Charter Hall Group Contents Financial calendar Highlights Year in review About us Chairman’s review Joint Managing Directors’ review Our strategy IFC Our performance Sustainability The Board Investor information Corporate governance statement Financial report 2 3 4 6 8 10 12 14 16 18 20 29 Financial year 2013 calendar Annual General Meeting Estimated interim distribution announced and securities/units trade ex-distribution Half year results Interim distribution paid Estimated final distribution announced and securities/units trade ex-distribution Full year results Final distribution paid Annual General Meeting December 2012 February 2013 February 2013 June 2013 August 2013 August 2013 November 2013 The 2012 Annual General Meeting will be held at The Westin Hotel, Level 6 Heritage Ballroom, No.1 Martin Place, Sydney, on Thursday, 8 November 2012 at 2.30pm Front cover: Allianz Centre 2 Market Street Sydney New South Wales This page: Windsor Marketplace Windsor New South Wales Charter Hall Group With $9.4 billion in assets under management across listed and unlisted funds, Charter Hall owns and manages 184 office, industrial and retail properties, comprising 2.3 million square metres of net lettable area, generating a gross rental income of $817 million from almost 3,000 tenants. 1 Annual Report 2012 Highlights We have secured over $1.3 billion1 of equity from retail and unlisted wholesale investors since June 2011 for investment into quality office, industrial and retail properties. Statutory profit after tax Full year distribution Equity secured to 30 June 2012 $16.7 million 18.2 cents per security $1 billion Operating earnings before specific items Net tangible assets (NTA) per security Equity secured since 30 June 2012 $63.6 million $2.13 $319 million Operating earnings after specific items Total funds under management (FUM) Yield on investment portfolio $54.8 million $9.4 billion1 7.1% 1. At 31 August 2012 2 Left to right: Paul Altschwager, Chief Financial Officer and Tim Carr, Group Financial Controller Charter Hall Group Year in review July 2011 October 2011 February 2012 Estate works commence at Charter Hall and TA Global’s $600 million Little Bay Cove residential project in Sydney. August 2011 CHOF5’s 40 Creek Street secures Fitness First Platinum following an active six months of leasing activity across the Brisbane building with approximately 5,525 square metres of space being leased. Charter Hall increases its stake in CQR to 10%. Charter Hall’s Core Plus Industrial Fund completes its $150 million equity raising. Charter Hall and CQR donate $10,000 in Coles vouchers to flood impacted communities in Moree, Queensland through its Balo Square shopping centre. 130 Stirling Street Trust (CHIF7) unitholders receive notice of the revaluation of the Trust, resulting in its NTA rising from $0.95 to $1.13 per unit with a distribution upgrade from 8% to 9% p.a. Leighton Contractors commits to 21,149 square metres in Charter Hall Opportunity Fund No.5’s (CHOF5) new $230 million A-grade office development, WorkZone in Perth. Charter Hall Retail REIT (CQR) acquires Albany Creek Shopping Centre in Brisbane for $40.1 million. Charter Hall Office REIT (CQO) contracts to sell 100% of its interests in its United States portfolio. The Independent Directors of CQO receive an indicative, highly conditional, non-binding and confidential proposal from a Macquarie Capital-led consortium to acquire for cash all of CQO issued units, other than those held by Charter Hall Group. Charter Hall Direct Industrial Fund is named the ‘Best new unlisted property fund of the year’ by Property Investment Research. March 2012 November 2011 The first soil is turned at CHOF5’s new A-grade commercial office development in Perth, WorkZone, marking the official commencement of construction works. CQR extends its NAB multi-currency debt facility to October 2016. Charter Hall’s Core Plus Industrial Fund acquires a 50% freehold interest in the Metcash Regional Distribution Centre in Perth, Western Australia for $61.5 million and signs a new $200 million syndicated debt facility. The Independent Directors of CQR and CQO, with assistance from Ernst & Young, complete a review of their corporate governance and fee arrangements. April 2012 CQO de-lists from the ASX and becomes a Charter Hall managed unlisted fund, named Charter Hall Office Trust (CHOT). One of Charter Hall’s founders, Cedric Fuchs, retires from the Board. Mr Fuchs remains with Charter Hall Group as an executive director of Charter Hall Direct Property Management Limited, the responsible entity of the Group’s direct funds business. Charter Hall’s Core Plus Office Fund completes a $200 million equity raising. September 2011 December 2011 Charter Hall exchanges contracts to sell Mentone Showrooms in Mentone, Victoria for $16.7 million to a private investor. Charter Hall announces the appointment of Paul Altschwager as Chief Financial Officer for the Group. January 2012 CQR refinances its $250 million A$CMBS facility. CHOT and Cbus Property’s premium grade office project at 171 Collins Street, Melbourne secures its third major lease pre-commitment with Egon Zehnder International joining BHP Billiton and Evans & Partners. CQR acquires a 50% interest in Wanneroo Central Shopping Centre in Perth, Western Australia for $35 million in a 50/50 retail partnership managed by Charter Hall. CQR settles the acquisition of Lansell Plaza, a sub-regional shopping centre located in the Bendigo suburb of Kangaroo Flat in Victoria for $32.5 million. May 2012 A consortium consisting of Public Sector Pension Investment Board (PSP) and an entity owned by the Government of Singapore Investment Corporation (GIC) enter into the Scheme Implementation Agreement with CQO to acquire all of the issued units of CQO, other than those owned by Charter Hall Group. Charter Hall Direct Property launches a new single property syndicate, 144 Stirling Street, Perth, Western Australia with a first year forecast income yield of 8.85%. Charter Hall’s Core Plus Office Fund acquires the remaining 50% interest in 225 St Georges Terrace, Perth, Western Australia for $96 million. The equity utilised for this acquisition was sourced from the Fund’s $200 million capital raising which was completed in late 2011. The first release apartments at Charter Hall and TA Global’s Little Bay Cove development are 94% presold. Scott Dundas is appointed Fund Manager of CQR. Charter Hall’s Direct Industrial Fund acquires its fifth asset, the Woolworths National Distribution Centre in Hoppers Crossing, Victoria for $39.5 million. Charter Hall’s 130 Stirling Street office building in Perth, Western Australia achieves a 5.5 Star NABERS Rating without greenpower, demonstrating the benefits of the Group’s active property management approach. David Deverall is appointed to the Charter Hall Board as a non-executive director. CQR refinances itsЄ€81 million German debt facility. June 2012 Charter Hall announces a distribution of 9.1 cents per security (cps) for the half year ended 30 June 2012. The total distribution per security for the year ended 30 June 2012 was 18.2cps, a 10.0% increase on the 16.5cps for the corresponding year ended June 2011. Over the past year, Charter Hall has been one of the industry’s strongest performing A-REITs, outperforming the S&P/ASX 200 A-REIT Accumulation Index by 7.4% with a total return of 14.6% (as at 31 July 2012). 3 Annual Report 2012 About us Charter Hall is one of Australia’s leading fully integrated property groups, with over 20 years’ experience managing high quality property on behalf of institutional, wholesale and retail clients. We have a $9.4 billion1 predominantly Australian property portfolio focused on the core real estate sectors of office, industrial and retail. We are the largest third party manager of Australian office and supermarket anchored retail centre assets, with the third largest managed industrial property portfolio. As an integrated property group, our 260 property specialists deliver professional services across the full property spectrum from investment management to property management and development. We believe sustainability is a key element to good business. By ensuring our actions are not only commercially sound but that they make a difference to our people, our customers and the environment in which we work and live, we can contribute in a positive way. Western Australia 20 properties Office Industrial Retail 6 3 11 Stapled Security Charter Hall Group (ASX:CHC) Charter Hall Property Trust (CHPT) Charter Hall Limited (CHL) Property Investment Total co-investments: $530m Funds Management Book value: $99m Development Investment Total co-investments: $67m $101m co-investment Listed Fund $2.0bn FUM $314m co-investment Wholesale Unlisted Funds $5.5bn FUM $115m co-investment Retail Investor Funds $1.9bn FUM $99m book value (intangible) Investment management Asset management Property management Development management Leasing services Transaction services $28m investment CIP 50% interest $29m co-investment Wholesale Opportunistic Investments in CHOF4 and CHOF5 $10m investment 685 La Trobe 50% interest 1. At 31 August 2012 4 Charter Hall Group South Australia 6 properties Office Retail Victoria 32 properties Office Industrial Retail 3 3 13 9 10 Charter Hall has 17 offshore assets via its managed funds which will be marketed for sale in the short to medium term Queensland 33 properties Office Industrial Retail 7 10 16 New South Wales 66 properties Office Industrial Retail Australian Capital Territory 5 properties Office Retail Tasmania 5 properties Office Industrial Retail 1 1 3 26 6 34 1 4 5 Annual Report 2012 Chairman’s review On behalf of the Board of Directors, I am pleased to present Charter Hall Group’s 2012 Annual Report. Despite uncertain economic conditions, Charter Hall had an active year delivering on our strategy of accessing, deploying and managing equity investment in office, industrial and retail properties within Australia. The sale of CQO’s US portfolio, and subsequent privatisation of CQO, consolidated our property funds management platform. We also achieved an 8% reduction in net operating expenses; improved our EBITDA margin (before specific items) by 420 basis points to 31.8%; and delivered $23 million in funds management earnings this year. It was pleasing to see active property and debt management in the co-investment portfolio lift the earnings yield by 70 basis points to 7.1%. By 30 June 2012, on balance sheet debt was reduced to zero. Charter Hall currently has total funds under management of $9.4 billion, securing over $1 billion in additional equity across our managed funds platform, with a further $319 million added since the end of the financial year. Our Australian assets have grown in line with our strategy to focus on the domestic market, where we have competitive advantages, with our Australian properties now under management increasing to $8.9 billion, from $8.5 billion 12 months ago. Charter Hall now manages 184 office, industrial and retail properties comprising 2.3 million square metres of lettable area, currently generating gross rental income of $817 million from almost 3,000 tenants. Committed to corporate governance Charter Hall continues to focus on maintaining the highest levels of corporate governance standards in all our managed funds. Charter Hall’s Board supported an independent review of both Charter Hall Retail and Office REITs’ corporate governance arrangements and fees structures conducted by Ernst & Young, who concluded that corporate governance arrangements were already of a high standard. Charter Hall Retail REIT Board adopted a number of refinements suggested as part of this review. We continue to operate our managed funds with a governance framework that sees the Funds’ boards and investment committees comprise an Independent Chairman, where applicable, and a majority of independents, whilst Investor Representative Committees also exist for the wholesale pooled funds. Charter Hall Office Trust The Proposal by a Consortium, comprising Reco Ambrosia Pte Ltd (an affiliate of the Government of Singapore Investment Corporation (Realty) Pte Ltd) and the Public Sector Pension Investment Board (of Canada) to acquire all units in CQO, other than those held by Charter Hall, was approved at the March unitholder meeting of CQO. All conditions precedent were met, including the completion of the sale of CQO’s remaining United States properties, and the Scheme was implemented on 30 April 2012. CQO was de-listed from the Australian Securities Exchange and renamed Charter Hall Office Trust, becoming one of the Charter Hall managed wholesale partnerships. Providing a scalable business During the year, we restructured our business to better align the business model and the Group’s organisational goals. Charter Hall now comprises Investment Management and Property Services divisions. This restructure provides a scalable operating model that focuses on our key client groups (fund investors and tenants) and our securityholders. The restructure saw a resizing of some areas of the business, which will result in cost savings whilst ensuring the business is focused on its domestic platform. Board changes This financial year, one of our founders, Cedric Fuchs, retired as an Executive Director. On behalf of all stakeholders, I pay tribute to Cedric for his remarkable contribution to the business. Cedric continues in his role as an executive director on the Charter Hall Direct Property Board and as a member of the Group’s managed fund investment committees. I am also pleased to welcome David Deverall to the Board, who joined us in May this year as a Non-Executive Director. David is CEO of Hunter Hall International Limited, Australia’s largest dedicated ethical investment manager that focuses on responsible investment in undervalued companies. David brings extensive experience in financial services, funds management and strategy to the Group. Due to an illness in his family, Glenn Fraser retired as a Non-Executive Director in August 2012. Glenn, who was Chairman of the Audit & Risk Committee, served as a Board member for seven years, making a significant contribution. We will miss his constructive and balanced approach. On behalf of all stakeholders, I thank him for this contribution and wish him and his family well for the future. Outlook While the Australian economy and the equities market continue to be impacted by global economic uncertainty, Charter Hall’s annuity style earnings offer investors a reliable source of income, from its property funds management and co-investment portfolio. The Board and management are committed to maximising returns for our clients invested in our managed funds, and in turn maximising returns for Charter Hall securityholders. I pay tribute to and thank Charter Hall’s outstanding staff, Board and management, and thank our securityholders and all stakeholders for their continued support. We all look forward to delivering continuing positive results in the year ahead. 6 Charter Hall Group Despite uncertain economic conditions, we have had an active year delivering on our strategy of accessing, deploying and managing equity investment in office, industrial and retail properties within Australia. Chairman Kerry Roxburgh 7 Annual Report 2012 Joint Managing Directors’ review In a market that continues to be impacted by the global economic uncertainty, Charter Hall has continued to deliver on its strategic objectives. During the 2012 financial year, we secured over $1 billion in equity, including $800 million of replacement equity for the privatisation of Charter Hall Office REIT (CQO) (now referred to as Charter Hall Office Trust (CHOT)). We have seen this momentum continue since year end, with the Group securing more than $319 million in additional equity including the establishment of a new retail partnership with a global institutional partner and across the unlisted retail funds platform. Results We are pleased to report that operating earnings before specific items increased 4.4% to 21.5 cents per security (cps) or $63.6 million, and while operating earnings after specific items and statutory profit after tax were impacted by various non-cash and specific items, the underlying business continues to perform well. The full year distribution was 18.2cps, a 10% increase over the prior financial year. A full provision of $14.2 million (4.7cps) for the CHOF4 performance fee clawback, a further 2.0cps for the CHOF5 inventory write down at the Little Bay Cove development project, together with the 3.4cps mark to market loss for interest rate derivatives in a number of funds, reduced net tangible assets per security to $2.13 at 30 June 2012. Importantly, 97% of EBITDA was generated from core property investments and property funds management, and 89% was derived from annuity style income, providing the Group with improved quality of earnings in the current market. Development investment will continue to represent a minor contribution, being 3% in financial year 2012 and potentially lower in financial year 2013, as capital is recycled into recurrent earnings activities. Growing our Australian property FUM We have continued to focus on our strategy to reweight our managed funds’ portfolios to Australia with domestic funds now representing 95% of total FUM. Australian FUM has grown by 11% per annum since June 2010. Our total FUM declined from $10.7 billion at 30 June 2011 to $9.4 billion today, following the $1.7 billion sale of CQO’s United States portfolio and a number of offshore sales within Charter Hall Retail REIT (CQR). CQR’s remaining offshore assets have been identified for sale. We have continued to see strong institutional and retail investor interest in Australian property with particular interest from foreign institutional capital. Charter Hall has utilised its deep market relationships to secure over $1.3 billion of equity since 30 June 2011, with $926 million invested by offshore investors. Utilising this equity, the Group and its managed funds acquired approximately $500 million of quality core properties during the year. Enhancing our property portfolios We continue to actively manage our property portfolios, having leased and renewed almost 250,000 square metres of lettable floor space, driving an improvement in the overall occupancy and like-for-like income growth during the year. Our development team has also progressed a number of projects within our off balance sheet $1.3 billion development book and pipeline, with more than $800 million within core funds across 14 projects. Realising equity from development investments We are focused on realising equity for wholesale investors and the Group from our opportunistic funds. The Group expects to realise more than $40 million of equity from its development investments over the next two years as completed projects are sold. The redeployment of these equity co-investments into recurrent earnings yield co-investments will be accretive to Group earnings and will assist in achieving our strategic objective to increase annuity income streams within the Group. Active capital management approach Active capital management remains a focus evidenced by the refinancing of $3.0 billion of debt across our managed funds during the year which delivered an increased weighted average debt maturity of 3.1 years and a substantially lower weighted average cost of debt. We also realised $68 million of equity from our co-investments, reinvesting $41 million into higher return investments. We will look to recycle a further $112 million of equity over the next two years. Outlook We remain focused on accessing, deploying and managing equity in the core property sectors of office, industrial and retail. Charter Hall is in a unique position in that we access equity across unlisted retail, unlisted wholesale and listed sources; and with the Australian market continuing to see strong capital inflows, we are well placed to capture these inflows to invest in high quality property. Subject to unforeseen events, we expect operating earnings for the financial year ended 30 June 2013 to be in the range of 22.5 to 23.0 cents per security, representing 5% to 7% growth over financial year 2012. We are committed to maintaining the strong momentum achieved this financial year through our continued focus on accessing equity from multiple sources; deploying this equity into quality, accretive investment opportunities in the core property sectors of office, retail and industrial; and utilising Charter Hall’s fully integrated property services platform to actively manage our extended portfolio. We look forward to providing a strong and sustainable total return through our focus on growing property income and capital returns for our securityholders and clients. 8 Charter Hall Group We look forward to providing a strong and sustainable total return through our focus on growing property income and capital returns for our securityholders and clients. Joint Managing Director David Harrison Joint Managing Director David Southon 9 Annual Report 2012 Our strategy With a focus on the core property sectors of office, industrial and retail, our strategy is to access, deploy and manage equity invested in these sectors to create value and provide growing income and capital returns for our clients and Charter Hall’s securityholders. Given property’s cyclical nature, our investment in these core sectors ensures our business benefits through the macroeconomic cycles. This allows us to generate sustainable returns with a high income yield component, consistent with the investment appetite of investors in the real estate asset class. Our key competitive advantages include: ◆◆ Access – our scale in the core real estate sectors enables us to attract further equity from multiple sources, including listed, pooled wholesale, partnership wholesale and direct retail, expanding our business reach for investors ◆◆ Deploy – with deep industry relationships and offices around Australia, we have strong market penetration, creating value for our clients by securing attractive acquisition opportunities ◆◆ Manage – with over 260 property specialists, we provide the full spectrum of property services including property funds management; asset management; leasing; property management; and development services, to actively manage our properties and create value Our FY13 strategic objectives ◆◆ Source equity to invest into core real estate sectors, targeting growth in the Australian funds under management platform by 6% to 10% per annum ◆◆ Realise and recycle $112 million of capital in property and development investments over the next two years ◆◆ Enhance return on equity through a disciplined recycling strategy ◆◆ Drive further growth in property investment portfolio yield and capital value ◆◆ Diversify sources of debt funding for our managed funds platform ◆◆ Continue to capitalise on our scalable operating platform to service our funds under management growth 10 Left to right: Andrew Glass, Head of Wholesale Pooled Funds and Nick Kelly, Head of Investor Relations 11 Our performance Property investment Charter Hall co-invests in the majority of its managed funds, strongly aligning the Group with our investors. Our property investment portfolio is well diversified across the core property sectors of office, industrial and retail, and is leased to high calibre Australian tenants such as Wesfarmers, Woolworths, Citigroup, BHP Billiton and Australian Government. The Group’s $530 million co-investment delivered an annualised income yield of 7.1%, up from 6.4% in the last financial year, as a result of the active management of the properties and the refinancing of debt facilities within our managed funds. Importantly, property investment represents 61% of the Group’s EBITDA. Property funds management In line with our strategy to reweight our managed funds portfolios to Australia, Charter Hall has $9.4 billion in funds under management at 31 August 2012. Only $0.5 billion of this is offshore property, following the disposal of almost $2.5 billion in non-core offshore assets within Charter Hall Office REIT’s (now Charter Hall Office Trust) portfolio and Charter Hall Retail REIT’s portfolio. Importantly, given our focus on the Australian market, our domestic funds management platform is $8.9 billion in total, representing 94% of total funds under management, having grown 4% since June 2011. Portfolio performance As an integrated property group, Charter Hall provides end to end property services for our funds and portfolios, from investment management to asset and property management services, with our growth in funds under management driving fee income from this platform. Revenue from these property services averaged 78 basis points (annualised) up from the last financial year, with 76% being derived from annuity style revenue. $1.3 billion1 of equity raised across our managed funds since 30 June 2011 During the year, we secured over $1 billion of equity from institutional and retail investors. Along with the privatisation of Charter Hall Office REIT, which is now managed as an unlisted wholesale fund on behalf of two foreign institutional investors, this has enabled us to acquire $500 million of quality Australian office, supermarket anchored retail and industrial properties within our managed funds. This in turn builds our domestic funds under management platform. Key acquisitions included the four additional retail centres within Charter Hall Retail REIT and four properties within our wholesale unlisted funds. 97% of our earnings is derived from core property investments and property funds management Australian funds under management has grown by 4% since June 2011 Property Investment 61% Property Funds Management 36% Development Investment 3% Retail Listed Wholesale June 2010 June 2011 Today 11% CAGR over two years 4% growth since June 2011 $bn 0 2 4 6 8 10 1. At 31 August 2012 12 Charter Hall Group Since year end, we have raised $319 million through the establishment of a new retail partnership for the acquisition of the $164 million Bay Village Shopping Centre with a global institutional partner; and across the unlisted retail funds platform. Our Direct Industrial Fund closed oversubscribed at $120 million and 144 Stirling Street Trust has closed raising $32 million within three months of its launch. Charter Hall was also appointed manager of PFA Diversified Property Trust in July 2012, which has increased our unlisted retail funds under management to $1.9 billion. Enhancing our portfolios The Group continues to look for opportunities to enhance our managed investment funds’ portfolios and we are currently undertaking 19 development projects across our $1.3 billion development book and pipeline. The 171 Collins Street office project in Melbourne, being developed within the Charter Hall Office Trust as a 50/50 joint venture with Cbus Property, is progressing well and was recently awarded a 6 star Green Star – Office Design (v2) Certified Rating from the Green Building Council of Australia. The building is due for completion in mid-2013 with BHP Billiton, Evans & Partners and Egon Zehnder International committing to 47% of space. Development investment Given continued challenging conditions within the opportunistic sector, we are focusing on repatriating the remaining $42.8 million of equity invested in our opportunistic funds, Charter Hall Opportunity Fund No.4 (CHOF4) and Charter Hall Opportunity Fund No.5 (CHOF5), over the next two years. As previously announced to the market, a full provision of $14.2 million (4.7 cents per security) for the CHOF4 performance fee clawback was made in financial year 2012. The Group has recently contracted for sale the completed office development at 40 Creek Street, Brisbane and has settled on more than 81% of residential apartments within the now completed Lacrosse Stage 1, Melbourne. These properties are both owned by CHOF5 in which Charter Hall has a 15% interest. The Little Bay Cove residential development in Sydney has been impacted by the challenging market conditions, with the land being revalued during the year. The Group’s exposure to the development is 15% through CHOF5, which has resulted in a $7.1 million impairment in the Group’s investment. The Group continues to deliver the estate works for the project, however we are currently in dispute with our development alliance partner on an allocation of the 28 housing lots and 10 development superlots between the parties post completion of this work. The national industrial pre-lease developer, Commercial & Industrial Property Pty Limited, in which Charter Hall has a 50% interest, continues to provide the Group with a strategic off-market source of industrial investment for its funds and contributed $1.5 million of earnings after tax to the Group. Strong equity inflows into our managed funds Wholesale pooled funds Wholesale partnerships Direct funds Total Equity secured during FY12 ($m) Equity secured since balance date ($m) 176 800 52 1,028 8 78 2331 319 1. Includes $185 million secured as part of the PFA platform 13 Annual Report 2012 Sustainability Sustainability is a critical part of how we manage risks and enhance financial, social and environmental value across our business. As an owner and manager of office, retail and industrial properties across Australia, we recognise that our success is dependent on building strong relationships with our tenants, fostering the trust of our investors and giving back to the communities that support our business. Our approach is centred on four key sustainability themes which are managed and monitored through Charter Hall Group’s sustainability strategy. Our goal Our key issues What we planned to do in FY12 Sustainable business Environment Our people Community To maximise our customer and investor satisfaction through operational excellence and by delivering long-term value. To actively work to reduce our consumption of natural resources. To create a safe and engaging environment that attracts, develops, retains and supports our people. To make a positive contribution to the communities where we work. ◆◆ Aligning our business operations with our stakeholders’ ◆◆ To improve the energy efficiency of our managed properties ◆◆ Attract, retain and develop high performance teams ◆◆ Contributing to our local communities long-term interests ◆◆ Keeping stakeholders well informed at all times ◆◆ Longevity of business success ◆◆ Being a trusted partner by stakeholders ◆◆ Enhancing corporate governance practices and reduce carbon emissions ◆◆ To conserve water in our managed properties ◆◆ To reduce the waste produced ◆◆ To improve the environmental performance of our properties ◆✓ Increase the transparency of our sustainability performance disclosure ◆✓ Monitor satisfaction through tenant surveys across our commercial and industrial portfolios ◆✓ Participate in sustainability ratings to enable benchmarking of our approach and performance ◆✓ Continue to implement the UN Principles of Responsible Investment ◆✓ Improve the coverage of our environmental performance data and refine metrics and targets to allow greater transparency of reporting ◆✓ Complete energy road maps for all asset classes where we have operational control ◆✓ Continue to integrate sustainability considerations into our asset business plans What we have achieved in FY12 ◆◆ Aligned our management team and people’s KPIs with our ◆◆ Benchmarked environmental performance of all managed updated business objectives commercial and retail assets ◆◆ Completed an Independent Review of our Code of Conduct ◆◆ Embedded environmental, social and governance issues ◆◆ Completed energy road maps for all commercial assets ◆◆ Included sustainability action plans in all commercial and into our business objectives retail asset business plans ◆◆ Launched Charter Hall Advantage, our platform for tenant engagement and communication ◆◆ Expanded our sustainability reporting through Charter Hall Group’s Corporate Responsibility & Sustainability (CR&S) Report 2012, to be released in December 2012 ◆◆ Responded to Carbon Disclosure Project 2012 Our priorities for FY13 ◆◆ Progress our stakeholder engagement approach to provide ◆◆ Reduce energy usage by 4% and water usage by 2.5% greater consistency and better inform our business in our retail funds in 2013 ◆◆ Further the accuracy and consistency of our CR&S reporting ◆◆ Establish energy and water performance targets for all and seek third-party assurance in 2013 commercial assets ◆◆ Upgrade our website to provide an improved interface for our stakeholders with Charter Hall ◆◆ Complete NABERS Energy ratings on all eligible retail centres ◆◆ Improve the coverage and robustness of our waste ◆◆ Launch our revised Code of Conduct to ensure we instil recycling data our ethics and values across our people ◆◆ Track the carbon emissions associated with our ◆◆ Continue to review our corporate governance policies and business travel framework against industry standards ◆◆ Undertake a review of our supplier chain to determine opportunities to influence CR&S outcomes 14 ◆◆ Respect and accept differences ◆◆ Engaging with communities local to our development activities ◆◆ Protect the mental health and well-being of our employees ◆◆ Foster a zero harm environment ◆✓ Build on our career and development opportunities for all employees ◆✓ Sustain a high performance workforce through robust performance management ◆✓ Continue to drive sustainability as a strategic imperative by including sustainability performance objectives for all employees ◆✓ Diversity remains a priority. Develop targeted programs to address any barriers to diversity at each stage of the employee lifecycle ◆✓ Appoint a Charitable Steering Committee and develop a formal charitable giving program to positively contribute to our local communities ◆✓ Develop a community involvement strategy for our retail centres ◆✓ Continue to implement the local charity support program by our new development projects ◆◆ Established a learning and development framework for all employees with 3.64 courses attended per employee ◆◆ Charitable Steering Committee developed a charitable giving framework for the Group ◆◆ Over 75% of our people attended sustainability workshops ◆◆ Donated over $228,000 to good causes through our to increase their understanding of sustainability issues charitable giving program ◆◆ Implemented a talent review and succession ◆◆ Raised over $56,000 through our development projects local charity support program ◆◆ Reviewed and updated our performance management system to strengthen alignment with Charter Hall’s ◆◆ Launched a Charter Hall workplace giving program for all employees ◆◆ Implemented a volunteer program that provides an additional paid leave day each year planning process strategic objectives strategic objectives ◆◆ Aligned our organisational structure to meet our ◆◆ Developed a Diversity and Inclusive strategy including targets for increasing women in leadership positions ◆◆ Implemented online safety incident reporting tool across our retail business ◆◆ Develop leaders who effectively build skills, knowledge and engagement, and consistently deliver on our Group strategy ◆◆ Improving the success of Charter Hall’s volunteer program by increasing the number of volunteer opportunities available ◆◆ Continue to provide opportunities for our people to develop their roles and future careers to our employees ◆◆ Increase staff participating in our workplace giving program ◆◆ Develop an efficient and effective recruitment framework ◆◆ Improve our internal communications and staff awareness of to attract high calibre talent community programs ◆◆ Create a remuneration strategy that drives performance, is consistent and fair, and is competitive in terms of employee retail centres ◆◆ Further evolve our community involvement strategy for our attraction and retention ◆◆ Continue to measure employee engagement and create a common understanding of the vision and values ◆◆ Create a work environment that recognises, respects and values differences ◆◆ Establish a cross-divisional OHS Steering Committee and strategy ◆◆ Review OHS capabilities and develop a training plan Charter Hall Group The chiller plant room at 2 Park Street, Sydney, New South Wales continues to be a major focus area for energy savings for the building and our tenants Sustainable business Environment Our people Community Our goal To maximise our customer and investor satisfaction through operational excellence and by delivering long-term value. To actively work to reduce our consumption of natural resources. To create a safe and engaging environment that attracts, develops, retains and supports our people. To make a positive contribution to the communities where we work. Our key issues ◆◆ Aligning our business operations with our stakeholders’ ◆◆ To improve the energy efficiency of our managed properties long-term interests and reduce carbon emissions ◆◆ Keeping stakeholders well informed at all times ◆◆ To conserve water in our managed properties ◆◆ Longevity of business success ◆◆ Being a trusted partner by stakeholders ◆◆ Enhancing corporate governance practices ◆◆ To reduce the waste produced ◆◆ To improve the environmental performance of our properties What we planned to do in FY12 ◆✓ Increase the transparency of our sustainability performance disclosure ◆✓ Monitor satisfaction through tenant surveys across our commercial and industrial portfolios ◆✓ Participate in sustainability ratings to enable benchmarking of our approach and performance ◆✓ Continue to implement the UN Principles of Responsible Investment ◆✓ Improve the coverage of our environmental performance data and refine metrics and targets to allow greater transparency of reporting ◆✓ Complete energy road maps for all asset classes where we have operational control ◆✓ Continue to integrate sustainability considerations into our asset business plans ◆◆ Attract, retain and develop high performance teams ◆◆ Respect and accept differences ◆◆ Protect the mental health and well-being of our employees ◆◆ Foster a zero harm environment ◆◆ Contributing to our local communities ◆◆ Engaging with communities local to our development activities ◆✓ Build on our career and development opportunities for all employees ◆✓ Sustain a high performance workforce through robust performance management ◆✓ Continue to drive sustainability as a strategic imperative by including sustainability performance objectives for all employees ◆✓ Diversity remains a priority. Develop targeted programs to address any barriers to diversity at each stage of the employee lifecycle ◆✓ Appoint a Charitable Steering Committee and develop a formal charitable giving program to positively contribute to our local communities ◆✓ Develop a community involvement strategy for our retail centres ◆✓ Continue to implement the local charity support program by our new development projects What we have achieved in FY12 ◆◆ Aligned our management team and people’s KPIs with our ◆◆ Benchmarked environmental performance of all managed updated business objectives commercial and retail assets ◆◆ Completed an Independent Review of our Code of Conduct ◆◆ Completed energy road maps for all commercial assets ◆◆ Embedded environmental, social and governance issues ◆◆ Included sustainability action plans in all commercial and into our business objectives retail asset business plans ◆◆ Established a learning and development framework for all employees with 3.64 courses attended per employee ◆◆ Charitable Steering Committee developed a charitable giving framework for the Group ◆◆ Over 75% of our people attended sustainability workshops ◆◆ Donated over $228,000 to good causes through our to increase their understanding of sustainability issues charitable giving program ◆◆ Implemented a talent review and succession ◆◆ Raised over $56,000 through our development projects ◆◆ Upgrade our website to provide an improved interface for ◆◆ Complete NABERS Energy ratings on all eligible retail centres ◆◆ Develop an efficient and effective recruitment framework planning process ◆◆ Reviewed and updated our performance management system to strengthen alignment with Charter Hall’s strategic objectives ◆◆ Aligned our organisational structure to meet our strategic objectives ◆◆ Developed a Diversity and Inclusive strategy including targets for increasing women in leadership positions ◆◆ Implemented online safety incident reporting tool across our retail business ◆◆ Develop leaders who effectively build skills, knowledge and engagement, and consistently deliver on our Group strategy ◆◆ Continue to provide opportunities for our people to develop their roles and future careers local charity support program ◆◆ Launched a Charter Hall workplace giving program for all employees ◆◆ Implemented a volunteer program that provides an additional paid leave day each year ◆◆ Improving the success of Charter Hall’s volunteer program by increasing the number of volunteer opportunities available to our employees ◆◆ Increase staff participating in our workplace giving program ◆◆ Improve our internal communications and staff awareness of to attract high calibre talent community programs ◆◆ Create a remuneration strategy that drives performance, is consistent and fair, and is competitive in terms of employee attraction and retention ◆◆ Continue to measure employee engagement and create a common understanding of the vision and values ◆◆ Create a work environment that recognises, respects and values differences ◆◆ Establish a cross-divisional OHS Steering Committee and strategy ◆◆ Review OHS capabilities and develop a training plan ◆◆ Further evolve our community involvement strategy for our retail centres 15 ◆◆ Launched Charter Hall Advantage, our platform for tenant engagement and communication ◆◆ Expanded our sustainability reporting through Charter Hall Group’s Corporate Responsibility & Sustainability (CR&S) Report 2012, to be released in December 2012 ◆◆ Responded to Carbon Disclosure Project 2012 Our priorities for FY13 ◆◆ Progress our stakeholder engagement approach to provide ◆◆ Reduce energy usage by 4% and water usage by 2.5% greater consistency and better inform our business in our retail funds in 2013 ◆◆ Further the accuracy and consistency of our CR&S reporting ◆◆ Establish energy and water performance targets for all and seek third-party assurance in 2013 commercial assets our stakeholders with Charter Hall ◆◆ Improve the coverage and robustness of our waste ◆◆ Launch our revised Code of Conduct to ensure we instil recycling data our ethics and values across our people ◆◆ Continue to review our corporate governance policies and business travel ◆◆ Track the carbon emissions associated with our framework against industry standards ◆◆ Undertake a review of our supplier chain to determine opportunities to influence CR&S outcomes Annual Report 2012 The Board Kerry Roxburgh Chairman Age: 70 Kerry joined the Charter Hall Board in August 2005 and became Chairman in October 2005. He is also Chair of the Nomination Committee, a member of the Audit, Risk and Compliance Committee and a member of the Investment Committee. Kerry has some 50 years of business experience, most notably as co-founder of E*TRADE Australia (where he was CEO and Chairman) and Executive Director of the Hong Kong Bank of Australia Group (where he was Head of Corporate Finance and Executive Chairman of James Capel Australia). Prior to this, he practised as a Chartered Accountant. Kerry is currently the Lead Independent Non-Executive Director of Ramsay Health Care Ltd, a Non-Executive Director of the Medical Indemnity Protection Society Group and of MIPS Insurance. He is the Chairman of Tyro Payments, of Tasman Cargo Airlines and TEKTUM. He is the Deputy Chairman of Marshall Investments. Kerry is also a Member of the Advisory Boards of AON Insurance and of Built Pty Ltd. Kerry is a Practitioner Member of the Stockbrokers Association of Australia, and holds a Bachelor of Commerce degree, and an MBA. Roy Woodhouse Deputy Chairman Age: 65 David Deverall Non-Executive Director Age: 46 Roy joined the Charter Hall Board as Deputy Chairman in July 2004. Roy is a member of the Remuneration and Human Resources Committee, the Nomination Committee, and the Investment Committee. 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 Asia Pacifi c. Roy co-founded KFPW, a joint venture with PwC specialising in outsourcing. Roy is Chairman of National Recycling Company and is a Fellow of the Australian Institute of Company Directors (AICD). Anne Brennan Non-Executive Director Age: 51 Anne joined the Charter Hall Board in October 2010, and is presently the Chair of the Remuneration and Human Resources Committee and a member of the Audit, Risk and Compliance Committee. With over 25 years’ professional experience, Anne has held a variety of senior management and executive roles in large corporates and professional services fi rms. She has particular expertise in mergers and acquisitions, fi nancial management, treasury, audit, risk management, tax, investor relations and ASX and statutory reporting. Anne is currently a Director of Argo Investments Ltd, Echo Entertainment Ltd, Myer Holdings Ltd and Nufarm Ltd. Anne holds a Bachelor of Commerce (Hons), is a Fellow of the Institute of Chartered Accountants Australia, and is a Fellow of the AICD. David joined the Charter Hall Board in May 2012, and is presently a member of the Audit, Risk and Compliance Committee. He has extensive experience in fi nancial services, funds management and strategy, having held previous positions as CEO of Perpetual Ltd, Chairman and Director of The Financial Services Council, and Group Head of Funds Management and Head of Strategy at Macquarie Group. David has recently been appointed CEO of Hunter Hall International Ltd, and remains Managing Director of Deverall Advisory, a consulting fi rm he founded. David holds an MBA and a Bachelor of Engineering (Mechanical), and is a member of the AICD. Glenn Fraser Non-Executive Director Age: 55 Glenn joined the Charter Hall Board in April 2005, and until August 2012 was Chairman of the Audit, Risk and Compliance Committee. Glenn specialises in infrastructure and property projects, and is a member of Transfi eld Holdings Advisory Board, having been instrumental in Transfi eld Holdings’ acquisition of its interest in Charter Hall and its expansion and listing in 2005. Glenn holds a Bachelor of Commerce, and is a member of the Institute of Chartered Accountants and the AICD. Glenn retired from the Board on 15 August 2012 due to family reasons. 16 Charter Hall Group Peter Kahan Non-Executive Director Age: 53 David Harrison Joint Managing Director Age: 46 David Southon Joint Managing Director Age: 46 David joined the Charter Hall Board as Joint Managing Director in August 2006. He is a member of the Group’s Valuation Committee and Investment Committee, and holds various roles for Charter Hall related entities. He has over 25 years of property industry experience. David is jointly responsible for all aspects of the Charter Hall business, with specifi c focus on investment management, corporate transactions and property investment activities. He also substantially contributes to investment origination, capital raisings and structuring of transactions. David is directly responsible for overseeing the operation of the investment management divisions, including the listed REITs, wholesale unlisted and retail unlisted divisions, together with investor relations. David is a Director of responsible entities Charter Hall Retail Management Limited, Charter Hall Offi ce Management Limited, and Charter Hall Direct Property Management Limited. As a co-founder of Charter Hall, David joined the Charter Hall Board as Joint Managing Director in August 2006. He is a member of the Group’s Valuation Committee and Investment Committee, is Chair of the Diversity Committee, and holds various roles for Charter Hall related entities. He has over 25 years of property industry experience. David is jointly responsible for all aspects of the Charter Hall business, and is primarily responsible for overseeing wholesale opportunistic funds, the operation of the development services division, project origination, project strategy and the formulation and implementation of Group’s strategy. David is a Director of responsible entities Charter Hall Retail Management Limited, Charter Hall Offi ce Management Limited, and Charter Hall Direct Property Management Limited, and is a member of the opportunistic Funds’ Investment Committees. Peter joined the Charter Hall Board in October 2009, following an investment in Charter Hall by The Gandel Group. Peter is the Deputy Chairman and a director of Gandel and has over 18 years of property and funds management experience. He joined Gandel in 1994, became the Group’s Finance Director in 2001 and was CEO from 2007 to 2012. Prior to this, Peter worked as a Chartered Accountant and held senior fi nancial roles in various industry sectors. Peter holds Bachelor of Commerce and Bachelor of Accountancy degrees and is a member of the Institute of Chartered Accountants Australia and the AICD. Colin McGowan Non-Executive Director Age: 66 Colin joined the Charter Hall Board in April 2005, and is presently the Chair of the Group’s Valuation Committee, and is a member of the Remuneration and Human Resources Committee, the Nomination Committee, and the Group’s Investment Committee. Colin was formerly CEO of the listed AMP Diversifi ed Property Trust, Executive Vice President of Bankers Trust (AUS), 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 Finsia. Annual Report 2012 17 At Charter Hall we aim to give investors excellent service through regular, concise and relevant communications. To fi nd out more about your investment in Charter Hall Group, contact the Investor information line on 1800 331 356. Investor information How do I invest in Charter Hall? Charter Hall Group securities are listed on the Australian Securities Exchange (ASX:CHC). Securityholders will need to use the services of a stockbroker or an online broking facility to invest in Charter Hall. Where can I fi nd more information about Charter Hall? Charter Hall’s website, www.charterhall.com.au contains extensive information on our Board and management team, corporate governance, sustainability, our property portfolio and all investor communications including distribution and tax information, and reports and presentations. The website also provides information on the broader Charter Hall Group including other managed funds available for investment. You can also register your details on our website to receive ASX announcements by an email alert as they are being released. To register your details, please visit our website at http://www.charterhall.com.au/ Subscribe-to-ASX-releases. Can I receive my Annual Report electronically? Charter Hall provides its annual report in both PDF and online formats (HTML). You can elect via your Investor login to receive notifi cation that this report is available online. Alternatively, you can elect to receive the report in hard copy. Can I receive my distribution via direct credit rather than cheque? You can receive your distribution payment effi ciently and safely by having it direct credited to your bank account. If you wish to receive your distribution by direct credit, please complete the appropriate form which can be obtained from and returned to the registry, or alternatively update your details directly online at www.charterhall. com.au at ‘Check your holding online’ in the Investor Centre. 