Charter Hall Group Annual Report 2018 Charter Hall Group Annual Report 2018 About Us We use our property expertise to access, deploy, manage and invest equity in our core real estate sectors — office, retail and industrial — to create value and generate superior returns for our customers. Contents 01 Our Strategy 12 Sustainability Shared Value To view our Corporate Governance Statement, go to charterhall.com. au/About-Us/Corporate- Governance HIGHLIGHTS 02 Sector Highlights LETTERS 04 Chair’s Report 03 Group Performance Highlights 08 Managing Director & Group CEO Letter OUR BOARD AND MANAGEMENT 18 Executive Committee 19 Board of Directors FINANCIAL REPORT 20 Financial Report and Other Information 112Investor Information 113 Corporate Directory Charter Hall Group Annual Report 2018 Our Strategy Access Accessing equity from listed, wholesale and retail investors. Deploy Creating value through attractive investment opportunities. Manage Funds management, asset management, leasing and development services. Invest Investing alongside our capital partners. FY18 GROSS EQUITY RAISED GROSS TRANSACTIONS FUM GROWTH INCREASE IN PI TO $1.7B $1.7b $3.5b ACQUISITIONS $2.5b DIVESTMENTS $1.0b $3.4b ASSETS 330 WEIGHTED AVERAGE LEASE EXPIRY 7.7years 5 YEAR GROSS EQUITY RAISED GROSS TRANSACTIONS FUM GROWTH $8.7b $17.9b $13.3b ACQUISITIONS $12.1b ADDITIONAL PROPERTIES 131 DIVESTMENTS $5.8b $179m 11.7% TOTAL PROPERTY INVESTMENT RETURN1 12.3% INCREASE IN PI $1.2b 211.4% TOTAL PROPERTY INVESTMENT RETURN1 14.0% 1. Total Property Investment Return is calculated as distributions received from funds plus growth in investment value divided by the opening investment value of the PI portfolio. This excludes investments held for less than a year and investments in Direct Funds. 01 Charter Hall Group Annual Report 2018 Sector Highlights Office FUM $11.1b Industrial FUM $6.1b Retail FUM $6.1b Direct FUM $3.0b PORTFOLIO 49 OCCUPANCY 98.2% WALE YRS 6.3 PORTFOLIO 116 OCCUPANCY 98.0% WALE YRS 9.7 PORTFOLIO 165 OCCUPANCY 97.9% WALE YRS 8.1 PORTFOLIO 54 OCCUPANCY 99.6% WALE YRS 9.3 0202 Diversification by Equity Source Wholesale Equity Listed Fund Retail Equity $2.9b 12% $4.4b 19% $23.2b $15.9b 69% Charter Hall Group Annual Report 2018 Group Performance Highlights OPERATING EARNINGS (POST TAX) PROPERTY INVESTMENTS $175.8m $1.7b 16.2% FUNDS UNDER MANAGEMENT (FUM) $23.2b 17.0% INVESTMENT CAPACITY $3.4b 11.7% NTA PER SECURITY GROWTH 6.1% TOTAL PLATFORM RETURN1 15.0% 1. Total Platform Return is calculated as growth in net tangible assets (NTA) per security plus distributions per security divided by the opening NTA per security. 03 Chair’s Report Welcome to the Charter Hall Group 2018 Annual Report Dear Securityholders, Shared growth is the foundation of the Charter Hall business; we invest alongside our capital partners so that our interests are aligned. At a time when confidence in the institutions who manage your wealth is paramount, your Board understands that our role is to serve investors – and this is something we never forget. I am pleased to report that the Group has executed well on our strategy in the 2018 financial year, growing Funds Under Management (FUM) by 17% to $23.2 billion as well increasing Property Investments by 11.7% to deliver a 12.3% total property investment return. This sound performance has delivered 6% growth in full year distributions to securityholders, to 31.8 cps for the 2018 financial year. This is consistent with our sustained long-term performance which over five years has seen Charter Hall deliver operating earnings per security post tax growth (OEPS) of 10.5% per annum (p.a.) and distribution per security compound annual growth of 9.5% p.a. This performance is consistent with our purpose to grow investor wealth by providing access to institutional quality property investments. High quality property investment offerings continue to attract capital This year has been a record year for equity inflows into Charter Hall’s property funds management platform – wholesale, direct and listed equity inflows have all contributed. We believe this ongoing investment support is the result of our strong performance history, our proven ability to deliver and our diversified sector offerings across office, retail and industrial property in Australia. 04 Charter Hall Group Annual Report 2018 Welcome to the Charter Hall Group 2018 Annual Report We accessed $1.7 billion of gross equity over the year, taking gross equity flows to $8.7 billion over the past five years. The $23.2 billion property portfolio that we invest in and manage now comprises 330 office, retail and industrial properties with nearly 2,500 tenant customers. Our Managing Director and Chief Executive Officer, David Harrison, provides more details on page 8 of this report. Growing our investable universe Post balance date, the Group announced a Scheme Implementation Agreement to acquire the ASX-listed Folkestone Property Group (ASX:FLK). The acquisition of Folkestone expands Charter Hall’s investable universe into the social infrastructure and early learning sector. The proposed acquisition would result in Charter Hall becoming the largest unitholder in the ASX-listed Folkestone Education Trust (FET), with a 12% stake, delivering Charter Hall an attractive 6.3% investment yield from a $1 billion, 9.9-year Weighted Average Lease Expiry (WALE) portfolio of 410 properties. We see this as an attractive area for future growth, with highly fragmented ownership and low institutional participation, but with high quality covenants and long WALE triple net leases. Robust balance sheet Charter Hall continues to have a conservative zero geared balance sheet and look-through gearing based on co-investments in funds and partnerships of 27.3%. We remain active in our approach to capital management, deepening our relationships with both the debt capital markets and banks. Post balance date, the Group undertook a US 10-year term Private Placement which raised A$231.5 million, whilst we also refinanced an undrawn $200 million five-year corporate facility in the period. Combined, the Group’s average debt term maturity exceeds 7.5 years. This prudent capital management approach has seen the Group assigned a corporate investment grade rating of Baa1 from Moody’s and places the Group in an excellent position to capitalise on opportunities across our investment portfolio with investment capacity exceeding $500 million prior to the Folkestone acquisition expected to complete in November 2018. Across the Group’s funds management platform, more than $3.4 billion of investment capacity existed at 30 June 2018 to fund the development pipeline and new acquisitions. A high performing, diverse culture We have a highly experienced team of 500 people working for us right across Australia, and your Board is committed to creating a culture at Charter Hall where our people are focused on delivering property solutions for our tenant customers. Innovation is a mainstay in our culture and we continue to work on driving improvements and encouraging innovation through the support of initiatives such as the Cedric Fuchs Scholarship and the first Australian PropTech Accelerator program. This year we were honoured to be included in the Top 20 most innovative companies in the ASX 200, as authored by Collective Campus. To ensure that we are building our talent pipeline, and that our people see clear pathways for themselves in the business, we look at transferrable skills and provide employees the opportunity to work in multiple areas of the business. During the year we provided our people and teams the opportunities to share ideas and develop new skills, with over 10% of our people being either promoted or seconded/transferred to different parts of the business to develop new skills, career opportunities and pathways. Our commitment also extends to attracting young people to grow our talent pipeline and facilitate greater innovation and diversity of thought. Our continued partnership with Western Sydney University and the University of Technology Sydney as part of the Charter Hall Scholarship Program is testament to this. Embedding sustainability and community Over the past five years, sustainability and community have become embedded in everything we do at Charter Hall. We have become increasingly focused on the wellbeing of the people who work in and visit our buildings. We now have Australia’s largest Green Star footprint, with 178 of our office, retail and industrial assets achieving a Green Star Performance rating; and 18 Green Star ratings for development achieving 5 Star Green Star or above. And, in the past year, we have: • • increased our Office portfolio NABERS Energy ratings to a 4.71 Star weighted average and maintained our 3.5 Star NABERS Energy weighted average rating in retail assets; increased our renewable footprint, with our portfolio now containing 2,456kW of solar PV, generating over 3,670MWh of electricity per year; and For more information, please visit charterhall.reportonline.com.au/ fy18/chc/ 05 Charter Hall Group Annual Report 2018 Charter Hall Group Annual Report 2018 • achieved a Silver WELL Interiors rating in our Melbourne and Perth office tenancies. We support the Australian community in various ways, including our partnership with the international movement, Pledge 1%, which integrates our business commitment towards investment in our communities, through our people, our places and our partnerships. This year, more than 80% of our people collectively volunteered 330 days of their time in the community and along with our people we donated $600,000 for community-based programs. One of the initiatives we supported this year was a partnership with Two Good Co in support of domestic violence shelters and the women in them – by providing nutritious meals, training and return to work opportunities. More information on our Shared Value and Sustainability initiatives can be found on page 12 of this report. A strong Board with a diverse skill set The Charter Hall Board continues to comprise a majority of independent Directors, in line with best practice. There were no changes to the Board composition during the 2018 financial year. I encourage all securityholders to familiarise themselves with your Directors – our biographies can be found on page 27 of the Directors’ Report. Farewell to one of our founders During the year we announced the retirement of one of our founders, and a key custodian of the Charter Hall way of doing business, Cedric Fuchs. His significant role in helping us build Charter Hall into one of Australia’s leading property groups is reflected in the exceptional growth and consistent solid performance of the Direct Property business, which has over $3.0 billion under management and is the largest unlisted property fund manager for retail investors in Australia. I would like to congratulate Cedric on his outstanding career, and thank him for his leadership and the knowledge and insights he has bestowed upon many of our people over the years. Most importantly, I thank Cedric and the co-founders for the courage it must have taken to establish Charter Hall in 1991. Cedric’s legacy will survive at Charter Hall through the Cedric Fuchs Scholarship which will ensure our people continue to innovate and drive improvements for our customers. Outlook Charter Hall remains in a strong financial position, supported by a high quality team focused on delivering outstanding results for our securityholders and capital partners. The Board remains equally focused on providing the Group with clear governance and oversight to assist management in continuing to deliver exceptional results, and to enhance a culture that builds meaningful careers while delivering growth for our investors. As we continue to build on the Group’s solid foundations, I take this opportunity to thank our customers, investors and securityholders for their support; and the team for their diligent delivery of the Group strategy. David Clarke Chair 06 Charter Hall Group Annual Report 2018 Charter Hall Group Annual Report 2018 The $23.2 billion property portfolio that we invest in and manage now comprises 330 office, retail and industrial properties with nearly 2,500 tenant customers. 07 Managing Director & Group CEO Letter Year-on-year growth and strong equity flows We have delivered a high quality result for our investors, growing earnings and distributions, and with $3.4 billion of investment capacity, we are growing scale in our funds management and property asset base across Australia. Charter Hall has continued the momentum delivered in previous years, posting 5% post tax growth in operating earnings per security, with record net equity inflows and FUM growth, whilst continuing to improve customer satisfaction with our solution- based focus on investors and tenants. Performance highlights Charter Hall Group (CHC) continues to strengthen, increasing our investment reach across Australia – through new funds, capital partners, tenant customers, asset acquisitions and development activity. At the same time we continue to maintain underlying portfolio metrics to deliver sustainable growth for our investors, building on the momentum of previous years. In this our 28th year of operation, Charter Hall has produced another solid full year financial result, delivering year-on-year growth across all key metrics to once again provide shared value to our securityholders and investors, our tenant customers, our people and the communities in which we operate. The Group’s total platform return, or the gain in net tangible assets plus distributions, was 15% for the 2018 financial year – a key focus 08 Charter Hall Group Annual Report 2018 of the Group as this is commensurate with the total return objectives of our managed funds and partnerships. Charter Hall’s Property Investments, which reflect our balance sheet co-investments, delivered a 12.3% total return, exceeding the IPD Unlisted wholesale index. Over the last five years this key metric has delivered 14% p.a., generating a 26% excess return to the comparable IPD Index return of 11.1% p.a. for the same five-year period. Over the past five years the Group has delivered compound average growth of 10.5% p.a. (post tax) in operating earnings per security and compound average growth of 9.5% p.a. in distributions per security, rising to 12.8% p.a. when the benefits of franking credits are included. Delivering sustainable returns Our portfolios are carefully curated with a risk-adjusted focus to optimise returns, while delivering resilience and durable cash flows by enhancing tenant quality, extending our weighted average lease expiries and driving income growth. Central to this growth is our ability to transact. Our leading market share in transactions (both acquisitions and divestments) along with our dedicated teams in each major metropolitan market nationally, provides invaluable insight into the local property markets. We undertook $3.5 billion of gross transactions as our investment management, transaction, property services and support teams worked collaboratively to buy and sell assets for the benefit of our funds and partnership investors, and Charter Hall securityholders. We continue to do this with a comprehensive set of risk filters. The Group continues to maintain strong balance sheets across its funds and partnerships, as demonstrated by the average gearing of our co-investment portfolio at 27.3% and $3.4 billion of investment capacity. Delivering on strategy We accessed $1.7 billion of gross equity over the year, taking gross equity flows to $8.7 billion over the past five years. We continue to drive investment returns by deploying this equity into the ongoing curation of the portfolios we manage via developments and acquisitions, net of divestments. Of the $3.5 billion of gross transactions this year, we divested a further $1 billion of assets. Over the last five years we have now realised $5.8 billion of divestments. Our focus remains on ensuring we manage portfolios to preserve capital and drive resilient income returns, optimising the earnings growth from the assets we manage. With a property portfolio of 330 properties, leased to nearly 2,500 tenants, Charter Hall’s market penetration and opportunities to provide cross-sector solutions to tenant customers, gives us a competitive advantage to secure multiple asset long-term leases from these customers who appreciate the scale and diversity of our market reach. Maintaining a strong balance sheet With a strong balance sheet, we have considerable financial flexibility with a further $3.4 billion of investment growth capacity across the Group and our platform as at 30 June 2018. We continue to diversify our sources of debt, increasing our exposure to alternative sources to bank funding where we can secure longer tenor on favourable terms. In June 2018, the Group was assigned a first-time Baa1 issuer rating with a stable outlook. The rating was also assigned to the Group’s US Private Placement. This is the first time that Moody’s has assigned ratings to the Group. Importantly, combined access to debt and available cash at hand provides significant investment capacity to support the growth of our $23.2 billion platform. We never take 09 for granted the importance of liquidity, access to debt and the need to constantly maintain and extend debt maturities, where we have a dual focus of spreading debt and lease expiries across all portfolios we own and manage. Growth in property investment earnings Our Property Investments are well diversified across sectors and funds, and importantly characterised by long WALE, high occupancy and an average annual rent review excluding market reviews of 3.6% p.a. (some 1.6% above current inflation levels) delivering real income growth to our investors. During the period, our Property Investment Portfolio grew significantly by 11.7% to $1.7 billion, a $179 million increase that provides an attractive 6.3% property investment yield. This reflects growth in underlying asset values and our additional co-investments alongside our investment partners. The diversification benefits of our portfolio are obvious, with a bias towards strongly performing office markets, a growing exposure and weighting to both logistics and long WALE retail, whilst our Group- wide focus on tenant resilience and industry diversification provides an insight into our risk management philosophy. Asset concentration is limited, with no one asset providing more than 2.3% of the Group’s Property Investment earnings, with the top 10 assets combining to only represent 15% of total Property Investment earnings. Occupancy has improved slightly, and through active asset management the portfolio WALE sits at an attractive 7.2 years. Our Weighted Average Rent Review remains strong at 3.6% and the number of properties within the Property Investment Portfolio has increased to 298. Charter Hall Group Annual Report 2018 “ As a fund manager, performance is everything. We have continued to outperform the MSCI IPD Index over 1, 3 and 5 years.” Outperformance over 1, 3 and 5 years (% p.a.) 1 Year CHC Total Return MSCI/IPD Benchmark 3 Years CHC Total Return 12.3% 12.0% MSCI/IPD Benchmark 12.2% 5 Years CHC Total Return MSCI/IPD Benchmark 11.1% 15.7% 14.0% A robust development pipeline Charter Hall’s development pipeline enables us to add value to existing assets while producing potential new product for our funds to limit the need of buying assets in a competitive on-market environment. Almost 50% of our $3.6 billion development pipeline is pre-leased and under construction. The Group currently has $1.7 billion of committed development projects underway, de-risked through leases to high quality tenants and fixed price building contracts. During the period, the $230 million 105 Phillip Street, Parramatta and $190 million 900 Ann Street, Brisbane office developments were completed, adding to the previous year’s completions such as the $355 million 333 George Street, Sydney project. For the first time, developments in the industrial sector now exceed those in the office sector with committed and uncommitted industrial projects at $1.7 billion, reflecting the increased industrial landbank which now exceeds 150 hectares. Development activity generally takes place in our managed funds which have mandates that permit development refurbishment and repositioning of assets to enhance value and expand their core investment holdings. These developments will generate high quality long-leased commercial property for our funds, at yields above current transaction pricing. This also provides attractive incremental FUM growth for Charter Hall and enhances our credentials to attract capital. Post balance date bid to acquire Folkestone Post balance date, the Group announced a Scheme Implementation Agreement to acquire the ASX-listed Folkestone Property 10 Group (FLK), a diversified real estate fund manager and developer. Like Charter Hall Group’s business model, the Folkestone funds management platform comprises listed, unlisted and direct retail funds, with both private clients and institutional capital. Folkestone’s largest fund is the ASX-listed Folkestone Education Trust (FET), which is the largest landlord within the early learning sector, owning and managing a $1 billion portfolio of 410 childcare properties across Australia and New Zealand. The acquisition of Folkestone expands Charter Hall’s investable universe into the social infrastructure and early learning sector and would result in Charter Hall becoming the largest shareholder in FET with a 12% stake, delivering Charter Hall an attractive 6.3% passing yield from a $1 billion 9.9-year WALE portfolio of properties. We see this as an attractive area for future growth, as well as complementing and building on our existing focus on the education sector as an area for future growth in our funds – which has been highlighted by an excellent relationship with Western Sydney University. The acquisition of Folkestone will add $1.6 billion of additional FUM to the Charter Hall platform and it will be earnings accretive for FY19. Outlook and guidance Looking forward, we remain confident in the underlying strength of our Australian portfolio which is strategically diversified to position us for resilient growth through market cycles. Institutional fund managers with demonstrated track records of delivering innovative funds growth and sustained outperformance for investors are expected to continue to attract equity inflows, as evidenced by continued equity inflows into financial year 2019. Charter Hall Group Annual Report 2018 In the early parts of the 2019 financial year we have continued to see strong market dynamics with excess demand for good quality investments, rental growth and improving occupancy levels. These conditions suggest support exists for current cap rates to continue and further firming in some sectors is apparent. With another active year ahead of us, we will be as focused as ever on delivering our strategy to access, deploy, manage and invest alongside our listed, retail and wholesale investors for shared growth. Based on no material change in current market conditions, our FY19 guidance is for 5% to 7% growth in post-tax operating earnings per security over financial year 2018. On the basis that the FLK transaction is completed, our FY19 guidance is for 8% to 10% growth in post-tax operating earnings per security, whilst the distribution payout ratio is expected to be between 85% and 95% of operating earnings per security post tax. A dedicated and committed team Finally, I would like to thank Charter Hall’s exceptional team based right across Australia for their continued hard work and dedication to achieve these results. On behalf of our senior executive management team, I thank you, our securityholders, for your continued trust and support as we deliver for you. David Harrison Managing Director & CEO Charter Hall Group Operating Earnings per Security Growth CAGR (Pre-tax) 13.7% 50 40 CAGR (Post-tax) 10.5% 30 20 10 0 Pre-tax OEPS Post-tax OEPS Post-tax CAGR (%) Pre-tax CAGR (%) 40.5cps 30.4cps 27.5cps 35.9cps 43.5cps 37.7cps 25.3cps 22.9cps FY13 FY14 FY15 FY16 FY17 FY18 10.4% 8.5% 10.5% 18.1% 5.0% Property Investment Portfolio $1,706m $1,527m $1,098m $944m $720m $548m Jun 13 Jun 14 Jun 15 Jun 16 Jun 17 Jun 18 2000 1500 1000 Property Investment Portfolio ($m) 500 0 11 Charter Hall Group Annual Report 2018 Charter Hall Group Annual Report 2018 Sustainability Shared Value Generating sustainable returns that have a long-term impact 12 v Deliverable/ Issue FY18 Progress towards FY20 Targets FY20 Target FY25 Target Aspiration Eco Innovation Environmental Performance Draft pathway developed using Science Based Targets methodology. Pathway to an equivalent 2-degree reduction in emissions. Achieve the equivalent of a 2-degree reduction in emissions. Net Zero Emissions. Reduce our impact on the planet Invest in renewable technologies Improve our Green footprint Improve our waste management Resilience Address climate change risk 250kW solar system commissioned at Singleton Square. Feasibility studies underway on solar installations across 16 shopping centres. Implementation of solar projects across applicable Charter Hall managed shopping centres. 2.5MW of solar has been installed across the entire Charter Hall portfolio, with our tenants, generating 3,976MWh per annum in green energy. Maintained and expanded our Green Star footprint, continuing to have Australia’s largest Green Star footprint, with the addition of 5 and 6 Star Green Star Design and As Built ratings achieved on office developments. Achieved 4.66 Star NABERS Energy Weighted Average Rating for Office Assets. Maintained 3.75 Star NABERS Energy Weighted Average Rating for Retail Assets. Renewable energy on all new large retail and industrial developments. 3 Star average Green Star Performance rating across the Group. 5 Star Green Star Design and As Built ratings sought on all new large developments. 4.75 Star NABERS Energy Weighted Average rating for office assets. 3.75 Star NABERS Energy Weighted Average rating for retail assets. 35% Waste Diversion achieved in Office Assets. 50% Waste Diversion in retail and office assets. 22% Waste Diversion achieved in Retail Assets. Climate change adaptation planning workshops held across office, retail and industrial; and adaptation plans commenced. All assets have climate change adaptation plans. Renewable energy creation in portfolio. 5 Star Green Star Design and As Built ratings sought on all new large developments. 5 Star NABERS Energy Weighted Average rating for office assets. 4 Star NABERS Energy Weighted Average rating for retail assets. 70% Waste Diversion in retail and office assets. Capital improvements in portfolio in line with climate change adaptation plans. Resilient communities and future proofed assets. Maintain certified EMS to ISO 14001. Address environmental risk Draft Environmental Management Plan developed for roll-out in FY19. Pre-certification audits conducted across 10 office and industrial properties. All assets have environmental management plans to AS 14001. 13 Charter Hall Group Annual Report 2018 Deliverable/ Issue 2018 Progress FY20 Target FY25 Target Aspiration Building Community Community and Social Cohesion Invest in our communities Our Pledge made a difference in our communities through: • Our People: 81% of our people undertook 330 Volunteer Days; • Our Places: contributed $1.3 million or 46,054sqm in space for the community; and • Our Partnerships donated $600,000 towards services and programs through our community partners. Stakeholder engagement plans prepared for 100% of new office and retail developments. Tenant Customer surveys across office, retail and industrial sectors. Employment strategy developed and implemented at two office developments, resulting in 16 participants trained in construction with 81% employment rate. Engage our stakeholders Build capacity in our communities Continued Pledge 1% Our People: Our Places: Our Partnerships. Continued Pledge 1% Our People: Our Places: Our Partnerships. Creation of the largest community hub network in Australia. Stakeholder engagement plans prepared for 100% of developments. 100% of developments and assets have stakeholder engagement plans. Employment strategy developed for all developments. Employment projects in all new developments. 100% of large retail centres have a community space. Community hubs in all large retail assets. Community spaces piloted in office assets. National programs with communities and partners to curate creative and community programs in all large assets. Create a national network of innovation enterprises. 14 Charter Hall Group Annual Report 2018 Deliverable/ Issue 2018 Progress FY20 Target FY25 Target Aspiration Building Community Inclusive Places Create great customer experiences Retail place experience under implementation. Industrial and Office commenced place presentation projects and approach. Create great employee experiences School holiday programs for Charter Hall employees in Melbourne and Sydney. Benojo Community Giving Portal established, which manages our Pledge 1% giving and volunteering. Build our diversity 40% female participation on CHC Board (Non-Executive Directors only). 20% female participation in senior executive positions. 54.2% female participation in the workplace. Place Index implemented across the portfolio. Ongoing place experience ratings across our portfolio. Leader in innovative place creation in our communities. Provision of a menu of benefits and programs for our buildings and our communities. Shape the way we acquire and develop talent to align with a future of work. Connect employee and customer value propositions to enhance the customer experience. > 35% female participation on CHC. 25%-35% female participation in senior executive positions. 50% female participation in the workplace. > 40% female participation on CHC Board (Non-Executive Directors only). > 40% female participation in senior executive positions. 50% female participation in the workplace. 15 Charter Hall Group Annual Report 2018 Charter Hall Group Annual Report 2018 Deliverable/ Issue 2018 Progress FY20 Target FY25 Target Aspiration Enabling Wellbeing Creating Healthy Spaces and Environments Charter Hall Melbourne and Perth tenancies achieved Silver WELL Interiors Certification. 4 WELL Core and Shell registrations. WELL Portfolio rating underway for CHOT portfolio. WELL building accreditation sought for all large Charter Hall state offices and in new office developments. WELL building accreditation sought for all large Charter Hall state offices and in new office developments. Leader in health and wellbeing in our communities. Comfy installed across Charter Hall tenancies and four buildings. Expansion of new technologies across the portfolio. Charter Hall Human Rights Policy developed as part of the Human Rights Framework. Supplier human rights risk assessment commenced. Social procurement integrated into national contracts. Ritualise Wellbeing program undertaken by 48% of Charter Hall employees. Significant progress made in implementation of the Human Rights framework. Development of social procurement strategy and expansion across our supply chain. Wellbeing strategy for our people and our places developed and implemented. Enhanced customer satisfaction experience in our assets. Integrated sustainable and equitable supply chain into assets and developments. Green, social and Indigenous enterprises in the Charter Hall supply chain. Wellbeing programs/facilities available to all large assets and employees. 16 Charter Hall Group Annual Report 2018 ‘Rise’ on the Mezzanine at No.1 Martin Place is a collaboration between our tenant customers, our community arts partner Project 504 and Pure Collective, a 100% “to cause” hospitality operator. Space creation that delivers prosperity for our customers 17 Executive Committee 1 3 5 7 9 1. David Harrison Managing Director & Group CEO BBus (Land Economics), FAPI, GDipAppFin 4. Richard Stacker Industrial CEO BBA (Accounting and Finance) Richard has over 25 years of experience in real estate funds management, real estate finance, accounting and risk management. With experience across all sectors, he has lead the establishment and structuring of new funds, management of these funds, overseeing the transactional, development, asset and property management. In July 2018 Richard became CEO of Charter Hall’s Industrial real estate business following his role as Head of Global Investor Relations. In this role, Richard leads a team of 50 industrial property specialists, including investment management, development, asset and property management professionals. Richard is also a Board member of Charter Hall’s unlisted retail investor business, Charter Hall Direct. Prior to joining Charter Hall, Richard was a Division Director of Macquarie Group and Chief Executive Officer of Macquarie Direct Property Management Limited. Previously to that, Richard was a General Manager with Lend Lease Corporation Limited and a senior manager with PricewaterhouseCoopers. He is a member of the Institute of Chartered Accountants in Australia. 