DEXUS
Annual Report 2012

Plain-text annual report

2012 DEXUS ANNUAL rEport DEXUS DIVERSIFIED TRUST (ArSN 089 324 541) lETTER FRom ThE ChaIR FIVE YEaR FINaNCIal SUmmaRY BoaRD oF DIRECToRS CoRpoRaTE goVERNaNCE STaTEmENT FINaNCIal REpoRT DirEctorS’ rEport AUDitor’S iNDEpENDENcE DEcLArAtioN coNSoLiDAtED StAtEmENt of comprEhENSivE iNcomE coNSoLiDAtED StAtEmENt of fiNANciAL poSitioN coNSoLiDAtED StAtEmENt of chANgES iN EqUity coNSoLiDAtED StAtEmENt of cASh fLowS NotES to thE fiNANciAL StAtEmENtS DirEctorS’ DEcLArAtioN iNDEpENDENt AUDitor’S rEport aDDITIoNal INFoRmaTIoN INVESToR INFoRmaTIoN DIRECToRY 1 3 4 6 14 38 39 40 41 42 43 89 90 92 94 96 2012 annual Reporting suite DEXUS property group (DXS) presents our 2012 annual reporting suite and supporting material for the year ending 30 June 2012: 1. the 2012 DEXUS Annual review – an integrated report summarising our financial, operational and corporate responsibility and Sustainability (cr&S) performance. 2. this 2012 DEXUS Annual report – DXS’s consolidated financial statements, corporate governance Statement and information about our Board of Directors. this document should be read in conjunction with the 2012 DEXUS Annual review. 3. the 2012 DEXUS combined financial Statements – the financial Statements of DEXUS industrial trust, DEXUS office trust and DEXUS operations trust. this document should be read in conjunction with the 2012 DEXUS Annual report and Annual review. it is available in hard copy on request by email at ir@dexus.com, phone on 1800 819 675 or online in our annual reporting suite at www.dexus.com/dxs/reports 4. the 2012 DEXUS performance pack – the data and information supporting the results outlined in the 2012 DEXUS Annual review will be available in our online annual reporting suite from mid-october 2012. further cr&S information can be found on our website at www.dexus.com/crs through these reports we demonstrate how we manage our financial and non-financial performance in line with our corporate strategy. we welcome your feedback, either via the feedback function in our online report at www.dexus.com/dxs/reports or by email at crs@dexus.com All amounts are A$ unless otherwise specified. DEXUS property group (DXS) (ASX code: DXS) consists of DEXUS Diversified trust (DDf), DEXUS industrial trust (Dit), DEXUS office trust (Dot) and DEXUS operations trust (DXo), collectively known as DXS or the group. Under Australian Accounting Standards, DDf has been deemed the parent entity for accounting purposes. therefore the DDf consolidated financial Statements include all entities forming part of DXS. All press releases, financial Statements and other information are available on our website: www.dexus.com cover: 12 creek Street, Brisbane, qLD lETTER FRom ThE ChaIR 2012 was a year of transition and refocus for DEXUS Property is a long term business. We are proud of the results we have achieved through prudent risk management and sound governance. We continue to manage operating cash flow carefully with the objective that distributions are fully funded from free cash flow. Operating cash flows have benefited from reduced capital expenditure as a result of the US central portfolio sale and the completion of our office portfolio’s nABERS Energy upgrade program in 2012. DEXUS’s strong financial position has enabled us to improve distributions to investors. Further: n from 1 July 2012, a new distribution policy was introduced broadening the distribution range to between 70% and 80% of FFO, in line with free cash flow (we expect this to average 75% over the medium term) n in April 2012, we commenced a $200 million strategic on‑market securities buy‑back Our investment philosophy, which seeks to maximise returns through investment in superior quality properties in core markets, continues to realise benefits for DEXUS investors. A new executive remuneration framework Following the 28.2% unfavourable response to our remuneration report at last year’s AGM, we fully reviewed our remuneration framework. I personally met with many of our major investors to get a better understanding of their concerns and the Board has reflected on that feedback in addition to advice from proxy advisors and remuneration consultants. The result is a proposed new remuneration framework subject to investor approval at the AGM on 5 november 2012. The framework focuses on equity interests for executives, applies a clearer balanced scorecard approach to short term incentives (STI) with caps on STI awards, introduces a long term incentive (lTI) grant as well as hurdles that are appropriate for the long term nature of our business. The full remuneration report starts on page 16 in this report. Our new remuneration framework is aligned more closely to conventional market practice and seeks to attract the best talent and reward strong performance, as we firmly believe this will deliver better results for our investors. The last 12 months saw the appointment of a new CEO, a review of our business and property portfolio and the development of a revised strategy for DEXUS. Uncertain market, but increasing opportunity Operating conditions continue to be challenging as a result of ongoing global economic uncertainty. This has continued to impact business confidence in FY12, with mixed indicators in the US and uncertainty about future growth in the economies of Europe and China. This uncertainty has contributed to subdued tenant demand. We expect these conditions to continue into FY13 but longer term market fundamentals remain sound. The flight to quality continues and investment appetite for prime properties in key locations – DEXUS’s speciality – remains robust. We are cautiously optimistic about the prospects of our core markets, particularly in the office sector. Australia continues to be an attractive destination for investment by foreign pension funds due to our growing economy, and the property sector stands to benefit. New cEo, new focus In november 2011, the Board appointed Darren Steinberg, who commenced on 1 March 2012 as the new Chief Executive Officer and Executive Director of DEXUS Funds Management limited. Darren brings a wealth of property sector experience to DEXUS with a background in listed and unlisted property, asset management and development. Over the past six months, Darren has streamlined operations, improved efficiencies and progressed strategic initiatives such as the sale of the US central portfolio. He has led the review and development of our revised strategy which is designed to reinforce DEXUS’s position as Australia’s leading real estate company. Our objective of exiting non‑core markets and focusing on core CBD office properties will enable us to enhance performance and ultimately achieve our goal of being the leader in office property in Australia. An active year for DEXUS While DEXUS’s core business is property investment management, we do not just own property. In 2012 we: n completed the development of two major office towers valued at over $1 billion n re‑financed $850 million of debt n raised over $420 million of equity in our wholesale fund n sold US$770 million of industrial US property at book value n substantially exited European markets through the sale of 71% of our portfolio for €82 million 2012 DEXUS AnnUAl REPORT 1 lETTER FRom ThE ChaIR good corporate citizenship This year we have continued to build upon the significant successes that we have achieved in CR&S. We are incorporating the United nations’ Principles of Responsible Investment as performance metrics for our investment decision making. Our $31 million nABERS Energy upgrade program is now complete, improving the value, performance and appeal of our office properties. We have led by example, being the first Australian property trust with our Sydney head office certified carbon neutral by low Carbon Australia for the second successive year. Our commitment is to maintain the highest standards of corporate governance, ethics and environmental and social responsibility. We do this in order to increase investor value, provide excellent service to our tenants, support our people, partner with our suppliers, engage with our communities and respect our environment. A change to the Board of Directors At the date of this report, the Board comprised nine Directors, eight of whom are independent. On 1 January 2012 we welcomed Richard Sheppard to the Board, replacing Brian Scullin who left on 31 October 2011. Richard is the former Managing Director and Chief Executive Officer of Macquarie Bank limited and former Deputy Managing Director of Macquarie Group limited, spending 36 years with the group. He brings a range of financial and business skills to the DEXUS Board, including valuable experience as a Director and Chairman of Macquarie Bank’s listed and unlisted property trusts. Darren Steinberg and Richard Sheppard have now joined the Board and I welcome them and the skills and experience they bring to the table. Diversity target progress DEXUS is committed to employee diversity as we believe it enables organisations to make better informed decisions. We set a target last year of 33% female participation at senior management level by 2015 and I am pleased to report as at 30 June 2012 we are at 30%. Looking forward The Board of Directors of DEXUS Funds Management limited is committed to developing a high performing organisation that creates superior value for investors and stakeholders. Our commitment to transparency and disclosure is fundamental to our operations. Further information on our financial, operational and Corporate Responsibility and Sustainability performance is provided in our 2012 DEXUS Annual Review. The financial year to 30 June 2012 has proven to be very successful for the Group in a difficult market environment and FY13 shows significant promise, with the launch of our revised strategy and early achievement of a number of strategic objectives. On behalf of the Board, I would like to thank you for your support over the past year and look forward to reporting on the Group’s continued success. christopher t Beare Chair 26 September 2011 2 2012 DEXUS AnnUAl REPORT FIVE YEaR FINaNCIal SUmmaRY Consolidated Statement of Comprehensive Income profit and loss Property revenue Management fees Proceeds from sale of inventory Property revaluations Reversal of previous impairment Contribution from equity accounted investments Other income Total income Property expenses Cost of sale of inventory Finance costs net gain/(loss) on sale of investment properties Employee benefit expense Impairments and property devaluations Other expenses Total expenses Foreign currency translation reserve transfer Profit/(loss) before tax Income and withholding tax (expense)/benefit Net profit/(loss) Other non‑controlling interests (including REnTS) Net profit/(loss) to stapled security holders Operating EBIT Funds from operations1 (cents per security) Distributions2 (cents per security) Consolidated Statement of Financial position Cash and receivables Property assets3 Other (including derivative financial instruments and intangibles) Total assets Payables and provisions Interest bearing liabilities Other (including financial instruments) Total liabilities net assets Minority interest Net assets (after non-controlling interest) nTA per security ($) Gearing ratio4 (%) Consolidated Statement of Changes in Equity Total equity at the beginning of the year net profit/(loss) Other comprehensive income/(loss) Contributions of equity, net of transaction costs Buy‑back of contributed equity, net of transaction costs Acquisition of non‑controlling interest Distributions provided for or paid Other transactions with equity holders Other non‑controlling interest movements during the year Total equity at the end of the year Consolidated Statement of Cash Flows net cash inflow from operating activities net cash inflow/(outflow) from investing activities net cash (outflow)/inflow from financing activities net (decrease)/increase 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 2008 $’000 2009 $’000 2010 $’000 2011 $’000 2012 $’000 664,831 26,760 – 184,444 – 2,467 12,829 891,331 (159,565) – (213,233) 2,297 (23,340) (61) (44,266) (438,168) – 453,163 (7,902) 445,261 (6,984) 438,277 485.9 11.90 11.90 135,671 8,731,773 481,543 9,348,987 322,528 3,006,919 184,487 3,513,934 5,835,053 205,998 5,629,055 1.77 33.2 5,704,943 445,261 77,929 243,524 – – (355,380) 402 (281,626) 5,835,053 374,445 11,065 (342,514) 42,996 59,603 (3,385) 99,214 708,506 63,663 – – – 31 5,739 777,939 (174,485) – (384,241) (1,880) (59,282) (1,685,733) (47,970) (2,353,591) – (1,575,652) 120,236 (1,455,416) (3,695) (1,459,111) 514.5 10.43 7.30 120,661 7,735,859 494,590 8,351,110 289,561 2,509,012 406,320 3,204,893 5,146,217 206,772 4,939,445 1.01 31.2 5,835,053 (1,455,416) (53,478) 1,129,971 – – (296,648) – (13,265) 5,146,217 359,577 (212,459) (170,190) (23,072) 99,214 8,703 84,845 663,068 51,588 – – 13,307 (26,243) 10,144 711,864 (169,753) – (190,685) (53,342) (58,978) (209,367) (28,132) (710,257) – 1,607 29,983 31,590 (170) 31,420 461.3 7.30 5.10 89,429 7,306,585 475,014 7,871,028 281,230 2,240,082 343,269 2,864,581 5,006,447 205,275 4,801,172 0.95 29.8 5,146,217 31,590 (7,034) 90,360 – – (244,411) – (10,275) 5,006,447 340,174 90,592 (444,382) (13,616) 84,845 (6,810) 64,419 629,072 50,655 3,359 148,433 – 34,053 5,486 871,058 (151,865) (3,353) (52,744) 7,052 (67,417) – (26,298) (294,625) – 576,433 (21,313) 555,120 (2,108) 553,012 437.2 7.40 5.18 109,921 7,487,082 390,641 7,987,644 274,346 2,215,056 191,401 2,680,803 5,306,841 204,028 5,102,813 1.01 28.4 5,006,447 555,120 (4,973) 14,528 – – (250,662) – (13,619) 5,306,841 239,342 (227,039) 4,949 17,252 64,419 (7,925) 73,746 653,582 50,712 49,847 75,227 – 13,784 3,933 847,085 (154,901) (43,998) (261,869) (32,566) (74,366) (14,846) (23,601) (606,147) (41,531) 199,407 (16,526) 182,881 (1,811) 181,070 467.9 7.65 5.35 90,035 6,922,722 351,350 7,364,107 276,970 1,940,762 139,049 2,356,781 5,007,326 – 5,007,326 1.00 27.2 5,306,841 182,881 41,864 – (50,950) (204,000) (257,408) 113 (12,015) 5,007,326 348,391 659,567 (1,019,837) (11,879) 73,746 (2,674) 59,193 1 Refer to page 33 for a definition of Funds From Operations (FFO). 2 70% of FFO. 3 Property assets include investment properties, non‑current assets held for sale, inventories and investment property accounted for using the equity method. 4 Includes cash. 2012 DEXUS AnnUAl REPORT 3 BoaRD oF DIRECToRS Chris Beare Chair and Independent Director BSc, BE (Hons), MBA, PhD, FAICD Chris Beare is both the Chair and an Independent Director of DEXUS Funds Management limited (appointed 4 August 2004). He is also a member of the Board nomination, Remuneration & Governance Committee (previously the Board nomination & Remuneration Committee) and the Board Finance Committee. Chris has significant experience in international business, technology, strategy, finance and management. Previously Chris was Executive Director of the Melbourne based Advent Management venture capital firm prior to joining investment bank Hambros Australia in 1991. Chris became Head of Corporate Finance in 1994 and joint Chief Executive in 1995, until Hambros was acquired by Société Générale in 1998. Chris remained a Director of SG Australia until 2002. From 1998 onwards, Chris helped form Radiata – a technology start‑up in Sydney and Silicon Valley – and as Chair and Chief Executive Officer, Chris steered it to a successful sale to Cisco Systems in 2001 and continued part time for four years as Director Business Development for Cisco. Chris has previously been a director of a number of companies in the finance, infrastructure and technology sectors. Chris is currently Chair of Mnet Group, an ASX listed company. Elizabeth alexander am Independent Director BComm, FCA, FAICD, FCPA Elizabeth Alexander is an Independent Director of DEXUS Funds Management limited (appointed 1 January 2005), Chair of DEXUS Wholesale Property limited and a member of the Board Audit, Risk & Sustainability Committee (previously the Board Audit Committee and Board Risk & Sustainability Committee). Elizabeth brings to the Board extensive experience in accounting, finance, corporate governance and risk management and was formerly a partner with PricewaterhouseCoopers. Elizabeth’s previous appointments include national Chair of the Australian Institute of Company Directors, national President of the Australian Society of Certified Practising Accountants and Deputy Chairman of the Financial Reporting Council. Elizabeth was Chairman of CSl and on the Boards of Amcor and Boral. Elizabeth is currently a Director of Medibank Private and the Chancellor of the University of Melbourne. Barry Brownjohn Independent Director BComm Barry Brownjohn is an Independent Director of DEXUS Funds Management limited (appointed 1 January 2005) and is Chair of the Board Audit, Risk & Sustainability Committee (previously the Board Audit Committee and Board Risk & Sustainability Committee). During the year, Barry was also a member of the Board Finance Committee. Barry has over 20 years’ experience in Australia, Asia and north America in international banking and previously held positions with the Bank of America including heading global risk management for the capital markets business, the Asia capital markets business and was the Australasian CEO between 1991 and 1996. Following his career with Bank of America, Barry has been active in advising companies in Australia and overseas on strategic expansion and capital raising strategies. Barry has also held numerous industry positions including Chairing the International Banks and Securities Association in Australia and the Asia Pacific Managed Futures Association. Barry is an Independent Director of Citigroup Australia Pty limited and a Director of Bakers Delight Holdings Pty limited. He also serves as a member on the Board of Governors of the Heart Research Institute. John Conde ao Independent Director BSc, BE (Hons), MBA John Conde is an Independent Director of DEXUS Funds Management limited (appointed 29 April 2009), is the Chair of the Board nomination, Remuneration & Governance Committee (previously the Board nomination & Remuneration Committee). During the year, John was also a member of the Board Compliance Committee. John brings to the Board extensive experience across diverse sectors including commerce, industry and government. John was previously Chairman of Ausgrid (formerly Energy Australia), Director of BHP Billiton and Excel Coal limited, Managing Director of Broadcast Investment Holdings Pty limited, Director of lumley Corporation and President of the national Heart Foundation of Australia. John is the Chairman of Bupa Australia Holdings Pty limited, Sydney Symphony limited and Destination nSW and Deputy Chairman of Whitehaven Coal limited. John is President of the Commonwealth Remuneration Tribunal and a Director of the McGrath Foundation limited. John is also Chairman of the Australian Olympic Committee (nSW) Fundraising Committee. 4 2012 DEXUS AnnUAl REPORT Tonianne Dwyer Independent Director BJuris (Hons), LLB (Hons) Tonianne Dwyer is an Independent Director of DEXUS Funds Management limited (appointed 24 August 2011) and DEXUS Wholesale Property limited, and a member of the Board Compliance Committee. Tonianne brings to the Board significant experience as a company director and executive working in listed property, funds management and corporate strategy across a variety of international markets. Tonianne was a Director from 2006 until 2010 of Quintain Estates and Development – a listed United Kingdom property company comprising funds management, investment and urban regeneration – and was previously Head of Funds Management from 2003. Prior to joining Quintain, Tonianne was a Director of Investment Banking at Hambros Bank, SG Cowen and Société Générale based in london. Tonianne also held directorships on a number of boards associated with Quintain’s funds management business including the Quercus, Quantum and iQ Property Partnerships and the Bristol & Bath Science Park Stakeholder Board. She is currently a Director of Cardno limited. Stewart Ewen oam Independent Director Stewart Ewen is an Independent Director of DEXUS Funds Management limited (appointed 4 August 2004) and a member of the Board nomination, Remuneration & Governance Committee (previously the Board nomination & Remuneration Committee). Stewart has extensive property sector experience and started his property career with the Hooker Corporation in 1966. In 1983, Stewart established Byvan limited which, by 2000, managed $8 billion in shopping centres in Australia, Asia and north America. In 2000, Stewart sold his interest in Byvan to the Savills Group. In 1990 he started navyB Pty ltd, which has completed in excess of $600 million of major residential and commercial property projects in Australia and new Zealand. Stewart was previously Managing Director of Enacon ltd, a Director of the Abigroup and Chairman of Tuscan Pty ltd, which developed and operated the Sydney University Village. Stewart was also a Director of CapitaCommercial Trust Management limited in Singapore from 2004 to 2008. Stewart was previously President of the Property Council of nSW, member of the nSW Heritage Council and Chair of the Cure Cancer Australia Foundation. Richard Sheppard Independent Director BEc (Hons) Richard Sheppard is an Independent Director of DEXUS Funds Management limited (appointed 1 January 2012) and a member of the Board Audit, Risk & Sustainability Committee (previously the Board Audit Committee and Board Risk & Sustainability Committee). From 1 July 2012, Richard is a member of the Board Finance Committee. Richard brings to the Board extensive experience in banking and finance and as a Director and Chairman of listed and unlisted property trusts. He was Managing Director and Chief Executive Officer of Macquarie Bank limited and Deputy Managing Director of Macquarie Group limited from 2007 until late 2011. Following seven years at the Reserve Bank of Australia, Richard joined Macquarie Group’s predecessor, Hill Samuel Australia in 1975, initially working in Corporate Finance. He became Head of the Corporate Banking Group in 1988 and headed a number of the Bank’s major operating Groups, including the Financial Services Group and the Corporate Affairs Group. He was a member of the Group Executive Committee since 1986 and Deputy Managing Director since 1996. Richard was Chairman of the Australian Government’s Financial Sector Advisory Council from 2009‑2011 and is a Director of the Bradman Foundation and the Sydney Cricket Club. He is also the Chairman of Eraring Energy and Chairman of the Macquarie Group Foundation. Darren Steinberg Chief Executive Officer and Executive Director BEc, FRICS, FAPI Darren Steinberg is CEO and an Executive Director of DEXUS Funds Management limited (appointed 1 March 2012). Darren has more than 20 years’ experience in the property industry. Prior to joining DEXUS in March 2012, Darren was Managing Director Colonial First State Global Asset Management with responsibility for $18 billion of listed property, unlisted property and asset management and development functions. Prior to that, Darren held a number of senior property roles with Stockland, Westfield, lend lease and Jones lang Wootton. Darren has a Bachelor of Economics from the University of Western Australia. Darren is the current national President of the Property Council of Australia, a Fellow of the Royal Institution of Chartered Surveyors and the Australian Property Institute and a member of the Australian Institute of Company Directors. peter St george Independent Director CA(SA), MBA Peter is an Independent Director of DEXUS Funds Management limited (appointed 29 April 2009) and the Chair of the Board Finance Committee. During the year, Peter was also a member of the Board Audit and Board Risk & Sustainability Committees. Peter has more than 20 years’ experience in senior corporate advisory and finance roles within natWest Markets and Hill Samuel & Co in london. Peter acted as Chief Executive/Co‑Chief Executive Officer of Salomon Smith Barney Australia/natWest Markets Australia from 1995 to 2001. Peter was previously a Director of Spark Infrastructure Group, its related companies and SFE Corporation limited. Peter is currently a Director of First Quantum Minerals limited (listed on the Toronto Stock Exchange) and Boart longyear limited. 2012 DEXUS AnnUAl REPORT 5 CoRpoRaTE goVERNaNCE STaTEmENT aSX Corporate governance principles and Recommendations principle 1 – Lay solid foundations for management and oversight 1.1 Companies should establish and disclose the functions reserved for the board and those delegated to senior executives 1.2 Companies should disclose the process for evaluating the performance of senior executives principle 2 – Structure of the board to add value 2.1 A majority of the board should be independent directors 2.2 The chair should be an independent director 2.3 The roles of chair and chief executive officer should not be exercised by the same individual 2.4 The board should establish a nomination committee 2.5 Companies should disclose the process for evaluating the performance of the board, its committees and individual directors principle 3 – promote ethical and responsible decision making 3.1 Companies should establish and disclose a code of conduct or a summary of the code DEXUS Page 7   Pages 7‑9      Pages 9‑10  3.2 3.3 3.4 Companies should establish and disclose a policy concerning diversity or a summary of that policy. The policy should include requirements for the board to establish measurable objectives for achieving gender diversity for the board to assess annually both the objectives and progress in achieving them Companies should disclose in each annual report the measurable objectives for achieving gender diversity in accordance with the diversity policy and progress towards achieving them Companies should disclose in each annual report the proportion of women employees in the whole organisation, women in senior executive positions and women on the board    principle 4 – Safeguard integrity in financial reporting 4.1 The board should establish an audit committee 4.2 The audit committee should be structured so that it consists only of non‑executive directors, with a majority of independent directors, is chaired by an independent chair who is not chair of the board and has at least three members 4.3 The audit committee should have a formal charter principle 5 – make timely and balanced disclosure 5.1 Companies should establish written policies designed to ensure compliance with ASX listing Rule disclosure requirements and to ensure accountability at a senior executive level for compliance to and disclosure of those policies or a summary of those policies principle 6 – respect the rights of shareholders 6.1 Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy principle 7 – recognise and manage risk 7.1 7.2 7.3 Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies The board should require management to design and implement the risk management and internal control systems to manage the company’s material business risks and report on whether those risks are being managed effectively. The board should disclose that management has reported as to the effectiveness of the company’s management of its material business risks The board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks principle 8 – remunerate fairly and responsibly 8.1 The board should establish a remuneration committee 8.2 8.3 The remuneration committee should be structured so that it: consists of a majority of independent directors, is chaired by an independent chair and has at least three members Companies should clearly distinguish the structure of non‑executive directors’ remuneration from that of executive directors and senior executives 6 2012 DEXUS AnnUAl REPORT Pages 10‑11    Page 11  Page 12  Pages 12‑13    Page 13    DEXUS Funds Management limited (DXFM) is the Responsible Entity of each of the four Trusts that comprise DEXUS Property Group (DXS). DXFM is also responsible for management of the Group’s third party funds and mandates. The Board is also directly responsible for appointing and removing the Chief Executive Officer, and Company Secretary, ratifying the appointment of the Chief Financial Officer, and monitoring the performance of the Group Management Committee. The Board has implemented a corporate governance framework which applies to all DXFM funds and mandates and is designed to support the strategic objectives of the Group by defining accountability and creating control systems to mitigate the risks inherent in its day‑to‑day operations. The framework meets the requirements of the ASX Corporate Governance Principles and Recommendations with 2010 Amendments (2nd edition), and addresses additional aspects of governance that the Board considers important. Effective 1 July, 2012, the Board increased the breadth of responsibility of the Board nomination & Remuneration Committee to include oversight of its corporate governance framework. As a result, the Committee changed its name to the Board nomination, Remuneration & Governance Committee. References to the Board nomination, Remuneration & Governance Committee in this Report should be assumed to also apply to the previously named Board nomination & Remuneration Committee. Further information relating to DEXUS’s corporate governance framework, including committee structure, Terms of Reference, key policies and procedures and a reconciliation of the ASX Principles against DXFM’s governance framework is available at www.dexus.com/corporategovernance principle 1 – lay solid foundations for management and oversight roles and responsibilities As DEXUS comprises four real estate investment trusts, its corporate governance practices satisfy the requirements relevant to unit trusts. The Board has determined that its governance framework will also meet the highest standards of a publicly listed company. This includes the conduct of an annual general meeting, the appointment of Independent Directors by DEXUS security holders and additional disclosure such as the remuneration report. Board responsibilities The framework ensures accountability and a balance of authority by clearly defining the roles and responsibilities of the Board and Executive Management. This enables the Board to provide strategic guidance while exercising effective oversight of management. The Board is responsible for: n reviewing and approving DEXUS’s business objectives and strategies to achieve them. These objectives are the performance targets for the Chief Executive Officer and Group Management Committee. Performance against these objectives is reviewed annually by the Board nomination, Remuneration & Governance Committee and is a primary input to the remuneration review of Group Management Committee members n approval of the annual business plan n approval of acquisitions, divestments, and major developments n ensuring that DEXUS’s fiduciary and statutory obligations to stakeholders are met During FY12 a new Chief Executive Officer was appointed by the Board following an executive search, including internal and external candidates, assisted by an external consultant. group management committee responsibilities The Board has appointed a Group Management Committee which is responsible for achieving DEXUS’s goals and objectives, including ensuring the prudent financial and risk management of the Group. Throughout the year the Group Management Committee generally met weekly. Members of the Group Management Committee in FY12 were the Chief Executive Officer, Chief Investment Officer, Chief Financial Officer, Chief Operating Officer and General Counsel. From 1 July, 2012, the Group Management Committee has been extended to include Executive General Managers heading Human Resources, Investor Relations and Communications, and Strategy and Research. principle 2 – Structure the Board to add value Board composition The composition of the Board acknowledges the duties and responsibilities it discharges and is determined by relevant experience and general qualifications including: n the ability and competence to make appropriate business decisions n an entrepreneurial talent for contributing to the creation of investor value n relevant experience in the property, investment and financial services sectors n high ethical standards n exposure to emerging issues, and n a commitment to the fiduciary and statutory obligations to further the interests of all investors and achieve the Group’s objectives The incumbent Directors bring a range of skills and experience to the Board in the areas of strategy, property investment, funds management, capital markets, corporate governance, financial and risk management. Their expertise enables them to relate to the strategies of DEXUS and to make a meaningful contribution to the Board’s deliberations. Size DEXUS has determined that the optimal size of the Board should be small enough to be able to act decisively, but large enough to ensure a diverse range of views is provided on any issue. Throughout FY12, the Board comprised nine members, eight Independent Directors plus the Chief Executive Officer. Although the DXFM constitution allows for the appointment of up to 10 Directors, the Board has determined that its long term target is eight members, and will migrate to this target over time. 2012 DEXUS AnnUAl REPORT 7 CoRpoRaTE goVERNaNCE STaTEmENT During the year, two Independent Directors were appointed to the Board and one resigned. Further, Victor Hoog Antink resigned as Chief Executive Officer and Executive Director and Darren Steinberg was appointed Chief Executive Officer and Executive Director, commencing 1 March, 2012. As a consequence of the transition to a new Chief Executive Officer, the Board identified a need for stability and continuity throughout 2012. Therefore no further changes are planned at Board level for the remainder of this calendar year. The tenure of Independent Directors at 30 June, 2012 was: Name Chris Beare (Chair) Elizabeth Alexander AM Barry Brownjohn John Conde AO Tonianne Dwyer Stewart Ewen OAM Richard Sheppard Peter St George 0 to 3 years 3 to 6 years 10 months 6 months 3 years 2 months 3 years 2 months 6 to 9 years 7 years 10 months 7 years 6 months 7 years 6 months 7 years 10 months Board independence Independent Directors are independent of management and must be free of any business or other relationship that could materially interfere with the exercise of his or her unfettered and independent judgement. To be independent, a Director must not have, in the previous three years: 1. been retained as a professional adviser to DEXUS either directly or indirectly, or as determined by the Board 2. been a significant customer of DEXUS or supplier to DEXUS (as determined by the Chair), or 3. held a significant financial interest in DEXUS either directly or indirectly (as determined by the Chair), or 4. held a senior executive position at DEXUS The Board regularly assesses the independence of its Directors, in light of interests disclosed to it. Stewart Ewen, an Independent Director, was paid a fixed fee of $30,000 per annum for his attendance at property inspections, reviewing property investment proposals and participating in informal management meetings. The Board has considered this circumstance and determined that it has not affected Stewart’s independence. This arrangement ceased on 30 June, 2012. While Directors of the Responsible Entity are not technically subject to the approval of security holders, the Board has determined that all Directors, other than the Chief Executive Officer, will stand for election by DEXUS stapled security holders. If a nominated Director fails to receive a majority vote that Director will not be appointed to the Board of DXFM. DXFM Directors, other than the Chief Executive Officer, will hold office for three years following his or her first appointment (or, if appointed by the Board between DXS Annual General Meetings, from the date of the Annual General Meeting immediately succeeding the initial appointment). Independent Directors are not expected to hold office for more than ten years or be nominated for more than three consecutive terms, whichever is the longer. The Chair is an Independent Director who is responsible for leadership of the Board, the efficient organisation and conduct of the Board’s functions and briefing Directors on issues arising relevant to the Board. The Board has defined the responsibilities and performance requirements of the Chief Executive Officer and the performance of the Chief Executive Officer is monitored by the Chair. Biographies outlining the skills and experience of each Director are set out on pages 4‑5 of this Annual Report. The procedure for selecting and appointing new Directors to the Board can be found at www.dexus.com/corporategovernance meetings The Board generally meets monthly between February and november, with additional ad hoc meetings held throughout the year as required. Board meetings are normally held at the registered office of DEXUS, although some meetings are held “offsite” to allow Directors to visit DEXUS owned and managed properties. For example, in July 2011, the Board met in newport Beach, California, at the offices of its US west coast operations. To assist participation, video conferencing facilities are utilised as required. Directors are expected to attend at least 75% of meetings a year. In FY12 there was 100% attendance at all Board meetings. Agenda items for Board meetings are set by the Chair in conjunction with the Chief Executive Officer and Company Secretary and include (but are not limited to): n Chief Executive Officer’s report n Company Secretary’s report n Minutes of Board Committee meetings n Reports on asset acquisitions, disposals and developments n Management presentations n Other business, where directors can raise any matters of concern Each monthly Board meeting includes time for Independent Directors to meet without the Chief Executive Officer or other executives present. Board papers are provided to Directors no less than five business days before the scheduled meeting. Senior management is made available to provide clarification or answer any questions Directors may have prior to the Board meeting, or to attend the Board meeting if requested by the Directors. 