18 Charter Hall Group How do I complete my annual tax return for the distributions I receive from Charter Hall? At the end of each fi nancial year, we issue securityholders with an Annual Taxation Statement. This statement includes information required to complete your tax return. The distributions paid in February and August are required to be included in your tax return for the fi nancial year the income was earned, that is, the distribution income paid in August 2012 should be included in your 2012 fi nancial year tax return. How do I make a complaint? Securityholders wishing to lodge a complaint should do so in writing and forward it to the Compliance Manager, Charter Hall Group at the address shown in the Directory. In the event that a complaint cannot be resolved within a reasonable time frame (usually 45 days) or you are not satisfi ed with our response, you can seek assistance from the Financial Ombudsman Service (FOS), an independent dispute resolution scheme available to those investors who have fi rst raised their complaint with us and who remain dissatisfi ed. FOS’s contact details are below: Financial Ombudsman Service GPO Box 3 Melbourne Vic. 3001 1300 780 808 Tel: +61 3 9613 6399 Fax: Email: info@fos.org.au Website: www.fos.org.au Can I reinvest my distribution? The Distribution Reinvestment Plan (DRP) allows you to have your distributions reinvested in additional securities in Charter Hall, rather than having your distributions paid to you. In recognition of the Group’s strong liquidity position, however, the DRP facility has been suspended. If and when Charter Hall reinstates a DRP, we will notify all securityholders. Do I need to supply my Tax File Number? You are not required by law to supply your Tax File Number (TFN), Australian Business Number (ABN) or exemption. However, if you do not provide these details, withholding tax may be deducted at the highest marginal rate from your distributions. If you wish to provide your TFN, ABN or exemption, please contact Link Market Services on 1300 303 063 or your sponsoring broker. You can also update your details directly online at www.charterhall.com. au at ‘Check your holding online’ in the Investor Centre. Left to right: Adrian Taylor, Head of Wholesale Partnerships, Richard Stacker, Head of Direct Property and Natalie Devlin, Head of People Annual Report 2012 19 Corporate governance statement Our commitment to corporate governance 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) is committed to delivering strong and sustainable returns (through property investment and management) to securityholders and investors. The Board of Charter Hall recognises the importance of good governance in achieving these corporate objectives, in discharging its responsibilities to all stakeholders and in addressing the broader role of being a good corporate citizen. Charter Hall’s governance framework is designed to ensure that the Group is effectively managed, statutory obligations are met, and Charter Hall’s culture of corporate integrity is reinforced. Due consideration has been given to the ASX Corporate Governance Principles and Recommendations (2nd Edition) published in June 2012 by the ASX Corporate Governance Council, and the Group confirms full adherence to these principles and recommendations for FY12 (the reporting period). This statement provides a summary of the corporate governance practices, systems and processes in place within Charter Hall, which were followed throughout the reporting period. Charter Hall’s key corporate policies can be found on its website at www.charterhall.com.au (Charter Hall’s website). Corporate governance foundations The Board The Board of Charter Hall is committed to effectively representing and promoting the Group, and thereby adding long-term value to all securityholders. The Board is accountable to securityholders for the management of Charter Hall’s business and affairs and as such is responsible for the overall strategy, governance and performance of the Group. To clarify the roles and responsibilities of directors and management, and to assist the Board in discharging its responsibilities, Charter Hall has established a governance framework which sets out the functions reserved to the Board and provides for the delegation of functions to Board Committees and management. Those functions and responsibilities reserved to the Board are set out in the Board Charter, which is available to view in the ‘Corporate Governance’ section of Charter Hall’s website. The Board has delegated day-to-day management functions to the Joint Managing Directors, and senior executives, who are required to work within authority limits and delegations set out in a ‘Delegations of Authority’ document. This document is approved by the Board, and is an internal working document. Non-executive directors have been appointed under a formal letter which sets out the key terms and conditions of that appointment. Each Joint Managing Director has a formal job description and letter of appointment which sets out his duties and obligations, rights, responsibilities and entitlements. 20 Charter Hall Group Governance framework The diagram below summarises Charter Hall’s governance framework, including the functions reserved for the Board and those carried out by the standing Board Committees. Charter Hall Board Formally delegates certain functions to Board Committees and to Management via formal Board and Committee charters. Directly retains responsibility for a range of matters including: ◆◆ overseeing the Group’s strategic direction ◆◆ monitoring the operational and financial position and performance of the Group ◆◆ overseeing the Group’s risk management framework ◆◆ setting the financial and informational reporting requirements from Management to the Board ◆◆ reporting to securityholders and the ASX ◆◆ monitoring the effectiveness of, and compliance with, policies governing the operation of the Group ◆◆ reviewing and approving the annual operating budgets ◆◆ determining dividend policy and approving dividends ◆◆ approving decisions concerning the capital of the Group ◆◆ overseeing and evaluating the performance of the Joint Managing Directors and other senior executives in the context of the Group’s strategies and objectives Nomination Committee Key functions: To review and make recommendations on: ◆◆ Board size and composition ◆◆ criteria for Board membership ◆◆ appointment and re-election of directors ◆◆ Board succession Audit, Risk and Compliance Committee Key functions: To oversee and review: ◆◆ the internal control and accountability systems ◆◆ the financial reporting process, including significant accounting issues and judgements ◆◆ the appointment and performance of the Auditor, including the scope and effectiveness of audits ◆◆ the internal systems of risk management and control (ensuring that material business risks are identified) ◆◆ compliance processes to meet legislative and regulatory requirements Remuneration and Human Resources Committee Key functions: To review and make recommendations on: ◆◆ executive remuneration and incentive policies ◆◆ remuneration for non-executive directors ◆◆ executive contracts ◆◆ key executive appointments and terminations ◆◆ employee equity based plans ◆◆ talent management and succession planning ◆◆ key human resources policies and practices ◆◆ diversity and inclusion objectives Joint Managing Directors Chief Financial Officer Other senior executives Company Secretary Risk Management Framework Annual Report 2012 21 Corporate governance statement Board Committees The Board has established three standing Board Committees to assist the Board in the execution of its responsibilities. Each Committee operates under a specific charter, which can be found in the ‘Corporate Governance’ section of Charter Hall’s website. In accordance with their respective charters, each Board Committee must have at least three non-executive members, be comprised of a majority of ‘independent’ directors, and be chaired by an ‘independent’ non-executive director. Director independence is discussed on page 24 of this statement. During the reporting period, the membership of each Board Committee was as follows: Board Committee Membership Audit, Risk and Compliance Remuneration and Human Resources Nomination Glenn Fraser (Chair), Anne Brennan, Kerry Roxburgh Anne Brennan (Chair), Colin McGowan, Roy Woodhouse, Peter Kahan (alternate member) Kerry Roxburgh (Chair), Roy Woodhouse, Colin McGowan, Peter Kahan (alternate member) The membership of the Board Committees will change from time to time, depending on the needs of the Board and the directors’ rotation policy. Following Glenn Fraser’s retirement from the Board on 15 August 2012, the membership of each Board Committee was revised to the following: Board Committee Membership Audit, Risk and Compliance Remuneration and Human Resources Nomination Anne Brennan (Acting Chair), Kerry Roxburgh, David Deverall Anne Brennan (Chair), Colin McGowan, Peter Kahan Kerry Roxburgh (Chair), Roy Woodhouse, Colin McGowan, Peter Kahan (alternate member) The membership of the Board Committees remains under review as the Board seeks to fill the non-executive director position left vacant by the departure of Glenn Fraser. The number of Board and Board Committee meetings held during the reporting period and the number of meetings that were attended by each of the directors is presented in the Directors’ Report on page 41 of this Annual Report. Management The Board has delegated the responsibility for day-to-day management of the Group to the Joint Managing Directors, who are assisted by an executive management team. The diagrams below present the executives who report to the Joint Managing Directors. David Harrison has specific responsibility for the investment management divisions of the Group, David Southon has specific responsibility for the service divisions of the Group, and they share responsibility for all shared services. David Harrison Joint Managing Director Shared Services* Investment Management Divisions* People Natalie Devlin Finance & IT Paul Altschwager Direct Property Richard Stacker Wholesale Pooled Funds Andrew Glass Wholesale Partnerships Adrian Taylor Retail REIT Scott Dundas Investor Relations Nick Kelly * Heads of the Investment Management Divisions and Shared Services form the executive management team. David Southon Joint Managing Director Shared Services* Service Divisions# People Natalie Devlin Finance & IT Paul Altschwager Marketing & Communications Asset Management Property Management Development Management # Heads of the Service Divisions are not part of the executive management team. 22 Advisory, Transactions & Leasing Charter Hall Group The Joint Managing Directors must consult with the Chairman or Deputy Chairman on any matters which the Managing Directors consider are of such a sensitive, extraordinary or strategic nature as to warrant attention of the Board, regardless of value. The authorisation thresholds for the control of expenditure and capital commitments have been established and are defined in the Group’s internal ‘Delegations of Authority’ document. Performance of senior executives The Group defines its senior executives as the Joint Managing Directors and its executive management team (identified above as the divisional heads of shared services and investment management). The senior executives are the Key Management Personnel (KMPs) listed in the Remuneration Report, which forms part of the Directors’ Report. A combination of financial and non-financial key performance indicators (KPIs) are used to monitor senior executive performance. Details of the KPIs used for the Joint Managing Directors in FY12 are set out in the Remuneration Report on page 48 of this Annual Report. The individual performance of the Joint Managing Directors is formally assessed on a bi-annual basis by the Board, based upon advice from the Remuneration and Human Resources Committee. All KPIs are carefully considered by the Remuneration and Human Resources Committee, which evaluates the performance of each Joint Managing Director individually and makes recommendations to the Board. Executives reporting to the Joint Managing Directors are assessed bi-annually against financial and non-financial KPIs. Assessments are made by either or both of the Joint Managing Directors depending on the reporting lines. Executive performance results are reported to the Remuneration and Human Resources Committee and the Board. This performance evaluation process was in place, and was followed, for the reporting period. Each senior executive has a formal job description and a letter of appointment that sets out his/her duties and obligations, rights, responsibilities and entitlements. Compliance with the Group’s Code of Conduct is mandatory for all employees and directors. Senior executives are provided with access to continuing education to update and enhance their skills and knowledge. An induction program exists for new senior executives to ensure they gain an understanding of the Group’s financial position, strategies, operations and risk management policies, as well as the responsibilities and roles of the Board and Management. Board structure Charter Hall aims to maintain a Board that comprises directors with a broad range of skills, expertise and experience who are able to effectively understand and manage the issues arising in Charter Hall’s business activities, and to review and challenge the performance of Management to optimise the Group’s performance. Throughout the reporting period, the Board was comprised of two executive directors and six non-executive directors. Of those six non-executive directors, a majority were independent directors (‘independence’ is discussed on page 24 of this statement). David Deverall joined the Board as a seventh non-executive and independent director on 7 May 2012. Glenn Fraser retired from the Board on 15 August 2012. Name Position Independent (Yes/No) Appointed Kerry Roxburgh Roy Woodhouse Anne Brennan David Deverall Glenn Fraser* David Harrison Peter Kahan Colin McGowan David Southon Chairman, Non-Executive Director Deputy Chairman, Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Joint Managing Director, Executive Director Non-Executive Director Non-Executive Director Joint Managing Director, Executive Director * Glenn Fraser retired from the Board on 15 August 2012 for family reasons. Yes Yes Yes Yes Yes No No Yes No 12 April 2005 6 April 2005 6 October 2010 7 May 2012 6 April 2005 30 August 2006 1 October 2009 6 April 2005 30 August 2006 Details of the background, particular qualifications, expertise and period of service of each director are set out in the Directors’ Report on pages 38 to 40 of this Annual Report. Annual Report 2012 23 The Chairman of the Board The Chairman is responsible for leadership of the Board and for the efficient organisation and conduct of the Board. The Chairman seeks effective contributions from all directors and promotes constructive and respectful relations between directors, and between the Board and Management. The role of the Chairman is further defined in the Board’s Charter, which is available to view under the ‘Corporate Governance’ section of Charter Hall’s website. Director independence The Board considers that a director is independent if he/she is independent of Management and free of any business or other relationship that could materially interfere with, or could reasonably be perceived to materially interfere with, the exercise of unfettered and independent judgement. Directors are required to declare their interests and the Board evaluates the materiality of any interests or relationships that could be perceived to compromise independence on a case by case basis, having regard to the circumstances of each director. Directors are expected to be meticulous in their disclosure of any material personal or family contract or relationship. Directors must also strictly adhere to constraints on their participation and voting in relation to matters in which they may have an interest, in accordance with the Corporations Act and the Group’s policies. The Board regularly assesses whether directors are independent, and each director is required to provide information relative to this assessment. It is noted that David Harrison and David Southon, due to their employment by the Group in an executive capacity, are not independent. In addition, Peter Kahan is considered not to be independent due to his role as Deputy Chairman and director of The Gandel Group, a substantial securityholder of Charter Hall. Independent decision making Directors are entitled to seek independent professional advice at the expense of the Group as required in the furtherance of their duties and in relation to their functions (including their Board Committee functions), subject to an estimate of costs being first approved by the Chairman or Deputy Chairman as reasonable. Non-executive directors of the Board meet regularly without Management present, in order to consider matters independently of Management. Director appointments The Nomination Committee reviews, and where appropriate, makes recommendations to the Board on the size and composition of the Board, including assessment of necessary and desirable competencies of Board members. The Committee’s Charter is available to view under the ‘Corporate Governance’ section of Charter Hall’s website. The Committee has adopted composition and membership criteria for the Board. A majority of the directors on the Board must be ‘independent’. Directors are to encompass an appropriate range of qualifications and expertise. Directors nominated for election require approval of the Board and must stand for re-election at the next General Meeting of securityholders. Also, guidelines have been adopted for director selection and nomination to the Board. Foremost is integrity, particular expertise (sector and functional) and the degree to which he/she complements the skill set of the existing Board members, his/her reputation and standing in the market, and in the case of prospective independent directors, the actual and perceived independence from Charter Hall. Presently, the Board and the Nomination Committee have engaged the services of an external adviser to assist in the development of a Board skills matrix. This matrix is used to identify any gaps in the skills and experience of the directors on the Board for the purposes of identifying the search and assessment criteria for new directors. The Committee’s current membership is set out on page 22 of this statement and the independence of the members is provided on page 23 of this statement. Details of the Committee’s meetings for the reporting period, and the attendance by members, are provided in the Directors’ Report on page 41 of this Annual Report. Board performance The following structures are in place to support the Group’s directors in performing their duties: ◆◆ an induction program for new directors on the Board; ◆◆ a formal annual performance self-assessment of the Board, Board Committees, and individual directors, externally facilitated this year; and ◆◆ access by directors to continuing education to ensure that their skills and knowledge are updated and enhanced. The procedure for evaluating Board performance (for the reporting period) required each director to complete an externally facilitated performance evaluation. These evaluations were submitted to an independent party who collated and provided summarised and individual results to the Chairman, who then distributed the results to the full Board. An external consulting firm was engaged for this process. Based on the results of the survey and the Chairman’s feedback, the Board as a whole discussed and analysed Board and Committee performances during the year, and directors engaged in one-on-one sessions with the Chairman. These discussions and sessions enabled the directors to consider suggestions for change and/or improvement. To ensure that directors are well-placed to discharge their duties effectively, they are provided in advance of Board meetings with papers containing sufficient information to enable informed discussion of all agenda items. Access to information The Joint Managing Directors, senior executives and the Company Secretary supply the Board with regular reports and information to enable the Board to discharge its duties. Directors are entitled to request additional information where they consider such information is necessary to make informed decisions. Company Secretary The Company Secretary plays an important role in supporting the effectiveness of the Board by ensuring that Board policy and procedures are followed, and coordinating the timely completion and dispatch of the Board agenda and briefing material. All directors have access to the Company Secretary. The appointment and removal of the Company Secretary is a matter for decision by the Board as a whole. The Company Secretary is accountable to the Board, through the Chairman, on all governance matters. 24 Corporate governance statementCharter Hall Group Ethical and responsible decision making Charter Hall is committed to being a good corporate citizen and has a robust framework of policies in place to achieve this. Code of conduct The Board has adopted a Code of Conduct which forms the basis for expected behaviour by Board members and all staff. It 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 confident that the Group conducts its affairs honestly and in accordance with ethical values and practices. The Code sets the standards for dealing ethically with employees, investors, customers, regulatory bodies and the financial 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 specifically 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. Staff are trained regularly on matters pertaining to ethical behaviour in the workplace. Topics covered during the reporting period included the key aspects of the Code, as well as a refresher course on fraud risk management, insider trading prohibitions and anti-money laundering and counter-terrorism financing. A summary of Charter Halls’ Code of Conduct and the Fraud Risk Management Policy are available to view under the ‘Corporate Governance’ section of Charter Hall’s website. A full copy of the Charter Hall Code of Conduct is also available upon request from the Company Secretary. Managing conflicts Charter Hall has implemented a governance framework to safeguard the interests of investors in the investment vehicles, which at times may conflict with those of Charter Hall as sponsor of related vehicles. As part of this framework, the Group has established a Related Party Transactions Policy for identifying and managing conflicts. The Policy provides guidance on the management of conflicts of interest arising between Charter Hall managed vehicles and their related parties and requires that: ◆◆ related party transactions are identified and conducted on arm’s length terms; ◆◆ related party transactions are tested by reference to whether they meet market standards; and ◆◆ decisions about transactions between Charter Hall managed vehicles and Charter Hall or its affiliates are made by independent members of the Board or Investment Committees (where they have been appointed). The Policy also contains detailed guidelines for the Board in dealing with conflicts, including that: ◆◆ 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 to be present at a Board meeting during consideration of the matter and subsequent vote unless the Board (excluding the relevant Board member) resolves otherwise; and ◆◆ Board members with a conflict not involving a material personal interest may be required to absent themselves from the relevant deliberations of the Board. The Policy is available to view under the ‘Corporate Governance’ section of Charter Hall’s website. The Group also has a conflicts protocol for dealing with competing deals (e.g. acquisitions, leasing). Such deals may 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. Personal conflicts that might arise generally for directors and staff are covered by the Code of Conduct referred to earlier in this statement. Securities trading The Group has in place a Securities Trading Policy which regulates the manner in which directors, senior executives and all staff involved in the management of the Group can deal in Charter Hall securities. The Policy specifies the periods in which personal trading is not permitted, the restrictions that apply to directors and senior executives, and the procedures for obtaining prior clearance for trading (when a blackout is not in effect). Staff compliance with the Policy is monitored under Charter Hall’s risk management framework. The Policy is subject to annual review by the Board, and has been lodged with the ASX. The Securities Trading Policy is available to view under the ‘Corporate Governance’ section of Charter Hall’s website. Sustainability Charter Hall is committed to playing a leading role in achieving a sustainable future and the Board has adopted a Sustainability Policy which forms the basis for integrating environmental and social governance issues into the Group’s activities. This Policy is available to view under the ‘About Us’ section of Charter Hall’s website. In addition, Charter Hall’s sustainability objectives are outlined on page 14 of this Annual Report. Diversity The Board is committed to fostering a diverse and inclusive workforce in pursuit of the achievement of Charter Hall’s corporate goals. Charter Hall considers diversity in the workplace as respecting and valuing differences based on a wide range of personal characteristics including gender, age and ethnicity, as well as diversity of thought and background. Charter Hall believes that people with different experiences, backgrounds and perspectives can provide unique viewpoints and innovative solutions from which the business can benefit. In particular, the promotion of greater gender diversity broadens the pool for recruitment of high quality directors and employees, is likely to support employee retention, encourage greater innovation, allows the Group to connect with its diverse client base, provides it with a balanced perspective, and is a socially and economically responsible governance practice. The Board has adopted a Diversity and Inclusion Policy, which is available to view under the ‘Corporate Governance’ section of Charter Hall’s website. This Policy, initially adopted in November 2010, was reviewed and updated by the Board during the reporting period. Management has established a Diversity Committee, comprising senior executives within the Group and chaired by one of the Joint Managing Directors. The aim of this Committee is to implement the specific diversity strategies and objectives of the Board. 25 Annual Report 2012 FY12 As at 30 June 2012, the proportion of women on the Board was 11%, in senior management was 18%, and across the Group was 49%. During the reporting period, the following work was achieved against the objectives set by the Board: Objective Achievements Selecting and appointing directors from a diverse pool of talent Recruitment of senior executives ◆◆ Developed and implemented an appointment process for future directors taking into account diversity of background and gender ◆◆ Defined and implemented a recruitment process which considers diversity of background as well as skills and experience Addressing impediments to diversity ◆◆ Implemented Appropriate Workplace Behaviour for all employees Identify, support and develop talented individuals with leadership potential across spectrum of gender, ethnicity and age Identifying ways to entrench diversity as a cultural priority across the Group Setting targets for women’s participation in the Board, senior management and across all business ◆◆ Updated the parental leave policy ◆◆ Created a working from home policy ◆◆ Developed and implemented a learning and development framework for all employees ◆◆ Developed Study Assistance, External Training and Professional Membership policies ◆◆ Reviewed and implemented changes to the Diversity and Inclusion Committee composition to create a greater focus on diversity and inclusion ◆◆ Progress has been made in terms of achieving this objective through the achievement of the objectives above ◆◆ Further focus on integrating diversity as a cultural priority will continue in FY13 ◆◆ Targets were set by the Board for increasing women in leadership, management and in business related roles Our focus for FY13 The Board has adopted the following objectives, which Management (through its Diversity Committee) will implement over a three year period up to 2015: ◆◆ increase the percentage of women in leadership and business related roles; and ◆◆ promote a culture that values diversity, inclusion and flexibility. To achieve these objectives in the forthcoming financial year, Charter Hall will be focusing on the following diversity and inclusion strategies: Strategy Actions Leadership Accountability Recruitment Communication Development Leaders to drive diversity outcomes and appropriate behaviours Integrate Charter Hall’s diversity commitment into every aspect of recruitment Communicate diversity policy and initiatives internally and externally Leadership development on diversity and targeted programs for women Charter Hall will measure its success in achieving its targets through: ◆◆ employee data such as workforce profile data, learning and development, talent and succession, flexible work practices and recruitment data; ◆◆ annual external benchmarking of the Group’s diversity initiatives and targets against our competitors; ◆◆ employee surveys to invite better understanding of what it takes to create a diverse and inclusive workplace; and ◆◆ engagement, retention and progression of an increased number of women in our business. 26 Corporate governance statementCharter Hall Group Financial integrity The Board has set in place a structure of review and authorisation to ensure that the Group’s financial information is presented truthfully and factually. Audit, Risk and Compliance Committee The Audit, Risk and Compliance Committee is responsible for assisting the Board in discharging its responsibilities to safeguard the integrity of Charter Hall’s financial reporting and the system of internal control. A key component of the Committee’s role is to provide advice and recommendations to the Board with respect to the accounting, audit, financial and risk management practices of the Group. The Committee’s Charter is reviewed annually by the Board, and is available to view under the ‘Corporate Governance’ section of Charter Hall’s website. The Committee’s current membership is set out on page 22 of this statement and the independence of the members is provided on page 23 of this statement. Details of the Committee’s meetings for the reporting period, and the attendance by members, are provided in the Directors’ Report on page 41 of this Annual Report. The Board regularly assesses and has determined that members of the Audit, Risk and Compliance Committee, collectively have an appropriate level of financial and property industry expertise to discharge their responsibilities. External Auditor The Board has appointed PricewaterhouseCoopers (PwC) as the Group’s Auditor. PwC is expected to carry out its responsibilities in accordance with Australian law and audit firm policy in respect of partner rotation. The Auditor is invited to attend meetings of the Audit, Risk and Compliance Committee, and also meets privately with Committee members at least twice a year. In order to ensure the independence of the Auditor, the Board has adopted an Auditor Independence Policy requiring that: ◆◆ the Auditor remain independent from Charter Hall; ◆◆ the Auditor monitor its independence and report to the Board every six months on its continuing independence; ◆◆ non-audit assignments undertaken by the Auditor are in accordance with the Policy; and ◆◆ all non-audit assignments are reported to the Audit, Risk and Compliance Committee. The Auditor attends the Group’s annual general meeting and is available to answer securityholder questions on the conduct of the audit, and the preparation and content of the Auditor’s Report. Charter Hall’s Auditor Independence Policy is available to view under the ‘Corporate Governance’ section of Charter Hall’s website. Internal Audit The Board places considerable importance on maintaining a strong control environment through an organisation structure with clearly drawn lines of accountability and authority. At this time, Charter Hall has not implemented an internal audit function; however, the Board has agreed with Management that an internal audit function (whether internally based or provided through an external service provider) will be introduced in FY13. Disclosure Charter Hall strives to provide timely, open and accurate information to all stakeholders, including securityholders, regulators and the wider investment community. This includes presenting a balanced approach to disclosure. Charter Hall has a Continuous Disclosure and Communications Policy which summarises the internal processes to ensure compliance with ASX Listing Rules and Australian law in respect of continuous disclosure. The Policy includes procedures for dealing with potentially price-sensitive information, including referral to the Joint Managing Directors and Company Secretary, and the Board where necessary, for a determination as to the appropriate disclosure required. Charter Hall’s Company Secretary is the ASX liaison person. The Continuous Disclosure and Communications Policy is available to view under the ‘Corporate Governance’ section of Charter Hall’s website. Securityholder communication Charter Hall’s Continuous Disclosure and Communications Policy also contains information on the methods of providing timely and relevant information to securityholders, including: ◆◆ the right for investors to receive an Annual Report and updates which keep them informed of Charter Hall’s performance and operations; ◆◆ placement under the ‘News Centre’ section of Charter Hall’s website of market-sensitive information in the form of ASX announcements or webcasts. Investors also have the ability under this section of the website to register to receive email alerts on the Group’s announcements to the ASX; ◆◆ placement under the ‘Investor Centre’ section of Charter Hall’s website of distribution and tax information, unit price performance, financial results information including the results webcast, investor presentations, past and current reports to securityholders and past securityholder meeting information; and ◆◆ presentations to investor roadshows that are required to be lodged with the ASX are uploaded to the ‘News Centre’ section of Charter Hall’s website. Charter Hall is required to hold an Annual General Meeting of securityholders, which is typically held between October and November. A full copy of the notice of meeting, including an explanatory memorandum on the resolutions, is placed under the ‘Investor Centre’ section of Charter Hall’s website. For securityholders who are unable to attend formal meetings to vote, proxies may be lodged online, by mail or by facsimile. Meetings are also webcast. Charter Hall’s Continuous Disclosure and Communications Policy is available to view under the ‘Corporate Governance’ section of Charter Hall’s website. Recent Annual Reports and financial results are available to view under the ‘Investor Centre’ section of Charter Hall’s website. Recent ASX announcements and investor webcasts are available to view under the ‘News Centre’ section of Charter Hall’s website. 27 Annual Report 2012 Risk management Management has implemented a Risk Management Framework (Framework) under the oversight of the Audit, Risk and Compliance Committee and the Board. This Framework sets the overall approach to risk management at Charter Hall and the functional elements of monitoring, assessment and reporting, as well as key participant responsibilities. Remuneration The Board has established a Remuneration and Human Resources Committee to assist the Board in implementing the Group’s human resources strategies. The Committee operates under a Charter approved by the Board, is comprised of only non-executive directors with a majority being ‘independent’, and is chaired by an independent director. In accordance with its Charter, the Committee is responsible for reviewing and reporting to the Board on the internal control and risk management systems of Charter Hall and assessing the information presented by Management. In addition, the Committee regularly assesses the adequacy of the Framework including Charter Hall’s compliance plans and systems, financial control systems and risk management policies and systems. Charter Hall’s Risk and Compliance Manager is responsible for daily risk and compliance processes across the business and monitors the efficiency of the Framework (including compliance systems) on an ongoing basis. The aim is to ensure that appropriate procedures, staff education and reporting arrangements are in place to support the Framework’s objectives. Management conducts an annual Operational Risk Self-Assessment (ORSA) where key risks and controls are considered and their effectiveness assessed. The results of this assessment are reported to the Audit, Risk and Compliance Committee and the Board. During the reporting period, Management reported to the Audit, Risk and Compliance Committee on the manner in which it manages its material risks, the effectiveness of the Framework and the results of the annual ORSA. The Board places considerable importance on maintaining a strong control environment through an organisational structure with clearly drawn lines of accountability and authority. In addition, the Board considers that an internal audit function would be beneficial to the Group, and is committed to implementing this function (internally or via external resources) within FY13. A summary of the Group’s Risk Management Framework is available to view under the ‘Corporate Governance’ section of Charter Hall’s website. JMDs and CFO assurance The Board has received assurance from the Joint Managing Directors and Chief Financial Officer that the Group’s consolidated financial statements are founded on a sound system of risk management and internal control and that the system is operating in all material respects in relation to financial reporting risks. This assurance is supported by a review and sign-off process from senior managers on the key items that make up the risk management and control systems. Broadly, the Committee is responsible for reviewing and making recommendations to the Board in respect of executive remuneration and incentive policies, equity based incentive schemes, diversity and inclusion objectives, talent management and succession planning and policies and procedures (covering recruitment, retention, performance measurement and termination). The Committee also reviews the remuneration of the non-executive directors, all key appointments and terminations to the executive management team (and other divisional heads), and the standard contractual terms applicable to Management. Stakeholder engagement is also a focus, as well as the disclosure of Charter Hall’s remuneration framework in public materials, such as this Annual Report. From a policy perspective, the Committee assists the Board in ensuring that: ◆◆ an appropriate human resources strategy is implemented to enable Charter Hall to deliver on its business strategy; ◆◆ remuneration policies and practices are in line with strategic goals and enables Charter Hall to attract and retain high calibre executives and directors who will create value for securityholders; ◆◆ directors and executives are fairly and responsibly remunerated having regard to the performance of Charter Hall, the performance of the executives and the general remuneration environment; ◆◆ Charter Hall has effective policies and procedures to attract, motivate and retain talented individuals to meet its needs; and ◆◆ people policies and practices align with Charter Hall’s vision, values and overall objectives, comply with the relevant legislation, reflect current governance and mitigate against operational, financial and reputational risk. The Committee’s current membership is set out on page 22 of this statement and the independence of members is discussed on page 23 of this statement. Details of meetings held and attendance by each Committee member are contained in the Directors’ Report on page 41 of this Annual Report. From time to time the Committee may commission the assistance of external consultants to ensure the Group’s remuneration policies remain appropriate, follow best practice and address the requirements of the Group’s stakeholders. Charter Hall’s Head of People and the Joint Managing Directors support the Committee by the provision of requested information and advice and are invited to attend meetings from time to time. Charter Hall distinguishes the structure of non-executive directors’ remuneration from that of executive directors and senior executives. Further information is provided in the Remuneration Report on pages 41 to 64 of this Annual Report. The Remuneration and Human Resources Committee’s Charter is available to view under the ‘Corporate Governance’ section of Charter Hall’s website. 28 Corporate governance statementCharter Hall Group Financial report for the year ended 30 June 2012 Annual Report 2012 29 Contents Directors’ report Auditor’s independence declaration Consolidated statements of comprehensive income Consolidated balance sheets Consolidated statement of changes in equity – Charter Hall Group Consolidated statement of changes in equity – Charter Hall Property Trust Group Consolidated cash flow statements 1. Summary of significant accounting policies 2. Financial risk management 3. Critical accounting estimates and judgements 4. Parent entity financial information 5. Segment information 6. Revenue 7. Expenses 8. Fair value adjustments 9. Income tax benefit 10. Distributions paid and payable 11. Cash and cash equivalents 12. Trade and other receivables 13. Assets classified as held for sale 14. Investments in associates at fair value through profit or loss 15. Derivative financial instruments 16. Inventories 17. Investments accounted for using the equity method 18. Intangible assets 19. Property, plant and equipment 20. Investment properties 21. Deferred tax assets 22. Trade and other payables 23. Provisions 24. Borrowings 25. Deferred tax liabilities 26. Provisions – non-current 27. Contributed equity 28. Reserves and accumulated losses 29. Non-controlling interest 30. Key management personnel 31. Remuneration of auditors 32. Commitments 33. Contingent liabilities 34. Related parties 35. Controlled entities 36. Investments in associates 37. Investments in joint ventures 38. Events occurring after the reporting date 39. Reconciliation of profit after tax to net cash inflow from operating activities 40. Earnings per security 41. Security-based benefits 42. Deed of cross guarantee Directors’ declaration Independent auditor’s report to stapled securityholders of Charter Hall Group and unitholders of Charter Hall Property Trust Group Unitholder analysis Corporate directory 31 67 68 70 72 73 74 75 82 87 88 89 93 93 94 94 95 96 96 99 100 100 101 101 101 102 103 104 105 106 106 111 112 112 114 115 116 120 121 121 122 123 126 132 135 135 136 137 140 142 143 145 147 30 Charter Hall Group Directors’ report for the year ended 30 June 2012 The Directors of Charter Hall Limited and the Directors of Charter Hall Funds Management Limited, the Responsible Entity of Charter Hall Property Trust, present their report together with the consolidated financial report of the Charter Hall Group (Group or CHC) and the consolidated financial report of the Charter Hall Property Trust Group (Charter Hall Property Trust Group or CHPT) for the year ended 30 June 2012, and the independent auditor’s report thereon. The financial report of the Group comprises Charter Hall Limited (Company or CHL) and its controlled entities, which include Charter Hall Funds Management Limited as the responsible entity of Charter Hall Property Trust (Trust). The financial report of the Charter Hall Property Trust Group comprises the Trust and its controlled entities. Charter Hall Limited and Charter Hall Funds Management Limited have identical boards of directors. The term Board hereafter should be read as a reference to both these Boards. The units in the Trust are ‘stapled’ to the shares in the Company. A stapled security comprises one Company share and one Trust unit. The stapled securities cannot be traded or dealt with separately. 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 and Non-Executive Independent Director ◆◆ Roy Woodhouse – Deputy Chairman and Non-Executive Independent Director ◆◆ Anne Brennan – Non-Executive Independent Director ◆◆ David Deverall – Non-Executive Independent Director (appointed 7 May 2012) ◆◆ Glenn Fraser – Non-Executive Independent Director (resigned 15 August 2012) ◆◆ Cedric Fuchs – Executive Director (resigned 24 November 2011) ◆◆ David Harrison – Joint Managing Director ◆◆ Peter Kahan – Non-Executive Director ◆◆ Colin McGowan – Non-Executive Independent Director ◆◆ David Southon – Joint Managing Director Principal activities During the year the principal continuing activities of the Group consisted of: (a) Property investment; (b) Property funds management; and (c) Development investment. No significant changes in the nature of the activities of the Group occurred during the year. Distributions – Charter Hall Group Distributions paid/declared to members during the year were as follows: Interim ordinary distribution for the six months ended 31 December 2011 of 9.10 cents per security paid on 23 February 2012 Final ordinary distribution for the six months ended 30 June 2012 of 9.10 cents per security paid on 28 August 2012 Interim ordinary distribution for the six months ended 31 December 2010 of 8.00 cents per security paid on 28 February 2011 Final ordinary distribution for the six months ended 30 June 2011 of 8.50 cents per security paid on 25 August 2011 2012 $’000 2011 $’000 26,888 26,951 – – 53,839 – – 23,500 24,969 48,469 Annual Report 2012 31 Directors’ report for the year ended 30 June 2012 Distribution Re-investment Plan (DRP) The DRP was not in operation during the year. Review and results of operations The Group recorded a statutory profit after tax attributable to stapled securityholders for the financial year of $16.7 million compared to a profit of $52.3 million in 2011. Operating earnings amounted to $54.8 million for the financial year compared to $60.4 million in 2011. Operating earnings before specific items related to the sale of Charter Hall Office REIT (CQO) US assets net of closure costs of the US office, costs of retaining the management rights, organisational restructure costs and provision for Charter Hall Opportunity Fund 4 performance fee clawback amounted to $63.6 million, an increase of 5.3% over the prior period. Operating earnings is a financial measure which represents the profit/(loss) under Australian Accounting Standards adjusted for fair value adjustments, impairment of assets, gains or losses on sale of investments, acquisition costs, non-operating movements in equity accounted investments, and non-cash items such as security-based benefits expense, amortisation and tax expense/(benefit). The inclusion of operating earnings as a measure of the Group’s profitability provides investors with the same basis that is used internally for evaluating operating segment performance. Operating earnings is used by the Board to make strategic decisions and as a guide to assessing an appropriate distribution to declare. The operating earnings information included in the table below has not been subject to any specific audit procedures by our auditor but has been extracted from Note 5: Segment information of the accompanying financial report. Reconciliation of operating earnings to statutory profit Operating earnings before specific items Specific items1 Operating earnings Fair value adjustments on derivatives2 Fair value adjustments on investments and property, including remeasurement gains2 Inventory writedown2 Transfer from reserves of cumulative FX losses on disposal of foreign investments2 Impairment of management rights Security-based benefits expense Other2 Statutory profit after tax attributable to stapled securityholders 2012 $’000 63,586 (8,741) 54,845 (9,933) (2,034) (5,814) (12,176) – (2,338) (5,872) 16,678 2011 $’000 60,422 – 60,422 2,141 14,239 (664) (871) (19,171) (4,090) 332 52,338 1. Specific items include $16.0 million fee revenue related to sale of Charter Hall Office REIT (CQO) US assets net of $4.0 million closure costs of the US office, $2.9 million costs of retaining the management rights, $3.9 million organisational restructure costs and $14.2 million provision for Charter Hall Opportunity Fund 4 (CHOF4) performance fee clawback which is then reduced by $0.3 million being the Group’s 3% equity share of the clawback receivable in CHOF4. 2. These items include the Group’s share of non-operating movements in equity accounted investments, including losses on sale of offshore investment properties of $2.0 million and amortisation charges of $2.4 million (including amortisation of management rights). Basic weighted average number of securities per note 40 (’000s) Basic earnings per stapled security per note 40 (cents) Operating earnings per stapled security before specific items per note 5 (cents) Operating earnings per stapled security per note 5 (cents) 295,625 5.64 21.51 18.55 293,254 17.85 20.60 20.60 32 Charter Hall Group The 30 June 2012 financial results with comparatives are summarised as follows: Revenue including minority interests ($ million)1 Statutory net profit after tax – stapled securityholders ($ million) Statutory earnings per stapled security (EPS) (cents) Operating earnings before specific items – stapled securityholders ($ million)2 Operating earnings before specific items per stapled security (cents)2 Operating earnings for stapled securityholders ($ million)2 Operating earnings per stapled security (cents)2 Distributions to stapled securityholders ($ million) Distribution per stapled security (cents) Total assets ($ million) Total liabilities ($ million) Net assets attributable to stapled securityholders ($ million)3 Securities on issue (million)4 Net assets per security Net tangible assets (NTA) attributable to stapled securityholders ($ million) NTA per stapled security ($)4 Gearing – borrowings to total assets5 Funds under management ($ billion) Domestic funds under management ($ billion) Charter Hall Group Charter Hall Property Trust Group 2012 123.6 16.7 5.64 63.6 21.5 54.8 18.6 53.8 18.2 877.8 121.4 728.9 296.2 2.46 630.2 2.13 1.45% 8.9 8.5 2011 109.6 52.3 17.85 60.4 20.6 60.4 20.6 48.5 16.5 957.6 175.6 749.8 293.8 2.55 649.8 2.21 8.12% 10.7 8.5 2012 53.3 36.1 12.21 N/A N/A N/A N/A 53.8 18.2 775.5 84.8 650.2 296.2 2.20 650.2 2.20 4.27% N/A N/A 2011 35.3 57.8 19.72 N/A N/A N/A N/A 48.5 16.5 1,032.3 135.0 850.2 293.8 2.89 850.2 2.89 9.44% N/A N/A 1. Gross revenue does not include share of net profits of associates of $2.9 million (2011: profit of $30.4 million) or gains on sale of investments in 2011 of $3.4 million. 