5. Adrian Taylor Office CEO BBus, CPA, GDipAppFin, FRICS Adrian Taylor is Charter Hall’s Office CEO with 26 years industry experience and eight years with Charter Hall. Adrian leads the A$11.1 billion office sector from end to end including Investment Management, Asset Management, Development and Property Management teams. He also helps develop the overall strategy and objectives for the office funds in conjunction with the Charter Hall Fund Managers and our Investors and helps guide the portfolio management, capital transactions, treasury and trust management teams to execute strategy. Adrian has extensive capital management experience including debt and equity raising. Prior to the Charter Hall Office REIT’s privatisation, he was its Chief Executive Officer and has deep capital transaction and extensive joint venture experience in Australia and the US. 2 4 6 8 See page 28. 2. Sean McMahon Chief Investment Officer BBus (Property) Sean has 30 years of property and investment banking experience in the real estate sector and has been active in the listed, wholesale and direct capital markets. Sean is responsible for the Group’s strategy and balance sheet investments, mergers and acquisitions, with oversight for multi sector disciplines including property transactions, together with corporate development. He brings a wealth of experience across investment markets, diversified across office, industrial and retail sectors, and has been responsible for driving the development of corporate strategies, capital allocation and reinvestment programs. Prior to joining Charter Hall, Sean worked at national diversified property group Australand (now known as Frasers) as Chief Investment Officer and was previously responsible for investment and development for all commercial, industrial and retail property. Prior to joining Frasers, Sean spent seven years at Macquarie Bank as a senior executive in the Property Investment Banking division undertaking property finance, structured finance, funds management and joint venture transactions. 3. Russell Proutt Chief Financial Officer BCom, CPA Russell joined Charter Hall in August 2017 and brings over 25 years’ finance experience to the Group. His experience has included property and infrastructure investment management in North America, Australia and broader Asia as well as extensive M&A and financing capability across global markets. Prior to joining Charter Hall, Russell was with Brookfield Asset Management for 12 years and a Managing Partner based in Canada and most recently, Australia where he worked in property and infrastructure sectors throughout the Asian region. Prior to joining Brookfield, Russell spent 15 years in investment banking and the financial services sector in North America. He has a breadth of knowledge across commercial property markets and broad experience across infrastructure and private equity investments, mergers and acquisitions, transactions and finance functions. 18 Charter Hall Group Annual Report 2018 Board of Directors 1 3 5 2 4 6 1. David Clarke Chair/Independent Non-Executive Director 2. Anne Brennan Independent Non-Executive Director 3. Philip Garling Independent Non-Executive Director 4. David Ross Independent Non-Executive Director 5. Karen Moses Independent Non-Executive Director 6. David Harrison Managing Director & Group CEO See pages 27–29 for Director bios. Adrian graduated with a Bachelor of Business from Monash University, is a Certified Practising Accountant, is Fellow of the Financial Services Institute of Australasia, a fellow Of the Royal Institute of Chartered Surveyors and is involved in numerous property industry groups including sitting on the Division Council of the Capital Markets Division of the Property Council of Australia. 6. Greg Chubb Retail CEO BBus (Land Economics), FAPI Greg is Fund Manager of the Charter Hall Retail REIT and Charter Hall’s Retail CEO, joining the Group in 2014 with more than 29 years property market experience. Greg is responsible for all management aspects of the Retail Funds Management platform to deliver value creation within the retail portfolio and optimise returns for our investors. Prior to joining Charter Hall, Greg was the Property Director at Coles Supermarkets Australia and Managing Director and Head of Retail for Sandalwood/Jones Lang LaSalle in Greater China. Greg has also held executive leadership roles at Mirvac and Lend Lease. Greg holds a Bachelor of Business Degree (Land Economy) from the University of Western Sydney, is a Fellow of the Australian Property Institute (FAPI) and is Joint Deputy Chair of the shopping Centre Council of Australia. 7. Natalie Devlin Group Executive – People, Brand and Community BA, Postgrad Dip in MR Management (Dean’s List Award) Natalie is responsible for culture, internal and external brand, organisational capability, sustainability and community investment. She is focused on achieving our aspiration to be ‘the place for people in property’ by creating an authentic and differentiated employee, customer and community experience for the Group. Natalie’s previous roles include Head of People and Development at Valad Property Group, where she established the human resources function during its rapid growth period, and Head of HR, Asia Pacific for a multinational publishing company, where she transformed their operating model. 8. Aidan Coleman Chief Technology Officer BTech, MBT Aidan is a key member of the executive team at Charter Hall, providing leadership and direction for all strategic and operational technology activities. Aidan is a technology thought leader with a track record for delivering technology-enabled change that has contributed directly to commercial outcomes in the property industry. With over 20 years in IT, the last seven in Property and Real Estate, Aidan has brought together the capabilities of enterprise IT and ‘prop-tech’ to lead the digital transform at both Charter Hall and previously at the Stockland Group. Aidan is on the advisory board for the ‘Realcomm’ global real estate innovation think-tank, is a stream-lead on the BCA sponsored ‘Innovation Nation’ initiative and is a key contributor to a number of Property Council of Australia initiatives such as the ‘Women in Property’ mentorship program and ‘CIO Cyber Security Roundtable’. 9. Steven Bennett Head of Direct Property BBA Steven oversees more than $3 billion of assets under management across multiple award winning, unlisted property products supported by retail, SMSF and high net worth investors. Steven’s key responsibilities include all aspects of investment management from identifying and sourcing property assets, structuring, debt financing, creation and launching of new property funds, capital raising, investor relations, stakeholder engagement and the ongoing management of the property portfolio. Prior to joining Charter Hall, Steven worked for Macquarie Bank for seven years in Sydney and London. Steven has 18 years of experience in funds management, banking, property, accounting and consultancy and is a member of The Institute of Chartered Accountants in Australia and New Zealand. 19 Charter Hall Group Annual Report 2018 Charter Hall Group Annual Report 2018 FINANCIAL REPORT AND OTHER INFORMATION FOR THE YEAR ENDED 30 JUNE 2018 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 Notes to the consolidated financial statements 1 Summary of significant accounting policies 2 Critical accounting estimates and judgements 3 Segment information 4 Revenue 5 Expenses 6 Income tax expense 7 Distributions/Dividends paid and payable 8 Earnings per stapled security 9 Cash and cash equivalents 10 Receivables and other assets 11 Assets classified as held for sale 12 Derivative financial instruments 13 Investments accounted for using the equity method 14 Investment properties 15 Intangible assets 16 Property, plant and equipment 17 Deferred tax assets and liabilities 18 Trade and other payables 19 Provisions 20 Borrowings Directors’ declaration to securityholders Independent Auditor’s Report Contact details Corporate directory 54 62 62 65 65 66 67 68 68 69 69 70 70 70 71 72 72 73 74 74 21 Contributed equity 22 Non-controlling interests 23 Reserves 24 Accumulated profits/(losses) 25 Remuneration of auditors 26 Reconciliation of profit after tax to net cash inflow from operating activities 27 Capital and financial risk management 28 Fair value measurement 29 Related parties 30 Controlled entities 31 Investments in associates 32 Investments in joint ventures 33 Interests in unconsolidated structured entities 34 Commitments 35 Contingent liabilities 36 Security-based benefits expense 37 Parent entity financial information 38 Deed of cross guarantee 39 Events occurring after the reporting date 21 47 48 50 51 52 53 54 76 77 77 79 79 80 80 84 86 89 91 96 98 98 99 99 100 101 103 104 105 113 113 20 DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2018 The Directors of Charter Hall Limited and the Directors of Charter Hall Funds Management Limited, the Responsible Entity (RE) 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 (CHPT) for the year ended 30 June 2018, 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 RE 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 year and up to the date of this report. – Chair and Non-Executive Independent Director • David Clarke • Anne Brennan – Non-Executive Independent Director • Philip Garling – Non-Executive Independent Director • David Harrison – Managing Director and Group CEO • Karen Moses • David Ross – Non-Executive Independent Director – Non-Executive Independent Director Principal activities During the year, the principal activities of the Group consisted of: (a) Investment in property funds; and (b) Property funds management. No significant changes in the nature of the activities of the Group occurred during the year. Distributions/Dividends – Charter Hall Group Distributions/dividends paid/declared to stapled securityholders during the year were as follows: Final ordinary dividend of 5.5 cents and ordinary distribution of 10.7 cents per stapled security for the six months ended 30 June 2018 payable on 31 August 2018 Interim ordinary dividend of 6.2 cents and interim ordinary distribution of 9.4 cents per stapled security for the six months ended 31 December 2017 paid on 28 February 2018 Final ordinary distribution for the six months ended 30 June 2017 of 15.6 cents per stapled security paid on 31 August 2017 Interim ordinary distribution for the six months ended 31 December 2016 of 14.4 cents per stapled security paid on 28 February 2017 Total distributions/dividends paid and payable to stapled securityholders 2018 $’m 75.5 72.6 – – 148.1 2017 $’m – – 72.7 59.4 132.1 21 Charter Hall Group Annual Report 2018 Review and results of operations The Group recorded a statutory profit after tax attributable to stapled securityholders for the year to 30 June 2018 of $250.2 million compared to a profit of $257.6 million for the year ended 30 June 2017. Operating earnings amounted to $175.8 million for the year to 30 June 2018, compared to $151.2 million for the year ended 30 June 2017, an increase of 16.3%. Operating earnings is split between property investments of $103.9 million (30 June 2017: $85.0 million) and property funds management of $71.9 million (30 June 2017: $66.2 million). The operating earnings information included in the table below has not been subject to any specific audit procedures but has been extracted from Note 3: Segment information of the accompanying financial report. Operating earnings attributable to stapled securityholders Realised and unrealised gains on derivatives1 Net fair value movements on investments and property1 Amortisation of intangibles Reversal/(impairment) of investment in joint venture Non-operating deferred income tax benefit/(expense) Gain/(loss) on disposal of property investments1 Performance fees expense1 Other1 Statutory profit after tax attributable to stapled securityholders Statutory profit attributable to Charter Hall Direct Diversified Consumer Staples Fund (non-controlling interest) Statutory profit after tax 1 Includes the Group’s proportionate share of non-operating items of equity accounted investments on a look through basis. Basic weighted average number of stapled securities per Note 8 (‘000s) Basic earnings per stapled security per Note 8 (cents) Operating earnings per stapled security (OEPS) per Note 3 (cents) 2018 $’m 175.8 (2.5) 98.4 (2.7) 7.3 0.5 (1.5) (16.5) (8.6) 250.2 1.0 251.2 2017 $’m 151.2 8.2 118.3 (4.3) (10.5) (4.1) 3.9 – (5.1) 257.6 – 257.6 2018 465,777 53.7 37.7 2017 420,838 61.2 35.9 22 DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 The 30 June 2018 financial results with comparatives are summarised as follows: Revenue ($ million)1 Statutory profit after tax for stapled securityholders ($ million) Statutory earnings per stapled security (EPS) (cents) Operating earnings for stapled securityholders ($ million)2 Operating earnings per stapled security (cents)2 Distributions/dividends to stapled securityholders ($ million) Distribution/dividend per stapled security (cents) Total assets ($ million) Total liabilities ($ million) Total net assets ($ million) Net assets attributable to non-controlling interest ($ million)3 Net assets attributable to stapled securityholders ($ million) Stapled securities on issue (million) Net assets per stapled security ($) Net tangible assets (NTA) attributable to stapled securityholders ($ million)4 NTA per stapled security ($)4 Balance sheet gearing5 Funds under management (FUM) ($ billion) Charter Hall Group 2018 246.2 250.2 53.7 175.8 37.7 148.1 31.8 2,013.6 155.4 1,858.2 35.6 1,822.6 465.8 3.91 1,777.1 3.82 0.00% 23.2 2017 213.4 257.6 61.2 151.2 35.9 132.1 30.0 1,873.1 150.8 1,722.3 – 1,722.3 465.8 3.70 1,674.9 3.60 0.00% 19.8 Charter Hall Property Trust Group 2018 2017 24.3 175.2 37.6 n/a n/a 93.6 20.1 1,724.5 73.3 1,651.2 35.6 1,615.6 465.8 3.47 1,615.6 3.47 0.00% n/a 19.7 218.0 51.8 n/a n/a 132.1 30.0 1,612.9 76.9 1,536.0 – 1,536.0 465.8 3.30 1,536.0 3.30 0.00% n/a 1 Gross revenue does not include share of net profits of associates and joint ventures of $169.1 million (30 June 2017: $207.2 million). 2 Excludes fair value adjustments, gains or losses on the sale of investments, amortisation and/or impairment of intangible assets, performance fees expense, non-operating deferred tax expense and other unrealised or one-off items. 3 Represents the 38.7% (30 June 2017: 0.0%) non-controlling interest share of the Charter Hall Direct Diversified Consumer Staples Fund. 4 Net tangible assets (NTA) attributable to stapled securityholders and NTA per stapled security ($) are calculated using assets less liabilities, net of intangible assets and related deferred tax. 5 Gearing is calculated by using debt drawn net of cash divided by total assets net of cash. Operating earnings per stapled security (OEPS) has increased 5.0% from 35.9 cents for the year ended 30 June 2017 to 37.7 cents for the year ended 30 June 2018. Annual distribution per stapled security (DPS) has increased 6.0% from 30.0 cents for the year ended 30 June 2017 to 31.8 cents for the year ended 30 June 2018. Net Tangible Assets per stapled security (NTA) at 30 June 2018 is $3.82, an increase of 6.1% over $3.60 at 30 June 2017. Funds Under Management (FUM) increased from $19.8 billion at 30 June 2017 to $23.2 billion at 30 June 2018 due to the establishment of a new fund, Charter Hall Direct Diversified Consumer Staples Fund, significant valuation uplifts, property acquisitions and developments in Charter Hall Office Trust, Charter Hall Prime Office Fund, Charter Hall Prime Industrial Fund, Core Logistics Partnership Trust and Charter Hall Counter Cyclical Trust. 23 Charter Hall Group Annual Report 2018 Review and results of operations continued Property Investment Property Investment provides the Group with yields from its co-investments in Group funds. Property Investment contributed $103.9 million in operating earnings to the Group. The Group’s property investments are classified into the following real estate sectors: • Office; • Industrial; • Retail; and • Diversified. The following table summarises the key metrics for the property investments of the Group: Ownership stake (%) Charter Hall investment ($m) FY 2018 Charter Hall investment income 1 ($m) Weighted average lease expiry (years) Weighted average market cap rate (%) Weighted average discount rate (%) Weighted Average rental reviews (%) FY 2018 Charter Hall investment yield 2 (%) Office Charter Hall Prime Office Fund (CPOF) Charter Hall Office Trust (CHOT) Brisbane Square Wholesale Fund (BSWF) Charter Hall Counter Cyclical Trust (CCT) Charter Hall Direct WorkZone Trust (WZF) Charter Hall Direct PFA Fund (PFA)3 Industrial Core Logistics Partnership Trust (CLP) Charter Hall Prime Industrial Fund (CPIF) Charter Hall Direct Industrial Fund No.4 (DIF4) Retail Charter Hall Retail REIT (CQR)4 BP Fund 1 (BP1)6 Charter Hall Prime Retail Fund (CPRF) Retail Partnership No. 6 Trust (RP6)4 BP Fund 2 (BP2)6 Long WALE Investment Partnership (LWIP)5 Long WALE Investment Partnership 2 (LWIP2)5 TTP Wholesale Fund (TTP)4, 6 Retail Partnership No. 2 (RP2)4 Diversified Charter Hall Long WALE REIT (CLW) Charter Hall Direct Diversified Consumer Staples Fund (DCSF)7 Property investment – subtotal Commercial and Industrial Property Pty Limited (CIP)8 Total 8.4 15.7 16.8 5.0 2.0 0.1 13.8 5.9 16.4 18.7 11.9 38.0 20.0 17.6 5.0 10.0 10.0 5.0 20.4 61.3 50.0 620.1 258.8 246.4 102.1 11.2 1.4 0.2 300.6 148.8 121.0 30.8 533.6 327.6 54.7 45.7 36.7 25.4 21.1 10.5 5.4 6.5 251.7 195.2 34.1 13.2 13.4 6.9 0.5 0.1 – 17.3 8.6 6.5 2.2 34.1 23.0 2.3 2.9 2.1 0.9 1.4 0.7 0.4 0.4 14.9 11.8 56.5 1,706.0 17.7 1,723.7 3.1 100.4 3.5 103.9 5.5 6.2 4.3 8.3 5.3 7.2 8.2 9.9 10.4 8.9 11.0 6.5 6.6 9.3 4.0 4.5 10.4 16.3 17.0 4.1 4.9 10.5 10.8 8.6 7.2 n/a 5.4 5.3 5.2 5.9 5.6 7.1 7.0 6.0 6.0 6.0 6.3 6.0 6.2 5.4 5.8 5.6 5.6 5.9 5.9 6.0 5.8 6.3 6.1 6.7 5.8 n/a 6.8 6.8 6.7 7.1 7.0 7.5 7.7 7.3 7.3 7.2 7.6 7.3 7.3 7.0 7.5 7.8 7.0 7.2 7.3 7.5 7.3 7.4 7.3 7.8 7.1 n/a 3.8 3.9 3.9 3.5 3.7 4.0 3.4 3.0 3.0 3.1 3.0 3.9 4.2 2.8 4.3 3.6 2.7 2.0 2.0 4.0 4.4 2.9 2.9 2.9 3.6 n/a 6.1 5.6 6.3 6.7 8.9 9.0 7.4 6.0 6.2 5.5 7.0 6.7 7.2 5.4 6.4 6.1 4.0 7.1 7.0 5.2 6.5 6.3 6.5 5.6 6.3 n/a 1 Charter Hall Group property investment earnings per segment, Note 3(b) of the financial report. 2 Yield = Operating earnings divided by investment value at start of the year adjusted for investments/divestments during the period. Excludes MTM movements in NTA during the year. 3 Formerly PFA Diversified Property Trust. 4 Average rent reviews is contracted weighted average rent increases of specialty tenants. 5 The LWIP and LWIP2 rental increase is CPI, uncapped. 6 These funds comprise the Long WALE Hardware Partnership (LWHP). 7 DCSF adjusted for non-controlling interest share of 38.7%. 8 CIP was reclassified as held for sale in June 2018. 24 DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 A summary of the significant activities of each of the Group’s property investments is provided below: (a) Office Charter Hall Prime Office Fund (CPOF) CPOF is a wholesale pooled fund that invests in high-quality office buildings located in Australia’s major capital cities. CPOF owns an interest in 24 assets valued at $4.5 billion. Charter Hall Office Trust (CHOT) CHOT is an unlisted wholesale partnership that invests in a high- quality portfolio of CBD office properties with a mix of premium and A grade quality buildings. The CHOT portfolio comprises 10 office assets valued at $2.9 billion. Brisbane Square Wholesale Fund (BSWF) BSWF is an unlisted partnership that owns two prime buildings in Brisbane and Perth CBD’s valued at $1.1 billion. Charter Hall Counter Cyclical Trust (CCT) CCT is an unlisted wholesale partnership designed to take advantage of counter-cyclical investment opportunities in the Perth and Brisbane office markets, currently comprising two assets with a portfolio value of $460 million. Charter Hall Direct WorkZone Trust (WZF) WZF is an unlisted single asset property syndicate investing in an A-grade office building located on the fringe of the Perth CBD, which was sold post balance date. Charter Hall Direct PFA Fund (PFA) PFA is an unlisted fund diversified across geographic locations, tenant profiles and lease expiries in Australia with a portfolio value of $360 million. (b) Industrial Core Logistics Partnership Trust (CLP) CLP is a wholesale industrial partnership which owns 27 assets valued at $1.6 billion. Charter Hall Prime Industrial Fund (CPIF) CPIF is a wholesale open ended fund focused on industrial and logistics assets in major Australian capital cities. CPIF owns a portfolio of 55 assets valued at $3.0 billion. Charter Hall Direct Industrial Fund No.4 (DIF4) DIF4 is an unlisted property fund investing in quality Australian industrial properties with a total value of $210 million. (c) Retail Charter Hall Retail REIT (CQR) CQR is an Australian Real Estate Investment Trust (A-REIT) listed on the Australian Securities Exchange (ASX) (ASX:CQR) and invests in convenience shopping centres anchored by Coles, Woolworths and Aldi supermarkets. CQR’s portfolio comprises 59 properties valued at $2.8 billion. Charter Hall Prime Retail Fund (CPRF) CPRF is a wholesale fund which owns Campbelltown Shopping Centre and an interest in Gateway Plaza, which was acquired post balance date, with a total portfolio value of $270 million. Retail Partnership No.6 Trust (RP6) RP6 is a wholesale fund focusing on neighbourhood and sub-regional shopping centres. RP6 owns two assets valued at $280 million. Long WALE Hardware Partnership (LWHP) The combined BP Fund 1, BP Fund 2 and TTP Wholesale Fund are collectively referred to as the Long WALE Hardware Partnership (LWHP), which owns 23 assets valued at $1.0 billion predominantly leased to Bunnings. Long WALE Investment Partnership (LWIP) LWIP is a wholesale partnership which owns 57 retail and pub assets valued at $770 million. These assets are leased to Australian Leisure and Hospitality Group (ALH) under triple net leases. Long WALE Investment Partnership 2 (LWIP2) LWIP2 is a wholesale partnership which owns nine retail and pub assets valued at $160 million. Retail Partnership No.2 (RP2) RP2 is a wholesale retail fund which owns the Bateau Bay Square shopping centre valued at $230 million on the Central Coast of New South Wales. (d) Diversified Charter Hall Long WALE REIT (CLW) CLW is a A-REIT listed on the ASX (ASX:CLW) and invests in high quality Australasian real estate assets that are predominantly leased to corporate and government tenants on long-term leases. CLW’s portfolio comprises 81 properties valued at $1.5 billion. Charter Hall Direct Diversified Consumer Staples Fund (DCSF) DCSF is an unlisted fund with a diversified and growing portfolio of properties leased to distributors and producers of consumer staples goods. DCSF owns six properties valued at $63 million. (e) Wholesale mandates The Group originates and manages segregated mandates for direct property investments either in joint venture with funds such as CPOF or CQR or as 100% owned assets by our clients. The total property value of wholesale mandates is $0.9 billion. (f) Direct investor funds The Group manages equity raised from retail investors via advisers, high net worth individuals and through direct distribution channels. The total FUM of these retail funds and single asset syndicates is $3.1 billion. (g) Commercial and Industrial Property Pty Limited (CIP) The Group had a 50% interest in CIP, an industrial development business, that was held for sale as at 30 June 2018 and subsequently sold post balance date. 25 Charter Hall Group Annual Report 2018 Review and results of operations continued Property Funds Management The Property Funds Management business provides investment management, asset management, property management, development management and leasing and transaction services to the Group’s $23.2 billion funds management portfolio. The use of an integrated property services model, which earns fees from providing these services to the managed portfolio, enhances the Group’s returns from capital invested. The Group also provides services to segregated mandates looking to capitalise on its property and funds management expertise. The Property Funds Management business contributed $71.9 million in operating earnings to the Group. During the year, total funds under management increased by $3.4 billion to $23.2 billion. The growth comprised development capital expenditure, net valuation uplifts, along with the acquisition of approximately $2.5 billion and divestment of approximately $1.0 billion of property. Significant changes in the state of affairs In May 2018, the Group completed several key initiatives to restructure its debt funding platform: • The Group’s debt facility was refinanced with a new unsecured $200.0 million credit facility plus an additional $20.0 million unsecured facility to support the bank guarantees with the maturity date changing to May 2023. • On 24 May 2018, the Group issued US Private Placement debt (USPP) for a 10-year fixed coupon with US$175.0 million principal. The Group simultaneously executed a cross currency interest rate swap to convert the US$175.0 million into A$231.5 million (exchange rate of $0.7559) and swapped the fixed coupon to an Australian floating rate. Receipt of the USPP proceeds is scheduled for 24 August 2018. Matters subsequent to the end of the period The following events have occurred subsequent to 30 June 2018: • • In July 2018, the Group entered into a binding agreement to sell its interest in joint venture Commercial and Industrial Property Pty Ltd (CIP) for net proceeds of $29.0 million. Other receivables from investments in CIP resulted in a total cash realisation from the transaction of $56.3 million. The sale completed on 10 August 2018. In July 2018, the Group entered into a binding agreement to purchase a three-building amalgamated holding on Queen Street Mall known as No. 1 Brisbane, located in Brisbane’s CBD, for a net purchase price of $94.0 million. • On 22 August 2018, Charter Hall and Folkestone Limited entered into a scheme implementation agreement for Charter Hall to acquire 100% of the shares in Folkestone Limited. Under the terms of the scheme, Folkestone shareholders will be entitled to receive from Charter Hall $1.354 cash per share, which equates to a $205.0 million outlay (excluding c.1.4 million CHC service rights (subject to CHC share price) to be issued to FLK management, (excluding Greg Paramor) vesting over 3 years). If the proposal is approved by Folkestone shareholders, completion is anticipated to be early November 2018. Except for the matters discussed above, no other matter or circumstance has arisen since 30 June 2018 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 Business strategy and prospects The Group’s strategy is to use its specialist property expertise to access, deploy and manage equity invested in Retail, Office, Industrial property and diversified property fund portfolios. Charter Hall Group invests alongside equity partners to create value and provide superior returns for clients and the Group’s securityholders. Charter Hall is well positioned to benefit from projected growth of capital inflows from investors seeking property investments driven by the attractive spreads between property yields and long-term interest rates. During the last 12 months, the Group has seen positive equity flows across all sectors from listed, wholesale and retail investors. Various risks could impact the Group’s financial performance, the potential nature and impact of these risks can change over time. The Group actively manages risks in line with the Group’s Corporate Governance Framework and the Risk Management Policy. In addition to the business risks referenced below, key strategic and operational risks include breaches of cyber security and privacy, work, health and safety, as well as environmental, social, governance and regulatory risks. These frameworks and policies can be found at www.charterhall.com.au. Property Investment portfolio The property investment portfolio composition is primarily driven by co-investment requirements where, typically, between 10–20% of the equity in a fund is contributed by Charter Hall. In addition to these co-investments, the Group may invest a higher proportion in certain funds to reweight its investment portfolio and continues to review opportunities to optimise the proportion of office, retail and industrial investments and extend the overall WALE of its property investment portfolio. The Group regularly reviews the performance of its property investment portfolio and relevant economic drivers to actively manage performance at an asset level in each fund. The material business risks faced by the property investment portfolio that may have an effect on financial performance of the Group include interest rate risk, refinancing risk, lease defaults or extended vacancies, portfolio concentration risks, development risk, joint venture risk and changes in economic or industry factors impacting tenants, property values or the ability to source suitable investment opportunities. Property funds management platform The Group manages property investments on behalf of listed, wholesale and direct investors and has strict policies in place to ensure appropriate governance procedures are in place to meet fiduciary responsibilities and manage any conflicts of interest. Charter Hall provides a suite of services including investment management, asset management, property management, transaction services, development services, treasury, finance, legal and custodian services based on each fund’s individual requirements. The Group regularly reviews investor requirements and preferences for an investment partner in the Australian core real estate sectors and transaction structures that would meet their requirements. The material business risks faced by the property funds management platform that may have an effect on the financial performance of the Group include not delivering on investor expectations or organizational conduct leading to loss of FUM or management rights, loss of key personnel impacting service delivery, economic factors impacting fee streams or property valuations, development risk and access to capital. 26 DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 Information on Directors David Clarke Chair/Independent Non-Executive Director Experience and expertise David joined the Board of Charter Hall Group on 10 April 2014, and was appointed Chair of the Board on 12 November 2014. David has over 35 years’ experience in investment banking, funds management, property finance and retail banking. David was Chief Executive Officer of Investec Bank (Australia) Limited from 2009 to 2013. Prior to joining Investec Bank, David was the CEO of Allco Finance Group and a Director of AMP Limited, following five years at Westpac Banking Corporation where he held a number of senior roles including Chief Executive of the Wealth Management Business, BT Financial Group. David also was previously an Executive Director at Lend Lease Corporation Limited, Chief Executive of MLC Limited, and prior to this was Chief Executive Officer of Lloyds Merchant Bank in London. David holds a Bachelor of Laws degree. Other current listed company directorships Austbrokers Holdings Limited Former listed company directorships in last three years Nil Special responsibilities Chair of the Nominations Committee Member of the Audit, Risk and Compliance Committee Member of the Investment Committee Interests in securities 45,875 stapled securities in Charter Hall Group via an indirect interest Anne Brennan Independent Non-Executive Director Experience and expertise Anne joined the Board of Charter Hall Group on 6 October 2010 and 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 her executive career, Anne 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. Anne has more than 35 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 New Zealand and a Fellow of the Australian Institute of Company Directors. Other current listed company directorships Argo Investments Limited Metcash Limited Nufarm Limited Former listed company directorships in last three years The Star Entertainment Group Limited Myer Holdings Limited Special responsibilities Chair of Remuneration and Human Resources Committee Member of Audit, Risk and Compliance Committee Interests in securities 30,000 stapled securities in Charter Hall Group via direct and indirect interests 27 Charter Hall Group Annual Report 2018 Information on Directors continued Philip Garling Independent Non-Executive Director Experience and expertise Philip joined the Board of the Charter Hall Group on 25 February 2013. Philip has over 35 years’ experience in property and infrastructure, development, operations and asset and investment management. His executive career included nine years as Global Head of Infrastructure at AMP Capital Investors and 22 years at Lend Lease Corporation, including five years as CEO of Lend Lease Capital Services. Philip holds a Bachelor of Building from the University of NSW, has completed the Advanced Management Program at the Australian Institute of Management and the Advanced Diploma at the Australian Institute of Company Directors. He is a Fellow of the Australian Institute of Company Directors, Australian Institute of Building and Institution of Engineers, Australia. Other current listed company directorships Downer EDI Limited Former listed company directorships in last three years Spotless Group Holdings Ltd Special responsibilities Member of the Nominations Committee Member of the Remuneration and Human Resources Committee Chair of the Investment Committee Interests in securities 16,759 stapled securities in Charter Hall Group via a direct interest David Harrison Managing Director and Group CEO Experience and expertise David has 32 years of property market experience across office, retail and industrial sectors in multiple geographies globally. As Charter Hall’s Managing Director and Group CEO, David is responsible for all aspects of the Charter Hall business, with specific focus on strategy and continuing the momentum from building an Investment Manager recognised as a multi-core sector market leader. David is an executive member of various Fund Boards and Partnership Investment Committees, Chair of the Executive Property Valuation Committee and Executive Leadership Committee. David has overseen the growth of the Charter Hall Group from $500 million to $23.2 billion of assets under management in 14 years. David holds a Bachelor of Business Degree (Land Economy) from the University of Western Sydney, is a Fellow of the Australian Property Institute (FAPI) and holds a Graduate Diploma in Applied Finance from the Securities Institute of Australia. David is a Director and Vice-President of the Property Council of Australia and chair of the Audit and Risk Committee. David is also a member of the Property Male Champions of Change. Other current listed company directorships Charter Hall Retail REIT Charter Hall Long WALE REIT Former listed company directorships in last three years Nil Special responsibilities Member of the Investment Committee Interests in securities 207,026 stapled securities in Charter Hall Group via direct interests and 1,441,773 stapled securities in Charter Hall Group via indirect interests. 