GPT Group
Annual Report 2018

Plain-text annual report

2018 ANNUAL FINANCIAL REPORT Contents Annual Financial Report of The GPT Group Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Supplementary Information Corporate Directory 1 79 139 Inside back cover Corporate Governance The GPT Group (GPT or the Group) comprises GPT Management Holdings Limited (ACN 113 510 188) (GPTMHL) and General Property Trust (Trust). GPT RE Limited (ACN 107 426 504) (GPTRE) AFSL (286511) is the Responsible Entity of the Trust. GPT’s stapled securities are listed on the Australian Securities Exchange (ASX). The third edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (Principles) provides a framework for good corporate governance for listed entities. GPT’s Corporate Governance Statement sets out how the Group has complied with the Principles. The Group’s Corporate Governance Statement is available on GPT’s website at: www.gpt.com.au/About-GPT/Corporate-Governance/Principles-and-Policies. GPT has also lodged an Appendix 4G (Key to Disclosures – Corporate Governance Principles and Recommendations) with the ASX. Annual Financial Report of The GPT Group Year ended 31 December 2018 Contents Directors’ Report ............................................................................................................................................................................ 2 Auditor’s Independence Declaration ............................................................................................................................................ 23 Financial Statements .................................................................................................................................................................... 24 Consolidated Statement of Comprehensive Income ............................................................................................................ 24 Consolidated Statement of Financial Position ..................................................................................................................... 25 Consolidated Statement of Changes in Equity ..................................................................................................................... 26 Consolidated Statement of Cash Flows ............................................................................................................................... 27 Notes to the Financial Statements ....................................................................................................................................... 28 Result for the year ....................................................................................................................................................... 28 1. Segment information .............................................................................................................................................. 28 Operating assets and liabilities .................................................................................................................................. 34 2. Investment properties ............................................................................................................................................ 34 3. Equity accounted investments ................................................................................................................................ 37 4. Trade and other receivables ................................................................................................................................... 39 5. Intangible assets ..................................................................................................................................................... 40 6. Inventories .............................................................................................................................................................. 41 7. Payables .................................................................................................................................................................. 41 8. Provisions ............................................................................................................................................................... 42 9. Taxation ................................................................................................................................................................... 43 Capital structure .......................................................................................................................................................... 45 10. Equity and reserves ................................................................................................................................................ 45 11. Earnings per stapled security ................................................................................................................................ 47 12. Distributions paid and payable ............................................................................................................................... 48 13. Borrowings ............................................................................................................................................................. 48 14. Financial risk management ................................................................................................................................... 49 Other disclosure items ................................................................................................................................................ 55 15. Cash flow information ............................................................................................................................................ 55 16. Commitments ......................................................................................................................................................... 56 17. Contingent liabilities .............................................................................................................................................. 56 18. Security based payments ....................................................................................................................................... 56 19. Related party transactions .................................................................................................................................... 58 20. Auditor’s remuneration .......................................................................................................................................... 59 21. Parent entity financial information......................................................................................................................... 59 22. Fair value disclosures ............................................................................................................................................ 60 23. Accounting policies ................................................................................................................................................. 63 24. Adoption of new accounting standards .................................................................................................................. 69 25. Events subsequent to reporting date ..................................................................................................................... 70 Directors’ Declaration ................................................................................................................................................................... 71 Independent Auditor’s Report ...................................................................................................................................................... 72 The GPT Group (GPT) comprises General Property Trust (Trust) and its controlled entities and GPT Management Holdings Limited (Company) and its controlled entities. General Property Trust is a registered scheme, registered and domiciled in Australia. GPT RE Limited is the Responsible Entity of General Property Trust. GPT Management Holdings Limited is a company limited by shares, incorporated and domiciled in Australia. GPT RE Limited is a wholly owned controlled entity of GPT Management Holdings Limited. Through GPT’s internet site, GPT has ensured that its corporate reporting is timely, complete and available globally at minimum cost to the Trust. All press releases, financial reports and other information are available on GPT’s website: www.gpt.com.au. 1 Directors’ Report Year ended 31 December 2018 The Directors of GPT RE Limited, the Responsible Entity of General Property Trust, present their report together with the financial statements of the General Property Trust (the Trust) and its controlled entities (the consolidated entity) for the financial year ended 31 December 2018. The consolidated entity together with GPT Management Holdings Limited and its controlled entities form the stapled entity, The GPT Group (GPT). General Property Trust is a registered scheme, GPT Management Holdings Limited is a company limited by shares, and GPT RE Limited is a company limited by shares, each of which is incorporated and domiciled in Australia. The registered office and principal place of business is the MLC Centre, Level 51, 19 Martin Place, Sydney NSW 2000. 1. Operating and financial review About GPT GPT is an owner and manager of a $14.0 billion diversified portfolio of high quality Australian retail, office and logistics property assets and together with GPT’s funds management platform the Group has $24.0 billion of property assets under management (AUM). GPT owns some of Australia’s most prominent real estate assets, including the Melbourne Central and Highpoint Shopping Centre in Melbourne, Australia Square, 1 Farrer Place and Citigroup Centre in Sydney and One One One Eagle Street in Brisbane. Listed on the Australian Securities Exchange (ASX) since 1971, GPT is today one of Australia’s largest diversified listed property groups with a market capitalisation of approximately $9.6 billion. GPT is one of the top 50 listed stocks on the ASX by market capitalisation as at 31 December 2018. GPT’s strategy is focused on leveraging its extensive real estate experience to deliver strong returns through disciplined investment, asset management and development. The development capability has a focus on creating value for securityholders through the enhancement of the core investment portfolio and in the creation of new investment assets. A key performance measure for GPT is Total Return. Total Return is calculated as the change in Net Tangible Assets (NTA) per security plus distributions per security declared over the year, divided by the NTA per security at the beginning of the year. This focus on Total Return is aligned with securityholders’ long term investment aspirations. In 2018 GPT achieved a Total Return of 15.8 per cent. GPT targets a Management Expense Ratio (MER) of less than 45 basis points. MER is calculated as management expenses as a percentage of assets under management. In 2018 GPT achieved an MER of 30 basis points. GPT focuses on maintaining a strong balance sheet. GPT’s gearing as at 31 December 2018 was 26.3 per cent and it has maintained a weighted average debt expiry of greater than 6 years. The average cost of debt for 2018 was 4.2 per cent. GPT Portfolio SOURCES OF DRAWN DEBT Retail 44% Office 42% Logistics 14% Retail Portfolio • 13 shopping centres Office Portfolio • 25 assets Logistics Portfolio • 28 assets • 940,000 sqm GLA* • 1,150,000 sqm NLA** • 870,000 sqm GLA* • 3,200 + tenants • $6.2b portfolio • $10.0b AUM * Gross lettable area ** Net lettable area • 550 + tenants • 80 + tenants • $5.9b portfolio • $1.9b portfolio • $12.1b AUM • $1.9b AUM 2 Annual Financial Report of The GPT Group Review of operations Funds from Operations (FFO) represents GPT’s underlying and recurring earnings from its operations. This is determined by adjusting statutory net profit after tax under Australian Accounting Standards for certain items which are non-cash, unrealised or capital in nature. GPT’s distribution policy is a payout ratio of approximately 95-105 per cent of Adjusted Funds from Operations (AFFO) which is broadly defined as FFO less maintenance capex and lease incentives. FFO and AFFO have been determined in accordance with the guidelines issued by the Property Council of Australia. The reconciliation of FFO to net profit after tax is set out below: For the year ended Retail – Operations net income – Development net income Office – Operations net income – Development net income Logistics – Operations net income – Development net income Funds management net income Corporate management expenses Net finance costs Income tax expense Funds from Operations (FFO) Other non-FFO items: Valuation increase Financial instruments mark to market and net foreign exchange loss Other items2 Net profit for the year after tax FFO per ordinary stapled security (cents) Funds from Operations (FFO) Maintenance capex Lease incentives Adjusted Funds from Operations (AFFO) Distribution paid and payable Distribution per ordinary stapled security (cents) 31 Dec 18 $M 31 Dec 171 $M Change % 318.6 7.6 326.2 267.7 1.0 268.7 104.8 5.1 109.9 42.6 (34.2) (124.4) (14.2) 574.6 910.7 (39.6) 6.0 1,451.7 31.84 574.6 (53.2) (60.9) 460.5 459.5 25.46 313.1 5.3 318.4 247.8 1.1 248.9 93.3 0.7 94.0 37.0 (30.6) (102.4) (11.1) 554.2 717.7 (2.9) (1.0) 1,268.0 30.77 554.2 (54.4) (53.5) 446.3 443.2 24.60 1.8% 43.4% 2.4% 8.0% (9.1%) 8.0% 12.3% 628.6% 16.9% 15.1% (11.8%) (21.5%) (27.9%) 3.7% 26.9% (1,265.5%) 700.0% 14.5% 3.5% 3.7% 2.2% (13.8%) 3.2% 3.7% 3.5% 1 The 31 December 2017 net profit for the year after tax has been restated as a result of the adoption of new accounting standards. Refer to note 24(a). 2 Other items include impairment expenses, amortisation of intangibles, profit on disposal of assets and related tax impact. Operating result GPT delivered FFO of $574.6 million for the 2018 financial year, an increase of 3.7 per cent on the prior year. This translated into FFO per security of 31.84 cents, up 3.5 per cent. The result was driven by strong contributions from the investment portfolio of high quality Australian retail, office and logistics properties. GPT’s statutory net profit after tax is $1,451.7 million, an increase of 14.5 per cent on the prior year, driven by $910.7 million in property valuation increases offset by higher negative mark to market and net foreign exchange movement of financial instruments. 3 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 2018 Distribution For the financial year ended 31 December 2018, distributions paid and payable to stapled securityholders totalled $459.5 million (2017: $443.2 million), representing an annual distribution of 25.46 cents, up 3.5 per cent on 2017 (2017: 24.60 cents). This includes 12.85 cents ($231.9 million) in respect of the second half of 2018, which was declared on 19 December 2018 and is expected to be paid on 28 February 2019. The payout ratio for the year ended 31 December 2018 is 99.8 per cent of AFFO (2017: 99.3 per cent). 16.9% 15.2% 12.5% 8.2% Total Return at the direct investment portfolio level was 12.5 per cent for 2018 with the split between portfolios detailed in the chart on the left. Retail (inc GPT Wholesale Shopping Centre Fund Interest) Office (inc GPT Wholesale Office Fund Interest) Logistics Total Portfolio (inc Equity Interests) GPT has maintained strong metrics across its core portfolios: Overall Portfolios Retail Portfolio Office Portfolio Logistics Portfolio Value of Portfolio Occupancy 97.8% (2017: 96.8%) Weighted average lease expiry (WALE) 4.9 years (2017: 5.2 years) Structured rental reviews $6.20 billion portfolio including GPT’s equity interest in the GPT Wholesale Shopping Centre Fund (2017: $5.85 billion) 99.6% (2017: 99.6%) 4.0 years (2017: 4.1 years) 74% of specialty income subject to average increases of 4.8% (2017: 74% subject to average increases of 4.7%) $5.93 billion portfolio including GPT’s equity interest in the GPT Wholesale Office Fund (2017: $4.90 billion) $1.89 billion portfolio (2017: $1.55 billion) 97.1% (2017: 95.2%) 5.2 years (2017: 5.6 years) 97.2% (2017: 96.1%) 7.1 years (2017: 7.6 years) 85% of income subject to average increases of 3.9% (2017: 91% subject to average increases of 3.9%) 91% of income subject to average increases of 3.3% (2017: 91% subject to average increases of 3.3%) Comparable income growth Weighted average capitalisation rate 3.8% (2017: 4.4%) 5.02% (2017: 5.27%) 2.2% (2017: 3.8%) 4.88% (2017: 5.10%) 5.8% (2017: 5.0%) 4.95% (2017: 5.18%) 2.8% (2017: 4.0%) 5.78% (2017: 6.31%) Retail (i) Operations net income The retail portfolio achieved a net revaluation uplift of $161.0 million in 2018, including GPT’s equity interest in the GPT Wholesale Shopping Centre Fund (GWSCF). The positive revaluation has been driven by a combination of net income growth and firming in valuation metrics, with favourable valuations achieved on Melbourne Central, Westfield Penrith and Charlestown Square. Like for like income growth of 2.2 per cent was driven by underlying structured rent increases and ongoing active remixing of the portfolio. Retail sales have improved over the 12 month period to December 2018, with annual weighted total centre sales up 2.4 per cent and total specialty sales up 3.6 per cent. The portfolio remains well leased with occupancy at 99.6 per cent. (ii) Development net income During 2018, the focus has been on the delivery of the $432.0 million Sunshine Plaza retail expansion (GPT share: $216.0 million). The development has been delayed due to inclement weather resulting in a staged opening in November 2018 and the major launch scheduled for March 2019. During 2018, the business unit contributed $7.6 million to FFO (2017: $5.3 million). 4 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 2018 Office Operations net income Logistics Operations net income The office portfolio achieved a net revaluation uplift of $598.5 million in 2018, including GPT’s equity interest in the GPT Wholesale Office Fund (GWOF), as a result of high occupancy, strong market rental growth and continued firming of investment metrics. The positive revaluation has been primarily driven by the Group’s Sydney assets, in particular MLC Centre, 2 Park St, Australia Square and Farrer Place. Like for like income growth of 5.8 per cent was achieved as a result of leasing success leading to strong rental growth and continued high levels of occupancy at 97.1 per cent (including signed leases). The assets which were the main contributors to income growth were Melbourne Central Tower, Australia Square, Farrer Place and MLC Centre. Also, the September 2018 acquisition of 60 Station Street, Parramatta has had a positive contribution to headline income growth. Development net income During the year the 15,800sqm 4 Murray Rose development was successfully completed at Sydney Olympic Park. The asset was delivered on time and within budget and is 81% leased at the year end with the Rural Fire Service taking 59% of the building. The development has delivered a development yield on cost over 7.5%. Construction has commenced on the new 26,000sqm tower at 32 Smith Street, Parramatta following the acquisition of the site in 2017. The pre-committed tenant for the new tower is QBE, who will occupy approximately 50% of the building. Practical completion is due in late 2020. The team is well progressed with a number of repositioning projects in Melbourne at 100 Queen Street, Melbourne Central Tower, CBW and 530 Collins Street. Funds Management As at and for the year ended 31 December 2018 Funds under management Number of Assets GPT Interest GPT Investment One year Equity IRR (post-fees) Share of profit – FFO Funds Management fee income The logistics portfolio achieved a net revaluation uplift of $151.2 million in 2018. This uplift is attributed to continued investor demand for quality logistics assets which led to a firming of investment metrics combined with positive leasing outcomes. The weighted average lease expiry has been maintained at a long duration of 7.1 years and like for like income growth is strong at 2.8 per cent. Development net income During the year the Group continued to successfully develop high quality logistics facilities to increase the portfolio quality and scale. At Huntingwood, the 11,000sqm warehouse reached practical completion in August 2018. The building was leased to Cahill Transport Group. Also, at 50 Old Wallgrove Road in Eastern Creek construction of a 30,000sqm facility was completed in January 2019. By the time of signing this financial report, 100% of the asset has been leased to ACR Supply Partners. Work continues to develop out and replenish the logistics land bank. This includes the November 2018 acquisition of 8.9 hectares of land in Melbourne which provides the opportunity to develop 48,000sqm of new logistics facilities. GWOF $7.8b 18 23.83% GWSCF $4.8b 8 28.57% Total $12.6b 26 N/A $1,524.0m $1,013.7m $2,537.7m 12.7% $69.8m $36.3m 4.8% $46.3m $21.9m N/A $116.1m $58.2m 5 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 2018GWOF GWOF’s portfolio value increased to $7.8 billion, up $0.7 billion from 2017 and the fund delivered a one year equity IRR of 12.7 per cent. The management fee income earned from GWOF for 2018 increased by $2.9 million as compared to 2017 due to strong upward revaluations across the portfolio. As a result of GPT not participating in the Fund’s Distribution Reinvestment Plan (DRP) and equity raising in December 2018, GPT’s ownership reduced to 23.83 per cent (2017: 24.95 per cent). GWSCF The fund delivered a one year equity IRR of 4.8 per cent. GWSCF’s portfolio value decreased to $4.8 billion, down $0.1 billion from 2017, primarily driven by the sale of GWSCF’s 83.33 per cent share in Homemaker City, Maribyrnong in December 2018 offset by upward revaluations. Management fee income earned from GWSCF of $21.9 million has increased by $4.6 million as compared to 2017. This was due to the acquisition of an additional 25 per cent interest in Highpoint Shopping Centre for $660.0 million and Homemaker City, Maribyrnong for $20.0 million in September 2017. Balance sheet • Total Return of 15.8 per cent (2017: 15.2 per cent) being the growth of NTA per stapled security of 54 cents to $5.58 plus the distribution paid/payable per stapled security of 25.46 cents, divided by the opening NTA per stapled security. • Total core assets increased by 13.8 per cent primarily due to acquisitions, development capital expenditure and positive property revaluations. • Total borrowings increased by 24.7 per cent due to acquisitions, development capital expenditure and fair value adjustments of $116.1 million to the carrying value of foreign currency debt. Capital management Cost of debt Net gearing Weighted average debt maturity Hedging S&P/Moody’s credit rating 31 Dec 18 31 Dec 17 Change 4.2% 26.3% 4.2% Unchanged 24.4% Up by 190bps 6.3 years 7.1 years Down 0.8 years 83.0% 76.0% Up 7% A stable/ A2 stable A stable/ A2 stable Unchanged As a result of GPT not participating in the Fund’s DRP, GPT’s ownership is now 28.57 per cent (2017: 28.80 per cent). GPT continues to maintain a strong focus on capital management. Key highlights for the year include: • weighted average cost of debt for the year is 4.2 per cent, unchanged from the previous year; • net gearing2 increased to 26.3 per cent (2017: 24.4 per cent), which is in line with the lower end of GPT’s target gearing range of 25 to 35 per cent. This was a result of debt funding acquisitions and development capital expenditure during the period offset by strong revaluation gains; • available liquidity through cash and undrawn facilities (inclusive of forward starting facilities available to GPT) is $1,059.5 million (2017: $1,095.1 million); and • net tangible assets reduced by a $32.0 million loss on net mark to market movements on derivatives and borrowings. Management expenses Corporate overheads increased to $34.2 million (2017: $30.6 million) during the year due to increases in regulatory fees and Directors and Officers insurance and higher unallocated technology costs for automation. Total management and administration expenses across all segments slightly reduced to $73.0 million (2017: $73.4 million) resulting in a lower MER of 30 basis points for 2018 (2017: 34 basis points). Financial position Net Assets 31 Dec 18 $M Net Assets 31 Dec 171 $M Change % Core Retail Office Logistics 6,299.2 5,921.9 1,958.8 5,938.4 4,884.4 1,639.3 Total core assets 14,179.9 12,462.1 Financing and corporate assets 598.1 495.2 Total assets Borrowings Other liabilities Total liabilities Net assets Total number of ordinary stapled securities (million) 14,778.0 12,957.3 4,114.9 3,300.6 562.5 4,677.4 10,100.6 1,804.9 550.8 3,851.4 9,105.9 1,801.6 6.1% 21.2% 19.5% 13.8% 20.8% 14.1% 24.7% 2.1% 21.4% 10.9% 0.2% NTA ($) 5.58 5.04 10.7% 1 The 31 December 2017 net assets have been restated as a result of the adoption of new accounting standards. Refer to note 24(a). 2 Calculated net of cash and excludes any fair value adjustment on foreign bonds and their associated cross currency derivative asset positions. 6 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 2018 Cash flows The cash balance as at December 2018 increased to $58.7 million (2017: $49.9 million). Operating activities The following table shows the reconciliation from FFO to the cash flow from operating activities: For the year ended FFO (Less): non-cash items included in FFO Less: interest capitalised on developments Add/(less): net movement in inventory Timing difference in receivables and payables Net cash inflows from operating activities Add: interest capitalised on developments (Less)/add: net movement in inventory Less: dividend income from available for sale investment Less: maintenance capex Less: lease incentives (excluding rent free) Free cash flow 31 Dec 18 $M 31 Dec 17 $M 574.6 (25.5) (13.7) 5.8 (7.2) 534.0 13.7 (5.8) – (53.2) (39.7) 449.0 554.2 (17.2) (8.6) (19.0) 26.1 535.5 8.6 19.0 (30.4) (54.4) (27.0) 451.3 Change % 3.7% (48.3%) (59.3%) 130.5% (127.6%) (0.3%) 59.3% (130.5%) 100.0% 2.2% (47.0%) (0.5%) The Non-IFRS information included above has not been audited in accordance with Australian Auditing Standards, but has been derived from note 1 and note 15 of the accompanying financial statements. Prospects Group GPT retains a portfolio of high quality assets with high occupancy levels and structured rental growth. As at 31 December 2018, the Group’s balance sheet is in a strong position, with a smooth, long debt expiry profile and net gearing at the lower end of the Group’s target range of 25 to 35 per cent. Retail GPT’s portfolio delivered total centre sales growth 2.4 per cent whilst specialties sales per square metre grew 2.5 per cent for the 12 months to 31 December 2018. The retail portfolio is well positioned with 85 per cent located in NSW and VIC and in markets with strong population growth. GPT is planning on capturing this growth by investing in assets to offer engaging places for its customers aimed at driving sales productivity, stimulating retailer demand and delivering long term investment returns. Progress continues to be made with mixed use developments at Melbourne Central and Rouse Hill which will be opportunities for GPT to deliver leading examples on how retail assets need to evolve and adapt to meet the changing needs of today’s retail consumer. Office GPT is progressing its future development pipeline in Sydney and Melbourne. Engagement continues with authorities for a proposed new office tower and retail precinct of up to 70,000sqm at Darling Park in Sydney. In Melbourne, the Group is seeking a pre-commitment tenant for a proposed 20,000sqm office tower at Melbourne Central. The Sydney and Melbourne CBD office markets in Australia experienced solid conditions in 2018, with demand being above long-term averages, low levels of net supply and tightening vacancy rates. Sydney and Melbourne reached vacancy rates of 4.1 per cent and 3.75 per cent respectively. These markets should experience ongoing tight vacancy conditions in 2019 with little new supply to come online and ongoing healthy levels of demand. Logistics An improving industrial economy driven by the growth in e-commerce, continues to fuel the demand for warehousing. New entrants and existing retailers seeking to expand into key locations is adding further pressure on the availability of land resulting in double digit increases of land values in prime locations. The investment market remains strong with assets transacting at yields firmer than previous market peaks. The medium term outlook is for Sydney and Melbourne to continue to benefit as preferred locations, given population nodes and strong and improving infrastructure. GPT will seek to increase exposure to the sector through development opportunities and acquisitions. 7 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 2018Funds management GPT has a large funds management platform which has experienced significant growth in the value of assets under management over the past five years. The funds management team will continue to actively manage the existing portfolios, with new acquisitions, divestments and developments in line with the relevant investment objectives of each fund. Guidance for 2019 In 2019 GPT expects to deliver 4 per cent growth in FFO per ordinary security and 4 per cent growth in distribution per ordinary security. Achieving this target is subject to risks detailed in the following section. Risks The Board is ultimately accountable for corporate governance and the appropriate management of risk. The Board determines the risk appetite and oversees the risk profile to ensure activities are consistent with GPT’s strategy and values. The Sustainability and Risk Committee and the Audit Committee support the Board and are responsible for overseeing and reviewing the effectiveness of the risk management framework. The Sustainability and Risk Committee, the Audit Committee and through them, the Board, receive reports on GPT’s risk management practices and control systems including the effectiveness of GPT’s management of its material business risks. GPT has an active enterprise-wide risk management framework. Within this framework the Board has adopted a policy setting out the principles, objectives and approach established to maintain GPT’s commitment to integrated risk management. GPT requires effective risk management as a core capability and consequently all employees are expected to be managers of risk. GPT’s risk management approach incorporates culture, people, processes and systems to enable the organisation to realise potential opportunities whilst managing adverse effects. The approach is consistent with AS/NZS ISO 31000:2018: Risk Management. The key components of the approach include the following: • the GPT Board, Leadership Team, employees and contractors all understand their risk management accountabilities, promote the risk awareness and risk management culture and apply risk processes to achieve the organisation’s objectives; • specialist risk management expertise is developed and maintained internally and provides coaching, guidance and advice; • risks are identified and assessed in a timely and consistent manner; • controls are effectively designed, embedded and assessed; • material operational risks and critical controls are monitored and reported to provide transparency and assurance that the risk profile is aligned with GPT’s risk appetite, strategy and values; and • macro-economic factors that may impact the business are considered and monitored. The risk appetite set by the Board considers the most significant, material risks to which GPT is exposed and provides the Board with ongoing monitoring of risk exposures which may arise over the short, medium and long term. The following table sets out material operational risks and issues, the potential impact to GPT and the ways in which they may be mitigated: Risk Category Risk/Issue Potential Strategic Impact Mitigation Investment mandate Investments do not perform in line with forecast • Lower distributions • Lower NTA • Credit ratings downgrade Adverse changes in market conditions Development Developments do not perform in line with forecast • Lower distributions • Lower NTA • Credit ratings downgrade • Lower distributions • Lower NTA • Credit ratings downgrade • Robust investment approval process • Formal due diligence process • Active asset management • Experienced internal management capability • Diversified multi-asset portfolio • Limit single asset exposure • Robust capital allocation process • Diversified multi-asset portfolio • Limit single asset exposure • Robust investment approval process • Oversight by Project Control Group (PCG) • Experienced internal management capability • Limit exposure to assets under development • Limit exposure to individual contractors • Minimum leasing pre-commitments prior to construction commencement 8 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 2018Risk Category Risk/Issue Potential Strategic Impact Mitigation Leasing Inability to lease assets in line with forecast • Lower distributions • Lower NTA • Credit ratings downgrade Capital management, including macro- economic factors Re-financing and liquidity risk • Ability to meet debt maturities • Limits ability to execute strategy • Credit ratings downgrade • Failure to continue as a going concern • Large and diversified tenant base • Ongoing investment to maintain quality of property portfolio • Experienced leasing team • Limit single tenant exposure • Diversity of funding sources and spreading of debt maturities with a long weighted average debt term • Maintaining a minimum liquidity buffer in cash and surplus committed credit facilities for the forward rolling twelve-month period Interest rate risk – higher interest rate cost than forecast • Lower distributions • Interest rate exposures are actively hedged Health and safety Incidents causing injury to tenants, visitors to the properties, employees and/or contractors • Harm to the tenants, visitors to GPT’s properties, employees and/or contractors • Formalised Health and Safety management system including policies and procedures for managing safety • Criminal/civil proceedings and resultant • Training and education of employees and People and culture Inability to attract, retain and develop talented people and provide an inclusive workplace Inability to maintain a high performing, ethical, and values based workplace This includes the consideration of risk culture and specifically conduct risk reputation damage contractors • Financial impact of remediation and restoration • Failure to provide an environment that • Background and reference checks on enables employees to excel • Failure to provide a safe working environment free of harassment, bullying and discrimination • Limits the ability to achieve business objectives in line with GPT’s values commencement • Whistleblower officer • Annual Performance management process setting objectives to promote clarity and accountability • Remedial performance management and disciplinary action • Monitoring of risk culture and conduct risk • Discretionary incentive system and Clawback Policy • Benchmarking and setting competitive remuneration • Development planning • Succession planning • Talent management processes • Promotion of GPT Values • Code of conduct • Conflicts of interest register • Compliance training • Grievance resolution process • Diversity & Inclusion policies, guidelines and training Environmental and social sustainability Inability to operate in a manner that does not compromise the health of ecosystems and meets accepted social norms • Negative impact to the communities, the environment and the ecosystems that GPT operates in • Limits the ability to deliver the business • Formalised Environment and Sustainability management system including policies and procedures for managing environmental and social sustainability risks This includes consideration of climate change, energy intensity, community wellbeing and supply chain integrity objectives and strategy • Criminal/civil proceedings and resultant reputation damage • Financial impact of remediation and restoration • Climate related risks and potential financial impacts are assessed within GPT’s enterprise-wide risk management framework Information security Risk of loss of data, breach of confidentiality, regulatory breach (privacy) and/or reputational impact including as a result from a cyber attack • Limits the ability to deliver the business objectives and strategy • Technology risk management framework • Privacy policy, guidelines and procedures • Criminal/civil proceedings and resultant reputation damage • Financial impact of remediation and restoration 9 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 20182. Environmental regulation 3. Events subsequent to reporting date GPT has policies and procedures in place that are designed to ensure that where operations are subject to any particular and significant environmental regulation under a law of Australia (for example property development and property management), those obligations are identified and appropriately addressed. This includes obtaining and complying with conditions of relevant authority consents and approvals and obtaining necessary licences. GPT is not aware of any significant breaches of any environmental regulations under the laws of the Commonwealth of Australia or of a State or Territory of Australia and has not incurred any significant liabilities under any such environmental legislation. In managing the portfolio, GPT monitors and assesses physical and transitional risks arising from climate change. These risks are considered in GPT’s investment and portfolio management decisions, as well as decisions to upgrade buildings in anticipation of a low carbon future. GPT discloses emissions data and climate strategy on its website. GPT continues to take an active leadership role in transitioning towards a low carbon future, participating in climate change public policy development through involvement in: • the Property Council of Australia; • the Green Building Council of Australia; On 16 January 2019, the Group announced the proposed sale of its 50 per cent share of the MLC Centre. Proceeds from the planned sale will initially repay debt prior to be being reinvested into the development pipeline. Other than the above, the Directors are not aware of any matter or circumstances occurring since 31 December 2018 that has significantly or may significantly affect the operations of GPT, the results of those operations or the state of affairs of GPT in the subsequent financial years. 4. Directors and secretary Information on directors Vickki McFadden – Chairman (appointed as a Non- Executive Director 1 March 2018 and Chairman from 2 May 2018) Vickki was appointed to the Board on 1 March 2018 and is also a member of the Nomination and Remuneration Committee. She brings a broad range of skills and experience to the Group gained during an 18 year career spanning investment banking, corporate finance and corporate law, and through her current and previous board-level positions. • the City of Sydney Better Building Partnership; and • demonstration projects partnering with the Australian Vickki currently holds Non-Executive directorships in the following listed entities and other entities: Renewable Energy Agency. GPT has achieved a Group-wide reduction of 42% in energy intensity, and a 56% reduction in emissions intensity since 2005. GPT is currently developing its Energy Master Plan which will continue the implementation of energy efficiency programs. GPT will seek to further decouple emissions from its energy requirements through renewable energy purchases, electrification of gas infrastructure and implementation of demand response programs. GPT’s comprehensive Climate Change and Energy Policy is available on GPT’s website. GPT is subject to the reporting requirements of the National Greenhouse and Energy Reporting Act 2007 (“NGER Act”). The NGER Act requires GPT to report its annual greenhouse gas emissions and energy use. The measurement period for GPT is 1 July to 30 June each year. GPT has implemented systems and processes for the collection and calculation of the data required which enables submission of its report to the Department of Climate Change and Energy Efficiency within the legislative deadline of 31 October each year. GPT has submitted its report to the Department of Climate Change and Energy Efficiency for the period ended 30 June 2018 within the required timeframe. More information about GPT’s participation in the NGER program is available at www.gpt.com.au. • Tabcorp Holdings Limited (since 2017); • Newcrest Mining Limited (since 2016); and • Myer Family Investments Pty Limited (since 2011). She is also President of the Takeovers Panel, a Member of Chief Executive Women and a Member of the Advisory Board and Executive Committee of the UNSW Business School. Vickki was previously Chairman of Eftpos Payments Australia Limited, Chairman of Skilled Group Limited (prior to its acquisition by Programmed Maintenance Services Limited) (Director from 2005 to 2015 and Chairman from 2010 to 2015), a non-executive director of Leighton Holdings Limited, and a Managing Director of Investment Banking at Merrill Lynch Australia. As at the date of this report she holds 50,000 GPT stapled securities. Rob Ferguson – Chairman (retired 2 May 2018) Rob joined the Board in May 2009 and was also a member of the Nomination and Remuneration Committee. He brings a wealth of knowledge and experience in finance, investment management and property as well as corporate governance. Rob currently holds Non-Executive directorships in the following listed and other entities: • Watermark Market Neutral Fund Limited (since 2013); and • Smartward Limited (since 2012). 10 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 2018He was also a Non-Executive Chairman of IMF Bentham Limited from 2004 to January 2015, Chairman of Primary Health Care Limited from 2009 to July 2018, and a Director of Tyro Payments Limited from 2005 to July 2018. As at the date of his retirement he held 207,628 GPT stapled securities. Robert Johnston – Chief Executive Officer and Managing Director Bob was appointed to the Board as Chief Executive Officer and Managing Director in September 2015. He has 30 years’ experience in the property sector including investment, development, project management and construction in Australia, Asia, the US and UK. Prior to joining GPT, Bob was the Managing Director of listed Australand Property Group which became Frasers Australand in September 2014. As at the date of this report he holds 821,765 GPT stapled securities. Brendan Crotty (retired on 9 November 2018) Brendan was appointed to the Board in December 2009 and was also a member of the Audit Committee and the Sustainability and Risk Committee. He brings extensive property industry experience to the Board, including 17 years as Managing Director of Australand until his retirement in 2007. Brendan is currently the Chairman of the National Housing Finance and Investment Corporation (since 2018), a director of Brickworks Limited (since 2008) and Chairman of Cloud FX Pte Ltd. Brendan was previously Chairman of Western Sydney Parklands Trust. As at the date of this retirement he held 67,092 GPT stapled securities. Eileen Doyle Eileen was appointed to the Board in March 2010. She is also the Chairman of the Sustainability and Risk Committee and a member of the Audit Committee and Nomination and Remuneration Committee (retired as a member in November 2018). She has diverse and substantial business experience having held senior executive roles and directorships in a wide range of industries, including research, financial services, building and construction, steel, mining, logistics and export. Eileen is also a Fellow of the Australian Academy of Technological Sciences and Engineering. Eileen currently holds the position of Non-Executive Director in the following listed and other entities: • Boral Limited (since 2010); and • Oil Search Limited (since 2016). Eileen was also previously a director of Bradken Limited from 2011 to November 2015. As at the date of this report she holds 45,462 GPT stapled securities. Swe Guan Lim Swe Guan was appointed to the Board in March 2015 and is also a member of the Audit Committee and the Sustainability and Risk Committee. Swe Guan brings significant Australian real estate skills and experience and capital markets knowledge to the Board, having spent most of his executive career as a Managing Director in the Government Investment Corporation (GIC) in Singapore. Swe Guan is currently Chairman of Cromwell European REIT in Singapore (since 2017) and a Director of Sunway Berhad in Malaysia (since 2011). Swe Guan is also a member of the Investment Committee of CIMB Trust Cap Advisors and was formerly a Director of Global Logistics Property in Singapore until January 2018. As at the date of this report, he holds 39,000 GPT stapled securities. Michelle Somerville Michelle was appointed to the Board in December 2015 and is also the Chairman of the Audit Committee and a member of the Sustainability and Risk Committee. She was previously a partner of KPMG for nearly 14 years specialising in external audit and advising Australian and international clients both listed and unlisted primarily in the financial services market in relation to business, finance risk and governance issues. Michelle currently holds the position of Non-Executive Director in the following entities: • Bank Australia Limited (since 2014); • Challenger Retirement and Investment Services Ltd (since 2014); • Save the Children (Australia) (since 2012); and • Down Syndrome Australia (since 2011). Michelle is also an independent consultant to the UniSuper Ltd Audit, Risk and Compliance Committee since 2015. As at the date of this report she holds 36,663 GPT stapled securities. Gene Tilbrook Gene was appointed to the Board in May 2010 and is also the Chairman of the Nomination and Remuneration Committee. He brings extensive experience in finance, corporate strategy, investments and capital management. Gene currently holds the position of Non-Executive Director in the following listed entities: • Orica Limited (since 2013); and • Woodside Petroleum Limited (since 2014). Gene was also a Director of listed entities Transpacific Industries Group Limited from 2009 to 2013, Fletcher Building Limited from 2009 to April 2015, and Aurizon Holdings Limited from 2010 to February 2016. As at the date of this report he holds 48,546 GPT stapled securities. 11 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 2018Angus McNaughton (appointed 1 November 2018) Angus was appointed to the Board in November 2018 and is also a member of the Nomination and Remuneration Committee and the Audit Committee. He brings extensive experience in property investment. Angus was previously the CEO and Managing Director of Vicinity Centres from August 2015 until December 2017. Prior to that time, Angus served as the Managing Director Property for Colonial First State Global Asset Management from 2011, before becoming the CEO and Managing Director of ASX-listed Novion Property Group in 2014. Angus led Novion through to the completion of the merger between Novion and Federation Centres, renamed as Vicinity Centres, in June 2015. Angus does not currently hold any Non-Executive Director roles in other listed entities. He was also previously Director, Real Estate of First State Investments in Singapore and Chief Executive Officer of Kiwi Income Property Trust in New Zealand. As at the date of this report he does not hold GPT stapled securities. James Coyne – General Counsel and Company Secretary James is responsible for the legal, compliance and company secretarial activities of GPT. He was appointed as the General Counsel and Company Secretary of GPT in 2004. His previous experience includes company secretarial and legal roles in construction, infrastructure, and the real estate funds management industry (listed and unlisted). Lisa Bau – Senior Legal Counsel and Company Secretary Lisa was appointed as a Company Secretary of GPT in September 2015. Her previous experience includes legal roles in mergers and acquisitions, capital markets, funds management and corporate advisory. Attendance of directors at meetings The number of Board meetings, including meetings of Board Committees, held during the financial year and the number of those meetings attended by each Director is set out below: Board Audit Committee Nomination and Remuneration Committee Sustainability and Risk Committee Number of meetings eligible to attend Number of meetings attended Number of meetings eligible to attend Number of meetings attended Number of meetings eligible to attend Number of meetings attended Number of meetings eligible to attend Number of meetings attended Vickki McFadden1 Rob Ferguson Robert Johnston1 Brendan Crotty Eileen Doyle Swe Guan Lim Angus McNaughton Michelle Somerville Gene Tilbrook 10 3 11 9 11 11 3 11 11 10 3 11 9 11 11 3 11 10 - - - 4 5 5 1 5 - - - - 3 3 5 1 5 - 4 2 - - 5 - 2 - 6 4 2 - - 5 - 2 - 6 - - - 3 4 4 - 4 - - - - 3 4 4 - 4 - 1 Vickki McFadden and Bob Johnston also attended meetings of the Committees as non-members. 12 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 20185. Other disclosures Non-audit services Indemnification and insurance of directors, officers and auditor GPT provides a Deed of Indemnity and Access (Deed) in favour of each of the Directors and Officers of GPT and its subsidiary companies and each person who acts or has acted as a representative of GPT serving as an officer of another entity at the request of GPT. The Deed indemnifies these persons on a full indemnity basis to the extent permitted by law for losses, liabilities, costs and charges incurred as a Director or Officer of GPT, its subsidiaries or such other entities. Subject to specified exclusions, the liabilities insured are for costs that may be incurred in defending civil or criminal proceedings that may be brought against Directors and Officers in their capacity as Directors and Officers of GPT, its subsidiary companies or such other entities, and other payments arising from liabilities incurred by the Directors and Officers in connection with such proceedings. GPT has agreed to indemnify the auditors out of the assets of GPT if GPT has breached the agreement under which the auditors are appointed. During the financial year, GPT paid insurance premiums to insure the Directors and Officers of GPT and its subsidiary companies. The terms of the contract prohibit the disclosure of the premiums paid. During the year PricewaterhouseCoopers, GPT’s auditor, has performed other services in addition to their statutory duties. Details of the amounts paid to the auditor, which includes amounts paid for non-audit services and other assurance services, are set out in note 20 to the financial statements. The Directors have considered the non-audit services and other assurance services provided by the auditor during the financial year. In accordance with advice received from the Audit Committee, the Directors are satisfied that the provision of non-audit services by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: • the Audit Committee reviewed the non-audit services and other assurance services at the time of appointment to ensure that they did not impact upon the integrity and objectivity of the auditor; • the Board’s own review conducted in conjunction with the Audit Committee concluded that the auditor independence was not compromised, having regard to the Board’s policy with respect to the engagement of GPT’s auditors; and • the fact that none of the non-audit services provided by PricewaterhouseCoopers during the financial year had the characteristics of management, decision-making, self-review, advocacy or joint sharing of risks. 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 23 and forms part of the Directors’ Report. Rounding of amounts The amounts contained in this report and in the financial statements have been rounded to the nearest hundred thousand dollars unless otherwise stated (where rounding is applicable) under the option available to GPT under ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191. GPT is an entity to which the Instrument applies. 13 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 20186. Remuneration report The Nomination and Remuneration Committee (the Committee) of the Board presents the Remuneration Report (Report) for the GPT Group. This Report has been audited in accordance with section 308(3C) of the Corporations Act 2001. The Board aims to ensure that the GPT Group’s remuneration platform is both market competitive and fair to all stakeholders; aligns performance measures to the achievement of GPT’s strategic objectives; and communicates the remuneration outcomes clearly and transparently. Governance Who are the members of the Committee? What is the scope of work of the Committee? Who is included in the Remuneration Report? The Committee consists of the following three Non-Executive Directors: • Gene Tilbrook (Committee Chairman); • Vickki McFadden; and • Angus McNaughton. 