2. Excludes fair value adjustments on investment property, financial assets and financial instruments, gains on sale of investments, non-operating movements in equity accounted investments, and non-cash items such as net gain on remeasurement of equity interests, security-based benefits expense, amortisation and income tax expense/(benefit). 3. Excludes non-controlled interest in DRF. 4. Excludes stapled securities issued under the Executive Loan Security Plan in accordance with AASB 2 Share-based Payments. 5. Gearing is calculated by using debt net of cash divided by total assets net of cash. 33 Annual Report 2012 Directors’ report for the year ended 30 June 2012 Review and results of operations (continued) Distribution per stapled security (DPS) has increased from 16.5 cents in FY11 to 18.2 cents in FY12. Net Tangible Assets per stapled security (NTA) has decreased from $2.21 at 30 June 2011 to $2.13 per security at year end. Funds Under Management (FUM) has decreased from $10.7 billion at 30 June 2011 to $8.9 billion at year end primarily as a result of US asset sales by Charter Hall Office REIT (CQO), in line with its strategy to exit from all offshore markets. Domestic funds under management remains unchanged from the prior year at $8.5 billion. Gearing has decreased from 8.12% at 30 June 2011 to 1.45% at 30 June 2012. Charter Hall Group is a diversified property group with a fully integrated business model. The Group has three business activities that contribute to overall performance: property investment, property funds management and development investment. The Group recorded a statutory profit after tax attributable to stapled securityholders for the financial year of $16.7 million compared to a profit of $52.3 million in 2011. Earnings per security for the year amounted to 5.64 cents compared to 17.85 cents for the prior year. Net tangible assets have declined 3.6% from $2.21 per security at 30 June 2011 to $2.13 at 30 June 2012. The Group delivered $63.6 million of operating earnings before specific items compared to $60.4 million in 2011. Property investment contributing $31.2 million (FY11: $29.9 million), property funds management contributing $23.8 million (FY11: $20.4 million), development investment contributing $2.6 million (FY11: $3.8 million), and the Group’s interest in Charter Hall Direct Retail Fund (DRF) contributing $6.0 million (FY11: $6.3 million). The Group delivered $54.8 million of operating earnings after specific items compared to $60.4 million in 2011. Property investment The Group’s property investment activities are classified into the following categories reflecting different sources of external equity managed across the Group: ◆◆ Direct property investment; ◆◆ Co-investment property interest in listed funds; ◆◆ Co-investment property interest in wholesale unlisted funds; and ◆◆ Co-investment property interest in retail investor funds. A summary of the activities of each of the above categories is provided below. i) Direct property investments Following the sale of the Mentone Showrooms property during the period, all the Group’s direct property investments are within the Charter Hall Direct Retail Fund (DRF). DRF is consolidated by the Group due to its 66% interest (held by the stapled Group). DRF is actively marketing all of its investment properties for sale. Accordingly, all investment property, including investment properties held indirectly through a joint venture, have been reclassified to current assets. Consequently, all debt and derivatives relating to those properties have also been disclosed as current liabilities. During the period, the Group sold its direct interest in the Mentone Showrooms in Melbourne, Victoria realising a gain on sale of $0.6 million, and its direct interest in Countdown in Auckland, New Zealand realising a loss on sale of $1.5 million. Charter Hall Direct Retail Fund (DRF) – $0.2 billion FUM, CHPT interest 50% and CHL interest 16% DRF is an unlisted property fund that invests directly in quality retail properties with a current portfolio of five retail shopping centres located in established markets in New South Wales, Victoria and Queensland. At 30 June 2012 this portfolio benefited from an occupancy rate of 99.6% and a weighted average lease expiry (WALE) of 5.5 years. The fund’s debt facility expires in November 2013. As noted above, all of DRF’s investment properties are being actively marketed for sale. ii) Listed fund Charter Hall Retail REIT (CQR) – $2.0 billion FUM, CHPT interest 10% with an equity interest carrying value of $101.3 million CQR’s investment strategy is to invest in neighbourhood and sub-regional shopping centres in Australia anchored by Coles and Woolworths. The REIT’s portfolio comprises assets across Australia with a reduced offshore exposure given the successful divestment program implemented in recent years. Asset revaluations of CQR’s portfolio for the year ended 30 June 2012 resulted in a valuation decrement of $21.1 million primarily due to devaluations for the REIT’s German and bulky retail assets. These valuation movements as well as interest rate derivative movements impacted the REIT’s NTA over the period. The occupancy of the CQR Australian portfolio at 30 June 2012 was 98.6%, with like for like property net operating income growth of 3.5%, reflecting the non-discretionary nature of income from the underlying assets. During the year the REIT acquired four Australian assets for $160 million (100% share), utilising proceeds from the sale of its US wholly-owned assets. iii) Wholesale unlisted funds Core Plus Office Fund (CPOF) – $1.5 billion FUM, CHPT interest 13% and CHL interest 1% with a combined equity interest carrying value of $113.0 million CPOF is an Australian unlisted wholesale office fund managed by the Group. CPOF has continued to focus on improving portfolio metrics, creating value via enhancements and acquisitions. With occupancy of 98% and a lease expiry profile of 5.5 years CPOF is well placed to benefit from improving market conditions. Following independent valuation of the entire portfolio across the June and December reporting periods of this financial year, CPOF maintains a gross asset value of $1.5 billion and a current weighted average capitalisation rate of 7.86%. Charter Hall Office Trust (CHOT) (formerly Charter Hall Office REIT (CQO)) – $2.0 billion FUM, CHPT interest 15% with an equity interest carrying value of $145.7 million At 30 June 2012, CHOT’s portfolio comprises 17 high grade office assets located in major business districts in Australia, and one premium office development under construction in the Melbourne CBD (171 Collins Street) with anticipated practical completion in May 2013. On 1 May 2012, the Group confirmed implementation of the privatisation of CQO by a consortium of investors (the Consortium). The unlisted trust is known as Charter Hall Office Trust (CHOT). The Group has been appointed the investment, property and development manager for CHOT. It is expected that the net fee revenue that the Group will earn from managing CHOT will be generally consistent with the net revenue earned previously from managing the Australian assets of CQO. With implementation of the privatisation, CQO changed from a listed REIT to a wholesale unit trust with liquidity reviews every five years. Accordingly, the Group will amortise the management rights over a six year period, which includes an additional year to source liquidity were the trust to be wound up at that time. As a participant in the Consortium, the Group’s interest in CHOT has increased from 10% to 15%. 34 Charter Hall Group Asset revaluations of CHOT’s Australian portfolio at 30 June 2012 resulted in an increase of $22.7 million (or $33.1 million since June 2011). The occupancy of the CHOT portfolio increased 2% to 98% at 30 June 2012, with like for like property net operating income growth of 3.6%. Core Plus Industrial Fund (CPIF) – $0.6 billion FUM, CHPT interest 8% and CHL interest 10% with a combined equity interest carrying value of $54.9 million CPIF is an Australian unlisted wholesale industrial fund managed by the Group. CPIF has continued its focus on holding core logistics investments and executing accretive acquisitions. The portfolio’s current weighted average capitalisation rate is 8.21%, with a WALE of 11.5 years underpinned by strong tenant covenants such as Woolworths, Coles, Metcash and Volkswagen. CPIF has been actively leasing over the financial year, reaching an occupancy level of 98% with minimal forward looking vacancy out until 2017. Other wholesale unlisted funds The Group also originates and manages segregated mandate capital for direct property investments either in joint ventures with funds such as CPOF or CQR or as 100% owned assets by our clients. There is a total portfolio value of $635 million within the segregated mandate business. iv) Retail investor funds – This business manages equity raised from retail investors via advisers and through direct distribution channels, with combined FUM of $1.5 billion Charter Hall Diversified Property Fund (DPF) – $0.1 billion FUM, CHPT interest of 25% representing a carrying value of $11.7 million DPF is an unlisted property fund with rolling seven-year review events that primarily invests in a diversified portfolio of three office buildings and three industrial properties located in established markets throughout Sydney, Melbourne and Perth which benefited from an occupancy rate of 97% and a weighted average lease expiry of 6.2 years at 30 June 2012. During the year asset sales totalling approximately $80 million were completed, with the net proceeds being used to reduce gearing and provide capital returns to investors ahead of the fund’s upcoming review event scheduled for October 2012. This review event is likely to lead to the sale of some or all of the fund’s remaining assets. Charter Hall Direct Property Fund (CHDPF) – $0.5 billion FUM, CHPT interest 4% representing a carrying value of $10.8 million CHDPF is an unlisted property fund that primarily invests in a diversified portfolio of Australian direct properties anchored by eight office properties located in established markets throughout Sydney, Melbourne and Brisbane which benefited from an occupancy rate of 97% and a weighted average lease expiry of 4.3 years with leases to over 110 tenants at 30 June 2012. The weighted average cap rate was 8.35%. The fund remains open for investor applications with the issue of a product disclosure statement in December 2010 and is continuing to provide limited liquidity through six-monthly withdrawal offers. Charter Hall Umbrella Fund (CHUF) – $0.1 billion FUM, CHPT interest 27% representing a carrying value of $39.5 million CHUF is an unlisted fund of funds with investments predominantly in Charter Hall Group managed funds, with no balance sheet gearing and exposure to a portfolio of more than 55 office, industrial and retail properties across Australia and New Zealand which benefited from a WALE of 7.6 years and a current occupancy of 98% at 30 June 2012. During the year the fund commenced providing limited liquidity through six-monthly withdrawal offers. Other managed funds The Group also manages a series of pooled and single asset syndicates totalling $193 million in asset value, in which the Group has no equity interest. Property funds management The property funds management business provides investment management, asset management, property management, development management, leasing and transaction services to not only funds in which the Group has a co-invested stake, but also to funds established and managed by the Group. The Group also provides services via segregated mandates looking to capitalise on the Group’s expertise. The Group’s managed funds have acquired approximately $439 million of property in Australia across Charter Hall Retail REIT ($176 million), Charter Hall Core Plus Office Fund ($96 million), Charter Hall Core Plus Industrial Fund ($85 million) and Direct Industrial Fund ($82 million). The Group’s managed funds have divested approximately $2.1 billion of assets, of which approximately $1.7 billion related to the divestment of CQO’s United States portfolio. The integrated property services model provides transactional, leasing, investment management, asset management and property management profits within the Property Funds Management business, which substantially enhance the returns from the capital invested in property and development investments. Development investment The Group’s development investments comprise a 50% interest in Commercial and Industrial Property Pty Ltd (CIP), an industrial development business, a 50% interest in an office development project at 685 La Trobe Street, Melbourne, together with equity co-investment interests in Charter Hall Opportunity Fund 4 (CHOF4) and Charter Hall Opportunity Fund 5 (CHOF5). CIP contributed $1.5 million (FY11: $4.0 million) of operating earnings to the Group, CHOF4 and CHOF5 contributed $0.3 million (FY11: loss $0.2 million) for the period and the Group has earned a commitment fee of $0.1 million relating to the Workzone development being undertaken by CHOF5 resulting in a combined contribution to operating earnings before interest and tax of $1.9 million (FY11: $3.8 million). The development at 685 La Trobe Street is at an early stage in the development process and has not made a contribution to the current period result. Charter Hall Opportunity Fund 4 (CHOF4) – $0.1 billion FUM, CHL interest 3% with an equity interest carrying value of $1.1 million CHOF4 is fully allocated with seven of eight projects completed and capital returned to investors. There is one remaining completed project in CHOF4, being Home HQ North Shore. In prior financial years the Group has received performance fees in respect of CHOF4 amounting to $14.2 million. These fees were subject to clawback provisions in the event CHOF4 did not achieve a gross equity internal rate of return (‘IRR’) of 13% over the life of the fund. As a result of a reduction in the IRR performance in CHOF4, the Charter Hall Board has resolved to raise a provision for the maximum potential clawback, being $14.2 million. The clawback is payable on the earlier of 31 December 2012, unless extended, or the sale of Home HQ North Shore. As the Group has a 3% interest in CHOF4, 3% of any performance fee clawback received by CHOF4 will be taken up in the equity accounted results of the Group. 35 Annual Report 2012 Review and results of operations (continued) Development investment (continued) Charter Hall Opportunity Fund 5 (CHOF5) – $0.5 billion FUM, CHL interest 15% with an equity interest carrying value of $28.5 million All of the vacant space within the development components of The Park Megacentre in Hastings, New Zealand has now been leased and sale of these tenanted units, and the remaining land, has commenced. 40 Creek Street, Brisbane is 100% leased, with all remaining Heads of Agreements converted into executed leases over the last quarter. Contracts for Sale have been exchanged for $84.5 million on 6 August 2012. Settlement was forecast for September 2012. Significant changes in the state of affairs Significant matters of the Group during the year, in addition to the review of operations above, were as follows: ◆◆ On 30 September 2011, the Group announced it had exchanged contracts and subsequently settled the sale of the Mentone Showrooms in Victoria. ◆◆ On 30 September 2011, the Group announced it had completed the acquisition from Macquarie Group Limited of all shares in Charter Hall Retail Management Limited and Charter Hall Direct Property Management Limited under the Share Sale Agreement (dated 12 February 2010) following the satisfaction of conditions precedent for a sum of $14.3 million. This transaction completed the acquisition of the Macquarie real estate funds management platform. PDS Constructions is making good progress on Aquilo in Mentone, Victoria with the construction of all townhouses in Stages 1 complete, Stage 2 being progressively completed and Stage 3 underway. As at 30 June 2012, 110 unconditional contracts of sale have been exchanged (92%), with nine townhouses available for sale. Purchaser settlements have continued during the quarter, with a total of 36 townhouses settled as of 30 June 2012. ◆◆ On 21 October 2011, the Group increased its ownership in Charter Hall Retail REIT (CQR) to 10%, by exercising its first right of refusal to acquire a portion of Macquarie Bank Limited Group’s holding in CQR. The Group acquired 1.7% of CQR units at a price of $3.20 per unit, a total acquisition price of $16.2 million. This acquisition was funded from the sale of the Mentone Showrooms. Progress at Workzone, Perth continues in line with programme. Broad Construction Services WA (Broad) is nine months into construction and anchor tenant Leighton Contractors Pty Ltd (Leighton) is well advanced with its fully integrated fit out design. The leasing campaign is underway for the balance of the available office and retail space with Savills and Lease Equity appointed respectively. Due to an acceptable offer to purchase not being received during the forward funded sale campaign, Management is now forecasting the sale of the development on completion in October 2013, however still remains confident that a sale may be secured prior to completion. Construction of the Lacrosse Apartments in La Trobe Street, Melbourne reached practical completion on 25 June 2012 and 129 apartments were settled prior to 30 June 2012. Rectification of defect items is substantially complete and the building has been handed over to the building manager. Four apartments are available for sale from a total of 312. Contracts on four retail tenancies have been exchanged leaving 14 tenancies available for sale. In respect of the Little Bay project, development of the Estate Works to create the individual housing and development superlots at the Little Bay project is currently underway, with completion scheduled for May 2013. Subsequent to year end, commercial negotiations are underway between the Development Alliance (DA) partners, being CHOF5 Little Bay Pty Limited (CHOF5LB) (a controlled entity of CHOF5) and TA Global Development Pty Ltd (TAG). In accordance with the DA Umbrella Deed, a Notice of Mediation has been issued to TAG by Charter Hall Funds Management Limited (CHFML) (in its capacity as trustee of CHOF5) in relation to a commercial dispute between the DA partners. The mediation notice has been rejected by TAG with a request for a clarification of the details of the alleged dispute between the parties. Ongoing commercial negotiations with TAG are being undertaken in an attempt to agree on the future direction of the project. As at the date of signing the financial statements, Charter Hall Group is not able to determine whether any financial impact will occur as a result of these negotiations and any subsequent dispute or mediation process with respect to either Charter Hall directly or its 15% co-investment in CHOF5. ◆◆ On 24 November 2011, the Group confirmed its support for the governance changes implemented across its listed REITs, CQO and CQR. The corporate governance and fee reviews were undertaken by independent directors of CHOML and Charter Hall Retail Management Limited (CHRML), as responsible entities (RE) of CQO and CQR, with the support of Ernst & Young. Governance changes included the introduction of term limits for independent directors, unitholders to ratify the appointment of independent directors, formalising the maximum number of independent directors in the Board Charter, detailed disclosure of the basis for related party fees, introduction of an effective internal audit function, adoption and disclosure of a gender diversity policy, directors’ fees to be paid by the REIT rather than the Charter Hall Group to maximise independence and alignment, review of remuneration structure to align the interests of the Fund Manager of each REIT, and improvement to key management personnel (KMP) remuneration disclosures. Fund management fee structures would remain unchanged. The REITs announced that whilst resetting performance fees may increase alignment, the resetting of performance fees would likely lead to increased costs for unitholders over time. Charter Hall has existing strong alignment to the performance of the REITs through its co-invested interest of 10% in CQR. ◆◆ On 1 May 2012, the Group confirmed implementation of the privatisation of CQO by a consortium of investors, being Reco Ambrosia Pte Ltd (RAP) (an affiliate of the Government of Singapore Investment Corporation Pte Ltd), the Public Sector Pension Investment Board of Canada (PSP) and a member of the Charter Hall Group (ASX:CHC) (collectively known as the Consortium). The new unlisted trust is known as Charter Hall Office Trust (CHOT). The Group has been appointed the investment, property and development manager for CHOT. It is expected that the net fee revenue that the Group will earn from managing CHOT will be generally consistent with the net revenue earned previously from managing the Australian assets of CQO. With implementation of the privatisation, CQO changed from a listed REIT to a wholesale unit trust with liquidity reviews every five years. The Group will amortise the management rights over a six year period, which includes an additional year to source liquidity were the trust to be wound up at that time. As a participant in the Consortium, the Group’s interest in CHOT rises to 15%. 36 Charter Hall GroupDirectors’ report for the year ended 30 June 2012 ◆◆ On 18 June 2012, the Group announced that it had implemented a $200 million capital reallocation from Charter Hall Property Trust (CHPT) to Charter Hall Limited (CHL), effective 30 June 2012. The capital reallocation aims to ensure a more appropriate allocation of capital between CHPT and CHL (which together trade on the Australian Securities Exchange as Charter Hall Group) which is more closely aligned with the Group’s long-term growth strategy. Under the capital reallocation proposal approved by securityholders at the Annual General Meeting on 24 November 2011, CHPT made capital payments of $200 million which were compulsorily applied as a capital contribution for existing shares of CHL. ◆◆ On 18 June 2012, the Group advised it would take up a provision of $14.2 million in relation to the potential clawback of Charter Hall Opportunity Fund No. 4 (CHOF4) performance fees received in respect of the 2007, 2008, 2009 and 2010 financial years. The final amount of any clawback will not be known until the earlier of the termination date of 31 December 2012, unless extended, or the completion of the sale of all the assets of CHOF4. ◆◆ On 28 June 2012, the Group announced it had entered into an Implementation Deed with various entities of Australian Property Growth Fund (APGF) for the retirement of APGF Management Limited (APGFM) (a wholly owned subsidiary of APGF) as responsible entity (RE) of PFA Diversified Property Trust (PFA) and the appointment of Charter Hall Direct Property Management Limited (CHDPML) (a wholly-owned subsidiary of Charter Hall). Subsequently, on 15 August 2012, PFA unitholders voted to approve the appointment of CHDPML as RE. ◆◆ On 28 June 2012 the Retail Partnership No. 2 Trust (RP2T) in which the Group has a 20% interest, contracted to acquire the Bay Village Shopping Centre in New South Wales for $164 million. Matters subsequent to the end of the period Since 30 June 2012, the Group has completed the following: ◆◆ On 1 August 2012, the Group announced that a Charter Hall managed wholesale fund (the Retail Partnership No. 2 Trust (RP2T)) had entered into an unconditional contract to acquire Bay Village Shopping Centre in New South Wales for $164 million. The Group holds a 20% equity interest in RP2T. The purchase of the centre was completed on 15 August 2012. The Group’s equity commitment to fund the acquisition is $19.5 million which was paid on 15 August 2012. ◆◆ In June 2012, Charter Hall Direct Property Management Limited contracted to purchase the right to manage the PFA Diversified Property Trust (PFA) subject to approval by unitholders. With the unitholders approving the purchase of the management rights for $5 million cash on 15 August 2012 and Australian Securities and Investments Commission (ASIC) approval given shortly after, Charter Hall Direct Property Management Limited is now the responsible entity for PFA. ◆◆ Subsequent to year end, following commercial negotiations between the Development Alliance (DA) partners in the Little Bay Cove project, being CHOF5 Little Bay Pty Limited (CHOF5LB) (a controlled entity of CHOF5) and TA Global Development Pty Ltd (TAG), in accordance with the DA Umbrella Deed, a Notice of Mediation has been issued to TAG by CHFML (in its capacity as trustee of CHOF5) in relation to a commercial dispute between the DA partners. The mediation notice has been rejected by TAG with a request for a clarification of the details of the alleged dispute between the parties. Ongoing commercial negotiations with TAG are being undertaken in an attempt to agree on the future direction of the project. Refer to note 36(e) for further information. As at the date of signing the financial statements, Charter Hall Group is not able to determine whether any financial impact will occur as a result of these negotiations and any subsequent dispute or mediation process with respect to either Charter Hall directly or its 15% co-investment in CHOF5. Except for the matters discussed above, no other matter or circumstance has arisen since 30 June 2012 that has significantly affected, or may significantly affect: (a) the Group’s operations in future financial years; or (b) the results of those operations in future financial years; or (c) the Group’s state of affairs in future financial years. Likely developments and expected results of operations As a fully integrated property group with diversified sources of equity invested across the office, retail and industrial sectors, Charter Hall is well placed to benefit from a projected growth of superannuation inflows in Australia and offshore markets. The Group derives property income returns and capital growth through its co-investments in its managed funds and its vertically integrated business model will allow Charter Hall to continue to provide specialist property services across its platform, generating fees from its managed funds. The Group remains focused on leveraging its fully integrated property services capabilities through initiating acquisitions and developments, undertaking capital raisings for unlisted funds, external mandates and partnerships, while also recycling capital to improve the return on equity from the co-investment portfolio. For its listed fund, CQR, the Group will continue to implement strategies to increase earnings per share and to de-risk the fund. As volatility continues in listed markets, Charter Hall has seen equity flows increasing to unlisted real estate and the Group is well positioned to benefit from these equity flows as wholesale investors further invest in low volatility direct property portfolios. Retail investor flows are expected to increase over time as investors seek a high quality manager with an integrated capability that delivers stable property investment returns from rental income and capital growth. Further information on likely developments in the operations of the Group and the expected results of operations have not been included in this annual financial report because the Directors believe it would be likely to result in unreasonable prejudice to the Group. 37 Annual Report 2012 Information on Directors Kerry Roxburgh Chairman/Independent Non-Executive Director Experience and expertise Kerry joined the Board of the Charter Hall Group on 12 August 2005 and became Chairman in October 2005. Kerry is a Practitioner Member of the Stockbroker Association of Australia and holds positions on the boards of several listed and unlisted companies. Currently, Kerry is the lead independent Non-Executive Director of Ramsay Health Care Ltd, a Non-Executive Director of the Medical Indemnity Protection Society and of MIPS Insurance Ltd. He is Chairman of Tyro Payments Ltd, of Tasman Cargo Airlines Ltd and of TEKTUM Ltd. He is also the Deputy Chairman of Marshall Investments Pty Ltd. Kerry is also a member of the Advisory Boards of AON Insurance and of Built Pty Ltd. In 2000, Kerry completed a three year term as CEO of E*TRADE Australia (a business that he co-founded in 1997), becoming its Chairman until June 2007, when it was acquired by the ANZ Bank. Prior to this, he was an Executive Director of Hong Kong Bank of Australia Group where for 10 years from 1986, he held various positions including Head of Corporate Finance and Executive Chairman of the group’s stockbroker, James Capel Australia. Until 1986, Mr Roxburgh was in practice for more than 20 years as a Chartered Accountant. Kerry holds a Bachelor of Commerce degree, and an MBA. Other current listed company directorships Ramsay Health Care Ltd (since 1997) Former listed company directorships in last three years Chairman of Eircom Holdings Limited (from 2006 to January 2010) Special responsibilities Chair of the Nomination Committee Member of the Audit, Risk and Compliance Committee Interests in securities 31,250 securities in Charter Hall Group Roy Woodhouse Deputy Chairman/Independent Non-Executive Director Experience and expertise Roy joined the Board of the Charter Hall Group on 2 July 2004. 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 Asia Pacific. Roy co-founded KFPW, a joint venture with PricewaterhouseCoopers specialising in outsourcing. Roy is Chairman of National Recycling Group, and a principal shareholder of The Stephenson Mansell Group, an Executive Leadership Development company. Roy is a Fellow of the Institute of Company Directors and a past Fellow of the Australian Institute of Valuers. Other current listed company directorships Nil Former listed company directorships in last three years Nil Special responsibilities Member of the Remuneration and Human Resources Committee Member of the Nomination Committee Interests in securities 21,429 securities in Charter Hall Group Anne Brennan Independent Non-Executive Director Experience and expertise Anne joined the Board of Charter Hall Group on 6 October 2010, and she is on the board of a number of other companies. Anne is an experienced executive and has held senior management roles in both large corporates and professional services firms. During Anne’s executive career she was the CFO at CSR and the Finance Director of the Coates Group. Prior to her executive roles, Anne was a partner in three professional services firms: KPMG, Arthur Andersen and Ernst & Young. She has more than 25 years’ experience in audit, corporate finance and transaction services. Anne was also a member of the national executive team and a board member of Ernst & Young. Anne holds a Bachelor of Commerce (Honours) degree, is a Fellow of the Institute of Chartered Accountants in Australia and a Fellow of the Australian Institute of Company Directors. Other current listed company directorships Argo Investments Limited Echo Entertainment Group Limited Myer Holdings Limited Nufarm Limited Former listed company directorships in last three years Nil Special responsibilities Member of Audit, Risk and Compliance Committee (from 15 August 2012, Acting Chair) Chair of Remuneration and Human Resources Committee Interests in securities 30,000 securities in Charter Hall Group via direct and indirect interests 38 Charter Hall GroupDirectors’ report for the year ended 30 June 2012 David Deverall Independent Non-Executive Director David Harrison Joint Managing Director/Executive Director Experience and expertise As Joint Managing Director of the Charter Hall Group, David Harrison is responsible for all aspects of the Charter Hall Group’s business, with specific focus on Investment Management, Corporate Transactions and Property Investment activities. David also substantially contributes to investment origination, capital raisings and structuring of transactions. David is directly responsible for overseeing the operation of the Investment Management Divisions, including the Listed REITs, Wholesale Unlisted and Retail Unlisted Divisions, together with Investor Relations. The Joint Managing Directors share responsibility for Corporate Finance, General Counsel and People, as well as working closely with the Chief Financial Officer in relation to Group Finance, Treasury, Information Technology and Capital Management. In addition to his responsibilities on the various unlisted Fund Boards and Investment Committees, David is an Executive Director on the responsible entity Boards of Charter Hall Retail REIT, Charter Hall Office Trust and Direct Funds business. With more than 25 years of experience in the Australian commercial property market, David 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 over the past 15 years. David holds a Bachelor of Business Degree (Land Economy) and a Graduate Diploma in Applied Finance, and is a Fellow Member of the Australian Property Institute (FAPI). Other current listed company directorships Charter Hall Retail REIT Former listed company directorships in last three years Charter Hall Office REIT Special responsibilities Nil Interests in securities 2,009,521 securities in Charter Hall Group via direct and indirect interests. 226,449 securities in the Charter Hall Executive Loan Securities Plan; securities in the Plan will vest upon the satisfaction of performance and service criteria. 862,961 Performance Rights and 849,868 Options in the Charter Hall Performance Rights and Options Plan; performance rights and options also vest after performance and service criteria are met. Experience and expertise David joined the Board of the Charter Hall Group on 7 May 2012. David is also CEO of Hunter Hall International Limited and Managing Director of Deverall Advisory, a consulting firm which provides strategic and corporate advice to CEOs and boards in the wealth management industry. Prior to this, David was the Managing Director and CEO of Perpetual Limited for eight years and during this time he was also Chairman of the peak wealth management industry body, The Financial Services Council. David has extensive experience in financial services, funds management and strategy, having also been Group Head of Funds Management and Head of Strategy at Macquarie Group. David holds an MBA and a Bachelor of Engineering (Mechanical), and is a member of the Australian Institute of Company Directors. Other current listed company directorships Hunter Hall International Limited Former listed company directorships in last three years Perpetual Limited Special responsibilities From 10 September 2012, a member of the Audit, Risk and Compliance Committee Interests in securities 15,287 securities in Charter Hall Group Glenn Fraser Independent Non-Executive Director (resigned 15 August 2012) Experience and expertise Glenn joined the Board of the Charter Hall Group on 6 April 2005. Glenn specialises in infrastructure and property projects, and is a member of the Transfield Holdings Advisory Board. He was instrumental in Transfield Holdings’ acquisition of its interest in Charter Hall and its expansion and listing in 2005. Joining Transfield Holdings in 1996, Glenn has held positions of CFO and General Manager – Finance Project Development, where he was responsible for the financial elements of Transfield Holdings’ infrastructure and property projects. Prior to this, Glenn was a principal of a project finance advisory business, Perry Development Finance Pty Limited, which was sold to Hambros Corporate Finance Limited in 1995. Glenn holds a Bachelor of Commerce, and is a member of the Institute of Chartered Accountants and the AICD. Due to family reasons, Glenn retired as a Non-Executive Director on 15 August 2012. Other current listed company directorships Nil Former listed company directorships in last three years Nil Special responsibilities Until 15 August 2012, Chair of the Audit, Risk and Compliance Committee Interests in securities 70,000 securities in Charter Hall Group via indirect interests 39 Annual Report 2012 Information on Directors (continued) Peter Kahan Non-Executive Director Experience and expertise Peter joined the Board of the Charter Hall Group on 1 October 2009, following an investment in the Charter Hall Group by The Gandel Group. Peter is the Executive Deputy Chairman of Gandel and has over 18 years of property and funds management experience. He joined Gandel in 1994 and was the Group’s CEO from 2007 to 2012. Prior to this, Peter worked as a Chartered Accountant and held senior financial positions in various industry sectors. From 2002 to 2006, he 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. He holds Bachelor of Commerce and Bachelor of Accountancy degrees 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 Alternate Member of the Remuneration and Human Resources Committee Interests in securities Nil Colin McGowan Independent Non-Executive Director Experience and expertise Colin joined the Board of the Charter Hall Group on 6 April 2005. Colin was formerly CEO of the listed AMP Diversified Property Trust, Executive Vice President of Bankers Trust (Australia), founding Fund Manager of the BT Property Trust and founding Fund Manager of Advance Property Fund. He is a qualified valuer, a Fellow of the Australian Property Institute and a Senior Fellow of the Financial Services Institute of Australasia (formally SIA). He 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. Other current listed company directorships Nil Former listed company directorships in last three years Nil Special responsibilities Member of the Remuneration and Human Resources Committee Member of the Nomination Committee Interests in securities Nil 40 David Southon Joint Managing Director/Executive Director Experience and expertise David is a co-founder of the Charter Hall Group and one of its Joint Managing Directors, with over 25 years of property industry experience. The Joint Managing Directors are responsible for the formulation and implementation of the Group’s strategy. David is directly responsible for overseeing the operation of the Property Services Divisions, including Development, Leasing, Transactions, Asset Management, Property Management, Marketing and Communications, as well as strategic involvement in project origination and direction. The Joint Managing Directors share responsibility for Investor Relations, Corporate Finance, General Counsel and People, as well as working closely with the Chief Financial Officer in relation to Group Finance, Treasury, Information Technology, and Capital Management. In addition to his responsibilities on the various Fund Boards and Investment Committees, David is an Executive Director on the responsible entity Boards for Charter Hall Retail REIT, Charter Hall Office Trust, and the Direct Funds business. He is also a Non-Executive Director on the Board of Commercial Industrial Property Pty Ltd (CIP), Chairman of the Charter Hall Diversity Committee and a member of the Investment Committees of Charter Hall Opportunity Funds 4 and 5. David holds a Bachelor of Business Degree (Land Economy), and is a Fellow Member of the Australian Property Institute (FAPI). Other current listed company directorships Charter Hall Retail REIT Former listed company directorships in last three years Charter Hall Office REIT Special responsibilities Nil Interests in securities 2,048,360 securities in Charter Hall Group via direct interests. 226,449 securities in the Charter Hall Executive Loan Security Plan; securities in the Plan will vest upon the satisfaction of performance and service criteria. 1,175,122 Options and 862,961 Performance Rights in the Charter Hall Performance Rights and Options Plan; options and performance rights also vest after performance and service conditions are met. Carolyne Rodger Company Secretary Carolyne Rodger was appointed Company Secretary of the Charter Hall Group on 18 June 2012. She is also Company Secretary for the Responsible Entity of the Charter Hall Retail REIT (ASX:CQR), and Secretary for a number of other related entities. Carolyne is admitted as a lawyer with the Supreme Court of New South Wales, and is a member of the Law Society of New South Wales. She holds a Bachelor of Business (in Accounting), a Bachelor of Laws, and a Graduate Diploma in Applied Finance and Investment. Prior to joining the Charter Hall Group in November 2011, Carolyne held senior roles in corporate governance, risk management, legal and compliance with two leading investment management firms in Australia. She has over 20 years of practical corporate governance experience. Persons who held the position of Company Secretary during the financial year were Natalie Allen (from 24 November 2011 to the end of the financial year) and Nathan Francis (from the start of the financial year until 24 November 2011). Charter Hall GroupDirectors’ report for the year ended 30 June 2012 Meetings of Directors The numbers of meetings of the Group’s Board of Directors and of each Committee of the Board held during the year ended 30 June 2012, and the numbers of meetings attended by each Director were: K Roxburgh R Woodhouse1 A Brennan D Deverall2 G Fraser3 C Fuchs4 D Harrison P Kahan C McGowan D Southon Full meetings of the Board of Directors A 19 17 17 2 17 6 19 19 19 19 B 19 19 19 2 19 10 19 19 19 19 Audit, Risk and Compliance Committee A B 5 * 5 * 5 * * * * * 5 * 5 * 5 * * * * * Nomination Committee Remuneration and HR Committee A 2 2 * * * * * * 2 * B 2 2 * * * * * * 2 * A * 8 8 * * * * * 8 * B * 8 8 * * * * * 8 * A = Number of meetings attended. B = Number of meetings held during the time the Director held office or was a member of the stated Committee during the year. * = Not a member of the stated Committee. 1. Includes attendance by P Kahan as an alternate for R Woodhouse. 2. D Deverall was appointed as a Non-Executive Director to the Group on 7 May 2012. 3. G Fraser resigned as a Non-Executive Director on 15 August 2012. 4. C Fuchs resigned as an Executive Director of the Group effective 24 November 2011. Remuneration overview Charter Hall’s Board is committed to clear and transparent disclosure of the Company’s remuneration structure and details of the value that key management personnel (KMP) derive from various remuneration components. The Board reviews the format and content of the remuneration report each year with a view to presenting information consistently, concisely and in a form that complies with the Corporations Act 2001 (the Act). In line with stakeholder feedback, this year Charter Hall has again included this brief overview of the key remuneration outcomes and actions taken during FY12 and planned for FY13, together with the actual cash value of remuneration received by KMPs. As required by Section 308(C) of the Act, the full audited remuneration report from page 43 of this Annual Financial Report provides more detail on Charter Hall’s remuneration strategy, components and outcomes. 1. Summary of key remuneration decisions taken in FY12 While stability in the remuneration structure is important, where modifications can be made to better align stakeholder interests and drive performance, the Board actively considers these. As a result the following key actions were taken: Fixed remuneration ◆◆ No fixed remuneration increases were awarded to the Joint Managing Directors (JMDs) in FY12; ◆◆ No fixed remuneration increases will be awarded to the JMDs and Senior Executives for FY13; and ◆◆ Non-Executive Director (NED) fees were not increased in FY12 and will not be increased in FY13. Short Term Incentive (STI) A key performance metric for the Group, operating earnings per security (OEPS), before specific items, was 21.5 cents, which represented an increase of 4.4% on the prior corresponding period. However, the Board recognised that net OEPS after specific items was 18.6 cents, down 9.7% on the prior corresponding period. Reflecting this performance, the Board and management considered it appropriate to apply restraint in relation to the STI for FY12: ◆◆ The STI pool for all employees was significantly below the ‘at target’ STI; and ◆◆ Although the financial gateway for the JMDs STI of 95% of target OEPS was achieved, it was considered appropriate that no STI would be awarded to the JMDs. Long Term Incentive (LTI) ◆◆ During FY12 the vesting period of the LTI was increased from two years (50%) and three years (50%) to full vesting at three years. 41 Annual Report 2012 Remuneration overview (continued) 2. Planned changes for FY13 The series of actions identified as part of a comprehensive review of the Group’s remuneration strategy in FY11 were implemented in FY12 and continue in FY13. These changes include: ◆◆ Adjusting the weighting of STI financial and non-financial measures from 50% financial and 50% non-financial in FY12 moving to 67% financial performance, and 33% non-financial performance in FY13; ◆◆ Introducing a Group financial gateway and setting threshold, target and stretch targets for STIs for all employees in FY13; ◆◆ Retaining the Absolute Total Securityholder Return (TSR) measure for LTI as it provides strong alignment with our business model of co-investing in managed funds with Absolute Return objectives; ◆◆ Increasing the range required for Absolute TSR from 10% to 12% to a range of 10% to 13% in FY13; and ◆◆ Introducing clawbacks on deferred, unpaid STI and unvested LTI for the JMDs and Senior Executives from FY13. 3. Actual remuneration received in FY12 The actual remuneration presented in the table below provides the remuneration that KMPs received during the financial year ended 30 June 2012. This voluntary disclosure, provided to increase transparency, includes: ◆◆ Fixed pay and other benefits for FY12; ◆◆ FY11 cash STI paid; and ◆◆ The embedded value of any LTI that vested during the year. The actual remuneration presented is distinct from the disclosed remuneration in the Remuneration Report on page 53, which is calculated in accordance with statutory obligations and accounting standards and therefore includes accounting values for current and prior years’ LTI grants which have not been (and may or may not be) received as they are dependent on performance hurdles being met. Reported Executives Actual Remuneration Outcomes FY12 FY12 Name Executive directors C Fuchs1 D Harrison D Southon Other key management personnel P Altschwager2 N Devlin S Dundas3 A Glass N Kelly S Sewell4 R Stacker A Taylor Short-term benefits Post- employment benefits Salary and fees $ Short-term incentive $ Super- annuation $ Share- based payment Value of securities vested $ Other Non- monetary benefits5 $ % of Total Remuneration consisting of options/rights Total $ 118,427 1,034,225 1,034,225 86,425 131,250 131,250 235,970 259,225 70,728 530,225 450,486 385,210 424,225 608,225 – 80,968 – 126,000 90,000 220,000 150,000 220,000 6,573 15,775 15,775 3,944 15,775 1,503 15,775 15,775 11,831 15,775 15,775 59,044 297,175 297,175 9,083 32,299 22,699 279,552 1,510,724 1,501,124 – – – 118,870 95,097 – – – – – – – – – – – 239,914 355,968 72,231 790,870 651,358 617,041 590,000 844,000 21 20 20 0 0 0 15 15 0 0 0 Totals 5,151,170 1,235,893 134,277 867,361 64,082 7,452,783 1. C Fuchs retired as a Director of Charter Hall on 24 November 2011, however remained an employee throughout the year. KMP remuneration reflected in the table above, represents all remuneration receipts to 24 November 2011. 2. P Altschwager commenced employment on 27 February 2012. 3. S Dundas became a KMP on 14 May 2012. 4. S Sewell ceased employment with Charter Hall on 17 February 2012. 5. Non-monetary benefits include motor vehicle costs and applicable FBT. 6. The FY10 PROP plan vested on 1 July 2011. 7. In FY11 the JMD’s were awarded an STI of $262,500. 