875,807 performance rights and 174,781 service rights in the Charter Hall Performance Rights and Options Plan; performance rights, service rights and options vest after performance and service conditions are met. 28 DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 Karen Moses Independent Non-Executive Director Experience and expertise Karen joined the Board of Charter Hall Group on 1 September 2016 and was appointed Chair of the Audit, Risk and Compliance Committee on 9 November 2016. Karen has over 30 years’ corporate experience in the energy industry spanning oil, gas, electricity and coal commodities, gaining her experience both within Australia and overseas. During her executive career, Karen was a senior executive at Origin Energy including the roles of Executive Director, Finance and Strategy and Chief Operating Officer. Karen holds a Bachelor of Economics and a Diploma of Education from the University of Sydney. Other current listed company directorships Orica Ltd (ASX:ORI) Boral Limited (ASX:BLD) Former listed company directorships in last three years Origin Energy Ltd (ASX:ORG) Special responsibilities Chair of Audit, Risk and Compliance Committee Interests in securities 23,137 stapled securities in Charter Hall Group via indirect interests David Ross Independent Non-Executive Director Experience and expertise David joined the Board of the Charter Hall Group on 20 December 2016. David has over 30 years’ corporate experience in the property industry and has gained his experience both within Australia and overseas, including a total of eight years as Chief Executive Officer of GPT and Global Chief Executive Officer, Real Estate Investments for Lend Lease. David is the Chair of Arena REIT, which owns, manages and develops property in the childcare and healthcare sectors. Previously, David held executive positions at GPT, Lend Lease and Babcock & Brown. Prior board appointments include a non-executive directorship with Sydney Swans Foundation Limited. David holds a Bachelor of Commerce from the University of Western Australia and an Associate Diploma in Valuation from Curtin University in Western Australia. Other current listed company directorships Arena REIT Former listed company directorships in last three years Nil Special responsibilities Member of Nominations Committee Member of Investment Committee Member of Remuneration and Human Resources Committee Interests in securities Nil Company Secretary Mark Bryant was appointed as joint Company Secretary for Charter Hall Group on 24 August 2015 and has been the sole Company Secretary since 1 March 2017. Mark holds a Bachelor of Business (Accounting) and a Bachelor of Laws (Hons) and has over 14 years’ experience as a lawyer, including advising on listed company governance, securities law, funds management, real estate and general corporate law. Mark is the Group General Counsel and Company Secretary for the Charter Hall Group. Meetings of Directors The number of meetings of the Group’s Board of Directors and of each Committee of the Board held during the year ended 30 June 2018, and the number of meetings attended by each Director were: Full meetings of the Board of Directors A 11 12 11 12 12 12 B 12 12 12 12 12 12 Audit, Risk and Compliance Committee B A Investment Committee B A Nomination Committee B A 6 6 * * 6 * 6 6 * * 6 * * 2 2 2 * 2 * 2 2 2 * 2 * 2 2 * * 2 * 2 2 * * 2 Remuneration and HR Committee A 4 * 4 * * 4 B 4 * 4 * * 4 A Brennan D Clarke P Garling D Harrison K Moses D Ross * Not a member of the stated Committee. 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. 29 Charter Hall Group Annual Report 2018 Remuneration Report summary Charter Hall Limited is pleased to present its Remuneration Report (Report) for the year ended 30 June 2018. The table below outlines the key changes made in 2018 and outcomes achieved in 2018. Component Key changes in FY 2018 Key management personnel (KMP) KMP changes included in the Report (section 1): • appointment of Russell Proutt as Chief Financial Officer; • departure of Paul Ford as Group Executive, Industrial; • Sean McMahon temporarily assuming the role of Industrial CEO along with his Chief Investment Officer role; and • Greg Chubb, Retail CEO, taking on the role of Fund Manager, CQR. Component Key remuneration outcomes in FY 2018 Fixed remuneration Increased the Managing Director and Group CEO’s (Managing Director) fixed annual remuneration (FAR) by 10% to $1,430,000, effective 1 July 2017 (section 3.3). ‘On target’ total remuneration and remuneration mix Other Reported Executives’ FAR remained flat during 2018, excluding increases for role changes. Increased the Managing Director’s ‘on target’ total remuneration (inclusive of target ‘at-risk’ components) by 10% to $4,290,000, effective 1 July 2017 (section 3.2). Increased ‘at-risk’ components of ‘on target’ total remuneration for Other Reported Executives averaging 4.7%, excluding role changes. Short term incentive (STI) An above target STI pool (120%) was awarded across the Group (section 3.4) based on actual performance against budget Group OEPS and Board discretion. Long term incentive (LTI) 100% of the FY 2015 grant vested as a result of the performance against absolute and relative TSR hurdles over the three years to 30 June 2017 (section 3.5). Other security plans Continued the General Employee Securities Plan ($1,000 grant) for eligible employees not participating in the LTI. Non-Executive Directors Increased the Fee Pool for Non-Executive Directors (NED) to $1.7 million per annum, as approved by the securityholders at the Annual General Meeting in November 2017 (section 5). 30 DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 Remuneration Report – unaudited Actual remuneration received in FY 2018 – unaudited The following table presents the actual remuneration received by Reported Executives during the financial year ended 30 June 2018. This voluntary disclosure is provided to increase transparency and includes: • fixed pay and other benefits for 2018; • 2017 cash STI paid during 2018; and • the value of any LTI and STI award that vested during 2018. The actual remuneration presented is distinct from the audited disclosed remuneration (as required by section 308(C) of the Corporations Act 2001 (Cth) (Act)) in the Financial Report on page 40, which is calculated in accordance with statutory obligations and accounting standards. The numbers in the audited disclosed remuneration include accounting values for current and prior years’ LTI grants which have not been (have not or may not be) received, as they are dependent on performance hurdles and service conditions being met. Name Executive Director D Harrison Other Reported Executives G Chubb4 S McMahon5 R Proutt6 A Taylor Former Reported Executive P Ford7 Totals Salary and other benefits1 $ Short term incentive2 $ Value of securities vested3 $ % of remuneration consisting of rights % Total $ 1,431,621 1,213,333 1,961,752 4,606,706 644,575 801,621 760,351 704,457 268,667 396,380 – 377,406 704,606 329,680 – 454,488 1,617,848 1,527,681 760,351 1,536,351 264,882 173,333 86,250 524,465 4,607,507 2,429,119 3,536,776 10,573,402 42.6 43.6 21.6 – 29.6 16.4 33.4 1 Other benefits include superannuation and non-monetary benefits. 2 Values relate to STI paid in FY 2018 in cash for FY 2017 performance. 3 Values at vesting date for LTI performance rights, STI deferred rights and any sign on service rights, they predominantly relate to performance rights for the FY 2016 LTI and subsequent deferred service rights relating to deferred STI payments. 4 On 19 December 2014, G Chubb was awarded 197,370 sign on service rights vesting in three equal tranches; the final tranche of 65,790 vested. 5 On 25 November 2016, S McMahon was awarded 59,056 sign on service rights which all vested. 6 R Proutt commenced on 20 July 2017. His remuneration is reported pro-rata for this reporting period. 7 P Ford took leave of absence from 19 June 2017. He formally ceased being a KMP on 14 September 2017 and remained employed by the Group until 15 December 2017. As he continued to be employed, his remuneration is shown for the period until 15 December 2017. This table shows his remuneration whilst employed excluding separation arrangements. Remuneration Report – audited 1. Key management personnel – audited This Report outlines the remuneration policies and practices that apply to Charter Hall’s KMP for the year ended 30 June 2018. The KMP include the Non-Executive Directors, Executive Directors and other Reported Executives who are responsible for the Group’s strategy. Name Non-Executive Directors David Clarke Anne Brennan Phil Garling Karen Moses David Ross Executive Director David Harrison Other Reported Executives Greg Chubb Sean McMahon Russell Proutt Adrian Taylor Former Reported Executive Paul Ford Role Chair Director Director Director Director Term as KMP Full Year Full Year Full Year Full Year Full Year Managing Director and Group CEO Full Year Retail CEO Chief Investment Officer and Industrial CEO Chief Financial Officer Office CEO Full Year Full Year Part Year (joined 20 July 2017) Full Year Group Executive, Industrial Part Year (ceased 14 Sept 2017) The Report has been prepared and audited in accordance with the requirements of the Act. 31 Charter Hall Group Annual Report 2018 Remuneration Report – audited continued 2. Remuneration governance Charter Hall’s Board and the Remuneration and Human Resources Committee (the Committee) are responsible for setting and overseeing remuneration policy for the Group. Members of the Committee The Committee is appointed by the Board and comprised solely of NEDs: • Anne Brennan (Chair of the Committee) • Philip Garling • David Ross Role of the Committee Charter Hall’s Board and the Committee are responsible for setting and overseeing remuneration policy for the Group. In summary, the Committee provides advice and recommendations to the Board for approval on: Attendance Remuneration and risk management External advisers and remuneration consultants • the Group’s remuneration and incentives framework; • fixed annual remuneration, total remuneration package for executives; • short term incentives and long term incentives for executives; • any other remuneration matters that relate to executives; • criteria for reviewing the performance of the Managing Director; • • incentive plans for all employees; and fees for NEDs of the Group and fund committees. The specific responsibilities of the Board and the Committee are detailed in their respective charters, which are available on the Group website at www.charterhall.com.au. Other Directors of the Board, the Managing Director and the Group Executive, People, Brand and Community attend Committee meetings by invitation. Importantly, executives (including the Managing Director), do not attend meetings, or sections of meetings, where agenda items for discussion relate to their own remuneration outcomes. Risk is managed at various points in the executive remuneration framework through: • part deferral of STI awards into service rights over two years; • LTI performance hurdles that reflect the long-term performance of the business, measured over three years with an additional one year holding lock; • clawback on unvested deferred STI and unvested LTI for material misstatement and financial misrepresentation; • minimum shareholding for Independent Directors; and • Board discretion on performance outcomes. Where necessary, the Committee seeks support from independent experts and advisers. Remuneration consultants provide information on market trends in respect of KMP remuneration structures and benchmarking information on KMP remuneration levels. Other external advisers (including legal practitioners) assist with the administration of the Group’s remuneration plans and ensure that the appropriate legal parameters are applied and employment contracts are in place. The Committee independently appoints its remuneration consultants and engages with them in a manner which ensures that any information provided is not subject to undue influence by management. The information provided by external advisers is used as an input only to the Committee’s considerations and decision making. The Board has ultimate decision making authority over matters of remuneration structure and outcomes. During the FY 2018 period Egan Associates provided guidance to the Board in connection with Non-Executive Directors fees and Managing Director remuneration. Work undertaken during FY 2018 for the Managing Director remuneration was benchmarking and did not constitute a remuneration recommendation for the purposes of the Corporations Act 2001. Work undertaken during FY 2018 for the Non-Executive Director remuneration was a remuneration recommendation and Egan Associates was paid $28,875 for this advice. The Committee is satisfied that the advice received from Egan Associates is free from undue influence from the KMP to whom the remuneration recommendations relate. Egan Associates also confirmed in writing that the remuneration recommendation was made free from undue influence by KMP. 32 DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 3. Executive remuneration framework 3.1 Executive remuneration strategy Charter Hall’s remuneration philosophy is aimed at rewarding performance. 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 illustrates the link between business strategy and remuneration outcomes: BUSINESS STRATEGY To access, deploy, manage and co-invest equity to create value and provide superior income and capital returns for our clients and securityholders through: • delivering outperformance for both managed fund/partnership investors and CHC securityholders • optimising total return on invested capital • growing sustainable earnings and maintaining resilience via long WALE portfolios and through strong customer relationships • developing a scalable and efficient platform • recruiting, retaining and motivating a high performance team REMUNERATION STRATEGY Create sustainable securityholder value by: Attract, retain and motivate talent by: • assessing performance and STI outcomes against financial and non-financial key performance indicators (KPI) linked to strategy • deferring a portion of STI into equity for executives • aligning LTI performance hurdles with securityholders’ • rewarding superior performance • offering competitive total remuneration • creating retention mechanisms • ensuring remuneration strategy is simple, transparent expected returns and consistent • ensuring a significant ‘at-risk’ component of total remuneration FAR FAR REMUNERATION COMPONENTS Remuneration ‘at risk’ and subject to performance outcomes STI LTI • OEPS target, and • KPIs (50% financial and 50% non-financial) Cash (67%) Deferred equity (33%) over two years • equal measures of absolute TSR and relative TSR (comparator group) • three year performance measures • additional one year holding lock REMUNERATION OUTCOMES Remuneration ‘at risk’ and subject to performance outcomes • Managing Director’s FAR increased 10% STI LTI 1 July 2017 (section 3.3) • Other Reported Executives’ remained flat on average in FY 2018, excluding role changes • STI pool of 120% of target STI pool • 100% of FY 2015 LTI grant vested based on FY 2018 OEPS performance above target and Board discretion • 100% of deferred equity STI due to vest in FY 2018 for FY 2015 (second tranche) and FY 2016 (first tranche) has vested (31 August 2017) • FY 2016 LTI grant will fully vest (31 August 2018) 33 Charter Hall Group Annual Report 2018 120 100 80 60 40 20 0 Remuneration Report – audited continued 3. Executive remuneration framework continued 3.2 Remuneration mix 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 base level of remuneration, the ‘at-risk’ STI and LTI components reward executives when pre-agreed performance measures are met or exceeded. The figures below for all Reported Executives show the percentage mix of fixed versus ‘at-risk’ for ‘on target’ total remuneration. The ‘maximum’ total remuneration for the Managing Director shows the mix of fixed versus ‘at-risk’ as a percentage of ‘on target’ remuneration. This reflects maximum STI of up to 150% of the target STI due to strong Company and executive outperformance. Other Reported Executives also have the potential to earn up to 150% of target STI. 33% 50% 33% 33% 33% 33% LTI STI FAR 28% 28% 26% 31% 19% 31% 20% 30% 43% 43% 50% 50% Target Maximum Chief Financial Officer Chief Investment Officer and Industrial CEO Retail CEO1 Office CEO MANAGING DIRECTOR OTHER REPORTED EXECUTIVES (TARGET ONLY) 1 G Chubb’s (Retail CEO) remuneration mix was changed in November 2017, when his position included the Fund Manager, CQR role. The above remuneration mix is effective November 2017. 3.3 Fixed remuneration Composition Fixed remuneration comprises cash base salary, statutory superannuation contributions and other nominated benefits. 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; and • • the market environment for each individual’s skills and capabilities. Benchmarking The following comparator group is used when determining the Reported Executives’ remuneration: Executive Director outcome • industry related companies: based on entities in the S&P/ASX 200 Australian Real Estate and Investment Trust (A-REIT) industry group. The fixed remuneration of the Managing Director, Mr Harrison, increased by 10% to $1,430,000 in the FY 2018 annual remuneration review (1 July 2017) such that his total package increased to $4,290,000. Mr Harrison’s last review was 1 February 2016 when he was appointed single Managing Director and Group CEO, reflecting his change in role. In determining Mr Harrison’s remuneration and appropriate remuneration mix, the Chair and the Remuneration and Human Resources Committee jointly commissioned an independent benchmarking by Egan Associates. The review had regard to: • 20 ASX listed entities ranked by market capitalisation on either side of the Charter Hall Group; • ASX listed entities ranked 20 positions either side of an assumed entity with an aggregate market capitalisation equal to the combined total of the Charter Hall Group, the Charter Hall Long WALE REIT and the Charter Hall Retail REIT; • Mr Harrison’s current role; and • market for established CEOs among REITs with varying attributes, specifically considering the fixed CEO remuneration payable by nine industry specific comparator entities. Other Reported Executives Other Reported Executives’ fixed remuneration remained flat on average in FY 2018, excluding increases for role changes. 34 DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 3.4 Short term incentive Purpose STI is an ‘at-risk’ incentive awarded annually, which is designed to reward executives, subject to performance against agreed financial and non-financial KPIs. Gateway for STI Determining and assessing the STI pool A Group financial gateway of 90% (95% for executives) of budgeted OEPS must be met before any STI entitlement is available, with the Board retaining overall discretion on performance achievement. The size of the pool is determined by the Board, upon advice from the Committee, based on achieving a budgeted OEPS target. The Board retains discretion to increase or decrease the overall STI pool available, based on its assessment of the overall performance throughout the year. In consultation with the Committee, the Board assesses the Group’s financial performance and the performance of all Reported Executives against agreed KPIs. Maximum STI potential The maximum STI potential for all employees is 150% of their STI target, enabling recognition for outperformance. Performance targets 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. Delivery KPIs are typically split between 50% financial and 50% non-financial, based on a balanced scorecard approach, which encourages executives to take a holistic approach to enhancing and protecting securityholder value. For all executives, STI is delivered in the form of cash (67%) and deferred service rights (33%). For the Retail CEO, deferred service rights are issued as securities in CQR rather than CHC due to his joint role of Fund Manager, CQR. Service rights are deferred over two years, with 50% vesting at the end of year one and 50% at the end of year two. The number of rights granted to an executive is determined based on an independent fair value calculation reviewed by Deloitte using the Black-Scholes valuation method. If an executive’s employment terminates prior to expiry of the relevant vesting period, the service rights will be forfeited or remain ‘on foot’, subject to the Board’s discretion to determine ‘good leaver’ status. Managing Director’s KPIs The Managing Director’s scorecard is divided into three performance goals, Financial, Customer and Leadership and Collaboration. For each of these goals there will be performance measures aligned to our core strategic objectives of growth and resilience. Below is a summary of the Managing Director’s performance measures and KPIs for FY 2018 as assessed by the Board. Performance goal Measures Financial (50%) Including Group OEPS; annuity revenue growth, growth in funds under management; maintain Group investment capacity. Status Exceeded Customer (25%) Delivering exceptional customer experience with continuous improvement and innovation. Exceeded Leadership and Collaboration (25%) Driving an engaged inclusive, diverse culture with strengthening leadership and succession. Achieved Other Reported Executives’ KPIs KPIs for other Reported Executives are broadly similar to that of the Managing Director and are focused on individual areas of accountability. Performance goal Measures Financial (50%) Including Group and Divisional financials and investment earnings; growth in funds under management; and divisional specific financial initiatives. Customer (25%) Including customer experience, service and satisfaction measures for funds and tenants. Leadership and Collaboration (25%) Including leadership contribution, succession, talent and engagement. Status Exceeded Exceeded Achieved 35 Charter Hall Group Annual Report 2018 40 35 30 25 20 15 10 5 0 Remuneration Report – audited continued 3. Executive remuneration framework continued Group FY 2018 performance outcomes In FY 2018, Charter Hall’s OEPS was 37.7 cents, which was 5.0% above the FY 2017 OEPS. The table below shows Charter Hall’s OEPS (cps) over a four year period: 18.1% growth 35.9 5.0% growth 37.7 10.5% growth 30.4 27.5 FY 2015 FY 2016 FY 20171 FY 2018 1 The first year CHC recognised operating tax expense. FY 2018 STI outcomes In FY 2018, 120% of the target STI pool was awarded across the Group, recognising outperformance of the Group’s OEPS against budget and as determined by the Board which we note compares to 129% in FY 2017 and 112.7% in FY 2016. The below table shows the STI outcomes for Reported Executives for 2018. All Reported Executives received 123% of STI target for FY 2018. This is based on a reflection of the executives’ leadership as a group, achievements of KPIs and their overall leadership team contribution to the Group. Name Executive Director D Harrison Other Reported Executives G Chubb2 S McMahon R Proutt3 A Taylor Former Reported Executive P Ford STI earned $ Paid in cash $ Deferred into service rights $ Target STI of fixed pay % STI earned compared to target % % of target STI opportunity forfeited1 % 1,758,900 1,172,600 586,300 100% 123% 481,048 710,940 612,136 516,600 320,699 473,960 408,091 344,400 160,349 236,980 204,045 172,200 – – – 62% 72% 66% 60% 35% 123% 123% 123% 123% 0% 100% 0% 0% 0% 0% 0% 1 The STI was not earned; the Act requires this disclosure as forfeiture. 2 STI earned is pro-rata for the year to reflect changes to remuneration in FY 2018. 3 STI pro-rata for period employed. 36 DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 3.5 Long term incentive Purpose Participants Type of equity awarded LTI aligns key employee rewards with sustainable growth in securityholder value over time. It also plays an important role in employee retention. All Reported Executives, executives, Fund Managers and selected other managers, comprising approximately 5.5% of employees. The LTI is governed by the Performance Rights and Options Plan (PROP), under which rights to stapled securities are granted to participants. Each performance right entitles the participant to one stapled security in the Charter Hall Group for nil consideration at the time of vesting, subject to meeting the performance hurdles outlined below. For FY 2018 detail, see specific grant allocation (section 6.2). Valuation The number of rights granted to an executive is determined based on an independent fair value calculation by Deloitte using the Black-Scholes valuation method. Performance measures, vesting schedule and holding lock For the FY 2018 LTI allocation, the two performance hurdles that applied to the performance rights for vesting over a three year period commencing 1 July 2017 were: • Absolute TSR (50%) – with vesting occurring on a straight line basis if the compound total return is between 9% and 12% per annum, with 50% vesting at the lower end of the range and 100% vesting at the higher end of the range. • Relative TSR (50%) – with vesting occurring on a straight line basis if the total compounded return is between the 50th and the 75th percentile when Charter Hall’s return is ranked against a comparator group of the S&P/ ASX 200 A-REIT Accumulation Index (XPJAI). The comparator group for the relative TSR grant is: – Abacus Property Group (ABP) – BWP Trust (BWP) – Cromwell Property Group (CMW) – Charter Hall Retail REIT (CQR) – Dexus Property Group (DXS) – Goodman Group (GMG) – Growthpoint Properties Australia (GOZ) – GPT Group (GPT) – Iron Mountain Incorporated (INM) – Investa Office Fund (IOF) – Mirvac Group (MGR) – National Storage REIT (NSR) – SCentre Group (SCG) – Shopping Centres Australasia Property Group (SCP) – Stockland (SGP) – Vicinity Centres (VCX) The Board is able to determine the treatment of the companies in the comparator group at its discretion. Any performance rights that fail to meet these performance hurdles by 30 June 2020 will lapse. Performance rights which vest will be subject to a further one year holding lock. Rationale for performance conditions TSR measures the overall returns that a company has provided for its securityholders, reflecting share price movements and reinvestment of dividends over a specified period. Absolute TSR provides a strong link to Charter Hall’s business strategy of co-investing in managed funds with absolute and total return hurdles. Relative TSR is the most widely used LTI hurdle adopted in Australia. It 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. 37 Charter Hall Group Annual Report 2018 Remuneration Report – audited continued 3. Executive remuneration framework continued Cessation of employment provisions For the FY 2018 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, including good 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. The Board, in its absolute discretion, may determine that all or a specified number of a participant’s unvested performance rights vest. In doing so, the Board has regard to whether the performance is in line with the performance conditions over the period from the date of the grant of the performance right to the date of the relevant event. Change of control provisions Treatment of dividends Participants who hold performance rights are not entitled to receive any distributions or dividends declared by the Group until the performance rights are exercised and held as stapled securities. Hedging and margin lending prohibitions In accordance with the Corporations Act 2001, all KMP are prohibited from hedging or otherwise protecting the value of unvested stapled securities. Group FY 2018 performance outcomes The Group delivered a compound TSR (including stapled security price movements and distributions) over the three years to 30 June 2017 (FY 2015 performance period) of 14% per annum and three years to 30 June 2018 (FY 2016 performance period) of 18% per annum, both exceeding the absolute TSR stretch performance hurdle of 13% each year, respectively. The following graphs demonstrate how the Group’s TSR has performed relative to the ASX A-REIT Accumulation Index for the three years to 30 June 2017 (FY 2015 LTI performance period) and three years to 30 June 2018 (FY 2016 LTI performance period). FY 2015 LTI period (vesting date 31 August 2017) 170% 160% 150% 140% 130% 120% 110% 100% 90% As at 30 June 2017 CHC: 153% Index: 140% Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 CHC A-REIT Accumulation Index 38 DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 FY 2016 LTI period (vesting date 31 August 2018) 170% 160% 150% 140% 130% 120% 110% 100% 90% As at 30 June 2018 CHC: 165% Index: 132% Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 CHC A-REIT Accumulation Index Outcomes • The FY 2015 LTI had a vesting date of 31 August 2017. As a result of the TSR performance over the three years to 30 June 2017, the performance hurdles were exceeded and 100% of the performance rights vested based on absolute and relative performance. • The FY 2016 LTI has a vesting date of 31 August 2018. As a result of the TSR performance over the three years to 30 June 2018, the performance hurdles were exceeded and 100% of the performance rights will vest based on absolute and relative performance. 3.6 Group summary of 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 Executives’ total remuneration, both fixed and ‘at risk’. Charter Hall’s STI is weighted towards growth in OEPS and the LTI provides an important link between remuneration and TSR. Key performance metrics Statutory profit after tax for stapled securityholders ($m) Operating earnings for stapled securityholders ($m) Operating earnings per stapled security (cents) Statutory earnings per stapled security (EPS) (cents) Growth in OEPS % Distribution per stapled security (cents) Stapled security price at 30 June ($) S&P/ASX 200 A-REIT Accumulation Index (XPJAI) – Jul – Jun (%) Total securityholder return – Jul – Jun (%) 2014 82.1 81.2 25.3 25.6 10.4 22.3 4.26 11.1 16.3 2015 117.9 98.8 27.5 32.8 8.7 24.2 4.52 20.3 11.8 2016 215.2 124.7 30.4 52.5 10.5 26.9 5.06 23.2 18.3 2017 257.6 151.2 35.9 61.2 18.1 30.0 5.50 –6.3 15.2 2018 250.2 175.8 37.7 53.7 5.0 31.8 6.52 13.0 24.6 Reported Executives total remuneration summary 2014 2015 20161 20172 20183 Fixed payments ($) STI accounting expense ($) LTI accounting expense ($)4 Earned remuneration ($)5 6,122,898 3,381,549 2,169,193 4,776,471 3,037,030 1,746,018 6,774,805 5,070,682 1,761,639 4,120,280 3,778,462 931,165 4,685,414 4,390,624 1,203,735 11,673,640 9,559,519 13,607,126 8,829,907 10,279,773 On target total remuneration ($) 11,984,905 9,257,989 12,198,875 7,864,408 9,205,916 Earned remuneration relative to target remuneration – over/(under) (%) (3%) 4% 12% 12% 12% 1 Includes remuneration for D Southon’s 2017 notice period and excludes his redundancy payments. 2 Includes remuneration for P Altschwager for his period of KMP and excludes his separation arrangements and excludes the STI payment reported for D Southon in 2017. 3 Includes remuneration for P Ford for his period of employment and excludes his termination benefits. 