2018 saw renewal and change on the Committee in line with changes to the Board: • Rob Ferguson retired at the GPT AGM on 2 May 2018; • Vickki McFadden joined GPT on 1 March 2018, and was appointed Chairman of GPT from 3 May 2018; • Angus McNaughton joined GPT on 1 November 2018; and • Eileen Doyle stepped down from the Committee on 8 November 2018. In 2018 the Committee undertook the following activities on behalf of the Board: • oversee the management of culture; • implement, monitor, evaluate and oversee GPT’s remuneration framework; • review and approve remuneration levels for the Board, Chief Executive Officer and key management personnel; • review and approve key performance indicators for the Chief Executive Officer and assess the Chief Executive Officer’s performance against those key performance indicators; • review compliance with legal and regulatory requirements associated with the activities of the Committee; • oversee the succession planning process for the Board, CEO and Leadership Team; • implement procedures for the evaluation of the performance of the Board and Board committees; • approve and oversee the implementation of GPT’s diversity & inclusion strategy, initiatives and policies; • approve and oversee initiatives around talent development and employee engagement; and • any other related matters regarding executives or the Board. Effective 1 January 2019 a Human Resources and Remuneration Committee (HRRC) was formed with the same membership as noted above. In addition, a Nomination Committee was formed consisting of the full Board1. GPT’s Key Management Personnel (KMP) are the individuals responsible for planning, controlling and managing the GPT Group (being the Non-Executive Directors, CEO, Chief Financial Officer (CFO), and the Chief Operating Officer (COO)). Committee key decisions and remuneration outcomes in 2018 Platform component Key decisions and outcomes Base Pay (Fixed) • Implemented the annual review of employee base pay effective 1 January 2018, with an average increase of 2.57%. • Following benchmarking, implemented an annual review of Non-Executive Director base and committee fees effective 1 January 2018, with an average increase of 3.12% to bring Non-Executive Directors remuneration closer to market. Short Term Incentive Compensation (STIC) • Maintained Funds from Operations (FFO) growth per security as the primary measure of Group financial performance. • The Group achieved an FFO growth per security outcome of 3.5% which generated a STIC pool maximum of $15.4 million. • Maintained a deferred equity component of STIC vesting in one tranche at the end of the year following the conclusion of the performance period. Long Term Incentive (LTI) Compensation • Achieved a compound annual Total Return2 for the 2016-18 period of 15.50%, exceeding the benchmark of 9.75% for maximum award, and delivered a Total Securityholder Return (TSR)3 of 32.76% which exceeded the ASX 200 AREIT Accumulation Index (the Index) performance of 26.60%. • As a result, the vesting outcome for the 2016-18 LTI plan was 82.71% of the performance rights for each of the Other employee ownership plans 24 participants in the LTI plan. • Launched the 2018-2020 LTI with two performance measures, Total Return and Relative TSR. • Maintained the same performance hurdles and ranges as the prior year’s LTI plan. • Aligned the vesting schedule for both performance measures such that 10% of the performance rights for each measure vest at Threshold performance, with straightline pro-rata vesting through to 100% at the maximum performance level. • Continued the General Employee Security Ownership Plan (GESOP) for 105 STIC eligible employees not in the LTI. Under GESOP each participant receives an amount equal to 10% of their STIC (less tax) delivered in GPT securities, which must be held for at least 1 year. • Continued the Broad Based Employee Security Ownership Plan (BBESOP) for 264 employees ineligible for GESOP. Under BBESOP, subject to GPT achieving the annual FFO growth per security target, participants receive $1,000 worth of GPT securities that cannot be transferred or sold until the earlier of 3 years from the allocation date or cessation of employment (or $1,000 cash (less tax) at the election of the individual). Policy and governance • Utilised external advice on market compensation benchmarks and practice, prevailing regulatory and governance standards, and drafting of incentive plan documentation from EY and Conari Partners4. 1 Further information about the role and responsibility of both the HRRC and the Nomination Committees is set out in their respective Charters, which are available on GPT’s website (www.gpt.com.au). No additional fees are paid for membership of the Nomination Committee. 2 Total Return is defined as the sum of the change in Net Tangible Assets (NTA) and distributions over the performance period, divided by the NTA at the beginning of the performance period. 3 TSR represents an investor’s return, calculated as the percentage difference between an initial amount invested in stapled securities and the final value of those stapled securities at the end of the relevant period, assuming distributions were reinvested. 4 During 2018, no remuneration recommendations in relation to Key Management Personnel, as defined by Division 1 of Part 1.2 of Chapter 1 of the Corporations Act 2001, were made by these or other consultants. 14 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 2018GPT’s vision and financial goals linked to remuneration structures GPT’s vision and financial goals To be the most respected property company in Australia in the eyes of our Investors, People, Customers and Communities Total Return > 8.5% Generate competitive Relative Total Securityholder Return Generate competitive FFO growth per security Base pay (Fixed) STIC (variable) LTI (variable) Total remuneration components • Base level of reward. • Discretionary, at risk, and • Set around Australian market median using external benchmark data (including AON Hewitt and the Financial Institutions Remuneration Group (FIRG)). • Reviewed based on employee’s responsibilities, experience, skill and performance. • External and internal relativities considered. with aggregate STIC funding aligned to overall Group financial outcomes. • Set around market median for target performance with potential to achieve top quartile for stretch outcomes. • Determined by GPT and individual performance against a mix of balanced scorecard measures which include financial and non- financial measures. • Financial measures include FFO growth per security, and earnings at portfolio, fund and/or property level as relevant. • Non-financial objectives focus on execution of strategy, delivery of key projects and developments, and people and culture objectives. • Delivered in cash, or (for senior executives), a combination of 50% cash and 50% equity with deferred vesting for 1 year. • Discretionary, at risk, and aligned to overall Group financial outcomes. • Set around market median for target performance with potential to achieve top quartile for stretch outcomes. • Vesting determined by GPT performance against Total Return and Relative TSR financial performance. • Relative TSR is measured against ASX200 AREIT Accumulation Index (including GPT). • Assessed over a 3 year performance period, no re-testing. • No value derived unless GPT meets or exceeds defined performance measures. • Delivered in GPT securities to align executive and securityholder interests. Other employee ownership plans (variable) GESOP • For STIC eligible individuals who are ineligible for LTI. • Equal to 10% of their STIC (less tax) delivered in GPT securities, which must be held for at least 1 year. BBESOP • For individuals ineligible for STIC or LTI. • GPT must achieve at least Target outcome on annual FFO growth per security. • A grant of $1,000 worth of GPT securities which must be held until the earlier of 3 years from the allocation date or cessation of employment (or $1,000 cash (less tax) at the election of the individual). Attract, retain, motivate and reward high calibre executives to deliver superior performance by providing: Align executive rewards to GPT’s performance and securityholder interests by: • Competitive rewards. • Opportunity to achieve incentives beyond base pay based on performance. • Assessing incentives against financial and non-financial business measures that are aligned with GPT strategy. • Delivering a meaningful component of executive remuneration in the form of equity subject to performance hurdles being achieved. 15 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 2018Employment Terms 1. Employment terms – Chief Executive Officer and Managing Director Term Contract duration Conditions Open ended. Termination by Executive 6 months’ notice. GPT may elect to make a payment in lieu of notice. Remuneration Package Bob Johnston’s 2018 remuneration arrangements were as follows: Base pay: $1,460,000. STIC: $0 to $1,825,000 (i.e. 0% to 125% of base pay) based on performance, paid in equal proportions of cash and deferred GPT securities, with the securities component vesting one year after the conclusion of the performance year. LTI: A grant of performance rights with the face value at time of grant of $2,190,000 (i.e. 150% of base pay) with vesting outcomes dependent on performance and continued service, and delivered in restricted GPT securities. Termination by Company for cause No notice requirement or termination benefits (other than accrued entitlements). Termination by Company (other) 12 months’ notice. Treatment of unvested STIC and LTI will be at the Board’s discretion under the terms of the relevant plans and GPT policy. Post-employment restraints 6 months non-compete, and 12 months non-solicitation of GPT employees. External Directorships Clawback Policy Bob Johnston is a Director on the Boards of the Property Industry Foundation (PIF) and the Property Council of Australia (PCA). He does not receive remuneration for these roles. All GPT employees who participate in STIC and LTI are subject to remuneration being clawed back if the recipient has acted fraudulently, dishonestly, or where there has been a material misstatement or omission in the Group’s financial statements leading to the receipt of an unfair benefit. 2. Employment terms – Executive KMP Term Contract duration Conditions Open ended. Termination by Executive 3 months’ notice. GPT may elect to make a payment in lieu of notice. Remuneration Package Component Base pay STIC5 LTI Mark Fookes $820,000 $0 to $820,000 $0 to $820,000 Anastasia Clarke $800,000 $0 to $800,000 $0 to $800,000 Termination by Company for cause No notice requirement or termination benefits (other than accrued entitlements). Termination by Company (other) 3 months’ notice. Severance payments may be made subject to GPT policy and capped at the three year average of the executive’s annual base (fixed) pay. Treatment of unvested STIC and LTI will be at the Board’s discretion under the terms of the relevant plans and GPT policy. Post-employment restraints 12 months non-solicitation of GPT employees. 3. Compensation mix at maximum STIC and LTI outcomes Executive KMP Bob Johnston Position Chief Executive Officer and Managing Director Anastasia Clarke Chief Financial Officer Mark Fookes Chief Operating Officer Base pay 26.7% 33.4% 33.4% STI 33.3% 33.3% 33.3% LTI 40.0% 33.3% 33.3% Fixed remuneration Variable or “at risk” remuneration6 5 The STIC is paid in an equal mix of cash and deferred GPT securities, with the securities component vesting 1 year after the conclusion of the performance year. 6 The percentage of each component of total remuneration is calculated with reference to maximum or stretch potential outcomes as set out under Remuneration Package in Tables 1 and 2 above. 16 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 2018Group Financial Performance and Incentive Outcomes 1. Five year Group financial performance Total Securityholder Return (TSR) (%) Total Return (%) NTA (per security) ($) FFO (per security) (cents) Security price at end of calendar year ($) 2018 7.0 15.8 5.58 31.8 5.34 2017 6.6 15.2 5.04 30.8 5.11 2016 10.1 15.5 4.59 29.9 5.03 2015 15.4 11.5 4.17 28.3 4.78 2014 34.5 9.6 3.94 26.8 4.35 2. Summary of CEO objectives and performance outcomes Performance measure Reason chosen Weighting Performance outcomes Financial FFO growth per security targets. Strategy Performance Strategy objectives focused on exploring growth opportunities for GPT group, as well as development and implementation of strategic plans for each division. Operational objectives focused on driving performance of the investment portfolio, key milestones in the development pipeline, and other projects. FFO growth per security is a key financial measure of GPT’s performance. Developing, communicating and implementing GPT’s strategy will underpin GPT’s medium term activities. Focus on delivery of investment and fund performance, conversion of the development pipeline and operational efficiency to optimise GPT’s performance. 70% 10% 15% People People objectives centred on increasing employee engagement, driving GPT’s diversity and inclusion agenda, and operational excellence. Maintaining a high performing executive team and achieving engagement and diversity goals is key to GPT’s performance. 5% The Group delivered FFO growth per security of 3.5% in 2018. This was in excess of the Group’s target of 3% growth but below the stretch objective set by the Board. Management continued to execute on strategies approved by the Board. This included securing new acquisitions in the Office and Logistics sector and advancing plans for development opportunities at Melbourne Central. Management did not achieve a successful outcome of the sale of Wollongong Central and progress on unlocking opportunities at Sydney Olympic Park and Camellia was behind target. GPT’s Total Shareholder Return was 7.03% versus 3.95% for the ASX AREIT 200 Accumulation Index. Occupancy remains high across the Group’s portfolio and like for like Net Operating Income (NOI) growth of 3.8% was achieved, however the like for like NOI growth for the retail portfolio was below target. Office lease expiries in 2020 and 2021 continued to be a focus for management however stretch target objectives were not achieved. Established the Operational Excellence PCG and delivered business efficiencies through the use of technology, streamlined decision making, and enhanced asset management support to the funds management platform. Pre-commitment for the 32 Smith Street development was achieved and Development Approval conditions satisfied allowing the commencement of the project, with the development on plan to deliver targeted returns. Progress was made on the Sunshine Plaza development but final completion has been delayed to the end of Q1 2019. Achieved Workplace Gender Equality Agency (WGEA) Employer of Choice for Gender Equality citation in February 2018 recognising GPT’s performance as among the best employers. Increased the percentage of females in the top 50% of the business (measured by remuneration) from 42.24% at the end of 2017 to 45.65%. Launched GPT’s second Reconciliation Action Plan (RAP), maintained participation of First Nations employees in the permanent workforce at 1%, and signed a 10 year agreement with Career Trackers to expand its internship program. Increased GPT’s score in the Australian Workplace Equality Index (AWEI) survey from 42 to 79, 16 points higher than the property sector average. 17 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 20183. STIC Framework The CEO objectives are cascaded (in full or in part) to KMP and all STIC participants where applicable. Performance measures and weightings may vary according to areas of responsibility for each STIC participant. Group and segment financial KPI’s and performance KPI’s in relation to occupancy, leasing, progress on developments, investment performance and operational efficiency are included. Performance objectives are then measured to determine performance outcomes and generate STIC recommendations. The 2018 STIC outcomes for the KMP are in Table 4 below, while STIC determination for the balance of the eligible employees7 is to occur in March 2019, which is post the issue of the 2018 Remuneration Report. For the Group, FFO growth per security performance hurdles are set for the year. For 2017, the Group delivered an FFO growth per security outcome of 3.0 per cent and generated a maximum amount of $13.8 million for the STIC pool, representing 64 per cent of the aggregate of STIC participants' maximum STIC potential, of which $13.4 million was ultimately distributed to employees based on the performance of the individual and their business unit/team against Group and individual KPI’s. The following table shows the distribution of the 2017 STIC outcomes as a percentage of the individuals maximum STIC opportunity. 2017 STIC Received as a % of Maximum STIC potential Percentage of STIC participants 0-50% 3.79% 50-60% 11.36% 60-70% 71.97% 70-80% 80-90% 90-100% 8.33% 4.55% 0.0% 4. 2018 STIC outcomes by Executive KMP8 Executive KMP Position Bob Johnston Chief Executive Officer and Managing Director Anastasia Clarke Chief Financial Officer Mark Fookes Chief Operating Officer Actual STIC awarded $1,227,000 $575,000 $575,000 Actual STIC awarded as a % of maximum STIC % of maximum STIC award forfeited Cash component Equity component (# of GPT securities)9 67.23% 32.77% $613,500 117,788 71.88% 70.12% 28.12% 29.88% $287,500 $287,500 55,198 55,198 5. Group performance measures for LTI Plans currently relevant LTI performance measurement period LTI 2016 2016–18 Performance measure Performance measure hurdle Weighting Results Relative TSR versus ASX200 AREIT Accumulation Index (including GPT) (the Index) 10% of rights vest at Index performance, up to 100% at Index plus 10% (pro rata vesting in between) 50% GPT’s TSR performance exceeded the Index by 6.16% Vesting % by performance measure Overall Plan Vesting Outcome (%) 65.41% 82.71% 2017 2017–19 2018 2018–20 Total Return Relative TSR versus ASX200 AREIT Accumulation Index (including GPT) Total Return Relative TSR versus ASX200 AREIT Accumulation Index (including GPT) Total Return 0% of rights vest at 8% Total Return, up to 100% at 9.5% Total Return (pro- rata vesting in between) 10% of rights vest at Index performance, up to 100% at Index plus 10% (pro rata vesting in between) 0% of rights vest at 8.5% Total Return, up to 100% at 10.0% Total Return (pro-rata vesting in between) 10% of rights vest at Index performance, up to 100% at Index plus 10% (pro rata vesting in between) 10% of rights vest at 8.5% Total Return, up to 100% at 10.0% Total Return (pro-rata vesting in between) 50% 15.50% 100.00% 50% N/A N/A 50% N/A N/A N/A 50% N/A N/A 50% N/A N/A N/A i.e. excluding the KMP. 7 8 Excluding the impact of movements in the GPT security price on deferred STIC value received. 9 The number of deferred GPT securities granted are calculated by dividing 50% of the Actual STIC awarded by GPT’s Q4 2017 Volume Weighted Average Security Price (VWAP) of $5.2085. The deferred GPT securities will vest subject to service on 31 December 2019. 18 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 20186. 2016-2018 LTI outcomes by Executive KMP Senior Executive Position Performance rights granted Performance rights vested Performance rights lapsed Bob Johnston Chief Executive Officer and Managing Director Anastasia Clarke Chief Financial Officer Mark Fookes Chief Operating Officer 450,257 139,365 171,527 372,385 115,262 141,862 77,872 24,103 29,665 7. LTI outcomes – fair value and maximum value recognised in future years10 Executive KMP Year Grant date Bob Johnston Chief Executive Officer and Managing Director 2018 10 May 2018 2017 22 May 2017 Anastasia Clarke 2018 29 March 2018 Chief Financial Officer 2017 21 February 2017 Mark Fookes 2018 29 March 2018 Chief Operating Officer 2017 21 February 2017 Fair value per performance right Performance rights granted as at 31 Dec 18 Maximum value to be recognised in future years Vesting date $2.62 $2.66 $2.62 $2.66 $2.62 $2.66 420,467 452,206 153,595 157,563 157,435 172,269 31 Dec 20 31 Dec 19 31 Dec 20 31 Dec 19 31 Dec 20 31 Dec 19 $1,222,712 $955,709 $438,169 $293,563 $459,154 $320,962 8. Reported remuneration – Executive KMP – Actual Amounts Received11 Fixed pay Variable or “at risk”12 Executive KMP Bob Johnston Chief Executive Officer and Managing Director Anastasia Clarke Chief Financial Officer Mark Fookes Chief Operating Officer Total Year 2018 2017 2018 2017 2018 2017 2018 2017 Base pay Superannuation $1,439,710 $1,415,168 $779,710 $730,168 $799,710 $800,168 $3,019,130 $2,945,504 $20,290 $19,832 $20,290 $19,832 $20,290 $19,832 $60,870 $59,496 Other13 $8,354 $3,299 $5,275 $2,480 $10,585 $4,326 $24,214 $10,105 STIC LTI Total $1,237,259 $1,972,002 $4,677,615 $1,195,801 $1,867,471 $4,501,571 $579,807 $523,556 $579,807 $565,442 $610,381 $1,995,463 $455,426 $1,731,462 $751,244 $2,161,636 $844,845 $2,234,613 $2,396,873 $3,333,627 $8,834,714 $2,284,799 $3,167,742 $8,467,646 9. Reported remuneration – Executive KMP – AIFRS Accounting14 Fixed pay Variable or “at risk” Executive KMP Bob Johnston Chief Executive Officer and Managing Director Anastasia Clarke Chief Financial Officer Mark Fookes Chief Operating Officer Total Year 2018 2017 2018 2017 2018 2017 2018 2017 Base pay Superannuation $1,520,636 $1,376,680 $794,923 $775,348 $825,109 $840,325 $3,140,668 $2,992,353 $20,290 $19,832 $20,290 $19,832 $20,290 $19,832 $60,870 $59,496 Other $8,354 $3,299 $5,275 $2,480 $10,585 $4,326 $24,214 $10,105 STIC (cash plus accrual) LTI award accrual15 Total $1,210,570 $1,168,869 $3,928,719 $1,219,543 $1,166,796 $3,786,150 $548,232 $569,961 $559,068 $669,971 $414,417 $1,783,137 $382,324 $1,749,945 $467,160 $1,882,212 $515,208 $2,049,662 $2,317,870 $2,050,446 $7,594,068 $2,459,475 $2,064,328 $7,585,757 10 For the avoidance of doubt, the GPT incentive plans (i.e. STIC and LTI) use face value grants of performance rights based on the VWAP of GPT securities for specified periods; reference to fair value per performance right is included in this table to comply with accounting standards. 11 This table discloses the cash and other benefit amounts actually received by GPT’s executive KMP, as distinct from the accounting expense. As a result, it does not align to Australian Accounting Standards. 12 Gross dollar values for the equity components have been calculated by multiplying the number of securities by GPT’s fourth quarter VWAP for the applicable year; 2018: $5.2956 (2017: $5.2085). 13 Other may include death and total/permanent disability insurance premiums, service awards, GPT superannuation plan administration fees, professional memberships, subscriptions and/or other benefits. 14 This table provides a breakdown of remuneration for executive KMP in accordance with statutory requirements and Australian accounting standards. 15 This column records the amount of the fair value of performance rights under the various LTI plans expensed in the relevant financial years, and does not represent actual LTI awards made to executives or the face value grant method. 19 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 201810. GPT security ownership – Executive KMP as at 31 December 2018 Executive KMP Bob Johnston Chief Executive Officer and Managing Director Anastasia Clarke Chief Financial Officer Mark Fookes Chief Operating Officer GPT Holdings (start of period)16 Employee Security Schemes (ESS) 2018 DSTIC 2016–18 LTI TOTAL ESS for 2018 Purchase /(Sales) during period17 GPT Holdings (end of period)18 Gross Value of GPT Holdings19 MSHR Guideline20 821,765 117,788 372,385 490,173 – 1,311,938 $6,947,499 $2,190,000 462,585 55,198 115,262 170,460 (223,839) 409,206 $2,166,991 $800,000 1,118,268 55,198 141,862 197,060 (156,013) 1,159,315 $6,139,269 $820,000 11. GPT performance rights – Executive KMP Executive KMP Bob Johnston Chief Executive Officer and Managing Director Anastasia Clarke Chief Financial Officer Mark Fookes Chief Operating Officer Performance rights that lapsed in 201821 (# of rights) Performance rights still on foot at 31/12/1822 (# of rights) Performance rights 135,278 45,702 53,184 872,673 311,158 329,704 16 GPT Holdings (start of period) include GPT securities obtained as sign on grants (Mr Johnston only), DSTIC up to and including 2017, LTI plans up to and including the 2015-17 LTI plan, and private holdings. 17 Movement in GPT security holdings as a result of the sale of vested, unrestricted security holdings and/or the sale or purchase of additional private holdings on the individuals own account during the 2018 calendar year. 18 GPT Holdings (end of period) is the sum of GPT Holdings (start of the period) plus DSTIC and LTI securities obtained under ESS and adjusted for any purchases or sales during the period. Note that some of the securities do not become actual holdings for the individual until after the conclusion of the performance year when Group results are known which allow the conversion of performance rights under the various plan terms. 19 The GPT Holdings (end of period) multiplied by GPT’s fourth quarter 2018 VWAP of $5.2956 to derive a dollar value. 20 GPT’s Minimum Security Holding Requirement (MSHR) guideline requires the CEO to acquire and maintain a holding equal to 150% of base salary. For other KMP and Leadership Team members the holding requirement is equal to 100% of base salary. Individuals have four years from commencement of employment to achieve the MSHR before it is assessed for the first time. 21 The sum of performance rights that were awarded to a participant in the 2016-2018 LTI that did not vest at the end of the 2016-2018 performance period, and as a result, lapsed and/or performance rights granted under the 2018 DSTIC that also lapsed. 22 The total of unvested performance rights currently on foot excluding any GPT securities or performance rights that may have lapsed up to 31 December 2018. This represents the current maximum number of additional GPT securities to which the individual may become entitled subject to satisfying the applicable performance measures in the 2017-19 and 2018-20 LTI plans on foot; as such, these performance rights represent the incentive opportunity over multiple future years, are subject to performance and hence “at risk”, and as a result may never vest. 20 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 2018Remuneration – Non-Executive Directors What are the key elements of the Non- Executive Director Remuneration Policy? • The Board determines the remuneration structure for Non-Executive Directors based on recommendations from the Committee. • Non-Executive Directors are paid one fee for participation as a Director in all GPT related companies (principally GPT RE Limited, the Responsible Entity of General Property Trust and GPT Management Holdings Limited). • Non-Executive Director remuneration is composed of three main elements: – Main Board fees; – Committee fees; and – Superannuation contributions at the statutory superannuation guarantee contribution rate. • Non-Executive Directors do not participate in any short or long term incentive arrangements and are not entitled to any retirement benefits other than compulsory superannuation. • Non-Executive Director remuneration is set by reference to comparable entities listed on the ASX (having regard to GPT’s industry sector and market capitalisation). • External independent advice on remuneration levels for Non-Executive Directors is sought annually. In the event that a review results in changes, the new Board and Committee fees are effective from the 1st of January in the applicable year and advised in the ensuing Remuneration Report. • Fees (including superannuation) paid to Non-Executive Directors are subject to an aggregate limit of $1,800,000 per annum, which was approved by GPT securityholders at the Annual General Meeting on 5 May 2015. As an executive director, Mr Johnston does not receive fees from this pool as he is remunerated as one of GPT’s senior executives. 1. Board and committee fees23,24 Board Base Fee Audit Committee Sustainability and Risk Committee Nomination and Remuneration Committee Chairman Members Year 2018 2017 2018 2017 $400,000 $380,000 $152,000 $148,000 $37,000 $36,000 $18,500 $18,000 $31,000 $30,000 $15,500 $15,000 2. Reported remuneration – Non-Executive Directors – AIFRS accounting25,26 Non-Executive Director – Current Vickki McFadden28 Chairman Eileen Doyle Swe Guan Lim Angus McNaughton29 Michelle Somerville Gene Tilbrook Non-Executive Director – Former Rob Ferguson30 Brendan Crotty31 Total Year 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Salary and fees Superannuation Other27 Fixed pay $289,851 – $214,596 $203,500 $186,000 $181,000 $27,917 – $204,500 $192,750 $183,000 $178,000 $137,949 $380,000 $159,292 $181,000 $1,403,105 $1,316,250 $16,481 – $20,094 $19,333 $17,670 $17,195 $2,652 – $19,428 $18,311 $17,385 $16,910 $8,617 $19,832 $15,133 $17,195 $117,460 $108,776 – – – – $908 $287 – – – – $1,103 $380 – – – – $2,011 $667 $31,000 $30,000 $15,500 $15,000 Total $306,332 – $234,690 $222,833 $204,578 $198,482 $30,569 – $223,928 $211,061 $201,488 $195,290 $146,566 $399,832 $174,425 $198,195 $1,522,576 $1,425,693 23 ‘Chairman’ used in this sense may refer to the chairperson of the board or a particular committee. 24 In addition to the fees noted in the table, all non-executive directors receive reimbursement for reasonable travel, accommodation and other expenses incurred while undertaking GPT business. 25 This table provides a breakdown of remuneration for Non-Executive Directors in accordance with statutory requirements and Australian accounting standards. 26 No termination benefits were paid during the financial year. 27 Other may include death and total/permanent disability insurance premiums and/or GPT superannuation plan administration fees. 28 Ms McFadden joined GPT on 1 March 2018, and was appointed Chairman of GPT from 3 May 2018. 29 Mr McNaughton joined GPT on 1 November 2018. 30 Mr Ferguson retired from the GPT Board on 2 May 2018. 31 Mr Crotty retired from the GPT Board on 8 November 2018. 21 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 2018 3. Non-Executive Director – GPT security holdings Non-Executive Director Balance 31/12/17 Purchase/(Sale) Balance 31/12/18 Private holdings (# of securities) Minimum security holding requirement (MSHR) MSHR guideline33 Gross value32 Vickki McFadden Eileen Doyle Swe Guan Lim Angus McNaughton Michelle Somerville Gene Tilbrook – 45,462 15,800 – 16,157 48,546 50,000 – 23,200 – 20,506 – 50,000 45,462 39,000 – 36,663 48,546 $264,780 $240,749 $206,528 – $194,153 $257,080 $400,000 $152,000 $152,000 $152,000 $152,000 $152,000 32 Non-Executive Directors holdings multiplied by GPT’s fourth quarter 2018 VWAP of $5.2956 to derive a dollar value. 33 The MSHR for Non-Executive Directors is equal to 100% of base fees. Individuals have four years from commencement of employment to achieve the MSHR before it is assessed for the first time. The Directors’ Report, including the Remuneration Report, is signed in accordance with a resolution of the Directors of the GPT Group. Vickki McFadden Chairman Sydney 11 February 2019 Bob Johnston Chief Executive Officer and Managing Director 22 Annual Financial Report of The GPT GroupDirectors’ Report – Year ended 31 December 2018Auditor’s Independence Declaration As lead auditor for the audit of General Property Trust for the year ended 31 December 2018, I declare that to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of General Property Trust and the entities it controlled during the period. Susan Horlin Partner PricewaterhouseCoopers Sydney 11 February 2019 PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 23 23 Annual Financial Report of The GPT Group Annual Financial Report of The GPT Group Financial Statements Consolidated Statement of Comprehensive Income Year ended 31 December 2018 Note 31 Dec 18 $M 31 Dec 171 $M Revenue Rent from investment properties Property and fund management fees Development revenue Development management fees Other income Fair value gain on investment properties Share of after tax profit of equity accounted investments Interest revenue Derecognition of available for sale financial asset Net gain on disposal of assets Gain on financial liability at amortised cost Net foreign exchange gain Total revenue and other income Expenses Property expenses and outgoings Management and other administration costs Development costs Depreciation expense Amortisation expense Impairment expense Finance costs Net loss on fair value movements of derivatives Net impact of foreign currency borrowings and associated hedging loss Total expenses Profit before income tax expense Income tax expense Profit after income tax expense Profit from discontinued operations Net profit for the year Other comprehensive income Items that may be reclassified to profit or loss, net of tax Movement in hedging reserve Movement in fair value of cash flow hedges Revaluation of available for sale financial asset Movement in net foreign exchange translation reserve Total other comprehensive income Total comprehensive income for the year Total comprehensive income for the year from continuing operations Total comprehensive income for the year from discontinued operations Net profit attributable to: - Securityholders of the Trust - Securityholders of other entities stapled to the Trust Total comprehensive income attributable to: - Securityholders of the Trust - Securityholders of other entities stapled to the Trust Basic earnings per unit attributable to ordinary securityholders of the Trust Earnings per unit (cents per unit) – profit from continuing operations Earnings per unit (cents per unit) – profit from discontinued operations Earnings per unit (cents per unit) – Total Basic earnings per stapled security attributable to ordinary stapled securityholders of the GPT Group Earnings per stapled security (cents per stapled security) – profit from continuing operations Earnings per security (cents per security) – profit from discontinued operations Earnings per security (cents per security) – Total 634.1 79.2 34.4 4.8 752.5 637.2 497.8 1.4 – 1.3 2.4 0.1 1,140.2 1,892.7 163.2 71.5 27.4 2.0 5.2 11.3 125.8 40.0 1.5 447.9 610.6 70.2 15.0 10.8 706.6 481.0 442.8 1.3 10.7 – 2.2 – 938.0 1,644.6 158.3 71.7 14.4 1.7 6.0 5.4 103.7 5.7 0.2 367.1 1,444.8 1,277.5 9.5 1,435.3 16.4 1,451.7 10.9 (3.8) – (16.8) (9.7) 1,442.0 1,442.4 (0.4) 10.3 1,267.2 0.8 1,268.0 (2.5) (6.9) (7.1) – (16.5) 1,251.5 1,250.7 0.8 1,417.7 34.0 1,248.2 19.8 1,424.8 17.2 1,238.8 12.7 77.7 0.9 78.6 79.5 0.9 80.4 69.3 – 69.3 70.4 – 70.4 9(a) 10(b) 10(b) 10(b) 10(b) 11(a) 11(a) 11(a) 11(b) 11(b) 11(b) 1 The 31 December 2017 Consolidated Statement of Comprehensive Income has been restated as a result of the adoption of new accounting standards. Refer to note 24(a). The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 24       Consolidated Statement of Financial Position As at 31 December 2018 ASSETS Current assets Cash and cash equivalents Trade receivables Other receivables Inventories Derivative assets Prepayments Other assets Current tax assets Total current assets Non-current assets Investment properties Equity accounted investments Intangible assets Inventories Property, plant and equipment Derivative assets Deferred tax assets Other assets Total non-current assets Total assets LIABILITIES Current liabilities Payables Current tax liabilities Borrowings Derivative liabilities Provisions Total current liabilities Non-current liabilities Borrowings Derivative liabilities Provisions Total non-current liabilities Total liabilities Net assets EQUITY Securityholders of the Trust (parent entity) Contributed equity Reserves Retained earnings Total equity of the Trust securityholders Securityholders of other entities stapled to the Trust Contributed equity Reserves Accumulated losses Total equity of other stapled securityholders Total equity Note 4(a) 4(b) 6 14(b) 9(b) 2 3 5 6 14(b) 9(c) 7 9(b) 13 14(b) 8 13 14(b) 8 10(a) 10(b) 10(c) 10(a) 10(b) 10(c) 31 Dec 18 $M 31 Dec 171 $M 58.7 51.4 52.5 31.0 1.5 12.8 22.8 0.8 231.5 10,128.8 3,905.9 26.8 113.3 12.7 338.9 20.1 – 14,546.5 14,778.0 411.0 – 516.0 4.0 26.2 957.2 3,598.9 120.2 1.1 3,720.2 4,677.4 10,100.6 7,825.7 (33.5) 2,790.0 10,582.2 325.9 37.9 (845.4) (481.6) 10,100.6 49.9 48.4 47.5 11.8 3.4 7.0 23.0 – 191.0 8,745.7 3,561.8 30.9 140.4 9.9 257.7 16.9 3.0 12,766.3 12,957.3 384.7 8.6 19.9 9.1 28.1 450.4 3,280.7 118.0 2.3 3,401.0 3,851.4 9,105.9 7,814.8 (40.6) 1,828.4 9,602.6 325.7 57.0 (879.4) (496.7) 9,105.9 1 The 31 December 2017 Consolidated Statement of Financial Position has been restated as a result of the adoption of new accounting standards. Refer to note 24(a). The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. 25 Annual Financial Report of The GPT Group 2 6 Equity attributable to Securityholders At 1 January 2017 Revaluation of available for sale financial asset net of tax Movement in hedging reserve Movement in fair value of cash flow hedges Other comprehensive income for the year Profit for the year Total comprehensive income for the year Note 10(b) 10(b) 10(b) Transactions with Securityholders in their capacity as Securityholders Issue of stapled securities Movement in employee incentive scheme reserve net of tax Reclassification of employee incentive security scheme reserve to retained earnings/accumulated losses Distributions paid and payable At 31 December 20171 Equity attributable to Securityholders At 1 January 20181 Movement in foreign exchange translation reserve Movement in hedging reserve Movement in fair value of cash flow hedges Other comprehensive income for the year Profit for the year Total comprehensive income for the year 10(a) 10(b) 10(c) 12 10(b) 10(b) 10(b) Transactions with Securityholders in their capacity as Securityholders Issue of stapled securities Movement in employee incentive scheme reserve net of tax Reclassification of employee incentive security scheme reserve to retained earnings/accumulated losses Distributions paid and payable At 31 December 2018 10(a) 10(b) 10(c) 12 General Property Trust Other entities stapled to the General Property Trust Contributed equity $M Reserves $M Retained earnings $M Contributed equity $M Total $M Reserves $M Accumulated losses $M Total $M Total equity $M 7,804.3 (31.2) 1,022.8 8,795.9 325.5 – – – – – – 10.5 – – – – (2.5) (6.9) (9.4) – (9.4) – – – – – – – – – (2.5) (6.9) (9.4) 1,248.2 1,248.2 1,248.2 1,238.8 – – 10.5 – 0.6 0.6 (443.2) (443.2) – – – – – – 0.2 – – – 59.5 (7.1) – – (7.1) – (7.1) – 4.6 – – (898.7) (513.7) 8,282.2 – – – – 19.8 19.8 – – (0.5) – (7.1) – – (7.1) 19.8 12.7 0.2 4.6 (0.5) – (7.1) (2.5) (6.9) (16.5) 1,268.0 1,251.5 10.7 4.6 0.1 (443.2) 9,105.9 7,814.8 (40.6) 1,828.4 9,602.6 325.7 57.0 (879.4) (496.7) 7,814.8 (40.6) 1,828.4 9,602.6 325.7 – – – – – – 10.9 – – – – 10.9 (3.8) 7.1 – 7.1 – – – – – – – – – 10.9 (3.8) 7.1 1,417.7 1,417.7 1,417.7 1,424.8 – – 10.9 – 3.4 3.4 (459.5) (459.5) – – – – – – 0.2 – – – 57.0 (16.8) – – (16.8) – (16.8) – (2.3) – – (879.4) (496.7) 9,105.9 – – – – 34.0 34.0 – – – – (16.8) (16.8) – – (16.8) 34.0 17.2 10.9 (3.8) (9.7) 1,451.7 1,442.0 0.2 (2.3) 11.1 (2.3) – – 3.4 (459.5) 7,825.7 (33.5) 2,790.0 10,582.2 325.9 37.9 (845.4) (481.6) 10,100.6 1 The 31 December 2017 Consolidated Statement of Changes in Equity have been restated as a result of the adoption of new accounting standards. Refer to note 24(a). The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. Y e a r e n d e d 3 1 D e c e m b e r 2 0 1 8 C o n s o l i d a t e d S t a t e m e n t o f C h a n g e s i n E q u i t y Annual Financial Report of The GPT Group Consolidated Statement of Cash Flows Year ended 31 December 2018 Cash flows from operating activities Receipts in the course of operations (inclusive of GST) Payments in the course of operations (inclusive of GST) Proceeds from sale of inventories Payments for inventories Distributions received from equity accounted investments Dividend received from available for sale investment Interest received Income taxes paid Finance costs paid Net cash inflows from operating activities 15(a) Cash flows from investing activities Payments for acquisition of investment properties Payments for operating capital expenditure on investment properties Payments for development capital expenditure on investment properties Proceeds from disposal of assets Payments for property, plant and equipment Payments for intangibles Investment in equity accounted investments Capital return from available for sale asset Capital return from joint venture Net cash outflows from investing activities Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Payment for termination of derivatives Distributions paid to securityholders Net cash outflows from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. Note 31 Dec 18 $M 31 Dec 17 $M 809.4 (286.8) 28.9 (21.4) 161.3 – 1.4 (20.9) (137.9) 534.0 (419.5) (81.8) (270.5) 13.3 (2.9) (3.4) 733.8 (267.3) 7.6 (25.1) 171.7 30.4 1.3 (6.9) (110.0) 535.5 (33.0) (84.1) (205.3) 5.5 (1.1) (4.8) (10.8) (158.3) – 1.9 10.7 – (773.7) (470.4) 2,862.1 1,434.1 (2,164.4) (1,066.9) – (449.2) 248.5 8.8 49.9 58.7 (3.1) (435.6) (71.5) (6.4) 56.3 49.9 27 Annual Financial Report of The GPT Group Notes to the Financial Statements Year ended 31 December 2018 These are the consolidated financial statements of the consolidated entity, GPT Group (GPT), which consists of General Property Trust (the Trust), GPT Management Holdings Limited (the Company) and their controlled entities. The notes to these financial statements have been organised into sections to help users find and understand the information they need to know. Additional information has also been provided where it is helpful to understand GPT’s performance. The notes to the financial statements are organised into the following sections: Note 1 – Result for the year: focuses on results and performance of GPT. Notes 2 to 9 – Operating assets and liabilities: provides information on the assets and liabilities used to generate GPT’s trading performance. Notes 10 to 14 – Capital structure: outlines how GPT manages its capital structure and various financial risks. Notes 15 to 25 – Other disclosure items: provides information on other items that must be disclosed to comply with Australian Accounting Standards and other regulatory pronouncements. Key judgements, estimates and assumptions In applying GPT’s accounting policies, management has made a number of judgements, estimates and assumptions regarding future events. The following judgements and estimates have the potential to have a material impact on the financial statements: Area of judgements and estimates Assumptions underlying Note Result for the year 1. Segment information GPT’s operating segments are described in the following table. The chief operating decision makers monitor the performance of the business on the basis of Funds from Operations (FFO) for each segment. FFO represents GPT’s underlying and recurring earnings from its operations, and is determined by adjusting the statutory net profit after tax for items which are non-cash, unrealised or capital in nature. FFO has been determined in accordance with guidelines issued by the Property Council of Australia. Segment Retail Office Types of products and services which generate the segment result Ownership, development (including mixed use) and management of predominantly regional and sub-regional shopping centres as well as GPT’s equity investment in GPT Wholesale Shopping Centre Fund. Ownership, development (including mixed use) and management of prime CBD office properties with some associated retail space as well as GPT’s equity investment in GPT Wholesale Office Fund. Logistics Ownership, development (including mixed use) and management of logistics assets. Funds Management Management of two Australian wholesale property funds in the retail and office sectors. Corporate Cash and other assets and borrowings and associated hedges plus resulting net finance costs, management operating costs and income tax expense. Management rights with indefinite life Impairment trigger and recoverable amounts IT development and software Inventories Impairment trigger and recoverable amounts Lower of cost and net realisable value Deferred tax assets Recoverability Security based payments Fair value 5 5 6 9 18 22 22 Fair value Fair value Assessment of control versus disclosure guidance 23(b) Investment properties Derivatives Investment in equity accounted investments 28 Annual Financial Report of The GPT Group(a) Segment financial information 31 December 2018 The segment financial information provided to the chief operating decision maker for the year ended 31 December 2018 is set out below: Logistics $M Funds Management $M Corporate $M Financial performance by segment Rent from investment properties Property expenses and outgoings Income from Funds Fee income Note b(ii) b(iii) b(iv) Management & administrative expenses b(v) Operations Net Income Development management fees Development revenue Development costs Development management expenses Development Net Income b(vi) b(vii) b(v) Interest income Finance costs Net Finance Costs Retail $M 370.5 (103.0) 46.3 15.0 (10.2) 318.6 2.6 6.6 – (1.6) 7.6 – – – Office $M 253.3 (53.1) 69.8 5.8 (8.1) 267.7 1.7 – – (0.7) 1.0 – – – 127.4 (21.0) – 0.2 (1.8) 104.8 0.5 38.5 (33.1) (0.8) 5.1 – – – Segment Result Before Tax 326.2 268.7 109.9 Income tax expense Funds from Operations (FFO) b(viii) b(i) – – – 326.2 268.7 109.9 – – – 58.2 (15.6) 42.6 – – – – – – – – 42.6 – 42.6 – – – – (34.2) (34.2) – – – – – 1.4 (125.8) (124.4) (158.6) (14.2) (172.8) Total $M 751.2 (177.1) 116.1 79.2 (69.9) 699.5 4.8 45.1 (33.1) (3.1) 13.7 1.4 (125.8) (124.4) 588.8 (14.2) 574.6 Reconciliation of segment assets and liabilities to the Consolidated Statement of Financial Position Current Assets Current assets Total Current Assets Non-Current Assets Investment properties Equity accounted investments Inventories Other non-current assets Total Non-Current Assets Total Assets Current and non-current liabilities Total Liabilities Net Assets 16.9 16.9 5,154.9 1,055.1 62.1 10.2 6,282.3 6,299.2 – – – – 14.1 14.1 3,080.5 2,840.8 – 0.6 1,893.4 – 51.2 0.1 5,921.9 1,944.7 5,921.9 1,958.8 – – – – 6,299.2 5,921.9 1,958.8 – – – – – – – – – – – 200.5 200.5 231.5 231.5 – 10,128.8 10.0 3,905.9 – 387.6 113.3 398.5 397.6 14,546.5 598.1 14,778.0 4,677.4 4,677.4 4,677.4 4,677.4 (4,079.3) 10,100.6 29 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 31 December 2017 The segment financial information provided to the chief operating decision maker for the year ended 31 December 2017 is set out below: Financial performance by segment Rent from investment properties Property expenses and outgoings Income from Funds Fee income Note b(ii) b(iii) b(iv) Management & administrative expenses b(v) Retail $M 360.1 (98.8) 46.5 15.0 (9.7) Office $M 239.2 (57.6) 68.8 4.4 (7.0) Operations Net Income 313.1 247.8 Development fees Development revenue Development costs Development management expenses Development Net Income b(vi) b(vii) b(v) Interest income Finance costs Net Finance Costs 9.0 10.8 (5.2) (9.3) 5.3 – – – 1.6 – – (0.5) 1.1 – – – Segment Result Before Tax Income tax expense Funds from Operations (FFO) b(viii) b(i) 318.4 248.9 – – 318.4 248.9 Logistics $M 112.5 (17.4) – 0.1 (1.9) 93.3 0.2 10.4 (9.2) (0.7) 0.7 – – – 94.0 – 94.0 Funds Management $M Corporate $M – – – 50.7 (13.7) 37.0 – – – – – – – – 37.0 – 37.0 – – – – (30.6) (30.6) – – – – – 1.3 (103.7) (102.4) (133.0) (11.1) (144.1) Total $M 711.8 (173.8) 115.3 70.2 (62.9) 660.6 10.8 21.2 (14.4) (10.5) 7.1 1.3 (103.7) (102.4) 565.3 (11.1) 554.2 Reconciliation of segment assets and liabilities to the Consolidated Statement of Financial Position Current Assets Current assets Total Current Assets Non-Current Assets Investment properties Equity accounted investments1 Inventories Other non-current assets Total Non-Current Assets Total Assets Current and non-current liabilities Total Liabilities Net Assets – – – – 11.8 11.8 4,818.7 1,047.1 62.4 10.2 5,938.4 5,938.4 – – 2,379.4 2,504.7 – 0.3 1,547.6 – 78.0 1.9 4,884.4 1,627.5 4,884.4 1,639.3 – – – – 5,938.4 4,884.4 1,639.3 – – – – – – – – – – – 179.2 179.2 191.0 191.0 – 8,745.7 10.0 3,561.8 – 306.0 140.4 318.4 316.0 12,766.3 495.2 12,957.3 3,851.4 3,851.4 3,851.4 3,851.4 (3,356.2) 9,105.9 1 The 31 December 2017 equity accounted investments balance has been restated as a result of the adoption of new accounting standards. Refer to note 24(a). 30 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 (b) Reconciliation of segment result to the Consolidated Statement of Comprehensive Income 31 Dec 18 $M 31 Dec 171 $M (i) FFO to Net profit for the year Segment result FFO Adjustments Fair value gain on investment properties Fair value gain and other adjustments to equity accounted investments Amortisation of lease incentives and costs Straightlining of rental income Valuation increase Net loss on fair value movement of derivatives Net impact of foreign currency borrowings and associated hedging loss Net foreign exchange (loss)/gain Gain on financial liability at amortised cost Financial instruments mark to market and net foreign exchange loss Net gain on disposal of assets Impairment expense Other items Total other items Consolidated Statement of Comprehensive Income Net profit for the year (ii) Rent from investment properties Segment result Rent from investment properties Less: share of rent from investment properties in equity accounted investments Adjustments Amortisation of lease incentives and costs Straightlining of rental income Consolidated Statement of Comprehensive Income Rent from investment properties (iii) Property expenses and outgoings Segment result Property expenses and outgoings Less: share of property expenses and outgoings in equity accounted investments Consolidated Statement of Comprehensive Income Property expenses and outgoings 574.6 637.2 314.1 (46.1) 5.5 910.7 (40.0) (1.5) (0.5) 2.4 (39.6) 18.3 (11.4) (0.9) 6.0 554.2 481.0 263.9 (38.9) 11.7 717.7 (5.7) (0.2) 0.8 2.2 (2.9) 10.7 (5.4) (6.3) (1.0) 1,451.7 1,268.0 751.2 (76.5) (46.1) 5.5 634.1 711.8 (74.0) (38.9) 11.7 610.6 (177.1) 13.9 (173.8) 15.5 (163.2) (158.3) 1 The 31 December 2017 reconciliation of segment result to the statement of comprehensive income has been restated as a result of the adoption of new accounting standards. Refer to note 24(a). 31 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 (iv) Share of after tax profit of equity accounted investments Segment result Income from Funds Share of rent from investment properties in equity accounted investments Share of property expenses and outgoings in equity accounted investments Development revenue – equity accounted investments Development costs – equity accounted investments Development revenue Adjustments Fair value gain and other adjustments to equity accounted investments Transition to AASB 9 Consolidated Statement of Comprehensive Income Share of after tax profit of equity accounted investments (v) Management and administration expenses Segment result Operations Development Less: depreciation expense Adjustment Other Consolidated Statement of Comprehensive Income Management and administration expenses (vi) Development revenue Segment result Development revenue Share of after tax profit of equity accounted investments Consolidated Statement of Comprehensive Income Development revenue (vii) Development costs Segment result Development costs Development costs – equity accounted investments Consolidated Statement of Comprehensive Income Development costs (viii) Income tax expense Segment result Income tax expense Adjustment Tax impact of reconciling items from segment result to net profit for the year Consolidated Statement of Comprehensive Income Income tax expense 31 Dec 18 $M 31 Dec 171 $M 116.1 76.5 (13.9) 10.7 (5.7) – 314.1 – 497.8 (69.9) (3.1) 2.0 (0.5) (71.5) 45.1 (10.7) 34.4 (33.1) 5.7 (27.4) 115.3 74.0 (15.5) – – 6.2 263.9 (1.1) 442.8 (62.9) (10.5) 1.7 – (71.7) 21.2 (6.2) 15.0 (14.4) – (14.4) (14.2) (11.1) 4.7 (9.5) 0.8 (10.3) 1 The 31 December 2017 reconciliation of segment result to the statement of comprehensive income has been restated as a result of the adoption of new accounting standards. Refer to note 24(a). 32 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 (c) Net profit on disposal and derecognition of assets Details of disposals/capital returns during the year: Cash consideration Less: transaction costs Net consideration Carrying amount of net assets sold/derecognised Foreign exchange gain realised on disposal/derecognition Transfer from reserves Profit on sale and derecognition before income tax The carrying amounts of assets and liabilities as at the date of disposal/derecognition were: Investment properties Other assets Net assets Revenue Expenses 31 Dec 18 $M 31 Dec 17 $M 13.4 (0.1) 13.3 (12.0) 17.0 – 18.3 12.0 – 12.0 10.7 – 10.7 (10.7) – 10.7 10.7 – 10.7 10.7 Rental revenue from investment properties is recognised on a straight line basis over the lease term. An asset is also recognised as a component of investment properties relating to fixed increases in operating lease rentals in future periods. When GPT provides lease incentives to tenants, any costs are recognised on a straight line basis over the lease term. Contingent rental income is recognised as revenue in the period in which it is earned. Revenue from dividends and distributions is recognised when they are declared. Interest income is recognised on an accruals basis using the effective interest method. Refer to note 23(e)(iv) for further information relating to revenue policies adopted under AASB 15 Revenue from Contracts with Customers. Property expenses and outgoings which include rates, taxes and other property outgoings, are recognised on an accruals basis. Finance costs Finance costs include interest, amortisation of discounts or premiums relating to borrowings and amortisation of ancillary costs incurred in connection with the arrangement of borrowings. Finance costs are expensed as incurred unless they relate to a qualifying asset. A qualifying asset is an asset under development which generally takes a substantial period of time to bring to its intended use or sale. Finance costs incurred for the acquisition and construction of a qualifying asset are capitalised to the cost of the asset for the period of time that is required to complete the asset. Where funds are borrowed specifically for a development project, finance costs associated with the development facility are capitalised. Where funds are used from group borrowings, finance costs are capitalised using the relevant capitalisation rate taking into account the group’s weighted average cost of debt. 33 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 Operating assets and liabilities 2. Investment properties Retail Office Logistics Properties under development Total investment properties (a) Retail Casuarina Square, NT Charlestown Square, NSW Highpoint Shopping Centre, VIC Homemaker City, Maribyrnong, VIC2 Westfield Penrith, NSW Sunshine Plaza, QLD Plaza Parade, QLD Rouse Hill Town Centre, NSW Melbourne Central, VIC – retail portion3 Total Retail (b) Office Note 31 Dec 18 $M 31 Dec 17 $M (a) (b) (c) (d) (e) 5,154.9 4,818.7 3,018.5 2,306.8 1,773.6 1,498.6 181.8 121.6 10,128.8 8,745.7 Ownership interest1 % Acquisition date Latest independent valuation date Valuer Fair value 31 Dec 18 $M Fair value 31 Dec 17 $M Pacific Highway, Charlestown, NSW 100.0 Oct 2002/Jul 2003 Jun 2018 Knight Frank Valuations 50.0 100.0 Oct 1973 Dec 1977 Dec 2018 Savills Australia Jun 2018 Knight Frank Valuations 16.7 16.7 50.0 Aug 2009 Aug 2009 Jun 1971 Dec 2018 CB Richard Ellis Pty Ltd 435.0 Jun 2018 CB Richard Ellis Pty Ltd Jun 2018 M3 Property **50.0 Dec 1992/Sep 2004 Dec 2018 CB Richard Ellis Pty Ltd 50.0 100.0 Jun 1999 Dec 2005 Dec 2018 CB Richard Ellis Pty Ltd Dec 2018 CB Richard Ellis Pty Ltd 100.0 May 1999/May 2001 Dec 2018 Savills Australia 1,513.0 1,383.2 Australia Square, Sydney, NSW MLC Centre, Sydney, NSW One One One Eagle Street, Brisbane, QLD Melbourne Central, VIC – office portion3 50.0 50.0 33.3 Sep 1981 Apr 1987 Apr 1984 Dec 2018 Colliers International Dec 2018 Jones Lang LaSalle Dec 2018 CB Richard Ellis Pty Ltd 100.0 May 1999/May 2001 Dec 2018 CB Richard Ellis Pty Ltd Corner of Bourke and William, VIC 60 Station Street, Parramatta, NSW4 100.0 4 Murray Rose Avenue, Sydney Olympic Park, NSW5 *100.0 50.0 Oct 2014 Sep 2018 May 2002 Dec 2018 Savills Australia Dec 2018 Colliers International Dec 2018 Cushman & Wakefield Total Office 300.8 969.3 8.0 – 716.3 564.0 13.3 635.2 322.6 924.8 6.6 434.2 11.7 669.5 449.3 10.0 606.8 5,154.9 4,818.7 557.5 775.0 300.0 603.0 380.0 278.0 125.0 444.2 662.2 293.7 546.7 360.0 – – 3,018.5 2,306.8 1 Freehold, unless otherwise marked with an * which denotes leasehold and ** denotes a combination of freehold and leasehold respectively. 