration consultants, resolved that LTI for the 2009 year would be delivered through a combination of the existing ELSP and the new PROP. The performance rights and options are unquoted securities and conversion to stapled securities, and vesting to executives, is subject to service and performance conditions which are discussed in the Remuneration report. The Board resolved in the 2010 year to replace the ELSP and utilise the PROP as the Group’s LTI. Performance rights Opening balance Number of rights issued on 22/12/08 at $0.001 Number of rights issued on 13/11/09 at $0.001 Number of rights issued on 18/6/10 at $0.001 Options Number of options issued on 4/11/09 at $0.485 Number of options issued on 13/11/09 at $0.485 Number of options issued on 18/6/10 at $0.70 2010 2009 1,628,789 – 6,249,000 2,578,500 10,456,289 16,352,050 5,988,125 6,446,500 28,786,675 – 1,628,789 – – 1,628,789 – – – – c) 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: ELSP, options and PROP 2010 $’000 1,317 2009 $’000 616 The model inputs for the Black-Scholes method for assessing the fair value at loan date for the ELSP securities, options and PROP rights issued during the year ended 30 June 2010 include the following: Grant date 7/8/08 10/10/08 19/11/08 22/12/08 13/11/09 18/6/10 Security price at grant date Loan value per security Expiry of loan Expected price volatility Risk-free interest rate $0.865 $1.04 6/8/13 23.68% 5.85% $0.66 $1.04 9/8/13 22.75% 4.28% $0.41 $1.04 18/11/13 58.06% 3.72% $0.30 $1.04 21/12/13 59.49% 3.19% $0.60 $0.485 1/7/14 40% 5.5% $0.70 $0.70 18/6/15 40% 5.5% 113 Annual Report 2010 Notes to the Consolidated Financial Statements 30 June 2010 42. DEED OF CROSS GUARANTEE Charter Hall Limited and Charter Hall Holdings Pty Ltd are parties to a deed of cross guarantee under which each company guarantees the debts of the other. By entering into the deed, the wholly-owned entities have been relieved from the requirement to prepare ﬁ nancial statements and directors’ report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission. a) Consolidated income statement, statement of comprehensive income and summary of movements in consolidated retailed earnings The above companies represent a ‘closed group’ for the purposes of the Class Order, and as there are no other parties to the deed of cross guarantee that are controlled by Charter Hall Limited, they also represent the ‘extended closed group’. Set out below is a consolidated income statement, a consolidated statement of comprehensive income and a summary of movements in consolidated retained earnings for the year ended 30 June 2010 of the closed group consisting of Charter Hall Limited and Charter Hall Holdings Pty Ltd. 2010 $’000 2009 $’000 40,250 (25,949) (666) (4,267) (6,636) (26,377) 1 572 (295) (23,367) 2,991 (20,376) 2010 $’000 29,679 (16,681) (276) (4,160) – (21,958) – (2,154) (17,644) (33,194) 2,120 (31,074) 2009 $’000 (20,376) (31,074) 18 – (20,358) (31,074) (32,345) (20,376) – (52,721) (1,271) (31,074) (32,345) Income statement Revenue from continuing operations Revenue Employee beneﬁ ts expense Depreciation Other expenses Business combination transaction costs Finance costs Foreign exchange loss Share of net loss of associates accounted for using the equity method Fair value adjustments Loss before income tax Income tax beneﬁ t Loss for the year Statement of comprehensive income Loss for the year Other comprehensive income Foreign currency reserve movement Total comprehensive loss for the year Summary of movements in consolidated accumulated losses Accumulated losses at the beginning of the ﬁ nancial year Loss for the year Dividends provided for or paid Accumulated losses at the beginning of the ﬁ nancial year 114 Charter Hall Group 42. DEED OF CROSS GUARANTEE (CONTINUED) b) Balance sheet Set out below is a consolidated balance sheet as at 30 June 2010 of the closed group consisting of Charter Hall Limited and Charter Hall Holdings Pty Ltd. 2010 $’000 2009 $’000 Assets Current assets Cash and cash equivalents Trade and other receivables Total current assets Non-current assets Trade and other receivables Investments accounted for using the equity method Investments in controlled entities Property, plant and equipment Investment in joint ventures Intangible assets Deferred tax assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Provisions Total current liabilities Non-current liabilities Trade and other payables Loans from associates Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses 11,610 32,937 44,547 5,145 52,442 47,305 3,561 7,450 111,831 21,500 249,234 293,781 28,529 749 29,278 11,270 324,933 15,330 879 352,412 381,690 1,088 20,201 21,289 5,601 43,258 25 2,280 – – 18,668 69,832 91,121 2,922 247 3,169 – 144,355 15,509 – 159,864 163,033 (87,909) (71,912) 9,427 (44,615) (52,721) (87,909) 6,383 (45,950) (32,345) (71,912) The closed group has net liabilities but has access to a debt facility provided by Charter Hall Property Trust which is not repayable until 31 July 2018. 