8 2012 DEXUS AnnUAl REPORT Some of the key decisions made by the Board during FY12 included the: n selection and appointment of a new Chief Executive Officer n selection and appointment of two new Independent Directors n disposal of non‑core US properties n design of a new remuneration framework n commencement of a share buy‑back n retirement of REnTS n approval of a revised Board Committee structure Access to training and information To ensure that each new Director is able to meet his or her responsibilities effectively, newly appointed Directors receive a briefing by DEXUS management on business strategy and operations. new Directors receive an information pack which addresses the corporate governance framework, Committee structures and their Terms of Reference, governing documents, and background reports. All Directors undertake training, including regular presentations by management and external advisers on sector, fund, and industry specific trends, and property tours. Directors are encouraged to: n seek independent professional advice, at the Group’s expense and independent of management n seek additional information from management, and n directly access senior DEXUS executives as required performance The Board nomination, Remuneration & Governance Committee oversees a two‑year Board performance evaluation program in which Board and Committee performance is evaluated in the first year and individual Director performance in the next. The process is designed to identify opportunities for performance improvement. During FY12, the Chair conducted a series of interviews with new and existing Independent Directors in order to ascertain their views regarding Board and Committee performance. As a result of these interviews, the Board implemented a number of improvements to Committee structures and membership, which were effective from 1 July 2012. Chris Beare also met with key investors to obtain feedback on the performance of DEXUS and its remuneration policy. Board support The Board has established a number of Committees to assist it in the fulfilment of its responsibilities. Terms of Reference for these are reviewed at least annually, and copies can be found at www.dexus.com/corporategovernance. Independent Directors have a standing invitation to attend any/all Board Committee meetings, and agendas of Board Committee meetings are provided to all Independent Directors in advance of each meeting. Each Committee meeting has a standing agenda item to identify improvements to reporting or processes that would benefit the Committee, as well as any items that require immediate reference to the Board or a regulator (where applicable). principle 3 – promote ethical and responsible decision making codes of conduct To meet statutory and fiduciary obligations to each investor group and to maintain confidence in its integrity, the Board has implemented a series of clearly articulated compliance policies and procedures to which all employees must adhere: n The Board considers it important that all employees meet the highest ethical and professional standards and has consequently established an Employee Code of Conduct and a Directors’ Code of Conduct, both of which are approved by the Board Compliance Committee. n DEXUS’s Anti‑Bribery Policy covers the acceptance and provision of appropriate gifts and benefits and reinforces the Group’s commitment not to make donations to political parties. n The Group strongly supports the disclosure of corrupt conduct, illegality, or substantial waste of company assets under its Good Faith Reporting policy. Employees who make such disclosures are protected from any detrimental action or reprisal, and an independent external disclosure management service provider has been appointed to ensure anonymity for those reporting incidents. On an annual basis, all employees are required to confirm compliance with key policies such as the Code of Conduct and Good Faith Reporting. insider trading and trading in DEXUS securities To minimise any potential conflicts of interest, the Board previously determined that DEXUS Directors and Senior Executives would not trade in any security managed by the Group. This position was reviewed by the Board in 2012 and, to better enhance alignment of interests, the Board determined that it would be appropriate for Directors to hold DEXUS securities in the future. The Board has set a minimum holding of 50,000 securities to be acquired by each Independent Director by 30 June 2015. newly appointed Independent Directors will be required to purchase 50,000 securities within their first three year term. The Group has implemented a securities trading policy that applies to Directors and employees who wish to invest in DEXUS securities for their personal account or on behalf of an associate. The policy requires any Director who wishes to trade in DEXUS securities to obtain written approval from the Chair and Company Secretary. Employees wishing to trade in DEXUS securities must obtain written approval from the Chief Executive Officer and General Manager, Compliance, Risk & Governance, before entering into a trade. Effective 1 July, 2012, DEXUS Directors and employees will only be able to trade DEXUS securities in defined trading windows. In the event that the Chair or Chief Executive Officer considers that there is the potential that inside information may be held or that a significant conflict of interest may arise, trading will not be permitted, even in defined trading windows. Policies and procedures are available on our website at www.dexus.com/corporategovernance 2012 DEXUS AnnUAl REPORT 9 CoRpoRaTE goVERNaNCE STaTEmENT conflicts of interest and related party dealings The Group has implemented policies covering the management of conflicts of interest. Business conflicts may arise: n from allocating property transactions, where there may be conflicts principle 4 – Safeguard integrity in financial reporting Board Audit committee1 To ensure the factual presentation of each Trust’s financial position, DXFM has put in place a structure of review and authorisation, which includes the establishment of a Board Audit Committee to review: between the interests of different DEXUS clients n the Financial Statements of each entity n when allocating a limited investment opportunity between a number n the independence and competence of the external auditor, and of clients n from tenant conflicts, where a prospective tenant has two similar properties to choose from, owned by different DEXUS clients, and n from related party dealings involving more than one of DEXUS’s clients Where a conflict of interest has been identified, the Compliance, Risk & Governance team liaises with the parties concerned to ensure the effective and timely management of the conflict. Where information barriers are put in place, the team monitors compliance with the relevant policies. On a monthly basis, the General Counsel reports to the Board on related party transactions, while the General Manager, Compliance, Risk & Governance reports related party transactions to the Board Compliance Committee each quarter. During FY12, DEXUS managed several related party transactions where DEXUS Property Services Pty limited (a wholly owned property management company) leased space to accommodate its onsite managers from properties owned by STC and DEXUS Wholesale Property Fund. In these cases, independent verification was sought to ensure that rent reflected market rates. responsible investment DEXUS’s environmental management policy aims to minimise the overall environmental impact of its operations, both in the development of new properties and the management of existing properties. As a signatory to the United nations Principles of Responsible Investment (UnPRI), DEXUS incorporates these principles into its investment decisions. Diversity DEXUS comprises a socially and culturally diverse workplace and has created a culture that is tolerant, flexible and adaptive to the changing needs of our environment. We are committed to diversity and promote an environment conducive to the merit‑based appointment of qualified employees, senior management, and Directors. Where professional intermediaries are used to identify or assess candidates, they are made aware of our commitment to diversity. DEXUS currently publishes annual statistics on the diversity profile of its Board and senior management, including a breakdown of the type and seniority of roles undertaken by women. DEXUS acknowledges and fulfils its obligations under relevant employment legislation. During FY12, all employees were required to undertake training addressing equal employment, victimisation, harassment, and bullying. To reinforce DEXUS’s zero tolerance approach to discrimination we have appointed an independent external disclosure management service provider to accept claims of inappropriate or unethical behaviour. n semi‑annual management representations to the Board Audit Committee, affirming the veracity of each entity’s Financial Statements The Committee’s Terms of Reference require that all members are Independent Directors with financial expertise and an understanding of the industry in which the Group operates. The Board Audit Committee: n has access to management n has unrestricted access to external auditors without management present n has the right and opportunity to seek explanations and additional information as it sees fit, and n may also obtain independent professional advice in the satisfaction of its duties at the cost of the Group and independent of management The Committee meets as frequently as required to undertake its role effectively, not less than four times a year, and the external auditor is invited to attend all meetings. During FY12, the members of the Board Audit Committee were: Barry Brownjohn, Chair, Independent Director Elizabeth Alexander AM, Independent Director Peter St George, Independent Director Richard Sheppard, Independent Director (appointed 1 February, 2012) Consistent with the Group’s objective to maintain efficient operations, effective 1 July, 2012, the Committee reverted to a membership of three, with Peter St George standing down. The following reports are made to the Board Audit Committee: n The Chief Executive Officer and the Chief Financial Officer make representations on a semi‑annual basis about the veracity of the Financial Statements and financial risk management systems n The Internal Risk Committee completes a Fraud Risk questionnaire semi‑annually to identify any instances of actual or perceived fraud during the period n The Chief Executive Officer makes a representation at least quarterly to the General Manager, Compliance, Risk & Governance, regarding conformance with compliance policies and procedures, with any significant exceptions reported to the Board Compliance Committee n The Chief Financial Officer provides quarterly certification to the Board Compliance Committee as to the continued adequacy of financial risk management systems PwC continues its appointment as statutory auditor of DXFM and its related trusts and entities. In order to ensure the independence of the statutory auditor, the Board Audit Committee has responsibility for approving the engagement of the auditor for any non‑audit service greater than $100,000. As at 30 June, 2012, fees paid to the external auditor for non‑audit services were 15% of audit fees (27.6% at 30 June, 2011). 1 The Board Audit Committee and Board Risk & Sustainability Committee were amalgamated and became the Board Audit, Risk & Sustainability Committee on 8 August 2012. 10 2012 DEXUS AnnUAl REPORT Board compliance committee The Corporations Act 2001 does not require DXFM to maintain a Board Compliance Committee as more than half its Directors are external Directors, but the Board has determined that the Board Compliance Committee provides additional control, oversight and independence of the compliance function. Consistent with the Group’s objective to maintain efficient operations, effective 1 July, 2012, the Committee membership was reduced to three, with John Conde and Tanya Cox standing down. The Committee reports any breaches of the Corporations Act 2001 or of the provisions contained in any Trust’s Constitution or Compliance Plans to the DXFM Board, and reports to ASIC in accordance with legislative requirements. In accordance with DEXUS’s Good Faith Reporting policy, employees have access to Board Compliance Committee members to raise any concerns regarding unethical business practices. To enable the Board Compliance Committee to fulfil its obligations effectively, an Internal Compliance Committee has been established to monitor the effectiveness of the Group’s internal compliance and control systems. principle 5 – make timely and balanced disclosure continuous disclosure DXFM has established a Continuous Disclosure Committee to ensure timely and accurate continuous disclosure for all material matters that impact the Group. Committee members comprise members of the Group Management Committee, which meets weekly to consider the activities of the Group and specifically considers whether any disclosure obligation is likely to arise as a result. The Continuous Disclosure Committee has been established to ensure that: n investors continue to have equal and timely access to material information, including the financial status, performance, ownership and governance of the Trusts; and n announcements are factual and presented in a clear and balanced way Management is required to provide a quarterly attestation to the Compliance, Risk & Governance team that there have been no issues within their area of responsibility that would be subject to continuous disclosure requirements. Following each DXFM Board meeting, Directors consider the issues discussed during the meeting and determine whether any price sensitive information has arisen that would require market disclosure. Compliance with our Continuous Disclosure and Analyst Briefings policy is subject to ongoing monitoring, the results of which are reported to the Board Compliance Committee. For a copy of the Policy, see www.dexus.com/corporategovernance. The Board Compliance Committee reviews compliance matters and monitors DXFM conformance with the requirements of its Australian Financial Services licence and of the Corporations Act 2001 as it relates to Managed Investment Schemes. The scope of the Committee includes all Trusts and the Group’s investment mandates. The Committee includes only members who are familiar with the requirements of Managed Investment Schemes and have risk and compliance experience. Committee members are encouraged to obtain independent professional advice in the satisfaction of their duties at the cost of the Group and independent of management, although during FY12, no member of the Board Compliance Committee needed to seek such independent professional advice. As at 30 June, 2012, the Committee comprised five members, three external members (who satisfy the requirements of Section 601JB(2) of the Corporations Act 2001) and two executives of the Group. The members of the Board Compliance Committee for FY12 were: Andy Esteban, Chair, external member John Conde AO, external member (and Independent Director) Tonianne Dwyer, external member (and Independent Director) (appointed 31 October, 2011) Tanya Cox, executive member John Easy, executive member The Compliance Plan Auditor is invited to each Board Compliance Committee meeting. The skills, experience and qualifications of John Conde and Tonianne Dwyer are detailed on pages 4 and 5 and details for Tanya Cox and John Easy are on page 14 in this Annual Report. Andy Esteban holds a Bachelor of Business majoring in Accounting. He is a CPA and a member of the Australian Institute of Company Directors. Andy has over 30 years’ experience in the financial services industry, 21 years of which were with Perpetual Trustees. In December 1999 he established FP Esteban and Associates, specialising in implementing and monitoring risk management and compliance frameworks in the financial services industry. He has provided consulting services to organisations including UBS Global Asset Management in Australia, Hong Kong, Singapore, Taiwan and China. Andy is Chair of Certitude Global Investments ltd, a Director of HFA Holdings ltd and Chair of their Audit and Risk Committee and a member of their Remuneration and nomination Committee; Chair of the Compliance Committees of Aberdeen Asset Management ltd, Deutsche Asset Management Australia ltd, and Grant Samuel; and an Independent Member of the of Australian Unity Funds Management ltd, Celsius Investment Management limited, Schroder Investment Management Australia ltd, Fidelity International Investment Management limited and Alliance Bernstein Compliance Committees. 2012 DEXUS AnnUAl REPORT 11 CoRpoRaTE goVERNaNCE STaTEmENT principle 6 – Respect the rights of shareholders Annual general meeting The Board has committed to the conduct of an Annual General Meeting (AGM) to facilitate the effective exercise by DXS security holders of their rights. Each AGM is designed to: n supplement effective communication with security holders n provide them with ready access to balanced and understandable information n increase the opportunities for participation, and n facilitate security holders’ rights to appoint Directors to the Board of DXFM The Group’s policy is that all Directors attend its AGM. The external auditor of the Trusts also attends each AGM and is available to answer investor questions about the conduct of the audits both of the Trusts’ financial records and of their Compliance Plans, as well as the preparation and content of the Auditor’s Report. DEXUS engages an independent service provider, link Market Services, to conduct any security holder vote required at the AGM. To facilitate participation, the AGM can be accessed via webcast for those security holders unable to attend the meeting. Stakeholder communication In addition to conducting an AGM, the Group has an investor relations and communications strategy that promotes an informed market and encourages participation with investors. This strategy includes use of the Group’s website to enable access to DEXUS announcements, annual and half‑year reports, presentations, and analyst support material. The website also contains historical information on announcements, distributions and other related information at www.dexus.com/dxs Analyst briefings are undertaken on a regular basis and enquiries received from investors are addressed in a timely manner in accordance with DEXUS’s policy on the handling of enquiries and complaints. principle 7 – Recognise and manage risk Board risk & Sustainability committee2 To oversee risk management at DEXUS, the Board has established a Board Risk & Sustainability Committee that is responsible for reviewing the Group’s operational risk management, environmental management, sustainability initiatives, internal audit practices, and handling any incidents of fraud. The Committee also approves and oversees the effectiveness of the Group’s Risk Management Framework. The Board Risk & Sustainability Committee and Board Audit Committee share common membership to ensure that a comprehensive understanding of control systems is maintained by both Committees. Members of the Board Risk & Sustainability Committee for FY12 were: Barry Brownjohn, Chair, Independent Director Elizabeth Alexander AM, Independent Director Peter St George, Independent Director Richard Sheppard, Independent Director (appointed 1 February, 2012) Consistent with the Group’s objective to maintain efficient operations, effective 1 July, 2012, the Committee reverted to a membership of three, with Peter St George standing down. During FY12, the Board Risk & Sustainability Committee focused on strategic risk management, including DEXUS’s appetite for risk. While some risks are identified, managed and monitored internally, DEXUS has appointed independent experts to undertake monitoring of health and safety, environmental risks, and other risks where expert knowledge is essential to ensure DEXUS has in place best practice processes and procedures. The Board Risk & Sustainability Committee is empowered to engage consultants, advisers, or other experts independently of management. During FY12, an independent external expert was appointed to undertake a detailed review of DEXUS’s Business Continuity Plan, which resulted in improvements to existing procedures. risk management The management of risk is an important aspect of the DEXUS’s activities, so the Group has created a segregated risk function reporting to the General Counsel (previously the Chief Operating Officer) on a day‑to‑day basis, as well as an Internal Risk Committee that has an independent reporting line to the Board Risk & Sustainability Committee. The General Manager, Compliance, Risk & Governance also has access to the Chief Executive Officer and Independent Directors. Risks to DEXUS come from numerous sources, driven by both internal and external factors and include (in no particular order): n Strategic risks n Market risks n Health and safety risks n Operational risks n Environmental risks n Financial risks n Regulatory risks n Fraud risks 2 The Board Audit Committee and Board Risk & Sustainability Committee were amalgamated and became the Board Audit, Risk & Sustainability Committee on 8 August 2012. 12 2012 DEXUS AnnUAl REPORT The Compliance, Risk & Governance team’s responsibility is to promote an effective risk and compliance culture by providing advice, drafting and updating relevant risk and compliance policies and procedures, conducting training, and monitoring and reporting adherence to key policies and procedures. Frameworks have been developed and implemented in accordance with ISO 31000:2009 (Risk Management) and AS 3806:2006 (Compliance Programs). The functions of the Compliance, Risk & Governance team include risk and compliance management, corporate governance, and internal audit. The ongoing effectiveness of the risk management and internal control systems is reported by the General Manager, Compliance, Risk & Governance to the Board Risk & Sustainability Committee and Board Compliance Committee on a quarterly basis. principle 8 – Remunerate fairly and responsibly Board Nomination, remuneration & governance committee A Board nomination, Remuneration & Governance Committee oversees all aspects of: n Director and Executive remuneration n Board renewal n Director, Chief Executive Officer, and management succession planning n Board and Committee performance evaluation n Director nominations The Committee comprises three Independent Directors: John Conde AO, Chair, Independent Director DEXUS’s internal control procedures are also subject to annual independent verification as part of the GS007 (Audit Implications of the Use of Service Organisations for Investment Management Services) audit. Chris Beare, Independent Director Stewart Ewen OAM, Independent Director internal audit The internal audit program has a three year cycle, the results of which are reported on a quarterly basis to the Internal Audit Committee and to the Board Risk & Sustainability Committee. While internal audit is resourced internally, DEXUS has adopted a co‑sourcing arrangement. The appointment of an external firm as co‑source service provider has the advantage of ensuring DXFM is informed of broader industry trends and experience. A partner from the internal audit co‑source service provider is invited to each Board Risk & Sustainability Committee meeting to keep Directors informed about these trends. Board finance committee The Group is subject to significant financial risk, including interest rate and foreign exchange exposures. To assist in the effective management of these exposures, the Board has established a committee specifically to deal with them. The Board Finance Committee’s role is to review and recommend financial risk management policies, hedging and funding strategies, forward looking financial management processes, and periodic market guidance for consideration by the Board. Members of the Board Finance Committee are: Peter St George, Chair, Independent Director Barry Brownjohn, Independent Director Chris Beare, Independent Director Consistent with the Group’s objective to maintain efficient operations and refresh its expertise, effective 1 July, 2012, Barry Brownjohn stood down and Richard Sheppard joined the Committee. To support this Committee’s deliberations, a Capital Markets Committee has been established. The Chief Executive Officer and Executive General Manager, Human Resources attend the Board nomination, Remuneration & Governance Committee meeting by invitation. It is the practice of the Board nomination, Remuneration & Governance Committee to meet without executives as required, and non‑committee members are not in attendance when their own performance or remuneration is discussed. The Board nomination, Remuneration & Governance Committee is empowered to engage external consultants independently of management and in FY12, appointed Ernst & Young and Egan Associates to provide it with independent remuneration services. To reflect the evolution of best practice remuneration policy, effective 1 July, 2012, the Board determined that 25% of all short term incentive payments to Senior Executives will be deferred over 12 and 24 months, and will be subject to clawback provisions. In 2012 the Board also determined that DEXUS’s existing Deferred Performance Payment Plan would be discontinued and that an lTI Plan would be introduced, granting equity awards over 36 and 48 months to Senior Executives, subject to performance hurdles. The lTI Plan is subject to security holder approval at the Group’s Annual General Meeting in november 2012. Details of the Group’s remuneration framework for Executives, Independent Directors and employees are set out in the Remuneration Report that forms part of the Directors’ Report contained in this report starting on page 14. There are no schemes for retirement benefits (other than superannuation) for Independent Directors. 2012 DEXUS AnnUAl REPORT 13 Financial Report DIRECToRS’ REpoRT for the year ended 30 June 2012 The Directors of DEXUS Funds Management limited (DXFM) as Responsible Entity of DEXUS Diversified Trust (DDF or the Trust) present their Directors’ Report together with the consolidated Financial Statements for the year ended 30 June 2012. The consolidated Financial Statements represents DDF and its consolidated entities, DEXUS Property Group (DXS or the Group). The Trust together with DEXUS Industrial Trust (DIT), DEXUS Office Trust (DOT) and DEXUS Operations Trust (DXO) form the DEXUS Property Group stapled security. 1 Directors and Secretaries 1.1 Directors The following persons were Directors of DXFM at all times during the year and to the date of this Directors’ Report, unless otherwise stated: Directors appointed Resigned Christopher T Beare 4 August 2004 Elizabeth A Alexander AM 1 January 2005 Barry R Brownjohn 1 January 2005 John C Conde AO 29 April 2009 Tonianne Dwyer 24 August 2011 Stewart F Ewen OAM 4 August 2004 Victor P Hoog Antink 1 October 2004 1 March 2012 Brian S Scullin 1 January 2005 31 October 2011 W Richard Sheppard 1 January 2012 Darren J Steinberg 1 March 2012 Peter B St George 29 April 2009 1.2 company Secretaries The names and details of the Company Secretaries of DXFM as at 30 June 2012 are as follows: Tanya l Cox mBa, maICD, FCSa, FCIS appointed: 1 october 2004 Tanya is the Executive General Manager Property Services and Chief Operating Officer of DEXUS Property Group and is responsible for the tenant and client service delivery model, corporate responsibility and sustainability practices, information technology solutions and company secretarial services across the Group. Tanya has over 25 years’ experience in the finance industry. Prior to joining DEXUS in July 2003, Tanya held various general management positions over the previous 15 years, including Director and Chief Operating Officer of nM Rothschild & Sons (Australia) ltd and General Manager – Finance, Operations and IT for Bank of new Zealand (Australia). Tanya is a Director of low Carbon Australia limited and Member of the Property Council of Australia national Risk Committee. Tanya is Chair of Australian Athletes With a Disability limited and is a non‑executive director of a number of not‑for‑profit organisations. Tanya is a member of the Australian Institute of Company Directors and a fellow of the Institute of Chartered Secretaries of Australia. Tanya has an MBA from the Australian Graduate School of Management, a Diploma in Applied Corporate Governance and was a finalist in the 2005 nSW Telstra Business Woman of the year awards. John C Easy B Comm, llB, aCSa, aCIS appointed: 1 July 2005 John is the General Counsel and Company Secretary of DXFM and is responsible for the legal function and compliance, risk and governance systems and practices across the Group. During his time with the Group, John has been involved in the establishment and public listing of Deutsche Office Trust, the acquisition of the Paladin and AXA property portfolios, and subsequent stapling and creation of DEXUS Property Group. Prior to joining DXS in november 1997, John was employed as a senior associate in the commercial property/funds management practices of law firms Allens Arthur Robinson and Gilbert & Tobin. John graduated from the University of new South Wales with Bachelor of laws and Bachelor of Commerce (Major in Economics) degrees. John also is an Associate of the Institute of Chartered Secretaries of Australia. John is General Counsel and Company Secretary for all DEXUS Group companies. He is also a member of the Board Compliance Committee and Chair of the Continuous Disclosure Committee. 14 2012 DEXUS AnnUAl REPORT 2 attendance of Directors at Board meetings and Board Committee meetings The number of Directors’ meetings held during the year and each Director’s attendance at those meetings is set out in the table below. The Directors met 13 times during the year. nine Board meetings were main meetings, four meetings were held to consider specific business. While the Board continually considers strategy, following commencement of the new CEO the Group’s strategic plans were reviewed in detail, culminating in a one day Board and senior executive workshop held in June 2012. main meetings held main meetings attended Specific meetings held Specific meetings attended Christopher T Beare Elizabeth A Alexander AM Barry R Brownjohn John C Conde AO Tonianne Dwyer Stewart F Ewen OAM Victor P Hoog Antink Brian E Scullin W Richard Sheppard Darren J Steinberg Peter B St George 9 9 9 9 7 9 5 3 5 4 9 9 9 9 9 7 9 5 3 5 4 9 4 4 4 4 4 4 1 – 2 2 4 4 4 4 4 4 4 1 – 2 2 4 Special meetings are held at a time to enable the maximum number of Directors to attend and are generally held to consider specific items that cannot be held over to the next scheduled main meeting. The table below sets out the number of Board Committee meetings held during the year for the Committees in place at the end of the year and each Director’s attendance at those meetings. Board audit Committee Board Risk & Sustainability Committee Board Compliance Committee Board Nomination & Remuneration Committee Board Finance Committee held attended held attended held attended held attended held attended Christopher T Beare Elizabeth A Alexander AM Barry R Brownjohn John C Conde AO Tonianne Dwyer Stewart F Ewen OAM Brian E Scullin W Richard Sheppard Peter B St George – 4 4 – – – – 2 4 – 4 4 – – – – 2 4 – 4 4 – – – – 2 4 – 4 4 – – – – 2 4 – – – 4 3 – 1 – – – – – 4 3 – 1 – – 11 – – 11 – 11 – – – 11 – – 11 – 11 – – – 4 – 4 – – – – – 4 4 – 4 – – – – – 4 2012 DEXUS AnnUAl REPORT 15 During the year an agreement was made to change our Chief Executive Officer (CEO). Following an executive search process and effective transition period, our new CEO commenced on 1 March 2012. We have provided further detail below of the remuneration arrangements that applied to our former CEO and the arrangements applying to our new CEO. This Remuneration Report has been prepared in accordance with AASB 124 Related Party Disclosures and section 300A of the Corporations Act 2001 for the year ended 30 June 2012. The information provided in this Report has been audited in accordance with the provisions of section 308 (3C) of the Corporations Act 2001. 3.2 Key management personnel In this report, Key Management Personnel (KMP) are those individuals having the authority and responsibility for planning, directing and controlling the activities of the DEXUS Property Group (Group), either directly or indirectly. They comprise: n non‑Executive Directors n the Chief Executive Officer (CEO) n Key Executives who are members of the Group Management Committee (GMC) Below are the individuals determined to be KMP of the Group, classified between non‑Executive Director and key Executive personnel. Non-Executive Directors During the year, the following relevant changes relating to the Board’s composition occurred: n Resignation of Mr Scullin as a non‑Executive Director effective 31 October 2011 n Appointment of Ms Dwyer as a non‑Executive Director effective 24 August 2011 n Appointment of Mr Sheppard as a non‑Executive Director effective 1 January 2012 Non-Executive Director Title Kmp 2012 Kmp 2011 Christopher T Beare Chair Elizabeth A Alexander AM Director Barry R Brownjohn John C Conde AO Tonianne Dwyer Stewart F Ewen OAM Brian E Scullin W Richard Sheppard Peter B St George Director Director Director Director Director Director Director 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 DIRECToRS’ REpoRT 3 Remuneration Report 3.1 overview The Remuneration Report has been prepared in accordance with the Corporations Act and relevant accounting standards. Whilst DXS is not required statutorily to prepare such a report, we continue to believe that disclosure of the Group’s remuneration practices is in the best interests of all security holders. Following a vote against the adoption of the 2011 Remuneration Report, we have made significant changes to the executive remuneration arrangements to be effective from 1 July 2012. The changes to the remuneration arrangements are subject to security holder approval at the Annual General Meeting (AGM) in november 2012. These changes resulted from extensive consultations with and feedback obtained from security holders, proxy advisors and remuneration advisors following last year’s AGM. The Chairman of the Board met personally with 14 of our institutional security holders during March and April of this year. Whilst further detail is provided below, we have reviewed fixed remuneration levels payable to key Executives (including the Chief Executive Officer) and annual “at‑risk” incentive remuneration opportunity (including the basis for and form of any such benefit), and will introduce a transparent and targeted long term incentive plan including a range of appropriate performance hurdles. The changes are aimed at ensuring each component of the Group’s overall remuneration framework reflects current market practice and the Group’s contemporary business environment and profile, specifically the A‑REIT sector. We have undertaken a significant restructure of the executive incentive plans so that they are more transparent, better understood and, most importantly, offer closer alignment of reward outcomes to security holder interests. This has involved the explicit inclusion of security holder return performance hurdles within the executive incentive plans and requiring relevant Executives to hold a significant proportion of their total remuneration in DXS securities upon achievement of such hurdles. The Board concluded that the DEXUS Deferred Performance Payment (DDPP) was perceived to be a long term incentive arrangement and assessed accordingly by external commentators – whereas, in reality, the DDPP was a deferral, annually, of a portion of a short term incentive award. The principal perceived problem of the DDPP was its potential to increase the value of the deferred award at a rate in excess of movement in security holder value. The DDPP will be replaced from 1 July 2012 and no new DDPP awards will be made with respect to remuneration after that date. The Board has also foreshadowed that it intends to exercise its discretion not to apply the DDPP outperformance multiplier on awards already granted but not yet vested (for 2010, 2011 and 2012). The new CEO and his direct reports will receive their DDPP awards for the 2012 financial year in the form of performance rights to DXS securities under a transition arrangement. The Board also concluded that the Remuneration Reports should provide greater disclosure on comparator groups and performance outcomes for Executives and that a more active security holder engagement strategy should be adopted. Upon completion of the review the Board resolved to introduce this new remuneration framework. 16 2012 DEXUS AnnUAl REPORT Key Executives During the year, the following executive changes occurred: n Mr Hoog Antink agreed with the Board to a CEO leadership transition and the Board commenced a search for a new CEO n Mr Steinberg was appointed CEO effective 1 March 2012 n In accordance with the transition agreement, Mr Hoog Antink was given notice by the Board that his services would be terminated on 31 March 2012 which triggered his contractual severance conditions n Mr Say was advised that his position of Chief Investment Officer would become redundant, effective 1 July 2012, which triggered his contractual severance conditions Key Executive position Darren J Steinberg Chief Executive Officer & Executive Director Tanya l Cox John C Easy Chief Operating Officer General Counsel Craig D Mitchell Chief Financial Officer Victor P Hoog Antink Former Executive – Chief Executive Officer Paul D Say Former Executive – Chief Investment Officer Kmp 2012 Kmp 2011 3 3 3 3 3 3 3 3 3 3 3 3.3 Board Nomination, remuneration & governance committee The objectives of the Committee are to assist the Board in fulfilling its responsibilities by overseeing all aspects of non‑Executive Director and Executive remuneration, as well as Board nomination and performance evaluation. Primarily, the responsibilities of the Committee are: n To review and recommend to the Board: – Board and CEO succession plans – performance evaluation procedures for the Board, its committees and individual Directors – the nomination, appointment, re‑election and removal of Directors – the approach to remuneration at DEXUS, including design and operation of employee incentive plans – Executive performance and remuneration outcomes – non‑Executive Directors’ fees During the year ended 30 June 2012 Committee members were: Non-Executive Director Title John C Conde AO Committee Chair Christopher T Beare Committee Member Stewart F Ewen OAM Committee Member 2012 2011 3 3 3 3 3 3 Mr Conde continued in his role as Committee Chair, drawing upon his extensive experience from a diverse range of appointments, including his role as President of the Commonwealth Remuneration Tribunal. The Committee’s experience is further enhanced through the membership of Mr Beare and Mr Ewen, each of whom has significant management experience in the property and financial services sectors. The Committee operates independently from management, and may at its discretion appoint external advisors or instruct management to compile information for its consideration. During the year the Committee appointed Egan Associates and Ernst & Young to provide remuneration advisory services. Such services were provided to the Committee free from any undue influence by management. advisor Description of Service Egan Associates Remuneration Advisory Services Ernst & Young Remuneration Advisory Services Clayton Utz Executive Contract Advice Fee $90,552 $116,884 $4,405 2012 DEXUS AnnUAl REPORT 17 DIRECToRS’ REpoRT 3 Remuneration Report (continued) 3.4 Executive remuneration Context The Board believes that key Executives should be rewarded at levels consistent with the complexity and risks involved in their position. Incentive awards should be scaled according to the relative performance of the Group, as well as business unit performance and individual effectiveness. The Group’s remuneration principles can be summarised as follows: For the 2012 financial year, participating Executives continued to receive performance pay in accordance with the DEXUS Performance Payment (DPP) and the DEXUS Deferred Performance Plan (DDPP). The first grant under the new lTI plan will be made in August 2013. Key Executives have agreed to accept their DDPP performance award for the 2012 financial year in the form of performance rights to DXS securities under a transition arrangement. Commencing 1 July 2012, the following will apply in relation to the remuneration of key Executives: Key Executives n no increase to fixed remuneration for the CEO and other key Executives Fair and competitive Aligned to investor interests Link between performance and reward Attract, motivate and retain talent n Implementation of the new remuneration framework will be effective FIXED REMUNERATION 1 July 2012 (conditional on security holder approval at the november 2012 AGM) + New STI plan VARIABLE AT-RISK REMUNERATION n Provide an annual performance‑based award assessment similar to that under the existing DPP based on a balanced scorecard of key performance indicators (KPIs) set at stretch The Group requires, and needs to retain, a senior management team with significant experience in: n the office, industrial and retail property sectors n property management, including securing new tenancies under contemporary lease arrangements, asset valuation and related financial structuring and property development in its widest context n capital markets, funds management, fund raising, joint venture negotiations and the provision of advice and support to independent investment partners n treasury, tax and compliance In this context the Committee reviews trends in employee reward structures and strategies embraced across these sectors, including: However, unlike the DPP: n Only 75% of any award will be immediately payable in cash. The remaining 25% will be deferred into performance rights to DXS securities n The performance rights will vest in equal tranches 12 and 24 months after they are awarded and be subject to clawback and service conditions during the deferral periods n Executives will be entitled to the benefit of any distributions paid on the underlying DXS securities prior to vesting through the issue of additional performance rights New LTI plan (to apply from 1 July 2013) n Performance‑based remuneration aligned better to security holder interest through a grant of performance rights to DXS securities n Subject to a performance assessment over three and four years n comparable international funds and asset managers which have an n Main features of the new lTI plan are: – Performance rights will be granted in two equal tranches vesting after 3 and 4 years subject to performance, clawback and service conditions being satisfied over each period – Performance hurdles will be based on relative total security holder return (TSR), FFO and ROE measures – no performance multiplier will apply for outperformance – Executives will not be entitled to distributions paid on the underlying DXS securities prior to the performance rights vesting – There will be no retesting of performance The tables and graphs on pages 19‑20 provide a summary of the proposed evolution of the existing remuneration framework to the new remuneration framework. They also illustrate the increased proportion of total remuneration that is deferred and also the new proportion held as performance rights to DXS securities. This evolution further aligns the Group’s executive remuneration structures with security holders’ interests. active presence in Australia n ASX listed entities n boutique property asset managers and consultants n private equity and hedge funds which have an increasing exposure to the business interests of the Group In establishing the new remuneration framework, the Board has been assisted by feedback from remuneration advisers, proxy advisers and institutional investors. Given that the Group instigated an extensive executive search process during 2011, the process provided invaluable input to the Group’s deliberations about total remuneration quantum and structure (fixed and variable) for the position of CEO of the Group. This process addressed conclusively the issue of CEO remuneration for the Group. Remuneration structure and key changes The remuneration structure for key Executives will comprise fixed remuneration, a short term incentive and a long term incentive. As previously announced by the Group and also highlighted in the overview section above, several key changes have been approved by the Board in respect of executive incentive plans. A revised short term incentive (STI) plan will be introduced for key Executives (CEO and his direct reports) from 1 July 2012 (the 2013 financial year). A new long term incentive (lTI) plan will also be introduced for key Executives to commence 1 July 2013 (the 2014 financial year). 