2 On 12 December 2018 GPT sold its 16.67% interest in Homemaker City, Maribyrnong, for consideration of $13.4 million. 3 Melbourne Central: 71.5% Retail and 28.5% Office (31 Dec 2017: 71.7% Retail and 28.3% Office). Melbourne Central – Retail Includes 100% of Melbourne Central car park and 100% of 202 Little Lonsdale Street. 4 On 6 September 2018 GPT acquired a 100% interest in 60 Station Street, Parramatta for total consideration of $292.9 million (including transaction costs of $15.3 million). 5 Following practical completion in October 2018, 4 Murray Rose Avenue, Olympic Park has been reclassified from properties under development to investment property in the Office portfolio. 34 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 Ownership interest1 % Acquisition date Latest independent valuation date Valuer Fair value 31 Dec 18 $M Fair value 31 Dec 17 $M (c) Logistics Citiwest Industrial Estate, Altona North, VIC Quad 1, Sydney Olympic Park, NSW Quad 4, Sydney Olympic Park, NSW 100.0 *100.0 *100.0 Aug 1994 Jun 2001 Jun 2004 Dec 2018 Dec 2018 Dec 2018 Savills Australia M3 Property M3 Property 90.0 28.0 58.0 Sydney Olympic Park Town Centre, NSW *100.0 Jun 2001–Apr 2013 Dec 2018 Jones Lang LaSalle 121.5 Rosehill Business Park, Camellia, NSW 16-34 Templar Road, Erskine Park, NSW 67-75 Templar Road, Erskine Park, NSW Austrak Business Park, Somerton, VIC 4 Holker Street, Newington, NSW 372-374 Victoria Street, Wetherill Park, NSW 18-24 Abbott Road, Seven Hills, NSW Citiport Business Park, Port Melbourne, VIC 83 Derby Street, Silverwater, NSW 10 Interchange Drive, Eastern Creek, NSW 407 Pembroke Road, Minto, NSW 38 Pine Road, Yennora, NSW 16-28 Quarry Road, Yatala, QLD 59 Forest Way, Karawatha, QLD 29-55 Lockwood Road, Erskine Park, NSW 36-52 Templar Road, Erskine Park, NSW 54-70 Templar Road, Erskine Park, NSW 1A Huntingwood Drive, Huntingwood, NSW 1B Huntingwood Drive, Huntingwood, NSW 55 Whitelaw Place, Wacol, QLD 54 Eastern Creek Drive, Eastern Creek, NSW Sunshine Business Estate, Sunshine, VIC2 396 Mount Derrimut Road, Derrimut, VIC3 399 Boundary Road, Truganina, VIC4 Total Logistics (d) Property under development 407 Pembroke Rd, Minto, NSW Austrak Business Park, Somerton, VIC 100.0 100.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 50.0 50.0 50 Old Wallgrove Road, Eastern Creek, NSW 100.0 4 Murray Rose Avenue, Sydney Olympic Park, NSW5 *100.0 32 Smith, Parramatta, NSW 100.0 21 Shiny Dr & 2, 6 & 10 Prosperity St, Truganina, VIC6 100.0 Total Properties under development May 1998 Jun 2008 Jun 2008 Oct 2003 Mar 2006 Jul 2006 Oct 2006 Mar 2012 Aug 2012 Aug 2012 Oct 2008 Nov 2013 Nov 2013 Dec 2012 Jun 2008 Jun 2008 Jun 2008 Oct 2016 Oct 2016 Dec 2016 Apr 2016 Jan 2018 Nov 2018 Dec 2018 Oct 2008 Oct 2003 Jun 2016 May 2002 Mar 2017 Nov 2018 81.6 24.0 51.5 90.2 81.4 58.3 24.2 Dec 2018 Savills Australia Dec 2018 Colliers International Dec 2018 CB Richard Ellis Pty Ltd 86.0 65.0 26.0 Dec 2018 Jones Lang LaSalle 182.4 170.5 Dec 2018 Jones Lang LaSalle Dec 2018 Dec 2018 M3 Property Savills Australia Dec 2018 Jones Lang LaSalle Dec 2018 Savills Australia Dec 2018 Jones Lang LaSalle Dec 2018 CB Richard Ellis Pty Ltd Dec 2018 Colliers International Dec 2018 Dec 2018 Dec 2018 Savills Australia Savills Australia Savills Australia Dec 2018 Jones Lang LaSalle Dec 2018 M3 Property Dec 2018 CB Richard Ellis Pty Ltd Dec 2018 CB Richard Ellis Pty Ltd Dec 2018 Savills Australia Dec 2018 CB Richard Ellis Pty Ltd Dec 2018 CB Richard Ellis Pty Ltd Nov 2018 Nov 2018 Savills Australia Savills Australia 35.5 26.5 39.3 82.5 40.0 33.3 30.5 61.0 44.8 114.0 104.5 107.0 152.0 46.0 25.5 16.5 51.8 78.0 12.4 15.6 33.0 24.8 34.6 75.8 34.8 33.2 25.5 52.9 44.3 108.0 98.1 98.3 145.0 41.3 9.6 15.0 42.7 – – – 1,773.6 1,498.6 Dec 2018 CB Richard Ellis Pty Ltd Dec 2018 Jones Lang LaSalle Dec 2018 Savills Australia – – Dec 2018 CB Richard Ellis Pty Ltd Nov 2018 Jones Lang LaSalle 5.8 32.8 60.2 – 62.0 21.0 5.6 21.7 21.7 33.0 39.6 – 181.8 121.6 1 Freehold, unless otherwise marked with an * which denotes leasehold and ** denotes a combination of freehold and leasehold respectively. 2 On 24 January 2018 GPT acquired a 100% interest in four logistics assets in Sunshine, Victoria for total consideration of $78.3 million (including transaction costs of $4.3 million). 3 On 1 November 2018 GPT acquired a 100% interest in 396 Mount Derrimut Road, Derrimut for total consideration of $13.1 million (including transaction costs of $0.7 million). 4 On 20 December 2018 GPT acquired a 100% interest in 399 Boundary Road, Truganina for total consideration of $16.7 million (including transaction costs of $1.1 million). 5 Following practical completion in October 2018, 4 Murray Rose Avenue, Olympic Park has been reclassified from properties under development to investment property in the Office portfolio. 6 On 16 November 2018 GPT acquired a 100% interest in 21 Shiny Drive and 2, 6 & 10 Prosperity Street, Truganina for total consideration of $22.3 million (including transaction costs of $1.3 million). 35 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 (e) Reconciliation Carrying amount at the beginning of the year 4,818.7 2,306.8 1,498.6 121.6 8,745.7 7,944.9 Retail $M Office $M Logistics $M Properties under development $M 31 Dec 18 $M 31 Dec 17 $M Additions – operating capital expenditure Additions – development capital expenditure Additions – interest capitalised1 Asset acquisitions Transfers from properties under development Transfer to inventory Transfers from inventory Disposals Fair value adjustments Lease incentives (includes rent free) Leasing costs Amortisation of lease incentives and costs Straightlining of leases 26.5 148.8 7.1 – – (9.0) – (12.0) 168.6 14.0 3.7 (12.8) 1.3 15.8 13.6 0.3 292.9 125.0 – – – 264.5 21.7 3.1 (24.5) (0.7) 5.6 24.6 0.4 108.1 – – – – 133.2 5.9 1.1 (8.8) 4.9 – 86.1 5.9 22.3 (125.0) – – – 70.9 – – – – 47.9 273.1 13.7 423.3 – (9.0) – (12.0) 637.2 41.6 7.9 (46.1) 5.5 50.9 215.8 8.6 33.0 – – 2.8 (5.5) 481.0 36.3 5.1 (38.9) 11.7 Carrying amount at the end of the year 5,154.9 3,018.5 1,773.6 181.8 10,128.8 8,745.7 1 A capitalisation interest rate of 4.2% (2017: 5.4%) has been applied when capitalising interest on qualifying assets. Land and buildings which are held to earn rental income or for capital appreciation or for both, and which are not wholly occupied by GPT, are classified as investment properties. Investment properties are initially recognised at cost and subsequently stated at fair value at each balance date. Fair value is based on the latest independent valuation adjusting for capital expenditure and capitalisation and amortisation of lease incentives since the date of the independent valuation report. Any change in fair value is recognised in the Consolidated Statement of Comprehensive Income in the period. Properties under development are stated at fair value at each balance date. Fair value is assessed with reference to reliable estimates of future cash flows, status of the development and the associated risk profile. Finance costs incurred on properties undergoing development are included in the cost of the development. Lease incentives provided by GPT to lessees are included in the measurement of fair value of investment property and are amortised over the lease term using a straightline basis. Critical judgements are made by GPT in respect of the fair values of investment properties. Fair values are reviewed regularly by management with reference to independent property valuations, recent offers and market conditions, using generally accepted market practices. The valuation process, critical assumptions underlying the valuations and information on sensitivity are disclosed in note 22. (f) Lease receivables Lease amounts to be received not recognised in the financial statements at balance date are as follows: Due within one year Due between one and five years Due after five years Total operating lease receivables 31 Dec 18 $M 31 Dec 17 $M 523.9 1,417.8 989.0 2,930.7 467.5 1,285.6 979.9 2,733.0 Lease amounts to be received includes future amounts to be received on non-cancellable operating leases, not recognised in the financial statements at balance date. A proportion of this balance includes amounts receivable for recovery of operating costs on gross and semi-gross leases which will be accounted for as revenue from contracts with customers as this income is earned. The remainder will be accounted for as lease income as it is earned. Amounts receivable under non-cancellable operating leases where GPT’s right to consideration for a service directly corresponds with the value of the service provided to the customer have not been included (for example, variable amounts payable by tenants for their share of the operating costs of the asset). 36 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 20183. Equity accounted investments Investments in joint ventures Investments in associates1 Total equity accounted investments (a) Details of equity accounted investments Note (a)(i) (a)(ii) 31 Dec 18 $M 31 Dec 17 $M 1,358.2 2,547.7 3,905.9 1,135.0 2,426.8 3,561.8 Name (i) Joint ventures 2 Park Street Trust2 1 Farrer Place Trust2 Horton Trust Lendlease GPT (Rouse Hill) Pty Limited2,3 Erskine Park Joint Venture DPT Operator Pty Limited Total investment in joint venture entities (ii) Associates GPT Wholesale Office Fund1,2,4 GPT Wholesale Shopping Centre Fund2,5 GPT Funds Management Limited Total investments in associates Ownership Interest Principal Activity 31 Dec 18 % 31 Dec 17 % 31 Dec 18 $M 31 Dec 17 $M Investment property Investment property Investment property Property development Property development Management Investment property Investment property Funds management 50.00 50.00 50.00 50.00 50.00 50.00 23.83 28.57 100.00 50.00 50.00 50.00 50.00 50.00 50.00 24.95 28.80 100.00 763.1 553.6 30.1 11.3 – 0.1 630.1 465.9 27.0 11.9 – 0.1 1,358.2 1,135.0 1,524.0 1,013.7 10.0 2,547.7 1,408.6 1,008.2 10.0 2,426.8 1 The 31 December 2017 balance of investments in associates has been restated as a result of the adoption of new accounting standards. Refer to note 24(a). 2 The entity has a 30 June balance date. 3 GPT has a 50% interest in Lendlease GPT (Rouse Hill) Pty Limited, a joint venture developing residential and commercial land at Rouse Hill, in partnership with Urban Growth and the NSW Department of Planning. 4 Ownership has decreased as a result of GPT not participating in the subsequent Distribution Reinvestment Plan (DRP) during the year and the equity raising in December 2018. 5 Ownership has decreased as a result of GPT not participating in the subsequent Distribution Reinvestment Plan (DRP) during the year. 37 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 (b) Summarised financial information for associates and joint ventures The information disclosed reflects the amounts presented in the 31 December 2018 financial results of the relevant associates and joint ventures and not GPT’s share of those amounts. They have been amended to reflect adjustments made by GPT when using the equity method, including fair value adjustments and modifications for differences in accounting policies. (i) Joint ventures Current assets Cash and cash equivalents Other current assets Total current assets 2 Park Street Trust 1 Farrer Place Trust Others Total 31 Dec 18 $M 31 Dec 17 $M 31 Dec 18 $M 31 Dec 17 $M 31 Dec 18 $M 31 Dec 17 $M 31 Dec 18 $M 31 Dec 17 $M 13.7 2.0 15.7 9.8 1.8 11.6 12.1 5.8 17.9 10.9 7.1 18.0 Total non-current assets 1,525.0 1,260.0 1,129.1 953.5 Current liabilities Financial liabilities (excluding trade payables, other payables and provisions) Other current liabilities Total current liabilities Non-current liabilities Financial liabilities (excluding trade payables, other payables and provisions) Total non-current liabilities 14.4 0.1 14.5 – – 9.4 2.0 11.4 – – 32.0 7.8 39.8 – – 33.0 6.7 39.7 – – 12.3 0.1 12.4 72.5 1.9 – 1.9 – – 17.6 8.2 25.8 63.9 2.8 0.1 2.9 8.8 8.8 38.1 7.9 46.0 38.3 17.1 55.4 2,726.6 2,277.4 48.3 7.9 56.2 – – 45.2 8.8 54.0 8.8 8.8 Net assets 1,526.2 1,260.2 1,107.2 931.8 83.0 78.0 2,716.4 2,270.0 64.8 16.0 – – – (2.8) 78.0 39.0 4.6 16.0 16.0 2,270.0 2,008.8 544.9 323.2 1.6 (3.7) 20.0 (116.4) – – 36.0 (98.0) 2,716.4 2,270.0 1,358.2 1,135.0 146.8 544.9 544.9 140.0 323.2 323.2 Reconciliation to carrying amounts: Opening net assets 1 January Profit for the year Capital injection Capital reduction Issue of equity 1,260.2 1,095.8 323.1 197.6 931.8 202.7 – – 848.2 109.6 – – – – 24.6 15.7 11.4 78.0 19.1 1.6 (3.7) – – – 4.3 Distributions paid/payable (61.4) (57.8) (43.0) (37.4) (12.0) Closing net assets GPT’s share 1,526.2 1,260.2 1,107.2 931.8 763.1 630.1 553.6 465.9 Summarised statement of comprehensive income Revenue Profit for the year Total comprehensive income 67.2 323.1 323.1 73.0 197.6 197.6 58.0 202.7 202.7 62.4 109.6 109.6 83.0 41.5 21.6 19.1 19.1 38 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 (ii) Associates GPT Wholesale Office Fund GPT Wholesale Shopping Centre Fund GPT Funds Management Limited Total 31 Dec 18 $M 31 Dec 171 $M 31 Dec 18 $M 31 Dec 17 $M 31 Dec 18 $M 31 Dec 17 $M 31 Dec 18 $M 31 Dec 17 $M Total current assets 83.0 68.1 34.5 51.8 10.0 10.0 127.5 129.9 Total non-current assets 7,734.5 7,032.8 4,809.3 4,799.6 Total current liabilities 148.4 156.5 98.1 129.4 Total non-current liabilities 1,273.4 1,299.1 1,197.3 1,221.5 – – – – – – 246.5 2,470.7 12,543.8 11,832.4 Net assets 6,395.7 5,645.3 3,548.4 3,500.5 10.0 10.0 9,954.1 Reconciliation to carrying amounts: Opening net assets 1 January 5,645.3 5,230.7 3,500.5 3,253.0 10.0 10.0 9,155.8 Profit for the year Issue of equity 715.1 284.6 684.1 – 164.7 28.6 400.6 7.2 Distributions paid/payable (249.3) (269.5) (145.4) (160.3) Closing net assets GPT’s share 6,395.7 5,645.3 3,548.4 3,500.5 1,524.0 1,408.6 1,013.7 1,008.2 Summarised statement of comprehensive income Revenue Profit for the year Total comprehensive income Distributions received/receivable from their associates 465.7 715.1 715.1 500.3 684.1 684.1 325.0 164.7 164.7 294.9 400.6 400.6 37.2 39.5 – – – – – 10.0 10.0 – – – – – – – 10.0 10.0 – – – – 879.8 313.2 (394.7) 9,954.1 2,547.7 790.7 879.8 879.8 285.9 2,520.6 9,155.8 8,493.7 1,084.7 7.2 (429.8) 9,155.8 2,426.8 795.2 1,084.7 1,084.7 37.2 39.5 1 The 31 December 2017 balance of investments in associates has been restated as a result of the adoption of new accounting standards. Refer to note 24(a). 4. Trade and other receivables (a) Trade receivables Current assets Trade receivables1 Accrued income Related party receivables2 Less: impairment of trade receivables Total current trade receivables 31 Dec 18 $M 31 Dec 17 $M 15.9 12.6 25.1 (2.2) 51.4 10.6 17.4 21.3 (0.9) 48.4 1 This includes trade receivables relating to revenue from contracts with customers. Refer to note 24(b) for the methodology of apportionment between trade receivables relating to AASB 15 revenue and other trade receivables balances. 2 The related party receivables are on commercial terms and conditions. 39 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 The following table shows the ageing analysis of GPT’s trade receivables. Retail Office Logistics Corporate Less: impairment of trade receivables Total loans and receivables (b) Other receivables Current assets Distributions receivable from associates Distributions receivable from joint ventures Other receivables Total current other receivables 0-30 days $M 3.6 15.2 1.6 27.1 – 47.5 31-60 days $M 0.2 0.3 0.3 0.2 – 1.0 31 Dec 18 61-90 days $M (0.1) 2.0 – 0.2 – 2.1 90+ days $M 2.0 0.7 – 0.3 (2.2) 0.8 Total $M 5.7 18.2 1.9 27.8 (2.2) 51.4 31 Dec 17 31-60 days $M 61-90 days $M 0.7 0.2 – – – – 0.1 – – – 0-30 days $M 6.9 13.2 2.5 23.0 – 45.6 0.9 0.1 90+ days $M 2.1 0.5 0.1 – (0.9) 1.8 Total $M 9.7 14.0 2.6 23.0 (0.9) 48.4 31 Dec 18 $M 31 Dec 17 $M 26.7 13.7 12.1 52.5 26.3 12.9 8.3 47.5 Loans and receivables are initially recognised at fair value and subsequently at amortised cost using the effective interest rate method less any allowance. All loans and receivables with maturities greater than 12 months after the balance date are classified as non-current assets. Refer to note 23(e) (iv) for the accounting policies for trade and other receivables and other information relating to the adoption of AASB 9 Financial Instruments. 5. Intangible assets Costs Balance as at 31 December 2016 Additions Disposals Transfer to other assets Balance as at 31 December 2017 Additions Balance as at 31 December 2018 Accumulated amortisation and impairment Balance as at 31 December 2016 Amortisation Impairment Disposals Balance as at 31 December 2017 Amortisation Balance as at 31 December 2018 Carrying amounts Balance as at 31 December 2017 Balance as at 31 December 2018 40 Management rights $M IT development and software $M Total $M 122.9 4.7 (11.4) 2.8 119.0 1.1 120.1 67.1 4.7 (11.4) 2.8 63.2 1.1 64.3 (42.5) (87.6) (5.7) (5.9) 11.4 (42.7) (5.1) (47.8) 20.5 16.5 (6.0) (5.9) 11.4 (88.1) (5.2) (93.3) 30.9 26.8 55.8 – – – 55.8 – 55.8 (45.1) (0.3) – – (45.4) (0.1) (45.5) 10.4 10.3 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 Management rights Management rights include property management and development management rights. Rights are initially measured at cost and subsequently amortised over their useful life, which ranges from 5 to 10 years. For the management rights of Highpoint Shopping Centre, management considers the useful life as indefinite as there is no fixed term included in the management agreement. Therefore, GPT tests for impairment at balance date. Assets are impaired if the carrying value exceeds their recoverable amount. The recoverable amount is determined using a multiples approach. A range of multiples from 10-15x have been used in the calculation. IT development and software Costs incurred in developing systems and acquiring software and licenses that will contribute future financial benefits are capitalised. These include external direct costs of materials and services and direct payroll and payroll related costs of employees’ time spent on the project. Amortisation is calculated on a straightline basis over the length of time over which the benefits are expected to be received, generally ranging from 3 to 10 years. IT development and software are assessed for impairment at each reporting date by evaluating if any impairment triggers exist. Where impairment triggers exist, management calculate the recoverable amount. The asset will be impaired if the carrying value exceeds the recoverable amount. Critical judgements are made by GPT in setting appropriate impairment triggers and assumptions used to determine the recoverable amount. 6. Inventories Development properties Current inventories Development properties Non-current inventories Total inventories 31 Dec 18 $M 31 Dec 17 $M 31.0 31.0 113.3 113.3 144.3 11.8 11.8 140.4 140.4 152.2 Development properties held as inventory to be sold are stated at the lower of cost and net realisable value. Cost Cost includes the cost of acquisition, development, finance costs and all other costs directly related to specific projects including an allocation of direct overhead expenses. Post completion of the development, finance costs and other holding charges are expensed as incurred. Net realisable value (NRV) The NRV is the estimated selling price in the ordinary course of business less estimated costs to sell. At each reporting date, management reviews these estimates by taking into consideration: • the most reliable evidence; and • any events which confirm conditions existing at the year end and cause any fluctuations of selling price and costs to sell. The amount of any write down is recognised as an impairment expense in the Consolidated Statement of Comprehensive Income. An impairment expense of $11.4 million has been recognised for the year ended 31 December 2018 (2017: Impairment expense reversal of $0.4 million). 7. Payables Trade payables and accruals GST payables Distribution payable to stapled securityholders Interest payable Levies payable Other payables Total payables 31 Dec 18 $M 31 Dec 17 $M 128.0 2.5 231.9 16.0 17.6 15.0 411.0 124.5 1.1 221.6 17.6 15.1 4.8 384.7 Trade payables and accruals represent liabilities for goods and services provided to GPT prior to the end of the financial year which are unpaid. They are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method. 41 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 20188. Provisions Current provisions Employee benefits Other Total current provisions Non-current provisions Employee benefits Total non-current provisions 31 Dec 18 $M 31 Dec 17 $M 12.2 14.0 26.2 1.1 1.1 10.1 18.0 28.1 2.3 2.3 Provisions are recognised when: • GPT has a present obligation (legal or constructive) as a result of a past event; • it is probable that resources will be expended to settle the obligation; and • a reliable estimate can be made of the amount of the obligation. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the obligation. Provision for employee benefits The provision for employee benefits represents annual leave and long service leave entitlements accrued for employees. The employee benefit liability expected to be settled within twelve months after the end of the reporting period is recognised in current liabilities. Employee benefits expenses in the Consolidated Statement of Comprehensive Income Employee benefits expenses 31 Dec 18 $M 115.6 31 Dec 17 $M 114.5 42 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 9. Taxation (a) Income tax expense Current income tax expense Deferred income tax credit Income tax expense in the Statement of Comprehensive Income Income tax expense attributable to: Profit from continuing operations Aggregate income tax expense 31 Dec 18 $M 31 Dec 17 $M 13.2 (3.7) 9.5 9.5 9.5 (b) Reconciliation of accounting profit to income tax expense and current tax (asset)/liability1 Net profit for the year excluding income tax expense 1,461.2 Less: Trust profit not subject to tax Profit which is subject to taxation Prima facie income tax at 30% tax rate (2017: 30%) Tax effect of amounts not deductible/assessable in calculating income tax expense: Adjustments for income tax for prior years Previously unrecognised tax losses Non-deductible revaluation items in the Company Non-assessable income Other tax adjustments Income tax expense Add/(less) amounts to reconcile to current tax (asset)/liability: Temporary differences: Employee benefits Provisions and accruals Dividends received Other deferred tax asset charged to income Movement in reserves Opening balance: Tax losses transferred from deferred tax asset Tax adjustments: Movement in reserves Tax payments made to tax authorities Current tax (asset)/liability (c) Deferred tax assets Employee benefits Provisions and accruals Other Net deferred tax asset Movement in temporary differences during the year Opening balance at beginning of the year Credited to the Statement of Comprehensive Income Movement in reserves Utilisation of tax losses Closing balance at end of the year (1,488.4) (27.2) (8.2) – – 22.5 (5.3) 0.5 9.5 0.5 – – 2.7 0.5 8.6 (1.7) (20.9) (0.8) 15.9 2.9 1.3 20.1 16.9 3.7 (0.5) – 20.1 1 The 31 December 2017 accounting profit has been restated as a result of the adoption of new accounting standards. Refer to note 24(a). 20.0 (9.7) 10.3 10.3 10.3 1,278.3 (1,273.4) 4.9 1.5 0.2 (0.4) 10.0 (6.1) 5.1 10.3 0.7 (0.3) 9.1 1.9 (1.7) (2.0) (2.5) (6.9) 8.6 15.4 2.9 (1.4) 16.9 7.5 9.7 1.7 (2.0) 16.9 43 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 (d) Effective tax rate Adoption of Voluntary Tax Transparency Code The Board of Taxation has released a voluntary Tax Transparency Code (TTC). The TTC sets out a recommended set of principles and minimum standards regarding the disclosure of tax information for businesses. GPT is committed to the TTC. The non-IFRS income tax disclosures below and in note 9(b) include the recommended additional disclosures. The Australian Accounting Standards Board have issued a Draft Appendix to the TTC outlining the method to calculate the effective tax rate as shown in the following table, using: • accounting profit before tax adjusted to exclude transactions which are not reflected in the calculation of income tax expense, including; – trust taxable income which is attributed in full to its securityholders; and – non tax related material items in the Company; and • tax expense adjusted to exclude carry forward tax losses that have been recognised and prior year under/overstatements. Net profit for the year before income tax expense Exclude: Trust profit not subject to tax Non-deductible revaluation items in the Company Amounts released from foreign currency translation reserve Equity accounted profits from joint ventures in the Company Distribution received from joint ventures taxable to the Company Profit used to calculate effective tax rate Income tax expense Exclude: Carry forward tax losses recognised Prior year (under)/overstatements Income tax expense used to calculate effective tax rate Effective tax rate 31 Dec 18 $M 1,461.2 31 Dec 171 $M 1,278.3 (1,488.4) (1,273.4) 75.1 (17.0) (5.9) 4.8 29.8 9.5 – – 9.5 32% 34.1 – (6.2) – 32.8 10.3 0.4 (0.2) 10.5 32% 1 The 31 December 2017 Net profit for the year excluding income tax expense and Trust profit not subject to tax have been restated as a result of the adoption of new accounting standards. Refer to note 24(a). Trusts Property investments are held by the Trust for the purposes of earning rental income. Under current tax legislation, the Trust is not liable for income tax provided the taxable income of the Trust including realised capital gains is attributed in full to its securityholders each financial year. Securityholders are subject to income tax at their own marginal tax rates on amounts attributable to them. Company and other taxable entities Income tax expense for the financial year is the tax payable on the current year’s taxable income. This is adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and for unused tax losses. Deferred income tax liabilities and assets – recognition Deferred income tax liabilities are recognised for all taxable temporary differences. Deferred income tax assets are recognised for all deductible temporary differences, carried forward unused tax assets and unused tax losses, to the extent it is probable that taxable profit will be available to utilise them. The carrying amount of deferred income tax assets is reviewed and reduced to the extent that it is no longer probable that sufficient taxable profit will be available. Deferred income tax liabilities and assets – measurement Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date. Deferred income tax is provided on temporary differences at the reporting date between accounting carrying amounts and the tax cost bases of assets and liabilities, other than for the following: • Where taxable temporary differences relate to investments in subsidiaries, associates and interests in joint ventures: – deferred tax liabilities are not recognised if the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and – deferred tax assets are not recognised if it is not probable that the temporary differences will reverse in the foreseeable future and taxable profit will not be available to utilise the temporary differences. Tax relating to equity items Income taxes relating to items recognised directly in equity are recognised in equity and not in the Consolidated Statement of Comprehensive Income. 44 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 Capital structure Capital is defined as the combination of securityholders’ equity, reserves and net debt (borrowings less cash). The Board is responsible for monitoring and approving the capital management framework within which management operates. The purpose of the framework is to safeguard GPT’s ability to continue as a going concern while optimising its debt and equity structure. GPT aims to maintain a capital structure which includes net gearing levels within a range of 25 to 35 per cent (based on net debt, less fair value adjustment on foreign bonds to total tangible assets, less cash and cross currency derivative assets) that is consistent with a stable investment grade credit rating in the “A category”. At 31 December 2018, GPT is credit rated A (stable)/A2 (stable) by Standard and Poor’s (S&P) and Moody’s Investor Services (Moody’s) respectively. The ratings are important as they reflect the investment grade credit rating of GPT which allows access to global capital markets to fund its development pipeline and future acquisition investment opportunities. The stronger ratings improve both the availability of capital, in terms of amount and tenor, and reduce the cost at which it can be obtained. GPT is able to vary the capital mix by: • issuing stapled securities; • buying back stapled securities; • activating the distribution reinvestment plan; • adjusting the amount of distributions paid to stapled securityholders; • selling assets to reduce borrowings; or • increasing borrowings. 10. Equity and reserves (a) Contributed equity Other entities stapled to the Trust $M Trust $M Total $M Number Ordinary stapled securities Opening securities on issue at 1 January 2017 1,797,955,568 7,804.3 325.5 8,129.8 Securities issued – Long Term Incentive Plan Securities issued – Deferred Short Term Incentive Plan Securities issued – Broad Based Employee Security Ownership Plan Securities issued – Employee Incentive Plan 2,763,052 855,355 54,338 12,569 6.0 4.2 0.2 0.1 0.1 0.1 – – 6.1 4.3 0.2 0.1 Closing securities on issue and contributed equity at 31 December 2017 1,801,640,882 7,814.8 325.7 8,140.5 Opening securities on issue at 1 January 2018 Securities issued – Long Term Incentive Plan Securities issued – Deferred Short Term Incentive Plan Securities issued – Broad Based Employee Security Ownership Plan 1,801,640,882 7,814.8 325.7 8,140.5 2,332,026 875,344 42,174 6.6 4.1 0.2 0.1 0.1 – 6.7 4.2 0.2 Closing securities on issue and contributed equity at 31 December 2018 1,804,890,426 7,825.7 325.9 8,151.6 Ordinary stapled securities are classified as equity and recognised at the fair value of the consideration received by GPT. Any transaction costs arising on the issue and buy back of ordinary securities are recognised directly in equity as a reduction, net of tax, of the proceeds received. 45 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 (b) Reserves Foreign currency translation reserve Cash flow hedge reserve Cost of hedging reserve Employee incentive scheme reserve Other entities stapled to GPT $M Other entities stapled to GPT $M Trust $M 35.1 (7.8) Trust $M (26.4) Balance at 1 January 2017 Revaluation of available for sale financial asset, net of tax Derecognition of available for sale financial asset, net of tax Movement in hedging reserve Movement in fair value of cash flow hedges Security-based payment transactions, net of tax – – – – – – – – – – – – – (6.9) – Balance at 31 December 2017 (26.4) 35.1 (14.7) Balance at 1 January 2018 (26.4) 35.1 (14.7) Net foreign exchange translation adjustments Movement in hedging reserve Movement in fair value of cash flow hedges Security-based payment transactions, net of tax – – – – (16.8) – – – – – (3.8) – Balance at 31 December 2018 (26.4) 18.3 (18.5) Nature and purpose of reserves Foreign currency translation reserve Other entities stapled to GPT $M Trust $M – – – – – – – – – – – – – – – – – – – – – – – – – – Other entities stapled to GPT $M 17.3 – – – – 4.6 21.9 21.9 – – – (2.3) 19.6 Trust $M 3.0 – – (2.5) – – 0.5 0.5 – 10.9 – – 11.4 – – – – – – – – – – – – – Available for sale reserve Total reserve Other entities stapled to GPT $M Other entities stapled to GPT $M Trust $M Trust $M – – – – – – – – – – – – – 7.1 (31.2) 59.5 1.0 (8.1) – – – – – – – – – – – – (2.5) (6.9) 1.0 (8.1) – – – 4.6 (40.6) 57.0 (40.6) 57.0 – (16.8) 10.9 (3.8) – – – (33.5) (2.3) 37.9 The reserve is used to record exchange differences arising on translation of foreign controlled entities and associated funding of foreign controlled entities. The movement in the reserve is recognised in the net profit when the investment in the foreign controlled entity is disposed. Cash flow hedge reserve The reserve records the portion of the unrealised gain or loss on a hedging instrument in a cash flow hedge that is determined to be an effective hedge relationship inclusive of share of cash flow hedge reserve of equity accounted investments. Cost of hedging reserve The reserve records the changes in the fair value of the currency basis spread that is part of cross currency swaps used to hedge foreign denominated borrowings, but is excluded from the hedge designations. This reserve is inclusive of share of cost of hedging reserve of equity accounted investments. Refer to note 23(e)(iv) for further details. Employee incentive scheme reserve The reserve is used to recognise the fair value of equity-settled security based payments provided to employees, including key management personnel, as part of their remuneration. Refer to note 18 for further details of the security based payments. Available for sale reserve The reserve is used to recognise the changes in the fair value of the available for sale financial assets. 46 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018(c) Retained earnings/accumulated losses Note Consolidated entity Balance at 1 January 2017 Net profit for the financial year Less: Distributions paid/payable to ordinary stapled securityholders 12 Reclassification of employee incentive security scheme reserve to retained earnings/accumulated losses Balance at 31 December 20171 Balance at 1 January 2018 Net profit for the financial year Less: Distributions paid/payable to ordinary stapled securityholders 12 Reclassification of employee incentive security scheme reserve to retained earnings/accumulated losses Balance at 31 December 2018 Trust $M 1,022.8 1,248.2 (443.2) 0.6 1,828.4 1,828.4 1,417.7 (459.5) 3.4 2,790.0 Other entities stapled to GPT $M (898.7) 19.8 – (0.5) (879.4) (879.4) 34.0 – – Total $M 124.1 1,268.0 (443.2) 0.1 949.0 949.0 1,451.7 (459.5) 3.4 (845.4) 1,944.6 1 The 31 December 2017 retained earnings/accumulated losses balance has been restated as a result of the adoption of new accounting standards. Refer to note 24(a). 11. Earnings per stapled security (a) Attributable to ordinary securityholders of the Trust Basic and diluted earnings per security – profit from continuing operations Basic and diluted earnings per security – profit from discontinued operations Total basic and diluted earnings per security attributable to ordinary securityholders of the Trust (b) Attributable to ordinary stapled securityholders of the GPT Group Basic and diluted earnings per security – profit from continuing operations Basic and diluted earnings per security – profit from discontinued operations Total basic and diluted earnings per security attributable to stapled securityholders of The GPT Group 31 Dec 18 Cents 31 Dec 18 Cents 31 Dec 17 Cents 31 Dec 17 Cents Basic Diluted Basic Diluted 77.7 0.9 78.6 79.5 0.9 80.4 77.5 0.9 78.4 79.4 0.9 80.3 69.3 – 69.3 70.4 – 70.4 69.2 – 69.2 70.3 – 70.3 The earnings and weighted average number of ordinary securities (WANOS) used in the calculations of basic and diluted earnings per ordinary stapled security are as follows: (c) Reconciliation of earnings used in calculating earnings per ordinary stapled security $M $M $M $M Net profit from continuing operations attributable to the securityholders of the Trust 1,401.3 1,401.3 1,247.4 1,247.4 Net profit from discontinued operations attributable to the securityholders of the Trust 16.4 16.4 0.8 0.8 Basic and diluted earnings of the Trust Add: Net profit from continuing operations attributable to the securityholders of other stapled entities Basic and diluted earnings of the Company Basic and diluted earnings of The GPT Group (d) WANOS WANOS used as the denominator in calculating basic earnings per ordinary stapled security Performance security rights at weighted average basis1 WANOS used as the denominator in calculating diluted earnings per ordinary stapled security 1,417.7 1,417.7 1,248.2 1,248.2 34.0 34.0 34.0 34.0 19.8 19.8 19.8 19.8 1,451.7 1,451.7 1,268.0 1,268.0 Millions Millions Millions Millions 1,804.4 1,804.4 1,801.1 1,801.1 2.7 1,807.1 2.4 1,803.5 1 Performance security rights granted under the employee incentive schemes are only included in dilutive earnings per ordinary stapled security where the performance hurdles are met as at the year end. 47 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 Calculation of earnings per stapled security Basic earnings per stapled security is calculated as net profit attributable to ordinary stapled securityholders of GPT, divided by the weighted average number of ordinary stapled securities outstanding during the financial year which is adjusted for bonus elements in ordinary stapled securities issued during the financial year. Diluted earnings per stapled security is calculated as net profit attributable to ordinary stapled securityholders of GPT divided by the weighted average number of ordinary stapled securities and dilutive potential ordinary stapled securities. Where there is no difference between basic earnings per stapled security and diluted earnings per stapled security, the term basic and diluted earnings per stapled ordinary security is used. 12. Distributions paid and payable Distributions are paid to GPT stapled securityholders half yearly. Distributions paid/payable 2018 6 month period ended 30 June 2018 6 month period ended 31 December 20181 Total distributions paid/payable for the year 2017 6 month period ended 30 June 2017 6 month period ended 31 December 2017 Total distributions paid/payable for the year Cents per stapled security Total amount $M 12.61 12.85 25.46 12.30 12.30 24.60 227.6 231.9 459.5 221.6 221.6 443.2 1 The December 2018 half yearly distribution of 12.85 cents per stapled security has been declared on 19 December 2018 and is expected to be paid on 28 February 2019 based on the record date of 31 December 2018. 13. Borrowings Current borrowings at amortised cost – unsecured Current borrowings at amortised cost – secured Current borrowings Non-current borrowings at amortised cost – unsecured Non-current borrowings at fair value through profit and loss – unsecured1 Non-current borrowings at amortised cost – secured Non-current borrowings Total borrowings2 – carrying amount Total borrowings3 – fair value 31 Dec 18 $M 31 Dec 17 $M 427.5 88.5 516.0 2,101.4 1,484.9 12.6 3,598.9 4,114.9 4,170.0 – 19.9 19.9 1,911.9 1,280.5 88.3 3,280.7 3,300.6 3,347.8 1 Cumulative fair value adjustments are shown in the table on the next page. 2 3 For the majority of the borrowings, the carrying amount is a reasonable approximation of fair value. Where material difference arises, the fair value is calculated using Including unamortised establishment costs, fair value and other adjustments. market observable inputs (level 2) and unobservable inputs (level 3). This excludes unamortised establishment costs. All borrowings with maturities greater than 12 months after reporting date are classified as non-current liabilities. When the terms of a financial liability are modified, AASB 9 Financial Instruments requires an entity to perform an assessment to determine whether the modified terms are substantially different from the existing financial liability. Where a modification is substantial, it will be accounted for as an extinguishment of the original financial liability and a recognition of a new financial liability. Where the modification does not result in extinguishment, the difference between the existing carrying amount of the financial liability and the modified cash flows discounted at the original effective interest rate is recognised in the Statement of Comprehensive Income as gain/loss on modification of financial liability. GPT management have assessed the modification of terms requirements within AASB 9 Financial Instruments and have concluded that these will not have a material impact for the Group. 48 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 The following table outlines the cumulative amount of fair value hedge adjustments that are included in the carrying amount of borrowings in the statement of financial position. Nominal amount Unamortised borrowing costs Amortised cost Cumulative fair value hedge adjustments Carrying amount The maturity profile of borrowings as at 31 December 2018 is as follows: Due within one year Due between one and five years Due after five years Cash and cash equivalents Total financing resources available at the end of the year Less: commercial paper4 Total financing resources available at the end of the year 31 Dec 18 $M 31 Dec 17 $M 1,221.8 (4.3) 1,217.5 267.4 1,484.9 Used facility1 $M 516.0 1,513.7 1,796.8 3,826.5 1,131.8 (2.5) 1,129.3 151.2 1,280.5 Unused facility2,3 $M – 1,178.3 – 1,178.3 58.7 1,237.0 (177.5) 1,059.5 Total facility1,2,3 $M 516.0 2,692.0 1,796.8 5,004.8 1 Excluding unamortised establishment costs, and fair value and other adjustments. This reflects the contractual cashflows payable on maturity of the borrowings taking into account historical exchange rates under cross currency swaps entered into to hedge the foreign currency denominated borrowings. 2 Drawings on GPT’s uncommitted commercial paper program are in addition to GPT’s committed facilities and are classified as current borrowings. These drawings may be refinanced by non-current unsecured undrawn bank loan facilities. Including $200 million of forward starting facilities available to GPT. 3 4 GPT’s commercial paper program is an uncommitted line with a maturity period of generally three months or less and is therefore excluded from available liquidity. Cash and cash equivalents includes cash on hand, cash at bank and short term money market deposits. Debt covenants GPT’s borrowings are subject to a range of covenants, according to the specific purpose and nature of the loans. Most bank facilities include one or more of the following covenants: • Gearing: total debt must not exceed 50 per cent of total tangible assets; and • Interest coverage: the ratio of earnings before interest and taxes (EBIT) to finance costs is not to be less than 2 times. A breach of these covenants may trigger consequences ranging from rectifying and/or repricing to repayment of outstanding amounts. GPT performed a review of debt covenants as at 31 December 2018 and no breaches were identified. 14. Financial risk management The GPT Board approve GPT’s treasury policy which: • establishes a framework for the management of risks inherent to the capital structure; • defines the role of GPT’s treasury; and • sets out the policies, limits, monitoring and reporting requirements for cash, borrowings, liquidity, credit risk, foreign exchange, interest rate and other derivative instruments. (a) Derivatives GPT enters into derivative transactions to manage exposure to market risks and volatility of financial outcomes that arise as part of normal business operations. GPT’s treasury policy requires hedging 100% of its foreign currency exposure in respect to foreign currency borrowings and therefore applies a hedge ratio of 1:1. GPT’s policy is for the critical terms of the cross currency swaps to align with the hedged item. GPT determines the existence of an economic relationship between the hedging instrument and the hedged item based on notional amounts, currency, reference interest rates, tenors, maturities and timing of cashflows. GPT assesses whether the derivative designated in each hedging relationship is expected to be and has been effective in offsetting changes in cashflows of the hedged item using the hypothetical derivative method. 49 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 In these hedge relationships, the main sources of ineffectiveness are: • the effect of the counterparty and GPT’s own credit risk on the fair value of the swaps, which is not reflected in the fair value of the hedged item; and • changes in swap rates will impact the fair value of the Australian dollar margin and implied foreign currency margin respectively. In order to qualify for hedge accounting, prospective hedge effectiveness testing must meet all of the following criteria: • an economic relationship exists between the hedged item and hedging instrument; • the effect of credit risk does not dominate the value changes resulting from the economic relationship; and • the hedge ratio is the same as that resulting from actual amounts of hedged items and hedging instruments for risk management. Derivatives are carried in the Consolidated Statement of Financial Position at fair value and classified according to their contractual maturities. If they do not qualify for hedge accounting, changes in fair value are recognised in the Consolidated Statement of Comprehensive Income including gains or losses on maturity or close-out. Where derivatives qualify for hedge accounting and are designated in hedge relationships, the recognition of any gain or loss depends on the nature of the item being hedged. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. For cash flow hedges, the effective portion of changes in the fair value of derivatives is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. GPT applies hedge accounting to borrowings denominated in foreign currencies only. Foreign exchange risk arising from borrowings denominated in foreign currency is managed with cross currency interest rate swaps which convert foreign currency exposures into Australian dollar exposures. GPT designates and documents the relationship between hedging instruments and hedged items and the proposed effectiveness of the risk management objective the hedge relationship addresses. On an ongoing basis, GPT documents its assessment of prospective hedge effectiveness. Foreign currency basis spreads have been excluded from GPT’s designated fair value and cash flow hedge relationships. Hedge accounting is discontinued when the hedging instrument expires, is terminated, or is no longer in an effective hedge relationship. The following table shows the carrying amount and nominal amount of each component of borrowings and derivative financial instruments categorised by hedge type. 31 Dec 18 31 Dec 17 Nominal amount $M Net Assets $M Net Liabilities1 $M Movement $M Nominal amount $M Net Assets $M Net Liabilities1 $M Movement $M Borrowings by hedge designation Fair value hedges (1,221.8) – (1,489.2) (206.2) (1,131.8) – (1,283.0) (340.2) Derivatives by hedge designation Fair value hedges Cash flow hedges 1,221.8 1,221.8 (21.1) 286.5 265.4 (3.0) 2.2 (0.8) (26.6) 148.9 122.3 1,131.8 1,131.8 17.4 140.0 157.4 (14.9) (0.2) (15.1) (2.0) (70.2) (72.2) 1 Excludes unamortised establishment costs. The following table shows the nominal amount of derivatives designated in cash flow and fair value hedge relationships in time bands based on the maturity of the derivatives. 31 Dec 18 0 to 12 months $M 1 to 5 years $M Over 5 years $M Total $M 0 to 12 months $M 31 Dec 17 1 to 5 years $M Over 5 years $M Total $M Cross currency interest rate swaps Nominal amount Average receive fixed interest rate – – – – 1,221.8 1,221.8 3.7% N/A – – – – 1,131.8 1,131.8 3.7% N/A 50 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 (i) Fair value hedges All changes in the fair value of the underlying item relating to the hedged risk (movements in benchmark interest rates) are recognised in the income statement together with the changes in the fair value of derivatives. The net difference is recorded in the income statement as ineffectiveness. The carrying value of borrowings in effective fair value hedge relationships is adjusted for gains or losses attributable to the risk(s) being hedged. The following table shows the gain/(loss) recognised in net impact of foreign currency borrowings and associated hedging loss in the Consolidated Statement of Comprehensive Income related to hedge ineffectiveness from fair value hedges. Change in value of hedged item used to measure ineffectiveness Change in value of hedging instrument to measure ineffectiveness Net gain/(loss) from ineffectiveness 31 Dec 18 Gain/(loss) $M 31 Dec 17 Gain/(loss) $M (116.1) 114.6 (1.5) 63.2 (63.4) (0.2) (ii) Cash flow hedges The portion of the gain or loss on the hedging instrument that is effective (offsets the movement on the hedged item attributable to interest rates and foreign exchange movements) is recognised directly in the cash flow hedge reserve in equity and any ineffective portion is recognised as net impact of foreign currency borrowings and associated hedging loss directly in the income statement. No hedge relationships have been discontinued during the year. Therefore there is no balance in the cash flow hedge reserve from any hedge relationship for which hedge accounting is no longer applied. There were no amounts transferred from the cash flow hedge reserve to profit or loss during the year (2017: $nil). During the current and prior financial years, there was no material impact on profit or loss resulting from ineffectiveness of cash flow hedges. (b) Interest rate risk Interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. GPT’s primary interest rate risk arises from borrowings. The following table provides a summary of GPT’s gross interest rate risk exposure as at 31 December 2018 on interest bearing borrowings as well as the net effect of interest rate risk management transactions. This excludes unamortised establishment costs and fair value and other adjustments. Fixed rate interest-bearing borrowings Floating rate interest-bearing borrowings Interest rate risk – sensitivity analysis Gross exposure Net exposure 31 Dec 18 $M 31 Dec 17 $M 31 Dec 18 $M 31 Dec 17 $M 2,346.8 1,479.7 3,826.5 2,056.8 1,065.5 3,122.3 3,190.0 636.5 3,826.5 2,370.0 752.3 3,122.3 The impact on interest expense and interest revenue of a 1 per cent increase or decrease in market interest rates is shown below. Interest expense is sensitive to movements in market interest rates on floating rate debt (net of any derivatives). A 1 per cent increase or decrease is used for consistency of reporting interest rate risk across GPT and represents management’s assessment of the potential change in interest rates. Impact on statement of comprehensive income Impact on interest revenue increase/(decrease) Impact on interest expense (increase)/decrease 31 Dec 18 (+1%) $M 31 Dec 18 (-1%) $M 31 Dec 17 (+1%) $M 31 Dec 17 (-1%) $M 0.6 (6.4) (0.6) 6.4 0.5 (7.5) (0.5) 7.5 51 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 Hedging interest rate risk Interest rate risk inherent on borrowings issued at floating rates is managed by entering into interest rate swaps that are used to convert a portion of floating interest rate borrowings to fixed interest rates, which reduces GPT’s exposure to interest rate volatility. The derivative financial instruments used to hedge interest rate risk which are presented in the Consolidated Statement of Financial Position comprise the following: Current derivative assets Non-current derivative assets Total derivative assets Subject to master netting but not offset Net derivative assets post offset Current derivative liabilities Non-current derivative liabilities Total derivative liabilities Subject to master netting but not offset Net derivative liabilities post offset 31 Dec 18 $M 31 Dec 17 $M 1.5 338.9 340.4 108.2 232.2 4.0 120.2 124.2 108.2 16.0 3.4 257.7 261.1 95.9 165.2 9.1 118.0 127.1 95.9 31.2 All of GPT’s derivatives were valued using market observable inputs (level 2) with the exception of a year on year inflation swap as at 31 December 2017. For additional fair value disclosures refer to note 22. Derivative financial assets and liabilities are not offset in the Consolidated Statement of Financial Position. Agreements with derivative counterparties are based on the ISDA (International Swap Derivatives Association) Master Agreement, which in certain circumstances (such as default) confers a right to set-off the position owing/receivable to a single counterparty to a net position as long as all outstanding derivatives with that counterparty are terminated. As GPT does not presently have a legally enforceable right to set-off, these amounts have not been offset in the Consolidated Statement of Financial Position, but have been presented separately. 52 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 (c) Liquidity risk Liquidity risk is the risk that GPT, as a result of its operations: • will not have sufficient funds to settle a transaction on the due date; • will be forced to sell financial assets at a value which is less than what they are worth; or • may be unable to settle or recover a financial asset at all. GPT manages liquidity risk by: • maintaining sufficient cash; • maintaining an adequate amount of committed credit facilities; • maintaining a minimum liquidity buffer in cash and surplus committed facilities for the forward rolling twelve month period; • minimising debt maturity concentration risk by diversifying sources and spreading maturity dates of committed credit facilities and maintaining a minimum weighted average debt maturity of 4 years; and • maintaining the ability to close out market positions. The following table provides an analysis of the undiscounted contractual maturities of liabilities which forms part of GPT’s assessment of liquidity risk: 31 Dec 18 31 Dec 17 1 year or less $M Over 1 year to 2 years $M Over 2 years to 5 years $M Over 5 years $M Total $M 1 year or less $M Over 1 year to 2 years $M Over 2 years to 5 years $M Over 5 years $M Total $M Liabilities Non-derivatives Payables Current tax liabilities Borrowings Projected finance cost on borrowings1 Derivatives Projected finance cost on derivative liabilities1,2 411.0 – – – – – – – 411.0 384.7 – 8.6 – – – – – – 384.7 8.6 516.0 312.7 1,201.0 1,796.8 3,826.5 20.0 513.5 982.0 1,606.8 3,122.3 136.3 132.2 299.4 392.3 960.2 128.2 114.2 279.1 433.6 955.1 23.3 22.2 54.6 11.5 111.6 23.8 21.7 36.5 6.8 88.8 Total liabilities 1,086.6 467.1 1,555.0 2,200.6 5,309.3 565.3 649.4 1,297.6 2,047.2 4,559.5 Less cash and cash equivalents 58.7 – – – 58.7 49.9 – – – 49.9 Total liquidity exposure Projected interest income on derivative assets2 1,027.9 467.1 1,555.0 2,200.6 5,250.6 515.4 649.4 1,297.6 2,047.2 4,509.6 19.9 12.5 16.2 33.1 81.7 34.3 31.6 59.5 64.4 189.8 Net liquidity exposure 1,008.0 454.6 1,538.8 2,167.5 5,168.9 481.1 617.8 1,238.1 1,982.8 4,319.8 1 Projection is based on the likely outcome of contracts given the interest rates, margins, forecast exchange rates and interest rate forward curves as at 31 December 2018 and 31 December 2017 up until the contractual maturity of the contract. The projection is based on future non-discounted cash flows and does not ascribe any value to optionality on any instrument which may be included in the current market values. Projected interest on foreign currency borrowings is shown after the impact of associated hedging. In accordance with AASB 7, the future value of contractual cash flows of non-derivative and derivative liabilities only is to be included in liquidity risk disclosures. As derivatives are exchanges of cash flows, the positive cash flows from derivative assets have been disclosed separately to provide a more meaningful analysis of GPT’s net liquidity exposure. The methodology used in calculating projected interest income on derivative assets is consistent with the above liquidity risk disclosures. 