Mirvac Group Annual Report 2016

Plain-text annual report

INDUSTRIAL Industrial assets that continue to outperform. RESIDENTIAL Real living that creates real returns. RETAIL Places to shop, eat and play. OFFICE Offices that are more than just a workplace. 2016 A N N U A L R E P O R T Mirvac Group comprises Mirvac Limited (ABN 92 003 280 699) and its controlled entities (including Mirvac Property Trust (ARSN 086 780 645) and its controlled entities). CONTENTS PAGE About Mirvac The year at a glance Letter from the Chairman and CEO & Managing Director Operating and financial review Our strategy Our performance Financial and Capital Management highlights Office & Industrial highlights Retail highlights Residential highlights Our people Health and Safety Innovation Sustainability Community Governance Board of directors Directors’ report Remuneration report Auditor’s independence declaration Consolidated financial statements Directors’ declaration Independent auditor’s report Securityholder information Directory/Events Calendar Glossary 4 6 7 10 11 12 14 20 24 28 32 34 35 37 39 40 42 45 65 66 115 116 118 120 121 ABOUT THIS REPORT The 2016 Annual Report is a consolidated summary of Mirvac Group’s operations, performance and financial position for the year ended 30 June 2016. In this report, unless otherwise stated, references to ‘Mirvac’, ‘Group’, ‘company’, ‘parent entity’, ‘we’, ‘us’ and ‘our’ refer to Mirvac Limited and its controlled entities, as a whole. Mirvac Limited also includes Mirvac Property Trust and its controlled entities. References in this report to a ‘year’ relates to the financial year ended 30 June 2016. All dollar figures are expressed in Australian dollars (AUD) unless otherwise stated. The consolidated financial statements included in this report were authorised for issue by the Directors on 16 August 2016. The Directors have the power to amend and reissue the financial statements. Mirvac’s full year financial statements can be viewed on, or downloaded from Mirvac’s website www.mirvac.com. The fabric of our cities depends on well-connected places to work, live and play. EVERYTHING’S c o n n e c t e d 699 Bourke Street, Melbourne ABOUT MIRVAC Mirvac is a leading, diversified Australian property group, with an integrated development and asset management capability. Principally located in Australia's four key cities of Sydney, Melbourne, Brisbane and Perth, we own and manage assets across the office, retail and industrial sectors, with over $15bn of assets currently under management. Our development activities allow us to create and deliver innovative and high-quality commercial assets and residential projects for our customers, while driving long-term value for our securityholders. Our integrated approach gives us a competitive advantage in the creation of quality assets across the entire lifecycle of a project; from planning through to design, construction and development, leasing, property management and long-term ownership. Established in 1972, Mirvac has more than 40 years of experience in the property industry and an unmatched reputation for delivering superior products and services across our businesses. 2 3 8 BRISBANE CANBERRA 1 1 10 15 13 13 SYDNEY 8 1 8 2 MELBOURNE PERTH 82 Office Retail Industrial Residential 4EVERYTHING’S CONNECTED - MIRVAC GROUP ANNUAL REPORT 2016OUR INTEGRATED MODEL Office & Industrial INTEGRATED DEVELOPMENT AND MANAGEMENT CAPABILITY BRISBANE Retail Residential 5MIRVAC GROUP ANNUAL REPORT 2016 - EVERYTHING’S CONNECTEDTHE YEAR AT A GLANCE $1.03bn STATUTORY PROFIT 69% $482m OPERATING PROFIT 6% Acquired Secured $2.9bn OF RESIDENTIAL PRE-SALES ON HAND Achieved 2,824 RESIDENTIAL SETTLEMENTS 24% Opened 200 George Street IN SYDNEY, NSW Mirvac’s new headquarters 6% $370m OF ASSETS across the office, industrial and retail sectors Completed over $880m IN ASSET SALES 9.9¢ DISTRIBUTIONS per stapled security 5% Secured Ping An Real Estate AS CAPITAL PARTNER for two residential projects in Sydney Secured management rights to the LAT PORTFOLIO (previously Investa Property Trust) 6EVERYTHING’S CONNECTED - MIRVAC GROUP ANNUAL REPORT 2016LETTER FROM THE CHAIRMAN AND CEO & MANAGING DIRECTOR Dear Securityholders, Mirvac has delivered another strong performance in the financial year 2016, reflecting the strength of our well-defined urban strategy and the substantial transformation of the business that has occurred over the past four years. We have significantly improved the quality of our office, industrial and retail portfolios through our unique asset creation capability and a targeted acquisition and divestment program. Our residential business has benefited considerably from our disciplined approach to allocating capital and is now delivering strong earnings and solid returns, with a robust future pipeline. With a strong focus on capital management, the Group’s gearing was at the lower end of the target range of between 20 and 30 per cent, and we priced AU$536 million US Private Placement in June this year, which, once settled, will see the weighted average debt maturity increase from 4.0 years at the end of the financial year to over 5.0 years. The strength of our balance sheet means we will continue to have the flexibility to grow the business in the future. We have done a considerable amount of work to transform the business over the past four years, and this has positioned us extremely well to deliver growth over the next three years, and importantly, long-term value for our securityholders. Our integrated, diversified and focused approach, which is at the core of what we do, is underpinned by our expertise as a creator, owner and manager of urban assets, as well as our deep understanding of our customer. Our multi-sector exposure allows us to flex our activities through cycles, and our unique asset creation capabilities allow us to extract value through redevelopment, repositioning and rezoning opportunities. In order to continue delivering on our strategy, we maintain an appropriate capital structure by prudently managing our balance sheet and leveraging third party capital. You can read more about our strategy on page 11. Executing against our strategy, we have delivered outstanding results in FY16, including a statutory profit of over $1.0 billion and an operating profit of $482 million. The significant increase to our statutory profit was driven by a $580 million revaluation uplift across our investment portfolio, and our solid earnings growth of six per cent was supported by a record number of residential settlements for the year. Within our Office & Industrial sector, we delivered an operating EBIT of $358 million, a decrease on the previous financial year as a result of divestments in FY15, although this was partially offset by assets we acquired. Within our urban Retail portfolio, we delivered an operating EBIT of $117 million, again, impacted by asset sales in FY15 and offset by acquisitions and completed developments; and we 7MIRVAC GROUP ANNUAL REPORT 2016 - EVERYTHING’S CONNECTEDare pleased to say our Residential business delivered an operating EBIT of $196 million, driven by a 24 per cent increase in residential lot settlements and gross margins above our target range. Our commercial and residential development activities delivered a ROIC of 14 per cent in FY16, well ahead of our FY17 target of 12 per cent, and we paid distributions of 9.9 cents per stapled security, a five per cent increase on the previous year. We have restructured our segment note reporting to better complement the sector-focused organisational restructure that was announced in June last year. Our aim is to simplify the way we present our financial results to the market and deliver greater transparency across each division. You will see the changes to our reporting structure in the pages that follow. The solid results we have delivered in FY16 clearly demonstrate the successful and ongoing transformation of Mirvac to an urban-focused property group, as well as our ability to maximise the value of the assets we own, manage and create. Over the past four years, we have carefully positioned our investment portfolio towards key urban locations. Our office portfolio, for instance, which comprises 93 per cent of Premium and A-grade assets, has an 81 per cent concentration to the Sydney and Melbourne CBDs; our industrial portfolio has an 85 per cent weighting to key logistics nodes in Sydney and our retail portfolio is 87 per cent weighted towards densely-populated urban areas. Our residential business is likewise largely overweight to the stronger performing Sydney and Melbourne markets; however, we still see the value of certain key locations in Brisbane and Perth. This urban focus has helped to deliver a strong performance across the business, with positive metrics and strong leasing activity across each of our investment portfolios and a high level of sales in our residential business, demonstrated by a record $2.9 billion of residential pre-sales on hand as at 30 June 2016. We have continued to demonstrate our asset creation capability with the completion of the Treasury Building in Perth; the Stage 2 expansion of Orion Springfield Central in Springfield; and 200 George Street in Sydney, Mirvac’s new Sydney headquarters. Underpinning our ability to create world-class assets is the Group’s unique integrated model, which allows us to manage each stage of a project in-house: from site acquisition, to design and construction, leasing, sales and marketing and asset and portfolio management. The move to 200 George Street in July this year was certainly a highlight for the business. A truly remarkable building, 200 George Street, known as the EY Centre, showcases our ability to maximise the potential of our assets, and with teams from all across the business involved in the delivery of this project, it is a true representation of the integrated model at work. Another key strength of Mirvac is our ability to adapt to the property cycle, acquiring, divesting and developing at the right time. In FY16, we acquired $370 million of assets across the office, industrial and retail sectors, ensuring that the assets we acquired were either those that we were confident we could unlock value in, such as Toombul Shopping Centre in Brisbane, or assets that will provide us with steady, growing and uncomplicated returns, as with the high-performing East Village in Sydney, in which we have a 50 per cent interest. In a period of strong capital demand, we disposed of over $880 million of non-aligned office and retail assets, further improving the quality of the portfolio as we continue to position the Group towards key urban locations. Our successful divestment program has allowed us to allocate capital more efficiently within the business. Attracting third-party capital remains a focus for the Group to allow us to continue to grow our business, and in FY16 we signed agreements with two significant capital partners, Ping An Real Estate and China Investment Corporation, within our Residential and our Office & Industrial businesses respectively. We will continue to focus on leveraging third-party capital in each of our sectors to grow our portfolios, reduce our risk and maximise the strength of the integrated model. We could not do what we do without our people, who continue to be our most valuable asset. A number of initiatives were implemented across the Group in FY16 to create long-lasting and beneficial change in the way we work and enhance employee engagement. These initiatives have included giving our employees the ability to choose when and where they work and ensuring they have access to the technology to enable them to do so. 8EVERYTHING’S CONNECTED - MIRVAC GROUP ANNUAL REPORT 2016We are committed to providing all staff – from our office workers to our centre management teams and construction workers on site – with the opportunity to incorporate greater work-life balance into their lives. Our continued focus on providing our people with a diverse and inclusive environment continued during the financial year, with a number of initiatives rolled out. Pleasingly, our work in this area was recognised with the PCA's inaugural Diversity Award, as well as an 'Employer of Choice for Gender Equality' citation from the Workplace Gender Equality Agency for the second consecutive year. Leadership and career development have also been areas we have invested in throughout the financial year, with a number of programs aimed at enhancing our leadership capabilities and employee development opportunities. Our This Changes Everything sustainability strategy has continued to deliver sizeable benefits to our business, and our Innovation program, Hatch, is facilitating a new way of thinking and a more inclusive workforce. As always, we have remained committed to ensuring safety at Mirvac is a top priority, and our Work Safe, Stay Safe initiative continues to be embedded in our processes. We are now looking at ways we can further enhance our HSE strategy, with an aim to launch a new strategy in the next financial year. We have made significant progress in transforming the business over the past four years, and we are optimistic about the future performance of the Group. As a result of our healthy balance sheet, high-performing investment portfolio and strong residential business, we are targeting EPS growth of eight to 11 per cent for FY17, and a three-year average Group ROIC of nine per cent or more. Importantly, we have a clear and ongoing focus to position the business in line with our strategy to ensure we can deliver long-term value for our securityholders for many years to come. We would like to take this opportunity to thank the Board, management and all Mirvac employees for their hard work and dedication to the Group, and congratulate them on another successful year. We would also like to thank you, our securityholders, for your ongoing commitment to Mirvac and we look forward to delivering value to you over the long term. Kind regards, John Mulcahy, Chairman Susan Lloyd-Hurwitz, CEO & Managing Director 9MIRVAC GROUP ANNUAL REPORT 2016 - EVERYTHING’S CONNECTED10 Operating and financial review Our strategy Our performance Office & Industrial Retail Residential 11 12 14 20 24 200 George Street, Sydney, New South Wales OPERATING AND FINANCIAL REVIEW - MIRVAC GROUP ANNUAL REPORT 201610 OUR STRATEGY To be focused, diversified and integrated. 11 FOCUSED DIVERSIFIED Deploying capital with discipline and delivering on our promises, with a strong focus on our customers. Maintaining an appropriate balance of passive and active invested capital through cycles, and retaining capability across the office and industrial, retail and residential sectors. INTEGRATED Leveraging our integrated model to create, own and manage quality Australian assets. Guiding this strategy and our decision making are four core principles. In order to deliver maximum value and drive a return on our investment for our securityholders, Mirvac will: Maintain an urban focus: Flex our activities through the cycle: We will continue to focus on urban markets, with an overweight preference to Sydney and Melbourne and clearly defined mandates for each sector of the business. Our deep understanding of our customers will ensure we remain experts in the markets we operate in. The property cycle drives our decision making, and our diversified structure and integrated model means we can adapt and change with the cycle. We have different priorities at different points in the cycle, which allows us to flex our activities and risk profile. Maximise the value of our assets: We will look to acquire property where we believe we have an opportunity to unlock value, through asset management, development, repositioning or rezoning. Our key point of difference is our unique capability to generate value by creating high-quality, investment-grade assets, as well as applying our expertise in managing the assets that we own. Maintain an appropriate and diversified capital structure and cost base: We manage our balance sheet capital according to the property cycle, and are focused on leveraging third party capital to grow our business and maximise the value of our integrated model. We maintain an appropriate and variable cost structure to enable us to remain agile in changing market conditions. Underpinning our strategy is a commitment to our people, innovation, technology, sustainability and safety. MIRVAC GROUP ANNUAL REPORT 2016 - OPERATING AND FINANCIAL REVIEW 12 OUR PERFORMANCE Mirvac’s urban strategy and a strong focus on capital management has delivered excellent results in FY16 and a platform for future growth. KEY FINANCIAL HIGHLIGHTS FOR THE YEAR ENDED 30 JUNE 2016: $1.03bn $482m STATUTORY PROFIT OPERATING PROFIT1 driven by substantial property revaluation uplifts across the investment portfolio representing 13.0 cents per stapled security (cpss) $509m OPERATING CASHFLOW FY15: $610m FY15: $455m FY15: $413m $366m DISTRIBUTIONS representing 9.9 cpss 21.9%2 $1.92 GEARING NET TANGIBLE ASSETS at the lower end of the Group’s target range of 20 to 30 per cent per stapled security FY15: $348m FY15: 24.3% FY15: $1.74 1. Excludes specific non-cash items, significant items and related taxation. 2. Net debt (at foreign exchange hedged rate) excluding leases/(total tangible assets-cash). OPERATING AND FINANCIAL REVIEW - MIRVAC GROUP ANNUAL REPORT 201613 KEY CAPITAL MANAGEMENT HIGHLIGHTS FOR THE YEAR ENDED 30 JUNE 2016: $1.2bn A$536m 4.0 years INCREASED AVAILABLE LIQUIDITY as a result of proceeds from non-core asset disposals and residential settlements US PRIVATE PLACEMENT NOTES (USPP) PRICED with maturities across tenors of 11, 12 and 15 years. The issue is expected to settle in September 2016 WEIGHTED AVERAGE DEBT MATURITY expected to increase to over 5.0 years post USPP issuance 5.0% AVERAGE BORROWING COSTS FY15: 5.2% MAINTAINED S&P BBB+ RATING RECEIVED Baa1 LONG-TERM ISSUER RATING From Moody’s Investors Service Mirvac’s strong capital management in FY16 means it is very well-placed for the year ahead. This is demonstrated by low gearing, and with debt maturing in 1H17 due to be replaced with long-term US debt, the Group’s weighted average debt maturity will significantly increase, while reducing the amount of debt due in any one year. MIRVAC GROUP ANNUAL REPORT 2016 - OPERATING AND FINANCIAL REVIEW14 6 1 0 2 T R O P E R L A U N N A P U O R G C A V R M I - I I I W E V E R L A C N A N F D N A G N T A R E P O I Offices that are more than just a workplace. Industrial assets that continue to outperform. 8 Chifley Square, Sydney, New Sout Wales 14 15 OFFICE & INDUSTRIAL Mirvac’s Office & Industrial portfolio continues to focus on key urban markets, providing secure, recurring income to the Group. Mirvac’s high-quality office portfolio comprises over 93 per cent Prime or A-grade assets, with an 81 per cent overweight to the strong Sydney and Melbourne markets. The Group has one of the largest office management portfolios in the country, in addition to a superior office development capability, demonstrated by projects such as 8 Chifley Square and the recently completed 200 George Street in Sydney, NSW; 699 Bourke Street in Melbourne, VIC; and the Treasury Building in Perth, WA. Meanwhile, Mirvac’s high-performing industrial portfolio, concentrated around key logistics nodes in both Sydney and Melbourne, continues to deliver strong metrics. Its concentration to the strong Sydney market at over 85 per cent means it is well- placed to benefit from Sydney’s economic growth. For the year ended 30 June 2016, Mirvac’s Office & Industrial division delivered earnings before interest and tax of $358m. $358m EARNINGS BEFORE INTEREST AND TAX $9.8bn ASSETS UNDER MANAGEMENT OFFICE Mirvac has a clear focus in its office business to create, own and manage high-quality, high-performing office assets. Over the past three years, the portfolio has transitioned away from metropolitan and lower- grade assets towards Prime and A-grade assets located in the Sydney and Melbourne CBDs. Highlights across the office portfolio for the year ended 30 June 2016 included: ● maintained high occupancy of 96.5 per cent1, with a long WALE of 6.5 years2; ● completed 105 deals over approximately 215,800 square metres3, with highlights including: > 275 Kent Street, Sydney NSW: renewed existing tenant, Westpac, for 58,500 square metres of office space for a 12-year term commencing in 2018; and > 60 Margaret Street, Sydney NSW: secured financial services group, ING DIRECT, for approximately 10,000 square metres on a 10-year term commencing July 2017; and > 367 Collins Street, Melbourne VIC: renewed Optus for over 8,900 square metres for a seven-year term, commencing in July 2016. 1. By area, including equity accounted investments and owner-occupied properties, and excluding assets held for development. 2. By income, including equity accounted investments and owner-occupied properties, and excluding assets held for development. 3. Excludes leasing of assets under development. MIRVAC GROUP ANNUAL REPORT 2016 - OPERATING AND FINANCIAL REVIEW16 ● total office asset revaluations provided an uplift of $405m1 (or 9.2 per cent) over the previous book value for the 12 months to 30 June 2016. On a like-for-like basis (excluding investment properties under construction (IPUC), acquisitions and disposals), the net uplift was $212m (or 6.2 per cent); ● exchanged contracts with UrbanGrowth to acquire Australian Technology Park, Sydney NSW in a consortium with AMP Capital’s Wholesale Office Fund, AMP Capital separate account client, Sunsuper and Centuria Property Funds for a total consideration of $263m; ● disposed of approximately $850m of assets with the sale of 1 Woolworths Way, Bella Vista NSW; Como Centre, South Yarra VIC; 16 Furzer Street, Phillip ACT; and, 3 and 5 Rider Boulevard, Rhodes NSW, in accordance with the Group's strategy; and ● commenced management of the LAT portfolio (previously the Investa Property Trust) in February 2016, having reached an agreement with a subsidiary of China Investment Corporation in December 2015 to become the asset manager. In line with Mirvac’s mandate to create world-class office assets that generate development returns, the Group progressed its active $1.4 billion office development pipeline in FY16, with highlights including: ● 200 George Street, Sydney NSW: achieved practical completion in June 2016. During the financial year, Mirvac signed lease agreements with energy giant, AGL; serviced office providers, Victory, and property group, Wanda, to take the building to 99 per cent pre-leased at completion. Lease deals with all ground-floor retail tenancies were also executed during the financial year; ● 2 Riverside Quay, Melbourne VIC: topping-off achieved in April 2016, with practical completion targeted for December 2016, allowing anchor tenant, PwC, to move in two months ahead of program. The building is now 100 per cent pre- leased, with Fender Katsalidis Architects signing an agreement for lease on the remaining office space in April 2016; ● 664 Collins Street, Melbourne VIC: development design is nearing finalisation with early construction works commencing in June 2016. The building’s office component is currently 33 per cent pre-leased to Pitcher Partners; ● 477 Collins Street, Melbourne VIC: signed heads of agreement with Deloitte to lease approximately 22,000 square metres of office space. Subject to the finalisation of the agreement for lease, works are expected to commence in the first half of FY17; and ● Treasury Building, Perth WA: achieved practical completion in August 2015, with the tower fully leased to the WA State Government for a 25-year lease term. MARKET OUTLOOK2 Strong business conditions in Sydney and Melbourne continue to result in solid net absorption levels, with prime vacancy rates tightening over the past six months. These markets are expected to tighten further over the next few years, with better effective rent growth, driven by above-average levels of stock withdrawals in Sydney and low supply completions in both markets. Tenant demand in Brisbane is improving, driven by the government and education sectors, albeit vacancy levels and incentives remain high. Meanwhile, there has been a slight contraction in Perth, as larger mining firms continue to consolidate space options. Vacancy in Brisbane and Perth is expected to gradually reduce, however, leasing will remain competitive, and as such, it is expected incentives will remain elevated. RISKS While tenant demand for office space remains challenging in Brisbane and Perth, Mirvac’s overweight position to Sydney and Melbourne means it is well-placed against this backdrop. The office portfolio metrics, comprising a long WALE and solid occupancy, also demonstrate Mirvac’s ability to maintain a strong and robust portfolio through the cycles of demand. In terms of its office developments, the Group seeks to manage uncertainty around tenant demand in a number of ways, such as substantially pre-letting development projects in advance of construction, while managing its capital commitments by partially selling down office developments to capital partners in advance of completion. 1. Includes 8 Chifley Square, Sydney NSW and Treasury Building, Perth WA. After adjustment for owner-occupied properties, the net uplift was $373m. 2. These future looking statements should be read in conjunction with future releases to the ASX. OPERATING AND FINANCIAL REVIEW - MIRVAC GROUP ANNUAL REPORT 2016INDUSTRIAL With a strong focus on leasing and asset creation, the Group’s industrial portfolio delivered strong metrics in FY16. 17 MARKET OUTLOOK3 Continuing investor demand for prime-grade industrial assets in key locations is resulting in compressed capitalisation rates, weighting predominantly towards the stronger markets of Sydney and Melbourne. With 85 per cent of its industrial portfolio weighted to Sydney, Mirvac continues to be well-placed to benefit from ongoing positive conditions in this market. RISKS Tenant demand for quality industrial space remains a key risk in the industrial sector. To mitigate this, Mirvac continues to focus on high-quality assets that appeal to a broad range of tenants, securing long-term leases and carefully managing its lease expiry profile. Highlights across the industrial portfolio for the year ended 30 June 2016 included: ● achieved 100 per cent occupancy1, with a long WALE of 7.9 years2; ● achieved like-for-like net operating income growth of 3.2 per cent; ● completed approximately 79,600 square metres of leasing activity; ● acquired an industrial facility at 26-38 Harcourt Road in Altona, VIC for a total consideration of $28m. The site comprises two interconnected warehouses and has a total building area of over 32,700 square metres; ● exchanged contracts for an industrial site at 274 Victoria Road, Rydalmere NSW for $48m, representing an initial yield of 6.7 per cent. The site, which is fully occupied and has a WALE of over 7.4 years, comprises 22,700 square metres of total gross lettable area. Settlement is expected in early FY17; and ● Calibre, Eastern Creek NSW: progressed negotiations with a number of prospective tenants over the first 19,000 square metre development, Warehouse 1. 1. By area. 2. By income. 3. These future looking statements should be read in conjunction with future releases to the ASX. MIRVAC GROUP ANNUAL REPORT 2016 - OPERATING AND FINANCIAL REVIEW18 Working towards WELLness Mirvac’s move to its new headquarters at 200 George Street, Sydney in July has been one of the company’s biggest events of 2016 — and while it’s a small step geographically, it’s a huge step forward for the business. The new Sydney headquarters (HQ) represents an exciting evolution in how buildings can work for their tenants. For the first time, Mirvac has been working with the International WELL Building Institute to target a gold certification for the tenancy. This innovative standard uses an evidence-based system to measure and monitor various aspects of a tenancy’s performance, particularly those focused on the health and wellbeing of occupants. The Group is also taking the opportunity to educate as many visitors as it can on the unique features of the building. A tenancy app has been created to enable visitors to learn more about the building as they move through the space. A major benefit of the new HQ is the way it’s been designed to promote healthier work practices. From the open layout and central staircase, which encourages movement and connection, to the collaborative technology and ergonomic furniture, and to the abundant plant life that brings nature into the building, every part of the design at 200 George Street has been carefully considered. To attain WELL certification, Mirvac has integrated smart technology at 200 George Street, including SAMBA sensors that monitor air quality and lighting that responds to natural circadian rhythms throughout the day. It also provides employees with healthy food options through its ‘profit for purpose’ café, run in partnership with the YMCA. OPERATING AND FINANCIAL REVIEW - MIRVAC GROUP ANNUAL REPORT 201619 275 Kent Street in Sydney, NSW also achieved a 6 Star Green Star Performance rating, becoming one of the first buildings in Australia to do so, while 8 Chifley Square, Sydney NSW achieved a 5 Star NABERS Energy rating and 5 Star NABERS Water rating. Mirvac’s ongoing commitment to sustainability across its office portfolio resulted in a 5.1 Star NABERS average energy rating, a result of targeted capital investment and a strong focus on operational efficiency. A Star Portfolio The Group continued to demonstrate excellence in sustainability across its office portfolio in FY16, with two of its existing assets achieving 6 Star Green Star ratings. 23 Furzer Street in Phillip, ACT was the first building in Australia to increase its Green Star rating from a 5 Star Green Star Office Design rating to a 6 Star Green Star Performance rating. 23 Furzer Street was also the first major property in Australia to attain a 6 Star NABERS Energy rating without GreenPower. In recognition of its outstanding environmental performance, 23 Furzer Street was awarded the Facility Management Award at the Chartered Institute of Building Services Engineers Awards in London. Earlier in the financial year, it received the Facility Management Industry Energy Efficiency Award and was named the Best Commercial Building Energy Efficiency Project by the Energy Efficiency Council. 1 3 1. 8 Chifley Square, Sydney NSW. 2. 275 Kent Street, Sydney NSW. 3. 