115 Annual Report 2010 Directors’ Declaration to Unitholders In the directors’ opinion: a) the ﬁ nancial statements and notes set out on pages 58 to 115 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 consolidated entity’s ﬁ nancial position as at 30 June 2010 and of its 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. c) at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed group identiﬁ ed in note 42 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in note 42. Note 1(a) conﬁ rms that the ﬁ nancial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. 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 24 September 2010 116 Charter Hall Group Independent Auditor’s Report to the members of Charter Hall Limited PricewaterhouseCoopers ABN 52 780 433 757 Darling Park Tower 2 201 Sussex Street GPO BOX 2650 SYDNEY NSW 1171 DX 77 Sydney Australia Telephone +61 2 8266 0000 Facsimile +61 2 8266 9999 Report on the ﬁ nancial report We have audited the accompanying ﬁ nancial report of Charter Hall Limited (the company), which comprises the balance sheet as at 30 June 2010, and the income statement, the statement of comprehensive income, statement of changes in equity and cash ﬂ ow statement for the year ended on that date, a summary of signiﬁ cant accounting policies, other explanatory notes and the directors’ declaration for the Charter Hall Group (the consolidated entity). The consolidated entity comprises the company and the entities it controlled at the year’s end or from time to time during the ﬁ nancial year. Directors’ responsibility for the ﬁ nancial report The directors of the company are responsible for the preparation and fair presentation of the ﬁ nancial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the ﬁ nancial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the ﬁ nancial statements comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the ﬁ nancial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the ﬁ nancial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the ﬁ nancial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the ﬁ nancial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the ﬁ nancial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the ﬁ nancial report. Our procedures include reading the other information in the Annual Report to determine whether it contains any material inconsistencies with the ﬁ nancial report. Our audit did not involve an analysis of the prudence of business decisions made by directors or management. We believe that the audit evidence we have obtained is sufﬁ cient and appropriate to provide a basis for our audit opinions. 117 Annual Report 2010 Independent Auditor’s Report (continued) to the members of Charter Hall Limited Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: a) the ﬁ nancial report of Charter Hall Limited is in accordance with the Corporations Act 2001., including: i) giving a true and fair view of the consolidated entity’s ﬁ nancial position as at 30 June 2010 and of its performance for the year ended on that date; and ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and b) the ﬁ nancial report also complies with International Financial Reporting Standards as disclosed in Note 1. Report on the remuneration report We have audited the remuneration report included in pages 44 to 47 of the directors’ report for the year ended 30 June 2010. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s opinion In our opinion, the remuneration report of Charter Hall Limited for the year ended 30 June 2010, complies with section 300A of the Corporations Act 2001. PricewaterhouseCoopers R Baker Partner 118 Charter Hall Group Sydney 24 September 2010 Securityholder Information 31 August 2010 The shareholder information set out below was applicable as at 31 August 2010. A Distribution of equity securities Analysis of numbers of equity securityholders by size of holding: Number of securities held by securityholder Ordinary securities held per band 1-1000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 and over Total B Registered equity securityholders