50% of the STI was awarded in cash and 50% deferred into service rights vesting after one year. 42 Charter Hall GroupDirectors’ report for the year ended 30 June 2012 1.2 External advisors and remuneration consultants Where necessary, the Board seeks advice from independent experts and advisors including remuneration consultants who ensure that executives’ remuneration is appropriately structured and consistent with comparable roles in the market. Other external advisors (including legal practitioners) assist with administration of the Group’s performance remuneration plans and ensuring that the appropriate legal parameters are understood and employment contracts are appropriately executed. Following the Federal Government’s legislative changes regarding the governance of executive remuneration arrangements, the Board adopted a protocol governing the appointment of remuneration consultants and the manner in which any recommendations are made by those consultants to ensure there is no undue influence by management. The advice and recommendations of external advisors are used as a guide only but do not serve as a substitute for thorough consideration of the issues by the Board. All decisions relating to remuneration strategy and approach are made independently by the Board with careful regard to the Committee’s recommendations, Charter Hall’s position, strategic objectives and current requirements. During the period the following external advisors provided advice to the Committee – Ernst and Young, and Freehills. These advisors did not provide any ‘remuneration recommendations’ to Charter Hall as defined by the Act. Remuneration Report – audited This Remuneration Report outlines Charter Hall’s remuneration policies and practices together with the details and outcomes of the specific remuneration arrangements that apply to Charter Hall’s KMP for the year ended 30 June 2012. This Report has been prepared in accordance with Section 300A of the Act and the information provided has been audited, as required by section 308(3C) of the Act. 1. Executive remuneration governance and structure 1.1 Governance The Remuneration and Human Resources Committee (Committee) provides advice and recommendations to the Board on: ◆◆ The Group’s Human Resources strategy; ◆◆ Criteria for reviewing the performance of the JMDs; ◆◆ Remuneration policies for Non-Executive Directors (NEDs) and Committee Members; ◆◆ Remuneration policy for senior executives; ◆◆ Incentive plans for all employees; and ◆◆ Any other remuneration matters that relate to executives. The Committee is appointed by the Board and is comprised solely of Non-Executive Directors, as follows: ◆◆ Anne Brennan (Chair of the Committee); ◆◆ Roy Woodhouse (Peter Kahan has attended meetings as Roy Woodhouse’s alternate from 27 February 2012); and ◆◆ Colin McGowan. The JMDs and the Head of People attend Committee meetings by invitation. Specialist external consultants attend as required. A minimum of two Committee members are required for a quorum. The members’ attendance is set out at page 41. The Committee’s charter is available on the Company’s website at www.charterhall.com.au. 43 Annual Report 2012 1. Executive remuneration governance and structure (continued) 1.3 Key Management Personnel The executives included in the table below are considered to be members of the KMP because they are members of the Group’s Executive Committee which is responsible for the Group’s strategy and operations. Executive Directors and Executives listed in the table below are referred to in this Remuneration Report as ‘Reported Executives’. Name Role Movement during FY12 Non-Executive Directors Anne Brennan David Deverall Glenn Fraser Peter Kahan Colin McGowan Kerry Roxburgh Roy Woodhouse Executive Directors David Harrison David Southon Former Executive Director Cedric Fuchs Director Director Director Director Director Chairman Director (Deputy Chairman) Joint Managing Director Joint Managing Director Executive Director Appointed 7 May 2012 Resigned 15 August 2012 Ceased to be a KMP as at 24 November 2011. However, he continues to work within the Group as an Executive Director of Charter Hall Direct Property Management Limited. Commenced 27 February 2012 Group Chief Financial Officer Head of People Fund Manager, Charter Hall Retail REIT (CQR) Head of Wholesale Pooled Funds Head of Investor Relations Head of Direct – Charter Hall Direct Property Head of Wholesale Partnerships – Charter Hall Office Trust (CHOT) CEO, Charter Hall Retail REIT Ceased to be a KMP as at 3 January 2012 and left the Group on 17 February 2012 Executives Paul Altschwager Natalie Devlin Scott Dundas Andrew Glass Nick Kelly Richard Stacker Adrian Taylor Former Executives Steven Sewell 44 Charter Hall GroupDirectors’ report for the year ended 30 June 2012 1.4 Decisions and actions taken during FY12 1.4.1 Aligning remuneration outcomes with Group performance The Board continued to ensure strong alignment between Charter Hall’s performance and remuneration outcomes. A key performance metric for the Group, operating earnings per security (OEPS), before specific items, was 21.5 cents, which represented an increase of 4.4% on the prior corresponding period and was consistent with market guidance. However, the Board recognise net OEPS after specific items was 18.6 cents, down 9.7% on the prior corresponding period. Reflecting this performance, the Board and management considered it appropriate to apply restraint in relation to payment of remuneration. As a result the following actions were taken: Action Explanation Freeze on Executive Fixed Remuneration Freeze on Directors’ Fees No STI awarded to the JMDs Reduced STI awarded for other employees Performance Rights only awarded Extended LTI vesting period There were no Fixed Remuneration increases for the JMDs in FY12. There are no Fixed Remuneration increases for the JMDs, Reported and Senior Executives in FY13. There were no fee increases for individual Non-Executive Directors (NEDs) in FY12. The NED fee pool was increased to $1,000,000 in November 2011 to facilitate additional NEDs. Although the required gateway for the JMDs STI of 95% of OEPS was achieved, it was agreed that the JMDs receive no STI in FY12. There is currently no gateway for the STI for employees other than the JMDs. The Board formed an overall view of Group performance taking into account specific items and reduced the ‘at target’ STI pool to 30% to reward the achievement of non- financial KPIs. Previous LTI grants comprised 50% Performance Rights and 50% Options. In FY12, only Performance Rights were granted. The FY12 grant vesting period increased from two years (50%) and three years (50%) to full vesting (100%) at three years. 1.4.2 Proposed remuneration framework changes for FY13 The Board endeavours to ensure that remuneration policies balance Charter Hall’s performance objectives and remain in step with community and shareholder expectations. While stability in the remuneration structure is important, where modifications can be made to better align stakeholder interests and drive performance, the Board actively considers these. In FY11 a comprehensive review of the Group’s remuneration strategy was initiated with changes being implemented progressively. The following changes are proposed for FY13: Component Change Short Term Incentive (STI) Long Term Incentive (LTI) Clawbacks Remuneration mixes ◆◆ Introduction of a Group financial gateway of 95% of OEPS. There is no STI entitlement below the gateway, however the Board retain an overall discretion on performance achievement; ◆◆ Articulation of performance and pay outcomes at threshold, target and stretch (capped at 125% of target OEPS); ◆◆ Reweighting of KPIs from 50% financial and 50% non-financial, to 67% financial and 33% non-financial; and ◆◆ Deferral of one-third of any STI awarded and any award above 100% into service rights split equally over two years (applies to JMDs and Senior Executives only). ◆◆ After considering alternative measures, the Absolute TSR measure has been maintained as it provides strong alignment with our business model of co-investing in managed funds with Absolute Return objectives. ◆◆ Increasing the range of the Absolute TSR measure from 10% to 12% to a range of 10% to 13%. ◆◆ Applies to unvested deferred STI and LTI for material misstatement, misrepresentation of financial results and Board discretion around overall performance (applies to the JMDs, Reported and Senior Executives only). ◆◆ Adjusting the remuneration mix for KMP (excluding the CFO and JMDs) from the current 60% fixed remuneration, 20% STI and 20% LTI to 60% fixed remuneration, 25% STI and 15% LTI to compensate for the introduction of STI deferral. 45 Annual Report 2012 1. Executive remuneration governance and structure (continued) 1.4 Decisions and actions taken during FY12 (continued) 1.4.2 Proposed remuneration framework changes for FY13 (continued) Charter Hall will continue to regularly review its remuneration policies to ensure that they remain appropriate and enable the Group to attract, motivate and retain the services of highly qualified employees and executives necessary for the Group to be able to achieve its strategic objectives and maximise securityholder value. 1.5 FY12 Remuneration philosophy and guiding principles Charter Hall’s remuneration philosophy is aimed at rewarding outperformance. This is achieved by attracting and retaining talented people who are motivated to achieve challenging performance targets aligned with both the business strategy and the long-term interests of securityholders. The following diagram illustrates the link between business strategy and remuneration outcomes: Charter Hall Business Strategy Key strategic goals: ◆◆ Deliver top quartile returns vs A-REIT 200; ◆◆ Recycle equity into higher yielding investments; ◆◆ Grow sustainable earnings (>80% annuity earnings); ◆◆ Develop a scalable and efficient platform; and ◆◆ Recruit, retain and motivate a high performance team. Charter Hall Remuneration Strategy Create sustainable securityholder value by: ◆◆ Assessing performance and STI plan outcomes against financial and non-financial KPIs linked to strategy; ◆◆ Deferring a portion of STI into equity for the JMDs and Divisional Heads; ◆◆ Aligning LTI performance hurdles with securityholders’ expected returns; and ◆◆ Ensuring a significant ‘at risk’ component of total remuneration. Attract, retain and motivate talent by: ◆◆ Rewarding superior performance; ◆◆ Offering competitive total remuneration; ◆◆ Creating retention mechanisms; and ◆◆ Ensuring remuneration strategy is simple, transparent and consistent. Charter Hall Remuneration Components Fixed STI LTI ◆◆ Set at the median of the Australian ◆◆ Size of the STI pool is linked to the market using external benchmarking data; ◆◆ Comprises cash salary, superannuation and packaged benefits; ◆◆ Reflects responsibilities, performance, qualifications and experience; ◆◆ Consideration is given to external and internal relativities; and ◆◆ Reviewed annually. achievement of a target OEPS number; ◆◆ STI targets are linked to KPIs which include performance targets of the Group, Division and individual; ◆◆ Financial measures relate to EPS, investment earnings and reduction in operating expenses; ◆◆ Non-financial measures relate to strategy, people, stakeholder and operational excellence; ◆◆ Targets are split 50/50 financial and non-financial; and ◆◆ Partial deferral into service rights over two years. ◆◆ LTI targets have direct links to securityholder value creation; ◆◆ Ensures participants only receive a benefit when Charter Hall achieves challenging TSR targets; ◆◆ Performance measures based on Relative Performance and Absolute TSR; ◆◆ Delivered as performance rights; ◆◆ Three year performance measurement period; and ◆◆ Capped at 10% of fully diluted securities on issue. 46 Charter Hall GroupDirectors’ report for the year ended 30 June 2012 1.6 Reported Executive remuneration mix The table below represents the target remuneration mix for KMP in FY12. The variable STI is ‘at target’, whilst the LTI represents the dollar value awarded for allocation purposes. JMDs CFO Other KMP Not ‘at risk’ Fixed Remuneration 50% 50% 60% ‘At risk’ STI 25% 25% 20% LTI 25% 25% 20% In FY13, the Other KMP remuneration mix will be reweighted by moving a percentage from LTI to STI to accommodate the introduction of the STI deferral, going to a mix of 60% fixed remuneration, 25% STI and 15% LTI. 2. Executive remuneration components and outcomes Executive remuneration is structured as a mixture of fixed and variable ‘at risk’ STI and LTI components. While fixed remuneration is designed to provide a predictable base level of remuneration, the STI and LTI components reward executives when challenging measures are met or exceeded. The components of the JMD’s remuneration packages are substantially the same as the other executives. However, there are differences in the quantum, delivery and timing for the JMDs due to the unique nature of their responsibilities and the central role they play in implementing the strategic direction of the Group. Where the JMD remuneration approach differs from the Reported Executives remuneration it is noted below. 2.1 Fixed Remuneration Composition Fixed remuneration comprises cash base salary, statutory superannuation contributions and other nominated benefits (such as car parking, novated leases and additional superannuation contributions). Review process Fixed remuneration is targeted at the median of the market and is reviewed annually, effective 1 July, benchmarked against equivalent roles in the market recognising: ◆◆ Individual performance; ◆◆ The competitive market environment for each individual’s skills and capabilities; ◆◆ Internal relativities; and ◆◆ Gender pay equality. Benchmarking and peer comparisons Benchmarking is challenging, as there are few companies that replicate Charter Hall’s business model. The following comparator groups represent our competitors for capital or for talent: ◆◆ Market capitalisation group: based on S&P/ASX 200 companies within 50% to 200% of Charter Hall’s market capitalisation ◆◆ Industry related companies: based on entities in the S&P/ASX 200 Australian Real Estate and Investment Trust (A-REIT) industry group, excluding Westfield which was not considered to be a comparator due to its scale. JMD benchmarking Fixed Remuneration Outcomes Given the unique nature of these positions, the Board references the remuneration paid to the comparator group CEOs and the ‘next highest paid senior executive’ (excluding the CFO) when setting their remuneration. In FY12 there were no increases for the JMDs and fixed remuneration increases for all other employees averaged 4%. In FY13 the Board has determined no fixed remuneration increases will be awarded to JMDs and Senior Executives. Fixed remuneration increases for all other employees averaged 3% overall. 2.2 Short Term Incentives (STI) Purpose Participants The STI is an ‘at-risk’ incentive awarded annually designed to reward executives subject to performance against agreed financial and non-financial Key Performance Indicators (KPI)s. All permanent employees with greater than three months service at the end of the calendar year. STI awards are pro-rated based on the amount of service within the year. 47 Annual Report 2012 2. Executive remuneration components and outcomes (continued) 2.2 Short Term Incentives (STI) (continued) Delivery Determining STI pools Performance targets Short term performance FY12 STI assessment – JMDs FY12 STI assessment – other KMP 48 For Reported and Senior Executives the STI is delivered in the form of cash (50%) and service rights (50%) deferred equally over two years. The number of rights to be issued will be determined by dividing the dollar value of the relevant STI entitlement by the independently valued fair value of CHC securities based on the volume-weighted average price (VWAP) over the five working days prior to the issue date of STI for staff (in FY12 this was 29 August 2012). If an Executive ceases employment prior to expiry of the relevant 12 month period, the equity rights will be forfeited. For all other employees the STI is delivered as cash. Subject to an overall cap, the size of the pool is determined by the Board, upon advice from the Remuneration and Human Resources Committee, based on achieving a targeted OEPS number. The Board retains discretion to increase or decrease the overall STI pool available, based on its assessment of the overall performance throughout the year. The STI measures are set to ensure appropriate focus on achievement of Group, divisional and individual performance targets that are aligned with implementation of Charter Hall’s overall strategy. KPIs in FY12 were split 50% financial and 50% non-financial and are based on a Balanced Scorecard approach which encourages executives to take a holistic approach to enhancing and protecting shareholder value. In FY12, the Group’s financial target was an OEPS of 21.9 cents. In FY12, Charter Hall’s operating earnings per security (OEPS) before specific items was 21.5c, which was broadly consistent with target. However, OEPS after specific items was 18.6c, which included the net CQO divestment fees after the costs of closing the US office; Group restructuring costs; and the one off provision for the possibility of a clawback of previously paid performance fees relating to Charter Hall Opportunity Fund 4. Taking the above into consideration, the Board and management considered it appropriate to apply restraint in relation to payment of STI reflecting its focus on cost control and appropriate reward for performance allowing for the impact of the specific items referred to above. This ensured that STI outcomes were directly aligned with Group performance. The JMDs have a financial gateway of 95% of target OEPS which must be achieved before any STI becomes available to be awarded. The Board, in consultation with the Remuneration and Human Resources Committee, assesses the Group’s financial performance and the performance of the JMDs against agreed KPIs. Although the financial gateway of 95% of target OEPS before specific items was achieved, it was considered appropriate that no STI be awarded in FY12 taking into account the effect of specific items on the OEPS. The JMDs’ KPIs for FY12 are summarised below: Measure KPI Financial 50% Including EPS at each of CHC, CHOT and CQR, maximising co-investment earnings in funds, and reduction of operating expenses Status Partially achieved Non-financial 50% Strategic measures (15%) – in relation to the business strategy, business plan and sustainability targets People measures (15%) – in relation to enhancing the organisational structure, employee engagement and increasing the number of women in leadership positions Stakeholder measures (10%) – including stakeholder management and communication, fundraising and building Charter Hall’s brand and value Operational excellence measures (10%) – including risk management, governance and business development Achieved Partially Achieved Partially Achieved Partially achieved Other employees did not have a gateway for their STI in FY12. 30% of the target STI pool was made available for the achievement of non-financial KPIs which represented 50% of the Balanced Scorecard. Similar KPIs applied to other KMPs focused on individual areas of accountability. In view of the reduced size of the FY12 STI awarded, the Board decided that no FY12 STI would be deferred for Reported and Senior Executives. Deferral of one-third of STI will occur in FY13. Details of the STI awarded for FY12 are provided in the following table: Charter Hall GroupDirectors’ report for the year ended 30 June 2012 Table 2.2.a. Reported Executives STI outcomes in FY12 (statutory accounting) FY12 Name Executive directors D Harrison D Southon Other key management personnel P Altschwager1 N Devlin S Dundas A Glass N Kelly S Sewell R Stacker A Taylor STI Earned $ Paid in Cash $ Target STI % of Fixed Pay % % STI earned of Target % % STI forfeited of target % – – – 34,322 65,196 48,539 48,588 – 65,193 92,456 – – – 34,322 65,196 48,539 48,588 – 65,193 92,456 50 50 50 33 33 33 33 33 33 33 – – – 38 45 27 32 – 45 45 100 100 100 62 55 73 68 100 55 55 1. Paul Altschwager commenced on 27 February 2012 and will not be eligible to receive an STI until FY13. 2.3 Long Term Incentives (LTI) Purpose Participants Type of equity awarded Number of instruments awarded Valuation Performance hurdles (equally weighted) and vesting schedule The LTI aligns key employee rewards with sustainable growth in securityholder value over time. It also plays an important role in staff retention. Reported Executives, Senior Executives and Fund Managers. The LTI is governed by the Performance Rights and Options Plan (PROP), under which either rights or options to securities are granted to participants. From FY12, all grants under the PROP comprised Performance Rights only (i.e. no Options). Each Performance Right entitles the participant to one security in the Charter Hall Group for nil consideration at the time of vesting subject to meeting the performance hurdles outlined below. Details of specific grants made to Reported Executives for FY12 are provided in Section 5 of the report. The aggregate number of offers that can be made under the PROP and the discontinued ELSP scheme, excluding those issued to Executive Directors, is limited to 10% of issued stapled securities of the Group. At 30 June 2012, LTI schemes accounted for 3% of the issued securities (note 27 in the financial statements) made up of: ◆◆ 5,412,897 performance rights; ◆◆ 6,229,835 options; and ◆◆ 589,213 service rights. These include securityholder approved issues of securities to Executive Directors. The value of an executive’s annual LTI grant is a set percentage of their Fixed Remuneration. In FY12 the number of rights granted to an executive was determined based on an independent fair value calculation by Deloittes using the Monte Carlo simulation valuation method which is consistent with the accounting fair value standard AASB 2. For FY13, the Board has resolved that the allocation methodology for any future LTI award will be valued using the Black-Scholes methodology and will continue to be valued for accounting purposes using a Monte Carlo simulation valuation. For the FY12 LTI allocation, the two performance hurdles that applied to the Performance Rights for vesting over a three year period commencing 1 July 2011 were: ◆◆ Absolute TSR (50%) – vesting occurs on a linear basis if the total return is between 10% and 12% per annum, starting at 50% vesting at the lower end of the range and 100% vesting at the higher end of the range; ◆◆ Relative Return (50%) – vesting occurs on a linear basis if the total compounded return is between the S&P/ASX 200 A-REIT Accumulation Index (XPJAI) and 1.10 times that number. Vesting starts at 50% at the lower end of the range and 100% will vest at the higher end of the range. Any Performance Rights that fail to meet these performance hurdles by 1 July 2014 will lapse. 49 Annual Report 2012 2. Executive remuneration components and outcomes (continued) 2.3 Long Term Incentives (LTI) (continued) Rationale for performance conditions Cessation of employment provisions Hedging and margin lending prohibitions Legacy programs Charter Hall’s approach to linking individual executive performance and Group performance to the vesting of equity rights is in line with market practice. The conditions are aimed at linking the retention and remuneration of the executive directly to rewards where securityholder returns are delivered. The focus on employee-held equity is also part of a deliberate policy to strengthen engagement and direct personal interest to the provision of returns for securityholders. TSR measures the overall returns that a company has provided for its shareholders, reflecting share price movements and reinvestment of dividends over a specified period. Relative TSR is the most widely used LTI hurdle adopted in Australia and ensures that value is only delivered to participants if the investment return actually received by CHC securityholders is sufficiently high relative to the return they could have received by investing in a portfolio of alternative A-REIT sector stocks over the same period. During the year the Board considered an alternate measure to Absolute TSR. The Absolute TSR hurdle has been retained as it provides a strong link to Charter Hall’s business model of co-investing in managed funds with absolute and total return targets. In FY13 the Absolute Hurdle will increase from a range of 10% to 12% per annum to a range of 10% to 13% per annum. For the FY12 LTI allocation, the following provisions apply in the case of cessation of a participant’s employment: ◆◆ Misconduct: all unvested Performance Rights are forfeited unless the Board determines otherwise; ◆◆ Resignation or where a participant breaches a post-termination restriction in their employment contract: all unvested Performance Rights are forfeited unless the Board determines otherwise; and ◆◆ All other leavers: all unvested Performance Rights lapse with effect from the date of cessation of employment, unless the Board allows part or all to vest early or remain on foot subject to the original terms of grant. In accordance with the Corporations Act 2001 all key management personnel are prohibited from hedging or otherwise protecting the value of unvested securities. The LTI is currently provided by participation in the PROP. Some personnel still have an interest in the LTI plan previously offered by Charter Hall, the Employee Loan Securities Plan (ELSP), which was suspended from 1 July 2009. Further details are set out in Note 41 of the financial statements. Long term performance outcomes The following graph demonstrates how the Company’s TSR (including share price movements and dividends) has performed relative to the ASX A-REIT Accumulation Index: Figure 1: Charter Hall’s 7 year (since listing) cumulative Total Securityholder Return performance CHC A-REIT Accumulation Index Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 500% 450% 400% 350% 300% 250% 200% 150% 100% 50% 50 Charter Hall GroupDirectors’ report for the year ended 30 June 2012 Long term performance outcomes (continued) Relative performance Charter Hall has performed generally in line with the A-REIT sector except in FY09 when it underperformed for most of that year. On acquisition of the majority of the Macquarie real estate funds management platform in March 2010, Charter Hall initially performed ahead of and more recently in line with the A-REIT Index. In the 12 months to 30 June 2012, Charter Hall has outperformed its peers in the S&P/ASX 200 A-REIT Accumulation Index by 3.4%. Absolute performance For the three years to June 2012, Charter Hall has achieved a combined average growth rate of 15% per annum based on an accumulation basis. This is based on a weighted average security price (VWAP) of $1.82 for the month of July 2009, a 30 June 2012 closing security price of $2.27 and cumulative distributions over the three years of 47.5 cents. This performance is in excess of the outperformance hurdle of 12%. LTI outcomes: The LTI vesting conditions for the Reported Executives provide a clear link to long-term total securityholder returns of Charter Hall. There is a direct correlation between the absolute underperformance of Charter Hall and the fact that until 30 June 2011, no LTI benefit had vested for any executive. The following LTI outcomes occurred in FY12: ◆◆ FY10 PROP – Based on the achievement of performance hurdles, the FY10 issue of the PROP has fully vested. This plan had its first vesting date on 1 July 2011 and its second vesting date on 1 July 2012. Both the relative and absolute outperformance hurdles were achieved. ◆◆ FY11 PROP – The first tranche of the FY11 PROP had a vesting date on 1 July 2012, by which date Charter Hall had not met the target performance hurdles. Under the plan rules, any rights or options that did not vest on the first vesting date, are carried over to be re-tested with the second tranche on 1 July 2013. Further details of LTI grants under the PROP and ELSP are set out in Section 5 of this report. 2.4 Group performance and Total Remuneration Outcomes The tables below provide information on Charter Hall’s performance against key metrics over the last five years and the relationship to Reported Executive Total Remuneration, both fixed and ‘at risk’. Charter Hall’s Short Term Incentive is weighted towards growth in operating earnings per security (OEPS) and the Long Term incentive provides an important link between remuneration and Total Securityholder Return. Table 2.4.a. Charter Hall 5 year performance Key Performance Metrics FY08 FY09 Statutory Earnings (Loss) per Security (cps) Statutory Net Profit (Loss) after Tax ($’000s) OEPS before specific items (%)1 Growth (Decline) in OEPS before specific items on prior year (%) Operating Profit before specific items ($’000s) Total Distribution per Security (cps) Security price at 30 June Total Securityholder Return (Loss) – July-June (%) 65.23 67,498 50.96 34.0 52,742 50.4 3.94 (58.4) (71.90) (82,222) 30.44 (40.3) 34,828 19.8 2.00 (44.6) FY10 3.22 6,840 16.83 (44.7) 35,781 12.8 2.40 26.4 FY11 FY12 17.85 52,338 20.60 22.4 60,422 16.5 2.15 (3.5) 5.64 16,678 21.51 4.4% 63,586 18.2 2.27 14.0% 1. A key performance metric for the Group, operating earnings per security (OEPS), before specific items, was 21.5 cents, which represented an increase of 4.4% on the prior corresponding period and was consistent with market guidance. However, the Board recognise net OEPS after specific items was 18.6 cents, down 9.7% on the prior corresponding period. Reflecting this performance, the Board and management considered it appropriate to apply restraint in relation to remuneration. 51 Annual Report 2012 2. Executive remuneration components and outcomes (continued) 2.4 Group performance and Total Remuneration Outcomes (continued) Table 2.4.b. Reported Executive Total Remuneration Remuneration Summary FY08 FY09 FY10 FY11 FY12 Fixed payments ($) STI accounting expense ($) LTI accounting expense ($)1 Earned remuneration ($)2 ‘At target’ remuneration ($)3 Earned remuneration relative to target remuneration – Over/(Under) (%) 2,334,122 1,295,000 1,746,376 5,375,498 4,049,474 3,415,610 105,000 137,2474 3,657,857 6,074,372 3,991,129 3,194,100 794,115 7,979,344 7,268,548 6,236,089 1,640,944 1,866,842 9,743,875 11,238,415 5,340,202 354,294 1,680,857 7,375,353 9,350,464 33 (40) 10 (13) (21) 1. The LTI expense attributed to the Reported Executives reflects the statutory accounting expense under AASB 2. 2. Earned remuneration for the Reported Executives is the sum of their Fixed Payments, the STI accounting expense and the LTI accounting expense. 3. Target remuneration is calculated based on the split of remuneration for the JMDs of 50/25/25 and the Other KMP of 60/20/20. Changes to the composition of the KMP (see Section 1.3) are reflected in the target remuneration number for FY12. Scott Dundas and Paul Altschwager became KMPs part-way through the year and their numbers are based on actual figures earned. Steven Sewell resigned and left the Group on 17 February 2012. 4. One of the FY09 LTI vesting measures was an EPS target. The target was not achieved and the LTI expense was reversed. 2.5 Security Holdings Table 2.5. Reported Executive Security Holdings FY12 Name Directors of Charter Hall Limited Ordinary securities K Roxburgh R Woodhouse A Brennan D Deverall G Fraser D Harrison P Kahan C McGowan D Southon Other key management personnel of the Group P Altschwager N Devlin S Dundas A Glass N Kelly R Stacker A Taylor 52 Opening balance Purchased/ (Sold) during the year LTI securities vesting/ (forfeited) during the year Closing balance 31,250 21,429 30,000 – 156,934 2,429,540 – – 2,461,161 – – – – 55,343 – – – – – 15,287 (86,934) (416,234) – – (90,980) – – – (36,392) (81,246) – – – – – – – 222,664 – – (95,372) – – – 36,392 50,058 – – 31,250 21,429 30,000 15,287 70,000 2,235,970 – – 2,274,809 – – – – 24,155 – – Charter Hall GroupDirectors’ report for the year ended 30 June 2012 3. Executive remuneration in detail 3.1 Total remuneration of Executives Details of the FY12 remuneration of the Reported Executives are provided in the following tables. Table 3.1.a. Reported Executives of the Group and Company FY12 (statutory accounting) FY12 Name Executive directors C Fuchs1 D Harrison D Southon Other key management personnel P Altschwager2 N Devlin S Dundas3 A Glass N Kelly S Sewell4 R Stacker A Taylor Short-term benefits Post- employment benefits Share- based payment Other Salary and fees $ Short-term incentive $ Super- annuation $ Securities, options and performance rights $ Annual Leave and Long Service Leave $ Non- monetary benefits5 $ % of Total Remuneration consisting of options/rights Total $ 118,427 1,034,225 1,034,225 – – – 6,573 15,775 15,775 52,952 503,059 503,059 (765) 45,949 21,717 9,083 32,299 22,699 186,271 1,631,307 1,597,475 235,970 259,225 70,728 530,225 450,486 385,210 424,225 608,225 – 34,322 65,196 48,539 48,588 – 65,193 92,456 3,944 15,775 1,503 15,775 15,775 11,831 15,775 15,775 142,311 42,180 12,783 132,340 111,518 (110,694) 113,875 177,473 18,243 (4,160) 14,202 4,665 30,008 (48,818) 40,042 42,697 – – – – – – – – 400,467 347,342 164,412 731,544 656,375 237,529 659,111 936,626 Totals 5,151,170 354,294 134,277 1,680,857 163,779 64,082 7,548,459 1. C Fuchs retired as a Director of Charter Hall on 24 November 2011, however remained an employee throughout the year. KMP remuneration reflected in the table above represents all remuneration receipts to 24 November 2011. 2. P Altschwager commenced employment on 27 February 2012. 3. S Dundas became a KMP on 14 May 2012. 4. S Sewell ceased employment with Charter Hall on 17 February 2012. 5. Non-monetary benefits include motor vehicle costs and associated FBT. 28 31 31 36 12 8 18 17 (47) 17 19 22 53 Annual Report 2012 3. Executive remuneration in detail (continued) 3.1 Total remuneration of Executives (continued) Table 3.1.b. Reported Executives of the Group and Company FY11 (statutory accounting) FY11 Name Executive directors C Fuchs D Harrison D Southon Other key management personnel J Bakker1 A Glass N Kelly S Sewell R Stacker A Taylor M Winnem1 Short-term benefits Post employment benefits Share- based payment Other Salary and fees $ Short-term incentive $ Super- annuation $ Securities, options and performance rights $ Annual Leave and Long Service Leave $ % of Total Remuneration consisting of options/rights Total $ 384,801 1,034,801 1,034,801 86,425 262,500 262,500 49,999 15,199 15,199 109,944 412,387 412,387 18,206 26,017 (31,247) 649,375 1,750,904 1,693,640 634,801 509,801 434,801 584,801 384,801 584,801 434,801 158,700 126,000 90,000 220,000 150,000 220,000 64,819 15,199 15,199 25,000 18,999 27,886 15,199 15,199 262,909 146,663 120,699 108,124 64,906 108,124 120,699 (5,000) (4,039) 12,116 (10,776) (6,497) 6,532 (18,463) 1,066,609 793,625 682,615 921,148 621,096 934,656 617,055 17 24 24 25 18 18 12 10 12 20 19 Totals 6,023,010 1,640,944 213,079 1,866,842 (13,151) 9,730,725 1. Jelte Bakker and Michael Winnem ceased being KMP on 30 June 2011. 3.2 JMD loan arrangements As disclosed in previous remuneration reports, each of the JMDs entered into a loan agreement with Charter Hall Limited in 2005 in relation to the purchase of 2,500,000 (now 625,000 following the one for four security consolidation in FY11) listed securities in Charter Hall Group. The securities purchased using the loans are not reflected in the LTI amounts for the JMDs. These securities were not issued as part of any remuneration arrangements. The terms of the loans were renegotiated in FY11. Further information about these loans is included in Note 30 of the financial statements. 54 Charter Hall GroupDirectors’ report for the year ended 30 June 2012 3.3 Key terms of employment 3.3.1. Current Executives The remuneration and other terms of employment for Reported Executives are formalised in employment agreements. Each of these agreements provides for participation in the Group’s STI and LTI programs (as described above) and payment of other benefits (including car allowances). The terms and conditions of employment of each executive reflect market conditions at the time of their contract. All Reported Executives’ contracts are ongoing in duration. The material terms of the employment agreements for the JMDs and Senior Executives are summarised below: Name Position Minimum Notice Period1 Employee Charter Hall David Harrison David Southon Paul Altschwager Natalie Devlin Scott Dundas Andrew Glass Nick Kelly Richard Stacker2 Adrian Taylor3 Joint Managing Director Joint Managing Director Group Chief Financial Officer Head of People Fund Manager – Charter Hall Retail REIT Head of Wholesale Pooled Funds Head of Investor Relations Head of Direct – Charter Hall Direct Property Head of Wholesale Partnerships – Charter Hall Office Trust 3 months 3 months 3 months 1 month 3 months 3 months 4 weeks 3 months 3 months 3 months 3 months 6 months 1 month 6 months 3 months 4 weeks 3 months 3 months 1. No notice period is required for termination by the Company for serious or wilful misconduct by the employee. 2. Termination payments under Richard Stacker’s contract equals six months base salary plus one month per year of service to a maximum of 12 months base salary. 3. Termination payments under Adrian Taylor’s contract equals nine months base salary plus one month per year of service to a maximum of 12 months base salary. Other than as described above, the Reported Executives’ contracts do not provide for any termination benefits aside from payment in lieu of notice (where applicable). Treatment of unvested incentives is dealt with in accordance with the terms of grant (refer to STI and LTI discussion in the section above). 3.3.2. Former executives Steven Sewell resigned on 3 January 2012 and ceased employment with the Group on 17 February 2012. He received no payments upon cessation of employment with the Group, other than statutory entitlements. 4. Non-Executive Director remuneration 4.1 Policy The Remuneration & Human Resources Committee makes recommendations to the Board on the total level of remuneration of the Chairman, Deputy Chairman and other non-executive directors (NEDs); including any additional fees payable to directors for membership of Board committees. Fees are set by reference to the following considerations: ◆◆ Industry practice and best principles of corporate governance; ◆◆ Responsibilities and risks attaching to the role of NED; ◆◆ The time commitment expected of NEDs on Group matters; and ◆◆ Reference to fees paid to NEDs of other comparable companies. The Board, through the Remuneration & Human Resources Committee, reviews periodically its approach to NED remuneration to ensure it remains in line with general industry practice and reflects proper compensation for duties undertaken. External independent advice is sought in these circumstances. 55 Annual Report 2012 4. Non-Executive Director remuneration (continued) 4.2 Fee framework NED fees, including committee fees, are set by the Board within the aggregate amount approved by shareholders. Currently, the aggregate amount is $1,000,000 per annum, which was approved by securityholders at the 2011 Annual General Meeting. The increase to the NED fee pool at the 2011 Annual General meeting was to facilitate the payment in FY12 of two additional NEDs: Mr David Deverall who was appointed on 7 May 2012; and Mr Peter Kahan, who became entitled to earn a Director’s fee from 1 October 2011. The total amount paid to NEDs in FY12 was $821,397. Under the current framework, NEDs receive: ◆◆ Board base fee; ◆◆ Committee fees; and ◆◆ Superannuation. The Chairman of the Board receives a loading of 100% in recognition of the additional demands and responsibilities of the role. The Deputy Chairman does not receive a loading. NEDs are also entitled to be reimbursed for all business related expenses, including travel on Charter Hall business, as may be incurred in the discharge of their duties in accordance with Charter Hall’s Constitution. In accordance with principles of good corporate governance, NEDs do not receive any benefits upon retirement under any retirement benefits schemes (other than statutory superannuation) and NEDs are not eligible to participate in any of Charter Hall Group’s employee incentive schemes. In FY12 there was no increase to NED fees. Details of the current fee structure are set out in the table below. Disclosure of NED remuneration for FY12 is set out section 4.3. below. FY12 FY11 200,000 100,000 200,000 100,000 20,210 13,475 20,210 13,475 2,000 2,000 8,800 20,210 13,475 20,210 13,475 2,000 2,000 8,800 Table 4.2. Summary of fee framework Board Chair Non-Chair Audit Risk and Compliance Committee Chair Non-Chair Remuneration and Human Resources Committee Chair Non-Chair Nomination Committee Chair Non-Chair Valuation Committee1 1. The valuation committee comprises one Non-Executive Director. 56 Charter Hall GroupDirectors’ report for the year ended 30 June 2012 4.3 Total remuneration details Table 4.3.1. Non-Executive Director remuneration FY12 (statutory accounting) FY12 Name Non-Executive Directors K Roxburgh – Chairman R Woodhouse – Deputy Chairman A Brennan D Deverall G Fraser1 P Kahan C McGowan Total Salary and fees $ Superannuation $ 203,644 105,940 122,647 14,780 131,451 75,000 108,500 761,962 11,831 9,535 11,038 1,330 9,926 – 15,775 59,435 1. Glenn Fraser received $21,167 for additional consulting services provided to the various Group Audit, Risk and Compliance Committees. Table 4.3.2. Non-Executive Director remuneration FY11 (statutory accounting) FY11 Name Non-Executive Directors K Roxburgh – Chairman R Woodhouse – Deputy Chairman A Brennan3 P Derrington2 G Fraser P Kahan C McGowan Total 1. Fees paid include a one-off payment for additional work relating to the Macquarie Acquisition. 2. Patrice Derrington resigned on 10 November 2010. 3. Anne Brennan commenced on 6 October 2010. Salary and fees1 $ Superannuation $ 224,550 111,701 67,746 34,648 97,737 – 83,725 620,107 14,769 11,024 6,097 3,906 29,678 – 47,000 112,474 Total $ 215,475 115,475 133,685 16,110 141,376 75,000 124,275 821,397 Total $ 239,319 122,725 73,843 38,554 127,415 – 130,725 732,581 57 Annual Report 2012 5. Appendix – Further detail on Long Term Incentives 5.1 Performance Rights and Options Plan details Table 5.1.a. Performance rights and options issued under the PROP Performance Rights Year of issue Securities Exercise price Vesting conditions FY10 FY11 FY121 Total performance rights issued 582,340 1,358,890 3,471,667 5,412,897 Nil Nil Nil Absolute and relative performance criteria described above Absolute and relative performance criteria described above Absolute and relative performance criteria described above Options Year of issue FY10 FY10 FY11 FY11 Total options issued Service Rights Year of issue Securities Exercise price Vesting conditions 2,832,178 678,516 2,595,744 123,397 6,229,835 $1.94 $2.80 $2.44 $2.35 Absolute and relative performance criteria described above Absolute and relative performance criteria described above Absolute and relative performance criteria described above Absolute and relative performance criteria described above Securities Exercise price Vesting conditions FY11 FY12 FY12 Total service rights issued 157,697 171,462 260,054 589,213 Nil Nil Nil Service conditions Service conditions – JMD Deferred STI Service conditions – CFO Sign-on 1. The increase from FY11 to FY12 reflects the move from 50% performance rights and 50% options to 100% performance rights in FY12. 58 Charter Hall GroupDirectors’ report for the year ended 30 June 2012 Valuation Model Inputs The Black-Scholes or Monte Carlo method, as applicable, is utilised for valuation and accounting purposes. The model inputs for the PROP performance rights and options plan issued during FY09, FY10, FY11 and FY12, and to assess the fair value, are as follows: Options Grant date Security price at grant date* Fair Value of Option* Exercise price per security* Expiry of loan Expected price volatility Risk-free interest rate Performance Rights Grant date Security price at grant date* Fair Value of Right* Expected price volatility Risk-free interest rate Service Rights Grant date Security price at grant date* Fair Value of Right* Expected price volatility Risk-free interest rate 13/11/09 18/6/10 6/9/10 11/11/10 $2.44 $0.51 $2.44 6/9/15 40% 5.5% 6/9/10 $2.44 $1.33 40% 5.5% $2.40 $0.39 $1.94 1/7/14 40% 5.5% $2.80 $0.56 $2.80 18/6/15 40% 5.5% $2.44 $0.51 $2.44 6/9/15 40% 5.5% 22/12/08 13/11/09 18/6/10 $1.20 $0.64 59% 3.2% 6/9/10 $2.44 $2.06 40% 5.5% $2.40 $1.07 40% 5.5% $2.80 $1.52 40% 5.5% 22/5/12 22/5/12 $2.08 $1.87 35% 4.3% $2.17 $1.53 30% 3.7% 11/1/11 $2.35 $0.49 $2.35 6/9/16 40% 5.5% 19/11/10 17/1/12 $2.44 $1.33 40% 5.5% $2.10 $0.94 39% 3.9% * Security prices for prior years have been restated for the unit consolidation during FY11. Table 5.1.b. Performance rights and options issued to Reported Executives Performance Rights FY10 Performance Rights FY11 Performance Rights FY12 Total Performance Rights Options FY10 Options FY11 Total Options Service Right FY12 Total Service Rights 22,522 96,520 96,520 61,540 201,924 201,924 107,419 564,517 564,517 191,481 862,961 862,961 80,515 345,060 670,314 153,848 504,808 504,808 234,363 849,868 1,175,122 – 85,731 85,731 – 85,731 85,731 – – 35,752 38,608 30,886 – 53,628 89,252 – 10,897 – 50,483 43,272 – – – – 97,581 107,527 141,130 120,968 – 157,549 223,433 – 108,478 143,279 230,221 195,126 – 211,177 312,685 – – 89,252 268,128 162,500 – 133,876 223,252 – 27,243 – 126,204 108,176 – – – – 27,243 89,252 394,332 270,676 – 133,876 223,252 260,054 – – – – – – – 260,054 – – – – – – – Executive Directors C Fuchs D Harrison D Southon Key management personnel P Altschwager N Devlin S Dundas A Glass N Kelly S Sewell R Stacker A Taylor Note: Performance Rights and Options issued to the ex-Macquarie KMP who joined Charter Hall in 2010 were issued in June 2010, in respect of the 2011 financial year. 59 Annual Report 2012 5. Appendix – Further detail on Long Term Incentives (continued) 5.1 Performance Rights and Options Plan details (continued) Table 5.1.c. Reported Executives Performance Rights and Options – details by plan Executive Directors C Fuchs D Harrison D Southon Type of Equity LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options LTI Options LTI Options LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options LTI Options LTI Options LTI Service Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options LTI Options LTI Options LTI Service Rights Rights previously granted Rights granted during the year Rights held at 30 June 2012 Grant Date Fair value per right at grant date Option exercise price No. vested and exercised during the year1,2,4 No. forfeited during the year Vesting Date Option Expiry Date Maximum value to be realised in future years3 12,621 21,876 21,876 30,770 30,770 – 78,204 78,204 76,924 76,924 100,962 93,750 93,750 100,962 100,962 – 335,157 335,157 252,404 252,404 – 100,962 93,750 93,750 100,962 100,962 – 335,157 335,157 252,404 252,404 – – – – – – 107,419 – – – – – – – – – 564,517 – – – – 85,731 – – – – – 564,517 – – – – 85,731 – 646 21,876 30,770 30,770 107,419 2,311 78,204 76,924 76,924 – 2,770 93,750 100,962 100,962 564,517 9,903 335,157 252,404 252,404 85,731 – 2,770 93,750 100,962 100,962 564,517 335,157 335,157 252,404 252,404 85,731 22-Dec-08 13-Nov-09 13-Nov-09 19-Nov-10 19-Nov-10 17-Jan-12 13-Nov-09 13-Nov-09 11-Nov-10 11-Nov-10 22-Dec-08 13-Nov-09 13-Nov-09 19-Nov-10 19-Nov-10 17-Jan-12 13-Nov-09 13-Nov-09 11-Nov-10 11-Nov-10 22-May-12 22-Dec-08 13-Nov-09 13-Nov-09 19-Nov-10 19-Nov-10 17-Jan-12 13-Nov-09 13-Nov-09 11-Nov-10 11-Nov-10 22-May-12 $0.64 $1.10 $1.03 $1.37 $1.29 $0.94 $0.39 $0.39 $0.51 $0.51 $0.64 $1.10 $1.03 $1.37 $1.29 $0.94 $0.39 $0.39 $0.51 $0.51 $1.53 $0.64 $1.10 $1.03 $1.37 $1.29 $0.94 $0.39 $0.39 $0.51 $0.51 $1.53 – – – – – – – – – – – – – – – – – – – $1.94 $1.94 $2.44 $2.44 $1.94 $1.94 $2.44 $2.44 $1.94 $1.94 $2.44 $2.44 – 21,230 75,893 90,980 325,254 90,980 – – – – – – – – – – – – – – – – – – – – – – – – – – – 12,621 30-Sep-11 100,962 30-Sep-11 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 01-Jul-14 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 01-Jul-14 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 29-Aug-12 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 01-Jul-14 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 29-Aug-12 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 100,962 30-Sep-11 – – – – – – – – – – – – – – – – – – – – 13-Nov-14 13-Nov-14 06-Sep-15 06-Sep-15 13-Nov-14 13-Nov-14 06-Sep-15 06-Sep-15 13-Nov-14 13-Nov-14 06-Sep-15 06-Sep-15 – – – – – – – – – – – – – – – – – – – – – – – 15,025 67,316 13,057 49,301 353,764 42,841 49,301 353,764 42,841 1. Tranche 2 of the FY10 Issue of the Performance Rights and Option Plan fully vested on 1 July 2012. 2. Tranche 1 of the FY11 Performance Rights and Options Plan did not meet its performance hurdles under the plan rules on 1 July 2012. All securities under this tranche are automatically carried over for retesting with Tranche 2 of this plan on 1 July 2013. 3. The maximum value of the grants yet to vest is the amount at the grant date fair value yet to be reflected in the Group's consolidated income statement. The minimum future value is $nil as the future performance and service conditions may not be met. 4. The intrinsic value at exercise date of options exercised by KMPs during the year were C Fuchs $14,420, D Harrison $81,314 and N Kelly $23,400. The Intrinsic value represents the closing trading price of CHC securities on the exercise date, less the strike price of $1.94 per security, multiplied by the number of options excercised. 60 Charter Hall GroupDirectors’ report for the year ended 30 June 2012 5. Appendix – Further detail on Long Term Incentives (continued) 5.1 Performance Rights and Options Plan details (continued) Table 5.1.c. Reported Executives Performance Rights and Options – details by plan Executive Directors C Fuchs D Harrison D Southon Type of Equity LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options LTI Options LTI Options LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options LTI Options LTI Options LTI Service Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options LTI Options LTI Options 12,621 21,876 21,876 30,770 30,770 – 78,204 78,204 76,924 76,924 100,962 93,750 93,750 100,962 100,962 335,157 335,157 252,404 252,404 100,962 93,750 93,750 100,962 100,962 335,157 335,157 252,404 252,404 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 107,419 564,517 85,731 564,517 – 646 21,876 30,770 30,770 107,419 2,311 78,204 76,924 76,924 – 2,770 93,750 100,962 100,962 564,517 9,903 335,157 252,404 252,404 85,731 – 2,770 93,750 100,962 100,962 564,517 335,157 335,157 252,404 252,404 85,731 22-Dec-08 13-Nov-09 13-Nov-09 19-Nov-10 19-Nov-10 17-Jan-12 13-Nov-09 13-Nov-09 11-Nov-10 11-Nov-10 22-Dec-08 13-Nov-09 13-Nov-09 19-Nov-10 19-Nov-10 17-Jan-12 13-Nov-09 13-Nov-09 11-Nov-10 11-Nov-10 22-May-12 22-Dec-08 13-Nov-09 13-Nov-09 19-Nov-10 19-Nov-10 17-Jan-12 13-Nov-09 13-Nov-09 11-Nov-10 11-Nov-10 22-May-12 LTI Service Rights 85,731 1. Tranche 2 of the FY10 Issue of the Performance Rights and Option Plan fully vested on 1 July 2012. 2. Tranche 1 of the FY11 Performance Rights and Options Plan did not meet its performance hurdles under the plan rules on 1 July 2012. All securities under this tranche are automatically carried over for retesting with Tranche 2 of this plan on 1 July 2013. 3. The maximum value of the grants yet to vest is the amount at the grant date fair value yet to be reflected in the Group's consolidated income statement. The minimum future value is $nil as the future performance and service conditions may not be met. 4. The intrinsic value at exercise date of options exercised by KMPs during the year were C Fuchs $14,420, D Harrison $81,314 and N Kelly $23,400. The Intrinsic value represents the closing trading price of CHC securities on the exercise date, less the strike price of $1.94 per security, multiplied by the number of options excercised. Rights previously granted Rights granted during the year Rights held at 30 June 2012 Grant Date Fair value per right at grant date Option exercise price No. vested and exercised during the year1,2,4 No. forfeited during the year Vesting Date Option Expiry Date Maximum value to be realised in future years3 $0.64 $1.10 $1.03 $1.37 $1.29 $0.94 $0.39 $0.39 $0.51 $0.51 $0.64 $1.10 $1.03 $1.37 $1.29 $0.94 $0.39 $0.39 $0.51 $0.51 $1.53 $0.64 $1.10 $1.03 $1.37 $1.29 $0.94 $0.39 $0.39 $0.51 $0.51 $1.53 – – – – – – $1.94 $1.94 $2.44 $2.44 – – – – – – $1.94 $1.94 $2.44 $2.44 – – – – – – – $1.94 $1.94 $2.44 $2.44 – – 21,230 – – – – 75,893 – – – – 90,980 – – – – 325,254 – – – – – 90,980 – – – – – – – – – 12,621 – – – – – – – – – 100,962 – – – – – – – – – – 100,962 – – – – – – – – – – 30-Sep-11 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 01-Jul-14 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 30-Sep-11 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 01-Jul-14 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 29-Aug-12 30-Sep-11 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 01-Jul-14 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 29-Aug-12 – – – – – – 13-Nov-14 13-Nov-14 06-Sep-15 06-Sep-15 – – – – – – 13-Nov-14 13-Nov-14 06-Sep-15 06-Sep-15 – – – – – – – 13-Nov-14 13-Nov-14 06-Sep-15 06-Sep-15 – – – – – 15,025 67,316 – – – 13,057 – – – – 49,301 353,764 – – – 42,841 – – – – – 49,301 353,764 – – – 42,841 – 61 Annual Report 2012 5.1 Performance Rights and Options Plan details (continued) Table 5.1.c. Reported Executives Performance Rights and Options – details by plan (continued) Type of Equity Key management personnel P Altschwager LTI Service Rights LTI Service Rights N Devlin S Dundas A Glass N Kelly R Stacker A Taylor LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options LTI Options LTI Options LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options LTI Options LTI Options LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options Rights previously granted Rights granted during the year Rights held at 30 June 2012 Grant Date Fair value per right at grant date Option exercise price No. vested and exercised during the year1,2,4 No. forfeited during the year Option Expiry Date Maximum value to be realised in future years3 – – 5,449 5,448 – 13,622 13,621 17,876 17,876 – 44,626 44,626 37,500 37,500 25,242 25,241 – 134,064 134,064 63,102 63,102 12,621 30,000 30,000 21,636 21,636 – 107,250 107,250 54,088 54,088 26,814 26,814 – 66,938 66,938 44,626 44,626 – 111,626 111,626 130,027 130,027 – – 97,581 – – – – 107,527 – – – – – – 141,130 – – – – – – – – – 120,968 – – – – – – 157,549 – – – – 223,433 – – 130,027 130,027 5,449 5,448 97,581 13,622 13,621 17,876 17,876 107,527 44,626 44,626 1,108 37,500 25,242 25,241 141,130 134,064 134,064 63,102 63,102 – 886 30,000 21,636 21,636 120,968 55,250 107,250 54,088 54,088 26,814 26,814 157,549 66,938 66,938 44,626 44,626 223,433 111,626 111,626 22-May-12 22-May-12 06-Sep-10 06-Sep-10 17-Jan-12 11-Jan-11 11-Jan-11 18-Jun-10 18-Jun-10 17-Jan-12 18-Jun-10 18-Jun-10 13-Nov-09 13-Nov-09 06-Sep-10 06-Sep-10 17-Jan-12 13-Nov-09 13-Nov-09 06-Sep-10 06-Sep-10 22-Dec-08 13-Nov-09 13-Nov-09 06-Sep-10 06-Sep-10 17-Jan-12 13-Nov-09 13-Nov-09 06-Sep-10 06-Sep-10 18-Jun-10 18-Jun-10 17-Jan-12 18-Jun-10 18-Jun-10 18-Jun-10 18-Jun-10 17-Jan-12 18-Jun-10 18-Jun-10 $1.87 $1.87 $1.37 $1.28 $0.94 $0.49 $0.49 $1.58 $1.46 $0.94 $0.56 $0.56 $1.10 $1.03 $1.37 $1.27 $0.94 $0.39 $0.39 $0.51 $0.51 $0.64 $1.10 $1.03 $1.37 $1.28 $0.94 $0.39 $0.39 $0.51 $0.51 $1.58 $1.46 $0.94 $0.56 $0.56 $1.58 $1.46 $0.94 $0.56 $0.56 – – – – – – – – – – – – – – – – – – – – – – – – $2.35 $2.35 $2.80 $2.80 $1.94 $1.94 $2.44 $2.44 $1.94 $1.94 $2.44 $2.44 $2.80 $2.80 $2.80 $2.80 36,392 29,114 52,000 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Vesting Date 31-Dec-12 31-Dec-13 01-Jul-12 01-Jul-13 01-Jul-14 30-Jun-12 30-Jun-13 30-Jun-12 30-Jun-13 01-Jul-14 30-Jun-12 30-Jun-13 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 01-Jul-14 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 01-Jul-14 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 01-Jul-12 01-Jul-13 01-Jul-14 01-Jul-12 01-Jul-13 01-Jul-12 01-Jul-13 01-Jul-14 01-Jul-12 01-Jul-13 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 12,621 30-Sep-11 – – – – – – – – – – – – – – – – – – – – – – – – – 06-Sep-15 06-Sep-15 18-Jun-15 18-Jun-15 13-Nov-14 13-Nov-14 06-Sep-15 06-Sep-15 13-Nov-14 13-Nov-14 06-Sep-15 06-Sep-15 13-Nov-14 13-Nov-14 13-Nov-14 13-Nov-14 144,870 197,820 2,289 61,151 2,234 8,589 67,384 8,212 10,572 88,441 10,731 9,062 75,807 9,198 12,884 98,731 12,318 21,443 140,018 20,541 – – – – – – – – – – – – – – – – – – – – – 1. Tranche 2 of the FY10 Issue of the Performance Rights and Option Plan fully vested on 1 July 2012. 