4 The LTI expense attributed to the Reported Executives reflects the statutory accounting expense under AASB2. 5 Earned remuneration for the Reported Executives is the sum of their fixed payments, the STI accounting expense and the LTI accounting expense. 39 Charter Hall Group Annual Report 2018 Remuneration Report – audited continued 4. Executive remuneration in detail 4.1 Total remuneration of Reported Executives The following table details the total remuneration of the Reported Executives of the Group for FY 2017 and FY 2018. Short-term benefits Post- employ- ment benefits Security-based payment Other long-term benefits Termin- ation benefits Cash short term incentive $ Salary $ Annual leave1 $ Non- monetary benefits2 $ Super- annuation $ Name Securities, options and perform- ance rights $ Security- based short term incentive $ Long service leave1 $ Termination benefits $ % of total remun- eration consisting of rights % Total $ Executive Director D Harrison 2018 2017 1,409,951 1,172,600 34,143 1,280,384 1,213,333 (147,108) 1,621 1,901 20,049 19,616 586,300 606,667 502,577 429,177 (55,970) 22,751 622,906 610,384 Other Reported Executives G Chubb 2018 2017 S McMahon3 2018 2017 R Proutt 2018 A Taylor 2018 2017 779,951 677,820 679,951 673,704 738,681 320,699 268,667 473,960 396,380 408,091 344,400 377,406 Former Reported Executive Director D Southon4 2017 197,190 – Former Other Reported Executives P Altschwager5 2017 P Ford6 2018 2017 254,658 448,754 – 173,333 375,287 134,783 Total 2018 4,486,098 2,719,750 13,037 (24,834) 1,621 1,901 20,049 19,616 160,349 134,333 59,608 161,457 12,320 11,561 (6,462) 14,118 1,621 1,901 20,049 19,616 547,980 198,190 226,745 209,733 14,001 12,213 22,483 1,621 20,049 204,045 296,990 13,325 17,347 (17,057) 4,457 7,418 20,049 19,616 172,200 188,703 90,212 75,641 13,682 23,125 – – – – 5,646 9,808 – – – 28,621 – – – – – – – – – – – – 3,671,271 3,426,721 1,210,589 1,183,084 2,057,845 1,529,971 1,705,285 1,342,298 1,348,556 197,190 893,344 1,447,489 30 30 18 25 38 27 29 20 20 – 2 4 14 27 22 – 11,988 80,548 200 5,188 10,024 19,616 – 86,667 27,603 26,536 – 15,348 417,099 – 709,584 787,430 11,141 110,269 1,670,874 1,203,735 (2,642) 417,099 10,696,872 Total 2017 4,066,333 2,761,092 (162,893) 23,955 107,887 1,214,560 931,165 84,998 893,344 9,920,441 1 Shows the movement in leave accruals for the year. 2 Non-monetary benefits for FY 2018 is salary continuance insurance. 3 I n recognition of the dual roles S McMahon has undertaken for the FY18 year, he has been allocated an extra grant of deferred service rights of $311,000 as approved by the Board. This is shown in the security-based short term incentive column. These service rights are to vest in full 31 August 2019. 4 D Southon ceased as KMP in his role as Joint Managing Director effective 1 February 2016. The data for FY2017 shows the difference between the STI target amount (as shown in previous FY 2016 reporting) and the actual amount paid due to performance criteria that were met and exceeded. Previously, the STI opportunity was shown at target amount. The performance criteria were exceeded and the actual amount paid was $690,161. The difference to the previously reported amount is shown in the 2017 data. None of these benefits are termination benefits for the purposes of the Corporations Act termination benefits cap. 5 In accordance with P Altschwager’s employment agreement, P Altschwager is entitled to a six months’ notice period. The termination benefits value also includes the security-based expense for unvested incentives as at 31 December 2016 which remain on foot and may vest at the same time as all other participants and statutory leave entitlements. None of these benefits are termination benefits for the purposes of the Corporations Act termination benefits cap. 6 In accordance with P Ford’s employment agreement, P Ford is entitled to a three months’ notice period during which he remained employed by the Group. The termination benefits value also includes a six month ex-gratia payment which forms part of his termination benefits under the Corporations Act termination benefits cap. It also includes his statutory leave entitlements. The security options and performance rights column includes the expense for unvested incentives as at 15 December 2017 which remain on foot and may vest at the same time as all other participants. None of the security expense benefits are termination benefits for the purposes of the Corporations Act termination benefits cap. 40 DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 4.2 Key terms of employment The remuneration and other terms of employment for Reported Executives are formalised in employment contracts. Each of these contracts provides for participation in the Group’s STI and LTI programs (as described above) and payment of other benefits. 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 Executive Directors and Reported Executives are summarised below: Name Position Executive Director D Harrison Other Reported Executives G Chubb S McMahon R Proutt A Taylor2 Former Reported Executive Managing Director Retail CEO Chief Investment Officer Chief Financial Officer Office CEO P Ford Group Executive, Industrial Minimum notice period1 Charter Hall Employee 6 months 12 months 3 months 6 months 6 months 3 months 3 months 6 months 6 months 3 months 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 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 the grant (refer to STI and LTI commentary in section 3). 5. Non-Executive Director remuneration Policy The Committee makes recommendations to the Board on the total level of remuneration of the Chair and other Non-Executive Directors, including any additional fees payable to Directors for membership of Board committees. Benchmarking 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 NEDs; • the time commitment expected of NEDs on Group matters; and • reference to fees paid to NEDs of other comparable companies. NED fees are periodically reviewed to ensure they remain in line with general industry practice and reflect proper compensation for duties undertaken. External independent advice is sought in these circumstances. Fee framework NED fees, including committee fees, are set by the Board within the aggregate amount of $1.7 million per annum as approved by securityholders at the AGM in November 2017. Under the current framework, NEDs, other than the Chair, receive (inclusive of superannuation): • Board base fee; and • Committee fees. The Chair receives an all-inclusive fee. NEDs are also entitled to be reimbursed for all business-related expenses, including travel on Charter Hall business, 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’s employee incentive schemes. 41 Charter Hall Group Annual Report 2018 Remuneration Report – audited continued 5. Non-Executive Director remuneration continued Remuneration outcomes As approved by the securityholders at the AGM in November 2017, the Fee Pool for NED fees increased to $1.7 million per annum (from $1.3 million). In June 2017, the Committee commissioned an independent remuneration benchmarking report from Egan Associates to determine, among other matters, appropriate NED fees and payments (Egan Report). The Egan Report recommended an increase to NED fees to reflect market practice and the accountabilities and workload of the Charter Hall Group Directors. The Egan Report is the most comprehensive Director fee review undertaken by the Board to date and the report’s recommendations are reflective of the considerable growth of the Charter Hall Group business since 2014. In arriving at its recommendation, the Egan Report considered the revenue, assets and market capitalisation of the Charter Hall Group together with the accountability of the Board for the stewardship of approximately $19.8 billion (at the time) of funds under management. Based on the Egan Report effective 1 July 2017, the Board agreed to the following changes in NED fees: • The Board Chair’s fee increased from $307,500 to $375,000; • Board member base fees increased from $123,000 to $150,000; and • Board Committees fees increased for both Chair and members. Minimum shareholding guidelines Minimum shareholding guidelines were implemented in FY 2016 requiring Independent Directors to hold CHC securities to the value of $50,000 (being approximately a year’s base fee, net of tax) to be purchased over a three year period. The valuation is based on the value of the securities at the time of purchase. Summary of fee framework per annum Board Chair Member Audit Risk and Compliance Committee Chair Member Remuneration and Human Resources Committee Chair Member Nomination Committee Chair Member Investment Committee1 Chair Member 2018 $ 2017 $ 375,000 150,000 307,500 123,000 40,000 20,000 30,000 15,000 3,000 3,000 15,000 10,000 30,000 15,000 25,000 13,879 2,060 2,060 4,500 – 1 The Investment Committee members have previously received no remuneration for the Committee fees. In FY 2018, the Chair (P Garling) received a payment of $4,500 for FY 2017 Investment Committee meetings. Non-Executive Director remuneration Non-Executive Directors D Clarke A Brennan P Garling1 K Moses D Ross Former Non-Executive Directors P Kahan C McGowan Total 2018 fees $ 2017 fees $ 375,000 200,000 177,841 190,000 178,000 – – 307,500 163,000 159,287 124,659 73,035 72,004 49,256 1,120,841 948,741 1 Due to timing adjustments for Committee memberships, P Garling’s actual remuneration shown is less than his fee entitlement of $183,000 for FY 2018. 42 DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 6. Appendix – further detail 6.1 Securityholdings Key management personnel securityholdings Name Directors of Charter Hall Limited Ordinary stapled securities D Clarke A Brennan P Garling K Moses D Ross Executive Director D Harrison Other Reported Executives G Chubb S McMahon R Proutt A Taylor Former Reported Executive P Ford1 Opening balance at 30 Jun 2017 Stapled securities acquired Rights and options exercised Stapled securities sold Closing balance at 30 Jun 2018 45,875 30,000 16,759 8,137 – 1,648,799 – – – 61,605 – – – – 15,000 – – – – – – – – – – – – – – – – – 45,875 30,000 16,759 23,137 – 351,411 (351,411) 1,648,799 126,217 59,056 – 81,413 (126,217) – – (81,413) – 59,056 – 61,605 15,450 (15,450) – 1 Deemed disposal of all stapled securityholdings as no longer a KMP of the Group. 6.2 Performance Rights and Option Plan details Performance rights and service rights outstanding under the PROP. Performance rights Year of issue 2016 2017 2018 Securities 857,738 818,364 843,477 Exercise price Vesting conditions Nil Nil Nil Absolute and relative performance criteria Absolute and relative performance criteria Absolute and relative performance criteria Total performance rights outstanding 2,519,579 Service rights Year of issue 2017 2018 2018 Total service rights issued Securities 134,438 94,468 258,623 487,529 Exercise price Vesting conditions Nil Nil Nil Service conditions – Deferred STI Service conditions Service conditions – Deferred STI Valuation model The Black-Scholes methodology is used for allocation purposes while the Monte Carlo method is used for accounting purposes. The accounting value determined using a Monte Carlo simulation valuation is in accordance with AASB 2. 43 Charter Hall Group Annual Report 2018 Remuneration Report – audited continued 6. Appendix – further detail continued 6.2 Performance Rights and Option Plan details continued Valuation model continued Reported Executives rights – details by plan Rights held at 30 June 2017 Rights granted during the year Rights vested and exercised during the year Rights forfeited during the year Rights held at 30 June 2018 Fair value per right at grant date ($) Grant date Fair value to be expensed in future years($)1 Vesting date Type of equity Executive Director D Harrison LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights STI Deferred Service Rights STI Deferred Service Rights STI Deferred Service Rights STI Deferred Service Rights STI Deferred Service Rights 248,371 250,965 330,178 – 43,420 59,620 59,620 – – – – – 294,664 – – – 57,581 57,580 248,371 – – – 43,420 59,620 – – – Other Reported Executives G Chubb LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Service Rights STI Deferred Service Rights STI Deferred Service Rights STI Deferred Service Rights STI Deferred Service Rights2 STI Deferred Service Rights2 S McMahon 42,135 39,490 36,991 – 65,790 6,791 11,501 11,501 – – – – – 30,909 – – – – 18,274 18,274 LTI Performance Rights LTI Performance Rights LTI Service Rights STI Deferred Service Rights STI Deferred Service Rights 112,934 – 59,056 – – – 100,763 – 18,811 18,811 R Proutt LTI Performance Rights LTI Service Rights LTI Service Rights A Taylor LTI Performance Rights LTI Performance Rights LTI Performance Rights LTI Performance Rights STI Deferred Service Rights STI Deferred Service Rights STI Deferred Service Rights STI Deferred Service Rights STI Deferred Service Rights – – – 108,181 62,979 31,489 48,315 49,099 46,018 – 17,522 15,576 15,576 – – – – – 57,697 – – – 17,911 17,910 42,135 – – – 65,790 6,791 11,501 – – – – – 59,056 – – – – – 48,315 – – – 17,522 15,576 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 19–Dec–14 250,965 30–Nov–15 330,178 25–Nov–16 294,664 23–Nov–17 – 30–Nov–15 – 25–Nov–16 59,620 25–Nov–16 57,581 23–Nov–17 57,580 23–Nov–17 – 19–Dec–14 39,490 30–Nov–15 36,991 25–Nov–16 30,909 23–Nov–17 – 19–Dec–14 – 30–Nov–15 – 25–Nov–16 11,501 25–Nov–16 18,274 08–Nov–17 18,274 08–Nov–17 2.09 31–Aug–17 1.41 31–Aug–18 1.39 31–Aug–19 2.65 31–Aug–20 4.16 31–Aug–17 4.37 31–Aug–17 4.15 31–Aug–18 5.93 31–Aug–18 5.65 31–Aug–19 – 18,962 169,525 536,004 – – – – – 2.09 31–Aug–17 1.41 31–Aug–18 1.39 31–Aug–19 2.65 31–Aug–20 4.03 30–Jun–17 4.16 31–Aug–17 4.37 31–Aug–17 4.15 31–Aug–18 3.88 31–Aug–18 3.62 31–Aug–19 – 2,984 18,992 56,225 – – – – – – 112,934 25–Nov–16 100,763 23–Nov–17 – 25–Nov–16 18,811 23–Nov–17 18,811 23–Nov–17 1.39 31–Aug–19 2.65 31–Aug–20 4.29 31–Aug–17 5.93 31–Aug–18 5.65 31–Aug–19 57,984 183,291 – – – 108,181 23–Nov–17 62,979 23–Nov–17 31,489 23–Nov–17 2.65 31–Aug–20 20–Jul–19 5.68 20–Jul–20 5.41 196,785 200,318 121,473 – 19–Dec–14 49,099 30–Nov–15 46,018 25–Nov–16 57,697 23–Nov–17 – 30–Nov–15 – 25–Nov–16 15,576 25–Nov–16 17,911 23–Nov–17 17,910 23–Nov–17 2.09 31–Aug–17 1.41 31–Aug–18 1.39 31–Aug–19 2.65 31–Aug–20 4.16 31–Aug–17 4.37 31–Aug–17 4.15 31–Aug–18 5.93 31–Aug–18 5.65 31–Aug–19 – 3,710 23,627 104,953 – – – – – 44 DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 Rights held at 30 June 2017 Rights granted during the year Rights vested and exercised during the year Rights forfeited during the year Rights held at 30 June 2018 Fair value per right at grant date ($) Grant date Fair value to be expensed in future years($)1 Vesting date Type of equity Former Reported Executives P Altschwager LTI Performance Rights STI Deferred Service Rights STI Deferred Service Rights STI Deferred Service Rights 101,967 18,419 9,346 9,346 – – – – 101,967 18,419 9,346 – P Ford LTI Performance Rights LTI Performance Rights LTI Performance Rights STI Deferred Service Rights STI Deferred Service Rights 15,450 15,005 20,786 – – – – – 8,226 8,226 15,450 – – – – – – – – – – – – – – 19–Dec–14 – 30–Nov–15 – 25–Nov–16 9,346 25–Nov–16 – 19–Dec–14 15,005 30–Nov–15 20,786 25–Nov–16 8,226 23–Nov–17 2.09 31–Aug–17 4.16 31–Aug–17 4.37 31–Aug–17 4.15 31–Aug–18 2.09 31–Aug–17 1.41 31–Aug–18 1.39 31–Aug–19 5.93 31–Aug–18 8,226 23–Nov–17 5.65 31–Aug–19 – – – – – – – – – 1 The maximum value of the grants yet to vest is the fair value amount at the grant date 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. 2 G Chubb will receive securities in CQR for these deferred STI rights. End of Remuneration Report – audited. Directors’ Report – unaudited continued Indemnification and insurance of directors, officers and auditor During the year, the 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 the 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 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. 45 Charter Hall Group Annual Report 2018 DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2018 Non-audit services continued During the year, the following fees were paid or payable for non-audit services provided by the auditor and its related practices by the Charter Hall Group and Charter Hall Property Trust Group: PricewaterhouseCoopers Australian firm Taxation services Total remuneration for taxation services Advisory services PricewaterhouseCoopers Australian firm Sustainability assurance Accounting advice Total remuneration for advisory services Total remuneration for non-audit services Charter Hall Group 2018 $ 2017 $ 57,222 57,222 135,781 135,781 76,698 53,252 129,950 187,172 – – – 135,781 1,132 Charter Hall Property Trust Group 2018 $ 1,132 1,132 – – – 2017 $ – – – – – – Environmental regulation The Charter Hall Group recognises that sustainability is more than protecting the natural environment; it is about responding to the needs of our customers, achieving our long-term commercial goals and working in partnership with our stakeholders to improve environmental and social outcomes. Our Group Sustainability Policy outlines our commitments to achieving a leading role in a sustainable future and can be found at https://www.charterhall.com.au/About-Us/Corporate-Governance/. The Group ensures compliance with applicable environmental standards and regulations and reports its greenhouse gas emissions and energy use on an annual basis under the National Greenhouse and Energy Reporting Act 2007. Charter Hall emissions reports are independently audited and in October 2018 the Group will report to the Clean Energy Regulator emissions for the measurement period 1 July 2017 to 30 June 2018. To mitigate its carbon emissions, the Group continues to implement resource efficiency measures across its portfolio of assets and is also exploring renewable energy generation opportunities within its office, retail and industrial portfolios. Charter Hall also voluntarily reports annually to international organisations, such as the United Nations Principles for Responsible Investment (PRI), Dow Jones Sustainability Index (DJSI) and the Carbon Disclosure Project (CDP). Charter Hall has recently submitted its 2018 PRI Report and DJSI Report (along with DJSI Reports for CQR and CLW), which address Charter Hall’s environment, social and governance (ESG) practices and emissions from 1 July 2016 to 30 June 2017. Charter Hall Group and CQR will report to CDP by August 2018 (due to changes in CDP reporting requirements), which will also demonstrate our environmental sustainability practices, initiatives and emissions from 1 July 2016 to 30 June 2017. Charter Hall funds (CQR, CHOT, CPOF, DOF, CPIF, CLP, CLW and BSWF) also voluntarily report to the Global Real Estate Sustainability Benchmark (GRESB). These funds have recently submitted their 2018 GRESB reports, which also address Charter Hall sustainability practices and emissions from 1 July 2016 to 30 June 2017. Proceedings on behalf of the Company Section 237 of the Corporations Act 2001 allows for a person to apply to the Court to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, in certain circumstances. No person has made such an application and no proceedings have been brought or intervened in on behalf of the Company with the Court under this section. 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 47. Rounding of amounts The Company is of a kind referred to in ASIC Corporations Instrument (Rounding in Financial/Directors’ Reports) 2016/191, relating to the ‘rounding off’ of amounts in the Directors’ Report. Amounts in the Directors’ Report have been rounded off in accordance with that instrument to the nearest hundred 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. Directors’ authorisation The Directors’ Report is made in accordance with a resolution of the Directors. The financial statements were authorised for issue by the Directors on 22 August 2018. The Directors have the power to amend and re-issue the Financial Statements. Tax Governance Statement Charter Hall Group has adopted the Board of Taxation’s Tax Transparency Code (TTC) at 30 June 2017. As part of the TTC, Charter Hall has published a Tax Governance Statement (TGS) which details Charter Hall Group’s corporate structure and tax corporate governance systems. Charter Hall Group’s TGS can be found on our website at www.charterhall.com.au. David Clarke Chair Sydney 22 August 2018 46 Charter Hall Group Annual Report 2018 AUDITOR’S INDEPENDENCE DECLARATION 47 Charter Hall Group Annual Report 2018 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2018 Income Revenue Share of net profit of investments accounted for using the equity method Net gain on sale of investments Net gain on investment in associates at fair value Total income Expenses Investment property expenses Depreciation Finance costs Net losses from derivative financial instruments Reversal/(impairment) of investments in joint ventures Net fair value adjustments on investment properties Amortisation of intangibles Asset management fees Employee costs Administration and other expenses Total expenses Profit before tax Income tax expense Profit for the year Profit for the year as attributable to: Equity holders of Charter Hall Limited Equity holders of Charter Hall Property Trust (non-controlling interest) Profit attributable to stapled securityholders of Charter Hall Group Net profit attributable to Charter Hall Direct Diversified Consumer Staples Fund (non-controlling interest) Profit for the year Note 4 31,32 31 5 5 5 32 14 5,15 5 5 6 Charter Hall Group Charter Hall Property Trust Group 2018 $’m 246.2 169.1 – 1.4 416.7 (0.9) (3.5) (3.2) (0.3) 7.3 (0.7) (2.7) – (110.9) (24.1) (139.0) 277.7 (26.5) 251.2 75.0 175.2 250.2 1.0 251.2 2017 $’m 213.4 207.2 3.2 – 423.8 – (3.5) (1.5) – (10.5) (0.7) (4.3) – (100.9) (21.2) (142.6) 281.2 (23.6) 257.6 39.6 218.0 257.6 – 257.6 2018 $’m 24.3 158.4 – 1.4 184.1 (1.0) – (3.5) (0.3) – (0.7) – (1.9) – (0.5) (7.9) 176.2 – 176.2 – 175.2 175.2 1.0 176.2 2017 $’m 19.7 198.0 3.8 – 221.5 – – (1.3) – – (0.7) – (1.4) – (0.1) (3.5) 218.0 – 218.0 – 218.0 218.0 – 218.0 48 Charter Hall Group Annual Report 2018 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CONTINUED FOR THE YEAR ENDED 30 JUNE 2018 Profit for the year Other comprehensive income Items that may be reclassified to profit or loss Exchange differences on translation of foreign operations Changes in the fair value of cash flow hedges Equity accounted fair value movements in cash flow hedges Other comprehensive income for the year 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 attributable to Charter Hall Direct Diversified Consumer Staples Fund (non-controlling interest) Total comprehensive income for the year Basic earnings per security (cents) attributable to: Equity holders of Charter Hall Limited Equity holders of Charter Hall Property Trust (non-controlling interest) Basic earnings per stapled security (cents) attributable to stapled securityholders of Charter Hall Group 8(a) Diluted earnings per security (cents) attributable to: Equity holders of Charter Hall Limited Equity holders of Charter Hall Property Trust (non-controlling interest) Diluted earnings per stapled security (cents) attributable to stapled securityholders of Charter Hall Group 8(b) Note 23 23 23 Charter Hall Group Charter Hall Property Trust Group 2018 $’m 251.2 (0.5) 1.2 0.3 1.0 2017 $’m 257.6 – – (0.5) (0.5) 2018 $’m 176.2 (0.5) 1.2 0.3 1.0 2017 $’m 218.0 – – (0.5) (0.5) 252.2 257.1 177.2 217.5 75.0 176.2 251.2 1.0 252.2 16.1 37.6 53.7 16.0 37.4 53.4 39.6 217.5 257.1 – 257.1 9.4 51.8 61.2 9.3 51.4 60.7 – 176.2 176.2 1.0 177.2 n/a 37.6 n/a n/a 37.4 n/a – 217.5 217.5 – 217.5 n/a 51.8 n/a n/a 51.4 n/a The above consolidated statements of comprehensive income should be read in conjunction with the accompanying notes. 49 Charter Hall Group Annual Report 2018 CONSOLIDATED BALANCE SHEETS AS AT 30 JUNE 2018 Assets Current assets Cash and cash equivalents Receivables and other assets Fair value of USPP commitment Assets classified as held for sale Total current assets Non-current assets Receivables and other assets Investments in associates at fair value through profit or loss Inventories Investments accounted for using the equity method Investment properties Intangible assets Property, plant and equipment Deferred tax assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Current tax liabilities Provisions Total current liabilities Non-current liabilities Trade and other payables Provisions Derivative financial instruments Borrowings Deferred tax liabilities Total non-current liabilities Total liabilities Net assets 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 profit Equity holders of Charter Hall Property Trust (non-controlling interest) Non-controlling interest in Charter Hall Direct Diversified Consumer Staples Fund Total equity Charter Hall Group Charter Hall Property Trust Group Note 9 10 20 11 10 31 13 14 15 16 17 18 19 18 19 12 20 17 2018 $’m 94.9 98.9 2.2 17.7 213.7 – 32.4 1.8 1,617.1 63.4 62.7 20.9 1.6 1,799.9 2,013.6 112.7 15.3 1.5 129.5 5.3 1.6 1.4 3.6 14.0 25.9 2017 $’m 174.4 66.2 – – 240.6 – 29.7 – 1,476.6 40.4 65.4 18.8 1.6 1,632.5 1,873.1 108.7 18.7 1.9 129.3 6.5 1.3 – – 13.7 21.5 155.4 1,858.2 150.8 1,722.3 21(a) 23 24 21(a) 23 24 285.7 (45.1) (33.6) 207.0 1,453.5 0.9 161.2 285.0 (44.6) (54.1) 186.3 1,456.9 (0.5) 79.6 2018 $’m 32.8 50.4 2.2 – 85.4 – 32.4 – 1,543.3 63.4 – – – 1,639.1 1,724.5 50.6 – – 50.6 17.7 – 1.4 3.6 – 22.7 73.3 1,651.2 – – – – 2017 $’m 53.4 29.9 – – 83.3 73.2 29.7 – 1,386.3 40.4 – – – 1,529.6 1,612.9 76.9 – – 76.9 – – – – – – 76.9 1,536.0 – – – – 1,453.5 0.9 161.2 1,456.9 (0.5) 79.6 1,615.6 1,536.0 1,615.6 1,536.0 35.6 1,858.2 – 1,722.3 35.6 1,651.2 – 1,536.0 The above consolidated balance sheets should be read in conjunction with the accompanying notes. 50 Charter Hall Group Annual Report 2018 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY – CHARTER HALL GROUP FOR THE YEAR ENDED 30 JUNE 2018 Attributable to the owners of Charter Hall Limited Contributed equity Reserves $’m Accumulated profit/(losses) $’m Note Balance at 1 July 2016 Profit for the year Other comprehensive income Total comprehensive income Transactions with equity holders in their capacity as equity holders: Contributions of equity, net of issue costs Buyback and issuance of securities for exercised performance rights Tax recognised direct to equity Transfer due to deferred compensation payable in service rights Distribution provided for or paid Security-based benefit expense Transfer unvested securities to accumulated losses Balance at 30 June 2017 Balance at 1 July 2017 Profit for the year Other comprehensive income Total comprehensive income Transactions with equity holders in their capacity as equity holders: Contributions of equity, net of issue costs Buyback and issuance of securities for exercised performance rights Tax recognised direct to equity Transfer due to deferred compensation payable in service rights Dividend/distribution provided for or paid Security-based benefit expense Transactions with non-controlling interests Balance at 30 June 2018 256.1 – – – 21(b) 28.3 6(c) 7 6(c) 7 (0.3) 0.9 – – – – 28.9 285.0 285.0 – – – – (0.4) 1.1 – – – – 0.7 285.7 (45.5) – – – – (2.4) 1.7 1.4 – 1.4 (1.2) 0.9 (44.6) (44.6) – – – – (3.9) 0.3 1.4 – 1.7 – (0.5) (45.1) (94.5) 39.6 – 39.6 – – (0.4) – – – 1.2 0.8 (54.1) (54.1) 75.0 – 75.0 – – – – (54.5) – – (54.5) (33.6) Non- controlling interest $’m 1,195.0 218.0 (0.5) 217.5 Total $’m 116.1 39.6 – 39.6 Charter Hall Group Total equity $’m 1,311.1 257.6 (0.5) 257.1 28.3 258.0 286.3 (2.7) 2.2 1.4 – 1.4 – 30.6 186.3 186.3 75.0 – 75.0 – (4.3) 1.4 1.4 (54.5) 1.7 – (54.3) (2.4) – – (132.1) – – 123.5 1,536.0 1,536.0 176.2 1.0 177.2 36.0 (3.3) – – (94.4) – (0.3) (62.0) (5.1) 2.2 1.4 (132.1) 1.4 – 154.1 1,722.3 1,722.3 251.2 1.0 252.2 36.0 (7.6) 1.4 1.4 (148.9) 1.7 (0.3) (116.3) 207.0 1,651.2 1,858.2 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 51 Charter Hall Group Annual Report 2018 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY – CHARTER HALL PROPERTY TRUST GROUP FOR THE YEAR ENDED 30 JUNE 2018 Attributable to the owners of the Charter Hall Property Trust Group Contributed equity $’m Reserves $’m Accumulated profit/(losses) $’m Note Balance at 1 July 2016 Profit for the year Other comprehensive income Total comprehensive income/(loss) Transactions with equity holders in their capacity as equity holders: Contributions of equity, net of issue costs Buyback and issuance of securities for exercised performance rights Distribution provided for or paid Balance at 30 June 2017 Balance at 1 July 2017 Profit for the year Other comprehensive income Total comprehensive income Transactions with equity holders in their capacity as equity holders: Contributions of equity, net of issue costs Buyback and issuance of securities for exercised performance rights Distribution provided for or paid Transactions with non-controlling interest 1,201.3 – – – 21(b) 258.0 7 (2.4) – 255.6 1,456.9 1,456.9 – – – 21(b) (0.1) 7 (3.3) – – (3.4) Balance at 30 June 2018 1,453.5 – – (0.5) (0.5) – – – – (0.5) (0.5) – 1.0 1.0 – – – 0.4 0.4 0.9 Total $’m 1,195.0 218.0 (0.5) (6.3) 218.0 – 218.0 217.5 – 258.0 – (132.1) (132.1) 79.6 79.6 175.2 – 175.2 (2.4) (132.1) 123.5 1,536.0 1,536.0 175.2 1.0 176.2 Non- controlling interest $’m – – – – – – – – – – 1.0 – 1.0 Total equity $’m 1,195.0 218.0 (0.5) 217.5 258.0 (2.4) (132.1) 123.5 1,536.0 1,536.0 176.2 1.0 177.2 – (0.1) 36.1 36.0 – (93.6) – (93.6) 161.2 (3.3) (93.6) 0.4 (96.6) 1,615.6 – (0.8) (0.7) 34.6 35.6 (3.3) (94.4) (0.3) (62.0) 1,651.2 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 52 Charter Hall Group Annual Report 2018 CONSOLIDATED CASH FLOW STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Note Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Tax paid Interest received Interest paid Distributions and dividends from investments Net cash inflow from operating activities 26 Cash flows from investing activities Payments for property, plant and equipment (net of lease incentive received) Proceeds on disposal of investment properties Payments for inventory Payments for investment properties Payment for acquisition of subsidiary (net of cash acquired) Investments in associates and joint ventures Proceeds on disposal and return of capital from investments in associates and joint ventures Loans to associates, joint ventures and related parties Repayments of loans to associates, joint ventures and related parties Net cash (outflow)/inflow from investing activities Cash flows from financing activities Proceeds from issues/(buy back) of stapled securities Proceeds from borrowings (net of borrowing costs) Repayment of borrowings Proceeds on disposal of partial interest in a subsidiary that does not involve loss of control Distributions to non-controlling interests Distributions paid to stapled securityholders Net cash inflow/(outflow) from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the year 9 Charter Hall Group Charter Hall Property Trust Group 2018 $’m 259.5 (153.5) (28.2) 3.7 (2.6) 90.2 169.1 (5.5) 5.5 (1.8) (29.1) – (98.5) 14.3 (17.8) 1.3 (131.6) (7.7) 24.4 (21.1) 33.9 (0.8) (145.3) (116.6) (79.1) 174.4 (0.4) 94.9 2017 $’m 217.8 (138.9) – 2.2 (1.3) 76.5 156.3 (4.6) 67.2 – (40.5) (25.2) (384.0) 120.0 (11.7) 21.2 (257.6) 281.2 88.8 (124.1) – – (115.6) 130.3 29.0 145.4 – 174.4 2018 $’m 14.1 (2.1) – 0.5 (2.6) 86.9 96.8 – 5.5 – (29.1) – (98.5) 10.9 (176.7) 257.7 (30.2) (6.8) 24.4 (21.1) 33.9 (0.8) (116.4) (86.8) (20.2) 53.4 (0.4) 32.8 2017 $’m 10.7 (2.4) – 0.3 (1.2) 72.5 79.9 – (40.5) – – – (379.8) 123.6 (407.6) 494.6 (209.7) 255.5 88.8 (88.8) – – (115.6) 139.9 10.1 43.3 – 53.4 The above consolidated cash flow statements should be read in conjunction with the accompanying notes. 53 Charter Hall Group Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 1 Summary of significant accounting policies The significant policies which have been adopted in the preparation of these consolidated financial statements for the year ended 30 June 2018 are set out below. These policies have been consistently applied to the years presented, unless otherwise stated. (a) Basis of preparation The Charter Hall Group (Group, CHC or Charter Hall) is a ‘stapled’ entity comprising Charter Hall Limited (Company or CHL) and its controlled entities, and Charter Hall Property Trust (Trust or CHPT) and its controlled entities (Charter Hall Property Trust Group). 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 (ASX). CHL has been identified as the parent entity in relation to the stapling. 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 ASIC Corporations (Stapled Group Reports) Instrument 2015/838, this financial report is a combined financial report that presents the consolidated 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 CHL and its controlled entities, including Charter Hall Funds Management Limited (Responsible Entity) as responsible entity for CHPT and CHPT and its controlled entities. 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 financial report of the Charter Hall Property Trust Group comprises the Trust and its controlled entities. These general purpose financial statements have 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 consolidated financial statements. 