23 Furzer street, Phillip ACT. 2 MIRVAC GROUP ANNUAL REPORT 2016 - OPERATING AND FINANCIAL REVIEW20 6 1 0 2 T R O P E R L A U N N A P U O R G C A V R M I - I I I W E V E R L A C N A N F D N A G N T A R E P O I Places to shop, eat and play. Orion Shopping Centre, Springfield, Queensland 20 21 RETAIL The Group’s Retail division continues to focus on densely-populated urban catchment areas, with an overweight position to the strong performing Sydney market. Mirvac’s strategy is to own and manage quality retail centres located in prime urban trade areas, in Australia's key eastern seaboard cities. The Group’s retail centres are individually branded, marketed and positioned to suit the specific needs of its customers in each of their unique catchment areas. For the year ended 30 June 2016, the Retail division delivered earnings before interest and tax of $117m. 99.4% OCCUPANCY $117m EARNINGS BEFORE INTEREST AND TAX Retail’s continued focus on urban areas and on capturing organic growth across its portfolio ensured a solid performance in FY16. Highlights across the retail portfolio for the year ended 30 June 2016 included: ● maintained high occupancy of 99.4 per cent 1; ● achieved comparable moving annual turnover (MAT) sales growth of 5.4 per cent and comparable specialty sales growth of 4.2 per cent; 1. By area. 2. Includes adjacent land of approximately 2,800 square metres. ● increased comparable specialty sales productivity by nine per cent to $9,623 per square metre; ● comparable specialty occupancy costs down 70bps to 15.3 per cent; ● executed 410 deals across approximately 52,400 square metres, with leasing spreads of 3.5 per cent; ● acquired Toombul Shopping Centre in Brisbane’s inner-north for a total consideration of $233m2, representing a core capitalisation rate of 6.5 per cent; ● entered into a joint venture with PAYCE Consolidated to purchase an interest in East Village, Zetland, Sydney NSW for a total consideration of $155m. Settlement occurred on 1 July 2016; ● disposed of the mixed-use Como Centre complex in South Yarra, VIC with the retail component sold for approximately $29m. Settlement occurred in June 2016; and ● Broadway Sydney ranked No.1 in Shopping Centre in News’ Big Guns Awards 2016 for MAT per square metre (MAT/m2) for the fourth consecutive year. The Group continued to create value across its Retail portfolio with a development pipeline that captures attractive organic growth. Highlights across Mirvac’s retail development projects for FY16 included: ● Orion Springfield Central, Brisbane QLD: achieved practical completion of the Stage 2 expansion in March 2016, with the official opening held in April 2016. The centre, which has a gross lettable area of approximately 70,000 square metres, now encompasses a comprehensive fashion, leisure, casual dining and entertainment offer to service the growing Greater Springfield. The additional retail space in Stage 2 is 97 per cent leased; MIRVAC GROUP ANNUAL REPORT 2016 - OPERATING AND FINANCIAL REVIEW22 ● Greenwood Plaza, Sydney NSW: progressed with development works on the enhanced casual dining precinct, with completion achieved in July 2016. The project is 100 per cent leased; ● Tramsheds, Harold Park NSW: significantly advanced the restoration of the historic tramsheds, with completion expected in the first half of FY17. The 6,200 square metre boutique retail space is 100 per cent pre-leased; and ● Broadway Sydney, Broadway NSW: significantly advanced with the development of the Level 2 expansion, which is expected to complete in 1H17. The new casual dining precinct and enhanced fashion offering will be anchored by leading international brands, H&M and Sephora. The project is 100 per cent pre-leased. MARKET OUTLOOK1 Consumer spending growth in New South Wales moderated slightly in the second half of FY16, but remains supported by solid levels of economic growth, continued house price growth and low unemployment levels. Australia’s major cities capture a high proportion of population growth, compared to regional areas. Together with a lower Australian dollar driving gains in service employment in major cities, retail centres in urban locations, which Mirvac continues to focus on, are well-positioned. RISKS While retail sales have improved generally, leasing demand in the broader market is variable and a number of retailers remain under pressure. To mitigate these risks, Mirvac is focused on continually refreshing its retail assets (via refurbishment, redevelopment or tenant remixing) to adapt to changing market dynamics. In addition to its focus on key urban and metropolitan markets, Mirvac ensures it maintains a diversified tenancy mix, where no single specialty retailer contributes greater than 1.6 per cent of the total portfolio’s gross rent. Dining out with Mirvac Retail Mirvac’s Retail team puts the shopper at the core of every decision they make. As a result, each and every one of the Group’s shopping centres offers a bespoke environment that reflects the core values of its community. A key focus for many of the centres is offering the best dining, leisure and entertainment facilities, in addition to a diverse retail mix and product offering; allowing shopping and socialising to seamlessly take place. During FY16, a number of Mirvac’s retail centres updated their dining and entertainment precincts to provide customers with an even better leisure experience. At Greenwood Plaza in North Sydney, NSW for instance, an outdated food court has been replaced with a sophisticated dining environment that reflects the aspirations of the centre’s customer base. At Broadway Sydney, NSW the team is developing a new shopping experience by combining fashion, food and art in an urban space. The lifestyle and leisure focus at the expanded Orion Springfield Central in south-east QLD was unveiled at the official opening in March this year, and similar offerings have been taking place at Kawana Shoppingworld in QLD and Stanhope Village in NSW, all of which are tailored to meet the needs of the local community. 1. These future looking statements should be read in conjunction with future releases to the ASX. OPERATING AND FINANCIAL REVIEW - MIRVAC GROUP ANNUAL REPORT 201623 In the next financial year, Mirvac intends to undertake more waste and recycling audits, facilitate greater tenant engagement, add braille signage to bins in its centres and investigate glass crushers to help its retail tenants with bulky bottle recycling (following a successful trial at Harbourside Shopping Centre). Recycling in Retail Mirvac’s retail portfolio has achieved a significant improvement in its recycling performance over the past few years, increasing its recycling rate by over 60 per cent since FY13, and on track to achieve a 75 per cent recycling target by FY18. A number of initiatives were implemented by Centre management teams across the retail portfolio to achieve this outcome, including: ● the Pulpmaster Organic Processing System: installed at eight centres, this system diverted over 675 tonnes of organic waste away from landfill in FY16; ● organic waste collections: commencing at Moonee Ponds, these collections have seen the recovery of 12.5 tonnes of organic waste from landfill; and ● Advanced Waste Treatment: Across NSW, Mirvac’s landfill waste undergoes a secondary sort process to recover recyclable materials from the landfill waste stream. In FY16, this has enabled over 1,500 tonnes of recyclable material to be recovered from the waste stream and diverted from landfill. MIRVAC GROUP ANNUAL REPORT 2016 - OPERATING AND FINANCIAL REVIEW24 6 1 0 2 T R O P E R L A U N N A P U O R G C A V R M I - I I I W E V E R L A C N A N F D N A G N T A R E P O I Real living that creates real returns. The Eastbourne, Victoria 1. Adjusted for Mirvac’s share of JVA and Mirvac managed funds. 24 25 RESIDENTIAL Mirvac’s Residential business is founded on a reputation for delivering high-quality residential product in Australia’s key cities of Sydney, Melbourne, Brisbane and Perth. With activities across both masterplanned communities and apartment projects, the Group’s integrated model ensures that expertise from all aspects of the business can be utilised: from design and construction to development and sales and marketing. For the year ended 30 June 2016, the Residential division delivered earnings before interest and tax of $196m, while delivering a return on invested capital of 12.4 per cent. $196m EARNINGS BEFORE INTEREST AND TAX A record 2,824 RESIDENTIAL LOT SETTLEMENTS Mirvac’s focus on delivering high-quality, innovative masterplanned communities and apartments ensured a strong result in FY16. Highlights across the residential business for the year ended 30 June 2016 included: ● settled a record 2,824 residential lots and achieved strong residential gross margins of over 24 per cent, driven by outperformance in masterplanned community projects in Sydney and Melbourne and apartment projects in Sydney; ● secured residential pre-sales of $2.9bn1, providing a high level of visibility in FY17 and beyond; 1. Adjusted for Mirvac’s share of JVA and Mirvac managed funds. ● secured approximately 1,900 new residential lots, including: > Ascot Green, Brisbane, QLD: entered into a project delivery agreement with Brisbane Racing Club to develop the estimated $992m residential precinct. Mirvac intends to deliver over 1,000 apartments and will work closely with Brisbane Racing Club on an exciting retail village; > Marrickville, Sydney, NSW: entered into a project delivery agreement with Marrickville Council to redevelop the old Marrickville Hospital in Sydney’s inner-west. Mirvac intends to deliver around 220 apartments, a library and community hub, as well as 1,200 square metres of open space; and > Piara Waters, Perth, WA: the site offers an urban infill opportunity in an area abundant with existing infrastructure, amenity and demand for vacant space. Mirvac intends to deliver approximately 400 masterplanned community lots. ● entered into a joint venture partnership with Ping An Real Estate, a subsidiary of the Ping An Insurance Group of China, for two residential projects in Sydney, NSW. These include The Finery in Waterloo and St Leonards Square in St Leonards, demonstrating Mirvac’s ongoing focus on attracting third party capital to grow its business; and ● released over 3,900 lots with successful launches across masterplanned communities and apartments, including: Masterplanned Communities: > Brighton Lakes NSW: achieved strong sales with 95 per cent of released lots pre-sold; > Gledswood Hills NSW: achieved strong sales, with 83 per cent of released lots pre-sold; > Harcrest VIC: achieved strong sales with 100 per cent of Stages 7, 9 and 10 pre-sold; MIRVAC GROUP ANNUAL REPORT 2016 - OPERATING AND FINANCIAL REVIEW 26 > Woodlea VIC: achieved strong sales with 95 per cent of released lots pre-sold; and > Tullamore VIC: achieved strong sales with 76 per cent of released lots pre-sold. Apartments: > Harold Park, Sydney NSW: released the final stage of the last precinct, with 61 per cent of released lots pre-sold; > Stage 2, Hope Street, South Brisbane QLD: achieved strong sales, with 96 per cent of released lots pre-sold; > The Finery, Waterloo NSW: achieved solid sales with 89 per cent of released lots pre-sold; > St Leonards Square, Sydney NSW: achieved strong sales with 90 per cent of released lots pre-sold; and > The Eastbourne, Melbourne VIC: successful launch with 55 per cent of released lots pre-sold. MARKET OUTLOOK1 Conditions in the Australian residential market remain mixed nationally, varying from state to state and within states. Indications of buyer activity, such as auction clearance rates and price levels, suggest conditions have moderated in Sydney and Melbourne from very high levels, but remain solid; and while lending criteria has tightened, a low interest rate environment is expected to support continued demand. In Brisbane, affordability is favourable and future supply risks appear to be reducing given a decrease in approvals and construction finance for lower tier developers. Conditions in Perth remain challenging, as the transition away from mining continues. RISKS Stricter lending criteria, both domestically and offshore, has sparked concern over the ability of purchasers to settle. To mitigate settlement risk, Mirvac has a range of strategies in place, and carefully and proactively monitors its settlement risk profile. In addition to a requirement of a 10 per cent deposit from purchasers, Mirvac has a structured communication and engagement program with its customers, and undertakes a thorough risk assessment of its exposure to foreign investment. Mirvac’s proven track record of managing its settlement risk is demonstrated by a history of low defaults, with a long-term average of less than one per cent. House with No Bills The House with No Bills was launched at Jack Road, Cheltenham, VIC in May 2016. The house was designed to reduce its reliance on electricity to the point that it will not generate any electricity bills. Methods to achieve this include increased roof insulation and the installation of solar PV panels, LED lighting, energy efficient appliances and smart metering and monitoring systems, which will assist homeowners in keeping track of where and how their energy is being used. 1. These future looking statements should be read in conjuntion with future releases for the ASX. OPERATING AND FINANCIAL REVIEW - MIRVAC GROUP ANNUAL REPORT 201627 MARRICKVILLE PHOTO TBC 1 MARRICKVILLE: Home to a New Kind of Community One of the commitments in Mirvac’s This Changes Everything sustainability strategy is to deliver a One Planet Living community. An initiative of sustainability action group, Bioregional, and its partners, One Planet Living seeks to make truly sustainable living a reality, using ecological footprinting and carbon footprinting as its headline indicators. An important first step was taken this year with Mirvac selecting its residential project in Marrickville, Sydney NSW, as the site for a One Planet Living community and registering the project with BioRegional. Located in Sydney’s inner west, the Marrickville Community Hub will see a former hospital transformed into a closely connected urban community. In addition to approximately 200 apartments, the project will encompass extensive outdoor community areas which will offer comfortable green space for residents, along with the local community. As well as the residential component, the One Planet Living community will incorporate the new Marrickville Library and community facilities. Features of the project that will help towards the One Planet Living rating include: • sustainability initiatives such as energy efficient building design and services, water sensitive urban design, a focus on reducing waste and an aspiration to increase the biodiversity value of the site; • bicycle racks and maintenance areas, electric vehicle charging and car share pods — all of which will encourage alternative transport methods; • community and kitchen gardens and a focus on healthy indoor and outdoor spaces to enhance the health and wellbeing of residents; • the adaptive re-use of heritage buildings and an urban design that aims to address the local streetscape, reflecting and enhancing the site’s local character and history; and • ongoing education programs for residents and the wider community on One Planet Living principles. As part of the project, Mirvac is also working on a community plan and educational strategy to help residents live a sustainable lifestyle, as well as a local economy strategy to promote businesses and employment in the area. There is no doubt Marrickville is an exciting step forward for Mirvac and for the inner west. The site in Marrickville will be a place that is uniquely designed around the human experience, and where community sits at the heart of every decision made. 1. Marrickville Community Hub (artist's impression). MIRVAC GROUP ANNUAL REPORT 2016 - OPERATING AND FINANCIAL REVIEWKeeping connected to our people and the communities that we serve. 28EVERYTHING’S CONNECTED - MIRVAC GROUP ANNUAL REPORT 2016OUR PEOPLE Mirvac’s strong performance in FY16 reflects the quality, passion and commitment of its people. During the financial year, the Group continued to focus on maintaining a diverse, skilled, high- performing and ultimately, engaged, workforce. The three key areas of focus this year included investing in the growth of Mirvac’s people, strengthening leadership across the business and mainstreaming flexibility at Mirvac. INVESTING IN OUR PEOPLE Mirvac is committed to supporting its people to be the best they can be through ongoing opportunities for growth and professional development. Employee development is essential to keep employees thriving, skilled and engaged, and this was a major focus for the business in FY16. Opportunities to do this come from a range of sources: from the quality of projects undertaken at Mirvac; formal learning programs offered through the Mirvac Learning Academy; and ongoing coaching from leaders and subject matter experts. THE MIRVAC LEARNING ACADEMY While learning has always been provided for employees, a central platform – the Mirvac Learning Academy – was introduced in FY16, giving employees easy access to a range of training and career development options. In addition to technical skills, the Mirvac Learning Academy covers leadership and interpersonal skills like communication, time management, influencing and presentation. LEADING EDGE Leadership has been another key area for the Group this financial year. EMBEDDING FLEXIBILITY AT MIRVAC Following the launch of a refreshed Diversity & Inclusion strategy last year, Mirvac spent FY16 delivering on key initiatives from the strategy. Gender equity continued to be a strong focus area for the Group; however, there was also a focus on a number of other enablers, such as ‘mainstreaming flexibility’, to help foster a diverse and inclusive culture. The Equilibrium Man Challenge, a Workplace Gender Equality Agency initiative that Mirvac participated in last year, successfully shifted the dialogue around flexibility at Mirvac from being something for ‘working mothers’ to being something for ‘everyone’. Approximately 15 per cent of Mirvac’s employees have a formal flexible arrangement and over 45 per cent of employees have an informal flexible arrangement, whereby they are able to change traditional hours or place of work to balance personal commitments. Mirvac’s progress in building a diverse and inclusive environment was recognised by the property industry in June, when it won the inaugural Diversity Award at the Property Council of Australia’s Innovation & Excellence Awards. Mirvac also received the ‘Employer of Choice for Gender Equality’ citation from the Workplace Gender Equality Agency for the second year in a row. To ensure gender diversity remains at the forefront, targets have been set for gender representation at Board and management levels, and there is a requirement for 50:50 representation in recruitment shortlists for senior roles. Mirvac also reports on gender diversity strength in talent and succession planning. Mirvac has developed and launched three core leadership programs geared towards leaders at different stages of their careers. Over 200 employees completed one of these leadership programs in FY16, which were available through the Mirvac Learning Academy. The focus for the Group moving forward is on productivity and outcomes, rather than hours spent at a desk, and ensuring employees are provided with the tools they need to have greater choice in how, when and where they work. Senior executives also participated in an INSEAD Masterclass focused on fostering High Performance Leadership. 29MIRVAC GROUP ANNUAL REPORT 2016 - EVERYTHING’S CONNECTEDMIRVAC CONSTRUCTION Building Balance Program One of the more immediate actions was the launch of ‘My Simple Thing’ in April, which asked construction employees to think of a simple change they can incorporate into their work lives to improve their work-life quality. Site-based teams are empowered to develop an action plan where team members support each other’s personal goals, while ensuring project milestones are achieved. Flexibility in construction is an industry-wide issue. To increase workplace flexibility for those in its construction teams, Mirvac launched the Building Balance initiative this year, which aims to challenge the attitude and behaviours embedded in the construction industry and to rethink the way processes and procedures are undertaken. The program is far reaching and looks at how construction teams can utilise the tools, technology and resources available to help streamline processes and improve efficiency. MIRVAC’S WORKFORCE AT A GLANCE over 1,420 TOTAL NUMBER OF EMPLOYEES 63WA QLD 146 NSW 979 VIC 241 EMPLOYEES BY LOCATION 16 weeks PAID PARENTAL LEAVE 60 : 40 GENDER SPLIT 86% 100% PARENTAL LEAVE RETURN RATE 50 : 50 BOARD REPRESENTATION 30EVERYTHING’S CONNECTED - MIRVAC GROUP ANNUAL REPORT 2016Transforming the Way We Work The Transforming the Way We Work (or TW3) program was launched in 2015 and has involved streamlining company processes, encouraging flexible work practices and utilising technology to ensure employees can work more efficiently. As part of this, over 1,200 laptops were deployed across the Group, and various digital technologies were introduced to allow for better connection and collaboration between employees online, while also reducing the reliance on paper. To help the Sydney head office prepare for its move to a more flexible working environment at 200 George Street, a level of office space was remodelled as a pilot workspace, designed for flexibility and bringing different people from across the business together. In order to facilitate a new way of working, it was also critical that all employees were provided with the tools and, in particular, the technology that enables more agile, collaborative and flexible work practices. To support the behavioural change underway as the Group continues to transform the way it works, Mirvac implemented a Flexibility Charter in FY16, which sets out the way people leaders and employees can adopt flexibility into their work lives, and outlines the behaviours expected in a new work environment. Behavioural training in how to work in a flexible environment was also provided to people leaders and employees. 31MIRVAC GROUP ANNUAL REPORT 2016 - EVERYTHING’S CONNECTEDHEALTH & SAFETY Creating a safe and healthy workplace for our people. the year numerous due diligence training sessions were conducted, ensuring a consistent level of HSE knowledge across senior and middle management. As with previous years, Mirvac has continued to perform well on the compliance front, with 99 per cent compliance on the License to Operate module, and a 93 per cent safety engagement score in our Employee Engagement Survey. Mirvac has an excellent track record in safety and remains unwavering in its commitment to ensuring the safety of its people and customers. This year, the business took the opportunity to look at Health, Safety and Environment (HSE) in broader terms, assess the approach to date and develop a clear plan for the future. A number of important initiatives continued to be rolled out during FY16, including training on alcohol and other drugs to raise awareness about the factors that underpin drug and alcohol misuse, from stress to social influences. Workshops took place between October and December 2015, with over 80 per cent of employees taking part. The Group also enhanced its hazard reporting system, making it easier for employees to use, and throughout Putting the H into HSE In March 2016, Mirvac embarked on a journey to develop a new HSE strategy. This involved a significant amount of research, including internal and external interviews with key stakeholders and a benchmarking study looking to global leaders in HSE. The HSE team is now in the process of developing a new strategy, to be launched in FY17. A key area for this strategy is to “put the H into HSE”, with an increased focus on health and wellbeing, while simplifying processes and utilising technology to streamline the HSE management system. 32EVERYTHING’S CONNECTED - MIRVAC GROUP ANNUAL REPORT 2016Making Safety our Business The Work Safe, Stay Safe initiative launched last year has resonated well with Mirvac’s employees, and the Group continued to embed this in the employee induction process as well as its HSE initiatives in Construction. providers as well as on-site teams. To continue to make communication even easier, the MRACs are now being translated into a smartphone app which is currently being piloted at Green Square and Brighton Lakes in Sydney, NSW. As construction sites involve high-risk activities, Mirvac also developed a new tool to make communication on sites easier for its construction employees. Mirvac Risk Assessment Cards (MRACs) visually depict what risks look like and what controls can be put in place to mitigate them. The MRACs were delivered to 850 construction workers across the country, and recipients included service Designing Out Our Risk (DOOR) is another program that enables the Group to manage risk early and effectively through all stages of development. Key personnel have been trained in DOOR to ensure there is someone championing the program in each part of the business. 33MIRVAC GROUP ANNUAL REPORT 2016 - EVERYTHING’S CONNECTEDINNOVATION Launched in 2014, Mirvac’s Hatch program has enabled the Group to weave innovation into the fabric of the business. A ROUND OF APPLAUSE Mirvac’s focus on innovation hasn’t gone unnoticed. At the 2015 BRW Most Innovative Companies Awards, Hatch won the Best Innovation Program, and Mirvac was ranked as the third Most Innovative Company in Australia. As well as its commitment to innovation through Hatch, Mirvac’s submission included the work it has done on the CSR Velocity Panels, as well as the Group’s Work Safe, Stay Safe initiative. Rather than work as a separate entity, Hatch is made up of a number of Innovation Champions from all parts of the business. Together, these Champions are responsible for sharing innovative thinking and methodology with their peers, in addition to working together towards a set of greater innovation goals. Mirvac defined eight Hatch missions to focus on last year, with a group of Champions assigned to each one. In FY16, Mirvac recruited a third set of Innovation Champions, meaning a greater pool of resources to work the Hatch missions. In addition to this, around 30 members of Mirvac’s senior management team completed innovation training in late 2015. As Hatch thinking comes to life across the business, there is perceptible and exciting change in the innovation journey, as theory starts to turn into action. After kicking off with the initial ‘scanning’ phase, Mirvac has spent 2016 focusing on the ideation and experimentation phases of the Hatch process. The next goal for Hatch: to build an external network through an open innovation platform, and to continue promoting Hatch as a broadly accepted, customer- centric ideology embedded into everything Mirvac does. Innovation process1 mission challenge decide implement scan ideate experiment promote 1. Source: Inventium 34EVERYTHING’S CONNECTED - MIRVAC GROUP ANNUAL REPORT 2016SUSTAINABILITY Mirvac launched its plan for a sustainable future in 2014 with This Changes Everything. The plan comprises four interconnected areas of focus: Reimagining Resources, Shaping the Future of Place, Enriching Communities and Smarter Thinking. Under each area is a long-term mission, supported by several more immediate commitments. This year, Mirvac achieved its key commitment to deliver a smart building by 2018, with both 200 George Street in Sydney and 699 Bourke Street in Melbourne. The Group has also set several new commitments around affordability and access, biodiversity, transport, supplier governance and resilience. SOCIAL RETURN ON INVESTMENT Mirvac, together with KPMG, has created a Social Return on Investment Framework to measure the social impacts of new residential communities. Known as 'The Value of Community', the initiative demonstrates real value for residents and the wider community across the areas of improved safety, sense of community, active living and sense of place. MIRVAC ENERGY During the year, Mirvac launched Mirvac Energy, a company that will invest in solar systems for Mirvac’s own assets, earning an income stream by selling energy, with two pilot projects at One Darling Island, Sydney and Orion Springfield Central, Brisbane totalling 1.1MW. 35MIRVAC GROUP ANNUAL REPORT 2016 - EVERYTHING’S CONNECTED ● Googong Township received a 5 Star Green Star Communities rating – the first project in New South Wales to be awarded this rating by the Green Building Council of Australia; and ● achieved a 6 Star Green Star Performance rating for 275 Kent Street, Sydney NSW and 23 Furzer Street, Phillip ACT, demonstrating that existing buildings can achieve a Green Star World Leadership level of performance. OTHER KEY ACHIEVEMENTS IN FY16 INCLUDED: ● registered Marrickville in Sydney, NSW for One Planet Living certification together with Marrickville Council (see page 27 for more details); ● launched the Nudge by Mirvac sustainability film festival (see page 38 for more detail); ● delivered the first net zero carbon home at Osprey Waters, WA; ● launched Mirvac’s ‘profit for purpose’ café at the Group’s new HQ, 200 George Street, Sydney NSW, in partnership with the YWCA. All profits from the café will go towards YWCA’s programs and services, aimed at supporting victims of domestic violence as well as homelessness for disadvantaged women and their families; 2 1 1. Googong Township, Googong NSW. 2. Song Café, 200 George Street, Sydney NSW. 36EVERYTHING’S CONNECTED - MIRVAC GROUP ANNUAL REPORT 2016COMMUNITY Mirvac is committed to supporting the communities in which it operates, by engaging with those who live, work and play in the places it creates. Under the umbrella of This Changes Everything, Mirvac has implemented a number of initiatives aimed at fostering meaningful connections with the wider community, such as charity work and educating people on sustainability through the powerful medium of film. CONNECTING WITH OUR CHARITY PARTNER, THE SMITH FAMILY With a mission to support disadvantaged children through education, The Smith Family is a national charity partner Mirvac is proud to support. Throughout FY16, Mirvac’s partnership was activated through a range of initiatives that were rolled out across all parts of the business. Some of the key initiatives that Mirvac and The Smith Family worked together on included: Learning for Life Tech tactics As part of The Smith Family’s Learning for Life scholarship program, Mirvac began sponsoring tertiary students in a number of locations. Raising Christmas Spirits Christmas is a tough time for many, so Mirvac ran a series of special fundraising activities, including a seasonal online program, ‘Simply Giving’, which allowed Mirvac employees to select toys via a website and donate them to those in need. Mirvac also ran a book and toy drive (with personal deliveries from Mirvac’s CEO & Managing Director, Susan Lloyd- Hurwitz), and raised $4,600 through a gift-wrapping service at Broadway Sydney, with funds going directly to The Smith Family's learning support programs for disadvantaged children. In preparation for the relocation of Mirvac’s Sydney office to its new HQ, the Group’s technology team donated over 200 computers worth $25,000. The computers were packaged up and provided at a low cost to families in need, with the funds raised invested back into Smith Family's programs for disadvantaged children. Giving in Kind Recycled clothing collection bins proved to be a great way to raise awareness and funds for The Smith Family, with bins placed in three of Mirvac’s shopping centres, giving tenants the chance to donate surplus stock. The collection were also installed at Mirvac’s head office in Sydney and at Summer Festival locations in New South Wales and the Australian Capital Territory. Caring for Community Office Matters This year, Mirvac provided focused support to four communities across the country: Alexandria Park, NSW; Brimbank, VIC; Brisbane, QLD; and Midland, WA. Support included Community Day activities such as art and writing competitions for students. Mirvac’s offices played a role in supporting The Smith Family, raising well over $8,000 through workplace giving, flower sales, a winter coat drive and a winter warmer lunch. In Brisbane, The Smith Family has taken residence at Mirvac’s 340 Adelaide Street office asset with Mirvac contributing to their rent, allowing them to direct these funds to their education programs. 