Twenty largest quoted equity securityholders The names of the twenty largest registered holders of quoted equity securities are listed below: Name Alphabridge Pty Ltd HSBC Custody Nominees (Australia) Limited National Nominees Limited JP Morgan Nominees Australia Limited Macquarie Capital Group Limited Citicorp Nominees Pty Limited CHL Executive Loan Security Plan Managers Pty Ltd Citicorp Nominees Pty Limited Cogent Nominees Pty Limited Cogent Nominees Pty Limited AMP Life Limited Wyllie Group Pty Ltd Citicorp Nominees Pty Limited Mr David William Harrison Mr David Southon UBS Nominees Pty Ltd Bond Street Custodians Limited Equity Trustees Limited Cedayu Pty Ltd Citicorp Nominees Pty Limited C Substantial holders Substantial holders in the Group are set out below: Ordinary securities Alphabridge Pty Ltd HSBC Custody Nominees (Australia) Limited National Nominees Limited J P Morgan Nominees Australia Limited Macquarie Capital Group Limited 95,013 960,708 2,563,525 36,185,170 1,185,560,672 1,225,365,088 Ordinary securities Number held Percentage of issued securities 200,863,798 194,469,829 124,892,217 121,521,901 121,272,558 58,141,857 50,343,597 48,467,778 37,690,491 27,172,659 25,019,322 24,940,912 6,162,197 5,724,091 5,591,552 5,550,061 4,638,935 4,564,184 4,477,333 4,365,447 16.39% 15.87% 10.19% 9.92% 9.90% 4.74% 4.11% 3.96% 3.08% 2.22% 2.04% 2.03% 0.50% 0.47% 0.46% 0.45% 0.38% 0.37% 0.37% 0.36% Number held Percentage 200,863,798 194,469,829 124,892,901 121,521,901 121,272,558 16.39% 15.87% 10.19% 9.92% 9.90% 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. 119 Annual Report 2010 Investor Relations Information relating to Charter Hall can be found at charterhall.com.au The website is a useful source of information about the Group and its property portfolio. The site contains a variety of investor information, including presentations, webcasts, newsletters, annual reports, half year updates, distribution history and timetable, unit price information and announcements to the ASX. Complaints Contact details What to do if you have a complaint Please contact us so that we can address your complaint. Unit registry To access information on your holding or to update/change your details contact: Compliance Manager Charter Hall Group GPO Box 2704 Sydney NSW 2001 Telephone 1300 365 585 (local call cost) Facsimile +61 2 8908 4040 Email reits@charterhall.com.au External dispute resolution In the event that the matter cannot be resolved within a reasonable period of time (usually 45 days) or you are not satisﬁ ed with our response, you can seek assistance from the Financial Ombudsman Service (FOS) Limited. FOS provides a free and independent dispute resolution service to our investors. FOS’s contact details are below: Financial Ombudsman Service GPO Box 3 Melbourne, Victoria, 3001 Telephone 1300 78 08 08 (local call cost) Facsimile +61 3 9613 6399 Email info@fos.org.au fos.org.au Link Market Services Limited Locked Bag A14 Sydney South NSW 1235 Telephone 1300 303 063 (within Australia) +61 2 8280 7134 (outside Australia) Facsimile +61 2 9287 0303 Email charterhall.reits@linkmarketservices.com.au linkmarketservices.com.au Manager All other enquiries related to your Charter Hall investment can be directed to the manager: Charter Hall Group GPO Box 2704 Sydney NSW 2001 Telephone 1300 365 585 (local call cost) Facsimile +61 2 8908 4040 Email reits@charterhall.com.au 120 Charter Hall Group Corporate Directory Manager Charter Hall Limited ABN 57 113 531 150 Charter Hall Funds Management Limited ABN 31 082 991 786 Registered ofﬁ ce Level 11, 333 George Street, Sydney NSW 2000 Directors Kerry Roxburgh Roy Woodhouse Cedric Fuchs Colin McGowan David Harrison David Southon Glenn Fraser Patrice Derrington Peter Kahan Chief Financial Ofﬁ cer Jelte Bakker Company Secretary Nathan Francis Telephone 1300 365 585 (within Australia) +61 2 8908 4000 (outside Australia) Facsimile (02) 8908 4040 (within Australia) +61 8908 4040 (outside Australia) Email reits@charterhall.com.au Web charterhall.com.au ASX Code CHC Auditor PricewaterhouseCoopers Darling Park Tower 2 201 Sussex Street Sydney NSW 1171 Solicitors Allens Arthur Robinson Level 28, Deutsche Bank Place Cnr of Hunter & Phillip Streets Sydney NSW 2000 Bankers National Australia Bank Level 24, NAB House, 255 George Street Sydney NSW 2000 Registry Link Market Services Limited Locked Bag A14 Sydney South NSW 1235 Notice of Annual General Meeting The Charter Hall Group Annual General Meeting will be held on: Date 10 November 2010 Time 2.30pm Venue Four