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 was therefore 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, acquisition accounted for CHL as at 6 June 2005. Group references in accounting policies The accounting policies in Note 1 apply to both the Group and Charter Hall Property Trust Group unless otherwise stated in the relevant policy. Compliance with IFRS The consolidated financial statements of the Group also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Historical cost convention The consolidated financial statements have been prepared on a historical cost basis, except for the following: • • investments in associates at fair value through profit or loss – measured at fair value; investments in financial assets held at fair value – measured at fair value; • Derivative financial instruments. New and amended standards adopted No new accounting standards or amendments have come into effect for the year ended 30 June 2018 that affect the Group’s operations or reporting requirements. (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 2018 and their results for the year then ended. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Controlled entities are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of controlled entities have been changed where necessary to ensure consistency with the policies adopted by the Group. Non-controlling interests in the results and equity of controlled entities are shown separately in the consolidated statement of comprehensive income, consolidated balance sheet and consolidated statement of changes in equity respectively. Investments in associates (ii) Associates are entities over which the Group has significant influence but not control or joint control. Investments in associates are accounted for in the consolidated balance sheet at either fair value through profit or loss (CHPT only) or by using the equity method (CHPT and CHL). On initial recognition, the Group elects to account for investments in associates at either fair value through profit or loss or using the equity method based on assessment of the expected strategy for the investment. Under the equity accounted method, the Group’s share of the associates’ post acquisition net profit after income tax expense is recognised in the consolidated statement of comprehensive income. The cumulative post-acquisition movements in results and reserves are adjusted against the carrying amount of the investment. Distributions and dividends received from associates are recognised in the consolidated financial report as a reduction of the carrying amount of the investment. Investments in associates at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the consolidated statement of comprehensive income. 54 Charter Hall Group Annual Report 2018 (iii) Joint arrangements Under AASB 11 Joint Arrangements, investments in joint arrangements are classified as either joint operations or joint ventures. The classification depends on the contractual rights and obligations of each investor, rather than the legal structure of the joint arrangement. (c) Segment reporting Segment information is reported in a manner that is consistent with internal reporting provided to the chief operating decision maker. The chief operating decision maker is responsible for allocating resources and assessing performance of the operating segments. Joint operations The Group recognises its direct right to the assets, liabilities, revenues and expenses of joint operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. These have been incorporated in the consolidated financial statements under the appropriate headings. Joint ventures Interests in joint ventures are accounted for using the equity method, with investments initially recognised at cost and adjusted thereafter to recognise the Group’s share of post-acquisition profits or losses of the investee in profit or loss, and the Group’s share of movements in other comprehensive income of the investee in other comprehensive income. Dividends received or receivable from joint ventures are recognised as a reduction in the carrying amount of the investment. When the Group’s share of losses in an equity accounted investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the other entity. Unrealised gains on transactions between the Group and its equity accounted investees are eliminated to the extent of the Group’s interest in these entities. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of equity accounted investees have been aligned where necessary to ensure consistency with the policies adopted by the Group. (iv) Changes in ownership interests When the Group ceases to equity account for an investment because of a loss of joint control or significant influence, any retained interest in the entity is remeasured to its fair value with the change in carrying amount recognised in profit or loss. This fair value becomes the initial carrying amount for the purposes of subsequently accounting for the retained interest as a joint venture entity or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. If the ownership interest in a joint venture entity or an associate is reduced but joint control or significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income is reclassified to profit or loss where appropriate. (d) Foreign currency translation (i) Functional and presentation currencies Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in Australian dollars, which is CHL’s and CHPT’s functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of comprehensive income, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. (iii) Foreign operations The results and financial position of foreign operations that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each consolidated balance sheet • presented are translated at the closing rate at the date of that consolidated balance sheet; income and expenses for each income statement and consolidated statement of comprehensive income are translated at average exchange rates; and • all resulting exchange differences are recognised in other comprehensive income. (iv) Foreign currency translation On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. On disposal of interests in foreign controlled entities, the cumulative foreign exchange gains/losses relating to these investments are transferred to the consolidated statement of comprehensive income in accordance with the requirements of AASB 121 The Effect of Changes in Foreign Exchange Rates. 55 Charter Hall Group Annual Report 2018 1 Summary of significant accounting policies continued (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: Investment management revenue (i) Investment management fees are brought to account on an accruals basis when the services have been performed and, if not received at the reporting date, are reflected in the consolidated balance sheet as a receivable. Performance fees are only recognised when the services have been performed and the amount can be reliably measured and it is probable the performance fee criteria will be met. Transaction fees are recognised when the services have been performed and the fee can be reliably estimated. 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 and judgements in Note 2. (ii) Property services revenue Property services revenue is brought to account on an accruals basis when the services have been performed and, if not received at the reporting date, are reflected in the consolidated balance sheet as a receivable. Where property services revenue is derived in respect of an acquisition or disposal of property, the revenue is recognised when services have been performed and the fee can be reliably estimated. (iii) Gross rental income Gross rental income 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. The portion of rental income relating to fixed increases in operating lease rentals in future years is recognised as a separate component of investment properties. Turnover rent is recognised on an accruals basis. (iv) Recovery of property related expenses Expense recoveries are brought to account on an accruals basis when the services have been performed and, if not received at the reporting date, are reflected in the consolidated balance sheet as a receivable. Interest income (v) 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 flows 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. (vi) Distributions Distributions are recognised as revenue when the right to receive payment is established. (vii) Other investment-related revenue Other investment-related revenue represents amounts received in relation to investment commitments and rebates relating to investments and is recognised where the right to receive payment is established. 56 (f) 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. 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, any non- controlling interest in the acquiree is recognised 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 the acquirer’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. (g) Income tax 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 Group’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. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 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. (h) Impairment of assets Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value-in-use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash generating units). Non-financial assets that suffered impairment in prior years are reviewed for possible reversal of the impairment at each reporting date. (i) Cash and cash equivalents For the purpose of presentation in the cash flow statement, 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 in the consolidated balance sheet. (j) Trade and other receivables Trade and other 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 uncollectible are written off in the year in which they are identified. A provision for doubtful debts is raised where there is objective evidence that the Group will not collect all amounts due. The amount of the provision is the difference between the carrying amount and estimated future cash flows. Cash flows relating to current receivables are not discounted. (k) Non-current assets classified as held for sale Non-current assets are classified as held for sale and carried as current assets if their carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable. They are measured at the lower of their carrying amount and fair value less costs of disposal, except for assets such as deferred tax assets and investment properties carried at fair value. An impairment loss is recognised for any initial or subsequent write-down of the asset to fair value less costs of disposal. A gain is recognised for any subsequent increases in fair value less costs of disposal of an asset, but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset is recognised at the date of derecognition. Non-current assets classified as held for sale are presented separately from the other assets in the consolidated balance sheet. The liabilities directly associated with assets classified as held for sale are also presented separately from other liabilities in the consolidated balance sheet. (l) Derivative financial instruments The Group uses derivatives to hedge its exposure to interest rates and foreign currency on foreign denominated borrowings. Derivative financial instruments are measured and recognised at fair value on a recurring basis. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either fair value hedges or cash flow hedges. Fair value hedges The gain or loss relating to the effective portion of interest rate swaps hedging fixed rate borrowings is recognised in profit or loss within finance costs. Changes in the fair value of the hedged fixed rate borrowings attributable to interest rate risk are recognised within ‘Net gains/(losses) from derivative financial instruments’. The gain or loss relating to the ineffective portion is also recognised in profit or loss within ‘Net gains/(losses) from derivative financial instruments’. Cash flow hedges The effective portion of changes in the fair value of derivatives is recognised in other comprehensive income and accumulated in the cash flow hedge reserve in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss within ‘Net gains/(losses) from derivative financial instruments’. Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss (for instance when the forecast transaction that is hedged takes place). The gain or loss relating to the effective portion of cross currency interest rate swaps hedging fixed rate borrowings is recognised in profit or loss within ‘Finance costs’. (m) Other financial assets Classification The Group classifies its other financial assets 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 trading. A financial asset held for trading is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are expected to be settled within 12 months; otherwise they are classified as non-current. 57 Charter Hall Group Annual Report 2018 1 Summary of significant accounting policies continued (m) Other financial assets continued Classification continued (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 the Group provides money, goods or services directly to a debtor with no intention of selling the receivable. They are included in current assets, except for those with maturities greater than 12 months after the reporting date. (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-derivative financial assets 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 way purchases and sales of investments are recognised at trade date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the consolidated statement of comprehensive income. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Subsequent measurement Available-for-sale 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 distribution income, are presented in the consolidated 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), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash 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(y) and Note 28. Impairment The Group 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 consolidated statement of comprehensive income – is removed from equity and recognised in the consolidated statement of comprehensive income. Impairment losses recognised in the consolidated statement of comprehensive income on equity instruments classified as available for sale are not reversed through the consolidated statement of comprehensive income. (n) Plant and equipment Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of 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 consolidated statement of comprehensive income during the financial year in which they are incurred. Depreciation on other assets is calculated using the straight line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives, as follows: • Furniture, fittings and equipment • Fixtures • Software 3 to 10 years 5 to 10 years 3 to 5 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 1(h)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the consolidated statement of comprehensive income. (o) Investment properties Investment properties comprise investment interests in land and buildings (including integral plant and equipment) held for the purpose of producing rental income, including properties that are under construction for future use as investment properties. Initially, investment properties are measured at cost including transaction costs. Subsequent to initial recognition, the investment properties are stated at fair value. Fair value of investment property is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The best evidence of fair value is given by current prices in an active market for similar property in the same location and condition. Gains and losses arising from changes in the fair values of investment properties are included in the consolidated statement of comprehensive income in the year in which they arise. 58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 At each balance date, the fair values of the investment properties are assessed by the Responsible Entity with reference to independent valuation reports or through appropriate valuation techniques adopted by the Responsible Entity. Specific circumstances of the owner are not taken into account. Further information relating to valuation techniques can be found in Note 28(d). Where the terms of a financial liability are renegotiated and the entity issues equity instruments to a creditor to extinguish all or part of the liability (debt for equity swap), a gain or loss is recognised in profit or loss, which is measured as the difference between the carrying amount of the financial liability and the fair value of the equity instruments issued. Where the Group disposes of a property at fair value in an arm’s length transaction, the carrying value immediately prior to the sale is adjusted to the transaction price, and the adjustment is recorded in the consolidated statement of comprehensive income within net fair value gain/(loss) on investment property. The carrying amount of investment properties recorded in the consolidated balance sheet takes into consideration components relating to lease incentives, leasing costs and fixed increases in operating lease rentals in future years. (p) Intangibles Intangibles – indefinite life assets (i) Intangibles with no fixed life are not amortised as they have an indefinite life. Intangibles 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. Intangibles are allocated to cash generating units for the purpose of impairment testing. (ii) Management Rights – finite life assets Management rights with a fixed life are amortised using the straight line method over their useful life. Management rights of Charter Hall Office Trust (CHOT) are amortised over nine years. (q) Trade and other payables Liabilities are recognised for amounts to be paid in the future for goods and services received, whether or not billed to the Group. The amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months after the reporting period. They are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method. (r) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the consolidated statement of comprehensive income over the period of the borrowing using the effective interest rate method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down unless there is an effective fair value hedge of the borrowings, in which case a fair value adjustment will be applied based on the mark to market movement in the benchmark component of the borrowings and this movement is recognised in profit or loss. If the facility has not been drawn down the fee is capitalised as a prepayment and amortised over the period of the facility to which it relates. Borrowings are removed from the consolidated balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss as other income or finance costs. 59 Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. (s) Borrowing costs Borrowing costs associated with the acquisition or construction of a qualifying asset, including interest expense, are capitalised as part of the cost of that asset during the period that is required to complete and prepare the asset for its intended use. Borrowing costs not associated with qualifying assets are expensed. (t) Provisions Provisions are recognised when the Group 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 can be reliably estimated. Provisions are not recognised for future operating losses. (u) 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 inclusive of GST. The net amount of GST recoverable from or payable to the tax authority is included in receivables or payables in the consolidated balance sheet. Cash flows relating to GST are included in the consolidated statement of cash flows 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. (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 a corporate bond rate 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. Charter Hall Group Annual Report 2018 1 Summary of significant accounting policies continued (v) Employee benefits continued (iv) Security-based benefits Security-based compensation benefits are provided to employees via the Charter Hall Performance Rights and Options Plan (PROP) and the General Employee Security Plan (GESP). Information relating to these schemes is set out in Note 36. For PROP, 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, impact of dilution, stapled security price at grant date, expected price volatility of the underlying stapled security, expected dividend yield and the risk-free interest rate for the term of the option and 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 stapled securities that are expected to vest. At each reporting date, the entity revises its estimate of the number of stapled securities that are expected to vest. The employee benefits expense recognised each year takes into account the most recent estimate. Upon the vesting of stapled securities, the balance of the stapled security-based benefits reserve relating to those stapled securities is transferred to equity, net of any directly attributable transaction costs. For GESP, eligible employees are entitled to receive up to $1,000 in stapled securities based on the stapled security price on the grant date. The cost of the stapled securities bought on market to settle the award liability is included in employee benefits expense. The stapled securities are held in trust on behalf of eligible employees until the earlier of the completion of three years’ service or termination. (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 by the Group before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits at the earlier of the following dates: (a) when the Group can no longer withdraw the offer of those benefits; and (b) when the entity recognises costs for a restructuring that is within the scope of AASB 137 and involves the payment of termination benefits. In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number of employees expected to accept the offer. Benefits falling due more than 12 months after the end of the reporting period are discounted to present value. (w) Contributed equity Ordinary stapled securities are classified as equity. Incremental costs directly attributable to the issue of new stapled securities or options are shown in equity as a deduction, net of tax, from the proceeds. (x) Distributions/dividends paid and payable A liability is recognised for the amount of any distribution/dividend declared by the Group on or before the end of the reporting period but not paid at balance date. (y) Fair value estimation The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. A fair value measurement of a non-financial asset takes into account the Group’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The fair value of financial instruments traded in active markets is determined using quoted market prices at the balance date. The quoted market price used for financial assets held by the Group 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. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of cross currency interest rate swaps is determined using forward foreign exchange market rates and the present value of the estimated future cash flows at the balance date. Certain unlisted property securities have been designated on initial recognition to be treated at fair value through profit or loss. Movements in fair value during the period have been recognised in the consolidated statement of comprehensive income. These assets have been acquired with the intention of being long-term investments. Where the assets in this category are expected to be sold within 12 months, they are classified as current assets; otherwise they are classified as non-current. 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 the Group for similar financial instruments. (z) Earnings per stapled security Basic earnings per stapled security is determined by dividing profit attributable to the stapled securityholders by the weighted average number of ordinary stapled securities on issue during the year. Basic earnings per stapled security is determined by dividing the profit by the weighted average number of ordinary stapled securities on issue during the year. Diluted earnings per stapled security is determined by dividing profit attributable to the stapled securityholders by the weighted average number of ordinary stapled securities and dilutive potential ordinary stapled securities on issue during the year. Diluted earnings per stapled security is determined by dividing the profit by the weighted average number of ordinary stapled securities and potential ordinary stapled securities on issue during the year. (aa) 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, disclosed in Note 37, has been prepared on the same basis as the Group’s financial statements except as set out below: 60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 Investments in controlled entities (i) Investments in controlled entities, associates and joint ventures are accounted for at cost or fair value through profit or loss in the financial statements of the parent entity. Such investments include both investments in equity securities issued by the controlled entity and other parent entity interests that in substance form part of the parent entity’s investment in the controlled entity. These include investments in the form of interest-free loans which have no fixed contractual term and which have been provided to the controlled entity as an additional source of long-term capital. Dividends and distributions received from controlled entities, associates and joint ventures are recognised in the parent entity’s statement of comprehensive income, rather than deducted from the carrying amount of these investments. (ii) 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. (iii) Recoverable amount of assets The carrying amounts of investments in controlled entities, associates and joint ventures valued on the cost basis are reviewed to determine whether they are in excess of their recoverable amount at balance date. If the carrying value exceeds their recoverable amount, the assets are written down to the lower value. The write-down is expensed in the year in which it occurs. (iv) 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 a tax funding agreement 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 6. 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. (ab) Impact of new standards and interpretations issued but not yet adopted by the Group Certain new accounting standards and interpretations have been published that are not mandatory for the year ended 30 June 2018 but are available for early adoption. The impact of these new standards and interpretations (to the extent relevant to the Group) is set out below: (i) AASB 9 Financial Instruments (applicable for financial periods starting on or after 1 January 2018) AASB 9 addresses the recognition, classification, measurement and derecognition of financial assets and liabilities and sets out new rules for hedge accounting. The Group has reviewed its financial assets and liabilities and is not expecting significant impacts from the adoption of the new standard on 1 July 2018: • equity investments currently measured at fair value through profit or loss (FVPL) will continue to be measured on the same basis under AASB 9, and • debt instruments currently classified as held-to-maturity and measured at amortised cost meet the conditions for classification at amortised cost under AASB 9. There will be no impact on the Group’s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities. The derecognition rules have been transferred from AASB 139 Financial Instruments: Recognition and Measurement and have not been changed. The new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses as is the case under AASB 139. It applies to financial assets classified at amortised cost, contract assets under AASB 15 Revenue from Contracts with Customers, loan commitments and certain financial guarantee contracts. Based on its assessments undertaken to date, management does not expect any additional material loss allowance relating to any of its financial assets to be recognised on initial adoption of AASB 9. The Group’s current hedge relationship for its cross-currency interest rate swaps will continue under AASB 9. The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group’s disclosures about its financial instruments particularly in the year of the adoption of the new standard. The Group will apply the new standard retrospectively from 1 July 2018, with the practical expedients permitted under the standard. Comparatives for 2018 will not be restated. (ii) AASB 15 Revenue from Contracts with Customers (applicable for financial periods starting on or after 1 January 2018) The standard is based on the principle that revenue is recognised when control of a good or service is transferred to a customer, so the notion of control replaces the notion of risks and rewards. It applies to all contracts with customers, excluding leases, financial instruments and insurance contracts. AASB 15 requires reporting entities to provide users of financial statements with more informative, relevant disclosures. The Group has assessed the effects of applying the new standard on the Group’s financial statements and has not identified any material changes in the pattern of revenue recognition. The AASB 15 requirement to present contract assets and contract liabilities separately in the balance sheet, will result in the reclassification of any accrued performance fees from trade and other receivables to contract assets in the Group’s balance sheet. The Group will adopt the standard in the financial year beginning 1 July 2018, applying the modified retrospective approach which will not require the restatement of comparatives. The Group does not expect any material adjustment to retained earnings as a result of adopting AASB 15. 61 Charter Hall Group Annual Report 2018 1 Summary of significant accounting policies continued (ab) Impact of new standards and interpretations issued but not yet adopted by the Group (iii) AASB 16 Leases (applicable for financial periods starting on or after 1 January 2019 – early adoption allowed if AASB 15 is adopted at the same time) The standard will affect primarily the accounting by lessees and will result in the recognition of almost all leases on balance sheet. The standard removes the current distinction between operating and financing leases and requires recognition of an asset and liability in relation to most operating leases. The income statement will also be affected because the total expense is typically higher in the earlier years of a lease and lower in later years. Additionally, operating expense will be replaced with interest and depreciation, so key financial metrics may change. The accounting by lessors will not significantly change. Management’s assessment identified that the impact on the Group’s office operating lease commitments will be the recognition of a right-of-use asset and a corresponding lease liability, Management is progressing with its transition plans. (ac) Comparative information Where necessary, comparative information has been adjusted to conform with changes in presentation in the current year. (ad) Rounding of amounts Under the option provided by ASIC Corporations (Rounding in Financial/ Directors’ Reports) Instrument 2016/191 issued by the Australian Securities and Investments Commission relating to the ‘rounding off’ of amounts in the financial statements, amounts in the Company and the Trust’s consolidated financial statements have been rounded to the nearest hundred thousand in accordance with that ASIC Corporations Instrument, unless otherwise indicated. 2 Critical accounting estimates and judgements The Charter Hall Group and Charter Hall Property Trust Group make estimates and assumptions concerning the future. 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. 