2. Tranche 1 of the FY11 Performance Rights and Options Plan did not meet its performance hurdles under the plan rules on 1 July 2012. All securities under this tranche are automatically carried over for retesting with Tranche 2 of this plan on 1 July 2013. 62 Charter Hall GroupDirectors’ report for the year ended 30 June 2012 5.1 Performance Rights and Options Plan details (continued) Table 5.1.c. Reported Executives Performance Rights and Options – details by plan (continued) Key management personnel P Altschwager N Devlin S Dundas A Glass N Kelly R Stacker A Taylor Type of Equity LTI Service Rights LTI Service Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options LTI Options LTI Options LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options LTI Options LTI Options LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Options LTI Options – – – – 5,449 5,448 13,622 13,621 17,876 17,876 44,626 44,626 37,500 37,500 25,242 25,241 – 134,064 134,064 63,102 63,102 12,621 30,000 30,000 21,636 21,636 – 107,250 107,250 54,088 54,088 26,814 26,814 66,938 66,938 44,626 44,626 – – 111,626 111,626 130,027 130,027 97,581 107,527 141,130 120,968 157,549 223,433 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 130,027 130,027 5,449 5,448 97,581 13,622 13,621 17,876 17,876 107,527 44,626 44,626 1,108 37,500 25,242 25,241 141,130 134,064 134,064 63,102 63,102 – 886 30,000 21,636 21,636 120,968 55,250 107,250 54,088 54,088 26,814 26,814 157,549 66,938 66,938 44,626 44,626 223,433 111,626 111,626 22-May-12 22-May-12 06-Sep-10 06-Sep-10 17-Jan-12 11-Jan-11 11-Jan-11 18-Jun-10 18-Jun-10 17-Jan-12 18-Jun-10 18-Jun-10 13-Nov-09 13-Nov-09 06-Sep-10 06-Sep-10 17-Jan-12 13-Nov-09 13-Nov-09 06-Sep-10 06-Sep-10 22-Dec-08 13-Nov-09 13-Nov-09 06-Sep-10 06-Sep-10 17-Jan-12 13-Nov-09 13-Nov-09 06-Sep-10 06-Sep-10 18-Jun-10 18-Jun-10 17-Jan-12 18-Jun-10 18-Jun-10 18-Jun-10 18-Jun-10 17-Jan-12 18-Jun-10 18-Jun-10 Rights previously granted Rights granted during the year Rights held at 30 June 2012 Grant Date Fair value per right at grant date Option exercise price No. vested and exercised during the year1,2,4 No. forfeited during the year Vesting Date Option Expiry Date Maximum value to be realised in future years3 $1.87 $1.87 $1.37 $1.28 $0.94 $0.49 $0.49 $1.58 $1.46 $0.94 $0.56 $0.56 $1.10 $1.03 $1.37 $1.27 $0.94 $0.39 $0.39 $0.51 $0.51 $0.64 $1.10 $1.03 $1.37 $1.28 $0.94 $0.39 $0.39 $0.51 $0.51 $1.58 $1.46 $0.94 $0.56 $0.56 $1.58 $1.46 $0.94 $0.56 $0.56 – – – – – $2.35 $2.35 – – – $2.80 $2.80 – – – – $1.94 $1.94 $2.44 $2.44 – – – – – – $1.94 $1.94 $2.44 $2.44 – – – $2.80 $2.80 – – – $2.80 $2.80 – – – – – – – – – – – – 36,392 – – – – – – – – 29,114 – – – – 52,000 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 12,621 – – – – – – – – – – – – – – – – – – – 31-Dec-12 31-Dec-13 01-Jul-12 01-Jul-13 01-Jul-14 30-Jun-12 30-Jun-13 30-Jun-12 30-Jun-13 01-Jul-14 30-Jun-12 30-Jun-13 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 01-Jul-14 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 30-Sep-11 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 01-Jul-14 01-Jul-11 01-Jul-12 01-Jul-12 01-Jul-13 01-Jul-12 01-Jul-13 01-Jul-14 01-Jul-12 01-Jul-13 01-Jul-12 01-Jul-13 01-Jul-14 01-Jul-12 01-Jul-13 – – 144,870 197,820 – – – 06-Sep-15 06-Sep-15 – – – 18-Jun-15 18-Jun-15 – – – – – 13-Nov-14 13-Nov-14 06-Sep-15 06-Sep-15 – – – – – – 13-Nov-14 13-Nov-14 06-Sep-15 06-Sep-15 – – – 13-Nov-14 13-Nov-14 – – – 13-Nov-14 13-Nov-14 – 2,289 61,151 – 2,234 – 8,589 67,384 – 8,212 – – – 10,572 88,441 – – – 10,731 – – – – 9,062 75,807 – – – 9,198 – 12,884 98,731 – 12,318 – 21,443 140,018 – 20,541 3. The maximum value of the grants yet to vest is the amount at the grant date fair value yet to be reflected in the Group's consolidated income statement. The minimum future value is $nil as the future performance and service conditions may not be met. 4. The intrinsic value at exercise date of options exercised by KMPs during the year were C Fuchs $14,420, D Harrison $81,314 and N Kelly $23,400. The Intrinsic value represents the closing trading price of CHC securities on the exercise date, less the strike price of $1.94 per security, multiplied by the number of options excercised. 63 Annual Report 2012 5.2 Legacy Program: Executive Loan Securities Plan (ELSP) details Table 5.2.a. Remaining securities under the ELSP – suspended from 1 July 2009 Year of issue FY08 Securities Transferred, sold or forfeited Retained in plan On issue Issue Price 2,682,326 (2,013,329) 9,058 678,055 $11.04 to $11.76 Vesting conditions applicable on securities remaining within the plan OEPS must increase by 5% in each year from FY07 or have achieved 5% compound annual growth on FY07. First tranche vested with the second and third not meeting the conditions. Total 2,682,326 (2,013,329) 9,058 678,055 Table 5.2.b. Reported Executives ELSP details – June 2012 Type of Equity Securities Grant Date1,2,3 Issue Price Last Vesting Date Loan Expiry % Vesting Securities in ELSP at June 2011 Securities forfeited/ lapsed in current year Securities vested in current year Securities in ELSP at June 2012 Maximum total value of grant yet to vest ($)4 Executive Directors C Fuchs ELSP ELSP ELSP 98,425 30-Jun-06 90,580 216,346 19-Nov-08 $5.08 30-Sep-08 01-Jul-11 03-Jul-07 $11.04 30-Sep-08 23-Jul-12 $4.16 30-Sep-11 18-Nov-13 67 33 0 65,616 30,194 72,116 65,616 – 72,116 D Harrison ELSP ELSP ELSP D Southon ELSP ELSP ELSP 290,354 30-Jun-06 679,348 $5.08 30-Sep-08 01-Jul-11 03-Jul-07 $11.04 30-Sep-08 23-Jul-12 $4.16 30-Sep-11 18-Nov-13 1,730,769 19-Nov-08 279,528 30-Jun-06 679,348 $5.08 30-Sep-08 01-Jul-11 03-Jul-07 $11.04 30-Sep-08 23-Jul-12 $4.16 30-Sep-11 18-Nov-13 1,730,769 19-Nov-08 67 193,570 193,570 – 33 226,449 0 576,923 576,923 67 186,352 186,352 – 33 226,449 0 576,923 576,923 – – – – 30,194 – – – – 226,449 – – – – – 226,449 – – Key management personnel N Kelly ELSP ELSP ELSP 46,584 16-Oct-06 72,464 $6.44 30-Sep-08 01-Jul-11 03-Jul-07 $11.04 30-Sep-08 23-Jul-12 $4.16 30-Sep-11 18-Nov-13 216,346 07-Aug-08 67 33 0 31,056 24,155 72,116 31,056 – 72,115 – – – – 24,155 – – – – – – – – – – – – – 1. For the ELSPs granted on 30 June 2006 and 16 October 2006, the loans associated with these grants expired on 1 July 2011. As these plans were out of the money on this date, all securities attaching to these loans were forfeited. 2. For the ELSPs granted on 3 July 2007, the loans associated with these grants expired on 23 July 2012. As these plans were out of the money on this date, all securities attaching to these loans were forfeited post year end. 3. For the ELSPs granted on 7 August 2008 and 19 November 2008, the final tranche of these plans did not vest due to failure to meet performance conditions. 4. The maximum value of securities yet to vest in the ELSP is $nil. All security based payment expenses in relation to the ELSP have been fully expensed in prior years. 64 Charter Hall GroupDirectors’ report for the year ended 30 June 2012 Indemnification and insurance of directors, officers and auditor During the year, Charter Hall Group contributed to the premium for a contract insuring all directors, secretaries, executive officers and officers of the Charter Hall Group and of each related body corporate of the Group, with the balance of the premium paid by funds managed by members of the Charter Hall Group. The insurance does not provide any cover for the independent auditor of the Charter Hall Group or of a related party of the Charter Hall Group. In accordance with usual commercial practice, the insurance contract prohibits disclosure of details of the nature of the liabilities covered by the insurance, the limit of indemnity and the amount of the premium paid under the contract. So long as the officers of the Responsible Entity act in accordance with the Charter Hall Property Trust’s Constitution and the Corporations Act 2001, the officers are indemnified out of the assets of the Charter Hall Property Trust against losses incurred while acting on behalf of the Charter Hall Property Trust. The Charter Hall Group indemnifies the auditor (PricewaterhouseCoopers Australia) against any liability (including legal costs) for third party claims arising from a breach by Charter Hall Group of the auditor’s engagement terms, except where prohibited by the Corporations Act 2001. Non-audit services The Company may decide to employ the auditor on assignments additional to its 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 satisfied 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 satisfied 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; and ◆◆ 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 Charter Hall Group and Charter Hall Property Trust Group, its related practices and non-related audit firms: (a) Audit services PricewaterhouseCoopers Australian firm Audit and review of financial reports Independent Review of the Charter Hall anti-money laundering program Non-PricewaterhouseCoopers audit firms for audit services W F White & Co Total remuneration for audit services (b) Taxation services PricewaterhouseCoopers Australian firm Tax compliance services, including review of company income tax returns Total remuneration for taxation services (c) Advisory services PricewaterhouseCoopers Australian firm Long-term incentive plan structure Accounting advice Total remuneration for advisory services Charter Hall Group Charter Hall Property Trust Group 2012 $ 2011 $ 2012 $ 2011 $ 347,597 387,791 32,184 47,388 55,000 – – 402,597 1,940 389,731 – – – – 32,184 47,388 60,976 60,976 55,050 55,050 10,000 10,000 29,720 29,720 10,000 25,500 35,500 53,525 – 53,525 – – – – – – 65 Annual Report 2012 Environmental regulation The principal activities of the Group are property investment, property funds management and development investment. Funds management involves minimal environmental impact. The Group ensures compliance with applicable environmental standards and regulations in its property investment and development investment activities. The Group reported its greenhouse gas emissions and energy use under the National Greenhouse and Energy Reporting Act 2007 for the first time in October 2011. In October 2012, the Group will report to the Clean Energy Regulator emissions for the measurement period 1 July 2011 to 30 June 2012. The Group has assessed the impact of the Australian Government’s Clean Energy Plan 2011 and does not anticipate a material impact to its operations from the carbon price. The Group will continue to implement resource efficiency measures to mitigate against price increases associated with the carbon price. 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. 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. 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 67. 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 office 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 17 September 2012 66 Charter Hall GroupDirectors’ report for the year ended 30 June 2012 Auditor’s independence declaration 67 Annual Report 2012 Consolidated financial statements for the year ended 30 June 2012 Consolidated statements of comprehensive income Total income 132,579 160,095 63,314 Income Revenue Share of net profit of associates accounted for using the equity method Net gain on remeasurement of equity interests Fair value adjustment on contingent consideration Net gain on sale of investment properties and derivatives Foreign exchange gains 7 7 8 8 8 7 7 9 Expenses Investment property expenses Depreciation Finance costs Net loss on sale of investment properties and derivatives Net valuation losses on investment properties Net unrealised loss from derivative financial instruments Net loss on investment in associates at fair value Foreign exchange losses Impairment of management rights Amortisation of management rights Asset management fees Performance fee clawback provision Management, administration and other expenses Total expenses Profit before tax Income tax benefit Profit for the year Profit/(loss) for the year is attributable to: Equity holders of Charter Hall Limited Equity holders of Charter Hall Property Trust (non‑controlling interest) Profit after tax attributable to stapled securityholders of Charter Hall Group Net profit/(loss) attributable to other non‑controlling interests Profit for the year Charter Hall Group Charter Hall Property Trust Group Notes 2012 $’000 2011 $’000 2012 $’000 2011 $’000 6 123,630 109,594 53,287 35,335 36(b) 2,949 4,645 1,355 – – 30,396 16,726 – 3,350 29 5,494 4,533 – – – 26,815 16,733 – 2,523 12 81,418 (4,839) – (7,196) – (128) (387) (319) – – – (5,726) – (1,899) (3,541) (725) (9,382) (1,627) (7,692) (310) (1,774) (943) – (1,307) – (14,239) (77,068) (4,795) (1,545) (8,111) – (2,518) (386) (309) – (19,171) – – – (70,689) (3,478) – (8,875) (2,179) (7,692) (310) (1,757) (955) – – (3,591) – (1,313) (118,608) (107,524) (30,150) (20,494) 13,971 432 14,403 52,571 2,666 55,237 33,164 – 33,164 60,924 323 61,247 (19,409) (5,493) – – 36,087 57,831 36,087 57,831 16,678 52,338 36,087 (2,275) 14,403 2,899 55,237 (2,923) 33,164 57,831 3,416 61,247 68 Charter Hall Group Profit for the year 14,403 55,237 33,164 61,247 Charter Hall Group Charter Hall Property Trust Group Notes 2012 $’000 2011 $’000 2012 $’000 2011 $’000 Other comprehensive income/(loss) for the year Exchange differences on translation of foreign operations Transfer of cumulative FX losses Other comprehensive income/(loss) for the year, net of tax Total comprehensive income for the year Total comprehensive income for the year is attributable to: Equity holders of Charter Hall Limited Equity holders of Charter Hall Property Trust (non‑controlling interest) Total comprehensive income attributable to stapled securityholders of Charter Hall Group Total comprehensive income/(loss) attributable to other non‑controlling interests Total comprehensive income for the year Basic and diluted earnings per stapled security Basic earnings per stapled security (cents) attributable to securityholders Diluted earnings per stapled security (cents) attributable to securityholders 28(a) 2,021 11,749 13,770 28,173 (19,677) – (19,677) 35,560 2,334 11,749 14,083 47,247 (19,024) – (19,024) 42,223 (19,724) (6,123) – – 49,143 38,743 49,143 38,743 29,419 32,620 49,143 38,743 (1,246) 28,173 2,940 35,560 (1,896) 47,247 3,480 42,223 40 40 5.64 5.35 17.85 17.06 12.21 11.49 19.72 18.13 The above consolidated statements of comprehensive income should be read in conjunction with the accompanying notes. Annual Report 2012 69 Consolidated financial statements for the year ended 30 June 2012 Consolidated balance sheets Assets Current assets Cash and cash equivalents Trade and other receivables Assets classified as held for sale Total current assets Non-current assets Trade and other receivables Investment in associates at fair value through profit or loss Inventories Investments accounted for using the equity method 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 Derivative financial instruments Provisions Borrowings Total current liabilities Non-current liabilities Trade and other payables Borrowings Deferred tax liabilities Derivative financial instruments Provisions Total non-current liabilities Total liabilities Net assets Charter Hall Group Charter Hall Property Trust Group Notes 2012 $’000 2011 $’000 2012 $’000 2011 $’000 11 12 13 12 14 16 17 19 20 18 21 24 22 15 23 24 22 24 25 15 26 39,315 32,110 136,390 207,815 26,266 43,438 921 70,625 21,674 17,601 136,390 175,665 4,841 13,788 – 18,629 12,870 9,400 163,542 355,874 62,638 9,518 472,159 3,026 – 98,687 10,507 564 78,445 7,450 517,707 3,167 159,518 99,994 11,255 – 669,969 886,936 62,180 – 373,578 – – – – 564 599,864 78,014 – 436,108 – 143,718 – – – 1,013,714 877,784 957,561 775,529 1,032,343 50,788 669 14,895 51,463 117,815 – – 2,185 – 1,428 3,613 58,061 – 834 – 58,895 12,106 101,862 1,129 407 1,217 116,721 30,288 669 – 53,863 84,820 – – – – – – 32,728 – – – 32,728 – 101,862 – 407 – 102,269 121,428 175,616 84,820 134,997 756,356 781,945 690,709 897,346 70 Charter Hall Group Equity Equity holders of Charter Hall Limited Contributed equity Reserves Accumulated losses Parent entity interest Equity holders of Charter Hall Property Trust Contributed equity Reserves Accumulated losses Equity holders of Charter Hall Property Trust (non‑controlling interest) Interest attributable to stapled securityholders of Charter Hall Group Non‑controlling interest in DRF Total equity Charter Hall Group Charter Hall Property Trust Group Notes 2012 $’000 2011 $’000 2012 $’000 2011 $’000 27 28(a) 28(b) 27 28(a) 28(b) 29 209,550 (49,055) (81,738) 78,757 739,175 (1,415) (87,609) 9,503 (47,547) (62,329) (100,373) 934,458 (9,747) (74,520) – – – – – – – – 739,175 (1,415) (87,609) 934,458 (9,747) (74,520) 650,151 850,191 650,151 850,191 728,908 27,448 756,356 749,818 32,127 781,945 650,151 40,558 690,709 850,191 47,155 897,346 The above consolidated balance sheets should be read in conjunction with the accompanying notes. Annual Report 2012 71 Consolidated statement of changes in equity – Charter Hall Group Attributable to the owners of Charter Hall Group Balance at 1 July 2010 Profit/(loss) for the year Other comprehensive income/(loss) Total comprehensive income/(loss) Transactions with equity holders in their capacity as equity holders: Contributions of equity, net of issue costs Distribution provided for or paid Security‑based payments Transactions with non‑controlling interests Transfer from accumulated losses Contributed equity $’000 936,445 – – – Reserves $’000 (40,029) – (19,718) (19,718) Accumulated losses $’000 (136,055) 52,338 – 52,338 7,516 – – – – 7,516 – – 4,090 (6,300) 4,663 2,453 – (48,469) – – (4,663) (53,132) Total $’000 760,361 52,338 (19,718) 32,620 7,516 (48,469) 4,090 (6,300) – (43,163) Non- controlling interest $’000 50,629 2,899 41 2,940 – (2,503) – (18,939) – (21,442) Total equity $’000 810,990 55,237 (19,677) 35,560 7,516 (50,972) 4,090 (25,239) – (64,605) Balance at 1 July 2011 943,961 (57,294) (136,849) 749,818 32,127 781,945 Profit/(loss) for the year Other comprehensive income Total comprehensive income/(loss) Transactions with equity holders in their capacity as equity holders: Performance rights and options exercised Distribution provided for or paid Security-based payments Transactions with non-controlling interests Transfer to accumulated losses – – – – 12,741 12,741 16,678 – 16,678 16,678 12,741 29,419 (2,275) 1,029 (1,246) 14,403 13,770 28,173 4,764 – – – – 4,764 (1,452) – 2,600 (2,402) (4,663) (5,917) – (53,839) – – 4,663 (49,176) 3,312 (53,839) 2,600 (2,402) – (50,329) – (2,667) – (766) – (3,433) 3,312 (56,506) 2,600 (3,168) – (53,762) Balance at 30 June 2012 948,725 (50,470) (169,347) 728,908 27,448 756,356 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 72 Charter Hall GroupConsolidated financial statements for the year ended 30 June 2012 Consolidated statement of changes in equity – Charter Hall Property Trust Group Attributable to the owners of Charter Hall Property Trust Group Balance at 1 July 2010 Profit/(loss) for the year Other comprehensive income/(loss) Total comprehensive income/(loss) Transactions with equity holders in their capacity as equity holders: Contributions of equity, net of issue costs Distribution provided for or paid Transactions with non‑controlling interests Transfer from accumulated losses Contributed equity $’000 927,018 – – – Reserves $’000 4,626 – (19,088) (19,088) Accumulated losses $’000 (79,219) 57,831 – 57,831 7,440 – – – 7,440 – – 52 4,663 4,715 – (48,469) – (4,663) (53,132) Total $’000 852,425 57,831 (19,088) 38,743 7,440 (48,469) 52 – (40,977) Non- controlling interest $’000 50,630 3,416 64 3,480 – (3,072) (3,883) – (6,955) Total equity $’000 903,055 61,247 (19,024) 42,223 7,440 (51,541) (3,831) – (47,932) Balance at 1 July 2011 934,458 (9,747) (74,520) 850,191 47,155 897,346 Profit/(loss) for the year Other comprehensive income Total comprehensive income/(loss) Transactions with equity holders in their capacity as equity holders: Performance rights and options exercised Reallocation to Charter Hall Limited Distribution provided for or paid Transactions with non-controlling interests Transfer to accumulated losses – – – – 13,056 13,056 36,087 – 36,087 36,087 13,056 49,143 (2,923) 1,027 (1,896) 33,164 14,083 47,247 4,717 (200,000) – – – (195,283) – – – (61) (4,663) (4,724) – – (53,839) – 4,663 (49,176) 4,717 (200,000) (53,839) (61) – (249,183) – – (3,889) (812) – (4,701) 4,717 (200,000) (57,728) (873) – (253,884) Balance at 30 June 2012 739,175 (1,415) (87,609) 650,151 40,558 690,709 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 73 Annual Report 2012 Consolidated cash flow statements Charter Hall Group Charter Hall Property Trust Group Notes 2012 $’000 2011 $’000 2012 $’000 2011 $’000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest paid Distributions and dividends from investments Net cash inflow from operating activities 39 Cash flows from investing activities Payments for property, plant and equipment Proceeds on disposal of investment property Payment for inventory Payments for investment properties Deferred payments for business combination Investments in associates and joint ventures Proceeds on disposal and return of capital from investments in associates Loans to associates and joint ventures Repayments from associates Repayments from key management personnel Transactions with non‑controlling interests Payments for acquisition of non‑controlling interests Net cash inflow/(outflow) from investing activities Cash flows from financing activities Proceeds from issues of securities and other equity securities Payment on settlement of derivative financial instruments Proceeds from borrowings Repayment of borrowings Distributions paid to securityholders Net cash outflow from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the year 11 146,830 (93,503) 53,327 2,562 (8,654) 31,773 79,008 (587) 33,742 (1,294) (717) (15,752) (68,522) 95,129 (6,120) – 800 – – 36,679 107,836 (72,932) 34,904 2,901 (7,494) 28,471 58,782 (1,128) 97,548 (7,450) (14,778) (280) (75,670) 439 (1,250) – – – (30,076) (32,645) 19,026 (14,150) 4,876 869 (8,644) 27,765 24,866 – 17,218 – (717) – (73,769) 130,086 (1,650) 26,527 – – – 97,695 28,018 (8,180) 19,838 1,554 (7,415) 26,230 40,207 – 115,461 – (14,030) – (67,230) 20,020 (96,868) 35,970 – (3,831) – (10,508) 4,162 – 2,257 – (183) 76,442 (128,728) (54,379) (102,686) (4,388) 48,510 (37,658) (35,030) (28,566) (183) 76,442 (128,728) (55,524) (105,736) (4,388) 48,510 (37,658) (37,952) (31,488) 13,001 (2,429) 16,825 (1,789) 26,266 28,380 48 39,315 315 26,266 4,841 8 21,674 6,638 (8) 4,841 The above consolidated cash flow statements should be read in conjunction with the accompanying notes. 74 Charter Hall GroupConsolidated financial statements for the year ended 30 June 2012 Notes to the consolidated financial statements for the year ended 30 June 2012 1 Summary of significant accounting policies (a) Basis of preparation The Charter Hall Group (the Group or CHC) is a ‘stapled’ entity comprising Charter Hall Limited (the Company or CHL) and its controlled entities, and Charter Hall Property Trust (the Trust or CHPT) and its controlled entities. The shares in the Company are stapled to the units in the Trust. The stapled securities cannot be traded or dealt with separately. The stapled securities of the Group are listed on the Australian Securities Exchange. The two Charter Hall entities comprising the stapled group remain separate legal entities in accordance with the Corporations Act 2001, and are each required to comply with the reporting and disclosure requirements of Accounting Standards and the Corporations Act 2001. As permitted by Class Order 05/642, issued by the Australian Securities and Investments Commission, this financial report is a combined financial report that presents the financial statements and accompanying notes of both the Charter Hall Group and the Charter Hall Property Trust Group. The financial report of the Charter Hall Group comprises Charter Hall Limited and its controlled entities including Charter Hall Funds Management Limited (Responsible Entity) as responsible entity for Charter Hall Property Trust. Charter Hall Limited has been identified 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 a non‑controlling interest, the stapled securityholders of CHL are the same as the stapled securityholders of CHPT. The results and equity of the Charter Hall Direct Retail Fund (DRF) not directly owned by the Group have been treated and disclosed as a non‑controlling interest. The financial report of the Charter Hall Property Trust Group comprises the Trust and its controlled entities. This general purpose financial report has been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. The Charter Hall Group and Charter Hall Property Trust Group are for‑profit entities for the purpose of preparing the financial statements. The principal accounting policies adopted in the preparation of the consolidated financial statements for the year ended 30 June 2012 are set out below. These policies have been consistently applied to the years presented, unless otherwise stated. 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 financial statements of the Group have been prepared as a continuation of the consolidated financial statements of CHH. CHH, as the deemed acquirer, has acquisition accounted for CHL as at 6 June 2005. Compliance with IFRSs Compliance with Australian Accounting Standards ensures that the financial statements comply with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). Consequently, these financial statements have been prepared in accordance with and comply with IFRS as issued by the IASB. Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of investment properties, financial assets and liabilities (including derivative financial instruments) held at fair value through profit or loss. Critical accounting estimates The preparation of the financial statements in conformity with Australian Accounting Standards requires the use of certain critical accounting estimates and 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 significant to the financial statements, are disclosed in note 3. (b) Principles of consolidation (i) Controlled entities The consolidated financial statements of the Charter Hall Group and the Charter Hall Property Trust Group incorporate the assets and liabilities of all controlled entities as at 30 June 2012 and their results for the year then ended. Controlled entities are all those entities over which the Company or the Trust has the power to govern the financial 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 Company or the Trust controls another entity. Controlled entities are fully consolidated from the date on which control is transferred. They are deconsolidated from the date that control ceases. The acquisition method of accounting is used to account for acquisition of controlled entities by the Company or Trust (refer to note 1(g)). Intercompany transactions, balances and unrealised gains on transactions between controlled entities are eliminated. Unrealised losses are also eliminated unless the transaction involves impairment of the asset transferred. Accounting policies of controlled entities have been changed where necessary to ensure consistency with the policies adopted by the Company or the Trust. Non‑controlling interests in the results and equity of controlled entities are shown separately in the consolidated statement of comprehensive income, consolidated balance sheets and consolidated statement of changes in equity respectively. (ii) Associates Associates are entities over which Charter Hall has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights or where Charter Hall is the responsible entity. Investments in associates are accounted for in the consolidated financial statements using the equity method of accounting after initially being recognised at cost, or as financial assets at fair value through profit or loss. Where the equity method of accounting is used, Charter Hall’s share of its associates’ post acquisition profits or losses is recognised in the statement of comprehensive income, 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 financial statements as a reduction in the carrying amount of the investment. Annual Report 2012 75 Notes to the consolidated financial statements for the year ended 30 June 2012 1 Summary of significant accounting policies (continued) (b) Principles of consolidation (continued) (ii) Associates (continued) When Charter Hall’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured long‑term receivables, Charter Hall does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between Charter Hall and its associates are eliminated to the extent of Charter Hall’s interests 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 Charter Hall. For investments in associates accounted for as financial assets at fair value through profit or loss, investments are carried at fair value with gains or losses arising from changes in the fair value being presented in the statement of comprehensive income within ‘fair value adjustments’ in the year in which they arise. Distribution income from investments in associates accounted at fair value through profit or loss is recognised in the statement of comprehensive income as part of revenue. (iii) Joint ventures Joint venture entities Investment in joint venture entities over which Charter Hall exercises joint control are accounted for in the consolidated financial statements using the equity method after initially being recognised at cost. Under the equity method, Charter Hall’s share of the profits or losses of each relevant joint venture entity is recognised in profit or loss, and the share of post‑acquisition movements in reserves is recognised in other comprehensive income. Details relating to the joint venture entities are set out in note 37. Profits and losses on transactions establishing the joint venture entity and transactions with the joint venture are eliminated to the extent of Charter Hall’s ownership interest until such time as they are realised by the joint venture entity on consumption or sale. However, a loss on the transaction is recognised immediately if the loss provides evidence of a reduction in the net realisable value of assets, or an impairment loss. Jointly controlled assets The proportionate interests in the assets, liabilities, income and expenses of a joint venture activity have been incorporated in the financial statements under the appropriate headings. Details of the joint venture activity are set out in note 37. (c) Segment reporting Segment information is presented on the same basis as that used for internal reporting purposes. 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 identified as the Board. (d) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the Group operates (the functional currency). The financial statements are presented in Australian Dollars which is the Group’s functional and presentation currency. (ii) Group companies The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary 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 in other comprehensive income. If an entity is sold, the proportionate share of exchange differences would be transferred out of equity and recognised in the income statement. Functional currencies and the relevant exchange rates are as follows: Spot rate US Dollar NZ Dollar Euro British Pounds Average rate US Dollar NZ Dollar Euro British Pounds 2012 2011 1.0238 1.2778 0.8084 0.6518 1.0312 1.2823 0.7695 0.6509 1.0713 1.2965 0.7401 0.6692 0.9856 1.3041 0.7242 0.6205 (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 represents income earned from the rental of properties (inclusive of outgoings recovered from tenants) and is recognised on a straight‑line basis over the lease term. Rental income relating to straightlining is included as a component of the net gain from fair value adjustments on investment properties. The portion of operating lease income in a reporting period relating to fixed increases in operating lease rentals in future years is recognised as a separate component of investment properties. (ii) Management fees Management fees are brought to account on an accruals basis and, if not received at the reporting date, are reflected 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, and services have been performed. 76 Charter Hall Group (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 in note 3. (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 flow 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 year’s income tax expense or benefit is the tax payable on the current year’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 financial 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 controlled entities 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 profit or taxable profit or loss. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised in profit or loss, except to the extent that it relates 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 Charter Hall. 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. Identifiable 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, Charter Hall 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 identifiable 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 Charter Hall’s share of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in profit 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 financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. (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 identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash‑generating units). Non‑financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. (i) Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial 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 insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. Annual Report 2012 77 Notes to the consolidated financial statements for the year ended 30 June 2012 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 Charter Hall 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 flows, discounted at the original effective interest rate. Cash flows relating to short‑term receivables are not discounted if the effect of discounting is immaterial. The amount of the provision is recognised in the income statement. (k) Investments and other financial assets Classification Charter Hall classifies its investments in the following categories: financial assets at fair value through profit or loss, loans and receivables, held‑to‑maturity investments, and available‑for‑sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and, in the case of assets classified as held‑to‑maturity, re‑evaluates this designation at each reporting date. (i) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for long‑term investment. Their treatment is discussed at note 1b(ii). Derivatives are also included unless they are designated as hedges. (ii) Loans and receivables Loans and receivables are non‑derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when Charter Hall 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 reporting date, which are classified as non‑current assets. Loans and receivables are included in receivables in the balance sheet. (iii) Held-to-maturity investments Held‑to‑maturity investments are non‑derivative financial assets with fixed or determinable payments and fixed maturities that management has the positive intention and ability to hold to maturity. (iv) Available-for-sale financial assets Available‑for‑sale financial assets, comprising principally marketable equity securities, are non‑derivatives that are either designated in this category or not classified 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 reporting date. Recognition and derecognition Regular purchases and sales of investments are recognised at trade‑date – the date on which Charter Hall commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit 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 flows from the financial assets have expired or have been transferred and Charter Hall has transferred substantially all the risks and rewards of ownership. Subsequent measurement Available‑for‑sale financial assets and financial assets at fair value through profit or 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 financial assets at fair value through profit or loss, excluding interest and dividend income, are presented in the statement of comprehensive income in the year in which they arise. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), Charter Hall 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 flow analysis, and option pricing models making maximum use of market inputs and relying as little as possible on entity‑specific inputs. Further details on how the fair value of financial instruments is determined are disclosed in note 1(m) and note 2. Impairment Charter Hall assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available‑for‑sale, a significant 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 financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the statement of comprehensive income – is removed from equity and recognised in the statement of comprehensive income. Impairment losses recognised in the statement of comprehensive income on equity instruments classified as available‑for‑sale are not reversed through the statement of comprehensive income. (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 method of recognising the resulting gain or loss 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 firm commitment (fair value hedges); or (2) Hedges of the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges). The fair values of various derivative financial 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 statement of comprehensive income and are included in fair value adjustment gains/(losses). The fair values previously recognised for hedges which are no longer effective are amortised over the remaining periods of the hedges. 78 Charter Hall Group (m) Fair value estimation The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments traded in active markets is based on quoted market prices at the reporting date. The quoted market price used for financial assets held by Charter Hall is the current bid price; the appropriate quoted market price for financial liabilities is the current ask price. The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. Charter Hall uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting 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 flows, are used to determine fair value for the remaining financial instruments. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward exchange contracts is determined using forward exchange market rates at the reporting date. The nominal value less estimated credit adjustments of trade receivables and payables approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to Charter Hall for similar financial instruments. (n) Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. (o) 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 plant and equipment. 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 benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of comprehensive income during the financial year in which they are incurred. (p) Investment properties Investment properties comprise investment interests in land and buildings (including integral plant and equipment) held for long‑term rental yields and not occupied by Charter Hall. This includes properties that are under construction for future use as investment properties. 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 specific asset. Charter Hall 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 fixed increases in operating lease rentals in future years. Changes in fair values are recorded in the statement of comprehensive income as part of fair value adjustments. (q) Intangibles (i) Management rights – indefinite lived assets Management rights in relation to entities with no fixed life are not amortised as they have an indefinite life. Management rights with an indefinite life are tested for impairment annually, or more frequently if events or changes in circumstances indicate that they might be impaired, and are carried at cost less accumulated impairment losses. Management rights are allocated to cash‑generating units for the purpose of impairment testing. (ii) Management rights – finite lived assets Management rights in relation to entities with a fixed life are amortised using the straight‑line method over their useful life. (r) Trade and other payables These amounts represent liabilities for goods and services provided to Charter Hall prior to the end of year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. (s) 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 statement of comprehensive income over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities, which are not incremental costs relating to the actual draw down of the facility, are recognised as a reduction in the borrowings and amortised on a straight‑line basis over the term of the facility. 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: Borrowings are classified as current liabilities unless Charter Hall has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. ◆◆ Furniture, fittings and equipment ◆◆ Fixtures ◆◆ Software 3 to 8 years 6 to 8 years 3 to 5 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. (t) Borrowing costs Borrowing costs associated with the construction of a qualifying asset, including interest expense, are capitalised as part of the cost of that asset 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. 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 statement of comprehensive income. (u) Provisions Provisions are recognised when Charter Hall has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. Provisions are not recognised for future operating losses. 79 Annual Report 2012 1 Summary of significant accounting policies (continued) (v) Employee benefits (i) Wages and salaries and annual leave Liabilities for wages and salaries, including non‑monetary benefits 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 reporting 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 outflows. (iii) Retirement benefit obligations Contributions to employee defined contribution superannuation funds are recognised as an expense as they become payable. (iv) Security-based benefits Security‑based compensation benefits are provided to employees via the Charter Hall Performance Rights and Options Plan (PROP). Information relating to these schemes is set out in note 41. For accounting purposes, the fair value at grant date is independently valued using a Monte Carlo simulation 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. For accounting purposes, the fair value of the securities granted is adjusted to reflect market vesting conditions, but excludes the impact of any non‑market vesting conditions (for example, profitability and sales growth targets). Non‑market vesting conditions are included in assumptions about the number of securities that are expected to vest. At each reporting date, the entity revises its estimate of the number of securities that are expected to vest. The employee benefit expense recognised each year takes into account the most recent estimate. Upon the vesting of securities and repayment of the loan, the balance of the security‑based benefits 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 Charter Hall recognises a liability and an expense for amounts payable to employees. Charter Hall recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. (vi) Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. Charter Hall recognises termination benefits 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 benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the reporting date are discounted to present value. (w) Contributed equity Ordinary stapled securities are classified 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. (x) Distributions Provision is made for the amount of any distribution declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the year but not distributed at reporting date. (y) Earnings per security (i) Basic earnings per security Basic earnings per security is calculated by dividing the profit attributable to equity holders of the Group, excluding any costs of servicing equity other than ordinary stapled securities, by the weighted average number of ordinary securities outstanding during the year, adjusted for bonus elements in ordinary stapled securities issued during the year. (ii) Diluted earnings per security Diluted earnings per security adjusts the figures used in the determination of basic earnings per stapled security to take into account the effect of interest and other financing costs after income tax 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. (z) 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 flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable, to the taxation authority, are presented as operating cash flows. (aa) Rounding of amounts The Company and the Trust are of a kind referred to in Class Order 98/100 (as amended), issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the financial statements. Amounts in the financial statements have been rounded to the nearest thousand dollars in accordance with that Class Order, unless otherwise indicated. (ab) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for year ended 30 June 2012 reporting periods. The impact of these new standards and interpretations (to the extent relevant to the Charter Hall Group or the Charter Hall Property Trust Group) is set out below. (i) AASB 9 Financial Instruments and AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (effective from 1 January 2013) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and liabilities. The standard is not applicable until 1 January 2013 but is available 80 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group for early adoption. AASB 9 only permits the recognition of fair value gains and losses in other comprehensive income if they relate to equity investments that are not held for trading. Fair value gains and losses on available‑for‑sale debt investments, for example, will therefore have to be recognised directly in the statement of comprehensive income. Neither the Charter Hall Group nor the Charter Hall Property Trust Group has yet decided when to adopt AASB 9. However, management does not expect this will have a significant impact on either the Charter Hall Group or the Charter Hall Property Trust Group’s consolidated financial statements as neither Group holds any available‑for‑sale investments. In December 2011, the IASB delayed the application date of IFRS 9 to 1 January 2015. The AASB is expected to make an equivalent amendment to AASB 9 shortly. (ii) AASB 2010-8 Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets (effective from 1 January 2012) In December 2010, the AASB amended AASB 112 Income Taxes to provide a practical approach for measuring deferred tax liabilities and deferred tax assets when investment property is measured using the fair value model. AASB 112 requires the measurement of deferred tax assets or liabilities to reflect the tax consequences that would follow from the way management expects to recover or settle the carrying amount of the relevant assets or liabilities, that is through use or through sale. The amendment introduces a rebuttable presumption that investment property which is measured at fair value is recovered entirely by sale. The Charter Hall Group and the Charter Hall Property Trust Group will apply the amendment from 1 July 2012. Management is currently evaluating the impact of the amendments. (iii) AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, revised AASB 127 Separate Financial Statements and AASB 128 Investments in Associates and Joint Ventures and AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards (effective 1 January 2013) In August 2011, the AASB issued a suite of five new and amended standards which address the accounting for joint arrangements, consolidated financial statements and associated disclosures. AASB 10 replaces all of the guidance on control and consolidation in AASB 127 Consolidated and Separate Financial Statements, and Interpretation 12 Consolidation – Special Purpose Entities. The core principle that a consolidated entity presents a parent and its subsidiaries as if they are a single economic entity remains unchanged, as do the mechanics of consolidation. However, the standard introduces a single definition of control that applies to all entities. It focuses on the need to have both power and rights or exposure to variable returns. Power is the current ability to direct the activities that significantly influence returns. Returns must vary and can be positive, negative or both. Control exists when the investor can use its power to affect the amount of its returns. There is also new guidance on participating and protective rights and on agent/ principal relationships. Management is currently evaluating the impact of the amendments. AASB 11 introduces a principles‑based approach to accounting for joint arrangements. The focus is no longer on the legal structure of joint arrangements, but rather on how rights and obligations are shared by the parties to the joint arrangement. Based on the assessment of rights and obligations, a joint arrangement will be classified as either a joint operation or a joint venture. Joint ventures are accounted for using the equity method, and the choice to proportionately consolidate will no longer be permitted. Parties to a joint operation will account for their share of revenues, expenses, assets and liabilities in much the same way as under the previous standard. AASB 11 also provides guidance for parties that participate in joint arrangements but do not share joint control. As the Charter Hall Group and the Charter Hall Property Trust Group already apply the appropriate accounting treatment for their joint arrangements, no material impact is expected. AASB 12 sets out the required disclosures for entities reporting under the two new standards, AASB 10 and AASB 11, and replaces the disclosure requirements currently found in AASB 127 and AASB 128. Application of this standard by the Charter Hall Group and the Charter Hall Property Trust Group will not affect any of the amounts recognised in the financial statements, but will impact the type of information disclosed in relation to the Charter Hall Group and the Charter Hall Property Trust Group’s investments. AASB 127 is renamed Separate Financial Statements and is now a standard dealing solely with separate financial statements. Application of this standard by the Charter Hall Group and the Charter Hall Property Trust Group will not affect any of the amounts recognised in the financial statements. Amendments to AASB 128 provide clarification that an entity continues to apply the equity method and does not remeasure its retained interest as part of ownership changes where a joint venture becomes an associate, and vice versa. The amendments also introduce a ‘partial disposal’ concept. The Charter Hall Group and the Charter Hall Property Trust Group are assessing the impact of these amendments. The Charter Hall Group and the Charter Hall Property Trust Group do not expect to adopt the new standards before their operative date. They would therefore be first applied in the financial statements for the reporting period commencing on 1 July 2013. (iv) AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 (effective 1 January 2013) AASB 13 was released in September 2011. It explains how to measure fair value and aims to enhance fair value disclosures. The Charter Hall Group and the Charter Hall Property Trust Group have yet to determine which, if any, of their current measurement techniques will have to change as a result of the new guidance. It is therefore not possible to state the impact, if any, of the new rules on any of the amounts recognised in the financial statements. However, application of the new standard will impact the type of information disclosed in the notes to the financial statements. Neither the Charter Hall Group nor the Charter Hall Property Trust Group intends to adopt the new standard before its operative date, which means that it would be first applied for the reporting period commencing on 1 July 2013. (v) AASB 2011-9 Amendments to Australian Accounting Standards – Presentation of Items of Other Comprehensive Income (effective 1 July 2012) In September 2011, the AASB made an amendment to AASB 101 Presentation of Financial Statements which requires entities to separate items presented in other comprehensive income into two groups, based on whether they may be recycled to profit or loss in the future. This will not affect the measurement of any of the items recognised in the balance sheet or the profit or loss in the current period. Both the Charter Hall Group and the Charter Hall Property Trust Group intend to adopt the new standard from 1 July 2012. 