37MIRVAC GROUP ANNUAL REPORT 2016 - EVERYTHING’S CONNECTEDMIRVAC’S ‘Nudge’ Film Festival Premieres Nationally During FY16, Mirvac launched Nudge by Mirvac, the Group’s very first sustainability film festival and a targeted initiative to help educate one million people by 2020. With over 100 entries from across student and open categories, the competition was a huge success. Nudge by Mirvac was an initiative with major sponsor, Qantas, and the films were judged by a panel that included author, media personality and member of the NSW Climate Change Council, Adam Spencer; social entrepreneur and DoSomething founder Jon Dee; Cool Australia founder and CEO Jason Kimberley; Mirvac Group General Manager, Sustainability & HSE, Paul Edwards; and Qantas Group Manager for Carbon Strategy, Megan Flynn. Mullumbimby, New South Wales, who created a musical to raise awareness on the responsible use of energy and resources. The winning film in the Open category came from Sophie Matterson of Adelaide and Angus Kennedy from Sydney, who highlighted the issue of coastline pollution with their documentary ‘Trash Tribe’. While this was only the first year of Nudge by Mirvac, it’s clear that the competition is a great means of engaging and educating people about sustainability. While a three-minute film might not seem like much, it has proven to be an incredible medium to spread the sustainability message and has demonstrated a real grassroots support for the environment and sustainable practices. Budding film-makers were invited to ‘Nudge a Neighbour to Change a Behaviour’ by submitting a three-minute film on the theme ‘Reimagining Resources’. Overall, the competition reached more than 30,000 people nationwide through 17 film screenings, over 1,000 website visits and hundreds of YouTube views. Lana Taylor, the 10-year-old winner of the Student individual category, produced the film ‘Nature Heroes’, which brilliantly depicted a superhero saving the world by switching to reusable shopping bags. The Student group category was won by students from Main Upper Arm Public School in The winning films are available on the Nudge by Mirvac YouTube page: youtube.com/c/nudgebymirvacaustralia 38EVERYTHING’S CONNECTED - MIRVAC GROUP ANNUAL REPORT 2016Governance Board of Directors Directors’ report Remuneration report Auditor’s independence declaration 40 42 45 65 40 BOARD OF DIRECTORS John Mulcahy Susan Lloyd-Hurwitz Christine Bartlett Peter Hawkins James M. Millar AM Samantha Mostyn John Peters Elana Rubin DIRECTORS’ EXPERIENCE AND AREAS OF SPECIAL RESPONSIBILITIES The members of the Mirvac Board and their qualifications, experience and responsibilities are set out below: John Mulcahy PhD (Civil Engineering), FIEAust, MAICD - Independent Non-Executive Chair Chair of the Nomination Committee Member of the Audit, Risk & Compliance Committee Member of the Human Resources Committee John Mulcahy was appointed a Non-Executive Director of Mirvac in November 2009 and the Independent Non-Executive Chair in November 2013. John has more than 29 years of leadership experience in financial services and property investment. John is the former Managing Director and Chief Executive Officer of Suncorp-Metway Limited. Prior to joining Suncorp-Metway, John held a number of senior executive roles at Commonwealth Bank, including Group Executive, Investment and Insurance Services. He also held a number of senior roles during his 14 years at Lend Lease Corporation, including Chief Executive Officer, Lend Lease Property Investment and Chief Executive Officer, Civil and Civic. John is currently a Non-Executive Director of ALS Limited (formerly Campbell Brothers Limited) (appointed February 2012), Deputy Chairman of GWA Group Limited (appointed November 2010) and Chairman of ORIX Australia Corporation Ltd (appointed March 2016). John is also a Director of The Shore Foundation Limited and the Great Barrier Reef Foundation and a former Director (and Chair from November 2010) of Coffey International Limited (from September 2009 to January 2016) and former Guardian of the Future Fund Board of Guardians (2006 until April 2015). Susan Lloyd-Hurwitz BA (Hons), MBA (Dist) - Chief Executive Officer & Managing Director (CEO/MD) - Executive Susan Lloyd-Hurwitz was appointed Chief Executive Officer & Managing Director in August 2012 and a Director of Mirvac Board in November 2012. Prior to this appointment, Susan was Managing Director at LaSalle Investment Management. Susan has also held senior executive positions at MGPA, Macquarie Group and Lend Lease Corporation, working in Australia, the USA and Europe. Susan has been involved in the real estate industry for over 27 years, with extensive experience in investment management in both the direct and indirect markets, development, mergers and acquisitions, disposals, research and business strategy. Susan is also President of INSEAD Australasian Council, a Director of the Green Building Council of Australia, and a member of the NSW Public Service Commission Advisory Board. Susan holds a Bachelor of Arts (Hons) from the University of Sydney and an MBA (Distinction) from INSEAD (France). Christine Bartlett BSc, MAICD - Independent Non-Executive Member of the Audit, Risk & Compliance Committee Christine Bartlett was appointed a Non-Executive Director of Mirvac in December 2014. She is currently a Non-Executive Director of GBST Holdings Ltd (appointed June 2015 and appointed Deputy Chair in January 2016), Sigma Pharmaceuticals Limited (appointed March 2016) and Chairman of The Smith Family. She is also an external Director to the Board of Clayton Utz (appointed January 2016). Christine is a member of the UNSW Australian School of Business Advisory Council and the Australian Institute of Company Directors. Previously, she has been a Director of PropertyLook and National Nominees Limited and Deputy Chairman of the Australian Custodial Services Association. Christine is an experienced CEO and senior executive, with extensive line management experience gained through roles with IBM, Jones Lang LaSalle and National Australia Bank Limited. Her executive career has included Australian, regional and global responsibilities based in Australia, the USA and Japan. Christine brings a commercial perspective especially in the areas of financial discipline, identifying risk, complex project management, execution of strategy, fostering innovation and taking advantage of new emerging technologies. Christine holds a Bachelor of Science from the University of Sydney and has completed senior executive management programs at INSEAD. Peter Hawkins BCA (Hons), FAICD, SFFin, FAIM, ACA (NZ) - Independent Non-Executive Chair of the Human Resources Committee Member of the Audit, Risk & Compliance Committee Member of the Nomination Committee Peter Hawkins was appointed a Non-Executive Director of Mirvac in January 2006, following his retirement from ANZ after a career of 34 years. Prior to his retirement, Peter was Group Managing Director, Group Strategic Development, responsible for the expansion and shaping of ANZ’s businesses, mergers, acquisitions and divestments and for overseeing its strategic cost agenda. Peter was a member of ANZ’s Group Leadership Team and sat on the boards of Esanda Limited, ING Australia Limited and ING (NZ) Limited, the funds management and life insurance joint ventures between ANZ and ING Group. He was previously Group Managing Director, Personal Financial Services, as well as holding a number of other senior positions during his career with ANZ. Peter was also a Director of BHP (NZ) Steel Limited from 1990 to 1991 and Visa Inc. from 2008 to 2011. Peter is currently a Non-Executive Director of Westpac Banking Corporation (appointed December 2008), MG Responsible Entity Limited, the responsible entity for MG Unit Trust (appointed April 2015 and listed in July 2015), Murray Goulburn Co-operative Co. Limited, Clayton Utz and Liberty Financial Pty Ltd, and a former Non-Executive Director of Treasury Corporation of Victoria. GOVERNANCE - MIRVAC GROUP ANNUAL REPORT 2016BOARD OF DIRECTORS (CONTINUED) 41 James M. Millar AM John Peters BCom, FCA, FAICD - Independent Non-Executive BArch, AdvDipBCM, ARAIA, GAICD - Independent Non-Executive Chair of the Audit, Risk & Compliance Committee Member of the Nomination Committee James M. Millar was appointed a Non-Executive Director of Mirvac in November 2009. He is the former Chief Executive Officer of Ernst & Young (EY) in the Oceania Region, and was a Director on their global board. James commenced his career in the Insolvency & Reconstruction practice at EY, conducting some of the largest corporate workouts of the early 1990s. He has qualifications in both business and accounting. James is a Non-Executive Director of Fairfax Media Limited (appointed July 2012), Macquarie Media Limited (appointed April 2015) and Slater and Gordon Limited (appointed December 2015). He is Chair of both the Export Finance and Insurance Corporation (appointed December 2014) and Forestry Corporation NSW (appointed March 2013). James serves a number of charities where he is a Trustee of the Australian Cancer Research Foundation and the Vincent Fairfax Family Foundation. He is a former Chair of Fantastic Holdings Limited (from May 2012 until June 2014) and The Smith Family (until April 2016), and a former Director of Helloworld Limited (from September 2010 until January 2016). Samantha Mostyn BA, LLB - Independent Non-Executive Member of the Human Resources Committee Samantha Mostyn was appointed a Non-Executive Director of Mirvac in March 2015. Samantha is a Non-Executive Director and corporate advisor, and is currently a Non-Executive Director of Virgin Australia Holdings Limited (appointed September 2010), Transurban Holdings Limited (appointed December 2010) and Cover-More Group Limited (appointed December 2013). She is also a Director (and Chair since November 2015) on an Australian APRA regulated Citibank Subsidiary Board. She serves as the President of the Australian Council for International Development and is Chair of Carriageworks. She is also involved in an advisory capacity in a number of sustainability, climate change, diversity and philanthropic organisations. Previously, Samantha has served as a Director of the Sydney Theatre Company, a Commissioner with the Australian Football League (AFL), the National Sustainability Council, and the National Mental Health Commission, and over many years held senior executive positions at IAG, Optus and Cable & Wireless Plc. Member of the Human Resources Committee John Peters was appointed a Non-Executive Director of Mirvac in November 2011. John brings to the Board over 40 years’ experience in architectural design, project management, property development and property management. For the last 21 years, John has been the principal of a private property development company focused on substantial mixed use developments and redevelopments in South East Queensland. During this period, he has also consulted to various investors and other financial stakeholders in several Queensland development projects. Prior to this, John was with Lend Lease Corporation for 14 years, where he was Queensland Manager Lend Lease Development, and Director, Lend Lease Commercial. John is a Non-Executive Director of Argyle Community Housing Ltd. Elana Rubin BA (Hons), MA, FFin, FAICD, FAIM - Independent Non-Executive Member of the Audit, Risk & Compliance Committee Member of the Nomination Committee Elana Rubin was appointed a Non-Executive Director of Mirvac in November 2010 and has extensive experience in property and financial services. Elana is a Director of Touchcorp Limited (appointed January 2015), Transurban Queensland, Victorian Funds Management Corporation and LaunchVic. She is also a member of several advisory Boards in property, infrastructure and governance. Elana is the former Chair of AustralianSuper (July 2007 to April 2013), one of Australia’s leading superannuation funds, having been on the Board since 2006. She was a Director of Victorian WorkCover Authority (December 2001 to February 2012) and Chair from 2006. She was also a Director of Mirvac Funds Management Limited, the responsible entity and trustee for Mirvac’s listed and unlisted funds, from November 2013 to February 2015. Elana was previously a Non-Executive Director of NAB Wealth / MLC (from April 2013 to October 2016), TAL Life Limited (formerly Tower Australia Limited) (from November 2007 to April 2013) and has been a Director on a number of listed companies and other entities including Bravura Solutions Ltd. Elana is a former member of the Federal Government's Infrastructure Australia Council (from May 2011 to September 2014). COMPANY SECRETARY Sean Ward BEc, BComm, MBA (Dist), FCSA, FFin Sean Ward was appointed Company Secretary on 23 August 2013. Sean joined Mirvac as Group Company Secretary in April 2013 and has more than 16 years’ corporate experience. Prior to joining Mirvac, Sean was the Head of Subsidiaries at Westpac Banking Corporation, providing company secretarial support for all of Westpac’s listed and unlisted entities and before this was a Senior Companies Advisor at ASX Limited. Sean recently completed his MBA with the Australian Graduate School of Management. MIRVAC GROUP ANNUAL REPORT 2016 - GOVERNANCE42 DIRECTORS’ REPORT The Directors of Mirvac Limited present their report, together with the consolidated financial statements of Mirvac Group (Mirvac or Group) for the year ended 30 June 2016. Mirvac comprises Mirvac Limited (parent entity) and its controlled entities, which include Mirvac Property Trust and its controlled entities. DIRECTORS The Directors of Mirvac in office at any time during the financial year and at the date of this report, together with information on their qualifications and experience are set out on pages 40 to 41. PRINCIPAL ACTIVITIES The principal continuing activities of Mirvac consist of real estate investment, development, third party capital management and property asset management. Mirvac performs these activities across three major segments: Office & Industrial, Retail and Residential. MEETINGS OF DIRECTORS REMUNERATION REPORT The Remuneration report as required under section 300A (1) of the Corporations Act 2001 is set out on pages 45 to 64 and forms part of the Directors’ report. The number of Directors’ meetings held and attended by each Director during the year ended 30 June 2016 is detailed below: Board Audit, Risk & Compliance Committee Human Resources Committee Nomination Committee Director Held1 Attended Held1 Attended Held1 Attended Held1 Attended John Mulcahy Susan Lloyd-Hurwitz Christine Bartlett Peter Hawkins Samantha Mostyn James M. Millar AM John Peters Elana Rubin 13 13 13 13 13 13 13 12 13 13 13 13 12 12 13 12 6 - 6 6 - 6 - 6 6 - 6 6 - 5 - 6 6 - - 6 6 - 6 - 6 - - 6 6 - 6 - 3 - - 3 - 3 - 3 3 - - 3 - 2 - 3 1. Indicates the number of meetings held during the period, excluding meetings not attended due to a potential conflict of interest. OTHER DIRECTORSHIPS Details of all directorships of other listed companies held by each Director in the three years immediately before 30 June 2016 are as follows: Director Company John Mulcahy ALS Limited (formerly Campbell Brothers Limited) Coffey International Limited GWA Group Limited Date appointed Date ceased February 2012 September 2009 November 2010 Current January 2016 Current Susan Lloyd-Hurwitz Nil Christine Bartlett Peter Hawkins James M. Millar AM Samantha Mostyn John Peters Elana Rubin GBST Holdings Ltd Sigma Pharmaceuticals Limited Westpac Banking Corporation MG Responsible Entity Limited1 Helloworld Limited (formerly Jetset Travelworld Limited) Fairfax Media Limited Fantastic Holdings Limited Macquarie Media Limited Slater and Gordon Limited Cover-More Group Limited Transurban Holdings Limited Virgin Australia Holdings Limited Nil Touchcorp Limited June 2015 March 2016 December 2008 April 2015 September 2010 July 2012 May 2012 April 2015 December 2015 December 2013 December 2010 September 2010 Current Current Current Current January 2016 Current June 2014 Current Current Current Current Current January 2015 Current 1. Peter Hawkins is a Director of MG Responsible Entity Limited, the responsible entity of MG Unit Trust which was listed on the ASX on 3 July 2015. GOVERNANCE - MIRVAC GROUP ANNUAL REPORT 2016 43 DIRECTORS’ REPORT (CONTINUED) REVIEW OF OPERATIONS A review of the operations of the Group during the financial year and the results of those operations are detailed in the Operating and financial review on pages 10 to 27. NET CURRENT ASSET DEFICIENCY As at 30 June 2016, the Group was in a net current liability position of $107m. This includes $604m of MTN and USPP due to mature in September 2016 and November 2016. The Group has at 30 June 2016 available liquidity of $1,187m consisting of cash and undrawn committed non-current bank facilities. Accordingly, the Directors expect that the Group will have ability to meet all financial obligations as and when they fall due. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Details of the state of affairs of the Group are disclosed on pages 10 to 27. Other than those matters disclosed, there were no significant changes to the state of affairs during the financial year. MATTERS SUBSEQUENT TO THE END OF THE YEAR As announced on 29 October 2015, the Group has acquired a 49.9 per cent interest in East Village, Zetland NSW for $155m. The acquisition was made by unit acquisition in the Joynton North Property Trust and is equity accounted. This transaction was completed on 1 July 2016. Also completed on 1 July 2016, was the acquisition of 274 Victoria Road, Rydalmere NSW for $48m and a 50 per cent interest in 80 Bay St Glebe, NSW for $11m. No other events have occurred since the end of the year which have significantly affected or may significantly affect Mirvac’s operations, the results of those operations, or Mirvac’s state of affairs in future years. ENVIRONMENTAL REGULATIONS Mirvac and its business operations are subject to compliance with both Commonwealth and State environment protection legislation. The Board is satisfied that adequate policies and procedures are in place to ensure Mirvac’s compliance with the applicable legislation. In addition, Mirvac is also subject to the reporting requirements of the National Greenhouse and Energy Reporting Act 2007 and Building Energy Efficiency Disclosure Act 2010. Mirvac is not aware of any incidents that have resulted in material non-compliance with environmental regulations during the financial year. More information on Mirvac’s sustainability strategy, actions and performance for the year ended 30 June 2016 can be found in our Sustainability report available in October 2016 on Mirvac’s website at: www.mirvac.com/ Sustainability/Sustainability-Reports. CORPORATE GOVERNANCE STATEMENT Mirvac is committed to ensuring that its systems, procedures and practices reflect a high standard of corporate governance. The Directors believe that Mirvac’s corporate governance framework is critical in maintaining high standards of corporate governance and fostering a culture that values ethical behaviour, integrity and respect, to protect stapled securityholders’ and other stakeholders’ interests at all times. During the year ended 30 June 2016, Mirvac’s corporate governance framework was consistent with the third edition of the Corporate Governance Principles and Recommendations released by the ASX Corporate Governance Council. Mirvac’s Corporate governance statement for the year ended 30 June 2016 and associated policies1 can be found on Mirvac’s website at: www.mirvac.com/about/corporate-governance. TAX GOVERNANCE STATEMENT Mirvac has adopted the Board of Taxation's Tax Transparency Code (TTC) at 30 June 2016. As part of the TTC, Mirvac has published a Tax Governance Statement (TGS) which details Mirvac’s corporate structure and tax corporate governance systems. Mirvac’s TGS can be found on Mirvac’s website at: www.mirvac.com/about/corporate-governance. RISKS As a property group involved in real estate investment, residential and commercial development and investment management, Mirvac faces a number of risks throughout the business cycle which have the potential to affect the Group’s achievement of its targeted financial outcomes. The Group’s objective is to ensure those risks are identified and appropriate strategies are implemented to control or otherwise manage the impact of those risks. Mirvac’s risk management framework is integrated with its day-to-day business processes and is supported by a dedicated Group Risk function. Further information on the Group’s risk management framework is detailed in Mirvac’s Corporate governance statement. For the year ended 30 June 2016, the Group continued to review both internal and external risks which have the potential to affect the Group’s targeted financial outcomes and to implement strategies to minimise their impact. Further information on the material risks identified for each of the sectors is outlined in the Operating and financial review on pages 10 to 27. At a Group level, Mirvac faces certain risks to achieving its financial outcomes; these risks are the types of risks typical for an Australian property group. These may include debt refinancing and compliance with debt covenants, compliance with health, safety and environment regulations, as well as broader economic conditions. FRAUD, BRIBERY AND CORRUPTION Mirvac has zero tolerance regarding fraud, bribery and corruption and requires all employees and service providers to adhere to the highest standards of honesty and integrity in the conduct of all its activities. Mirvac will uphold all laws relevant to countering bribery, fraud and corruption in the jurisdictions in which it operates. Any allegation of a person from within or associated with Mirvac (notwithstanding the capacity in which they are acting), acting in a manner inconsistent with this statement will be treated seriously, regardless of the seniority of those involved. Disciplinary action including dismissal may result. Where it is believed that a criminal offence may have been committed, the police and other relevant bodies may be informed. 1. Excluding the Fraud, Bribery and Corruption Policy and the Political Donations Policy. A summary of these policies is contained in the Code of Conduct which is available on our website at: www.mirvac.com/about/corporate-governance. MIRVAC GROUP ANNUAL REPORT 2016 - GOVERNANCE44 DIRECTORS’ REPORT (CONTINUED) NON-AUDIT SERVICES From time to time, Mirvac may engage its external auditor, PricewaterhouseCoopers, to perform services additional to their statutory audit duties. Details of the amounts paid or payable to PricewaterhouseCoopers for audit and non-audit services provided during the year ended 30 June 2016 are set out in note H5 to the consolidated financial statements. In accordance with the advice received from the ARCC, the Board is satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 and did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services were reviewed by the ARCC to ensure they did not affect the impartiality and objectivity of the auditor; and • none of the services undermined the general principles relating to auditor independence as set out in Accounting Professional & Ethical Standards 110 Code of Ethics for Professional Accountants, including reviewing or auditing the auditor’s own work, acting in a management or a decision-making capacity for the Group, acting as advocate for the Group or jointly sharing economic risk and rewards. 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 65 and forms part of the Directors’ report. ROUNDING OF AMOUNTS The amounts in the consolidated financial statements have been rounded off to the nearest million (m) dollars in accordance with ASIC Corporations Instrument 2016/191. This statement is made in accordance with a resolution of the Directors. Susan Lloyd-Hurwitz Director Sydney 16 August 2016 GOVERNANCE - MIRVAC GROUP ANNUAL REPORT 2016Remuneration Report 1. Introduction 2. Who is covered by this report 3. Key questions 4. Our remuneration strategy and the link to business strategy 5. Executive KMP remuneration mix at Mirvac 6. How remuneration is structured 7. Business and executive remuneration outcomes 8. Summary of FY16 remuneration 9. Actual remuneration received in FY16 10. Total remuneration in FY16 11. LTI grants in FY16 12. Equity instrument disclosures relating to KMP 13. Other transactions with KMP 14. Service agreements for the Executive KMP 46 46 47 49 50 50 54 56 57 58 59 60 61 62 15. Governance and how remuneration decisions are made 62 16. Non-Executive Directors’ remuneration 17. Additional required disclosures 63 64 46 1 INTRODUCTION The Directors of Mirvac are pleased to present securityholders with the 2016 remuneration report. This report outlines Mirvac’s approach to remuneration for its executives and, in particular, the link between Mirvac’s strategy and its remuneration framework and the link between performance and reward. Mirvac’s remuneration framework reflects our commitment to deliver competitive remuneration for excellent performance in order to attract the best and retain and motivate talented individuals, while aligning the interests of executives and securityholders. At the heart of our remuneration framework are: • incentives based on financial measures that reflect core value drivers and non-financial strategic objectives that reflect key initiatives and goals critical to organisational transformation and success; • consideration of business and operational risk through the design of performance objectives, clawbacks and the exercise of Board discretion; 2 WHO IS COVERED BY THIS REPORT • incentives that align the interests of executives to securityholders; • vesting periods for deferred incentives that reflect the time horizons over which Mirvac invests, while providing appropriate stretch and incentive for executives; and, • best-practice governance. Mirvac’s remuneration framework is an integral component of the overall People Strategy. More on our People Strategy and how this supports Mirvac's performance can be found in the Our People section, page 29. Mirvac delivered excellent performance against key financial measures and key non-financial strategic objectives in the 2016 financial year. This report outlines how Mirvac’s performance has driven the remuneration outcomes for senior executives. This report covers the key management personnel (KMP) of Mirvac, who are the people responsible for determining and executing Mirvac’s strategy. This includes both the Executive KMP (the CEO/MD, CFO and heads of business units who are part of the Executive Leadership Team), as well as Non-Executive Directors. For the year ended 30 June 2016, the KMP were: KMP Non-Executive KMP John Mulcahy Christine Bartlett Peter Hawkins James M. Millar AM Samantha Mostyn John Peters Elana Rubin Executive KMP Position Chair Director Director Director Director Director Director Susan Lloyd-Hurwitz CEO/MD John Carfi Brett Draffen Shane Gannon Head of Residential Chief Investment Officer Chief Financial Officer Campbell Hanan1 Head of Office & Industrial Susan MacDonald Head of Retail Former Executive KMP Andrew Butler2 Group Executive, Office David Rolls3 Head of Cities & Urban Renewal Term as KMP Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Part Year Full Year Prior Year Only Part Year 1. Campbell Hanan commenced his role on 1 March 2016. His employment with Mirvac commenced on 9 February 2016 and he was on unpaid leave until 1 March 2016. 2. Andrew Butler ceased as Executive KMP 30 June 2015. 3. David Rolls ceased employment 18 March 2016. The information provided in this remuneration report has been audited as required by section 308(3C) of the Corporations Act 2001. REMUNERATION REPORT - MIRVAC GROUP ANNUAL REPORT 20163 KEY QUESTIONS 47 Key questions Mirvac approach Remuneration in 2016 1 How is Mirvac’s performance reflected in this year’s remuneration outcomes? Mirvac’s remuneration outcomes are strongly linked to the delivery of sustainable stapled securityholder value over the short and long term. Further info Section 4 Page 49 Short term: Mirvac has delivered strong performance in terms of operating earnings, ROIC and delivery of non-financial strategic objectives, which has resulted in above target performance on our balanced scorecard and a corresponding higher-than-usual payout of short-term incentives (STI). Long term: The three-year performance period for the FY14 long- term incentives (LTI) completed on 30 June 2016. Forty-seven per cent of the award vested, reflecting mixed results with very strong ROIC performance over the three-year performance period, but below median relative TSR performance. The Mirvac Board is committed to ensuring executives’ remuneration links to the achievement of sustainable value for securityholders and therefore will continue to use ROIC and TSR for the FY17 LTI award. The only change to our approach to remuneration in FY16 was a change in how the Board determines STI pool funding. In previous years, funding was based on operating earnings and ROIC (each with 35 per cent weighting) and 30 per cent weighting on non-financial objectives. For FY16, the Board strengthened the alignment between financial performance and STI pool funding by calculating the pool based on operating earnings and ROIC (both with 50 per cent weighting), with discretion to moderate the outcome taking into consideration achievement of non-financial strategic initiatives. The LTI broadly remained unchanged in FY16; however, the threshold performance level for the ROIC performance hurdle increased from 7.5 per cent to 8 per cent, and the stretch from 9 per cent to 10 per cent. No, there are no significant changes planned for FY17. However, in line with previous years, the Board will review and adjust (if necessary) the threshold and stretch performance levels for the performance objectives applicable to the STI and LTI awards. 2 What changes have been made to the remuneration structure in FY16? 3 Are any changes planned for FY17? Remuneration framework 4 Where does Mirvac’s remuneration sit relative to the market? Fixed and variable pay are both aimed at the market median, with remuneration opportunities for outstanding performance extending up to the 75th percentile of the market. 5 What proportion of remuneration is ‘at risk’? The majority of Executive KMP’s remuneration is based on performance, with more than 50 per cent at risk. Section 6 Page 50 Section 6 Page 50 Section 6 Page 50 Section 5 Page 50 6 Are there any clawback provisions for incentives? Yes, if there is a material financial misstatement, any unvested LTI or deferred STI awards can be clawed back. Section 6 Page 52 & 53 7 What is Mirvac’s minimum securityholding requirement? The CEO/MD must maintain a minimum securityholding of 100 per cent of fixed remuneration. Other Executives must hold 50 per cent of their fixed remuneration. Non-Executive Directors must hold 25,000 securities. Section 12 Page 60 Section 16 Page 64 MIRVAC GROUP ANNUAL REPORT 2016 - REMUNERATION REPORT48 3 KEY QUESTIONS (CONTINUED) Key questions Mirvac approach Short term incentives (STI) 8 Are any STI payments deferred? Yes, 25 per cent of STIs for Executive KMP are awarded as rights over Mirvac securities, half of which vest in one year and half in two years. If the Executive resigns before the vesting period ends, the rights do not vest and are forfeited. 9 Are STI payments capped? Yes, an Executive’s STI is capped at double their STI target, achievable only in circumstances of both exceptional individual and Group performance. Long term incentives (LTI) 10 What are the performance measures for the LTI? 50 per cent subject to relative TSR, and 50 per cent subject to ROIC. 11 Does the LTI have re-testing? No, there is no re-testing. 12 Are dividends/distributions paid on unvested LTI awards? 13 Is the size of LTI grants increased in light of performance conditions? No, dividends/distributions are not paid on unvested LTI awards. This ensures that Executives are only rewarded when performance hurdles have been achieved at the end of the performance period. No, there is no adjustment to reflect the performance conditions. 