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: (a) Classification and carrying value of investments The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Critical judgements are made in assessing whether an investee entity is controlled or subject to significant influence or joint control. These judgements include an assessment of the nature, extent and financial effects of the Group’s interest in investee entities, including the nature and effects of its contractual relationship with the entity or with other investors. Investments in associates are accounted for at either fair value through profit or loss (CHPT only) or by using the equity method (CHPT and CHL). CHPT designates investments in associates as fair value through profit or loss or equity accounted on a case by case basis taking the investment strategy into consideration. Management regularly reviews equity accounted investments for impairment and remeasures investments carried at fair value through profit or loss by reference to changes in circumstances or contractual arrangements, external independent property valuations and market conditions, using generally accepted market practices. When a recoverable amount is estimated through a value in use calculation, critical judgements and estimates are made regarding future cash flows and an appropriate discount rate. When a fair value is estimated through an earnings valuation, critical judgements and estimates are made in relation to the earnings measure and appropriate multiple. (b) Performance fee recognition Critical judgements and estimates are made by the Group in respect of recognising performance fee revenue. Performance fees are only recognised when services have been performed and they can be reliably estimated and are probable. Detailed calculations are completed and the risks associated with the fee are assessed when deciding when it is appropriate to recognise revenue. Key risks include the period remaining from balance sheet date to performance fee crystallisation date and the degree of probability that any potential fee may unwind during that period. Key drivers of performance fees are assessed based on historic data and prevailing economic conditions to inform judgements on the extent to which the fee can be reliably estimated. (c) Intangible assets Critical judgements and estimates are made by the Group in assessing the recoverable amount of intangibles acquired, where the funds to which those intangibles relate have an indefinite life. Intangibles 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. Refer to Note 15 for further details. Critical judgements are also made in assessing the manner in which the cost of indefinite life intangible assets is expected to be recovered and in recognising a corresponding deferred tax liability. (d) Deferred tax assets Critical judgements and accounting estimates are made in assessing the extent to which the utilisation of tax losses carried forward is considered probable and the corresponding deferred tax asset recognised. 3 Segment information (a) Description of segments Charter Hall Property Trust Group The Board allocates resources and assesses the performance of operating segments for the entire Charter Hall Group. Results are not separately identified and reported according to the legal structure of the Charter Hall Group and therefore segment information for CHPT is not prepared and provided to the chief operating decision maker. 62 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 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. Operating earnings is a financial measure which represents statutory profit after tax adjusted for proportionately consolidated fair value adjustments, gains or losses on sale of investments, amortisation and/or impairment of intangible assets, performance fee expenses, non-operating tax expense and other unrealised or one-off items. Operating earnings is the primary measure of the Group’s underlying and recurring earnings from its operations. Operating earnings is used by the Board to make strategic decisions and as a guide to assessing an appropriate distribution to declare. Segment operating earnings reviewed by the Board ceased to include the gross up of proportionately consolidated income and expenses. This focus has been reflected in an update to the tables in this note, including restating the comparatives. It should be noted that this change did not impact the segment operating earnings reported from previous periods. The Board has identified the following two reportable segments, the performance of which it monitors separately. Property Investments This segment comprises investments in property funds. Property Funds Management This segment comprises investment management services and property management services. (b) Operating segments The operating segments provided to the Board for the reportable segments for the year ended 30 June 2018 are as follows: 30 June 2018 Property Investment earnings Investment management revenue Property services revenue Total income Net operating expenses Corporate expenses EBITDA Depreciation Net interest income Operating earnings before tax Income tax expense Operating earnings attributable to stapled securityholders Basic weighted average number of securities (‘m) Operating earnings per stapled security (cents) 30 June 2017 – Restated Property Investment earnings Investment management revenue Property services revenue Total income Net operating expenses Corporate expenses EBITDA Depreciation Net interest income Operating earnings before tax Income tax expense Operating earnings attributable to stapled securityholders Basic weighted average number of securities (‘m) Operating earnings per stapled security (cents) Refer to Note 8 for statutory earnings per stapled security figures. 63 Property Investments $’m Property Funds Management $’m 103.8 – – 103.8 (1.0) – 102.8 – 1.1 103.9 – 103.9 – 144.3 56.7 201.0 (71.6) (27.0) 102.4 (3.5) – 98.9 (27.0) 71.9 Property Investments $’m Property Funds Management $’m 84.8 – – 84.8 (1.0) – 83.8 – 1.2 85.0 – 85.0 – 131.7 46.8 178.5 (65.1) (24.2) 89.2 (3.5) – 85.7 (19.5) 66.2 Total $’m 103.8 144.3 56.7 304.8 (72.6) (27.0) 205.2 (3.5) 1.1 202.8 (27.0) 175.8 465.8 37.7 Total $’m 84.8 131.7 46.8 263.3 (66.1) (24.2) 173.0 (3.5) 1.2 170.7 (19.5) 151.2 420.8 35.9 Charter Hall Group Annual Report 2018 3 Segment information continued (c) The reconciliation of operating earnings to statutory profit after tax attributable to stapled securityholders is shown below: Operating earnings attributable to stapled securityholders Realised and unrealised gains on derivatives1 Net fair value movements on equity accounted investments1 Amortisation of intangibles Reversal/(impairment) of investment in joint venture Non-operating income tax benefit/(expense) Gain/(loss) on disposal of property investments1 Performance fees expense1 Other1 Statutory profit after tax attributable to stapled securityholders 2018 $’m 175.8 (2.5) 98.4 (2.7) 7.3 0.5 (1.5) (16.5) (8.6) 250.2 2017 $’m 151.2 8.2 118.3 (4.3) (10.5) (4.1) 3.9 – (5.1) 257.6 1 Includes the Group’s proportionate share of non-operating items of equity accounted investments on a look through basis. (d) Reconciliation of operating earnings from the property investments segment to the share of net profit of investments accounted for using the equity method and the net gain on investment in associates at fair value in the statement of comprehensive income Operating earnings – investments Add: non-operating equity accounted profit Less: distributions in operating income Add: net gain on investment in associates at fair value Add: net operating expenses Less: net interest income Less: net rental income Share of net profit of investments accounted for using the equity method Net gain/(loss) on investment in associates at fair value 2018 $’m 103.9 70.7 (2.2) 1.4 1.0 (1.1) (3.2) 170.5 169.1 1.4 170.5 (e) Reconciliation of property funds management income stated above to revenue per the statement of comprehensive income Property funds management revenue Add: recovery of property and fund-related expenses Add: interest income Add: distributions received for investments accounted for at fair value Add: rental income Revenue per statement of comprehensive income Geographical segments are immaterial as the vast majority of the Group’s income is from Australian sources. Assets and liabilities have not been reported on a segmented basis as the Board is focused on the consolidated balance sheet. 64 2017 $’m 85.0 122.8 (0.4) – 1.0 (1.2) – 207.2 207.2 – 207.2 2017 $’m 178.5 31.7 2.7 0.4 0.1 2018 $’m 201.0 33.6 4.0 2.2 5.4 246.2 213.4 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 4 Revenue Gross rental income Investment management revenue1 Property services revenue1 Other revenue Recovery of property and fund-related expenses Interest Distributions/Dividends2 Other investment-related revenue Total other revenue Total revenue3 Charter Hall Group Charter Hall Property Trust Group 2018 $’m 5.4 144.3 56.7 206.4 33.6 4.0 2.2 – 39.8 2017 $’m 0.1 131.7 46.8 178.6 31.8 2.7 0.3 – 34.8 246.2 213.4 2018 $’m 5.4 – – 5.4 – 4.2 3.1 11.6 18.9 24.3 2017 $’m 0.1 – – 0.1 – 9.0 0.4 10.2 19.6 19.7 1 Revenue from the Group’s property and funds management business is categorised into the two main lines of operations being investment management and property services. 2 Represents the distribution of income from investments in associates accounted for at fair value by the Group and Charter Hall Property Trust Group. 3 Revenue excludes share of net profits of equity accounted associates and joint ventures. 5 Expenses Charter Hall Group Charter Hall Property Trust Group 2018 $’m 2017 $’m 2018 $’m 2017 $’m Profit before income tax includes the following specific expenses: Depreciation Plant and equipment Impairment of investments (Reversal)/impairment of investments Amortisation and impairment of intangibles Intangibles – amortisation Intangibles – reversal of impairment Total amortisation and impairment Finance costs Interest and finance charges paid/payable Net losses from derivative financial instruments Loss on derivative financial instruments designated as a fair value hedge – unrealised Employee costs Employee benefit expenses Restructuring costs Security-based benefits expense Payroll tax Total employee costs Administration and other expenses Advertising, marketing and promotion Occupancy costs Accounting, professional and other costs Communication and IT expenses Administration expenses Total administration and other expenses 3.5 3.5 (7.3) 10.5 2.7 – 2.7 3.2 0.3 101.6 1.3 1.7 6.3 110.9 3.0 3.5 6.4 6.0 5.2 5.1 (0.8) 4.3 1.5 – 94.5 0.3 1.4 4.7 100.9 2.8 3.3 5.4 5.5 4.2 24.1 21.2 65 – – – – – 3.5 0.3 – – – – – – – 0.3 0.1 0.1 0.5 – – – – – 1.3 – – – – – – 0.1 0.1 Charter Hall Group Annual Report 2018 6 Income tax expense (a) Income tax expense Current tax expense Deferred income tax expense Under provided in prior years Deferred income tax expense (Increase)/decrease in deferred tax assets for the tax consolidated group Increase in deferred tax liabilities for the tax consolidated group Increase in deferred tax assets for entities outside the tax consolidated group (b) Reconciliation of income tax expense/(benefit) to prima facie tax payable Profit before income tax expense Prima facie tax expense 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-allowable expenses Other allowable deductions Foreign losses not recognised Sundry items Non-taxable dividends, net of equity accounted profit (Reversal)/impairment of equity accounted investment Recognition of deferred tax asset on previously unrecognised income tax losses Income sheltered by previously unrecognised losses in subsidiary outside of the tax consolidated group Amounts under provided in respect of prior years Income tax expense (c) Amounts recognised directly in equity Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss or other comprehensive income but directly debited or credited to equity: Current tax: Deduction for rights vesting in excess of the cumulative fair value expense Deferred tax: Estimated future deduction for rights vesting, in excess of the cumulative fair value expense Deferred tax: Unwind of deferred tax assets on rights which failed to meet vesting conditions Note 17 17 17 Charter Hall Group 2018 $’m 25.6 0.6 0.3 26.5 (1.1) 1.7 – 0.6 2017 $’m 19.5 4.1 – 23.6 0.8 4.9 (1.6) 4.1 Charter Hall Property Trust Group 2018 $’m 2017 $’m – – – – – – – – – – – – – – – – 277.7 83.3 281.2 84.3 176.2 53.0 218.0 65.4 (53.0) 0.2 (0.1) 0.1 – (1.0) (2.2) – (1.0) 0.2 26.5 (1.1) (0.3) – (1.4) (65.4) 0.1 (0.1) 0.1 (0.1) (1.2) 3.1 (1.6) (0.3) 4.7 23.6 (0.9) (1.7) 0.4 (2.2) (53.0) – – – – – – (65.4) – – – – – – – – – – – – – – – – – – – – – – 66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 (d) 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(g). 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. (e) Charter Hall Property Trust Under current Australian income tax legislation, the Trust is not liable for income tax on its taxable income (including any assessable component of capital gains) provided that the unitholders are presently entitled to the income of the Trust. (f) Tax losses – Charter Hall Group At 30 June 2018, the Group has approximately $12.5 million (2017: $13.6 million) of tax effected unrecognised income tax losses. At 30 June 2018, the Group has approximately $12.7 million (2017: $13.0 million) of tax effected unrecognised capital tax losses. 7 Distributions/Dividends paid and payable Ordinary stapled securities Final ordinary dividend of 5.5 cents and ordinary distribution of 10.7 cents per stapled security for the six months ended 30 June 2018 payable on 31 August 2018 Interim ordinary dividend of 6.2 cents and interim ordinary distribution of 9.4 cents per stapled security for the six months ended 31 December 2017 paid on 28 February 2018 Final ordinary distribution for the six months ended 30 June 2017 of 15.6 cents per stapled security paid on 31 August 2017 Interim ordinary distribution for the six months ended 31 December 2016 of 14.4 cents per stapled security paid on 28 February 2017 Total distributions/dividends paid and payable to stapled securityholders Distributions paid and payable to DCSF non-controlling interests Total distributions/dividends paid and payable Charter Hall Group Charter Hall Property Trust Group 2018 $’m 2017 $’m 2018 $’m 2017 $’m 75.5 72.6 – – 148.1 0.8 148.9 – – 72.7 59.4 132.1 – 132.1 49.8 43.8 – – 93.6 0.8 94.4 – – 72.7 59.4 132.1 – 132.1 Franking credits available in the parent entity (Charter Hall Limited) for dividends payable in subsequent financial years based on a tax rate of 30% (2017: 30%) are $35.7 million (2017: $29.0 million). These amounts are calculated from the balance of the franking account as at the end of the reporting period, adjusted for franking credits and debits that will arise from the settlement of liabilities or receivables for income tax and dividends after the end of the year. 67 Charter Hall Group Annual Report 2018 8 Earnings per stapled security (a) Basic earnings per security attributable to: Equity holders of Charter Hall Limited Equity holders of Charter Hall Property Trust (non-controlling interest) Stapled securityholders of Charter Hall Group (b) Diluted earnings per security attributable to: Equity holders of Charter Hall Limited Equity holders of Charter Hall Property Trust (non-controlling interest) Stapled securityholders of Charter Hall Group Charter Hall Group Charter Hall Property Trust Group 2018 Cents 2017 Cents 2018 Cents 2017 Cents 16.1 37.6 53.7 16.0 37.4 53.4 2018 $’m 9.4 51.8 61.2 9.3 51.4 60.7 2017 $’m n/a 37.6 n/a n/a 37.4 n/a 2018 $’m n/a 51.8 n/a n/a 51.4 n/a 2017 $’m (c) Reconciliations of earnings used in calculating earnings per stapled security Equity holders of Charter Hall Limited 75.0 39.6 n/a n/a Profit attributable to the ordinary stapled securityholders of the Group used in calculating basic and diluted earnings per stapled security 250.2 257.6 175.2 218.0 (d) Weighted average number of stapled securities used as the denominator Weighted average number of ordinary stapled securities used as the denominator in calculating basic earnings per stapled security Adjustments for calculation of diluted earnings per stapled security: Performance rights Service rights Weighted average number of ordinary stapled securities and potential ordinary stapled securities used as the denominator in calculating diluted earnings per stapled security (e) Information concerning the classification of securities 2018 Number 2017 Number 2018 Number 2017 Number 465,777,131 420,838,262 465,777,131 420,838,262 2,381,990 420,802 2,881,070 546,854 2,381,990 420,802 2,881,070 546,854 468,579,923 424,266,186 468,579,923 424,266,186 Performance rights, service rights issued under the Charter Hall Performance Rights and Options Plan The performance and service rights are unquoted securities. Conversion to stapled securities and vesting to executives is subject to performance and/or service conditions. Stapled securities issued under the General Employee Securities Plan (GESP) Stapled securities issued under the GESP are purchased on market on behalf of eligible employees but held in trust until the earlier of the completion of three years’ service or termination. No adjustment to diluted earnings per stapled security is required under the GESP. 9 Cash and cash equivalents Cash at bank and on hand Charter Hall Group 2018 $’m 94.9 2017 $’m 174.4 Charter Hall Property Trust Group 2018 $’m 32.8 2017 $’m 53.4 These amounts earn fixed and floating interest rates of between 1.6% and 1.8% (2017: 1.6% and 2.5%). 68 DIRECTORS’ REPORTFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 10 Receivables and other assets Current Trade receivables Loans to joint ventures Loans to associates Distributions receivable Other receivables Prepayments Non-current Loan receivable from Charter Hall Limited Note 29(e) 29(e) Charter Hall Group Charter Hall Property Trust Group 2018 $’m 29.7 25.8 – 41.0 1.7 0.7 98.9 – – 2017 $’m 27.9 8.5 0.8 27.4 0.9 0.7 66.2 – – 2018 $’m 5.9 16.3 – 27.4 0.8 – 50.4 – – 2017 $’m 2.7 – 0.8 26.3 0.1 – 29.9 73.2 73.2 (a) Bad and doubtful trade receivables During the year, the Charter Hall Group and Charter Hall Property Trust Group incurred $nil expense (2017: $nil) in respect of provisioning for bad and doubtful trade receivables. (b) Fair values Receivables are carried at amounts that approximate their fair value. (c) Credit risk There is a limited concentration of credit risk as the majority of current and non-current receivables are due from related parties of Charter Hall Group and Charter Hall Property Trust Group. Refer to Note 27 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: Current 1 to 3 months 3 to 6 months More than 6 months Charter Hall Group Charter Hall Property Trust Group 2018 $’m 29.7 – – – 29.7 2017 $’m 27.8 – 0.1 – 27.9 2018 $’m 5.9 – – – 5.9 2017 $’m 2.7 – – – 2.7 As at 30 June 2018, Charter Hall Group had trade receivables of $nil (2017: $0.1 million) past due but not impaired. Charter Hall Property Trust had $nil receivables past due (2017: $nil). 11 Assets classified as held for sale In June 2018, the Group’s interest in Commercial and Industrial Property Pty Ltd (CIP), a property development company, met the criteria to be reclassified as a held for sale asset. Immediately prior to the reclassification, $7.3 million of accumulated impairment losses were reversed to reflect its fair value less costs to sell. CIP Charter Hall Group Charter Hall Property Trust Group 2018 $’m 17.7 2017 $’m – 2018 $’m – 2017 $’m – Valuation basis Assets held for sale are carried at the lower of book value and fair value less costs to sell, representing the amount at which the assets could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm’s length transaction at the date of valuation. 69 Charter Hall Group Annual Report 2018 12 Derivative financial instruments Non-current liabilities Cross currency interest rate swaps Charter Hall Group Charter Hall Property Trust Group 2018 $’m 1.4 2017 $’m 2018 $’m 2017 $’m – 1.4 – Cross currency interest rate swaps In May 2018, the Group entered into A$/US$ cross currency interest rate swap agreements that hedge the Group’s exposure to foreign currency and interest rate fluctuations arising from a US Private Placement (USPP) note issuance to be funded in August 2018. The swap agreements entitle the Group to receive interest, at semi-annual intervals, at a fixed rate on a notional principal amount of US$175.0 million and oblige it to pay, at quarterly intervals, at a floating rate on a notional principal amount of A$231.5 million. The swap agreements mature in May 2028. 13 Investments accounted for using the equity method Investments in associates Investments in joint venture entities Charter Hall Group Charter Hall Property Trust Group Note 31 32 2018 $’m 1,336.6 280.5 1,617.1 2017 $’m 1,218.1 258.5 1,476.6 2018 $’m 1,262.8 280.5 1,543.3 2017 $’m 1,147.3 239.0 1,386.3 Investments in associates represent units in listed and unlisted Charter Hall managed funds which are accounted for using the equity method. Refer to Note 31(a) for carrying value of investments in associates. Investments in joint venture entities represent joint venture interests in Australia which are accounted for using the equity method. Refer to Note 32(a) for carrying value of investments in joint venture entities. 14 Investment properties The Group’s controlled entity investment fund, Charter Hall Direct Diversified Consumer Staples Fund, has a portfolio of investment properties which are consolidated into the Group’s balance sheet. A reconciliation of the carrying amount of investment properties at the beginning and end of the year is set out below: Opening balance Additions Acquisition costs incurred Revaluation decrement attributable to acquisition costs Gain/(loss) on property revaluation Straightlining of rental income Disposals Closing balance Charter Hall Group Charter Hall Property Trust Group 2018 $’m 40.4 27.5 1.4 (1.4) 0.7 0.3 (5.5) 63.4 2017 $’m – 108.3 – – (0.7) – (67.2) 40.4 2018 $’m 40.4 27.5 1.4 (1.4) 0.7 0.3 (5.5) 63.4 2017 $’m – 41.1 – – (0.7) – – 40.4 Key valuation assumptions used in the determination of the investment properties’ fair value and the Group’s valuation policy are disclosed in Note 28. Leasing arrangements The investment properties, excluding development properties, are leased to tenants under long-term operating leases with rentals payable monthly. Minimum lease payments under non-cancellable operating leases of investment properties not recognised in the financial statements are receivable as follows: 70 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 Due within one year Due between one and five years Over five years Charter Hall Group Charter Hall Property Trust Group 2018 $’m 4.4 17.8 20.0 42.2 2017 $’m 2.4 7.2 12.7 22.3 2018 $’m 4.4 17.8 20.0 42.2 2017 $’m 2.4 7.2 12.7 22.3 15 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 (now Charter Hall Office Trust), Macquarie CountryWide Trust (now Charter Hall Retail REIT) and Macquarie Direct Property Fund (now Charter Hall Direct Office 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 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. On 1 May 2012, Charter Hall Office REIT (CQO) was privatised and CQO changed from a listed REIT to a wholesale unit trust (CHOT) with liquidity reviews every five years. In November 2016, CHOT’s investors agreed to extend the life of the fund by three years to 30 April 2020. The amortisation period for the CHOT management rights has also been extended prospectively by three years. The Group is amortising the associated intangible assets over a nine year period from 1 May 2012, which includes an additional year to source liquidity were the fund to be wound up as a result of a liquidity review. On 15 August 2012, a subsidiary of the Group paid the previous manager of Charter Hall Direct PFA Fund (PFA) to facilitate the appointment of a Group subsidiary as the responsible entity of PFA. As PFA is an open ended fund with no termination date or review event contemplated in its constitution, these facilitation payments have been treated as an intangible asset which is considered to have an indefinite useful life. Indefinite life intangibles Charter Hall Retail REIT Opening and closing balance Charter Hall Direct Office Fund Opening and closing balance Charter Hall Direct PFA Fund Opening balance Reversal of impairment Closing balance Total indefinite life intangibles Finite life intangibles Charter Hall Office Trust Opening balance Amortisation charge Closing balance At balance date Cost Accumulated amortisation Total finite life intangibles Total intangible assets Charter Hall Group Charter Hall Property Trust Group 2018 $’m 2017 $’m 2018 $’m 2017 $’m 42.3 42.3 7.4 5.2 – 5.2 7.4 4.4 0.8 5.2 54.9 54.9 10.5 (2.7) 7.8 50.3 (42.5) 7.8 62.7 15.6 (5.1) 10.5 50.3 (39.8) 10.5 65.4 – – – – – – – – – – – – – – – – – – – – – – – – 71 Charter Hall Group Annual Report 2018 15 Intangible assets continued All indefinite life intangible assets recognised on the consolidated balance sheet are subject to an annual impairment assessment. The impairment assessments support the carrying values and the methodology applied is an assessment of value in use based on discounted cash flows. Key assumptions used for the indefinite life intangible impairment calculations are as follows: • cash flow projections covering a three year period based on financial budgets approved by management. Cash flows beyond the three year period are extrapolated using estimated growth rates appropriate for the business; • pre-tax discount rate range of 14–16% (2017: 14–16%) which is in excess of the Group’s weighted average cost of capital; • growth after three years of 2–3% (2017: 2–3%) per annum; and • terminal value multiple of 7.0–8.0 times earnings (2017: 7.0–8.0 times). Impairment is tested at the cash generating unit (CGU) level being each fund which generates management fee income. 16 Property, plant and equipment Opening net book amount Additions Depreciation charge Closing net book amount At balance date Cost Accumulated depreciation Net book amount 17 Deferred tax assets and liabilities Deferred tax assets comprises temporary differences attributable to: Tax losses carried forward1 Deferred tax assets comprises temporary differences attributable to: Employee benefits Other Deferred tax liabilities comprises temporary differences attributable to: Intangible assets Investment in associates Other Charter Hall Group 2018 $’m 18.8 5.6 (3.5) 20.9 33.4 (12.5) 20.9 2017 $’m 14.9 7.4 (3.5) 18.8 29.3 (10.5) 18.8 Charter Hall Group 2018 $’m 1.6 12.9 0.9 13.8 17.2 8.1 2.5 27.8 2017 $’m 1.6 11.9 0.5 12.4 18.1 6.4 1.6 26.1 Net deferred tax liabilities (14.0) (13.7) Charter Hall Property Trust Group 2018 $’m 2017 $’m – – – – – – – – – – – – – – Charter Hall Property Trust Group 2018 $’m 2017 $’m – – – – – – – – – – – – – – – – – – 1 Tax losses carried forward in 2017 were acquired following the acquisition of Charter Hall Opportunity Fund No. 5 (CHOF5) as a wholly owned entity. CHOF5 does not form part of the Charter Hall tax consolidated group and therefore is not included in the net deferred tax liability balance on the balance sheet. 72 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 A reconciliation of the carrying amount of deferred tax assets for the tax consolidated group at the beginning and end of the current and previous years is set out below: Charter Hall Group Balance at 1 July 2016 (Charged)/credited to income statement (Charged)/credited to directly to equity Balance at 30 June 2017 (Charged)/credited to income statement (Charged)/credited directly to equity Balance at 30 June 2018 Note 6 6 Tax losses carried forward $’m Employee benefits $’m 1.5 (1.5) – – – – – 9.1 1.5 1.3 11.9 0.7 0.3 12.9 Other $’m 1.3 (0.8) – 0.5 0.4 – 0.9 Total $’m 11.9 (0.8) 1.3 12.4 1.1 0.3 13.8 A reconciliation of the carrying amount of deferred tax liabilities for the tax consolidated group at the beginning and end of the current and previous years is set out below: Note 6 6 Intangible assets $’m Investment in associate $’m 14.9 3.2 18.1 (0.9) 17.2 5.4 1.0 6.4 1.7 8.1 Other $’m 0.9 0.7 1.6 0.9 2.5 Total $’m 21.2 4.9 26.1 1.7 27.8 Charter Hall Group Charter Hall Property Trust Group 2018 $’m 1.3 3.0 75.5 1.8 4.1 24.1 1.6 1.3 2017 $’m 1.1 3.3 72.7 0.8 3.5 21.7 4.5 1.1 112.7 108.7 – 5.3 5.3 – 6.5 6.5 2018 $’m – 0.8 49.8 (0.1) – – 0.1 – 50.6 17.7 – 17.7 2017 $’m – 0.5 72.7 (0.2) – – 3.9 – 76.9 – – – Charter Hall Group Balance at 1 July 2016 Charged/(credited) to income statement Balance at 30 June 2017 Charged/(credited) to income statement Balance at 30 June 2018 18 Trade and other payables Current Trade payables Accruals Distribution payable GST payable Annual leave liability Employee benefits liability Other payables Lease incentive liability Non-current Loan payable to Charter Hall Limited Lease incentive liability All current liabilities are expected to be settled within 12 months. 73 Charter Hall Group Annual Report 2018 19 Provisions Current Employee benefits – long service leave Non-current Employee benefits – long service leave 20 Borrowings Current assets Movement in fair value of USPP commitment attributable to the hedged position Non-current liabilities Cash advance facilities (DCSF) Less: unamortised transaction costs Charter Hall Group 2018 $’m 1.5 1.6 2017 $’m 1.9 1.3 Charter Hall Property Trust Group 2018 $’m 2017 $’m – – – – Charter Hall Group Charter Hall Property Trust Group 30 Jun 2018 $’m 30 Jun 2017 $’m 30 Jun 2018 $’m 30 Jun 2017 $’m 2.2 2.2 5.4 (1.8) 3.6 – – – – – 2.2 2.2 5.4 (1.8) 3.6 – – – – – Charter Hall Property Trust Group In May 2018, the Group completed several key initiatives to restructure its debt platform: • Debt facility was refinanced with a new unsecured $200 million credit facility plus an additional $20 million unsecured facility to support the bank guarantees with the maturity date changing to May 2023. • US$175 million (A$231.5 million) US Private Placement (USPP) issuance: – 10 year duration. – Funding to occur on 24 August 2018. – Fixed US$ coupon of 4.61% which is 100% hedged in Australian dollars (principal plus interest), with A$ interest payable of BBSW + 2.05% margin. At 30 June 2018, drawn borrowings of $nil (30 June 2018: $nil) and bank guarantees of $14.3 million (30 June 2018: $14.3 million) had been utilised under these facilities, which under the terms of the agreements reduce the available facilities. No liability is recognised for bank guarantees. Movement in fair value of USPP commitment attributable to the hedged position This adjustment reflects movement in the fair value of an unrecognised firm commitment to issue USPP notes which offsets the change in fair value of cross currency swaps designated as a fair value hedge. DCSF Facility The fund has two revolving debt facilities of A$25.0 million and NZ$7.0 million. The facilities were established in November 2017 with a maturity date of November 2020. At 30 June 2018, drawn borrowings of NZ$6.0 million had been utilised under this facility. The NZ$6.0 million drawn borrowings translated into A$5.4 million are presented on the balance sheet net of A$1.8 million of unamortised transaction costs under the CHPT facility. The carrying amounts of assets pledged as security for borrowings are: Non-current First ranking security Investments in associates – Charter Hall Property Trust Investment properties – DCSF Total non-current assets pledged as security 74 Charter Hall Group Charter Hall Property Trust Group 2018 $’m – 63.4 63.4 2017 $’m 1,416.0 – 1,416.0 2018 $’m – 63.4 63.4 2017 $’m 1,416.0 – 1,416.0 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 (a) Financial arrangements The Charter Hall Group and Charter Hall Property Trust Group had unrestricted access at reporting date to the following lines of credit: Charter Hall Property Trust (CHPT) Total facilities Drawn balance for bank guarantees Balance available for drawing Charter Hall Direct Diversified Consumer Staples Fund (DCSF) Cash advance facilities Drawn balance Balance available for drawing Total balance available for drawing Charter Hall Group Charter Hall Property Trust Group 2018 $m 220.0 (14.3) 205.7 31.3 (5.4) 25.9 2017 $m 125.0 (14.3) 110.7 – – – 2018 $m 220.0 (14.3) 205.7 31.3 (5.4) 25.9 2017 $m 125.0 (14.3) 110.7 – – – 231.6 110.7 231.6 110.7 (b) Gearing 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 total assets with both net of cash and cash equivalents. The gearing ratio of the Charter Hall Group at 30 June 2018 was nil % (30 June 2017: nil %) and Charter Hall Property Trust Group nil % (30 June 2017: nil %). 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 monitoring compliance with covenants. (c) Net debt reconciliation This section sets out an analysis of net debt and the movements in net debt for each of the periods presented. Charter Hall Group 2018 Bank debt Borrowing costs Fair value of USPP commitment Cash Charter Hall Property Trust Group 2018 Bank debt Borrowing costs Funding received from CHL Fair value of USPP commitment Cash Movement in derivatives and foreign exchange $’m Movement in borrowing costs $’m Opening balance $’m Movement in cash $’m Closing balance $’m – – – (174.4) (174.4) – – (73.2) – (53.4) (126.6) – – (2.2) – (2.2) – – – (2.2) – (2.2) – (1.8) – – (1.8) – (1.8) – – – (1.8) 5.4 – – 79.5 84.9 5.4 – 90.9 – 20.6 116.9 5.4 (1.8) (2.2) (94.9) (93.5) 5.4 (1.8) 17.7 (2.2) (32.8) (13.7) 75 Charter Hall Group Annual Report 2018 21 Contributed equity (a) Security capital Charter Hall Limited Charter Hall Property Trust 2018 Securities 2017 Securities Ordinary securities – stapled securities, fully paid 465,777,131 465,777,131 (b) Movements in ordinary stapled security capital 2018 $’m 285.7 1,453.5 1,739.2 2017 $’m 285.0 1,456.9 1,741.9 Details Opening balance at 1 July 2016 Buyback and issuance of securities for exercised performance and service rights1 Tax recognised directly in equity Issued under institutional placement2 Closing balance at 30 June 2017 Less: transaction costs on stapled security issues Closing balance per accounts at 30 June 2017 Buyback and issuance of securities for exercised performance and service rights3 Tax recognised directly in equity Balance at 30 June 2018 Less: transaction costs on stapled security issues Number of securities1 Weighted average issue price Charter Hall Limited $’m Charter Hall Property Trust $’m Total $’m 412,717,802 – – 53,059,329 465,777,131 465,777,131 $2.63 $5.48 – – $2.83 465,777,131 256.1 1,201.4 1,457.5 (0.3) 0.9 28.7 285.4 (0.4) 285.0 (0.4) 1.1 285.7 – 285.7 (2.5) – 262.0 1,460.9 (4.0) 1,456.9 (3.3) – 1,453.6 (0.1) 1,453.5 (2.8) 0.9 290.7 1,746.3 (4.4) 1,741.9 (3.7) 1.1 1,739.3 (0.1) 1,739.2 Balance per accounts at 30 June 2018 465,777,131 1 879,616 stapled securities bought on market at an average value of $5.74, offset by the exercise of 445,518 performance rights with a fair value of $1.16 and 434,098 service rights with an average value of $4.11. 