81 Annual Report 2012 1 Summary of significant accounting policies (continued) (ab) New accounting standards and interpretations (continued) (vi) Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) and Disclosures – Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7) (effective 1 January 2014 and 1 January 2013 respectively) In December 2011, the IASB made amendments to the application guidance in IAS 32 Financial Instruments: Presentation, to clarify some of the requirements for offsetting financial assets and financial liabilities in the balance sheet. These amendments are effective from 1 January 2014. They are unlikely to affect the accounting for any of the Charter Hall Group or the Charter Hall Property Trust Group’s current offsetting arrangements. However, the IASB has also introduced more extensive disclosure requirements into IFRS 7 which will apply from 1 January 2013. The AASB is expected to make equivalent changes to IAS 32 and AASB 7 shortly. When they become applicable, the Charter Hall Group and the Charter Hall Property Trust Group will have to provide a number of additional disclosures in relation to their offsetting arrangements. Both the Charter Hall Group and the Charter Hall Property Trust Group intend to apply the new rules for the first time in the financial year commencing 1 July 2013. (ac) Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases (note 32). Payments made under operating leases are charged to the statement of comprehensive income on a straight‑line basis. Lease income from operating leases is recognised in income on a straight‑line basis over the lease term. (ad) Assets held for sale Non‑current assets are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. For an asset to be classified as held for sale, it must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets and its sale must be highly probable. Assets classified as held for sale are measured at the lower of their carrying value and fair value less costs to sell. (ae) Parent entity financial information The financial information for the parent entity of the Charter Hall Group, Charter Hall Limited, and for the parent entity of the Charter Hall Property Trust Group, Charter Hall Property Trust, is disclosed in note 4, and has been prepared on the same basis as the consolidated financial statements, except as set out below. (i) Investments in controlled entities, associates and joint venture entities Investments in controlled entities, associates and joint venture entities are accounted for at cost in the financial statements of Charter Hall Limited and Charter Hall Property Trust. Dividends received from controlled entities, associates and joint venture entities are recognised in the parent entity’s profit or loss, rather than deducted from the carrying amount of these investments. (ii) 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 standalone 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. (iii) Receivables and payables Trade amounts receivable from controlled entities in the normal course of business and other amounts advanced on commercial terms and conditions are included in receivables. Similarly, amounts payable to controlled entities are included in payables. 2 Financial risk management Both the Charter Hall Group and Charter Hall Property Trust Group activities expose it to a variety of financial risks: market risk (price risk, interest rate risk, and foreign exchange risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments such as interest rate swaps to hedge certain risk exposures. Risk management is carried out by the Group Treasurer, the Chief Financial Officer and the Joint Managing Directors in consultation with senior management, the Audit, Risk and Compliance Committee and the Board of Directors. The Managing Directors identify, evaluate and hedge financial risks in close co‑operation with the finance department. The Board provides guidance for overall risk management, as well as covering specific areas, such as mitigating price, interest rate and credit risks, the use of derivative financial instruments and investing excess liquidity. (a) Market risk (i) Unlisted units price risk The Group is exposed to unlisted unit price risk. This arises from investments 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 a sound understanding of the underlying property values and trends that give rise to price risk. The carrying value of investments in associates at fair value through profit or loss is measured with reference to the funds’ unit prices which are determined in accordance with the funds’ respective constitutions. The key determinant of the unit price is the underlying property values which are approved by the Board and the Valuation sub‑Committee of the Board. The table below illustrates the potential impact a change in unlisted unit prices by +/–10% would have on the Charter Hall Group and Charter Hall Property Trust Group’s profit 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 either 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 definitive indicator of future price variations. 82 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group 2012 Assets – Charter Hall Group Investment in associates at fair value through profit or loss Assets – Charter Hall Property Trust Group Investment in associates at fair value through profit or loss 2011 Assets – Charter Hall Group Investment in associates at fair value through profit or loss Assets – Charter Hall Property Trust Group Investment in associates at fair value through profit or loss –10% +10% Carrying amount $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 62,638 (6,264) (6,264) 6,264 6,264 62,180 (6,218) (6,218) 6,218 6,218 –10% +10% Carrying amount $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 78,445 (7,845) (7,845) 7,845 7,845 78,014 (7,801) (7,801) 7,801 7,801 (ii) Cash flow and fair value interest rate risk As both the Charter Hall Group and Charter Hall Property Trust Group have no significant long‑term interest bearing assets, both Groups’ income and operating cash receipts are not materially exposed to changes in market interest rates. The Charter Hall Group and Charter Hall Property Trust Group’s interest rate risk arises from borrowings of $51,462,849 (2011: $101,861,453). Borrowings drawn at variable rates expose both Groups to cash flow interest rate risk. Borrowings drawn at fixed rates expose both Groups to fair value interest rate risk. The Charter Hall Group and Charter Hall Property Trust Group’s policy is to fix rates between 50‑100% of core borrowings for the anticipated debt term. Core borrowings are defined as being the level of borrowings that are expected to be held for a period of more than two years. At year end 54% (2011: 49%) of total borrowings (including debt in the Charter Hall Retail Joint Venture Trust (RJVT) to which the Group is a party – refer note 24(b)) had fixed interest rates through the use of derivatives. Excluding RJVT, at year end 39% (2011: 38%) of total borrowings had fixed interest rates through the use of derivatives. The Charter Hall Group and Charter Hall Property Trust Group both manage their cash flow interest rate risk by using floating‑to‑fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Generally, the Charter Hall Group and Charter Hall Property Trust Group raise long‑term borrowings at floating rates and swap them into fixed rates that are lower than those available if the Group borrowed at fixed rates directly. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals (mainly quarterly), the difference between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional principal amounts. Refer to note 12(d) for interest rate sensitivity analysis on assets and note 24(c) for sensitivity analysis for liabilities. (iii) Foreign exchange risk Both the Charter Hall Group and Charter Hall Property Trust Group are exposed to foreign exchange risk arising principally from their equity accounted investment in the Charter Hall Retail REIT (CQR). CQR’s investments have offshore operations in the US, Europe and New Zealand and manage their foreign exchange exposures principally through the use of offsetting borrowings in related foreign currencies and through the use of derivative financial instruments. Any residual unhedged risk remains in the foreign currency translation reserve of these funds and the Charter Hall Group’s and Charter Hall Property Trust Group’s equity accounted share of movements in these reserves are recognised in the foreign currency translation reserve of the Group. The tables on the following page illustrate the potential impact a change in foreign exchange rates of +/–10% would have on the Charter Hall Group’s and Charter Hall Property Trust Group’s profit and equity: 83 Annual Report 2012 2 Financial risk management (continued) (a) Market risk (continued) (iii) Foreign exchange risk (continued) Charter Hall Group US dollars + 10.0% – 10.0% Euros + 10.0% – 10.0% NZ dollars + 10.0% – 10.0% Charter Hall Property Trust Group US dollars + 10.0% – 10.0% Euros + 10.0% – 10.0% NZ dollars + 10.0% – 10.0% 2012 2011 Profit $’000 Equity $’000 Profit $’000 Equity $’000 140 (170) 40 (40) 18 (22) 140 (170) 40 (40) 27 (33) (392) 484 (600) 740 (102) 122 (520) 640 (600) 740 (33) (2) 324 (394) 58 (66) 26 (32) 324 (394) 58 (66) 20 (24) (6,448) 6,554 (566) 699 (23) 26 (6,456) 6,563 (566) 699 (30) 34 (b) Credit risk The Charter Hall Group and Charter Hall Property Trust Group have policies in place to ensure that sales of services are made to customers with appropriate credit histories. Over half of the Charter Hall Group’s and Charter Hall Property Trust Group’s income is derived from management fees and performance fees from related parties. Approximately 13% (2011: 16%) of the Charter Hall Group’s income is derived from rental properties, whilst approximately 29% (2011: 50%) of the Charter Hall Property Trust Group’s income is derived from rental properties; all tenants are assessed for creditworthiness, taking into account their financial position, past experience and other factors. Refer to note 12(e) for more information on credit risk. Derivative counterparties and cash transactions are limited to high credit quality financial institutions. The Charter Hall Group and Charter Hall Property Trust Group have policies that limit the amount of credit exposure to any one financial institution. (c) Liquidity risk Prudent liquidity risk management implies maintaining sufficient 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, the Charter Hall Group and Charter Hall Property Trust Group aim at maintaining flexibility in funding by keeping committed credit lines available. Maturities of financial liabilities The following table provides the contractual maturity of Charter Hall Group’s and Charter Hall Property Trust Group’s financial liabilities and derivatives. The amounts presented represent the future contractual undiscounted principal and interest cash flows and therefore do not equate to the value shown in the balance sheet. Repayments which are subject to notice are treated as if notice were given immediately. 84 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group Charter Hall Group 2012 Trade and other payables Contingent consideration payable Borrowings Interest rate swaps 2011 Trade and other payables Contingent consideration payable Borrowings Interest rate swaps Charter Hall Property Trust Group 2012 Trade and other payables Borrowings Interest rate swaps 2011 Trade and other payables Borrowings Interest rate swaps Carrying amount $’000 Less than 1 year $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Total cash flows $’000 40,249 10,539 51,463 669 102,920 58,061 12,106 101,862 407 172,436 30,288 53,863 669 84,820 32,728 101,862 407 134,997 40,249 10,788 1,878 1,092 54,007 58,061 – 4,739 – 62,800 30,288 4,281 1,092 35,661 32,728 4,739 – 37,467 – – 52,820 461 53,281 – 13,841 4,739 224 18,804 – 52,820 461 53,281 – 4,739 224 4,963 – – – – – – – 104,446 183 104,629 – – – – – 104,446 183 104,629 – – – – – – – – – – – – – – – – – – 40,249 10,788 54,698 1,553 107,288 58,061 13,841 113,924 407 186,233 30,288 57,101 1,553 88,942 32,728 113,924 407 147,059 (d) Fair value measurements The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. AASB 7 Financial Instruments: Disclosures requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: (i) Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities; (ii) Level 2 – 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); and (iii) Level 3 – Inputs for the asset or liability that are not based on observable market data (unobservable inputs). 85 Annual Report 2012 2 Financial risk management (continued) (d) Fair value measurements (continued) The following tables present the Charter Hall Group and Charter Hall Property Trust Group’s financial assets and financial liabilities measured and recognised at fair value. Charter Hall Group 2012 Assets Investment in associates at fair value through profit or loss Total assets Liabilities Derivative financial instruments Contingent consideration payable Total liabilities Charter Hall Group 2011 Assets Investment in associates at fair value through profit or loss Total assets Liabilities Derivative financial instruments Contingent consideration payable Total liabilities Charter Hall Property Trust Group 2012 Assets Investment in associates at fair value through profit or loss Total assets Liabilities Derivative financial instruments Total liabilities Charter Hall Property Trust Group 2011 Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 – – – – – – – 669 – 669 62,638 62,638 – 10,539 10,539 62,638 62,638 669 10,539 11,208 Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 – – – – – – – 407 – 407 78,445 78,445 – 12,106 12,106 78,445 78,445 407 12,106 12,513 Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 – – – – – – 669 669 62,180 62,180 62,180 62,180 – – 669 669 Total $’000 Level 1 $’000 Level 2 $’000 Level 3 $’000 Assets Investment in associates at fair value through profit or loss Total assets Liabilities Derivative financial instruments Total liabilities – – – – – – 407 407 78,014 78,014 78,014 78,014 – – 407 407 86 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group The following tables present the changes in Level 3 instruments for the year: 2012 Opening balance Additions Disposals Payments made Increase/(decrease) recognised in profit and loss Closing balance 2011 Opening balance Additions Disposals Increase/(decrease) recognised in profit and loss Closing balance Charter Hall Group Charter Hall Property Trust Group Investment in associates at fair value through profit or loss $’000 Contingent consideration payable $’000 Investment in associates at fair value through profit or loss $’000 Contingent consideration payable $’000 78,445 273 (14,306) – (1,774) 62,638 12,106 – – (1,452) (115) 10,539 78,014 229 (14,306) – (1,757) 62,180 – – – – – – Charter Hall Group Charter Hall Property Trust Group Investment in associates at fair value through profit or loss $’000 Contingent consideration payable $’000 Investment in associates at fair value through profit or loss $’000 Contingent consideration payable $’000 73,739 5,454 (439) (309) 78,445 11,270 – – 836 12,106 73,433 4,900 – (319) 78,014 – – – – – The carrying amounts of current trade receivables and payables approximate their fair values due to their short‑term nature. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Charter Hall Group and Charter Hall Property Trust Group for similar financial instruments. The fair value of current borrowings approximates the carrying amount, as the impact of discounting is not significant. 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 financial impact on the entity and that are believed to be reasonable under the circumstances. (a) Critical accounting estimates and assumptions The Charter Hall Group and Charter Hall Property Trust Group make estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates or assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: (i) Carrying value of investments Critical judgements are made by the Charter Hall Group and Charter Hall Property Trust Group in respect of the carrying value of investments in associates (notes 14 and 36) and investment properties (notes 13 and 20). These investments are reviewed regularly for impairment by reference to external independent property valuations and market conditions, using generally accepted market practices. The reported fair values of investment properties reflect market conditions at the end of the reporting period. While this represents best estimates as at the reporting date, actual sales prices may be higher or lower than the most recent valuations. This is particularly relevant in periods of market illiquidity or uncertainty. (ii) Estimated performance fees Critical judgements are made by the Charter Hall Group in respect of recognising performance fee revenue. Performance fees are only recognised when services have been performed and 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. (iii) Estimated performance fee clawback The Charter Hall Group has raised a provision to refund performance fees previously earned with respect to the Charter Hall Opportunity Fund 4 (CHOF4). Contractual arrangements allow a clawback of performance fees on termination of CHOF4 (currently scheduled for December 2012) to the extent necessary to allow CHOF4 to achieve a gross equity IRR equal to 13%. The gross equity IRR is calculated prior to the deduction of performance fees, fund management fees, fund costs and income tax. 87 Annual Report 2012 3 Critical accounting estimates and judgements (continued) (a) Critical accounting estimates and assumptions (continued) (iii) Estimated performance fee clawback (continued) Critical judgements have been made in determining the amount of any clawback which will not be known until all assets of CHOF4 are realised. To date, the Group has received a total of $14.2 million in performance fees over the life of this fund in respect of the 2007, 2008, 2009 and 2010 financial years. There have been no performance fees recognised in the current period or in the prior year ended 30 June 2011. Having regard to this and current market conditions, the Charter Hall Board has resolved to raise a provision for the maximum potential liability, being $14.2 million (included in current liabilities in this financial report). The clawback is payable on the earlier of the termination date of 31 December 2012, unless extended, or the completion of the sale of all the assets of CHOF4. No other performance fees received by the Group from other Charter Hall managed funds in prior periods or the current year are subject to clawback arrangements. (iv) Charter Hall Opportunity Fund 5 (CHOF5) – Little Bay development Critical judgement has been made in the assessment of commercial negotiations with TA Global Developments Pty Limited (TAG) over the Little Bay development project. Refer to note 38: Events occurring after the reporting date. (v) Tax losses The Charter Hall Group has not recognised tax losses from previous years as recovery against future taxable income of the tax consolidated group is not expected in the medium term. (vi) Impairment testing of management rights Critical judgements are made by the Charter Hall Group in assessing the carrying value of management rights acquired, where the funds to which those management rights relate have an indefinite life. Management rights are considered to have an indefinite useful life if there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. (vii) Classification of investments in associates The Charter Hall Group and Charter Hall Property Trust Group have determined that it is appropriate for investments in wholesale and listed funds to be equity accounted and investments in unlisted retail funds to be recognised at fair value through profit or loss. 4 Parent entity financial information (a) Summary financial information The individual financial statements for the parent entity of the Charter Hall Group, being Charter Hall Limited, and the Charter Hall Property Trust Group, being Charter Hall Property Trust, show the following aggregate amounts: Balance sheet Current assets Total assets Current liabilities Total liabilities Shareholders’ equity Issued capital1 Reserves Security‑based benefits reserve Foreign currency translation reserve Accumulated losses Profit/(loss) for the year Total comprehensive profit/(loss) Charter Hall Limited Charter Hall Property Trust 2012 $’000 2011 $’000 2012 $’000 2011 $’000 1,310 326,892 45 163,638 780 324,494 – 355,874 31,772 706,947 27,320 27,320 44,180 833,481 29,829 62,257 209,550 9,503 739,175 934,458 1,717 – (48,013) 163,254 (5,395) (5,395) 1,717 18 (42,618) (31,380) (19,778) (19,778) – – (59,548) 679,627 103,686 103,686 – – (163,234) 771,224 (29,494) (29,494) 1. On 18 June 2012, the Group announced implementation of the $200 million capital reallocation from Charter Hall Property Trust (CHPT) to Charter Hall Limited (CHL), effective 30 June 2012. The capital reallocation aims to ensure a more appropriate allocation of capital between CHPT and CHL (which together trade on the Australian Securities Exchange as Charter Hall Group) which is more closely aligned with the Group’s long‑term growth strategy. Under the capital reallocation proposal approved by securityholders at the Annual General Meeting on 24 November 2011, CHPT made capital payments of $200 million which were compulsorily applied as a capital contribution for existing shares of CHL. 88 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group (b) Contingent liabilities of the parent entity Charter Hall Limited and Charter Hall Property Trust had no contingent liabilities (2011: $nil). (c) Contractual commitments As at 30 June 2012, both Charter Hall Limited and Charter Hall Property Trust had no contractual commitments other than that disclosed below (2011: $nil). Charter Hall Opportunity Fund 5 (CHOF5) Workzone (Workzone) On 21 December 2011, Charter Hall Limited and Charter Hall Funds Management Limited as trustee for CHOF5 entered into a Preferred Equity Deed (deed) committing $9 million to fund development of the Workzone project. At 30 June 2012 $4.5 million of this facility had been drawn down and is included in receivables in this financial report. A further $1 million was drawn down in July 2012 leaving an undrawn commitment of $3.5 million at the date of this report. (d) 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 for 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 Charter Hall Group Management has determined the operating segments based on the reports reviewed by the Board that are used to make strategic decisions. The Board is responsible for allocating resources and assessing performance of the operating segments, and therefore has been identified as the chief operating decision maker. The Board has identified the following three reportable segments, the performance of which it monitors separately. ◆◆ Property investment This segment comprises interests in investment properties and listed/unlisted property funds. The property investment division has the profit result of the DRF investment identified separately for management purposes. ◆◆ Property funds management This segment comprises funds management services, development management services and other property services. ◆◆ Development investment This segment comprises development investment activities of the Group. Charter Hall Property Trust Group The Charter Hall Property Trust Group’s only business is investing in direct property and listed and unlisted property funds. Consequently the Charter Hall Property Trust Group comprises a single reportable segment. 89 Annual Report 2012 5 Segment information (continued) (b) Segment information provided to the Board Charter Hall Group The operating segments provided to the Board for the reportable segments for the year ended 30 June 2012 are as follows: 30 June 2012 Total net rental income Total investment income Total rental and property income Net development income Total property funds management income Total income Operating expenses Less: recovery of expenses Net operating expenses Operating earnings before interest, tax, depreciation and amortisation (EBITDA) Depreciation Operating earnings before interest and tax (EBIT) Interest income Interest expense Operating earnings (including DRF) Non‑controlling interest Operating earnings before specific items Specific items1 Operating earnings attributable to stapled securityholders Weighted average number of securities (’000) Operating earnings per security before specific items Operating earnings per security (EPS) Number of securities for dividend per security (DPS) (’000) DPS Property investment $’000 Property funds management $’000 Development investment $’000 305 34,011 34,316 – – 34,316 (423) – (423) 33,893 – 33,893 211 (2,921) 31,183 – 31,183 – – – – – 73,355 73,355 (62,436) 12,396 (50,040) 23,315 (725) 22,590 1,208 – 23,798 – 23,798 (9,038) 31,183 14,760 – – – 1,943 – 1,943 – – – 1,943 – 1,943 615 – 2,558 – 2,558 297 2,855 DRF $’000 13,946 – 13,946 – – 13,946 (566) – (566) 13,380 – 13,380 – (4,789) 8,591 (2,544) 6,047 – 6,047 Combined Group $’000 14,251 34,011 48,262 1,943 73,355 123,560 (63,425) 12,396 (51,029) 72,531 (725) 71,806 2,034 (7,710) 66,130 (2,544) 63,586 (8,741) 54,845 295,625 21.51cps 18.55cps 296,168 18.20cps 1. Specific items include $16.0 million fee revenue related to sale of Charter Hall Office REIT (CQO) US assets net of $4.0 million closure costs of the US office, $2.9 million costs of retaining the management rights, $3.9 million organisational restructure costs and $14.2 million provision for Charter Hall Opportunity Fund 4 (CHOF4) performance fee clawback which is then reduced by $0.3 million being the Group’s 3% equity share of the clawback receivable in CHOF4. Geographical segments are immaterial as the vast majority of the Group’s income is from Australian sources. 90 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group The reportable segments for the year ended 30 June 2011 are as follows: Property investment $’000 Property funds management $’000 Development investment $’000 – 31,599 31,599 – – 31,599 (472) – (472) 31,127 – 31,127 192 (1,450) 29,869 – 29,869 – – – – – 75,257 75,257 (64,806) 10,240 (54,566) 20,691 (1,545) 19,146 1,339 – 20,485 – 20,485 – 29,869 20,485 – – – 3,769 – 3,769 – – – 3,769 – 3,769 – – 3,769 – 3,769 – 3,769 DRF $’000 15,052 – 15,052 – – 15,052 (796) – (796) 14,256 – 14,256 996 (6,665) 8,587 (2,288) 6,299 – Combined Group $’000 15,052 31,599 46,651 3,769 75,257 125,677 (66,074) 10,240 (55,834) 69,843 (1,545) 68,298 2,527 (8,115) 62,710 (2,288) 60,422 – 6,299 60,422 30 June 2011 Total net rental income Total investment income Total rental and property income Net development income Total property funds management income Total income Operating expenses Less: recovery of expenses Net operating expenses EBITDA Depreciation EBIT Interest income Interest expense Operating earnings (including DRF) Non‑controlling interest Operating earnings before specific items Specific items Operating earnings attributable to stapled securityholders Number of securities (’000) Operating EPS Number of securities for DPS (’000) DPS The reconciliation of income per the segment notes for 2012 and 2011 to the statement of comprehensive income is below: Total income per segment note Add: recovery of expenses Add specific item: fees related to the sale of the Charter Hall Office REIT US assets Add specific item: 3% equity accounted share of CHOF4 performance fee Add: investment property expenses Add: interest income Less: equity accounted profit in property investment segment Less: equity accounted (loss)/profit in funds management and corporate segment Less: equity accounted profit in development investment segment Less: equity accounted profit in DRF Add: other Revenue per income statement 2012 $’000 123,560 12,396 16,044 297 152,297 2,985 2,176 (29,981) (68) (2,104) (1,675) – 123,630 293,254 20.60cps 293,756 16.50cps 2011 $’000 125,677 10,240 – – 135,917 4,084 1,675 (26,869) 6 (3,769) (1,485) 35 109,594 91 Annual Report 2012 5 Segment information (continued) (b) Segment information provided to the Board (continued) The reconciliation of net interest expense per the segment notes for 2012 and 2011 to the statement of comprehensive income is below: Net operating interest per segment note Less: unwind of discount on contingent consideration Less: early payout of derivative financial instrument Add: bridging equity interest reclassified to investment income Net interest expense 2012 $’000 (5,676) (1,240) (265) 480 (6,701) 2011 $’000 (5,588) (836) – 1,175 (5,249) Operating earnings is a financial measure which represents the profit/(loss) under Australian Accounting Standards adjusted for fair value adjustments, impairment of assets, gains or losses on sale of investments, acquisition costs, non‑operating movements in equity accounted investments, and non‑cash items such as security‑based benefits expense, amortisation, and tax expense/(benefit). The inclusion of operating earnings as a measure of the Group’s profitability provides investors with the same basis that is used internally for evaluating operating segment performance. Operating earnings is used by the Board to make strategic decisions and as a guide to assessing an appropriate distribution to declare. The calculation of operating earnings by adjusting for amounts in the Statement of Comprehensive Income excluding the non‑controlling interest in DRF is shown below: Operating earnings before specific items Specific items1 Operating earnings Fair value adjustments on derivatives2 Fair value adjustments on investments and property, including remeasurement gains2 Inventory writedown2 Transfer from reserves of cumulative FX losses on disposal of foreign investments2 Impairment of management rights Security‑based benefits expense Other2 Statutory profit after tax attributable to stapled securityholders Excluding non-controlling interest 2012 $’000 63,586 (8,741) 54,845 (9,933) (2,034) (5,814) (12,176) – (2,338) (5,872) 16,678 2011 $’000 60,422 – 60,422 2,141 14,239 (664) (871) (19,171) (4,090) 332 52,338 1. Specific items include $16.0 million fee revenue related to sale of Charter Hall Office REIT (CQO) US assets net of $4.0 million closure costs of the US office, $2.9 million costs of retaining the management rights, $3.9 million organisational restructure costs and $14.2 million provision for Charter Hall Opportunity Fund 4 (CHOF4) performance fee clawback which is then reduced by $0.3 million being the Group’s 3% equity share of the clawback receivable in CHOF4. 2. These items include the Group’s share of non‑operating movements in equity accounted investments, including losses on sale of offshore investment properties of $2.0 million and amortisation charges of $2.4 million (including amortisation of management rights). Basic weighted average number of securities per note 40 Operating earnings before specific items per stapled security (excl. non‑controlling interest) Specific items Operating earnings per stapled security (excluding non‑controlling interest) 295,624,609 21.51 cents 2.96 cents 18.55 cents 293,253,621 20.60 cents – 20.60 cents Assets and liabilities have not been reported on a separate basis as the Board is provided with consolidated information. 92 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group 6 Revenue Sales revenue Gross rental income Management and performance fees Other revenue Interest Distributions/dividends* Total revenue Charter Hall Group Charter Hall Property Trust Group 2012 $’000 2011 $’000 2012 $’000 2011 $’000 15,561 101,863 117,424 2,681 3,525 6,206 123,630 17,716 85,491 103,207 2,862 3,525 6,387 109,594 15,532 – 15,532 34,276 3,479 37,755 53,287 17,723 – 17,723 14,107 3,505 17,612 35,335 * The Group and Trust Group own 25.2% (2011: 36.4%) of Charter Hall Diversified Property Fund, 26.6% (2011: 24.9%) of Charter Hall Umbrella Fund and 3.8% (2011: 3.5%) of Charter Hall Direct Property Fund, which are all accounted for at fair value. This represents the distribution of income from these funds. 7 Expenses Charter Hall Group Charter Hall Property Trust Group Notes 2012 $’000 2011 $’000 2012 $’000 2011 $’000 Profit before income tax includes the following specific expenses: Depreciation Plant and equipment Amortisation Of leasing and other incentives Of management rights Finance costs Interest and finance charges paid/payable Finance costs due to unwinding of discount on contingent consideration Impairment of management rights 18 Management, administration and other expenses Employee benefits expense Security‑based payments expense Superannuation expense Legal and consulting costs Rent expense – minimum lease payments on operating leases Other occupancy costs Other expenses 725 1,545 1,031 1,307 8,142 1,240 9,382 – 57,461 2,338 3,153 4,233 1,541 906 7,436 77,068 1,183 – 7,275 836 8,111 19,171 51,480 4,090 2,023 1,864 1,483 1,008 8,741 70,689 – 546 – 8,875 – 8,875 – – – – 33 – – 1,280 1,313 – 682 – 7,196 – 7,196 – – – – – – – 1,899 1,899 93 Annual Report 2012 8 Fair value adjustments Charter Hall Group Charter Hall Property Trust Group Notes 2012 $’000 2011 $’000 2012 $’000 2011 $’000 Included in total income: Contingent consideration payable Included in total expenses: Investment properties Investment in associates at fair value through profit or loss Derivative financial instruments 22 20 14, 36(b) 15 1,355 – – – (7,692) (1,774) (310) (9,776) (2,518) (309) (386) (3,213) (7,692) (1,757) (310) (9,759) (128) (319) (387) (834) 9 Income tax benefit (a) Income tax benefit Current tax expense Deferred income tax benefit Over provided in prior years Deferred income tax benefit comprises: (Increase)/decrease in deferred tax assets Increase/(decrease) in deferred tax liabilities (b) Numerical reconciliation of income tax benefit to prima facie tax payable Profit/(loss) before income tax expense Prima facie tax expense/(benefit) 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 Non‑assessable income Non‑allowable expenses Share‑based payments expense Losses not recognised Sundry items Tax on LTI interest Non‑taxable dividends, net of equity accounted profit Over provided in prior years Difference in overseas tax rates Income tax benefit 94 Charter Hall Group Charter Hall Property Trust Group Notes 21 25 2012 $’000 – (482) 50 (432) (1,538) 1,056 (482) 2011 $’000 2012 $’000 218 (3,341) 457 (2,666) (3,231) (110) (3,341) – – – – – – – 2011 $’000 – (323) – (323) 321 (644) (323) 13,971 52,571 33,164 60,924 4,191 15,771 9,949 18,277 (10,442) – 549 43 4,096 348 37 732 50 (36) (432) (18,932) (3,968) 267 1,227 2,437 – 623 (485) 457 (63) (2,666) (10,442) – – – – 493 – – – – – (18,932) – – – – 655 – – – – – Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group (c) Tax consolidation legislation Charter Hall Limited and its wholly‑owned Australian controlled entities have implemented the tax consolidation legislation with effect from 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’ financial 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 financial 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. (d) Tax losses – Charter Hall Group Unused tax losses for which no deferred tax asset has been recognised Potential tax benefit @ 30% 2012 $’000 14,018 4,205 2011 $’000 12,071 3,621 Based upon the completion of the June 2011 income tax return, the actual carried forward tax losses (unbooked) was calculated to be $2,575,000. This was a reduction of $1,046,000 on the previously disclosed carried forward losses (unbooked) in the 30 June 2011 financial statements of $3,621,000. 10 Distributions paid and payable (a) Ordinary securities Interim ordinary distribution for the six months ended 31 December 2011 of 9.10 cents per security paid on 23 February 2012 Final ordinary distribution for the six months ended 30 June 2012 of 9.10 cents per security paid on 28 August 2012 Interim ordinary distribution for the six months ended 31 December 2010 of 8.00 cents per security paid on 28 February 2011 Final ordinary distribution for the six months ended 30 June 2011 of 8.50 cents per security paid on 25 August 2011 Total distributions paid and payable Less: distributions paid to holders of LTI securities Paid in cash Satisfied by issue of securities Charter Hall Group Charter Hall Property Trust Group 2012 $’000 2011 $’000 2012 $’000 2011 $’000 26,950 27,013 – – 26,950 27,013 – – – 24,507 – 24,507 – 53,963 (124) 53,839 53,963 – 26,039 50,546 (2,077) 48,469 50,546 – – 53,963 (124) 53,839 53,963 – 26,039 50,546 (2,077) 48,469 50,546 – Franking credits available in the parent entity (Charter Hall Limited) for subsequent financial years based on a tax rate of 30% (2011: 30%) are $3,336,951 (2011: $3,336,951). 95 Annual Report 2012 11 Cash and cash equivalents Cash at bank and on hand 39,315 26,266 21,674 2012 $’000 2011 $’000 2012 $’000 2011 $’000 4,841 Charter Hall Group Charter Hall Property Trust Group (a) Cash at bank and on hand These amounts earn floating interest rates of between nil and 3.4% (2011: 4.7%). 12 Trade and other receivables Current Trade receivables Loans to key management personnel Loans to joint ventures Distributions receivable Other receivables Prepayments Non-current Loans to key management personnel Loans to joint ventures Loans to associates Loan receivable from Charter Hall Limited Charter Hall Group Charter Hall Property Trust Group Notes 2012 $’000 2011 $’000 2012 $’000 2011 $’000 34(e) 34(e) 34(e) 9,535 955 1,650 10,441 8,821 708 32,110 3,400 5,000 4,470 – 12,870 22,035 706 – 11,556 7,922 1,219 43,438 4,400 5,000 – – 9,400 481 – 1,650 9,703 5,573 194 17,601 – – – 163,542 163,542 1,037 – – 11,289 1,367 95 13,788 – – – 355,874 355,874 Further information relating to loans to key management personnel is set out in note 30. (a) Bad and doubtful trade receivables In the year, the Charter Hall Group and Charter Hall Property Trust Group incurred nil expense/benefit (2011: $nil) in respect of provisioning for bad and doubtful trade receivables. (b) Fair values The receivables are carried at amounts that approximate their fair value. 96 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group (c) Interest rate risk The Charter Hall Group’s and Charter Hall Property Trust Group’s exposure to interest rate risk and the effective weighted average interest rate by maturity period is set out in the following tables: Charter Hall Group Fixed interest maturing in: 2012 Cash and cash equivalents Trade receivables Loans to key management personnel Loans to joint ventures Loans to associates Distributions receivable Other receivables Weighted average interest rate Floating interest rate $’000 39,315 – – – – – – 39,315 1 year or less $’000 – – 955 – – – – 955 Over 1 to 2 years $’000 – – 1,000 5,000 4,470 – – 10,470 Over 2 to 3 years $’000 – – 2,400 – – – – 2,400 Over 3 to 4 years $’000 Over 4 to 5 years $’000 Over 5 years $’000 – – – – – – – – – – – – – – – – – – – – – – – – 3.35% 10.50% 10.79% 10.50% Charter Hall Group Fixed interest maturing in: 2011 Cash and cash equivalents Trade receivables Loans to key management personnel Loans to joint ventures Distributions receivable Other receivables Weighted average interest rate Floating interest rate $’000 26,266 – – – – – 26,266 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 5 years $’000 – – 706 – – – 706 – – 1,000 – – – 1,000 – – 1,000 5,000 – – 6,000 – – 2,400 – – – 2,400 – – – – – – – – – – – – – – 3.36% 12.50% 10.50% 11.75% 10.50% Non- interest bearing $’000 – 9,535 – 1,650 – 10,441 8,821 30,447 Non- interest bearing $’000 – 22,035 – – 11,556 7,922 41,513 Total $’000 39,315 9,535 4,355 6,650 4,470 10,441 8,821 83,587 Total $’000 26,266 22,035 5,106 5,000 11,556 7,922 77,885 97 Annual Report 2012 12 Trade and other receivables (continued) (c) Interest rate risk (continued) Charter Hall Property Trust Group Fixed interest maturing in: 2012 Cash and cash equivalents Trade receivables Loans to joint ventures Distributions receivable Other receivables Loan receivable from Charter Hall Limited Weighted average interest rate Floating interest rate $’000 21,674 – – – – 163,542 185,216 9.09% 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 5 years $’000 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Charter Hall Property Trust Group Fixed interest maturing in: 2011 Cash and cash equivalents Trade receivables Distributions receivable Other receivables Loan receivable from Charter Hall Limited Weighted average 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 5 years $’000 4,841 – – – 355,874 360,715 8.04% – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Non- interest bearing $’000 – 481 1,650 9,703 5,573 Total $’000 21,674 481 1,650 9,703 5,573 – 17,407 163,542 202,623 Non- interest bearing $’000 – 1,037 11,289 1,367 Total $’000 4,841 1,037 11,289 1,367 – 13,693 355,874 374,408 (d) Interest rate sensitivity analysis The following tables illustrate the potential impact a change in interest rates of +/–1% would have on the Charter Hall Group and Charter Hall Property Trust Group’s profit after tax and equity. Charter Hall Group –1% +1% Carrying amount $’000 39,315 26,266 Profit $’000 Equity $’000 Profit $’000 Equity $’000 (393) (393) (263) (263) (393) (393) (263) (263) 393 393 263 263 393 393 263 263 2012 Assets Cash and cash equivalents Total (decrease)/increase 2011 Assets Cash and cash equivalents Total (decrease)/increase 98 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group (d) Interest rate sensitivity analysis (continued) Charter Hall Property Trust Group –1% +1% 2012 Assets Cash and cash equivalents Loan receivable from Charter Hall Limited Total (decrease)/increase 2011 Assets Cash and cash equivalents Loan receivable from Charter Hall Limited Total (decrease)/increase Carrying amount $’000 21,674 163,542 4,841 355,874 Profit $’000 Equity $’000 Profit $’000 Equity $’000 (217) (1,635) (1,852) (48) (3,559) (3,607) (217) (1,635) (1,852) (48) (3,559) (3,607) 217 1,635 1,852 48 3,559 3,607 217 1,635 1,852 48 3,559 3,607 (e) Credit risk There is a limited concentration of credit risk with respect to current and non‑current receivables, as the Charter Hall Group and Charter Hall Property Trust Group have a large number of customers. Refer to note 2 for more information on the risk management policy of the Charter Hall Group and Charter Hall Property Trust Group. The ageing of trade receivables at the reporting date was as follows: 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. 13 Assets classified as held for sale Mentone residential properties Bunnings Stafford, Stafford Road, Stafford Home HQ, Ipswich Menai Central, Menai Home HQ, Nunawading 33 Windorah Street, Stafford Charter Hall Retail Joint Venture Trust Charter Hall Group Charter Hall Property Trust Group 2012 $’000 8,068 416 1,051 9,535 2011 $’000 19,856 348 1,831 22,035 2012 $’000 463 18 – 481 2011 $’000 752 65 220 1,037 Charter Hall Group Charter Hall Property Trust Group 2012 $’000 – 19,000 24,500 35,000 27,500 11,704 18,686 136,390 2011 $’000 921 – – – – – – 921 2012 $’000 – 19,000 24,500 35,000 27,500 11,704 18,686 136,390 2011 $’000 – – – – – – – – The Mentone residential properties held for sale at 30 June 2011 were sold in July 2011 at book value. These assets are held for sale as it is considered highly probable that they will be sold in the next 12 months. All assets are investment properties except for the Charter Hall Retail Joint Venture Trust in which the Group holds a 50% interest. The fair value represents the amount at which the assets could be exchanged between a knowledgeable willing buyer and a knowledgeable seller in an arm’s length transaction at the date of the valuation, in accordance with Australian Valuation Standards. 99 Annual Report 2012 14 Investments in associates at fair value through profit or loss Charter Hall Group Charter Hall Property Trust Group Notes 2012 $’000 2011 $’000 2012 $’000 2011 $’000 Investments in associates 36(b)(i) 62,638 78,445 62,180 78,014 Changes in fair values of investments in associates at fair value through profit or loss are recorded in fair value adjustments in the statement of comprehensive income. These investments comprise units in certain unlisted Charter Hall managed funds which have been designated at fair value through profit or loss. Information about the Charter Hall Group and Charter Hall Property Trust Group’s material exposure to share and unit price risk is provided in note 2(a)(i). 15 Derivative financial instruments Current liabilities Interest rate swap contracts Non-current liabilities Interest rate swap contracts Charter Hall Group Charter Hall Property Trust Group 2012 $’000 669 669 – – 2011 $’000 – – 407 407 2012 $’000 669 669 – – 2011 $’000 – – 407 407 (a) Instruments used by the Group The Charter Hall Group and Charter Hall Property Trust Group utilise derivative financial instruments to hedge exposure to fluctuations in interest rates in accordance with the Charter Hall Group and Charter Hall Property Trust Group’s financial risk management policies (refer to note 2). Interest rate swap contracts The Charter Hall Group and Charter Hall Property Trust Group’s policy is to fix rates for between 50% to 100% of core borrowings for the anticipated debt term (refer note 2(a)(ii)). Accordingly, the Charter Hall Group and Charter Hall Property Trust Group have previously entered into interest rate swap contracts under which they are obliged to receive interest at variable rates and to pay interest at fixed rates. All swaps have been entered into by DRF, which is consolidated. Swaps currently in place cover 39% (2011: 38%) of the loan principal outstanding. The fixed interest rates in 2012 ranged between 5.05% and 5.46% (2011: between 6.84% and 7.48%) for AUD swaps (including margin and line fees). There was a NZD swap that was paid out during the year. The interest rate swap is shown as current despite an expiry date of 2 December 2013 as it is expected to be closed out in the next 12 months. At reporting date, the notional principal amounts and periods of expiry of the interest rate swap contracts are as follows: 1 to 2 years 2 to 3 years More than 3 years 2012 $’000 20,000 – – 20,000 2011 $’000 18,203 20,000 – 38,203 The contracts require settlement of net interest receivable or payable every 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 amount of fair value adjustments on hedges recorded directly in the income statement was a loss of $310,069 (2011: loss of $386,000). 