2 (d) Refinancing risk Refinancing risk is the risk that credit is unavailable or available at unfavourable interest rates and credit market conditions resulting in an unacceptable increase in GPT’s interest cost. Refinancing risk arises when GPT is required to obtain debt to fund existing and new debt positions. GPT manages this risk by spreading sources, counterparties and maturities of borrowings in order to minimise debt concentration risk, allow averaging of credit margins over time and reducing refinance amounts. As at 31 December 2018, GPT’s exposure to refinancing risk can be monitored by the spreading of its contractual maturities on borrowings in the liquidity risk table above or with the information in note 13. 53 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 (e) Foreign exchange risk Foreign exchange risk refers to the risk that the value of a financial commitment, asset or liability will fluctuate due to changes in foreign exchange rates. GPT’s foreign exchange risk arises primarily from: • firm commitments of highly probable forecast transactions for receipts and payments settled in foreign currencies or with prices dependent on foreign currencies; and • investments in foreign assets. The foreign exchange risk arising from borrowings denominated in foreign currency is managed with cross currency interest rate swaps which convert foreign currency exposures into Australian dollar exposures. Sensitivity to foreign exchange is deemed insignificant. Foreign currency assets and liabilities The following table shows the Australian dollar equivalents of amounts within the Consolidated Statement of Financial Position which are denominated in foreign currencies. Euros United States Dollars Hong Kong Dollars 31 Dec 18 $M 31 Dec 17 $M 31 Dec 18 $M 31 Dec 17 $M 31 Dec 18 $M 31 Dec 17 $M – – – – – – 1.2 – 1.2 0.3 – 0.3 – 211.0 211.0 – 1,182.2 1,182.2 0.1 118.2 118.3 – 1,096.1 1,096.1 – 53.6 53.6 – 307.0 307.0 – 24.1 24.1 – 186.9 186.9 Assets Cash and cash equivalents Derivative financial instruments Liabilities Other liabilities Borrowings1 1 Excluding unamortised establishment costs (f) Credit risk Credit risk is the risk that a contracting entity will not complete its obligations under a contractual agreement, resulting in a financial loss to GPT. GPT has exposure to credit risk on all financial assets included on the Consolidated Statement of Financial Position. GPT manages this risk by: • establishing credit limits for financial institutions and monitoring credit exposures for customers to ensure that GPT only trades and invests with approved counterparties; • investing and transacting derivatives with multiple counterparties that have a minimum long term credit rating of A- from S&P, or equivalent if an S&P rating is not available, minimising exposure to any one counterparty; • providing loans into joint ventures, associates and third parties, only where GPT is comfortable with the underlying property exposure within that entity; • regularly monitoring loans and receivables balances; • regularly monitoring the performance of its associates, joint ventures and third parties; and • obtaining collateral as security (where appropriate). Receivables are reviewed regularly throughout the year. A provision for doubtful debts is recognised at an amount equal to lifetime ECL. Refer to 23(e)(iv) for the calculation of lifetime ECL. GPT’s policy is to hold collateral as security over tenants via bank guarantees (or less frequently collateral such as bond deposits or cash). The maximum exposure to credit risk as at 31 December 2018 is the carrying amounts of financial assets recognised on GPT’s Consolidated Statement of Financial Position. For more information refer to note 4. 54 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 Other disclosure items 15. Cash flow information (a) Cash flows from operating activities Reconciliation of net profit after tax to net cash inflows from operating activities: Net profit for the year Fair value gain on investment properties Fair value loss on derivatives Net impact of foreign currency borrowings and associated hedging loss Gain on financial liability at amortised cost Impairment expense Share of after tax profit of equity accounted investments (net of distributions) Profit on disposal of assets Decrecognition of available for sale financial asset Depreciation and amortisation Non-cash employee benefits – security based payments Non-cash revenue adjustments Interest capitalised Profit on sale of inventories Proceeds from sale of inventories Payment for inventories (Increase)/decrease in operating assets (Decrease)/increase in operating liabilities Net foreign exchange loss/(gain) Other Net cash inflows from operating activities 1 The 31 December 2017 cash flow reconciliation has been restated as a result of the adoption of new accounting standards. Refer to note 24(a). (b) Net debt reconciliation Reconciliation of net debt movements during the financial year: Net debt as at 1 January 2017 Cash flows Foreign exchange adjustments Other non-cash movements Net debt as at 31 December 2017 Net debt as at 1 January 2018 Cash flows Foreign exchange adjustments Other non-cash movements Net debt as at 31 December 2018 Borrowings due within 1 year $M (48.8) 28.8 – 0.1 (19.9) (19.9) (157.5) – (338.6) (516.0) Cash $M 56.3 (6.4) – – 49.9 49.9 8.8 – – 58.7 31 Dec 18 $M 1,451.7 (637.2) 31 Dec 171 $M 1,268.0 (481.0) 40.0 1.5 (2.4) 11.3 (335.2) (18.3) – 7.2 10.7 24.1 (13.7) (1.7) 28.9 (21.4) (12.0) (6.0) 0.5 6.0 534.0 Borrowings due after 1 year $M (2,947.8) (396.0) 63.2 (0.1) 5.7 0.2 (2.2) 5.4 (283.9) – (10.7) 7.7 13.2 8.5 (8.6) (1.5) 7.6 (25.1) 21.3 5.6 (0.8) 6.1 535.5 Total $M (2,940.3) (373.6) 63.2 – (3,280.7) (3,250.7) (3,280.7) (3,250.7) (540.2) (116.1) 338.1 (688.9) (116.1) (0.5) (3,598.9) (4,056.2) 55 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 16. Commitments (a) Capital expenditure commitments Commitments arising from contracts principally relating to the purchase and development of investment properties contracted for at balance date but not recognised on the Consolidated Statement of Financial Position. Retail Office Logistics Properties under development Corporate Total capital expenditure commitments (b) Operating lease commitments 31 Dec 18 $M 31 Dec 17 $M 52.7 44.9 14.6 177.7 4.9 294.8 101.2 23.1 6.1 48.3 1.4 180.1 Operating lease commitments are contracted non-cancellable future minimum lease payments expected to be payable but not recognised on the Consolidated Statement of Financial Position. Due within one year Due between one and five years Over five years Total operating lease commitments (c) Commitments relating to equity accounted investments GPT’s share of equity accounted investments’ commitments at balance date are set out below: Capital expenditure Total joint ventures and associates’ commitments 31 Dec 18 $M 31 Dec 17 $M 5.7 18.0 14.3 38.0 3.2 6.2 – 9.4 31 Dec 18 $M 108.2 108.2 31 Dec 17 $M 31.8 31.8 17. Contingent liabilities (b) BBESOP A contingent liability is a liability that is not sufficiently certain to qualify for recognition as a provision where uncertainty may exist regarding the outcome of future events. As at the end of 2018, GPT has no material contingent liabilities which need to be disclosed. Under the plan individuals who are not eligible to participate in any other employee security scheme may receive $1,000 worth of GPT securities or $1,000 cash if GPT achieves at least target level performance. Securities must be held for the earlier of 3 years or the end of employment. 18. Security based payments (c) DSTI GPT currently has four employee security schemes – the General Employee Security Ownership Plan (GESOP), the Broad Based Employee Security Ownership Plan (BBESOP), the Deferred Short Term Incentive Plan (DSTI) and the Long Term Incentive (LTI) Scheme. (a) GESOP The Board believes in creating ways for employees to build an ownership stake in the business. As a result, the Board introduced the GESOP in March 2010 for individuals who do not participate in the LTI. Under the plan individuals who participate receive an additional benefit equivalent to 10 per cent of their short term incentives (STIC) which is (after the deduction of income tax) invested in GPT securities to be held for a minimum of 1 year. 56 Since 2014, STIC is delivered to the senior executives as 50 per cent in cash and 50 per cent in GPT stapled securities (a deferred component). The deferred component is initially awarded in the form of performance rights, with the rights converting to restricted GPT stapled securities to the extent the performance conditions are met. For the 2014 and 2015 plans, half of the awarded stapled securities will vest one year after conversion with the remaining half vesting two years after conversion, subject to continued employment up to the vesting dates. For the 2016 and any subsequent plans, all the awarded stapled securities will vest one year after conversion, subject to continued employment up to the vesting date. Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 (d) LTI At the 2009 AGM, GPT securityholders approved the introduction of a LTI plan based on performance rights. Any subsequent amendments to the LTI plan have been approved by GPT securityholders. The LTI plan covers each 3 year period. Awards under the LTI to eligible participants are in the form of performance rights which convert to GPT stapled securities for nil consideration if specified performance conditions for the applicable 3 year period are satisfied. Please refer to the Remuneration Report for detail on the performance conditions. The Board determines those executives eligible to participate in the plan and, for each participating executive, grants a number of performance rights calculated as a percentage of their base salary divided by GPT’s volume weighted average price (VWAP) for the final quarter of the year preceding the plan launch. Fair value of performance rights issued under DSTI and LTI The fair value of the performance rights is recognised as an employee benefit expense with a corresponding increase in the employee security scheme reserve in equity. Fair value is measured at grant date, recognised over the period during which the employees become unconditionally entitled to the rights and is adjusted to reflect market vesting conditions. Non-market vesting conditions are included in assumptions about the number of rights that are expected to be vested. At each reporting date, GPT revises its estimate of the number of performance rights that are expected to be exercisable and the employee benefit expense recognised each reporting period takes into account the most recent estimate. The impact of the revision to original estimates, if any, is recognised in the Consolidated Statement of Comprehensive Income with a corresponding adjustment to equity. Fair value of the performance rights issued under LTI is determined using the Monte Carlo simulation and the Black Scholes methodologies. Fair value of the performance rights issued under DSTI is determined using the security price. The following key inputs are taken into account: Fair value of rights Security price at valuation date Total Securityholder Return Grant dates Expected vesting dates Security price at the grant date Expected life Distribution yield Risk free interest rate Volatilty1 1 The volatility is based on the historic volatility of the security. (e) Summary table of all employee security schemes Rights outstanding at 1 January 2017 Rights granted during 2017 Rights forfeited during 2017 Rights converted to GPT stapled securities during 20171 Rights outstanding at 31 December 2017 Rights outstanding at 1 January 2018 Rights granted during 2018 Rights forfeited during 2018 Rights converted to GPT stapled securities during 20182 Rights outstanding at 31 December 2018 2018 LTI $2.62 $4.74 7.0% 2018 DSTI $5.34 $5.34 N/A 29 March 2018 29 March 2018 31 December 2020 31 December 2019 $4.74 $4.74 3 years (2 years remaining) 2 years (1 year remaining) 5.4% 2.1% 18.0% Number of rights LTI 8,607,534 2,854,675 (323,771) (2,792,225) 8,346,213 8,346,213 2,712,482 (879,580) (2,332,026) 7,847,089 DSTI 1,212,639 1,338,498 (357,284) (855,355) 1,338,498 1,338,498 1,308,548 (550,030) (875,344) 1,221,672 4.8% N/A N/A Total 9,820,173 4,193,173 (681,055) (3,647,580) 9,684,711 9,684,711 4,021,030 (1,429,610) (3,207,370) 9,068,761 1 Rights under the 2016 DSTI plan were converted to GPT stapled securities on 20 March 2017 and rights under the 2014 LTI Plan were converted to GPT stapled securities on 14 February 2017. 2 Rights under the 2017 DSTI plan were converted to GPT stapled securities on 19 March 2018 and rights under the 2015 LTI Plan were converted to GPT stapled securities on 13 February 2018. 57 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 Securities outstanding at 1 January 2017 Securities granted during 2017 Securities vested during 2017 Securities outstanding at 31 December 2017 Securities outstanding at 1 January 2018 Securities granted during 2018 Securities vested during 2018 Securities outstanding at 31 December 2018 19. Related party transactions General Property Trust is the ultimate parent entity. Number of stapled securities GESOP 60,756 53,982 (60,756) 53,982 53,982 62,609 (53,982) 62,609 BBESOP 92,761 48,480 (17,688) 123,553 123,553 37,488 (46,277) 114,764 Total 153,517 102,462 (78,444) 177,535 177,535 100,097 (100,259) 177,373 Equity interests in joint ventures and associates are set out in note 3. Loans provided to joint ventures and associates as part of the funding of those arrangements are set out in note 4. Key management personnel Key management personnel compensation was as follows: Short term employee benefits Post employment benefits Long term incentive award accrual Total key management personnel compensation 31 Dec 18 $’000 31 Dec 17 $’000 6,943.4 178.3 2,050.4 9,172.1 6,778.9 168.3 2,064.3 9,011.5 Information regarding individual Directors’ and Senior Executives’ remuneration is provided in the Remuneration Report. There have been no other transactions with key management personnel during the year. Transactions with related parties Transactions with related parties other than associates and joint ventures Expenses 31 Dec 18 $’000 31 Dec 17 $’000 Contributions to superannuation funds on behalf of employees (6,172.5) (5,704.0) Transactions with associates and joint ventures Revenue and expenses Responsible Entity fees from associates Property management fees Development management fees from associates Rent expense Management fees from associates Distributions received/receivable from joint ventures Distributions received/receivable from associates Payroll costs recharged to associates Other transactions Loans (advanced to)/repaid from joint ventures Increase in units in joint ventures Increase in units in associates 58 58,233.0 17,654.2 5,196.5 1,406.0 6,356.4 58,183.6 104,331.3 9,519.9 50,744.1 15,660.8 6,963.9 (597.3) 6,441.7 48,783.5 110,030.9 9,396.8 1,839.1 (10,926.9) – 146.0 (17,915.2) (139,818.3) Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 20. Auditor’s remuneration Audit services PricewaterhouseCoopers Australia Statutory audit and review of financial reports Total remuneration for audit services Other assurance services PricewaterhouseCoopers Australia Regulatory and contractually required audits Total remuneration for other assurance services Total remuneration for audit and assurance services Non-audit related services PricewaterhouseCoopers Australia Other services Taxation services Total remuneration for non audit related services Total auditor’s remuneration 21. Parent entity financial information Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Net assets Equity Equity attributable to secutityholders of the parent entity Contributed equity Reserves Retained earnings Total equity Profit attributable to members of the parent entity Total comprehensive income for the year, net of tax, attributable to members of the parent entity Capital expenditure commitments Retail Office Logistics Properties under development Total capital expenditure commitments 31 Dec 18 $’000 31 Dec 17 $’000 1,266.2 1,266.2 1,245.2 1,245.2 197.7 197.7 1,463.9 170.3 – 170.3 1,634.2 208.5 208.5 1,453.7 58.0 3.5 61.5 1,515.2 Parent entity 31 Dec 18 $M 31 Dec 171 $M 102.3 15,431.9 15,534.2 313.1 4,533.2 4,846.3 10,687.9 7,849.1 (5.9) 2,844.7 10,687.9 1,815.9 1,815.9 32.7 32.4 3.9 177.7 246.7 148.2 12,964.2 13,112.4 383.8 3,424.6 3,808.4 9,304.0 7,833.9 (13.5) 1,483.6 9,304.0 1,258.3 1,258.3 92.4 11.8 3.9 48.3 156.4 59 1 The 31 December 2017 parent entity information has been restated as a result of the adoption of new accounting standards. Refer to note 24(a). Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 Inter-co loan receivables are considered to be low risk, and therefore the impairment provision is determined as 12 months expected credit losses. Applying the expected credit risk model does not result in any loss allowance being recognised in 2018. The parent entity had a deficiency of current net assets of $210.8 million (2017: $235.6 million) arising as a result of the inclusion of the provision for distribution payable to stapled securityholders. The parent has access to cash and undrawn financing facilities of $1,059.5 million as set out in note 13. 22. Fair value disclosures The most significant categories of assets for which fair values are used are investment properties and financial instruments. Information about how those values are calculated, including the valuation process, critical assumptions underlying the valuations, information on sensitivity and other information required by the accounting standards, is provided in this note. (i) Fair value measurement, valuation techniques and inputs A description of the valuation techniques and key inputs are included in the following table: Class of assets/liabilities Fair value hierarchy1 Valuation technique Inputs used to measure fair value Retail Level 3 Office Level 3 Discounted cash flow (DCF) and income capitalisation method DCF and income capitalisation method Unobservable inputs 31 Dec 2018 Unobservable inputs 31 Dec 2017 3.1% – 3.6% 3.0% – 3.7% 10 year average specialty market rental growth Gross market rent (per sqm p.a.) $1,279 – $2,306 $1,280 – $2,252 Adopted capitalisation rate Adopted terminal yield Adopted discount rate 4.1% – 5.5% 4.4% – 5.8% 6.3% – 7.0% 4.3% – 5.5% 4.5% – 5.8% 6.3% – 7.3% Net market rent (per sqm p.a.) $410 – $1,605 $420 – $1,450 10 year average market rental growth Adopted capitalisation rate Adopted terminal yield Adopted discount rate Lease incentives (gross) Logistics Level 3 DCF and income capitalisation method Net market rent (per sqm p.a.) 10 year average market rental growth Adopted capitalisation rate Adopted terminal yield Adopted discount rate Lease incentives (gross) Properties under development Level 3 Income capitalisation method, or land rate Net market rent (per sqm p.a.) Adopted capitalisation rate Derivative financial instruments Level 2 DCF (adjusted for counterparty credit worthiness) Level 3 Foreign currency borrowings Level 2 DCF Land rate (per sqm) Interest rates Basis CPI Volatility Foreign exchange rates Interest rates CPI volatility Interest rates Foreign exchange rates 3.1% – 4.2% 4.6% – 5.5% 5.0% – 5.8% 6.4% – 6.8% 3.1% – 4.0% 5.0% – 5.5% 5.3% – 5.8% 6.6% – 7.0% 17.5% – 35.0% 23.3% – 35.0% $56 – $490 2.8% – 3.1% 5.25% – 7.25% 5.50% – 7.50% 6.75% – 7.75% $68 – $385 2.8% – 3.4% 5.5% – 8.0% 6.0% – 8.3% 7.0% – 8.5% 10.0% – 25.0% 10.0% – 25.0% $118 – $635 5.1% – 5.5% $1,122 – $25,425 $115 – $410 5.8% – 6.8% $122 – $945 Not applicable – all inputs are market observable inputs Not applicable – market observable input N/A 0.91% Not applicable – all inputs are market observable inputs 1 Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 – inputs other than quoted prices included within 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 – inputs for the asset or liability that are not based on observable market data (unobservable inputs). 60 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 DCF method Under the DCF method, the fair value is estimated using explicit assumptions regarding the benefits and liabilities of ownership over the assets’ or liabilities’ life including an exit or terminal value. The DCF method involves the projection of a series of cash flows from the assets or liabilities. To this projected cash flow series, an appropriate, market-derived discount rate is applied to establish the present value of the cash flow stream associated with the assets or liabilities. Income capitalisation method This method involves assessing the total net market income receivable from the property and capitalising this in perpetuity to derive a capital value, with allowances for capital expenditure and reversions. Gross market rent Net market rent 10 year average specialty market rental growth 10 year average market rental growth A gross market rent is the estimated amount of rent for which a property or space within a property should lease between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and wherein the parties have each acted knowledgeably, prudently and without compulsion. The gross market rent is all inclusive and takes into account outgoings and potential turnover rent. A net market rent is the estimated amount for which a property or space within a property should lease between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and wherein the parties have each acted knowledgeably, prudently and without compulsion. In a net rent, the owner recovers outgoings from the tenant on a pro-rata basis (where applicable). An average of a 10 year period of forecast annual percentage growth rates in Retail specialty tenancy rents. Specialty tenants are those tenancies with a gross lettable area of less than 400 square metres (excludes ATMs and kiosks). The expected annual rate of change in market rent over a 10 year forecast period. Adopted capitalisation rate The rate at which net market income is capitalised to determine the value of a property. The rate is determined with regards to market evidence and the prior external valuation. Adopted terminal yield The capitalisation rate used to convert income into an indication of the anticipated value of the property at the end of the holding period when carrying out a discounted cash flow calculation. The rate is determined with regards to market evidence and the prior external valuation. Adopted discount rate The rate of return used to convert a monetary sum, payable or receivable in the future, into present value. Theoretically it should reflect the opportunity cost of capital, that is, the rate of return the capital can earn if put to other uses having similar risk. The rate is determined with regards to market evidence and the prior external valuation. Land rate (per sqm) The land rate is the market land value per sqm. Lease incentives A lease incentive is often provided to a lessee upon the commencement of a lease. Incentives can be a combination of, or, one of the following: a rent free period, a fit-out contribution, a cash contribution or rental abatement. Counterparty credit worthiness Credit value adjustments are applied to derivatives assets based on that counterparty’s credit risk using the observable credit default swaps curve as a benchmark for credit risk. Debit value adjustments are applied to derivatives liabilities based on GPT’s credit risk using GPT’s credit default swaps curve as a benchmark for credit risk. (ii) Valuation process – investment properties GPT manages the semi-annual valuation process to ensure that investment properties are held at fair value in GPT’s accounts and that GPT is compliant with applicable regulations (for example the Corporations Act 2001 and ASIC regulations), the GPT RE Constitution and Compliance Plan. GPT has a Valuation Committee (committee) which is comprised of the Chief Operating Officer, Chief Financial Officer, Head of Funds Management and Head of Capital Transactions. The purpose of the committee is to: • approve the panel of independent valuers; • review valuation inputs and assumptions; • provide an escalation process where there are differences of opinion from various team members responsible for the valuation; • oversee the finalisation of the valuations; and • review the external valuation sign-off and any comments that have been noted. All external valuations and internal tolerance checks are reviewed by the valuation committee prior to these being presented to the Board for approval. External valuations GPT’s external valuations are performed by independent professionally qualified valuers who hold recognised relevant professional qualifications and have specialised expertise in the investment properties being valued. Selected independent valuation firms form part of a panel approved by the committee. Each valuation firm is limited to undertaking consecutive valuations of a property for a maximum period of two years. The Valuation Policy requires an external valuation at least annually for all completed investment properties. Properties under development with value of $100 million or greater are externally valued at least every six months. Unimproved land is externally valued at least every three years. 61 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018Internal tolerance checks Every six months, with the exception of properties externally valued, an internal tolerance check is prepared. The internal tolerance check involves the preparation of a DCF and income capitalisation valuation for each investment property. These are produced using a capitalisation rate, terminal yield and discount rates based on comparable market evidence and recent external valuation parameters. The tolerance measurement will typically be a mid-point of these two approaches. These internal tolerance checks are used to determine whether the book value is in line with the fair value or whether an external valuation is required. The valuation of the properties under development is determined by a development feasibility analysis for each parcel of land within each asset. The development feasibility is prepared on an “as if complete” basis and is a combination of the income capitalisation method and where appropriate, the discounted cash flow method. The cost to complete the development includes development costs, finance costs and an appropriate profit and risk margin. These costs are deducted from the “as if complete” valuation to determine the “as is” basis or “current fair value.” Fair value of vacant land parcels is based on the market land value per square metre. Highest and best use Fair value for investment properties is calculated for the highest and best use whether or not current use reflects highest and best use. For all GPT investment properties current use equates to the highest and best use, with the exception of Sydney Olympic Park Town Centre. The masterplan for Sydney Olympic Park provides long term opportunities for the Town Centre to significantly increase the floor space developed within the precinct, subject to development and planning approvals. The assets are currently leased and any future redevelopment is also subject to the expiration of these leases. (iii) Sensitivity information – investment properties Significant inputs Net market rent Fair value measurement sensitivity to significant increase in input Fair value measurement sensitivity to significant decrease in input 10 year average specialty market rental growth Increase Decrease 10 year average market rental growth Adopted capitalisation rate Adopted terminal yield Adopted discount rate Lease incentives Decrease Increase Generally, if the assumption made for the adopted capitalisation rate changes, the adopted terminal yield will change in the same direction. The adopted capitalisation rate forms part of the income capitalisation approach and the adopted terminal yield forms part of the discounted cash flow approach. The mid-point of the two valuations is then typically adopted. Discounted cash flow approach When assessing a discounted cash flow, the adopted discount rate and adopted terminal yield have a strong interrelationship because the discount rate will determine the rate at which the terminal value is discounted to the present value. In theory, an increase (softening) in the adopted discount rate and a decrease (tightening) in the adopted terminal yield could potentially offset the impact on fair value, and vice versa. If both the discount rate and terminal yield moved in the same direction, the impact on fair value would be magnified. Income capitalisation approach When calculating income capitalisation, the net market rent has a strong interrelationship with the adopted capitalisation rate. This is because the methodology involves assessing the total net market income receivable from the property and capitalising this in perpetuity to derive a capital value. In theory, an increase in the net market rent and an increase (softening) in the adopted capitalisation rate could potentially offset the impact to the fair value, and vice versa. If the net market rent increases but the capitalisation rate goes down (or vice versa), this may magnify the impact on fair value. 62 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018(iv) Financial instruments The following table presents the changes in level 3 instruments for recurring fair value measurements. GPT’s policy is to recognise transfers into and transfers out of fair value hierarchy levels as at the end of the reporting period. Opening balance 1 January 2017 Fair value movements in profit or loss Transfers from level 3 to level 2 Closing balance 31 December 2017 Opening balance 1 January 2018 Fair value movements in profit or loss Closing balance 31 December 2018 Sensitivities Financial assets at fair value through profit and loss $M 9.3 – (9.3) – – – – Derivative liabilities $M (12.3) 7.2 – (5.1) (5.1) 5.1 – Total $M (3.0) 7.2 (9.3) (5.1) (5.1) 5.1 – The following table summarises the impact from the change of significant inputs on GPT’s profit and on equity for the year. Change of significant input 1% increase in interest rates – gain 1% decrease in interest rates – loss 31 Dec 18 $M 31 Dec 17 $M – – – (5.1) 1.4 (1.5) Fair value of level 3 derivatives 23. Accounting policies (a) Basis of preparation The financial report has been prepared: • in accordance with the requirements of the Trust’s Constitution, Corporations Act 2001, Australian Accounting Standards (AAS) and other authoritative pronouncements of the Australian Accounting Standards Board and International Financial Reporting Standards; • on a going concern basis in the belief that GPT will realise its assets and settle its liabilities and commitments in the normal course of business and for at least the amounts stated in the financial statements. The net deficiency of current assets over current liabilities at 31 December 2018 of $725.7 million arises as a result of the inclusion of the provision for distribution payable to stapled securityholders and an increase in current borrowings. GPT has access to cash and undrawn financing facilities of $1,059.5 million as set out in note 13; • under the historical cost convention, as modified by the revaluation for financial assets and liabilities and investment properties at fair value through the Consolidated Statement of Comprehensive Income; • using consistent accounting policies with adjustments to bring into line any dissimilar accounting policies being adopted by the controlled entities, associates or joint ventures; and • in Australian dollars with all values rounded in the nearest hundred thousand dollars in accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, unless otherwise stated. In accordance with Australian Accounting Standards, the stapled entity reflects the consolidated entity. Equity attributable to other stapled entities is a form of non-controlling interest and, in the consolidated entity column, represents the contributed equity of the Company. Comparatives in the Consolidated Statement of Comprehensive Income, Consolidated Statement of Financial Position and notes to the financial statements have been restated to the current year presentation. There was no effect on the profit for the year. As a result of the stapling, investors in GPT will receive payments from each component of the stapled security comprising distributions from the Trust and dividends from the Company. The financial report was approved by the Board of Directors on 11 February 2019. 63 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 (b) Basis of consolidation Controlled entities The consolidated financial statements of GPT report the assets, liabilities and results of all controlled entities for the financial year. Controlled entities are all entities over which GPT has control. GPT controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Controlled entities are consolidated from the date on which control is obtained to the date on which control is disposed. The acquisition of controlled entities is accounted for using the acquisition method of accounting. All intercompany balances and transactions, income and expenses and profits and losses resulting from intra-group transactions have been eliminated. Associates Associates are entities over which GPT has significant influence but not control, generally accompanying a shareholding of between 10% and 50% of the voting rights. Management considered if GPT controls its associates (GPT Wholesale Shopping Centre Fund and GPT Wholesale Office Fund) and concluded that it does not based on the following considerations. GPT has a 23.83 per cent equity interest in GPT Wholesale Office Fund (GWOF) and 28.57 per cent equity interest in GPT Wholesale Shopping Centre Fund (GWSCF) as at 31 December 2018. GPT Funds Management Limited (GPTFM), which is wholly owned by the GPT Group is the Responsible Entity (RE) of the Funds. The Board of GPT FM comprises six Directors, of which GPT can only appoint two. As a result, the Group has significant influence over GPT FM and accordingly accounts for it as an associate using the equity method. The Group also has significant influence over the Funds’ and accounts for its interests in them using the equity method. Investments in associates are accounted for using the equity method. Under this method, GPT’s investment in associates is carried in the Consolidated Statement of Financial Position at cost plus post acquisition changes in GPT’s share of net assets. GPT’s share of the associates’ result is reflected in the Consolidated Statement of Comprehensive Income. Where GPT’s share of losses in associates equals or exceeds its interest in the associate, including any other unsecured long term receivables, GPT does not recognise any further losses, unless it has incurred obligations or made payments on behalf of the associate. Joint arrangements Investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations each investor has, rather than the legal structure of the joint arrangement. GPT has assessed the nature of its joint arrangements and determined it has both joint operations and joint ventures. 64 Joint operations GPT has significant co-ownership interests in a number of properties through unincorporated joint ventures. These interests are held directly and jointly as tenants in common. GPT recognises its direct share of jointly held assets, liabilities, revenues and expenses in the consolidated financial statements under the appropriate headings. The investment properties that are directly owned as tenants in common are disclosed in note 2. Joint ventures Investments in joint ventures are accounted for in the Consolidated Statement of Financial Position using the equity method which is the same method adopted for associates. (c) Other accounting policies Significant accounting policies that summarise the recognition and measurement basis used and are relevant to an understanding of the financial statements are provided throughout the notes to the financial statements. Other accounting policies include: (i) Foreign currency translation Functional and presentation currency Items included in the financial statements of each of the GPT entities are measured using the currency of the primary economic environment in which they operate (‘the functional currency’). Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated Statement of Comprehensive Income. Foreign operations Non-monetary items that are measured in terms of historical cost are converted using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences of non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss. Exchange differences arising on monetary items that form part of the net investment in a foreign operation are taken against a foreign currency translation reserve on consolidation. Where forward foreign exchange contracts are entered into to cover any anticipated excesses of revenue less expenses within foreign joint ventures, they are converted at the ruling rates of exchange at the reporting period. The resulting foreign exchange gains and losses are taken to the Consolidated Statement of Comprehensive Income. Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018(ii) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST (or equivalent tax in overseas locations) except where the GST incurred on purchase of goods and services is not recoverable from the tax authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable. Receivables and payables are stated inclusive of the amount of GST. The net amount of GST receivable from, or payable to, the taxation authority is included with other receivables or payables in the Consolidated Statement of Financial Position. Cash flows are presented on a gross basis in the Statement of Cash Flows. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to, the taxation authority are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (d) New and amended accounting standards and interpretations adopted from 1 January 2018 GPT has adopted AASB 9 and AASB 15 at 1 January 2018. AASB 9 addresses the classification, measurement and de- recognition of financial assets and financial liabilities. AASB 15 contains a single model that applies to contracts with customers and two approaches to recognising revenue: at a point in time or over time. There have been no significant changes to GPT’s financial performance and position as a result of the adoption of the new and amended accounting standards and interpretations effective for annual reporting periods beginning on or after 1 January 2018, with the exception of the adoption of AASB 9. The impact of AASB 9 is a $1.1 million reduction in the value of equity accounted investments and retained earnings in equity. Refer to note 24(a). There has been no financial impact as a result of adopting AASB 15 and new disclosures have been included where required. (e) Changes in accounting policies AASB 9 Financial Instruments The requirements of AASB 9 represent a significant change from AASB 139 Financial Instruments: Recognition and Measurement. The nature and effects of the key changes to GPT’s accounting policies resulting from the adoption of AASB 9 are summarised below. (i) Classification and measurement of financial assets and financial liabilities On 1 January 2018 (the date of initial application of AASB 9), GPT’s management has assessed which business models apply to the financial assets held by the group and has classified its financial instruments into the appropriate AASB 9 categories. The adoption of AASB 9 has not impacted the carrying value of financial assets but has resulted in classification changes on initial application at 1 January 2018 which is shown in the following table: Original classification under AASB 139 New classification under AASB 9 Original carrying amount under AASB 139 31 Dec 17 $M New carrying amount under AASB 9 31 Dec 17 $M Financial Assets Trade receivables Loans and receivables Other receivables Loans and receivables Other assets Loans and receivables Available for sale financial asset Available for sale financial asset Financial assets at amortised cost Financial assets at amortised cost Financial assets at amortised cost Financial assets at fair value through profit and loss 48.4 47.5 23.0 – 48.4 47.5 23.0 – Loans and receivables are classified and measured at amortised cost. GPT holds these financial assets in order to collect the contractual cash flows, and the contractual terms are solely payments of outstanding principal and interest on the principal amount outstanding. Available for sale financial assets are classified and measured at fair value through profit and loss. AASB 9 requires that all financial liabilities be subsequently classified at amortised cost, except in certain circumstances. None of these circumstances apply to GPT and accordingly there is no change to the classification of GPT’s payables and borrowings on adoption of AASB 9. 65 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 (ii) Impairment of financial assets AASB 9 replaces the ‘incurred loss’ model in AASB 139 with an ‘expected credit loss’ (ECL) model. The new impairment model applies to financial assets measured at amortised cost, contract assets and debt investments at fair value through other comprehensive income (FVOCI), but not to investments in equity instruments. Under AASB 9, credit losses are recognised earlier than under AASB 139. GPT has assessed the impact of the adoption of an ECL model under AASB 9 and an adjustment to the opening balance has been recognised (see note 24(a)). (iii) Derivatives and hedge accounting On 1 January 2018 (the date of initial application of AASB 9), GPT has elected to adopt the new general hedge accounting model in AASB 9. There has been no impact with the adoption of AASB 9 on GPT’s derivatives and hedge accounting. GPT’s risk management strategies and hedge documentation are aligned with the requirements of AASB 9 and therefore hedging relationships are treated as continuing. (iv) Accounting policies Policy applicable from 1 January 2018 AASB 9 contains three principal classification categories for financial assets: • measured at amortised cost; • fair value through other comprehensive income (FVOCI); and • fair value through profit and loss (FVTPL). The classification depends on the entity’s business model for managing the financial assets and the contractual terms of the cash flows. Financial assets at amortised cost Loans and receivables Loans and receivables are initially recognised at fair value and subsequently at amortised cost using the effective interest rate method less any allowance under the ECL model. All loans and receivables with maturities greater than 12 months after the balance date are classified as non- current assets. Recoverability of receivables At each reporting date, GPT assesses whether financial assets carried at amortised cost are ‘credit-impaired’. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. GPT recognises loss allowances at an amount equal to lifetime ECL on trade and other receivables. Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets. Lifetime ECLs are the ECLs that result from all possible default events over the expected life of the trade receivable and are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to GPT in accordance with the contract and the cash flows that GPT expects to receive). A default on trade receivables is when the counterparty fails to make contractual payments 66 when they fall due and management determines that collection of the debt should no longer be pursued. GPT analyses the age of outstanding receivable balances and applies historical default percentages adjusted for other current observable data as a means to estimate lifetime ECL. Other current observable data may include: • • forecasts of economic conditions such as unemployment, interest rates, gross domestic product and inflation; financial difficulties of a counterparty or probability that a counterparty will enter bankruptcy; and • conditions specific to the asset to which the receivable relates. Debts that are known to be uncollectable are written off when identified. Derivatives and hedge accounting Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. For cash flow hedges, the effective portion of changes in the fair value of derivatives is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. When cross currency interest rate swaps are used to hedge the market risks of borrowings denominated in foreign currencies, GPT does not designate the currency basis spread as part of the hedging instrument within the hedge relationship. Currency basis spread is a liquidity premium that is charged for exchanging different currencies, and changes over time impacting the fair value of cross currency swaps. The changes in the fair value of currency basis spread are recognised in other comprehensive income in the hedging reserve in equity. Until 31 December 2017, GPT recognised these changes in the cash flow hedge reserve. (v) Transition Changes in accounting policies resulting from the adoption of AASB 9 have been applied retrospectively. The impact on GPT’s previously reported financial position at 31 December 2017, as a result of the adoption AASB 9 and its application retrospectively, is detailed in note 24(a). AASB 15 Revenue from Contracts with Customers The requirements of AASB 15 replace AASB 118 Revenue and AASB 111 Construction Contracts. AASB 15 is based on the principle that revenue is recognised when control of a good or service is transferred to a customer. It contains a single model that applies to contracts with customers and two approaches to recognising revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognised. It applies to all contracts with customers except leases, financial instruments and insurance contracts. It requires reporting entities to provide users of financial statements with more informative and relevant disclosures. Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018(vi) Classification and measurement of revenue Revenue is recognised over time if: • the customer simultaneously receives and consumes the benefits as the entity performs; • the customer controls the asset as the entity creates or enhances it; or • the seller’s performance does not create an asset for which the seller has an alternative use and there is a right to payment for performance to date. Where the above criteria is not met, revenue is recognised at a point in time. The following table summarises the changes in terminology with respect to the timing of revenue recognition between AASB 111 and AASB 118 compared to AASB 15 and the new revenue recognition policies under AASB 15. From GPT’s assessment of when performance obligations are satisfied, there is no change in the timing of revenue recognition when comparing the previous accounting policies to those now under AASB 15. Type of revenue Description Recoveries revenue Recharge revenue Fund management fees Fee income – property management fees Fee income – property management leasing fees – over time The Group recovers the costs associated with general building and tenancy operation from lessees in accordance with specific clauses within lease agreements. These are invoiced monthly based on an annual estimate. The consideration for the current month is due on the first day of the month. Revenue is recognised as the estimated costs are consumed by the tenant. Should any adjustment be required based on actual costs incurred, this is recognised in the statement of financial performance within the same reporting period and billed annually. The Group recovers costs for any additional specific services requested by the lessee under the lease agreement. These costs are recovered in accordance with specific clauses within the lease agreements. Revenue from recharges is recognised as the services are provided. The lessee is invoiced on a monthly basis, where applicable. The consideration for the current month is due on the first day of the month. The Company provides fund management services to GPT Wholesale Office Fund (GWOF) and GPT Wholesale Shopping Centre Fund (GWSCF) (the Funds) in accordance with the Funds constitutions. The services are utilised on an ongoing basis and revenue is calculated and recognised in accordance with the relevant constitution. The fees are invoiced on a quarterly basis and consideration is payable within 21 days of the quarter end. The Company provides property management services to the owners of property assets in accordance with property services agreements. The services are utilised on an ongoing basis and revenue is calculated and recognised in accordance with the specific agreement. The fees are invoiced monthly with variable payment terms depending on the individual agreements. Should an adjustment, as calculated in accordance with the property services agreement be required, this is recognised in the statement of financial performance within the same reporting period. Under some property management agreements, the Company provides a lease management service to the owners. These services are delivered on an ongoing basis and revenue is recognised monthly, calculated in accordance with the property management agreement. The fees are invoiced monthly with variable payment terms depending on the individual agreements. Revenue recognition policy under AASB 111, AASB 17 and AASB 118 Revenue recognition policy under AASB 15 Recognised on an accruals basis based on the contract terms Over time Revenue recognised when costs are incurred Over time Recognised on an accruals basis based on the contract terms. Over time Recognised on an accruals basis based on the contract terms. Over time Recognised on an accruals basis based on the contract terms. Over time Fee income – property management leasing fees – point in time Under some property management agreements, the Company provides a lease management service to the owners. The revenue is recognised when the specific service is delivered (e.g. on lease execution) and consideration is due 30 days from invoice date. Recognised in the period in which the services are rendered. Point in time 67 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018Type of revenue Description Development management fees The Company provides development management services to the owners of property assets in accordance with development management agreements. Revenue is calculated and recognised in accordance with the specific agreement. The fees are invoiced on a monthly basis, in arrears, and consideration is due 30 days from invoice date. Development revenue Sale of inventory (vii) Transition The Company provides development management services to the owners of property assets in accordance with development management agreements. Revenue is calculated in accordance with the specific agreement and invoiced in accordance with the contract terms. Consideration is due from the customer based on the specific terms agreed in the contract and is recognised when the Company has control of the benefit. Proceeds from the sale of inventory are recognised by the Company in accordance with a specific contract entered into with another party for the delivery of inventory. Revenue is calculated in accordance with the contract. Consideration is payable in accordance with the contract. Revenue is recognised when control has been transferred to the buyer. Revenue recognition policy under AASB 111, AASB 17 and AASB 118 Revenue recognition policy under AASB 15 If the agreement includes an hourly fee, the revenue is recognised in the period in which the services are rendered. If the agreement includes a fixed price, the revenue is recognised in proportion to the value of the works as a percentage of the total project cost delivered until the completion of the associated development works. Recognised in the period in which the services are rendered. Over time Over time Point in time When significant risk and rewards are transferred. Point in time Changes in accounting policies resulting from the adoption of AASB 15 have been applied retrospectively. There has been no impact on GPT’s previously reported financial position as a result of the adoption AASB 15. Application of Standard 1 January 2019 (f) New accounting standards and interpretations issued but not yet adopted The following standards and amendments to standards are relevant to GPT. Reference Description AASB 16 Leases AASB 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. It will change the way lessees account for leases by eliminating the current dual accounting model which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there will be a single, on-balance sheet accounting model that is similar to the current finance lease accounting. Where GPT is the lessee, this new treatment will result in recognition of a right of use asset along with the associated lease liability in the Consolidated Statement of Financial Position and both a depreciation and interest charge in the Consolidated Statement of Comprehensive Income. In contrast, lessor accounting for lease income is not expected to change with the adoption of the new standard other than the separation of service income from lease income for disclosure purposes as a result of the adoption of AASB 15. The new leasing model requires the recognition of operating leases on the Consolidated Statement of Financial Position. In relation to these operating leases, if GPT had adopted the new standard from 1 January 2018, management estimates that net profit before tax for the year ended 31 December 2018 would increase by approximately $0.1 million. Assets at 31 December 2018 would increase by approximately $18.9 million and liabilities would increase by approximately $19.9 million. In addition, lease liabilities arising from leasehold arrangements which are currently recognised as a component of Investment Properties will be separately disclosed in the Statement of Financial Position. 