2 53,059,329 stapled securities issued under Institutional Placement and Security Purchase Plan in May 2017 with an issue price of $5.48. 3 1,356,889 stapled securities bought on market at an average value of $5.58, offset by the exercise of 918,240 performance rights with a fair value of $2.09 and 438,649 service rights with an average value of $4.37. (c) Ordinary stapled securities Ordinary stapled securities entitle the holder to participate in distributions/dividends and the proceeds on winding up of the Company/Trust in proportion to the number of and amounts paid on the stapled securities held. On a show of hands, every holder of ordinary stapled securities present at a meeting in person or by proxy is entitled to one vote and upon a poll, each holder is entitled to one vote per security that they hold. (d) Distribution Re-investment Plan The Group has established a Distribution Re-investment Plan (DRP) under which holders of ordinary stapled securities may elect to have all or part of their distribution satisfied by the issue of new ordinary stapled securities rather than by being paid in cash. The DRP was suspended for the distribution paid on 25 August 2016 and subsequent distributions. 76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 22 Non-controlling interests During the period, the Group reduced its holding in the Charter Hall Direct Diversified Consumer Staples Fund from 100% to 61.3%. The proceeds on redemption were $12.4 million, received in cash. The difference between the redemption proceeds and amount transferred to non-controlling interests of $0.3 million has been recognised directly in equity. Summarised balance sheet Current assets Current liabilities Current net assets Non-current assets Non-current liabilities Non-current net assets Net assets Accumulated non-controlling interest Summarised statement of comprehensive income Revenue Profit for the period Other comprehensive loss Total comprehensive income Comprehensive income allocated to non-controlling interest 23 Reserves Business combination reserve Security-based benefits reserve Cash flow hedge reserve Transactions with non-controlling interests Other reserves Charter Hall Limited Charter Hall Property Trust Charter Hall Group Charter Hall Property Trust Group 2018 $’m 34.4 0.4 34.0 63.4 5.3 58.1 92.1 35.6 2018 $’m 4.2 3.3 (0.5) 2.8 1.0 2017 $’m – – – 39.9 – 39.9 39.9 – 2017 $’m – – – – – 2018 $’m 34.4 0.4 34.0 63.4 5.3 58.1 92.1 35.6 2018 $’m 4.2 3.3 (0.5) 2.8 1.0 2017 $’m – – – 39.9 – 39.9 39.9 – 2017 $’m – – – – – Charter Hall Group Charter Hall Property Trust Group 2018 $’m (52.0) 4.9 1.2 0.4 1.3 (44.2) (45.1) 0.9 (44.2) 2017 $’m (52.0) 5.7 – – 1.2 (45.1) (44.6) (0.5) (45.1) 2018 $’m – – 1.2 0.4 (0.7) 0.9 – 0.9 0.9 2017 $’m – – – – (0.5) (0.5) – (0.5) (0.5) 77 Charter Hall Group Annual Report 2018 23 Reserves continued Movements: Business combination reserve Opening and closing balance Security-based benefits reserve Opening balance Security-based benefits expense Transfer due to deferred compensation payable in performance rights Transferred to equity on options and performance rights exercised Transfer unvested securities to accumulated losses Closing balance Cash flow hedge reserve Opening balance Changes in the fair value of cash flow hedges Closing balance Transactions with non-controlling interests Opening balance Disposal of DCSF units at premium Closing balance Other reserves Opening balance Exchange differences on translation of foreign operations Equity accounted fair value movements in cash flow hedges Deferred tax asset recognised directly in equity Closing balance Charter Hall Group Charter Hall Property Trust Group 2018 $’m 2017 $’m 2018 $’m 2017 $’m (52.0) (52.0) 5.7 1.7 1.4 (3.9) – 4.9 – 1.2 1.2 – 0.4 0.4 1.2 (0.5) 0.3 0.3 1.3 6.5 1.4 1.4 (2.4) (1.2) 5.7 – – – – – – – – (0.5) 1.7 1.2 – – – – – – – 1.2 1.2 – 0.4 0.4 (0.5) (0.5) 0.3 – (0.7) – – – – – – – – – – – – – – (0.5) – (0.5) (a) 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. (b) Security based benefits reserve The security based benefits reserve is used to recognise the fair value of rights and options issued under the PROP. (c) Cash flow hedge reserve The cash flow hedge reserve is used to record gains or losses on derivatives that are designated and qualify as cash flow hedges and that are recognised in other comprehensive income. Amounts are reclassified to profit or loss when the associated hedged transaction affects profit or loss. (d) 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. 78 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 (e) Other reserves Exchange differences arising on translation of foreign controlled entities and the Charter Hall Group’s and Charter Hall Property Trust Group’s share of foreign exchange differences arising from the 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. Equity accounted fair value movements in cash flow hedges is the equity accounted portion of the gains or losses on hedging instruments in cash flow hedges that are determined to be an effective hedge relationship. Deferred tax credits recognised directly in equity relate to the excess of the expected future tax deduction on performance and service rights on issue over the cumulative fair value expensed to date. 24 Accumulated profits/(losses) Opening balance Profit for the year Distributions Transfer unvested securities to accumulated losses Deferred tax asset recognised directly to equity Closing balance Charter Hall Limited Charter Hall Property Trust Closing balance Charter Hall Group Charter Hall Property Trust Group 2018 $’m 25.5 250.2 (148.1) – – 127.6 (33.6) 161.2 127.6 2017 $’m (100.8) 257.6 (132.1) 1.2 (0.4) 25.5 (54.1) 79.6 25.5 2018 $’m 79.6 175.2 (93.6) – – 161.2 – 161.2 161.2 2017 $’m (6.3) 218.0 (132.1) – – 79.6 – 79.6 79.6 25 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 non-related audit firms: (a) Audit services PricewaterhouseCoopers – Australian Firm Audit and review of financial reports Other assurance services Total remuneration for audit services (b) Taxation services PricewaterhouseCoopers – Australian Firm Taxation services Total remuneration for taxation services (c) Advisory services PricewaterhouseCoopers – Australian Firm Sustainability Accounting advice Total remuneration for advisory services Charter Hall Group Charter Hall Property Trust Group 2018 $ 2017 $ 2018 $ 2017 $ 290,829 10,000 300,829 304,750 18,000 322,750 57,222 57,222 135,781 135,781 76,698 53,252 129,950 – – – 6,961 – 6,961 1,132 1,132 – – – 7,000 – 7,000 – – – – – 79 Charter Hall Group Annual Report 2018 26 Reconciliation of profit after tax to net cash inflow from operating activities Profit after tax for the year Non-cash items: Amortisation and impairment of intangibles (Reversal)/impairment of joint ventures Depreciation and amortisation Non-cash security-based benefits expense Net gain on sale of investments, property and derivatives Fair value adjustments Straightlining of rental income Unrealised net loss on derivative financial instruments Change in assets and liabilities, net of effects from purchase of controlled entity: Increase in trade debtors and other receivables Increase/(decrease) in trade creditors and accruals Share of net profits from equity accounted investments in associates and joint ventures (Increase)/decrease for net deferred income tax Net cash inflow from operating activities Charter Hall Group Charter Hall Property Trust Group 2018 $’m 251.2 2.7 (7.3) 4.6 1.8 – (0.8) (0.3) 0.4 (3.8) 4.7 (81.1) (3.0) 169.1 2017 $’m 257.6 4.3 10.5 3.6 1.4 (3.2) 0.7 – – (11.5) 20.1 (129.9) 2.7 156.3 2018 $’m 176.2 – – 0.3 – – (0.8) (0.3) 0.4 (3.5) (0.9) (74.6) – 96.8 2017 $’m 218.0 – – 0.1 – (3.7) 0.7 – – (9.4) 0.1 (125.9) – 79.9 Distribution and interest income received on investments has been classified as cash flow from operating activities. 27 Capital and financial risk management (a) Capital risk management The key capital risk management objective of the Charter Hall Group and Charter Hall Property Trust Group is to optimise returns through the mix of available capital sources whilst complying with statutory and constitutional capital requirements, and complying with the covenant requirements of the finance facility. The capital management approach is regularly reviewed by management and the Board as part of the overall strategy. The capital mix can be altered by issuing new units, electing to have the DRP underwritten, adjusting the amount of distributions paid, activating a stapled security buyback program or selling assets. (b) 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 framework focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. From time to time, the Group uses derivative financial instruments such as interest rate swaps and option contracts to hedge certain risk exposures. Risk management is carried out by the Group Treasurer, the Chief Financial Officer and the Managing Director and Group CEO in consultation with senior management, the Audit, Risk and Compliance Committee and the Board of Directors. The Group Treasurer identifies, evaluates and hedges financial risks in close co-operation with the Chief Financial Officer. 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. 80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 (i) Market risk Unlisted unit 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 executives 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 respective fund board or investment committee and the Executive Property Valuation Committee. The following table 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 the Group’s investments with the relevant benchmark and market volatility. However, actual movements in the price may be greater or less than anticipated due to a number of factors. As a result, historic price variations are not a definitive indicator of future price variations. -10% +10% Carrying amount $’m Profit $’m Equity $’m Profit $’m Equity $’m Charter Hall Group 2018 Assets – Charter Hall Group Investments in associates at fair value through profit or loss 2017 Assets – Charter Hall Group Investments in associates at fair value through profit or loss Charter Hall Property Trust Group 2018 Assets – Charter Hall Property Trust Group Investments in associates at fair value through profit or loss 2017 Assets – Charter Hall Property Trust Group 32.4 (3.2) (3.2) 29.7 (3.0) (3.0) 32.4 (3.2) (3.2) Investments in associates at fair value through profit or loss 29.7 (3.0) (3.0) Cash flow and fair value interest rate risk The Charter Hall Group has no long-term interest bearing assets. 3.2 3.0 3.2 3.0 3.2 3.0 3.2 3.0 Charter Hall Property Trust has a loan payable to Charter Hall Limited which is an unsecured stapled loan maturing on 30 June 2021 with interest charged on an arm’s length basis. Refer to Note 29(e) for further details. The Charter Hall Group’s and Charter Hall Property Trust Group’s external interest rate risk arises from the $220 million loan facilities and the cross-currency interest rate swaps that convert its USPP interest rate exposure from fixed to variable. At 30 June 2018 no borrowings were drawn on these facilities (2017: $nil). 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 mitigate interest rate risk by ensuring that interest rates on core borrowings for the anticipated debt term match the use of those funds. Core borrowings are defined as being the level of borrowings that are expected to be held for a period of more than two years. 81 Charter Hall Group Annual Report 2018 27 Capital and financial risk management continued (b) Financial risk management continued Interest rate risk exposure (ii) The Group’s controlled subsidiary, Charter Hall Direct Diversified Consumer Staples Fund, has drawn debt of $5.4 million. This exposure is not considered to be material to the Group. The Group has no other drawn debt. The Charter Hall Property Trust’s exposure arises predominantly from an unsecured stapled loan maturing on 30 June 2021 payable to Charter Hall Limited bearing a variable interest rate. 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 and equity. Effective interest rate Fair value $’m Carrying amount $’m Profit $’m Equity $’m Profit $’m Equity $’m -1% +1% Charter Hall Group 2018 Financial assets Cash and cash equivalents Financial liabilities Interest bearing liabilities Total increase/(decrease) 2017 Financial assets Cash and cash equivalents Charter Hall Property Trust Group 2018 Financial assets Cash and cash equivalents Financial liabilities Loan payable to Charter Hall Ltd Interest bearing liabilities Total increase/(decrease) 2017 Financial assets Cash and cash equivalents Loan receivable from Charter Hall Ltd Total increase/(decrease) 1.8% 4.7% 94.9 5.4 94.9 5.4 (0.9) 0.1 (0.8) (0.9) 0.1 (0.8) 0.9 (0.1) 0.8 0.9 (0.1) 0.8 2.5% 174.4 174.4 (1.7) (1.7) 1.7 1.7 1.8% 7.8% 4.7% 2.5% 9.3% 32.8 17.7 5.4 53.4 73.2 32.8 17.7 5.4 53.4 73.2 (0.3) (0.3) 0.2 0.1 – (0.5) (0.7) (1.2) 0.2 0.1 – (0.5) (0.7) (1.2) 0.3 (0.2) (0.1) – 0.5 0.7 1.2 0.3 (0.2) (0.1) – 0.5 0.7 1.2 The fair value of interest bearing liabilities 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. (iii) Foreign exchange risk The Charter Hall Group’s principal exposure to foreign exchange risk arises from its investments in foreign subsidiaries and exposure to US Private Placement issuances denominated in US dollars. The major asset held by foreign subsidiaries is cash in foreign denominated bank accounts. Cross currency swaps are used to convert US dollar borrowings into Australian dollar exposure. 82 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 (c) 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. 56.8% of the Charter Hall Group’s income is derived from management fees, transaction and other fees from related parties. 40.6% of the Charter Hall Group’s income is derived from equity accounted investments in property funds and distributions from investments in property funds held at fair value through the profit and loss. The balance relates to interest income and gross rental income. 87.2% of the Charter Hall Property Trust Group’s income is derived from equity accounted investments in property funds and distributions from investments in property funds held at fair value through profit and loss. Where appropriate, tenants in the underlying property funds for Charter Hall Group and the Charter Hall Property Trust Group are assessed for creditworthiness, taking into account their financial position, past experience and other factors. Refer to Note 10(c) 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. (d) 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. 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. Charter Hall Group 2018 Trade and other payables Derivative financial instruments Net contractual amounts payable/(receivable) Total financial liabilities 2017 Trade and other payables Total financial liabilities Charter Hall Property Trust Group 2018 Trade and other payables Derivative financial instruments Net contractual amounts payable/(receivable) Total financial liabilities 2017 Trade and other payables Total financial liabilities Carrying amount $’m Less than one year $’m Between one and five years $’m Over five years $’m Total cash flows $’m 118.0 112.7 1.4 119.4 115.2 115.2 68.3 1.4 69.7 76.9 76.9 6.4 119.1 108.7 108.7 68.3 6.4 74.7 76.9 76.9 2.3 (2.9) (0.6) 1.1 1.1 – (2.9) (2.9) – – 3.0 5.2 8.2 5.3 5.3 – 5.2 5.2 – – 118.0 8.7 126.7 115.2 115.2 68.3 8.7 77.0 76.9 76.9 Offsetting financial assets and liabilities The Group is a party to the master franchise agreement as published by International Swaps and Derivative Associates, Inc. (ISDA) which allows the Group’s counterparties, under certain conditions (i.e. event of default), to set off the position owing/receivable under a derivative contract to a net position outstanding. As at 30 June 2018, there was a gross liability position of $1.4 million with no amounts subject to offset. As the Group does not have a legally enforceable right to set off, none of the financial assets or financial liabilities are offset on the balance sheet of the Group. 83 Charter Hall Group Annual Report 2018 28 Fair value measurement (a) Recognised fair value measurement The Charter Hall Group and the Charter Hall Property Trust Group measure and recognise the following assets and liabilities at fair value on a recurring basis: Investments in associates at fair value through profit and loss (refer to Note 7). • • Derivatives. • Investment properties. AASB 13 Fair Value Measurement 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). The following table presents the Charter Hall Group and Charter Hall Property Trust Group’s assets and liabilities measured and recognised at fair value: Charter Hall Group 30 June 2018 Investments in associates at fair value through profit and loss Investment properties Total assets Cross currency interest rate swaps Total liabilities 30 June 2017 Investments in associates at fair value through profit and loss Investment properties Total assets Charter Hall Property Trust Group 30 June 2018 Investments in associates at fair value through profit and loss Investment properties Total assets Cross currency interest rate swaps Total liabilities 30 June 2017 Investments in associates at fair value through profit and loss Investment properties Total assets Level 1 $’m Level 2 $’m Level 3 $’m – – – – – – – – – – – – – – – – – – – (1.4) (1.4) – – – – – – (1.4) (1.4) – – – 32.4 63.4 95.8 – – 29.7 40.4 70.1 32.4 63.4 95.8 – – 29.7 40.4 70.1 Total $’m 32.4 63.4 95.8 (1.4) (1.4) 29.7 40.4 70.1 32.4 63.4 95.8 (1.4) (1.4) 29.7 40.4 70.1 There have been no transfers between Level 1, Level 2 and Level 3 during the period. (b) Disclosed fair values 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. 84 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 (c) Valuation techniques used to derive Level 2 fair values Derivatives Derivatives are classified as level 2 on the fair value hierarchy as the inputs used to determine fair value are observable market data but not quoted prices. The fair value of cross currency interest rate swaps is determined using forward foreign exchange market rates and the present value of the estimated future cash flows at the balance date. Credit value adjustments are calculated based on the counterparty’s credit risk using the counterparty’s credit default swap curve as a benchmark. Debit value adjustments are calculated based on the Group’s credit risk using debt financing available to the Group as a benchmark. (d) Valuation techniques used to derive Level 3 fair values Investments in associates The fair value of investments in associates held at fair value through profit and loss, which are investments in unlisted securities, are determined giving consideration to the unit prices and net assets of the underlying funds. The unit prices and net asset values are largely driven by the fair values of investment properties and derivatives held by the funds. Recent arm’s length transactions, if any, are also taken into consideration. The fair value of investments in associates at fair value through profit or loss is impacted by the price per security of the investment. An increase to the price per security results in an increase to the fair value of the investment. Investment property The fair value measurement of investment property takes into account the Group’s ability to generate economic benefits by using the asset in its highest and best use. The use of independent external valuers is on a rotational basis at least once every 12 months, or earlier, where the Responsible Entity deems it appropriate or believes there may be a material change in the carrying value of the property. Where an independent valuation is not obtained, the fair value is determined using Discounted Cash Flow and income capitalisation methods. The table below identifies the inputs, which are not based on observable market data, used to measure the fair value (Level 3) of the investment properties: Adopted capitalisation rate (% p.a.) 6.0-7.8 6.8-8.5 Fair value $’m 63.4 40.4 Adopted terminal yield (% p.a.) 6.3-9.9 7.0-9.0 Adopted discount rate (% p.a.) 6.8-9.5 7.5-9.3 Definition A method in which a discount rate is applied to future expected income streams to estimate the present value. 2018 2017 Term Discounted Cash Flow (DCF) method Income capitalisation method A valuation approach that provides an indication of value by converting future cash flows to a single current capital value. Gross market rent The estimated amount for which an interest in real property should be leased to a major tenant on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. Capitalisation rate The return represented by the income produced by an investment, expressed as a percentage. Terminal yield A percentage return applied to the expected net income following a hypothetical sale at the end of the cash flow period. Discount rate A rate of return used to convert a future monetary sum or cash flow into present value. Movement in the inputs are likely to have an impact on the fair value of investment properties. An increase in gross market rent will likely lead to an increase in fair value. A decrease in adopted capitalisation rate, adopted terminal yield or adopted discount rate will likely lead to an increase in fair value. 85 Charter Hall Group Annual Report 2018 29 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 30. (c) Key management personnel The following persons were considered key management personnel (excluding Non-Executive Directors) during the year: Executive Director D Harrison Other key management personnel G Chubb S McMahon R Proutt A Taylor Former key management personnel P Ford1 1 Ceased being key management personnel on 14 September 2017. Below are the aggregate amounts paid or payable to key management personnel (including Non-Executive Directors): Salary and fees Non-Executive Director remuneration Short-term incentives Superannuation Value of securities vested Non-monetary benefits Termination benefits Charter Hall Group 2018 $’000 4,564 1,121 4,391 110 1,204 11 417 2017 $’000 3,988 949 3,976 108 931 24 893 11,818 10,869 Charter Hall Property Trust Group 2018 $’000 2017 $’000 – – – – – – – – – – – – – – – – 86 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 (d) Transactions with related parties The following income was earned from related parties during the year: Associates Accounting cost recoveries Marketing cost recoveries Transaction and performance fees Management and development fees Property management fees and cost recoveries Joint ventures Accounting cost recoveries Marketing cost recoveries Transaction and performance fees Management and development fees Property management fees and cost recoveries Other Accounting cost recoveries Marketing cost recoveries Transaction and performance fees Management and development fees Property management fees and cost recoveries Investment-related revenue Charter Hall Group 2018 $’000 8,043 2,281 41,011 84,312 49,068 676 210 7,280 10,241 6,444 1,680 98 7,977 12,512 2,813 – 2017 $’000 7,321 2,342 44,597 63,450 48,558 658 205 3,901 11,005 4,217 1,604 50 8,079 10,620 1,976 – The following balances arising through the normal course of business were due from related parties at balance date: 234,646 208,583 Associates Management fee receivables Other receivables Joint ventures Management fee receivables Other receivables Other Management fee receivables Other receivables Charter Hall Group 2018 $’000 8,535 11,570 636 3,067 924 1,301 26,033 2017 $’000 8,369 13,518 2,282 1,181 682 1,413 27,445 87 Charter Hall Property Trust Group 2018 $’000 2017 $’000 – – – – – – – – – – – – – – – – – – – – – – – – – 11,599 11,599 – – – – – 10,200 10,200 Charter Hall Property Trust Group 2018 $’000 2017 $’000 – – – – – – – – – – – – – – Charter Hall Group Annual Report 2018 29 Related parties continued (e) Loans to/(from) related parties Loans to joint ventures Opening balances Loans advanced Loan repayments received Closing balance Loans to other related parties Opening balances Loans advanced Loan repayments received Closing balance Loans to/(from) Charter Hall Limited Opening balance Loans advanced Loan repayments received Net interest charged Closing balance Charter Hall Group Charter Hall Property Trust Group 2018 $’000 8,500 17,800 (500) 25,800 750 – (750) – – – – – – 2017 $’000 6,500 2,000 – 8,500 2,586 19,398 (21,234) 750 2018 $’000 – 16,300 – 16,300 750 – (750) – – – – – – 73,175 163,688 (256,952) 2,403 (17,686) 2017 $’000 – – – – 2,586 19,398 (21,234) 750 139,860 397,897 (473,321) 8,739 73,175 No provisions for doubtful debts have been raised in relation to any outstanding balances. The loan to/(from) CHL comprises an unsecured stapled loan maturing on 30 June 2021. Interest is charged on an arm’s length basis which, at 30 June 2018, amounted to a weighted average rate of 8.3% (June 2017: 9.3%). (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 $1,917,000 (2017: $1,382,000). At 30 June 2018, related fees payable amounted to $471,000 (2017: $414,000). 88 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 30 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 CH La Trobe Trust Controlled entities of Charter Hall Holdings Pty Ltd Bieson Pty Limited Brisbane Square Holdings Pty Limited Brisbane Square Pty Limited Charter Hall (NZ) Pty Limited Charter Hall Asset Services Pty Limited Charter Hall Development Services Pty Ltd Charter Hall Direct Property Management Limited Charter Hall Escrow Agent Pty Limited Charter Hall Funds Management Limited Charter Hall Holdings Investment Trust Charter Hall Holdings Real Estate Pty Limited Charter Hall International Office Pty Limited1 Charter Hall Investment Management Limited Charter Hall Nominees Pty Limited Charter Hall Office Collins Street Pty Limited Charter Hall Office Investments Pty Limited1 Charter Hall Opportunity Fund No. 5 Charter Hall Opportunity Fund No. 5 Bringelly Trust Charter Hall Real Estate Europe Limited2 Charter Hall Real Estate Inc 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 and NT) 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 Limited Charter Hall WALE Limited Charter Hall Wholesale Management Limited CHLWR No. 1 Pty Ltd CHLWR No. 2 Pty Ltd CHREI US Office LLC CHREI US Retail LLC Dorcasia Pty Limited3 Visokoi Pty Limited Votraint No. 1622 Pty Limited Country of incorporation Principal activity Class of securities 2018 % 2017 % Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia UK USA Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia USA USA Australia Australia Australia Property management Property investment Ordinary Ordinary Trustee company Trustee company Trustee company Property management Property management Property management Responsible entity Holding company Responsible entity Holding company Holding company Holding company Responsible entity Trustee company Holding company Holding company Property development Property development Property management Property management Property management Property management Property management Property management Property management Property management Property management Responsible entity Responsible entity Responsible entity Holding company Holding company Property management Property management Trustee company Trustee company Trustee company 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 1 Charter Hall International Office Pty Limited and Charter Hall Office Investments Pty Limited were de-registered in July 2017. 2 Charter Hall Real Estate Europe Limited was dissolved in July 2017. 3 Dorcasia Pty Limited was acquired in April 2018. 89 Charter Hall Group Annual Report 2018 30 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 Chester Hill Trust4 Charter Hall Co-Investment Trust5 Charter Hall Co-Investment Trust 26 Charter Hall Direct Diversified Consumer Staples Fund CHC CDC Holding Trust CHPT RP2 Trust DCSF NZ Trust 50 Franklin Street Trust7 Country of incorporation Principal activity Class of securities 2018 % 2017 % Property investment Australia Property investment Australia Property investment Australia Property investment Australia Property investment Australia Australia Property investment New Zealand Property investment Australia Property investment Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 61 100 100 61 100 – 100 – 100 100 100 100 – 4 Charter Hall Chester Hill Trust was established in May 2018. 5 Charter Hall Co-Investment Trust is an entity which was set up by Charter Hall Property Trust to hold its investments in Charter Hall Retail REIT (CQR), Charter Hall Office Trust (CHOT), BP Fund 1 (BP1), BP Fund 2 (BP2), Core Logistics Partnership (CLP), TTP Wholesale Fund (TTP), Retail Partnership No. 6 Trust (RP6), Charter Hall Prime Retail Fund (CPRF), Brisbane Square Wholesale Fund (BSWF) and Charter Hall Long WALE REIT (CLW). 6 Charter Hall Co-Investment Trust 2 is an entity which was set up by Charter Hall Property Trust to hold its investment in Charter Hall Prime Office Fund (CPOF). 7 50 Franklin Street Trust was established in December 2017. (b) Details of controlled entities of the Charter Hall Property Trust Group Name of entity Controlled entities of Charter Hall Property Trust Charter Hall Chester Hill Trust1 Charter Hall Co-Investment Trust2 Charter Hall Co-Investment Trust 23 Charter Hall Direct Diversified Consumer Staples Fund CHC CDC Holding Trust CHPT RP2 Trust DCSF NZ Trust 50 Franklin Street Trust4 Country of incorporation Principal activity Class of securities 2018 % 2017 % Property investment Australia Property investment Australia Property investment Australia Property investment Australia Property investment Australia Australia Property investment New Zealand Property investment Australia Property investment Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 61 100 100 61 100 – 100 – 100 100 100 100 – 1 Charter Hall Chester Hill Trust was established in May 2018. 2 Charter Hall Co-Investment Trust is an entity which was set up by Charter Hall Property Trust to hold its investments in Charter Hall Retail REIT (CQR), Charter Hall Office Trust (CHOT), BP Fund 1 (BP1), BP Fund 2 (BP2), Core Logistics Partnership (CLP), TTP Wholesale Fund (TTP), Retail Partnership No. 6 Trust (RP6), Charter Hall Prime Retail Fund (CPRF), Brisbane Square Wholesale Fund (BSWF) and Charter Hall Long WALE REIT (CLW). 3 Charter Hall Co-Investment Trust 2 is an entity which was set up by Charter Hall Property Trust to hold its investment in Charter Hall Prime Office Fund (CPOF). 4 50 Franklin Street Trust was established in December 2017. 90 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 31 Investments in associates (a) Carrying amounts Information relating to associates is set out below. All associates are incorporated and operate in Australia. Unless otherwise noted all associates have a 30 June year end. Charter Hall Group Name of entity Accounted for at fair value through profit or loss:1 Unlisted Charter Hall Direct Industrial Fund No. 4 Charter Hall Direct WorkZone Trust Charter Hall Direct PFA Fund Equity accounted Unlisted Charter Hall Prime Office Fund Charter Hall Office Trust2 Core Logistics Partnership Charter Hall Prime Industrial Fund Long WALE Investment Partnership Charter Hall Counter Cyclical Trust Retail Partnership No. 2 Trust Listed Charter Hall Retail REIT3 Charter Hall Long WALE REIT4 Total investments in associates Principal activity Property investment Property investment Property investment Property investment Property investment Property investment Property investment Property investment Property investment Property investment Property investment Property investment Ownership interest Carrying amount 2018 % 2017 % 2018 $’m 2017 $’m 16.4 2.0 0.1 8.4 15.7 13.8 5.9 5.0 5.0 5.0 18.7 20.4 21.2 – 0.1 10.5 14.3 13.8 6.0 5.0 – 5.0 18.6 20.0 30.8 1.4 0.2 32.4 258.8 246.4 148.8 121.0 21.1 11.2 6.5 29.5 – 0.2 29.7 236.4 212.9 139.2 117.1 19.0 – 6.3 327.6 195.2 1,336.6 1,369.0 321.2 166.0 1,218.1 1,247.8 1 These investments comprise units in certain unlisted Charter Hall managed funds which have been designated at fair value through profit or loss. Changes in fair values of investments in associates at fair value through profit or loss are recorded in fair value adjustments in the consolidated statement of comprehensive income. 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 27 Capital and financial risk management. 2 The entity has a 31 December balance date. 3 Fair value at the ASX closing price as at 30 June 2018 was $315.6 million (30 June 2017: $306.6 million). 4 Fair value at the ASX closing price as at 30 June 2018 was $208.6 million (30 June 2017: $171.2 million). 