18 2012 DEXUS AnnUAl REPORT Existing framework component fixed remuneration f i X E D DEXUS performance payment (Dpp) A t r i S K DEXUS Deferred performance payment (DDpp) Long term incentive (Lti) New framework component fixed remuneration Sti (immediate) Sti (deferred) f i X E D A t r i S K Long term incentive (Lti) % of fixed remuneration 100% Target 85% (CEO) 75% (CFO & CIO) 50% (other key Execs) Target 100% (CEO) 75% (CFO & CIO) 50% (other key Execs) % of fixed remuneration 100% Target 100% (CEO & CFO) 70% (other key Execs) Outperformance up to 125% (CEO & CFO) up to 87.5% (other key Execs performance measure Market review Annual performance against pre‑agreed weighted financial and non‑financial KPIs (i.e. balanced scorecard) performance range Delivery mechanism Actual payments reflect individual expertise & market conditions Cash, superannuation & packaged benefits 0 to 100% of target remuneration structure Cash 0 to 100% of target remuneration structure and 1.1 to 1.5 times award for outperformance of 3 year benchmark investment returns Phantom composite equity (DXS and Unlisted), vesting over 3 years Outperformance multiplier incentive available not available performance measure Market review performance range Delivery mechanism Actual payments reflect individual expertise & market conditions Cash, superannuation & packaged benefits 75% paid in cash 25% deferred into DXS performance rights, vesting in equal tranches 12 and 24 months after award and subject to service and clawback provisions Failure to meet threshold performance will result in zero payment for that performance component To achieve target STI, Executives must meet pre‑agreed business and individual KPIs set at stretch To achieve maximum STI, Executives must achieve exceptional business and Individual performance outcomes Grant based on a pre‑determined % of fixed remuneration Annual performance against pre‑agreed weighted financial and non‑financial KPIs (i.e. balanced scorecard) Vesting conditional on future performance hurdles (Relative TSR and earnings measures) DXS performance rights, vesting in two equal tranches 3 and 4 years after grant and subject to service and clawback provisions Maximum Opportunity at grant: 85% (CEO) 50% (CFO) 30% (other key Execs) 2012 DEXUS AnnUAl REPORT 19 DIRECToRS’ REpoRT 3 Remuneration Report (continued) 3.4 Executive remuneration (continued) Key Executives (continued) Target remuneration mix for key Executives (expressed as a percentage of fixed remuneration) is shown below: target remuneration structure LTI Deferred STI STI Fixed K S I R T A D E X I F 85% 25% 75% 85% 31% 94% 50% 25% 75% 50% 31% 94% 30% 18% 53% 30% 22% 66% 100% 100% 100% 100% 100% 100% Target Outperformance Target Outperformance Target Outperformance CEO CFO Other key Executives Evolution of cEo remuneration NEW LTI STI Fixed K S I R T A D E X I F DDPP 50% Vesting – performance period (performance rights) 50% Vesting – performance period (performance rights) Performance period 12.5% Vesting 12.5% Vesting Deferral period (performance rights) 75% Vesting (cash payment) 100% Vesting – deferral period (phantom equity) EXISTING DPP Performance period 100% Vesting (cash payment) Fixed July June August Year 2 Year 3 Year 4 Year 5 The illustration below highlights the maximum remuneration opportunity for the CEO under the new framework incorporating a traditional lTI with performance hurdles, compared to the current remuneration framework incorporating the established DPP and DDPP, the latter which embraced a performance multiplier at vesting. The illustration reflects an uplift in security price over the 4 year lTI vesting period and the impact of the multiplier (incorporating security price growth and distributions) under the current DDPP. The new framework also incorporates a deferral element under the annual incentive award in the form of DXS securities and, whilst revealing a reduction in key Executive potential reward, better aligns remuneration opportunity to security holder interests. Capital growth Capital growth (reflective of 2009 DDPP and includes distributions) NEW EXISTING 100% Fixed 100% Fixed 94% STI cash 31% STI deferred 85% LTI 15% 85% DPP 100% DDPP 40% 55% DDPP Multiplier 100% 200% 300% 400% 20 2012 DEXUS AnnUAl REPORT Frequently asked questions New remuneration structure Sti plan What is the STI Plan? What is the new remuneration structure? The remuneration structure for Executives at Target is as follows: n CEO – 35% fixed, 65% at‑risk n CFO – 40% fixed, 60% at‑risk n Other key Executives – 50% fixed, 50% at‑risk The “at‑risk” amount consists of STI and lTI components which, if certain Group and Individual performance conditions are not met, can be significantly reduced (in the case of the STI) or forfeited entirely (in the case of the lTI). Why does the Board consider this structure appropriate? The Board considers the remuneration structure to be appropriate as it: CEO CFO n reflects market practice n links individual performance to STI outcomes n is closely aligned to security holder interests through lTI performance hurdles n through equity exposure and outperformance potential, the structure offers attractive incentives for highly effective Executives total remuneration How does the Board determine total remuneration? The Committee reviews a considerable amount of information from a variety of sources to ensure an appropriate outcome reflecting market practice (incorporating various benchmarks) is achieved. These sources include: n Publicly available remuneration reports of A‑REIT competitors n Publicly available remuneration reports from ASX listed companies with similar market capitalisation and complexity n Advice on remuneration levels of privately held property, funds management, and private equity owned companies n Salary survey data from Hart Consulting, Avdiev, Aon Hewitt, FIRG and others as appropriate n Advice from external advisors appointed by the Committee, Egan Associates and Ernst & Young The comparator group considered as part of the above process is significantly larger than the comparator group adopted for assessment of the Group’s relative TSR performance under the new lTI plan (refer below). Executives are recruited from the former group though DXS performance will subsequently be assessed appropriately with respect to the latter. fixed remuneration What is fixed remuneration? Fixed remuneration is the regular pay (base salary and statutory superannuation contributions) an Executive receives in relation to his/her role. It reflects the complexity of the role, as well as the skills and competencies required to fulfil it, and is determined having regard to a variety of information sources to ensure the quantum is fair and competitive. How is fixed remuneration determined? The Committee sets fixed remuneration around the median level of comparable companies after making adjustments for the different risk profiles of those companies (refer to Total Remuneration above). The STI Plan provides the Executive with an opportunity to achieve an annual remuneration outcome in addition to fixed remuneration, subject to the achievement of pre‑agreed Group, divisional and individual performance objectives which are set out in a personalised balanced scorecard. How much can be earned under the STI Plan? Expressed as a percentage of fixed remuneration, Executives can earn the following incentive payments under the STI Plan: Target outperformance 100% 100% 70% 125% 125% 87.5% Other key Executives Aggregate performance below predetermined thresholds would result in no award being made under the STI Plan. The amount each Executive can earn is dependent on how he/she performs against a balanced scorecard of KPIs that is set at the beginning of each year. The balanced scorecard is arranged in categories and each category is weighted differently depending on the specific accountabilities of each Executive. If an Executive does not meet threshold performance in a category, the score for that category will be zero. The combination of KPIs in each category is set at stretch levels such that it would be very difficult for any Executive to score 100% in any category. Target is this combination of KPIs and is therefore a stretch goal. Typically the balanced scorecard in the old plan has delivered 85% to 90% of target for fully effective performance. We expect the new plan to operate in a similar fashion. With the introduction of thresholds, failure to achieve a KPI threshold will result in no payment for that KPI and potentially, in aggregate, for the total STI assessment. Furthermore, outperformance would only be recognised if an Executive outperformed the balanced scorecard KPIs by exceptional achievements. How does the deferral component operate? 25% of any award under the STI Plan will be deferred and awarded in the form of performance rights to DXS securities. The rights will vest in two equal tranches, 12 and 24 months after being awarded subject to clawback and continued employment based on a deferral period commencing 1 July after the relevant performance period. How is the STI Plan aligned to security holder interests? The STI Plan is aligned to security holder interests in the following ways: n as an immediate reward opportunity to attract, motivate and retain talented Executives who can influence the future performance of the Group n through a 25% mandatory STI deferral for Executives – ensuring that Executives have a continuing interest in the outperformance of DXS securities – allowing for future clawback of STI awards in the event of a material misstatement of the Group’s financial position When is the STI paid? Paid to Executives in August of the financial year immediately following the performance period, following the sign‑off of statutory accounts and announcement of Group’s annual results. 2012 DEXUS AnnUAl REPORT 21 DIRECToRS’ REpoRT 3 Remuneration Report (continued) 3.4 Executive remuneration (continued) Frequently asked questions (continued) How are the performance hurdles measured? Relative TSR n 50% vesting for performance at the median of comparator group; n Straight‑line vesting for performance between the 50th and 75th How is the allocation of deferred STI determined? percentile; and The number of performance rights awarded is based on 25% of the STI value awarded to the Executive divided by the volume weighted average price (VWAP) of securities 10 trading days either side of the first trading day of the new financial year. n 100% vesting for performance at or above the 75th percentile. n Proposed comparator group: – listed: CPA, IOF, GPT, CFX, WRT, DXS – Unlisted: AMP Office, GWOF, APPF, Investa, ISPT (Diversified) How are distributions treated during the deferral period? Executives will be entitled to the benefit of distributions paid on the underlying DXS securities prior to vesting through the issue of additional performance rights. Lti plan What is the LTI Plan? The lTI is an incentive grant which rewards Executives for sustained earnings and security holder returns and is delivered in the form of performance rights to DXS securities. How are grants under the LTI Plan determined? Executives receive a grant of performance rights to DXS securities (dependent on their role and responsibilities) under the lTI Plan equivalent to the following percentage of Fixed Remuneration: CEO CFO Other Key Executives How does the LTI Plan work? lTI grant (% of Fixed Remuneration) 85% 50% 30% Performance rights are converted into DXS securities upon achievement of performance conditions set by the Board. Performance against the selected hurdles will be assessed in two equal tranches over two periods, 3 and 4 years after the grant date. If the performance conditions are not met over either period, then the respective performance rights will be forfeited. There is no re‑testing of forfeited rights. What are the performance hurdles? n 50% measured on the basis of the Group’s performance against relative total security holder return (Relative TSR) performance hurdle. TSR represents an investor’s return, calculated as the percentage difference between the initial amount invested and the final value of the DXS securities at the end of the relevant period, assuming distributions were reinvested. n 25% measured on the basis of the Group’s performance against a predetermined Funds From Operations (FFO) per security hurdle rate. FFO is defined as profit/loss after tax adjusted for property revaluations, impairments, derivative and FX mark to market impacts, amortisation of certain tenant incentives, straight line rent adjustments, deferred tax expense/benefit and any capital distributions received. n 25% measured on the basis of predetermined Return on Equity performance hurdles. Vesting under the Relative TSR measure will be on a sliding scale and reflect the degree of outperformance relative to a comparator group of companies. The comparator group will comprise both listed and unlisted entities. 22 2012 DEXUS AnnUAl REPORT FFO per security and Return on Equity n 50% vesting for Target performance; n Straight line vesting for performance between Target and Stretch; and n 100% vesting for Stretch performance. How is the LTI Plan aligned to security holder interests? Aligned to long term security holder interests in the following ways: n as a reward to Executives when the Group’s overall performance exceeds specific predetermined earnings and security holder return benchmarks n as a reward mechanism which encourages Executive retention and at the same time allows for future clawback of lTI grants for financial underperformance, deliberate misrepresentation or fraud n aligning the financial interests of security holders with Executives through exposure to DXS securities and the Group’s performance n encouraging and incentivising Executives to make sustainable business decisions within the Board‑approved risk appetite and strategy of the Group What policies and procedures exist to support the integrity of the LTI Plan? The administration of the lTI Plan is supported by Plan Guidelines which provide Executives with the rules of the Plan and guidance as to how it is to be administered. Executives are prevented from hedging their exposure to unvested DXS securities or trading in DXS securities or related products. The Group also has Conflict of Interest and Insider Trading policies in place to support the integrity of the lTI Plan, which extend to family members and associates of the Executive. How is the allocation of performance rights determined? The number of performance rights granted is based on the grant value to the Executive (% of fixed remuneration) divided by the volume weighted average price (VWAP) of securities 10 trading days either side of the first trading day of the new financial year. How are distributions treated prior to vesting? Executives will not be entitled to distributions paid on the underlying DXS securities prior to the performance rights vesting. Under both the STI and lTI plans, if an Executive voluntarily resigns, or is terminated by the Group for cause prior to vesting, all unvested performance rights are forfeited. If an Executive’s employment is terminated for reasons such as retirement, redundancy, reorganisation, change in control or other unforeseen circumstances, the Committee will recommend whether “good leaver” provisions apply, for decision by the Board. The operation of all incentive plans is at the discretion of the Board which retains the right to discontinue, suspend or amend the operation of such plans. For both the STI and lTI plans, where entitlements involve DXS securities, it is the Board’s intention, subject to legal and tax advice, that DXS securities be acquired on‑market and not through the issue of new securities. at-risk remuneration arrangements for 2012 n At the conclusion of the three year vesting period, if the “Composite Executives were awarded at‑risk cash remuneration under the DPP for the 2012 financial year. The awards were based on a Balanced Scorecard assessment of performance for the financial year. Key Executives, agreed to accept their DDPP award as performance rights under a transition arrangement in respect of the 2012 financial year. Awards were made under the DDPP to all participating Executives including eligible former Executives. DEXUS performance payment (Dpp) award The DPP, which previously rewarded annual performance, will be retired in favour of the new STI plan (discussed above), effective 1 July 2012. There are no legacy payments required to be made under the DPP once the cash payments for year ending 30 June 2012 are made in August 2012. DEXUS Deferred performance payment (DDpp) award The DDPP, which offered deferred cash incentives and was the primary mechanism to promote retention of Executives, will be retired effective 1 July 2012 (subject to security holder approval at the november 2012 AGM). DDPP awards from years 2010, 2011 and 2012 (where applicable) will continue to vest in accordance with the plan guidelines. During 2012 the Board foreshadowed that it intends to exercise its discretion not to apply the outperformance multiplier with respect to the 2010, 2011 and 2012 awards. Former Executives Mr Hoog Antink and Mr Say will receive a final award under the DDPP (with respect to their performance for the 2012 financial year), which will vest in July 2015. The Committee determined that Mr Hoog Antink and Mr Say were “good leavers” under the DDPP and that their DDPP awards will continue to vest according to the vesting schedule. Along with other DDPP participants, the Board has foreshadowed that Mr Hoog Antink and Mr Say will not receive a multiplier on their awards for years 2010, 2011, and 2012. The DDPP Plan operates as follows: n DDPP is subject to a three year vesting period from the allocation date n The DDPP allocation value is notionally invested during the vesting period in DXS securities (50%) and Unlisted Funds and Mandates (50%) n During the vesting period, DDPP values fluctuate in line with changes in the “Composite Total Return” (simulating notional investment exposure), comprising 50% the total return of DXS securities and 50% of the combined asset weighted total return of the Group’s Unlisted Funds and Mandates Total Return” meets or exceeds the “Composite Performance Benchmark”, the Board may approve the application of an outperformance multiplier to the final DDPP payment value: 1. The “Composite Performance Benchmark” comprises 50% of the S&P/ASX 200 Property Accumulation Index and 50% of the Mercer Unlisted Property Fund Index over the 3‑year vesting period 2. For performance up to 100% of the “Composite Performance Benchmark”, Executives receive a final DDPP payment by reference to the “Composite Total Return” of the preceding 3‑year vesting period 3. For the 2009 performance between 100% and 130% of the “Composite Performance Benchmark” an outperformance multiplier may be applied by the Board, ranging from 1.1 to a maximum of 1.5 times the final DDPP payment value Note: For the 2010, 2011 and 2012 DDPP awards, the Board has foreshadowed that it intends to exercise its discretion not to apply the outperformance multiplier. transition award Key Executives agreed to accept their DDPP award in the form of performance rights to DXS securities under a transition arrangement in respect of the 2012 financial year. Subject to security holder approval in november 2012, Executives will be awarded performance rights to DXS securities vesting in July 2015 (with a similar vesting period to the DDPP), subject to future clawback and service conditions. The award allocation will be determined based on the value awarded to the Executive divided by the volume weighted average price (VWAP) of securities 10 trading days either side of the first trading day of the new financial year. Executives will be entitled to any distributions paid on the underlying DXS securities prior to the rights vesting (consistent with the basis for performance assessment under the DDPP) through the issue of additional performance rights each period equivalent to the distribution value entitlement. Unlike the DDPP, there will be no multiplier in respect of these performance rights. These equity awards are a one‑off arrangement as part of the Group’s transition to its new remuneration framework, effective 1 July 2012. If security holder approval is not obtained at the november 2012 AGM, relevant Executives will receive an award under the DDPP. 2012 DEXUS AnnUAl REPORT 23 DIRECToRS’ REpoRT 3 Remuneration Report (continued) 3.5 Service agreements The employment arrangements for Executives at the time of their appointment are set out below. CEo – Darren J Steinberg On 1 March 2012, the Group appointed Mr Steinberg as CEO under the following contract terms; as announced to the market on 28 november 2011: Employment agreement Employment is under a rolling service agreement Terms Fixed remuneration $1,400,000 per annum (inclusive of compulsory superannuation, packaged benefits and fringe benefits tax) Short‑term incentive Pro rata participation in the DPP (30% of Total Remuneration) and DDPP (35% of Total Remuneration) for the year ended 30 June 2012 Sign‑on award $1,500,000 upon commencement as part compensation for foregone remuneration from his previous employer and to secure his services. An additional $500,000 for the year ending 30 June 2013 subject to achievement of specific Key Performance Indicators under the DPP By Mr Steinberg with 6 months’ notice or by the Group with 12 months’ notice (or payment in lieu) Termination no entitlement to severance payment By the Group without notice if serious misconduct has occurred Former CEo – Victor p hoog antink The former CEO’s employment contract commenced on 1 October 2004. The principal terms of the employment arrangement were as follows: Employment agreement Employment is under a rolling service agreement Terms Fixed remuneration $1,550,000 per annum (inclusive of compulsory superannuation, packaged benefits and fringe benefits tax) Short term incentive Termination Participation in the DPP (30% of Total Remuneration) and DDPP (35% of Total Remuneration) for the year ended 30 June 2012 By Mr Hoog Antink with 6 months’ notice or by the Group with 6 months’ notice (or payment in lieu) Entitlement to severance payment of 100% of Fixed Remuneration By the Group without notice if serious misconduct has occurred By mutual agreement between Mr Hoog Antink and the Board, a 4 months’ notice period applied on his departure. Mr Hoog Antink was entitled to a pro rata DPP and DDPP entitlement for the 2012 year with vesting in accordance with the vesting schedule of the DDPP Plan. CFo and other key Executives The following contract terms were in place for Mr Mitchell, Mr Say, Ms Cox and Mr Easy, being key Executives of DEXUS for the year ending 30 June 2012: Employment agreement Employment is under a rolling service agreement Terms Fixed remuneration $450,000‑$750,000 per annum (inclusive of compulsory superannuation, packaged benefits and fringe benefits tax) Short term incentive Participation in the DPP (25%‑30% of Total Remuneration) and DDPP (25%‑35% of Total Remuneration) Termination By Executive with 3 months’ notice or by the Group with 3 months’ notice (or payment in lieu) Entitlement to severance payment of 75% of Fixed Remuneration By the Group without notice if serious misconduct has occurred The Group may terminate the Executive’s employment by providing three months written notice, or payment in lieu of notice, based on Fixed Remuneration. In addition, the Group may provide a DPP payment and/or a DDPP award to the Executive for the period from the last review date (being 1 July). On termination by the Group, any DDPP awards will vest in accordance with the vesting schedule of the DDPP. In the case of termination by the Group for serious misconduct, the Executive is entitled only to the fixed portion of his or her remuneration, and only up to the date of termination. Any unvested DDPP awards will be forfeited. Aspects of these employment arrangements will be updated to reflect their participation in the new remuneration framework over the balance of the current calendar year. 24 2012 DEXUS AnnUAl REPORT 3.6 performance pay (linking Group Performance to Performance Pay for 2012 financial year) group performance group highlights property portfolio Capital management Funds management 3.4% FFO per security growth 1 million square metres of space in total leased $10 million in cost savings secured 5.4% Office like‑for‑like nOI growth total return analysis $1.6 billion Total transactions across the Group 27.2% Gearing at 30 June 2012 Top quartile investment performance for DWPF and STC US$770 million US central portfolio sold 70‑80% FFO payout ratio from FY13 $420 million+ Equity raised for DWPF The table below sets out DXS’s total security holder return since inception, relative to the S&P/ASX200 Property Accumulation Index. It also sets out DXS’s Composite Total Return since inception, relative to the Composite Performance Benchmark. The DEXUS Composite Total Return is 50% of the total return of DXS securities, plus 50% of the combined asset weighted total return of its unlisted funds and mandates and the Composite Performance Benchmark is 50% of the S&P/ASX200 Property Accumulation Index and 50% of Mercers’ Unlisted Property Fund Index. Year ended 30 June 2012 DEXUS Property Group S&P/ASX200 Property Accumulation Index DEXUS Composite Total Return Composite Performance Benchmark 1 Year (% per annum) 2 Years (% per annum) 3 Years (% per annum) Since 1 october 2004 (% per annum) 12.20 11.00 11.00 10.20 16.80 8.40 13.70 9.20 14.30 12.30 11.80 9.90 3.70 (2.10) 6.70 4.30 In determining the construction of the Composite Total Return and in particular the relative weighting between the returns of DEXUS Property Group and its unlisted funds and mandates, the Board considered the following factors: n the desire of DEXUS Property Group to attract and retain third party funds and mandates based on the assurance that incentives are in place to ensure their equitable treatment n the economic contribution to DEXUS Property Group of management fees arising from third party funds under management n the increased investment in its management team and infrastructure, enabled by third party funds management fees, including in‑house research, valuations and sustainability teams, the cost of which is defrayed by those fees n the greater market presence and relevance the third party business brings to DEXUS Property Group The Board previously considered whether the construction of the Composite Total Return should reflect the actual value of the unlisted funds and mandates ($5.6 billion as at 30 June 2012), and DEXUS Property Group’s own funds under management ($6.9 billion as at 30 June 2012). Cognisant of all the above factors, the Board determined that a 50/50 allocation, rather than an allocation varying according to asset weighting, most fairly reflects the value contribution of third party funds to DEXUS Property Group and provides the greatest assurance that all investors are treated equitably. 2012 DEXUS AnnUAl REPORT 25 DIRECToRS’ REpoRT 3 Remuneration Report (continued) 3.6 performance pay (continued) group performance (continued) total return of DXS securities S&P/ASX200 Property Accumulation Index DXS 220 200 180 160 140 120 100 80 60 40 20 0 Oct 04* Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 * 31 October 2004 to 30 June 2012. Source: UBS Securities Australia ltd. The chart below illustrates the DXS’s performance relative to A‑REITs above $2 billion market capitalisation over the past three financial years. 40% 35% 30% 25% 20% 15% 10% 5% 0 GMG GPT DXS CPA CFX MGR XPJAI WDC SGP Source: UBS Securities Australia ltd. The chart below illustrates DXS’s performance against the broader property sector over the past three years. 40% 35% 30% 25% 20% 15% 10% 5% 0 GMG IOF GPT CDI CQR APZ DXS CPA CFX BWP MGR XPJAI ALZ CHC ABP WDC SGP AJA Source: UBS Securities Australia ltd. DXS continues to outperform the S&P/ASX200 Property Accumulation Index and has exceeded this benchmark on a rolling three year basis each period since inception in October 2004. In addition, the DXS Composite Total Return has also outperformed the Composite Performance Benchmark on a rolling three year basis since inception. Whilst the Directors recognise that improvement is always possible, they consider that the Group’s business model, which aims to deliver consistent returns with relatively moderate risk, has been central to DXS’s relative outperformance, and that its approach to executive remuneration, with a focus on consistent outperformance of objectives, is aligned with and supports the superior execution of the Group’s strategic plans. 26 2012 DEXUS AnnUAl REPORT individual performance assessment – Balanced Scorecard Prior to the commencement of each financial year, the Board approves DEXUS’s strategic and operational objectives which are then translated into a series of weighted financial and non‑financial Key Performance Indicators (KPIs) for management. KPIs are assembled to form each Executive’s Balanced Scorecard. The Balanced Scorecard is divided into four components – financial performance, business development, management and strategy, stakeholder engagement, and leadership. These components are weighted differently for each Executive. For each of the components the Executive has objectives, measures and specific initiatives set for that year. These scorecards are agreed with the Executive at the beginning of the year, reviewed at half year and assessed for performance awards at the end of the year. The KPIs are clear, tailored to each Executive’s role, measurable and specific. It would be very difficult for an Executive to achieve all of the KPIs. Most Executives would have 3 to 8 measures and often up to 10 particular initiatives in each component of the scorecard. These measures can be very specific – sell certain assets, recruit new Executives, improve tenant satisfaction by x%, implement certain projects by x date, etc. Without specifically identifying an Executive or all the measures and initiatives, we have illustrated below in abbreviated form an indicative balanced scorecard that applied last year. Theme Weight objective measure Initiative Financial performance 40% n Financial outperformance n Deliver financial targets in n Secure at least $4m relative to peers Business Plan of trading profits n net operating income n Re‑finance $800m of debt (pre‑asset sales) > $490m n FFO > $370.2m n Increase debt duration to > 4.0 years n Capital expenditure = $60m n Reduce cost of funds n Group FFO per security 7.65 cents n lease 123 Albert Street to 100% n non‑core assets sales by 31 December 2011 n lease 1 Bligh Street to 80% by 30 June 2012 n [US central initiative]1 n [US West coast initiative]1 Business development, management and strategy 30% n Enhance performance n CR&S Report n [Office sector initiative]1 management n Delivery of divisional n [Industrial sector value‑add n Maintain leadership in CR&S Business Plans initiative]1 n [Retail sector initiative]1 n [3rd party FUM initiative]1 n [International initiative]1 Stakeholder engagement 10% n Improve Investor Relations n Investor surveys n Proactive media coverage n Analyst feedback n Develop Investor Relations plan n [Brand and external marketing]1 n Tenant satisfaction survey n Implement Top Client contact plan improved from previous year leadership 20% n Develop executive management n Teamwork and trust review via n Mentor & promote team members n Implement change management one‑on‑one interviews n Build corporate branding n Embed DEXUS values n Staff engagement survey results n Succession planning n Staff turnover measures n [Specific personal actions]1 n [Specific external actions]1 n leadership programs 1 Specific initiatives viewed as commercial in confidence and therefore not disclosed. Additional Kpis Additional KPIs for the Group, set following the commencement of the new CEO, for the year ended 30 June 2012 can be summarised as follows: Financial objectives performance as at 30 June 2012 n Reduce business expenses and create operational efficiencies n Implemented business restructure and management changes n Progress recycling of non‑core properties and exiting offshore markets n Settlement of US central portfolio and German portfolio sales n Reduce the cost and improve the access to capital n Revised payout ratio n Commenced on‑market buy‑back 2012 DEXUS AnnUAl REPORT 27 DIRECToRS’ REpoRT 3 Remuneration Report (continued) 3.6 performance pay (continued) group performance (continued) performance pay outcomes Following an assessment of Executive’s Balanced Scorecards, the Board has determined that the following remuneration outcomes are appropriate with respect to each Executive’s performance during the year ending 30 June 2012. Awards were rounded by the Board following their assessment of the criticality and weighting of group, divisional and individual performance, which is reflected in the table below: Key Executive position Darren J Steinberg Chief Executive Officer Craig D Mitchell Chief Financial Officer Tanya l Cox John C Easy Chief Operating Officer General Counsel former Executives Victor P Hoog Antink Chief Executive Officer Paul D Say Chief Investment Officer Balanced Scorecard result Dpp award 90% 87% 93% 90% 83% 82% 360,000 500,000 200,000 200,000 825,000 350,000 Transition performance rights1 420,000 500,000 200,000 200,000 DDpp award – – – – – – 975,000 350,000 1 Refer to notes 1 and 38 of the Financial Statements for details on this award. Unvested and vesting DDpp awards The table below shows the value of unvested and vested DDPP awards as at 30 June 2012. For awards made in 2009, a performance factor has been approved by the Board under the DDPP Plan rules which reflects the Group’s strong relative performance over a three year period. The table also shows the value of awards made under the DDPP Plan for former Executives Mr Hoog Antink and Mr Say. Following these final awards, the DDPP Plan will be closed and will continue to operate only as a legacy plan to administer prior year awards. participant award date DDpp allocation value movement in DDpp value since award date Closing DDpp value as at 30 June 2012 movement due to performance factor Vesting DDpp value as at 30 June 2012 Vest date Victor P Hoog Antink 1 Jul 2012 975,000 – 975,000 1 Jul 2011 1,300,000 143,650 1,443,650 1 Jul 2010 1,200,000 352,200 1,552,200 – – – – – – 1 Jul 2015 1 Jul 2014 1 Jul 2013 1 Jul 2009 915,000 364,536 1,279,536 511,814 1,791,350 1 Jul 2012 Craig D Mitchell 1 Jul 2012 1 Jul 2011 1 Jul 2010 1 Jul 2009 – 450,000 400,000 325,000 – 49,725 117,400 129,480 – 499,725 517,400 454,480 Paul G Say 1 Jul 2012 350,000 – 350,000 Tanya l Cox John C Easy 1 Jul 2011 1 Jul 2010 1 Jul 2009 1 Jul 2012 1 Jul 2011 1 Jul 2010 1 Jul 2009 1 Jul 2012 1 Jul 2011 1 Jul 2010 1 Jul 2009 400,000 250,000 200,000 – 190,000 180,000 150,000 – 185,000 188,000 162,000 44,200 73,375 79,680 – 20,995 52,830 59,760 – 20,443 55,178 64,541 444,200 323,375 279,680 – 210,995 232,830 209,760 – 205,443 243,178 226,541 – – – – – – 1 Jul 2015 1 Jul 2014 1 Jul 2013 181,792 636,272 1 Jul 2012 – – – – – – 1 Jul 2015 1 Jul 2014 1 Jul 2013 111,872 391,552 1 Jul 2012 – – – – – – 1 Jul 2015 1 Jul 2014 1 Jul 2013 83,904 293,664 1 Jul 2012 – – – – – – 1 Jul 2015 1 Jul 2014 1 Jul 2013 90,616 317,157 1 Jul 2012 28 2012 DEXUS AnnUAl REPORT 3.7 Actual performance pay received Executive remuneration actual cash received In line with best‑practice recommendations, the amounts shown in the table below provide a summary of actual remuneration received during the year ended 30 June 2012. The DPP and DDPP cash payments were received for performance in the 2011 and 2008 financial years respectively. Key Executive Darren J Steinberg Craig D Mitchell Tanya l Cox John C Easy Former Executives Victor P Hoog Antink Paul G Say Cash salary pension & super benefits1 461,409 734,225 434,225 427,225 1,145,191 734,225 5,258 15,775 15,775 22,775 15,775 15,775 other short term benefits2 1,500,000 – – – Earned in prior FY Term benefits3 Dpp cash payments4 DDpp cash payment5 Total – – – – – 450,000 195,000 190,000 – 1,966,667 353,950 1,553,950 247,765 169,896 892,765 809,896 815,978 1,550,000 1,100,000 1,274,220 5,901,164 107,856 750,000 400,000 353,950 2,361,806 1 Includes employer contributions to superannuation under the superannuation guarantee legislation and salary sacrifice amounts. 2 Mr Steinberg received a one‑off sign on payment, Mr Hoog Antink and Mr Say received payment for accrued but unused leave entitlements upon termination. 3 notice and severance payments made under contractual terms to former Executives Mr Hoog Antink and Mr Say. 4 Cash payment made in August 2011 with respect to the 2011 DPP (i.e. annual performance payment for the prior year). 