14 Can LTI participants hedge their No, this is prohibited. unvested LTI? 15 Does Mirvac buy securities or issue new securities for share-based awards? For deferred STI awards, securities are purchased on-market. For LTI awards, the Board has discretion to issue new securities or buy securities on-market. Further info Section 5 Page 50 Section 6 Page 51 Section 6 Page 51 Section 6 Page 52 Section 6 Page 53 Section 6 Page 52 Section 6 Page 53 Section 6 Page 53 Section 6 Page 53 16 Does Mirvac issue share options? Executive agreements 17 What is the maximum an Executive can receive on termination? No, Mirvac uses performance rights for the deferred STI and LTI awards. Executive KMP termination entitlements are limited to 12 months’ fixed remuneration. Section 14 Page 62 REMUNERATION REPORT - MIRVAC GROUP ANNUAL REPORT 20164 REMUNERATION STRATEGY AND THE LINK TO BUSINESS STRATEGY 49 At Mirvac, our remuneration is linked to the drivers of our business strategy, helping to create sustainable value for securityholders. Mirvac’s remuneration strategy is designed to support and reinforce its business strategy. The at-risk components of remuneration are tied to measures that reflect the successful execution of our business strategy in both the short and long term. Our strategic drivers are reflected in STI performance measures and LTI performance measures. So Mirvac’s actual performance directly affects what executives are paid. Strategic drivers STI performance objectives LTI performance objectives Mirvac’s performance What executives are paid Relative Total Shareholder Return (TSR) Measures the performance of Mirvac securitires over time, relative to other entities in a comparison group. Return on Invested Capital (ROIC) Measures Mirvac’s profitablility relative to its total assets. It is calculated by dividing earnings by total assets. LTI vesting outcome in FY16 = 47% of target In FY14–FY16 • Mirvac’s TSR was below median relative to its comparison group. • Mirvac’s average annual ROIC is 9.7%. In FY16 • Operating earnings were $482m, up from $455m in FY15. • ROIC was 12.3% up from 9.0% in FY15. In FY16 Overall Mirvac performed well against the scorecard of non-financial strategic objectives. CEO/MD STI outcome in FY16 = 128% of target Average STI in FY16 for other eligible Senior Executives = 130% of target Capital efficiency and financial performance Deliver top 3 A-REIT returns. Operating earnings Reflects how much revenue the business has generated for the year, less operating costs. Return on Invested Capital (ROIC) Measures Mirvac’s profitablility relative to its total assets. It is calculated by dividing earnings by total assets. Customer and investor satisfaction Provide customers and investors an experience that delivers excellence, consistently exceeds expectations and engenders loyalty. Customer/investor satisfaction measures Measures include retail customer and office tenant satisfaction surveys, as well as residential customer satisfaction surveys. High-performing people and culture Have an engaged and motivated workforce with superior skills and capabilities. People measures Measures include engagement, talent turnover, diversity targets, and succession planning targets. HSE&S leadership Be recognised as a leader in sustainability. Provide workplaces free from harm and supported by a culture where safety remains an absolute prority. HSE&S leadership measures Measures include Lost Time Injury Frequency Rate, timely incident reporting, and sutainability targets. MIRVAC GROUP ANNUAL REPORT 2016 - REMUNERATION REPORT50 5 EXECUTIVE KMP REMUNERATION MIX AT MIRVAC Mirvac’s executive remuneration approach is strongly performance focused. A significant proportion of executive remuneration is based on sustained performance, aligned with the business strategy. Executive remuneration at Mirvac is: • performance based: more than 60 per cent of total remuneration is at risk; • equity focused: 52 per cent of the CEO/MD’s total remuneration is paid in equity and about one third of other Executive KMP total remuneration is paid in equity; • encouraging an ownership mindset: as a minimum securityholding, the CEO/MD is required to hold 100 per cent of fixed remuneration as Mirvac securities, and all other Executive KMP are required to hold 50 per cent of their fixed remuneration as Mirvac securities; and • multi-year focused: 50 per cent of STI deferral is subject to a one-year deferral and the remaining 50 per cent to a two-year deferral. LTI performance is measured over a three-year period. The graphs below set out the remuneration structure and mix for the CEO/MD and other Executive KMP at Mirvac. CEO/MD Performance Dependent Fixed remuneration 31% Target STI 23% Maximum LTI2 46% Cash 17% Deferred1 6% Relative TSR (50% of award) 23% ROIC (50% of award) 23% Other Executive KMP Performance Dependent Fixed remuneration 40% Target STI 30% Maximum LTI2 30% Cash 22.5% Deferred1 7.5% Relative TSR (50% of award) 15% ROIC (50% of award) 15% 1. Deferred STI: 50 per cent deferred for 12 months, 50 per cent deferred for 24 months. Subject to clawback. 2. LTI granted as performance rights with performance measured over a three-year period. Subject to clawback. 6 HOW REMUNERATION IS STRUCTURED MARKET POSITIONING OF FIXED AND TOTAL REMUNERATION Mirvac has adopted a market positioning strategy designed to attract and retain talented employees, and to reward them for delivering strong performance. The market positioning strategy also supports fair and equitable outcomes between employees. Fixed remuneration acts as a base-level reward for a competent level of performance. It includes cash, compulsory superannuation and any salary-sacrificed items (including FBT). Fixed remuneration at Mirvac is targeted at the median (50th percentile), with flexibility based on: • the size and complexity of the role; When determining the relevant market for each role, Mirvac considers the companies from which it sources talent, and to whom it could potentially lose talent. From time to time, the Board engages its independent remuneration advisor to provide remuneration benchmarking data as input into setting remuneration for Executive KMP. Refer to section 15, page 62. For business roles: • primary comparison group: A-REIT sector, plus Lendlease Group and Aveo Group; and • secondary comparison group: general industry with a similar market capitalisation (50 per cent to 200 per cent of Mirvac’s 12-month average market capitalisation). • the criticality of the role to successful execution of the For corporate roles: business strategy; • role accountabilities; • skills and experience of the individual; and • market pay levels for comparable roles. Total target remuneration (being fixed remuneration, STI and LTI) is positioned at the median (50th percentile) with the opportunity to earn total remuneration up to the upper quartile (75th percentile) in the event that both the individual and the business exceed stretch targets. • primary comparison group: general industry with a similar market capitalisation (50 per cent to 200 per cent of Mirvac’s 12-month average market capitalisation). The use of general industry reflects the greater transferability of skills for these roles; and • secondary comparison group: specific peers in the A-REIT sector, plus Lendlease Group and Aveo Group. REMUNERATION REPORT - MIRVAC GROUP ANNUAL REPORT 20166 HOW REMUNERATION IS STRUCTURED (CONTINUED) 51 STI: HOW DOES IT WORK? Purpose Motivate and reward employees for contributing to the delivery of annual business performance. Eligibility All permanent Mirvac employees employed on the award date are eligible to participate in the STI plan. Target, minimum and maximum STI opportunity Group STI scorecard/pool funding A target STI is set for each individual, which will be earned if Group and individual performance is on target. Actual STI awards can range from zero to double the target opportunity, depending on Group and individual performance, but is capped at a maximum of 200 per cent of target. Group operating earnings must be at least 90 per cent of target before any STI payments are made. The STI pool funding is calculated based on operating earnings and ROIC (both with 50 per cent weighting) and moderated by the Board based on achievement of non-financial strategic objectives. The targets for the individual non-financial strategic objectives are not disclosed as some are commercially sensitive. The objectives are quantitative in nature and are set in line with the short and medium-term strategic objectives. Category Measure Rationale for using Measurement For both financial performance objectives on the Group STI scorecard, a threshold, plan and stretch goal is set at the start of the financial year with the outcome calculated based on the following scale: Performance level Group STI score % target 50th to 75th Pro-rata between 50 and 100 >8% to 10% Pro-rata between 50 and 100 Maximum 75th and above 100 10% 100 Vesting/ delivery The performance rights will automatically exercise if and when the performance conditions are achieved. If the performance rights vest, entitlements will be satisfied by either an allotment of new securities to participants or by the purchase of existing securities on-market. Any performance rights that do not vest at the end of the performance period will lapse. There is no re-testing. Executive KMP will be expected to retain the resulting securities until they satisfy the minimum securityholding guidelines. Termination/ forfeiture Resignation or dismissal: all unvested performance rights are forfeited. Retirement, redundancy, agreed transfer to an investment partner, total and permanent disablement or death: the HRC determines the number of rights which will lapse or are retained, subject to both the original performance period and hurdles. Change of control event: the Board, in its absolute discretion, determines the number of performance rights that vest, if any, taking into account the performance from the date of grant to the event. Clawback policy Dilution Hedging Mirvac has in place a clawback policy for Executive KMP (and other Executives capable of influencing the results of the Group). The policy gives the Board the ability to claw back incentives in the event of a material financial misstatement. The clawback provisions apply to unvested STI and LTI awards received after the introduction of the policy in February 2013. Dilution that may result from securities being issued under Mirvac’s LTI plan is capped at the limit set out in ASIC Class Order 14/1000, which provides that the number of unissued securities under those plans must not exceed five per cent of the total number of securities of that class as at the time of the relevant offer. Consistent with the Corporations Act 2001, participants are prohibited from hedging their unvested performance rights. LEGACY REMUNERATION ARRANGEMENTS Mirvac’s LTI plans have changed over time to align with market practice, while continuing to support Mirvac’s business strategy. The Employee Incentive Scheme (EIS) is a legacy plan now closed to new awards/participants. The EIS provided loans to executives to purchase Mirvac stapled securities. The plan will be run down until all loans under it are extinguished. Any costs relating to this legacy plan were fully expensed and disclosed in previous reporting periods. Additional details are available in prior years’ Annual Reports. MIRVAC GROUP ANNUAL REPORT 2016 - REMUNERATION REPORT54 7 BUSINESS AND EXECUTIVE REMUNERATION OUTCOMES HOW THE GROUP’S PERFORMANCE HAS TRANSLATED INTO STI AWARDS Performance was strong across the Group in FY16, with both operating earnings and ROIC significantly higher than those for FY15 and outperforming targets set by the Board. The Group’s STI scorecard of 125 per cent (of a potential 150 per cent) reflects the strong financial results. Mirvac’s financial performance directly affects the STI awards in two ways: • the STI has a gateway requirement of Group operating earnings being at least 90 per cent of target; and • the Group’s STI scorecard has two financial measures, each worth 50 per cent of the total pool: operating earnings and ROIC. This graph on the right shows how the average STI outcome for all employees has been closely tied to performance on these two measures since FY12. Financial performance in each case is expressed as a percentage of the business target set for the year, while the STI outcome represents the average STI award to participants that year as a percentage of target. Financial performance vs average STI outcome 160% 140% 120% 100% 80% 60% 40% FY12 FY13 FY14 FY15 FY16 Operating earnings ROIC Average STI The diagram below sets out Mirvac’s performance and the resulting STI outcomes: Gateway achieved (over 90% of target earnings achieved) ROIC (50%) + Operating earnings (50%) + Non-financial strategic objectives HRC approved a Group STI score of 125% of target (from a maximum potential pool of 150% of target) FY16 cash STI pool – $27.4 million (5.7% of Mirvac’s operating earnings) Fixed remuneration Individual STI target Group STI score (0-150%) Individual STI score (0-150%) Individual STI award (capped at 200% of target) Each Executive KMP is awarded an individual STI score between zero and 150% of their target. Scores are based on an assessment of their performance for the year against their individual objectives. HOW THE GROUP’S PERFORMANCE HAS TRANSLATED INTO LTI AWARDS Mirvac’s financial and security price performance directly affects the vesting of the LTI awards: • half of the LTI is subject to a relative TSR performance measure; and • the remaining half is subject to ROIC (for grants made from FY14 onwards). The three years to 30 June 2016 saw mixed performance levels. The Group exceeded the threshold for ROIC, resulting in vesting of 94 per cent of the ROIC component of the FY14 award. In contrast, the Group’s TSR was below median of the comparator group, and therefore did not meet the threshold for vesting. As a result, the portion of the FY14 award that related to relative TSR will not vest and will lapse (as there is no re-testing). REMUNERATION REPORT - MIRVAC GROUP ANNUAL REPORT 20167 BUSINESS AND EXECUTIVE REMUNERATION OUTCOMES (CONTINUED) 55 The diagram below sets out the Group’s performance and the resulting LTI outcomes for the Executive KMP. FY14 LTI GRANTS TO ELIGIBLE PARTICIPANTS AND RELATIVE TSR AND ROIC PERFORMANCE HURDLES ARE SET 30 JUNE 2016: THREE-YEAR PERFORMANCE PERIOD ENDS FOR THE FY14 GRANTS AND PERFORMANCE IS MEASURED FOR RELATIVE TSR AND ROIC Mirvac’s security price and distributions over the past five years Mirvac TSR (1 July 2013 to 30 June 2016) RELATIVE TSR $400 $350 $300 $250 $200 $150 $100 $50 $0 FY12 FY13 FY14 FY15 FY16 $2.5 $2.0 $1.5 $1.0 $0.5 $0 70% 60% 50% 40% 30% 20% 10% 0% -10% 1 July 14 30 Jun 14 30 Jun 15 30 Jun 16 Distributions paid ($m) Security price at 30 June ($) MGR 25th percentile 50th percentile 75th percentile Mirvac’s TSR was below the median of the comparator group, and therefore did not meet the threshold for vesting. NONE OF THE PERFORMANCE RIGHTS LINKED TO THE TSR MEASURE VESTED ROIC PERFORMANCE Mirvac’s ROIC has been consistent over the past three years: • FY14 exceeded the threshold; • FY15 exceeded the threshold; and • FY16 exceeded the threshold. Mirvac’s average annual ROIC over the three-year performance period was 9.7%, resulting in the stretch target being exceeded. ROIC Mirvac’s ROIC performance over the three years ) % ( C I O R 13 2 2 10 2 2 7 2 2 2 2 2 1 0 Stretch 10 Threshold 7.5 7.8 9.0 FY14 FY15 12.3 FY16 9.7 3-year average 94% OF THE PERFORMANCE RIGHTS LINKED TO THE ROIC MEASURE VESTED 47% VESTING OF THE TOTAL FY14 LTI AWARD MIRVAC GROUP ANNUAL REPORT 2016 - REMUNERATION REPORT 56 7 BUSINESS AND EXECUTIVE REMUNERATION OUTCOMES (CONTINUED) Executive KMP vesting outcomes for the past three years A summary of vesting under Mirvac’s performance-based equity grants that have vested in the past three years is shown in the following table: Grant year Performance hurdle Performance period Performance period ended Vested % FY12 FY13 FY14 Relative TSR and ROE Relative TSR and ROE Relative TSR and ROIC 3 years 3 years 3 years 30 June 2014 30 June 2015 30 June 2016 77.0 36.5 47.0 Past financial performance The table below provides summary information on the Group’s earnings and stapled securityholders’ wealth for the five years to 30 June 2016: Profit attributable to the stapled securityholders of Mirvac ($m) Operating profit ($m) Distributions paid ($m) Security price at 30 June ($) Operating earnings per stapled security (EPS) – diluted (cents) Statutory EPS – basic (cents) FY16 1,033 482 355 2.02 13.0 27.9 FY15 610 455 336 1.85 12.3 16.5 FY14 447 438 326 1.79 11.9 12.2 FY13 140 378 226 1.61 10.9 4.1 FY12 416 366 280 1.28 10.7 12.2 8 SUMMARY OF FY16 REMUNERATION Strong financial performance and sound capital management are reflected in above-target STI payouts for Executive KMP in FY16. The performance period for the FY14 LTI award ended on 30 June 2016. Vesting of 47 per cent reflects the mixed results with strong ROIC performance over the three-year period, but below median TSR performance. Fixed and total target remuneration There were no increases to the fixed remuneration or total target remuneration for any Executive KMP during FY16. CEO/MD remuneration The CEO/MD's fixed remuneration was not increased in FY16. Actual remuneration received STI (section 9, page 57) increased as a result of: • 2 tranches of deferred STI vesting in FY16 compared to 1 tranche in FY15; and • 47 per cent of LTI vesting in FY16 compared to 36.5 per cent in FY15. The CEO/MD's FY16 STI was above target, reflecting strong Group and Individual performance, however as explained below, the STI outcome was lower than in FY15 partly due to a change in STI pool funding. Strong results across all operating metrics resulted in an above target STI pool of 125 per cent, down from 131 per cent in FY15. In FY16 there was a change in approach to calculating the STI pool to better align financial outcomes with pool funding. In previous years, funding was based on operating earnings and ROIC (each with 30 per cent weighting) and 30 per cent weighting on non-financial objectives. For FY16, the Board strengthened the alignment between financial performance and STI pool funding by calculating the pool based on operating earnings and ROIC (both with 50 per cent weighting) with discretion to moderate the outcome taking into consideration achievement of non-financial strategic objectives. The STI pool in FY16 was driven by: • operating earnings increasing to $482m from $455m; • ROIC performance improving to 12.3 per cent from 9.0 per cent; and • strong performance against the scorecard of the non-financial strategic objectives. REMUNERATION REPORT - MIRVAC GROUP ANNUAL REPORT 20168 SUMMARY OF FY16 REMUNERATION (CONTINUED) 57 LTI Vesting of LTI grants is dependent on achieving target on ROIC and relative TSR over a three-year period. This year’s vesting was impacted by below-target relative TSR performance. This resulted in none of the awards relating to the TSR hurdle vesting. ROIC performance was above threshold but below maximum, resulting in 94 per cent of the awards subject to the ROIC hurdle vesting. As a result, 47 per cent of overall LTI awards vested. Non-Executive Director fees No changes 9 ACTUAL REMUNERATION RECEIVED IN FY16 The following table sets out the actual value of the remuneration received by Executive KMP members during the year. The figures in this table are different from those shown in the accounting table in section 10, which includes an apportioned accounting value for all unvested STI and LTI grants during the year (some of which remain subject to satisfaction of performance and service conditions and may not ultimately vest). The table below, on the other hand, shows the LTI value based on the value of awards that vested in respect of performance period ended 30 June 2016. In the table below: • Cash STI: the cash portion of STI payments to be made in September 2016 in recognition of performance during FY16; • Deferred STI: the value of the two-year deferred STI from FY14 and the one-year deferred STI from FY15 multiplied by the share price on 30 June 2016; and • LTI: the value of performance rights whose performance period ended 30 June 2016 (being the number of performance rights that vested multiplied by the share price on 30 June 2016, being the last day of the performance period). ACTUAL REMUNERATION RECEIVED IN FY16 Fixed remuneration $ Year Cash STI $ STI $ LTI $ Other1 $ Total $ Deferred Executive KMP Susan Lloyd-Hurwitz John Carfi Brett Draffen Shane Gannon Campbell Hanan2 Susan MacDonald3 Former Executive KMP Andrew Butler4 David Rolls5 2016 1,500,000 1,077,288 499,819 1,396,093 25,535 4,498,735 2015 2016 2015 2016 2015 2016 2015 2016 2016 2015 2015 2016 2015 1,500,000 1,381,641 212,926 767,963 24,046 3,886,576 700,000 481,976 93,150 58,788 11,750 1,345,664 700,000 481,425 - 21,051 11,353 1,213,829 950,000 735,101 310,345 327,705 20,094 2,343,245 950,000 933,375 118,829 331,872 15,368 2,349,444 900,000 697,601 210,193 212,064 14,707 2,034,565 900,000 707,400 67,149 266,667 547,601 - - - 234,685 1,909,234 4,345 818,613 700,000 481,976 93,150 195,465 10,918 1,481,509 700,000 481,425 - 379,836 11,353 1,572,614 700,000 550,200 76,313 337 10,977 1,337,827 502,804 - 93,150 258,758 664,994 1,519,706 700,000 481,425 - - 11,353 1,192,778 1. Includes long service leave accrued during the year. In the case of David Rolls, Other reflects termination benefits in accordance with his service agreement. 3. Susan MacDonald elected to purchase additional leave, the amount shown above reflects her Fixed Remuneration before deducting the purchased leave. 2. Campbell Hanan commenced his role on 1 March 2016. His employment with Mirvac commenced on 9 February 2016 and he was on unpaid leave until 1 March 2016. 4. Andrew Butler ceased being Executive KMP on 30 June 2015. 5. David Rolls ceased employment with Mirvac on 18 March 2016. The expense shown for security-based payments has been accelerated up to the date of termination. MIRVAC GROUP ANNUAL REPORT 2016 - REMUNERATION REPORT 58 9 ACTUAL REMUNERATION RECEIVED IN FY16 (CONTINUED) EXECUTIVE KMP STI AWARDS IN FY16 The following table shows the actual STI outcomes for each of the Executive KMP for FY16. Executive KMP Susan Lloyd-Hurwitz John Carfi Brett Draffen Shane Gannon Campbell Hanan1 Susan MacDonald STI target % of STI max % of fixed remuneration Actual STI % max STI forfeited % max 75 70 80 80 70 70 150 140 160 160 140 140 64 66 64 65 65 66 36 34 36 35 35 34 Actual STI (total) $ 1,436,384 642,634 980,134 930,134 730,134 642,634 1. Campbell Hanan’s target bonus opportunity was based on 12 months employment. The amounts shown above represent his actual STI relative to his FY16 target opportunity. 10 TOTAL REMUNERATION IN FY16 The following table shows the total remuneration for members of the Executive KMP for FY16 and FY15, including FY15 remuneration details for individuals who are no longer Executive KMP but were included in the FY15 remuneration report. These disclosures are calculated in accordance with the accounting standards and accordingly differ from the information presented in the Actual remuneration received in FY16 table in section 9. Short-term benefits Post- employment Security-based payments Other long-term benefits Other Cash salary Cash Non-cash short-term Super Value Deferred Long service and fees1 STI2 benefits3 benefits4 contributions of rights5 STI leave (‘LSL’)6 Year $ $ $ $ $ $ $ $ Termination benefits $ Total remuneration $ Executive KMP Susan Lloyd-Hurwitz Other Executive KMP 2016 1,443,189 1,077,288 38,922 - 19,308 1,545,795 382,676 24,116 2015 1,442,910 1,381,641 38,307 10,467 18,783 606,853 244,262 24,046 John Carfi Brett Draffen 2016 680,692 481,976 382 2015 681,217 481,425 - 2016 921,670 735,101 13,724 2015 922,195 933,375 9,022 Shane Gannon 2016 880,692 697,601 2015 881,217 707,400 Campbell Hanan7 2016 257,013 547,601 Susan MacDonald8 2016 653,769 481,976 2015 681,217 481,425 - - - - - Former Executive KMP Andrew Butler9 2015 640,210 550,200 41,006 David Rolls10 2016 488,323 - 2015 681,217 481,425 - - - - - - - - - - - - - 19,308 236,571 127,427 11,368 18,783 107,622 66,865 11,353 19,308 467,566 252,553 15,392 18,783 171,934 158,860 15,368 19,308 384,814 204,519 14,707 220,000 18,783 177,879 114,765 14,685 9,654 - 76,056 4,345 19,308 227,635 127,427 10,918 18,783 162,456 66,865 11,353 18,783 99,648 95,185 10,977 1,456,009 14,481 352,098 77,471 - 664,994 1,597,367 18,783 121,016 66,865 11,353 1,380,659 - - - - - - - - - - - 4,531,294 3,767,269 1,557,724 1,367,265 2,425,314 2,229,537 2,201,641 2,134,729 894,669 1,521,033 1,422,099 Performance related remuneration % of total remuneration 66% 59% 54% 48% 60% 57% 58% 47% 70% 55% 50% 51% 27% 48% 1. Cash salary and fees includes accrued annual leave. 2. STI payments relate to cash portion of STI awards accrued for the relevant year. 3. Non-cash benefits include salary-sacrificed benefits and related FBT where applicable. 4. Prior year comparatives for other short-term benefits include relocation expenses for the CEO/MD and payments to the CFO as part compensation for the STI and LTI entitlements he forfeited on resigning from his previous employer. 5. Valuation of rights is conducted by an independent advisor. 6. Long service leave relates to amounts accrued during the year. 7. Campbell Hanan commenced his role on 1 March 2016. His employment with Mirvac commenced on 9 February 2016 and he was on unpaid leave until 1 March 2016. 8. Susan MacDonald elected to purchase additional leave, the amount shown above reflects the accounting expense relating to her Cash salary and is therefore net of any purchased leave amounts. There was no change to her fixed remuneration. 9. Andrew Butler ceased being Executive KMP on 30 June 2015. 10. David Rolls ceased employment with Mirvac on 18 March 2016. In accordance with accounting standards, the expense shown for security-based payments has been accelerated up to the date of termination. REMUNERATION REPORT - MIRVAC GROUP ANNUAL REPORT 201611 LTI GRANTS IN FY16 59 The table below shows LTI grants made during FY16, subject to performance conditions over the three-year performance period ending 30 June 2018. Accounting standards require the estimated valuation of the grants recognised over the performance period. The minimum value of the grant is nil if the performance conditions are not met. The maximum value is based on the estimated fair value calculated at the time of the grant and amortised in accordance with the accounting standard requirements. LTI max as a % of fixed remuneration Performance measure Number of performance rights granted Fair value per performance right $ Maximum total value of grant1 $ Executive Susan Lloyd-Hurwitz Total John Carfi Total Brett Draffen Total Shane Gannon Total Susan MacDonald Total Former Executive David Rolls Total Relative TSR ROIC Relative TSR ROIC Relative TSR ROIC Relative TSR ROIC Relative TSR ROIC Relative TSR ROIC 150 90 90 90 50 50 735,250 735,250 1,470,500 205,882 205,882 411,764 279,412 279,411 558,823 264,706 264,705 529,411 114,379 114,379 228,758 114,379 114,379 228,758 0.75 0.81 0.75 0.81 0.75 0.81 0.75 0.81 0.75 0.81 0.75 0.81 551,438 595,553 1,146,991 154,412 166,764 321,176 209,559 226,323 435,882 198,530 214,411 412,941 85,784 92,647 178,431 85,784 92,647 178,431 1. The value of performance rights reflects the fair value at the time of grant. For the LTI grants subject to ROIC performance, 50 per cent vesting is assumed in the above valuation. Key inputs used in valuing performance rights granted during FY16 were as follows: Grant date 7 December 2015 Exercise price Performance hurdles Relative TSR and ROIC Expected life Performance period start 1 July 2015 Volatility Performance period end 30 June 2018 Risk-free interest rate (per annum) Security price at grant date $1.87 Dividend/distribution yield (per annum) $nil 2.6 years 19% 2.13% 5.5% The fair value is determined by Ernst & Young using a Binomial tree methodology for the ROIC component and a Monte-Carlo simulation for the TSR component. MIRVAC GROUP ANNUAL REPORT 2016 - REMUNERATION REPORT60 12 EQUITY INSTRUMENT DISCLOSURES RELATING TO KMP SECURITYHOLDINGS Executive KMP members are expected to establish and maintain a minimum securityholding (excluding performance rights) to the value of 100 per cent of fixed remuneration for the CEO/MD and 50 per cent of fixed remuneration for all other Executive KMP. Executive KMP have five years to build up their securityholding to the expected level. As at 30 June 2016, the number of ordinary securities in Mirvac held during the year by Executive KMP, including their personally-related parties, is set out below: Susan Lloyd-Hurwitz John Carfi Brett Draffen Shane Gannon Campbell Hanan Balance 1 July 20151 54,456 248,036 954,718 - - Changes2 530,209 11,083 164,486 36,297 - Balance 30 June 2016 Value 30 June 2016 $ Minimum securityholding guideline $ Date securityholding to be attained 584,665 1,181,023 1,500,000 Nov 2017 259,119 523,420 1,119,204 2,260,792 36,297 73,320 - - 350,000 475,000 450,000 400,000 350,000 Jul 2019 Jul 2017 Dec 2018 Feb 2021 Jul 2019 Susan MacDonald 114,399 205,316 319,715 645,824 1. Opening balance includes any Mirvac securities acquired by the Executive KMP on vesting of the LTI award where the period ended on 30 June 2015. 2. Changes include additions/disposals resulting from first or final disclosure of a KMP and vesting of performance rights where the performance period ended on 30 June 2016. OPTIONS No options (i.e. a right to acquire a security upon payment of an exercise price) were granted, as remuneration during FY16 and no unvested or unexercised options are held by Executive KMP as of 30 June 2016. PERFORMANCE RIGHTS HELD DURING THE YEAR The number of performance rights in Mirvac held during the year by each Executive KMP, including their personally-related parties, is set out below: LTI Deferred STI Balance 1 July 20151 Rights issued Rights relating to performance period ending 30 June 2016 Rights issued Rights vested/ fortfeited Balance 30 June 2016 Susan Lloyd-Hurwitz 3,161,689 1,470,500 (1,470,500) 264,682 (115,095) 3,311,276 John Carfi Brett Draffen Shane Gannon 471,012 411,764 1,028,829 558,823 (61,922) (345,171) 92,227 178,807 - 913,081 (64,232) 1,357,056 821,935 529,411 (223,367) 135,517 (36,297) 1,227,199 Campbell Hanan - - - - Susan MacDonald 433,154 228,758 (205,882) 92,227 - - - 548,257 1. Opening balance excludes any performance rights where the performance period ended on 30 June 2015. REMUNERATION REPORT - MIRVAC GROUP ANNUAL REPORT 201612 EQUITY INSTRUMENT DISCLOSURES RELATING TO KMP (CONTINUED) 61 Details of the movement in the number and value of performance rights held by Executive KMP during the year are set out below: Plan Grant date Number of rights granted Value at granted date1 $ Vesting date Number of rights % of total grant Value of rights1 $ Number of rights % of total grant Value of rights1 $ LTI 10 Dec 13 1,470,500 1,106,551 30 Jun 16 691,135 47% 520,079 779,365 53% 586,472 Vested Lapsed STI 19 Sep 14 115,095 188,756 19 Sep 15 115,095 100% 188,756 Susan Lloyd-Hurwitz LTI 17 Dec 14 1,461,000 1,015,395 30 Jun 17 STI 19 Sep 14 115,094 178,396 19 Sep 16 STI 18 Sep 15 STI 18 Sep 15 132,341 132,341 213,069 18 Sep 16 201,158 18 Sep 17 LTI 7 Dec 15 1,470,500 1,143,314 30 Jun 18 - - - - - - - - - - 0% - - - - - - - - - - - - Total 4,896,871 4,046,639 806,230 708,835 779,365 586,472 LTI LTI 10 Dec 13 61,922 46,596 30 Jun 16 29,103 47% 21,900 32,819 53% 24,696 17 Dec 14 409,090 284,318 30 Jun 17 John Carfi STI 18 Sep 15 STI 18 Sep 15 46,114 46,113 74,244 18 Sep 16 70,092 18 Sep 17 LTI 7 Dec 15 411,764 320,147 30 Jun 18 - - - - - - - - - - - - - - - - Total 975,003 795,397 29,103 21,900 32,819 24,696 LTI 10 Dec 13 345,171 259,741 30 Jun 16 162,230 47% 122,078 182,941 53% 137,663 STI 19 Sep 14 64,232 105,340 19 Sep 15 64,232 100% 105,340 STI 19 Sep 14 64,232 99,560 19 Sep 16 Brett Draffen LTI 17 Dec 14 555,194 385,860 30 Jun 17 STI 18 Sep 15 89,404 143,940 18 Sep 16 STI 18 Sep 15 89,403 135,893 18 Sep 17 LTI 7 Dec 15 558,823 434,485 30 Jun 18 - - - - - - - - - - 0% - - - - - - - - - - - - Total 1,766,459 1,564,819 226,462 227,418 182,941 137,663 LTI 10 Dec 13 223,367 168,084 30 Jun 16 104,982 47% 78,999 118,385 53% 89,085 STI 19 Sep 14 36,297 59,527 19 Sep 15 36,297 100% 59,527 Shane Gannon LTI 17 Dec 14 525,974 365,552 30 Jun 17 STI 19 Sep 14 36,297 56,260 19 Sep 16 STI 18 Sep 15 STI 18 Sep 15 67,759 67,758 109,092 18 Sep 16 102,992 18 Sep 17 LTI 7 Dec 15 529,411 411,617 30 Jun 18 - - - - - - - - - - 0% - - - - - - - - - - - - Total 1,486,863 1,273,124 141,279 138,526 118,385 89,085 LTI 10 Dec 13 205,882 154,926 30 Jun 16 96,764 47% 72,815 109,118 53% 82,111 LTI 17 Dec 14 227,272 157,954 30 Jun 17 Susan MacDonald STI 18 Sep 15 STI 18 Sep 15 46,114 46,113 74,244 18 Sep 16 70,092 18 Sep 17 LTI 7 Dec 15 228,758 177,859 30 Jun 18 - - - - - - - - - - - - - - - - Total 754,139 635,075 96,764 72,815 109,118 82,111 1. The value of performance rights reflects the fair value at the time of grant. For the LTI grants subject to ROIC performance, 50 per cent vesting is assumed in the above valuation. 