68 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 24. Adoption of new accounting standards (a) AASB 9 Financial Instruments – impact of adoption As set out in note 23, GPT has adopted AASB 9. The impact on GPT’s 31 December 2018 Consolidated Statement of Comprehensive Income, Consolidated Statement of Financial Position and Consolidated Statement of Changes in Equity as a result of applying AASB 9 retrospectively is as follows: 31 Dec 17 Prior year $M Decrease $M 31 Dec 17 Restated $M CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Extract) Other income Share of after tax profit of equity accounted investments Total other income Total revenue and other income Profit before income tax expense Profit after income tax expense Net profit for the year Total comprehensive income for the year Total comprehensive income for the year from continuing operations Net profit attributable to: - Securityholders of the Trust Total comprehensive income attributable to: - Securityholders of the Trust CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Extract) ASSETS Non-current assets Equity accounted investments Total non-current assets Total assets EQUITY Securityholders of the Trust (parent entity) Retained earnings Total equity of the Trust securityholders Total equity 443.9 939.1 1,645.7 1,278.6 1,268.3 1,269.1 1,252.6 1,251.8 1,249.3 1,239.9 3,562.9 12,767.4 12,958.4 1,829.5 9,603.7 9,107.0 (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) 442.8 938.0 1,644.6 1,277.5 1,267.2 1,268.0 1,251.5 1,250.7 1,248.2 1,238.8 3,561.8 12,766.3 12,957.3 1,828.4 9,602.6 9,105.9 69 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Extract) Year ended 31 Dec 2017 Equity attributable to Securityholders Profit for the year Decrease Profit for the year – restated Total comprehensive income for the year Decrease Total comprehensive income for the year – restated Equity attributable to Securityholders at 31 Dec 2017 Decrease Equity attributable to Securityholders at 31 Dec 2017 – restated General Property Trust Consolidated Retained earnings $M Total equity $M Total equity $M 1,249.3 (1.1) 1,248.2 1,249.3 (1.1) 1,248.2 1,829.5 (1.1) 1,828.4 1,249.3 (1.1) 1,248.2 1,239.9 (1.1) 1,238.8 9,603.7 (1.1) 9,602.6 1,269.1 (1.1) 1,268.0 1,252.6 (1.1) 1,251.5 9,107.0 (1.1) 9,105.9 (b) AASB 15 Revenue from Contracts with Customers – impact of adoption As set out in note 23, GPT has adopted AASB 15. There have been no changes to GPT’s financial performance and position as a result of the adoption of this standard. Lease Revenue Segment Result Lease revenue Recoveries and recharge revenue Share of rent from investment properties in equity accounted investments Less: Share of rent from investment properties in equity accounted investments Amortisation of lease incentives and costs Straightlining of leases Consolidated Statement of Comprehensive Income Rent from investment properties Rent from investment properties 31 Dec 18 31 Dec 17 Retail $M Office $M Logistics $M Total $M Retail $M Office $M Logistics $M Total $M 286.7 145.7 117.9 550.3 279.0 136.5 105.1 520.6 81.9 1.9 32.9 74.7 9.5 124.3 - 76.6 79.3 1.8 30.3 72.4 7.4 117.0 - 74.2 370.5 253.3 127.4 751.2 360.1 239.2 112.5 711.8 (76.5) (46.1) 5.5 634.1 (74.0) (38.9) 11.7 610.6 Rent from investment properties is recognised and measured in accordance with AASB 16 Leases. In addition to revenue generated directly from the lease, rent from investment properties includes non-lease revenue earned from tenants, predominantly in relation to recovery of asset operating costs, which is recognised and measured under AASB 15 Revenue from Contracts with Customers. Details on the classification and measurement of this non-lease revenue is disclosed in note 23(e)(iv). 25. Events subsequent to reporting date On 16 January 2019, the Group announced the proposed sale of its 50 per cent share of the MLC Centre. Proceeds from the planned sale will initially repay debt prior to be being reinvested into the development pipeline. Other than the above, the Directors are not aware of any matter or circumstance occurring since 31 December 2018 that has significantly or may significantly affect the operations of GPT, the results of those operations or the state of affairs of GPT in subsequent financial years. 70 Annual Financial Report of The GPT GroupNotes to the Financial Statements – Year ended 31 December 2018 Directors’ Declaration Year ended 31 December 2018 In the Directors of the Responsible Entity’s opinion: (a) The consolidated financial statements and notes set out on pages 24 to 70 are in accordance with the Corporations Act 2001, including: • complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and • giving a true and fair view of GPT’s financial position as at 31 December 2018 and of its performance for the financial year ended on that date; and (b) the consolidated financial statements and notes comply with International Financial Reporting Standards as disclosed in note 23 to the financial statements. (c) There are reasonable grounds to believe that GPT will be able to pay its debts as and when they become due and payable. The net deficiency of current assets over current liabilities at 31 December 2018 of $725.7 million arises as a result of the inclusion of the provision for distribution payable to stapled securityholders and an increase in current borrowings. GPT has access to cash and undrawn financing facilities of $1,059.5 million as set out in note 13 to the financial statements. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer as required by Section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. Vickki McFadden Chairman GPT RE Limited Sydney 11 February 2019 Bob Johnston Chief Executive Officer and Managing Director 71 Annual Financial Report of The GPT Group Independent auditor’s report  To the stapled security holders of The GPT Group  Report on the audit of the financial report  Our opinion In our opinion:   The accompanying financial report of General Property Trust (GPT) (the Registered Scheme) and its controlled entities (together, the Group or The GPT Group) is in accordance with the Corporations Act  2001, including:  (a) giving a true and fair view of the Group's financial position as at 31 December 2018 and of its  financial performance for the year then ended  (b) complying with Australian Accounting Standards and the Corporations Regulations 2001.    What we have audited The Group financial report comprises:     • • • • • Basis for opinion ● ● ● ● ● ● the consolidated statement of financial position as at 31 December 2018 the consolidated statement of comprehensive income for the year then ended  the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended the notes to the financial statements, which include a summary of significant accounting policies the directors’ declaration.      We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under • those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report.   We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.      Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code.       PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124  T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au    Liability limited by a scheme approved under Professional Standards Legislation   67  72 Annual Financial Report of The GPT Group Our audit approach   An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report.   We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates.             • • • • • ● For the purpose of our audit we used overall Group materiality of $28.7 million, which represents approximately 5% of the Group’s Funds from Operations (FFO).  Materiality Audit scope Key audit matters ● Amongst other relevant    topics, we communicated the following key audit matters to the Audit Committee: ● The structure of the Group is commonly referred to as a 'stapled group'. In a stapled group, the securities of two or more entities are 'stapled' together and cannot be traded separately. In the case of the Group, the units in GPT have been stapled to the shares in GPT Management Holdings Limited (GPT MH). For the purposes of consolidation accounting, GPT is the 'deemed' parent and the financial report reflects the consolidation of GPT and its controlled entities and GPT MH and its controlled entities. ● We applied this threshold,  •  Valuation of investment  properties (including  those under development) Carrying value of inventories Valuation of derivatives together with qualitative considerations, to determine the scope of our audit and the  nature, timing and extent of ● These are further described in our audit procedures and to  the Key audit matters section evaluate the effect of  of our report. misstatements on the financial report as a whole. − −   ● We chose FFO because, in our − ● Our audit focused on where the view, it is the key performance indicator used Group made subjective  by security holders to judgements; for example  measure the performance of significant accounting  the Group. An explanation of estimates involving what is included in FFO is  assumptions and inherently located in Note 1, Segment  uncertain future events. information.  ● We selected 5% based on our ● The Group holds equity accounted investments in two        68 73 Annual Financial Report of The GPT Group professional judgement noting it is also within the range of commonly accepted profit related thresholds.   wholesale real estate investment funds. The auditors of these funds (“component auditors”) assisted in performing procedures on behalf of the Group engagement team.  ● We determined the level of   involvement we needed to have in the audit work performed by the component auditors to be able to conclude whether sufficient appropriate audit evidence had been obtained. This included written instructions and active dialogue throughout the year.        Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context.    How our audit addressed the key audit matter  We obtained the latest independent property market  reports to develop an understanding of the prevailing  market conditions in which the Group invests. Key audit matters     • • • • • Key audit matter Valuation of investment properties (including those under development) $10,128.8 million (2017: $8,745.7 million) Refer to note 2 •  The Group’s investment property portfolio is comprised of office, retail and logistics properties including properties under development in those categories.  We discussed the specifics of the portfolio of properties with management including new leases entered into during the year, lease expiries, capital expenditure, vacancy rates and other specific risk factors to identify specific properties for further testing.      For a sample of leases, we compared the rental income used in the external valuation and internal tolerance check models to the tenancy schedule. Investment properties are valued at fair value at reporting date using either the income capitalisation approach or the discounted cash flow approach. The value of investment properties is dependent on the valuation methodology adopted and the inputs into the valuation model. Factors such as prevailing market conditions, the individual nature, condition and location of each property and the expected future income for each property directly impact fair values. Amongst others, the following assumptions are key in establishing fair value:       We compared the Group’s market capitalisation rates and discount rates by location and asset grade to a range we determined reasonable based on benchmark market data. Where capitalisation rates and discount rates fell outside of our anticipated ranges, we considered the rationale for the adopted metric. In addition to the above, for selected properties under       69  74 Annual Financial Report of The GPT Group • Capitalisation rate  • Discount rate.  development we: • Compared key inputs in the ‘as if complete’ valuation to underlying support; and External valuations • On a sample basis, compared key assumptions used within the development’s ‘cost to complete’ schedule to underlying support, for example, expected future costs to subcontractor agreements.   In accordance with the Group’s valuation policy, all  investment properties must be externally valued by an independent valuation expert at least once every 12 months. If a property is not externally valued at  balance date, an internal tolerance check is performed to determine whether the book value (most recent  valuation plus capital expenditure) is in line with management’s estimate of fair value or whether an  external valuation is required.  For all properties externally valued, we agreed the fair  value per the final valuation reports to the Group’s We considered this a key audit matter because of the: accounting records.  • Relative size of the investment property balance in the consolidated statement of financial position.  • Quantum of revaluation gains that directly impact  the consolidated statement of comprehensive income  through the fair value gain on investment properties.  • • Inherently subjective nature of investment property valuations due to the use of assumptions in the • valuation methodology. • • Sensitivity of valuations to key input assumptions, specifically capitalisation and discount rates. • • • Assessed the competency and capabilities of management’s expert, i.e. the external valuer and confirmed that the Group followed its policy of rotating valuation firms at least every two years. • Read a sample of the valuers’ terms of engagement to identify any clauses that might affect their objectivity or impose limitations on their work.        For a sample of external valuations we: Internal tolerance check We confirmed with management that the capitalisation and discounted cash flow models utilised for the internal tolerance checks were consistent with the prior period. For a sample of internal tolerance checks, we compared key inputs to supporting documentation, compared key assumptions to market benchmarking data and performed recalculations over the internal tolerance check models.  •  For each project we obtained the Group’s latest feasibility models and discussed with management matters such as the overall project strategy, cost movements and claims (where applicable).    Carrying value of inventories $144.3 million (2017: $152.2 million) Refer to note 6  The Group develops a portfolio of sites for future sale  which is classified as inventory. The Group’s Using the information gained from these discussions inventories are held at the lower of the cost and net  and our prior year knowledge of the business, we used realisable value for each inventory project. a risk based approach to select a sample of projects to  perform net realisable value testing. For the sample of The cost of the inventory includes the cost of  selected projects we: acquisition, development, finance costs and all other  costs directly related to specific projects including an  allocation of direct overhead expenses.  We considered the carrying value of inventories a key audit matter given the significant judgement required • Further discussed with management the life cycle of the project, key project risks, changes to project strategy, current and future estimated sales prices,       70  75 Annual Financial Report of The GPT Group by the Group in estimating future selling prices, costs  to complete projects and selling costs. These judgments may have a material impact on the  calculation of net realisable value and therefore in determining whether the value of a project should be  written down (impaired). During the year ended 31 December 2018 an impairment of $11.4m was recognised.  construction progress and costs and any new and previous impairments. • Compared the estimated selling prices to market sales data in similar locations or to recent sales in the project. • Compared the forecasted costs to complete for the project to the relevant construction contracts (if available) or to construction cost estimates.     • Compared the carrying value to the net realisable value (NRV) to identify projects with potential impairments.         • Obtained the transfer agreement for the development site transferred from investment property to inventory during the year and agreed the transfer price in the agreement to the external valuation. We developed an understanding of the movements in  the derivative balances during the year. We obtained  independent counterparty confirmations to confirm the existence of each derivative at year end. • Traced a sample of capital expenditure additions to supporting documentation and tested whether they were valid costs that could be capitalised in accordance with the requirements of Australian Accounting Standards.      • • • • Valuation of derivatives • $216.2 million ($134.0 million) (net valuation including current assets, non-current assets, current liabilities and non-current liabilities) Refer to note 14 • The Group issues debt denominated in both foreign  and domestic currencies as part of its funding strategy and enters into derivative transactions to manage the  associated foreign exchange and interest rate risk.  The Group holds a portfolio of derivative instruments  including Cross Currency Interest Rate Swaps (CCIRS), Interest Rate Swaps (IRS) and other derivatives.   The Group only applies hedge accounting to the borrowings denominated in foreign currencies. Risk  arising from borrowings denominated in foreign  currencies is managed with CCIRS. The CCIRS are in  hedge accounting relationships with the HKD and USD bonds disclosed in the consolidated statement of  financial position. Other derivatives are not in hedge  accounting relationships.  Through inquiry with management and inspection of a sample of hedge documentation, we identified the application of hedge accounting on new and existing derivative instruments. • Together with PwC treasury specialists, we independently calculated the fair value of the derivatives, independently sourcing market data inputs used in the valuation calculations. We selected a sample of derivative balances to test based on material instrument type. For each sample: • We agreed the key terms of the derivatives back to the individual counterparty contracts. To test the application of hedge accounting in accordance with Australian Accounting Standards, we performed the following procedures in conjunction The Group has transitioned to the hedge accounting        71 76 Annual Financial Report of The GPT Group     • • • • • requirements under AASB 9 Financial Instruments during the period.   We considered the valuation of derivatives to be a key audit matter because of the:  • Nature and complexity involved in valuing derivative instruments.  with PwC treasury specialists for a sample of hedge relationships: • Assessed whether the Group’s hedge documentation, designation and effectiveness testing approach was in accordance with the hedge accounting requirements of Australian Accounting Standards.  • Relative size of the derivative balances and potential for variability in the size of these balances year on year.    • Assessed whether the hedge effectiveness criteria continued to be met. • Inspected the hedge documentation for new hedge relationships to assess whether hedge accounting criteria were met. • Complexity involved in the application of hedge accounting in accordance with Australian Accounting  Standards.   • Assessed the appropriateness of hedge accounting journals across the relevant accounts (cash flow hedge reserve, cost of hedging reserve, fair value adjustment  of the borrowings and profit or loss) based on changes in fair value of the hedge accounted derivatives and underlying hedged items. The recognition and presentation of gains and losses was agreed to the consolidated statement of comprehensive income.   Other information   The directors of the responsible entity of GPT, GPT RE limited (the directors) are responsible for the other information. The other information comprises the information included in the Group’s Annual  Financial Report for the year ended 31 December 2018, but does not include the financial report and  our auditor’s report thereon.  •  Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon.  In connection with our audit of the financial report, our responsibility is to read the other information  and, in doing so, consider whether the other information is materially inconsistent with the financial  report or our knowledge obtained in the audit, or otherwise appears to be materially misstated.   If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the financial report    The directors are responsible for the preparation of the financial report that gives a true and fair view  in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such  internal control as the directors determine is necessary to enable the preparation of the financial  report that gives a true and fair view and is free from material misstatement, whether due to fraud or error.        72 77 Annual Financial Report of The GPT Group In preparing the financial report, the directors are responsible for assessing the ability of the Group to  continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease  operations, or have no realistic alternative but to do so.  Auditor’s responsibilities for the audit of the financial report   Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material  misstatement when it exists. Misstatements can arise from fraud or error and are considered material  if, individually or in the aggregate, they could reasonably be expected to influence the economic  decisions of users taken on the basis of the financial report.    A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf  This description forms part of our auditor's report.     • • • • • Report on the remuneration report  Our opinion on the remuneration report  We have audited the remuneration report included in pages 14 to 22 of the Directors Report for the year ended 31 December 2018.   In our opinion, the remuneration report of The GPT Group for the year ended 31 December 2018 complies with section 300A of the Corporations Act 2001.    Responsibilities •  The directors are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards.      PricewaterhouseCoopers       Susan Horlin Partner Bianca Buckman Partner     Sydney 11 February 2019    73 78 Annual Financial Report of The GPT GroupAnnual Financial Report of GPT Management Holdings Limited and its Controlled Entities Year ended 31 December 2018 Contents Directors’ Report .......................................................................................................................................................................... 80 Auditor’s independence declaration ............................................................................................................................................. 98 Financial Statements .................................................................................................................................................................... 99 Consolidated Statement of Comprehensive Income ............................................................................................................ 99 Consolidated Statement of Financial Position ................................................................................................................... 100 Consolidated Statement of Changes in Equity ................................................................................................................... 101 Consolidated Statement of Cash Flows ............................................................................................................................ 102 Notes to the Financial Statements ..................................................................................................................................... 103 Result for the year ..................................................................................................................................................... 103 1. Segment information ............................................................................................................................................ 103 Operating assets and liabilities ................................................................................................................................ 104 2. Equity accounted investments .............................................................................................................................. 104 3. Trade receivables .................................................................................................................................................. 105 4. Intangible assets ................................................................................................................................................... 106 5. Inventories ............................................................................................................................................................ 107 6. Property, plant and equipment............................................................................................................................. 107 7. Other assets ......................................................................................................................................................... 108 8. Payables ................................................................................................................................................................ 109 9. Provisions ............................................................................................................................................................. 109 10. Taxation ................................................................................................................................................................. 110 Capital structure ........................................................................................................................................................ 112 11. Equity and reserves .............................................................................................................................................. 112 12. Earnings per share ............................................................................................................................................... 113 13. Dividends paid and payable .................................................................................................................................. 114 14. Borrowings ........................................................................................................................................................... 114 15. Financial risk management ................................................................................................................................. 115 Other disclosure items .............................................................................................................................................. 118 16. Cash flow information .......................................................................................................................................... 118 17. Commitments ....................................................................................................................................................... 119 18. Contingent liabilities ............................................................................................................................................ 119 19. Security based payments ..................................................................................................................................... 119 20. Related party transactions .................................................................................................................................. 121 21. Auditors remuneration ......................................................................................................................................... 123 22. Parent entity financial information ....................................................................................................................... 123 23. Fair value disclosures .......................................................................................................................................... 124 24. Discontinued operations and available for sale financial assets ......................................................................... 124 25. Accounting policies ............................................................................................................................................... 125 26. Events subsequent to reporting date ................................................................................................................... 129 Directors’ Declaration ................................................................................................................................................................. 130 Independent Auditor’s Report .................................................................................................................................................... 131 Supplementary information ........................................................................................................................................................ 139 This financial report covers both GPT Management Holdings Limited (the Company) as an individual entity and the Consolidated Entity consisting of GPT Management Holdings Limited and its controlled entities. GPT Management Holdings Limited is a company limited by shares, incorporated and domiciled in Australia. Through GPT’s internet site, GPT has ensured that its corporate reporting is timely, complete and available globally at minimum cost to the Company. All press releases, financial reports and other information is available on GPT’s website: www.gpt.com.au. 79 Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Directors’ Report Year ended 31 December 2018 The Directors of GPT Management Holdings Limited (the Company), present their report together with the financial statements of GPT Management Holdings Limited and its controlled entities (the Consolidated Entity) for the financial year ended 31 December 2018. The Consolidated Entity is stapled to the General Property Trust (GPT Trust) and the GPT Group (GPT or the Group) financial statements include the results of the stapled entity as a whole. GPT Management Holdings Limited is a company limited by shares, incorporated and domiciled in Australia. The registered office and principal place of business is MLC Centre, Level 51, 19 Martin Place, Sydney NSW 2000. 1. Operating and financial review About GPT GPT is an owner and manager of a $14.0 billion diversified portfolio of high quality Australian retail, office and logistics property assets and together with GPT’s funds management platform the Group has $24.0 billion of property assets under management (AUM). GPT owns some of Australia’s most prominent real estate assets, including Melbourne Central and Highpoint Shopping Centre in Melbourne, Australia Square, 1 Farrer Place and Citigroup Centre in Sydney and One One One Eagle Street in Brisbane. Listed on the Australian Securities Exchange (ASX) since 1971, GPT is today one of Australia’s largest diversified listed property groups with a market capitalisation of approximately $9.6 billion. GPT is one of the top 50 listed stocks on the ASX by market capitalisation as at 31 December 2018. GPT’s strategy is focused on leveraging its extensive real estate experience to deliver strong returns through disciplined investment, asset management and development. The development capability has a focus on creating value for securityholders through the enhancement of the core investment portfolio and in the creation of new investment assets. A key performance measure for GPT is Total Return. Total Return is calculated as the change in Net Tangible Assets (NTA) per security plus distributions per security declared over the year, divided by the NTA per security at the beginning of the year. This focus on Total Return is aligned with securityholders’ long term investment aspirations. In 2018 GPT achieved a Total Return of 15.8 per cent. GPT targets a Management Expense Ratio (MER) of less than 45 basis points. MER is calculated as management expenses as a percentage of assets under management. In 2018 GPT achieved an MER of 30 basis points. GPT focuses on maintaining a strong balance sheet. GPT’s gearing as at 31 December 2018 was 26.3 per cent and it has maintained a weighted average debt expiry of greater than 6 years. The average cost of debt for 2018 was 4.2 per cent. Review of operations The Consolidated Entity’s financial performance for the year ended 31 December 2018 is summarised below. The net loss after tax for the year ended 31 December 2018 is $40,962,000 (2017: $14,222,000). Property management fees Development management fees and revenue Fund management fees Management costs recharged Proceeds from sale of inventory Other income Expenses (Loss)/profit from continuing operations before income tax expense Income tax expense Loss after income tax for continuing operations Loss from discontinued operations Net loss for the year 80 31 Dec 18 $’000 31 Dec 17 $’000 Change % 43,511 21,634 84,619 32,059 28,883 5,688 38,863 32,039 77,206 32,334 10,358 18,368 (234,159) (203,315) (17,765) (7,670) (25,435) (15,527) (40,962) 5,853 (6,406) (553) (13,669) (14,222) 12% (32%) 10% (1%) 179% (69%) 15% (404%) 20% 4,499% 14% 188% Consolidated Entity result Logistics The increase in the net loss compared with 2017 is mainly attributable to a decrease in development management revenue, the derecognition of available for sale financial assets in 2017, an increase in expenses due to revaluations of financial arrangements and a higher loss from discontinued operations. This is partially offset by an increase in proceeds from the sale of inventory, property management fees and funds management fees. Property management Retail The Consolidated Entity is responsible for property management activities across the retail sector. Property management fees increased to $29,025,000 in 2018 as a result of higher base and turnover rent and growth from redevelopments, offset by lower energy income. Office The Consolidated Entity is responsible for property management activities across the office sector. Property management fees increased to $12,208,000 in 2018 as a result of higher leasing fees and membership income from Space & Co. Logistics The Consolidated Entity is responsible for property management activities across the logistics sector. Property management fees increased to $2,278,000 in 2018 as a result of property acquisitions and development completions. Development management Retail During 2018, the focus has been on the delivery of the $432.0 million Sunshine Plaza retail expansion (GPT share: $216.0 million). The development has been delayed due to inclement weather resulting in a staged opening in November 2018 and the major launch scheduled for March 2019. During 2018, the business unit contributed $7.6 million to GPT’s Funds from Operations (FFO) (2017: $5.3 million). Office During the year the 15,800sqm 4 Murray Rose development was successfully completed at Sydney Olympic Park. The asset was delivered on time and within budget and is 81 per cent leased at the year end with the Rural Fire Service taking 59 per cent of the building. The development has delivered a development yield on cost over 7.5 per cent. Construction has commenced on the new 26,000sqm tower at 32 Smith Street, Parramatta following the acquisition of the site last year. The pre-committed tenant for the new tower is QBE, who will occupy approximately 50 per cent of the building. Practical completion is due in late 2020. The team is well progressed with a number of repositioning projects in Melbourne at 100 Queen St, Melbourne Central Tower, CBW and 530 Collins Street. During the year the Group continued to successfully develop high quality logistics facilities to increase the portfolio quality and scale. At Huntingwood, the 11,000sqm warehouse reached practical completion in August 2018. The building was leased to Cahill Transport Group. Also, at 50 Old Wallgrove Road in Eastern Creek construction of a 30,000sqm facility was completed in January 2019. By the time of signing this financial report, 100 per cent of the asset has been leased to ACR Supply Partners. Work continues to develop out and replenish the logistics land bank. This includes the November 2018 acquisition of 8.9 hectares of land in Melbourne which provides the opportunity to develop 48,000sqm of new logistics facilities. Funds Management GPT Wholesale Office Fund (GWOF) GWOF’s portfolio value increased to $7.8 billion, up $0.7 billion from 2017 and the fund delivered a one year equity IRR of 12.7 per cent. The management fee income earned from GWOF for 2018 increased by $2.9 million as compared to 2017 due to strong upward revaluations across the portfolio. As a result of GPT not participating in the Fund’s Distribution Reinvestment Plan (DRP) and equity raising in December 2018, GPT’s ownership reduced to 23.83 per cent (2017: 24.95 per cent). GPT Wholesale Shopping Centre Fund (GWSCF) The fund delivered a one year equity IRR of 4.8 per cent. GWSCF’s portfolio value decreased to $4.8 billion, down $0.1 billion from 2017. This was primarily driven by the sale of GWSCF’s 83.33 per cent share in Homemaker City, Maribyrnong in December 2018 offset by upward revaluations. Management fee income earned from GWSCF of $21.9 million has increased by $4.6 million as compared to 2017. This was due to the acquisition of an additional 25 per cent interest in Highpoint Shopping Centre for $660.0 million and Homemaker City, Maribyrnong for $20.0 million in September 2017. As a result of GPT not participating in the Fund’s DRP, GPT’s ownership is now 28.57 per cent (2017: 28.80 per cent). Management costs recharged Management costs recharged are in line with prior year. During the year GPT’s MER (Management Expense Ratio) decreased to 30 basis points (2017: 34 basis points). Expenses Expenses increased to $234,159,000 in 2018 (2017: $203,315,000) as a result of revaluations of financial arrangements, impairment expense and higher costs related to the sale of inventory. 81 Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled EntitiesFinancial position Financing activities 31 Dec 18 $’000 31 Dec 17 $’000 Change % Current assets Non-current assets Total assets Current liabilities 107,299 133,715 239,101 266,955 346,400 400,670 70,751 129,304 Non-current liabilities 175,759 115,471 Total liabilities Net assets 246,510 244,775 99,890 155,895 (20%) (10%) (14%) (45%) 52% 1% (36%) Total assets decreased by 14 per cent to $346,400,000 in 2018 (2017: $400,670,000) due to reduced trade receivables and loan receivables. Total liabilities increased by 1 per cent and remains in line with prior year at $246,510,000 in 2018 (2017: $244,775,000). Capital management The Consolidated Entity has an external loan relating to the Metroplex joint venture. The Consolidated Entity has non-current, related party borrowings from GPT Trust and its subsidiaries. Under Australian Accounting Standards, the loans are revalued to fair value each reporting period. Cash flows The cash balance as at 31 December 2018 decreased to $19,259,000 (2017: $20,033,000). Operating activities Net cash inflows from operating activities have increased in 2018 to $87,913,000 (2017: $31,458,000) due to proceeds from related party receivables, offset by income taxes paid in 2018 and dividends received from available for sale financial assets in 2017. The following table shows the reconciliation from net loss to the cash flow from operating activities: Net loss for the year (40,962) (14,222) 188% 31 Dec 18 $’000 31 Dec 17 $’000 Change % Non-cash items included in net loss Capital return from available for sale financial asset Timing difference Net cash flows from operating activities Investing activities 94,419 62,207 52% – (10,699) 34,456 (5,828) (100%) (691%) 87,913 31,458 179% Net cash flows from investing activities have decreased to outflows of $5,371,000 in 2018 (2017: inflows of $6,165,000) due to the capital return from available for sale financial asset in 2017. 82 Net cash outflows from financing activities have increased to $83,316,000 in 2018 (2017: $35,432,000) due to repayment of related party borrowings and the purchase of securities for the employee incentive scheme. Dividends The Directors have not declared any dividends for the year ended 31 December 2018 (2017: nil). Prospects Group GPT retains a portfolio of high quality assets with high occupancy levels and structured rental growth. As at 31 December 2018, the Group’s balance sheet is in a strong position, with a smooth, long debt expiry profile and net gearing at the lower end of the Group’s target range of 25 to 35 per cent. Retail GPT’s portfolio delivered total centre sales growth of 2.4 per cent whilst specialties sales per square metre grew 2.5 per cent for the 12 months to 31 December 2018. The retail portfolio is well positioned with 85 per cent located in NSW and VIC and in markets with strong population growth. GPT is planning on capturing this growth by investing in assets to offer engaging places for its customers aimed at driving sales productivity, stimulating retailer demand and delivering long term investment returns. Progress continues to be made with mixed use developments at Melbourne Central and Rouse Hill which will be opportunities for GPT to deliver leading examples on how retail assets need to evolve and adapt to meet the changing needs of today’s retail consumer. Office GPT is progressing its future development pipeline in Sydney and Melbourne. Engagement continues with authorities for a proposed new office tower and retail precinct of up to 70,000sqm at Darling Park in Sydney. In Melbourne, the Group is seeking a pre-commitment tenant for a proposed 20,000sqm office tower at Melbourne Central. The Sydney and Melbourne CBD office markets in Australia experienced solid conditions in 2018, with demand being above long-term averages, low levels of net supply and tightening vacancy rates. Sydney and Melbourne reached vacancy rates of 4.1 per cent and 3.75 per cent respectively. These markets should experience ongoing tight vacancy conditions in 2019 with little new supply to come online and ongoing healthy levels of demand. Logistics An improving industrial economy driven by the growth in e-commerce, continues to fuel the demand for warehousing. New entrants and existing retailers seeking to expand into key locations is adding further pressure on the availability of land resulting in double digit increases of land values in prime locations. The investment market remains strong with assets transacting at yields firmer than previous market peaks. Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities The medium term outlook is for Sydney and Melbourne to continue to benefit as preferred locations, given population nodes and strong and improving infrastructure. GPT will seek to increase exposure to the sector through development opportunities and acquisitions. Funds management GPT has a large funds management platform which has experienced significant growth in the value of assets under management over the past five years. The funds management team will continue to actively manage the existing portfolios, with new acquisitions, divestments and developments in line with the relevant investment objectives of each fund. Guidance for 2019 In 2019 GPT expects to deliver 4 per cent growth in FFO per ordinary security and 4 per cent growth in distribution per ordinary security. Achieving this target is subject to risks detailed in the following section. Risks The Board is ultimately accountable for corporate governance and the appropriate management of risk. The Board determines the risk appetite and oversees the risk profile to ensure activities are consistent with GPT’s strategy and values. The Sustainability and Risk Committee and the Audit Committee support the Board and are responsible for overseeing and reviewing the effectiveness of the risk management framework. The Sustainability and Risk Committee, the Audit Committee and through them, the Board, receive reports on GPT’s risk management practices and control systems including the effectiveness of GPT’s management of its material business risks. GPT has an active enterprise-wide risk management framework. Within this framework the Board has adopted a policy setting out the principles, objectives and approach established to maintain GPT’s commitment to integrated risk management. GPT requires effective risk management as a core capability and consequently all employees are expected to be managers of risk. GPT’s risk management approach incorporates culture, people, processes and systems to enable the organisation to realise potential opportunities whilst managing adverse effects. The approach is consistent with AS/NZS ISO 31000:2018: Risk Management. The key components of the approach include the following: • the GPT Board, Leadership Team, employees and contractors all understand their risk management accountabilities, promote the risk awareness and risk management culture and apply risk processes to achieve the organisation’s objectives; • specialist risk management expertise is developed and maintained internally and provides coaching, guidance and advice; • risks are identified and assessed in a timely and consistent manner; • controls are effectively designed, embedded and assessed; • material operational risks and critical controls are monitored and reported to provide transparency and assurance that the risk profile is aligned with GPT’s risk appetite, strategy and values; and • Macro-economic factors that may impact the business are considered and monitored. The risk appetite set by the Board considers the most significant, material risks to which GPT is exposed and provides the Board with ongoing monitoring of risk exposures which may arise over the short, medium and long term. The following table sets out material operational risks and issues, the potential impact to GPT and the ways in which they may be mitigated: Risk Category Risk/Issue Potential Strategic Impact Mitigation Investment mandate Investments do not perform in line with forecast • Lower distributions • Lower NTA • Credit ratings downgrade Development Adverse changes in market conditions Developments do not perform in line with forecast • Lower distributions • Lower NTA • Credit ratings downgrade • Lower distributions • Lower NTA • Credit ratings downgrade • Robust investment approval process • Formal due diligence process • Active asset management • Experienced internal management capability • Diversified multi-asset portfolio • Limit single asset exposure • Robust capital allocation process • Diversified multi-asset portfolio • Limit single asset exposure • Robust investment approval process • Oversight by Project Control Group (PCG) • Experienced internal management capability • Limit exposure to assets under development • Limit exposure to individual contractors • Minimum leasing pre-commitments prior to construction commencement 83 Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled EntitiesRisk Category Risk/Issue Potential Strategic Impact Mitigation Leasing Inability to lease assets in line with forecast • Lower distributions • Lower NTA • Credit ratings downgrade • Large and diversified tenant base • Ongoing investment to maintain quality of property portfolio • Experienced leasing team • Limit single tenant exposure Capital management, including macro- economic factors Re-financing and liquidity risk Health and safety Interest rate risk – higher interest rate cost than forecast Incidents causing injury to tenants, visitors to the properties, employees and/or contractors • Ability to meet debt maturities • Limits ability to execute strategy • Credit ratings • Failure to continue as a going concern • Diversity of funding sources and spreading of debt maturities with a long weighted average debt term • Maintaining a minimum liquidity buffer in cash and surplus committed credit facilities for the forward rolling twelve-month period • Lower distributions • Interest rate exposures are actively hedged • Harm to the tenants, visitors to • Formalised Health and Safety management GPT’s properties, employees and/ or contractors system including policies and procedures for managing safety • Criminal/civic proceedings and resultant reputation damage • Financial impact of remediation and restoration • Training and education of employees and contractors People and culture Inability to attract, retain • Failure to provide an environment • Background and reference checks on that enables people to excel commencement and develop talented people and provide an inclusive workplace Inability to maintain a high performing, ethical, and values based workplace This includes the consideration of risk culture and specifically conduct risk • Failure to provide a safe working environment free of harassment, bullying and discrimination • Limits the ability to achieve business objectives in line with GPT’s values • Whistleblower officer • Annual performance management process setting objectives to promote clarity and accountability • Remedial performance management and disciplinary action • Monitoring of risk culture and conduct risk • Discretionary incentive system and Clawback Policy • Benchmarking and setting competitive remuneration • Development planning • Succession planning • Talent management processes • Promotion of GPT Values • Code of conduct • Conflicts of interest register • Compliance training • Grievance resolution process • Diversity & Inclusion policies, guidelines and training • Formalised Environment and Sustainability management system including policies and procedures for managing environmental and social sustainability risks • Climate related risks and potential financial impacts are assessed within GPT’s enterprise- wide risk management framework • Technology risk management framework • Privacy policy, guidelines and procedures Environmental and social sustainability Information security Inability to operate in a manner that does not compromise the health of ecosystems and meets accepted social norms This includes consideration of climate change, energy intensity, community wellbeing and supply chain integrity Risk of loss of data, breach of confidentiality, regulatory breach (privacy) and/or reputational impact including as a result from a cyber attack • Negative impact to the communities, the environment and the ecosystems that GPT operates in • Limits the ability to deliver the business objectives and strategy • Criminal/civic proceedings and resultant reputation damage • Financial impact of remediation and restoration • Limits the ability to deliver the business objectives and strategy • Criminal/civic proceedings and resultant reputation damage • Financial impact of remediation and restoration 84 Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities2. Environmental regulation GPT has policies and procedures in place that are designed to ensure that where operations are subject to any particular and significant environmental regulation under a law of Australia (for example property development and property management), those obligations are identified and appropriately addressed. This includes obtaining and complying with conditions of relevant authority consents and approvals and obtaining necessary licences. GPT is not aware of any significant breaches of any environmental regulations under the laws of the Commonwealth of Australia or of a State or Territory of Australia and has not incurred any significant liabilities under any such environmental legislation. In managing the portfolio, GPT monitors and assesses physical and transitional risks arising from climate change. These risks are considered in GPT’s investment and portfolio management decisions, as well as decisions to upgrade buildings in anticipation of a low carbon future. GPT discloses emissions data and climate strategy on its website. GPT continues to take an active leadership role in transitioning towards a low carbon future, participating in climate change public policy development through involvement in: • the Property Council of Australia; • the Green Building Council of Australia; • the City of Sydney Better Building Partnership; and • demonstration projects partnering with the Australian Renewable Energy Agency. GPT has achieved a Group-wide reduction of 42 per cent in energy intensity, and a 56 per cent reduction in emissions intensity since 2005. GPT is currently developing its Energy Master Plan which will continue the implementation of energy efficiency programs. GPT will seek to further decouple emissions from its energy requirements through renewable energy purchases, electrification of gas infrastructure and implementation of demand response programs. GPT’s comprehensive Climate Change and Energy Policy is available on GPT’s website. GPT is subject to the reporting requirements of the National Greenhouse and Energy Reporting Act 2007 (“NGER Act”). The NGER Act requires GPT to report its annual greenhouse gas emissions and energy use. The measurement period for GPT is 1 July to 30 June each year. GPT has implemented systems and processes for the collection and calculation of the data required which enables submission of its report to the Department of Climate Change and Energy Efficiency within the legislative deadline of 31 October each year. GPT has submitted its report to the Department of Climate Change and Energy Efficiency for the period ended 30 June 2018 within the required timeframe. More information about GPT’s participation in the NGER program is available at www.gpt.com.au. 3. Events subsequent to reporting date The Directors are not aware of any matter or circumstances occurring since 31 December 2018 that has significantly or may significantly affect the operations of the Consolidated Entity, the results of those operations or the state of affairs of the Consolidated Entity in the subsequent financial years. 4. Directors and secretary Information on Directors Vickki McFadden – Chairman (appointed as a Non-Executive Director 1 March 2018 and Chairman from 2 May 2018) Vickki was appointed to the Board on 1 March 2018 and is also a member of the Nomination and Remuneration Committee. She brings a broad range of skills and experience to the Group gained during an 18 year career spanning investment banking, corporate finance and corporate law, and through her current and previous board-level positions. Vickki currently holds Non-Executive directorships in the following listed entities and other entities: • Tabcorp Holdings Limited (since 2017); • Newcrest Mining Limited (since 2016); and • Myer Family Investments Pty Limited (since 2011). She is also President of the Takeovers Panel, a Member of Chief Executive Women and a Member of the Advisory Board and Executive Committee of the UNSW Business School. Vickki was previously Chairman of Eftpos Payments Australia Limited, Chairman of Skilled Group Limited (prior to its acquisition by Programmed Maintenance Services Limited) (Director from 2005 to 2015 and Chairman from 2010 to 2015), a non-executive Director of Leighton Holdings Limited, and a Managing Director of Investment Banking at Merrill Lynch Australia. As at the date of this report she holds 50,000 GPT stapled securities. Rob Ferguson – Chairman (retired 2 May 2018) Rob joined the Board in May 2009 and was also a member of the Nomination and Remuneration Committee. He brings a wealth of knowledge and experience in finance, investment management and property as well as corporate governance. Rob currently holds Non-Executive directorships in the following listed and other entities: • Watermark Market Neutral Fund Limited (since 2013); and • Smartward Limited (since 2012). He was also a Non-Executive Chairman of IMF Bentham Limited from 2004 to January 2015, Chairman of Primary Health Care Limited from 2009 to July 2018, and a Director of Tyro Payments Limited from 2005 to July 2018. As at the date of his retirement he held 207,628 GPT stapled securities. 