5 Cash payment made in August 2011 with respect to the 2008 DDPP award that vested on 30 June 2011 (i.e. realisation of three year deferred performance payment). Executive remuneration statutory accounting method The amounts shown in this table are prepared in accordance with AASB 124 Related Party Disclosures and do not represent actual cash payments received by Executives for the year ended 30 June 2012. Amounts shown under long Term Benefits reflect the accounting expenses recorded during the year with respect to prior year deferred remuneration and awards that have or are yet to vest. For performance payments and awards made with respect to the year ended 30 June 2012, refer to the Performance Pay Outcomes section of this report. Short term benefits post-employment benefits Security-based benefits long term benefits Key Executive Year Cash salary Dpp awards $ $ other short term benefits $ pension & super benefits $ Darren J Steinberg 2012 461,409 360,000 1,500,000 5,258 2011 – – Craig D Mitchell 2012 734,225 500,000 2011 684,801 450,000 Tanya l Cox 2012 434,225 200,000 2011 375,001 195,000 John C Easy 2012 427,225 200,000 2011 401,801 190,000 – – – 15,775 – 15,199 – 15,775 – 49,999 – 22,775 – 23,199 Sub‑Total 2012 2,057,084 1,260,000 1,500,000 59,583 2011 1,461,603 835,000 – 88,397 Former Executives Termination benefits $ – – – – – – – – – – Transition performance rights $ 105,000 – 125,000 DDpp awards $ – – – Change in prior DDpp awards $ Total $ – – 2,431,667 – 328,664 1,703,664 – 450,000 273,781 1,873,781 50,000 – 149,140 849,140 – 190,000 161,359 971,359 50,000 – 158,013 858,013 – 185,000 131,830 931,830 330,000 – 635,817 5,842,484 – 825,000 566,970 3,776,970 Victor P Hoog Antink 2012 1,145,191 825,000 815,978 15,775 1,550,000 2011 1,502,801 1,100,000 – 47,199 – Paul G Say 2012 734,225 350,000 107,856 15,775 750,000 2011 649,801 400,000 – 50,199 400,000 – – – – 975,000 938,512 6,265,456 1,300,000 900,583 4,850,583 350,000 216,352 2,524,208 400,000 226,785 1,726,785 Total 2012 3,936,500 2,435,000 2,423,834 91,133 2,300,000 330,000 1,325,000 1,790,681 14,632,148 2011 3,614,205 2,335,000 – 185,795 – – 2,525,000 1,694,338 10,354,338 1 Annual cash performance payment made in August 2012. 2 Mr Steinberg received a one‑off sign‑on payment, Mr Hoog Antink and Mr Say received payment for accrued but unused leave entitlements upon termination. 3 Includes employer contributions to superannuation under the superannuation guarantee legislation and salary sacrifice amounts. 4 notice and severance payments made under contractual terms to former Executives Mr Hoog Antink and Mr Say. 5 Reflects the accounting expense accrued during the financial year for transition three year performance rights vesting in July 2015. This does not represent an actual payment or potential value. 6 DDPP legacy Plan only applicable to former Executives Mr Hoog Antink and Mr Say and vesting after three years in July 2015. 7 Indicates the movement in value during the financial year of unvested and vesting DDPP grants. This does not represent an actual payment or potential value. 2012 DEXUS AnnUAl REPORT 29 DIRECToRS’ REpoRT 3 Remuneration Report (continued) 3.8 Non-Executive Directors non‑Executive Directors’ fees are reviewed annually by the Committee to ensure they reflect the responsibilities of directors and are market competitive. The Committee reviews information from a variety of sources to inform their recommendation regarding non‑Executive Directors fees to the Board. Information considered included: n Publicly available remuneration reports from ASX listed companies with similar market capitalisation and complexity n Publicly available remuneration reports from A‑REIT competitors The table below outlines the Board fee structure (inclusive of statutory superannuation contributions) for the year ended 30 June 2012: Committee Chair member Director’s Base Fee (DXFM) $350,0001 $150,000 Board Risk & Sustainability Board Audit Board Compliance Board Finance $15,000 $15,000 $15,000 $15,000 $15,000 $7,500 $7,500 $7,500 $7,500 $7,500 n Information supplied by external remuneration advisors, including Board nomination & Remuneration Egan Associates and Ernst & Young Total fees paid to non‑Executive Directors remain within the aggregate fee pool of $1,750,000 per annum approved by DEXUS security holders at the AGM in October 2008. In 2012, the Board determined that it would be appropriate for non‑Executive Directors (existing and new) to hold DEXUS securities. A minimum target of 50,000 securities is to be acquired in each Director’s first three year term (effective from 1 July 2012). Such securities would be subject to the Group’s existing trading and insider information policies. Other than the Chair who receives a single fee, non‑Executive Directors receive a base fee plus additional fees for membership of Board Committees. Breakdown of Non-Executive Director’s fee composition DWPl Board $30,000 $15,000 1 The Chairman receives a single fee for his entire engagement, including service on Committees of the Board. From 1 July 2012: n The nomination & Remuneration Committee has broadened its mandate to include oversight of DEXUS corporate governance practices and is now named the nomination, Remuneration & Governance Committee. To reflect the increased workload and responsibilities of this Committee, fees were increased to $15,000 for Members and $30,000 for the Chair from 1 July 2012 n no other fee increases will be applicable to non‑Executive Directors Base fee Committee fees Non-Executive Director Year DXFm Risk & Sustainability audit Compliance Finance Nomination and Remuneration DWpl Total Christopher T Beare 2012 2011 Elizabeth A Alexander AM 2012 Barry R Brownjohn John C Conde AO Tonianne Dwyer1 Stewart F Ewen OAM Brian E Scullin2 W Richard Sheppard3 Peter B St George Total 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 350,000 350,000 150,000 150,000 150,000 150,000 150,000 150,000 129,125 – 150,000 150,000 50,000 150,000 75,000 – 150,000 150,000 1,354,125 1,250,000 – – – – 7,500 7,500 7,500 7,500 15,000 15,000 15,000 15,000 – – – – – – – – – – – – – – – – 3,125 3,125 – 7,500 7,500 – 7,500 7,500 – – – – – – 7,500 7,500 5,000 – – – 5,000 15,000 – – – – 33,125 33,125 30,000 30,000 17,500 22,500 – – – – 7,500 7,500 – – – – – – – – – – 15,000 15,000 22,500 22,500 – – – – – – 15,000 15,000 – – 7,500 7,500 – – – – – – – – 350,000 350,000 30,000 195,000 30,000 195,000 – – – – 187,500 187,500 172,500 172,500 10,000 144,125 – – – – 157,500 157,500 5,000 60,000 15,000 180,000 – – – – 81,250 – 180,000 180,000 22,500 45,000 1,527,875 22,500 45,000 1,422,500 1 Ms Dwyer was appointed on 24 August 2011. 2 Mr Scullin resigned effective 31 October 2011. 3 Mr Sheppard was appointed 1 January 2012. In addition to the non‑Executive Directors’ fee structure outlined above, Mr Ewen’s company was paid a fixed fee of $30,000 per annum for his attendance at property inspections, for reviewing property investment proposals and participating in informal management meetings. This fee has been discontinued effective 1 July 2012. 30 2012 DEXUS AnnUAl REPORT Non-Executive Director’s statutory accounting table The amounts shown in this table are prepared in accordance with AASB 124 Related Party Disclosures. The table is a summary of the actual cash and benefits received by each non‑Executive Director for the year ended 30 June 2012. Non-Executive Director Year Short term benefits $ post-employment benefits $ other long term benefits $ Christopher T Beare Elizabeth A Alexander AM Barry R Brownjohn John C Conde AO Tonianne Dwyer1 Stewart F Ewen OAM Brian E Scullin2 W Richard Sheppard3 Peter B St George Total 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 1 Ms Dwyer was appointed on 24 August 2011. 2 Mr Scullin resigned effective 31 October 2011. 3 Mr Sheppard was appointed 1 January 2012. 334,225 334,801 170,539 179,801 172,018 172,301 158,257 158,257 132,225 – 109,052 109,052 55,046 165,138 74,541 – 165,138 165,138 1,371,041 1,284,488 15,775 15,199 24,461 15,199 15,482 15,199 14,243 14,243 11,900 – 48,448 48,448 4,954 14,862 6,709 – 14,862 14,862 156,834 138,012 Total $ 350,000 350,000 195,000 195,000 187,500 187,500 172,500 172,500 144,125 – 157,500 157,500 60,000 180,000 81,250 – 180,000 180,000 – – – – – – – – – – – – – – – – – – – – 1,527,875 1,422,500 2012 DEXUS AnnUAl REPORT 31 DIRECToRS’ REpoRT 4 Directors’ interests The Board’s policy on insider trading and trading in DXS securities, or securities in any of the funds managed by the Group, by any Director or employee is outlined in the Corporate Governance Statement. Following a review of the policy by the Board in 2012, and to further enhance alignment of interests, the Board determined that it would be appropriate for Directors to hold DXS securities in the future. The Board has set a minimum holding of 50,000 securities to be acquired by each Independent Director by 30 June 2015. newly appointed Independent Directors will be required to purchase 50,000 securities within their first three year term. As at the date of this Directors’ Report no Director directly or indirectly held: n DXS securities; or n options over, or any other contractual interest in, DXS securities; or n an interest in any other fund managed by DXFM or any other entity that forms part of the Group. 5 Directors’ directorships in other listed entities The following table sets out directorships of other listed entities, not including DXFM, held by the Directors at any time in the three years immediately prior to the end of the year, and the period for which each directorship was held: Director Company Date appointed Christopher T Beare Mnet Group limited 6 november 2009 Elizabeth A Alexander AM CSl limited John C Conde AO Whitehaven Coal limited Tonianne Dwyer Cardno limited 12 July 1991 3 May 2007 25 June 2012 Date resigned or ceased being a Director of a listed entity 19 October 2011 W Richard Sheppard Macquarie Office Management limited1 Macquarie Countrywide Management limited2 Macquarie DDR Management limited3 28 May 2009 31 March 2007 8 October 2003 1 March 2010 1 March 2010 18 June 2010 Peter B St George Boart longyear limited First Quantum Minerals limited4 21 February 2007 20 October 2003 1 Responsible entity for Macquarie Office Trust (ASX: MOF). 2 Responsible entity for Macquarie Countrywide Trust (ASX: MCW). 3 Responsible entity for Macquarie DDR Trust (ASX: MDT). 4 listed for trading on the Toronto Stock Exchange in Canada and the london Stock Exchange in the United Kingdom. 6 principal activities During the year the principal activity of the Group was to own, manage and develop high quality real estate assets and manage real estate funds on behalf of third party investors. There were no significant changes in the nature of the Group’s activities during the year. 7 Total value of Trust assets The total value of the assets of the Group as at 30 June 2012 was $7,364.1 million (2011: $7,987.6 million). Details of the basis of this valuation are outlined in note 1 of the notes to the Financial Statements and form part of this Directors’ Report. 32 2012 DEXUS AnnUAl REPORT 8 Review of results and operations financial results DEXUS Property Group’s financial performance for the year ended 30 June 2012 is summarised below. To fully understand our results, please refer to the full Financial Statements included in this Financial Report. In accordance with Australian Accounting Standards, net profit includes a number of non‑cash adjustments including fair value movements in asset and liability values. Funds from Operations1 (FFO) is a global financial measure of real estate operating performance after finance costs and taxes, and is adjusted for certain non‑cash items. The Directors consider FFO to be a measure that reflects the underlying performance of the Group. The following table reconciles between profit attributable to stapled security holders, FFO and distributions paid to stapled security holders. net profit for the year attributable to stapled security holders net fair value gain of investment properties2 Impairment of inventories net fair value loss/(gain) of derivatives net loss/(gain) on sale of investment properties3 Foreign currency translation reserve transfer on partial disposal of foreign operations Incentive amortisation and rent straight‑line2,4 REnTS capital distribution Deferred tax and other Funds From operations (FFo) Retained earnings5 Distributions FFO per security (cents) Distribution per security (cents) net tangible asset backing per security ($) 30 June 2012 $m 30 June 2011 $m 181.1 (82.7) 14.8 102.1 72.8 41.5 31.7 (10.2) 16.7 367.8 (110.4) 257.4 7.65 5.35 1.00 553.0 (182.0) – (44.2) (7.1) – 28.6 (10.4) 20.1 358.0 (107.3) 250.7 7.40 5.18 1.01 1 DEXUS’s FFO comprises net profit/loss after tax attributable to stapled security holders calculated in accordance with Australian Accounting Standards and adjusted for: property revaluations, impairments, derivative and FX mark‑to‑market impacts, amortisation of certain tenant incentives, gain/loss on sale of certain assets, straight‑line rent adjustments, deferred tax expense/benefit and DEXUS REnTS Trust capital distribution. 2 Including DXS’s share of equity accounted investments. 3 Including tax and finance cost impacts of the US central portfolio sale. 4 Including cash and fit‑out incentives amortisation. 5 Based on the distribution policy for the financial year ended 30 June 2012 of 70% of FFO. net profit attributable to stapled security holders is $181.1 million or 3.75 cents per security, a decrease of $371.9 million from the prior year (2011: $553.0 million) predominantly due to the movement in non‑cash items and the impact of selling the US central portfolio. The key drivers are: n net fair value loss on derivatives of $102.1 million (2011: gain of $44.2 million) which includes unrealised, non‑cash losses resulting from the restating of derivatives to account for lower market interest rates n net revaluation gains from investment properties and inventories of $67.9 million, representing an average increase of 1.0% across the portfolio (2011: $182.0 million). This gain is underpinned by a $93.5 million or 2.0% revaluation increase in the office portfolio n net loss on sale of investment properties of $72.8 million, primarily relating to the divestment of the US central portfolio on 21 June 2012 for US$770 million and the divestment of 12 European industrial properties for €82.0 million Operationally, FFO increased 2.7% to $367.8 million (2011: $358.0 million) underpinned by strong performance from the office portfolio and a reduced cost of funds. FFO per security increased 3.4% to 7.65 cents (2011: 7.40 cents). Based on the current distribution policy of 70% of FFO, the distribution paid for the year to 30 June 2012 increased 3.3% to 5.35 cents per security (2011: 5.18 cents per security). 2012 DEXUS AnnUAl REPORT 33 DIRECToRS’ REpoRT 8 Review of results and operations (continued) operations portfolio composition The total value of investment property at 30 June 2012 was $6.9 billion. The office portfolio represented 67% of total investments while the Australian industrial portfolio represented 24%. Following the sale of the US central portfolio on 21 June 2012, the industrial US portfolio now represents 8% of total investments. $6.9bn Office 67% Industrial 24% Industrial US 8% Other 1% Key portfolio metrics 30 June 2012 office Industrial Industrial US1 Total Occupancy (% by area) Occupancy (% by income) Tenant retention (%) WAlE (years) like‑for‑like nOI growth (%) Weighted average cap rate (%) Total return – 1 year (%) 97.1 96.8 66 4.9 5.4 7.30 9.5 1 Industrial US west coast portfolio only. 91.7 92.8 59 4.4 (1.6) 8.59 8.0 97.1 93.4 98.2 95.8 66 4.4 3.8 – 4.7 3.3 6.32 7.51 10.0 – office portfolio n Portfolio value $4.7 billion (2011: $4.5 billion) n like‑for‑like net operating income (nOI) growth 5.4% (2011: 3.3%) n Occupancy (by area/income) 97.1%/96.8% (2011: 96.2%/95.3%) n Weighted average lease expiry (by income) 4.9 years (2011: 5.3 years) net operating income increased by $34.6 million (13.6%) to $289.8 million (2011: $255.2 million) driven by strong like‑for‑like nOI growth of 5.4% and the completion of the Bligh and Albert Street developments. new leases completed during the year achieved average rental increases of 4.6%. Occupancy for the office portfolio was strong at 97.1% (2011: 96.2%), up 0.9% and 4.4% higher than the national average of 92.2%. Developments at 1 Bligh Street, Sydney and 123 Albert Street, Brisbane, which were completed in July 2011, are 90% and 99% committed respectively. During the year over 75,600 square metres of space was leased which includes securing heads of agreement over 19,000 square metres. The stand‑out success was securing of a new Government tenant, with no downtime, at Garema Court in Canberra. Subdued tenant demand in the Sydney and Melbourne office markets and global economic uncertainty have seen tenants tending to remain in existing premises and, in some cases, downsize their office space requirements. While this has led to some upward pressure on incentives, our proactive approach to leasing has seen only a slight increase in incentives (excluding development leasing) to 17.3%, for leases executed during the year (2011: 16.0%). 34 2012 DEXUS AnnUAl REPORT The office portfolio capital value increased 3.7% or $168.7 million to $4.7 billion for the year (2011: $4.5 billion) and the weighted average capitalisation rate for the portfolio tightened 7 basis points to 7.30% at 30 June 2012. Industrial portfolio n Portfolio value $1.7 billion (2011: $1.6 billion) n like‑for‑like nOI change ‑1.6% (2011: 1.1%) n Occupancy (by area/income) 91.7%/92.8% (2011: 96.2%/95.1%) n Weighted average lease expiry (by income) 4.4 years (2011: 4.7 years) net operating income increased by $3.6 million (3.1%) to $120.0 million (2011: $116.4 million) primarily as a result of the completion of eight developments during the year, with a combined cost of $144.1 million. like‑for‑like nOI was down 1.6% primarily due to the vacancy of Garigal Road, Belrose which had been identified for sale but has not yet been sold. In an active year for the Australian industrial portfolio over 300,000 square metres of industrial space was leased including over 195,000 square metres within the stable portfolio (representing 17% of total portfolio area) and over 105,000 square metres in developments. Occupancy by area fell to 91.7% (2011: 96.2%) with the departure of Elders at Gillman on 30 June 2012 (6% of portfolio nlA) however, post 30 June 2012, 57% of this space has been leased or is secured under heads of agreement, at rents averaging 34% higher than prior rents. The Australian industrial portfolio capital value remained relatively stable for the year with the weighted average capitalisation rate tightening by 5 basis points to 8.59% at 30 June 2012. Industrial US portfolio n Portfolio value US$549.5 million or A$539.2 million (2011: US$490.8 million or $A457.0 million)1 n like‑for‑like nOI growth 3.8% (2011: 3.3%)1 n Occupancy (by area/income) 97.1%/98.2% (2011: 97.7%/97.4%)1 n Weighted average lease expiry (by income) 4.4 years (2011: 4.5 years)1 On a constant currency basis, net operating income declined $1.4 million to $74.7 million (2011: $76.1 million) due to property transactions including the sale of the central portfolio which settled on 21 June 2012. like‑for‑like nOI growth for the remaining core west coast portfolio was strong at 3.8% (2011: ‑4.5%). During the year a total of 184 leases were executed, totalling over 5.4 million square feet, or 23% of total lettable area. Following the internalisation of leasing management of the central portfolio in June 2011, occupancy for the central portfolio improved by 10.3% to 89.7% prior to its sale 12 months later. Occupancy for the industrial US portfolio at 30 June 2012 was 97.1%, broadly in line with the prior year occupancy of 97.7% for the core west coast portfolio. As a consequence of the sale of the US central portfolio, the Group now owns and manages 24 industrial properties over 6.8 million square feet in the west coast industrial markets and three land parcels in Texas. The industrial US portfolio now represents 8% of the investment portfolio and is considered non‑core. The Group expects to exit the US within 12 to 24 months. 1 Industrial US west coast portfolio only. capital management Financing costs and treasury Highlights for the year ended 30 June 2012 include: n Debt facilities totalling $850 million were refinanced in the domestic bank, US bond and US mortgage markets at margins below 2% n Following the sale of the US central portfolio for US$770 million, a restructure of US debt facilities was undertaken, including prepaying certain debt obligations and unwinding various interest rate swaps associated with the US funding n The $204 million in Real‑estate perpetual Exchanngeable sTep‑up Securities (REnTS) were repurchased on 29 June 2012, prior to the step up date, resulting in the wind up of the DEXUS REnTS Trust n The weighted average cost of funds has reduced by 50 basis points from 6.6% to 6.1% and the average debt duration was maintained at 4.2 years as at 30 June 2012 n Gearing (including cash) at 30 June 2012 was 27.2%, well below the Group’s target of less than 40% n The Group is comfortably within all covenant limits and the Group’s credit ratings of Baa1 and BBB+, both with stable outlooks, were reaffirmed during the year Securities buy-back An on‑market securities buy‑back commenced in April 2012 for up to $200 million of securities, representing approximately 5% of securities on issue. As at 30 June 2012 a total of 55.2 million securities had been bought back for a total cost of $51.0 million, at an average price of $0.923 per security. During July 2012 a further 21.3 million securities were bought back for a total cost of $19.7 million. Cumulatively, 35.3% of the total $200 million commitment has now been fulfilled. Distribution policy The distribution payout policy for the financial year ended 30 June 2012 is 70% of FFO. On 16 April 2012 the Group announced a change to the distribution policy effective from FY13. Under the new policy the Group will distribute between 70% and 80% of FFO, in line with free cash flows, with the expectation that over time the average payout ratio will be around 75% of FFO. Third party funds management The DEXUS Wholesale Property Fund (DWPF) was again a top quartile performer, delivering a 9.7% total return in the 12 months to 30 June 2012. DWPF has outperformed the Mercer IPD index on a three year rolling basis by 1.7% per annum. The fund also raised over $420 million of equity during the year and has now raised $1.4 billion since early 2010. The Group’s Australian mandate (STC) also outperformed its benchmarks on a one and three year basis. During the year, STC sold its half share of QV1 in Perth for $310 million. Management business EBIT increased $1.2 million driven by $5.8 million of industrial trading profits and increased third party revenue, offset by $6.5 million in one off costs relating to CEO transition costs and redundancies. The management expense ratio for the year ended 30 June 2012 excluding these one off costs was 30 basis points. The funds management business unit delivered a 54% margin and the property management business unit delivered a 10% margin. Interest expense Following the completion of two premium grade office buildings at 1 Bligh Street in Sydney and 123 Albert Street in Brisbane in July 2011, interest is no longer being capitalised on these developments. This was the principal driver of the $27.5 million increase in financing costs, which was offset by additional rental income from the two properties. Overall cost of funds reduced 50 basis points to 6.1% for the year ended 30 June 2012 (2011: 6.6%). Transactions and developments DEXUS completed $1.6 billion in transactions over the course of the year including: n The single largest transaction was the US$770 million sale of the US central portfolio, comprising 65 industrial properties. The transaction settled on 21 June 2012 n The Group also sold 71% of the European portfolio during the year, comprising lower quality industrial assets with large capital expenditure requirements and short lease terms, resulting in seven properties remaining including one in Germany and six in France. The proceeds for the 12 properties sold was $107.5 million n On behalf of third party funds the Group sold a 50% interest in QV1 Building in Perth for $310 million (for STC) and acquired three properties (for DWPF) including 452 Flinders Street in Melbourne for $201.5 million and two industrial properties for $96.5 million; the Sir Joseph Banks Corporate Park in Botany, nSW and 34 Manton Street in Morningside, Queensland During the year the Group completed eight industrial developments delivering over 120,000 square metres with a total cost of $144.1 million and a yield on cost of 9.2%. Developments leased to loscam at laverton and DB Schenker at Erskine Park were sold, delivering $5.8 million in trading profits for the year. 2012 DEXUS AnnUAl REPORT 35 DIRECToRS’ REpoRT 8 Review of results and operations (continued) Strategy Management has undertaken a strategic review of the overall Group, since the commencement of the new CEO on 1 March 2012. The outcomes of the review have resulted in capitalising on the Group’s key competitive strengths and taking advantage of opportunities both within the Australian real estate sector and internal to the Group. The Group’s revised strategy is focused on the delivery of superior risk‑adjusted returns for investors, through investment in high quality Australian real estate, primarily comprising CBD office properties. The Group will achieve this by: n Being the leading owner and manager of Australian office n Having the best people, strongest tenant relationships, and most efficient systems n Being the wholesale partner of choice in Australian office, industrial and retail n Actively managing capital and risk in a prudent and disciplined manner The Group will continue to have an office and industrial oriented platform and will grow primarily through its third party funds management platform and an increased office exposure. The strategic review identified that the Group’s offshore exposure is considered non‑core and Management will concentrate on the core Australian office and industrial markets. An offshore exit strategy will be progressed that is focused on maximising returns for investors over the next 12 to 24 months. The first phase of execution involves re‑focusing the business and strengthening the platform for growth and performance. During the year ended 30 June 2012 and as a part of the strategic review process several strategic initiatives were executed including the: n Sale of the US central portfolio n Commencement of an on‑market securities buy‑back n Announcement of the revised distribution payout policy n Implementation of a business restructure and associated management changes 9 likely developments and expected results of operations In the opinion of the Directors, disclosure of any further information regarding business strategies and future developments or results of the Group, other than the information already outlined in this Directors’ Report or the Financial Statements accompanying this Directors’ Report would be unreasonably prejudicial to the Group. 10 Significant changes in the state of affairs The Directors are not aware of any matter or circumstance not otherwise dealt with in this Directors’ Report or the Financial Statements that has significantly or may significantly affect the operations of the Group, the results of those operations, or the state of the Group’s affairs in future financial years. 11 matters subsequent to the end of the financial year Since the end of the financial year the Directors are not aware of any matter or circumstance not otherwise dealt with in this Directors’ Report or the Financial Statements that has significantly or may significantly affect the operations of the Group, the results of those operations, or the state of the Group’s affairs in future financial years. 12 Distributions Distributions paid or payable by the Group for the year ended 30 June 2012 were 5.35 cents per security (2011: 5.18 cents per security) as outlined in note 27 of the notes to the Financial Statements. 13 DXFm’s fees and associate interests Details of fees paid or payable by the Group to DXFM for the year ended 30 June 2012 are outlined in note 32 of the notes to the Financial Statements and form part of this Directors’ Report. The number of interests in the Group held by DXFM or its associates as at the end of the financial year were nil (2011: nil). 14 Interests in DXS securities The movement in securities on issue in the Group during the year and the number of securities on issue as at 30 June 2012 are detailed in note 24 of the notes to the Financial Statements and form part of this Directors’ Report. With the exception of performance rights which are discussed in detail in the Remuneration Report, the Group did not have any options on issue as at 30 June 2012 (2011: nil). 15 Environmental regulation The Group’s senior management, through its Board Risk and Sustainability Committee, oversee the policies, procedures and systems that have been implemented to ensure the adequacy of its environmental risk management practices. It is the opinion of this Committee that adequate systems are in place for the management of its environmental responsibilities and compliance with its various licence requirements and regulations. Further, the Committee is not aware of any material breaches of these requirements. 16 Indemnification and insurance The insurance premium for a policy of insurance indemnifying Directors, officers and others (as defined in the relevant policy of insurance) is paid by DXH. PricewaterhouseCoopers (PwC or the Auditor), is indemnified out of the assets of the Group pursuant to the DEXUS Specific Terms of Business agreed for all engagements with PwC, to the extent that the Group inappropriately uses or discloses a report prepared by PwC. The Auditor, PwC, is not indemnified for the provision of services where such an indemnification is prohibited by the Corporations Act 2001. 17 audit 17.1 Auditor PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001. 17.2 Non-audit services The Group may decide to employ the Auditor on assignments, in addition to their statutory audit duties, where the Auditor’s expertise and experience with the Group are important. Details of the amounts paid or payable to the Auditor, for audit and non‑audit services provided during the year, are set out in note 6 of the notes to the Financial Statements. The Board Audit Committee is satisfied that the provision of non‑audit services provided during the year by the Auditor (or by another person or firm on the Auditor’s behalf) is compatible with the standard of independence for auditors imposed by the Corporations Act 2001. 36 2012 DEXUS AnnUAl REPORT The reasons for the Directors being satisfied are: n a Charter of Audit Independence was adopted in 2010 that provides guidelines under which the Auditor may be engaged to provide non‑audit services without impairing the Auditor’s objectivity or independence. n the Charter states that the Auditor will not provide services where the Auditor may be required to review or audit its own work, including: – the preparation of tax provisions, accounting records and financial statements; 20 management representation The Chief Executive Officer and Chief Financial Officer have reviewed the Group’s financial reporting processes, policies and procedures together with its risk management, internal control and compliance policies and procedures. Following that review, it is their opinion that the Group’s financial records for the financial year have been properly maintained in accordance with the Corporations Act 2001 and the Financial Statements and their notes comply with the accounting standards and give a true and fair view. 21 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 15 August 2012. The Directors have the power to amend and reissue the Financial Statements. christopher t Beare Chair 15 August 2012 Darren J Steinberg Chief Executive Officer 15 August 2012 – the design, implementation and operation of information technology systems; – the design and implementation of internal accounting and risk management controls; – conducting valuation, actuarial or legal services; – consultancy services that include direct involvement in management decision making functions; – investment banking, borrowing, dealing or advisory services; – acting as trustee, executor or administrator of trust or estate; – prospectus independent expert reports and being a member of the due diligence committee; and – providing internal audit services. n the Board Audit Committee regularly reviews the performance and independence of the Auditor and whether the independence of this function has been maintained having regard to the provision of non‑audit services. The Auditor has provided a written declaration to the Board regarding its independence at each reporting period and Board Audit Committee approval is required before the engagement of the Auditor to perform any non‑audit service for a fee in excess of $100,000. The above Directors’ statements are in accordance with the advice received from the Board Audit Committee. 17.3 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 38 and forms part of this Directors’ Report. 18 Corporate governance DXFM’s Corporate Governance Statement is set out in a separate section of the DEXUS Property Group Annual Report and forms part of this Directors’ Report. 19 Rounding of amounts and currency The Group is a registered scheme of the kind referred to in Class Order 98/0100, issued by the Australian Securities & Investments Commission, relating to the rounding off of amounts in this Directors’ Report and the Financial Statements. Amounts in this Directors’ Report and the Financial Statements have been rounded off in accordance with that Class Order to the nearest thousand dollars, unless otherwise indicated. All figures in this Directors’ Report and the Financial Statements, except where otherwise stated, are expressed in Australian dollars. 2012 DEXUS AnnUAl REPORT 37 Financial Report aUDIToR’S INDEpENDENCE DEClaRaTIoN for the year ended 30 June 2012 38 2012 DEXUS AnnUAl REPORT Financial Statements CoNSolIDaTED STaTEmENT oF CompREhENSIVE INComE for the year ended 30 June 2012 Revenue from ordinary activities Property revenue Proceeds from sale of inventory Interest revenue Management fee revenue Total revenue from ordinary activities net fair value gain of investment properties Share of net profit of associates accounted for using the equity method net foreign exchange gain Other income Total income Expenses Property expenses Cost of sale of inventory Finance costs net (loss)/gain on sale of investment properties net fair value (loss)/gain of derivatives Depreciation and amortisation Impairment of inventories Impairment of goodwill Employee benefits expense Other expenses Total expenses Foreign currency translation reserve transfer on partial disposal of foreign operations profit before tax Tax benefit/(expense) Income tax benefit Withholding tax expense Total tax expense profit after tax other comprehensive income/(loss): Exchange differences on translating foreign operations Foreign currency translation reserve transfer on partial disposal of foreign operations Total comprehensive income for the year profit for the year attributable to: Unitholders of the parent entity Unitholders of other stapled entities (non‑controlling interests) Stapled security holders Other non‑controlling interest Total profit for the year Total comprehensive income for the year attributable to: Unitholders of the parent entity Unitholders of other stapled entities (non‑controlling interests) Stapled security holders Other non‑controlling interest Total comprehensive income for the year Earnings per unit Basic earnings per unit on profit attributable to unitholders of the parent entity Diluted earnings per unit on profit attributable to unitholders of the parent entity Earnings per stapled security Basic earnings per unit on profit attributable to stapled security holders Diluted earnings per unit on profit attributable to stapled security holders Note 2 15 3 5 4(a) 4(c) 25(a) 25(a) 37 37 37 37 2012 $’000 2011 $’000 653,582 49,847 1,743 50,712 755,884 75,227 13,784 2,170 20 847,085 (154,901) (43,998) (261,869) (32,566) (1,564) (2,805) (14,846) (625) (74,366) (18,607) (606,147) (41,531) 199,407 20,131 (36,657) (16,526) 182,881 333 41,531 224,745 81,475 99,595 181,070 1,811 182,881 139,145 83,789 222,934 1,811 224,745 Cents 1.69 1.69 3.75 3.75 629,072 3,359 1,565 50,655 684,651 148,433 34,053 574 742 868,453 (151,865) (3,353) (52,744) 7,052 2,605 (3,811) – (194) (67,417) (22,293) (292,020) – 576,433 4,851 (26,164) (21,313) 555,120 (4,973) – 550,147 182,368 370,644 553,012 2,108 555,120 153,280 394,856 548,136 2,011 550,147 Cents 3.77 3.77 11.44 11.44 The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 2012 DEXUS AnnUAl REPORT 39 Financial Statements CoNSolIDaTED STaTEmENT oF FINaNCIal poSITIoN As at 30 June 2012 Current assets Cash and cash equivalents Receivables non‑current assets classified as held for sale Inventories Derivative financial instruments Current tax assets Other Total current assets Non-current assets Investment properties Plant and equipment Inventories Investments accounted for using the equity method Derivative financial instruments Deferred tax assets Intangible assets Other Total non-current assets Total assets Current liabilities Payables Interest bearing liabilities Current tax liabilities Provisions Derivative financial instruments Total current liabilities Non-current liabilities Interest bearing liabilities Derivative financial instruments Deferred tax liabilities Provisions Other Total non-current liabilities Total liabilities Net assets Equity Equity attributable to unitholders of the parent entity Contributed equity Reserves Retained profits parent entity unitholders’ interest Equity attributable to unitholders of other stapled entities (non-controlling interests) Contributed equity Reserves Retained profits other stapled unitholders’ interest Stapled security holders’ interest Other non‑controlling interest Total equity Note 2012 $’000 2011 $’000 7 8 9 10 11 12 13 14 10 15 11 16 17 18 19 20 21 11 20 11 22 21 23 24 25 25 24 25 25 26 59,193 30,842 212,264 26,841 3,617 198 10,646 73,746 36,175 59,260 7,991 23,112 1,247 11,396 343,601 212,927 6,391,457 4,682 70,990 217,043 74,655 36,729 223,641 1,309 7,105,914 3,926 104,247 200,356 77,108 55,577 224,684 2,905 7,020,506 7,774,717 7,364,107 7,987,644 108,484 – 2,087 151,969 8,243 108,916 315,777 7,014 147,806 5,000 270,783 584,513 1,940,762 112,659 12,391 16,517 3,669 1,899,279 155,085 18,151 17,624 6,151 2,085,998 2,096,290 2,356,781 2,680,803 5,007,326 5,306,841 1,605,014 (46,053) 197,380 1,798,077 (103,670) 222,638 1,756,341 1,917,045 3,156,465 53,239 41,281 3,014,665 68,566 102,537 3,250,985 3,185,768 5,007,326 – 5,102,813 204,028 5,007,326 5,306,841 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. 