13 OTHER TRANSACTIONS WITH KMP There are a number of transactions between KMP and the Group. The terms and conditions of these transactions are considered to be no more favourable than in similar transactions on an arm’s length basis. On occasions, Directors and other KMP may purchase goods and services from Mirvac. These purchases are on terms and conditions available to Mirvac employees generally. As set out in the Directors’ report, a number of the Directors of Mirvac are also Directors of other companies. On occasions, the Group may purchase goods and services from or supply goods and services to these entities. These transactions are undertaken on normal commercial terms and conditions and the Director or other KMP does not directly influence these transactions. MIRVAC GROUP ANNUAL REPORT 2016 - REMUNERATION REPORT62 14 SERVICE AGREEMENTS FOR THE EXECUTIVE KMP Each Executive KMP member, including the CEO/MD, has a formal contract, known as a service agreement. These service agreements are of a continuing nature and have no fixed term of service. There were no changes to the service agreements for Executive KMP in FY16. Campbell Hanan commenced his role on 1 March 2016. His employment with Mirvac commenced on 9 February 2016 and he was on unpaid leave until 1 March 2016. Campbell joined on similar terms and conditions to those of other Executive KMP in respect of notice and termination. The key terms of the service agreements for the CEO/MD and other Executive KMP members are summarised below: Contract term Susan Lloyd-Hurwitz No fixed term Other Executive KMP No fixed term Employee 6 months 3 months 1. Payable if Mirvac terminates employee with notice, for reasons other than unsatisfactory performance. Notice period Group 6 months 3 months Termination payment1 6 months 9 months 15 GOVERNANCE AND HOW REMUNERATION DECISIONS ARE MADE The Board, HRC, advisors and management work closely to apply our remuneration principles and ensure our strategy supports sustainable securityholder value. BOARD Oversees remuneration With advice from HUMAN RESOURCES COMMITTEE ● Four independent Non-Executive Directors ● Advises Board on remuneration strategy ● Specific recommendations on Director remuneration ● Approves KMP terms of employment Based on REMUNERATION PRINCIPLES ● Align and contribute to Mirvac’s key strategic business objectives and desired business outcomes ● Support Mirvac’s desired performance-based culture ● Encompass the concept of pay parity ● Align the interests of employees with and be fair and equitable those of securityholders ● Assist Mirvac in attracting and retaining the employees required to execute the business strategy ● Be simple and easily understood The HRC has appointed Ernst & Young as its external remuneration advisor. Ernst & Young provides both information on current market practice and independent input into key remuneration decisions. Ernst & Young’s terms of engagement include specific measures designed to protect its independence. To effectively perform its role, Ernst & Young needs to interact with members of Mirvac management, particularly those in the Human Resources team. However, to ensure independence, members of Mirvac’s management are precluded from requesting services that would be considered to be a ‘remuneration recommendation’ as defined by the Corporations Act 2001. During the year ended 30 June 2016, Ernst & Young provided the HRC with: • fair value and vesting calculations for equity awards; • market remuneration information, used as an input to the annual review of Executive KMP remuneration; and • regulatory updates and market trend analysis. No remuneration recommendations were provided by Ernst & Young or any other advisor during the year. REMUNERATION REPORT - MIRVAC GROUP ANNUAL REPORT 201616 NON-EXECUTIVE DIRECTORS’ REMUNERATION 63 APPROACH TO NON-EXECUTIVE DIRECTOR FEES In contrast to Executive KMP remuneration, the remuneration of Mirvac’s Non-Executive Directors is not linked to performance. This is consistent with Non-Executive Directors being responsible for objective and independent oversight of the Group. Mirvac Limited’s Constitution provides that Non-Executive Directors may determine their own remuneration, but the total amount provided to all Directors (not including the CEO/MD and any other Executive Directors) must not exceed the sum agreed by securityholders at a general meeting. The maximum aggregate remuneration of $2.25m per annum was approved by securityholders at the 2014 AGM. Non-Executive Directors have not received any fees other than those described in this section, and do not receive bonuses or any other incentive payments or retirement benefits. The Non-Executive Directors are reimbursed for expenses properly incurred in performing their duties as a Director of Mirvac. The schedule of fees for Non-Executive Directors during FY16 is set out in the table below and fees are annual fees, unless otherwise stated: Board/committee Mirvac Limited and Mirvac Funds Limited Board Chair1 Mirvac Limited and Mirvac Funds Limited Board member ARCC and HRC Chair2 Committee member3 Due Diligence Committee (per diem fee) $ 480,000 185,000 30,000 18,000 4,000 1. Chair fee covers all Board and committee responsibilities. 2. The ARCC and HRC Chair fee is in addition to the Committee member fee. 3. The single committee fee is paid once for all committee memberships. ACTUAL REMUNERATION FOR NON-EXECUTIVE DIRECTORS Non-Executive Directors John Mulcahy Christine Bartlett Peter Hawkins James M. Millar AM Samantha Mostyn John Peters Elana Rubin2 Total Year 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Short-term benefits Post-employment1 Cash salary and fees $ Superannuation contributions $ Total $ 460,692 461,217 185,388 108,143 213,692 214,217 213,692 213,792 185,388 61,796 171,324 170,868 185,388 252,396 1,615,564 1,482,429 19,308 18,783 17,612 10,274 19,308 18,783 19,308 18,783 17,612 5,871 31,676 32,132 17,612 18,271 480,000 480,000 203,000 118,417 233,000 233,000 233,000 232,575 203,000 67,667 203,000 203,000 203,000 270,667 142,436 122,897 1,758,000 1,605,326 1. Relates to payments required under superannuation legislation. 2. Elana Rubin received an additional $18,000 in FY15 for her service on the Mirvac Capital Partners Limited and Mirvac Funds Management Limited Boards. MINIMUM SECURITYHOLDING FOR NON-EXECUTIVE DIRECTORS AND ACTUAL SECURITYHOLDING In order to further strengthen the alignment of interests between Non-Executive Directors and stapled securityholders, each Non-Executive Director is required to hold a minimum securityholding of 25,000 Mirvac stapled securities. The securities can be acquired over a two-year period from their date of appointment. MIRVAC GROUP ANNUAL REPORT 2016 - REMUNERATION REPORT64 16 NON-EXECUTIVE DIRECTORS’ REMUNERATION (CONTINUED) MINIMUM SECURITYHOLDING FOR NON-EXECUTIVE DIRECTORS AND ACTUAL SECURITYHOLDING (CONTINUED) Balance 1 July 2015 Changes Balance 30 June 2016 John Mulcahy Christine Bartlett Peter Hawkins James M. Millar AM Samantha Mostyn John Peters Elana Rubin 25,000 25,000 596,117 40,714 15,000 30,000 34,343 - - - - - - - 25,000 25,000 596,117 40,714 15,000 30,000 34,343 Minimum securityholding guideline Date securityholding to be attained 25,000 25,000 25,000 25,000 25,000 25,000 25,000 Jul 2014 Dec 2016 Jul 2014 Jul 2014 Mar 2017 Jul 2014 Jul 2014 17 ADDITIONAL REQUIRED DISCLOSURES OTHER BENEFITS Fees paid by Mirvac for Directors’ and Officers’ liability insurance are not itemised for each Director, as their disclosure would breach the terms of the policy. Executives and Directors (including Non-Executive Directors) are entitled to participate in arrangements available to directly purchase Mirvac developed residential property, on the same terms and conditions as for other employees within the Group. LOANS TO DIRECTORS AND OTHER KMP Details of loans made to Directors and Executive KMP (including loans granted under legacy LTI plans), including their personally-related parties, are set out below. The loans below are attributable to the legacy EIS plan, which provided loans to executives to purchase Mirvac stapled securities. This plan is closed to new awards/participants. Individuals with loans above $100,000 during the year: John Carfi Brett Draffen Balance 1 July 2015 $ Balance 30 June 2016 $ Highest indebtedness during the year $ 173,401 244,953 170,404 - 173,401 244,953 No write-downs or provision for impairment for receivables has been recognised in relation to any loans made to Directors or Executive KMP. TERMS USED IN THIS REMUNERATION REPORT Term Meaning Adjusted earnings Statutory profit/loss after tax excluding: income tax expense and benefits; interest expense; bank and inter-company interest income; fair value of derivatives and exchange differences (FX); and changes in reserves (not including FX reserve). A-REIT S&P/ASX 200 Australian Real Estate Investment Trust Index. Clawback Mirvac’s clawback policy gives the HRC the ability to claw back incentives in the event of a material financial misstatement. The clawback provisions apply to unvested STI and LTI awards received after the introduction of the policy in February 2013. Executive KMP The KMP that are also part of the Executive Leadership Team (the CEO/MD, CFO and heads of business units who are part of the Executive Leadership Team). Executives Members of Mirvac’s Executive Leadership Team (including the Executive KMP and other Executives). KMP Key Management Personnel are those people with authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly. Operating assets Closing total assets excluding: cash and cash equivalents; tax assets; derivative financial assets; inter-company assets (i.e. inter-company receivables and inter-company loans); shares in subsidiaries; and deferred land payable. Performance right A right to a Mirvac security at the end of a performance period, subject to the satisfaction of performance measures. ROIC TSR Adjusted earnings of a financial year divided by average monthly operating assets for the financial year. Total Shareholder Return measures the percentage growth in a company’s security price together with the value of dividends/distributions received during the period, assuming that all of those dividends/ distributions are re-invested into new securities. REMUNERATION REPORT - MIRVAC GROUP ANNUAL REPORT 201665 Auditor’s Independence Declaration As lead auditor for the audit of Mirvac Limited for the year ended 30 June 2016, I declare that to the best of my knowledge and belief, there have been: 1. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and 2. no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Mirvac Limited and the entities it controlled during the period. Jane Reilly Partner PricewaterhouseCoopers Sydney 16 August 2016 PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation MIRVAC GROUP ANNUAL REPORT 2016 - AUDITOR’S INDEPENDENCE DECLARATIONConsolidated financial statements Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows 67 68 69 70 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS A. Basis of preparation B. Results for the year B1 Segment information B2 Revenue B3 Expenses B4 Events occurring after the end of the year B5 Income tax C. Property and development assets C1 Property portfolio C2 Investment properties C3 Property, plant and equipment C4 Investment in joint ventures C5 Inventories C6 Commitments D. Capital structure and risks D1 Capital management D2 Borrowings and liquidity D3 Derivative financial instruments D4 Financial risk management D5 Fair value measurement of financial instruments 71 73 73 78 79 79 80 82 82 84 85 86 88 89 90 90 90 91 92 94 E. Equity E1 Distributions E2 Contributed equity E3 Reserves E4 Security-based payments F. Operating assets and liabilities F1 Receivables F2 Other financial assets F3 Intangible assets F4 Payables F5 Provisions G. Group structure G1 Group structure and deed of cross guarantee G2 Parent entity H. Other information H1 Contingent liabilities H2 Earnings per stapled security H3 Related parties H4 Reconciliation of profit to operating cash flow H5 Auditors’ remuneration I. Appendices I1 Property listing I2 Controlled entities 96 96 96 97 97 99 99 100 101 102 102 103 103 105 106 106 106 106 107 108 108 108 111 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2016 67 FY16 and FY15 profit for the year attributable to stapled securityholders $482m $497m $54m FY16 FY15 $455m $141m $14m $0m $100m $200m $300m $400m $500m $600m $700m $800m $900m $1,000m $1,100m I Operating profit after tax I Revaluation of investment properties and investment properties under construction I Other MIRVAC GROUP ANNUAL REPORT 2016 - CONSOLIDATED FINANCIAL STATEMENTSNote2016$m2015$mRevenue B22,3211,696Other incomeRevaluation of investment properties and investment properties under constructionC2497141Share of net profit of joint venturesC411567Net gain on sale of assets B23360Gain on financial instruments B286188Total revenue and other income3,0522,152Development expenses1,335785Investment properties expenses and outgoings149143Employee benefits and other expensesB3174177Selling and marketing expenses4746Depreciation and amortisation expenses3730Finance costs B3137145Loss on foreign exchange and financial instruments B396198Business combination transaction costs2-Profit before income tax1,075628Income tax expenseB5(42)(18)Profit for the year attributable to stapled securityholders1,033610Other comprehensive income that may be reclassified to profit or lossExchange differences on translation of foreign operations, net of taxE3(1)8Other comprehensive income that will not be reclassified to profit or lossRevaluation of owner-occupied propertiesE3419Other comprehensive income for the year4017Total comprehensive income for the year attributable to stapled securityholders1,073627Earnings per stapled security (EPS) attributable to stapled securityholders CentsCentsBasic EPSH227.916.5Diluted EPSH227.916.5The above consolidated statement of comprehensive income (SoCI) should be read in conjunction with the accompanying notes.68 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2016 CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016Note2016$m2015$mCurrent assetsCash and cash equivalents35460 ReceivablesF111073 InventoriesC5750774 Derivative financial assetsD35- Other financial assets F2211 Other assets2522 Total current assets1,246940 Non-current assetsReceivablesF15657InventoriesC5848939Investment propertiesC27,1006,751Investments in joint ventures C4824562Derivative financial assetsD3228176Other financial assetsF2152264Property, plant and equipmentC3311262Intangible assetsF37939Deferred tax assetsB5325413Total non-current assets9,9239,463Total assets11,16910,403Current liabilitiesPayablesF4425352Deferred revenue B2106321BorrowingsD2604-Derivative financial liabilities D3912ProvisionsF5209202Total current liabilities1,353887Non-current liabilitiesPayablesF48285Deferred revenueB26029BorrowingsD22,2112,634Derivative financial liabilitiesD310276Deferred tax liabilitiesB5169213ProvisionsF51217Total non-current liabilities2,6363,054Total liabilities3,9893,941Net assets7,1806,462EquityContributed equityE26,8126,804ReservesE313895Retained earnings230(437)Total equity attributable to the stapled securityholders7,1806,462The above consolidated statement of financial position (SoFP) should be read in conjunction with the accompanying notes.CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2016 69 Attributable to stapled securityholders of Mirvac Contributed equity $m Reserves $m Retained earnings $m Total equity $m Note Balance 30 June 2014 Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners of the Group Security-based payments Expense recognised – EEP Expense recognised – LTI and STI LTI vested Legacy schemes vested Distributions Total transactions with owners of the Group Balance 30 June 2015 Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners of the Group Security-based payments Expense recognised – EEP Expense recognised – LTI and STI LTI vested STI vested Legacy schemes vested Distributions Total transactions with owners of the Group E4 E4 E2/E4 E2 E1 E4 E4 E2/E4 E4 E2 E1 6,797 - - - 1 - 4 2 - 7 6,804 - - - 1 - 4 - 3 - 8 77 - 17 17 - 5 (4) - - 1 95 - 40 40 - 9 (4) (1) (1) - 3 Balance 30 June 2016 6,812 138 (698) 610 - 610 - - - (1) (348) (349) (437) 1,033 - 1,033 - - - - - (366) (366) 230 6,176 610 17 627 1 5 - 1 (348) (341) 6,462 1,033 40 1,073 1 9 - (1) 2 (366) (355) 7,180 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. MIRVAC GROUP ANNUAL REPORT 2016 - CONSOLIDATED FINANCIAL STATEMENTS70 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2016 CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016Note2016$m2015$mCash flows from operating activitiesReceipts from customers (inclusive of goods and services tax)2,2152,052Payments to suppliers and employees (inclusive of goods and services tax)(1,618)(1,555)597497Interest received2324Distributions received from joint ventures 4142Interest paid(151)(150)Tax paid(1)-Net cash inflows from operating activitiesH4509413Cash flows from investing activitiesPayments for investment properties(751)(977)Payments for property, plant and equipment(16)(13)Proceeds from sale of investment properties and assets held for sale8001,072Repayments of loans from unrelated parties4482Contributions to joint ventures (28)(40)Proceeds from joint ventures 1512Payments for other intangibles(38)-Payments for investments(27)-Proceeds from sale of investments-12Net cash (outflows)/inflows from investing activities(1)148Cash flows from financing activitiesProceeds from borrowings2,7611,120Repayments of borrowings(2,620)(1,383)Distributions paid(355)(336)Net cash outflows from financing activities(214)(599)Net increase/(decrease) in cash and cash equivalents294(38)Cash and cash equivalents at the beginning of the year6098Cash and cash equivalents at the end of the year35460The above consolidated statement of cash flows should be read in conjunction with the accompanying notes.71 A BASIS OF PREPARATION MIRVAC — STAPLED SECURITIES A Mirvac stapled security comprises one Mirvac Limited share ‘stapled’ to one unit in Mirvac Property Trust (MPT) to create a single listed security traded on the ASX. The stapled securities cannot be traded or dealt with separately. Mirvac Limited (the deemed parent entity) and Mirvac Funds Limited (as responsible entity for MPT) have common directors and operate as Mirvac Group. Mirvac Limited and MPT have a Deed of Cooperation to recharge each other on a cost recovery basis, where permitted by law, to maintain the best interests of Mirvac as a whole. The stapled security structure will cease to operate on the first of: • Mirvac Limited or MPT resolving by special resolution in a general meeting, and in accordance with its Constitution, to terminate the stapled security structure; or • Mirvac Limited or MPT commencing winding up. The ASX reserves the right (but without limiting its absolute discretion) to remove entities with stapled securities from the official list if their securities cease to be stapled together, or either one or more stapled entities issues any equity securities of the same class which are not stapled. Mirvac Limited and MPT remain separate legal entities in accordance with the Corporations Act 2001. For accounting purposes, Mirvac Limited has been deemed the parent entity of MPT. STATEMENT OF COMPLIANCE These consolidated financial statements are general purpose financial statements. They have been prepared in accordance with Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board, the Corporations Act 2001 and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Mirvac Group is a for-profit entity for the purpose of preparing the consolidated financial statements. BASIS OF PREPARATION These financial statements have been prepared on a going concern basis, using historical cost conventions except for investment properties, investment properties under construction, owner-occupied properties, derivative financial instruments and other financial assets and financial liabilities which have been measured at fair value. All figures in the financial statements are presented in Australian dollars and have been rounded to the nearest million (m) dollars in accordance with ASIC Corporations Instrument 2016/191, unless otherwise indicated. Where necessary, comparative information has been restated to conform to the current year’s disclosures. CRITCAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of financial statements requires estimation and judgement. The areas involving a higher degree of estimation or judgement are discussed in the following notes: Revenue Income tax Investment properties Property, plant and equipment Investments in joint ventures Inventories Fair value measurement of financial instruments Security-based payments Intangible assets Note B2 B5 C2 C3 C4 C5 D5 E4 F3 MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS72 MIRVAC – STAPLED SECURITIES (CONTINUED) NEW AND AMENDED STANDARDS ADOPTED BY THE GROUP The new and amended standards adopted by the Group for the year ended 30 June 2016 have not had a significant impact on the current period or any prior period and are not likely to have a significant impact on future periods. NEW STANDARDS NOT YET ADOPTED Certain new accounting standards have been published that are not mandatory for the year ended 30 June 2016 and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards is set out below: • AASB 9 Financial Instruments (effective for financial years commencing on or after 1 January 2018, with early adoption permitted) AASB 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities. The Group does not expect a material impact to the Group’s accounting for financial instruments. The Group has not yet decided when to adopt AASB 9; • AASB 15 Revenue from Contracts with Customers (effective for financial years commencing on or after 1 January 2018, with early adoption permitted) AASB 15 is based on the principle that revenue is recognised when control of a good or service is transferred to a customer. AASB 15 will not impact on investment properties rental revenue, as the revenue is accounted for under AASB 117 Leases. The new standard is unlikely to have a material impact on development and construction revenue as the performance obligation is delivering the completed product. The Group has not yet decided when to adopt AASB 15; and • AASB 16 Leases (effective for financial years commencing on or after 1 January 2019, with early adoption permitted if AASB 15 is also adopted) AASB 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. This standard will predominantly affect lessees, bringing all major leases on balance sheet. As the Group operates mainly as a lessor, the standard is not expected to impact the Group’s accounting for leases significantly. The Group has not yet decided when to adopt AASB 16. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016B RESULTS FOR THE YEAR 73 This section explains the results and performance of the Group, including detailed breakdowns and segmental analysis. B1 SEGMENT INFORMATION Mirvac’s segments have been realigned following the comprehensive revision of the Group’s operating model, with an effective date of 1 July 2015. The new segments reflect the reporting to the Executive Leadership Team, who are the Group’s chief operating decision makers. The new segments are Office & Industrial, Retail, Residential and Corporate & other. Office & Industrial Residential Manages the Office & Industrial property portfolio to produce rental income along with developing office and industrial projects. This segment also manages joint ventures and properties for third party investors and owners. Designs, develops, markets and sells residential properties to external customers including Masterplanned Communities and Apartments in core metropolitan markets in conjunction with strategic partners. Retail Corporate & other Manages the Retail property portfolio, including shopping centres, to produce rental income. This segment also develops shopping centres and manages joint ventures and properties for third party investors and owners. This segment covers group-level functions including governance, finance, legal, risk management and corporate secretarial. This segment holds an investment in the Tucker Box Hotel Group joint venture (refer to note C4). Geographically, the Group operates predominately in Australia. No single customer in the current or prior year provided more than 10 per cent of the Group’s revenue. Three-year performance review Statutory profit Operating profit Funds from operations 69% Increase from FY15 6% Increase from FY15 7% Increase from FY15 $1,033m $610m $447m $438m $455m $482m $448m $468m $500m FY14 FY15 FY16 FY14 FY15 FY16 FY14 FY15 FY16 $1,200m $1,000m $800m $600m $400m $200m $0m MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS74 B1 SEGMENT INFORMATION (CONTINUED) Operating EBIT: FY15 to FY16 EBIT by Segment $800m $600m $600m ($30m) $4m $66m $640m $400m $200m $0m $750m $650m $550m $450m $350m $250m $150m $50m ($50m) $130m $113m $196m $117m $388m $358m ($31m) ($31m) FY15 Office & Industrial Retail Residential FY16 FY15 FY16 I Residential I Office & Industrial I Retail I Corporate & other NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016Presented below are the key profit metrics, a breakdown of revenue by function and other required information for each segment: 2016 Key profit metrics Office & Industrial $mRetail $mResidential $m Corporate & other $m Total $m Property net operating income (NOI) 331125-16472Development EBIT33-209-242Asset and funds management EBIT93-113Management and administration expenses(15)(11)(13)(48)(87)Earnings before interest and taxes (EBIT)1358117196(31)640Development interest costs2(3)-(61)-(64)Other net interest costs3---(58)(58)Income tax expense ---(36) (36)Operating profit after tax355117135(125)482Include security-based payments expense---(10)(10)Exclude amortisation of incentives 199--28Funds from operations374126135(135)5001. EBIT includes share of net profit of joint ventures.2. Includes cost of goods sold interest of $3m in Office & Industrial and $40m in Residential.3. Includes interest revenue of $15m.2016 Revenue by function Office & Industrial $mRetail $mResidential $m Corporate & other $m Total $m Property rental revenue1393211--604Development revenue255851,091-1,654Asset and funds management revenue376-417Other revenue56111537Total operating revenue9632281,102192,312Share of net profit of joint ventures 21-171654Other income 21-171654Total operating revenue and other income 9842281,119352,366Non-operating items463129-94686Total statutory revenue and other income 1,4473571,1191293,0521. Excludes straight-lining of lease revenue of $9m in Office & Industrial.2. Includes management fees.3. Property management revenue incurred on the Group's investment properties of $7m in Office & Industrial and $5m in Retail has been eliminated.B1 SEGMENT INFORMATION (CONTINUED) 75 MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS2016 Other information Office & Industrial$mRetail $mResidential $mCorporate & other$m Total$m Segment assets and liabilitiesAssetsInvestment properties14,7212,663--7,384Inventories12121,475-1,598Indirect investments256462801771,027Other assets2230251,0831,160Total assets5,4282,7011,7801,26011,169Total liabilities278683263,3173,989Net assets5,1502,6331,454(2,057)7,180Other segment informationShare of net profit of joint ventures 74-1823115Depreciation and amortisation expenses20102537Acquisitions of investments and PPE506404106161,0321. Includes investment properties under construction and owner-occupied properties.2. Includes carrying value of investments in joint ventures and other indirect investments.The comparative information has been restated to reflect the new segment structure for consistency.2015 (restated) Key profit metrics Office & Industrial $mRetail $mResidential $m Corporate & other $m Total $m Property net operating income (NOI) 350125-15490Development EBIT52-142-194Asset and funds management EBIT12-14Management and administration expenses(15)(14)(12)(47)(88)Earnings before interest and taxes1388113130(31)600Development interest costs2(4)-(69)-(73)Other net interest costs3---(54)(54)Income tax expense---(18)(18)Operating profit after tax38411361(103)455Include security-based payments expense---(6)(6)Exclude amortisation of incentives 127--19Funds from operations39612061(109)4681. EBIT includes share of net profit of joint ventures.2. Includes cost of goods sold interest of $1m in Office & Industrial and $45m in Residential.3. Includes interest revenue of $18m.76 B1 SEGMENT INFORMATION (CONTINUED) 1. Includes investment properties under construction and owner-occupied properties. 2. Includes carrying value of investments in joint ventures and loans to related parties. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 20162015 (restated) Revenue by function Office & Industrial $mRetail $mResidential $m Corporate & other $m Total $m Property rental revenue1405208--613Development revenue282-943-1,025Asset and funds management revenue335-19Other revenue103171343Total operating revenue500216960141,690Share of net profit of joint ventures 19-41538Net gain on sale of assets44---44Other income 63-41582Total operating revenue and other income 563216964291,772Non-operating items11845-217380Total statutory revenue and other income 6812619642462,1521. Excludes straight-lining of lease revenue of $5m in Office & Industrial.2. Includes management fees.3. Property management revenue incurred on the Group's investment properties of $7m in Office & Industrial and $6m in Retail has been eliminated.2015 (restated) Other information Office & Industrial$mRetail $mResidential $mCorporate & other$m Total$m Segment assets and liabilitiesAssetsInvestment properties14,8242,171--6,995Inventories355-1,358-1,713Indirect investments2322-122163607Other assets5011529751,088Total assets5,5512,1821,5321,13810,403Total liabilities397463203,1783,941Net assets5,1542,1361,212(2,040)6,462Other segment information Share of net profit of joint ventures 30-53368Depreciation and amortisation expenses1972331Acquisitions of investments and PPE620 406 4121,042B1 SEGMENT INFORMATION (CONTINUED) 77 1. 2. 3. 4. 5. 6. Included within Management and administration expenses. Included within Depreciation and amortisation expenses. Included within Revenue. Included within Share of net profit of joint ventures. Included within Net gain on sale of assets. Included within Income tax expense. MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSRECONCILIATION OF STATUTORY PROFIT TO OPERATING PROFIT AFTER TAXThe following table shows how profit for the year attributable to stapled securityholders reconciles to operating profit after tax: Office & Industrial $mRetail $mResidential $mCorporate & other $m2016$m2015 $mProfit for the year attributable to stapled securityholders 796243135(141)1,033610Exclude specific non-cash itemsRevaluation of investment properties and investment properties under construction(374)(123)--(497)(141)Net loss on foreign exchange movements and financial instruments6--4 1010Security-based payments expense1---10 106Depreciation of owner-occupied properties2 5 2 --76Straight-lining of lease revenue3(9)---(9)(5)Amortisation of lease fitout incentives291--109Share of net profit of joint ventures relating to movement of non-cash items4(53)--(8)(61)(30)Exclude significant itemsNet gain on sale of non-aligned assets5(27)(6)--(33)(16)Restructuring costs1---447Business combination transaction costs2---2-Tax effectTax effect of non-cash and significant items6---66(1)Operating profit after tax355117135(125)48245578 B2 REVENUE The Group has two main revenue streams; development revenue and property rental revenue. Development revenue is derived from constructing and then selling properties. Property rental revenue comes from holding properties as investment properties and earning rental yields over time. Revenue is measured at the fair value of the consideration received or receivable, net of returns, trade allowances and duties and taxes paid. Mirvac recognises revenue when it can be reliably measured, payment is probable and the specific criteria for each revenue stream have been met. Development revenue During construction, development projects are capitalised as inventories, refer to note C5. Revenue is recognised upon settlement of the development projects. Other revenue from development projects, such as project management fees, is recognised as services are performed. Deferred revenue Some development contracts on commercial projects are funded by a third party, generally known as fund through projects. Payments for these projects are received during construction. As revenue is only recognised on settlements, payments received are recognised as deferred revenue until settlement. Although deferred revenue is classified as a liability in the consolidated SoFP, on settlement it will be recognised in the consolidated SoCI and not be repaid in cash. At 30 June 2016, the Group held $166m of deferred revenue which mainly related to the Green Square, Sydney and Riverside Quay, Melbourne projects (2015: $350m mainly related to Old Treasury Building, Perth and 200 George Street, Sydney projects). Property rental revenue Rental revenue from investment properties is recognised on a straight-line basis over the lease term of, net of any incentives. For further details on lease incentives refer to note C1. Asset and funds management revenue Revenue is recognised as the service is delivered for property asset or investment funds management, property advisory and facilities management services. FY16 Revenue Revenue FY14 to FY16 2% 1% by function 26% 71% $2,500m $2,000m $1,500m $1,000m $500m $0m $2,321m $1,868m $1,696m I Development I Property rental I Other I Asset and funds management FY14 FY15 FY16 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 20162016$m2015$mRevenueDevelopment revenue1,6541,022Property rental revenue1613618Asset and funds management revenue1713Interest revenue1518Other revenue2225Total revenue 2,3211,6961. Includes straight-lining of lease revenue of $9m (2015: $5m).B2 REVENUE (CONTINUED) 79 MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS2016$m2015$mNet gain on sale of assetsNet gain on sale of financial instruments-44Net gain on sale of investments in joint ventures -10Net gain on sale of investment properties336Total net gain on sale of assets3360Gain on financial instrumentsGain on cross currency derivatives 86188Total gain on financial instruments86188B3 EXPENSESDEVELOPMENT EXPENSESDevelopment expenses are recognised when the related revenue is recognised.INVESTMENT PROPERTIES EXPENSES AND OUTGOINGSExpenses and outgoings include rates and taxes and are recognised on an accruals basis.2016$m2015$mProfit before income tax includes the following specific expensesEmployee benefits expenses125121Other expenses4956Total employee benefits and other expenses174177Finance costsInterest paid/payable (net of inventory provision release)140137Interest capitalised1(49)(40)Interest previously capitalised and now expensed (net of inventory provision release)24346Borrowing costs amortised32Total finance costs137145Loss on foreign exchange and financial instrumentsForeign exchange loss on borrowings39182Loss on interest rate derivatives5116Loss on financial instruments6-Total loss on foreign exchange and financial instruments961981. Relates to Residential $38m (2015: $32m) and commercial projects $11m (2015: $8m). 