85 Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled EntitiesRobert Johnston – Chief Executive Officer and Managing Director Bob was appointed to the Board as Chief Executive Officer and Managing Director in September 2015. He has 30 years’ experience in the property sector including investment, development, project management and construction in Australia, Asia, the US and UK. Prior to joining GPT, Bob was the Managing Director of listed Australand Property Group which became Frasers Australand in September 2014. As at the date of this report he holds 821,765 GPT stapled securities. Brendan Crotty (retired on 9 November 2018) Brendan was appointed to the Board in December 2009 and was also a member of the Audit Committee and the Sustainability and Risk Committee. He brings extensive property industry experience to the Board, including 17 years as Managing Director of Australand until his retirement in 2007. Brendan is currently the Chairman of the National Housing Finance and Investment Corporation (since 2018), a Director of Brickworks Limited (since 2008) and Chairman of Cloud FX Pte Ltd. Brendan was previously Chairman of Western Sydney Parklands Trust. As at the date of this retirement he held 67,092 GPT stapled securities. Eileen Doyle Eileen was appointed to the Board in March 2010. She is also the Chairman of the Sustainability and Risk Committee and a member of the Audit Committee and Nomination and Remuneration Committee (retired as a member in November 2018). She has diverse and substantial business experience having held senior executive roles and directorships in a wide range of industries, including research, financial services, building and construction, steel, mining, logistics and export. Eileen is also a Fellow of the Australian Academy of Technological Sciences and Engineering. Eileen currently holds the position of Non-Executive Director in the following listed and other entities: • Boral Limited (since 2010); and • Oil Search Limited (since 2016). Eileen was also previously a Director of Bradken Limited from 2011 to November 2015. As at the date of this report she holds 45,462 GPT stapled securities. Swe Guan Lim Swe Guan was appointed to the Board in March 2015 and is also a member of the Audit Committee and the Sustainability and Risk Committee. Swe Guan brings significant Australian real estate skills and experience and capital markets knowledge to the Board, having spent most of his executive career as a Managing Director in the Government Investment Corporation (GIC) in Singapore. 86 Swe Guan is currently Chairman of Cromwell European REIT in Singapore (since 2017), and a Director of Sunway Berhad in Malaysia (since 2011). Swe Guan is also a member of the Investment Committee of CIMB Trust Cap Advisors and was formerly a Director of Global Logistics Property in Singapore until January 2018. As at the date of this report, he holds 39,000 GPT stapled securities. Michelle Somerville Michelle was appointed to the Board in December 2015 and is also the Chairman of the Audit Committee and a member of the Sustainability and Risk Committee. She was previously a partner of KPMG for nearly 14 years specialising in external audit and advising Australian and international clients both listed and unlisted primarily in the financial services market in relation to business, finance risk and governance issues. Michelle currently holds the position of Non-Executive Director in the following entities: • Bank Australia Limited (since 2014); • Challenger Retirement and Investment Services Ltd (since 2014); • Save the Children (Australia) (since 2012); and • Down Syndrome Australia (since 2011). Michelle is also an independent consultant to the UniSuper Ltd Audit, Risk and Compliance Committee since 2015. As at the date of this report she holds 36,663 GPT stapled securities. Gene Tilbrook Gene was appointed to the Board in May 2010 and is also the Chairman of the Nomination and Remuneration Committee. He brings extensive experience in finance, corporate strategy, investments and capital management. Gene currently holds the position of Non-Executive Director in the following listed entities: • Orica Limited (since 2013); and • Woodside Petroleum Limited (since 2014). Gene was also a Director of listed entities Transpacific Industries Group Limited from 2009 to 2013, Fletcher Building Limited from 2009 to April 2015, and Aurizon Holdings Limited from 2010 to February 2016. As at the date of this report he holds 48,546 GPT stapled securities. Angus McNaughton (appointed 1 November 2018) Angus was appointed to the Board in November 2018 and is also a member of the Nomination and Remuneration Committee and the Audit Committee. He brings extensive experience in property investment. Angus was previously the CEO and Managing Director of Vicinity Centres from August 2015 until December 2017. Prior to that time, Angus served as the Managing Director Property for Colonial First State Global Asset Management from 2011, before becoming the CEO and Managing Director of ASX-listed Novion Property Group in 2014. Angus led Novion through to Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entitiesthe completion of the merger between Novion and Federation Centres, renamed as Vicinity Centres, in June 2015. James Coyne – General Counsel and Company Secretary Angus does not currently hold any Non-Executive Director roles in other listed entities. He was also previously Director, Real Estate of First State Investments in Singapore and Chief Executive Officer of Kiwi Income Property Trust in New Zealand. As at the date of this report he does not hold GPT stapled securities. James is responsible for the legal, compliance and company secretarial activities of GPT. He was appointed as the General Counsel and Company Secretary of GPT in 2004. His previous experience includes company secretarial and legal roles in construction, infrastructure, and the real estate funds management industry (listed and unlisted). Lisa Bau – Senior Legal Counsel and Company Secretary Lisa was appointed as a Company Secretary of GPT in September 2015. Her previous experience includes legal roles in mergers and acquisitions, capital markets, funds management and corporate advisory. Attendance of directors at meetings The number of Board meetings, including meetings of Board Committees, held during the financial year and the number of those meetings attended by each Director is set out below: Board Audit Committee Nomination and Remuneration Committee Sustainability and Risk Committee Number of meetings eligible to attend Number of meetings attended Number of meetings eligible to attend Number of meetings attended Number of meetings eligible to attend Number of meetings attended Number of meetings eligible to attend Number of meetings attended Vickki McFadden1 Rob Ferguson Robert Johnston1 Brendan Crotty Eileen Doyle Swe Guan Lim Angus McNaughton Michelle Somerville Gene Tilbrook 10 3 11 9 11 11 3 11 11 10 3 11 9 11 11 3 11 10 – – – 4 5 5 1 5 – – – – 3 3 5 1 5 – 4 2 – – 5 – 2 – 6 4 2 – – 5 – 2 – 6 – – – 3 4 4 – 4 – – – – 3 4 4 – 4 – 1. Vickki McFadden and Bob Johnston also attended meetings of the Committees as non-members. 5. Other disclosures Indemnification and insurance of directors, officers and auditor GPT provides a Deed of Indemnity and Access (Deed) in favour of each of the Directors and Officers of GPT and its subsidiary companies and each person who acts or has acted as a representative of GPT serving as an officer of another entity at the request of GPT. The Deed indemnifies these persons on a full indemnity basis to the extent permitted by law for losses, liabilities, costs and charges incurred as a Director or Officer of GPT, its subsidiaries or such other entities. Subject to specified exclusions, the liabilities insured are for costs that may be incurred in defending civil or criminal proceedings that may be brought against Directors and Officers in their capacity as Directors and Officers of GPT, its subsidiary companies or such other entities, and other payments arising from liabilities incurred by the Directors and Officers in connection with such proceedings. GPT has agreed to indemnify the auditors out of the assets of GPT if GPT has breached the agreement under which the auditors are appointed. During the financial year, GPT paid insurance premiums to insure the Directors and Officers of GPT and its subsidiary companies. The terms of the contract prohibit the disclosure of the premiums paid. 87 Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled EntitiesNon-audit services During the year PricewaterhouseCoopers, GPT’s auditor, has performed other services in addition to their statutory duties. Details of the amounts paid to the auditor, which includes amounts paid for non-audit services and other assurance services, are set out in note 21 to the financial statements. The Directors have considered the non-audit services and other assurance services provided by the auditor during the financial year. In accordance with advice received from the Audit Committee, the Directors are satisfied that the provision of non-audit services by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: • the Audit Committee reviewed the non-audit services and other assurance services at the time of appointment to ensure that they did not impact upon the integrity and objectivity of the auditor • the Board’s own review conducted in conjunction with the Audit Committee concluded that the auditor independence was not compromised, having regard to the Board’s policy with respect to the engagement of GPT’s auditor, and • the fact that none of the non-audit services provided by PricewaterhouseCoopers during the financial year had the characteristics of management, decision-making, self-review, advocacy or joint sharing of risks. 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 98 and forms part of the Directors’ Report. Rounding of amounts The amounts contained in this report and in the financial statements have been rounded to the nearest thousand dollars unless otherwise stated (where rounding is applicable) under the option available to the Consolidated Entity under ASIC Corporations (Rounding in Financial/ Directors’ Reports) Instrument 2016/191. The Consolidated Entity is an entity to which the Instrument applies. 6. Remuneration report The Nomination and Remuneration Committee (the Committee) of the Board presents the Remuneration Report (Report) for the GPT Group. This Report has been audited in accordance with section 308(3C) of the Corporations Act 2001. The Board aims to ensure that the GPT Group’s remuneration platform is both market competitive and fair to all stakeholders; aligns performance measures to the achievement of GPT’s strategic objectives; and communicates the remuneration outcomes clearly and transparently. Governance Who are the members of the Committee? What is the scope of work of the Committee? The Committee consists of the following three Non-Executive Directors: • Gene Tilbrook (Committee Chairman); • Vickki McFadden; and • Angus McNaughton. 2018 saw renewal and change on the Committee in line with changes to the Board: • Rob Ferguson retired at the GPT AGM on 2 May 2018; • Vickki McFadden joined GPT on 1 March 2018, and was appointed Chairman of GPT from 3 May 2018; • Angus McNaughton joined GPT on 1 November 2018; and • Eileen Doyle stepped down from the Committee on 8 November 2018. In 2018 the Committee undertook the following activities on behalf of the Board: • oversee the management of culture; • implement, monitor, evaluate and oversee GPT’s remuneration framework; • review and approve remuneration levels for the Board, Chief Executive Officer and key management personnel; • review and approve key performance indicators for the Chief Executive Officer and assess the Chief Executive Officer’s performance against those key performance indicators; • review compliance with legal and regulatory requirements associated with the activities of the Committee; • oversee the succession planning process for the Board, CEO and Leadership Team; • implement procedures for the evaluation of the performance of the Board and Board committees; • approve and oversee the implementation of GPT’s diversity & inclusion strategy, initiatives and policies; • approve and oversee initiatives around talent development and employee engagement; • any other related matters regarding executives or the Board; and Effective 1 January 2019 a Human Resources and Remuneration Committee (HRRC) was formed with the same membership as noted above. In addition, a Nomination Committee was formed consisting of the full Board1. Who is included in the Remuneration Report? GPT’s Key Management Personnel (KMP) are the individuals responsible for planning, controlling and managing the GPT Group (being the Non-Executive Directors, CEO, Chief Financial Officer (CFO), and the Chief Operating Officer (COO)). 1 Further information about the role and responsibility of both the HRRC and the Nomination Committees is set out in their respective Charters, which are available on GPT’s website (www.gpt.com.au). No additional fees are paid for membership of the Nomination Committee. 88 Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled EntitiesCommittee key decisions and remuneration outcomes in 2018 Platform component Key decisions and outcomes Base Pay (Fixed) • Implemented the annual review of employee base pay effective 1 January 2018, with an average increase of 2.57%. • Following benchmarking, implemented an annual review of Non-Executive Director base and committee fees effective 1 January 2018, with an average increase of 3.12% to bring the Non-Executive Directors’ remuneration closer to market. Short Term Incentive Compensation (STIC) • Maintained Funds from Operations (FFO) growth per security as the primary measure of Group financial performance. • The Group achieved an FFO growth per security outcome of 3.5% which generated a STIC pool maximum of $15.4 million. • Maintained a deferred equity component of STIC vesting in one tranche at the end of the year following the conclusion of the performance period. Long Term Incentive (LTI) Compensation • Achieved a compound annual Total Return2 for the 2016-18 period of 15.50%, exceeding the benchmark of 9.75% for maximum award, and delivered a Total Securityholder Return (TSR)3 of 32.76% which exceeded the ASX 200 AREIT Accumulation Index (the Index) performance of 26.60%. • As a result, the vesting outcome for the 2016-18 LTI plan was 82.71% of the performance rights for each of the 24 participants in the LTI plan. • Launched the 2018-2020 LTI with two performance measures, Total Return and Relative TSR. • Maintained the same performance hurdles and ranges as the prior year’s LTI plan. • Aligned the vesting schedule for both performance measures such that 10% of the performance rights for each measure vest at Threshold performance, with straight line pro-rata vesting through to 100% at the maximum performance level. Other employee ownership plans • Continued the General Employee Security Ownership Plan (GESOP) for 105 STIC eligible employees not in the LTI. Under GESOP each participant receives an amount equal to 10% of their STIC (less tax) delivered in GPT securities, which must be held for at least 1 year. • Continued the Broad Based Employee Security Ownership Plan (BBESOP) for 264 employees ineligible for GESOP. Under BBESOP, subject to GPT achieving the annual FFO growth per security target, participants receive $1,000 worth of GPT securities that cannot be transferred or sold until the earlier of 3 years from the allocation date or cessation of employment (or $1,000 cash (less tax) at the election of the individual). Policy and governance • Utilised external advice on market compensation benchmarks and practice, prevailing regulatory and governance standards, and drafting of incentive plan documentation from EY and Conari Partners4. 2 Total Return is defined as the sum of the change in Net Tangible Assets (NTA) and distributions over the performance period, divided by the NTA at the beginning of the performance period. 3 TSR represents an investor’s return, calculated as the percentage difference between an initial amount invested in stapled securities and the final value of those stapled securities at the end of the relevant period, assuming distributions were reinvested. 4 During 2018, no remuneration recommendations in relation to Key Management Personnel, as defined by Division 1 of Part 1.2 of Chapter 1 of the Corporations Act 2001, were made by these or other consultants. 89 Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled EntitiesGPT’s vision and financial goals linked to remuneration structures GPT’s vision and financial goals To be the most respected property company in Australia in the eyes of our Investors, People, Customers and Communities Total Return > 8.5% Generate competitive Relative Total Securityholder Return Generate competitive FFO growth per security Base pay (Fixed) STIC (variable) LTI (variable) Total remuneration components • Base level of reward. • Discretionary, at risk, and • Set around Australian market median using external benchmark data (including AON Hewitt and the Financial Institutions Remuneration Group (FIRG)). • Reviewed based on employee’s responsibilities, experience, skill and performance. • External and internal relativities considered. with aggregate STIC funding aligned to overall Group financial outcomes. • Set around market median for target performance with potential to achieve top quartile for stretch outcomes. • Determined by GPT and individual performance against a mix of balanced scorecard measures which include financial and non- financial measures. • Financial measures include FFO growth per security, and earnings at portfolio, fund and/or property level as relevant. • Non-financial objectives focus on execution of strategy, delivery of key projects and developments, and people and culture objectives. • Delivered in cash, or (for senior executives), a combination of 50% cash and 50% equity with deferred vesting for 1 year. • Discretionary, at risk, and aligned to overall Group financial outcomes. • Set around market median for target performance with potential to achieve top quartile for stretch outcomes. • Vesting determined by GPT performance against Total Return and Relative TSR financial performance. • Relative TSR is measured against ASX200 AREIT Accumulation Index (including GPT). • Assessed over a 3 year performance period, no re- testing. • No value derived unless GPT meets or exceeds defined performance measures. • Delivered in GPT securities to align executive and securityholder interests. Other employee ownership plans (variable) GESOP • For STIC eligible individuals who are ineligible for LTI. • Equal to 10% of their STIC (less tax) delivered in GPT securities, which must be held for at least 1 year. BBESOP • For individuals ineligible for STIC or LTI. • GPT must achieve at least Target outcome on annual FFO growth per security. • A grant of $1,000 worth of GPT securities which must be held until the earlier of 3 years from the allocation date or cessation of employment (or $1,000 cash (less tax) at the election of the individual). Attract, retain, motivate and reward high calibre executives to deliver superior performance by providing: Align executive rewards to GPT’s performance and securityholder interests by: • competitive rewards • opportunity to achieve incentives beyond base pay based on performance. • assessing incentives against financial and non-financial business measures that are aligned with GPT strategy • delivering a meaningful component of executive remuneration in the form of equity subject to performance hurdles being achieved. 90 Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled EntitiesEmployment Terms 1. Employment terms – Chief Executive Officer and Managing Director Term Contract duration Conditions Open ended. Termination by Executive 6 months’ notice. GPT may elect to make a payment in lieu of notice. Remuneration Package Bob Johnston’s 2018 remuneration arrangements were as follows: • Base pay: $1,460,000 • STIC: $0 to $1,825,000 (ie 0% to 125% of base pay) based on performance, paid in equal proportions of cash and deferred GPT securities, with the securities component vesting one year after the conclusion of the performance year • LTI: A grant of performance rights with the face value at time of grant of $2,190,000 (ie 150% of base pay) with vesting outcomes dependent on performance and continued service, and delivered in restricted GPT securities. Termination by Company for cause No notice requirement or termination benefits (other than accrued entitlements). Termination by Company (other) 12 months’ notice. Treatment of unvested STIC and LTI will be at the Board’s discretion under the terms of the relevant plans and GPT policy. Post-employment restraints 6 months non-compete, and 12 months non-solicitation of GPT employees. External Directorships Bob Johnston is a Director on the Boards of the Property Industry Foundation (PIF) and the Property Council of Australia (PCA). He does not receive remuneration for these roles. Clawback Policy All GPT employees who participate in STIC and LTI are subject to remuneration being clawed back if the recipient has acted fraudulently, dishonestly, or where there has been a material misstatement or omission in the Group’s financial statements leading to the receipt of an unfair benefit. 2. Employment terms – Executive KMP Term Contract duration Conditions Open ended. Termination by Executive 3 months’ notice. GPT may elect to make a payment in lieu of notice. Remuneration Package Component Base pay STIC5 LTI Mark Fookes $820,000 $0 to $820,000 $0 to $820,000 Anastasia Clarke $800,000 $0 to $800,000 $0 to $800,000 Termination by Company for cause Termination by Company (other) No notice requirement or termination benefits (other than accrued entitlements). 3 months’ notice. Severance payments may be made subject to GPT policy and capped at the three year average of the executive’s annual base (fixed) pay. Treatment of unvested STIC and LTI will be at the Board’s discretion under the terms of the relevant plans and GPT policy. Post-employment restraints 12 months non-solicitation of GPT employees. 3. Compensation mix at maximum STIC and LTI outcomes Executive KMP Position Bob Johnston Chief Executive Officer and Managing Director Anastasia Clarke Chief Financial Officer Mark Fookes Chief Operating Officer Base pay 26.7% 33.4% 33.4% STI 33.3% 33.3% 33.3% LTI 40.0% 33.3% 33.3% Fixed remuneration Variable or “at risk” remuneration6 5 The STIC is paid in an equal mix of cash and deferred GPT securities, with the securities component vesting 1 year after the conclusion of the performance year. 6 The percentage of each component of total remuneration is calculated with reference to maximum or stretch potential outcomes as set out under Remuneration Package in Tables 1 and 2 above. 91 Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled EntitiesGroup Financial Performance and Incentive Outcomes 1. Five year Group financial performance Total Securityholder Return (TSR) (%) Total Return (%) NTA (per security) ($) FFO (per security) (cents) Security price at end of calendar year ($) 2018 7.0 15.8 5.58 31.8 5.34 2017 6.6 15.2 5.04 30.8 5.11 2016 10.1 15.5 4.59 29.9 5.03 2015 15.4 11.5 4.17 28.3 4.78 2014 34.5 9.6 3.94 26.8 4.35 2. Summary of CEO Objectives and Performance Outcomes Performance measure Reason chosen Weighting Performance outcomes Financial FFO growth per security targets. Strategy Performance Strategy objectives focused on exploring growth opportunities for GPT group, as well as development and implementation of strategic plans for each division. Operational objectives focused on driving performance of the investment portfolio, key milestones in the development pipeline, and other projects. 70% 10% 15% FFO growth per security is a key financial measure of GPT’s performance. Developing, communicating and implementing GPT’s strategy will underpin GPT’s medium term activities. Focus on delivery of investment and fund performance, conversion of the development pipeline and operational efficiency to optimise GPT’s performance. People 5% People objectives centred on increasing employee engagement, driving GPT’s diversity and inclusion agenda, and operational excellence. Maintaining a high performing executive team and achieving engagement and diversity goals is key to GPT’s performance. The Group delivered FFO growth per security of 3.5% in 2018. This was in excess of the Group’s target of 3% growth but below the stretch objective set by the Board. Management continued to execute on strategies approved by the Board. This included securing new acquisitions in the Office and Logistics sector and advancing plans for development opportunities at Melbourne Central. Management did not achieve a successful outcome of the sale of Wollongong Central and progress on unlocking opportunities at Sydney Olympic Park and Camellia was behind target. GPT’s Total Shareholder Return was 7.03% versus 3.95% for the ASX AREIT 200 Accumulation Index. Occupancy remains high across the Group’s portfolio and like for like Net Operating Income (NOI) growth of 3.8% was achieved, however the like for like NOI growth for the retail portfolio was below target. Office lease expiries in 2020 and 2021 continued to be a focus for management however stretch target objectives were not achieved. Established the Operational Excellence PCG and delivered business efficiencies through the use of technology, streamlined decision making, and enhanced asset management support to the funds management platform. Pre-commitment for the 32 Smith Street development was achieved and Development Approval conditions satisfied allowing the commencement of the project, with the development on plan to deliver targeted returns. Progress was made on the Sunshine Plaza development but final completion has been delayed to the end of Q1 2019. Achieved Workplace Gender Equality Agency (WGEA) Employer of Choice for Gender Equality citation in February 2018 recognising GPT’s performance as among the best employers. Increased the percentage of females in the top 50% of the business (measured by remuneration) from 42.24% at the end of 2017 to 45.65%. Launched GPT’s second Reconciliation Action Plan (RAP), maintained participation of First Nations employees in the permanent workforce at 1%, and signed a 10 year agreement with Career Trackers to expand its internship program. Increased GPT’s score in the Australian Workplace Equality Index (AWEI) survey from 42 to 79, 16 points higher than the property sector average. 3. STIC Framework The CEO objectives are cascaded (in full or in part) to KMP and all STIC participants where applicable. Performance measures and weightings may vary according to areas of responsibility for each STIC participant. GPT Group and segment financial KPI’s and performance KPI’s in relation to occupancy, leasing, progress on developments, investment performance and operational efficiency are included. Performance objectives are then measured to determine performance outcomes and generate STIC recommendations. 92 Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled EntitiesThe 2018 STIC outcomes for the KMP are in Table 4, below, while STIC determination for the balance of the eligible employees7 is to occur in March 2019, which is post the issue of the 2018 Remuneration Report. For the Group, FFO growth per security performance hurdles are set for the year. For 2017, the Group delivered an FFO growth per security outcome of 3.0 per cent and generated a maximum amount of $13.8 million for the STIC pool, representing 64 per cent of the aggregate of STIC participants’ maximum STIC potential, of which $13.4 million was ultimately distributed to employees based on the performance of the individual and their business unit/team against Group and individual KPI’s. For the Group, FFO growth per security performance hurdles are set for the year. For 2017, the Group delivered an FFO growth per security outcome of 3.0 per cent and generated a maximum amount of $13.8 million for the STIC pool, representing 64 per cent of the aggregate of STIC participants’ maximum STIC potential, of which $13.4 million was ultimately distributed to employees based on the performance of the individual and their business unit/team against Group and individual KPI’s. The following table shows the distribution of the 2017 STIC outcomes as a percentage of the individual’s maximum STIC opportunity. 2017 STIC Received as a % of Maximum STIC potential Percentage of STIC participants 0–50% 3.79% 50–60% 60–70% 70–80% 80–90% 90–100% 11.36% 71.97% 8.33% 4.55% 0.0% 4. 2018 STIC outcomes by Executive KMP8 Executive KMP Position Bob Johnston Chief Executive Officer and Managing Director Anastasia Clarke Chief Financial Officer Mark Fookes Chief Operating Officer Actual STIC awarded Actual STIC awarded as a % of maximum STIC % of maximum STIC award forfeited Cash component Equity component (# of GPT securities)9 $1,227,000 $575,000 $575,000 67.23% 71.88% 70.12% 32.77% 28.12% 29.88% $613,500 $287,500 $287,500 117,788 55,198 55,198 5. Group performance measures for LTI Plans currently relevant LTI performance measurement period LTI 2016 2016-18 Performance measure Performance measure hurdle Weighting Results 10% of rights vest at Index performance, up to 100% at Index plus 10% (pro rata vesting in between) 50% GPT’s TSR performance exceeded the Index by 6.16% Relative TSR versus ASX200 AREIT Accumulation Index (including GPT) (the Index) Total Return 0% of rights vest at 8% Total Return, up to 100% at 9.5% Total Return (pro- rata vesting in between) 50% 15.50% 100.00% 82.71% Vesting % by performance measure Overall Plan Vesting Outcome (%) 65.41% 2017 2017-19 Relative TSR versus ASX200 AREIT Accumulation Index (including GPT) 10% of rights vest at Index performance, up to 100% at Index plus 10% (pro rata vesting in between) 50% N/A N/A 2018 2018-20 Total Return Relative TSR versus ASX200 AREIT Accumulation Index (including GPT) Total Return 0% of rights vest at 8.5% Total Return, up to 100% at 10.0% Total Return (pro-rata vesting in between) 10% of rights vest at Index performance, up to 100% at Index plus 10% (pro rata vesting in between) 10% of rights vest at 8.5% Total Return, up to 100% at 10.0% Total Return (pro-rata vesting in between) 50% N/A N/A N/A 50% N/A N/A 50% N/A N/A N/A i.e. excluding the KMP. 7 8 Excluding the impact of movements in the GPT security price on deferred STIC value received. 9 The number of deferred GPT securities granted are calculated by dividing 50% of the Actual STIC awarded by GPT’s fourth quarter 2017 Volume Weighted Average Security Price (VWAP) of $5.2085. The deferred GPT securities will vest subject to service on 31 December 2019. 93 Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities6. 2016–2018 LTI outcomes by Executive KMP Senior Executive Position Bob Johnston Chief Executive Officer and Managing Director Anastasia Clarke Chief Financial Officer Mark Fookes Chief Operating Officer Performance rights granted Performance rights vested Performance rights lapsed 450,257 139,365 171,527 372,385 115,262 141,862 77,872 24,103 29,665 7. LTI outcomes – fair value and maximum value recognised in future years10 Executive KMP Bob Johnston Chief Executive Officer and Managing Director Anastasia Clarke Chief Financial Officer Mark Fookes Chief Operating Officer Year 2018 2017 2018 2017 2018 2017 Grant date 10 May 2018 22 May 2017 29 March 2018 21 February 2017 29 March 2018 21 February 2017 Fair value per performance right Performance rights granted as at 31 Dec 18 $2.62 $2.66 $2.62 $2.66 $2.62 $2.66 420,467 452,206 153,595 157,563 157,435 172,269 Vesting date 31 Dec 20 31 Dec 19 31 Dec 20 31 Dec 19 31 Dec 20 31 Dec 19 Maximum value to be recognised in future years $1,222,712 $955,709 $438,169 $293,563 $459,154 $320,962 8. Reported remuneration – Executive KMP – Actual Amounts Received11 Fixed pay Variable or “at risk”12 Executive KMP Bob Johnston Chief Executive Officer and Managing Director Anastasia Clarke Chief Financial Officer Mark Fookes Chief Operating Officer Total Year 2018 2017 2018 2017 2018 2017 2018 2017 Base pay Superannuation $1,439,710 $1,415,168 $779,710 $730,168 $799,710 $800,168 $3,019,130 $2,945,504 $20,290 $19,832 $20,290 $19,832 $20,290 $19,832 $60,870 $59,496 Other13 $8,354 $3,299 $5,275 $2,480 $10,585 $4,326 $24,214 $10,105 STIC LTI Total $1,237,259 $1,972,002 $4,677,615 $1,195,801 $1,867,471 $4,501,571 $579,807 $523,556 $579,807 $565,442 $610,381 $455,426 $751,244 $844,845 $1,995,463 $1,731,462 $2,161,636 $2,234,613 $2,396,873 $3,333,627 $8,834,714 $2,284,799 $3,167,742 $8,467,646 10 For the avoidance of doubt, the GPT incentive plans (ie STIC and LTI) use face value grants of performance rights based on the VWAP of GPT securities for specified periods; reference to fair value per performance right is included in this table to comply with accounting standards. 11 This table discloses the cash and other benefit amounts actually received by GPT’s executive KMP, as distinct from the accounting expense. As a result, it does not align to Australian Accounting Standards. 12 Gross dollar values for the equity components have been calculated by multiplying the number of securities by GPT’s fourth quarter VWAP for the applicable year; 2018: $5.2956 (2017: $5.2085). 13 Other may include death and total/permanent disability insurance premiums, service awards, GPT superannuation plan administration fees, professional memberships, subscriptions and/or other benefits. 94 Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities9. Reported remuneration – Executive KMP – AIFRS Accounting14 Fixed pay Variable or “at risk” Executive KMP Bob Johnston Chief Executive Officer and Managing Director Anastasia Clarke Chief Financial Officer Mark Fookes Chief Operating Officer Total Year 2018 2017 2018 2017 2018 2017 2018 2017 Base pay Superannuation $1,520,636 $1,376,680 $794,923 $775,348 $825,109 $840,325 $3,140,668 $2,992,353 $20,290 $19,832 $20,290 $19,832 $20,290 $19,832 $60,870 $59,496 Other $8,354 $3,299 $5,275 $2,480 $10,585 $4,326 $24,214 $10,105 STIC (cash plus accrual) LTI award accrual15 Total $1,210,570 $1,168,869 $3,928,719 $1,219,543 $1,166,796 $3,786,150 $548,232 $569,961 $559,068 $669,971 $414,417 $382,324 $467,160 $515,208 $1,783,137 $1,749,945 $1,882,212 $2,049,662 $2,317,870 $2,050,446 $7,594,068 $2,459,475 $2,064,328 $7,585,757 10. GPT security ownership – Executive KMP as at 31 December 2018 GPT Holdings (start of period)16 Employee Security Schemes (ESS) 2018 DSTIC 2016-18 LTI TOTAL ESS for 2018 Purchase /(Sales) during period17 GPT Holdings (end of period)18 Gross Value of GPT Holdings19 MSHR Guideline20 821,765 117,788 372,385 490,173 – 1,311,938 $6,947,499 $2,190,000 462,585 55,198 115,262 170,460 (223,839) 409,206 $2,166,991 $800,000 1,118,268 55,198 141,862 197,060 (156,013) 1,159,315 $6,139,269 $820,000 Executive KMP Bob Johnston Chief Executive Officer and Managing Director Anastasia Clarke Chief Financial Officer Mark Fookes Chief Operating Officer 11. GPT performance rights – Executive KMP Executive KMP Bob Johnston Chief Executive Officer and Managing Director Anastasia Clarke Chief Financial Officer Mark Fookes Chief Operating Officer Performance rights Performance rights that lapsed in 201821 (# of rights) Performance rights still on foot at 31/12/1822 (# of rights) 135,278 45,702 53,184 872,673 311,158 329,704 14 This table provides a breakdown of remuneration for executive KMP in accordance with statutory requirements and Australian accounting standards. 15 This column records the amount of the fair value of performance rights under the various LTI plans expensed in the relevant financial years, and does not represent actual LTI awards made to executives or the face value grant method. 16 GPT Holdings (start of period) include GPT securities obtained as sign on grants (Mr Johnston only), DSTIC up to and including 2017, LTI plans up to and including the 2015-17 LTI plan, and private holdings. 17 Movement in GPT security holdings as a result of the sale of vested, unrestricted security holdings and/or the sale or purchase of additional private holdings on the individuals own account during the 2018 calendar year. 18 GPT Holdings (end of period) is the sum of GPT Holdings (start of the period) plus DSTIC and LTI securities obtained under ESS and adjusted for any purchases or sales during the period. Note that some of the securities do not become actual holdings for the individual until after the conclusion of the performance year when Group results are known which allow the conversion of performance rights under the various plan terms. 19 The GPT Holdings (end of period) multiplied by GPT’s fourth quarter 2018 VWAP of $5.2956 to derive a dollar value. 20 GPT’s Minimum Security Holding Requirement (MSHR) guideline requires the CEO to acquire and maintain a holding equal to 150% of base salary. For other KMP and Leadership Team members the holding requirement is equal to 100% of base salary. Individuals have four years from commencement of employment to achieve the MSHR before it is assessed for the first time. 21 The sum of performance rights that were awarded to a participant in the 2016-2018 LTI that did not vest at the end of the 2016-2018 performance period, and as a result, lapsed and/or performance rights granted under the 2018 DSTIC that also lapsed. 22 The total of unvested performance rights currently on foot excluding any GPT securities or performance rights that may have lapsed up to 31 December 2018. This represents the current maximum number of additional GPT securities to which the individual may become entitled subject to satisfying the applicable performance measures in the 2017-19 and 2018-20 LTI plans on foot; as such, these performance rights represent the incentive opportunity over multiple future years, are subject to performance and hence “at risk”, and as a result may never vest. 95 Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled EntitiesRemuneration – Non-Executive Directors What are the key elements of the Non- Executive Director Remuneration Policy? • The Board determines the remuneration structure for Non-Executive Directors based on recommendations from the Committee. • Non-Executive Directors are paid one fee for participation as a Director in all GPT related companies (principally GPT RE Limited, the Responsible Entity of GPT Trust and GPT Management Holdings Limited). • Non-Executive Director remuneration is composed of three main elements: – Main Board fees – Committee fees, and – Superannuation contributions at the statutory superannuation guarantee contribution rate. • Non-Executive Directors do not participate in any short or long term incentive arrangements and are not entitled to any retirement benefits other than compulsory superannuation. • Non-Executive Director remuneration is set by reference to comparable entities listed on the ASX (having regard to GPT’s industry sector and market capitalisation). • External independent advice on remuneration levels for Non-Executive Directors is sought annually. In the event that a review results in changes, the new Board and Committee fees are effective from the 1st of January in the applicable year and advised in the ensuing Remuneration Report. • Fees (including superannuation) paid to Non-Executive Directors are subject to an aggregate limit of $1,800,000 per annum, which was approved by GPT securityholders at the Annual General Meeting on 5 May 2015. As an Executive Director, Mr Johnston does not receive fees from this pool as he is remunerated as one of GPT’s senior executives. 1. Board and committee fees23,24 Chairman Members Year 2018 2017 2018 2017 Board Base Fee Audit Committee Sustainability and Risk Committee Nomination and Remuneration Committee $400,000 $380,000 $152,000 $148,000 $37,000 $36,000 $18,500 $18,000 $31,000 $30,000 $15,500 $15,000 $31,000 $30,000 $15,500 $15,000 2. Reported remuneration – Non-Executive Directors – AIFRS accounting25,26 Fixed pay Non-Executive Director Year Salary and fees Superannuation Other27 Total Current Vickki McFadden28 Chairman Eileen Doyle Swe Guan Lim Angus McNaughton29 Michelle Somerville Gene Tilbrook Former Rob Ferguson30 Brendan Crotty31 Total 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 $289,851 – $214,596 $203,500 $186,000 $181,000 $27,917 – $204,500 $192,750 $183,000 $178,000 $137,949 $380,000 $159,292 $181,000 $1,403,105 $1,316,250 $16,481 – $20,094 $19,333 $17,670 $17,195 $2,652 – $19,428 $18,311 $17,385 $16,910 $8,617 $19,832 $15,133 $17,195 $117,460 $108,776 – – – – $908 $287 – – – – $1,103 $380 – – – – $2,011 $667 $306,332 – $234,690 $222,833 $204,578 $198,482 $30,569 – $223,928 $211,061 $201,488 $195,290 $146,566 $399,832 $174,425 $198,195 $1,522,576 $1,425,693 23 ‘Chairman’ used in this sense may refer to the chairperson of the board or a particular committee. 24 In addition to the fees noted in the table, all non-executive directors receive reimbursement for reasonable travel, accommodation and other expenses incurred while undertaking GPT business. 25 This table provides a breakdown of remuneration for Non-Executive Directors in accordance with statutory requirements and Australian accounting standards. 26 No termination benefits were paid during the financial year. 27 Other may include death and total/permanent disability insurance premiums and/or GPT superannuation plan administration fees. 28 Ms McFadden joined GPT on 1 March 2018, and was appointed Chairman of GPT from 3 May 2018. 29 Mr McNaughton joined GPT on 1 November 2018. 30 Mr Ferguson retired from the GPT Board on 2 May 2018. 31 Mr Crotty retired from the GPT Board on 8 November 2018. 96 Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities 3. Non-Executive Director – GPT security holdings Non-Executive Director Vickki McFadden Eileen Doyle Swe Guan Lim Angus McNaughton Michelle Somerville Gene Tilbrook Private holdings (# of securities) Minimum security holding requirement (MSHR) Balance 31/12/17 Purchase/(Sale) Balance 31/12/18 Gross value32 MSHR guideline33 - 45,462 15,800 - 16,157 48,546 50,000 - 23,200 - 20,506 - 50,000 45,462 39,000 - 36,663 48,546 $264,780 $240,749 $206,528 - $194,153 $257,080 $400,000 $152,000 $152,000 $152,000 $152,000 $152,000 The Directors’ Report, including the Remuneration Report, is signed in accordance with a resolution of the Directors of GPT Management Holdings Limited. Vickki McFadden Chairman Sydney 11 February 2019 Bob Johnston Chief Executive Officer and Managing Director 32 Non-Executive Directors holdings multiplied by GPT’s fourth quarter 2018 VWAP of $5.2956 to derive a dollar value. 33 The MSHR for Non-Executive Directors is equal to 100% of base fees. Individuals have four years from commencement of employment to achieve the MSHR before it is assessed for the first time. 97 Directors’ Report – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled EntitiesAuditor’s Independence Declaration Auditor’s Independence Declaration As lead auditor for the audit of GPT Management Holdings Limited for the year ended 31 December 2018, I declare that to the best of my knowledge and belief, there have been: As lead auditor for the audit of GPT Management Holdings Limited for the year ended Auditor’s Independence Declaration 31 December 2018, I declare that to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and As lead auditor for the audit of GPT Management Holdings Limited for the year ended (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 31 December 2018, I declare that to the best of my knowledge and belief, there have been: (b) no contraventions of any applicable code of professional conduct in relation to the audit. in relation to the audit; and This declaration is in respect of GPT Management Holdings Limited and the entities it controlled (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 (b) no contraventions of any applicable code of professional conduct in relation to the audit. during the period. This declaration is in respect of GPT Management Holdings Limited and the entities it controlled (b) no contraventions of any applicable code of professional conduct in relation to the audit. during the period. in relation to the audit; and This declaration is in respect of GPT Management Holdings Limited and the entities it controlled during the period. Susan Horlin Partner Susan Horlin PricewaterhouseCoopers Partner PricewaterhouseCoopers Susan Horlin Partner PricewaterhouseCoopers Sydney 11 February 2019 Sydney 11 February 2019 Sydney 11 February 2019 PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 Liability limited by a scheme approved under Professional Standards Legislation. T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au 19 Liability limited by a scheme approved under Professional Standards Legislation. 19 19 98 Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Financial Statements Consolidated Statement of Comprehensive Income Year ended 31 December 2018 Note 31 Dec 18 $’000 31 Dec 17 $’000 Revenue Fund management fees Property management fees Development management fees Development revenue Other revenue Management costs recharged Other income Share of after tax profit of equity accounted investments Interest revenue Profit on the sale of other assets Proceeds from sale of inventory Derecognition of available for sale financial asset Total revenue and other income Expenses Remuneration expenses Cost of sale of inventory Property expenses and outgoings Development expenses Repairs and maintenance Professional fees Depreciation Amortisation Revaluation of financial arrangements Impairment expense Finance costs Other expenses Total expenses (Loss)/profit before income tax Income tax expense Loss after income tax from continuing operations Loss from discontinued operations Net loss for the year Other comprehensive income from discontinued operations Items that may be reclassified to profit and loss Net foreign exchange translation adjustments Revaluation of available for sale financial asset Total comprehensive loss for the year Net (loss)/profit attributable to: - Members of the Company - Non-controlling interest Total comprehensive (loss)/income attributable to: - Members of the Company - Non-controlling interest 2(c) 10(a) 24(b) 11(b) 11(b) 84,619 43,511 21,634 – – 32,059 181,823 5,003 685 – 28,883 – 34,571 216,394 121,435 27,214 9,014 – 4,762 5,766 2,014 5,205 42,018 11,256 1,263 4,212 234,159 (17,765) 7,670 (25,435) (15,527) (40,962) 77,206 38,863 24,601 7,438 331 32,334 180,773 6,237 572 4 10,358 10,699 27,870 208,643 123,124 8,976 8,879 8,237 4,597 5,098 1,867 6,041 20,164 5,334 2,332 8,141 202,790 5,853 6,406 (553) (13,669) (14,222) (16,770) – (57,732) 30 (7,125) (21,317) (41,524) 562 (18,776) 4,554 (58,294) 562 (25,871) 4,554 Earnings per share attributable to the ordinary equity holders of the Company Basic and diluted earnings per share (cents per share) from continuing operations Basic and diluted earnings per share (cents per share) – Total 12(a) 12(a) (1.44) (2.30) (0.28) (1.04) The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 99 Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Consolidated Statement of Financial Position At 31 December 2018 ASSETS Current assets Cash and cash equivalents Trade receivables Other receivables Loan receivables Current tax asset Inventories Prepayments Total current assets Non-current assets Intangible assets Property, plant and equipment Inventories Equity accounted investments Deferred tax asset Deferred acquisition costs Other assets Total non-current assets Total assets LIABILITIES Current liabilities Payables Current tax liability Provisions Borrowings Total current liabilities Non-current liabilities Borrowings Provisions Other liabilities Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Accumulated losses Total equity attributable to Company members Non-controlling interests Total equity Note 3 20 10(b) 5 4 6 5 2 10(c) 7 8 10(b) 9 14 14 9 11(a) 11(b) 11(c) 31 Dec 18 $’000 31 Dec 17 $’000 19,259 45,476 4,507 – 763 34,654 2,640 107,299 26,799 12,661 143,618 21,423 21,091 545 12,964 239,101 346,400 36,889 – 33,862 – 70,751 154,618 13,602 7,539 175,759 246,510 99,890 20,033 62,895 630 37,032 – 11,808 1,317 133,715 30,901 9,910 177,410 21,988 17,763 1,198 7,785 266,955 400,670 62,109 8,559 38,715 19,921 129,304 99,146 10,250 6,075 115,471 244,775 155,895 325,855 19,794 325,703 37,803 (261,799) (220,275) 83,850 16,040 99,890 143,231 12,664 155,895 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. 100 Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Equity attributable to Company Members At 1 January 2017 Revaluation of available for sale financial asset net of tax Derecognition of available for sale financial asset Foreign currency translation reserve Other comprehensive income for the year (Loss)/profit for the year Total comprehensive income for the year Transactions with Members in their capacity as Members Issue of securities Movement in employee incentive security scheme reserve net of tax Reclassification of employee incentive security scheme reserve to accumulated losses Distributions At 31 December 2017 Equity attributable to Company Members At 1 January 2018 Foreign currency translation reserve Other comprehensive income for the year (Loss)/profit for the year Total comprehensive income for the year Transactions with Members in their capacity as Members Return of capital Issue of securities Movement in employee incentive security scheme reserve net of tax Distributions At 31 December 2018 Note 11(b) 11(b) 11(b) 11(c) 11(a) 11(b) 11(b) 11(c) 11(b) 11(c) 11(a) 11(b) 11(c) Company Non-controlling interests Contributed equity $’000 Reserves $’000 Accumulated losses $’000 Total $’000 Contributed equity $’000 Reserves $’000 Accumulated losses $’000 Total $’000 Total equity $’000 325,512 44,683 (201,041) 169,154 22,060 – – – – – – 983 (8,108) 30 (7,095) – – – – 983 (8,108) 30 (7,095) – (18,776) (18,776) (7,095) (18,776) (25,871) 191 – – – – (243) 458 – – – (458) – 191 (243) – – – – – – – – – – – – 325,703 37,803 (220,275) 143,231 22,060 325,703 37,803 (220,275) 143,231 22,060 – – – – – 152 – – (16,770) (16,770) – – (16,770) (16,770) – (41,524) (41,524) (16,770) (41,524) (58,294) – – (1,239) – – – – – – 152 (1,239) – – – – – (888) – – – 325,855 19,794 (261,799) 83,850 21,172 – – – – – – – – – – – – – – – – – – – – – – (9,396) 12,664 181,818 – – – – – – – – 4,554 4,554 4,554 4,554 – – – – – – (4,554) (9,396) (4,554) 12,664 983 (8,108) 30 (7,095) (14,222) (21,317) 191 (243) – (4,554) 155,895 (9,396) 12,664 155,895 – – 562 562 – – – – – 562 562 (888) – – 3,702 (5,132) 3,702 16,040 (16,770) (16,770) (40,962) (57,732) (888) 152 (1,239) 3,702 99,890 Y e a r e n d e d 3 1 D e c e m b e r 2 0 1 8 C o n s o l i d a t e d S t a t e m e n t o f C h a n g e s i n E q u i t y The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 1 0 1 Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Consolidated Statement of Cash Flows Year ended 31 December 2018 Cash flows from operating activities Receipts in the course of operations (inclusive of GST) Payments in the course of operations (inclusive of GST) Proceeds from the sale of inventories Payments for inventories Receipts from development activities Payments for development activities Distributions received from equity accounted investments Interest received Finance costs paid Dividend received from available for sale financial asset Income taxes paid Net cash inflows from operating activities Cash flows from investing activities Proceeds from sale of property, plant and equipment Payments for property, plant and equipment Payments for intangibles Return of capital from equity accounted investment Capital return from available for sale financial asset Net cash (outflows)/inflows from investing activities Cash flows from financing activities Repayment of related party borrowings Proceeds from related party borrowings Repayments of borrowings Proceeds from borrowings Purchase of securities for the employee incentive scheme Net cash outflows from financing activities Net cash (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Note 31 Dec 18 $’000 31 Dec 17 $’000 16(a) 264,045 (164,193) 28,883 (24,502) – – 4,770 685 (899) – 20,876 87,913 – (3,007) (3,326) 962 – (5,371) (206,305) 145,668 (28,404) 20,932 (15,207) (83,316) (774) 20,033 19,259 149,423 (137,730) 10,358 (51,951) 41,686 (3,904) – 572 (991) 30,437 (6,442) 31,458 1,279 (1,119) (4,694) – 10,699 6,165 (35,181) 16,256 (14,681) 15,705 (17,531) (35,432) 2,191 17,842 20,033 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. 