100 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group (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 financial instruments. The Charter Hall Group and Charter Hall Property Trust Group undertake their transactions in interest rate contracts only with investment grade financial institutions. (c) Interest rate risk exposures Refer to note 2(c) for the Charter Hall Group and Charter Hall Property Trust Group’s exposure to interest rate risk on interest rate swaps. Interest rate swaps with a notional principal amount of NZ$23.6 million (2011: $40.2 million) were terminated during the year, resulting in a realised loss of $134,000 (2011: gain of $345,323). 16 Inventories Non-current 685 La Trobe property development Charter Hall Group Charter Hall Property Trust Group 2012 $’000 9,518 9,518 2011 $’000 7,450 7,450 2012 $’000 2011 $’000 – – – – 17 Investments accounted for using the equity method Investments in associates Investments in joint venture entities Notes 36 37 Charter Hall Group Charter Hall Property Trust Group 2012 $’000 444,515 27,644 472,159 2011 $’000 470,083 47,624 517,707 2012 $’000 373,578 – 373,578 2011 $’000 417,408 18,700 436,108 (a) Investments in associates These investments represent units in listed and unlisted Charter Hall managed funds which are accounted for in the consolidated financial statements using the equity method of accounting. (b) Investments in joint venture entities These investments represent joint venture interests in Australian and overseas joint ventures which are accounted for in the consolidated financial statements using the equity method of accounting. 18 Intangible assets In March 2010, the Charter Hall Group completed a transaction to acquire the majority of Macquarie Group’s core real estate management platform. This transaction was structured to secure the management rights (i.e. future management fee revenue) of Macquarie Office Trust (renamed Charter Hall Office REIT), Macquarie CountryWide 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. With the exception of management rights held over the Charter Hall Office Trust (CHOT), management considers that the management rights have an indefinite life as there are no finite terms in the underlying agreements and the Charter Hall Group has no intention to cease managing these Funds. The carrying value of management rights with an indefinite life (i.e. excluding CHOT) is $52.961 million. On 1 May 2012, Charter Hall Office REIT (CQO) was privatised and renamed CHOT. With implementation of the privatisation, CQO changed from a listed REIT to a wholesale unit trust with liquidity reviews every five years. It is expected that the net fee revenue that the Group will earn from managing CHOT will be generally consistent with the net revenue earned previously from managing the Australian assets of CQO. As the management rights of CHOT are subject to a liquidity event, the Group will amortise the management rights over a six year period commencing from 1 May 2012 (includes an additional year to source liquidity were the trust to be wound up in five years as a result of the liquidity review). Only the management rights held over the Charter Hall Office Trust are being amortised. 101 Annual Report 2012 18 Intangible assets (continued) Opening balance Impairment charge Amortisation charge Closing balance Charter Hall Group Charter Hall Property Trust Group 2012 $’000 99,994 – (1,307) 98,687 2011 $’000 119,165 (19,171) – 99,994 2012 $’000 2011 $’000 – – – – – – – – All management rights recognised on the balance sheet were independently valued as at 30 April 2012 by KPMG Corporate Finance. The valuation supports the carrying values and the methodology applied was an assessment of fair value (less costs to sell) based on discounted cash flows. Key assumptions used for the indefinite life intangibles valuation calculations are as follows: ◆◆ Cash flow projections based on financial budgets approved by management covering a five year period. Cash flows beyond the five year period are extrapolated using estimated growth rates appropriate for the business; ◆◆ Discount rate range of 14% to 17% (2011: 13% to 18%) which is in excess of the Charter Hall Group’s weighted average cost of capital as a result of the management platform carrying more risk than the return on property investment cash flows; ◆◆ Growth over the next five years of 3% (2011: 3%) per annum; and ◆◆ Terminal value multiple of 4.9 to 7.0 times earnings (2011: 7.0 times). 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. 19 Property, plant and equipment Charter Hall Group Year ended 30 June 2011 Opening net book amount Additions Disposals Depreciation charge Closing net book amount At 30 June 2011 Cost Accumulated depreciation Net book amount Year ended 30 June 2012 Opening net book amount Additions Disposals Depreciation charge Closing net book amount At 30 June 2012 Cost Accumulated depreciation Net book amount 102 Furniture, fittings and equipment $’000 Fixtures $’000 Software $’000 Total $’000 1,217 662 (15) (367) 1,497 2,993 (1,496) 1,497 1,497 109 – (325) 1,281 3,102 (1,821) 1,281 768 – – (52) 716 1,073 (357) 716 716 3 – (70) 649 1,076 (427) 649 1,607 473 – (1,126) 954 2,300 (1,346) 954 954 472 – (330) 1,096 2,772 (1,676) 1,096 3,592 1,135 (15) (1,545) 3,167 6,366 (3,199) 3,167 3,167 584 – (725) 3,026 6,950 (3,924) 3,026 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group 20 Investment properties Property Charter Hall Property Trust Group DRF properties Home HQ, Nunawading Bunnings, Stafford Home HQ, Ipswich Menai Central, Menai 33 Windorah Street, Stafford Countdown, Auckland, NZ1 Type % owned Independent valuation amount $’000 Book value 2012 $’000 Book value 2011 $’000 Bulky retail Bulky retail Bulky retail Bulky retail Bulky retail Retail 50 100 100 100 100 – Carried as held for sale Carried as held for sale Carried as held for sale Carried as held for sale Carried as held for sale Sold during the year – – – – – – – – – – – – – – – – – – 31,000 18,750 27,065 37,000 11,700 18,203 143,718 15,800 159,518 Charter Hall Group Mentone Showrooms, Mentone2 Bulky retail – Sold during the year 1. Countdown, Auckland, New Zealand was sold on 29 June 2012 for NZ$22 million. 2. Mentone Showrooms, Mentone was sold on 28 October 2011 for $17.7 million. Refer to note 13 for details of the carrying values of properties classified as held for sale at 30 June 2012. A reconciliation of the carrying amounts at the beginning and end of the current and previous years is set out below: At fair value Opening balance Acquisitions and additions Lease incentives paid Lease incentives amortised Disposals Transferred to held for sale Net loss from fair value adjustment Foreign currency exchange gain/(loss) Closing balance Charter Hall Group Charter Hall Property Trust Group Notes 2012 $’000 2011 $’000 2012 $’000 2011 $’000 159,518 503 80 (546) (34,427) (117,704) (7,692) 268 – 202,118 15,610 34 (682) (53,205) (921) (2,518) (918) 159,518 143,718 503 80 (546) (18,627) (117,704) (7,692) 268 – 201,348 15,569 34 (682) (71,505) – (128) (918) 143,718 8 (a) Amounts recognised in the statement of comprehensive income for investment properties Rental income Direct operating expenses from property that generated rental income Charter Hall Group Charter Hall Property Trust Group 2012 $’000 2011 $’000 2012 $’000 2011 $’000 15,561 17,716 15,532 17,723 (3,541) 12,020 (4,795) 12,921 (3,478) 12,054 (4,839) 12,884 This table includes the comprehensive income of all investment properties held during the year, regardless of whether they have been sold or reclassified as held for sale. The income is up to the date of sale or 30 June respectively. 103 Annual Report 2012 20 Investment properties (continued) (b) Valuation basis As at 30 June 2012 all investment properties have been classified as held for sale. They are carried at fair value, representing the amount at which the assets could be exchanged between a knowledgeable willing buyer and a knowledgeable seller in an arm’s length transaction at the date of valuation, in accordance with Australian Valuation Standards. Investment properties not independently valued are carried at Directors’ valuations, which are based on detailed internal calculations. The Directors’ valuations are approved by a Valuation Committee consisting of four members. The Chair of the Committee is Colin McGowan and the committee has another independent member in Rick Higgins (an independent non‑executive director of Charter Hall Direct Property Management Pty Limited (a subsidiary of Charter Hall Limited)). The other two members are executive directors. The valuations at 30 June 2011 had a weighted average capitalisation rate of 8.46% and a weighted average vacancy rate of 1.5%. All investment property has been reclassified to assets held for sale at 30 June 2012. 21 Deferred tax assets Deferred tax assets comprises temporary differences attributable to: Employee benefits Investments in associates Management rights Provisions Other A reconciliation of the carrying amount of deferred tax assets at the beginning and end of the current and previous years is set out below: Opening balance Charged to income statement Charged to other comprehensive income Charged directly to equity reserves Closing balance Deferred tax assets expected to reverse within 12 months Deferred tax assets expected to reverse after more than 12 months Charter Hall Group Charter Hall Property Trust Group Notes 2012 $’000 2011 $’000 2012 $’000 2011 $’000 2,052 4,089 – 4,272 94 10,507 11,255 1,538 9 (2,295) 10,507 3,256 4,221 2,842 – 936 11,255 5,721 3,231 8 2,295 11,255 6,418 4,192 4,089 10,507 7,063 11,255 9 – – – – – – – – – – – – – – – – – – – – 321 (321) – – – – – – 104 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group 22 Trade and other payables Current liabilities Trade payables Accruals Distribution payable GST payable Annual leave payable Deferred consideration payable for business combination Contingent consideration payable Employee benefits payable Other payables All current liabilities are expected to be settled within 12 months. Non-current liabilities Contingent consideration payable Charter Hall Group Charter Hall Property Trust Group 2012 $’000 2011 $’000 2012 $’000 2011 $’000 712 3,424 27,585 1,755 2,193 – 10,539 3,927 653 50,788 1,926 4,337 25,458 1,681 2,209 14,300 – 7,345 805 58,061 359 1,814 27,888 219 – – – – 8 30,288 4,702 2,070 25,683 265 – – – – 8 32,728 Charter Hall Group Charter Hall Property Trust Group 2012 $’000 2011 $’000 2012 $’000 2011 $’000 – 12,106 – – (i) Contingent consideration payable On 1 March 2010, the Charter Hall Group completed a transaction to acquire the majority of Macquarie Group’s core real estate management platform comprising the management of two listed and three unlisted real estate funds and co‑investments in Macquarie Office Trust (renamed Charter Hall Office REIT), Macquarie CountryWide Trust (renamed Charter Hall Retail REIT) and Macquarie Direct Property Fund (renamed Charter Hall Direct Property Fund). 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 purchase 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). On 9 March 2012, an instalment of $1,451,664 was paid. The fair value of the contingent consideration at 30 June 2012 of $10,539,093 (2011: $12,105,593) was estimated by applying a 13% discount rate to expected payments of $10,788,460 (2011: $13,840,189) from July 2012 onwards. (ii) Deferred consideration payable for business combination – prior year 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) completed on 30 September 2011. 105 Annual Report 2012 23 Provisions Employee benefits – long service leave Performance fee clawback Charter Hall Group Charter Hall Property Trust Group 2012 $’000 656 14,239 14,895 2011 $’000 834 – 834 2012 $’000 – – – 2011 $’000 – – – The Group is entitled to performance fees in respect of CHOF4, calculated at 33.34% of the excess return above a gross equity internal rate of return (IRR) of 13% on the paid up capital allocated to a project. To date, the Group has received a total of $14.2 million in performance fees over the life of this fund. There have been no performance fees recognised in the current period or in the prior year ended 30 June 2011. Contractual arrangements allow a clawback of performance fees on termination of CHOF4 (on the earlier of the termination date of 31 December 2012, unless extended, or the completion of the sale of all the assets of CHOF4) to the extent necessary to allow CHOF4 to achieve a gross equity IRR equal to 13%. The gross equity IRR is calculated prior to the deduction of performance fees, fund management fees, fund costs and income tax. In the 31 December 2011 Interim Financial Report, the Group reported a contingent liability of up to $14.2 million may be incurred in relation to the potential CHOF4 clawback of performance fees received in respect of the 2007, 2008, 2009 and 2010 financial years. Having regard to this and current market conditions, the Charter Hall Board has resolved to raise a provision for the maximum potential liability, being $14.2 million. The clawback is payable on the earlier of the termination date of 31 December 2012, unless extended, or the completion of the sale of all the assets of CHOF4. (a) Movements in provisions Refer to note 26 for the movement in provisions and split between current and non‑current. 24 Borrowings Unsecured Loan from Charter Hall Holdings Pty Ltd Secured Bank loans drawn DRF Unamortised borrowing costs Total current borrowings Secured Bank loans drawn DRF Charter Hall Property Trust Unamortised borrowing costs1 Total non-current borrowings Charter Hall Group Charter Hall Property Trust Group 2012 $’000 – 51,750 (287) 51,463 2011 $’000 – – – – 2012 $’000 2,400 51,750 (287) 53,863 2011 $’000 – – – – – – – – 69,953 33,010 (1,101) 101,862 – – – – 69,953 33,010 (1,101) 101,862 1. Disclosed on the balance sheet as Other Assets are unamortised borrowing costs of $564,287 (2011: $582,044) relating to the Charter Hall Property Trust Westpac facility. Since there is no debt drawn at 30 June 2012 on this facility the unamortised borrowing costs have been disclosed on the balance sheet as Other Assets for the current year. The prior year amount continues to be disclosed above, aggregated with unamortised borrowing costs incurred on the DRF facility. Current year unamortised borrowing costs of $287,151 relate to the DRF facility. 106 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group The DRF loan comprises a $40.0 million National Australia Bank (NAB) facility and a $15.5 million share of a $64.0 million joint venture Westpac facility. Amounts drawn under the NAB facility are potentially repayable if the Fund defaults on payments of interest or principal or allows: ◆◆ The ratio of total liabilities to total assets to exceed 55% or the ratio of debt to secured property values to exceed 50%; or ◆◆ The ratio of EBIT to interest expense to fall below 1.75 times or the ratio of net rental income to interest to fall below 1.65 times. Amounts drawn under the DRF JV Westpac facility are potentially repayable if the Fund defaults on payments of interest or principal or allows: ◆◆ The ratio of debt to secured property assets to exceed 60%; or ◆◆ The ratio of net rental income to interest to fall below 1.6 times. Amounts drawn under the $75.0 million Charter Hall Property Trust loan are potentially repayable if the Trust defaults on payments of interest or principal or allows: ◆◆ The ratio of debt to total tangible assets to exceed 35%; ◆◆ The ratio of debt to EBITDA to exceed 4 times; or ◆◆ The ratio of EBIT to gross interest to fall below 3 times. Subsequent to 30 June 2012 the interest cover covenant was amended as follows: ◆◆ The ratio of ‘net cash inflow’ to gross interest to be a minimum of 4.25 times, replacing the ratio of EBIT to gross interest not being less than 3 times. During the year, DRF entered into an agreement with Charter Hall Holdings Pty Ltd to borrow $2.4 million which was fully drawn and is repayable on demand. The interest rate is BBSY +3%. The DRF loan facility is contractually not repayable until November 2013, but has been disclosed as current due to assets held for sale and an expectation that the borrowings will therefore be repaid within the next 12 months. The DRF bank loan is secured by a floating charge over all the assets of DRF and by a mortgage over the investment properties held by DRF. The Charter Hall Property Trust loan is secured over the Trust’s investment in listed and unlisted funds, excluding 22,500,000 units of the Trust’s investment in Charter Hall Core Plus Office Fund. The carrying amounts of assets pledged as security for borrowings are: Current Floating charge Cash and cash equivalents Receivables First mortgage Investment property classified as held for sale Investment in jointly controlled entity classified as held for sale Total current assets pledged as security Non-current First mortgage Investment properties Investment in associates Investment in jointly controlled entities Total non‑current assets pledged as security Total assets pledged as security Charter Hall Group Charter Hall Property Trust Group 2012 $’000 2011 $’000 2012 $’000 2011 $’000 1,265 1,307 117,704 18,686 138,962 – 414,777 – 414,777 553,739 2,324 1,831 – – 4,155 143,718 478,412 18,700 640,830 644,985 1,265 1,307 117,704 18,686 138,962 – 414,777 – 414,777 553,739 2,324 1,831 – – 4,155 143,718 478,412 18,700 640,830 644,985 107 Annual Report 2012 24 Borrowings (continued) (a) Financing arrangements The Charter Hall Group and Charter Hall Property Trust Group had unrestricted access at reporting date to the following lines of credit: Total facilities Used at reporting date Unused at reporting date Charter Hall Group Charter Hall Property Trust Group 2012 $’000 130,500 51,750 78,750 2011 $’000 170,500 102,963 67,537 2012 $’000 132,900 54,150 78,750 2011 $’000 170,500 102,963 67,537 The Charter Hall Group and Charter Hall Property Trust Group’s $100 million WBC debt facility was reduced to $75.0 million in April 2012. This facility expires in May 2014. DRF’s existing $55.0 million facility was reduced to $40.0 million on 29 June 2012. The expiry date remains at 30 November 2013. Whilst the DRF loan facility is contractually not repayable until November 2013, borrowings have been disclosed as current due to assets held for sale and an expectation that the borrowings will therefore be repaid within the next 12 months. DRF is party to a second WBC debt facility, totalling $64.0 million, with the Charter Hall Retail Joint Venture Trust (RJVT), Charter Hall Lake Macquarie Trust (LMT), Charter Hall Mount Hutton Trust (MHT) and CQR Nunawading Trust (CQRNT). RJVT is an equity accounted investment which in turn owns 100% of LMT and MHT. CQRNT is a wholly‑owned entity of the Charter Hall Retail REIT (CQR) which is also an equity accounted investment. Accordingly, only $15.5 million of the $64.0 million facility, representing DRF’s share of debt relating to its 50% interest in the Nunawading shopping centre, is recorded on balance sheet with the remaining $48.5 million drawn by associates RJVT and CQRNT. DRF is joint and severally liable alongside RJVT, LMT, MHT and CQRNT for the amount of the facility, which is cross collateralised across three joint venture held mortgaged assets being shopping centres at Lake Macquarie (held by LMT), Mount Hutton (held by MHT) and Nunawading (50% held by CQRNT). (b) Interest rate risk exposures The following tables set out the Charter Hall Group and Charter Hall Property Trust Group’s exposure to interest rate risk, including the contractual repricing dates and the effective weighted average interest rate by maturity period. Exposures arise predominantly from liabilities bearing variable interest rates as the Charter Hall Group and Charter Hall Property Trust Group intend to hold fixed rate liabilities to maturity. Charter Hall Group Fixed interest maturing in: 2012 Trade and other payables Contingent consideration payable Borrowings Interest rate swaps Weighted average interest rate Floating interest rate $’000 – – 51,750 (20,000) 31,750 3.63% 1 year or less $’000 – – – – – Over 1 to 2 years $’000 – – – 20,000 20,000 5.46% Over 2 to 3 years $’000 Over 3 to 4 years $’000 Over 4 to 5 years $’000 Over 5 years $’000 Non- interest bearing $’000 Total $’000 – – – – – – – – – – – – – – – – – – – – 40,249 40,249 10,539 – – 50,788 10,539 51,750 – 102,538 108 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group Charter Hall Group Fixed interest maturing in: 2011 Trade and other payables Contingent consideration payable Borrowings Interest rate swaps Weighted average interest rate Floating interest rate $’000 – – 101,862 (38,203) 63,659 4.63% 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 5 years $’000 Non- interest bearing $’000 Total $’000 – – – – – – – – – 18,203 18,203 – – 20,000 20,000 4.71% 4.71% – – – – – – – – – – – – – – – 58,061 58,061 12,106 – – 70,167 12,106 101,862 – 172,029 Charter Hall Property Trust Group Fixed interest maturing in: 2012 Trade and other payables Borrowings Interest rate swaps Floating interest rate $’000 – 54,150 (20,000) 34,150 1 year or less $’000 – – – – Over 1 to 2 years $’000 – – 20,000 20,000 Over 2 to 3 years $’000 Over 3 to 4 years $’000 Over 4 to 5 years $’000 Over 5 years $’000 – – – – – – – – – – – – – – – – Non- interest bearing $’000 30,288 – – 30,288 Total $’000 30,288 54,150 – 84,438 Weighted average interest rate 3.75% 5.46% Charter Hall Property Trust Group Fixed interest maturing in: 2011 Trade and other payables Borrowings Interest rate swaps Weighted average interest rate Floating interest rate $’000 – 101,862 (38,203) 63,659 4.63% 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 5 years $’000 – – – – – – 18,203 18,203 – – 20,000 20,000 – – – – – – – – – – – – Non- interest bearing $’000 32,728 – – 32,728 Total $’000 32,728 101,862 – 134,590 4.71% 4.71% 109 Annual Report 2012 24 Borrowings (continued) (c) Interest rate sensitivity analysis The following table illustrates the potential impact a change in interest rates of +/–1% would have on the Charter Hall Group and Charter Hall Property Trust Group’s profit after tax and equity. Charter Hall Group –1% +1% 2012 Liabilities Borrowings Derivative financial instruments Total (decrease)/increase 2011 Liabilities Borrowings Derivative financial instruments Total (decrease)/increase Carrying amount $’000 51,463 669 101,862 407 Profit $’000 Equity $’000 Profit $’000 Equity $’000 518 (450) 68 1,019 (1,771) (752) 518 (450) 68 1,019 (1,771) (752) (518) 445 (73) (1,019) 469 (550) (518) 445 (73) (1,019) 469 (550) Charter Hall Property Trust Group –1% +1% 2012 Liabilities Borrowings Derivative financial instruments Total (decrease)/increase 2011 Liabilities Borrowings Derivative financial instruments Total (decrease)/increase Carrying amount $’000 53,863 669 101,862 407 Profit $’000 Equity $’000 Profit $’000 Equity $’000 542 (450) 92 1,019 (1,771) (752) 542 (450) 92 1,019 (1,771) (752) (542) 445 (97) (1,019) 469 (550) (542) 445 (97) (1,019) 469 (550) (d) Fair value Charter Hall Group The carrying amounts and fair values of borrowings at reporting date are: On-balance sheet Non-traded financial liabilities Bank loans 2012 2011 Carrying amount $’000 Fair value $’000 Carrying amount $’000 Fair value $’000 51,463 51,750 101,862 102,963 The fair value of borrowings is inclusive of costs which would be incurred on settlement of a liability, and is based upon market prices, where a market exists, or by discounting the expected future cash flows by the current interest rates for liabilities with similar risk profiles. 110 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group Charter Hall Property Trust Group The carrying amounts and fair values of borrowings at reporting date are: On-balance sheet Non-traded financial liabilities Bank loans 2012 2011 Carrying amount $’000 Fair value $’000 Carrying amount $’000 Fair value $’000 53,863 54,150 101,862 102,963 The fair value of borrowings is inclusive of costs which would be incurred on settlement of a liability, and is based upon market prices, where a market exists, or by discounting the expected future cash flows by the current interest rates for liabilities with similar risk profiles. (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 ratio of the Charter Hall Group at 30 June 2012 was 1.45% (2011: 8.12%), and of the Charter Hall Property Trust Group was 4.3% (2011: 9.4%). 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. 25 Deferred tax liabilities Charter Hall Group Charter Hall Property Trust Group Notes 2012 $’000 2011 $’000 2012 $’000 2011 $’000 Deferred tax liabilities comprises temporary differences attributable to: Accrued revenue Contingent consideration payable Investment in associates Other A reconcilation of the carrying amount of deferred tax liabilities at the beginning and end of the current and previous years is set out below: Opening balance Deferred tax benefit Charged to income statement Charged to other comprehensive income Closing balance 9 Deferred tax liabilities expected to reverse within 12 months Deferred tax liabilities expected to reverse after more than 12 months 84 903 1,078 120 2,185 1,129 – 1,056 – 2,185 1,107 1,078 2,185 4 868 198 59 1,129 1,273 – (110) (34) 1,129 931 198 1,129 – – – – – – – – – – – – – – – – – – 661 (644) – (17) – – – – 111 Annual Report 2012 Charter Hall Group Charter Hall Property Trust Group 2012 $’000 1,428 2011 $’000 1,217 2012 $’000 – 2011 $’000 – Charter Hall Group Charter Hall Property Trust Group 2012 $’000 2,051 33 2,084 656 1,428 2,084 2011 $’000 1,628 423 2,051 834 1,217 2,051 2012 $’000 2011 $’000 – – – – – – – – – – – – Charter Hall Group Charter Hall Property Trust Group 2012 $’000 – 14,239 14,239 14,239 – 14,239 2011 $’000 2012 $’000 2011 $’000 – – – – – – – – – – – – – – – – – – Notes 2012 Securities 2011 Securities 2012 $’000 2011 $’000 (b),(c),(e) 296,168,170 296,168,170 293,755,894 293,755,894 948,725 948,725 943,961 943,961 26 Provisions – non-current Employee benefits – long service leave (a) Movements in provisions Movements in employee benefits provisions are set out below: Long service leave Opening balance Additional provisions recognised Closing balance Current Non‑current Total Movements in performance fee clawback provision is set out below: Opening balance Provision recognised during the year Closing balance Current Non‑current Total 27 Contributed equity (a) Security capital1 Ordinary securities – fully paid 112 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group (b) Movements in ordinary security capital Details Notes Number of securities 1 Issue price3 2012 $’000 (d) (e) Opening balance Add back LTI securities reversed in prior year2 Distribution Re‑investment Plan issue August 2010 Balance before consolidation Consolidation at one for four Balance at 30 June 2011 Less: LTI securities reversed2 Balance per accounts at 30 June 2011 Add back LTI securities reversed last year2 Performance rights and options exercised Cancellation of forfeited LTI securities off market Balance at 30 June 2012 Less: LTI securities reversed2 Balance per accounts at 30 June 2012 Charter Hall Limited4 Charter Hall Property Trust4 1,162,380,237 50,343,595 12,641,256 $0.59 1,225,365,088 (919,023,274) 306,341,814 (12,585,920) 293,755,894 12,585,920 2,412,255 (11,907,844) 296,846,225 (678,055) 296,168,170 $1.94 943,961 73,179 4,764 (65,692) 956,212 (7,487) 948,725 209,550 739,175 948,725 2011 $’000 936,445 73,179 7,516 1,017,140 – 1,017,140 (73,179) 943,961 943,961 9,503 934,458 943,961 1. This includes shares of Charter Hall Limited and units in 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 (ELSP) have been issued in trust and have a corresponding loan given to the employee. Under AASB 2: Share-based Payment, the loan, interest received on the loan, securities and the distribution paid and payable are derecognised for the preparation of the financial statements. 3. Security issue prices for transactions occurring pre October 2010 are stated on a pre security consolidation basis. 4. On 18 June 2012, the Group announced implementation of the $200 million capital reallocation from Charter Hall Property Trust (CHPT) to Charter Hall Limited (CHL), effective 30 June 2012. The capital reallocation aims to ensure a more appropriate allocation of capital between CHPT and CHL (which together trade on the Australian Securities Exchange as Charter Hall Group) which is more closely aligned with the Group’s long‑term growth strategy. Under the capital reallocation proposal approved by securityholders at the Annual General Meeting on 24 November 2011, CHPT made capital payments of $200 million which were compulsorily applied as a capital contribution for existing shares of CHL. (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. (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 satisfied 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 has been inactive since the 30 June 2010 distribution. (e) Consolidation In October 2010, the Group completed a consolidation of its securities on the basis of one new security for every four pre‑consolidation securities. Where the consolidation of a holding resulted in a fractional security, that fraction was rounded up to the next whole security. The consolidation of securities resulted in the Group reducing its total securities on issue from 1,225,365,088 to 306,341,814 units. 113 Annual Report 2012 28 Reserves and accumulated losses (a) Reserves Business combination reserve Security‑based benefits reserve Transactions with non‑controlling interests Foreign currency reserve Charter Hall Limited and controlled entities Charter Hall Property Trust Movements: Business combination reserve Opening and closing balance Security-based benefits reserve Opening balance Expense relating to LTI scheme Expense relating to deferred STI transferred to security‑based payment reserve Transferred to equity on options and performance rights exercised Closing balance Transactions with non-controlling interests Opening balance DRF acquisition premium Acquisitions/redemptions above net tangible assets Closing balance Foreign currency reserve Opening balance Exchange differences on translation of foreign operations Transfer of cumulative FX losses to profit/(loss) Transfer to accumulated losses Closing balance Charter Hall Group Charter Hall Property Trust Group 2012 $’000 2011 $’000 2012 $’000 2011 $’000 (52,000) 12,605 (8,702) (2,373) (50,470) (49,055) (1,415) (50,470) (52,000) 11,457 (6,300) (10,451) (57,294) (47,547) (9,747) (57,294) (52,000) (52,000) 11,457 2,338 262 (1,452) 12,605 (6,300) (2,295) (107) (8,702) (10,451) 992 11,749 (4,663) (2,373) 7,367 4,090 – – 11,457 – (6,300) – (6,300) 4,604 (19,718) – 4,663 (10,451) – – (9) (1,406) (1,415) – (1,415) (1,415) – – – – – – 52 – (61) (9) (9,799) 1,307 11,749 (4,663) (1,406) – – 52 (9,799) (9,747) – (9,747) (9,747) – – – – – – – 52 – 52 4,626 (19,088) – 4,663 (9,799) (i) Business combination reserve This reserve relates to the reverse acquisition at the initial public offering (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. (ii) Security‑based payments reserve The security‑based payments reserve is used to recognise the fair value of securities issued under the ELSP and rights and options issued under the PROP. 114 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group (iii) Transactions with non‑controlling interests Transactions with non‑controlling interests that do not result in loss of control are treated as transactions with equity owners of the Charter Hall Group and Charter Hall Property Trust Group. A change in ownership interest results in an adjustment between the carrying amounts of controlling and non‑controlling interests to reflect their relative interests in the controlled entity. Any difference between the amount of the adjustment to non‑controlling interests and any consideration paid or received is recognised within this reserve. (iv) Foreign currency reserve Exchange differences arising on translation of foreign controlled entities and the Charter Hall Group and Charter Hall Property Trust Group’s share of foreign exchange differences arising from their equity accounted investments are recognised in other comprehensive income as described in note 1(d) and accumulated in a separate reserve within equity. The cumulative amount is reclassified to profit or loss when the net investment is disposed of. (b) Accumulated losses Movements in accumulated losses were as follows: Opening balance Net profit for the year Distributions Transfer from foreign currency reserve Closing balance Charter Hall Limited and controlled entities Charter Hall Property Trust Charter Hall Group Charter Hall Property Trust Group 2012 2011 2012 2011 (136,849) 16,678 (53,839) 4,663 (169,347) (81,738) (87,609) (169,347) (136,055) 52,338 (48,469) (4,663) (136,849) (62,329) (74,520) (136,849) (74,520) 36,087 (53,839) 4,663 (87,609) – (87,609) (87,609) (79,219) 57,831 (48,469) (4,663) (74,520) – (74,520) (74,520) 29 Non-controlling interest The financial statements of the Charter Hall Group include the financial statements for the consolidated entity consisting of Charter Hall Limited and its controlled entities including Charter Hall Property Trust (CHPT). Charter Hall Limited has been identified 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 a 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(b) Charter Hall Group 2012 $’000 2011 $’000 739,175 (1,415) (87,609) 650,151 934,458 (9,747) (74,520) 850,191 115 Annual Report 2012 29 Non-controlling interest (continued) The Charter Hall Group and Charter Hall Trust Group have each consolidated 100% of the net assets and results of DRF. However, with regard to the Charter Hall Group 34.09% (2011: 34.63%) of DRF is owned by non‑controlling unitholders, and with regard to the Charter Hall Property Trust Group 50.37% (2011: 50.78%) of DRF is owned by non‑controlling unitholders. Their non‑controlling interest (NCI) in the total equity of DRF is as follows: Interest in: Contributed equity Reserves Accumulated losses Other non-controlling interest in DRF 30 Key management personnel Charter Hall Group Charter Hall Property Trust Group 2012 $’000 2011 $’000 2012 $’000 2011 $’000 34.09% NCI 34.63% NCI 50.37% NCI 50.78% NCI 67,348 – (39,900) 27,448 68,056 (330) (35,599) 32,127 99,515 – (58,957) 40,558 100,772 (496) (53,121) 47,155 (a) Directors The following persons were Directors of Charter Hall Limited and Charter Hall Funds Management Limited during the year: ◆◆ Kerry Roxburgh – Chairman and Non‑Executive Independent Director ◆◆ Roy Woodhouse – Deputy Chairman and Non‑Executive Independent Director ◆◆ Anne Brennan – Non‑Executive Independent Director ◆◆ David Deverall – Non‑Executive Independent Director (appointed 7 May 2012) ◆◆ Glenn Fraser – Non‑Executive Independent Director (resigned 15 August 2012) ◆◆ Cedric Fuchs – Executive Director (resigned 24 November 2011) ◆◆ David Harrison – Joint Managing Director ◆◆ Peter Kahan – Non‑Executive Director ◆◆ Colin McGowan – Non‑Executive Independent Director ◆◆ David Southon – Joint Managing Director (b) Other key management personnel The following persons also had authority and responsibility for planning, directing and controlling the activities of the Charter Hall Group and Charter Hall Property Trust Group, directly or indirectly, during the year. The number of other key management personnel in the year ended 30 June 2012 was seven (2011: seven). Name Position Employer P Altschwager N Devlin S Dundas A Glass N Kelly R Stacker A Taylor Group Chief Financial Officer Head of People Fund Manager – Charter Hall Retail REIT Head of Wholesale Pooled Funds Head of Investor Relations Head of Direct – Charter Hall Direct Property Head of Wholesale Partnerships – Charter Hall Office Trust 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 116 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group (c) Key management personnel compensation (including non-executive Directors) Key management personnel are employed by the Charter Hall Group. Payments made by the Charter Hall Trust Group to the Charter Hall Group do not include any amounts directly attributable to the compensation of key management personnel. Short‑term employee benefits Post‑employment benefits Security‑based benefits Long‑term employee benefits Non‑monetary benefits 2012 $ 2011 $ 5,505,464 134,277 1,680,857 163,779 64,082 7,548,459 8,296,788 326,698 1,866,842 (13,151) – 10,477,177 (d) Equity instrument disclosures relating to key management personnel (i) Security holdings The numbers of securities in the Charter Hall Group held during the year by each Director and other key management personnel of the Group, including their personally related parties, are set out below. 2012 Name Directors of Charter Hall Limited Ordinary securities K Roxburgh R Woodhouse A Brennan D Deverall G Fraser D Harrison P Kahan C McGowan D Southon Other key management personnel of the Group Ordinary securities P Altschwager N Devlin S Dundas A Glass N Kelly R Stacker A Taylor Opening balance1 Purchased/ (sold) during the year 31,250 21,429 30,000 – 156,934 2,429,540 – – 2,461,161 – – – – 55,343 – – – – – 15,287 (86,934) (416,234) – – (90,980) – – – (36,392) (81,246) – – LTI securities vesting/ (forfeited) during the year – – – – – 222,664 – – (95,372) – – – 36,392 50,058 – – Closing balance1 31,250 21,249 30,000 15,287 70,000 2,235,970 – – 2,274,809 – – – – 24,155 – – 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 of $11.04 per security which is significantly higher than the security price at 30 June 2012 of $2.27. 117 Annual Report 2012 30 Key management personnel (continued) (d) Equity instrument disclosures relating to key management personnel (continued) (i) Security holdings (continued) 2011 Name Directors of Charter Hall Limited Ordinary securities K Roxburgh R Woodhouse A Brennan 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 Opening balance1 Purchased/ (sold) during the year LTI securities vesting/ (forfeited) during the year 31,250 21,429 – 156,934 1,454,459 2,429,540 – – 2,461,161 136,952 – 55,343 – – – 138,929 – – 30,000 – – – – – – – – – – – – (31,305) – – – – – – – – – – – – – – – – Closing balance1 31,250 21,429 30,000 156,934 1,454,459 2,429,540 – – 2,461,161 136,952 – 55,343 – – – 107,624 The Executive Directors of Charter Hall Group and other key management personnel of Charter Hall Group held the following performance rights as at reporting date in the Company’s PROP: 2010 2011 2012 Total 96,520 96,520 201,924 201,924 564,517 564,517 862,961 862,961 – – 35,752 38,608 30,886 53,628 89,252 – 10,897 – 50,483 43,272 – – – 97,581 107,527 141,130 120,968 157,549 223,433 – 108,478 143,279 230,221 195,126 211,177 312,685 Executive Directors D Harrison D Southon Key management personnel P Altschwager N Devlin S Dundas A Glass N Kelly R Stacker A Taylor 118 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group The Executive Directors of Charter Hall Group and other key management personnel of Charter Hall Group held the following options as at reporting date in the Company’s PROP: Executive Directors D Harrison D Southon Key management personnel P Altschwager N Devlin S Dundas A Glass N Kelly R Stacker A Taylor 2010 2011 2012 Total 345,060 670,314 504,808 504,808 – – 89,252 268,128 162,500 133,876 223,252 – 27,243 – 126,204 108,176 – – – – – – – – – – – 849,868 1,175,122 – 27,243 89,252 394,332 270,676 133,876 223,252 The Executive Directors of Charter Hall Group and other key management personnel of the Charter Hall Group held the following service rights as at reporting date in the Company’s PROP: Executive Directors D Harrison D Southon Key management personnel P Altschwager 2012 Total 85,731 85,731 85,731 85,731 260,054 260,054 (e) Loans to key management personnel Details of loans made to Directors of Charter Hall Limited and other key management personnel of Charter Hall Group, including their personally related parties, are set out below. (i) Aggregates for key management personnel 2012 2011 Balance at start of the year $ 5,106,250 5,145,000 Interest charged in the year $ Payments made during the year $ Balance at end of the year $ Number in Group at the end of the year 507,684 206,250 (1,258,558) (245,000) 4,355,376 5,106,250 2 2 (ii) Individuals with loans above $100,000 during the period 2012 D Harrison D Southon 2011 D Harrison D Southon Balance at start of the year $ Interest charged in the year $ Payments made during the year $ Balance at end of the year $ Highest indebtness during the year 2,553,125 2,553,125 264,540 243,144 (535,933) (722,625) 2,281,732 2,073,644 2,579,666 2,579,666 2,605,000 2,540,000 103,125 103,125 (155,000) (90,000) 2,553,125 2,553,125 2,685,411 2,620,411 119 Annual Report 2012 30 Key management personnel (continued) (e) Loans to key management personnel (continued) (i) Aggregates for key management personnel (continued) When Charter Hall Group listed in 2005, the Product Disclosure Statement dated 11 May 2005 disclosed that related parties of the Joint Managing Directors, David Harrison and David Southon, had entered into loan agreements with CHL. Loans of $2.5 million each were provided to fund the purchase of 2,500,000 (subsequently 625,000 following the one‑for‑four security consolidation in October 2010) listed securities in the Charter Hall Group. At that time, these loans were made to align the Joint Managing Directors’ interests with those of the Group and securityholders. Each loan is to a related party of the Joint Managing Directors, being the Harrison Family Trust and the Southon Family Trust. The loans, which were initially for a three‑year period, were extended in 2008 for three years to 6 June 2011 under the same terms and conditions. Until 6 June 2011, interest on the loans was equivalent to the Charter Hall Group distribution paid in respect of the securities purchased using the loan proceeds. At the time of the roll‑over in June 2008, distributions received on these securities exceeded an arm’s length interest rate. In FY11, however, the distributions received were below an arm’s length interest rate $209,375 on each loan. This has not been charged to each of the borrowers. On 7 June 2011, the loans were extended for a further three‑year period to 31 July 2014, with repayment, interest, security and LVR conditions that are at arm’s length terms and conditions as follows: Repayment Minimum repayments of $300,000 each on or before 31 July 2011, $500,000 each on or before 31 July 2012 and 31 July 2013 respectively, with the remaining principal balance at the end of the term. Subsequently, further amended to be five days after payment of the CHC distribution. Interest An interest rate of 12.5% p.a. for a loan to value ratio (LVR) greater than 50%, 10.5% p.a. for an LVR less than or equal to 50%; 9% p.a. for an LVR less than or equal to 40%, with interest payable in arrears upon each distribution date of the Charter Hall Group, commencing February 2012. Additional security Security over these loans is by way of a first ranking mortgage over all CHC securities held by the Harrison Family Trust and the Southon Family Trust, with the borrowers having the right to release CHC securities if the LVR is less than 40%. At 30 June 2012, the number of CHC securities held by the Harrison Family Trust was 2,009,521 (2011: 2,009,521) and the number held by the Southon Family Trust was 2,048,360 (2011: 2,048,360). LVR covenant Loans are not to exceed an LVR of 60%, at bi‑annual testing dates, with the borrowers obligated to provide either additional security or repay such amount of the loan within 30 days, to ensure compliance with the LVR covenant. 31 Remuneration of auditors During the year, the following fees were paid or payable for services provided by the auditors of the Charter Hall Group and Charter Hall Property Trust Group, their related practices and nonrelated audit firms: (a) Audit services PricewaterhouseCoopers Australian firm Audit and review of financial reports Independent Review of the Charter Hall anti‑money laundering program Non‑PricewaterhouseCoopers audit firms for audit services W F White & Co Total remuneration for audit services Charter Hall Group Charter Hall Property Trust Group 2012 $ 2011 $ 2012 $ 2011 $ 347,597 387,791 32,184 47,388 55,000 – – – – 402,597 1,940 389,731 – 32,184 – 47,388 120 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group (b) Taxation services PricewaterhouseCoopers Australian firm Tax compliance services, including review of company income tax returns Total remuneration for taxation services (c) Advisory services PricewaterhouseCoopers Australian firm Long‑term incentive plan structure Accounting advice Total remuneration for advisory services Charter Hall Group Charter Hall Property Trust Group 2012 $ 2011 $ 2012 $ 2011 $ 60,976 60,976 55,050 55,050 10,000 10,000 29,720 29,720 10,000 25,500 35,500 53,525 – 53,525 – – – – – – The Charter Hall Group and Charter Hall Property Trust Group’s policy is to employ PricewaterhouseCoopers (PwC) on assignments additional to statutory audit duties where PwC’s expertise and experience with the Charter Hall Group and Charter Hall Property Trust 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 Charter Hall Group and Charter Hall Property Trust Group’s policy to seek competitive tenders for all major consulting projects. 32 Commitments (a) Lease commitments: Group as lessee Commitments payable 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 five years Commitment fees from associates Charter Hall Group Charter Hall Property Trust Group 2012 1,549 5,808 7,357 2011 1,476 8,088 9,564 2012 2011 – – – – – – (b) Capital commitments As at 30 June 2012 there were no contractual capital commitments (2011: $nil). (c) Commitments: Other Charter Hall Direct 144 Stirling Street Trust (144SST) On 15 May 2012, Charter Hall Direct Property Management Limited issued a Product Disclosure Statement (PDS) seeking investors for an unlisted property syndicate to invest in a trust to acquire a building at 144 Stirling Street, Perth. If an amount equal to or greater than $16 million but less than $32 million was raised by 31 December 2012, the Group (as underwriter) had agreed to underwrite the balance of units available under the offer. Subsequent to 30 June 2012, CHDPML was successful in raising the $32 million in equity sought in the PDS. Accordingly the Group will not be required to underwrite any part of the equity‑raising for 144SST. Charter Hall Opportunity Fund No. 5 (CHOF5) Workzone (Workzone) On 21 December 2011, Charter Hall Limited and Charter Hall Funds Management Limited as trustee for CHOF5 entered into a Preferred Equity Deed (deed) committing $9 million to fund development of the Workzone project. At 30 June 2012 $4.5 million of this facility had been drawn down and is included in receivables in this financial report. A further $1 million was drawn down in July 2012 leaving an undrawn commitment of $3.5 million at the date of this report. CHPT RP2 Trust – Bay Village acquisition CHPT RP2 Trust was established on 29 May 2012 to acquire a 20% interest in the Retail Partnership No. 2 Trust (RP2T). RP2T entered into a contract on 28 June 2012 to acquire the Bay Village shopping centre at Bateau Bay in New South Wales for $164 million. The purchase of the centre was completed on 15 August 2012. The Group’s equity commitment to fund the acquisition is $19.5 million which was paid on 15 August 2012. 33 Contingent liabilities There were no contingent liabilities as at 30 June 2012. 121 Annual Report 2012 34 Related parties (a) Parent entity The parent entity of the Charter Hall Group is Charter Hall Limited. The parent entity of the Charter Hall Property Trust Group is the Charter Hall Property Trust. (b) Controlled entities Interests in controlled entities are set out in note 35. (c) Key management personnel Disclosures relating to key management personnel are set out in note 30. (d) Transactions with related parties Transactions with associates and joint ventures are disclosed in note 36 and note 37 respectively. The following income was earned from related parties during the year: Charter Hall Group Charter Hall Property Trust Group 2012 $ 2011 $ 2012 $ 2011 $ Accounting fees Marketing fees Management and performance fees from associates Transaction fees from associates Commitment fees from associates Property management fees from associates 4,174,581 86,930 37,756,063 28,622,218 135,000 29,456,354 4,155,000 113 39,208,306 17,389,370 – 20,806,449 – – – – – – – – – – – – (e) Loans to/from related parties Loans to joint ventures and associates Opening balance Loans advanced Interest charged Interest received Closing balance Loans to Charter Hall Limited Opening balance Loans advanced Loan repayments received Capital reallocation Interest charged Closing balance Charter Hall Group Charter Hall Property Trust Group 2012 $ 2011 $ 2012 $ 2011 $ 5,000,000 6,120,000 601,644 (601,644) 11,120,000 3,750,000 1,250,000 594,658 (594,658) 5,000,000 – – – – – – – – – – – – – – – – – – – – – – 355,874,328 137,447,221 (163,127,456) (200,000,000) 33,347,550 163,541,643 282,424,290 96,868,199 (35,970,548) – 12,552,387 355,874,328 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. The loans to Charter Hall Limited comprise two unsecured stapled loans maturing in July 2018 and July 2019 respectively. Interest is charged on an arm’s length basis which, at 30 June 2012, amounted to a weighted average rate of 9.76% (June 2011: 8.04%). (f) Fees paid to the Responsible Entity or its associates Fees paid to the Responsible Entity of the Charter Hall Property Trust, and its associates, by the Charter Hall Property Trust Group amounted to $3,591,041 (2011: $5,725,675). 122 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group 35 Controlled entities The consolidated financial statements of the Charter Hall Group incorporate the assets, liabilities and results of the following controlled entities in accordance with the accounting policy described in note 1(b): (a) Details of controlled entities of the Charter Hall Group Name of entity Controlled entities of Charter Hall Limited Charter Hall Holdings Pty Limited CHTOM Pty Limited (formerly Charter Hall CUB Pty Ltd) Charter Hall Mordialloc Pty Limited Charter Hall La Trobe Pty Limited CH La Trobe Trust Charter Hall Opportunity Fund No. 6 CHOF6 123 Pty Limited CHOF6 123 Trust CHOF6 Terrace Pty Limited Controlled entities of Charter Hall Holdings Pty Ltd Bieson Pty Limited Bowvilla Pty Limited CH Nominees Pty Limited (formerly Sandkilt (No 2) Pty Limited) Charter Hall Asset Services Pty Limited (formerly Charter Hall Asset Services Limited) Charter Hall Asset Services Europe Sp z.o.o Charter Hall Direct Property Management Limited1 Charter Hall Escrow Agent Pty Limited (formerly Charter Hall Holdings Real Estate (Vic) Pty Limited) Charter Hall Funds Management Limited Charter Hall Holdings Investment Trust Charter Hall Holdings Real Estate Pty Limited Charter Hall International Office Pty Limited Charter Hall (NZ) Pty Limited Charter Hall Office Collins Street Pty Limited Charter Hall Office Investments Pty Limited Charter Hall Office Management Limited Charter Hall Real Estate Inc CHREI US Office LLC CHREI US Retail LLC Charter Hall Real Estate Europe Limited Charter Hall Real Estate Management Services 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 Charter Hall Real Estate Management Services (SA) Pty Limited Charter Hall Real Estate Management Services (TAS) Pty Limited Charter Hall Real Estate Management Services (VIC) Pty Limited Charter Hall Real Estate Management Services (WA) Pty Limited Charter Hall Retail Management Limited1 Frolish Pty Limited Real Estate Capital Investments Limited Stelridge Pty Limited Visokoi Pty Limited Country of incorporation Class of securities 2012 % 2011 % Equity holding Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Poland Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia USA USA USA UK 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 Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – – 100 100 100 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – 100 100 100 100 1. On 30 September 2011, the Charter Hall Group completed the acquisition from Macquarie Group Limited of all shares in Charter Hall Direct Property Management Pty Limited and Charter Hall Retail Management Pty Limited following the satisfaction of conditions precedent for a sum of $14.3 million. This transaction completed the acquisition of the Macquarie real estate funds management platform. Although Charter Hall did not previously own the shares of these entities, Charter Hall had economic control of these entities and hence they have been consolidated since March 2010. 