40 2012 DEXUS AnnUAl REPORT Financial Statements CoNSolIDaTED STaTEmENT oF ChaNgES IN EqUITY for the year ended 30 June 2012 Note Stapled security holders’ equity Contributed equity Retained profits $’000 $’000 Foreign currency translation reserve $’000 asset revaluation reserve $’000 Security- based payments reserve $’000 Stapled security- holders’ equity $’000 other non- controlling interest Total equity $’000 $’000 4,798,214 33,186 (72,967) 42,739 – 4,801,172 205,275 5,006,447 Closing balance as at 30 June 2011 4,812,742 325,175 (77,843) 42,739 – 5,102,813 204,028 5,306,841 4,812,742 325,175 (77,843) 42,739 – 5,102,813 204,028 5,306,841 opening balance as at 1 July 2010 Profit for the year attributable to: Unitholders of the parent entity Other stapled entities (non‑controlling interests) Other non‑controlling interest profit for the year other comprehensive (loss)/income for the year attributable to: Unitholders of the parent entity Other stapled entities (non‑controlling interests) Total other comprehensive loss for the year – 182,368 370,644 – 553,012 – – – – – (29,088) – 24,212 – (4,876) – – – – – – Transactions with owners in their capacity as owners Contributions of equity, net of transaction costs Distributions paid or provided for Total transactions with owners in their capacity as owners Transfer (from)/to retained profits 14,528 – – (250,662) 27 14,528 (250,662) (10,361) – – – – – opening balance as at 1 July 2011 Profit for the year attributable to: Unitholders of the parent entity Other stapled entities (non‑controlling interests) Other non‑controlling interest profit for the year – 81,475 – – – 99,595 – 181,070 – – – – other comprehensive income/(loss) for the year attributable to: Unitholders of the parent entity Other stapled entities (non‑controlling interests) Total other comprehensive income for the year Transactions with owners in their capacity as owners – – – – 57,670 – – (15,806) 41,864 Buy‑back of contributed equity, net of transaction costs Capital payments and capital contributions, net of transaction costs Acquisition of non‑controlling interest Security‑based payments expense Distributions paid or provided for 38 27 Total transactions with owners in their capacity as owners Transfer (from)/to retained profits (50,950) – (313) – – – – – – (257,408) (51,263) (257,408) (10,176) – – – – – – – – – – – – – – – – – – – – – – – – – – – – 182,368 – 182,368 370,644 – – 2,011 370,644 2,011 553,012 2,011 555,023 (29,088) – (29,088) 24,212 – 24,212 (4,876) – (4,876) 14,528 (250,662) (991) 13,537 (12,628) (263,290) – (236,134) (10,361) – (13,619) (249,753) – 10,361 – – – – – – – – – – – – – – – 81,475 – 81,475 – – – 99,595 – – 1,811 99,595 1,811 181,070 1,811 182,881 – 57,670 – 57,670 – – (15,806) 41,864 – – (15,806) 41,864 – (50,950) – (50,950) – – 426 – (313) – 426 (257,408) – (313) (204,000) (204,000) 426 (269,423) – (12,015) 426 (308,245) (216,015) (524,260) – (10,176) 10,176 – Closing balance as at 30 June 2012 4,761,479 238,661 (35,979) 42,739 426 5,007,326 – 5,007,326 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 2012 DEXUS AnnUAl REPORT 41 Financial Statements CoNSolIDaTED STaTEmENT oF CaSh FloWS for the year ended 30 June 2012 Cash flows from operating activities Receipts in the course of operations (inclusive of GST) Payments in the course of operations (inclusive of GST) Interest received Finance costs paid to financial institutions Distributions received from associates accounted for using the equity method Income and withholding taxes (paid)/received Proceeds from sale of property classified as inventory Payments for property classified as inventory Net cash inflow from operating activities Cash flows from investing activities Proceeds from sale of investment properties Note 2012 $’000 2011 $’000 854,518 797,297 (365,050) (332,682) 1,931 1,539 (157,719) (169,484) 7,539 (1,109) 53,206 – 118 – (44,925) (57,446) 35(a) 348,391 239,342 883,604 170,547 Payments for capital expenditure on investment properties 35(b) (177,600) (291,917) Payments for acquisition of investment properties Payments for acquisition of investments net of cash Payments for investments accounted for using the equity method Payments for property, plant and equipment Net cash inflow/(outflow) from investing activities Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Payments for buy‑back of contributed equity Capital contribution and capital payment transaction costs Acquisition of non‑controlling interest Distributions paid to security holders Distributions paid to other non‑controlling interests Net cash (outflow)/inflow from financing activities Net (decrease)/increase 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 (34,730) (41,083) – (872) (8,565) (61,726) (3,142) (1,988) 659,567 (227,039) 2,628,212 2,245,856 (3,123,096) (1,999,591) (50,950) (313) (204,000) – – – (254,533) (228,913) (15,157) (12,403) (1,019,837) 4,949 (11,879) 17,252 73,746 (2,674) 64,419 (7,925) Cash and cash equivalents at the end of the year 7 59,193 73,746 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. 42 2012 DEXUS AnnUAl REPORT Financial Statements NoTES To ThE FINaNCIal STaTEmENTS for the year ended 30 June 2012 Note 1 Summary of significant accounting policies (a) Basis of preparation In accordance with Australian Accounting Standards, the entities within the Group must be consolidated. The parent entity and deemed acquirer of DIT, DOT and DXO is DDF. These Financial Statements represent the consolidated results of DDF, which comprises DDF and its controlled entities, DIT and its controlled entities, DOT and its controlled entities, and DXO and its controlled entities. Equity attributable to other trusts stapled to DDF is a form of non‑controlling interest and represents the equity of DIT, DOT and DXO. Other non‑controlling interests represent the equity attributable to parties external to the Group. DEXUS Property Group stapled securities are quoted on the Australian Securities Exchange under the “DXS” code and comprise one unit in each of DDF, DIT, DOT and DXO. Each entity forming part of the Group continues as a separate legal entity in its own right under the Corporations Act 2001 and is therefore required to comply with the reporting and disclosure requirements under the Corporations Act 2001 and Australian Accounting Standards. DEXUS Funds Management limited (DXFM) as Responsible Entity for DDF, DIT, DOT and DXO may only unstaple the Group if approval is obtained by a special resolution of the stapled security holders. These general purpose Financial Statements for the year ended 30 June 2012 have been prepared in accordance with the requirements of the Constitution of the entities within the Group, the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board and interpretations. Compliance with Australian Accounting Standards ensures that the Financial Statements and notes also comply with International Financial Reporting Standards (IFRS). These Financial Statements are prepared on a going concern basis and in accordance with historical cost conventions and have not been adjusted to take account of either changes in the general purchasing power of the dollar or changes in the values of specific assets, except for the valuation of certain non‑current assets and financial instruments (refer notes 1(e), 1(l), 1(o), 1(q), 1(v), 1(w), and 1(aa)). The accounting policies adopted are consistent with those of the previous financial year and corresponding interim reporting period, unless otherwise stated. Critical accounting estimates The preparation of Financial Statements requires the use of certain critical accounting estimates and management to exercise its judgement in the process of applying the Group’s accounting policies. Other than the estimations described in notes 1(e), 1(l), 1(o), 1(q), 1(v), 1(w) and 1(aa), no key assumptions concerning the future or other estimation of uncertainty at the end of each reporting period have a significant risk of causing material adjustments to the Financial Statements in the next annual reporting period. (b) principles of consolidation (i) Controlled entities The Financial Statements have been prepared on a consolidated basis in recognition of the fact that while the securities issued by the Group are stapled into one trading security and cannot be traded separately, the Financial Statements must be presented on a consolidated basis. The parent entity and deemed acquirer of the Group is DDF. The accounting policies of the subsidiaries are consistent with those of the parent. Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one‑half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. The Financial Statements incorporate an elimination of inter‑entity transactions and balances to present the Financial Statements on a consolidated basis. net profit and equity in controlled entities, which is attributable to the unitholdings of non‑controlling interests, are shown separately in the Statement of Comprehensive Income and Statement of Financial Position respectively. Where control of an entity is obtained during a financial year, its results are included in the Statement of Comprehensive Income from the date on which control is gained. They are deconsolidated from the date that control ceases. The Financial Statements incorporate all the assets, liabilities and results of the parent and its controlled entities. (ii) partnerships and joint ventures Where assets are held in a partnership or joint venture with another entity directly, the Group’s share of the results and assets of this partnership or joint venture are consolidated into the Statement of Comprehensive Income and Statement of Financial Position of the Group. Where assets are jointly controlled via ownership of units in single purpose unlisted unit trusts or shares in companies, the Group applies equity accounting to record the operations of these investments (refer note 1(t)). (c) revenue recognition (i) Rent Rental revenue is brought to account on a straight‑line basis over the lease term for leases with fixed rent review clauses. In all other circumstances rental revenue is brought to account on an accruals basis. If not received at the end of the reporting period, rental revenue is reflected in the Statement of Financial Position as a receivable. Recoverability of receivables is reviewed on an ongoing basis. Debts which are known to be not collectable are written‑off. (ii) management fee revenue Management fees are brought to account on an accruals basis, and if not received at the end of the reporting period, are reflected in the Statement of Financial Position as a receivable. Uncertainty around property valuations (iii) Interest revenue The fair value of our investment properties in the United States and Europe have been adjusted to reflect market conditions at the end of the reporting period. While this represents the best estimates of fair value as at the end of the reporting period, the current uncertainty in these markets means that if investment property is sold in the future, the price achieved may be higher or lower than the most recent valuation, or higher or lower than the fair value recorded in the Financial Statements. Interest revenue is brought to account on an accruals basis using the effective interest rate method and, if not received at the end of the reporting period, is reflected in the Statement of Financial Position as a receivable. (iv) Dividends and distribution revenue Revenue from dividends and distributions are recognised when declared. Amounts not received at the end of the reporting period are included as a receivable in the Statement of Financial Position. 2012 DEXUS AnnUAl REPORT 43 NoTES To ThE FINaNCIal STaTEmENTS Note 1 Summary of significant accounting policies (continued) (d) Expenses Expenses are brought to account on an accruals basis and, if not paid at the end of the reporting period, are reflected in the Statement of Financial Position as a payable. (iii) Financial guarantee contracts Financial guarantee contracts are recognised as a financial liability at the time the guarantee is issued. The liability is initially measured at fair value and subsequently at the higher of the amount determined in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognised less cumulative amortisation, where appropriate. (i) property expenses Property expenses include rates, taxes and other property outgoings incurred in relation to investment properties and property, plant and equipment where such expenses are the responsibility of the Group. (ii) Borrowing costs Borrowing costs include interest, amortisation of discounts or premiums relating to borrowings, amortisation or ancillary costs incurred in connection with arrangement of borrowings and foreign exchange losses net of hedged amounts on borrowings, including trade creditors and lease finance charges. Borrowing costs are expensed as incurred unless they relate to qualifying assets. Qualifying assets are assets which take more than 12 months to get ready for their intended use or sale. In these circumstances, borrowing costs are capitalised to the cost of the asset during the period of time that is required to complete and prepare the asset for its intended use or sale. Where funds are borrowed generally, borrowing costs are capitalised using a weighted average capitalisation rate. (e) Derivatives and other financial instruments (i) Derivatives The Group’s activities expose it to a variety of financial risks including foreign exchange risk and interest rate risk. Accordingly, the Group enters into various derivative financial instruments such as interest rate swaps, cross currency swaps and foreign exchange contracts to manage its exposure to certain risks. Written policies and limits are approved by the Board of Directors of the Responsible Entity, in relation to the use of financial instruments to manage financial risks. The Responsible Entity continually reviews the Group’s exposures and updates its treasury policies and procedures. The Group does not trade in derivative instruments for speculative purposes. Even though derivative financial instruments are entered into for the purpose of providing the Group with an economic hedge, the Group has elected not to apply hedge accounting under AASB 139 Financial Instruments: Recognition and Measurement for interest rate swaps and foreign exchange contracts. Accordingly, derivatives including interest rate swaps, interest rate component of cross currency swaps and foreign exchange contracts, are measured at fair value with any changes in fair value recognised in the Statement of Comprehensive Income. (ii) Debt and equity instruments issued by the group Financial instruments issued by the Group are classified as either liabilities or as equity in accordance with the substance of the contractual arrangements. Accordingly, ordinary units issued by DDF, DIT, DOT and DXO are classified as equity. Interest and distributions are classified as expenses or as distributions of profit consistent with the Statement of Financial Position classification of the related debt or equity instruments. Transaction costs arising on the issue of equity instruments are recognised directly in equity (net of tax) as a reduction of the proceeds of the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued. The fair value of financial guarantees is determined as the present value of the difference in the net cash flows between the contractual payments under the debt instrument and the payments that would be required without the guarantee, or the estimated amount that would be payable to a third party for assuming the obligations. Where guarantees in relation to loans or other payables of subsidiaries or associates are provided for no compensation, the fair values are accounted for as contributions and recognised as part of the cost of the investment. (iv) other financial assets loans and other receivables are measured at amortised cost using the effective interest rate method less impairment. (f) goods and services tax/value added tax Revenues, expenses and capital assets are recognised net of any amount of Australian and new Zealand Goods and Services Tax (GST) or French and German Value Added Tax (VAT), except where the amount of GST/VAT incurred is not recoverable. In these circumstances the GST/VAT is recognised as part of the cost of acquisition of the asset or as part of the expense. Cash flows are included in the Statement of Cash Flows on a gross basis. The GST component of cash flows arising from investing and financing activities that is recoverable from or payable to the Australian Taxation Office is classified as cash flows from operating activities. (g) taxation Under current Australian income tax legislation, DDF, DIT and DOT are not liable for income tax provided they satisfy certain legislative requirements. The Group may be liable for income tax in jurisdictions where foreign property is held (i.e. United States, France, Germany, and new Zealand). DXO is subject to Australian income tax as follows: n the income tax expense for the year is the tax payable on the current year’s taxable income based on a tax rate of 30% adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses; n deferred tax assets and liabilities are recognised for temporary differences arising from differences between the carrying amount of assets and liabilities and the corresponding tax base of those items. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax assets or liabilities. An exception is made for certain temporary differences arising from the initial recognition of an asset or a liability (where they do not arise as a result of a business combination and did not affect either accounting profit/loss or taxable profit/loss); n 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; n deferred tax assets and liabilities 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; and n 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. 44 2012 DEXUS AnnUAl REPORT Withholding tax payable on distributions received by the Group from DEXUS Industrial Properties Inc. (US REIT) and DEXUS US Properties Inc. (US W REIT) are recognised as an expense when tax is withheld. Deferred tax assets or 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. Under current Australian income tax legislation, the security holders will generally be entitled to receive a foreign tax credit for US withholding tax deducted from distributions paid by the US REIT and US W REIT. DIT France logistique SAS (DIT France), a wholly owned sub‑trust of DIT, is liable for French corporation tax on its taxable income at the rate of 33.33%. In addition, a deferred tax liability or asset and its related deferred tax expense/benefit is recognised on differences between the tax cost base of the French real estate assets and their accounting carrying value at end of the reporting period, where required. DEXUS GlOG Trust, a wholly owned Australian sub‑trust of DIT, is liable for German corporate income tax on its German taxable income at the rate of 15.82%. In addition, a deferred tax liability or asset and its related deferred tax expense/benefit is recognised on differences between the tax cost base of the German real estate assets and their accounting carrying value at end of the reporting period, where required. DOT nZ Sub‑Trust no. 1, a wholly owned Australian sub‑trust of DOT, is liable for new Zealand corporate tax on its new Zealand taxable income at the rate of 30%. In addition, a deferred tax liability or asset and its related deferred tax expense/benefit is recognised on differences between the tax cost base of the new Zealand real estate asset and the accounting carrying value at end of the reporting period, where required. DEXUS Canada Trust, a wholly owned Australian sub‑trust of DIT, is liable for Canadian income tax on its Canadian taxable income at the rate of 42.92%. DXO and its wholly owned controlled entities have formed a tax consolidated group. As a consequence, these entities are taxed as a single entity. (h) Distributions In accordance with the Trust’s Constitution, the Group distributes its distributable income to unitholders by cash or reinvestment. Distributions are provided for when they are approved by the Board of Directors and declared. (i) repairs and maintenance Plant is required to be overhauled on a regular basis and is managed as part of an ongoing major cyclical maintenance program. The costs of this maintenance are charged as expenses as incurred, except where they relate to the replacement of a component of an asset, in which case the replaced component will be derecognised and the replacement costs capitalised in accordance with note 1(o). Other routine operating maintenance, repair costs and minor renewals are also charged as expenses as incurred. (j) cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held at call with financial institutions and 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. (k) receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method, which is based on the invoiced amount less provision for doubtful debts. Trade receivables are required to be settled within 30 days and are assessed on an ongoing basis for impairment. Receivables which are known to be uncollectable are written‑off by reducing the carrying amount directly. A provision for doubtful debts is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The provision for doubtful debts is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short term receivables are not discounted as the effect of discounting is immaterial. (l) inventories land and properties held for resale land and properties held for resale are stated at the lower of cost and the net realisable value. Cost is assigned by specific identification and includes the cost of acquisition, and development and holding costs such as borrowing costs, rates and taxes. Holding costs incurred after completion of development are expensed. Net realisable value net realisable value is determined using the estimated selling price in the ordinary course of business. Costs to bring inventories to their finished condition, including marketing and selling expenses, are estimated and deducted to establish net realisable value. (m) Non-current assets held for sale non‑current assets are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use, and a sale is considered highly probable. They are measured at the lower of their carrying amount and fair value less costs to sell, except for assets such as deferred tax assets, assets arising from employee benefits, financial assets and investment property that are carried at fair value and contractual rights under insurance contracts, which are specifically exempt from this requirement. (n) other financial assets at fair value through profit and loss Interests held by the Group in controlled entities and associates are measured at fair value through profit and loss to reduce a measurement or recognition inconsistency. (o) property, plant and equipment Property, plant and equipment is stated at historical cost less depreciation and accumulated impairment. Historical cost includes expenditure that is directly attributable to its acquisition. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the Statement of Comprehensive Income during the reporting period in which they are incurred. Property, plant and equipment is tested for impairment whenever events or changes in circumstances indicate that the carrying amounts exceed their recoverable amounts (refer note 1(u)). 2012 DEXUS AnnUAl REPORT 45 NoTES To ThE FINaNCIal STaTEmENTS Note 1 Summary of significant accounting policies (continued) (p) Depreciation of property, plant and equipment land is not depreciated. Depreciation on buildings (including fit‑out) is calculated on a straight‑line basis so as to write‑off the net cost of each non‑current asset over its expected useful life. Estimates for remaining useful lives are reviewed on a regular basis for all assets and are as follows: Buildings (including fit‑out) IT and office equipment 5‑40 years 3‑5 years (q) investment properties The Group’s investment properties consist of properties held for long term rental yields and/or capital appreciation and property that is being constructed or developed for future use as investment property. Investment properties are initially recognised at cost including transaction costs. Investment properties are subsequently recognised at fair value in the Financial Statements. Each valuation firm and its signatory valuer are appointed on the basis that they are engaged for no more than three consecutive valuations. The basis of valuations of investment properties is fair value being the amounts for which the assets could be exchanged between knowledgeable willing parties in an arm’s length transaction, based on current prices in an active market for similar properties in the same location and condition and subject to similar leases. In addition, an appropriate valuation method is used, which may include the discounted cash flow and the capitalisation method. Discount rates and capitalisation rates are determined based on industry expertise and knowledge and, where possible, a direct comparison to third party rates for similar assets in a comparable location. Rental revenue from current leases and assumptions about future leases, as well as any expected operational cash outflows in relation to the property, are also reflected in fair value. In relation to development properties under construction for future use as investment property, where reliably measurable, fair value is determined based on the market value of the property on the assumption it had already been completed at the valuation date less costs still required to complete the project, including an appropriate adjustment for profit and risk. External valuations of the individual investment properties are carried out in accordance with the Constitutions for each trust forming the Group or may be earlier where the Responsible Entity believes there is a potential for a material change in the fair value of the property. Changes in fair values are recorded in the Statement of Comprehensive Income. The gain or loss on disposal of an investment property is calculated as the difference between the carrying amount of the asset at the date of disposal and the net proceeds from disposal and is included in the Statement of Comprehensive Income in the year of disposal. Subsequent redevelopment and refurbishment costs (other than repairs and maintenance) are capitalised to the investment property where they result in an enhancement in the future economic benefits of the property. (r) Leasing fees leasing fees incurred are capitalised and amortised over the lease periods to which they relate. (s) Lease incentives Prospective lessees may be offered incentives as an inducement to enter into operating leases. These incentives may take various forms including cash payments, rent free periods, or a contribution to certain lessee costs such as fit‑out costs or relocation costs. 46 2012 DEXUS AnnUAl REPORT The costs of incentives are recognised as a reduction of rental revenue on a straight‑line basis from the earlier of the date which the tenant has effective use of the premises or the lease commencement date to the end of the lease term. The carrying amount of the lease incentives is reflected in the fair value of investment properties. (t) investments accounted for using the equity method Some property investments are held through the ownership of units in single purpose unlisted trusts or shares in unlisted companies where the Group exerts significant influence but does not have a controlling interest. These investments are considered to be associates and the equity method of accounting is applied in the Financial Statements. Under this method, the entity’s share of the post‑acquisition profits of associates is recognised in the Statement of Comprehensive Income. The cumulative post‑acquisition movements are adjusted against the carrying amount of the investment. Dividends or distributions receivable from associates are recognised as a reduction in the carrying amount of the investment. When the Group’s share of losses in an associate equal or exceed its interest in the associate (including any unsecured receivables) the Group does not recognise any further losses unless it has incurred obligations or made payments on behalf of the associate. (u) impairment of assets Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows, which are largely independent of the cash inflows from other assets or groups of assets (cash‑generating units). non‑financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. (v) intangible assets (i) goodwill Goodwill is recognised as at the acquisition date and is measured as the excess of the aggregate of the fair value of consideration transferred and the non‑controlling interest’s proportionate share of the acquiree’s identifiable net assets over the fair value of the identifiable net assets acquired. The carrying value of the goodwill is tested for impairment at the end of each reporting period with any decrement in value taken to the Statement of Comprehensive Income as an expense. (ii) management rights Management rights represent the asset management rights owned by the Group which entitle it to management fee revenue from both finite and indefinite life trusts. Those rights that are deemed to have a finite useful life are measured at cost and amortised using the straight‑line method over their estimated remaining useful lives of 20 years. Management rights with indefinite useful lives are not subject to amortisation and are tested for impairment annually. (w) financial assets and liabilities (i) Classification The Group has classified its financial assets and liabilities as follows: Financial asset/liability Classification Valuation basis Reference Receivables Other financial assets Payables loans and receivables loans and receivables Amortised cost Refer note 1(k) Amortised cost Refer note 1(e) Financial liability at amortised cost Amortised cost Refer note 1(x) Interest bearing liabilities Financial liability at amortised cost Amortised cost Refer note 1(y) Derivatives Fair value through profit or loss Fair value Refer note 1(e) Financial assets and liabilities are classified in accordance with the purpose for which they were acquired. (ii) Fair value estimation of financial assets and liabilities (i) Foreign currency transactions The fair value of financial assets and financial liabilities must be estimated for recognition and measurement and for disclosure purposes. The fair value of financial instruments traded in active markets (such as publicly traded derivatives) is based on quoted market prices at the end of the reporting period. 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 (for example, over‑the‑counter derivatives) is determined using valuation techniques including dealer quotes for similar instruments and discounted cash flows. In particular, the fair value of interest rate swaps and cross currency swaps are calculated as the present value of the estimated future cash flows, the fair value of forward exchange rate contracts is determined using forward exchange market rates at the end of the reporting period, and the fair value of interest rate option contracts is calculated as the present value of the estimated future cash flows taking into account the time value and implied volatility of the underlying instrument. (x) payables These amounts represent liabilities for amounts owing at end of the reporting period. The amounts are unsecured and are usually paid within 30 days of recognition. (y) interest bearing liabilities Subsequent to initial recognition at fair value, net of transaction costs incurred, interest bearing liabilities are measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the Statement of Comprehensive Income over the period of the borrowings using the effective interest method. Interest bearing liabilities are classified as current liabilities unless the Group has an unconditional right to defer the liability for at least 12 months after the reporting date. (z) foreign currency Items included in the Financial Statements of the Group are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The Financial Statements are presented in Australian dollars, which is the functional and presentation currency of the Group. 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 period end exchange rates of financial assets and liabilities denominated in foreign currencies are recognised in the Statement of Comprehensive Income. (ii) Foreign operations Foreign operations are located in the United States, new Zealand, France and Germany. These operations have a functional currency of US dollars, nZ dollars and Euros respectively, which are translated into the presentation currency. The assets and liabilities of the foreign operations are translated at exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising are recognised in the foreign currency translation reserve and recognised in profit or loss on disposal or partial disposal of the foreign operation. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at exchange rates prevailing at the end of each reporting period. (aa) Employee benefits (i) Wages, salaries and annual leave liabilities for employee benefits for wages, salaries and annual leave represent present obligations resulting from employees’ services provided to the end of the reporting period, calculated at undiscounted amounts based on remuneration wage and salary rates that the Group expects to pay at the end of the reporting period including related on‑costs, such as workers compensation, insurance and payroll tax. (ii) long service leave The provision for employee benefits for long service leave represents the present value of the estimated future cash outflows, to be made resulting from employees’ services provided to the end of the reporting period. The provision is calculated using expected future increases in wage and salary rates including related on‑costs and expected settlement dates based on turnover history and is discounted using the rates attaching to national government bonds at the end of the reporting period that most closely matches the term of the maturity of the related liabilities. The unwinding of the discount is treated as long service leave expense. 2012 DEXUS AnnUAl REPORT 47 NoTES To ThE FINaNCIal STaTEmENTS Note 1 Summary of significant accounting policies (continued) (aa) Employee benefits (continued) (iii) Security-based payments Security‑based employee benefits will be provided to eligible participants via the DEXUS Transitional Performance Rights Plan (“the Plan”). Information relating to this Plan is set out in note 38. Under the Plan, participating employees will be granted a certain number of performance rights which will vest into DXS stapled securities at no cost, if certain vesting conditions are satisfied. The fair value of performance rights granted is recognised as an employee benefit expense with a corresponding increase in the security‑based payments reserve in equity. The total amount to be expensed is determined by reference to the fair value of the performance rights granted. Fair value is determined independently using Black‑Scholes and Binomial pricing models with reference to the expected life of the rights, security price at grant date, expected price volatility of the underlying security, expected distribution yield and the risk free interest rate for the term of the rights. non‑market vesting conditions are included in assumptions about the number of performance rights that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each period, the Group revises its estimates of the number of performance rights that are expected to vest based on the non‑market vesting conditions. The impact of the revised estimates, if any, is recognised in profit or loss with a corresponding adjustment to equity. When performance rights vest, the Group will arrange for the delivery or allocation of the appropriate number of securities to the participant. (ab) Earnings per unit Basic earnings per unit are determined by dividing the net profit attributable to unitholders of the parent entity by the weighted average number of ordinary units outstanding during the year. Diluted earnings per unit are adjusted from the basic earnings per unit by taking into account the impact of dilutive potential units. The Group did not have such dilutive potential units during the year. (ac) operating segments Operating segments are reported in a manner that is consistent with the internal reporting provided to the Chief Operating Decision Maker (CODM). The CODM has been identified as the Board of Directors as they are responsible for the strategic decision making within the Group. (ad) rounding of amounts The Group is the kind referred to in Class Order 98/0100, issued by the Australian Securities & Investments Commission, relating to the rounding off of amounts in the Financial Statements. Amounts in the Financial Statements have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. (ae) parent entity financial information The financial information for the parent entity, DEXUS Diversified Trust, disclosed in note 28, has been prepared on the same basis as the consolidated Financial Statements except as set out below: (i) Investment in subsidiaries, associates and joint venture entities Distributions received from associates are recognised in the parent entity’s Statement of Comprehensive Income, rather than being deducted from the carrying amount of these investments. 48 2012 DEXUS AnnUAl REPORT (af) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for the 30 June 2012 reporting period. Our assessment of the impact of these new standards and interpretations is set out below: aaSB 2012-3 Amendments to Australian Accounting Standard – Offsetting Financial Assets and Financial Liabilities and aaSB 2012-2 Disclosures – Offsetting Financial Assets and Financial Liabilities (effective 1 July 2014 and 1 July 2013 respectively). In June 2012, the AASB approved amendments to the application guidance in AASB 132 Financial Instruments: Presentation, to clarify some of the requirements for offsetting financial assets and financial liabilities in the Financial Statements. These amendments are effective from 1 July 2014. They are unlikely to affect the accounting for any of the Group’s current offsetting arrangements. The AASB has also introduced more extensive disclosure requirements into AASB 7 which will apply from 1 July 2013. The Group intends to apply the new rules from 1 July 2013 and does not expect any significant impacts. aaSB 2012-5 Amendments to Australian Accounting Standard arising from Annual Improvements 2009-2011 cycle (effective 1 July 2013). In June 2012, the AASB approved a number of amendments to Australian Accounting Standards as a result of the 2009‑2011 annual improvements project. The Group will apply the amendments from 1 July 2013 and does not expect any significant impacts. aaSB 9 Financial Instruments and aaSB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and aaSB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (effective 1 January 2013). AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. The standard simplifies the classifications of financial assets into those to be carried at amortised cost and those to be carried at fair value. The Group intends to apply the standards from 1 July 2013 and does not expect any significant impacts. aaSB 2010-8 Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets (effective 1 January 2012). In December 2010, the AASB amended AASB 112 Income Taxes to provide an amended approach for measuring deferred tax liabilities and deferred tax assets when investment property is measured using the fair value model. AASB 112 requires the measurement of deferred tax assets or liabilities to reflect the tax consequences that would follow from the way management expects to recover or settle the carrying amount of the relevant assets or liabilities, that is through use or through sale. The Group intends to apply the standard from 1 July 2012 and does not expect any significant impacts. aaSB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements (effective 1 July 2013). In July 2011 the AASB decided to remove the individual KMP disclosure requirements from AASB 124 Related Party Disclosures, to achieve consistency with the international equivalent standard and remove a duplication of the requirements with the Corporations Act 2001. While this will reduce the disclosures that are currently required in the notes to the Financial Statements, it will not affect any of the amounts recognised in the Financial Statements. The amendments apply from 1 July 2013 and cannot be adopted early. Note 2 property revenue 2012 $’000 2011 $’000 Rent and recoverable outgoings 681,166 648,421 Incentive amortisation (63,003) (58,732) Other revenue 35,419 39,383 Total property revenue 653,582 629,072 Note 3 Finance costs Interest paid/payable Amount capitalised Other finance costs net fair value loss/(gain) of interest rate swaps Finance costs attributable to US sales transaction1 2012 $’000 2011 $’000 135,297 124,427 (22,458) (60,955) 5,169 4,444 99,561 (15,172) 217,569 52,744 44,300 – Total finance costs 261,869 52,744 1 As a result of the US sales transaction on 21 June 2012, debt was repaid and associated finance costs, that are incremental to the costs that would ordinarily be incurred by the Group, were recognised in the Statement of Comprehensive Income. These costs include the cost of early repayment of debt, restructure of derivatives and accelerated deferred borrowing costs. The average capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation is 7.70% (2011: 7.74%). aaSB 10 Consolidated financial statements (effective 1 January 2013). AASB 10 replaces all of the guidance on control and consolidation in AASB 127 Consolidated and separate financial statements, and SIC‑12 Consolidation – special purpose entities. The standard introduces a single definition of control that applies to all entities. It focuses on the need to have both power and rights or exposure to variable returns before control is present. The Group intends to apply the standard from 1 July 2013 and does not expect any significant impacts. aaSB 11 Joint Arrangements (effective 1 January 2013). AASB 11 introduces a principles based approach to accounting for joint arrangements. The focus is no longer on the legal structure of joint arrangements, but rather on how rights and obligations are shared by the parties to the joint arrangement. Based on the assessment of rights and obligations, a joint arrangement will be classified as either a joint operation or joint venture. Joint ventures are accounted for using the equity method, and the choice to proportionately consolidate will no longer be permitted. The Group intends to apply the standard from 1 July 2013 and does not expect any significant impacts. aaSB 12 Disclosure of interests in other entities (effective 1 January 2013). AASB 12 sets out the required disclosures for entities reporting under the two new standards, AASB 10 and AASB 11, and replaces the disclosure requirements currently found in AASB 128. Application of this standard will not affect any of the amounts recognised in the Financial Statements, but may impact some of the Group’s current disclosures. The Group intends to apply the standard from 1 July 2013. aaSB 128 Investments in associates and joint ventures (effective 1 January 2013). Amendments to AASB 128 provide clarification that an entity continues to apply the equity method and does not remeasure its retained interest as part of ownership changes where a joint venture becomes an associate, and vice versa. The Group intends to apply the standard from 1 July 2013 and does not expect any significant impacts. aaSB 13 Fair value measurement (effective 1 January 2013). AASB 13 explains how to measure fair value and aims to enhance fair value disclosures. Application of this standard will not affect any of the amounts recognised in the Financial Statements, but may impact some of the Group’s current disclosures. The Group intends to apply the standard from 1 July 2013. Revised aaSB 101 Presentation of Financial Statements (effective 1 July 2012). The amendment requires entities to separate items presented in other comprehensive income into two groups, based on whether they may be recycled to profit or loss in the future. It will not affect the measurement of any of the items recognised in the balance sheet or the profit or loss in the current period. The Group intends to adopt the new standard from 1 July 2012. 