2. Relates to Residential $40m (2015: $45m) and commercial projects $3m (2015: $1m).B4 EVENTS OCCURRING AFTER THE END OF THE YEARAs announced on 29 October 2015, the Group has acquired a 49.9 per cent interest in East Village, Zetland NSW for $155m. The acquisition was made by unit acquisition in the Joynton North Property Trust and is equity accounted. This transaction was completed on 1 July 2016. Also completed on 1 July 2016, was the acquisition of 274 Victoria Road, Rydalmere NSW for $48m and a 50 per cent interest in 80 Bay Street Glebe, NSW for $11m.No other events have occurred since the end of the year which have significantly affected or may significantly affect Mirvac’s operations, the results of those operations, or Mirvac’s state of affairs in future years.80 B5 INCOME TAX Most of the Group’s profit is earned by trusts which are not subject to taxation. Income from the trusts is instead attributed to unitholders who pay income tax at their marginal tax rates. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016ACCOUNTING FOR INCOME TAXIncome tax expense is calculated at the applicable tax rate (currently 30 per cent in Australia) and recognised in the profit for the year, unless it relates to other comprehensive income or transactions recognised directly in equity. The tax expense comprises both current and deferred tax. Broadly, current tax represents the tax expense paid or payable for the current year. Deferred tax accounts for tax on temporary differences. Temporary differences generally occur when income and expenses are recognised by tax authorities and for accounting purposes in different periods. Deferred tax assets, including those arising from tax losses, are only recognised to the extent it is probable that sufficient taxable profits will be available to utilise the losses in the foreseeable future. Deferred tax is not recognised on the initial recognition of goodwill. Mirvac estimates future taxable profits based on reviewed budgets and forecasts extending five years. Future taxable profits are influenced by a variety of general economic and business conditions, which are outside the control of Mirvac. A change in any of these assumptions could have an impact on the future profitability of the Group and may affect the recovery of deferred tax assets. TAX CONSOLIDATION LEGISLATIONMirvac Limited and its wholly owned Australian controlled entities are in a tax consolidated group. The entities in the tax consolidated group have entered into a tax sharing agreement which, in the opinion of the Directors, limits the joint and several liability of the wholly owned entities in the case of a default by the head entity, Mirvac Limited. The entities in the tax consolidated group have also entered into a tax funding agreement to fully compensate/be compensated by Mirvac Limited for current tax balances and the deferred tax assets for unused tax losses and credits transferred. INCOME TAX ANALYSISReconciliation to effective tax rate2016$m 2015$mProfit before income tax1,075628Add: Group elimination entries not subject to corporate taxation1 419Less: MPT profit not subject to taxation(977)(581)Profit which is subject to taxation13956Income tax expense calculated at 30 per cent4217Tax effect of amounts which are not deductible/(taxable) in calculating taxable incomeOther non-deductible/non-assessable items324519Over-provision in prior years(3)(1)Income tax expense2 4218Effective tax rate330%32%1. Group eliminations not subject to corporate tax generally relate to MPT profit restatements required for consolidated group reporting purposes.2. The income tax expense represents both current and deferred tax. 3. Effective tax rate is calculated as the income tax expense divided by the profit which is subject to taxation.B5 INCOME TAX (CONTINUED) 81 MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSMovement in deferred taxBalance 1 July 2014$mRecognised in profit or loss $mRecognised in other comprehensive income$m Acquisition/ disposal of controlled entity$mRecognised in provisions$mBalance 30 June 2015$mRecognised in profit or loss$mRecognised on acquisition $m Balance 30 June 2016$mUnearned gains and losses with joint ventures22(11)--- 11(1)-10Accruals34(3)--- 31(5)-26Employee provisions and accruals7---- 7--7Deferred revenue5568-2- 125(71)-54Derivative financial instruments34(7)---276-33Impairment of loans to unrelated parties7(3)--- 4--4PPE11--- 2--2Tax losses192(7)--- 185(29)-156Foreign exchange translation losses-22 (1)-- 2112-33Deferred tax assets 35260(1)2-413(88)-325Investments in joint ventures(17)4--9(4)(1)-(5)Inventories(86)(64)-(3)2(151)65-(86)Derivative financial instruments(9)(46)--- (55)(17)-(72)Foreign exchange translation gains(30)30-------Other(1)(2)--- (3)-(3)(6)Deferred tax liabilities(143)(78)-(3)11(213)47(3)(169)Net deferred tax assets 209(18)(1)(1)11200(41)(3)156Deferred tax assets expected to be recovered after more than 12 months are $295m (2015: $413m). Reconciliation of income tax expense to tax paid2016$m 2015$mCurrent tax 1-Deferred tax4118Total income tax expense4218Temporary differencesUnearned progress billings(71)68Inventories65(64)Unrealised derivative financial instrument revaluations(11)(53)Unrealised foreign currency translation revaluations1252Other temporary differences(7)(13)Transfer from tax losses(29)(7)Tax paid1111. The current tax paid relates to tax payable in the USA. Unrecognised tax losses2016$m 2015$mUnused tax losses which have not been recognised as deferred tax assets due to uncertainty of utilisation 625621Potential tax benefit at 30 per cent18818682 C PROPERTY AND DEVELOPMENT ASSETS This section includes investment properties, owner-occupied properties, investments in joint ventures and inventories. It represents the core assets of the business and drives the value of the Group. C1 PROPERTY PORTFOLIO Mirvac holds a property portfolio for long term rental yields and capital appreciation. Depending on the specific arrangements for each property, they are classified as investment properties, owner-occupied properties or properties held through joint ventures. Investment properties Investment properties are properties owned by Mirvac and not occupied by the Group. Investment properties include investment properties under construction, which will become investment properties once construction is completed. Mirvac accounts for its investment properties at fair value and revaluations are recognised as other income. Owner-occupied properties Owner-occupied properties are held, partly or fully, for Mirvac’s use and are classified as property, plant and equipment. Owner-occupied properties are held at fair value with revaluation gains classified as other comprehensive income and held in the asset revaluation reserve in equity. Refer to note E3 for further details. Investments in joint venture (JV) Mirvac enters into arrangements with third parties to jointly own investment properties. If Mirvac has joint control over the activities and joint rights to the net assets of an arrangement, then it is classified as a JV. The JV hold investment property at fair value and Mirvac recognises its share of the JV’s profit or loss as other income. For further details on accounting for JV, refer to note C4. Judgement in fair value estimation Fair value is based on the highest and best use of an asset — for all of Mirvac’s property portfolio, the existing use is its highest and best use. The fair values of properties are calculated using a combination of market sales comparison, discounted cash flow and capitalisation rate. To assist with calculating reliable estimates, Mirvac uses external valuers on a rotational basis. Approximately half of the portfolio is externally valued each year, with management internally estimating the fair value of the remaining properties. The fair values are a best estimate, but may differ to the actual sales price if the properties were to be sold. The key judgements for each valuation method are explained below: Market sales comparison: Utilises recent sales of comparable properties, adjusted for any differences including the nature, location and lease profile; Discounted cash flow (DCF): Projects a series of cash flows over the property’s life and a terminal value, discounted using a discount rate to give the present value; and The projected cash flows incorporate expected rental income (based on contracts or market rates), operating costs, lease incentives, lease fees, capital expenditure, and a terminal value from selling the property. The terminal value is calculated by applying the terminal yield to the net market income. The discount rate is a market rate reflecting the risk associated with the cash flows, the nature, location and tenancy profile of the property relative to comparable investment properties and other asset classes. Capitalisation rate: Capitalises the fully-leased net income for a property into perpetuity at an appropriate capitalisation rate. The fully-leased net income is based on contracted rents, market rents, operating costs and future income on vacant space. The capitalisation rate reflects the nature, location and tenancy profile of the property, together with current market evidence and sales of comparable properties. There generally is not an active market for investment properties under construction, so fair value is measured using DCF or residual valuations. DCF valuations for investment properties under construction are as described above, but also consider the costs and risks of completing construction and letting the property. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016C1 PROPERTY PORTFOLIO (CONTINUED) 83 FY16 Property Portfolio 4% <1% 6% 14% 34% 9% I Office I Industrial Office by segment by geography 57% 15% 61% I Retail I NSW I VIC I QLD I ACT I WA I USA Industrial Retail • $4,402m in Office assets • $729m in Industrial assets • $2,663m in Retail assets • 28 investment grade assets1 • 16 investment grade assets4 • 15 investment grade assets6 • 9.2% net valuation uplift2 • 6.6% net valuation uplift4 • 5.4% net valuation uplift6 • Weighted average • Weighted average • Weighted average capitalisation rate of 6.23%3 capitalisation rate of 6.56%5 capitalisation rate of 6.10%5 1. 2. Includes investment properties under construction but excludes 55 Coonara Avenue, West Pennant Hills NSW. 4. Includes investment properties under construction. 5. Excludes investment properties under construction. Includes 8 Chifley Square, Sydney NSW and Treasury Building, 28 Barrack Street, Perth WA. 6. Includes investment properties under construction and owner-occupied properties. 3. Excludes investment properties under construction and 55 Coonara Avenue, West Pennant Hills NSW. MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSJudgement in fair value estimation (continued) Residual: Estimates the value of the completed project, less the remaining development costs, which include construction, finance costs and an allowance for developer’s risk and profit. This valuation is then discounted back to the present value.Note C2 explains the key inputs and sensitivity to changes. Lease incentivesThe carrying amount of investment properties includes lease incentives provided to tenants. Lease incentives are deferred and recognised on a straight-line basis over the lease term as a reduction of property rental income. BREAKDOWN OF MIRVAC’S PROPERTY PORTFOLIO BY SECTOR20162015NoteOffice $mIndustrial $mRetail $mTotal$mOffice $mIndustrial $mRetail $mTotal $mInvestment properties3,6816952,5436,9193,8296612,0726,562Investment properties under construction993448181157-32189Total investment propertiesC23,7807292,5917,1003,9866612,1046,751Owner-occupied properties C3212-72284177-67244Investment in joint ventures1C4410--410322 --322Total property portfolio4,4027292,6637,7944,4856612,1717,3171. Represents Mirvac’s share of the JV’s investment properties, which is included within the carrying value of investments in JV.Refer to note I1 for a detailed listing of Mirvac’s property portfolio.84 C1 PROPERTY PORTFOLIO (CONTINUED) REVALUATION OF PROPERTY PORTFOLIO FY16 Net revaluation gain ($580m) FY15 Net revaluation gain ($160m) $326m $48m $123m $88m $14m $39m IP/IPUC OOP JV1 $30m $4m $49m IP/IPUC OOP JV1 $2m $3m $14m $m $100m $200m $300m $400m $500m $m $50m $100m $150m 1. Represents Mirvac’s share of the JV’s revaluation gain which is included within the share of net profits of JV. I Office I Industrial I Retail C2 INVESTMENT PROPERTIES Investment properties, including investment properties under construction, are held at fair value and any gains or losses are recognised in other income. The fair value movements are non-cash and do not affect the Group’s distributable income. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016 20162015Office$m Industrial$mRetail$mTotal $mTotal$mBalance 1 July3,9866612,1046,7516,016 Expenditure capitalised 23216130378328 Acquisitions11232274418686 Disposals(743)-(31)(774)(401)Net revaluation gains from fair value adjustments32648123497141 Exchange differences on translation of foreign operations-2-28 Transfer (to)/from inventories(106)(29)-(135)4 Amortisation of lease fitout incentives, leasing costs and rent incentives(27)(1)(9)(37)(31)Balance 30 June3,7807292,591 7,1006,751 C2 INVESTMENT PROPERTIES (CONTINUED) 85 FAIR VALUE MEASUREMENT AND VALUATION BASIS Investment properties are measured as Level 3 financial instruments. Refer to note D5 for explanation of the levels of fair value measurement. The DCF and capitalisation rate valuation methods both use unobservable inputs in determining fair value; ranges of the inputs are included below: Inputs used to measure fair value Level 3 Fair value $m Net market income $/sqm 10 year compound annual growth rate % Capitalisation Rate % Terminal yield % Discount rate % 3,780 729 2,591 3,986 661 2,104 325 – 1,590 0.00 – 3.75 5.38 – 9.50 5.75 – 10.00 7.13 – 9.50 52 – 225 2.50 – 3.50 5.50 – 7.75 6.00 – 8.00 7.50 – 8.25 225 – 1,524 3.00 – 4.40 5.25 – 8.00 5.50 – 8.00 7.75 – 9.50 205 – 1,003 0.00 – 4.10 6.00 – 9.50 6.25 – 10.00 8.00 – 12.00 15 – 345 2.33 – 3.30 6.00 – 9.50 6.25 – 9.75 8.00 – 9.75 221 – 1,071 3.00 – 4.43 6.00 – 8.00 6.25 – 8.00 8.50 – 9.50 Segment 2016 Office1 Industrial Retail1 2015 Office1 Industrial Retail1 1. Includes owner-occupied properties. Movement in any of the unobservable inputs is likely to have an impact on the fair value of investment property. The higher the net market income or 10 year compound annual growth rate, the higher the fair value. The higher the capitalisation rate, terminal yield or discount rate, the lower the fair value. C3 PROPERTY, PLANT AND EQUIPMENT Mirvac uses part of 60 Margaret Street, Sydney as a head office and part as investment property. For accounting purposes, it is regarded as owner-occupied property and classified as property, plant and equipment (PPE). The owner-occupied property is held at fair value but, unlike investment properties, revaluation gains are classified as other comprehensive income and held in the asset revaluation reserve in equity. DEPRECIATION PPE is depreciated straight-line over its estimated useful life as follows: • owner-occupied properties 40 years; • plant and equipment 3–15 years; and • land indefinite. Valuation of PPE Owner-occupied properties are measured at fair value as explained in note C1. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the owner-occupied properties and the net amount is revalued to fair value. The original cost of owner-occupied properties is $218m (2015: $213m). Other PPE is measured at cost less accumulated depreciation and impairment losses. All PPE is considered for impairment when relevant and no PPE (2015: $nil) is considered impaired. MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 86 C3 PROPERTY, PLANT AND EQUIPMENT (CONTINUED) A joint venture (JV) is an arrangement where Mirvac has joint control over the activities and joint rights to the net assets. Refer to note G1 for details on how Mirvac decides if it controls an entity. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 201620162015Owner-occupied properties $mPlant and equipment $mTotal $mOwner-occupied properties$mPlant and equipment$mTotal $mBalance 1 July2441826223810248Revaluation gains47-4712-12Additions-1616-1313Depreciation(7)(7)(14)(6)(5)(11)Balance 30 June2842731124418262Cost or fair value2844532924442286Accumulated depreciation-(18)(18)-(24)(24)Balance 30 June 2842731124418262C4 INVESTMENTS IN JOINT VENTURESMirvac initially records JV at the cost of the investment and subsequently accounts for them using the equity method. Under the equity method, the Group’s share of the JV’s profit or loss is added to/deducted from the carrying amount each year. Distributions received or receivable are recognised by reducing the carrying amount of the JV. When transactions between Mirvac and its JV create an unrealised gain, the Group eliminates the unrealised gain relating to Mirvac’s proportional interest in the JV. Unrealised losses are eliminated in the same way unless there is evidence of impairment, in which case the loss is realised. Judgement in testing for impairment of investments in JVJV are tested for impairment at the end of each year, and impaired if necessary, by comparing the carrying amount to the recoverable amount. The recoverable amount is calculated as the estimated present value of future distributions to be received from the JV and from its ultimate disposal. At 30 June 2016, none of the investments in JV is considered to be impaired (2015: none). 2016 $m2015 $mConsolidated SoFPInvestments in JV 824562Total investments in JV824562Consolidated SoCIShare of net profit of JV 11567Total share of net profit of JV 11567All JV are established or incorporated in Australia. The table below provides summarised financial information for those JV that are material to the Group. The Group does not have any associates. The information below reflects the total amounts presented in the financial statements of the relevant JV and not the Group’s share, unless otherwise stated. The information has been amended to reflect any unrealised gains or losses on transactions between Mirvac and its JV. C4 INVESTMENTS IN JOINT VENTURES (CONTINUED) 87 MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSMirvac 8 Chifley Trust1Mirvac (Old Treasury) Trust1Tucker Box Hotel GroupOther joint venturesTotal2016$m2015$m2016$m2015$m2016$m2015$m2016$m2015$m2016$m2015$mPrincipal activitiesInvestment propertyInvestment propertyHotel investmentVariousSummarised SoFPCash and cash equivalents-366631437052140Other current assets2-1-77401175411182Total current assets23766108444245463322Total non-current assets4123794092645074734034791,7311,595Borrowings-------64-64Other current liabilities337(2)1110145144166155Total current liabilities337(2)1110145208166219Borrowings----1701546351233205Other non-current liabilities---19111166717259Total non-current liabilities---19117115579118250464Net assets4113794091413353166233981,7781,234Group's share of net assets in %505050505050Group's share of net assets in $20619020471168158300178878597Carrying amount in Group’s SoFP2189173198651671582701668245621. The difference between the carrying amount and the Group’s share in the net assets of its investment is a result of elimination due to the Group’s transactions with its investment.2. Included in the 2016 carrying amount of other joint ventures is the partnership with Ping An Real Estate which was entered into during the year. This joint venture partnership includes $66m in the Mirvac SLS Development Trust (St Leonards) and $23m in Mirvac Ping An Waterloo Development Trust (Waterloo).Mirvac 8 Chifley TrustMirvac (Old Treasury) TrustTucker Box Hotel GroupOther joint venturesTotal2016$m2015$m2016$m2015$m2016$m2015$m2016$m2015$m2016$m2015$mSummarised SoCIRevenue60589545674280160491296EBITDA232216-3937531613175Interest income--13--1427Interest expense----7816142322Income tax expense/(benefit)------4(1)4(1)Profit after tax55549144764356228128Non-operating items(32)(32)(74)(1)(15)(35)(1)1(122)(67)Operating profit after tax2322173322934710661Profit after tax55549144764356228128Other comprehensive income-------(21)-(21)Total comprehensive income5554914476435(15)228107Distributions received/receivable by Group from JV12118214131163542CAPITAL EXPENDITURE COMMITMENTSAt 30 June 2016, the Group's share of its JV’s capital commitments which have been approved but not yet provided for was $nil (2015: $nil). 88 C5 INVENTORIES The Group develops some residential and commercial properties for sale, and not to hold as an investment property. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016Inventories are classified as current if they are expected to be settled within 12 months, or otherwise classified as non-current. Development projectsDevelopment projects are valued at the lower of cost and net realisable value (NRV). No inventories required write downs to NRV during the year (2015: $nil).Cost includes the costs of acquisition, development, interest capitalised and all other costs directly related to specific projects. An allocation of direct overhead expenses is also included. Judgement in calculating NRV of inventoriesNRV is the estimated selling price in the ordinary course of business less the estimated costs to complete and sell the development. NRV is estimated using the most reliable evidence available at the time, including expected fluctuations in selling price and estimated costs to complete and sell. InterestInterest costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset while in active development. Qualifying assets are assets that take a substantial period of time to get ready for their intended use or sale. Other interest costs are expensed as incurred.20162015Current$mNon-current$mCurrent$mNon-Current$mResidential apartmentsAcquisition costs113153108252Development costs 361260213219Interest capitalised during development32482659NRV write-downs provision-(64)(12)(65)Total residential apartments506397335465Residential masterplanned communities Acquisition costs6731876405Development costs 115742953Interest capitalised during development23421653NRV write-downs provision(25)(43)(17)(63)Total residential masterplanned communities180391104448Residential686788439913Office & Industrial Acquisition costs333353Development costs 602630121Interest capitalised during development1142NRV write-downs provision(2)-(5)-Total Office & Industrial 626033526RetailInterest capitalised during development2---Total Retail2---Total inventories750848774939C5 INVENTORIES (CONTINUED) 89 Residential Office & Industrial Retail • 2,824 lots settled during the year • 12.4% ROIC • Practical completion achieved for Treasury Building, Perth and 200 George Street, Sydney • 10 Office & Industrial active developments • 23.0% ROIC • Key Retail active developments: Broadway Shopping Centre, Greenwood Shopping Centre and Tramsheds Harold Park Retail FY16 Inventories 8% 26% 10% by product line 36% 56% by geography 29% 35% I Apartments I Masterplanned communities I Office & Industrial I NSW I VIC I QLD I WA C6 COMMITMENTS CAPITAL EXPENDITURE COMMITMENTS At 30 June 2016, capital commitments on Mirvac’s existing property portfolio were $225m (2015: $81m). There are no properties pledged as security by the Group (2015: nil). LEASE COMMITMENTS Property rental revenue is accounted for as operating leases. The revenue and expenses are recognised in the consolidated SoCI on a straight-line basis over the lease term. Payments for operating leases are made net of any lease incentives. The future receipts and payments are shown as undiscounted contractual cash flows. Future operating lease receipts as a lessor Future operating lease payments as a lessee $489m $1,446m $1,191m $10m $7m $1m FY15 FY16 $414m $1,310m $1,046m FY15 FY16 $4m $25m $27m $m $800m $1,600m $2,400m $3,200m $m $25m $50m $75m $100m I Within one year I Between one and five years I Later than five years MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSInventory movement for the year2016 $m2015 $mBalance 1 July1,7131,457Costs incurred 1,1101,080Settlements (1,388)(842)Provision release2822Transfer to investment properties135(4)Balance 30 June1,5981,713 90 D CAPITAL STRUCTURE AND RISKS This section outlines the market, credit and liquidity risks that the Group is exposed to and how it manages these risks. Capital comprises stapled securityholders’ equity and net debt (borrowings less cash). D1 CAPITAL MANAGEMENT Mirvac has a capital management framework, approved and monitored by the Board. The framework aims to address the market, credit and liquidity risks while also meeting the Group’s strategic objectives. The Group seeks to maintain an investment grade credit rating of BBB+ to reduce the cost of capital and diversify its sources of debt capital. The Group’s target gearing ratio is between 20 and 30 per cent. If the Group wishes to change its gearing ratio, it could adjust its dividends/distributions, issue new equity (or buy back shares), or sell property to repay borrowings. At 30 June 2016, the Group was in compliance with all regulatory and debt covenant ratios. D2 BORROWINGS AND LIQUIDITY Gearing ratio 24.3% 30 June 2015 21.9% 30 June 2016 The Group takes out borrowings at both fixed and floating interest rates and also uses interest rate swaps to reduce the interest rate risk as discussed in note D3. The Group also increased its bank loan facilities from $1,400m to $1,700m during the year to provide additional liquidity. At 30 June 2016, the Group has $833m of committed undrawn bank facilities available with no debt maturities until FY17. Drawn debt maturities as at 30 June 2016 Drawn debt sources as at 30 June 2016 $702m $200m $400m 32% $200m $134m $100m $38m $330m 68% $800m $604m $600m $400m $200m $m FY17 FY18 FY19 FY20 FY21 FY22 onwards I Bank loans I Bonds BORROWINGS Borrowings are initially recognised at fair value, net of transaction costs. Borrowings are subsequently measured at amortised cost using the effective interest rate method. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016D2 BORROWINGS AND LIQUIDITY (CONTINUED) 91 Mirvac uses derivative financial instruments to economically hedge its exposure to movements in interest and foreign exchange rates and not for trading or speculative purposes. Refer to note D4 for further details of how Mirvac manages financial risk. The chart below shows the net amount of debt subject to fixed interest rates and the average fixed interest rate payable each year. Hedging profile 4.20% 3.70% $2,000m $1,750m $1,500m $1,250m $1,000m $750m $500m $250m $m 3.52% 3.48% 3.48% 3.34% 3.30% 4.5% 4.0% 3.5% 3.0% 2.5% FY16 FY17 FY18 FY19 FY20 FY21 FY22 I Swaps I Options I Fixed I Average MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS20162015Current$mNon-current$mTotal Carrying amount$mTotal Fair value$mCurrent$mNon-current$mTotal Carrying amount$mTotal Fair value$mUnsecured borrowingsBank loans-867867867-920920920Bonds6041,3441,9482,090- 1,7141,7141,813Total unsecured borrowings6042,2112,8152,957-2,6342,6342,733Undrawn bank facilities--833---480-The following table sets out Mirvac’s net exposure to interest rate risk by maturity periods. Exposures arise predominately from liabilities bearing variable interest rates, as the Group intends to hold fixed rate liabilities to maturity.20162015Floating interest rate$mFixed interest maturing in:Total$mFloating interest rate$mFixed interest maturing in:Total$mLess than 1 year$m1 to 2 years$m2 to 5 years$mOver 5 years$mLess than 1 year$m1 to 2 years$m2 to 5 years$mOver 5 years$mBank loans867----867920----920Bonds1,0802352002001251,840954-2354001251,714Interest rate swaps(1,300)-100500700-(1,100)100-400600-Total6472353007008252,7077741002358007252,634The fair value of the bank loans is considered to approximate their carrying amount. The fair value of the bonds is calculated as the expected future cash flows discounted by the relevant current market rates. D3 DERIVATIVE FINANCIAL INSTRUMENTS92 D3 DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) Mirvac’s activities expose it to a variety of financial risks including market risk, credit risk and liquidity risk. Mirvac seeks to minimise the potential impact of these financial risks on financial performance, for example by using derivative financial instruments to protect against interest rate and foreign exchange risk. Financial risk management is carried out by a central treasury department (Mirvac Group Treasury) under policies approved by the Board. The Board provides overall risk management principles and policies covering specific areas. Mirvac Group Treasury identifies, evaluates, reports and manages financial risks in close cooperation with the Group’s operating units in accordance with Board policy. The table below summarises key financial risks and how they are managed: Risk Definition Exposures arising from Management of exposures Market risk — interest rate The risk that the fair value or cash flows of financial instruments will fluctuate due to changes in market interest rates. • Borrowings issued at fixed rates and variable rates • Derivatives • Interest rate derivatives manage cash flow interest rate risk by converting floating rate borrowings to fixed or capped rates with a target of 55 per cent. • Mirvac does not manage the fair value risk for debt instruments from interest rates, as it does not have an impact on the cash flows paid by the business. • Refer to note D2 for details on the interest rate exposure for borrowings. • Cross currency interest rate swaps to convert US dollar borrowings to Australian dollar exposures. • Foreign currency borrowings as a natural hedge for foreign operations. • The Group is exposed to minimal price risk and so does not manage the exposures. Market risk — foreign exchange The risk that the fair value of a financial commitment, asset or liability will fluctuate due to changes in foreign exchange rates. • Bonds denominated in US dollars • Receipts and payments which are denominated in other currencies Market risk — price The risk that the fair value of other financial assets at fair value through profit or loss fluctuate due to changes in the underlying share/unit price. • Other financial assets at fair value through profit or loss, with any resultant gain or loss recognised in other comprehensive income NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 201620162015Asset $mLiability $mAsset $mLiability $mCurrent Interest rate swaps-9-12Cross currency interest rate swaps5---Total current derivative financial instruments59-12Non-current Interest rate swaps5801736Cross currency interest rate swaps2232215940Total non-current derivative financial instruments22810217676Total derivative financial assets/liabilities23311117688Although Mirvac uses derivative financial instruments to economically hedge its borrowings, they are not formally designated as hedges for accounting purposes. The fair value movements are recognised in profit or loss; if hedge accounting were applied, the fair value movements would be classified as other comprehensive income in the consolidated SoCI and held in a separate hedging reserve in equity. The net fair value loss for the year was $35m (2015: $172m).All swaps require settlement on a quarterly basis. Translation gains or losses on the net investment in foreign operations are recorded through the foreign currency translation reserve.D4 FINANCIAL RISK MANAGEMENTD4 FINANCIAL RISK MANAGEMENT (CONTINUED) 93 Risk Definition Exposures arising from Management of exposures Notional amount and expiry of CCIRS $1,600m $1,400m $1,200m $1,000m $800m $600m $1,467m $964m $885m $400m $369m $369m $382m $200m $m $134m $134m 1 to 2 years 2 to 5 years over 5 years Total I 30 June 2016 I 30 June 2015 MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSCredit riskThe risk that a counterparty will not make payments to Mirvac as they fall due.