Seasons Hotel Sydney Winten Teale Buchanan Room 199 George Street Sydney NSW 2000 Disclaimer This Annual Report has been prepared and issued by Charter Hall Limited (ABN 57 113 531 150) and Charter Hall Funds Management Limited (ABN 31 082 991 786, AFSL 262861) (CHFML) as Responsible Entity of the Charter Hall Property Trust (together, the Charter Hall Group or Group). The information contained in this report has been compiled to comply with legal and regulatory requirements and to assist the recipient in assessing the performance of the Group independently and does not relate to, and is not relevant for, any other purpose. This report is not intended to be and does not constitute an offer or a recommendation to acquire any securities in the Charter Hall Group. The receipt of this report by any person and any information contained herein or subsequently communicated to any person in connection with the Charter Hall Group is not to be taken as constituting the giving of investment, legal, or tax advice by the Charter Hall Group, their related bodies corporate, their directors or employees to any such person. Each recipient should consult their own counsel, accountant, and other advisers as to legal, tax, business, ﬁ nancial and other considerations in relation to the Charter Hall Group. Neither the Charter Hall Group, their related bodies corporate, directors, employees nor any other person who may be taken to have been involved in the preparation of this annual report represents or warrants that the information contained in this report, provided either orally or in writing to a recipient in the course of its evaluation of the Charter Hall Group or the matters contained in this annual report, is accurate or complete. Historical performance is not a reliable indicator of future performance. Due care and attention has been exercised in the preparation of forecast information, however, forecasts, by their very nature, are subject to uncertainty and contingencies, many of which are outside the control of the Group. Actual results may vary from any forecasts and any variation may be materially positive or negative. CHFML does not receive fees in respect of the general ﬁ nancial product advice it may provide; however, entities within the Charter Hall Group receive fees for operating the Trust in accordance with its constitution. Entities within the Group may also receive fees for managing the assets of, and providing resources to the Trust. For more detail on fees, see this annual report. To contact us, call 02 8908 4000 (local call cost). Information Regarding U.S. Investors / U.S. Persons Each person that holds Charter Hall Group securities that is in the United States (U.S.) or is a U.S. person is required to be a Qualiﬁ ed Institutional Buyer / Qualiﬁ ed Purchaser (QIB/QP) at the time of the acquisition of any Charter Hall Group securities, and is required to make the representations in a subscription agreement as of the time it acquired the applicable securities. The securities can only be resold or transferred in a regular brokered transaction on the ASX in accordance with Rule 903 or 904 of Regulation S, where neither it nor any person acting on its behalf knows or has reason to know, that the sale has been prearranged with, or that the purchaser is, in the United States or a U.S. person (e.g. no prearranged trades (‘special crossing’) with U.S. Persons or other off-market transactions). To the maximum extent permitted by law, the Charter Hall Group reserve the right to (i) request any person that they deem to be in the United States or a U.S. Person, who was not at the time of acquisition of the securities a QIB/QP, to sell its securities, (ii) refuse to record any subsequent sale or transfer of securities to a person in the United States or a U.S. Person, and (iii) take such other action as they deem necessary or appropriate to enable the Charter Hall Group to maintain the exception from registration under Section 3(c)(7) of the Investment Company Act. If you are not the beneﬁ cial owner of securities in the Charter Hall Group, you must pass this information to the beneﬁ cial owner of the securities. Complaints handling A formal complaints handling procedure is in place for the Group. CHFML is a member of the Financial Ombudsman Service (“FOS”). Complaints should in the ﬁ rst instance be directed to CHFML. If you have any enquiries or complaints, please contact the Compliance Manager on 02 8908 4000 (local call cost). charterhall.com.au

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