2012 DEXUS AnnUAl REPORT 49 NoTES To ThE FINaNCIal STaTEmENTS Note 4 Income tax (a) income tax benefit Current tax benefit/(expense) Deferred tax benefit Total income tax benefit Deferred income tax benefit included in income tax benefit comprises: Increase in deferred tax assets Decrease/(increase) in deferred tax liabilities Total deferred tax benefit (b) reconciliation of income tax expense to net profit Profit before tax less amounts not subject to income tax (note 1(g)) prima facie tax benefit at the australian tax rate of 30% (2011: 30%) Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: Depreciation and amortisation Movements in the carrying value and tax cost base of properties net (loss)/gain on sale of investment properties Sundry items Income tax benefit Note 16 22 2012 $’000 1,065 19,066 20,131 8,677 10,389 19,066 2011 $’000 (97) 4,948 4,851 11,803 (6,855) 4,948 2012 $’000 2011 $’000 199,407 576,433 (261,463) (614,379) (62,056) (37,946) 18,617 11,384 905 5,101 (4,606) 114 1,342 (7,886) 26 (15) 1,514 (6,533) 20,131 4,851 (c) withholding tax expense Withholding tax expense of $36,657,000 (2011: $26,164,000) comprises deferred tax expense of $34,164,000 (2011: $23,592,000) and current tax expense of $2,493,000 (2011: $2,572,000). The deferred tax expense is recognised on differences between the tax cost base of the US assets and liabilities and their accounting carrying value at the end of the reporting period. The majority of the deferred tax expense arises due to the tax depreciation and revaluation of US investment properties, the reversal of deferred tax assets associated with the US asset sale, and the mark‑to‑market of derivatives. Note 5 other expenses Audit and taxation fees Custodian fees legal and other professional fees Registry costs and listing fees Occupancy expenses Administration expenses Other staff expenses External management fees Other expenses Total other expenses 50 2012 DEXUS AnnUAl REPORT Note 6 2012 $’000 2,036 411 1,917 705 3,054 3,830 1,990 – 4,664 2011 $’000 2,264 474 1,542 651 2,881 4,101 2,528 2,799 5,053 18,607 22,293 Note 6 audit, taxation and transaction services fees During the year, the Auditor and its related practices, and non‑related audit firms earned the following remuneration: audit fees PwC Australia – audit and review of Financial Statements PwC US – audit and review of Financial Statements1 PwC fees paid in relation to outgoings audits2 PwC Australia – regulatory audit and compliance services PwC Australia – audit and review of US asset disposals3 audit fees paid to pwC Fees paid to non‑PwC audit firms Total audit fees Taxation fees Fees paid to PwC Australia Fees paid to PwC nZ Fees paid to PwC US Fees paid to PwC Australia in respect of US asset disposals3 Taxation fees paid to pwC Fees paid to non‑PwC audit firms Total taxation fees4 Total audit and taxation fees5 Transaction services fees Fees paid to PwC Australia Transaction services fees paid to pwC Fees paid to non‑PwC audit firms Total transaction services fees4 Total audit, taxation and transaction services fees 2012 $ 2011 $ 1,220,819 1,068,066 – 278,057 102,793 107,361 176,925 170,816 115,000 – 1,615,537 1,624,300 52,691 57,874 1,668,228 1,682,174 69,560 188,539 17,068 12,670 – 3,103 45,000 – 131,628 204,312 498,635 484,384 630,263 688,696 2,298,491 2,370,870 110,000 243,557 110,000 243,557 – 52,432 110,000 295,989 2,408,491 2,666,859 1 PwC Australia were engaged for the audit and review of the US entities for the year ended 30 June 2012. 2 Fees paid in relation to outgoing audits are included in property expenses in the Statement of Comprehensive Income. 3 Fees paid in relation to US asset disposals are included in loss on sale of investment properties in the Statement of Comprehensive Income. 4 These services include general compliance work, one‑off project work and advice. 5 After allowing for the impact of footnotes 2 and 3 above, total audit and taxation fees included in other expenses is $2,035,698 (2011: $2,263,509). Note 7 Current assets – cash and cash equivalents Cash at bank Short term deposits1 Total current assets – cash and cash equivalents 2012 $’000 20,752 38,441 2011 $’000 28,039 45,707 59,193 73,746 1 As at 30 June 2012, the Group held US$25.2 million (A$24.7 million) in escrow in relation to the US asset disposals in June 2012. As at 30 June 2011, the Group held C$34.7 million (A$33.4 million) in escrow in relation to the sale of its Canadian asset in June 2011. These funds were released during the year ended 30 June 2012. 2012 DEXUS AnnUAl REPORT 51 NoTES To ThE FINaNCIal STaTEmENTS Note 8 Current assets – receivables Rent receivable less: provision for doubtful debts Total rental receivables Fees receivable Interest receivable Other receivables Total other receivables Total current assets – receivables Note 9 Non-current assets classified as held for sale (a) Non-current assets held for sale Investment properties held for sale Total non-current assets classified as held for sale (b) reconciliation Opening balance at the beginning of the year Disposals Transfer from investment properties1 Foreign exchange differences on foreign currency translation net fair value gain of investment properties held for sale Additions, amortisation and other Closing balance at the end of the year 2012 $’000 7,469 (901) 6,568 9,873 94 2011 $’000 9,203 (3,112) 6,091 9,354 282 14,307 20,448 24,274 30,084 30,842 36,175 2012 $’000 2011 $’000 212,264 59,260 212,264 59,260 Note 2012 $’000 2011 $’000 59,260 18,068 (34,938) (15,674) 13 187,375 (2,015) 1,550 1,032 59,260 (2,445) – 51 212,264 59,260 1 On 30 June 2012, 114‑120 Old Pittwater Road, Brookvale, nSW was transferred from investment properties to non‑current assets held for sale with an intention to sell. On 30 June 2012, 50% of an industrial portfolio consisting of assets at DEXUS Industrial Estate laverton north, VIC, Altona north, VIC and Quarry at Greystanes, nSW was transferred from investment properties to non‑current assets held for sale with an intention to sell. On 30 June 2012, a parcel of land at Quarry at Greystanes, nSW was transferred from investment properties to non‑current assets held for sale with an intention to sell. Disposals n On 16 September 2011, Schillerstraße 51, Ellhofen was disposed of for gross proceeds of €6.8 million (A$9.4 million). n On 16 September 2011, Schillerstraße 42, 42a & Bahnhofstraße 44, 50, Ellhofen was disposed of for gross proceeds of €4.0 million (A$5.5 million). n On 16 September 2011, Sulmstraße, Ellhofen‑Weinsberg was disposed of for gross proceeds of €9.8 million (A$13.6 million). n On 30 December 2011, niedesheimerstraße 24, Worms was disposed of for gross proceeds of €2.5 million (A$3.1 million). n On 26 June 2012, Über der Dingelstelle, langenweddingen was disposed of for gross proceeds of €2.9 million (A$3.6 million). Note 10 Inventories (a) Land and properties held for resale Current assets land and properties held for resale Total current assets – inventories Non-current assets land and properties held for resale Total non-current assets – inventories Total assets – inventories 52 2012 DEXUS AnnUAl REPORT 2012 $’000 2011 $’000 26,841 26,841 7,991 7,991 70,990 104,247 70,990 104,247 97,831 112,238 (b) reconciliation Opening balance at the beginning of the year Transfer (to)/from investment properties1 Disposals Impairment Acquisitions, additions and other Closing balance at the end of the year Note 13 2012 $’000 112,238 (7,035) (43,998) (14,846) 2011 $’000 45,470 6,448 (3,353) – 51,472 63,673 97,831 112,238 1 On 30 June 2012, 50% of Boundary Road laverton VIC – Fastline, was transferred from inventories to investment properties with an intention to hold. Acquisitions n On 29 november 2011, undeveloped land was acquired at 3676 Ipswich Road, Wacol, QlD. n On 29 June 2012, undeveloped land was acquired at 57‑75 Templar Road, Erskine Park, nSW. Disposals n On 21 July 2011, two lots located at Templar Road, Erskine Park, nSW were disposed of for gross proceeds of $10.1 million. n On 27 October 2011, a 6,534 square metre development for loscam at Foundation Drive, laverton, VIC was disposed of for gross proceeds of $11.7 million. n On 15 June 2012, 94‑106 lenore Drive, Erskine Park, nSW was disposed of for gross proceeds of $28.0 million. Note 11 Derivative financial instruments Current assets Interest rate swap contracts Cross currency swap contracts Forward foreign exchange contracts Total current assets – derivative financial instruments Non-current assets Interest rate swap contracts Cross currency swap contracts Forward foreign exchange contracts Total non-current assets – derivative financial instruments Current liabilities Interest rate swap contracts Forward foreign exchange contracts Total current liabilities – derivative financial instruments Non-current liabilities Interest rate swap contracts Cross currency swap contracts Total non-current liabilities – derivative financial instruments Net derivative financial instruments Refer note 29 for further discussion regarding derivative financial instruments. Note 12 Current assets – other Prepayments Total current assets – other 2012 $’000 2011 $’000 1,284 – 2,333 3,617 3,336 17,583 2,193 23,112 74,655 71,765 – – 3,198 2,145 74,655 77,108 8,155 88 8,243 4,675 325 5,000 112,544 154,677 115 408 112,659 155,085 (42,630) (59,865) 2012 $’000 2011 $’000 10,646 11,396 10,646 11,396 2012 DEXUS AnnUAl REPORT 53 NoTES To ThE FINaNCIal STaTEmENTS Note 13 Non-current assets – investment properties (a) properties Kings Park Industrial Estate, Vardys Road, Marayong, nSW Target Distribution Centre, Taras Road, Altona north, VIC1, 2 Axxess Corporate Park, Corner Ferntree Gully & Gilby Roads, Mount Waverley, VIC Knoxfield Industrial Estate, Henderson Road, Knoxfield, VIC 12 Frederick Street, St leonards, nSW 2 Alspec Place, Eastern Creek, nSW Centrewest Industrial Estate, 108‑120 Silverwater Road, Silverwater, nSW 40‑50 Talavera Road, Macquarie Park, nSW 44 Market Street, Sydney, nSW 8 nicholson Street, Melbourne, VIC 130 George Street, Parramatta, nSW Flinders Gate Complex, 172 Flinders Street & 189 Flinders lane, Melbourne, VIC 383‑395 Kent Street, Sydney, nSW 14 Moore Street, Canberra, ACT** Sydney CBD Floor Space (1 Chifley Square, Sydney), nSW3 34‑60 little Collins Street, Melbourne, VIC** 32‑44 Flinders Street, Melbourne, VIC Flinders Gate Complex, 172 Flinders Street, Melbourne, VIC 383‑395 Kent Street Car Park, Sydney, nSW 123 Albert Street, Brisbane, QlD4 2‑4 Military Road, Matraville, nSW 79‑99 St Hilliers Road, Auburn, nSW 3 Brookhollow Avenue, Baulkham Hills, nSW 1 Garigal Road, Belrose, nSW 2 Minna Close, Belrose, nSW 114‑120 Old Pittwater Road, Brookvale, nSW5 145‑151 Arthur Street, Flemington, nSW 436‑484 Victoria Road, Gladesville, nSW 1 Foundation Place, Greystanes, nSW 5‑15 Rosebery Avenue & 25‑55 Rothschild Avenue, Rosebery, nSW 10‑16 South Street, Rydalmere, nSW DEXUS Industrial Estate, Pound Road West, Dandenong South, VIC DEXUS Industrial Estate, Boundary Road (including 440 Doherty’s Road), laverton north, VIC1, 2 12‑18 Distribution Drive, laverton north, VIC 250 Forest Road South, lara, VIC 15‑23 Whicker Road, Gillman, SA 25 Donkin Street, West End, Brisbane, QlD 52 Holbeche Road, Arndell Park, nSW 30‑32 Bessemer Street, Blacktown, nSW 27‑29 liberty Road, Huntingwood, nSW 154 O’Riordan Street, Mascot, nSW 1 50% classified as investment property held for sale at 30 June 2012. 2 The valuation reflects 50% of the independent valuation amount. 3 Heritage floor space retained following the disposal of 1 Chifley Square, Sydney, nSW. 4 Classified as development property held as investment property at 30 June 2011. 5 Classified as investment property held for sale at 30 June 2012. The title to all properties is freehold, with the exception of the properties marked ** which are leasehold. 54 2012 DEXUS AnnUAl REPORT ownership acquisition date Independent valuation date Independent Independent valuation amount valuer Book value Book value 30 Jun 2012 30 Jun 2011 % 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 50 100 100 100 100 100 100 100 May 1990 Oct 1995 Oct 1996 Aug 1996 Jul 2000 Mar 2004 May 2010 Oct 2002 Sep 1987 nov 1993 May 1997 Mar 1999 Sep 1987 May 2002 Jul 2000 nov 1984 Jun 1998 Mar 1999 Sep 1987 Oct 1984 Dec 2009 Sep 1997 Dec 2002 Dec 1998 Dec 1998 Sep 1997 Sep 1997 Sep 1997 Feb 2003 Apr 1998 Sep 1997 Jan 2004 Jul 2002 Jul 2002 Dec 2002 Dec 2002 Dec 1998 Jul 1998 May 1997 Jul 1998 Jun 1997 Dec 2009 Jun 2011 Jun 2010 Jun 2011 Jun 2011 Dec 2011 n/a Dec 2011 Jun 2010 Jun 2012 Dec 2010 Jun 2011 Dec 2011 Jun 2010 Dec 2011 Jun 2011 Jun 2011 Jun 2011 Dec 2011 Jun 2012 Jun 2012 Dec 2011 Jun 2012 Jun 2012 Jun 2012 Dec 2011 Jun 2011 Dec 2011 Jun 2010 Dec 2010 Jun 2011 Jun 2012 Jun 2012 Jun 2010 Jun 2012 Dec 2010 Dec 2010 Jun 2012 Jun 2011 Dec 2010 Jun 2011 $’000 88,000 16,250 179,400 37,600 33,500 24,900 n/a 31,500 192,700 93,500 77,000 28,500 133,000 37,000 129 39,200 29,500 54,000 64,000 375,500 52,900 37,500 42,000 16,300 24,000 45,500 28,000 41,500 41,500 89,000 39,250 72,000 36,200 48,000 52,300 25,500 27,000 12,500 16,250 8,000 13,750 (i) (i) (g) (g) (a) (d) n/a (g) (d) (a) (f) (e) (a) (i) (a) (i) (e) (e) (a) (d) (i) (g) (f) (a) (a) (a) (f) (e) (f) (f) (g) (f) (i) (g) (e) (a) (f) (f) (e) (i) (e) 182,838 181,249 217,692 207,000 133,964 127,225 27,600 33,000 $’000 89,009 16,300 37,704 33,873 24,900 24,300 29,000 93,500 77,200 28,100 129 39,259 29,932 54,000 64,000 375,500 52,900 37,522 42,000 16,300 24,000 – 28,472 41,676 43,255 90,840 40,701 74,454 36,875 50,437 52,300 27,300 29,400 12,500 15,606 8,026 14,334 $’000 88,660 32,500 37,600 33,500 24,328 25,931 27,981 80,162 79,460 28,500 129 39,200 29,500 54,000 60,000 – 48,902 37,400 40,112 20,500 27,312 44,128 28,000 43,500 43,000 89,756 39,250 75,300 73,200 50,193 50,000 28,800 26,200 12,500 16,250 8,000 13,750 Note 13 Non-current assets – investment properties (a) properties Kings Park Industrial Estate, Vardys Road, Marayong, nSW Target Distribution Centre, Taras Road, Altona north, VIC1, 2 Axxess Corporate Park, Corner Ferntree Gully & Gilby Roads, Mount Waverley, VIC Knoxfield Industrial Estate, Henderson Road, Knoxfield, VIC Centrewest Industrial Estate, 108‑120 Silverwater Road, Silverwater, nSW 12 Frederick Street, St leonards, nSW 2 Alspec Place, Eastern Creek, nSW 40‑50 Talavera Road, Macquarie Park, nSW 44 Market Street, Sydney, nSW 8 nicholson Street, Melbourne, VIC 130 George Street, Parramatta, nSW Flinders Gate Complex, 172 Flinders Street & 189 Flinders lane, Melbourne, VIC 383‑395 Kent Street, Sydney, nSW 14 Moore Street, Canberra, ACT** Sydney CBD Floor Space (1 Chifley Square, Sydney), nSW3 34‑60 little Collins Street, Melbourne, VIC** 32‑44 Flinders Street, Melbourne, VIC Flinders Gate Complex, 172 Flinders Street, Melbourne, VIC 383‑395 Kent Street Car Park, Sydney, nSW 123 Albert Street, Brisbane, QlD4 2‑4 Military Road, Matraville, nSW 79‑99 St Hilliers Road, Auburn, nSW 3 Brookhollow Avenue, Baulkham Hills, nSW 1 Garigal Road, Belrose, nSW 2 Minna Close, Belrose, nSW 114‑120 Old Pittwater Road, Brookvale, nSW5 145‑151 Arthur Street, Flemington, nSW 436‑484 Victoria Road, Gladesville, nSW 1 Foundation Place, Greystanes, nSW 12‑18 Distribution Drive, laverton north, VIC 250 Forest Road South, lara, VIC 15‑23 Whicker Road, Gillman, SA 25 Donkin Street, West End, Brisbane, QlD 52 Holbeche Road, Arndell Park, nSW 30‑32 Bessemer Street, Blacktown, nSW 27‑29 liberty Road, Huntingwood, nSW 154 O’Riordan Street, Mascot, nSW 5‑15 Rosebery Avenue & 25‑55 Rothschild Avenue, Rosebery, nSW 10‑16 South Street, Rydalmere, nSW DEXUS Industrial Estate, Pound Road West, Dandenong South, VIC DEXUS Industrial Estate, Boundary Road (including 440 Doherty’s Road), laverton north, VIC1, 2 ownership % acquisition date Independent valuation date Independent valuation amount $’000 Independent valuer Book value 30 Jun 2012 $’000 Book value 30 Jun 2011 $’000 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 100 100 100 100 100 100 100 May 1990 Oct 1995 Oct 1996 Aug 1996 Jul 2000 Mar 2004 May 2010 Oct 2002 Sep 1987 nov 1993 May 1997 Mar 1999 Sep 1987 May 2002 Jul 2000 nov 1984 Jun 1998 Mar 1999 Sep 1987 Oct 1984 Dec 2009 Sep 1997 Dec 2002 Dec 1998 Dec 1998 Sep 1997 Sep 1997 Sep 1997 Feb 2003 Apr 1998 Sep 1997 Jan 2004 Jul 2002 Jul 2002 Dec 2002 Dec 2002 Dec 1998 Jul 1998 May 1997 Jul 1998 Jun 1997 Dec 2009 Jun 2011 Jun 2010 Jun 2011 Jun 2011 Dec 2011 n/a Dec 2011 Jun 2010 Jun 2012 Dec 2010 Jun 2011 Dec 2011 Jun 2010 Dec 2011 Jun 2011 Jun 2011 Jun 2011 Dec 2011 Jun 2012 Jun 2012 Dec 2011 Jun 2012 Jun 2012 Jun 2012 Dec 2011 Jun 2011 Dec 2011 Jun 2010 Dec 2010 Jun 2011 Jun 2012 Jun 2012 Jun 2010 Jun 2012 Dec 2010 Dec 2010 Jun 2012 Jun 2011 Dec 2010 Jun 2011 88,000 16,250 179,400 37,600 33,500 24,900 n/a 31,500 192,700 93,500 77,000 28,500 133,000 37,000 129 39,200 29,500 54,000 64,000 375,500 52,900 37,500 42,000 16,300 24,000 45,500 28,000 41,500 41,500 89,000 39,250 72,000 36,200 48,000 52,300 25,500 27,000 12,500 16,250 8,000 13,750 (i) (i) (g) (g) (a) (d) n/a (g) (d) (a) (f) (e) (a) (i) (a) (i) (e) (e) (a) (d) (i) (g) (f) (a) (a) (a) (f) (e) (f) (f) (g) (f) (i) (g) (e) (a) (f) (f) (e) (i) (e) 89,009 16,300 88,660 32,500 182,838 181,249 37,704 33,873 24,900 24,300 29,000 37,600 33,500 24,328 25,931 27,981 217,692 207,000 93,500 77,200 28,100 80,162 79,460 28,500 133,964 127,225 27,600 33,000 129 39,259 29,932 54,000 64,000 375,500 52,900 37,522 42,000 16,300 24,000 – 28,472 41,676 43,255 90,840 40,701 74,454 36,875 50,437 52,300 27,300 29,400 12,500 15,606 8,026 14,334 129 39,200 29,500 54,000 60,000 – 48,902 37,400 40,112 20,500 27,312 44,128 28,000 43,500 43,000 89,756 39,250 75,300 73,200 50,193 50,000 28,800 26,200 12,500 16,250 8,000 13,750 2012 DEXUS AnnUAl REPORT 55 NoTES To ThE FINaNCIal STaTEmENTS Note 13 Non-current assets – investment properties (continued) (a) properties (continued) 11 Talavera Road, Macquarie Park, nSW DEXUS Industrial Estate, Egerton Street, Silverwater, nSW 89 Egerton Street, Silverwater, nSW 114 Fairbank Road, Clayton, VIC 30 Bellrick Street, Acacia Ridge, QlD Quarry Industrial Estate, 8 Basalt Road, Greystanes, nSW – Solaris1, 2 Quarry Industrial Estate, 5 Bellevue Circuit, Greystanes, nSW – Symbion1, 2 Quarry Industrial Estate, 6 Bellevue Circuit, Greystanes, nSW – Fujitsu1, 4 Quarry Industrial Estate, 2‑6 Basalt Road, Greystanes, nSW – Camerons Transport1, 4 2‑10 Distribution Drive, laverton north, VIC – Fastline1, 4 27 Distribution Drive, laverton north, VIC – Toll1, 4 25 Distribution Drive, laverton north, VIC – ACFS1, 4 45 Clarence Street, Sydney, nSW Governor Phillip & Macquarie Tower Complex, 1 Farrer Place, Sydney, nSW2 309‑321 Kent Street, Sydney, nSW2 One Margaret Street, Sydney, nSW Victoria Cross 60 Miller Street, north Sydney, nSW The Zenith, 821 Pacific Highway, Chatswood, nSW2 Woodside Plaza, 240 St Georges Terrace, Perth, WA 30 The Bond, 30‑34 Hickson Road, Sydney, nSW Southgate Complex, 3 Southgate Avenue, Southbank, VIC 201‑217 Elizabeth Street, Sydney, nSW2 Garema Court, 140‑180 City Walk, Canberra, ACT** Australia Square Complex, 264‑278 George Street, Sydney, nSW2 non‑core international properties6 Total investment properties excluding development properties Total development properties held as investment property Total investment properties 1 50% classified as investment property held for sale at 30 June 2012. 2 The valuation reflects 50% of the independent valuation amount. 3 Heritage floor space retained following the disposal of 1 Chifley Square, Sydney. 4 Classified as development property held as investment property at 30 June 2011. 5 Classified as investment property held for sale at 30 June 2012. 6 Includes new Zealand, United States and European properties. The title to all properties is freehold, with the exception of the properties marked ** which are leasehold. (a) Colliers International (b) landmark White (c) Cushman & Wakefield (d) Jones lang laSalle (e) Knight Frank (f) FPD Savills (g) m3property (h) Weiser Realty Advisors (USA) (i) CB Richard Ellis 56 2012 DEXUS AnnUAl REPORT ownership acquisition date Independent valuation date Independent Independent valuation amount valuer % 100 100 100 100 100 100 100 100 100 100 100 100 100 50 50 100 100 50 100 100 100 50 100 50 n/a Jun 2002 May 1997 May 1997 Jul 1997 Jun 1997 Dec 2007 Dec 2007 Dec 2007 Dec 2007 Jun 2010 Jun 2010 Jun 2010 Dec 1998 Dec 1998 Dec 1998 Dec 1998 Dec 1998 Dec 1998 Jan 2001 May 2002 Aug 2000 Aug 2000 Aug 2000 Aug 2000 n/a Jun 2010 Jun 2012 Jun 2012 Dec 2010 Jun 2010 Dec 2011 Jun 2012 n/a n/a n/a n/a n/a Jun 2011 Dec 2010 Jun 2012 Dec 2011 Jun 2011 Jun 2010 Jun 2012 Dec 2010 Jun 2012 Jun 2011 Dec 2011 Dec 2011 n/a $’000 127,000 35,000 4,000 14,900 19,600 12,625 16,050 n/a n/a n/a n/a n/a 247,500 643,000 191,000 173,500 135,000 107,500 460,000 145,000 418,350 144,000 29,500 278,750 (g) (g) (g) (f) (d) (e) (d) n/a n/a n/a n/a n/a (f) (d) (d) (d) (a) (e) (f) (a) (i) (d) (a) (f) Book value Book value 30 Jun 2012 30 Jun 2011 $’000 $’000 147,856 141,000 35,000 33,300 4,000 15,208 20,335 12,625 16,050 20,000 14,900 7,035 5,379 5,870 6,900 15,090 20,300 24,502 30,411 – – – – – 250,301 247,500 651,086 645,443 191,000 184,308 175,326 170,863 141,135 135,000 117,266 112,953 460,000 441,000 146,509 145,455 418,350 385,000 148,080 144,000 48,800 31,000 271,500 271,463 6,297,441 6,572,265 94,016 533,649 6,391,457 7,105,914 n/a n/a 656,132 1,380,799 11 Talavera Road, Macquarie Park, nSW DEXUS Industrial Estate, Egerton Street, Silverwater, nSW 89 Egerton Street, Silverwater, nSW 114 Fairbank Road, Clayton, VIC 30 Bellrick Street, Acacia Ridge, QlD Quarry Industrial Estate, 8 Basalt Road, Greystanes, nSW – Solaris1, 2 Quarry Industrial Estate, 5 Bellevue Circuit, Greystanes, nSW – Symbion1, 2 Quarry Industrial Estate, 6 Bellevue Circuit, Greystanes, nSW – Fujitsu1, 4 Quarry Industrial Estate, 2‑6 Basalt Road, Greystanes, nSW – Camerons Transport1, 4 Governor Phillip & Macquarie Tower Complex, 1 Farrer Place, Sydney, nSW2 2‑10 Distribution Drive, laverton north, VIC – Fastline1, 4 27 Distribution Drive, laverton north, VIC – Toll1, 4 25 Distribution Drive, laverton north, VIC – ACFS1, 4 45 Clarence Street, Sydney, nSW 309‑321 Kent Street, Sydney, nSW2 One Margaret Street, Sydney, nSW Victoria Cross 60 Miller Street, north Sydney, nSW The Zenith, 821 Pacific Highway, Chatswood, nSW2 Woodside Plaza, 240 St Georges Terrace, Perth, WA 30 The Bond, 30‑34 Hickson Road, Sydney, nSW Southgate Complex, 3 Southgate Avenue, Southbank, VIC 201‑217 Elizabeth Street, Sydney, nSW2 Garema Court, 140‑180 City Walk, Canberra, ACT** Australia Square Complex, 264‑278 George Street, Sydney, nSW2 non‑core international properties6 Total investment properties excluding development properties Total development properties held as investment property Total investment properties ownership % acquisition date Independent valuation date Independent valuation amount $’000 Independent valuer Book value 30 Jun 2012 $’000 Book value 30 Jun 2011 $’000 100 100 100 100 100 100 100 100 100 100 100 100 100 50 50 100 100 50 100 100 100 50 100 50 n/a Jun 2002 May 1997 May 1997 Jul 1997 Jun 1997 Dec 2007 Dec 2007 Dec 2007 Dec 2007 Jun 2010 Jun 2010 Jun 2010 Dec 1998 Dec 1998 Dec 1998 Dec 1998 Dec 1998 Dec 1998 Jan 2001 May 2002 Aug 2000 Aug 2000 Aug 2000 Aug 2000 n/a Jun 2010 Jun 2012 Jun 2012 Dec 2010 Jun 2010 Dec 2011 Jun 2012 n/a n/a n/a n/a n/a Jun 2011 Dec 2010 Jun 2012 Dec 2011 Jun 2011 Jun 2010 Jun 2012 Dec 2010 Jun 2012 Jun 2011 Dec 2011 Dec 2011 n/a 127,000 35,000 4,000 14,900 19,600 12,625 16,050 n/a n/a n/a n/a n/a 247,500 643,000 191,000 173,500 135,000 107,500 460,000 145,000 418,350 144,000 29,500 278,750 (g) (g) (g) (f) (d) (e) (d) n/a n/a n/a n/a n/a (f) (d) (d) (d) (a) (e) (f) (a) (i) (d) (a) (f) 147,856 141,000 35,000 33,300 4,000 15,208 20,335 12,625 16,050 20,000 14,900 7,035 5,379 5,870 6,900 15,090 20,300 24,502 30,411 – – – – – 250,301 247,500 651,086 645,443 191,000 184,308 175,326 170,863 141,135 135,000 117,266 112,953 460,000 441,000 146,509 145,455 418,350 385,000 148,080 144,000 48,800 31,000 271,500 271,463 n/a n/a 656,132 1,380,799 6,297,441 6,572,265 94,016 533,649 6,391,457 7,105,914 2012 DEXUS AnnUAl REPORT 57 NoTES To ThE FINaNCIal STaTEmENTS Note 13 Non-current assets – investment properties (continued) (a) properties (continued) Valuation basis The basis of valuation of investment properties is fair value, being the amounts for which the assets could be exchanged between knowledgeable willing parties in an arm’s length transaction, based on current prices in an active market for similar properties in the same location and condition and subject to similar leases. In relation to development properties under construction for future use as investment property, fair value is determined based on the market value of the property on the assumption it had already been completed at the valuation date less costs still required to complete the project, including an appropriate adjustment for profit and risk. Properties independently valued in the last 12 months were based on independent assessments by a member of the Australian Property Institute, the new Zealand Institute of Valuers, the Appraisal Institute in the United States of America, the French Real Estate Valuation Institution or the Society of Property Researchers, Germany. Key valuation assumptions The below table illustrates the key valuation assumptions used in the determination of the investment properties fair value. 2012 Weighted average capitalisation rate (%) Weighted average lease expiry by income (years) Occupancy by income (%) 2011 Weighted average capitalisation rate (%) Weighted average lease expiry by income (years) Occupancy by income (%) australian office australian industrial US industrial 7.3 4.9 96.8 7.4 5.3 95.3 8.6 4.4 92.8 8.6 4.7 95.1 6.3 4.4 98.2 7.6 3.9 87.9 Ten year discounted cash flows and capitalisation valuation methods are used together with active market evidence. In addition to the key assumptions set out in the table above, assumed portfolio downtime ranges from six to 12 months and tenant retention ranges from 50% to 75%. acquisitions n On 6 July 2011, 6711 Valley View Street, la Palma, California was acquired for US$18.3 million (A$17.1 million), excluding acquisition costs. n On 27 October 2011, 2250 Riverside Avenue, Colton, California was acquired for US$18.4 million (A$17.5 million), excluding acquisition costs. Disposals n On 14 September 2011, Tri‑County 5, Tri‑County Parkway, Schertz, San Antonio, Texas was disposed of for gross proceeds of US$1.8 million (A$1.8 million). n On 16 September 2011, 2700 International Street, Columbus, Ohio was disposed of for gross proceeds of US$3.1 million (A$3.0 million). n On 26 September 2011, 44633‑44645 Guilford Road & 21641 Beaumeade Circle, Ashburn, Virginia was disposed of for gross proceeds of US$22.2 million (A$22.9 million). n On 30 november 2011, Kopenhagenerstraße, Duisburg was disposed of for gross proceeds of €18.9 million (A$25.1 million). n On 30 november 2011, Theodorstraße, Düsseldorf was disposed of for gross proceeds of €14.5 million (A$19.3 million). n On 23 December 2011, 9842 International Boulevard, Cincinnati, Ohio was disposed of for gross proceeds of US$4.5 million (A$4.4 million). n On 17 February 2012, 7700 68th Avenue, Brooklyn Park was disposed of for gross proceeds of US$3.0 million (A$2.8 million). n On 21 June 2012, 65 properties in the United States were disposed of for gross proceeds of US$770.0 million (A$771.1 million). n On 26 June 2012, Im Gewerbegebiet 18, Friedewald was disposed of for gross proceeds of €2.4 million (A$3.0 million). n On 26 June 2012, Im Steinbruch 4, 6, Knetzgau was disposed of for gross proceeds of €4.8 million (A$5.9 million). n On 26 June 2012, Carl‑leverkus‑Straße 3‑5 & Winkelsweg 182‑184, langenfeld was disposed of for gross proceeds of €4.9 million (A$6.0 million). n On 26 June 2012, Schneiderstraße 82, langenfeld 3 was disposed of for gross proceeds of €2.9 million (A$3.6 million). n On 26 June 2012, Former Straße 6, Unna was disposed of for gross proceeds of €7.6 million (A$9.4 million). 58 2012 DEXUS AnnUAl REPORT (b) reconciliation Opening balance at the beginning of the year Additions Acquisitions lease incentives Amortisation of lease incentives Rent straight‑lining Disposals Transfer to non‑current assets classified as held for sale1 Transfer from/(to) inventories2 net fair value gain of investment properties Foreign exchange differences on foreign currency translation Closing balance at the end of the year Note 9 10 2012 $’000 2011 $’000 7,105,914 7,146,397 160,725 267,455 35,175 62,732 41,205 85,439 (62,672) (58,732) 4,434 (2,119) (881,109) (141,674) (187,375) (59,260) 7,035 (6,448) 73,677 148,433 72,921 (314,782) 6,391,457 7,105,914 1 On 30 June 2012, 114‑120 Old Pittwater Road, Brookvale nSW was transferred from investment properties to non‑current assets held for sale with an intention to sell. On 30 June 2012, 50% of an industrial portfolio consisting of assets at DEXUS Industrial Estate laverton north, VIC, Altona north, VIC and Quarry at Greystanes, nSW was transferred from investment properties to non‑current assets held for sale with an intention to sell. On 30 June 2012, a parcel of land at Quarry at Greystanes, nSW was transferred from investment properties to non‑current assets held for sale with an intention to sell. 2 On 30 June 2012, 50% of Boundary Road, laverton, VIC – Fastline, was transferred from inventories to investment properties with an intention to hold. (c) investment properties pledged as security Refer to note 20 for information on investment properties pledged as security. Note 14 Non-current assets – plant and equipment Opening balance at the beginning of the year Additions Depreciation charge Disposals – cost Disposals – accumulated depreciation Closing balance at the end of the year Cost Accumulated depreciation Net book value as at the end of the year Plant and equipment comprises IT and office equipment. 2012 $’000 3,926 3,142 (2,386) – – 4,682 14,811 (10,129) 4,682 2011 $’000 5,264 1,988 (3,326) (1,400) 1,400 3,926 11,669 (7,743) 3,926 2012 DEXUS AnnUAl REPORT 59 NoTES To ThE FINaNCIal STaTEmENTS Note 15 Non-current assets – investments accounted for using the equity method Investments are accounted for in the Financial Statements using the equity method of accounting (refer note 1). Information relating to this entity is set out below: Name of entity principal activity ownership interest Bent Street Trust Office property investment Total non-current assets – investments accounted for using the equity method The Bent Street Trust was formed in Australia. 2012 % 33.3 2011 % 33.3 2012 $’000 2011 $’000 217,043 200,356 217,043 200,356 movements in carrying amounts of investments accounted for using the equity method Opening balance at the beginning of the year Units issued during the year Interest acquired during the year Share of net profit after tax1 Distributions received/receivable Closing balance at the end of the year Results attributable to investments accounted for using the equity method Operating profit before income tax operating profit after income tax less: Distributions received/receivable Retained profits/(accumulated losses) at the beginning of the year Retained profits at the end of the year 2012 $’000 2011 $’000 200,356 93,344 8,565 1,264 13,784 (6,926) 61,726 11,832 34,053 (599) 217,043 200,356 13,784 34,053 13,784 34,053 (6,926) (599) 6,858 33,454 844 (32,610) 7,702 844 1 Share of net profit after tax includes a fair value gain of $7.5 million (2011: $33.6 million) in relation to the Group’s share of the Bligh Street investment property. Summary of the performance and financial position of investments accounted for using the equity method The Group’s share of aggregate profit, assets and liabilities of investments accounted for using the equity method are: Profit from ordinary activities after income tax expense Assets liabilities Share of expenditure commitments Capital commitments 2012 $’000 2011 $’000 13,784 34,053 221,170 212,252 4,127 11,896 12,447 646 60 2012 DEXUS AnnUAl REPORT Note 16 Non-current assets – deferred tax assets The balance comprises temporary differences attributable to: Investment properties Derivative financial instruments Tax losses Employee provisions Other Total non-current assets – deferred tax assets movements Opening balance at the beginning of the year Reversal of previous tax losses Recognition of tax losses Temporary differences Credited to the Statement of Comprehensive Income movements in deferred withholding tax arising from: Temporary differences Foreign currency translation Charged to the Statement of Comprehensive Income Closing balance at the end of the year Note 17 Non-current assets – intangible assets management rights Opening balance at the beginning of the year Amortisation charge Closing balance at the end of the year Cost Accumulated amortisation Accumulated impairment Total management rights goodwill Opening balance at the beginning of the year Impairment Closing balance at the end of the year Cost Accumulated impairment Total goodwill 2012 $’000 2011 $’000 – 23,753 1,048 22,264 12,229 1,188 4,719 13,865 12,229 1,011 36,729 55,577 55,577 – 79,927 (3,033) 8,399 13,865 278 971 8,677 11,803 (28,648) (23,592) 1,123 (12,561) (27,525) (36,153) 36,729 55,577 2012 $’000 2011 $’000 222,353 223,000 (418) (647) 221,935 222,353 252,382 252,382 (2,644) (2,226) (27,803) (27,803) 221,935 222,353 2,331 (625) 1,706 2,998 (1,292) 1,706 2,525 (194) 2,331 2,998 (667) 2,331 Total non-current assets – intangible assets 223,641 224,684 Management rights represent the asset management rights owned by DEXUS Holdings Pty limited, a wholly owned subsidiary of DXO, which entitle it to management fee revenue from both finite life trusts and indefinite life trusts. Those rights that are deemed to have a finite useful life (held at a value of $5,686,657 (2011: $7,769,204)) are measured at cost and amortised using the straight‑line method over their estimated remaining useful lives of 20 years. Management rights that are deemed to have an indefinite life are held at a value of $216,248,492 (2011: $214,584,150). 2012 DEXUS AnnUAl REPORT 61 NoTES To ThE FINaNCIal STaTEmENTS Note 17 Non-current assets – intangible assets (continued) impairment of management rights During the current year, management carried out a review of the recoverable amount of its management rights. The review did not identify any events or circumstances that would indicate an impairment of management rights associated with indefinite life trusts. The value in use has been determined using Board approved long term forecasts in a five year discounted cash flow model. Forecasts were based on projected returns of the business in light of current market conditions. The performance in year five has been used as a terminal value. Key assumptions: n A terminal capitalisation rate of 12.5% (2011: 12.5%) was used incorporating an appropriate risk premium for a management business. n The cash flows have been discounted at 9.3% (2011: 9.3%) based on externally published weighted average cost of capital for an appropriate peer group plus an appropriate premium for risk. A 0.25% (2011: 0.25%) decrease in the discount rate would increase the valuation by $2.4 million (2011: $2.3 million). 2012 $’000 913 396 2011 $’000 1,097 1,808 1,309 2,905 2012 $’000 38,985 17,452 – 20,508 16,215 885 2011 $’000 41,806 13,168 3,142 13,194 15,487 181 14,439 21,938 108,484 108,916 Note 18 Non-current assets – other Tenant bonds Other Total non-current assets – other Note 19 Current liabilities – payables Trade creditors Accruals Amount payable to other non‑controlling interests Accrued capital expenditure Prepaid income GST payable Accrued interest Total current liabilities – payables 62 2012 DEXUS AnnUAl REPORT Note 20 Interest bearing liabilities Current Secured Bank loans Total secured Unsecured US senior notes Total unsecured Deferred borrowing costs Total current liabilities – interest bearing liabilities Non-current Secured Bank loans Total secured Unsecured US senior notes Bank loans Medium term notes Preference shares Total unsecured Deferred borrowing costs Total non-current liabilities – interest bearing liabilities Total interest bearing liabilities Notes 2012 $’000 2011 $’000 (d) – – – – – – 250,983 250,983 65,183 65,183 (389) 315,777 (b), (c) 75,459 153,218 75,459 153,218 (a) (e) 493,674 720,967 1,046,660 701,573 340,000 340,000 91 86 1,880,425 1,762,626 (15,122) (16,565) 1,940,762 1,899,279 1,940,762 2,215,056 2012 DEXUS AnnUAl REPORT 63 NoTES To ThE FINaNCIal STaTEmENTS Note 20 Interest bearing liabilities (continued) Financing arrangements Type of facility US senior notes (144A) US senior notes (USPP) Medium term notes Multi‑option revolving credit facilities Bank debt – secured Total Bank guarantee utilised Unused at balance date 2012 $’000 2012 $’000 Note Currency Security maturity date Utilised Facility limit US$ US$ A$ Unsecured Oct 14 to Mar 21 366,110 366,110 Unsecured Dec 14 to Mar 17 127,564 127,564 Unsecured Jul 14 to Apr 17 340,000 340,000 (a) (c) Multi Currency Unsecured Sep 13 to Jul 17 1,046,660 1,620,623 US$ Secured Jun 17 to Dec 17 75,459 75,459 1,955,793 2,529,756 1,148 572,815 Each of the Group’s unsecured borrowing facilities are supported by guarantee arrangements, and have negative pledge provisions which limit the amount and type of encumbrances that the Group can have over their assets and ensures that all senior unsecured debt ranks pari passu. (a) multi-option revolving credit facilities This includes 18 facilities maturing between September 2013 and July 2017 with a weighted average maturity of September 2015. The total facility limit comprises US$153.5 million (A$150.6 million) and A$1,470.0 million (refer additional information below). A$1.1 million is utilised as bank guarantees for developments. (b) Bank loans – secured During the period, a total of US$80.9 million (A$82.6 million) was repaid and associated mortgages discharged. (c) Bank loans – secured This includes a total of US$76.9 million (A$75.5 million) of secured bank facilities with maturities of June 2017 and December 2017. The facilities are secured by mortgages over investment properties totalling US$178.5 million (A$175.2 million) as at 30 June 2012. (d) Bank loans – secured During the period, a total of A$250.0 million was repaid and associated mortgages discharged. (e) preferred shares US REIT has issued US$92,550 (A$90,815) of preferred shares as part of the requirement to be classified as a Real Estate Investment Trust (REIT) under US tax legislation. These preferred shares will remain on issue until such time that the Board decides that it is no longer in the Group’s interest to qualify as a REIT. Additional information The Group has forward start commitments of A$100 million, A$150 million and A$50 million to extend existing facilities from their current maturity dates within the next 12 months to maturities of December 2015, December 2016 and July 2017, respectively. 