• Cash and cash equivalents• Receivables • Derivative financial assets• Other financial assets• Setting credit limits and obtaining collateral as security (where appropriate).• Diversified trading spread across large financial institutions with investment grade credit ratings.• Regularly monitoring the exposure to each counterparty and their credit ratings.• Refer to note F1 for details on credit risk exposure on receivables. The Group deems the exposure to credit risk as immaterial for all other classes of financial assets and liabilities.Liquidity riskThe risk that Mirvac will not be able to meet its obligations as they fall due. • Payables• Borrowings • Derivative financial liabilities• Regular forecasts of the Group’s liquidity requirements. Surplus funds are only invested in highly liquid instruments.• Availability of cash, marketable securities and committed credit facilities.• Ability to raise funds through issue of new securities through placements or DRP.• Refer to note D2 for details of liquidity risk of the Group’s financing arrangements.MARKET RISK Foreign exchange risk The cross currency swaps that are in place cover 100 per cent of the US dollar bonds (interest payments and redemption value) with the same maturity profiles as the bonds. This removes exposure to foreign exchange movements between the US dollar and Australian dollar. Foreign currency transactions are translated into the entity’s functional currency using the exchange rate at the transaction date. Foreign exchange gains and losses resulting from settling foreign currency transactions and from translating foreign currency monetary assets and liabilities at year-end are recognised in the consolidated SoCI. Sensitivity analysis — interest rate risk and foreign exchange riskThis sensitivity analysis shows the impact on profit after tax and equity if Australian interest rates and USD:AUD exchange rates changed by 50 basis points (bp):Total impact on profit after tax and equity2016201550 bp $m50 bp $m50 bp $m50 bp  $mSensitivity in:Changes in:Interest rate risk1Australian interest rates$29m increase$34m decrease$19m increase$21m decreaseForeign exchange risk2USD:AUD exchange rates$61m decrease$59m increase$26m decrease$24m increase1. This calculation shows the impact on borrowings, cash and derivative financial instruments held as an economic hedge. It assumes that no interest is capitalised into qualifying assets as discussed in note B3. If fair value movements were excluded, operating profit would reduce if interest rates were to rise.2. The profit and loss impact is due to fair value movements in the cross-currency swaps; operating profit would not be impacted by movements in US interest rates.94 D4 FINANCIAL RISK MANAGEMENT (CONTINUED) Mirvac measures various financial assets and liabilities at fair value which, in some cases, may be subjective and depend on the inputs used in the calculations. The different levels of measurement are described below: ● Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; ● Level 2: not traded in an active market but calculated with significant inputs coming from observable market data; and ● Level 3: significant inputs to the calculation that are not based on observable market data (unobservable inputs). Mirvac holds no Level 1 financial instruments. The methods and assumptions used to estimate the fair value of Mirvac’s financial instruments are as follows: Derivative financial instruments Mirvac’s derivative financial instruments are classified as Level 2, as the fair values are calculated based on observable market interest rates and foreign exchange rates. The fair values of interest rate swaps are calculated as the present value of the estimated future cash flows based on observable yield curves. Other financial assets Other financial assets include units in unlisted funds, convertible notes issued by related parties and loan notes issued by unrelated parties; refer to note F2 for further details. The carrying value of other financial assets is equal to the fair value. Units in unlisted funds are traded in inactive markets and the fair value is determined by the unit price as advised by the trustee of the fund, based on the value of the fund’s underlying assets. The fund’s assets are subject to regular external valuations using the valuation methods explained in note C1. The fair value of convertible notes and loan notes is calculated based on the expected cash inflows. Expected cash inflows are determined based on the repayment terms, interest rates, agreed project costs and credit risk. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016LIQUIDITY RISK Maturities of financial liabilities and derivative financial assetsMirvac’s maturity of financial liabilities and derivative financial assets is provided in the following table. The amounts disclosed in the table are the contractual undiscounted cash flows: 20162015Maturing in:Total$mMaturing in:Total$mLess than 1 year$m1 to 2 years$m2 to 5 years$mOver 5 years$mLess than 1 year$m1 to 2 years$m2 to 5 years$mOver 5 years$mPayables153110636-6736737836-787Unsecured bank loans 16 52 854 - 922 19 20 720 252 1,011 Bonds 692 264 485 951 2,392 69 660 440 808 1,977 Net settled derivativesInterest rate swaps — floating to fixed2123331188171617(13)37Interest rate swaps — fixed to floating(7)(4)--(11)(7)(6)(3)-(16)Gross settled derivatives (cross currency swaps)Outflow800 43258 1,2162,317193841744401,017(Inflow)(811)(53)(272)(1,304)(2,440)(47)(395)(206)(551)(1,199)1,2424311,3948743,9417437571,1789363,6141. Includes deferred revenue.D5 FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTSD5 FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS (CONTINUED) 95 MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSThe following table summarises the financial instruments measured and recognised at fair value on a recurring a basis:Note20162015Level 1 $mLevel 2 $mLevel 3 $mTotal $mLevel 1 $mLevel 2 $mLevel 3 $mTotal $mFinancial assets carried at fair valueUnits in unlisted fundsF2--2323--1111Other financial assetsF2--131131--264264Derivative financial assetsD3-233-233-176-176-233154387-176275451Financial liabilities carried at fair valueDerivative liabilitiesD3-111-111-88-88-111-111-88-88There were no transfers between the fair value hierarchy levels during the year. The following table presents a reconciliation of the carrying value of Level 3 instruments (excluding investment properties):20162015Unlisted securities $mOther financial assets $mUnlisted securities $mOther financial assets $mBalance 1 July1126412131Acquisitions127--185Disposal2---(52)Equity conversion-(95) --Losses recognised in loss on foreign exchange and financial instruments(6)-(1)-Repayment3-(38)--Return of capital(9)---Balance 30 June 23131112641. Primarily relates to the acquisition of Leader Auta Trust of $21m (2015: Blackstone loan notes $169m and convertible notes from Mirvac (Old Treasury Trust) $16m). 2. 2015 relates to the disposal of Heritage Maintenance Annuity — Treasury Building Hotel.3. Repayment of Blackstone loan notes.Refer to note C2 for a reconciliation of the carrying value of Level 3 investment properties.96 E EQUITY This section includes distributions, stapled securityholders’ equity and reserves. It represents how the Group raised equity from its stapled securityholders in order to finance the Group’s activities, both now and in the future. E1 DISTRIBUTIONS Half yearly ordinary distributions paid/payable and distribution per security: 5.3% growth 9.9cpss 9.4cpss 4.7cpss $174m Paid on 29 Feb 2016 4.5cpss $167m Paid on 26 Feb 2015 5.2cpss 4.9cpss $192m Payable on 30 Aug 2016 $181m Paid on 26 Aug 2015 $366m Paid/payable $348m Paid I 2016 I 2015 31 December 30 June Annual All distributions in the current and prior years were unfranked. Franking credits available for future years, based on a tax rate of 30 per cent, total $22m (2015: $21m). E2 CONTRIBUTED EQUITY Mirvac’s contributed equity includes ordinary shares in Mirvac Limited and ordinary units in MPT which are stapled together to form stapled securities and cannot be traded separately. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016Each ordinary security entitles the holder to receive distributions when declared, to one vote at securityholders’ meetings and polls and to a proportional share of proceeds on winding up of Mirvac.When new securities or options are issued, the directly attributable incremental costs are deducted from equity, net of tax.CONTRIBUTED EQUITY20162015No. m$mNo. m$mMirvac Limited — ordinary shares issued3,6992,0733,6942,072MPT — ordinary units issued3,6994,7393,6944,732Total contributed equity6,8126,804The total number of stapled securities issued as listed on the ASX at 30 June 2016 was 3,702m (2015: 3,697m) which includes 3m of stapled securities issued under the LTI plan and EIS (2015: 3m). Securities issued to employees under the Mirvac employee LTI plan and EIS are accounted for as options and are recognised in the security-based payments reserve, not in contributed equity. Refer to note E3 for further details.MOVEMENTS IN PAID UP EQUITY20162015No. securities mSecurities $mNo. securities mSecurities $mBalance 1 July3,6946,8043,6896,797Securities issued under EEP -1-1LTI vested 4454Legacy schemes vested 13-2Balance 30 June 3,6996,8123,6946,804Mirvac issues securities to employees as security-based payments; refer to note E3 for details.E3 RESERVES 97 Mirvac currently operates the following security-based payments (SBP) schemes: ● Employee Exemption Plan (EEP); ● Long Term Incentive Plan (LTI); and ● Short Term incentive (STI) awards. The total of all securities issued under all employee security schemes is limited to five per cent of the issued securities of the stapled group in any five-year period. EEP The EEP provides eligible employees with up to $1,000 worth of Mirvac securities at no cost. Employees cannot sell the securities for three years or until they cease employment with the Group, in which case they keep any securities already granted. Other than the restriction on selling, holders have the same rights and benefits as other securityholders. LTI The LTI provides senior executives with performance rights to reward executives based on the Group’s performance, thus retaining executives and providing them with an interest in the Group’s securities. The performance rights vest based on Mirvac’s TSR and ROIC performance (ROE for the FY13 LTI award) over a three-year period. MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSASSET REVALUATION RESERVE (ARR)The ARR records revaluations of owner-occupied property. Refer to note C3 for details.FOREIGN CURRENCY TRANSLATION RESERVE (FCTR)Mirvac has one controlled entity which holds an investment property in the USA and its functional currency is US dollars. The assets and liabilities are translated to Australian dollars using the exchange rate at year end; income and expenses are translated using an average exchange rate for the year. All exchange differences are recognised in other comprehensive income and the FCTR.SECURITY-BASED PAYMENTS (SBP) RESERVEThe SBP reserve recognises the SBP expense. Further details on security-based payments are explained in note E4.NON-CONTROLLING INTERESTS (NCI) RESERVEThe NCI reserve was used to record the discount received on acquiring the non-controlling interest in MREIT in December 2009. NoteARR$mFCTR $mSBP reserve $mNCI reserve $mCapital reserve $mTotal reserves $mBalance 1 July 2015684168(1)95Revaluation of owner-occupied properties1C341----41Foreign currency translation differencesD4-(1)---(1)Security-based payment movements E4--3--3Balance 30 June 20161093198(1)138Balance 1 July 201459(4)158(1)77Revaluation of owner-occupied properties1C39----9Foreign currency translation differencesD4-9---9Security-based payment movementsE4--1--1Deferred tax-(1)---(1)Balance 30 June 2015684168(1)951. The $6m difference (2015: $3m) to the revaluation gain in note C3 is due to fitout and lease amortisation recognised directly in the consolidated SoCI.E4 SECURITY-BASED PAYMENTS98 E4 SECURITY-BASED PAYMENTS (CONTINUED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016LEGACY LTI PLAN AND EISThe superseded LTI plan operated from 2006 to 2007, providing eight-year interest-free loans to eligible employees and executives. The superseded EIS operated before 2006 and also provided interest-free loans but without an eight-year restriction. Both schemes had three-year vesting periods. If an employee resigns, they have to either repay the loan or forfeit the securities. ACCOUNTING FOR THE SBP SCHEMESThe EEP securities issued each year are recognised as an expense and directly in contributed equity immediately. The securities issued in FY16 were issued on 22 March 2016 when the stapled security price was $1.87. At 30 June 2016, a total of 6.8m (2015: 6.2m) stapled securities have been issued to employees under the EEP.The LTI, STI and legacy LTI plan and EIS are accounted for as equity-settled SBP. The fair value is estimated at grant date and recognised over the vesting period as an expense and in the SBP reserve. When the SBP vest, ordinary securities are issued and recognised as a transfer from the SBP reserve to contributed equity.RECONCILIATION OF RIGHTS OUTSTANDING UNDER SBP SCHEMESBalance 1 JulyIssuedVestedForfeited Balance 30 JuneLTI 17,968,147 9,688,810 3,422,760 5,463,589 18,770,608 STI 720,515 1,034,268 360,258 - 1,394,525 Total rights FY1618,688,66210,723,0783,783,0185,463,58920,165,133Total rights FY15 16,979,800 11,571,940 3,572,835 6,290,243 18,688,662 The weighted average remaining contractual life at 30 June 2016 was 1.44 years (2015: 1.54 years).SBP expense recognised within employee benefits expenses is as follows: 2016 $m2015 $mLTI74STI21Total SBP expense taken to SBP reserve95EEP recognised directly in contributed equity11Total SBP expense106The movements in the SBP reserve are as follows:2016 $m2015 $mBalance 1 July1615Total SBP expense taken to SBP reserve95LTI vested and taken to contributed equity(4)(4)STI vested (1)-Legacy schemes vested(1)-Balance 30 June1916Judgement in calculating fair value of SBPTo calculate the expense for equity-settled SBP, the fair value of the equity instruments at grant date has to be estimated. The fair value is determined using the Monte Carlo simulation method; key judgements and assumptions include exercise price, vesting and performance criteria, security price at grant date, volatility, distribution yield and risk-free interest rate. These judgements and assumptions relating to fair value measurement may impact the SBP expense taken to profit or loss and reserves.E4 SECURITY-BASED PAYMENTS (CONTINUED) 99 Assumptions used for the fair value of performance rights awarded during the current reporting period are as follows: Grant date 7 December 2015 Exercise price Performance hurdles Relative TSR and ROIC Expected life Performance period start Performance testing date Security price at grant date 1 July 2015 Volatility 1 July 2018 Risk-free interest rate (per annum) $1.87 Distribution yield (per annum) $nil 2.6 years 19% 2.13% 5.5% F OPERATING ASSETS AND LIABILITIES MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSF1 RECEIVABLESReceivables are initially recognised at fair value. Receivables are subsequently measured at amortised cost using the effective interest rate method, less provision for impairment if required. Due to the short-term nature of current receivables, their carrying amount (less impairment provision) is assumed to be the same as their fair value. For the majority of the non-current receivables, the carrying amount is also not significantly different to their fair value.Collectability of receivables is reviewed on an ongoing basis. A provision for impairment is recognised when there is objective evidence that collection of the receivable is doubtful. The provision is calculated as the difference between the carrying amount and the estimated future repayments, discounted at the effective interest rate where relevant. Receivables which are known to be uncollectable are written off. Note20162015Gross$mProvision for Impairment$mNet$m Gross$mProvision for impairment$mNet$m Current receivablesTrade receivables33-3324-24Loans to related partiesH335(4)3121-21Loans to unrelated parties25(12)1321(13)8Other receivables33-3323(3)20Total current receivables126(16)11089(16)73Non-current receivablesLoans to related partiesH330(22)849(25)24Other receivables81(33)4866(33)33Total non-current receivables111(55)56115(58)57Total receivables237(71)166204(74)130100 F1 RECEIVABLES (CONTINUED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016PROVISION FOR IMPAIRMENT2016 $m2015 $mBalance 1 July(74)(88)Amounts utilised for write-down of receivables116Provision for impairment release/(recognised)2(2)Balance 30 June(71)(74)Not past due $mDays past dueTotal $m1 – 30 $m31 – 60 $m61 – 90 $m91-120 $m Over 120 $mTotal receivables1117632-45237Provision for impairment(36)----(35)(71)Balance 30 June 2016757632-10166Total receivables161611-35204Provision for impairment(39)----(35)(74)Balance 30 June 2015122611--130The Group does not have any significant credit risk exposure to a single customer. The Group holds collateral over receivables of $211m (2015: $286m). The collateral held equals the carrying amount of the relevant receivables. Refer to note D4 for further details on the Group’s exposure to, and management of, credit risk.F2 OTHER FINANCIAL ASSETSUNITS IN UNLISTED FUNDSThe Group may hold units in unlisted funds which do not give Mirvac control, as explained in note G1, or significant influence, as explained in note C4. Distributions received are recognised in revenue and any changes in fair value are recognised in the gain or loss on foreign exchange and financial instruments in the consolidated SoCI.CONVERTIBLE NOTESConvertible notes were issued by Mirvac (Old Treasury) Trust, a joint venture, to the Group to fund the joint venture’s investment properties under construction. On 30 November 2015, these convertible notes were converted into equity and therefore, the Group’s investment in the joint venture has increased by the value of the convertible notes held. LOAN NOTESLoan notes of $156m were issued as partial payment for the sale of non-aligned assets during FY15, with interest accrued on the notes. All capitalised interest was repaid in FY16, with partial repayment of the original principle also made during the year.FAIR VALUE MEASUREMENTOther financial assets are carried at fair value. Fair value is estimated as explained in note D5.Collectability of other financial assets is reviewed on the same basis as receivables. Refer to note F1 for details. 2016 $m2015 $mCurrentUnits in unlisted fund 211Total current other financial assets 211Non-current Units in unlisted fund21-Convertible notes issued by related parties-95Loan notes issued by unrelated parties131169Total non-current other financial assets 152264F3 INTANGIBLE ASSETS 101 MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSMirvac has two types of intangible assets: goodwill and management rights. Management rights are the rights to manage properties and funds and have been initially recognised at fair value as part of business combinations. Management rights relating to Office & Industrial are estimated to have a useful life of 10 years and are carried at cost less accumulated amortisation and impairment losses. Management rights relating to Retail are considered to be open-ended and therefore have no expiry. Management considers the useful life as indefinite and the management rights are tested annually for impairment.In February 2016, Mirvac paid a cash consideration of $37m to a subsidiary of Morgan Stanley to facilitate negotiation of agreements with a subsidiary of China Investment Corporation (CIC) to become the manager of Leader Auta Trust (LAT). The preliminary acquisition accounting reflects management rights with a fair value of $9m, a deferred tax liability of $3m and goodwill of $31m. The goodwill acquired is attributable to the profitability of the acquired business, as well as benefits derived from the acquired workforce and other intangible assets that cannot be separately recognised. The goodwill is not expected to be deductible for income tax. The breakdown of intangible assets by operating segment is set out below. For comparability, the comparative information has been restated to reflect the new operating segment structure explained in note B1.Carrying amountsBalance 1 July 2014$mBalance 30 June 2015$mAdditions$mBalance 30 June 2016$mGoodwillOffice & Industrial31313162Corporate55-5Total goodwill36363167Management rightsOffice & Industrial--99Retail33-3Total management rights33912Total intangible assets39394079Impairment testingGoodwill and indefinite-life management rights are tested annually for impairment. Finite life management rights are tested when an indicator of impairment exists. For the purposes of assessing impairment, assets are grouped at the lowest levels for which goodwill is monitored for internal management purposes and allocated to cash generating units (CGU). The allocation is made to groups of CGU identified according to operating segments. An asset is impaired if the recoverable amount, calculated as the higher of value in use and the fair value less costs to sell, is less than its carrying amount. Key assumptions used to calculate value in use and the higher of fair value less costs to sellIntangible assets are measured as Level 3 financial instruments. Refer to note D5 for explanation of the levels of fair value measurement. The estimation of the recoverable amount depends on the nature of the CGUs.For CGUs relating to the Group’s property portfolio, the value in use is the discounted present value of estimated cash flows that the CGU will generate. The cash flow projections are based on approved forecasts covering a 10 year period. AASB 136 Impairment of Assets recommends that cash flow projections should cover a maximum period of five years, unless a longer period can be justified. As the cash flow projections used for budgeting and forecasting are based on long-term, predictable and quantifiable leases, with renewal assumptions based on sector and industry experience, management is comfortable that a 10 year cash flow projection is more appropriate. The key assumptions used to determine the forecast cash flows included net market rent, capital expenditure, CR, growth rate, discount rate and market conditions. The growth rate has been adjusted to reflect current market conditions and does not exceed the long-term average growth rate for the business in which the CGU operates. A terminal growth rate of three per cent has also been applied.The discount and growth rates applied to the cash flow projections are specific and reflect the risks of each segment. The growth rate applied beyond the initial period is noted in the table below. The growth rate does not exceed the long-term average growth rate for each CGU.102 F3 INTANGIBLE ASSETS (CONTINUED) 1. Weighted average growth rate used to extrapolate cash flows beyond the forecast period. 2. The value in use calculation is based on forecasts approved by management covering a 10 year period. No forecast growth rate is assumed as the value in use calculations are based on forecast cash flows from existing projects and investment properties. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016Cash generating units20162015Growth rate1% paPre-tax discount rate% paGrowth rate1% paPre-tax discount rate% paGoodwillOffice & Industrial-27.5-28.5Corporate-29.8-210.0Management rightsRetail3.013.01.013.0No intangible assets were impaired in 2016 (2015: nil).The Directors and management have considered reasonably possible changes to the key assumptions and have not identified any reasonably possible changes that could cause an impairment.F4 PAYABLESTrade payables due more than 12 months after year end date are classified as non-current.2016 $m2015 $mCurrentTrade payables8796Accruals256202Deferred payment for land526Annual leave accrual1212Amounts due to related parties-1Other payables6515Total current payables425352Non-currentDeferred payment for land6556Other payables1729Total non-current payables8285Total payables507437F5 PROVISIONSLONG SERVICE LEAVE (LSL) Where the LSL provision is expected to be settled more than 12 months after year end, the expected future payments are discounted to present value. The corporate bond rates used to discount the expected future payments have maturities aligned to the estimated timing of future cash flows.In calculating the LSL provision, management judgement is required to estimate future wages and salaries, on-cost rates and employee service periods. DISTRIBUTIONS PAYABLEA provision is made for the amount of distributions declared at or before year end but not yet paid; refer to note E1.RESTRUCTURINGRestructuring provisions are recognised when a detailed plan has been developed and communicated to affected personnel. F5 PROVISIONS (CONTINUED) WARRANTIES The Group is obliged to rectify any defective work during the warranty period of its developments. Warranties are also known as post completion maintenance costs. Movements in each class of provision during the year are set out below: 103 MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLong service leave$m Distributions payable$mRestructuring$mWarranties$mOther$mTotal$mBalance 1 July 20151218151156219Additional provisions13664--371Payments made/amounts utilised during the year(1)(355)(9)(4)-(369)Balance 30 June 201612192-116221Current9192-8-209Non-current3--36121. Includes employee severance costs of $4m.G GROUP STRUCTURE This section explains how the Group is structured; the Deed of Cross Guarantee between Group companies and disclosures for the parent entity.G1 GROUP STRUCTURE AND DEED OF CROSS GUARANTEECONTROLLED ENTITIESThe consolidated financial statements of Mirvac incorporate the assets, liabilities and results of all controlled entities. Controlled entities are all entities over which the Group has power to direct the activities of the entity and has an exposure to, and ability to, influence its variable returns from its involvement with the entity. Controlled entities are fully consolidated from the date control is obtained until the date that control ceases. Inter-entity transactions and balances are eliminated. Unrealised losses are also eliminated, unless the transaction provides evidence of impairment of the assets transferred.STRUCTURED ENTITIESA structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. Mirvac considers that all funds and trusts in which it currently has an investment, or from which it currently earns income, to be structured entities. Depending on the Group’s power to direct the activities of the entity and its exposure to and ability to influence its own returns, it may consolidate the entity. In other cases, it may sponsor or have some form of exposure to a structured entity but not consolidate it. If Mirvac does not control a structured entity, but has significant influence, it is treated as an associate. The Group does not have any associates. FUNDS AND TRUSTSMirvac invests in a number of funds and trusts which invest in real estate as investment properties. The funds and trusts finance their operations through borrowings and through equity issues. The Group determines whether it controls or has significant influence over these funds and trusts as discussed above. Mirvac Limited and certain wholly-owned entities (collectively the Closed Group) are parties to a Deed of Cross Guarantee (the Deed). The members of the Closed Group guarantee to pay any deficiency in the event that another member winds up. Refer to note I2 for a list of Closed Group members.104 G1 GROUP STRUCTURE AND DEED OF CROSS GUARANTEE (CONTINUED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016Closed Group SoCI2016 $m2015 $mRevenue 2,115843Other incomeRevaluation of investment properties and investment properties under construction1015Share of net profit of joint ventures 197Net gain on sale of assets-44Gain on financial instruments86188Total revenue and other income2,2301,097Development expenses1,677586Investment properties expenses and outgoings97Employee benefits and other expenses176181Selling and marketing expenses4635Depreciation and amortisation expenses75Finance costs 132109Net loss on foreign exchange and financial instruments 90188Business combination transaction costs2-Profit/(loss) before income tax91(14)Income tax expense(26)(18)Profit/(loss) for the year 65(32) Closed Group SoFP2016$m2015$mCurrent assetsCash and cash equivalents32418Receivables135757Inventories761651Derivative financial assets5-Other assets1414Total Current Assets1,2391,440Non-current assetsReceivables1,0441,090Inventories923652Investment properties254138Investments in joint ventures 273169Derivative financial assets228176Other financial assets332308Property, plant and equipment27 17Intangible assets423Deferred tax assets331399Total non-current assets3,4542,952Total assets4,6934,392Current liabilitiesPayables573333Deferred revenue121379Borrowings604-Derivative financial liabilities913Provisions1720Total current liabilities1,324745G1 DEED OF CROSS GUARANTEE (CONTINUED) 105 MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNon-current liabilitiesPayables7960Deferred revenue6037Borrowings2,1862,634Derivative financial liabilities10276Deferred tax liabilities169201Provisions1117Total non-current liabilities2,6073,025Total liabilities3,9313,770Net assets762622EquityContributed equity2,0742,072Reserves1313Retained earnings(1,325)(1,463)Total equity762622G2 PARENT ENTITYThe financial information for the parent entity, Mirvac Limited, is prepared on the same basis as the consolidated financial statements, except as set out below:Investments in controlled entities and JV – carried at cost. The parent entity recognises income from JV when distributions become receivable, rather than recognising a share of net profit; andTax consolidation legislation – Mirvac Limited is the head entity of a tax consolidated group as discussed in note B5. As the head entity, Mirvac Limited recognises the current tax balances and the deferred tax assets for unused tax losses and credits assumed from other members as well as its own current and deferred tax amounts. Amounts