91 Charter Hall Group Annual Report 2018 31 Investments in associates continued (a) Carrying amounts continued Charter Hall Property Trust Group Name of entity Accounted for at fair value through profit or loss: Unlisted Charter Hall Direct Industrial Fund No. 41 Charter Hall Direct WorkZone Trust Charter Hall Direct PFA Fund Principal activity Property investment Property investment Property investment Equity accounted Unlisted Charter Hall Office Trust2 Charter Hall Prime Office Fund Core Logistics Partnership Charter Hall Prime Industrial Fund Long WALE Investment Partnership Charter Hall Counter Cyclical Trust Retail Partnership No. 2 Trust Charter Hall Opportunity Fund No. 5 Listed Charter Hall Retail REIT3 Charter Hall Long WALE REIT4 Total investments in associates Property investment Property investment Property investment Property investment Property investment Property investment Property investment Property development Property investment Property investment Ownership interest Carrying amount 2018 % 2017 % 2018 $’m 2017 $’m 16.4 2.0 0.1 15.7 7.9 13.8 2.8 5.0 5.0 5.0 7.5 18.7 20.4 21.2 – 0.1 14.3 10.0 13.8 2.9 5.0 – 5.0 7.5 18.6 20.0 30.8 1.4 0.2 32.4 246.4 244.1 148.8 58.3 21.1 11.2 6.5 3.6 29.5 – 0.2 29.7 212.9 223.0 139.2 56.4 19.0 – 6.3 3.3 327.6 195.2 1,262.8 1,295.2 321.2 166.0 1,147.3 1,177.0 1 These investments comprise units in certain unlisted Charter Hall managed funds which have been designated at fair value through profit or loss. Changes in fair values of investments in associates at fair value through profit or loss are recorded in fair value adjustments in the consolidated statement of comprehensive income. 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 27 Capital and financial risk management. 2 The entity has a 31 December balance date. 3 Fair value at the ASX closing price as at 30 June 2018 was $315.6 million (30 June 2017: $306.6 million). 4 Fair value at the ASX closing price as at 30 June 2018 was $208.6 million (30 June 2017: $171.2 million). (b) Summarised movements in carrying amounts of associates accounted for at fair value through profit or loss Opening balance Investment Net (loss)/gain on investment in associates at fair value Disposal of units Closing balance Charter Hall Group Charter Hall Property Trust Group 2018 $’m 29.7 1.3 1.4 – 32.4 2017 $’m 0.2 35.9 – (6.4) 29.7 2018 $’m 29.7 1.3 1.4 – 32.4 2017 $’m 0.2 35.9 – (6.4) 29.7 92 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 (c) Summarised movements in carrying amounts of equity accounted associates Opening balance Investment Share of profit after income tax Distributions received/receivable Share of movement in reserves Return of capital Disposal of units Transfer of associate acquired as subsidiary1 Transfer from investment in joint ventures Closing balance Charter Hall Group Charter Hall Property Trust Group 2018 $’m 1,218.1 62.5 140.5 (74.1) 0.3 (10.7) – – – 1,336.6 2017 $’m 851.3 288.8 192.8 (72.3) (0.5) (32.7) (19.1) (7.4) 17.2 1,218.1 2018 $’m 1,147.3 62.5 133.3 (69.9) 0.3 (10.7) – – – 1,262.8 2017 $’m 784.6 280.9 185.1 (68.2) (0.5) (32.7) (19.1) – 17.2 1,147.3 1 CHOF5 was reclassified in 2017 from associate to controlled entity on increase of ownership to 100%. (d) Summarised financial information for material associates The tables below provide summarised financial information for the associates that are material to CHC and CHPT. Materiality is assessed on the investments’ contribution to Group income and net assets. The information presented reflects the amounts in the financial statements of the associates, not the Group’s proportionate share. Charter Hall Office Trust $’m Charter Hall Retail REIT $’m Charter Hall Prime Office Fund $’m Core Logistics Partnership $’m Charter Hall Long WALE REIT $’m 2018 Summarised balance sheet: Current assets Non-current assets Current liabilities Non-current liabilities Net assets Summarised statement of comprehensive income: Revenue Profit for the year from continuing operations Profit from discontinued operations Total comprehensive income 2017 Summarised balance sheet: Current assets Non-current assets Current liabilities Non-current liabilities Net assets Summarised statement of comprehensive income: Revenue Profit for the year from continuing operations Other comprehensive income Total comprehensive income 117.2 2,652.3 93.6 979.4 1,696.5 226.9 146.3 – 148.6 245.0 2,462.2 96.3 936.4 1,674.5 215.5 251.3 (2.2) 249.1 178.8 4,239.8 83.4 1,211.9 3,123.3 238.7 386.6 – 385.5 128.3 2,986.3 105.8 742.8 2,266.0 202.2 333.7 – 333.7 15.3 1,413.0 32.4 324.3 1,071.6 97.8 132.3 – 132.3 33.5 1,318.4 28.4 321.6 1,001.9 97.8 101.7 – 101.7 49.5 1,345.5 24.4 430.3 940.4 69.0 83.3 – 83.3 12.2 1,180.5 17.7 357.6 817.4 45.6 34.6 – 34.6 23.4 2,860.7 45.9 1,274.1 1,564.1 140.8 206.5 (12.4) 194.1 53.8 2,589.3 57.0 1,099.1 1,487.0 146.9 523.1 – 523.1 93 Charter Hall Group Annual Report 2018 31 Investments in associates continued (e) Reconciliation of net assets of associates to carrying amounts of equity accounted investments Charter Hall Group 2018 Net assets of associate Group’s share in % Group’s share in $ Other movements not accounted for under the equity method1 Carrying amount Movements in carrying amounts: Opening balance Investment Share of profit after income tax Other comprehensive gain/(loss) Distributions received/receivable Return of capital Closing balance 2017 Net assets of associate Group’s share in % Group’s share in $ Other movements not accounted for under the equity method1 Carrying amount Movements in carrying amounts: Opening balance Investment Disposal Share of profit after income tax Other comprehensive income/(loss) Distributions received/receivable Return on capital Closing balance Charter Hall Office Trust $’m Charter Hall Retail REIT $’m Charter Hall Prime Office Fund $’m Core Logistics Partnership $’m Charter Hall Long WALE REIT $’m 1,564.1 15.7 245.6 0.8 246.4 212.9 25.0 29.2 – (10.0) (10.7) 246.4 1,487.0 14.3 212.6 0.3 212.9 164.1 – – 74.8 – (10.3) (15.7) 212.9 1,696.5 18.7 317.2 10.4 327.6 321.2 – 27.3 0.4 (21.3) – 327.6 1,674.5 18.6 311.5 9.7 321.2 226.7 73.3 – 42.6 (0.4) (21.0) – 321.2 3,123.3 8.4 262.4 (3.6) 258.8 236.4 – 35.7 (0.1) (13.2) – 258.8 2,266.0 10.5 237.9 (1.5) 236.4 183.3 30.0 – 34.8 – (11.7) – 236.4 1,071.6 13.8 147.9 0.9 148.8 139.2 – 18.3 – (8.7) – 148.8 1,001.9 13.8 138.3 0.9 139.2 170.0 – (19.2) 15.2 – (9.8) (17.0) 139.2 940.4 20.4 191.8 3.4 195.2 166.0 24.6 16.8 – (12.2) – 195.2 817.4 20.0 163.5 2.5 166.0 – 165.4 – 7.2 – (6.6) – 166.0 1 Other movements are primarily due to the funds issuing new units to external investors at a price above or below the underlying net assets of the fund or, for listed investments, where the Group has acquired units on market at a price different to the fund’s NTA. 94 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 Charter Hall Property Trust 2018 Net assets of associate Group’s share in % Group’s share in $ Other movements not accounted for under the equity method1 Carrying amount Movements in carrying amounts: Opening balance Investment Share of profit after income tax Other comprehensive gain/(loss) Distributions received/receivable Return of capital Closing balance 2017 Net assets of associate Group’s share in % Group’s share in $ Other movements not accounted for under the equity method1 Carrying amount Movements in carrying amounts: Opening balance Investment Disposal Share of profit after income tax Other comprehensive income/(loss) Distributions received/receivable Disposal Closing balance Charter Hall Office Trust $’m Charter Hall Retail REIT $’m Charter Hall Prime Office Fund $’m Core Logistics Partnership $’m Charter Hall Long WALE REIT $’m 1,564.1 15.7 245.6 0.8 246.4 212.9 25.0 29.2 – (10.0) (10.7) 246.4 1,487.1 14.3 212.7 0.2 212.9 164.1 – – 74.8 – (10.3) (15.7) 212.9 1,696.5 18.7 317.2 10.4 327.6 321.2 – 27.3 0.4 (21.3) – 327.6 1,674.5 18.6 311.5 9.7 321.2 226.7 73.3 – 42.6 (0.4) (21.0) – 321.2 3,123.3 7.9 246.7 (2.6) 244.1 223.0 – 33.7 (0.1) (12.5) – 244.1 2,266.0 9.9 224.3 (1.3) 223.0 171.4 30.0 – 32.6 – (11.0) – 223.0 1,071.6 13.8 147.9 0.9 148.8 139.2 – 18.3 – (8.7) – 148.8 1,001.9 13.8 138.3 0.9 139.2 170.0 – (19.2) 15.2 – (9.8) (17.0) 139.2 940.4 20.4 191.8 3.4 195.2 166.0 24.6 16.8 – (12.2) – 195.2 817.4 20.0 163.5 2.5 166.0 – 165.4 – 7.2 – (6.6) – 166.0 1 Other movements are primarily due to the funds issuing new units to external investors at a price above or below the underlying net assets of the fund or, for listed investments, where the Group has acquired units on market at a price different to the fund’s NTA. 95 Charter Hall Group Annual Report 2018 31 Investments in associates continued (f) Summarised financial information and movement in carrying amounts of other equity accounted associates The following table shows the Group’s share of the summarised profit and loss of equity accounted associates that are not material to the Group, and a reconciliation of the movement in the aggregated carrying amount of these investments. Movements in aggregate carrying amount: Opening balance Reclassification from material associates1 Investment Share of profit after income tax Distributions received/receivable Return of capital Transfer from investments in joint ventures Closing balance Charter Hall Group Charter Hall Property Trust Group 2018 $’m 142.4 – 12.9 13.2 (8.7) – – 159.8 2017 $’m 12.5 94.7 20.1 18.2 (12.9) (7.4) 17.2 2018 $’m 85.0 – 12.9 8.0 (5.2) – – 142.4 100.7 2017 $’m 6.3 46.1 12.2 12.7 (9.5) – 17.2 85.0 1 Charter Hall Prime Industrial Fund was reclassified from material associates during the year ended 30 June 2017, as a result of the listing of the Charter Hall Long WALE REIT in 2017. (g) Commitments and contingent liabilities of associates Below are commitments and contingent liabilities of associates material to the Group’s balance sheet. Charter Hall Prime Office Fund’s (CPOF) capital expenditure contracted for at the reporting date but not recognised as liabilities was $604.1 million (2017: $85.2 million) relating to investment properties. 32 Investments in joint ventures (a) Carrying amounts Information relating to joint ventures is set out below. All joint ventures are incorporated and operate in Australia. Unless otherwise noted all associates have a 30 June year end. Charter Hall Group Name of entity Unlisted Brisbane Square Wholesale Fund BP Fund 11 Charter Hall Prime Retail Fund Retail Partnership No. 6 Trust Commercial and Industrial Property Pty Ltd 2 BP Fund 21 Long WALE Investment Partnership 2 TTP Wholesale Fund (TTP)1 Principal activity Property investment Property investment Property investment Property investment Property development Property investment Property investment Property investment Ownership interest Carrying amount 2018 % 16.8 11.9 38.0 20.0 50.0 17.6 10.0 10.0 2017 % 16.8 8.4 38.0 20.0 50.0 13.2 10.0 10.0 2018 $’m 102.1 54.7 45.7 36.7 – 25.4 10.5 5.4 280.5 2017 $’m 99.6 28.4 44.8 34.3 19.5 13.8 10.1 8.0 258.5 1 These funds comprise the Long WALE Hardware Partnership. During the year ended 30 June 2017 there was a $2.0 million capital distribution from BP Fund 2 which was settled by a simultaneous capital call in the BP Fund 1. 2 Commercial and Industrial Property Pty Ltd met the criteria to be reclassified as a held for sale asset in June 2018, see Note 11. 96 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 Charter Hall Property Trust Group Name of entity Unlisted Brisbane Square Wholesale Fund BP Fund 11 Charter Hall Prime Retail Fund Retail Partnership No. 6 Trust BP Fund 21 Long WALE Investment Partnership 2 TTP Wholesale Fund (TTP)1 Principal activity Property investment Property investment Property investment Property investment Property investment Property investment Property investment Ownership interest Carrying amount 2018 % 16.8 11.9 38.0 20.0 17.6 10.0 10.0 2017 % 16.8 8.4 38.0 20.0 13.2 10.0 10.0 2018 $’m 102.1 54.7 45.7 36.7 25.4 10.5 5.4 280.5 2017 $’m 99.6 28.4 44.8 34.3 13.8 10.1 8.0 239.0 1 These funds comprise the Long WALE Hardware Partnership. During the year ended 30 June 2017 there was a $2.0 million capital distribution from BP Fund 2 which was settled by a simultaneous capital call in the BP Fund 1. (b) Summarised financial information and movements in carrying amounts Movements in aggregate carrying amount: Opening balance Investment Share of profit after income tax Distributions received/receivable Reversal/(impairment) of carrying amount Return of capital Disposal of units Transfer to held for sale Transfer to investments in associates Closing balance Charter Hall Group Charter Hall Property Trust Group 2018 $’m 258.5 34.1 28.6 (27.6) 7.3 (2.7) – (17.7) – 280.5 2017 $’m 285.4 149.7 14.4 (8.5) (10.5) (2.0) (152.8) – (17.2) 258.5 2018 $’m 239.0 34.2 25.1 (15.1) – (2.7) – – – 280.5 2017 $’m 256.9 149.7 12.9 (8.5) – (2.0) (152.8) – (17.2) 239.0 (c) Commitments and contingent liabilities of joint ventures Below are commitments and contingent liabilities of joint ventures material to the Group’s balance sheet. Charter Hall Prime Retail Fund’s capital commitments contracted for at the reporting date but not recognised as liabilities was $58.5 million (2017: $nil). Brisbane Square Wholesale Fund’s (BSWF) capital expenditure contracted for at the reporting date but not recognised as liabilities was $28.6 million (2017: $nil). BSWF had contingent liabilities at the reporting date of $83.4 million (2017: $nil) relating to potential capital works. 97 Charter Hall Group Annual Report 2018 33 Interests in unconsolidated structured entities The Charter Hall Group considers its investments in associates and joint ventures to be unconsolidated structured entities, on the basis that the Group’s voting rights are not the sole factor in determining whether control over an entity exists. Where the Group determines that control over an entity does not exist, the entity is recognised as an associate or joint venture of the Group for reporting purposes. The activity and objective of the unconsolidated structured entities of the Group include property investment for annuity income and medium to long-term capital growth and/or development profit. The aggregate of all the Group’s interests and maximum exposure to loss in unconsolidated structured entities, being the Group’s interests in associates and joint ventures, are included in the table below: Current assets Trade receivables Distributions receivable Loans to associates and joint ventures Assets classified as held for sale Total current assets Non-current assets Investments in associates at fair value through profit or loss Investments accounted for using the equity method Total non-current assets Total carrying amount of interests in unconsolidated structured entities Charter Hall Group Charter Hall Property Trust Group 2018 $’m 1.1 41.0 25.8 17.7 85.6 2017 $’m 1.0 27.5 9.3 – 37.8 2018 $’m – 27.4 – – 27.4 2017 $’m – 26.4 – – 26.4 32.4 1,617.2 1,649.6 1,735.2 29.7 1,477.3 1,507.0 1,544.8 32.4 1,543.2 1,575.6 1,603.0 29.7 1,376.4 1,406.1 1,432.5 Total funds under management in unconsolidated structured entities 21,457.2 18,388.7 21,457.2 18,375.7 There are no additional arrangements that would expose the Charter Hall Group or Charter Hall Property Trust Group to losses beyond the carrying amounts. During the year, the Charter Hall Group earned fees from structured entities in its capacity as investment manager. Refer to Note 29 for further information. No financial support has been provided to the funds beyond the loans disclosed in the above table. 34 Commitments (a) Lease commitments – Group as lessee Due within one year Due between one and five years Over five years Charter Hall Group Charter Hall Property Trust Group 2018 $’m 4.1 15.0 2.4 21.5 2017 $’m 3.4 14.4 6.4 24.2 2018 $’m – – – – 2017 $’m – – – – Commitments are payable in relation to non-cancellable operating leases contracted for at the balance sheet date but not recognised as liabilities. (b) US Private Placement (USPP) In May 2018, the Group committed to issue US$175 million (A$231.5 million) of USPP notes. Refer to Note 20 for details. Capital commitments Charter Hall Group The Group had no contracted capital commitments as at 30 June 2018 (30 June 2017: $nil). Charter Hall Property Trust Group The Trust Group had no contracted capital commitments as at 30 June 2018 (30 June 2017: $nil). 98 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 35 Contingent liabilities The Group did not have any material contingent liabilities as at 30 June 2018 (30 June 2017: $nil) other than the bank guarantees of $14.3 million (30 June 2017: $14.3 million) provided for under the bank facility (refer to Note 20). 36 Security-based benefits expense (a) 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 are subject to service and performance conditions which are discussed in the Remuneration Report. Charter Hall Group and Charter Hall Property Trust Group Performance rights Rights issued 19/12/14 Rights issued 30/11/15 Rights issued 25/11/16 Rights issued 23/11/17 Performance rights issued Number of rights forfeited/lapsed Prior years Current year Number of rights vested Prior years Current year Closing balance Service rights Rights issued 19/12/14 Rights issued 30/11/15 Rights issued 25/11/16 Rights issued 23/11/17 Service rights issued Number of rights forfeited/lapsed Prior years Current year Number of rights vested Prior years Current year Closing balance 2015 Number 2016 Number 2017 Number 2018 Number Total Number 1,051,804 – – – – 1,085,276 – – – – 998,453 1,051,804 1,085,276 998,453 – – – 871,739 871,739 1,051,804 1,085,276 998,453 871,739 4,007,272 (133,564) – (205,581) (21,957) (121,270) (58,819) – (28,262) (460,415) (109,038) – (918,240) – – – – – – – (918,240) – 857,738 818,364 843,477 2,519,579 554,401 – – – 554,401 – 409,195 – – 409,195 – – 344,548 – 344,548 – – – 353,091 353,091 554,401 409,195 344,548 353,091 1,661,235 – – (10,422) – (16,616) – (488,611) (65,790) – (219,409) (179,364) – – (193,494) 134,438 – – – – 353,091 (27,038) – (708,020) (438,648) 487,529 (b) PROP expense Total expenses related to the PROP recognised during the year as part of employee benefit expense were as follows: Performance rights and option plan Charter Hall Group Charter Hall Property Trust Group 2018 $’m 1.7 2017 $’m 1.4 2018 $’m – 2017 $’m – All PROP expenses were recognised in operating expenses during the current and prior year. 99 Charter Hall Group Annual Report 2018 36 Security-based benefits expense continued (c) Option inputs The Black-Scholes or Monte Carlo method, as applicable, is utilised for valuation and accounting purposes. The model inputs to assess the fair value of the PROP rights granted during FY2018 are as follows: Grant date Stapled security price at grant date1 Fair value of right Expected volatility2 Dividend yield Risk-free interest rate CHC Performance rights 23/11/2017 $6.16 $2.65 21.2% 4.9% CHC Service rights – Deferred STI CHC Service rights – Sign on CQR Service rights – Deferred STI 23/11/2017 $6.16 $5.79 18.3% 4.9% 23/11/2017 $6.16 $5.59 19.9% 4.9% 8/11/2017 $4.10 $3.75 13.4% 6.9% 1.9% 1.9% 1.9% 2.0% 1 The grant date reflects the date the rights were allocated. Participants are eligible and performance period commences from 1 July of the relevant financial year for performance rights. 2 Expected volatility takes into account historical market price volatility. (d) Charter Hall General Employee Security Plan (GESP) During the year, eligible employees received up to $1,000 (2017: $1,000) in stapled securities which vested immediately on issue but are held in trust until the earlier of the completion of three years’ service or termination. An expense of $371,000 (2017: $350,000) was recognised in relation to this plan during the year. 37 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 parent entity of the Charter Hall Property Trust Group, being the Charter Hall Property Trust, show the following aggregate amounts: Balance sheet Current assets Total assets Current liabilities Total liabilities Shareholders’ equity Issued capital Other reserves Accumulated losses Net equity Profit for the year Total comprehensive income for the year Charter Hall Limited Charter Hall Property Trust 2018 $’m 139.2 151.1 45.7 66.6 285.7 (53.6) (147.6) 84.5 68.0 68.0 2017 $’m 9.0 177.5 85.9 85.9 285.0 (52.9) (140.5) 91.6 20.0 20.0 2018 $’m 8.8 1,297.6 48.0 51.4 1,453.5 1.2 (208.5) 1,246.2 50.7 50.7 2017 $’m 62.6 1,300.9 73.1 73.1 1,456.9 – (229.1) 1,227.8 52.7 52.7 Notwithstanding the net current liability, Charter Hall Property Trust has total net assets of $1.2 billion and liquidity through the inter-staple loan with Charter Hall Limited. 100 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 (b) Contingent liabilities of the parent entity Charter Hall Limited and Charter Hall Property Trust had no contingent liabilities as at 30 June 2018 (30 June 2017: $nil) other than the bank guarantees of $14.3 million provided for under the bank facility held by Charter Hall Property Trust (refer to Note 20(a)). (c) Contractual commitments As at 30 June 2018, Charter Hall Limited had no contractual commitments (2017: $nil). As at 30 June 2018, Charter Hall Property Trust was committed to issue US$175 million (A$231.5 million) of USPP notes as disclosed in Note 34 (2017: $nil). 38 Deed of cross guarantee Charter Hall Group Charter Hall Limited and its wholly owned subsidiary, Charter Hall Holdings Pty Ltd (CHH), are parties to a deed of cross guarantee under which each company guarantees the debts of the other. By entering into the deed, CHH has been relieved from the requirement to prepare financial statements and a directors’ report under ASIC Instrument 2016/785 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 Instrument 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 as follows 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 Depreciation Finance costs Foreign exchange (loss)/gain Share of net profit of associates accounted for using the equity method Amortisation and impairment of intangibles Other expenses Profit before income tax Income tax expense Profit for the year Summary of movements in consolidated accumulated losses Accumulated losses at the beginning of the financial year Profit for the year Dividends paid/payable Accumulated losses at the end of the financial year 2018 $’m 233.0 (3.5) (6.6) 0.2 3.5 (2.7) (127.6) 96.3 (24.6) 71.7 (64.8) 71.7 (54.5) (47.6) 2017 $’m 205.7 (3.5) (9.9) (0.2) 2.5 (5.1) (131.2) 58.3 (23.6) 34.7 (99.5) 34.7 – (64.8) 101 Charter Hall Group Annual Report 2018 38 Deed of cross guarantee continued (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. 2018 $’m 60.6 61.6 17.7 139.9 2.4 17.7 15.1 95.3 20.9 62.7 214.1 354.0 86.4 1.5 87.9 5.3 – 60.0 6.0 1.6 72.9 160.8 193.2 285.7 (45.0) (47.6) 193.1 2017 $’m 117.4 44.8 – 162.2 0.8 – 15.1 114.7 18.8 65.4 214.8 377.0 46.7 1.9 48.6 6.3 129.7 – 7.4 1.3 144.7 193.3 183.7 285.0 (36.5) (64.8) 183.7 Assets Current assets Cash and cash equivalents Trade and other receivables Assets held for sale Total current assets Non-current assets Trade and other receivables Loans due from Charter Hall Property Trust Investment in associates at fair value through profit or loss Investments in controlled entities Property, plant and equipment Intangible 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 due to Charter Hall Property Trust Net loans due to related entities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses Total equity 102 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2018Charter Hall Group Annual Report 2018 39 Events occurring after the reporting date The following events have occurred subsequent to 30 June 2018: • • In July 2018, the Group entered into a binding agreement to sell its interest in joint venture Commercial and Industrial Property Pty Ltd (CIP) for net proceeds of $29.0 million. Other receivables from investments in CIP resulted in a total cash realisation from the transaction of $56.3 million. The sale completed on 10 August 2018. In July 2018, the Group entered into a binding agreement to purchase a three-building amalgamated holding on Queen Street Mall known as No. 1 Brisbane, located in Brisbane’s CBD, for a net purchase price of $94.0 million. • On 22 August 2018, Charter Hall and Folkestone Limited entered into a scheme implementation agreement for Charter Hall to acquire 100% of the shares in Folkestone Limited. Under the terms of the scheme, Folkestone shareholders will be entitled to receive from Charter Hall $1.354 cash per share, which equates to a $205.0 million outlay (excluding c.1.4 million CHC service rights (subject to CHC share price) to be issued to FLK management, (excluding Greg Paramor) vesting over 3 years). If the proposal is approved by Folkestone shareholders, completion is anticipated to be early November 2018. Except for the matters discussed above, no other matter or circumstance has arisen since 30 June 2018 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. 103 Charter Hall Group Annual Report 2018 DIRECTORS’ DECLARATION TO SECURITYHOLDERS FOR THE YEAR ENDED 30 JUNE 2018 In the opinion of the Directors of Charter Hall Limited (Company), and the Directors of the Responsible Entity of Charter Hall Property Trust (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 48 to 103 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 positions as at 30 June 2018 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 38 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 38. 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 Managing Director and Group CEO 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. David Clarke Chairman Sydney 22 August 2018 104 Charter Hall Group Annual Report 2018 INDEPENDENT AUDITOR’S REPORT FOR THE YEAR ENDED 30 JUNE 2018 105 Charter Hall Group Annual Report 2018 INDEPENDENT AUDITOR’S REPORT FOR THE YEAR ENDED 30 JUNE 2018 106 Charter Hall Group Annual Report 2018 107 Charter Hall Group Annual Report 2018 INDEPENDENT AUDITOR’S REPORT FOR THE YEAR ENDED 30 JUNE 2018 108 Charter Hall Group Annual Report 2018 109 Charter Hall Group Annual Report 2018 INDEPENDENT AUDITOR’S REPORT FOR THE YEAR ENDED 30 JUNE 2018 directors determine is necessary to enable the preparation of financial reports that give a true and fair view and are free from material misstatement, whether due to fraud or error. In preparing the financial reports, the directors are responsible for assessing the ability of the Charter Hall Group and Charter Hall Property Trust Group to continue as going concerns, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial reports Our objectives are to obtain reasonable assurance about whether the financial reports as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial reports is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor's report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 31 to 45 of the Directors’ Report for the year ended 30 June 2018. In our opinion, the remuneration report of Charter Hall Limited for the year ended 30 June 2018 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of Charter Hall Limited 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. PricewaterhouseCoopers Wayne Andrews Partner Sydney 22 August 2018 110 Charter Hall Group Annual Report 2018 SECURITYHOLDER ANALYSIS A. Distribution of stapled securityholders as at 24 September 2018 Range 100,001 and Over 50,001 to 100,000 10,001 to 50,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total Unmarketable B. Top 20 registered securityholders as at 24 September 2018 Rank Name A/C Designation Stapled Securities Held % of Issued Stapled Securities Held 446,390,159 2,357,084 7,439,165 4,595,691 4,488,077 506,955 465,777,131 1,814 95.84 0.51 1.60 0.99 0.96 0.11 100.00 0.00 No. of Holders 53 35 394 631 1,613 1,360 4,086 321 Stapled Securities Held %IC of Issued Securities 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED CITICORP NOMINEES PTY LIMITED NATIONAL NOMINEES LIMITED BNP PARIBAS NOMINEES PTY LTD BNP PARIBAS NOMS PTY LTD CITICORP NOMINEES PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED AMP LIFE LIMITED MUTUAL TRUST PTY LTD MILTON CORPORATION LIMITED BNP PARIBAS NOMS (NZ) LTD PORTMIST PTY LIMITED UBS NOMINEES PTY LTD BOND STREET CUSTODIANS LIMITED IOOF INVESTMENT MANAGEMENT LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED AET SFS PTY LTD BNP PARIBAS NOMINEES PTY LTD BOND STREET CUSTODIANS LIMITED Total Balance of register Grand totalC. Substantial securityholder notices as at 24 September 2018 Ordinary Securities AMP Limited (CAN 079 354 519) and its related bodies corporate Cohen & Steers Inc. and all bodies controlled by Cohen & Steers, Inc. The Vanguard Group, Inc. Commonwealth Bank of Australia ACN 123 123 124 (CBA) and its related bodies corporate 111 Date of Change 09 Aug 2018 29 Mar 2018 02 Mar 2018 183,991,924 115,977,248 43,276,682 34,278,271 19,860,185 14,614,434 5,795,590 5,288,858 4,334,152 1,918,924 1,901,000 1,501,287 1,441,773 1,263,891 1,247,363 1,056,099 687,164 569,686 498,863 498,106 440,001,500 25,775,631 39.50 24.90 9.29 7.36 4.26 3.14 1.24 1.14 0.93 0.41 0.41 0.32 0.31 0.27 0.27 0.23 0.15 0.12 0.11 0.11 94.47 5.53 465,777,131 100.00 Stapled Securities Held 23,447,043 28,256,492 42,953,286 % Securities Held 5.03% 6.07% 9.22% 25 Sep 2017 26,246,842 5.64% Charter Hall Group Annual Report 2018 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 find 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, 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 www.charterhall.com.au and subscribe to updates. Can I receive my Annual Report electronically? Charter Hall provides its annual report in both PDF and online formats (HTML). You can elect via the Investor Login facility on our website to receive notification that this report is available online. Alternatively, you can elect to receive the report in hard copy. How do I receive payment of my distribution? Charter Hall Group pays its distributions via direct credit. This enables you to receive automatic payment of your distributions quickly and securely. You can nominate any Australian or New Zealand bank, building society, credit union or cash management account for direct payment by downloading a direct credit form using the Investor Login facility and sending it to Link Market Services. On the day of payment, you will be sent a statement via post or email confirming that the payment has been made and setting out details of the payment. The Group no longer pays distributions by cheque. Can I reinvest my distribution? When operating, 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. If you would like to participate in the DRP, you can do so online using the Investor Login facility available on our website; or you can complete a DRP Application Form available from our registry. 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 using the Investor Login facility on our website. How do I complete my annual tax return for the distributions I receive from Charter Hall? At the end of each financial 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 financial year the income was earned; that is, the distribution income paid in August 2018 should be included in your 2018 financial 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 timeframe (usually 45 days) or you are not satisfied with our response, you can seek assistance from the Financial Ombudsman Service (FOS), an independent dispute resolution scheme available to those investors who have first raised their complaint with us and who remain dissatisfied. FOS’s contact details are below: Financial Ombudsman Service GPO Box 3 Melbourne VIC 3001 Tel: Fax: + 61 3 9613 6399 Email: info@fos.org.au Web: www.fos.org.au 1300 780 808 112 Charter Hall Group Annual Report 2018 CONTACT DETAILS 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: Directors David Clarke (Chair), Anne Brennan, Philip Garling, David Harrison, Karen Moses and David Ross Company Secretary Mark Bryant ASX Code Charter Hall Group stapled securities are listed on the Australian Securities Exchange (ASX:CHC). Principal registered office in Australia Level 20, No.1 Martin Place Sydney NSW 2000 Tel: +61 2 8651 9000 Auditor PricewaterhouseCoopers One International Towers Sydney Watermans Quay, Barangaroo Sydney NSW 2000 Link Market Services Limited Locked Bag A14 Sydney South NSW 1235 Tel: 1300 303 063 (within Australia) +61 2 8280 7134 (outside Australia) +61 2 9287 0303 Fax: Email: charterhall.reits@linkmarketservices.com.au Web: 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 (within Australia) +61 2 8651 9000 (outside Australia) Fax: +61 2 9221 4655 Email: reits@charterhall.com.au Web: www.charterhall.com.au DISCLAIMER 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 nor any of its related bodies corporate, Directors or employees to any such person. Neither the Charter Hall Group, its 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 2018 unless otherwise stated. All references to dollars ($) or A$ are to Australian Dollars unless otherwise stated. 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 the confirmation letter or 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 a US Person, 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 it deems 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. © Charter Hall 113 Charter Hall Group Annual Report 2018 TO BE SUPPLIED? [Mark Bryant] www.charterhall.com.au