102 Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Notes to the Financial Statements Year ended 31 December 2018 These are the consolidated financial statements of GPT Management Holdings Limited and its controlled entities (the Consolidated Entity). The notes to these financial statements have been organised into sections to help users find and understand the information they need to know. Additional information has also been provided where it is helpful to understand the Consolidated Entity’s performance. The notes to the financial statements are organised into the following sections: Note 1 – Result for the year: focuses on results and performance of the Consolidated Entity. Notes 2 to 10 – Operating assets and liabilities: provides information on the assets and liabilities used to generate the Consolidated Entity’s trading performance. Notes 11 to 15 – Capital structure: outlines how the Consolidated Entity manages its capital structure and various financial risks. Notes 16 to 26 – Other disclosure items: provides information on other items that must be disclosed to comply with Australian Accounting Standards and other regulatory pronouncements. Result for the year 1. Segment information The chief operating decision makers monitor the performance of the business in a manner consistent with that of the financial report. Refer to the Consolidated Statement of Comprehensive Income for the segment financial performance and the Consolidated Statement of Financial Position for the total assets and liabilities. Revenue Rental revenue is recognised on a straightline basis over the lease term. When the consolidated entity provides lease incentives to tenants, any costs are recognised on a straightline basis over the lease term. Revenue from dividends and distributions are recognised when they are declared. Interest income is recognised on an accruals basis using the effective interest method. Refer to note 25(e) for information relating to revenue policies adopted under AASB 15 Revenue from Contracts with Customers. Key judgements, estimates and assumptions Expenses In applying the Consolidated Entity’s accounting policies, management has made a number of judgements, estimates and assumptions regarding future events. The following judgements and estimates have the potential to have a material impact on the financial statements: Area of judgements and estimates Assumptions underlying Note Management rights with indefinite life Impairment trigger and recoverable amounts IT development and software Impairment trigger and Inventories recoverable amounts Lower of cost and net realisable value Deferred tax assets Recoverability Security based payments Fair value Investment in financial assets Investment in equity accounted investments Fair value Assessment of control versus disclosure guidance 25(b) 4 4 5 10 19 23 Property expenses and outgoings which include rates, taxes and other property outgoings, are recognised on an accruals basis. Finance costs Finance costs include interest, amortisation of discounts or premiums relating to borrowings and amortisation of ancillary costs incurred in connection with the arrangement of borrowings. Finance costs are expensed as incurred unless they relate to a qualifying asset. A qualifying asset is an asset under development which generally takes a substantial period of time to bring to its intended use or sale. Finance costs incurred for the acquisition and construction of a qualifying asset are capitalised to the cost of the asset for the period of time that is required to complete the asset. Where funds are borrowed specifically for a development project, finance costs associated with the development facility are capitalised. Where funds are used from group borrowings, finance costs are capitalised using the relevant capitalisation rate taking into account the Group’s weighted average cost of debt. 103 Annual Financial Report of GPT Management Holdings Limited and its Controlled EntitiesOperating assets and liabilities 2. Equity accounted investments Investments in joint ventures Investments in associates Total equity accounted investments (a) Details of equity accounted investments Name (i) Joint ventures DPT Operator Pty Limited Lendlease GPT (Rouse Hill) Pty Limited1 Erskine Park Trust Total investment in joint ventures (ii) Associates GPT Funds Management Limited Total investment in associates Note (a)(i) (a)(ii) 31 Dec 18 $’000 31 Dec 17 $’000 11,423 10,000 21,423 11,988 10,000 21,988 Ownership interest Principal activity 31 Dec 18 % 31 Dec 17 % 31 Dec 18 $’000 31 Dec 17 $’000 Management Property development Property development 50.00 50.00 50.00 50.00 50.00 50.00 Funds management 100.00 100.00 90 11,324 9 89 11,896 3 11,423 11,988 10,000 10,000 10,000 10,000 1 The entity has a 30 June balance date. The Consolidated Entity has a 50 per cent interest in Lendlease GPT (Rouse Hill) Pty Limited, a joint venture developing residential and commercial land at Rouse Hill, in partnership with Urban Growth and the NSW Department of Planning. The Consolidated Entity’s interest is held through a subsidiary that is 52 per cent owned by the Consolidated Entity and 48 per cent owned by GPT Trust. (b) Summarised financial information for joint ventures and associates The information disclosed reflects the amounts presented in the financial results of the relevant joint ventures and associates and not the Consolidated Entity’s share of those amounts. They have been amended to reflect adjustments made by the entity when using the equity method, including fair value adjustments and modifications for differences in accounting policy. 31 Dec 18 $’000 31 Dec 17 $’000 21,817 18,464 11,812 52,093 19,755 19,755 32,338 21,169 254 21,423 25,966 18,488 17,408 61,862 28,180 28,180 33,682 21,841 147 21,988 Cash and cash equivalents Other assets Property investments and loans Total assets Liabilities Total liabilities Net assets Consolidated entity’s share of net assets Additional ownership costs Total equity accounted investment 104 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities (c) Share of after tax profit of equity accounted investments Revenue Expenses Profit before income tax expense Income tax expense Profit after income tax expense Share of after tax profit of joint ventures and associates Additional ownership costs Share of after tax profit of equity accounted investments (d) Reconciliation of the carrying amount of investments in joint ventures and associates Carrying value at 1 January 2018 Return of capital Share of after tax profit of joint ventures and associates Distributions received/receivable Carrying value at 31 December 2018 Additional ownership costs Carrying amount of equity accounted investments 3. Trade receivables Trade receivables1 Less: impairment of trade receivables Accrued income Related party receivables2 Trade receivables 31 Dec 18 $’000 31 Dec 17 $’000 24,052 (12,201) 11,851 (1) 11,850 5,925 (922) 5,003 12,478 (3) 12,475 (1) 12,474 6,237 – 6,237 31 Dec 18 $’000 31 Dec 17 $’000 21,988 (1,850) 5,925 (4,747) 21,316 107 21,423 15,752 – 6,237 (1) 21,988 – 21,988 31 Dec 18 $’000 31 Dec 17 $’000 30,948 (622) 30,326 188 14,962 45,476 23,950 (12) 23,938 1,474 37,483 62,895 1 The trade receivables balance includes amounts receivable from GWOF and GWSCF. See note 20 for more details on related party transactions. 2 The related party receivables are from GPT Trust and have been agreed on commercial terms and conditions. The table below shows the ageing analysis of the Consolidated Entity’s receivables. 31 Dec 18 31 Dec 17 Not Due $’000 0-30 days $’000 31-60 days $’000 61-90 days $’000 90+ days $’000 Total $’000 Not Due $’000 0-30 days $’000 31-60 days $’000 61-90 days $’000 90+ days $’000 Total $’000 Trade receivables Impairment of trade receivables 188 39,259 1,122 3,434 2,095 46,098 1,474 57,675 504 – – – – (622) (622) – – – Total trade receivables 188 39,259 1,122 3,434 1,473 45,476 1,474 57,675 504 – – – 3,254 62,907 (12) (12) 3,242 62,895 Refer to note 25(e) for the accounting policies for Trade Receivables and other information relating to the adoption of AASB 9 Financial Instruments. 105 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities 4. Intangible assets Cost At 1 January 2017 Additions Transfers Disposals At 31 December 2017 Additions Transfers At 31 December 2018 Accumulated amortisation and impairment At 1 January 2017 Amortisation Disposal Impairment At 31 December 2017 Amortisation At 31 December 2018 Carrying amounts At 31 December 2017 At 31 December 2018 Management rights Management rights $’000 IT development and software $’000 55,825 – – – 55,825 – – 55,825 (45,094) (326) – – (45,420) (138) (45,558) 10,405 10,267 67,157 4,702 2,843 (11,467) 63,235 3,498 (2,395) 64,338 (42,632) (5,715) 11,467 (5,859) (42,739) (5,067) (47,806) 20,496 16,532 Total $’000 122,982 4,702 2,843 (11,467) 119,060 3,498 (2,395) 120,163 (87,726) (6,041) 11,467 (5,859) (88,159) (5,205) (93,364) 30,901 26,799 Management rights include property management and development management rights. Rights are initially measured at cost and rights with a definite life are subsequently amortised over their useful life, which has been assessed at 10 years. For the management rights of Highpoint Shopping Centre, management considers the useful life as indefinite as there is no fixed term included in the management agreement. Therefore, the Consolidated Entity tests for impairment at balance date. Assets are impaired if the carrying value exceeds their recoverable amount. The recoverable amount is determined using a multiples approach. A range of multiples from 10 – 15x have been used in the calculation. IT development and software Costs incurred in developing systems and acquiring software and licenses that will contribute future financial benefits are capitalised. These include external direct costs of materials and services and direct payroll and payroll related costs of employees’ time spent on the project. Amortisation is calculated on a straightline basis over the length of time over which the benefits are expected to be received, generally ranging from 3 to 10 years. IT development and software are assessed for impairment at each reporting date by evaluating if any impairment triggers exist. Where impairment triggers exist, management calculate the recoverable amount. The asset will be impaired if the carrying amount exceeds the recoverable amount. Critical judgements are made by management in setting appropriate impairment triggers and assumptions used to determine the recoverable amount. 106 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities 5. Inventories Development properties Current inventories Development properties Non-current inventories Total inventories 31 Dec 18 $’000 31 Dec 17 $’000 34,654 34,654 143,618 143,618 178,272 11,808 11,808 177,410 177,410 189,218 An impairment expense has been recognised for the year ended 31 December 2018 of $11,391,000 in relation to Metroplex. Development properties held as inventory to be sold are stated at the lower of cost and net realisable value. Cost Cost includes the cost of acquisition, development, finance costs and all other costs directly related to specific projects including an allocation of direct overhead expenses. Post completion of the development, finance costs and other holding charges are expensed as incurred. Net realisable value (NRV) The NRV is the estimated selling price in the ordinary course of business less estimated costs to sell. At each reporting date, management reviews these estimates by taking into consideration: • the most reliable evidence; and • any events which confirm conditions existing at the year end and cause any fluctuations of selling price and costs to sell. The amount of any inventories write down is recognised as an impairment expense in the Consolidated Statement of Comprehensive Income. 6. Property, plant and equipment Computers At cost Less: accumulated depreciation and impairment Total computers Office fixtures and fittings At cost Less: accumulated depreciation and impairment Total office fixtures and fittings Total property, plant and equipment 31 Dec 18 $’000 31 Dec 17 $’000 15,008 (12,314) 2,694 17,532 (7,565) 9,967 12,661 15,092 (11,077) 4,015 12,683 (6,788) 5,895 9,910 107 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Reconciliations of the carrying amount of property, plant and equipment at the beginning and end of the financial year are set out below: At 1 January 2017 Opening carrying value Additions Disposals Transfers Depreciation At 31 December 2017 At 1 January 2018 Opening carrying value Additions Transfers Depreciation At 31 December 2018 Computers $’000 Office fixtures & fittings $’000 5,007 980 (1,341) 383 (1,014) 4,015 4,015 – (84) (1,237) 2,694 9,893 81 – (3,226) (853) 5,895 5,895 2,578 2,271 (777) 9,967 Total $’000 14,900 1,061 (1,341) (2,843) (1,867) 9,910 9,910 2,578 2,187 (2,014) 12,661 The value of property, plant and equipment is measured as the cost of the asset less depreciation and impairment. The cost of the asset includes acquisition costs and any costs directly attributable to bring the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. 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 Consolidated Entity and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the Consolidated Statement of Comprehensive Income during the financial period in which they are incurred. Depreciation Items of property, plant and equipment are depreciated on a straightline basis over their useful lives. The estimated useful life is between 3 and 40 years. Impairment The Consolidated Entity tests property, plant and equipment for impairment where there is an indicator that the asset may be impaired. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Disposals Gains and losses on disposals are determined by comparing proceeds from disposals with the carrying amount of the property, plant and equipment and are included in the Consolidated Statement of Comprehensive Income in the year of disposal. 7. Other assets Lease incentive asset Investment in financial asset Other financial asset Total other assets 108 31 Dec 18 $’000 31 Dec 17 $’000 5,338 4,576 3,050 12,964 3,493 4,292 – 7,785 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities 8. Payables Trade payables1 Accruals Other payables Total payables 31 Dec 18 $’000 31 Dec 17 $’000 1,932 24,813 10,144 36,889 27,813 27,689 6,607 62,109 1 2017 includes a $10,461,283 distribution payable to GPT Trust for GPT Trust’s 48 per cent ownership of GPT Residential (Rouse Hill) Trust of which the Consolidated Entity has control. Trade payables and accruals represent liabilities for goods and services provided to the Consolidated Entity prior to the end of the financial year which are unpaid. They are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method. 9. Provisions Current provisions Employee benefits Other Total current provisions Non-current provisions Employee benefits Other Total non-current provisions Total provisions As at 1 January 2017 Arising during the year Utilised during the year As at 31 December 2017 As at 1 January 2018 Arising during the year Utilised during the year As at 31 December 2018 31 Dec 18 $’000 31 Dec 17 $’000 29,623 4,239 33,862 11,942 1,660 13,602 47,464 Other $’000 3,684 7,143 (574) 10,253 10,253 1,641 (5,995) 5,899 29,159 9,556 38,715 9,553 697 10,250 48,965 Total $’000 37,907 36,480 (25,422) 48,965 48,965 23,009 (24,510) 47,464 Employee benefits $’000 34,223 29,337 (24,848) 38,712 38,712 21,368 (18,515) 41,565 Provisions are recognised when: • the Consolidated Entity has a present obligation (legal or constructive) as a result of a past event; • • a reliable estimate can be made of the amount of the obligation. it is probable that resources will be expended to settle the obligation; and Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the obligation. Provision for employee benefits The provision for employee benefits represents annual leave, long service leave and parental leave entitlements accrued for employees. The employee benefit liability expected to be settled within twelve months after the end of the reporting period is recognised in current liabilities. The non-current provision relates to entitlements, including long service leave, which are due to be payable after more than twelve months from the balance sheet date. It is measured as the present value of expected future payments for the service provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at balance date on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Employee benefit on-costs are recognised together with the employee benefits and included in employee benefit liabilities. 109 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities 31 Dec 18 $’000 31 Dec 17 $’000 11,554 (3,884) 7,670 7,670 7,670 17,012 (10,606) 6,406 6,406 6,406 31 Dec 18 $’000 31 Dec 17 $’000 (17,765) (15,527) (33,292) 5,853 (13,669) (7,816) (9,988) (2,345) – – 22,525 – (222) (5,086) – – 441 7,670 457 (84) – 2,955 556 175 (421) 10,028 (3,210) (2,865) – 2,592 1,480 972 6,406 713 (236) 9,131 2,616 (1,618) 8,559 (2,011) (20,876) (763) (6,442) 8,559 10. Taxation (a) Income tax expense Current income tax expense Deferred income tax credit Income tax expense in the Consolidated Statement of Comprehensive Income Income tax expense attributable to: Loss from continuing operations Aggregate income tax expense (b) Reconciliation of income tax expense to prima facie tax payable Loss from continuing operations before income tax expense Loss from discontinued operations before income tax expense Net loss before income tax expense Prima facie income tax credit at 30% tax rate (2017: 30%) Tax effect of amounts not deductible/assessable in calculating income tax expense: Prior year adjustments Previously unrecognised tax losses Non-deductible revaluation items Non assessable income: Derecognition of available for sale financial asset Other non-assessable income Other tax adjustments: Release of amounts from foreign currency translation reserve Release of gain from available for sale reserve Other income Permanent differences arising from non-deductible amounts Income tax expense Add/(less) amounts to reconcile to current tax (asset)/liability: Temporary differences: Employee benefits Provisions and accruals Dividends received Other deferred tax asset charged to income Movement in reserves Opening balance: Balance transferred from prior period Tax adjustments: Tax payments made to tax authorities Current tax (asset)/liability 110 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities (c) Deferred tax asset Employee credits Provisions and accruals Other Net deferred tax asset Movement in temporary differences during the year Opening balance at the beginning of the year Credited to the Consolidated Statement of Comprehensive Income Movement in reserves Other/utilisation of tax losses Closing balance at the end of the year (d) Effective tax rate Net loss for the year excluding income tax expense Add: non-deductible revaluation items Less: amounts released from foreign currency translation reserve Less: equity accounted profits from joint ventures Add: distribution received from joint ventures taxable to the Company Profit used to calculate effective tax rate Income tax expense Add: carry forward tax losses recognised Less: prior year under/overstatements Income tax expense used to calculate effective tax rate Effective tax rate Adoption of Voluntary Tax Transparency Code 31 Dec 18 $’000 31 Dec 17 $’000 15,906 2,863 2,322 21,091 17,763 3,884 (556) – 21,091 15,449 2,947 (633) 17,763 7,550 10,606 1,618 (2,011) 17,763 31 Dec 18 $’000 31 Dec 17 $’000 (33,292) 75,082 (16,953) (5,925) 4,770 23,682 7,670 – – 7,670 32% (7,816) 33,657 – (6,237) – 19,604 6,406 421 (175) 6,652 34% The Board of Taxation has released a voluntary Tax Transparency Code (TTC). The TTC sets out a recommended set of principles and minimum standards regarding the disclosure of tax information for businesses. The Consolidated Entity is committed to the TTC. The non-IFRS income tax disclosures above and in note 10(b) include the recommended additional disclosures. The Australian Accounting Standards Board have issued a Draft Appendix to the TTC outlining the method to calculate the effective tax rate as shown in the table above, using: • accounting profit before tax adjusted to exclude transactions which are not reflected in the calculation of income tax expense; and • tax expense adjusted to exclude carry forward tax losses that have been recognised and prior year under/overstatements. Income tax expense Income tax expense for the financial year is the tax payable on the current year’s taxable income. This is adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and for unused tax losses. Deferred income tax liabilities and assets – recognition Deferred income tax liabilities are recognised for all taxable temporary differences. Deferred income tax assets are recognised for all deductible temporary differences, carried forward unused tax assets and unused tax losses, to the extent it is probable that taxable profit will be available to utilise them. The carrying amount of deferred income tax assets is reviewed and reduced to the extent that it is no longer probable that sufficient taxable profit will be available. Deferred income tax assets and liabilities – measurement Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date. 111 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Deferred income tax is provided on temporary differences at the reporting date between accounting carrying amounts and the tax cost bases of assets and liabilities, other than for the following: • Where taxable temporary differences relate to investments in subsidiaries, associates and interests in joint ventures: – deferred tax liabilities are not recognised if the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and – deferred tax assets are not recognised if it is not probable that the temporary differences will reverse in the foreseeable future and taxable profit will not be available to utilise the temporary differences. Tax relating to equity items Income taxes relating to items recognised directly in equity are recognised in equity and not in the Consolidated Statement of Comprehensive Income. Capital structure 11. Equity and reserves (a) Contributed equity Ordinary stapled securities Opening securities on issue at 1 January 2017 Securities issued – Long Term Incentive Plan Securities issued – Deferred Short Term Incentive Plan Securities issued – Broad Based Employee Security Ownership Plan Securities issued – Employee Incentive Plan Closing securities on issue at 31 December 2017 Opening securities on issue at 1 January 2018 Securities issued – Long Term Incentive Plan Securities issued – Deferred Short Term Incentive Plan Securities issued – Broad Based Employee Security Ownership Plan Number $’000 1,797,955,568 325,512 2,763,052 855,355 54,338 12,569 1,801,640,882 1,801,640,882 2,332,026 875,344 42,174 109 76 5 1 325,703 325,703 92 57 3 Closing securities on issue at 31 December 2018 1,804,890,426 325,855 Ordinary securities are classified as equity and recognised at the fair value of the consideration received by the Consolidated Entity. Any transaction costs arising on the issue and buy back of ordinary securities are recognised directly in equity as a reduction, net of tax, of the proceeds received. (b) Reserves Balance at 1 January 2017 Net foreign exchange translation adjustments Reclassification to accumulated losses Employee incentive schemes expense, net of tax Tax on incentives valued at reporting date Purchase of securities Issue of securities Revaluation of available for sale financial asset, net of tax Derecognition of available for sale financial asset, net of tax Balance at 31 December 2017 Balance at 1 January 2018 Net foreign exchange translation adjustments Employee incentive schemes expense, net of tax Tax on incentives valued at reporting date Issue of securities Balance at 31 December 2018 112 Foreign Currency Translation Reserve $’000 Employee Incentive Scheme Reserve $’000 Fair Value Reserve $’000 Total Reserve $’000 34,913 30 – – – – – – – 34,943 34,943 (16,770) – – – 18,173 2,645 7,125 44,683 – 458 624 (552) (131) (184) – – 2,860 2,860 – (531) (556) (152) 1,621 – – – – – – 983 (8,108) – – – – – – – 30 458 624 (552) (131) (184) 983 (8,108) 37,803 37,803 (16,770) (531) (556) (152) 19,794 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Nature and purpose of reserves Foreign currency translation reserve The reserve is used to record exchange differences arising on translation of foreign controlled entities and associated funding of foreign controlled entities. The movement in the reserve is recognised in the net profit when the investment in the foreign controlled entity is disposed. Employee incentive scheme reserve The reserve is used to recognise the fair value of equity-settled security-based payments provided to employees, including key management personnel, as part of their remuneration. Refer to note 19 for further details of security based payments. Fair value reserve The fair value reserve comprises the cumulative net change in available for sale financial assets until the assets are derecognised or impaired. (c) Accumulated losses Balance at 1 January 2017 Net (loss)/profit for the year Reclassification from employee incentive security scheme Distributions Balance at 31 December 2017 Balance at 1 January 2018 Net (loss)/profit for the year Distributions Balance at 31 December 2018 12. Earnings per share (a) Basic and diluted earnings per share Basic and diluted earnings per share – loss from continuing operations Basic and diluted loss per share – loss from discontinued operations Total basic and diluted earnings per share Company $’000 (201,041) (18,776) (458) – (220,275) (220,275) (41,524) – (261,799) Non-controlling interest $’000 (9,396) 4,554 – (4,554) (9,396) (9,396) 562 3,702 (5,132) 31 Dec 18 Cents (1.44) (0.86) (2.30) (b) The profit used in the calculation of the basic and diluted earnings per share is as follows: (Loss)/profit reconciliation – basic and diluted Loss from continuing operations Loss from discontinued operations Profit attributed to external non-controlling interest (c) WANOS 31 Dec 18 $’000 (25,997) (15,527) 562 (40,962) Total $’000 (210,437) (14,222) (458) (4,554) (229,671) (229,671) (40,962) 3,702 (266,931) 31 Dec 17 Cents (0.28) (0.76) (1.04) 31 Dec 17 $’000 (5,107) (13,669) 4,554 (14,222) The earnings and weighted average number of ordinary shares (WANOS) used in the calculations of basic and diluted earnings per ordinary share are as follows: WANOS used as denominator in calculating basic earnings per ordinary share Performance security rights (weighted average basis)1 WANOS used as denominator in calculating diluted earnings per ordinary share 31 Dec 18 Number of shares ‘000s 31 Dec 17 Number of shares ‘000s 1,804,400 2,654 1,807,054 1,801,095 2,410 1,803,505 1 Performance security rights granted under the Long Term Incentive plan are only included in dilutive earnings per ordinary share where the performance hurdles are met as at the year end. 113 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Calculation of earnings per share Basic earnings per share is calculated as net profit or loss attributable to ordinary shareholders of the Company, divided by the weighted average number of ordinary shares outstanding during the financial year which is adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share is calculated as net profit or loss attributable to ordinary shareholders of the Company divided by the weighted average number of ordinary shares and dilutive potential ordinary securities. Where there is no difference between basic earnings per share and diluted earnings per share, the term basic and diluted earnings per ordinary share is used. 13. Dividends paid and payable No dividends have been paid or declared for the 2018 financial year (2017: nil). 14. Borrowings Current borrowings at amortised cost – secured Current borrowings Non-current borrowings at amortised cost – secured Related party borrowings from GPT Trust at amortised cost Non-current borrowings Total borrowings 1 Including unamortised establishment costs. 31 Dec 18 31 Dec 17 Carrying amount1 $’000 Fair value2 $’000 Carrying amount1 $’000 Fair value2 $’000 - - 12,587 142,031 154,618 154,618 - - 12,636 142,031 154,667 154,667 19,921 19,921 - 99,146 99,146 119,067 19,980 19,980 - 99,625 99,625 119,605 2 For the majority of borrowings, the carrying amount approximates its fair value. The fair value of fixed rate interest-bearing borrowings is estimated by discounting the future contractual cash flows at the current market interest rate curve. Excluding unamortised establishment costs. The unsecured borrowings are provided by GPT Trust and its subsidiaries and have been revalued based on an adjusted working capital calculation at 31 December 2018, in accordance with the loan agreement. As a result, a revaluation loss of $75,000,000 (2017: $34,097,679) for both continuing ($42,461,499) and discontinued ($32,538,501) operations has been recognised in the Consolidated Statement of Comprehensive Income. The following borrowings were revalued to nil at 31 December 2018 (Dec 2017: nil): • the amount outstanding on the loan facility to GPT Management Holdings Limited at 31 December 2018 is $332,527,776 (Dec 2017: $348,797,027). $16,269,251 was repaid during the period. This facility expires on 31 December 2030 • the amount outstanding on the loan facility to GPT International Pty Limited at 31 December 2018 is $59,359,269 (Dec 2017: $75,628,519). $16,269,250 was repaid during the period. This facility expires on 12 June 2032 • the amount outstanding on the loan facility to Voyages Hotels & Resorts (Loan 1) at 31 December 2018 is $16,347,082 (Dec 2017: $32,616,333). $16,269,251 was repaid during the period. This facility expires on 30 June 2032 • the amount outstanding on the loan facility to Voyages Hotels & Resorts (Loan 2) at 31 December 2018 is $31,683,609 (Dec 2017: $47,952,859). $16,269,250 was repaid during the period. This facility expires on 3 January 2035 • the amount outstanding on the loan facility to GPT Property Management Ltd was fully repaid during the year, totalling $9,922,998. No interest is payable in connection with the above loans from 3 September 2015. The loans are non-revolving interest free borrowings that are revalued each reporting date in accordance with accounting standards. Borrowings are initially recognised at fair value and subsequently measured at amortised cost using the effective interest rate method. Under this method, any transaction fees, costs, discounts and premiums directly related to the borrowings are recognised in the Consolidated Statement of Comprehensive Income over the expected life of the borrowings. All borrowings with maturities greater than 12 months after reporting date are classified as non-current liabilities. When the terms of a financial liability are modified, AASB 9 requires an entity to perform an assessment to determine whether the modified terms are substantially different from the existing financial liability. Where a modification is substantial, it will be accounted for as an extinguishment of the original financial liability and a recognition of a new financial liability. Where the modification does not result in extinguishment, the difference between the existing carrying amount of the financial liability and the modified cash flows discounted at the original effective interest rate is recognised in the Consolidated Statement of Comprehensive Income as gain/loss on modification of financial liability. The Consolidated Entity has assessed the modification of terms requirements within AASB 9 and have concluded that for intercompany loans with modifications these were deemed to be substantial resulting in extinguishment. Accordingly there has been no gain/loss recognised in the Consolidated Statement of Comprehensive Income. 114 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities The maturity profile of borrowings is provided below: Due within one year Due between one and five years Due after five years Cash and cash equivalents Total financing resources available at the end of the year 1 Excludes unamortised establishment costs. Total facility1 $’000 Used facility1 $’000 Unused facility $’000 – 36,154 668,618 704,772 – 31,860 562,724 594,584 – 4,294 105,894 110,188 19,259 129,447 Cash and cash equivalents includes cash on hand, cash at bank and short term money market deposits. 15. Financial risk management The Board approve the Consolidated Entity’s treasury policy which: • establishes a framework for the management of risks inherent to the capital structure; • defines the role of the Consolidated Entity’s treasury; and • sets out the policies, limits, monitoring and reporting requirements for cash, borrowings, liquidity, credit risk, foreign exchange and interest rate instruments. (a) Interest rate risk Interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Consolidated Entity’s primary interest rate risk arises from interest bearing borrowings. The table below provides a summary of the Consolidated Entity’s gross interest rate risk exposure as at 31 December 2018 on interest bearing borrowings together with the net effect of interest rate risk management transactions. This excludes unamortised establishment costs. Fixed rate interest-bearing borrowings Floating rate interest-bearing borrowings Gross exposure Net exposure 2018 $’000 – 154,618 154,618 2017 $’000 48,353 70,714 119,067 2018 $’000 – 154,618 154,618 2017 $’000 48,353 70,714 119,067 The impact on interest expense and interest revenue of a 1 per cent increase or decrease in market interest rates is shown below. A 1 per cent increase or decrease is used for consistency of reporting interest rate risk across the Consolidated Entity and represents management’s assessment of the potential change in interest rates. Impact on Statement of Comprehensive Income Impact on interest revenue increase/(decrease) Impact on interest expense (increase)/decrease 2018 (+1%) $’000 193 (1,547) (1,354) 2018 (-1%) $’000 (193) 1,547 1,354 2017 (+1%) $’000 200 (708) (508) 2017 (-1%) $’000 (200) 708 508 115 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities (b) Liquidity risk Liquidity risk is the risk that the Consolidated Entity, as a result of its operations: • will not have sufficient funds to settle a transaction on the due date; • will be forced to sell financial assets at a value which is less than what they are worth; or • may be unable to settle or recover a financial asset at all. The Consolidated Entity manages liquidity risk by: • maintaining sufficient cash; • maintaining an adequate amount of committed credit facilities; • maintaining a minimum liquidity buffer in cash and surplus committed facilities for the forward rolling twelve month period; and • maintaining the ability to close out market positions. The table below shows an analysis of the undiscounted contractual maturities of liabilities which forms part of the Consolidated Entity’s assessment of liquidity risk. Liabilities Non-derivatives Payables Current tax liability Borrowings1 1 year or less $’000 36,889 – – 31 Dec 18 Over 1 year to 2 years $’000 Over 2 years to 5 years $’000 31 Dec 17 Over 5 years $’000 Total $’000 1 year or less $’000 Over 1 year to 2 years $’000 Over 2 years to 5 years $’000 Over 5 years $’000 Total $’000 – – – – – – 36,889 62,109 – 8,559 – – – – – – 62,109 8,559 31,860 – 562,724 594,584 19,980 28,353 39,224 546,487 634,044 Projected interest cost on borrowings 10,429 9,569 27,097 5,993 53,088 7,646 4,804 5,928 5,669 24,047 Total liabilities 47,318 41,429 27,097 568,717 684,561 98,294 33,157 45,152 552,156 728,759 Less cash and equivalents 19,259 – – – 19,259 20,033 – – – 20,033 Total liquidity exposure 28,059 41,429 27,097 568,717 665,302 78,261 33,157 45,152 552,156 708,726 1 Excluding unamortised establishment costs and fair value adjustments. Includes unsecured borrowings provided by GPT Trust and its subsidiaries which have been revalued to nil as per note 14. (c) Refinancing risk Refinancing risk is the risk that credit is unavailable or available at unfavourable interest rates and credit market conditions result in an unacceptable increase in the Consolidated Entity’s interest cost. Refinancing risk arises when the Consolidated Entity is required to obtain debt to fund existing and new debt positions. The Consolidated Entity manages this risk by spreading sources, counterparties and maturities of borrowings in order to minimise debt concentration risk, allow averaging of credit margins over time and reducing refinance amounts. As at 31 December 2018, the Consolidated Entity’s exposure to refinancing risk can be monitored by the spreading of its contractual maturities on borrowings in the liquidity risk table above or with the information in note 14. 116 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities (d) Foreign exchange risk Foreign exchange risk refers to the risk that the value of a financial commitment, asset or liability will fluctuate due to changes in foreign exchange rates. The Consolidated Entity’s foreign exchange risk arises primarily from: • firm commitments of highly probable forecast transactions for receipts and payments settled in foreign currencies or with prices dependent on foreign currencies; and • investments in foreign assets. Sensitivity to foreign exchange is deemed insignificant. Foreign currency assets and liabilities The following table shows the Australian dollar equivalents of amounts within the Consolidated Statement of Financial Position which are denominated in foreign currencies. Assets Cash and cash equivalents Liabilities Other liabilities (e) Credit risk Euros United States Dollars 31 Dec 18 $’000 31 Dec 17 $’000 31 Dec 18 $’000 31 Dec 17 $’000 – – – – 1,151 1,151 304 304 – – – – 133 133 – – Credit risk is the risk that a contracting entity will not complete its obligations under a contractual agreement, resulting in a financial loss to the Consolidated Entity. The Consolidated Entity has exposure to credit risk on all financial assets included on their Consolidated Statement of Financial Position. The Consolidated Entity manages this risk by: • establishing credit limits for financial institutions and monitoring credit exposures for customers to ensure that the Consolidated Entity only trades and invests with approved counterparties; • providing loans to joint ventures, associates and third parties, only where the Consolidated Entity is comfortable with the underlying property exposure within that entity; • regularly monitoring loans and receivables balances; • regularly monitoring the performance of its associates, joint ventures and third parties; and • obtaining collateral as security (where appropriate). Receivables are reviewed regularly throughout the year. The maximum exposure to credit risk as at 31 December 2018 is the carrying amounts of financial assets recognised on the Consolidated Statement of Financial Position. For more information, refer to note 3. 117 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Other disclosure items 16. Cash flow information (a) Cash flows from operating activities Reconciliation of net loss after tax to net cash inflows from operating activities: Net loss for the year Share of after tax profit of equity accounted investments (net of distributions) Loss on disposal of assets Capital return from available for sale financial asset Impairment expense Profit on transfer from foreign cash translation reserve Non-cash employee benefits – security based payments Fair value movement of investment in GPT Trust Interest capitalised Deferred interest Amortisation of rental abatement Depreciation expense Amortisation expense Amortisation of deferred acquisition costs Finance costs Revaluation of financial arrangements Profit on sale of inventory Payments for inventories Proceeds from inventories Decrease in operating assets (Increase)/decrease in operating liabilities Other Net cash inflows from operating activities (b) Net debt reconciliation Reconciliation of net debt movements during the financial year: Net debt as at 31 December 2017 Cash flows Other non-cash movements Net debt as at 31 December 2018 Borrowings due within 1 year $’000 (19,921) 19,980 (59) – Cash $’000 20,033 (774) – 19,259 31 Dec 18 $’000 (40,962) (233) – – 11,256 (16,954) 16,608 (443) (5,910) – 392 2,014 5,205 653 5,260 75,000 (1,669) (24,502) 28,883 47,589 (15,401) 1,127 87,913 Borrowings due after 1 year $’000 (99,146) (26,872) (28,600) 31 Dec 17 $’000 (14,222) (6,237) 62 (10,699) 5,334 – 21,781 (295) (10,486) (3,252) 476 1,867 6,041 654 11,394 34,098 (1,382) (51,951) 10,358 18,534 18,615 768 31,458 Total $’000 (99,034) (7,666) (28,659) (154,618) (135,359) 118 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities 17. Commitments (a) Capital expenditure commitments Capital expenditure commitments at 31 December 2018 were $10,019,000 (2017: $1,401,000). Commitments arise from the purchase of plant and equipment and intangibles, which have been contracted for at balance date but not recognised on the Consolidated Statement of Financial Position. (b) Operating lease commitments Due within one year Due between one and five years Over five years Total operating lease commitments 31 Dec 18 $’000 31 Dec 17 $’000 9,191 24,917 18,882 52,990 6,430 15,049 5,495 26,974 Operating lease commitments are contracted non-cancellable future minimum lease payments expected to be payable but not recognised on the Consolidated Statement of Financial Position. (c) Commitments relating to equity accounted investments Capital expenditure commitments Total joint venture and associates commitments 31 Dec 18 $’000 31 Dec 17 $’000 40 40 168 168 The capital expenditure commitments in the Consolidated Entity’s equity accounted investments at 31 December 2018 relate to Lendlease GPT (Rouse Hill) Pty Limited (2017: Lendlease GPT (Rouse Hill) Pty Limited). 18. Contingent liabilities A contingent liability is a liability that is not sufficiently certain to qualify for recognition as a provision where uncertainty may exist regarding the outcome of future events. GPT Management Holdings Ltd has provided guarantees over GPT RE Limited as responsible entity of GPT Trust’s obligations under the note purchase and guarantee agreements in relation to US Private Placement issuances totalling US$850,000,000 until December 2032. Apart from the matter referred to above, there are no other material contingent liabilities at reporting date. 19. Security based payments GPT currently has four employee security schemes – the General Employee Security Ownership Plan (GESOP), the Broad Based Employee Security Ownership Plan (BBESOP), the Deferred Short Term Incentive Plan (DSTI) and the Long Term Incentive (LTI) Scheme. (a) GESOP The Board believes in creating ways for employees to build an ownership stake in the business. As a result, the Board introduced the GESOP in March 2010 for individuals who do not participate in the LTI. Under the plan individuals who participate receive an additional benefit equivalent to 10 per cent of their short term incentives (STIC) which is (after the deduction of income tax) invested in GPT securities to be held for a minimum of 1 year. (b) BBESOP Under the plan individuals who are not eligible to participate in any other employee security scheme may receive $1,000 worth of GPT securities or $1,000 cash if GPT achieves at least target level performance. Securities must be held for the earlier of 3 years or the end of employment. (c) DSTI Since 2014, STIC is delivered to the senior executives as 50 per cent in cash and 50 per cent in GPT stapled securities (a deferred component). The deferred component is initially awarded in the form of performance rights, with the rights converting to restricted GPT stapled securities to the extent the performance conditions are met. For the 2014 and 2015 plans, half of the awarded stapled securities will vest one year after conversion with the remaining half vesting two years after conversion, subject to continued employment up to the vesting dates. For the 2016 and any subsequent plans, all the awarded stapled securities will vest one year after conversion, subject to continued employment up to the vesting date. 119 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities (d) LTI At the 2009 Annual General Meeting (AGM), GPT securityholders approved the introduction of a LTI plan based on performance rights. Any subsequent amendments to the LTI plan have been approved by GPT securityholders. The LTI plan covers each 3 year period. Awards under the LTI to eligible participants are in the form of performance rights which convert to GPT stapled securities for nil consideration if specified performance conditions for the applicable 3 year period are satisfied. Please refer to the Remuneration Report for detail on the performance conditions. The Board determines those executives eligible to participate in the plan and, for each participating executive, grants a number of performance rights calculated as a percentage of their base salary divided by GPT’s volume weighted average price (VWAP) for the final quarter of the year preceding the plan launch. Fair value of performance rights issued under DSTI and LTI The fair value of the performance rights is recognised as an employee benefit expense with a corresponding increase in the employee security scheme reserve in equity. Fair value is measured at grant date, recognised over the period during which the employees become unconditionally entitled to the rights and is adjusted to reflect market vesting conditions. Non-market vesting conditions are included in assumptions about the number of rights that are expected to be vested. At each reporting date, GPT revises its estimate of the number of performance rights that are expected to be exercisable and the employee benefit expense recognised each reporting period takes into account the most recent estimate. The impact of the revision to original estimates, if any, is recognised in the Consolidated Statement of Comprehensive Income with a corresponding adjustment to equity. Fair value of the performance rights issued under LTI is determined using the Monte Carlo simulation and the Black Scholes methodologies. Fair value of the performance rights issued under DSTI is determined using the security price. The following key inputs are taken into account: Fair value of rights Security price at valuation date Total Securityholder Return Grant dates Expected vesting dates Security Price at the grant date Expected life Distribution yield Risk free interest rate Volatilty1 1 The volatility is based on the historic volatility of the security. 2018 LTI $3.64 $5.34 7.0% 2018 DSTI $5.34 $5.34 N/A 29 March 2018 29 March 2018 31 December 2020 31 December 2019 $4.74 $4.74 3 years (2 years remaining) 2 years (1 year remaining) 4.8% 1.9% 15.8% 4.8% N/A N/A 120 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities (e) Summary table of all employee security schemes Rights outstanding at 1 January 2017 Rights granted during 2017 Rights forfeited during 2017 Rights converted to GPT stapled securities during 20171 Rights outstanding at 31 December 2017 Rights outstanding at 1 January 2018 Rights granted during 2018 Rights forfeited during 2018 Rights converted to GPT stapled securities during 20182 Rights outstanding at 31 December 2018 DSTI 1,212,639 1,338,498 (357,284) (855,355) 1,338,498 1,338,498 1,308,548 (550,030) (875,344) 1,221,672 Number of rights LTI 8,607,534 2,854,675 (323,771) (2,792,225) 8,346,213 8,346,213 2,712,482 (879,580) (2,332,026) 7,847,089 Total 9,820,173 4,193,173 (681,055) (3,647,580) 9,684,711 9,684,711 4,021,030 (1,429,610) (3,207,370) 9,068,761 1 Rights under the 2016 DSTI plan were converted to GPT stapled securities on 20 March 2017 and rights under the 2014 LTI Plan were converted to GPT stapled securities on 14 February 2017. 2 Rights under the 2017 DSTI plan were converted to GPT stapled securities on 19 March 2018 and rights under the 2015 LTI Plan were converted to GPT stapled securities on 13 February 2018. Securities outstanding at 1 January 2017 Securities granted during 2017 Securities vested during 2017 Securities outstanding at 31 December 2017 Securities outstanding at 1 January 2018 Securities granted during 2018 Securities vested during 2018 Securities outstanding at 31 December 2018 20. Related party transactions Number of stapled securities GESOP 60,756 53,982 (60,756) 53,982 53,982 62,609 (53,982) 62,609 BBESOP 92,761 48,480 (17,688) 123,553 123,553 37,488 (46,277) 114,764 Total 153,517 102,462 (78,444) 177,535 177,535 100,097 (100,259) 177,373 GPT Management Holdings Limited is the ultimate parent entity. The Consolidated Entity is stapled to GPT Trust and the Group financial statements include the results of the stapled entity as a whole. Equity interests in joint ventures and associates are set out in note 2. Payables and loans with GPT Trust are set out in note 8 and note 14 respectively. Key management personnel Key management personnel compensation was as follows: Short term employee benefits Post employment benefits Long term incentive award accrual Total key management personnel compensation 31 Dec 18 $ 6,943,395 178,330 2,050,446 9,172,171 31 Dec 17 $ 6,778,850 168,272 2,064,328 9,011,450 Information regarding individual Directors’ and Senior Executives’ remuneration is provided in the Remuneration Report. There have been no other transactions with key management personnel during the year. 121 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Transactions with related parties Transactions with related parties other than associates and joint ventures Transactions with GPT Trust: Revenue and expenses Fund management fees from GPT Trust Property management fees from GPT Trust Development management fees from GPT Trust Option fees received from GPT Trust Management costs recharged from GPT Trust Property rent and outgoings paid to GPT Trust Interest paid to GPT Trust Receivables Current receivables Loan receivable Other non-current financial asset receivable Other transactions Revaluation of arrangements with GPT Trust – continued and discontinued operations Purchase of inventory from GPT Trust Transactions with employees 31 Dec 18 $ 31 Dec 17 $ 25,087,668 25,282,904 14,160,874 14,469,095 20,472,495 15,650,457 538,500 – 7,516,215 7,095,234 (3,774,934) (3,661,067) (5,725,395) (11,309,992) 14,961,590 37,483,052 – 37,032,383 3,050,000 - 75,000,000 34,097,679 5,925,000 2,799,125 Contributions to superannuation funds on behalf of employees (6,172,487) (5,703,954) 58,232,953 50,744,061 17,654,198 15,660,782 5,196,484 6,963,854 657,717 653,208 5,698,709 5,788,457 9,519,877 9,396,803 (1,406,006) (597,294) 7,200,079 9,089,187 14,934,895 12,926,671 Transactions with GWOF and GWSCF: Revenue Responsible Entity fees Asset management fees Development management fees Directors fees recharged Management costs recharged Payroll costs recharged Expense Rent expenses Receivables and payables Current receivable outstanding Current fund management fee receivable 122 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities 21. Auditors remuneration Audit services PricewaterhouseCoopers Australia Statutory audit and review of financial reports Total remuneration for audit services Other assurance services PricewaterhouseCoopers Australia Regulatory and contractually required audits Total remuneration for other assurance service Total remuneration for audit and assurance service Non-audit related services PricewaterhouseCoopers Australia Other services Taxation services Total remuneration for non-audit related services Total auditor’s remuneration 22. Parent entity financial information Assets Total current assets Total non-current assets Total assets Liabilities Total current liabilities Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses Total equity Profit attributable to members of the parent entity Total comprehensive income for the year attributable to members of the parent entity Operating lease commitments Due within one year Due between one and five years Over five years Total operating lease commitments 31 Dec 18 $ 31 Dec 17 $ 278,996 278,996 345,846 345,846 257,813 257,813 536,809 99,818 99,818 445,664 15,300 – 15,300 552,109 – 3,500 3,500 449,164 Parent entity 31 Dec 18 $’000 31 Dec 17 $’000 387,757 116,561 504,318 208,364 21,139 229,503 274,815 288,431 117,756 406,187 176,788 99,146 275,934 130,253 325,855 325,703 4,426 5,667 (55,466) (201,117) 274,815 130,253 145,651 145,651 9,191 24,917 18,882 52,990 5,190 5,190 6,430 15,049 5,495 26,974 123 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Capital expenditure commitments The parent entity has $7,893,000 capital expenditure commitments at 31 December 2018 (2017: $807,000). Parent entity financial information The financial information for the parent entity of the Consolidated Entity, GPT Management Holdings Limited, has been prepared on the same basis as the consolidated financial statements, except where set out below. Investments in subsidiaries, associates and joint ventures Investments in subsidiaries, associates and joint ventures are accounted for at cost in the financial statements of the parent entity. Distributions received from subsidiaries, associates and joint ventures are recognised in the parent entity’s profit or loss rather than being deducted from the carrying amount of these investments. 23. Fair value disclosures Information about how the fair value of financial instruments is calculated and other information required by the accounting standards, including the valuation process and critical assumptions underlying the valuations are disclosed below. (a) Fair value measurement, valuation techniques and inputs Class of assets Fair value hierarchy Valuation technique Inputs used to measure fair value Range of unobservable inputs 31 Dec 18 31 Dec 17 Investment in financial assets Level 2 Market price Market price Not applicable – observable input The different levels of the fair value hierarchy have been defined as follows: Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 – inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices). Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs). 24. Discontinued operations and available for sale financial assets (a) Discontinued operations At 31 December 2018, there are two discontinued operations: Hotel/Tourism portfolio and Funds Management – Europe portfolio. Hotel/Tourism The Consolidated Entity has substantially completed its exit from the Hotel/Tourism portfolio. Funds Management – Europe Relates to equity investments in small closed-end funds (a legacy of GPT’s ownership of GPT Halverton) managed by The Citco Group Limited. (b) Details of financial performance and cash flow information relating to discontinued operations The table below sets out the financial performance and cash flow information for the discontinued operations that continue to be owned by the Consolidated Entity at reporting date. Revenue Expenses Loss before income tax Income tax Loss after income tax of discontinued operations Net cash outflow from operating activities Net decrease in cash from discontinued operations 31 Dec 18 $’000 31 Dec 17 $’000 17,015 (32,542) (15,527) – (13,669) (13,669) – – (15,527) (13,669) – – 13 13 During the year, GPT Europe 2 Sarl in Luxembourg and Hamburg Trust HTG USA 3 GmbH & Co KG, a foreign entity which held Series D Preferred Units in Babcock & Brown Residential Operating Partnership LP, were wound-up. This resulted in the recognition of a $16,770,000 foreign exchange gain in discontinued operations. 124 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Discontinued operation A discontinued operation is a part of the Consolidated Entity’s business that: • • it has disposed of or has classified as held for sale and that represents a major line of its business or geographical area of operations; or is part of a single co-ordinated plan to dispose of such a line of business or area of operations. The results of discontinued operations are presented separately on the face of the Consolidated Statement of Comprehensive Income and the assets and liabilities are presented separately on the face of the Consolidated Statement of Financial Position. (c) Derecognition of available for sale financial assets In October 2017, the Consolidated Entity received a return of capital of $10,699,000 in respect of its 5.3 per cent interest in BGP Holding Plc (BGP). BGP was classified as an available for sale financial asset with a carrying value of $9,296,000 at 31 December 2016. In 2017, following the return of capital the asset was derecognised in the Consolidated Statement of Financial Position and $10,699,000 was recognised in the Consolidated Statement of Comprehensive Income as profit on derecognition of the available for sale financial asset. Assets held for sale Non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. 