receivable from or payable to the other members are recognised by Mirvac Limited as inter-entity receivables or payables. Parent entity2016$m2015$mCurrent assets4,0204,209Total assets4,3564,567Current liabilities2,2652,479Total liabilities2,2652,479EquityContributed equity2,0732,072SBP reserve1915Retained earnings(1)1Total equity2,0912,088Loss/(profit) for the year(2)2Total comprehensive income for the year(2)2The parent entity is party to the Deed of Cross Guarantee discussed in note G1 and therefore guarantees the debts of the other Closed Group members. At 30 June 2016, the Group did not provide any other guarantees (2015: $nil), have any contingent liabilities (2015: $nil), or any capital commitments (2015: $nil). Closed Group SoFP (continued)2016$m2015$m106 H OTHER INFORMATION This section provides additional required disclosures that are not covered in the previous sections. H1 CONTINGENT LIABILITIES A contingent liability is a possible obligation that may become payable depending on a future event or a present obligation that is not probable to require payment/cannot be reliably measured. A provision is not recognised for contingent liabilities. Basic earnings per stapled security (EPS) is calculated by dividing: ● the profit attributable to stapled securityholders; by ● the weighted average number of ordinary securities (WANOS) outstanding during the year. Diluted EPS adjusts the WANOS to take into account dilutive potential ordinary securities from security-based payments. Basic and diluted EPS 27.9 16.5 ) s t n e c ( S P E I FY16 I FY15 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 20162016$m2015$mBank guarantees and performance bonds granted in the normal course of business197127Health and safety claims 11The Group has no contingent liabilities relating to joint ventures (2015: $nil).H2 EARNINGS PER STAPLED SECURITY 20162015Profit attributable to stapled securityholders ($m) used to calculate basic and diluted EPS1,033610WANOS used in calculating basic EPS (m)3,6973,693WANOS used in calculating diluted EPS (m)3,7003,697H3 RELATED PARTIES KEY MANAGEMENT PERSONNEL COMPENSATIONThe remuneration report on pages 45 to 64 provides detailed disclosures of key management personnel compensation. The total expense is summarised below:2016$’0002015$’000Short-term employment benefits 10,52712,694Security-based payments4,0332,261Post-employment benefits249 254Other long-term benefits8199Total key management personnel compensation14,89015,308There are no outstanding loans to directors or employees (2015: nil). During 2016, $11m of loans were repaid. H3 RELATED PARTIES (CONTINUED) 107 $40,000 $30,000 0 0 0 $ $10,000 $ $34,811 $21,922 $13,858 $1,442 $829 $2,505 $6,054 $5,637 $4,830 $6,078 Interest income Project development fees Management and services fees Construction billings Responsible entity fees I FY16 I FY15 MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSTRANSACTIONS WITH JV 2016$m2015$mLoans due from JVBalance at 1 July 4546Loans advanced49Loan repayments received(11)(13)Write-offs(1)-Interest capitalised 23Balance at 30 June 3945Transactions between Mirvac and its JV were made on commercial terms and conditions. Distributions received from JV were on the same terms and conditions that applied to other securityholders.H4 RECONCILIATION OF PROFIT TO OPERATING CASH FLOWFor the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash at bank and short-term deposits at call.2016$m2015$mProfit for the year attributable to stapled securityholders1,033610Net gain on financial instruments(29)(172)Net loss on foreign exchange 39182Net gain on sale of investments-(10)Net gain on sale of investment properties(33)(6)Share of net profit of joint ventures (115)(67)Joint venture distributions received4142Revaluation of investment properties and investment properties under construction(497)(141)Depreciation and amortisation expenses3730Security-based payments expense106Change in operating assets and liabilities:Increase in receivables(40)(4)Increase in inventories(37)(20)Increase/(decrease) in payables68(50)(Decrease)/increase in provisions for employee benefits(5)6Decrease in tax effected balances4114Increase in other assets/liabilities(4)(7)Net cash inflows from operating activities509413108 H5 AUDITORS’ REMUNERATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016 2016 $0002015 $000Audit services Audit and review of financial reports1,7001,793Other assurance services504375Other services Tax advice and compliance services182105Advisory services31107Total auditors’ remuneration 2,4172,380I APPENDICESThis section provides detailed listings of Mirvac’s properties and controlled entities.I1 PROPERTY LISTINGThis table shows details of Mirvac’s properties portfolio. Refer to notes C1 to C4 for further details.OfficeBook valueCapitalisation rateDiscount rate 2016$m 2015 $m 2016% 2015 % 2016% 2015 % 1 Darling Island, Pyrmont NSW2071966.506.757.508.251 Woolworths Way, Bella Vista NSW1-250-7.75-8.5010-20 Bond Street, Sydney NSW (50% interest)2402005.756.377.258.00101-103 Miller Street, North Sydney NSW (50% interest)2152096.00 6.38 7.508.2516 Furzer Street, Phillip ACT2-68-7.75-8.75189 Grey Street, Southbank QLD86837.257.638.008.50200 George Street, Sydney NSW (50% interest)2371-5.386.007.138.0023 Furzer Street, Phillip ACT2542527.137.258.758.50275 Kent Street, Sydney NSW (50% interest)4764365.386.007.508.503 Rider Boulevard, Rhodes NSW1-89-8.00-8.75340 Adelaide Street, Brisbane QLD50558.258.758.258.75367 Collins Street, Melbourne VIC2622386.376.507.508.2537 Pitt Street, Sydney NSW73687.008.007.758.75380 St Kilda Road, Melbourne VIC1591406.757.257.508.2540 Miller Street, North Sydney NSW1351146.256.757.508.50472 Pacific Highway, St Leonards NSW3-63- - --477 Collins Street, Melbourne VIC78727.007.008.008.25486 Pacific Highway, St Leonards NSW3-58-- --5 Rider Boulevard, Rhodes NSW1-134-7.75-8.7551 Pitt Street, Sydney NSW26267.008.007.508.7555 Coonara Avenue, West Pennant Hills NSW75709.509.509.509.756-8 Underwood Street, Sydney NSW10107.259.007.759.0065 Pirrama Road, Pyrmont NSW1321276.507.007.508.25699 Bourke Street, Melbourne VIC (50% interest)82775.886.137.508.2590 Collins Street, Melbourne VIC2051856.006.507.508.25Allendale Square, 77 St Georges Terrace, Perth WA2142287.258.008.009.25I1 PROPERTY LISTING (CONTINUED) 109 MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSOfficeBook valueCapitalisation rateDiscount rate 2016$m 2015 $m 2016% 2015 % 2016% 2015 % Australian Technology Park (Locomotive Sheds), Locomotive Street, Redfern NSW482-7.50-8.25-Como Centre, Cnr Toorak Road & Chapel Street, South Yarra VIC1-158-7.50-8.00-8.00-12.00Quay West Car Park, 109-111 Harrington Street, Sydney NSW34307.007.258.759.25Riverside Quay, Southbank VIC2151936.757.507.758.75Total investment properties3,6813,829 2 Riverside Quay, Southbank VIC (50% interest)55245.876.137.508.50200 George Street, Sydney NSW (50% interest)2-1335.386.007.138.00664 Collins Street, Melbourne VIC (50% interest)615-6.00-7.50-Australian Technology Park (CBA), Locomotive Street, Redfern NSW (33.3% interest)429-5.75-8.00-Total investment properties under construction99157Total investment properties and investment properties under construction3,7803,986Owner-occupied properties60 Margaret Street, Sydney NSW2121776.006.887.508.25Investment in joint ventures 8 Chifley Square, Sydney NSW (50% interest)2061905.385.757.137.75Treasury Building, 28 Barrack Street, Perth WA (50% interest)2041326.00-8.00-Total Office4,4024,485IndustrialBook valueCapitalisation rateDiscount rate 2016$m 2015 $m 2016% 2015 % 2016% 2015 % 1-47 Percival Road, Smithfield NSW41366.757.508.008.751900-2060 Pratt Boulevard, Chicago Illinois USA52457.007.258.258.5026-38 Harcourt Road, Altona North VIC428-6.75-8.50-271 Lane Cove Road, North Ryde NSW34327.758.258.259.0034-39 Anzac Avenue, Smeaton Grange NSW25237.508.008.259.0039 Britton Street, Smithfield NSW22216.757.258.008.7539 Herbert Street, St Leonards NSW1671536.506.758.008.7547-67 Westgate Drive, Altona North VIC22197.259.508.009.758 Brabham Drive, Huntingwood NSW21206.507.007.758.75Calibre, 60 Wallgrove Road, Eastern Creek NSW (50% interest)5-56- 6.00-9.00 -9.00-10.50Hoxton Distribution Park, Hoxton Park NSW (50% interest)1501325.506.007.508.00Nexus Industry Park (Building 1), Lyn Parade, Prestons NSW23227.007.258.008.75Nexus Industry Park (Building 2), Lyn Parade, Prestons NSW16157.007.258.008.75Nexus Industry Park (Building 3), Lyn Parade, Prestons NSW29267.257.508.258.75Nexus Industry Park (Building 4), Lyn Parade, Prestons NSW43406.757.258.008.75Nexus Industry Park (Building 5), Lyn Parade, Prestons NSW22217.007.258.258.75Total investment properties695661Calibre, 60 Wallgrove Road, Eastern Creek NSW (50% interest)534-6.756.00-9.008.009.00-10.50Total investment property under construction34-Total investment properties and investment properties under construction729661Total Industrial729661110 I1 PROPERTY LISTING (CONTINUED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016RetailBook valueCapitalisation rateDiscount rate 2016$m 2015 $m 2016% 2015 % 2016% 2015 % 1-3 Smail Street, Ultimo NSW428-6.25 - 8.25-Birkenhead Point Outlet Centre, Drummoyne NSW3423216.00-8.006.25-8.008.00-9.508.50-9.50Broadway Shopping Centre, Broadway NSW (50% interest)73502925.256.007.758.75Cherrybrook Village Shopping Centre, Cherrybrook NSW96916.507.008.508.75Como Centre, Cnr Toorak Road & Chapel Street, South Yarra VIC1-21-7.50-8.50Cooleman Court, Weston ACT56527.007.508.509.00Greenwood Plaza, North Sydney NSW (50% interest) 107946.006.258.008.75Harbourside, Sydney NSW2602626.506.508.259.00Kawana Shoppingworld, Buddina QLD3323226.006.258.258.75Moonee Ponds Central, Moonee Ponds VIC72696.507.758.009.00Orion Springfield Central, Springfield QLD3232356.006.508.009.00Rhodes Waterside, Rhodes NSW (50% interest)1681496.006.258.258.50St Marys Village Centre, St Marys NSW50487.007.258.509.00Stanhope Village, Stanhope Gardens NSW1291166.257.008.259.00Toombul Shopping Centre, Nundah QLD4,8230-6.50-8.50-Total investment properties2,5432,072 Investment properties under construction Orion Springfield land, Springfield QLD91422---- Tramsheds Harold Park, Glebe NSW34106.006.758.008.75Total investment properties under construction4832 Total investment properties and investment properties under construction2,5912,104Owner-occupied properties Metcentre, Sydney NSW72676.006.508.258.75Total Retail2,6632,171 Propery PortfolioTotal investment properties and investment properties under construction 7,1006,751Total owner-occupied properties284244Total investments in joint ventures410322Total property portfolio7,7947,3171. Investment property disposed of during the year.2. Investment property reached practical completion during the year and was reclassified from investment properties under construction.3. Investment property transferred to inventories during the year.4. Investment property acquired during the year.5. During the year, 50 per cent transferred to inventories and the remaining 50 per cent reclassified as investment property under construction.6. Transferred from inventories during the year.7. Includes 52-60 Francis Street, Glebe NSW (50% interest).8. Excludes adjacent site held as inventory. 9. Portion of site disposed during the year.I2 CONTROLLED ENTITIES 111 All entities controlled by the Group are shown below. Unless otherwise noted, they are wholly owned and were incorporated or established in Australia during the current year and prior years. MEMBER OF THE CLOSED GROUP 197 Salmon Street Pty Limited A.C.N. 087 773 859 Pty Limited A.C.N. 110 698 603 Pty Limited A.C.N. 150 521 583 Pty Limited A.C.N. 165 515 515 Pty Limited CN Collins Pty Limited Mirvac Capital Pty Limited Mirvac Commercial Funding Pty Limited Mirvac Commercial Sub SPV Pty Limited Mirvac Constructions (Homes) Pty. Limited Mirvac Constructions (QLD) Pty Limited Mirvac Constructions (SA) Pty Limited Everleigh Commercial Holdings Pty Limited1 Mirvac Constructions (VIC) Pty Limited Fast Track Bromelton Pty Limited Mirvac Constructions (WA) Pty Limited Fyfe Road Pty Limited Gainsborough Greens Pty Limited Hexham Project Pty Limited HIR Boardwalk Tavern Pty Limited HIR Golf Club Pty Limited HIR Golf Course Pty Limited Mirvac Constructions Pty Limited Mirvac Design Pty Limited Mirvac Developments Pty Limited Mirvac Doncaster Pty Limited Mirvac Elderslie Pty Limited Mirvac Energy Pty Limited3 HIR Property Management Holdings Pty Limited Mirvac ESAT Pty Limited HIR Tavern Freehold Pty Limited Hoxton Park Airport Limited HPAL Holdings Pty Limited Industrial Commercial Property Solutions (Constructions) Pty Limited Industrial Commercial Property Solutions (Finance) Pty Limited Industrial Commercial Property Solutions (Holdings) Pty Limited Industrial Commercial Property Solutions (Queensland) Pty Limited Industrial Commercial Property Solutions Pty Limited JF ASIF Pty Limited Magenta Shores Finance Pty Limited Marrickville Projects Pty Ltd1 Mirvac (Beacon Cove) Pty Limited Mirvac (Docklands) Pty Limited Mirvac (Old Treasury Development Manager) Pty Limited Mirvac (Old Treasury Hotel) Pty Limited Mirvac (WA) Pty Limited Mirvac (Walsh Bay) Pty Limited Mirvac Aero Company Pty Limited Mirvac Advisory Pty Limited Mirvac AOP SPV Pty Limited Mirvac Birkenhead Point Marina Pty Limited Mirvac Capital Investments Pty Limited Mirvac Capital Office Pty Limited Mirvac Capital Partners Investment Management Pty Limited Mirvac Capital Partners Limited2 Mirvac Finance Limited Mirvac Funds Limited2 Mirvac Funds Management Limited2 Mirvac George Street Holdings Pty Limited Mirvac George Street Pty Limited Mirvac Green Square Pty Limited Mirvac Group Finance Limited Mirvac Group Funding Limited Mirvac Harbourtown Pty Limited Mirvac Harold Park Pty Limited Mirvac Holdings (WA) Pty Limited Mirvac Holdings Limited Mirvac Home Builders (VIC) Pty Limited Mirvac Homes (NSW) Pty Limited Mirvac Homes (QLD) Pty Limited Mirvac Homes (SA) Pty Limited Mirvac Homes (VIC) Pty Limited Mirvac Homes (WA) Pty Limited Mirvac Hotel Services Pty Limited Mirvac ID (Bromelton) Pty Limited Mirvac ID (Bromelton) Sponsor Pty Limited Mirvac Industrial Developments Pty Limited Mirvac International (Middle East) No. 2 Pty Limited Mirvac International (Middle East) No. 3 Pty Limited Mirvac International Investments Limited Mirvac International No 3 Pty Limited Mirvac JV’s Pty Limited Mirvac Kent Street Holdings Pty Limited Mirvac Mandurah Pty Limited MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS112 I2 CONTROLLED ENTITIES (CONTINUED) MEMBER OF THE CLOSED GROUP (CONTINUED) Mirvac National Developments Pty Limited Mirvac Services Pty Limited Mirvac Newcastle Pty Limited Mirvac South Australia Pty Limited Mirvac Old Treasury Holdings Pty Limited Mirvac Pacific Pty Limited Mirvac Parking Pty. Limited Mirvac Parklea Pty Limited Mirvac Precinct 2 Pty Limited Mirvac Procurement Pty Limited Mirvac Spare Pty Limited Mirvac Spring Farm Limited Mirvac SPV 1 Pty Limited Mirvac Trademarks Pty Limited Mirvac Treasury Limited Mirvac Treasury No. 3 Limited Mirvac Projects (Retail and Commercial) Pty Ltd Mirvac Victoria Pty Limited Mirvac Projects Dalley Street Pty Limited Mirvac Wholesale Funds Management Limited Mirvac Projects George Street Pty Limited Mirvac Wholesale Industrial Developments Limited Mirvac Projects No. 2 Pty. Limited Mirvac Woolloomooloo Pty Limited Mirvac Projects Pty Limited Mirvac Properties Pty Limited MRV Hillsdale Pty Limited MWID (Brendale) Pty Limited Mirvac Property Advisory Services Pty. Limited MWID (Mackay) Pty Limited Mirvac Property Services Pty Limited Newington Homes Pty Limited Mirvac Queensland Pty Limited Oakstand No.15 Hercules Street Pty Limited Mirvac Real Estate Debt Funds Pty Limited Planned Retirement Living Pty Limited Mirvac Real Estate Pty Limited Mirvac REIT Management Limited2 Mirvac Residential Projects Pty Ltd1 Mirvac Retail Head SPV Pty Limited Mirvac Retail Sub SPV Pty Limited Mirvac Rockbank Pty Limited Spring Farm Finance Pty Limited Springfield Development Company Pty Limited SPV Magenta Pty Limited TMT Finance Pty Limited Tucker Box Management Pty Limited 1. This entity was established/incorporated during the year ended 30 June 2016. 2. This entity is party to the Deed of Cross Guarantee as disclosed in note G1; however, the entity is still required to lodge separate financial statements. 3. Previously registered as Mirvac Waterloo Pty Limited. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016I2 CONTROLLED ENTITIES (CONTINUED) 113 INTERESTS IN CONTROLLED ENTITIES OF MIRVAC NOT INCLUDED IN THE CLOSED GROUP 107 Mount Street Head Trust 107 Mount Street Sub Trust Banksia Unit Trust Mirvac Nike Holding Pty Ltd2 Mirvac Pennant Hills Residential Trust2 Mirvac Ping An Residential Developments Pty Ltd2,5 Domaine Investments Management Pty Limited1 Mirvac Precinct Trust2 Eveleigh Commercial Pty Ltd2 Eveleigh Precinct Pty Ltd2 Ford Mirvac Unit Trust Magenta Shores Unit Trust Magenta Unit Trust MFM US Real Estate Inc3 MGR US Real Estate Inc3 Mirvac Projects Dalley Street Trust Mirvac Projects George Street Trust Mirvac Projects Norwest Trust Mirvac Projects Norwest No. 2 Trust Mirvac Projects Trust Mirvac St Leonards Pty Limited Mirvac St Leonards Trust Mirvac (Old Treasury) Pty Limited1 Mirvac SLS Development Pty Ltd1,2 Mirvac 8 Chifley Pty Limited1 Mirvac Blue Trust Mirvac Chifley Holdings Pty Limited Mirvac Green Trust Mirvac Harold Park Trust MWID (Brendale) Unit Trust Pigface Unit Trust Rovno Pty. Limited Suntrack Holdings Pty Limited Suntrack Property Trust Mirvac Industrial No. 2 Sub Trust4 Taree Shopping Centre Pty Limited Mirvac Locomotive Trust2 1. The Group holds 50 per cent of this entity. 4. This entity was transferred from MPT on 16 May 2016. 2. This entity was incorporated/established during the year ended 30 June 2016. 5. The Group holds 99 per cent of this entity. 3. This entity was incorporated in the USA. INTERESTS IN CONTROLLED ENTITIES OF MPT 10-20 Bond Street Trust 1900-2000 Pratt Inc.1 197 Salmon Street Trust 275 Kent Street Holding Trust 367 Collins Street Trust 367 Collins Street No. 2 Trust 380 St Kilda Road Trust2 477 Collins Street No. 1 Trust 477 Collins Street No. 2 Trust Australian Office Partnership Trust Chifley Holding Trust Meridian Investment Trust No. 2 Meridian Investment Trust No. 3 Meridian Investment Trust No. 4 Meridian Investment Trust No. 5 Meridian Investment Trust No. 6 Mirvac 90 Collins Street Trust Mirvac Allendale Square Trust Mirvac Altona Trust No. 13 Mirvac Altona Trust No. 23 Mirvac Bay Street Trust3 Mirvac Bourke Street No.1 Sub-Trust Eveleigh Commercial Holdings Pty Limited Mirvac Bourke Street No.2 Sub-Trust Eveleigh Trust3 Eveleigh Trust 1 3,4 Eveleigh Trust 23,4 Eveleigh Trust 33,5 George Street Holding Trust James Fielding Trust Mirvac Broadway Sub-Trust Mirvac Capital Partners 1 Trust Mirvac Collins Street Trust No.1 Sub-Trust Mirvac Collins Street Trust No.2 Sub-Trust Mirvac Commercial Trust4 Mirvac Commercial No.3 Sub Trust JF Infrastructure - Sustainable Equity Fund Mirvac Funds Finance Pty Limited JFIF Victorian Trust JFM Hotel Trust Mirvac Funds Loan Note Pty Limited Mirvac Glasshouse Sub-Trust Meridian Investment Trust No. 1 Mirvac Group Funding No.2 Pty Limited MIRVAC GROUP ANNUAL REPORT 2016 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS114 INTERESTS IN CONTROLLED ENTITIES OF MPT (CONTINUED) Mirvac Group Funding No.3 Pty Limited6 Mirvac Harbourside Sub Trust Mirvac Industrial Fund Mirvac Industrial No. 1 Sub Trust Mirvac Industrial No. 2 Sub Trust7 Mirvac Pitt Street Trust Mirvac Property Trust No.3 Mirvac Property Trust No.4 Mirvac Property Trust No.5 Mirvac Property Trust No.6 Mirvac Property Trust No.7 Mirvac Retail Sub-Trust No. 3 Mirvac Retail Sub-Trust No. 4 Mirvac Rhodes Sub-Trust Mirvac Rydalmere Trust No. 13 Mirvac Rydalmere Trust No. 23 Mirvac Smail Street Trust3 Mirvac Toombul Trust No. 13 Mirvac Toombul Trust No. 23 Nike Holding Trust3 Old Treasury Holding Trust Pennant Hills Office Trust Mirvac Real Estate Investment Trust Springfield Regional Shopping Centre Trust Mirvac Retail Head Trust Mirvac Retail Sub-Trust No. 1 Mirvac Retail Sub-Trust No. 2 The George Street Trust The Mulgrave Trust 1. This entity was incorporated in the USA. 5. This entity was deregistered/wound up during the year ended 30 June 2016. 2. One unit on issue held by Mirvac Limited as custodian for MPT. 6. Previously registered as Mirvac Group Funding No.2 Limited. 3. This entity was established during the year ended 30 June 2016. 7. On 16 May 2016, 100 per cent of the units in this trust were transferred to Mirvac 4. On 2 October 2015, 100 per cent of the units in these trusts were sold to an Projects Pty Limited. external party. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MIRVAC GROUP ANNUAL REPORT 2016115 DIRECTORS’ DECLARATION In the Directors’ opinion: a) the financial statements and the notes set out on pages 66 to 114 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the consolidated entity’s financial position at 30 June 2016 and of its performance for the financial year ended on that date; b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and c) at the date of this declaration, there are reasonable grounds to believe that the members of the extended Closed Group identified in note I2 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the Deed of Cross Guarantee described in note G1. The basis of preparation note confirms that the financial statements also comply with IFRS as issued by the IASB. The Directors have been given the declarations by the CEO & Managing Director and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. Susan Lloyd-Hurwitz Director Sydney 16 August 2016 MIRVAC GROUP ANNUAL REPORT 2016 - DIRECTORS' DECLARATION116 INDEPENDENT AUDITOR’S REPORT Independent auditor’s report to the members of Mirvac Limited Report on the financial report We have audited the accompanying financial report of Mirvac Limited (the company), which comprises the consolidated statement of financial position as at 30 June 2016, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for Mirvac Limited (the consolidated entity). The consolidated entity comprises the company and the entities it controlled at year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company 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 is free from material misstatement, whether due to fraud or error. In the basis of preparation note, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the consolidated entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation INDEPENDENT AUDITOR’S REPORT - MIRVAC GROUP ANNUAL REPORT 2016 INDEPENDENT AUDITOR’S REPORT (CONTINUED) 117 Auditor’s opinion In our opinion: (a) the financial report of Mirvac Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2016 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) the financial report and notes also comply with International Financial Reporting Standards as disclosed in the basis of preparation note. Report on the Remuneration Report We have audited the remuneration report included in pages 45 - 64 of the directors’ report for the year ended 30 June 2016. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s opinion In our opinion, the remuneration report of Mirvac Limited for the year ended 30 June 2016 complies with section 300A of the Corporations Act 2001. PricewaterhouseCoopers Jane Reilly Partner Sydney 16 August 2016 MIRVAC GROUP ANNUAL REPORT 2016 - INDEPENDENT AUDITOR’S REPORT118 SECURITYHOLDER INFORMATION MANAGING YOUR SECURITYHOLDING Securityholders with queries concerning their holding, distribution payments or other related matters should contact Mirvac’s registry, Link Market Services Limited, as follows: • Mirvac information line (toll free within Australia): +61 1800 356 444; or • Website: www.linkmarketservices.com.au When contacting the registry, please quote your current address details together with your Securityholder Reference Number (SRN) or Holder Identification Number (HIN) as shown on your Issuer Sponsored or CHESS statements. The most efficient way to access your securityholding details is online at www.linkmarketservices.com.au. You will need your SRN or your HIN (this reference number is recorded in statements that you receive about your holding in Mirvac) when you log-in online. You can do the following online at www.linkmarketservices.com.au: • elect to receive important communications by email; • choose to have your distribution payments paid directly into your bank account; • provide your tax file number (TFN) or Australian Business Number (ABN); and • lodge your votes for securityholder meetings. Managing your securityholding online is speedier, cost-effective and environmentally friendly. If it is easier for you to update your securityholding information by post, you can download the forms from www.linkmarketservices.com.au or by contacting the Mirvac information line (toll free within Australia) on +61 1800 356 444 to request the appropriate forms to be sent out to you. The information set out below was prepared at 29 July 2016 and applies to Mirvac’s stapled securities (ASX code: MGR). As at 29 July 2016, there were 3,701,691,507 stapled securities on issue. SUBSTANTIAL SECURITYHOLDERS As disclosed in substantial holding notices lodged with the ASX at 29 July 2016: Date of change Number of stapled securities Percentage of issued equity %1 Name The Vanguard Group, Inc BlackRock Group 08/03/2016 01/12/2015 AMP Limited and its related bodies corporate 04/05/2016 CBRE Clarion Securities LLC Commonwealth Bank of Australia Group 19/04/2016 15/07/2015 1. Percentage of issued equity held as at the date notice provided. RANGE OF SECURITYHOLDERS Range 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 313,809,010 234,081,290 227,541,856 186,962,505 185,022,971 8.48 6.32 6.15 5.05 5.00 Number of securityholders Number of stapled securities 6,580 11,094 5,834 7,017 291 30,816 3,101,067 30,379,188 42,527,508 165,699,838 3,459,983,906 3,701,691,507 SECURITYHOLDER INFORMATION - MIRVAC GROUP ANNUAL REPORT 2016SECURITYHOLDER INFORMATION (CONTINUED) 119 20 LARGEST SECURITYHOLDERS Name HSBC Custody Nominees (Australia) Limited JP Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Limited BNP Paribas Noms Pty Ltd Citicorp Nominees Pty Limited AMP Life Limited RBC Investor Services Australia Nominees Pty Limited BNP Paribas Nominees Pty Ltd BNP Paribas Noms (NZ) Ltd RBC Investor Services Australia Nominees Pty Limited HSBC Custody Nominees (Australia) Limited – GSCO ECA Bond Street Custodians Limited Argo Investments Limited National Nominees Limited HSBC Custody Nominees (Australia) Limited Share Direct Nominees Avanteos Investments Limited Yalaba Pty Ltd HSBC Custody Nominees (Australia) Limited Total for 20 largest securityholders Total other securityholders Total stapled securities on issue Number of stapled securities Percentage of issued equity % 1,354,944,301 772,948,173 513,357,155 295,851,200 178,942,824 65,521,606 63,589,861 24,278,443 19,884,913 13,223,117 10,245,806 8,780,546 8,775,696 6,000,551 5,608,326 5,211,541 4,774,526 4,645,138 4,331,876 3,442,616 3,364,358,215 337,333,292 3,701,691,507 36.60 20.88 13.87 7.99 4.83 1.77 1.72 0.66 0.54 0.36 0.28 0.24 0.24 0.16 0.15 0.14 0.13 0.12 0.12 0.09 90.89 9.11 100.00 Number of securityholders holding less than a marketable parcel (being 228 securities at the closing market price of $2.20 on 29 July 2016): 1,855. VOTING RIGHTS Subject to the Constitutions of Mirvac Limited and of MPT and to any rights or restrictions for the time being attached to any class or classes of shares, units or stapled securities: • on a show of hands, each Member present in person or by proxy, attorney, or representative has one vote; and • on a poll, each Member has: - in the case of a resolution of Mirvac Limited, one vote for each share in Mirvac Limited held; and - in the case of a resolution of MPT, one vote for each whole $1.00 of unit value in MPT held. MIRVAC GROUP ANNUAL REPORT 2016 - SECURITYHOLDER INFORMATION120 DIRECTORY REGISTERED OFFICE/PRINCIPAL OFFICE SECURITYHOLDER ENQUIRIES Mirvac Group (comprising Mirvac Limited ABN 92 003 280 699 and Mirvac Funds Limited ABN 70 002 561 640, AFSL 233 121 as responsible entity of MPT ARSN 086 780 645) Level 28 200 George Street Sydney NSW 2000 Telephone +61 2 9080 8000 Facsimile +61 2 9080 8111 www.mirvac.com Telephone +61 1800 356 444 Correspondence should be sent to: Mirvac Group C/- Link Market Services Limited Locked Bag 14 Sydney South NSW 1235 Further investor information can be located in the Investor Centre tab on Mirvac’s website at www.mirvac.com. SECURITIES EXCHANGE LISTING Mirvac is listed on the Australian Securities Exchange (ASX code: MGR). AUDITOR PricewaterhouseCoopers 201 Sussex Street Sydney NSW 2000 DIRECTORS John Mulcahy (Chair) Susan Lloyd-Hurwitz (CEO/MD) Christine Bartlett Peter Hawkins Samantha Mostyn James M. Millar AM John Peters Elana Rubin COMPANY SECRETARY Sean Ward STAPLED SECURITY REGISTRY Link Market Services Limited 1A Homebush Bay Drive Rhodes NSW 2138 Telephone +61 1800 356 444 ANNUAL GENERAL/GENERAL MEETING Mirvac Group’s 2016 AGM will be held at 10.00am (Australian Eastern Daylight Time) on Thursday, 17 November 2016 at the Swissotel Sydney, 68 Market Street, Sydney NSW 2000 UPCOMING EVENTS 25 October: First Quarter Operational Update 17 November: 2016 Annual General and General Meetings 30 December: FY17 Half Year Distribution - Ex-distribution date 31 December: FY17 Half Year Distribution - Record Date DIRECTORY/EVENTS CALENDAR - MIRVAC GROUP ANNUAL REPORT 2016GLOSSARY 121 1H17 Half year ending 31 December 2016 HSE&S Health, safety, environment and sustainability AASB Australian Accounting Standards Board ABN AGM ANZ Australian Business Number Annual General and General Meeting Australia & New Zealand Banking Group Limited ARCC Audit, Risk & Compliance Committee A-REIT Australian Real Estate Investment Trust ARR Asset revaluation reserve ARSN Australian Registered Scheme Number ASIC ASX BRW CCIR CEO Australian Securities and Investments Commission Australian Securities Exchange Business Review Weekly Cross-currency interest rate Chief Executive Officer IASB IFRS IP IPUC JV JVA KMP LAT LSL LTI International Accounting Standards Board International Financial Reporting Standards Investment properties Investment properties under construction Joint ventures Joint ventures and associates Key management personnel Leader Auta Trust Long service leave Long term incentives LTIFR Lost time injury frequency rates MAT MPT Moving annual turnover Mirvac Property Trust CEO/MD Chief Executive Officer/Managing Director MRAC Mirvac Risk Assessment Cards CFO CGU Chief Financial Officer Cash generating unit MREIT Mirvac Real Estate Investment Trust MTN Medium term notes CHESS Clearing House Electronic Subregister System NABERS National Australian Built Environment Rating CPSS Cents per stapled security DCF Discounted cash flow DOOR Designing Out Our Risk DRP EBIT EEP EIS EPS FBT Dividend/distribution reinvestment plan Earnings before interest and taxes Employee Exemption Plan Employee Incentive Scheme Earnings per stapled security Fringe benefits tax FCTR Foreign currency translation reserve FX FY11 FY12 Foreign exchange Year ended 30 June 2011 Year ended 30 June 2012 FY13 Year ended 30 June 2013 FY14 FY15 FY16 FY17 HIN HQ HRC HSE Year ended 30 June 2014 Year ended 30 June 2015 Year ended 30 June 2016 Year ending 30 June 2017 Holder Identification Number Headquarters Human Resources Committee Health, safety and environment System Non-Executive Directors Net realisable value Owner-occupied properties Property, plant and equipment Photovoltaic (panels) PricewaterhouseCoopers Return on equity Return on invested capital Security-based payments Statement of comprehensive income Statement of financial position Securityholder Reference Number Short term incentives Tax file number Tax Governance Statement Total Shareholder Return Tax Transparency Code NED NRV OOP PPE PV PwC ROE ROIC SBP SoCI SoFP SRN STI TFN TGS TSR TTC USPP US Private Placement WALE Weighted average lease expiry WANOS Weighted average number of ordinary securities WELS Water Efficiency Labelling and Standards 200 George Street, Sydney, New South Wales MIRVAC GROUP ANNUAL REPORT 2016 - GLOSSARY 200 George Street, Sydney, New South Wales 200 George Street, Sydney, New South Wales MIRVAC.COM.AU

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