64 2012 DEXUS AnnUAl REPORT Note 21 provisions Current Provision for distribution Provision for employee benefits Total current liabilities – provisions Movements in each class of provision during the financial year, other than employee benefits, are set out below: provision for distribution Opening balance at the beginning of the year Additional provisions Payments and reinvestment of distributions Closing balance at the end of the year 2012 $’000 2011 $’000 128,206 125,331 23,763 22,475 151,969 147,806 2012 $’000 2011 $’000 125,331 118,110 257,408 250,662 (254,533) (243,441) 128,206 125,331 A provision for distribution has been raised for the period ended 30 June 2012. This distribution is to be paid on 31 August 2012. Non-current Provision for employee benefits Total non-current liabilities – provisions Note 22 Non-current liabilities – deferred tax liabilities The balance comprises temporary differences attributable to: Derivative financial instruments Goodwill Investment properties Other Total non-current liabilities – deferred tax liabilities movements Opening balance at the beginning of the year Temporary differences (Credited)/charged to the Statement of Comprehensive Income movements in deferred withholding tax arising from: Temporary differences Foreign currency translation Charged to the Statement of Comprehensive Income Closing balance at the end of the year Note 23 Non-current liabilities – other Tenant bonds Total non-current liabilities – other 2012 $’000 2011 $’000 16,517 17,624 16,517 17,624 2012 $’000 2011 $’000 3,848 2,205 5,926 412 1,137 2,331 13,862 821 12,391 18,151 18,151 11,296 (10,389) (10,389) 6,855 6,855 5,516 (887) 4,629 – – – 12,391 18,151 2012 $’000 3,669 3,669 2011 $’000 6,151 6,151 2012 DEXUS AnnUAl REPORT 65 NoTES To ThE FINaNCIal STaTEmENTS Note 24 Contributed equity (a) contributed equity of unitholders of the parent entity Opening balance at the beginning of the year Capital payments Buy‑back of contributed equity Distributions reinvested Transaction costs Closing balance at the end of the year (b) contributed equity of unitholders of other stapled entities Opening balance at the beginning of the year Capital contributions Buy‑back of contributed equity Distributions reinvested Transaction costs Closing balance at the end of the year Capital payments and capital contributions 2012 $’000 2011 $’000 1,798,077 1,789,973 (174,979) (18,006) – (78) – – 8,104 – 1,605,014 1,798,077 2012 $’000 2011 $’000 3,014,665 3,008,241 174,979 (32,944) – – – 6,424 (235) – 3,156,465 3,014,665 In December 2011, DXS implemented the Capital Reallocation Proposal approved by security holders at the 2011 Annual General Meeting held on 31 October 2011. Under the Capital Reallocation Proposal, DOT and DDF made capital payments to security holders of 3.616 cents for each DOT and DDF unit which was then compulsorily applied as a capital contribution to DIT and DXO units. Security holders did not receive any cash as part of the Capital Reallocation Proposal. In April 2012, DXS commenced a securities buy‑back of up to $200 million. As at 30 June 2012, DXS had purchased 55,206,519 stapled securities at an average price of $0.92 per stapled security. (c) Number of securities on issue Opening balance at the beginning of the year Buy‑back of contributed equity Distributions reinvested Closing balance at the end of the year Terms and conditions 2012 No. of securities 2011 No. of securities 4,839,024,176 4,820,821,799 (55,206,519) – – 18,202,377 4,783,817,657 4,839,024,176 Each stapled security ranks equally with all other stapled securities for the purposes of distributions and on termination of the Group. Each stapled security entitles the holder to vote in accordance with the provisions of the Constitutions and the Corporations Act 2001. (d) Distribution reinvestment plan Under the distribution reinvestment plan (DRP), stapled security holders may elect to have all or part of their distribution entitlements satisfied by the issue of new stapled securities, rather than being paid in cash. On 13 December 2010, the Group announced the suspension of the DRP until further notice. 66 2012 DEXUS AnnUAl REPORT Note 25 Reserves and retained profits (a) reserves Foreign currency translation reserve Asset revaluation reserve Security‑based payments reserve Total reserves movements: Foreign currency translation reserve Opening balance at the beginning of the year Exchange differences on translating foreign operations Foreign currency translation reserve transfer on partial disposal of foreign operations Closing balance at the end of the year asset revaluation reserve Opening balance at the beginning of the year Closing balance at the end of the year Security-based payments reserve Opening balance at the beginning of the year Security‑based payments expense Closing balance at the end of the year (b) Nature and purpose of reserves Foreign currency translation reserve 2012 $’000 2011 $’000 (35,979) (77,843) 42,739 42,739 426 – 7,186 (35,104) (77,843) (72,967) 333 (4,876) 41,531 – (35,979) (77,843) 42,739 42,739 42,739 42,739 – 426 426 – – – The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign operations. asset revaluation reserve The asset revaluation reserve is used to record the fair value adjustment arising on a business combination. Security-based payments reserve The security‑based payments reserve is used to recognise the fair value of performance rights to be issued under the DEXUS Transitional Performance Rights Plan. Refer to note 38 for further details. (c) retained profits Opening balance at the beginning of the year net profit attributable to security holders Transfer of capital reserve of other non‑controlling interests Distributions provided for or paid Closing balance at the end of the year 2012 $’000 2011 $’000 325,175 33,186 181,070 553,012 (10,176) (10,361) (257,408) (250,662) 238,661 325,175 2012 DEXUS AnnUAl REPORT 67 NoTES To ThE FINaNCIal STaTEmENTS Note 26 other non-controlling interests Interest in Contributed equity Reserves Accumulated losses Total other non-controlling interests 2012 $’000 2011 $’000 – – – – 200,126 70,568 (66,666) 204,028 As announced to REnTS unitholders on 30 March 2012, all REnTS preference units were repurchased on 29 June 2012. In accordance with the terms and conditions of the issue of the preference units, REnTS unitholders received the full face value of the preference units ($100 per unit) in addition to the final distribution entitlement of $1.37 per unit. As a result of the repurchase, REnTS are no longer recognised as a non‑controlling interest. Note 27 Distributions paid and payable (a) Distribution to security holders 31 December (paid 29 February 2012) 30 June (payable 31 August 2012) (b) Distribution to other non-controlling interests DEXUS REnTS Trust (paid 18 October 2011) DEXUS REnTS Trust (paid 17 January 2012) DEXUS REnTS Trust (paid 18 April 2012) DEXUS REnTS Trust (paid 29 June 2012) Total distributions (c) Distribution rate 31 December (paid 29 February 2012) 30 June (payable 31 August 2012) Total distributions 2012 $’000 2011 $’000 129,202 125,331 128,206 125,331 257,408 250,662 2012 $’000 3,223 3,101 2,897 2,794 2011 $’000 3,162 3,182 3,142 3,142 12,015 12,628 269,423 263,290 2012 Cents per security 2011 Cents per security 2.67 2.68 5.35 2.59 2.59 5.18 (d) franked dividends The franked portions of the final dividends recommended after 30 June 2012 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the year ended 30 June 2012. Franking credits Opening balance at the beginning of the year Franking credits arising during the year on payment of tax at 30% Franking debits arising during the year on receipt of tax refund at 30% Closing balance at the end of the year 2012 $’000 2011 $’000 17,196 19,730 – (1,015) 1,528 (4,062) 16,181 17,196 68 2012 DEXUS AnnUAl REPORT Note 28 parent entity financial information (a) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Total current assets Total assets Total current liabilities Total liabilities Equity Contributed equity Retained profits Total equity net profit for the year Total comprehensive income for the year (b) guarantees entered into by the parent entity Refer to note 30 for details of guarantees entered into by the parent entity. (c) contingent liabilities The parent entity had no contingent liabilities as at 30 June 2012 (2011: nil). 2012 $’000 2011 $’000 220,722 162,887 2,255,845 2,567,774 116,125 114,676 499,028 650,730 1,605,014 1,798,077 151,803 118,967 1,756,817 1,917,044 139,091 155,671 139,091 155,671 (d) capital commitments The following amounts represent capital expenditure of the parent entity on investment properties contracted at the end of the reporting period but not recognised as liabilities payable: Investment properties Total capital commitments 2012 $’000 3,393 2011 $’000 11,817 3,393 11,817 2012 DEXUS AnnUAl REPORT 69 NoTES To ThE FINaNCIal STaTEmENTS Note 29 Financial risk management To ensure the effective and prudent management of the Group’s capital and financial risks, the Group has a well established framework consisting of a Board Finance Committee and a Capital Markets Committee. The Board Finance Committee is accountable to and primarily acts as an advisory body to the DXFM Board and includes three Directors of the DXFM Board. Its responsibilities include reviewing and recommending financial risk management policies and funding strategies for approval. The Group is rated BBB+ by Standard and Poor’s (S&P) and Baa1 by Moody’s. The Group considers potential impacts upon the rating when assessing the strategy and activities of the Group and regards those impacts as an important consideration in its management of the Group’s capital structure. The Group is required to comply with certain financial covenants in respect of its interest bearing liabilities. During the 2012 and 2011 reporting periods, the Group was in compliance with all of its financial covenants. The Capital Markets Committee is a management committee that is accountable to both the Board Finance Committee and the Group Management Committee. It convenes at least quarterly and conducts a review of financial risk management exposures including liquidity, funding strategies and hedging. It is also responsible for the development of financial risk management policies and funding strategies for recommendation to the Board Finance Committee, and the approval of treasury transactions within delegated limits and powers. Further information on the Group’s governance structure, including terms of reference, is available at www.dexus.com (1) capital risk management The Group manages its capital to ensure that entities within the Group will be able to continue as a going concern while maximising the return to owners through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt (see note 20), cash and cash equivalents, and equity attributable to security holders. The capital structure is monitored and managed in consideration of a range of factors including: n the cost of capital and the financial risks associated with each class of capital; n gearing levels and other covenants; n potential impacts on net tangible assets and security holders’ equity; n potential impacts on the Group’s credit rating; and n other market factors and circumstances. To minimise the potential impacts of foreign exchange risk on the Group’s capital structure, the Group’s policy is to hedge the majority of its foreign asset and liability exposures. Consequently the magnitude of the assets and liabilities on the Statement of Financial Position (translated into Australian dollars) and gearing ratios will rise and fall as exchange rates fluctuate. This policy ensures that net tangible assets are not materially affected by currency movements (refer foreign exchange risk below). The Group has a stated target gearing level of below 40%. The gearing ratio calculated in accordance with our covenant requirements at 30 June 2012 was 27.8% (as detailed below). gearing ratio 2012 $’000 2011 $’000 Total interest bearing liabilities1 1,955,999 2,211,637 Total tangible assets2 7,025,465 7,607,163 Gearing ratio 27.8% 29.1% 1 Total interest bearing liabilities excludes deferred borrowing costs and includes the fair value of cross currency swaps as reported internally to management. 2 Total tangible assets comprise total assets less intangible assets, derivatives and deferred tax balances as reported internally to management. DXFM is the Responsible Entity for the managed investment schemes that are stapled to form the Group. DXFM has been issued with an Australian Financial Services licence (AFSl). The licence is subject to certain capital requirements including the requirement to hold minimum net tangible assets (of $5 million), and to maintain a minimum level of surplus liquid funds. Furthermore, the Responsible Entity maintains trigger points in accordance with the requirements of the licence. These trigger points maintain a headroom value above the AFSl requirements and the entity has in place a number of processes and procedures should a trigger point be reached. DWPl, a wholly owned entity, has also been issued with an AFSl as it is the Responsible Entity for DEXUS Wholesale Property Fund (DWPF). It is subject to the same requirements. (2) financial risk management The Group’s activities expose it to a variety of financial risks: credit risk, market risk (including currency risk, interest rate risk and price risk), and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. Accordingly, the Group enters into various derivative financial instruments such as interest rate swaps, cross currency interest rate swaps, and foreign exchange contracts to manage its exposure to certain risks. The Group does not trade in derivative instruments for speculative purposes. The Group uses different methods to measure the different types of risks to which it is exposed, including monitoring the current and forecast levels of exposure, and conducting sensitivity analysis. Risk management is implemented by a centralised treasury department (Group Treasury) whose members act under written policies that are endorsed by the Board Finance Committee and approved by the Board of Directors of the Responsible Entity. Group Treasury identifies, evaluates and hedges financial risks in close cooperation with the Group’s business units. The treasury policies approved by the Board of Directors cover overall treasury risk management, as well as policies and limits covering specific areas such as liquidity risk, interest rate risk, foreign exchange risk, credit risk and the use of derivatives and other financial instruments. In conjunction with its advisers, the Responsible Entity continually reviews the Group’s exposures and (at least annually) updates its treasury policies and procedures. 70 2012 DEXUS AnnUAl REPORT (a) liquidity risk liquidity risk is the risk that the Group will not have sufficient available funds to meet financial obligations in an orderly manner when they fall due or at an acceptable cost. The Group identifies and manages liquidity risk across short term, medium term, and long term categories: n short term liquidity management includes continuously monitoring forecast and actual cash flows; n medium term liquidity management includes maintaining a level of committed borrowing facilities above the forecast committed debt requirements (liquidity headroom buffer). Committed debt includes future expenditure that has been approved by the Board or Investment Committee (as required within delegated limits), and may also include projects that have a very high probability of proceeding, taking into consideration risk factors such as the level of regulatory approval, tenant pre‑commitments and portfolio considerations; and n long term liquidity risk is managed through ensuring an adequate spread of maturities of borrowing facilities so that refinancing risk is not concentrated, and ensuring an adequate diversification of funding sources where possible, subject to market conditions. refinancing risk A key liquidity risk is the Group’s ability to refinance its current debt facilities. As the Group’s debt facilities mature, they are usually required to be refinanced by extending the facility or replacing the facility with an alternative form of capital. The refinancing of existing facilities may also result in margin price risk, whereby market conditions may result in an unfavourable change in credit margins on the refinanced facilities. The Group’s key risk management strategy for margin price risk on refinancing is to spread the maturities of debt facilities over different time periods to reduce the volume of facilities to be refinanced and the exposure to market conditions in any one period. An analysis of the contractual maturities of the Group’s interest bearing liabilities and derivative financial instruments is shown in the table below. The amounts in the table represent undiscounted cash flows. 2012 2011 Expiring between one and two years $’000 Expiring between two and five years $’000 Expiring after five years Expiring within one year $’000 $’000 Expiring between one and two years $’000 Expiring between two and five years $’000 Expiring after five years $’000 – – – – – – – – – 36,175 108,916 (72,741) – – – – – – – – – Expiring within one year $’000 30,842 108,484 (77,642) Receivables Payables Interest bearing liabilities and interest Fixed interest rate liabilities and interest 45,211 45,211 525,169 295,433 117,506 104,327 603,438 525,524 Floating interest rate liabilities and interest 71,210 163,776 1,142,431 151,860 326,254 105,971 899,860 73,380 Total interest bearing liabilities and interest1 116,421 208,987 1,667,600 447,293 443,760 210,298 1,503,298 598,904 Derivative financial instruments Derivative assets Derivative liabilities 35,184 22,541 18,557 ‑ 65,100 38,431 48,564 8,450 37,241 29,163 49,650 14,039 57,768 54,702 129,639 61,515 Total net derivative financial instruments2 (2,057) (6,622) (31,093) (14,039) 7,332 (16,271) (81,075) (53,065) 1 Refer to note 20 (interest bearing liabilities). Excludes deferred borrowing costs and preference shares, but includes estimated fees and interest. 2 The notional maturities on derivatives is only shown for cross currency interest rate swaps (refer foreign exchange rate risk) and forward foreign exchange contracts as they are the only instruments where a principal amount is exchanged. For interest rate swaps, only the net interest cash flows (not the notional principal) are included. For financial assets and liabilities that have floating rate interest cash flows, future cash flows have been calculated using static interest and exchange rates prevailing at the end of each reporting period. Refer to note 11 (derivative financial instruments) for fair value of derivatives. Refer note 30 (contingent liabilities) for financial guarantees. 2012 DEXUS AnnUAl REPORT 71 NoTES To ThE FINaNCIal STaTEmENTS Note 29 Financial risk management (continued) (2) financial risk management (continued) (b) market risk Market risk is the risk that the fair value or future cash flows of the Group’s financial instruments will fluctuate because of changes in market prices. The market risks that the Group is exposed to are detailed further below. (i) interest rate risk Interest rate risk is the risk that fluctuating interest rates will cause an adverse impact on interest payable (or receivable), or an adverse change on the capital value (present market value) of long term fixed rate instruments. Interest rate risk for the Group arises from interest bearing financial assets and liabilities that the Group holds. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The primary objective of the Group’s risk management policy for interest rate risk is to minimise the effects of interest rate movements on the Group’s portfolio of financial assets and liabilities and financial performance. The policy sets out the minimum and maximum hedging amounts for the Group, which is managed on a portfolio basis. Cash flow interest rate risk on borrowings is managed through the use of interest rate swaps, whereby a floating interest rate exposure is converted to a fixed interest rate exposure. Fair value interest rate risk on borrowings is also managed through the use of interest rate swaps, whereby a fixed interest exposure is converted to a floating interest rate exposure. The mix of fixed and floating rate exposures is monitored regularly to ensure that the interest rate exposure on the Group’s cash flows is managed within the parameters defined by the Group Treasury Policy. As at 30 June 2012, 67% (2011: 84%) of the financial assets and liabilities of the Group had an effective fixed interest rate. The Group holds borrowings in multiple currencies with both fixed and floating rate exposures and is exposed to interest rate risk related to each particular currency. The net notional amount of fixed rate debt and interest rate swaps in place in each year and the weighted average effective hedge rate per currency is set out below. Fixed rate debt A$ fixed rate debt1 US$ fixed rate debt1 Interest rate swaps A$ hedged1 A$ hedge rate (%)2 US$ hedged1 US$ hedge rate (%)2 June 2013 $’000 June 2014 $’000 June 2015 $’000 June 2016 $’000 June 2017 $’000 > June 2018 $’000 75,000 75,000 75,000 75,000 56,250 – 250,093 250,093 250,093 250,093 250,093 229,259 957,500 814,167 640,000 538,333 430,000 90,208 4.26% 4.77% 5.23% 5.43% 5.48% 5.99% 135,000 120,000 83,333 82,917 60,000 17,500 2.79% 2.85% 3.48% 3.58% 3.70% 3.58% Combined fixed debt and swaps (a$ equivalent) 1,410,354 1,264,326 1,055,889 953,797 803,284 342,491 hedge rate (%) 3.87% 4.20% 4.67% 4.77% 4.78% 4.19% 1 Average amounts for the period. Hedged amounts above do not include potential hedges that are cancellable at the counterparty’s option. Fixed rate debt is fixed coupon debt less the amount converted to floating rate basis via coupon‑matched swaps. 2 The above hedge rates do not include margins payable on borrowings. 72 2012 DEXUS AnnUAl REPORT Sensitivity on interest expense The table below shows the impact on unhedged net interest expense (excluding non‑cash items) of a 50 basis points increase or decrease in short term and long term market interest rates. The sensitivity on cash flow arises due to the impact that a change in interest rates will have on the Group’s floating rate debt and derivative cash flows. net interest expense is only sensitive to movements in market rates to the extent that floating rate debt is not hedged. +/– 0.50% (50 basis points) +/– 0.50% (50 basis points) +/– 0.50% (50 basis points) +/– 0.50% (50 basis points) Total a$ equivalent 2012 (+/–) $’000 2011 (+/–) $’000 A$ US$ € C$ 2,557 856 183 – 888 932 (25) 150 3,622 1,866 The increase or decrease in interest expense is proportional to the increase or decrease in interest rates. Sensitivity on fair value of interest rate swaps The table below shows the impact on the Statement of Comprehensive Income for changes in the fair value of interest rate swaps for a 50 basis points increase and decrease in short term and long term market interest rates. The sensitivity on the fair value arises from the impact that changes in market rates will have on the mark‑to‑market valuation of the interest rate swaps. The fair value of interest rate swaps is calculated as the present value of estimated future cash flows on the instruments. Cash flows are discounted using the forward price curve of interest rates at the end of the reporting period. Although interest rate swaps are transacted for the purpose of providing the Group with an economic hedge, the Group has elected not to apply hedge accounting to its interest rate derivatives. Accordingly, gains or losses arising from changes in the fair value are reflected in the Statement of Comprehensive Income. +/– 0.50% (50 basis points) +/– 0.50% (50 basis points) +/– 0.50% (50 basis points) Total a$ equivalent (ii) foreign exchange risk A$ US$ € 2012 (+/–) $’000 2011 (+/–) $’000 13,991 13,060 640 – 8,934 2,714 14,619 25,044 Foreign exchange risk is the risk that movements in exchange rates used to convert foreign currency revenues, expenses, assets, or liabilities to the Group’s functional currency will have an adverse effect on the Group. The Group operates internationally with investments in north America, new Zealand, France and Germany. As a result of these activities, the Group has foreign exchange risk, arising primarily from: n translation of investments in foreign operations; n borrowings and cross currency swaps denominated in foreign currencies; and n earnings distributions and other transactions denominated in foreign currencies. The objective of the Group’s foreign exchange risk management policy is to ensure that movements in exchange rates have minimal adverse impact on the Group’s foreign currency assets and liabilities, and net foreign currency cash flows as outlined below. 2012 DEXUS AnnUAl REPORT 73 NoTES To ThE FINaNCIal STaTEmENTS Note 29 Financial risk management (continued) (2) financial risk management (continued) (b) market risk (continued) (ii) foreign exchange risk (continued) Foreign currency assets and liabilities Exposure to foreign exchange risk is minimised by predominantly matching the currency of the Group’s debt with the currency of its investment to form a natural hedge against movements in exchange rates. This policy reduces the risk that movements in foreign exchange rates will have an adverse impact on security holder’s equity and net tangible assets. Where Australian dollar borrowings are used to fund the foreign currency investment, the Group may transact cross currency swaps for the purpose of providing an alternate source of foreign currency funding whilst maintaining the natural hedge. In these instances the Group has committed foreign currency borrowing capacity in place that can replace the foreign currency amounts that are due under the cross currency swaps. The Group’s net foreign currency exposures for net investments in foreign operations and hedging instruments are as follows: US$ assets1 US$ net borrowings and cross currency swaps2 US$ denominated net investment % hedged € assets1 € net borrowings and cross currency swaps2 € denominated net investment % hedged C$ assets C$ net borrowings and cross currency swaps2 C$ denominated net investment % hedged nZ$ assets1 NZ$ denominated net investment % hedged Total foreign net investment (a$ equivalent) Total % hedged 2012 $’000 2011 $’000 549,564 1,259,179 (523,710) (1,246,552) 25,854 12,627 95% 99% 36,650 128,788 (32,613) (129,803) 4,037 (1,015) 89% 101% – – – 0% 35,573 (30,000) 5,573 84% 123,253 123,001 123,253 123,001 0% 0% 126,868 110,711 81% 92% 1 Assets exclude working capital and cash as reported internally to management. 2 net borrowings equals interest bearing liabilities less cash. Where there are no interest bearing liabilities, cash is excluded. Cross currency swap amounts comprise the foreign currency denominated leg of the cross currency swaps. 74 2012 DEXUS AnnUAl REPORT Sensitivity on equity (foreign currency translation reserve) The table below shows the impact on the foreign currency translation reserve for changes in the translated value of foreign currency assets and liabilities for an increase and decrease in foreign exchange rates per currency. The increase and decrease in cents per currency has been based on the historical movements of the Australian dollar relative to each currency1. The cents per currency has been applied to the spot rates prevailing at the end of each reporting period2. The impact on the foreign currency translation reserve arises as the translation of the Group’s foreign currency assets and liabilities are recorded (in Australian dollars) directly in the foreign currency translation reserve. + 13.2 cents (13%) (2011: 14.2 cents) – 13.2 cents (13%) (2011: 14.2 cents) + 10.3 cents (13%) (2011: 9.6 cents) – 10.3 cents (13%) (2011: 9.6 cents) + 10.6 cents (8%) (2011: 10.9 cents) – 10.6 cents (8%) (2011: 10.9 cents) + 8.6 cents (8%) (2011: 8.7 cents) – 8.6 cents (8%) (2011: 8.7 cents) US$ (A$ equivalent) 2012 $’000 2,912 2011 $’000 1,373 US$ (A$ equivalent) (3,780) (1,792) € (A$ equivalent) € (A$ equivalent) nZ$ (A$ equivalent) 563 (727) 7,374 nZ$ (A$ equivalent) (8,704) C$ (A$ equivalent) C$ (A$ equivalent) – – (158) 205 7,375 (8,731) 413 (488) 1 The sensitivity on market rates has been based on the standard deviation of the annual change in the Australian dollar exchange rate per currency since 1984 or commencement. 2 Exchange rates at 30 June 2012: A$/US$ 1.0191 (2011: 1.0739), A$/€ 0.8092 (2011: 0.7405), A$/nZ$ 1.2771 (2011: 1.2953), A$/C$ 1.0454 (2011: 1.0389). Sensitivity on fair value of cross currency swaps The table below shows the impact on the Statement of Comprehensive Income for changes in the fair value of cross currency swaps for a 50 basis points increase and decrease in market rates. The sensitivity on the fair value arises from the impact that changes in short term and long term market rates will have on the interest rate mark‑to‑market valuation of the cross currency swaps1. The Group has elected not to apply hedge accounting to its cross currency swaps. Accordingly, gains or losses arising from changes in the fair value are reflected in the Statement of Comprehensive Income. +/– 0.50% (50 basis points) +/– 0.50% (50 basis points) +/– 0.50% (50 basis points) Total a$ equivalent US$ (A$ equivalent) € (A$ equivalent) C$ (A$ equivalent) 2012 (+/–) $’000 2011 (+/–) $’000 – – – – 2 10 3 15 1 note the above sensitivity is reflective of how changes in interest rates will affect the valuation of the cross currency swaps. The effect of movements in foreign exchange rates on the valuation of cross currency swaps is reflected in the foreign currency translation reserve sensitivity. Net foreign currency denominated cash flows Foreign exchange risk exists in relation to net cash flows and transactions with foreign operations that are denominated in foreign currencies. This risk is managed through the use of forward foreign exchange contracts (after taking into account the natural hedging through foreign denominated interest expense). Forward foreign exchange contracts outstanding at 30 June 2012 and 30 June 2011 are as follows: 1 year or less Over 1 and less than 2 years More than 2 years 2012 2012 2012 2011 2011 2011 To pay US$’000 To receive a$’000 Weighted average exchange rate To pay US$’000 To receive a$’000 Weighted average exchange rate – – – 2,304 – – – – – 4,400 2,650 2,500 6,199 3,981 3,678 0.7098 0.6657 0.6798 2012 DEXUS AnnUAl REPORT 75 NoTES To ThE FINaNCIal STaTEmENTS Note 29 Financial risk management (continued) (2) financial risk management (continued) (b) market risk (continued) (ii) foreign exchange risk (continued) Sensitivity on fair value of foreign exchange contracts The table below shows the impact on the Statement of Comprehensive Income for changes in the fair value of forward foreign exchange contracts for an increase and decrease in market rates. The increase and decrease in cents per currency has been based on the historical movements of the Australian dollar relative to each currency1. The cents per currency has been applied to the spot rates prevailing at the end of each reporting period2. The sensitivity on the fair value arises from the impact that changes in market rates will have on the mark‑to‑market valuation of the forward foreign exchange contracts. Although forward foreign exchange contracts are transacted for the purpose of providing the Group with an economic hedge, the Group has elected not to apply hedge accounting to its forward foreign exchange contracts. Accordingly, gains or losses arising from changes in the fair value are reflected in the Statement of Comprehensive Income. + 13.2 cents (13%) (2011: 14.2 cents) – 13.2 cents (13%) (2011: 14.2 cents) US$ (A$ equivalent) US$ (A$ equivalent) 2012 $’000 – – 2011 $’000 1,339 (1,026) 1 The sensitivity on market rates has been based on the standard deviation of the annual change in the Australian dollar exchange rate per currency since 1984 or commencement. 2 Exchange rates at 30 June 2012: A$/US$ 1.0191 (2011: 1.0739), A$/nZ$ 1.2771 (2011: 1.2953). (c) Credit risk Credit risk is the risk of loss to the Group in the event of non‑performance by the Group’s financial instrument counterparties. Credit risk arises from cash and cash equivalents, loans and receivables, and derivative financial instruments. The Group has exposure to credit risk on all financial assets. The Group manages this risk by: n adopting a process for determining an approved counterparty, with consideration of qualitative factors as well as the counterparty’s rating; n regularly monitoring counterparty exposure within approved credit limits that are based on the lower of a S&P, Moody’s and Fitch credit rating. The exposure includes the current market value of in‑the‑money contracts as well as potential exposure, which is measured with reference to credit conversion factors as per APRA guidelines; n entering into ISDA Master Agreements once a financial institution counterparty is approved; n ensuring tenants, together with approved credit limits, are approved and ensuring that leases are undertaken with a large number of tenants; n for some trade receivables, obtaining collateral where necessary in the form of bank guarantees and tenant bonds; and n regularly monitoring loans and receivables on an ongoing basis. A minimum S&P rating of A– (or Moody’s or Fitch equivalent) is required to become or remain an approved counterparty. As at 30 June 2012, the lowest rating of counterparties the Group is exposed to was A (S&P) (2011: A+ (S&P)). Financial instrument transactions are spread among a number of approved financial institutions within specified credit limits to minimise the Group’s exposure to any one counterparty. As a result, there is no significant concentration of credit risk for financial instruments. The maximum exposure to credit risk at 30 June 2012 and 30 June 2011 was the carrying amount of financial assets recognised on the Statement of Financial Position. As at 30 June 2012 and 30 June 2011, there were no significant concentrations of credit risk for trade receivables. Trade receivable balances and the credit quality of trade debtors are consistently monitored on an ongoing basis. The ageing analysis of loans and receivables net of provisions at 30 June 2012 is ($’000): 29,213 (0‑30 days), 706 (31‑60 days), 207 (61‑90 days), 716 (91+ days). The ageing analysis of loans and receivables net of provisions at 30 June 2011 is ($’000): 34,336 (0‑30 days), 637 (31‑60 days), 530 (61‑90 days), 672 (91+ days)). Amounts over 31 days are past due, however, no receivables are impaired. The credit quality of financial assets that are neither past due nor impaired is consistently monitored to ensure that there are no adverse changes in credit quality. 76 2012 DEXUS AnnUAl REPORT (d) Fair value of financial instruments Fair value interest rate risk is the risk of an adverse change in the net fair (or market) value of an asset or liability due to movements in interest rates. As at 30 June 2012 and 30 June 2011, the carrying amounts and fair value of financial assets and liabilities are shown as follows: Financial assets Cash and cash equivalents loans and receivables (current) Derivative assets Total financial assets Financial liabilities Trade payables Derivative liabilities Interest bearing liabilities Fixed interest bearing liabilities Floating interest bearing liabilities Preference shares Total financial liabilities 2012 Carrying amount1 $’000 59,193 30,842 78,272 2012 Fair value2 $’000 2011 Carrying amount1 $’000 2011 Fair value2 $’000 59,193 30,842 73,746 36,175 73,746 36,175 78,272 100,220 100,220 168,307 168,307 210,141 210,141 108,484 108,484 108,916 108,916 120,902 120,902 160,085 160,085 673,674 743,217 1,011,864 1,065,852 1,282,119 1,282,119 1,220,060 1,220,060 91 91 86 86 2,185,270 2,254,813 2,501,011 2,554,999 1 Carrying value is equal to the value of the financial instruments on the Statement of Financial Position. 2 Fair value is the amount for which the financial instrument could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction, however, not recognised on the Statement of Financial Position. The fair value of interest bearing liabilities and derivative financial instruments has been determined by discounting the expected future cash flows by the relevant market interest rates. The discount rates applied range from 0.25% to 5.66% for US$ and 2.97% to 6.75% for A$. Refer note 1(w) for fair value methodology for financial assets and liabilities. The Group uses methods in the determination and disclosure of the fair value of financial instruments. These methods comprise: level 1: the fair value is calculated using quoted prices in active markets. level 2: the fair value is determined using inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). level 3: the fair value is estimated using inputs for the asset or liability that are not based on observable data. 2012 DEXUS AnnUAl REPORT 77 NoTES To ThE FINaNCIal STaTEmENTS Note 29 Financial risk management (continued) (2) financial risk management (continued) (d) Fair value of financial instruments (continued) The following tables present the assets and liabilities measured and recognised as at fair value at 30 June 2012 and 30 June 2011. 30 June 2012 Financial assets Derivative assets Interest rate derivatives Cross currency swaps Forward exchange contracts Financial liabilities Interest bearing liabilities Fixed interest bearing liabilities Floating interest bearing liabilities Derivative liabilities Interest rate derivatives Cross currency swaps Forward exchange contracts 30 June 2011 Financial assets Derivative assets Interest rate derivatives Cross currency swaps Forward exchange contracts Financial liabilities Interest bearing liabilities Fixed interest bearing liabilities Floating interest bearing liabilities Derivative liabilities Interest rate derivatives Cross currency swaps Forward exchange contracts level 1 $’000 level 2 $’000 level 3 $’000 2012 $’000 – – – – – – – – – – – 75,939 – 2,333 78,272 743,217 1,282,119 2,025,336 120,699 115 88 120,902 – – – – – – – – – – – 75,939 – 2,333 78,272 743,217 1,282,119 2,025,336 120,699 115 88 120,902 level 1 $’000 level 2 $’000 level 3 $’000 2011 $’000 – – – – – – – – – – – 75,101 20,781 4,338 100,220 1,065,852 1,220,060 2,285,912 159,352 408 325 160,085 – – – – – – – – – – – 75,101 20,781 4,338 100,220 1,065,852 1,220,060 2,285,912 159,352 408 325 160,085 During the year, there were no transfers between level 1, level 2 and level 3 fair value measurements. 