25. Accounting policies (a) Basis of preparation The financial report has been prepared: • in accordance with the requirements of the Company’s constitution, Corporations Act 2001, Australian Accounting Standards (AAS) and other authoritative pronouncements of the Australian Accounting Standards Board and International Financial Reporting Standards; • on a going concern basis in the belief that the Consolidated Entity will realise its assets and settle its liabilities and commitments in the normal course of business and for at least the amounts stated in the financial statements. The Consolidated Entity has access to undrawn financing facilities of $110,188,000 as set out in note 14; • under the historical cost convention, as modified by the revaluation for financial assets and liabilities at fair value through the Consolidated Statement of Comprehensive Income; • using consistent accounting policies and adjustments to bring into line any dissimilar accounting policies being adopted by the controlled entities, associates or joint ventures; and • in Australian dollars with all values rounded to the nearest thousand dollars, in accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, unless otherwise stated. Comparatives in the Consolidated Statement of Comprehensive Income, Consolidated Statement of Financial Position and notes to the financial statements have been restated to the current year presentation. There was no effect on the loss for the year. The financial report was approved by the Board of Directors on 11 February 2019. (b) Basis of consolidation Controlled entities The consolidated financial statements of the Consolidated Entity report the assets, liabilities and results of all controlled entities for the financial year. Controlled entities are all entities over which the Consolidated Entity has control. The Consolidated Entity controls an entity when the Consolidated Entity is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Controlled entities are consolidated from the date on which control is obtained to the date on which control is disposed. The acquisition of controlled entities is accounted for using the acquisition method of accounting. All intercompany balances and transactions, income, expenses, profits and losses resulting from intra-group transactions have been eliminated. Associates Associates are entities over which the Consolidated Entity has significant influence but not control, generally accompanying a shareholding of between 10 per cent and 50 per cent of the voting rights. GPT Funds Management Limited (GPTFM), which is wholly owned by the Company is the Responsible Entity (RE) of the Funds. The Board of GPTFM comprises six Directors, of which GPT can only appoint two. As a result, the Company has significant influence over GPTFM and accordingly accounts for it as an associate using the equity method. Investments in associates are accounted for using the equity method. Under this method, the Consolidated Entity’s investment in associates is carried in the Consolidated Statement of Financial Position at cost plus post acquisition changes in the Consolidated Entity’s share of net assets. The Consolidated Entity’s share of the associates’ result is reflected in the Consolidated Statement of Comprehensive Income. Where the Consolidated Entity’s share of losses in associates equals or exceeds its interest in the associate, including any other unsecured long term receivables, the Consolidated Entity does not recognise any further losses, unless it has incurred obligations or made payments on behalf of the associate. 125 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled EntitiesJoint arrangements (ii) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST (or equivalent tax in overseas locations) except where the GST incurred on purchase of goods and services is not recoverable from the tax authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable. Receivables and payables are stated inclusive of the amount of GST. The net amount of GST receivable from, or payable to, the taxation authority is included with other receivables or payables in the Consolidated Statement of Financial Position. Cash flows are presented on a gross basis in the Consolidated Statement of Cash Flows. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to, the taxation authority are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (iii) Deferred acquisition costs Deferred acquisition costs associated with the property management business are costs that are directly related to and incremental to earning property management fee income. These costs are recorded as an asset and are amortised in the income statement on the same basis as the recognition of property management fee revenue. (d) New and amended accounting standards and interpretations adopted from 1 January 2018 The Consolidated Entity has adopted AASB 9 and AASB 15 at 1 January 2018. AASB 9 addresses the classification, measurement and de-recognition of financial assets and financial liabilities. AASB 15 contains a single model that applies to contracts with customers and two approaches to recognising revenue: at a point in time or over time. There have been no significant changes to the Consolidated Entity’s financial performance and position as a result of the adoption of new and amended accounting standards and interpretations effective for annual reporting periods beginning on or after 1 January 2018. New disclosures have been included as required. (e) Changes in accounting policies AASB 9 Financial Instruments The requirements of AASB 9 represent a significant change from AASB 139 Financial Instruments. The nature and effects of the key changes to the Consolidated Entity’s accounting policies resulting from the adoption of AASB 9 are summarised below. Investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations each investor has, rather than the legal structure of the joint arrangement. The Consolidated Entity has assessed the nature of its joint arrangements and determined it has joint ventures only. Joint ventures Investments in joint ventures are accounted for in the Consolidated Statement of Financial Position using the equity method which is the same method adopted for associates. (c) Other accounting policies Significant accounting policies that summarise the recognition and measurement basis used and are relevant to an understanding of the financial statements are provided throughout the notes to the financial statements. Other accounting policies include: (i) Foreign currency translation Functional and presentation currency Items included in the financial statements of each of the GPT entities are measured using the currency of the primary economic environment in which they operate (‘the functional currency’). Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated Statement of Comprehensive Income. Foreign operations Non-monetary items that are measured in terms of historical cost are converted using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences of non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss. Exchange differences arising on monetary items that form part of the net investment in a foreign operation are taken against a foreign currency translation reserve on consolidation. Where forward foreign exchange contracts are entered into to cover any anticipated excesses of revenue less expenses within foreign joint ventures, they are converted at the ruling rates of exchange at the reporting period. The resulting foreign exchange gains and losses are taken to the Consolidated Statement of Comprehensive Income. 126 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities(i) Classification and measurement of financial assets and financial liabilities On 1 January 2018 (the date of initial application of AASB 9), the Consolidated Entity’s management assessed which business models apply to the financial assets held and has classified its financial instruments into the appropriate AASB 9 categories. The adoption of AASB 9 has not impacted the carrying value of financial assets but has resulted in classification changes on initial application at 1 January 2018 which is shown in the following table: Original classification under AASB 139 New classification under AASB 9 Financial assets Original carrying amount under AASB 139 31 Dec 17 $’000 New carrying amount under AASB 9 31 Dec 17 $’000 Trade receivables Loans and receivables Financial assets at amortised cost Other receivables Loans and receivables Financial assets at amortised cost Loan receivables Loans and receivables Financial assets at amortised cost 62,895 630 37,032 62,895 630 37,032 Loans and receivables are classified and measured at amortised cost. The Consolidated Entity holds these financial assets in order to collect the contractual cash flows and the contractual terms are solely payments of outstanding principal and interest on the principal amount outstanding. AASB 9 requires that all financial liabilities be subsequently classified at amortised costs, except in certain circumstances. None of these circumstances apply to the Consolidated Entity and accordingly there is no change to the classification and measurement of the Consolidated Entity’s payables and borrowings on adoption of AASB 9. (ii) Impairment of financial assets AASB 9 replaces the ‘incurred loss’ model in AASB 139 with an ‘expected credit loss’ (ECL) model. The new impairment model applies to financial assets measured at amortised cost, contract assets and debt investments at fair value through other comprehensive income (FVOCI), but not to investments in equity instruments. Under AASB 9, credit losses are recognised earlier than under AASB 139. The Consolidated Entity has assessed the impact of the adoption of an ECL model under AASB 9 and identified that the impairment loss was immaterial. See ‘Recoverability of loans and receivables’ section below for details on how ECL amounts are determined. (iii) Accounting policies Policy applicable from 1 January 2018 AASB 9 contains three principal classification categories for financial assets: • measured at amortised cost; • • fair value through other comprehensive income; and fair value through profit and loss (FVTPL). The classification depends on the entity’s business model for managing the financial assets and the contractual terms of the cash flows. Financial assets at amortised costs Loans and receivables Loans and receivables are initially recognised at fair value and subsequently at amortised cost using the effective interest rate method less any allowance under the ECL model. All loans and receivables with maturities greater than 12 months after the balance date are classified as non- current assets. Recoverability of loans and receivables At each reporting date, the Consolidated Entity assesses whether financial assets carried at amortised cost are ‘credit- impaired’. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. The Consolidated Entity recognises loss allowances at an amount equal to lifetime ECL on trade and other receivables. Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets. Lifetime ECLs are the ECLs that result from all possible default events over the expected life of the trade receivable and are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (ie the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Consolidated Entity expects to receive). The Consolidated Entity analyses the age of outstanding receivable balances and applies historical default percentages adjusted for other current observable data as a means to estimate lifetime ECL. Other current observable data may include: • • forecasts of economic conditions such as unemployment, interest rates, gross domestic product and inflation; and financial difficulties of a counterparty or probability that a counterparty will enter bankruptcy. Debts that are known to be uncollectable are written off when identified. (iv) Transition The impact on the Consolidated Entity’s previously reported financial position as at 31 December 2017 as a result of the adoption AASB 9 and its application retrospectively is immaterial to the Consolidated Entity. 127 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities AASB 15 Revenue from Contracts with Customers The requirements of AASB 15 replace AASB 118 Revenue and AASB 111 Construction Contracts. AASB 15 is based on the principle that revenue is recognised when control of a good or service is transferred to a customer. It contains a single model that applies to contracts with customers and two approaches to recognising revenue: at a point in time or over time. The model features a contract–based five-step analysis of transactions to determine whether, how much and when revenue is recognised. It applies to all contracts with customers except leases, financial instruments and insurance contracts. It requires reporting entities to provide users of financial statements with more informative and relevant disclosures. (v) Classification and measurement of revenue Revenue is recognised over time if: • the customer simultaneously receives and consumes the benefits as the entity performs; • the customer controls the asset as the entity creates or enhances it; or • the seller’s performance does not create an asset for which the seller has an alternative use and there is a right to payment for performance to date. Where the above criteria is not met, revenue is recognised at a point in time. The table below summarises the changes in terminology with respect to the timing of revenue recognition between AASB 111 and AASB 118 compared to AASB 15 and the new revenue recognition policies under AASB 15. From the Consolidated Entity’s assessment of when performance obligations are satisfied, there is no change in the timing of revenue recognition when comparing the previous accounting policies to those now under AASB 15. Type of revenue Description Fund management fees Fee income – property management fees Fee income – property management leasing fees – over time The Consolidated Entity provides fund management services to GWOF and GWSCF (the Funds) in accordance with the Funds constitutions. The services are utilised on an ongoing basis and revenue is calculated and recognised in accordance with the relevant constitution. The fees are invoiced on a quarterly basis and consideration is payable within 21 days of the quarter end. The Consolidated Entity provides property management services to the owners of property assets in accordance with property services agreements. The services are utilised on an ongoing basis and revenue is calculated and recognised in accordance with the specific agreement. The fees are invoiced monthly with variable payment terms depending on the individual agreements. Should an adjustment, as calculated in accordance with the property services agreement be required, this is recognised in the Consolidated Statement of Comprehensive Income within the same reporting period. Under some property management agreements, the Consolidated Entity provides a lease management service to the owners. These services are delivered on an ongoing basis and revenue is recognised monthly, calculated in accordance with the property management agreement. The fees are invoiced monthly with variable payment terms depending on the individual agreements. Fee income – property management leasing fees – point in time Under some property management agreements, the Consolidated Entity provides leasing management services to the owners. The revenue is recognised when the specific service is delivered (e.g. on lease execution) and consideration is due 30 days from invoice date. Development management fees The Consolidated Entity provides development management services to the owners of property assets in accordance with development management agreements. Revenue is calculated and recognised in accordance with the specific agreement. The fees are invoiced on a monthly basis, in arrears, and consideration is due 30 days from invoice date. Revenue recognition policy under AASB 111 and AASB 118 Recognised on an accruals basis based on the contract terms. Revenue recognition policy under AASB 15 Over time Recognised on an accruals basis based on the contract terms. Over time Recognised on an accruals basis based on the contract terms. Over time Recognised in the period in which the services are rendered. Point in time Over time Over time If the agreement includes an hourly fee, the revenue is recognised in the period in which the services are rendered. If the agreement includes a fixed price, the revenue is recognised in proportion to the value of the works as a percentage of the total project cost delivered until the completion of the associated development works. 128 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled EntitiesType of revenue Description Development revenue Sale of inventory Sale of assets The Consolidated Entity provides development management services to the owners of property assets in accordance with development management agreements. Revenue is calculated in accordance with the specific agreement and invoiced in accordance with the contract terms. Consideration is due from the customer based on the specific terms agreed in the contract and is recognised when the Consolidated Entity has control of the benefit. Proceeds from the sale of inventory are recognised by the Consolidated Entity in accordance with a specific contract entered into with another party for the delivery of inventory. Revenue is calculated in accordance with the contract. Consideration is payable in accordance with the contract. Revenue is recognised when control has been transferred to the buyer. Proceeds from the sale of assets are recognised by the Consolidated Entity in accordance with a specific contract entered into with another party for the delivery of the asset. Revenue is calculated in accordance with the contract. Consideration is payable in accordance with the contract. Revenue is recognised when control has been transferred to the buyer. Revenue recognition policy under AASB 111 and AASB 118 Recognised in the period in which the title of the asset is transferred. Revenue recognition policy under AASB 15 Point in time When significant risks and rewards are transferred. Point in time When significant risks and rewards are transferred. Point in time (f) New accounting standards and interpretations issued but not yet adopted The following standards and amendments to standards are relevant to the Consolidated Entity. Reference AASB 16 Leases Application of Standard 1 January 2019 Description AASB 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. It will change the way lessees account for leases by eliminating the current dual accounting model which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there will be a single, on-balance sheet accounting model that is similar to the current finance lease accounting. Where the Consolidated Entity is the lessee, this new treatment will result in recognition of a right of use asset along with the associated lease liability in the Consolidated Statement of Financial Position and both a depreciation and interest charge in the Consolidated Statement of Comprehensive Income. In contrast, lessor accounting for lease income is not expected to change with the adoption of the new standard other than the separation of service income from lease income for disclosure purposes as a result of the application of AASB 15. The new leasing model requires the recognition of operating leases on the Consolidated Statement of Financial Position. If the Consolidated Entity had adopted the new standard from 1 January 2018, management estimates that the net loss before tax for the year ended 31 December 2018 would decrease by approximately $224,000. Assets at 31 December 2018 would increase by approximately $28,504,000 and liabilities increase by $30,616,000. 26. Events subsequent to reporting date The Directors are not aware of any matter or circumstance occurring since 31 December 2018 that has significantly or may significantly affect the operations of the Consolidated Entity, the results of those operations or the state of affairs of the Consolidated Entity in subsequent financial years. 129 Notes to the Financial Statements – Year ended 31 December 2018Annual Financial Report of GPT Management Holdings Limited and its Controlled EntitiesDirectors’ Declaration Year ended 31 December 2018 In the directors of GPT Management Holdings Limited’s opinion: (a) the consolidated financial statements and notes set out on pages 99 to 129 are in accordance with the Corporations Act 2001, including: • complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and • giving a true and fair view of the Consolidated Entity’s financial position as at 31 December 2018 and of its performance for the financial year ended on that date; and (b) the consolidated financial statements and notes comply with International Financial Reporting Standards as disclosed in note 25 to the financial statements (c) there are reasonable grounds to believe that the Consolidated Entity will be able to pay its debts as and when they become due and payable. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer as required by Section 295A of the Corporations Act 2001. This declaration is made in accordance with the resolution of the directors. Vickki McFadden Chairman Bob Johnston Chief Executive Officer and Managing Director GPT Management Holdings Limited Sydney 11 February 2019 130 Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Independent auditor’s report To the members of GPT Management Holdings Limited   Report on the audit of the financial report Our opinion  In our opinion:  The accompanying financial report of GPT Management Holdings Limited (the Company) and its controlled entities (together, the Group) is in accordance with the Corporations Act 2001, including:  (a) giving a true and fair view of the Group's financial position as at 31 December 2018 and of its   financial performance for the year then ended (b) complying with Australian Accounting Standards and the Corporations Regulations 2001.      What we have audited The Group financial report comprises:    • • • • • the consolidated statement of financial position as at 31 December 2018 the consolidated statement of comprehensive income for the year then ended the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended the notes to the financial statements, which include a summary of significant accounting policies  the directors’ declaration.    Basis for opinion ● ● ● ● ● ●   We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial • report section of our report.   We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.      Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities  in accordance with the Code.      PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au     Liability limited by a scheme approved under Professional Standards Legislation.   49  131 Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report.    We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates.             Materiality • • ● For the purpose of our audit we used overall Group • materiality of $2.2 million, which represents • approximately 1% of the • Group total revenue and other income. ● We applied this threshold,   Audit scope Key audit matters  ● Amongst other relevant ● The audit scope covered the  consolidated Group which includes GPT Management Holdings Limited and its  controlled entities. topics, we communicated the following key audit matters to the Group’s Audit Committee:   ● Our audit focused on where the − Carrying value of Inventories Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. − Revenue recognition − Remuneration expense ● These are further described in the Key audit matters section of our report.            • together with qualitative considerations, to determine  the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. ● We chose Group total revenue and other income as the Group generates income from funds management, property management and development management fees, whilst expenses within the Group are recharged to GPT Trust which can be altered based on the recharge model utilised. ● We selected a 1% threshold based on our professional judgement, noting it is also within the range of commonly acceptable revenue related thresholds.       50 Key audit matters  Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the 132 context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. Key audit matter How our audit addressed the key audit matter Carrying value of Inventories For each project we obtained the Group’s latest $178.3 million (2017: $189.2 million) Refer to note 5 feasibility models and discussed with management The Group develops a portfolio of sites for future sale which is classified as inventory. The Group’s inventories are held at the lower of the cost and net realisable value for each inventory project. The cost of the inventory includes the cost of acquisition, development, finance costs and all other costs directly related to specific projects including an allocation of direct overhead expenses. We considered the carrying value of inventories a key audit matter given the relative size of the balance in the Consolidated Statement of Financial Position and the significant judgement required by the Group in estimating future selling prices, costs to complete and selling costs. These judgments may have a material impact on the calculation of net realisable value and therefore in determining whether the value of a project should be written down (impaired). During the year ended 31 December 2018 an impairment of $11.4m was recognised. matters such as the overall project strategy, cost movements and claims (where applicable). Using the information gained from these discussions and our prior year knowledge of the business, we used a risk based approach to select a sample of projects to perform net realisable value testing. For the sample of selected projects we: • Further discussed with management the life cycle of the project, key project risks, changes to project strategy, current and future estimated sales prices, construction progress and costs and any new and previous impairments. • Compared the estimated selling prices to market sales data in similar locations or to recent sales in the project. • Compared the forecasted costs to complete the project to the relevant construction contracts (if available) or to construction cost estimates. • Compared the carrying value to the net realisable value (NRV) to identify projects with potential impairments. • Obtained the purchase agreement for the development site acquired during the year and agreed this to the acquisition price 51 Annual Financial Report of GPT Management Holdings Limited and its Controlled Entitiesmodel utilised. ● We selected a 1% threshold based on our professional judgement, noting it is also within the range of commonly model utilised. acceptable revenue related ● We selected a 1% threshold thresholds. based on our professional judgement, noting it is also within the range of commonly acceptable revenue related thresholds. Key audit matters     Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do Key audit matters not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the Key audit matter context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. Carrying value of Inventories $178.3 million (2017: $189.2 million) Refer to note 5 Key audit matter How our audit addressed the key audit matter For each project we obtained the Group’s latest feasibility models and discussed with management How our audit addressed the key audit matters such as the overall project strategy, cost matter movements and claims (where applicable).        The Group develops a portfolio of sites for future sale which is classified as inventory. The Group’s Carrying value of Inventories inventories are held at the lower of the cost and net $178.3 million (2017: $189.2 million) Refer to note 5 realisable value for each inventory project.   The cost of the inventory includes the cost of The Group develops a portfolio of sites for future sale  acquisition, development, finance costs and all other which is classified as inventory. The Group’s costs directly related to specific projects including an  inventories are held at the lower of the cost and net allocation of direct overhead expenses. realisable value for each inventory project.  • • • • • The cost of the inventory includes the cost of We considered the carrying value of inventories a key acquisition, development, finance costs and all other audit matter given the relative size of the balance in costs directly related to specific projects including an the Consolidated Statement of Financial Position and allocation of direct overhead expenses. the significant judgement required by the Group in estimating future selling prices, costs to complete and We considered the carrying value of inventories a key selling costs. These judgments may have a material audit matter given the relative size of the balance in impact on the calculation of net realisable value and the Consolidated Statement of Financial Position and therefore in determining whether the value of a the significant judgement required by the Group in project should be written down (impaired). During estimating future selling prices, costs to complete and the year ended 31 December 2018 an impairment of • selling costs. These judgments may have a material $11.4m was recognised. impact on the calculation of net realisable value and  therefore in determining whether the value of a project should be written down (impaired). During the year ended 31 December 2018 an impairment of $11.4m was recognised.  Using the information gained from these discussions For each project we obtained the Group’s latest and our prior year knowledge of the business, we used feasibility models and discussed with management a risk based approach to select a sample of projects to matters such as the overall project strategy, cost perform net realisable value testing. For the sample of movements and claims (where applicable). selected projects we: Using the information gained from these discussions • Further discussed with management the and our prior year knowledge of the business, we used life cycle of the project, key project risks, a risk based approach to select a sample of projects to changes to project strategy, current and perform net realisable value testing. For the sample of selected projects we: future estimated sales prices, construction progress and costs and any new and • Further discussed with management the previous impairments. life cycle of the project, key project risks, • Compared the estimated selling prices to changes to project strategy, current and market sales data in similar locations or to future estimated sales prices, construction recent sales in the project. progress and costs and any new and previous impairments. • Compared the forecasted costs to complete the project to the relevant construction • Compared the estimated selling prices to contracts (if available) or to construction market sales data in similar locations or to cost estimates. recent sales in the project. • Compared the carrying value to the net • Compared the forecasted costs to complete realisable value (NRV) to identify projects the project to the relevant construction with potential impairments. contracts (if available) or to construction cost estimates. • Obtained the purchase agreement for the development site acquired during the year • Compared the carrying value to the net recorded. We tested the payment to cash. and agreed this to the acquisition price realisable value (NRV) to identify projects recorded. We tested the payment to cash. with potential impairments.                  Traced a sample of capital expenditure Obtained the purchase agreement for the Traced a sample of capital expenditure additions to supporting documentation and development site acquired during the year additions to supporting documentation and tested they were valid costs that could be and agreed this to the acquisition price tested they were valid costs that could be capitalised in accordance with the capitalised in accordance with the requirements of Australian Accounting requirements of Australian Accounting Standards. Standards. 51 • • • Revenue recognition $181.8 million (2017: $180.8 million) Revenue recognition  $181.8 million (2017: $180.8 million)  The Group earns revenue through its role as a fund  and property manager, and through development The Group earns revenue through its role as a fund  revenue earned through the development of property, and property manager, and through development either for third parties, or directly on its own account revenue earned through the development of property, for ultimate sale. Total revenue for the year ended 31 either for third parties, or directly on its own account December 2018 was comprised of the following four for ultimate sale. Total revenue for the year ended 31 streams: December 2018 was comprised of the following four streams: • Fund management fees ($84.6 million). • Fund management fees ($84.6 million). • Property management fees ($43.5 million). We developed an understanding of each revenue stream and the processes for calculating and We developed an understanding of each revenue recording revenue. We also developed an stream and the processes for calculating and understanding of the process by which funds in recording revenue. We also developed an relation to revenue are received into the Group’s bank understanding of the process by which funds in accounts, and identified the key controls including relation to revenue are received into the Group’s bank bank account reconciliations. accounts, and identified the key controls including  bank account reconciliations.  Fund management fees  Fund management fees We tested a sample of fund management fees and performed the following procedures, amongst others: We tested a sample of fund management fees and performed the following procedures, amongst others: • Inspected the relevant fund constitutions to develop an understanding of the basis upon which fund 133 51 • Property management fees ($43.5 million). • Management costs recharged ($32.1 million). • Management costs recharged ($32.1 million). • Development management fees ($21.6 million). • Development management fees ($21.6 million). For all of the above revenue streams, a portion is earned from other entities in The GPT Group. For all of the above revenue streams, a portion is earned from other entities in The GPT Group. We considered this a key audit matter due to the size and magnitude of revenue, and due to there being We considered this a key audit matter due to the size multiple revenue streams increasing the complexity of and magnitude of revenue, and due to there being recognition. multiple revenue streams increasing the complexity of recognition. • Inspected the relevant fund constitutions to develop management fee revenue is earned. an understanding of the basis upon which fund management fee revenue is earned. • Recalculated the management fees by applying the fee percentage per the fund’s constitution to the • Recalculated the management fees by applying the fund’s net assets and tracing the amount to cash fee percentage per the fund’s constitution to the receipts. fund’s net assets and tracing the amount to cash receipts. • Agreed fund management fee corporate overhead recharges to board approved budgets. • Agreed fund management fee corporate overhead recharges to board approved budgets. Property management fees Property management fees For property and leasing management fees and other property management fees we performed the For property and leasing management fees and other following procedures, amongst others: property management fees we performed the following procedures, amongst others: • Inspected a sample of agreements to develop an understanding of the basis upon which revenue is • Inspected a sample of agreements to develop an earned. understanding of the basis upon which revenue is earned. • Recalculated a sample of property and leasing management fees and traced relevant inputs to source • Recalculated a sample of property and leasing documentation. management fees and traced relevant inputs to source documentation. • Traced a sample of other property management fees • Traced a sample of other property management fees 52 52 Annual Financial Report of GPT Management Holdings Limited and its Controlled Entitiesrecorded. We tested the payment to cash. • Traced a sample of capital expenditure additions to supporting documentation and tested they were valid costs that could be capitalised in accordance with the requirements of Australian Accounting Standards.  Revenue recognition $181.8 million (2017: $180.8 million)   The Group earns revenue through its role as a fund and property manager, and through development revenue earned through the development of property, either for third parties, or directly on its own account for ultimate sale. Total revenue for the year ended 31 December 2018 was comprised of the following four streams:   We developed an understanding of each revenue stream and the processes for calculating and recording revenue. We also developed an understanding of the process by which funds in relation to revenue are received into the Group’s bank accounts, and identified the key controls including bank account reconciliations. Fund management fees We tested a sample of fund management fees and performed the following procedures, amongst others:  • Fund management fees ($84.6 million). • Property management fees ($43.5 million).   • Inspected the relevant fund constitutions to develop an understanding of the basis upon which fund management fee revenue is earned.   • Management costs recharged ($32.1 million).   • Recalculated the management fees by applying the fee percentage per the fund’s constitution to the fund’s net assets and tracing the amount to cash receipts. • Development management fees ($21.6 million). For all of the above revenue streams, a portion is earned from other entities in The GPT Group. We considered this a key audit matter due to the size and magnitude of revenue, and due to there being multiple revenue streams increasing the complexity of recognition.     • • • • •   Property management fees • Agreed fund management fee corporate overhead recharges to board approved budgets.  For property and leasing management fees and other property management fees we performed the following procedures, amongst others:    • Inspected a sample of agreements to develop an understanding of the basis upon which revenue is earned.  •     • Traced a sample of other property management fees to relevant invoices and cash receipts. • Recalculated a sample of property and leasing management fees and traced relevant inputs to source documentation.   Management costs recharged       For management costs recharged during the year, we discussed with management the terms under which costs are recharged by the Group to entities in The GPT Group. Recharge arrangements are budgeted by the Group and reviewed annually. In relation to recharges: 52 • We developed an understanding of the budgeting process and obtained evidence of management review of the 2018 budget.     • We reconciled the approved management cost recharge budget to the general ledger.   • We agreed payroll recharge amounts to the audit procedures performed over the Group remuneration expense.  Development management fees 134 • We developed an understanding of the Group’s calculation methodology for charging development management fees. This is based on an approved daily rate and actual time spent, or management approved project fees. • We inspected the Board minute to obtain the approved development management day rates. • We recalculated a sample of development management fees and agreed relevant inputs to the calculation back to source data, for example timesheet extracts. We considered management's AASB 15 Revenue Recognition assessment by selecting a sample of contracts for each material revenue stream and assessed whether they had been appropriately recognised under the new standard. Remuneration expense $121.4 million (2017: $123.1 million) Our procedures over the remuneration expense included: The Group is the employer of all employees who provide services to The GPT Group. The payroll process is administered by a third party under the oversight and approval of the Group. The third party provider is responsible for the processing of all salaries and wages, including overtime, allowances • Developing an understanding of the payroll processes and relevant key controls. • Testing these key controls to determine whether they were operating effectively. 53 Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities to relevant invoices and cash receipts. Management costs recharged   For management costs recharged during the year, we discussed with management the terms under which costs are recharged by the Group to entities in The GPT Group. Recharge arrangements are budgeted by the Group and reviewed annually. In relation to recharges:    • We developed an understanding of the budgeting process and obtained evidence of management review of the 2018 budget.   • We reconciled the approved management cost recharge budget to the general ledger.    • We agreed payroll recharge amounts to the audit procedures performed over the Group remuneration expense.  Development management fees     • • • • •  • We developed an understanding of the Group’s calculation methodology for charging development management fees. This is based on an approved daily rate and actual time spent, or management approved  project fees.   • We inspected the Board minute to obtain the approved development management day rates.   • We recalculated a sample of development management fees and agreed relevant inputs to the calculation back to source data, for example timesheet extracts.  •     We considered management's AASB 15 Revenue Recognition assessment by selecting a sample of contracts for each material revenue stream and assessed whether they had been appropriately recognised under the new standard.  Remuneration expense  $121.4 million (2017: $123.1 million) Our procedures over the remuneration expense included: The Group is the employer of all employees who provide services to The GPT Group. The payroll process is administered by a third party under the oversight and approval of the Group. The third party provider is responsible for the processing of all salaries and wages, including overtime, allowances       • Testing these key controls to determine whether they were operating effectively. • Developing an understanding of the payroll processes and relevant key controls.     53    135 Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities and superannuation and cash bonuses, but not share based payments. Each month a detailed payroll journal is provided electronically by the third party provider and uploaded into the general ledger.    • Reconciling the year to date payroll cost from the payroll system to the general ledger. • Comparing the total payroll expense and employee benefit provisions for the current year to the prior year and obtaining explanations for material movements. • Using data analysis tools to examine payroll payments made during the year, we considered unusual trends and payments that fell outside of our expected ranges. For payments we deemed higher risk, we traced them back to source documentation and other evidence to investigate explanations provided by management.     • Obtaining the Board Nomination and Remuneration Committee approval for the 2018 bonus pool and developing an understanding of the key performance metrics influencing the quantum of management bonuses.  Management bonuses are accrued throughout the year based on potential bonus pools approved by the Board Nomination and Remuneration Committee at the start of the year. Bonuses are subject to performance hurdles and final bonus amounts are  subject to approval by the Board Nomination and Remuneration Committee prior to payment.   In addition to salaries, wages and bonuses, there are equity incentive schemes available to eligible employees. These schemes are a mix of short term and long term incentive plans. Each scheme has a number of vesting conditions, including employee tenure, personal performance metrics, and Group  wide performance metrics, that need to be satisfied in order for the shares to vest.    • • • • • Two of the schemes are in the form of performance rights which convert to GPT Group stapled securities. The Group uses fair value techniques and models to calculate the fair value of the rights, which requires a level of judgement and estimation. We considered remuneration expense as a key audit matter due to the magnitude of this balance and the multiple streams of employee costs included in this balance. For equity incentive scheme expenses, together with PwC valuation experts, we reviewed the valuation methodology adopted by management in valuing the share rights subject to market and non-market  hurdles. We also:    • Assessed the reasonableness of the valuation inputs underlying the valuation of the share rights.   • Performed parallel calculations of the share rights that are subject to the market performance hurdle.  •  • Agreed inputs to the equity incentive scheme accounting model to supporting documentation and assessed the model for mathematical accuracy.    • Agreed a sample of new rights grants to the relevant invitation letters.   Other information The directors of the Group (the directors) are responsible for the other information. The other information comprises the information included in the Annual Financial report for the year ended 31 December 2018, but does not include the financial report and our auditor’s report thereon.      Our opinion on the financial report does not cover the other information and accordingly we do not  express any form of assurance conclusion thereon.       54  136 Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated.   If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.  Responsibilities of the directors for the financial report   The directors are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error.     In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.       • • • • • Auditor’s responsibilities for the audit of the financial report  Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that  includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material  if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report.    A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor's report. •     Report on the remuneration report  Our opinion on the remuneration report   We have audited the remuneration report included in pages 88 to 97 of the directors’ report for the year ended 31 December 2018. In our opinion, the remuneration report of GPT Management Holdings Limited for the year ended 31 December 2018 complies with section 300A of the Corporations Act 2001.             55  137 Annual Financial Report of GPT Management Holdings Limited and its Controlled Entities Responsibilities The directors are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards.      PricewaterhouseCoopers         Susan Horlin Partner   • • • • •  11 February 2019    Partner Bianca Buckman Sydney    •                   56  138 Annual Financial Report of GPT Management Holdings Limited and its Controlled EntitiesSupplementary information Securityholder information Substantial Securityholders UniSuper Vanguard Investments Australia BlackRock Group State Street Corporation Voting Rights Number of Securities 233,746,431 183,628,450 163,118,343 106,158,896 Securityholders in the GPT Group are entitled to one vote for each dollar of the value of the total securities they hold in the Group. Distribution of Securityholders 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and Over Total Number of Securityholders Number of Securityholders Percentage of Total Issued Securities 13,543 13,168 3,511 2,291 101 32,614 0.35 1.78 1.39 2.63 93.85 100.00% There were 938 securityholders holding less than a marketable parcel of 94 securities, based on a close price of $5.34 as at 31 December 2018, and they hold 20,209 securities. Twenty Largest Securityholders HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited BNP Paribas Nominees Pty Ltd Citicorp Nominees Pty Limited National Nominees Limited BNP Paribas Noms Pty Ltd Citicorp Nominees Pty Limited National Nominees Limited HSBC Custody Nominees (Australia) Limited AMP Life Limited Bond Street Custodians Limited Argo Investments Limited HSBC Custody Nominees (Australia) Limited HSBC Custody Nominees (Australia) Limited Limited-GSCO ECA UBS Nominees Pty Ltd BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd DRP HSBC Custody Nominees (Australia) Limited - A/C 2 BNP Paribas Noms (Nz) Ltd Netwealth Investments Limited IOOF Investment Management Limited Total Total Securities on Issue Number of Securities Percentage of Total Issued Securities 713,568,212 349,555,681 272,717,751 157,303,685 61,888,098 23,063,660 18,325,383 13,500,000 12,403,082 11,400,048 4,457,851 3,480,667 3,022,536 2,632,473 2,364,633 2,307,436 2,006,802 1,915,713 1,728,350 1,476,655 39.54 19.37 15.11 8.72 3.43 1.28 1.02 0.75 0.69 0.63 0.25 0.19 0.17 0.15 0.13 0.13 0.11 0.11 0.10 0.08 1,659,118,716 1,804,890,426 91.92 100.00% 139 Annual Financial ReportIssue of Securities The following table lists the issue of GPT securities during the period from 1 January 2018 to 31 December 2018. A complete list of all securities issued since GPT’s inception in 1971 can be obtained from the Group’s website (www.gpt.com.au) or by calling the GPT Securityholder Service Centre on 1800 025 095 (freecall within Australia). Date 13.02.18 19.03.18 21.03.18 Description Issue of Securities Issue of Securities Issue of Securities Number of Securities Price ($) 2,332,026 875,344 42,174 4.83 4.79 4.77 Amount ($) 11,263,686 4,192,898 201,170 Investor information Securityholder Services AGM Information You can access your investment online at www.linkmarketservices.com.au, signing in using your SRN/HIN, Surname and Postcode. Functions available include updating your address details, downloading a PDF of your Annual Tax Statement and collecting FATCA/CRS self certification. Also online at www.linkmarketservices.com.au are regularly requested forms relating to payment instructions, name corrections and changes and deceased estate packs. For assistance with altering any of your investment details, please phone the GPT Registry on 1800 025 095 (free call within Australia) or +61 1800 025 095 (outside Australia). Receive Your Report Electronically Sustainability is core to GPT’s vision and values. As part of our sustainability initiatives we would like to offer you the opportunity to receive notification of GPT’s investor communications electronically, including the 2018 Annual Financial Report and the Annual Review. We encourage securityholders to visit www.gpt.com.au to view the online versions of these reports. As an investor opting to receive your securityholder updates electronically, you will benefit by receiving prompt information and have the convenience and security associated with electronic delivery. There are also significant cost savings associated with this method of communication and above all this is a responsible and environmentally friendly option. To receive your investor communications electronically, please go to www.linkmarketservices.com.au and register for online services. GPT’s Annual General Meeting (AGM) will be held at the Swissotel Sydney, 68 Market Street, Sydney, New South Wales on Wednesday, 15 May 2019, commencing at 10.00am (Sydney time). GPT encourages securityholders to attend the AGM. The AGM will also be webcast live via GPT’s website (www.gpt.com.au) for those securityholders who are unable to attend in person. Additionally, the Chairman’s address will be immediately announced to the ASX on the day. Investor Calendar 28 February 2019 December 2018 Half Year Distribution Payment and Annual Tax Statement 15 May 2019 Annual General Meeting June 2019 June 2019 Half Year Distribution Announcement 12 August 2019 2019 Interim Result Announcement August 2019 June 2019 Half Year Distribution Payment An investor calendar is also available on GPT’s website at www.gpt.com.au/events Distribution Policy and Payments GPT has a distribution policy in place that effectively aligns the Group’s capital management framework with its business strategy, which reflects a sustainable distribution level to ensure a prudent approach to managing the Group’s gearing through market and economic cycles. GPT makes distribution payments to securityholders two times a year, for the six months ended 30 June and the six months ended 31 December. GPT declares and pays its distribution in Australian dollars. 140 Supplementary information – Year ended 31 December 2018Annual Financial ReportCorporate directory The GPT Group Comprising: GPT Management Holdings Limited ACN 113 510 188 and GPT RE Limited ACN 107 426 504 AFSL 286511 As Responsible Entity for General Property Trust ARSN 090 110 357 Board of Directors Vickki McFadden (Chairman) Bob Johnston Eileen Doyle Gene Tilbrook Lim Swe Guan Michelle Somerville Angus McNaughton Company Secretaries James Coyne Lisa Bau Telephone: +61 2 8239 3555 Facsimile: +61 2 9225 9318 Audit Committee Michelle Somerville (Chairman) Lim Swe Guan Eileen Doyle Angus McNaughton Nomination and Remuneration Committee1 Gene Tilbrook (Chairman) Vickki McFadden Angus McNaughton Sustainability and Risk Committee Eileen Doyle (Chairman) Lim Swe Guan Michelle Somerville Registered Office Level 51 MLC Centre 19 Martin Place Sydney NSW 2000 Telephone: +61 2 8239 3555 Facsimile: +61 2 9225 9318 Auditors PricewaterhouseCoopers One International Towers Sydney, Watermans Quay, Barangaroo Sydney NSW 2000 Principal Registry Link Market Services GPT Security Registrar Locked Bag A14 Sydney South NSW 1235 Within Australia: 1800 025 095 (free call) Outside Australia: +61 1800 025 095 +61 2 9287 0303 Fax: registrars@linkmarketservices.com.au Email: www.linkmarketservices.com.au Website: Stock Exchange Quotation GPT is listed on Australian Securities Exchange under ASX Listing Code GPT. 1 From 1 January 2019 a Human Resources and Remuneration Committee was formed with the same membership as noted above, and a Nomination Committee was formed consisting of the full Board. 9 1 / 2 0 2 7 0 T P G 

Continue reading text version or see original annual report in PDF format above