123 Annual Report 2012 35 Controlled entities (continued) (a) Details of controlled entities of the Charter Hall Group (continued) Name of entity Controlled entities of Charter Hall Property Trust Charter Hall Direct Retail Fund Charter Hall Co‑Investment Trust1 Charter Hall Special Situations Office Fund2 CHPT RP2 Trust3 Country of incorporation Class of securities Australia Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Equity holding 2012 % 66 100 100 100 2011 % 66 100 100 – 1. Charter Hall Co‑Investment Trust is an entity which was set up by Charter Hall Property Trust to hold its investments in Charter Hall Office Trust (CHOT), Charter Hall Retail REIT (CQR) and Charter Hall Direct Property Fund (CHDPF). 2. Special Situations Office Fund is currently inactive, but will likely be used for Charter Hall’s next unlisted fund. 3. CHPT RP2 Trust was established on 29 May 2012 to acquire a 20% interest in the Retail Partnership No. 2 Trust (RP2T). RP2T entered into a contract on 28 June 2012 to acquire the Bay Village shopping centre at Bateau Bay in New South Wales. Name of entity Controlled entities of Charter Hall Direct Retail Fund Core Plus Retail Fund New Zealand Redcliffe Retail Property Trust1 Belconnen Retail Warehouse Trust1 Box Hill Retail Warehouse Trust1 Nerang Retail Warehouse Trust1 Nowra Retail Warehouse Trust1 Penrith Retail Warehouse Trust1 Stafford Retail Warehouse Trust Stafford Wiley Trust Ipswich Retail Property Trust Rothwell Retail Property Trust1 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 2012 % Equity holding Australia 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 Ordinary 100 – – – – – – 100 100 100 – 100 100 100 100 100 2011 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 1. On 31 May 2012, unitholders were advised that these trusts were dissolved on that date. Accordingly, the results of these entities are included in the statement of comprehensive income up until 31 May 2012. 124 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group (b) Details of controlled entities of the Charter Hall Property Trust Group Name of entity Controlled entities of Charter Hall Property Trust Charter Hall Direct Retail Fund Charter Hall Co‑Investment Trust1 Charter Hall Special Situations Office Fund2 CHPT RP2 Trust3 Country of incorporation Class of securities Australia Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Equity holding 2012 % 49 100 100 100 2011 % 49 100 100 – 1. Charter Hall Co‑Investment Trust is an entity which was set up by Charter Hall Property Trust to hold its investments in Charter Hall Office Trust (CHOT), Charter Hall Retail REIT (CQR) and Charter Hall Direct Property Fund (CHDPF). 2. Special Situations Office Fund is currently inactive, but will likely be used for Charter Hall’s next unlisted fund. 3. CHPT RP2 Trust was established on 29 May 2012 to acquire a 20% interest in the Retail Partnership No. 2 Trust (RP2T). RP2T entered into a contract on 28 June 2012 to acquire the Bay Village shopping centre at Bateau Bay in New South Wales. Name of entity Controlled entities of Charter Hall Direct Retail Fund Core Plus Retail Fund New Zealand Redcliffe Retail Property Trust1 Belconnen Retail Warehouse Trust1 Box Hill Retail Warehouse Trust1 Nerang Retail Warehouse Trust1 Nowra Retail Warehouse Trust1 Penrith Retail Warehouse Trust1 Stafford Retail Warehouse Trust Stafford Wiley Trust Ipswich Retail Property Trust Rothwell Retail Property Trust1 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 2012 % Equity holding Australia 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 Ordinary 100 – – – – – – 100 100 100 – 100 100 100 100 100 2011 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 1. On 31 May 2012, unitholders were advised that these trusts had been dissolved on that date. Accordingly, the results of these entities are included in the statement of comprehensive income up until 31 May 2012. 125 Annual Report 2012 36 Investments in associates (a) Carrying amounts Information relating to associates is set out below. Charter Hall Group Ownership interest Name of entity Principal activity 2012 % 2011 % 2012 $’000 2011 $’000 Accounted for at fair value through profit or loss Unlisted Charter Hall Diversified Property Fund Charter Hall Umbrella Fund Charter Hall Direct Property Fund Charter Hall Direct Industrial Fund Charter Hall Property Securities Fund Equity accounted: Unlisted Charter Hall Opportunity Fund 4 Charter Hall Opportunity Fund 5 Charter Hall Core Plus Office Fund Charter Hall Core Plus Industrial Fund Charter Hall Office Trust1 Retail Partnership No. 2 Trust2 Listed Charter Hall Office REIT1 Charter Hall Retail REIT Total investments in associates Property investment Property investment Property investment Property investment REIT securities investment Property development Property development Property investment Property investment Property investment Property investment Property investment Property investment 25.2 26.6 3.8 0.2 2.1 3.0 15.0 13.9 18.0 15.0 20.0 – 10.0 36.4 24.9 3.5 – 1.4 3.0 15.0 16.2 21.3 – – 10.0 8.2 11,713 39,469 10,770 228 458 62,638 1,128 28,493 112,951 54,885 145,720 – – 101,338 444,515 507,153 26,964 40,612 10,438 – 431 78,445 1,218 31,286 110,428 53,281 – – 185,681 88,189 470,083 548,528 1. On 1 May 2012, the Charter Hall Office REIT was privatised. As a result the Charter Hall Office REIT changed from a listed REIT to a wholesale unit trust known as Charter Hall Office Trust. 2. The 20% interest in the Retail Partnership No. 2 Trust (RP2T) was acquired on 29 May 2012 for $2. RP2T entered into a contract on 28 June 2012 to acquire the Bay Village shopping centre at Bateau Bay in New South Wales. The above associates are incorporated in Australia. The investments in Charter Hall Diversified Property Fund, Charter Hall Umbrella Fund, Charter Hall Direct Property Fund and Charter Hall Direct Industrial Fund are held by Charter Hall Property Trust (CHPT) and are accounted for at fair value through the profit or loss (note 14). The investment in Charter Hall Diversified Property Fund (DPF) consists of units which represent a 17.9% (2011: 19.6%) interest but also an additional investment in the form of bridging equity of $7.4 million (2011: $19.9 million), which is 7.3% (2011: 16.8%). CHPT has provided DPF with a bridging loan facility totalling $18.0 million, currently drawn to $7.4 million. This facility is available to DPF with an initial expiry date of 18 July 2018; however, there is a clause in the agreement which allows the borrower to provide written notice within 14 days prior to that date electing to extend the agreement in perpetuity. The investment in Charter Hall Property Securities Fund is held by a controlled entity of Charter Hall Limited and is accounted for at fair value through the profit or loss (note 14). The investments in Charter Hall Opportunity Funds 4 and 5 held by Charter Hall Limited are equity accounted in the consolidated financial statements (note 17). Both Charter Hall Limited and Charter Hall Property Trust have an investment in Charter Hall Core Plus Office Fund and Charter Hall Core Plus Industrial Fund, and are equity accounted. Charter Hall Office Trust, Charter Hall Retail REIT and the Retail Partnership No. 2 Trust 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. 126 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group Charter Hall Property Trust Group Ownership interest Name of entity Principal activity 2012 % 2011 % 2012 $’000 2011 $’000 Accounted for at fair value through profit or loss Unlisted Charter Hall Diversified Property Fund Charter Hall Umbrella Fund Charter Hall Direct Property Fund Charter Hall Direct Industrial Fund Equity accounted: Unlisted Charter Hall Core Plus Office Fund Charter Hall Core Plus Industrial Fund Charter Hall Office Trust1 Retail Partnership No. 2 Trust2 Listed Charter Hall Office REIT1 Charter Hall Retail REIT Total investments in associates Property investment Property investment Property investment Property investment Property investment Property investment Property investment Property investment Property investment Property investment 25.2 26.6 3.8 0.2 12.6 7.8 15.0 20.0 – 10.0 36.4 24.9 3.5 – 13.3 21.3 – – 10.0 8.2 11,713 39,469 10,770 228 62,180 102,635 23,885 145,720 – – 101,338 373,578 435,758 26,964 40,612 10,438 – 78,014 90,257 53,281 – – 185,681 88,189 417,408 495,422 1. On 1 May 2012, the Charter Hall Office REIT was privatised. As a result the Charter Hall Office REIT changed from a listed REIT to a wholesale unit trust known as Charter Hall Office Trust. 2. The 20% interest in the Retail Partnership No. 2 Trust (RP2T) was acquired on 29 May 2012 for $2. RP2T entered into a contract on 28 June 2012 to acquire the Bay Village shopping centre at Bateau Bay in New South Wales. The above associates are incorporated in Australia. The investments in Charter Hall Diversified Property Fund, Charter Hall Umbrella Fund, Charter Hall Direct Property Fund and Charter Hall Direct Industrial Fund are held by Charter Hall Property Trust (CHPT) and are accounted for at fair value through the profit or loss (note 14). The investment in Charter Hall Diversified Property Fund (DPF) consists of units which represent a 17.9% (2011: 19.6%) interest but also an additional investment in the form of bridging equity of $7.4 million (2011: $19.9 million), which is 7.3% (2011: 12.3%). CHPT has provided DPF with a bridging loan facility totalling $18.0 million, currently drawn to $7.4 million. This facility is available to DPF with an initial expiry date of 18 July 2018, however there is a clause in the agreement which allows the borrower to provide written notice within 14 days prior to that date electing to extend the agreement in perpetuity. The investments in Charter Hall Core Plus Office Fund, Charter Hall Core Plus Industrial Fund, Charter Hall Office Trust, Charter Hall Retail REIT and the Retail Partnership No. 2 Trust 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. 127 Annual Report 2012 36 Investments in associates (continued) (b) Movements in carrying amounts (i) Investments at fair value through profit or loss Charter Hall Diversified Property Fund Opening balance Investment Redemptions and repayment of bridging equity Fair value adjustment Closing balance Charter Hall Umbrella Fund Opening balance Investment Fair value adjustment Closing balance Charter Hall Direct Property Fund Opening balance Investment Fair value adjustment Closing balance Macquarie Property Income Fund Opening balance Investment Fair value adjustment Disposal of units Closing balance Charter Hall Direct Industrial Fund Opening balance Investment Fair value adjustment Closing balance Charter Hall Property Securities Fund Opening balance Investment Fair value adjustment Closing balance Total investments at fair value through profit or loss Opening balance Investment Redemptions and repayment of bridging equity Fair value adjustment Closing balance 128 Charter Hall Group Charter Hall Property Trust Group 2012 $’000 2011 $’000 2012 $’000 2011 $’000 26,964 – (14,306) (945) 11,713 40,612 – (1,143) 39,469 10,438 – 332 10,770 – – – – – – 229 (1) 228 431 44 (17) 458 22,068 4,900 – (4) 26,964 41,578 – (966) 40,612 9,787 – 651 10,438 306 119 14 (439) – – – – – – 435 (4) 431 26,964 – (14,306) (945) 11,713 40,612 – (1,143) 39,469 10,438 – 332 10,770 – – – – – – 229 (1) 228 – – – – 22,068 4,900 – (4) 26,964 41,578 – (966) 40,612 9,787 – 651 10,438 – – – – – – – – – – – – – 78,445 273 (14,306) (1,774) 62,638 73,739 5,454 (439) (309) 78,445 78,014 229 (14,306) (1,757) 62,180 73,433 4,900 – (319) 78,014 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group (ii) Equity accounted investments Charter Hall Opportunity Fund 4 Opening balance Investment Share of loss after income tax Distributions received/receivable Closing balance Charter Hall Opportunity Fund 5 Opening balance Investment Share of loss after income tax Distributions received/receivable Reserves Closing balance Charter Hall Core Plus Office Fund Opening balance Investment Share of profit after income tax Distributions received/receivable Disposal of units Gain on remeasurement of equity interest Closing balance Charter Hall Core Plus Industrial Fund Opening balance Share of profit after income tax Distributions received/receivable Disposal of units Gain on remeasurement of equity interest Closing balance Charter Hall Office Trust (formerly Charter Hall Office REIT) Opening balance Investment Share of profit/(loss) after income tax Distributions received/receivable Share of movement in reserves Gain on remeasurement of equity interest Closing balance Retail Partnership No. 2 Trust Opening balance Investment* Closing balance * Investment of $2, which is $nil rounded to the nearest $1,000. Charter Hall Group Charter Hall Property Trust Group 2012 $’000 1,218 – (90) – 1,128 31,286 4,815 (7,331) (259) (18) 28,493 110,428 – 8,460 (6,992) – 1,055 112,951 53,281 4,711 (3,324) – 217 54,885 185,681 47,662 (8,161) (93,735) 12,961 1,312 145,720 – – – 2011 $’000 1,254 – (26) (10) 1,218 24,670 7,605 (989) – – 31,286 104,314 – 11,415 (5,516) – 215 110,428 51,989 3,770 (2,935) – 457 53,281 155,149 37,031 5,688 (9,424) (17,002) 14,239 185,681 – – – 2012 $’000 2011 $’000 – – – – – – – – – – – 90,257 10,086 7,690 (6,353) – 955 102,635 53,281 2,217 (1,724) (30,094) 205 23,885 185,681 47,662 (8,161) (93,735) 12,961 1,312 145,720 – – – – – – – – – – – – – – 104,314 – 10,787 (5,058) (20,008) 222 90,257 51,989 3,770 (2,935) – 457 53,281 155,149 37,031 5,688 (9,424) (17,002) 14,239 185,681 – – – 129 Annual Report 2012 36 Investments in associates (continued) (b) Movements in carrying amounts (continued) (ii) Equity accounted investments (continued) Charter Hall Retail REIT Opening balance Investment Share of profit after income tax Distributions received/receivable Share of movement in reserves Gain on remeasurement of equity interest Closing balance Total equity accounted investments Opening balance Investment Share of (loss)/profit after income tax Distributions received/receivable Reserves Disposal of units Gain on remeasurement of equity interests Closing balance (c) Fair value of listed investments in associates Charter Hall Office REIT1 Charter Hall Retail REIT Charter Hall Group Charter Hall Property Trust Group 2012 $’000 2011 $’000 2012 $’000 2011 $’000 88,189 16,176 2,587 (7,820) 145 2,061 101,338 470,083 68,653 176 (112,130) 13,088 – 4,645 444,515 82,326 7,425 4,928 (6,177) (2,128) 1,815 88,189 419,702 52,061 24,786 (24,062) (19,130) – 16,726 470,083 88,189 16,176 2,587 (7,820) 145 2,061 101,338 417,408 73,924 4,333 (109,632) 13,106 (30,094) 4,533 373,578 82,326 7,425 4,928 (6,177) (2,128) 1,815 88,189 393,778 44,456 25,173 (23,594) (19,130) (20,008) 16,733 417,408 Charter Hall Group Charter Hall Property Trust Group 2012 $’000 – 99,177 2011 $’000 165,397 79,705 2012 $’000 – 99,177 2011 $’000 165,397 79,705 1. Charter Hall Office REIT was delisted on 13 April 2012 and privatised on 1 May 2012. Fair value represents market value of CQO and CQR units as at 30 June 2012 and 2011. (d) Share of equity accounted associates’ profits or losses Charter Hall Group Charter Hall Property Trust Group 2012 $’000 2,674 (2,498) 176 2011 $’000 26,534 (1,748) 24,786 2012 $’000 4,311 22 4,333 2011 $’000 27,370 (2,197) 25,173 Profit before income tax Income tax expense Profit after income tax 130 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group (e) Contingent liabilities of associates Subsequent to year end, following commercial negotiations between the Development Alliance (DA) partners in the Little Bay Cove project, being CHOF5 Little Bay Pty Limited (CHOF5LB) (a controlled entity of CHOF5) and TA Global Development Pty Limited (TAG), in accordance with the DA Umbrella Deed, a Notice of Mediation has been issued to TAG by CHFML (in its capacity as trustee of CHOF5) in relation to a commercial dispute between the DA partners. The mediation notice has been rejected by TAG with a request for a clarification of the details of the alleged dispute between the parties. Ongoing commercial negotiations with TAG are being undertaken in an attempt to agree on the future direction of the project. As at the date of signing the financial statements, CHOF5 is not able to determine whether any financial impact will occur as a result of these negotiations and any subsequent dispute or mediation process. CHOF5LB has been in negotiations with Westpac, who provide the Little Bay debt facility, about ongoing covenant compliance and extending the facility past the expiry of 30 January 2013. Delays experienced on the project due to inclement weather have resulted in the completion date of the project extending from November 2012 to April 2013. This extended delay, being 120 days past completion date constitutes a review event under the debt facility. Whilst Westpac has advised it is continuing to consider its position in relation to the review event and any further powers it may wish to exercise, it has advised the following changes to the terms of the facility: ◆◆ By 15 September 2012 CHOF5LB was to provide an up to date valuation, which was duly complied with; and ◆◆ By 30 September 2012 the facility limit is to be permanently reduced by $15.4 million (or such greater sum as may be required to ensure that the LVR is not more than 51.5%) to $69.9 million (CHOF5’s obligation is $7.7 million, being its 50% interest in the DA); and any secured money outstanding in excess of the new facility limit is to be repaid. CHOF5 has sufficient funds to meet its $7.7 million share of the above obligations. Westpac has acknowledged formal credit approval will be sought to extend the expiry date from 30 January 2013 to 30 May 2013, if requested, providing the above terms are complied with. (f) Summarised financial information of associates Charter Hall Group 2012 Charter Hall Diversified Property Fund Charter Hall Umbrella Fund Charter Hall Direct Property Fund Charter Hall Direct Industrial Fund Charter Hall Property Securities Fund Charter Hall Opportunity Fund 4 Charter Hall Opportunity Fund 5 Charter Hall Core Plus Office Fund Charter Hall Core Plus Industrial Fund Charter Hall Office Trust (formerly Charter Hall Office REIT) Retail Partnership No. 2 Trust Charter Hall Retail REIT 2011 Charter Hall Diversified Property Fund Charter Hall Umbrella Fund Charter Hall Direct Property Fund Charter Hall Opportunity Fund 4 Charter Hall Opportunity Fund 5 Charter Hall Core Plus Office Fund Charter Hall Core Plus Industrial Fund Charter Hall Office REIT Charter Hall Retail REIT Charter Hall Group’s share of: Assets $’000 Liabilities $’000 Revenues $’000 Profit/(loss) $’000 25,333 37,417 19,476 317 472 3,556 52,731 207,275 109,583 296,878 – 194,458 947,496 55,979 37,957 18,320 3,756 46,964 220,889 94,925 322,713 157,069 958,572 5,945 586 8,586 103 21 2,428 24,238 94,324 54,698 151,158 – 93,120 435,207 30,009 648 7,800 2,538 15,678 110,461 41,644 137,032 68,880 414,690 2,855 2,355 2,688 20 63 818 14,393 18,550 9,793 18,092 – 18,606 88,233 5,332 1,982 1,834 201 2,844 15,739 10,801 23,055 17,388 79,176 (475) 1,892 1,099 7 29 (90) (7,331) 8,460 4,711 (8,161) – 2,587 2,728 1,979 2,226 1,344 (26) (989) 11,415 3,770 5,688 4,928 30,335 131 Annual Report 2012 36 Investments in associates (continued) (f) Summarised financial information of associates (continued) Charter Hall Property Trust Group 2012 Charter Hall Diversified Property Fund Charter Hall Umbrella Fund Charter Hall Direct Property Fund Charter Hall Direct Industrial Fund Charter Hall Core Plus Office Fund Charter Hall Core Plus Industrial Fund Charter Hall Office Trust (formerly Charter Hall Office REIT) Retail Partnership No. 2 Trust Charter Hall Retail REIT 2011 Charter Hall Diversified Property Fund Charter Hall Umbrella Fund Charter Hall Direct Property Fund Charter Hall Core Plus Office Fund Charter Hall Core Plus Industrial Fund Charter Hall Office REIT (formerly Charter Hall Office REIT) Charter Hall Retail REIT 37 Investments in joint ventures (a) Carrying amounts Information relating to joint ventures is set out below. Charter Hall Property Trust Group’s share of: Assets $’000 Liabilities $’000 Revenues $’000 Profit/(loss) $’000 25,333 37,417 19,476 317 188,344 47,689 296,878 – 194,458 809,912 55,979 37,957 18,320 180,541 94,925 322,713 157,069 867,504 5,945 586 8,586 103 85,709 23,804 151,158 – 93,120 369,011 30,009 648 7,800 90,284 41,644 137,032 68,880 376,297 2,855 2,355 2,688 20 16,862 4,610 18,092 – 18,606 66,088 5,332 1,982 1,834 15,739 10,801 23,055 17,388 76,131 (475) 1,892 1,099 7 7,690 2,217 (8,161) – 2,587 6,856 1,979 2,226 1,344 10,787 3,770 5,688 4,928 30,722 Charter Hall Group Ownership interest Name of company Principal activity 2012 % 2011 % 2012 $’000 2011 $’000 Unlisted Commercial and Industrial Property Pty Ltd Maguire Macquarie Management LLC Macquarie‑Regency Management LLC Reliance Investment Management Pty Limited Charter Hall Retail JV Trust Property development Asset management Asset management Investment management Property investment 50 50 50 – 50 Charter Hall Property Trust Group Ownership interest Name of company Principal activity Unlisted Charter Hall Retail JV Trust Property investment 2012 % 50 132 50 50 50 50 50 2011 % 50 27,598 – 46 – – 27,644 28,843 – 26 55 18,700 47,624 2012 $’000 2011 $’000 – 18,700 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group (b) Movements in carrying amounts Commercial and Industrial Property Pty Limited Opening balance Share of profit after income tax Dividends received/receivable Closing balance Maguire Macquarie Management LLC Opening balance Closing balance Macquarie-Regency Management LLC Opening balance Share of profit after income tax Dividends received/receivable Closing balance Reliance Investment Management Pty Limited Opening balance Investment Share of profit after income tax Disposal Closing balance Charter Hall Retail JV Trust Opening balance Investment Share of profit after income tax Distribution received/receivable Reclassified to assets held for sale Closing balance Total investments in joint ventures Opening balance Investment Share of profit after income tax Distributions/dividends received/receivable Disposal Reclassified to assets held for sale Closing balance Charter Hall Group Charter Hall Property Trust Group 2012 $’000 2011 $’000 2012 $’000 2011 $’000 28,843 1,544 (2,789) 27,598 26,517 3,984 (1,658) 28,843 – – 26 86 (66) 46 55 93 (18) (130) – 18,700 – 1,161 (1,175) (18,686) – 47,624 93 2,773 (4,030) (130) (18,686) 27,644 – – 117 221 (312) 26 – 281 (226) – 55 – 18,534 1,631 (1,465) – 18,700 26,634 18,815 5,610 (3,435) – – 47,624 – – – – – – – – – – – – – – – 18,700 – 1,161 (1,175) (18,686) – 18,700 – 1,161 (1,175) – (18,686) – – – – – – – – – – – – – – – – – 18,534 1,631 (1,465) – 18,700 – 18,534 1,631 (1,465) – – 18,700 133 Annual Report 2012 37 Investments in joint ventures (continued) (c) Carrying value of joint venture entity Commercial and Industrial Property Pty Limited 27,598 28,843 2012 $’000 2011 $’000 2012 $’000 – 2011 $’000 – Charter Hall Group Charter Hall Property Trust Group In accordance with our accounting policy (note 1(h)), consideration was given to the fair value less cost to sell (FVLCTS) method but management believes value in use (VIU) gives the most accurate recoverable amount and resulted in a higher recoverable amount. The base case scenario for assessing value in use has been updated by management at 30 June 2012 and includes the Group’s share of expected net profit after tax in line with forecast FY13 of $2.5 million with a growth factor of 5% and discount rate of 15% through to the end of the forecast period. There has been no impairment or reversal of impairment in the year ended 30 June 2012 (2011: nil). (d) Share of joint venture’s revenue, expenses and results Revenues Expenses Profit 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 Charter Hall Group Charter Hall Property Trust Group 2012 $’000 64,524 (61,289) 3,235 2011 $’000 83,055 (75,732) 7,323 2012 $’000 4,220 (3,059) 1,161 2011 $’000 4,052 (2,421) 1,631 Charter Hall Group Charter Hall Property Trust Group 2012 $’000 30,622 1,133 31,755 19,518 5,198 24,716 7,039 2011 $’000 2012 $’000 19,775 35,809 55,584 8,985 21,726 30,711 24,873 – – – – – – – 2011 $’000 417 35,233 35,650 389 16,561 16,950 18,700 At 30 June 2012 the investment in the Charter Hall Retail JV Trust has been reclassified to held for sale. 134 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group 38 Events occurring after the reporting date Since 30 June 2012, the Group has completed the following: ◆◆ On 1 August 2012, the Group announced that a Charter Hall managed wholesale fund (the Retail Partnership No. 2 Trust (RP2T)) had entered into an unconditional contract to acquire Bay Village shopping centre in New South Wales for $164.0 million. The Group holds a 20% equity interest in RP2T. The purchase of the centre was completed on 15 August 2012. The Group’s equity commitment to fund the acquisition is $19.5 million which was paid on 15 August 2012. ◆◆ In June 2012, Charter Hall Direct Property Management Limited contracted to purchase the right to manage the PFA Diversified Property Trust (PFA) subject to approval by unitholders. With the unitholders approving the purchase of the management rights for $5.0 million cash on 15 August 2012 and Australian Securities and Investments Commission (ASIC) approval given shortly after, Charter Hall Direct Property Management Limited is now the responsible entity for PFA. ◆◆ Subsequent to year end, following commercial negotiations between the Development Alliance (DA) partners in the Little Bay Cove project, being CHOF5 Little Bay Pty Limited (CHOF5LB) (a controlled entity of CHOF5) and TA Global Development Pty Ltd (TAG), in accordance with the DA Umbrella Deed, a Notice of Mediation has been issued to TAG by CHFML (in its capacity as trustee of CHOF5) in relation to a commercial dispute between the DA partners. The mediation notice has been rejected by TAG with a request for a clarification of the details of the alleged dispute between the parties. Ongoing commercial negotiations with TAG are being undertaken in an attempt to agree on the future direction of the project. Development of the Estate Works to create the individual housing and development superlots at the Little Bay project is currently underway, with completion scheduled for May 2013. Refer to note 36(e) for further information. As at the date of signing the financial statements, Charter Hall Group is not able to determine whether any financial impact will occur as a result of these negotiations and any subsequent dispute or mediation process with respect to either Charter Hall directly or its 15% co‑investment in CHOF5. Except for the matters discussed above, no other matter or circumstance has arisen since 30 June 2012 that has significantly affected, or may significantly affect: (a) The Group’s operations in future financial years; or (b) The results of those operations in future financial years; or (c) The Group’s state of affairs in future financial years. 39 Reconciliation of profit after tax to net cash inflow from operating activities Charter Hall Group Charter Hall Property Trust Group Profit after tax for the year Depreciation and amortisation Non‑cash employee benefits expense – security‑based benefits Loss/(gain) on sale of investments, property and derivatives Net gain on remeasurement of equity interests Fair value adjustments Impairment of management rights Change in operating assets and liabilities, net of effects from purchase of controlled entity Decrease/(increase) in trade debtors and other receivables (Decrease)/increase in trade creditors and accruals Net income receivable from investment in associates and joint venture entities Increase/(decrease) in provisions Decrease in provision for deferred income tax Net cash inflow from operating activities 2012 $’000 14,403 3,851 2,338 1,627 (4,645) 8,421 – 20,189 (4,985) 24,185 14,239 (615) 79,008 2011 $’000 55,237 1,545 4,090 (3,350) (16,726) 3,213 19,171 2,979 82 (4,789) – (2,670) 58,782 2012 $’000 33,164 1,334 – 2,179 (4,533) 9,759 – (29,013) (5,230) 17,206 – – 24,866 Dividend and interest income received on investments has been classified as cash flow from operating activities. 2011 $’000 61,247 – – (2,523) (16,733) 834 – 9,700 (8,548) (3,430) (340) – 40,207 135 Annual Report 2012 40 Earnings per security (a) Basic earnings per stapled security Basic earnings attributable to the stapled securityholders (b) Diluted earnings per security Diluted earnings attributable to the stapled securityholders (c) Reconciliations of earnings used in calculating earnings per security Profit attributable to the ordinary equity holders of the Group used in calculating basic earnings per security Interest received from LTI securities Profit attributable to the ordinary equity holders of the Group used in calculating diluted earnings per security (d) Weighted average number of securities used as the denominator Charter Hall Group Charter Hall Property Trust Group 2012 Cents 2011 Cents 2012 Cents 2011 Cents 5.64 17.85 12.21 19.72 5.35 17.06 11.49 18.13 2012 $’000 2011 $’000 2012 $’000 2011 $’000 16,678 123 52,338 2,077 36,087 – 57,831 – 16,801 54,415 36,087 57,831 Charter Hall Group Charter Hall Property Trust Group 2012 Number 2011 Number 2012 Number 2011 Number 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 Service rights Options Securities issued under the Charter Hall Limited Executive Loan Security Plan (ELSP) Weighted average number of ordinary securities and potential ordinary securities used as the denominator in calculating diluted earnings per security 295,624,609 293,253,621 295,624,609 293,253,621 4,097,636 240,139 7,843,591 3,480,731 206,340 9,482,030 4,097,636 240,139 7,843,591 3,480,731 206,340 9,482,030 6,176,495 12,585,920 6,176,495 12,585,920 313,982,470 319,008,642 313,982,470 319,008,642 (e) Information concerning the classification of securities (i) 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. (ii) 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 corresponding loans granted to employees. Under AASB 2 Share-based Payment, the loan, interest received on the loan, securities and the distribution paid and payable are derecognised for the preparation of the financial statements but recognised for the calculation of diluted earnings per security. 136 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group 41 Security-based benefits (a) Charter Hall – Executive Loan Security Plan (ELSP) (legacy plan) The ELSP was suspended on 1 July 2009. The establishment of the Charter Hall Limited Executive Loan Security Plan was approved by the Board in the process of the initial public offering. Staff who were eligible to participate in the plan were determined by the Joint Managing Directors in discussion with the Board. Securities were granted under the plan at market value and were 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 distributes 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: Charter Hall Group and Charter Hall Property Trust Group Opening balance (number of securities) Impact of consolidation at one for four Cancellation of forfeited LTI securities off market 2012 Number 2011 Number 12,585,920 – (11,907,844) 678,055 50,343,597 (37,757,677) – 12,585,920 During the year, nil (2011: nil) securities were forfeited by ELSP members but have been retained in the plan. The remaining ELSP securities were forfeited on 23 July 2012. (b) Charter Hall – Performance Rights and Options Plan (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. Charter Hall Group and Charter Hall Property Trust Group 2009 Number 2010 Number 2011 Number 2012 Number Total Number Performance rights Rights issued on 22/12/08 Rights issued on 13/11/09 Rights issued on 18/6/10 Rights issued on 6/9/10 Rights issued on 11/11/10 Rights issued on 17/1/12 Rights issued Number rights forfeited/lapsed in prior years Number rights forfeited/lapsed in current year Number rights vested in prior year Number rights vested in current year Closing balance 407,242 – – – – – 407,242 (27,094) (380,148) – – – – 1,562,250 644,625 – – – – – – 863,345 465,388 – – – – – – 3,905,231 407,242 1,562,250 644,625 863,345 465,388 3,905,231 2,206,875 1,328,733 3,905,231 7,848,081 (109,467) (344,768) – (704,912) 1,047,728 (7,693) (427,538) – – 893,502 – (433,564) – – 3,471,667 (144,254) (1,586,018) – (704,912) 5,412,897 137 Annual Report 2012 41 Security-based benefits (continued) (b) Charter Hall – Performance Rights and Options Plan (PROP) (continued) Charter Hall Group and Charter Hall Property Trust Group 2009 Number 2010 Number 2011 Number 2012 Number Total Number Service rights Rights issued on 6/9/10 Rights issued on 22/5/12 Rights issued Number rights forfeited/lapsed in prior years Number rights forfeited/lapsed in current year Number rights vested in prior year Number rights vested in current year Closing balance Options Options issued on 4/11/09 at $1.94 Options issued on 13/11/09 at $1.94 Options issued on 18/6/10 at $2.80 Options issued on 6/9/10 at $2.44 Options issued on 11/11/10 at $2.44 Options issued on 19/1/11 at $2.35 Options issued Number options forfeited/lapsed in prior years Number options forfeited/lapsed in current year Number options vested in prior year Number options vested in current year Closing balance – – – – – – – – – – – – – – – – – – – – – – – – – – – – 316,377 – 316,377 (51,096) (107,584) – – 157,697 – 431,516 431,516 – – – – 431,516 4,088,078 1,497,036 1,611,656 – – – – – – 2,035,649 1,163,464 123,397 7,196,770 3,322,510 (391,472) (1,587,261) – (1,707,343) 3,510,694 (19,232) (584,137) – – 2,719,141 – – – – – – – – – – – – 316,377 431,516 747,893 (51,096) (107,584) – – 589,213 4,088,078 1,497,036 1,611,656 2,035,649 1,163,464 123,397 10,519,280 (410,704) (2,171,398) – (1,707,343) 6,229,835 (c) Expenses arising from security-based benefits transactions Total expenses arising from security‑based benefits transactions recognised during the year as part of employee benefit expense were as follows: Performance rights and options plan Charter Hall Group Charter Hall Property Trust Group 2012 $’000 2,338 2011 $’000 4,090 2012 $’000 – 2011 $’000 – 138 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group The Black‑Scholes or Monte Carlo method, as applicable, is utilised for valuation and accounting purposes. The model inputs for the PROP performance rights and options plan issued during FY09, FY10, FY11 and FY12 and to assess the fair value are as follows: Options Grant date Security price at grant date* Fair value of option* Exercise price per security* Expiry of loan Expected price volatility Risk‑free interest rate Performance rights 13/11/09 18/06/10 06/09/10 11/11/10 11/01/11 $2.40 $0.39 $1.94 01/07/14 40.0% 5.5% $2.80 $0.56 $2.80 18/06/15 40.0% 5.5% $2.44 $0.51 $2.44 06/09/15 40.0% 5.5% $2.44 $0.51 $2.44 06/09/15 40.0% 5.5% $2.35 $0.49 $2.35 06/09/16 40.0% 5.5% Grant date 22/12/08 13/11/09 18/06/10 06/09/10 19/11/10 17/01/12 Security price at grant date* Fair value of right* Expected price volatility Risk‑free interest rate $1.20 $0.64 59.0% 3.2% $2.40 $1.07 40.0% 5.5% $2.80 $1.52 40.0% 5.5% $2.44 $1.33 40.0% 5.5% $2.44 $1.33 40.0% 5.5% $2.10 $0.94 39.0% 3.9% Service rights Grant date Security price at grant date* Fair value of right* Expected price volatility Risk‑free interest rate * Security prices for prior years have been restated for the unit consolidation during FY11. 06/09/10 22/05/12 22/05/12 $2.44 $2.06 40.0% 5.5% $2.08 $1.87 35.0% 4.3% $2.17 $1.53 30.0% 3.7% 139 Annual Report 2012 42 Deed of cross guarantee Charter Hall Group 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 financial statements and directors’ reports under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission. (a) Consolidated statement of comprehensive income and summary of movements in consolidated accumulated losses 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 statement of comprehensive income and a summary of movements in consolidated accumulated losses for the year of the closed group consisting of Charter Hall Limited and Charter Hall Holdings Pty Ltd. Statement of comprehensive income Revenue Fair value adjustment on contingent consideration Depreciation Finance costs Foreign exchange loss Share of net (loss)/gain of associates accounted for using the equity method Gain on sale of investments, property and derivatives Impairment of goodwill Fair value adjustments Amortisation of management rights Performance fee clawback Other expenses Loss before income tax Income tax benefit Loss for the year Other comprehensive income/(loss) for the year: Exchange differences on translation of foreign operations Total comprehensive loss for the year Summary of movements in consolidated accumulated losses Accumulated losses at the beginning of the financial year Loss for the year Accumulated losses at the end of the financial year 2012 $’000 2011 $’000 91,176 1,355 (720) (37,506) (90) (5,894) 479 – (2,351) (1,306) (14,239) (56,267) (25,363) 13,075 (12,288) 60,783 – (1,506) (16,565) (407) 2,742 793 (19,171) (10,742) – – (51,715) (35,788) 7,247 (28,541) 18 (12,270) (18) (28,559) (81,262) (12,288) (93,550) (52,721) (28,541) (81,262) 140 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group (b) Balance sheet Set out below is a consolidated balance sheet of the closed group consisting of Charter Hall Limited and Charter Hall Holdings Pty Ltd. 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 Investment in associates at fair value through profit or loss Investments in controlled entities Property, plant and equipment Investment property 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 Charter Hall Property Trust Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets/(liabilities) Equity Contributed equity Reserves Accumulated losses Total equity 2012 $’000 2011 $’000 6,866 31,142 38,008 5,000 57,219 13,110 85,465 3,026 – 98,687 12,513 275,020 313,028 45,267 14,847 60,114 10,539 163,543 990 1,236 176,308 236,422 76,606 209,551 (39,395) (93,550) 76,606 12,501 39,011 51,512 5,000 61,402 15,461 75,455 3,159 15,800 99,994 10,767 287,038 338,550 77,786 816 78,602 12,106 355,874 872 1,086 369,938 448,540 (109,990) 9,503 (38,231) (81,262) (109,990) On 18 June 2012, the Group announced implementation of the $200 million capital reallocation from Charter Hall Property Trust (CHPT) to Charter Hall Limited (CHL), effective 30 June 2012. The capital reallocation aims to ensure a more appropriate allocation of capital between CHPT and CHL (which together trade on the Australian Securities Exchange as Charter Hall Group) which is more closely aligned with the Group’s long‑term growth strategy. Under the capital reallocation proposal approved by securityholders at the Annual General Meeting on 24 November 2011, CHPT made capital payments of $200 million which were compulsorily applied as a capital contribution for existing shares of CHL. 141 Annual Report 2012 Director’s Declaration to Unitholders for the year ended 30 June 2012 In the opinion of the Directors of Charter Hall Limited (the Company), and the Directors of the Responsible Entity of Charter Hall Property Trust (the Trust), Charter Hall Funds Management Limited (collectively referred to as the Directors): (a) the financial statements and notes of Charter Hall Limited and its controlled entities including Charter Hall Property Trust and its controlled entities (Charter Hall Group) and Charter Hall Property Trust and its controlled entities (Charter Hall Property Trust Group) set out on pages 68 to 141 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 Charter Hall Group’s and Charter Hall Property Trust Group’s financial position as at 30 June 2012 and of their performance for the financial year ended on that date; and (b) there are reasonable grounds to believe that both Charter Hall Limited and the Charter Hall Property Trust will be able to pay their debts as and when they become due and payable; and (c) at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed group identified 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) confirms that the financial 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 Financial Officer 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 17 September 2012 142 Charter Hall Group Independent auditor’s report to stapled securityholders of Charter Hall Group and unitholders of Charter Hall Property Trust Group Independent auditor’s report to the stapled securityholders of Charter Hall Group and Charter Hall Property Trust Group Report on the financial report We have audited the accompanying financial report which comprises: The balance sheet as at 30 June 2012, the statement of comprehensive income, statement of changes in equity and cash flow statement for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for Charter Hall Group (the consolidated stapled entity or Charter Hall Group). The consolidated stapled entity, as described in Note 1 to the financial report, comprises Charter Hall Limited and the entities it controlled at the year’s end or from time to time during the financial year. The balance sheet as at 30 June 2012, the statement of comprehensive income, statement of changes in equity and cash flow statement for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for Charter Hall Property Trust Group (the consolidated entity or Charter Hall Property Trust Group). The consolidated entity comprises Charter Hall Property Trust and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of Charter Hall Limited and the directors of Charter Hall Funds Management Limited, the responsible entity of Charter Hall Property Trust (collectively referred to as “the directors”) are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. 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 financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. Our procedures include reading the other information in the Annual Report to determine whether it contains any material inconsistencies with the financial report. PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 143 Annual Report 2012 Independent auditor’s report to stapled securityholders of Charter Hall Group and unitholders of Charter Hall Property Trust Group (continued) Independent auditor’s report to the stapled securityholders of Charter Hall Group and Charter Hall Property Trust Group (continued) We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. 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 financial report of Charter Hall Group and Charter Hall Property Trust Group is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of Charter Hall Group’s and Charter Hall Property Trust Group’s financial positions as at 30 June 2012 and of their performances for the year ended on that date; and complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) the financial report and notes also comply with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the remuneration report included in pages 43 to 64 of the directors’ report for the year ended 30 June 2012. 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 2012, complies with section 300A of the Corporations Act 2001. PricewaterhouseCoopers R A Baker Partner Sydney 19 September 2012 144 Notes to the consolidated financial statements for the year ended 30 June 2012Charter Hall Group Unitholder analysis Securityholder information 31 August 2012 The shareholder information set out below was applicable as at 31 August 2012. A Distribution of equity securities as at 31 August 2012 Analysis of numbers of equity securityholders by size of holding: Number of securities held by security holders 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 50,000 50,001 to 100,000 100,001 and Over Total The total number of securityholders with less than a marketable parcel of 151 securities is 202 and they hold 10,922 securities B Registered equity securityholders as at 31 August 2012 Twenty largest quoted equity securityholders The names of the twenty largest registered holders of quoted equity securities are listed below: HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED WOODROSS NOMINEES PTY LTD NATIONAL NOMINEES LIMITED CITICORP NOMINEES PTY LIMITED BESGAN NO. 1 PTY LTD BESGAN NO. 3 PTY LTD BESGAN NO. 2 PTY LTD BESGAN NO. 4 PTY LTD CITICORP NOMINEES PTY LIMITED AMP LIFE LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED BNP PARIBAS NOMS PTY LTD JP MORGAN NOMINEES AUSTRALIA LIMITED BNP PARIBAS NOMS PTY LTD BNP PARIBAS NOMS PTY LTD EQUITY TRUSTEES LIMITED MR DAVID JOHN SOUTHON PORTMIST PTY LIMITED AUST EXECUTOR TRUSTEES SA LTD RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED Number held 46,021,737 36,322,288 30,122,493 25,227,012 22,575,728 12,990,488 12,990,488 12,990,487 12,990,487 12,013,832 9,054,504 5,650,626 5,195,739 3,663,161 3,389,558 2,981,025 2,956,202 2,461,198 2,048,360 2,009,521 1,895,359 1,639,696 Ordinary securities held per band 140,694 1,755,395 1,994,688 6,898,461 3,115,904 284,494,205 298,399,347 Ordinary securities Percentage of issued securities 15.42 12.17 10.09 8.45 7.57 4.35 4.35 4.35 4.35 4.03 3.03 1.89 1.74 1.23 1.14 1.00 0.99 0.82 0.69 0.67 0.64 0.55 145 Annual Report 2012 Unitholder analysis Securityholder information 31 August 2012 C Substantial holders as at 31 August 2012 Substantial holders of ordinary stapled securities in the Group are set out below*: Ordinary securities The Gandel Group Macquarie Group Commonwealth Bank of Australia AMP Limited Date of Change 07/03/12 01/05/12 17/05/12 05/04/12 Number held 51,961,950 34,151,391 24,589,501 20,301,923 % 17.54 11.50 7.96 6.58 *Information in this table has been collated from the most recent relevant substantial holder notices lodged with ASX, as at 31 August 2012. D Voting rights as at 31 August 2012 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. 146 Charter Hall Group Corporate directory Registry To access information on your holding or update/change your details including name, address, tax file number, payment instructions and document requests, contact: Link Market Services Locked Bag A14 Sydney South NSW 1235 Tel: 1300 303 063 (within Australia) +61 2 8280 7134 (outside Australia) Fax: +612 9287 0303 Email: charterhall.reits@ linkmarketservices.com.au Website: www.linkmarketservices.com.au Investor relations All other enquiries related to Charter Hall Group can be directed to Investor Relations: Charter Hall Group GPO Box 2704 Sydney NSW 2001 Tel: 1300 365 585 (local call cost) +61 2 8908 4000 (outside Australia) Fax: +61 2 8908 4040 Email: reits@charterhall.com.au Directors Kerry Roxburgh, Roy Woodhouse, Anne Brennan, David Deverall, David Harrison, Peter Kahan, Colin McGowan and David Southon Company Secretary Carolyne Rodger ASX Code Charter Hall Group stapled securities are listed on the Australian Securities Exchange (code CHC). Principal registered office in Australia Level 11, 333 George Street Sydney NSW 2000 Tel: +61 2 8908 4000 Auditor PricewaterhouseCoopers Darling Park Tower 2 201 Sussex Street Sydney NSW 1171 Solicitors Allens Linklaters Level 28, Deutsche Bank Place Cnr of Hunter & Phillip Streets Sydney NSW 2000 Website address www.charterhall.com.au Annual Report 2012 147 Information regarding US Investors/US Persons: Each person that holds Charter Hall Group securities that is in the United States (US) or is a US person is required to be a Qualified Institutional Buyer/Qualified 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 US person (e.g. no prearranged trades (‘special crossing’) with US Persons or other off‑market transactions). To the maximum extent permitted by law, the Charter Hall Group reserves the right to (i) request any person that they deem to be in the United States or a US 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 US 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 beneficial owner of securities in the Charter Hall Group, you must pass this information to the beneficial 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 first instance be directed to CHFML. If you have any enquiries or complaints, please contact the Compliance Manager on +61 2 8908 4000. IMPORTANT NOTICE 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 the 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. This report does not take into account the personal objectives, financial situation or needs of any investor. Before investing in Charter Hall Group securities, you should consider your own objectives, financial situation and needs and seek independent financial, legal and/or taxation advice. Historical performance is not a reliable indicator of future performance. Due care and attention has been exercised in the preparation of forward looking statements. However, any forward looking statements contained in this report are not guarantees or predictions of future performance and, by their very nature, are subject to uncertainties and contingencies, many of which are outside the control of the Group. Actual results may vary materially from any forward looking statements contained in this report. Readers are cautioned not to place undue reliance on any forward looking statements. Except as required by applicable law, the Group does not undertake any obligation to publicly update or review any forward looking statements, whether as a result of new information or future events. 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 or any of their related bodies corporate, directors or employees to any such person. 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 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 report, is accurate or complete. CHFML does not receive fees in respect of the general financial product advice it may provide; however, entities within the Charter Hall Group receive fees for operating the Charter Hall Property Trust in accordance with its constitution. Entities within the Group may also receive fees for managing the assets of, and providing resources to the Charter Hall Property Trust. All information herein is current as at 30 June 2012 unless otherwise stated. All references to dollars ($) or A$ are Australian Dollars unless otherwise stated. 148 Charter Hall Group u a . m o c . t c n c e r p i www.charterhall.com.au