78 2012 DEXUS AnnUAl REPORT Note 30 Contingent liabilities Details and estimates of maximum amounts of contingent liabilities are as follows: Bank guarantees by the Group in respect of variations and other financial risks associated with the development of: 1 Bligh Street, Sydney, nSW1 Boundary Road, laverton, VIC – Stage 2 123 Albert Street, Brisbane, QlD 34‑60 little Collins Street, Melbourne, VIC Contingent liabilities in respect of developments 2012 $’000 2011 $’000 250 368 500 30 5,650 – 5,682 30 1,148 11,362 1 Bank guarantee held in relation to an equity accounted investment (refer note 15). DDF together with DIT, DOT and DXO is also a guarantor of a total of A$1,470.0 million and US$153.5 million (A$150.6 million) of bank bilateral facilities, a total of A$340.0 million of medium term notes, a total of US$130.0 million (A$127.6 million) of privately placed notes, and a total of US$374.5 million (A$367.4 million) public 144A senior notes, which have all been negotiated to finance the Group and other entities within DXS. The guarantees have been given in support of debt outstanding and drawn against these facilities, and may be called upon in the event that a borrowing entity has not complied with certain requirements such as failure to pay interest or repay a borrowing, whichever is earlier. During the period no guarantees were called. The guarantees are issued in respect of the Group and do not constitute an additional liability to those already existing in interest bearing liabilities on the Statement of Financial Position. The Directors of the Responsible Entity are not aware of any other contingent liabilities in relation to the Group, other than those disclosed in the Financial Statements, which should be brought to the attention of security holders as at the date of completion of this report. Note 31 Commitments (a) capital commitments The following amounts represent capital expenditure on investment properties and inventories contracted at the end of each reporting period but not recognised as liabilities payable: Investment properties Inventories Total capital commitments (b) Lease payable commitments The future minimum lease payments payable by the Group are: Within one year later than one year but not later than five years later than five years Total lease payable commitments 2012 $’000 52,825 10,126 2011 $’000 37,425 13,253 62,951 50,678 2012 $’000 3,456 5,861 6,119 2011 $’000 3,200 7,726 6,098 15,436 17,024 Payments made under operating leases are expensed on a straight‑line basis over the term of the lease, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased property. The Group has a commitment for ground rent payable in respect of a leasehold property included in investment properties, and commitments for its Head Office premise at 343 George Street, Sydney and its US Office premise at newport, California. no provisions have been recognised in respect of non‑cancellable operating leases. 2012 DEXUS AnnUAl REPORT 79 NoTES To ThE FINaNCIal STaTEmENTS Note 31 Commitments (continued) (c) Lease receivable commitments The future minimum lease payments receivable by the Group are: Within one year later than one year but not later than five years later than five years Total lease receivable commitments Note 32 Related parties responsible Entity DXFM is the Responsible Entity of DDF, DIT, DOT and DXO. 2012 $’000 2011 $’000 512,226 505,234 1,491,519 1,436,299 740,434 712,081 2,744,179 2,653,614 DXFM was also the Responsible Entity of Gordon Property Trust and Gordon Property Investment Trust (collectively known as “the Syndicate”). On 30 April 2011, Gordon Property Trust and Gordon Property Investment Trust were wound up. DXH is the parent entity of DWPl, the Responsible Entity for DWPF. responsible Entity fees Under the terms of the Constitutions of the entities within the Group, the Responsible Entity is entitled to receive fees in relation to the management of the Group. DXFM’s parent entity, DXH, is entitled to be reimbursed for administration expenses incurred on behalf of the Group. DEXUS Property Services Pty limited (DXPS), a wholly owned subsidiary of DXH, is entitled to property management fees from the Group. related party transactions Responsible Entity fees in relation to Group assets are on a cost recovery basis. All agreements with third party funds are conducted on normal commercial terms and conditions. DEXUS wholesale property fund Responsible Entity fee income Property management fee income Recovery of administration expenses Aggregate amount receivable at the end of each reporting period (included above) Property management fees receivable at the end of each reporting period (included above) Administration expenses receivable at the end of each reporting period (included above) the Syndicate Responsible Entity fee income Property management fee income Performance fee Recovery of administration expenses Bent Street trust Property management fee income Recovery of administration expenses Property management fees receivable at the end of each reporting period (included above) Administration expenses receivable at the end of each reporting period (included above) 80 2012 DEXUS AnnUAl REPORT 2012 $ 2011 $ 19,003,659 16,483,106 7,435,393 6,185,789 3,141,448 2,122,590 1,666,675 1,432,482 710,019 1,076,948 142,607 30,298 2012 $ 2011 $ – – – – 439,709 499,173 1,669,625 102,585 2012 $ 2011 $ 704,044 1,403,196 265,379 67,692 43,180 2,889 – – transactions with master Development corporation (mDc) The Group entered into a two year lease agreement with the two MDC principals for the newport office which commenced on 1 June 2010 and expired on 31 May 2012 for which rental of US$165,000 (A$159,266) (2011:US$180,000 (A$167,613)) was payable. In addition, on 1 February 2011 the Group entered into a one year assignment of a sublease agreement from MDC for adjacent office space which expired 31 January 2012 for which rental of US$26,628 (A$25,702) (2011:US$45,648 (A$42,507)) was payable. The Group has earned management fee revenue for managing the MDC property portfolio that the two MDC principals held interests in. The management fees of US$397,322 (A$383,682) (2011: US$973,884 (A$959,787)) are consolidated in the Group. Directors The following persons were Directors of DXFM at all times during the year and to the date of this report, unless otherwise stated: other key management personnel In addition to the Directors listed above, the following persons were deemed by the Board nomination and Remuneration Committee to be key management personnel during all or part of the financial year: Name Title Darren J Steinberg1 Chief Executive Officer Victor P Hoog Antink2 Chief Executive Officer Tanya l Cox John C Easy Craig D Mitchell Paul G Say3 1 Appointed 1 March 2012. 2 Resigned 1 March 2012. 3 Resigned 30 June 2012. Chief Operating Officer General Counsel Chief Financial Officer Chief Investment Officer C T Beare, BSc, BE (Hons), MBA, PhD, FAICD1, 4, 5 E A Alexander AM, BComm, FCA, FAICD, FCPA1, 2, 6 B R Brownjohn, BComm1, 2, 5, 6 J C Conde AO, BSc, BE (Hons), MBA1, 4, 12 T Dwyer, BJuris (Hons), llB (Hons)7 S F Ewen OAM1, 4 no key management personnel or their related parties held an interest in the Group for the years ended 30 June 2012 and 30 June 2011. There were no loans or other transactions with key management personnel or their related parties during the years ended 30 June 2012 and 30 June 2011. 2012 $ 2011 $ V P Hoog Antink, BComm, MBA, FCA, FAPI, FRICS, FAICD8 Compensation Short term employee benefits 10,166,375 8,266,683 Post employment benefits 247,967 912,706 Other long term benefits 3,115,681 4,794,526 Termination benefits Security‑based payments 2,300,000 330,000 – – 16,160,023 13,973,915 The Group has shown the detailed remuneration disclosures in the Directors’ Report. The relevant information can be found in section 3 of the Directors’ Report. B E Scullin, BEc9 W R Sheppard, BEc (Hons)10 D J Steinberg, BEc, FRICS, FAPI11 P B St George, CA(SA), MBA1, 2, 5, 6 1 Independent Director. 2 Board Audit Committee Member. 3 Board Compliance Committee Member. 4 Board nomination and Remuneration Committee Member. 5 Board Finance Committee Member. 6 Board Risk & Sustainability Committee Member. 7 Appointed as Independent Director and Board Compliance Committee Member on 24 August 2011. 8 Resigned as Director on 1 March 2012. 9 Resigned as Independent Director and Board Compliance Committee Member on 31 October 2011. 10 Appointed as Independent Director, Board Audit Committee Member and Board Risk & Sustainability Committee Member on 1 January 2012. 11 Appointed as Director on 1 March 2012. 12 Resigned as Board Compliance Committee Member on 1 July 2012. no Directors held an interest in the Group for the years ended 30 June 2012 and 30 June 2011. 2012 DEXUS AnnUAl REPORT 81 NoTES To ThE FINaNCIal STaTEmENTS Note 33 Events occurring after reporting date Between 1 July 2012 and 15 August 2012, as part of the securities buy‑back announced in April 2012, 21.3 million stapled securities were purchased for $19.7 million. On 13 July 2012, 114‑120 Old Pittwater Road, Brookvale, nSW was disposed of for gross proceeds of $40.5 million. On 14 August 2012, the Group exchanged contracts for the acquisition of an office tower at 50 Carrington Street, Sydney nSW for $58.5 million. On 15 August 2012, the Group exchanged contracts for the acquisition of a 50% interest in an office tower at 12 Creek Street, Brisbane QlD for $120.8 million (representing 50% of the total purchase price). This asset will be co‑owned with DWPF. Since the end of the year, other than the matters disclosed above, the Directors are not aware of any matter or circumstance not otherwise dealt with in their Directors’ Report or the Financial Statements that has significantly or may significantly affect the operations of the Group, the results of those operations, or state of the Group’s affairs in future financial periods. Note 34 operating segments (a) Description of segments The Chief Operating Decision Maker (CODM) has been identified as the Board of Directors as they are responsible for the strategic decision making within the Group. DXS management has identified the Group’s operating segments based on the sectors analysed within the management reports reviewed by the CODM in order to monitor performance across the Group and to appropriately allocate resources. Refer to the table below for a brief description of the Group’s operating segments. office – australia and New Zealand This comprises office space with any associated retail space; as well as car parks and office developments in Australia and new Zealand. Industrial – australia This comprises domestic industrial properties, industrial estates and industrial developments. Industrial – United States This comprises industrial properties, industrial estates and industrial developments in the United States. management Business Financial Services all other segments This comprises funds management of third party clients and owned assets, property management services, development and other corporate costs associated with maintaining and operating the Group. The treasury function of the Group is managed through a centralised treasury department. As a result, all treasury related financial information relating to borrowings, finance costs as well as fair value movements in derivatives, are prepared and monitored separately. This comprises the European industrial portfolio. This operating segment does not meet the quantitative thresholds set out in AASB 8 Operating Segments due to its relatively small scale. As a result this non‑core operating segment has been included in “all other segments” in the operating segment information. 82 2012 DEXUS AnnUAl REPORT – – – – – – – – – – 493,405 4,675 (261,869) (74,366) 82,767 (14,846) (32,566) (1,564) 6,922,722 308,707 (b) Segment information provided to the coDm The segment information provided to the CODM for the reportable segments for the year ended 30 June 2012 and 30 June 2011 includes the following: 30 June 2012 office australia & New Zealand $’000 Industrial australia $’000 Industrial United States $’000 management Business Financial Services all other segments Eliminations Total $’000 $’000 $’000 $’000 $’000 Segment performance measures Property revenue1 390,908 149,752 105,569 Proceeds from sale of inventory Management fee revenue Interest revenue Inter‑segment revenue2 – – – – – – – – – – – – 3,592 49,847 50,712 – – – – 1,743 39,024 – 12,323 – – – – – – – – 662,144 49,847 50,712 1,743 (39,024) – Total operating segment revenue 390,908 149,752 105,569 143,175 1,743 12,323 (39,024) 764,446 Net operating income (NoI)2 289,753 120,036 74,721 management business EBIT Finance costs Compensation related expenses net fair value gain/(loss) of investment property3 Impairment of inventories net loss on sale of investment property net fair value loss on derivatives Segment asset measures – – – – – – – – – 93,519 (42,976) 36,475 – – – – – – – – (14,846) (17,213) – – – – 4,675 – – – (261,869) (74,366) 8,895 – – – (4,251) – (15,353) – – – – (1,564) – Direct property portfolio 4,679,501 1,560,892 539,206 Additions to direct property portfolio 120,403 70,357 64,259 97,831 51,632 – – 45,292 2,056 Segment liability measures Interest bearing liabilities – – – – 1,940,762 – – 1,940,762 1 Includes the Group’s share of property revenue of its investment accounted for using the equity method of $8.6 million. 2 Includes internal property management fees of $11.5 million included in operating segment revenue for the Management Business and in property expenses for Office Australia and new Zealand nOI and Industrial Australia nOI but eliminated for statutory accounting purposes. These fees are recovered from tenants and included in property revenue. 3 Includes net fair value gain of investment property of $75.2 million and the Group’s share of the net fair value gain of its investment accounted for using the equity method of $7.5 million. 2012 DEXUS AnnUAl REPORT 83 NoTES To ThE FINaNCIal STaTEmENTS Note 34 operating segments (continued) (b) Segment information provided to the coDm (continued) 30 June 2011 office australia & New Zealand $’000 Industrial australia $’000 Industrial United States $’000 management Business Financial Services all other segments Eliminations Total $’000 $’000 $’000 $’000 $’000 Segment performance measures Property revenue 344,057 144,554 115,723 Proceeds from sale of inventory Management fee revenue Interest revenue Inter‑segment revenue1 – – – – – – – – – – – – 4,181 3,359 50,655 – – – – 1,565 37,119 – 20,557 – – – – – – – – 629,072 3,359 50,655 1,565 (37,119) – Total operating segment revenue 344,057 144,554 115,723 95,314 1,565 20,557 (37,119) 684,651 Net operating income (NoI)1 255,204 116,355 79,591 management business EBIT Finance costs Compensation related expenses net fair value gain/(loss) of investment property2 net gain/(loss) on sale of investment property net fair value gain on derivatives Segment asset measures – – – – – – – – – 122,686 (13,448) 81,130 – – (349) 7,313 – – – 3,453 – – – (52,744) (67,417) – 218 – – – – 2,605 16,037 – – – (8,337) (130) – Direct property portfolio 4,510,798 1,518,963 1,171,163 112,238 Additions to direct property portfolio 300,813 63,948 85,832 63,673 – – 173,920 4,963 Segment liability measures – – – – – – – – – 467,187 3,453 (52,744) (67,417) 182,031 7,052 2,605 7,487,082 519,229 Interest bearing liabilities – – – – 2,215,056 – – 2,215,056 1 Includes internal property management fees of $10.2 million included in operating segment revenue for the Management Business and in property expenses for Office Australia and new Zealand nOI and Industrial Australia nOI but eliminated for statutory accounting purposes. These fees are recovered from tenants and included in property revenue. 2 Includes net fair value loss of investment property of $148.4 million and the Group’s share of the net fair value loss of its investments accounted for using the equity accounted method of $33.6 million. (c) other segment information (i) Segment revenue The revenue from external parties reported to the Board is measured in a manner consistent with that in the Statement of Comprehensive Income. Revenue from external customers is derived predominantly through property revenue and management fee revenue. A breakdown of revenue by operating segment is provided in the tables above. The Group internally manages many of its investment properties for which inter‑segment management fees are received (refer to note 32 for information relating to inter‑company management fee income). Furthermore, inter‑segment rental income is received from the funds management company. These amounts are eliminated on consolidation (refer to the reconciliation below). Gross operating segment revenue less: inter‑segment revenue eliminated on consolidation Responsible Entity fee revenue Other management fee revenue Total inter-segment revenue Total operating segment revenue Share of property revenue from associates Total revenue from ordinary activities 84 2012 DEXUS AnnUAl REPORT 2012 $’000 2011 $’000 803,470 721,770 (26,576) (12,448) (39,024) (26,150) (10,969) (37,119) 764,446 684,651 (8,562) – 755,884 684,651 The Group is domiciled in Australia. The result of its revenue from external customers in Australia is $602.3 million (2011: $548.4 million), and the total revenue from external customers in other countries is $162.1 million (2011: $136.3 million). Revenue from external customers includes $149.8 million (2011: $115.7 million) attributable to the United States portfolio. Segment revenues are allocated based on the country in which the investment property is located. There is no single external tenant responsible for greater than 10% of external revenue. (ii) Net operating income (NoI) and operating earnings before interest and tax (operating EBIT) The Board assesses the performance of each operating sector based on a measure of nOI, which is determined as property revenue less attributable property expenses. The performance indicator predominantly used as a measure of the management business performance is the Management Business EBIT, which comprises management fee revenue less compensation related expenses and other management operating expenses. Both the property nOI and the management business’ EBIT exclude the effects of finance costs, taxation and non‑cash items, such as unrealised fair value adjustments, which are monitored by management separately. The reconciliation below reconciles these profit measures to the profit attributable to stapled security holders. Reconciliation of net operating income and management business EBIT to Group net loss attributable to stapled security holders: Property revenue per Statement of Comprehensive Income Property expenses per Statement of Comprehensive Income Intercompany property revenue and expenses1 Share of net operating income from associates Net operating income (NoI) Add: management business EBIT1 less: Internal management fees2 Other income and expense3 operating EBIT Interest revenue Finance costs Share of net fair value gain from associates net fair value gain of investment properties net (loss)/gain on sale of investment properties net fair value (loss)/gain of derivatives Impairment and other4 Tax expense Other non‑controlling interests Foreign currency translation reserve transfer on partial disposal of foreign operations 2012 $’000 2011 $’000 653,582 629,072 (154,901) (151,865) (11,480) (10,413) 6,204 393 493,405 467,187 4,675 3,453 (26,576) (26,150) (3,606) (7,281) 467,898 437,209 1,743 1,565 (261,869) (52,744) 7,540 75,227 (32,566) (1,564) (15,471) (16,526) (1,811) (41,531) 33,598 148,433 7,052 2,605 (1,285) (21,313) (2,108) – Net profit attributable to stapled security holders 181,070 553,012 1 Includes internal property expenses of $11.5 million (2011: $10.2 million) included in nOI for management reporting purposes but eliminated for statutory accounting purposes. The internal property management expenses comprise of property management fees included in the management business EBIT. 2 Elimination of internally generated Responsible Entity fees of $20.4 million (2011: $19.5 million) and $6.2 million (2011: $6.7 million) other internal management fees. 3 Other income and expenses comprise foreign exchange gains; depreciation, other income and expenses excluding amounts included in the management business’ EBIT. 4 Includes $1.1 million of non‑recurring depreciation in the year ended 30 June 2011. 2012 DEXUS AnnUAl REPORT 85 NoTES To ThE FINaNCIal STaTEmENTS Note 34 operating segments (continued) (c) other segment information (continued) (iii) Segment assets The amounts provided to the CODM as a measure of segment assets is the direct property portfolio. The direct property portfolio values are allocated based on the physical location of the asset and are measured in a manner consistent with the Statement of Financial Position. The direct property portfolio comprises investment properties, all development properties and the Group’s share of properties held through equity accounted investments. The reconciliation below reconciles the total direct property portfolio balance to total assets in the Statement of Financial Position. The Group is domiciled in Australia. Total non‑current assets other than financial instruments and deferred tax assets located in Australia is $6,350.7 million (2011: $6,354.8 million), and the amount located in other countries is $559.6 million (2011: $1,287.2 million). This includes $539.2 million (2011: $1,172.5 million) attributable to the United States portfolio. Reconciliation of direct property portfolio to Group total assets in the Statement of Financial Position: Investment properties non‑current assets held for sale Inventories Investment property (accounted for using the equity method)1 Direct property portfolio Cash and cash equivalents Receivables Intangible assets Derivative financial instruments Deferred tax assets Current tax assets Plant and equipment Prepayments and other assets2 Total assets 2012 $’000 2011 $’000 6,391,457 7,105,914 212,264 97,831 221,170 59,260 112,238 209,670 6,922,722 7,487,082 59,193 30,842 223,641 78,272 36,729 198 4,682 7,828 73,746 36,175 224,684 100,220 55,577 1,247 3,926 4,987 7,364,107 7,987,644 1 This represents the Group’s portion of the investment property accounted for using the equity accounted method. 2 Other assets include the Group’s share of total net assets of its investments accounted for using the equity accounted method less the Group’s share of the investment property value which is included in the direct property portfolio. 86 2012 DEXUS AnnUAl REPORT Note 35 Reconciliation of net profit to net cash inflow from operating activities (a) reconciliation net profit for the year Capitalised interest Depreciation and amortisation Impairment of inventories Impairment of goodwill net fair value gain of investment properties Share of net profit of associates accounted for using the equity method net fair value loss/(gain) of derivatives net fair value (loss)/gain of interest rate swaps net loss/(gain) on sale of investment properties net foreign exchange gain Transfer of foreign currency losses on partial disposal of foreign operations Provision for doubtful debts Change in operating assets and liabilities Decrease/(increase) in receivables Decrease in prepaid expenses Decrease in other non‑current assets ‑ investments Decrease/(increase) in inventories (Increase)/decrease in other current assets Decrease in other non‑current assets Decrease in payables Decrease in current liabilities Increase/(decrease) in other non‑current liabilities Decrease in deferred tax assets Net cash inflow from operating activities 2012 $’000 2011 $’000 182,881 555,120 (22,458) (60,955) 2,805 14,846 625 3,811 – 194 (75,227) (148,433) (13,784) (34,053) 1,564 (2,605) 100,491 (41,599) 32,566 (2,170) 41,531 (2,211) (7,052) (574) – (5,516) 7,544 750 (5,649) 2,159 34,992 24,222 14,407 (66,768) (4,313) 1,596 (7,746) (6,528) 33,142 4,741 1,199 (3,770) (6,177) (158) 13,088 31,205 348,391 239,342 (b) capital expenditure on investment properties Payments for capital expenditure on investment properties include $99.8 million (2011: $101.8 million) of maintenance and incentive capital expenditure. Note 36 Non-cash financing and investing activities Distributions reinvested Note 24 2012 $’000 2011 $’000 – 14,528 2012 DEXUS AnnUAl REPORT 87 NoTES To ThE FINaNCIal STaTEmENTS Note 37 Earnings per unit Earnings per unit are determined by dividing the net profit attributable to unitholders by the weighted average number of ordinary units outstanding during the year. The weighted average number of units has been adjusted for the bonus elements in units issued during the year and comparatives have been appropriately restated. Basic earnings per unit on profit attributable to unitholders of the parent entity Diluted earnings per unit on profit attributable to unitholders of the parent entity Basic earnings per unit on profit attributable to stapled security holders Diluted earnings per unit on profit attributable to stapled security holders (a) reconciliation of earnings used in calculating earnings per unit net profit for the year net profit attributable to unitholders of other stapled entities (non‑controlling interests) net profit attributable to other non‑controlling interests 2012 cents 1.69 1.69 3.75 3.75 2011 cents 3.77 3.77 11.44 11.44 2012 $’000 2011 $’000 182,881 555,120 (99,595) (370,644) (1,811) (2,108) Net profit attributable to the unitholders of the Trust used in calculating basic and diluted earnings per unit 81,475 182,368 (b) weighted average number of units used as a denominator 2012 securities 2011 securities Weighted average number of units outstanding used in calculation of basic and diluted earnings per unit 4,834,864,561 4,836,131,743 Note 38 Security-based payments The DXFM Board has, subject to security holder approval at the november 2012 Annual General Meeting, approved a one‑off grant of performance rights to DXS stapled securities to eligible participants. Awards under the 2012 Transitional Performance Rights Plan (“the Plan”) will be in the form of performance rights awarded to eligible participants which convert to DXS stapled securities for nil consideration if specific service conditions for a four year period are satisfied. The DXFM Board approved the eligible participants nominated by nomination and Remuneration Committee. Each participant will be granted performance rights, based on performance against agreed 2012 key performance indicators, as a percentage of their target remuneration mix. The dollar value, once approved by the DXFM Board, will be converted into performance rights to DXS stapled securities using the average closing price of DXS securities for the period of ten days either side of 30 June 2012. Participants must remain in employment for the four year period in order for the performance rights to vest. The fair value of the performance rights will be amortised over the four year period starting from 1 July 2011 to 30 June 2015. In accordance with AASB2 Share‑based Payments, fair value has been independently determined using a Black‑Scholes and Binomial pricing models which take into account the following inputs: n Grant date n Expected vesting date n Security price at grant date n Expected price volatility (based on historic DXS security price movements) n Expected life n Dividend yield n Risk free interest rate The number of performance rights granted was 1,840,656. The fair value of these performance rights is $0.9263 per performance right and the total security‑based payment expense recognised during the year ended 30 June 2012 was $426,250. 88 2012 DEXUS AnnUAl REPORT Financial Report DIRECToRS’ DEClaRaTIoN for the year ended 30 June 2012 The Directors of DEXUS Funds Management limited as Responsible Entity of DEXUS Diversified Trust declare that the Financial Statements and notes set out on pages 39 to 88: (i) comply with Australian Accounting Standards, the Corporations Act 2001 and other mandatory professional reporting requirements; and (ii) give a true and fair view of the Group’s financial position as at 30 June 2012 and of their performance, as represented by the results of their operations and their cash flows, for the year ended on that date. In the Directors’ opinion: (a) the Financial Statements and notes are in accordance with the Corporations Act 2001; (b) there are reasonable grounds to believe that the Group and its consolidated entities will be able to pay their debts as and when they become due and payable; and (c) the Group has operated in accordance with the provisions of the Constitution dated 15 August 1984 (as amended) during the year ended 30 June 2012. 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 Chief Executive Officer 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. christopher t Beare Chair 15 August 2012 2012 DEXUS AnnUAl REPORT 89 Financial Report INDEpENDENT aUDIToR’S REpoRT for the year ended 30 June 2012 90 2012 DEXUS AnnUAl REPORT 2012 DEXUS AnnUAl REPORT 91 aDDITIoNal INFoRmaTIoN Top 20 security holders as at 31 august 2012 Rank Name 1 2 3 4 5 6 7 8 9 HSBC Custody nominees (Australia) limited JP Morgan nominees Australia limited national nominees limited Citicorp nominees Pty limited Citicorp nominees Pty limited AMP life limited BnP Paribas nominees Pty ltd JP Morgan nominees Australia limited BnP Paribas nominees Pty ltd 10 BnP Paribas nominees Pty ltd 11 RBC Investor Services Australia nominees Pty limited 12 Questor Financial Services limited 13 Equity Trustees limited 14 Bond Street Custodians limited 15 HSBC Custody nominees (Australia) limited 16 Share Direct nominees Pty ltd <10026 A/C> 17 Queensland Investment Corporation 18 Invia Custodian Pty limited 19 Bond Street Custodians limited 20 Suncorp Custodian Services Pty limited Total Balance of Register grand Total Number of securities % of issued capital 1,748,881,339 882,660,661 776,983,696 265,577,746 124,635,062 106,064,042 86,806,820 66,667,886 40,567,677 40,042,934 34,774,331 23,545,205 23,047,075 20,361,945 12,727,054 10,568,607 10,244,528 9,888,555 7,909,264 7,373,602 36.75 18.55 16.33 5.58 2.62 2.23 1.82 1.40 0.85 0.84 0.73 0.49 0.48 0.43 0.27 0.22 0.22 0.21 0.17 0.15 4,299,327,129 459,126,353 4,758,453,482 90.35 9.65 100.00 Substantial holders at 31 august 2012 The names of substantial holders, who at 31 August 2012 have notified the Responsible Entity in accordance with Section 671B of the Corporations Act 2001, are: Date Name 30 Aug 2012 CBRE Clarion Securities llC 28 Jan 2011 InG Group 1 May 2012 AMP lImited 28 Oct 2010 Vanguard Group 2 Dec 2009 BlackRock Investment Management 11 Jul 2012 Westpac Banking Corporation Group Number of stapled securities % voting 440,873,263 388,416,634 293,093,543 291,637,480 275,099,167 244,213,504 8.11 8.03 6.06 6.03 5.77 5.05 92 2012 DEXUS AnnUAl REPORT Class of securities DEXUS Property Group has one class of stapled security trading on the ASX with security holders holding stapled securities at 31 August 2012. Spread of securities at 31 august 2012 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 Securities 4,475,613,665 58,543,086 183,295,519 30,313,786 10,189,072 498,354 4,758,453,482 % 94.06 1.23 3.85 0.64 0.21 0.01 100.00 Number of holders 355 860 8,506 4,001 3,250 1,567 18,539 At 31 August 2012, the number of security holders holding less than a marketable parcel of 524 securities ($500) is 1,103 and they hold in total 135,700 securities. Voting rights At meetings of the security holders of DEXUS Diversified Trust, DEXUS Industrial Trust, DEXUS Office Trust and DEXUS Operations Trust, being the Trusts that comprise DEXUS Property Group, on a show of hands, each security holder of each Trust has one vote. On a poll, each security holder of each Trust has one vote for each dollar of the value of the total interests they have in the Trust. Securities restricted or subject to voluntary escrow There are no stapled securities that are restricted or subject to voluntary escrow. on-market buy-back DEXUS Property Group commenced an on‑market securities buy‑back on 16 April 2012. At 31 August 2012 DEXUS Property Group has acquired 92,566,887 securities for $86.1 million on an average price of $0.9299. Cost base apportionment For capital gains tax purposes, the cost base apportionment details for DXS securities for the 12 months ended 30 June 2012 are: Date DEXUS Diversified Trust DEXUS Industrial Trust DEXUS office Trust DEXUS operating Trust 1 Jul 2011 to 31 Dec 2011 1 Jan 2012 to 30 June 2012 37.88% 35.34% 11.27% 14.19% 50.85% 47.48% 0 2.99% Historical cost base details are available at www.dexus.com/dxs/tax in the downloads section. 2012 DEXUS AnnUAl REPORT 93 INVESToR INFoRmaTIoN DEXUS Property Group is one of the largest real estate groups listed on the Australian Securities Exchange (ASX) and is listed under the ASX code DXS. Over 18,000 investors located in 15 countries around the world invest in DXS, highlighting the investors’ demand both domestically and abroad for our high quality property portfolio investor relations The Investor Relations team drives and facilitates communication with existing and potential institutional investors, financial analysts and retail investors. The team, alongside DEXUS senior management, maintains strong rapport with the investment community through proactive and regular investor engagement initiatives. During FY12, we participated in investor conferences and roadshows in Singapore, Hong Kong, and the United States. We are committed to ensuring all investors have equal access to information about our investment activities. In line with our commitment to the long term integration of sustainable business practices, we provide investor communications via various electronic methods. We provide a wide range of information including ASX announcements, our annual reporting suite, presentations, corporate governance policies, Board of Directors and Executive team information at www.dexus.com In addition, we have communication tools available on our website, including: n an online enquiry facility at www.dexus.com/contact and contact directory n an investor login facility at www.dexus.com/dxs which allows investors to choose the method of delivery for distributions, distribution statements and investor reports n a subscribe feature at www.dexus.com/media which enables investors to receive ASX announcements as they are released n a “create your property report” function at www.dexus.com/ properties which enables you to select and download individual or group property information Unclaimed distribution income If you believe you have unpresented cheques or unclaimed distribution income, please contact the DXS Infoline on 1800 819 675. For monies outstanding more than seven years, please contact the nSW Office of State Revenue on 1300 366 016, use their search facility at www.osr.nsw.gov.au or email unclaimedmoney@osr.nsw.gov.au Annual taxation statements An annual taxation statement is sent to investors in August each year. The statement summarises the distributions provide to you during the 2011‑2012 financial year and includes information required to complete your tax return. Annual taxation statements are also available online at www.dexus.com via our investor login facility. Non-resident information The notice required by non‑resident investors and custodians of non‑resident investors for the purposes of Section 12‑400 of Schedule 1 to the Tax Administration Act 1953 is available at www.dexus.com/dxs/tax prior to the payment of each distribution. complaints Investors wishing to lodge a complaint should do so in writing and forward it to DEXUS Funds Management limited at the address shown in the Directory. DEXUS Funds Management limited is a member of Financial Ombudsman Service (FOS), an independent dispute resolution scheme who may be contacted at: Financial Ombudsman Service GPO Box 3 Melbourne VIC 3001 Annual general meeting information On Monday 5 november 2012 our Annual General Meeting (AGM) will be held at ASX Exchange Square, 20 Bridge Street, Sydney commencing at 2.00pm. Phone: 1300 780 808 Fax: +61 3 9613 6399 Email: info@fos.org.au Website: www.fos.org.au We encourage investors to attend the AGM in person and to meet our Board of Directors and Executive team. The AGM will be webcast at www.dexus.com for those investors who are unable to attend in person. The Chairman’s address and the meeting results will be announced to the ASX and will be available at www.dexus.com/dxs Distribution payments DXS revised its distribution policy effective from 1 July 2012. The new payout policy will be to distribute between 70% and 80% of Funds From Operations (FFO), in line with free cash flow, with the expectation that over time the average payout ratio will be around 75% of FFO. Distributions are paid for the six months to 31 December and 30 June each year. Distribution statements are available in print and electronic formats and paid by direct credit into a nominated bank account or by cheque. To change the method of receiving distributions or how they are paid, please use our investor login facility at www.dexus.com/dxs 94 2012 DEXUS AnnUAl REPORT 2013 Distribution calendar period end 31 Dec 2012 30 Jun 2013 aSX announcement Ex-distribution date 18 Dec 2012 19 Jun 2013 21 Dec 2012 24 Jun 2013 Record date 31 Dec 2012 28 Jun 2013 payment date 28 Feb 2013 30 Aug 2013 anticipated date 5 november 2012 14 February 2013 15 August 2013 31 October 2013 2013 reporting calendar Event 2012 Annual General Meeting 2013 Half year results 2013 Annual results 2013 Annual General Meeting Please note that these dates are indicative and are subject to change without prior notice. Key ASX announcements 27.08.12 24.08.12 16.08.12 Appendix 3Y (Peter St George) change in Director’s Interest Appendix 3Y (Stewart Ewen) change in Director’s Interest Appendix 3Y (Christopher Beare) change in Director’s Interest Appendix 3Y (John Conde) change in Director’s Interest DEXUS security trading policy 2012 Combined Financial Statements 2012 Property Synopsis & Portfolio Results 2012 Annual Results & Strategic Review presentation 2012 Annual Results & Strategic Review release 2012 Appendix IX 4E and DXS 2012 Financial Report 02.08.12 DEXUS announces new executive framework 03.07.12 22.06.12 DXS change in membership of Compliance Committee DXS announces the completion of the sale of its US central portfolio 20.06.12 DEXUS 2012 June distribution details 18.06.12 DEXUS sells industrial development at Erskine Park 14.06.12 DEXUS 2012 Sydney industrial tour 08.05.12 DEXUS 2012 March portfolio update 07.05.12 16.04.12 04.04.12 DEXUS announces restructure and senior management changes DEXUS announces sale of US central portfolio and capital management initiatives DEXUS Property Group United States portfolio update – response to market speculation 30.03.12 DEXUS repurchase of REnTS 29.02.12 DEXUS 2012 half year report 15.02.12 21.12.11 16.12.11 07.12.11 28.11.11 08.11.11 31.10.11 DEXUS 2012 half year results DEXUS 2012 half year results release and presentation DEXUS provides a capital reallocation letter to security holders DEXUS 2011 December distribution details DEXUS implements the capital reallocation DEXUS announces future retirement of Chief Executive Officer and appointment of successor DEXUS announces Richard Sheppard appointed as new director DEXUS 2011 September portfolio update DEXUS 2011 Annual General Meeting address and presentation DEXUS membership change in Compliance Committee DEXUS 2011 Annual General Meeting results DEXUS Supplemental Deed Polls DEXUS Consolidated Constitutions 11.10.11 DEXUS 2011 Sydney office tour 26.09.11 DEXUS 2011 notice of Annual General Meeting DEXUS 2011 annual reporting suite 2012 DEXUS AnnUAl REPORT 95 DIRECToRY DEXUS Diversified Trust ARSn 089 324 541 DEXUS Industrial Trust ARSn 090 879 137 DEXUS Office Trust ARSn 090 768 531 DEXUS Operations Trust ARSn 110 521 223 responsible Entity DEXUS Funds Management limited ABn 24 060 920 783 Directors of the responsible Entity Christopher T Beare, Chair Elizabeth A Alexander AM Barry R Brownjohn John C Conde AO Tonianne Dwyer Stewart F Ewen OAM W Richard Sheppard Darren J Steinberg, CEO Peter B St George Secretaries of the responsible Entity Tanya l Cox John C Easy registered office of responsible Entity level 9, 343 George Street Sydney nSW 2000 PO Box R1822 Royal Exchange Sydney nSW 1225 Phone: +61 2 9017 1100 Fax: +61 2 9017 1101 Email: ir@dexus.com www.dexus.com DEXUS US office Suite 110, 4000 Westerly Place newport Beach CA 92660 Phone: +1 949 724 8886 Fax: +1 949 724 8887 Email: ir@dexus.com www.dexus.com/us Auditors PricewaterhouseCoopers Chartered Accountants 201 Sussex Street Sydney nSW 2000 investor enquiries Registry Infoline: 1800 819 675 or +61 2 8280 7126 Investor Relations: +61 2 9017 1330 Email: ir@dexus.com www.dexus.com Security registry link Market Services limited level 12, 680 George Street Sydney nSW 2000 locked Bag A14 Sydney South nSW 1235 Registry Infoline: 1800 819 675 or +61 2 8280 7126 Fax: +61 2 9287 0303 Email: registrars@linkmarketservices.com.au Website: www.linkmarketservices.com.au Open Monday to Friday between 8.30am and 5.30pm (Sydney time). For enquiries regarding your holding you can contact the security registry, or access your holding details at www.dexus.com using the Investor login link. Australian Securities Exchange ASX code: DXS 96 2012 DEXUS AnnUAl REPORT 2012 DEXUS ANNUAL rEport www.dexus.com 

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